Registration No. 333-83183
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1 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:
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
__X__ on May 1, 2000 pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
_____ 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. Flexible Premium Variable Life Insurance Policy
(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
CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2
N-8B-2 Item Caption in Prospectus
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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 Cova; 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 Cova; 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
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EXPLANATORY NOTE
This Registration Statement contains two versions (Version A and Version B)
of the Prospectus. The only differences between the two versions are the
underlying investment options and the Illustrations. Other versions of
Version A may be created in the future. The distribution system for each
version of the Prospectus is different. The Prospectuses will be filed with
the Commission pursuant to Rule 497 under the Securities Act of 1933. The
Registrant undertakes to update this Explanatory Note, as needed,
each time a Post-Effective Amendment is filed.
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PROSPECTUS - VERSION A
Flexible Premium Variable Life Insurance Policy
issued by
COVA FINANCIAL LIFE
INSURANCE COMPANY
COVA VARIABLE LIFE
ACCOUNT FIVE
This prospectus describes the Flexible Premium Variable Life Insurance Policy
that we are offering.
We have designed the Policy for use in estate and retirement planning and other
insurance needs of individuals. The Policy provides for maximum flexibility by
allowing you to vary your premium payments and to change the level of death
benefits payable.
You, the policyowner, have a number of investment choices in the Policy. These
investment choices include a General Account as well as the following __
Investment Funds listed below which are offered through our Separate Account
(you can invest in up to 15 of the Investment Funds and the General Account at
any one time). When you purchase a Policy, you bear the complete investment
risk. This means that the Accumulation Account Value of your Policy may increase
and decrease depending upon the investment performance of the Investment Fund(s)
you select. The duration of the Policy and, under some circumstances, the death
benefit will increase and decrease depending upon investment performance.</R.
AIM Variable Insurance Funds:
Advisor: A I M Advisors, Inc.
AIM V.I. Capital Appreciation Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
Alliance Variable Products Series Fund, Inc.:
Advisor: Alliance Capital
Management L.P.
Premier Growth Portfolio (Class A)
Real Estate Investment Portfolio (Class A)
Cova Series Trust:
Advisor: J.P. Morgan
Investment Management Inc.
International Equity Portfolio
Large Cap Stock Portfolio
Quality Bond Portfolio
Select Equity Portfolio
Small Cap Stock Portfolio
Advisor: Lord, Abbett & Co.
Bond Debenture Portfolio
Developing Growth Portfolio
Large Cap Research Portfolio
Lord Abbett Growth and Income Portfolio
Mid-Cap Value Portfolio
Franklin Templeton Variable Insurance Products Trust*, Class 1 Shares:
Advisor: Franklin Advisers, Inc.
Franklin Small Cap Fund (the surviving fund of the merger with
Franklin Small Cap Investments Fund)
Advisor: Franklin Mutual Advisers, LLC
Mutual Shares Securities Fund (the surviving fund of the merger with
Mutual Shares Investments Fund)
Advisor: Templeton Asset
Management Ltd.
Templeton Developing Markets Securities Fund (formerly,
Templeton Developing Markets Fund)
Advisor: Templeton Investment
Counsel, Inc.
Templeton International Securities Fund (formerly, Templeton
International Fund)
Advisor: 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:
Advisor: Conning Asset
Management Company
Money Market Fund
Goldman Sachs Variable Insurance Trust ("VIT"):
Advisor: Goldman Sachs
Asset Management, a unit of the Investment Management Division of
Goldman, Sachs & Co.
Goldman Sachs VIT Growth and Income Fund
Goldman Sachs VIT Internet Tollkeeper Fund (not currently
available)
Advisor: Goldman Sachs
Asset Management International
Goldman Sachs VIT Global Income Fund
Goldman Sachs VIT International Equity Fund
Kemper Variable Series:
Advisor: Scudder Kemper
Investments, Inc.
Kemper Government Securities Portfolio
Kemper Small Cap Growth Portfolio
Kemper Small Cap Value Portfolio
Liberty Variable Investment Trust:
Advisor: Newport Fund
Management Inc.
Newport Tiger Fund, Variable Series
MFS Variable Insurance Trust:
Advisor: Massachusetts
Financial Services Company
MFS Emerging Growth Series
MFS Global Governments Series
MFS Growth With Income Series
MFS High Income Series
MFS Research Series
Oppenheimer Variable Account Funds:
Advisor: OppenheimerFunds, Inc.
Oppenheimer Bond Fund/VA
Oppenheimer Capital Appreciation Fund/VA
Oppenheimer High Income Fund/VA
Oppenheimer Main Street Growth & Income Fund/VA
Oppenheimer Strategic Bond Fund/VA
Putnam Variable Trust:
Advisor: Putnam Investment
Management, Inc.
Putnam VT Growth and Income Fund - Class IA Shares
Putnam VT International Growth Fund - Class IA Shares
Putnam VT International New
Opportunities Fund - Class IA Shares
Putnam VT New Value Fund - Class IA Shares
Putnam VT Vista Fund - Class IA Shares
Variable Insurance Products Fund:
Advisor: Fidelity Management & Research Company
VIP Growth Portfolio
VIP Equity-Income Portfolio
Variable Insurance Products Fund II:
Advisor: Fidelity Management & Research Company
VIP II Contrafund(R) Portfolio
Variable Insurance Products Fund III:
Advisor: Fidelity Management & Research Company
VIP III Growth Opportunities Portfolio
VIP III Growth & Income Portfolio
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Flexible Premium Variable
Life Insurance Policy. The Securities and Exchange Commission maintains a Web
site (http://www.sec.gov) that contains information regarding registrants that
file electronically with the Commission.
The Policy:
o is not a bank deposit.
o is not federally insured.
o is not endorsed by any bank or government agency.
The Policy is subject to investment risk. You may be subject to loss of
principal.
The SEC has not approved the Policy or determined that this prospectus is
accurate or complete. Any representation that it has is a criminal offense.
DATE: May 1, 2000
TABLE OF CONTENTS Page
SPECIAL TERMS
SUMMARY
The Variable Life Insurance Policy
Purchases
Investment Choices
Expenses
Death Benefit
Taxes
Access to Your Money
Other Information
Inquiries
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
2. PURCHASES
Application for a Policy
Premiums
Unscheduled Premiums
Lapse and Grace Period
Reinstatement
Allocation of Premium
Accumulation Account Value of Your Policy
Method of Determining Accumulation Account Value
of an Investment Fund
Net Investment Factor
Our Right to Reject or Return a Premium Payment
3. INVESTMENT FUNDS
Substitution and Limitations on Further Investments
Transfers
Dollar Cost Averaging
Portfolio Rebalancing
Approved Asset Allocation Programs
4. EXPENSES
Tax Charges
Sales Charge
Selection and Issue Expense Charge
Monthly Policy Charge
Monthly Cost of Insurance Charge
Charges for Additional Benefit Riders
Mortality and Expense Risk Charge
Surrender Charge
Transaction Charges
Investment Fund Expenses
5. DEATH BENEFIT
Change of Death Benefit
Change in Face Amount
6. TAXES
Life Insurance in General
Taking Money Out of Your Policy
Diversification
7. ACCESS TO YOUR MONEY
Policy Loans
Loan Interest Charged
Security
Repaying Policy Debt
Partial Withdrawals
Pro-Rata Surrender
Full Surrenders
8. OTHER INFORMATION
Cova
Distribution
The Separate Account
Suspension of Payments or Transfers
Ownership
Adjustment of Charges
PART II
Executive Officers and Directors
Voting
Disregard of Voting Instructions
Legal Opinions
Our Right to Contest
Additional Benefits
Federal Tax Status
Introduction
Diversification
Tax Treatment of the Policy
Policy Proceeds
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 Funds
SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you as
possible. However, by the very nature of the Policy certain technical words or
terms are unavoidable. We have identified some of these terms and provided you
with a definition.
Accumulation Account Value -- The total of the amounts credited to the Owner in
the Separate Account, the General Account and the Loan Account.
Attained Age -- The Issue Age of the Insured plus the number of completed Policy
years.
Beneficiary -- The person(s) named in the application or by later designation to
receive Policy proceeds in the event of the Insured's death. A Beneficiary may
be changed as set forth in the Policy and this prospectus.
Cash Surrender Value -- The Accumulation Account Value of a Policy on the date
of surrender, less any Indebtedness, less any unpaid selection and issue expense
charge due for the remainder of the first Policy year, less any unpaid monthly
Policy charge due for the remainder of the first Policy year, and less any
surrender charge.
Face Amount -- The minimum death benefit under the Policy so long as the Policy
remains in force before the Insured's Attained Age 100.
General Account -- Our assets other than those allocated to the Separate Account
or any other separate account.
Indebtedness -- The sum of all unpaid Policy loans and accrued interest on
loans.
Insured -- The person whose life is insured under the Policy.
Investment Funds -- Investments within the Separate Account which we make
available under the Policy.
Investment Start Date -- The date the initial premium is applied to the General
Account and/or the Investment Funds. This date is the later of the Issue Date or
the date the initial premium is received at our Service Office.
Issue Age -- The age of the Insured at his or her nearest birthday as of the
Issue Date.
Issue Date -- The date as of which insurance coverage begins under a Policy. It
is also the date from which Policy anniversaries, Policy years, and Policy
months are measured. It is the Effective Date of coverage under the Policy.
Loan Account -- The account of Cova to which amounts securing Policy Loans are
allocated. The Loan Account is part of Cova's General Account.
Loan Subaccount -- A Loan Subaccount has been established for the General
Account and for each Investment Fund. Any Accumulation Account Value transferred
to the Loan Account will be allocated to the appropriate Loan Subaccount to
reflect the origin of the Accumulation Account Value. At any point in time, the
Loan Account will equal the sum of all the Loan Subaccounts.
Monthly Anniversary -- The same date in each succeeding month as the Issue Date
except that whenever the Monthly Anniversary falls on a date other than a
Valuation Date, the Monthly Anniversary will be deemed the next Valuation Date.
If any Monthly Anniversary would be the 29th, 30th, or 31st day of a month that
does not have that number of days, then the Monthly Anniversary will be the last
day of that month.
Net Premium -- The premium paid, less the premium tax charge, less the Federal
tax charge, less the sales charge.
Owner -- The owner of a Policy, as designated in the application or as
subsequently changed.
Policy -- The flexible premium variable life insurance Policy offered by us and
described in this prospectus.
Pro-Rata Surrender -- A requested reduction of both the Face Amount and the
Accumulation Account Value by a given percentage.
Separate Account -- Cova Variable Life Account Five, a separate investment
account established by Cova to receive and invest the Net Premiums paid under
the Policy, and certain other variable life policies, and allocated by you to
provide variable benefits.
Service Office -- Cova Financial Life Insurance Company, P.O. Box 66757, St.
Louis, MO 63166-6757.
Target Premium -- A premium calculated when a Policy is issued, based on the
Insured's age, sex (except in unisex policies) and risk class. The Target
Premium is used to calculate the first year's premium expense charge, the
surrender charge, and agent compensation under the Policy.
Valuation Date -- Each day that the New York Stock Exchange (NYSE) is open for
trading and Cova is open for business. Cova is open for business every day that
the NYSE is open for trading.
Valuation Period -- The period between two successive Valuation Dates,
commencing at the close of the NYSE (usually 4:00 p.m. Eastern Standard Time) on
a Valuation Date and ending with the close of the NYSE on the next succeeding
Valuation Date.
The prospectus is divided into three sections: the Summary, Part I and Part II.
The sections in the Summary correspond to sections in Part I of this prospectus
which discuss the topics in more detail. Part II contains even more detailed
information.
SUMMARY
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance Policy is a contract between you, the owner, and us,
an insurance company. The Policy provides for the payment of a death benefit to
your selected Beneficiary upon the death of the person Insured. This death
benefit is distributed free from Federal income taxes. The Policy can be used as
part of your estate planning or used to save for retirement. The Insured is the
person you choose to have insured under the Policy.
You, the owner, can be the Insured, but you do not have to be.
The Policy described in this prospectus is a flexible premium variable life
insurance Policy. The Policy is "flexible" because:
o the frequency and amount of premium payments can vary;
o you can choose between death benefit options; and
o you can change the amount of insurance coverage.
The Policy is "variable" because the Accumulation Account Value of your Policy,
when allocated to the Investment Funds, may increase or decrease depending upon
the investment results of the selected Investment Funds. The duration of your
Policy may vary and, under certain circumstances, so may your death benefit.
So long as the Insured is alive, you can surrender the Policy for all or part of
its Cash Surrender Value. You may also obtain a Policy loan, using the Policy as
security. We will pay a death benefit when the Insured dies.
We make available a number of riders to meet a variety of your estate planning
needs. The minimum Face Amount of insurance that we offer is $50,000.
2. PURCHASES
You purchase the Policy by completing the proper forms. Your registered
representative can help you. In some circumstances, we may contact you for
additional information regarding the Insured. We may require the Insured to
provide us with medical records, physician's statement or a complete paramedical
examination.
The minimum initial premium we accept is computed for you based on the Face
Amount you request. The Policy is designed for the payment of subsequent
premiums. You can establish planned annual premiums. The minimum subsequent
premium that we accept is $10.
3. INVESTMENT CHOICES
You can put your money in our General Account or in any or all of the Investment
Funds. However, you can only put your money in up to 15 of the Investment Funds
and the General Account at any one time. A brief description of the
Investment Funds is contained in Appendix B and a detailed description of the
Investment Funds, their investment policies, restrictions, risks, and charges is
contained in the prospectuses for each Investment Fund. You should read the
prospectuses carefully.
4. EXPENSES
We make certain deductions from your premiums, your Accumulation Account Value
and from the Investment Funds. These deductions are made for taxes, mortality
and expense risks, administrative expenses, sales charges, the cost of providing
life insurance protection and for the cost associated with the management and
investment operations of the Investment Funds. These deductions are summarized
as follows:
o Deductions from each premium payment.
Tax Charges. We currently deduct 1.3% of each premium payment to pay the Federal
Tax Charge. We also deduct a Premium Tax Charge currently equal to 2.35% to pay
the state and local premium taxes.
Sales Charge. The Sales Charge, which is also referred to as the percent of
premium charge, is determined as follows:
(1) in the first Policy year, 15% of the amount you pay up to the Target
Premium, and 5% of the amount you pay over the Target Premium;
(2) in the 2nd through 10th Policy years, 5% of the actual premium you pay; and
(3) in the 11th Policy year and later, 2% of the actual premium you pay.
o Monthly deductions from your Accumulation Account Value.
Selection and Issue Expense Charge. During the first 10 Policy years, we assess
a charge of up to 1% per $1000 of Face Amount. This charge varies by Issue Age,
risk class and sex (except in unisex policies) of the Insured.
Monthly Policy Charge. This charge is equal to $25 per month for the first
policy year, and $6 per policy month thereafter. This amount is deducted from
the Accumulation Account Value of your Policy on the Investment Start Date and
each Monthly Anniversary date.
Monthly Cost of Insurance. This amount is deducted monthly from your
Accumulation Account Value on the Investment Start Date and each Monthly
Anniversary date. The amount of the deduction varies with the age, sex (except
in unisex policies), risk class of the Insured, duration and the amount of death
benefit at risk.
Charges for Additional Benefit Riders. On each Monthly Anniversary date, the
amount of the charge, if any, for additional benefit riders is determined in
accordance with the rider and is shown on the specifications page of your
Policy.
o Deductions from the Investment Funds.
Mortality and Expense Risk Charge. This risk charge is guaranteed not to exceed,
on an annual basis, 0.55% of the average value of each of your Investment Funds
and is deducted each Valuation Date.
The current risk charge depends on the number of years your Policy has been in
force and is as follows:
Years Daily Charge Factor Annual Equivalent
-------- -------------------- -------------------
1-10 .0015027% 0.55%
11-20 .0012301% 0.45%
21+ .0009572% 0.35%
This deduction is guaranteed not to increase while the Policy is in force. We
will not increase the mortality and expense risk charge to .55% in years 11 and
beyond.
<TABLE>
<CAPTION>
Investment Fund Expenses
Annual Fund Operating Expenses (as a percentage of average net assets)
Other Fund Expenses
Management (after reimbursement Total Annual
Investment Funds Fees and/or waivers as noted) Fund Expenses
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AIM Variable Insurance Funds
Advisor: A I M Advisors, Inc.
<S> <C> <C> <C>
AIM V.I. Capital Appreciation Fund .62% .11% .73%
AIM V.I. International Equity Fund .75% .22% .97%
AIM V.I. Value Fund .61% .15% .76%
Alliance Variable Products Series Fund, Inc.
Advisor: Alliance Capital Management L.P.
Premier Growth Portfolio (Class A) 1.00% .05% 1.05%
Real Estate Investment Portfolio
(Class A)(1) .49% .46% .95%
Cova Series Trust (2)
Advisor: J.P. Morgan Investment Management Inc.
International Equity Portfolio .79% .31% 1.10%
Large Cap Stock Portfolio .65% .10% .75%
Quality Bond Portfolio .54% .10% .64%
Select Equity Portfolio .67% .10% .77%
Small Cap Stock Portfolio .85% .19% 1.04%
Advisor: Lord, Abbett & Co.
Bond Debenture Portfolio .75% .10% .85%
Developing Growth Portfolio .90% .30% 1.20%
Large Cap Research Portfolio 1.00% .30% 1.30%
Lord Abbett Growth and Income Portfolio(3) .65% .05% .70%
Mid-Cap Value Portfolio 1.00% .30% 1.30%
Franklin Templeton Variable Insurance Products Trust, Class 1 Shares
Advisor: Franklin Advisers, Inc.
Franklin Small Cap Fund (4) .55% .27% .82%
Advisor: Franklin Mutual Advisers, LLC
Mutual Shares Securities Fund (5) .60% .19% .79%
Advisor: Templeton Asset Management Ltd.
Templeton Developing Markets
Securities Fund (6) 1.25% .31% 1.56%
Advisor: Templeton Investment Counsel, Inc.
Templeton International Securities
Fund (7) .69% .19% .88%
Advisor: Templeton Global Advisors Limited
Templeton Growth Securities Fund (8) .83% .05% .88%
General American Capital Company
Advisor: Conning Asset Management Company
Money Market Fund .125% .08% .205%
Goldman Sachs Variable Insurance Trust (9)
Advisor: Goldman Sachs Asset Management
Goldman Sachs VIT Growth and Income Fund .75% .25% 1.00%
Goldman Sachs VIT Internet Tollkeeper
FundSM 1.00% .25% 1.25%
Advisor: Goldman Sachs Asset Management International
Goldman Sachs VIT Global Income Fund .90% .25% 1.15%
Goldman Sachs VIT International Equity Fund 1.00% .35% 1.35%
Kemper Variable Series
Advisor: Scudder Kemper Investments, Inc.
Kemper Government Securities Portfolio .55% .08% .63%
Kemper Small Cap Growth Portfolio .65% .06% .71%
Kemper Small Cap Value Portfolio (10) .75% .09% .84%
Liberty Variable Investment Trust
Advisor: Newport Fund Management Inc.
Newport Tiger Fund, Variable Series .90% .31% 1.21%
MFS Variable Insurance Trust (11)
Advisor: Massachusetts Financial Services Company
MFS Emerging Growth Series .75% .09% .84%
MFS Global Governments Series (12) .75% .16% .91%
MFS Growth With Income Series .75% .13% .88%
MFS High Income Series(12) .75% .16% .91%
MFS Research Series .75% .11% .86%
Oppenheimer Variable Account Funds
Advisor: OppenheimerFunds, Inc.
Oppenheimer Bond Fund/VA .72% .01% .73%
Oppenheimer Capital Appreciation
Fund/VA .68% .02% .70%
Oppenheimer High Income
Fund/VA .74% .01% .75%
Oppenheimer Main Street Growth &
Income Fund/VA .73% .05% .78%
Oppenheimer Strategic Bond Fund/VA .74% .04% .78%
Putnam Variable Trust
Advisor: Putnam Investment Management, Inc.
Putnam VT Growth and Income Fund -
Class IA Shares .46% .04% .50%
Putnam VT International Growth Fund -
Class IA Shares .80% .22% 1.02%
Putnam VT International New Opport-
unities Fund - Class IA Shares 1.08% .33% 1.41%
Putnam VT New Value Fund -
Class IA Shares .70% .10% .80%
Putnam VT Vista Fund - Class IA Shares .65% .10% .75%
Variable Insurance Products Fund (Initial Class)
Variable Insurance Products Fund II (Initial Class)
Variable Insurance Products Fund III (Initial Class)
Advisor: Fidelity Management & Research Company
VIP III Growth Opportunities
Portfolio (Initial Class) (13) .58% .11% .69%
VIP Growth Portfolio (Initial
Class) (13) .58% .08% .66%
VIP II Growth & Income Portfolio
(Initial Class) (13) .48% .12% .60%
VIP Equity-Income Portfolio
(Initial Class) (13) .48% .09% .57%
VIP II Contrafund(R) Portfolio
(Initial Class) (13) .58% .09% .67%
(1) The expenses shown with respect to the Real Estate Investment Portfolio are
net of voluntary reimbursements. Expenses have been capped at .95% annually and
the adviser to the Fund intends to continue such reimbursements for the
foreseeable future. For the year ended December 31, 1999, the expenses for the
Real Estate Investment Portfolio, before reimbursement, were: .90% management
fees and .82% for other expenses.
(2) 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.
(3) The Portfolio commenced investment operations on January 8, 1999.
(4) 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%.
(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 0.60%, Other Expenses 0.19%, and Total Fund Operating Expenses
0.79%.
(6) On 2/8/00, shareholders approved a merger and reorganization that
combined the fund with the Templeton Developing Markets 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 1.25%, Other Expenses 0.29%, and Total Fund
Operating Expenses 1.54%.
(7) 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%.
(8) 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.
(9) The investment advisers to the Goldman Sachs VIT Growth and Income, Internet
Tollkeeper, International Equity and Global Income Funds have voluntarily
agreed to reduce or limit certain "Other Expenses" of such Funds (excluding
management fees, taxes, interest, brokerage fees, litigation, indemnification
and other extraordinary expenses) to the extent such expenses exceed 0.25%,
0.25%, 0.35% and 0.25% per annum of such Funds' average daily net assets,
respectively. The expenses shown include this reimbursement. If not included,
the "Other Expenses" and "Total Annual Portfolio Expenses" for the Goldman
Sachs Growth and Income, Internet Tollkeeper, International Equity and Global
Income Funds would be .47% and 1.22%, ___% and ___% (estimated), .77% and 1.77%
and 1.78% and 2.68%, respectively. The reductions or limitations may be
discontinued or modified by the investment advisers in their discretion at
any time. The Fund's expenses shown in the fee table are based on estimated
expenses for the fiscal year ending December 31, 2000.
(10) Pursuant to its agreement with Kemper Variable Series, the investment manager
and the accounting agent have agreed, for the one year period commencing May 1,
2000, to limit their respective fees and to reimburse other operating expenses to
the extent necessary to limit total operating expenses of the Kemper Small Cap
Value Portfolio to .84%. The amounts set forth in the table above reflect
actual expenses for the past fiscal year, which were at or lower than these
expense limits, after the benefit of any custodial credits.
(11) Each series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with its
custodian and dividend disbursing agent. Each series may enter into other such
arrangements and directed brokerage arrangements, which would also have the
effect of reducing the series' expenses. The expenses shown above do not take
into account these expense reductions, and are therefore higher than the
actual expenses of the series.
(12) MFS has contractually agreed to bear expenses for these series, subject to
reimbursement by these series, such that each series' "Other Expenses" do not
exceed 0.15% of the average daily net assets of the series during the current
fiscal year. Absent the expense reimbursement, the Total Annual Portfolio
Expenses for the year ended December 31, 1999, were 1.05% for the
MFS Global Governments Series and .97% for the High Income Series.
The payments made by MFS on behalf of each series under this arrangement are
subject to reimbursement by the series to MFS, which will be accomplished
by the payment of an expense reimbursement fee by the series to MFS computed
and paid monthly at a percentage of the series' average daily net assets for
its then current fiscal year, with a limitation that immediately after such
payment, the series' "Other Expenses" will not exceed the percentage set forth
above for that series. The obligation of MFS to bear a series' "Other Expenses"
pursuant to this arrangement, and the series' obligation to pay the
reimbursement fee to MFS, terminates on the earlier of the date on which
payments made by the series equal the prior payment of such reimbursable
expenses by MFS or December 31, 2004. MFS may, in its discretion, terminate
this arrangement at an earlier date provided that the arrangement will
continue for each series until at least May 1, 2001, unless terminated with
the consent of the board of trustees which oversees the series.
(13) A portion of the brokerage commissions that certain funds pay was used
to reduce fund expenses. In addition, through arrangements with certain funds,
or FMR on behalf of certain funds', custodian credits realized as a result of
uninvested cash balances were used to reduce a portion of each applicable fund's
expenses. With these reductions, total expenses would have been: .68% for
the Growth Opportunities Portfolio; .65% for the Growth Portfolio; .59% for the
Growth & Income Portfolio; .56% for the Equity-Income Portfolio; and .65% for the
Contrafund Portfolio.
</TABLE>
Surrender Charge. A Surrender Charge may be deducted in the event you make a
full or partial withdrawal of your Policy. If you surrender your Policy or let
it lapse during the first ten Policy years, we will keep part of the
Accumulation Account Value of your Policy to help us recover the costs of
selling and issuing the Policy.
The Surrender Charge is 45% of the Target Premium if you surrender the Policy or
let it lapse during the first five Policy years. Afterwards, the amount of the
Surrender Charge goes down each month. After the 10th Policy year there is no
charge. A Surrender Charge will apply to any decrease in Face Amount.
There is a table in your Policy that shows the amount of the Target Premium and
the percentage of the Surrender Charge for each month.
If you make a partial withdrawal from your Policy, we will charge a pro-rated
portion of the Surrender Charge. There may also be a Partial Withdrawal Fee
charged.
Partial Withdrawal Fee and Transfer Fee. The first 12 requested transfers or
partial withdrawals in a Policy year are free. For each partial withdrawal or
transfer in excess of 12 in a Policy year, there is a fee assessed which is
currently equal to $25.
5. DEATH BENEFIT
The amount of the death benefit depends on:
o the Face Amount of your Policy;
o the death benefit option in effect at the time of the Insured's
death; and
o under some circumstances the Accumulation Account Value of your Policy.
There are three death benefit options: Option A, Option B and Option C. If death
benefit Option A is in effect, the death benefit is the greater of your total
Face Amount in effect or the Accumulation Account Value of your Policy on the
date of the Insured's death multiplied by the applicable factor. Under this
option, the amount of the death benefit is fixed, except when we use the factor
to determine the benefit percentage.
If death benefit Option B is in effect, the death benefit is the greater of your
total Face Amount in effect plus the Accumulation Account Value of your Policy,
or the Accumulation Account Value of your Policy multiplied by the applicable
factor. Under this option, the amount of the death benefit is variable (but will
never be less than the Face Amount).
If death benefit Option C is in effect, the death benefit is the greater of your
total Face Amount in effect or the Accumulation Account Value multiplied by an
Attained Age factor.
So long as the Policy remains in force, prior to the Insured's Attained Age 100,
the minimum death benefit will be at least the current Face Amount.
Under certain circumstances you can change death benefit options. You can also
change the Face Amount under certain circumstances.
At the time of application for a Policy, you designate a Beneficiary who is the
person or persons who will receive the death proceeds. You can change your
Beneficiary unless you have designated an irrevocable Beneficiary. The
Beneficiary does not have to be a natural person.
6. TAXES
Your Policy has been designed to comply with the definition of life insurance in
the Internal Revenue Code. As a result, the death proceeds paid under the Policy
should be excludable from the gross income of your Beneficiary. However, estate
taxes may apply. Any earnings in your Policy are not taxed until you take them
out. The tax treatment of the loan proceeds and surrender proceeds will depend
on whether the Policy is considered a Modified Endowment Contract (MEC).
Proceeds taken out of a MEC are considered to come from earnings first and are
includible in taxable income. If you are younger than 5 91/2 when you take money
out of a MEC, you may also be subject to a 10% Federal tax penalty on the
earnings withdrawn.
7. ACCESS TO YOUR MONEY
You can terminate your Policy at any time during the lifetime of the Insured and
we will pay you the Cash Surrender Value of your Policy. At any time during the
Insured's lifetime and before the Policy has terminated, you may withdraw a part
of your Accumulation Account Value subject to the requirements of the Policy.
When you terminate your Policy or make a partial withdrawal, a surrender charge
and partial withdrawal fee may be assessed.
You can also borrow against the Accumulation Account Value of your Policy.
8. OTHER INFORMATION
Free Look. You can cancel the Policy within 20 days after you receive it or the
45th day after you sign your application, whichever period ends later. We will
refund all premiums paid. In the state of California, if you are 60 years or
older on the Issue Date, you can cancel your Policy within 30 days after you
receive it in which case we will refund your Policy's Account Value plus fees
and charges (i.e., premium tax charge, Federal tax charge, selection and issue
expense charge, cost of insurance, monthly Policy charge, percent of premium
charge and mortality and expense risk charge) deducted from the Account Value as
of the day we receive your returned Policy. Upon completion of the underwriting
process, we will allocate your initial Net Premium to the Money Market Fund
until the reallocation date, which occurs upon the expiration of the free look
period. After that, we will invest your Policy's Accumulation Account Value and
any subsequent premiums as you requested.
Who Should Purchase the Policy? The Policy is designed for individuals and
businesses that have a need for death protection but who also desire to
potentially increase the values in their policies through investment in the
Investment Funds. The Policy offers the following to individuals:
o create or conserve one's estate;
o supplement retirement income; and
o access to funds through loans and surrenders.
If you currently own a variable life insurance policy on the life of the
Insured, you should consider whether the purchase of the Policy is appropriate.
Also, you should carefully consider whether the Policy should be used to replace
an existing Policy on the life the Insured.
Additional Features. The following additional features are offered:
o you can arrange to have a regular amount of money automatically transferred
from the Money Market Fund to selected Investment Funds each month,
theoretically giving you a lower average cost per unit over time than a
single one time purchase. We call this feature Dollar Cost Averaging.
o you can arrange to automatically readjust your Accumulation Account Value
between Investment Funds periodically to keep the allocation you select. We
call this feature Portfolio Rebalancing.
o we also offer a number of additional riders that are common to life
insurance policies.
These features and riders may not be available in your state and may not be
suitable for your particular situation.
9. INQUIRIES
If you need more information about purchasing a Policy, please contact us at:
Cova Life Sales Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
800-523-1661
If you need Policyowner service (such as changes in Policy information, inquiry
into Policy values, or to make a loan), please contact us at our service center:
Cova Financial Life Insurance Company
P.O. Box 66757
St. Louis, MO 63166-6757
877-357-4419
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance Policy is a contract between you, the owner, and us,
an insurance company. This kind of Policy is most commonly used for retirement
planning and/or estate planning.
The Policy provides for life insurance coverage on the Insured. It has an
Accumulation Account Value, a death benefit, surrender rights, loan privileges
and other characteristics associated with traditional and universal life
insurance. However, since the Policy is a variable life insurance policy, the
value of your Policy will increase or decrease depending upon the investment
experience of the Investment Funds you choose. The duration or amount of the
death benefit may also vary based on the investment performance of the
underlying Investment Funds. To the extent you select any of the Investment
Funds, you bear the investment risk. If your Accumulation Account Value less any
loans, loan interest accrued, unpaid selection and issue charge due for the
remainder of the first Policy year and, if surrender charges and any Partial
Withdrawal Fee is insufficient to pay the monthly deductions, the Policy may
terminate.
Because the Policy is like traditional and universal life insurance, it provides
a death benefit which is paid to your named Beneficiary. When the Insured dies,
the death proceeds are paid to your Beneficiary which should be excludable from
the gross income of the Beneficiary. The tax-free death proceeds make this an
excellent way to accumulate money you do not think you will use in your
lifetime. It is also a tax-efficient way to provide for those you leave behind.
If you need access to your money, you can borrow from the Policy, make a total
surrender or a partial withdrawal.
2. PURCHASES
Application for a Policy
In order to purchase a Policy, you must submit an application to us that
requests information about the proposed Insured. In some cases, we will ask for
additional information. We may request that the proposed Insured provide us with
medical records, a physician's statement or possibly require other medical
tests.
Premiums
Before coverage begins under a Policy, the application and the premium must be
in good order as determined by our administrative rules. You may receive a copy
of a Policy before that time for examination but there will be no coverage. Each
premium after the initial premium must be at least $10. The Policy is not
designed for professional market timing organizations, other entities, or
persons using programmed, large, or frequent transfers.
You can establish a schedule of planned premiums. We will send you billing
notices for these premium payments. A failure to pay such a premium payment will
not itself cause the Policy to lapse.
Unscheduled Premiums
You can make additional unscheduled premium payments at any time while the
Policy is in force. However, in order to preserve the favorable tax status of
the Policy, we may limit the amount of the premiums and may return any premiums
that exceed the limits stated under the Internal Revenue Code.
If Cova receives a premium payment which would cause the death benefit to
increase by an amount that exceeds the Net Premium portion of the payment, then
Cova reserves the right to:
(1) refuse that premium payment; or
(2) require additional evidence of insurability before it accepts the premium.
Lapse and Grace Period
During the first 5 Policy years, your Policy will not lapse if the Cash
Surrender Value of your Policy is insufficient to pay for the monthly deductions
when:
o the sum of all premiums paid on the Policy (reduced by any partial
withdrawals and any outstanding loan balance) is at least equal to the sum
of the No Lapse Monthly Premiums for the elapsed months since the Issue
Date.
The No Lapse Monthly Premium amount is found on the specifications page of your
Policy. This amount may be modified if you change your Face Amount, make a
change in the premium class of the Insured within 5 years of the Issue Date, or
if there is an addition or deletion of a rider.
Lapse will occur if:
o the Cash Surrender Value is not sufficient to cover the monthly deduction
(except for reasons stated above);
o the sum of all the premiums you paid into the Policy (reduced by any
partial withdrawal or any outstanding loan balance) is less than the No
Lapse Monthly Premium; and
o a grace period expires without a sufficient premium payment.
When a Policy is about to terminate, the Policy provides a grace period in order
for you to make a premium payment or a loan repayment to keep your Policy in
force. The grace period, which is 62 days, begins on the Monthly Anniversary on
which the Cash Surrender Value is insufficient to meet the next monthly
deduction. We will notify you by mail of the amount of additional premium that
must be paid to keep the Policy from terminating. If we do not receive the
required amount within the grace period, the Policy will lapse and terminate
without Accumulation Account Value.
If the Insured dies during the grace period, any overdue monthly deductions will
be deducted from the death benefit otherwise payable.
Reinstatement
If your Policy terminated at the end of a grace period, you can request that we
reinstate it (restore your insurance coverage) anytime within 5 years after its
termination. To reinstate your Policy you must:
o submit a written request for reinstatement;
o submit proof satisfactory to us that the Insured is still insurable at the
risk class that applies for the latest Face Amount portion then in effect;
o pay a Net Premium large enough to cover the monthly deductions that were
due at the time of lapse and 2 times the monthly deduction due at the time
of reinstatement; and
o pay an amount large enough to cover any loan interest due and unpaid at the
time of lapse.
The reinstatement date is the date on or following the day we approve the
application for reinstatement. The Accumulation Account Value of your Policy on
the reinstatement date is equal to:
o the amount of any Policy loan reinstated;
o increased by the Net Premiums paid at reinstatement, any Policy loan paid
at the time of reinstatement, and the amount of any surrender charge paid
at the time of lapse.
The Policy may not be reinstated if it has been surrendered or if the Insured
dies before the reinstatement date. There will be a full monthly deduction for
the Policy month which includes the reinstatement date.
Allocation of Premium
When we receive a premium from you, we deduct:
o a Tax Charge for premium taxes and Federal taxes; and
o a Sales Charge.
The premium less these charges is referred to as the Net Premium. Your Net
Premium is allocated to the General Account or one or more of the Investment
Funds, as selected by you.
When we issue you a Policy, we automatically allocate your initial premium to
the Money Market Fund. Once the free look period expires, the Accumulation
Account Value of your Policy is allocated to the General Account and/or the
Investment Funds in accordance with your selections requested in the
application. For any chosen allocation, the percentages must be in whole
numbers. This allocation is not subject to the transfer fee provision. However,
we reserve the right to limit the number of selections that you may invest in at
any one time.
Accumulation Account Value of Your Policy
The Accumulation Account Value equals the sum of the amounts in the General
Account, the Investment Funds you have selected, and the Loan Account.
Method of Determining Accumulation
Account Value of an Investment Fund
The value of your Policy will go up or down depending upon the investment
performance of the Investment Fund(s) you choose and the charges and deductions
made against your Policy.
The Accumulation Account Value of the Investment Funds is determined for each
Valuation Period. When we apply your initial premium to an Investment Fund, the
Accumulation Account Value equals the Net Premium allocated to the Investment
Fund, minus the monthly deduction(s) due from the Issue Date through the
Investment Start Date. Thereafter, on each Valuation Date, the Accumulation
Account Value in an Investment Fund will equal:
(1) The Accumulation Account Value in the Investment Fund on the preceding
Valuation Date, multiplied by the Investment Fund's Net Investment Factor
(defined below) for the current Valuation Period; plus
(2) Any Net Premium payments received during the current Valuation Period which
are allocated to the Investment Fund; plus
(3) Any loan repayments allocated to the Investment Fund during the current
Valuation Period; plus
(4) Any amounts transferred to the Investment Fund from the General Account or
from another Investment Fund during the current Valuation Period; plus
(5) That portion of the interest credited on outstanding loans which is
allocated to the Investment Fund during the current Valuation Period; minus
(6) Any amounts transferred from the Investment Fund to the General Account,
Loan Account, or to another Investment Fund during the current Valuation
Period (including any transfer charges); minus
(7) Any partial withdrawals from the Investment Fund during the current
Valuation Period; minus
(8) Any withdrawal due to a Pro-Rata Surrender from the Investment Fund during
the current Valuation Period; minus
(9) Any withdrawal or surrender charges incurred during the current Valuation
Period attributed to the Investment Fund in connection with a partial
withdrawal or Pro-Rata Surrender; minus
(10) If a Monthly Anniversary occurs during the current Valuation Period, the
portion of the monthly deduction allocated to the Investment Fund during
the current Valuation Period to cover the Policy month which starts during
that Valuation Period.
Net Investment Factor
The Net Investment Factor measures the investment performance of an Investment
Fund during a Valuation Period. The Net Investment Factor for each Investment
Fund for a Valuation Period is calculated as follows:
(1) The value of the assets at the end of the preceding Valuation Period; plus
(2) The investment income and capital gains, realized or unrealized, credited
to the assets in the Valuation Period for which the Net Investment Factor
is being determined; minus
(3) The capital losses, realized or unrealized, charged against those assets
during the Valuation Period; minus
(4) Any amount charged against each Investment Fund for taxes, including any
tax or other economic burden resulting from the application of the tax laws
determined by us to be properly attributable to the Investment Funds, or
any amount set aside during the Valuation Period as a reserve for taxes
attributable to the operation or maintenance of each Investment Fund; minus
(5) The mortality and expense risk charge equal to a percentage of the average
net assets for each day in the Valuation Period. This charge, for mortality
and expense risks, is determined by the length of time the Policy has been
in force. It will not exceed the amounts shown in the following table:
Policy Percentage of Effective
Years Avg. Net Assets Annual Rate
--------- ---------------- ----------------
1-10 0.0015027 0.55%
11-20 0.0012301 0.45%
21+ 0.0009572 0.35%
divided by
6) The value of the assets at the end of the preceding Valuation Period.
Our Right to Reject or Return a Premium Payment
In order to receive the tax treatment for life insurance under the Internal
Revenue Code (Code), a Policy must initially qualify and continue to qualify as
life insurance under the Code. To maintain this qualification, we have reserved
the right under the Policy to return any premiums paid which we have determined
will cause the Policy to fail as life insurance. We also have the right to make
changes in the Policy or to make a distribution to the extent we determine this
is necessary to continue to qualify the Policy as life insurance. Such
distributions may have current income tax consequences to you.
If subsequent premiums will cause your Policy to become a Modified Endowment
Contract (MEC) we will contact you prior to applying the premium to your Policy.
If you elect to have the premium applied, we require that you acknowledge in
writing that you understand the tax consequences of a MEC before we will apply
the premiums.
3. INVESTMENT FUNDS
There are currently ___ Investment Funds available in connection with the Policy
we are offering here. The Investment Funds are offered through one of eleven
open-end, diversified management investment companies: (1) AIM Variable
Insurance Funds (2) Alliance Variable Products Series Fund, Inc., (3) Cova
Series Trust, (4) Franklin Templeton Variable Insurance Products Trust (5)
General American Capital Company, (6) Goldman Sachs Variable Insurance Trust,
(7) Kemper Variable Series, (8) Liberty Variable Investment Trust, (9) MFS
Variable Insurance Trust, (10) Oppenheimer Variable Account Funds, (11) Putnam
Variable Trust and (12) Variable Insurance Products Fund, Variable Insurance
Products Fund II and Variable Insurance Products Fund III.
You can only invest in up to 15 of the Investment Funds and the General Account
at any one time.
Purchasers should read this prospectus carefully before investing. Copies of
the prospectuses for the Investment Funds 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 Fund.)
The investment objectives and policies of certain of the Investment Funds are
similar to the investment objectives and policies of other mutual funds that
certain of the investment advisers manage. Although the objectives and policies
may be similar, the investment results of the Investment Funds may be higher
or lower than the results of such other mutual funds. The investment advisers
cannot guarantee, and make no representation, that the investment results
of similar funds will be comparable even though the funds have the same
investment advisers.
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.
The following is a list of the Investment Funds and investment managers
available under the Policy:
AIM Variable Insurance Funds:
Advisor: A I M Advisors, Inc.
AIM V.I. Capital Appreciation Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
Alliance Variable Products Series Fund, Inc.:
Advisor: Alliance Capital
Management L.P.
Premier Growth Portfolio (Class A)
Real Estate Investment Portfolio (Class A)
Cova Series Trust:
Advisor: J.P. Morgan
Investment Management Inc.
International Equity Portfolio
Large Cap Stock Portfolio
Quality Bond Portfolio
Select Equity Portfolio
Small Cap Stock Portfolio
Advisor: Lord, Abbett & Co.
Bond Debenture Portfolio
Developing Growth Portfolio
Large Cap Research Portfolio
Lord Abbett Growth and Income Portfolio
Mid-Cap Value Portfolio
Franklin Templeton Variable Insurance Products Trust*, Class 1 Shares:
Advisor: Franklin Advisers, Inc.
Franklin Small Cap Fund (the surviving fund of the merger with
Franklin Small Cap Investments Fund)
Advisor: Franklin Mutual Advisers, LLC
Mutual Shares Securities Fund (the surviving fund of the merger with
Mutual Shares Investments Fund)
Advisor: Templeton Asset
Management Ltd.
Templeton Developing Markets Securities Fund (formerly,
Templeton Developing Markets Fund)
Advisor: Templeton Investment
Counsel, Inc.
Templeton International Securities Fund (formerly, Templeton
International Fund)
Advisor: 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:
Advisor: Conning Asset
Management Company
Money Market Fund
Goldman Sachs Variable Insurance Trust ("VIT"):
Advisor: Goldman Sachs
Asset Management, a unit of the Investment Management Division of
Goldman, Sachs & Co.
Goldman Sachs VIT Growth and Income Fund
Goldman Sachs VIT Internet Tollkeeper Fund (not currently
available)
Advisor: Goldman Sachs
Asset Management International
Goldman Sachs VIT Global Income Fund
Goldman Sachs VIT International Equity Fund
Kemper Variable Series:
Advisor: Scudder Kemper
Investments, Inc.
Kemper Government Securities Portfolio
Kemper Small Cap Growth Portfolio
Kemper Small Cap Value Portfolio
Liberty Variable Investment Trust:
Advisor: Newport Fund
Management Inc.
Newport Tiger Fund, Variable Series
MFS Variable Insurance Trust:
Advisor: Massachusetts
Financial Services Company
MFS Emerging Growth Series
MFS Global Governments Series
MFS Growth With Income Series
MFS High Income Series
MFS Research Series
Oppenheimer Variable Account Funds:
Advisor: OppenheimerFunds, Inc.
Oppenheimer Bond Fund/VA
Oppenheimer Capital Appreciation Fund/VA
Oppenheimer High Income Fund/VA
Oppenheimer Main Street Growth & Income Fund/VA
Oppenheimer Strategic Bond Fund/VA
Putnam Variable Trust:
Advisor: Putnam Investment
Management, Inc.
Putnam VT Growth and Income Fund Class IA Shares
Putnam VT International Growth Fund Class IA Shares
Putnam VT International New
Opportunities Fund Class IA Shares
Putnam VT New Value Fund Class IA Shares
Putnam VT Vista Fund - Class IA Shares
Variable Insurance Products Fund:
Advisor: Fidelity Management & Research Company
VIP Growth Portfolio
VIP Equity-Income Portfolio
Variable Insurance Products Fund II:
Advisor: Fidelity Management & Research Company
VIP II Contrafund(R) Portfolio
Variable Insurance Products Fund III:
Advisor: Fidelity Management & Research Company
VIP III Growth Opportunities Portfolio
VIP III Growth & Income Portfolio
Shares of the Investment Funds may be offered in connection with certain
variable annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with us. Certain
Investment Funds may also be sold directly to qualified plans. The Funds believe
that offering their shares in this manner will not be disadvantageous to you.
We may enter into certain arrangements under which we are reimbursed by the
Investment Funds' advisers, distributors and/or affiliates for the
administrative services which we provide to the Funds.
Substitution and Limitations on Further Investments
We may substitute one of the Investment Funds you have selected with another
Investment Fund. We will not do this without the prior approval of the
Securities and Exchange Commission. We may also limit further investment in an
Investment Fund. We will give you notice of our intention to do this.
Transfers
At your request, we will transfer amounts in your Policy from any Investment
Fund to another Investment Fund, or to and from the General Account (subject to
restrictions). The minimum amount that can be transferred is the lesser of the
minimum transfer amount (currently $500), or the total value in an Investment
Fund or the General Account. You can make twelve transfers or partial
withdrawals in a Policy year without charge. We currently charge a transfer fee
of $25 for additional transfers in a Policy year.
You cannot make a transfer out of our General Account in the first Policy year.
The maximum amount you can transfer from the General Account in any Policy year
after the 1st is the greater of:
(a) 25% of a Policy's Cash Surrender Value in the General Account at the
beginning of the Policy year; or
(b) the previous Policy year's General Account maximum withdrawal amount not to
exceed the total Cash Surrender Value of the Policy.
Transfers resulting from Policy loans will not be counted for purposes of the
limitations on the amount or frequency of transfers allowed in each Policy year.
We have not designed this Policy or the underlying Investment Funds for use by
professional market timing organizations, other entities, or persons using
programmed, large, or frequent transfers. If it appears that there is a pattern
of exchanges that coincides with a "market timing" strategy and are disruptive
to the Investment Funds, the transfer will be refused. Policies under common
ownership or control may be aggregated for purposes of transfer limits. We will
coordinate with the Fund managers to restrict the transfer privilege or reject
any specific premium allocation request for any person, if, in the Investment
Fund manager's judgment, the Investment Fund would be unable to invest
effectively in accordance with its investment objectives and policies, or would
otherwise potentially be adversely affected.
Although we currently intend to continue to permit transfers for the foreseeable
future, the Policy provides that we may at any time revoke, modify, or limit the
transfer privilege.
Dollar Cost Averaging
Dollar cost averaging is a program which enables you to allocate specified
dollar amounts from the Money Market Fund to other Investment Funds on a monthly
basis. By allocating amounts on a monthly basis, you may be less susceptible to
the impact of market fluctuations.
The minimum transfer amount is $100. The minimum amount that can be allocated to
an Investment Fund is 5% of the amount transferred. You can elect to participate
in this program at any time by properly completing the dollar cost averaging
election form.
Dollar cost averaging will terminate when any of the following occurs:
1) the value of the Money Market Fund is completely depleted; or
2) you request termination in writing.
There is no current charge for dollar cost averaging but we reserve the right to
charge for this program in the future. Transfers made under dollar cost
averaging do not count against the total of 12 transfers allowed without charge
in a Policy year. Dollar cost averaging cannot be used simultaneously with the
portfolio rebalancing program.
Portfolio Rebalancing
Over time, the funds in the General Account and the Investment Funds will
accumulate at different rates as a result of different investment returns. You
may direct us to automatically restore the balance of the Accumulation Account
Value in the General Account and in the Investment Funds to the percentages
determined in advance. There are two methods of rebalancing available --
periodic and variance.
Periodic Rebalancing. Under this option you elect a frequency (monthly,
quarterly, semiannually or annually), measured from the Policy anniversary. On
each date elected, we will rebalance the Investment Funds and/or General Account
to reallocate the Accumulation Account Value according to the investment
percentages you elected.
Variance Rebalancing. Under this option you elect a specific allocation
percentage for the General Account and each Investment Fund. For each such
account, the allocation percentage (if not zero) must be a whole percentage and
must not be less than five percent. You also elect a maximum variance percentage
(5%, 10%, 15%, or 20% only), and can exclude specific Investment Funds and/or
the General Account from being rebalanced. On each Monthly Anniversary we will
review the current balances to determine whether any Investment Fund balance is
outside of the variance range (either above or below) as a percentage of the
specified allocation percentage. If any Investment Fund is outside of the
variance range, we will generate transfers to rebalance all of the specified
Investment Funds and/or the General Account back to the predetermined
percentages.
Transfers resulting from portfolio rebalancing will not be counted against the
total number of transfers allowed in a Policy year before a charge is applied.
You may elect either method of portfolio rebalancing by specifying it on the
Policy application, or may elect it later for an in force Policy, or may cancel
it, by submitting a change form acceptable to us.
We reserve the right to suspend portfolio rebalancing at any time on any class
of policies on a nondiscriminatory basis, or to charge an administrative fee for
election changes in excess of a specified number in a Policy year in accordance
with our administrative rules. Portfolio rebalancing cannot be used
simultaneously with the dollar cost averaging program.
Approved Asset Allocation Programs
We recognize the value to certain Owners of having available, on a continuous
basis, advice for the allocation of their money among the Investment Funds
available under the Policy. Certain providers of these types of services have
agreed to provide such services to Owners in accordance with our administrative
rules regarding such programs.
We have made no independent investigation of these programs. We have only
established that these programs are compatible with our administrative systems
and rules.
Even though we permit the use of approved asset allocation programs, the Policy
was not designed for professional market timing organizations. Repeated patterns
of frequent transfers are disruptive to the operations of the Investment Funds,
and should we become aware of such disruptive practices, we may modify the
transfer privilege either on an individual or class basis.
If you participate in an approved asset allocation program, the transfers made
under the program are not taken into account in determining any transaction
charges.
4. EXPENSES
There are charges and other expenses associated with the Policy that reduce the
return on your investment in the Policy. The charges and expenses are:
Tax Charges
There are charges for Federal taxes, and state and local premium taxes which are
deducted from each premium payment. The Federal tax charge is currently 1.3% of
each premium. The premium tax charge is currently 2.35% of premium payments. If
the tax rates change, we may change the amount of the deduction to cover the new
rate.
Sales Charge
A sales charge will be deducted from each premium payment to partially
compensate us for expenses incurred in distributing the Policy and any
additional benefits provided by riders. We currently intend to deduct a sales
charge determined according to the following schedule:
Policy Year 1: 15% of premium up to Target Premium; 5%
of premium above Target Premium
Policy Years 2-10: 5% of all premium paid
Policy Years 11+: 2% of all premium paid
The expenses covered by the sales charge include agent sales commissions, the
cost of printing prospectuses and sales literature, and any advertising costs.
Where policies are issued to Insureds with higher mortality risks or to Insureds
who have selected additional insurance benefits, a portion of the amount
deducted for the sales charge is used to pay distribution expenses and other
costs associated with these additional coverages.
To the extent that sales expenses are not recovered from the sales charge and
the surrender charge, those expenses may be recovered from other sources,
including the mortality and expense risk charge described below.
Selection and Issue Expense Charge
During the first ten Policy years, we generally assess a monthly selection and
issue expense charge to cover the costs associated with the underwriting and
issue of the Policy. The monthly charge per $1,000 of Face Amount ranges from
approximately 4 cents to one dollar, and varies by Issue Age, risk class, and
(except on unisex Policies) sex of the Insured.
Monthly Policy Charge
We deduct a monthly Policy charge on the Investment Start Date and each Monthly
Anniversary date. The charge is equal to $25 per Policy month for the first
Policy year. Thereafter, it is $6 per Policy month guaranteed not to increase
while the Policy is in force.
The charge reimburses us for expenses incurred in the administration of the
Policies. Such expenses include: confirmations, annual reports and account
statements, maintenance of Policy records, maintenance of Separate Account
records, administrative personnel costs, mailing costs, data processing costs,
legal fees, accounting fees, filing fees, the costs of other services necessary
for policyowner servicing and all accounting, valuation, regulatory and updating
requirements.
Monthly Cost of Insurance Charge
This charge compensates us for the insurance coverage we provide in the month
following the charge. The monthly cost of insurance charge for each Policy month
equals the total of the insurance risk charges for the Policy month for each
Face Amount portion then in effect.
The monthly cost of insurance charge is deducted on each Monthly Anniversary for
the following Policy month. The monthly cost of insurance charge is determined
in a manner that reflects the anticipated mortality of the Insured and the fact
that the death benefit is not payable until the death of the Insured. Because
the monthly cost of insurance charge depends upon a number of variables, the
charge will vary for each Policy month. We will determine the cost of insurance
charge by multiplying the applicable cost of insurance rate or rates by the net
amount at risk (defined below) for each Policy month.
The monthly cost of insurance rates are determined at the beginning of each
Policy year. The rates will be based on the Attained Age, duration, rate class,
and (except for unisex policies) sex of the Insured at issue. The monthly cost
of insurance rates generally increase as the Insured's Attained Age increases.
The rate class of an Insured also will affect the cost of insurance rate. For
the initial Face Amount, we will use the rate class on the Issue Date. If the
death benefit equals a percentage of Accumulation Account Value, an increase in
Accumulation Account Value will cause an automatic increase in the death
benefit. The rate class for such increase will be the same as that used for the
initial Face Amount.
We currently place the Insured into a preferred rate class, a standard rate
class, or into rate classes involving a higher mortality risk.
Actual monthly cost of insurance rates may change, and the actual monthly cost
of insurance charge will be determined by us based on our expectations as to
future mortality experience. However, the actual monthly cost of insurance rates
will not be greater than the guaranteed cost of insurance rates set forth in the
Policy. For Policies which are not in a substandard risk class, the guaranteed
cost of insurance rates are equal to 100% of the rates set forth in the
male/female smoker/non-smoker 1980 CSO Mortality Tables (1980 CSO Tables NA and
SA and 1980 CSO Tables NG and SG for sex distinct policies and policies issued
in qualified pension plans). All Policies are based on the Attained Age of the
Insured. Higher rates apply if the Insured is determined to be in a substandard
risk class.
In two otherwise identical policies, an Insured in the preferred rate class will
have a lower cost of insurance than an Insured in a rate class involving higher
mortality risk. Each rate class is also divided into two categories: smokers and
nonsmokers. Non-smoker Insureds will generally incur a lower cost of insurance
than similarly situated Insureds who smoke. (Insureds under Attained Age 20 are
automatically assigned to the non-smoker rate class.)
The net amount at risk for a Policy month is:
(1) the death benefit at the beginning of the Policy month divided by 1.0032737
(which reduces the net amount at risk, solely for purposes of computing the
cost of insurance, by taking into account assumed monthly earnings at an
annual rate of 4%); less
(2) the Accumulation Account Value at the beginning of the Policy month.
In calculating the monthly cost of insurance charges, the cost of insurance rate
for a Face Amount is applied to the net amount at risk for that Face Amount.
Charges for Additional Benefit Riders
The amount of the charge, if any, each Policy month for additional benefit
riders is determined in accordance with the rider and is shown on the
specifications page of your Policy.
Mortality and Expense Risk Charge
We will deduct a daily charge from the Investment Funds. The amount of the
deduction is determined as a percentage of the average net assets of each
Investment Fund. The current daily deduction percentages, and the equivalent
effective annual rates, are:
Daily
Policy Charge Annual
Years Factor Equivalent
-------- ----------- -----------
1-10 .0015027% 0.55%
11-20 .0012301% 0.45%
21+ .0009572% 0.35%
This deduction is guaranteed not to increase while the Policy is in force. This
risk charge compensates us for assuming the mortality and expense risks under
the Policy. The mortality risk assumed by us is that the Insureds, as a group,
may not live as long as expected. The expense risk assumed by us is that actual
expenses may be greater than those assumed. We expect to profit from this
charge.
Surrender Charge
For up to 10 years after the Issue Date, we will impose a contingent deferred
sales charge, also referred to as a surrender charge, when the following occur:
o upon surrender or lapse of the Policy;
o upon a partial withdrawal;
o upon a Pro-Rata Surrender; or
o upon a decrease in Face Amount.
The amount of the charge assessed will depend upon a number of factors,
including the type of event (a full surrender, lapse, or partial withdrawal),
the amount of any premium payments made under the Policy prior to the event, and
the number of Policy years having elapsed since the Policy was issued.
The surrender charge compensates us for expenses relating to the distribution of
the Policy, including agents' commissions, advertising, and the printing of the
prospectus and sales literature.
The surrender charge percentage is shown in the following table.
If surrender or lapse occurs in The percentage of the annual
the last month of Policy year: Target Premium payable is:
------------------------------ ----------------------------
1 through 5 45%
6 40%
7 30%
8 20%
9 10%
10 and later 0%
The Target Premium (on which we base the surrender charge) is shown in your
Policy. As shown above, the maximum surrender charge is 45% of the annual Target
Premium payable.
In addition, the percentages are reduced equally for each Policy month during
the years shown. For example, during the seventh year, the percentage is reduced
equally each month from 40% at the end of the sixth year to 30% at the end of
the seventh year. This table may be modified if required by law or regulation of
the governing jurisdiction.
The amount of the surrender charge deducted upon a partial withdrawal or
Pro-Rata Surrender will equal a fraction of the charge that would be deducted if
the Policy were surrendered at that time. The fraction will be determined by
dividing the amount of the withdrawal by the Accumulation Account Value before
the withdrawal and multiplying the result by the surrender charge. Immediately
after a withdrawal, the Policy's remaining surrender charge will equal the
amount of the surrender charge immediately before the withdrawal less the amount
deducted in connection with the withdrawal.
A surrender charge will apply when there is a decrease in Face Amount for up to
10 years from the Policy's Issue Date. A partial withdrawal may cause a decrease
in Face Amount and therefore, we may deduct a surrender charge. If the Face
Amount is decreased by some fraction of any previous increases in Face Amount
and/or the Face Amount at issue, the surrender charge deducted will be the
previously defined surrender charge multiplied by the fraction.
Transaction Charges
There is no transaction charge for the first twelve partial withdrawals or
requested transfers in a Policy year. We will impose a charge of $25 for each
partial withdrawal or requested transfer in excess of twelve in a Policy year.
We may revoke or modify the privilege of transferring amounts to or from the
General Account at any time. Partial withdrawals and Pro-Rata Surrenders will
result in the imposition of the applicable surrender charge.
Investment Fund Expenses
The expenses of the Investment Funds are shown in the Summary.
The value of the net assets of the Investment Funds will reflect the investment
advisory fee and other expenses incurred by the underlying investment companies.
The Investment Fund expenses are collected from the underlying Investment Fund,
and are not direct charges against the Separate Account assets or reductions
from the Policy's Accumulation Account Value. Expenses of the Funds are not
fixed or specified under the terms of the Policy, and actual expenses may vary.
These underlying Investment Fund expenses are taken into consideration in
computing each Investment Fund's net asset value, which is used to calculate the
unit values in the Separate Account. The management fees and other expenses are
more fully described in the prospectus of each individual Investment Fund. The
information relating to the Investment Fund expenses was provided by the
Investment Fund and was not independently verified by us. Except as otherwise
specifically noted, the management fees and other expenses are not currently
subject to fee waivers or expense reimbursements.
5. DEATH BENEFIT
The amount of the death benefit depends on the total Face Amount, the
Accumulation Account Value of your Policy on the date of death and the death
benefit option (Option A, Option B, or Option C) in effect at that time. The
actual amount we will pay the Beneficiary will be reduced by any Indebtedness.
The initial Face Amount and the death benefit option in effect on the Issue Date
are shown on the specifications page of your Policy.
Option A. The amount of the death benefit under Option A is the greater of:
o the Face Amount; or
o the Accumulation Account Value of your Policy on the date of death
multiplied by the applicable multiple percentage shown in the "Applicable
Percentage of Accumulation Account Value Table For Insureds Less than Age
100" shown below.
Option B. The amount of the death benefit under Option B is the greater of:
o the Face Amount plus the Accumulation Account Value of your Policy on the
date of death; or
o the Accumulation Account Value of your Policy on the date of death
multiplied by the applicable multiple percentage shown in the "Applicable
Percentage of Accumulation Account Value Table For Insureds Less than Age
100" shown below.
Applicable Percentage of Accumulation Account Value Table
For Insureds Less Than Age 100
Insured Policy Accumulation Account Value
Person's Age Multiple Percentage
---------------- -----------------------------------
40 or under 250%
45 215%
50 185%
55 150%
60 130%
65 120%
70 115%
78 to 90 105%
95 to 99 101%
For ages that are not shown on this table the applicable percentage multiples
will decrease by a ratable portion for each full year.
Option C. The amount of the death benefit under Option C is the greater of:
o the Face Amount; or
o the Accumulation Account Value of your Policy on the date of the Insured's
death multiplied by the applicable factor from the Table of Attained Age
Factors shown in your Policy.
If your Policy is in force after the Insured's Attained Age is 100, then the
Death Benefit will be 101% of the Policy's Accumulation Account Value.
Change of Death Benefit
If the Policy was issued with either death benefit Option A or death benefit
Option B, the death benefit option may be changed. A Policy issued under death
benefit Option C may not be changed for the entire lifetime of the Policy.
Similarly, a Policy issued under either death benefit Option A or B may not
change to death benefit Option C for the lifetime of the Policy. A request for
change must be made to us in writing. The Effective Date of such a change will
be the Monthly Anniversary on or following the date we receive the change
request.
A death benefit Option A Policy may be changed to have death benefit Option B.
The Face Amount will be decreased to equal the death benefit less the
Accumulation Account Value on the Effective Date of the change. Satisfactory
evidence of insurability must be submitted to us in connection with a request
for a change from death benefit Option A to death benefit Option B. A change may
not be made if it would result in a Face Amount of less than the minimum Face
Amount.
A death benefit Option B Policy may be changed to have death benefit Option A.
The Face Amount will be increased to equal the death benefit on the Effective
Date of the change.
A change in death benefit option may have Federal income tax consequences.
Change in Face Amount
Subject to certain limitations set forth below, you may decrease or increase the
Face Amount of a Policy once each Policy year after the first Policy year. A
written request is required for a change in the Face Amount. A change in Face
Amount may affect the cost of insurance rate and the net amount at risk, both of
which affect your cost of insurance charge. A reduction in the Face Amount of a
Policy may have Federal income tax consequences.
Any decrease in the Face Amount will become effective on the Monthly Anniversary
on or following receipt of the written request by us. The amount of the
requested change must be at least $5,000 ($2,000 for Policies issued in
qualified pension plans) and the Face Amount remaining in force after any
requested decrease may not be less than the minimum Face Amount. If you decrease
the Face Amount and the Policy does not comply with the maximum premium
limitations required by Federal tax law, the decrease may be limited or the
Accumulation Account Value may be returned to you (at your election), to the
extent necessary to meet these requirements. If you want to increase the Face
Amount, you must submit proof that the Insured is insurable by our standards on
the date the requested increase is submitted and the Insured must have an
Attained Age not greater than age 80 on the Policy anniversary that the increase
will become effective.
6. TAXES
NOTE: We have prepared the following information on Federal income taxes as a
general discussion of the subject. It is not intended as tax advice to anyone.
You should consult your own tax adviser about your own circumstances. We have
included an additional discussion regarding taxes in Part II.
Life Insurance in General
Life insurance, such as this Policy, is a means of providing for death
protection and setting aside money for future needs. Congress recognized the
importance of such planning and provided special rules in the Internal Revenue
Code for life insurance.
Simply stated, these rules provide that you will not be taxed on the earnings on
the money held in your life insurance Policy until you take the money out.
Beneficiaries generally are not taxed when they receive the death proceeds upon
the death of the Insured. However, estate taxes may apply.
Taking Money Out of Your Policy
You, as the owner, will not be taxed on increases in the value of your Policy
until a distribution occurs either as a surrender or as a loan. If your Policy
is a MEC, any loans or surrenders from the Policy will be treated as first
coming from earnings and then from your investment in the Policy. Consequently,
these earnings are included in taxable income.
The Internal Revenue Code (Code) also provides that any amount received from a
MEC which is included in income may be subject to a 10% penalty. The penalty
will not apply if the income received is: (1) paid on or after the taxpayer
reaches age 591/2 ; (2) paid if the taxpayer becomes totally disabled (as that
term is defined in the Code); or (3) in a series of substantially equal payments
made annually (or more frequently) for the life (or life expectancy) of the
taxpayer.
If your Policy is not a MEC, any surrender proceeds will be treated as first a
recovery of the investment in the Policy and to that extent will not be included
in taxable income. Furthermore, any loan will be treated as Indebtedness under
the Policy and not as a taxable distribution. See "Tax Status" in Part II for
more details.
Diversification
The Code provides that the underlying investments for a variable life insurance
Policy must satisfy certain diversification requirements in order to be treated
as a life insurance contract. We believe that the Investment Funds are being
managed so as to comply with such requirements.
Under current Federal tax law, it is unclear as to the circumstances under which
you, because of the degree of control you exercise over the underlying
investments, and not us would be considered the owner of the shares of the
Investment Funds. If you are considered the owner of the investments, it will
result in the loss of the favorable tax treatment for the Policy. It is unknown
to what extent owners are permitted to select Investment Funds, to make
transfers among the Investment Funds or the number and type of Investment Funds
owners may select from. If guidance from the Internal Revenue Service is
provided which is considered a new position, the guidance would generally be
applied prospectively. However, if such guidance is considered not to be a new
position, it may be applied retroactively. This would mean that you, as the
owner of the Policy, could be treated as the owner of the Investment Funds. Due
to the uncertainty in this area, we reserve the right to modify the Policy in an
attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
Policy Loans
We will loan money to you at the loan interest rate we establish. The request by
you for a loan must be in writing.
You may borrow an amount up to the loan value of the Policy. The loan value is:
o the Accumulation Account Value of the Policy on the date the loan request
is received; less
o interest to the next loan interest due date; less
o anticipated monthly deductions to the next loan interest due date; less
o any existing loan; less
o any surrender charge; plus
o interest expected to be earned on the loan balance to the next loan
interest due date.
Policy loan interest is payable on each Policy anniversary. The minimum amount
that you can borrow is $500. The loan may be completely or partially repaid at
any time while the Insured is living. When a Policy loan is made, we will deduct
Accumulation Account Value from your Policy equal to the amount of the loan,
plus interest due and place it in the Loan Subaccount as security for the loan.
This Accumulation Account Value amount is expected to earn interest at a rate
("the earnings rate") which is lower than the rate charged on the Policy loan
("the borrowing rate"). The Accumulation Account Value that we use as security
will accrue interest daily at an annual earnings rate of 4%.
Unless the Owner requests a different allocation, the Accumulation Account Value
amount used as security for the loan will be transferred from the Investment
Funds and the General Account on a pro-rata basis to the Loan Account. This will
reduce the Policy's Accumulation Account Value in the General Account and the
Investment Fund(s). These transactions will not be considered transfers for
purposes of the limitations on transfers between Investment Funds or to or from
the General Account.
A Policy loan, whether or not repaid, will have a permanent effect on the death
benefits and Policy values because the values transferred to the Loan Account
will not share in the investment results of the Investment Funds while the loan
is outstanding. If the Loan Account earnings rate is less than the investment
performance of the selected Investment Funds and/or the General Account, the
values and benefits under the Policy will be reduced as a result of the loan. In
addition, if the Indebtedness exceeds the Accumulation Account Value minus the
surrender charge on any Monthly Anniversary, the Policy will lapse, subject to a
grace period. (See "Purchases -- Lapse and Grace Period".) A lapse of the Policy
with a loan outstanding may have Federal income tax consequences. (See "Federal
Tax Status".)
Interest credited to the Accumulation Account Value held in the Loan Subaccount
as security for the loan will be allocated on Policy anniversaries to the
General Account and the Investment Funds. The interest credited will also be
transferred: (1) when a new loan is made; (2) when a loan is partially or fully
repaid; and (3) when an amount is needed to meet a monthly deduction.
Policy loans may have Federal income tax consequences. (See "Federal Tax
Status".)
Loan Interest Charged
The borrowing rate we charge for Policy loan interest will be based on the
following schedule:
For Loans Annual
Outstanding During Interest Rate
--------------------- ---------------
Policy Years 1-10 4.50%
Policy Years 11-20 4.25%
Policy Years 21+ 4.15%
We will inform you of the current borrowing rate when a Policy loan is
requested.
Policy loan interest is due and payable annually on each Policy anniversary. If
you do not pay the interest when it is due, the unpaid loan interest will be
added to the outstanding Indebtedness as of the due date and you will be charged
interest at the same rate as the rest of the Indebtedness.
Security
The Policy will be the only security for the loan.
Repaying Policy Debt
You may repay the loan at any time prior to the death of the Insured and as long
as the Policy is in force. Any Indebtedness outstanding will be deducted before
any benefit proceeds are paid or applied under a payment option.
Repayments will be allocated to the General Account and the Investment Funds
based on how the Accumulation Account Value used for security was allocated.
Unpaid loans and loan interest will be deducted from any settlement of your
Policy.
Any payments received from you will be applied as premiums, unless you clearly
request in writing that it be used as repayment of Indebtedness.
Partial Withdrawals
After the first Policy year, you may make partial withdrawals from the Policy's
Cash Surrender Value. Each Policy year you are allowed 12 free partial
withdrawals. For each partial withdrawal after 12, we impose a $25 fee. A
partial withdrawal may be subject to a surrender charge and have Federal income
tax consequences.
The minimum amount of a partial withdrawal request, net of any applicable fees
and surrender charges, is the lesser of:
(1) $500 from an Investment Fund or the General Account; or
(2) the Policy's Accumulation Account Value in an Investment Fund.
Partial withdrawals made during a Policy year are subject to the following
limitations. The maximum amount that may be withdrawn from an Investment Fund is
the Policy's Accumulation Account Value net of any applicable surrender charges
and fees in that Investment Fund. The total partial withdrawals and transfers
from the General Account over the Policy year may not exceed a maximum amount
equal to the greater of the following:
(1) 25% of the Cash Surrender Value in the General Account at the beginning of
the Policy year, multiplied by the withdrawal percentage limit shown in the
Policy; or
(2) the previous Policy year's maximum amount.
You may allocate the amount withdrawn plus any applicable surrender charges and
fees, subject to the above conditions, among the Investment Funds and the
General Account. If no allocation is specified, then the partial withdrawal will
be allocated among the Investment Funds and the General Account in the same
proportion that the Policy's Accumulation Account Value in each Investment Fund
and the General Account bears to the total Accumulation Account Value of the
Policy, less the Accumulation Account Value in the Loan Account, on the date the
request was received. If the limitations on withdrawals from the General Account
will not permit this pro-rata allocation, you will be requested to provide an
alternate allocation.
No amount may be withdrawn that would result in there being insufficient
Accumulation Account Value to meet any surrender charge and applicable fees that
would be payable immediately following the withdrawal upon the surrender of the
remaining Accumulation Account Value.
The death benefit will be affected by a partial withdrawal, unless death benefit
Option A or Option C is in effect and the withdrawal is made under the terms of
an anniversary partial withdrawal rider. If death benefit Option A or death
benefit Option C is in effect and the death benefit equals the Face Amount, then
a partial withdrawal will decrease the Face Amount by an amount equal to the
partial withdrawal plus the applicable surrender charge resulting from that
partial withdrawal. If the death benefit is based on a percentage of the
Accumulation Account Value, then a partial withdrawal will decrease the Face
Amount by an amount by which the partial withdrawal plus the applicable
surrender charge and fees exceeds the difference between the death benefit and
the Face Amount. If death benefit Option B is in effect, the Face Amount will
not change.
The Face Amount remaining in force after a partial withdrawal may not be less
than the minimum Face Amount. Any request for a partial withdrawal that would
reduce the Face Amount below this amount will not be implemented.
Partial withdrawals may affect the way in which the cost of insurance charge is
calculated and the amount of pure insurance protection afforded under a Policy.
We may change the minimum amount required for a partial withdrawal or the number
of times partial withdrawals may be made.
Pro-Rata Surrender
After the first Policy year, you can make a Pro-Rata Surrender of the Policy.
The Pro-Rata Surrender will reduce the Face Amount and the Accumulation Account
Value by a percentage chosen by you. This percentage must be any whole number. A
Pro-Rata Surrender may have Federal income tax consequences. The percentage will
be applied to the Face Amount and the Accumulation Account Value on the Monthly
Anniversary on or following our receipt of the request.
You may allocate the amount of decrease in Accumulation Account Value plus any
applicable surrender charge and fees among the Investment Funds and the General
Account. If no allocation is specified, then the decrease in Accumulation
Account Value and any applicable surrender charge and fees will be allocated
among the Investment Funds and the General Account in the same proportion that
the Policy's Accumulation Account Value in each Investment Fund and the General
Account bears to the total Accumulation Account Value of the Policy, less the
Accumulation Account Value in the Loan Account, on the date the request for
Pro-Rata Surrender is received.
A Pro-Rata Surrender cannot be processed if it will reduce the Face Amount below
the minimum Face Amount of the Policy. No Pro-Rata Surrender will be processed
for more Cash Surrender Value than is available on the date of the Pro-Rata
Surrender. A cash payment will be made to you for the amount of Accumulation
Account Value reduction less any applicable surrender charges and fees.
Pro-Rata Surrenders may affect the way in which the cost of insurance charge is
calculated and the amount of the pure insurance protection afforded under the
Policy.
Full Surrenders
To effect a full surrender, either the Policy must be returned to us along with
the request, or the request must be accompanied by a completed affidavit of
loss, which is available from us. Upon surrender, we will pay the Cash Surrender
Value to you in a single sum. We will determine the Cash Surrender Value as of
the date that we receive your written request at our Service Office. If the
request is received on a Monthly Anniversary, the monthly deduction otherwise
deductible will be included in the amount paid. Coverage under a Policy will
terminate as of the date of surrender. The Insured must be living at the time of
a surrender. A surrender may have Federal income tax consequences.
8. OTHER INFORMATION
Cova
Cova Financial Life Insurance Company (Cova) was originally incorporated on
September 6, 1972 as Industrial Indemnity Life Insurance Company, a California
corporation, and changed its name to Xerox Financial Life Insurance Company in
1986. On June 1, 1995, a wholly-owned subsidiary of General American Life
Insurance Company (General American Life) purchased Cova, which on that date
changed its name to Cova Financial Life Insurance Company. On January 6, 2000,
Metropolitan Life Insurance Company (MetLife) acquired GenAmerica Corporation,
the ultimate parent company of Cova Financial Services Life Insurance Company
(Cova Life), the parent company of Cova. The acquisition of GenAmerica
Corporation does not affect policy benefits or any other terms or conditions
under your Policy. MetLife, headquartered in New York city since 1868, is a
leading provider of insurance and financial products and services to individual
and group customers.
Cova is presently licensed to do business in the state of California.
Distribution
Cova Life Sales Company (Life Sales), One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644, acts as the distributor of the Policies. Life
Sales is our affiliate.
Commissions will be paid to broker-dealers who sell the Policies. Currently,
broker-dealers will be paid first-year commissions equal up to 90% of Target
Premium and 4.0% of excess premiums paid in Policy year 1. In renewal years, the
commissions will equal up to 5.0% of premiums paid in Policy years 2-10 and 2.0%
in Policy years 11 and beyond. In addition, broker-dealers will receive
annually, asset-based compensation equal up to .25% of Accumulation Account
Value for all Policy years beginning the 13th month. Sometimes, Cova enters into
an agreement with the broker-dealer to pay the broker-dealer persistency bonuses
in addition to the standard commission.
The Separate Account
We established a separate account, Cova Variable Life Account Five (Separate
Account), to hold the assets that underlie the policies.
The assets of the Separate Account are held in our name on behalf of the
Separate Account and legally belong to us. However, those assets that underlie
the Policies, are not chargeable with liabilities arising out of any other
business we may conduct. All the income, gains and losses (realized or
unrealized) resulting from those assets are credited to or against the Policies
and not against any other policies we may issue.
Suspension of Payments or Transfers
We may be required to suspend or postpone any payments or transfers for any
period when:
1) the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2) trading on the New York Stock Exchange is restricted;
3) an emergency exists as a result of which disposal of shares of the
Investment Funds is not reasonably practicable or we cannot reasonably
value the shares of the Investment Funds;
4) during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
We may defer the portion of any transfer, amount payable or surrender, or Policy
Loan from the General Account for not more than 6 months.
Ownership
Owner. The Insured is the Owner of the Policy unless another person or entity is
shown as the Owner in the application. The Owner is entitled to all rights
provided by the Policy. If there is more than one Owner at a given time, all
owners must exercise the rights of ownership by joint action. If the Owner dies,
and the Owner is not the Insured, the Owner's interest in the Policy becomes the
property of his or her estate unless otherwise provided. Unless otherwise
provided, the Policy is jointly owned by all Owners named in the Policy or by
the survivors of those joint Owners. Unless otherwise stated in the Policy, the
final Owner is the estate of the last joint Owner to die.
Beneficiary. The Beneficiary is the person(s) or entity you name to receive any
death proceeds. The Beneficiary is named at the time the Policy is issued unless
changed at a later date. You can name a contingent Beneficiary prior to the
death of the Insured. Unless an irrevocable Beneficiary has been named, you can
change the Beneficiary at any time before the Insured dies. If there is an
irrevocable Beneficiary, all Policy changes except premium allocations and
transfers require the consent of the Beneficiary.
Primary and contingent Beneficiaries are as named in the application, unless you
make a change. To change a Beneficiary, you must submit a written request to us.
We may require the Policy to record the change. The request will take effect
when signed, subject to any action we may take before receiving it.
One or more irrevocable Beneficiaries may be named.
If a Beneficiary is a minor, we will make payment to the guardian of his or her
estate. We may require proof of age of any Beneficiary.
Proceeds payable to a Beneficiary will be free from the claims of creditors, to
the extent allowed by law.
Assignment. You can assign the Policy. A copy of any assignment must be filed
with our Service Office. We are not responsible for the validity of any
assignment. If you assign the Policy, your rights and those of any
revocably-named person will be subject to the assignment. An assignment will not
affect any payments we may make or actions we may take before such assignment
has been recorded at our Service Office. This may be a taxable event. You should
consult a tax adviser if you wish to assign the Policy.
Adjustment of Charges
The Policy is available for purchase by individuals, corporations, and other
institutions. For certain individuals and certain corporate or other groups or
sponsored arrangements purchasing one or more policies, we may waive or adjust
the amount of the sales charge, contingent deferred sales charge, monthly
administrative charge, or other charges where the expenses associated with the
sale of the Policy or policies or the underwriting or other administrative costs
associated with the Policy or policies warrant an adjustment.
Sales, underwriting, or other administrative expenses may be reduced for reasons
such as expected economies resulting from a corporate purchase or a group or
sponsored arrangement, from the amount of the initial premium payment or
payments, or from the amount of projected premium payments. We will determine in
our discretion if, and in what amount, an adjustment is appropriate. We may
modify the criteria for qualification for adjustment of charges as experience is
gained, subject to the limitation that such adjustments will not be unfairly
discriminatory against the interests of any owner.
PART II
Executive Officers and Directors
The directors and executive officers of Cova and their principal occupations for
the past five years are as follows:
<TABLE>
<CAPTION>
Principal Occupation During
Name the Past Five Years
- ---- -------------------
<S> <C>
John W. Barber*** Director of Cova - June, 1995 to present; Director of First Cova Life Insurance Company (FCLIC) -
June, 1995 to present; Director of Cova Financial Services Life Insurance Company (CFSLIC) - June,
1995 to present; Vice President and Controller of General American Life Insurance Company -
December, 1984 to present; President and Director of Equity Intermediary Company - October, 1988 to
present.
William P. Boscow* Vice President of Cova and CFSLIC - 1996 to present; Senior Vice President of Cova Life Management
Company (CLMC), February, 1999 to present; First Vice President of CLMC, 1996 - January 1999.
Constance A. Doern**** Vice President of Cova - 1997 to present, prior thereto Assistant Vice President from 1990 to
1995; Vice President of CFSLIC - 1997 to present, prior thereto Assistant Vice President from 1990
to 1995; Vice President of FCLIC - 1997 to present, prior thereto Assistant Vice President from
1993 to 1995; Vice President of J&H/KVI - 1989 to 1998; Vice President of Cova Life Administration
Services Company (CLASC) - 1998 to present.
Patricia E. Gubbe* Vice President of Cova - 1989 to present; Vice President of CFSLIC - 1989 to present; Vice
President of FCLIC - 1992 to present; First Vice President of CLMC - 1996 to present, prior thereto
Vice President from 1989 to 1996; President and Chief Compliance Officer of Cova Life Sales Company
(CLSC) from February, 1999 to present; Vice President and Chief Compliance Officer of CLSC -1989 to
January, 1999.
Philip A. Haley* Executive Vice President of Cova - May 1997 to present, prior thereto Vice President from 1990 to
1997 and Assistant Vice President from 1989 to 1990; Executive Vice President of FCLIC - May, 1997
to present, prior thereto Vice President from 1995 to 1997; Executive Vice President of CFSLIC -
May 1997 to present, prior thereto Vice President from 1990 to 1997 and Assistant Vice President
from 1989 to 1990; Executive Vice President of CLMC from May, 1997 to present, prior thereto Senior
Vice President from 1996 to 1997 and Vice President from 1990 to 1996 and Assistant Vice President
from 1989 to 1990; Vice President of CLSC from 1991 to present, prior thereto Assistant Vice
President from 1989 to 1991.
J. Robert Hopson* Vice President, Chief Actuary and Director of Cova and CFSLIC - 1991 to present; Vice President,
Chief Actuary and Director of FCLIC - 1992 to present; Senior Vice President, Chief Actuary and
Director of CLMC - 1996 to present, prior thereto Vice President and Director from 1993 to 1996 and
Vice President from 1991 to 1993.
E. Thomas Hughes, Jr.** Treasurer and Director of Cova - June, 1995 to present; Treasurer and Director of CFSLIC -
June, 1995 to present; Treasurer of FCLIC - June, 1995 to present; Corporate Actuary and Treasurer
of General American Life Insurance Company - October, 1994 to present. Formerly, Executive Vice
President - Group Pensions, General American Life Insurance Company - March, 1990 to October, 1994.
In addition to the Cova companies, Director of the following General American subsidiary companies:
Paragon Life Insurance Company and RGA Reinsurance Company - October, 1994 to present. Treasurer of
the following General American subsidiary companies: Paragon Life Insurance Company, General Life
Insurance Company of America, General Life Insurance Company, General American Holding Company, Red
Oak Realty Company, Gen Mark Incorporated, Walnut Street Securities, Inc., Walnut Street Advisers
Inc., White Oak Royalty Company, Walnut Street Funds, Inc., and RGA Reinsurance Company - October,
1994 to present.
Douglas E. Jacobs* Vice President of Cova, CFSLIC and CLMC - 1985 to present.
Lisa O. Kirchner**** Vice President of Cova - 1997 to present, prior thereto Assistant Vice President from 1990 to 1995;
Vice President of CFSLIC - 1997 to present, prior thereto Assistant Vice President from 1988 to
1995; Vice President of FCLIC - 1997 to present, prior thereto Assistant Vice President from 1993
to 1995; Vice President of J&H/KVI - 1985 to 1998; Vice President of CLASC - 1998 to present.
James W. Koeger** Assistant Treasurer of Cova
Richard A. Liddy** Chairman of the Board of Directors of Cova, CFSLIC, FCLIC, CLMC, Cova Investment Advisory
Corporation (Advisory) and Cova Investment Allocation Corporation (Allocation) - April, 1997 to
present; Chairman of the Board, President and Chief Executive Officer of General American Life
Insurance Company - May, 1992 to present; Mr. Liddy also holds various positions with the General
American subsidiaries as follows: Chairman of the Board and President of General American Mutual
Holding Company, GenAmerica Corporation and General American Holding Company; Chairman of the Board
of Security Equity Life Insurance Company, Conning Corporation, The Walnut Street Funds, Inc.,
General American Capital Company, Reinsurance Group of America, Inc., RGA Life Reinsurance Company
of Canada, and RGA Reinsurance Company.
William C. Mair* Vice President and Director of Cova, CFSLIC and FCLIC from 1995 to present; Vice President,
Controller and Director of Cova from 1995 to 1998, prior thereto Vice President, Controller,
Treasurer and Director. Vice President, Controller and Director of CFSLIC from 1995 to 1998, prior
thereto Vice President, Controller, Treasurer and Director; Director of FCLIC from 1993 to present;
Vice President, Controller and Director of FCLIC from 1992 to 1998; Secretary of FCLIC from 1992 to
1995; Vice President, Treasurer, Controller and Director of Advisory - 1993 to present; Vice
President, Treasurer, Controller and Director of Allocation - 1994 to present; Director of CLSC -
1992 to present; Senior Vice President, Treasurer, Controller and Director of CLMC - 1989 to
present; Vice President, Treasurer, Controller, Chief Financial Officer, Chief Accounting Officer
and Trustee of Cova Series Trust - 1996 to present.
Matthew P. McCauley** Assistant Secretary and Director of Cova, CFSLIC and FCLIC - June, 1995 to present; Associate
General Counsel and Vice President of General American Life Insurance Company - 1973 to present;
also, Director, Vice President, General Counsel and Secretary for several other General American
subsidiaries including Equity Intermediary Company, Red Oak Realty Company, and White Oak Royalty
Company; General American Holding Company and Paragon Life Insurance Company. General Counsel and
Secretary, Reinsurance Group of America, Incorporated. Director and Secretary, General American
Capital Company. General Counsel and Secretary, Conning Corporation. General Counsel, Conning Asset
Management Company. Director of RGA Reinsurance Company, Walnut Street Securities, Inc. Secretary
to the Walnut Street Funds, Inc.
Mark E. Reynolds* Executive Vice President and Director of Cova and CFSLIC - May, 1997 to present; Executive Vice
President, Chief Financial Officer and Director of FCLIC - May, 1997 to present; Executive Vice
President of CLMC - May, 1997 to present; Executive Vice President and Director of Advisory -
December, 1996 to present; Executive Vice President and Director of Allocation - December, 1996 to
present.
Myron H. Sandberg* Vice President of Cova and CFSLIC - 1985 to present; and Vice President of CLMC - 1989 to present.
John W. Schaus* Vice President of Cova and CFSLIC - 1988 to present; First Vice President of CLMC from January,
1999 to present; prior thereto, Vice President of CLMC - 1989 to 1998.
Bernard J. Spaulding* Senior Vice President and General Counsel of Cova, CFSLIC, FCLIC and CLMC since March, 1999;
Secretary of Cova, CFSLIC, FCLIC - September 1999 to present.
Lorry J. Stensrud* President and Director of Cova, CFSLIC, FCLIC and CLMC from June, 1995 to present, prior thereto
Executive Vice President; President and Director of Advisory from 1993 to present; President and
Director of Allocation from 1994 to present. Director of CLSC from 1989 to present; President,
Chief Executive Officer and Trustee of Cova Series Trust - 1996 to present.
Joann T. Tanaka* Senior Vice President of Cova and CFSLIC - January, 1999 to present; prior thereto, Vice President
of Cova and CFSLIC from July, 1998 to December, 1998; Senior Vice President, Conning Asset
Management, General American - June, 1987 to June, 1998. Director of CFSLIC, Cova and FCLIC from
September, 1999 to present.
Patricia M. Wersching** Assistant Treasurer of Cova
Peter L. Witkewiz* Vice President and Controller of Cova, CFSLIC and FCLIC - July, 1998 to present; Vice President of
Cova, CFSLIC and FCLIC - 1993 to June, 1998.
<FN>
* Business Address: Cova, One Tower Lane, Suite 3000, Oakbrook Terrace, IL 60181
** Business Address: General American, 700 S. Market Street, St. Louis, MO 63101
*** Business Address: General American, 13045 Tesson Ferry Road, St. Louis, MO 63128
**** Business Address: Cova Life Administration Services Company, 4700 Westown Parkway, Bldg. 4, Suite 200, West Des
Moines, IA 50266
</FN>
</TABLE>
Voting
In accordance with our view of present applicable law, we will vote the shares
of the Investment Funds at special meetings of shareholders in accordance with
instructions received from Owners having a voting interest. We will vote shares
for which we have not received instructions in the same proportion as we vote
shares for which we have received instructions. We will vote shares we own in
the same proportion as we vote shares for which we have received instructions.
The funds do not hold regular meetings of shareholders.
If the Investment Company Act of 1940 or any regulation thereunder should be
amended or if the present interpretation thereof should change, and as a result
we determine that we are permitted to vote the shares of the funds in our own
right, we may elect to do so.
The voting interests of the Owner in the funds will be determined as follows:
Owners may cast one vote for each $100 of Accumulation Account Value of a Policy
which is allocated to an Investment Fund on the record date.
Fractional votes are counted.
The number of shares which a person has a right to vote will be determined as of
the date to be chosen by us not more than sixty (60) days prior to the meeting
of the fund. Voting instructions will be solicited by written communication at
least fourteen (14) days prior to such meeting.
Each Owner having such a voting interest will receive periodic reports relating
to the Investment Funds in which he or she has an interest, proxy material and a
form with which to give such voting instructions.
Disregard of Voting Instructions
We may, when required to do so by state insurance authorities, vote shares of
the funds without regard to instructions from owners if such instructions would
require the shares to be voted to cause an Investment Fund to make, or refrain
from making, investments which would result in changes in the sub-classification
or investment objectives of the Investment Fund. We may also disapprove changes
in the investment policy initiated by owners or trustees/directors of the funds,
if such disapproval is reasonable and is based on a good faith determination by
us that the change would violate state or Federal law or the change would not be
consistent with the investment objectives of the Investment Funds or which
varies from the general quality and nature of investments and investment
techniques used by other funds with similar investment objectives underlying
other variable contracts offered by us or of an affiliated company. In the event
we disregard voting instructions, a summary of this action and the reasons for
such action will be included in the next annual report to owners.
Legal Opinions
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice on
certain matters relating to the Federal securities and income tax laws in
connection with the Policies.
Our Right to Contest
We cannot contest the validity of the Policy except in the case of fraud after
it has been in effect during the Insured's lifetime for two years. If the Policy
is reinstated, the two-year period is measured from the date of reinstatement.
In addition, if the Insured commits suicide in the two-year period, or such
period as specified in state law, the benefit payable will be limited to
premiums paid less Indebtedness and less any surrenders. We also have the right
to adjust any benefits under the Policy if the answers in the application
regarding the use of tobacco are not correct.
Additional Benefits
Subject to certain requirements, one or more of the following additional
insurance benefits may be added to a Policy by rider. The descriptions below are
intended to be general; the terms of the Policy riders providing the additional
benefits may vary from state to state, and the Policy rider should be consulted.
In addition, certain riders may not be available in your state. The cost of any
additional riders will be determined in accordance with the rider and shown on
the specifications page of your Policy. (See "Expenses -- Charge for Additional
Benefit Riders".) Certain restrictions may apply and are described in the
applicable rider.
Accelerated Benefit Rider -- This rider provides a benefit to the Owner if the
Insured becomes terminally ill and is not expected to live more then twelve
months. The Owner may receive 25%, 50% or 75% (but no more than $250,000) of the
eligible proceeds in a lump sum. "Eligible proceeds" means the death benefit
that would have been payable had the Insured died on the date the rider is
exercised.
The receipt of an accelerated death benefit amount may adversely affect the
recipient's eligibility for Medicaid or other government benefits or
entitlements.
Anniversary Partial Withdrawal Rider -- This rider allows the Owner to withdraw
up to 15% of the Policy's Cash Surrender Value on any Policy Anniversary without
reducing the Face Amount. A contingent deferred sales charge will still apply.
Guaranteed Survivor Purchase Option (GSPO-Plus) -- This rider grants the Policy
Owner or the Insured's Beneficiary the option to purchase, upon the death of the
Insured, on the 10th anniversary of the rider, and on the rider anniversary
nearest the Designated Life's 65th birthday, a specified amount of additional
insurance coverage on the Designated Life (or Lives) without furnishing evidence
of insurability.
Lifetime Coverage Rider -- This rider provides the continuation of the Policy's
Face Amount beyond age 100, provided the Policy remains in force to age 100 with
a positive Cash Surrender Value. If the Policy is in force after the Insured's
Attained Age 100, the death benefit will be the greater of the Face Amount or
101% of the Accumulation Account Value.
Secondary Guarantee Rider -- This rider guarantees that if, during the secondary
guarantee period, the sum of all premiums paid on the Policy, reduced by any
partial withdrawals and any outstanding loan balance, is greater than or equal
to the sum of the secondary guarantee premiums required since the Issue Date,
the Policy will not lapse as a result of an Accumulation Account Value less any
loans, loan interest due, and any surrender charge being insufficient to pay the
monthly deduction.
The secondary guarantee period is the lesser of twenty Policy years, or the
number of Policy years until the Insured reaches Attained Age 70. For Policies
issued after Attained Age 60, the secondary guarantee period is ten Policy
years.
Supplemental Coverage Term Rider -- This rider provides level term insurance on
the life of the Insured under the base policy. It can be added only at issue. It
cannot be increased or added to an existing Policy.
Waiver of Monthly Deduction Rider -- This rider provides for the waiver of the
monthly deductions while the Insured is totally disabled, subject to certain
limitations described in the rider. The Insured must have become disabled after
age 5 and before age 65.
Waiver of Specified Premium Rider -- This rider provides for crediting the
Policy's Accumulation Account Value with a specified monthly premium while the
Insured is totally disabled. The monthly premium selected at issue is not
guaranteed to keep the Policy in force. The Insured must have become disabled
after age 5 and before age 65.
Federal Tax Status
NOTE: The following description is based upon our understanding of current
Federal income tax law applicable to life insurance in general. We cannot
predict the probability that any changes in such laws will be made. Purchasers
are cautioned to seek competent tax advice regarding the possibility of such
changes. Section 7702 of the Internal Revenue Code of 1986, as amended ("Code"),
defines the term "life insurance contract" for purposes of the Code. We believe
that the Policies to be issued will qualify as "life insurance contracts" under
section 7702. We do not guarantee the tax status of the Policies. Purchasers
bear the complete risk that the Policies may not be treated as "life insurance"
under Federal income tax laws. Purchasers should consult their own tax advisers.
It should be further understood that the following discussion is not exhaustive
and that special rules not described in this prospectus may be applicable in
certain situations.
Introduction. The discussion contained herein is general in nature and is not
intended as tax advice. Each person concerned should consult a competent tax
adviser. No attempt is made to consider any applicable state or other tax laws.
Moreover, the discussion herein is based upon our understanding of current
Federal income tax laws as they are currently interpreted. No representation is
made regarding the likelihood of continuation of those current Federal income
tax laws or of the current interpretations by the Internal Revenue Service.
We are taxed as a life insurance company under the Code. For Federal income tax
purposes, the Separate Account is not a separate entity from us and its
operations form a part of us.
Diversification. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable life insurance policies. The Code
provides that a variable life insurance Policy will not be treated as life
insurance for any period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification of
the Policy as a life insurance contract would result in imposition of Federal
income tax to the owner with respect to earnings allocable to the Policy prior
to the receipt of payments under the Policy. The Code contains a safe harbor
provision which provides that life insurance policies, such as these policies,
will meet the diversification requirements if, as of the close of each quarter,
the underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five (55%) percent of the total assets
consist of cash, cash items, U.S. Government securities and securities of other
regulated investment companies. There is an exception for securities issued by
the U.S. Treasury in connection with variable life insurance policies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
Section 1.817-5), which established diversification requirements for the
investment funds underlying variable contracts such as the Policies. The
regulations amplify the diversification requirements for variable contracts set
forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment fund will be deemed
adequately diversified if: (i) no more than 55% of the value of the total assets
of the fund is represented by any one investment; (ii) no more than 70% of the
value of the total assets of the fund is represented by any two investments;
(iii) no more than 80% of the value of the total assets of the fund is
represented by any three investments; and (iv) no more than 90% of the value of
the total assets of the fund is represented by any four investments. For
purposes of these regulations, all securities of the same issuer are treated as
a single investment. The Code provides that, for purposes of determining whether
or not the diversification standards imposed on the underlying assets of
variable contracts by Section 817(h) of the Code have been met, "each United
States government agency or instrumentality shall be treated as a separate
issuer."
We intend that each Investment Fund underlying the Policies will be managed by
the managers in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification regulations do
not provide guidance regarding the circumstances in which owner control of the
investments of the Separate Account will cause the owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Policy. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of owner control which may be exercised under the Policy is different
in some respects from the situations addressed in published rulings issued by
the Internal Revenue Service in which it was held that the Policyowner was not
the owner of the assets of the separate account. It is unknown whether these
differences, such as the owner's ability to transfer among investment choices or
the number and type of investment choices available, would cause the owner to be
considered the owner of the assets of the Separate Account.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in you being retroactively
determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, we reserve the right to modify the Policy
in an attempt to maintain favorable tax treatment.
Tax Treatment of the Policy. The Policy has been designed to comply with the
definition of life insurance contained in Section 7702 of the Code. Although
some interim guidance has been provided and proposed regulations have been
issued, final regulations have not been adopted. Section 7702 of the Code
requires that the amount of mortality and other expense charges be reasonable.
In establishing these charges, we have relied on the interim guidance provided
in IRS Notice 88-128 and proposed regulations issued on July 5, 1991. Currently,
there is even less guidance as to a Policy issued on a substandard risk basis
and thus it is even less clear whether a Policy issued on such basis would meet
the requirements of Section 7702 of the Code.
While we have attempted to comply with Section 7702, the law in this area is
very complex and unclear. There is a risk, therefore, that the Internal Revenue
Service will not concur with our interpretations of Section 7702 that were made
in determining such compliance. In the event the Policy is determined not to so
comply, it would not qualify for the favorable tax treatment usually accorded
life insurance policies. You should consult your own tax advisers with respect
to the tax consequences of purchasing the Policy.
Policy Proceeds. The tax treatment accorded to loan proceeds and/or surrender
payments from the policies will depend on whether the Policy is considered to be
a MEC. (See "Tax Treatment of Loans and Surrenders.") Otherwise, we believe that
the Policy should receive the same Federal income tax treatment as any other
type of life insurance. As such, the death benefit thereunder is excludable from
the gross income of the Beneficiary under Section 101(a) of the Code. Also, you
are not deemed to be in constructive receipt of the Cash Surrender Value,
including increments thereon, under a Policy until there is a distribution of
such amounts.
Federal, state and local estate, inheritance and other tax consequences of
ownership, or receipt of Policy proceeds, depend on the circumstances of each
owner or Beneficiary.
Tax Treatment of Loans and Surrenders. Section 7702A of the Code sets forth the
rules for determining when a life insurance Policy will be deemed to be a MEC. A
MEC is a contract which is entered into or materially changed on or after June
21, 1988 and fails to meet the 7-pay test. A Policy fails to meet the 7-pay test
when the cumulative amount paid under the Policy at any time during the first 7
Policy years exceeds the sum of the net level premiums which would have been
paid on or before such time if the Policy provided for paid-up future benefits
after the payment of seven (7) level annual premiums. A material change would
include any increase in the future benefits or addition of qualified additional
benefits provided under a Policy unless the increase is attributable to: (1) the
payment of premiums necessary to fund the lowest death benefit and qualified
additional benefits payable in the first seven Policy years; or (2) the
crediting of interest or other earnings with respect to such premiums.
Furthermore, any Policy received in exchange for a Policy classified as a MEC
will be treated as a MEC regardless of whether it meets the 7-pay test. However,
an exchange under Section 1035 of the Code of a life insurance Policy entered
into before June 21, 1988 for the Policy will not cause the Policy to be treated
as a MEC if no additional premiums are paid.
Due to the flexible premium nature of the Policy, the determination of whether
it qualifies for treatment as a MEC depends on the individual circumstances of
each Policy.
If the Policy is classified as a MEC, then surrenders and/or loan proceeds are
taxable to the extent of income in the Policy. Such distributions are deemed to
be on a last-in, first-out basis, which means the taxable income is distributed
first. Loan proceeds and/or surrender payments, including those resulting from
the lapse of the Policy, may also be subject to an additional 10% Federal income
tax penalty applied to the income portion of such distribution. The penalty
shall not apply, however, to any distributions: (1) made on or after the date on
which the taxpayer reaches age 59 1/2; (2) which is attributable to the taxpayer
becoming disabled (within the meaning of Section 72(m)(7) of the Code); or (3)
which is part of a series of substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy) of the taxpayer or
the joint lives (or joint life expectancies) of such taxpayer and his
Beneficiary.
If a Policy is not classified as a MEC, then any surrenders shall be treated
first as a recovery of the investment in the Policy which would not be received
as taxable income. However, if a distribution is the result of a reduction in
benefits under the Policy within the first fifteen years after the Policy is
issued in order to comply with Section 7702, such distribution will, under rules
set forth in Section 7702, be taxed as ordinary income to the extent of income
in the Policy.
Any loans from a Policy which is not classified as a MEC, will be treated as
Indebtedness of the owner and not a distribution. Upon complete surrender, if
the amount received plus loan Indebtedness exceeds the total premiums paid that
are not treated as previously surrendered by the Policy owner, the excess
generally will be treated as ordinary income.
Personal interest payable on a loan under a Policy owned by an individual is
generally not deductible. Furthermore, no deduction will be allowed for interest
on loans under policies covering the life of any employee or officer of the
taxpayer or any person financially interested in the business carried on by the
taxpayer to the extent the Indebtedness for such employee, officer or
financially interested person exceeds $50,000. The deductibility of interest
payable on Policy loans may be subject to further rules and limitations under
Sections 163 and 264 of the Code.
Policyowners should seek competent tax advice on the tax consequences of taking
loans, distributions, exchanging or surrendering any Policy.
Multiple Policies. The Code further provides that multiple MECs that are issued
within a calendar year period to the same owner by one company or its affiliates
are treated as one MEC for purposes of determining the taxable portion of any
loans or distributions. Such treatment may result in adverse tax consequences
including more rapid taxation of the loans or distributed amounts from such
combination of policies. You should consult a tax adviser prior to purchasing
more than one MEC in any calendar year period.
Tax Treatment of Assignments. An assignment of a Policy or the change of
ownership of a Policy may be a taxable event. You should therefore consult a
competent tax adviser should you wish to assign or change the owner of your
Policy.
Qualified Plans. The Policies may be used in conjunction with certain Qualified
Plans. Because the rules governing such use are complex, you should not do so
until you have consulted a competent Qualified Plans consultant.
Income Tax Withholding. All distributions or the portion thereof which is
includible in gross income of the Policy owner are subject to federal income tax
withholding. However, in most cases you may elect not to have taxes withheld.
You may be required to pay penalties under the estimated tax rules, if
withholding and estimated tax payments are insufficient.
Reports to Owners
Each year a report will be sent to you which shows the current Policy values,
premiums paid and deductions made since the last report, and any outstanding
loans.
Legal Proceedings
There are no legal proceedings to which the Separate Account or the Distributor
is a party or to which the assets of the Separate Account are subject. We are
not involved in any litigation that is of material importance in relation to our
total assets or that relates to the Separate Account.
Experts The balance sheets of the Company as of December 31, 1999 and 1998, and
the related statements of income, shareholder's equity, and cash flows for each
of the years in the three-year period ended December 31, 1999, and the statement
of assets and liabilities of the Separate Account as of December 31, 1999, and
the related statements of operations and changes in net assets for the period
from commencement of operations through December 31, 1999 have been included
herein in reliance upon the reports of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon authority of said firm as
experts in accounting and auditing.
Financial Statements
Financial statements of the Separate Account and of the Company are provided
below.
COVA VARIABLE LIFE ACCOUNT FIVE
Financial Statements
December 31, 1999
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Contract Owners of Cova Variable
Life Account Five, Board of Directors
and Shareholder of Cova Financial Life
Insurance Company:
We have audited the accompanying statement of assets and liabilities of each of
the sub-accounts comprising Cova Variable Life Account Five of Cova Financial
Life Insurance Company (the Separate Account), as of December 31, 1999, and the
related statements of operations and changes in net assets for the year then
ended. These financial statements are the responsibility of the Separate
Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1999 by correspondence with
transfer agents. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the sub-accounts of Cova
Variable Life Account Five of Cova Financial Life Insurance Company as of
December 31, 1999, and the results of their operations and the changes in their
net assets for the year then ended, in conformity with generally accepted
accounting principles.
Chicago, Illinois
March 20, 2000
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
Assets:
Investments:
Cova Series Trust (Cova):
<S> <C> <C> <C>
Lord Abbett Growth and Income Portfolio 8,901 shares at a net asset value of $24.070563 per share $214,245
Bond Debenture Portfolio 8,713 shares at a net asset value of $12.474609 per share 108,696
Developing Growth Portfolio 8 shares at a net asset value of $14.885144 per share 113
Large Cap Research Portfolio 7,812 shares at a net asset value of $14.991245 per share 117,113
Mid-Cap Value Portfolio 5,439 shares at a net asset value of $11.168093 per share 60,745
Quality Bond Portfolio 9 shares at a net asset value of $10.669328 per share 100
Small Cap Stock Portfolio 7,608 shares at a net asset value of $17.268582 per share 131,374
Large Cap Stock Portfolio 21,786 shares at a net asset value of $20.674865 per share 450,417
Select Equity Portfolio 8,640 shares at a net asset value of $16.112437 per share 139,209
International Equity Portfolio 7,466 shares at a net asset value of $16.225039 per share 121,140
AIM Variable Insurance Funds, Inc. (AIM):
AIM V.I. Value Fund 1,900 shares at a net asset value of $33.50 per share 63,660
AIM V.I. Capital Appreciation Fund 764 shares at a net asset value of $35.58 per share 27,171
General American Capital Company (GACC):
Money Market Fund 15,680 shares at a net asset value of $20.252283 per share 317,557
Templeton Variable Products Series
Fund (Templeton):
Templeton Bond Fund 10 shares at a net asset value of $9.99 per share 100
Franklin Small Cap Investments Fund 9 shares at a net asset value of $15.79 per share 141
Templeton Stock Fund 5 shares at a net asset value of $24.39 per share 110
Templeton International Fund 5 shares at a net asset value of $22.25 per share 108
Franklin Growth Investments Fund 7 shares at a net asset value of $16.70 per share 123
------------
Total assets $1,752,122
============
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
Net Assets:
Accumulation units:
Single premium variable life policies (SPVL):
<S> <C> <C> <C>
Cova Lord Abbett Growth and Income 17,211 accumulation units at $12.448204 per unit $214,245
Cova Bond Debenture 10,240 accumulation units at $10.614338 per unit 108,696
Cova Developing Growth 9 accumulation units at $13.050371 per unit 113
Cova Large Cap Research 8,504 accumulation units at $13.771430 per unit 117,113
Cova Mid-Cap Value 6,003 accumulation units at $10.119059 per unit 60,745
Cova Quality Bond 9 accumulation units at $10.551764 per unit 100
Cova Small Cap Stock 10,224 accumulation units at $12.850204 per unit 131,374
Cova Large Cap Stock 31,535 accumulation units at $14.283064 per unit 450,417
Cova Select Equity 11,048 accumulation units at $12.600289 per unit 139,209
Cova International Equity 8,926 accumulation units at $13.571289 per unit 121,140
AIM V.I. Value 5,407 accumulation units at $11.774189 per unit 63,660
AIM V.I. Capital Appreciation 1,951 accumulation units at $13.925402 per unit 27,171
GACC Money Market 28,826 accumulation units at $11.013039 per unit 317,457
Templeton Bond 10 accumulation units at $9.970060 per unit 100
Franklin Small Cap Investments 10 accumulation units at $14.136079 per unit 141
Templeton Stock 10 accumulation units at $11.011283 per unit 110
Templeton International 10 accumulation units at $10.827249 per unit 108
Franklin Growth Investments 10 accumulation units at $12.333825 per unit 123
------------
1,752,022
Flexible premium variable universal life policies (FPVUL):
GACC Money Market 10 accumulation units at $10.047103 per unit 100
------------
Total net assets $1,752,122
============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Operations
Period ended December 31, 1999
<TABLE>
<CAPTION>
Cova
-----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ - 242 - 156 78 1 213
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of
portfolio shares (50) 2 - (13) (46) - 77
Realized gain distributions - 78 - - - 1 -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) (50) 80 - (13) (46) 1 77
----------- ----------- ----------- ----------- ----------- ----------- -----------
Change in unrealized appreciation 6,653 3,004 13 10,559 (3,680) (2) 34,574
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets from operations $ 6,603 3,326 13 10,702 (3,648) - 34,864
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Operations
Period ended December 31, 1999
<TABLE>
<CAPTION>
Cova AIM GACC Templeton
------------------------------------ ------------------------- ----------- -----------
Large V.I.
Cap Select International V.I. Capital Money
Stock Equity Equity Value Appreciation Market Bond
---------- ----------- ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 329 275 415 110 18 - -
---------- ----------- ------------ ----------- ------------ ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of
portfolio shares (116) (167) 31 6 17 6,140 -
Realized gain distributions 7,182 9,317 1,110 575 558 - -
---------- ----------- ------------ ----------- ------------ ----------- -----------
Net realized gain (loss) 7,066 9,150 1,141 581 575 6,140 -
---------- ----------- ------------ ----------- ------------ ----------- -----------
Change in unrealized appreciation 16,032 (10,304) 16,888 4,069 6,608 3,725 -
---------- ----------- ------------ ----------- ------------ ----------- -----------
Net increase (decrease) in net
assets from operations $ 23,427 (879) 18,444 4,760 7,201 9,865 -
========== =========== ============ =========== ============ =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Operations
Period ended December 31, 1999
<TABLE>
<CAPTION>
Templeton
-------------------------------------------------------
Franklin Franklin
Small Cap Growth
Investments Stock International Investments Total
----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends $ - - - - 1,837
----------- ----------- -------------- ------------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of portfolio
shares - - - - 5,881
Realized gain distributions - - - - 18,821
----------- ----------- -------------- ------------- -----------
Net realized gain (loss) - - - - 24,702
----------- ----------- -------------- ------------- -----------
Change in unrealized appreciation 41 10 8 23 88,221
----------- ----------- -------------- ------------- -----------
Net increase (decrease) in net
assets from operations $ 41 10 8 23 114,760
=========== =========== ============== ============= ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Changes in Net Assets
Period ended December 31, 1999
<TABLE>
<CAPTION>
Cova
----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ - 242 - 156 78 1 213
Net realized gain (loss) (50) 80 - (13) (46) 1 77
Change in unrealized appreciation 6,653 3,004 13 10,559 (3,680) (2) 34,574
Net increase (decrease) from ----------- ----------- ----------- ----------- ----------- ----------- -----------
operations 6,603 3,326 13 10,702 (3,648) - 34,864
----------- ----------- ----------- ----------- ----------- ----------- -----------
Contract transactions:
Cova payments 100 100 100 100 100 100 100
Cova redemptions - - - - - - -
Payments received from contract
owners - - - - - - -
Transfers between sub-accounts, net 209,709 105,997 - 107,473 65,008 - 97,560
Transfers for contract benefits,
terminations and insurance charges (2,167) (727) - (1,162) (715) - (1,150)
Net increase (decrease) in net
assets from contract ----------- ----------- ----------- ----------- ----------- ----------- -----------
transactions 207,642 105,370 100 106,411 64,393 100 96,510
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets 214,245 108,696 113 117,113 60,745 100 131,374
Net assets at beginning of period - - - - - - -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net assets at end of period $ 214,245 108,696 113 117,113 60,745 100 131,374
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Changes in Net Assets
Period ended December 31, 1999
<TABLE>
<CAPTION>
Cova AIM GACC Templeton
-------------------------------------- ------------------------- ----------- -----------
Large V.I.
Cap Select International V.I. Capital Money
Stock Equity Equity Value Appreciation Market Bond
----------- ---------- ------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ 329 275 415 110 18 - -
Net realized gain (loss) 7,066 9,150 1,141 581 575 6,140 -
Change in unrealized appreciation 16,032 (10,304) 16,888 4,069 6,608 3,725 -
Net increase (decrease) from ----------- ---------- ------------- ----------- ------------ ----------- -----------
operations 23,427 (879) 18,444 4,760 7,201 9,865 -
----------- ---------- ------------- ----------- ------------ ----------- -----------
Contract transactions:
Cova payments 100 100 100 100 100 300 100
Cova redemptions - - - - - (102) -
Payments received from contract
owners - - - - - 1,654,000 -
Transfers between sub-accounts, net 430,747 141,193 103,808 59,046 20,004 (1,340,545) -
Transfers for contract benefits,
terminations and insurance charges (3,857) (1,205) (1,212) (246) (134) (5,961) -
Net increase (decrease) in net
assets from contract ----------- ---------- ------------- ----------- ------------ ----------- -----------
transactions 426,990 140,088 102,696 58,900 19,970 307,692 100
----------- ---------- ------------- ----------- ------------ ----------- -----------
Net increase (decrease) in net
assets 450,417 139,209 121,140 63,660 27,171 317,557 100
Net assets at beginning of period - - - - - - -
----------- ---------- ------------- ----------- ------------ ----------- -----------
Net assets at end of period $ 450,417 139,209 121,140 63,660 27,171 317,557 100
=========== ========== ============= =========== ============ =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Changes in Net Assets
Period ended December 31, 1999
<TABLE>
<CAPTION>
Templeton
---------------------------------------------------------
Franklin Franklin
Small Cap Growth
Investments Stock International Investments Total
-------------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ - - - - 1,837
Net realized gain (loss) - - - - 24,702
Change in unrealized appreciation 41 10 8 23 88,221
Net increase (decrease) from -------------- ----------- ------------- ------------- -----------
operations 41 10 8 23 114,760
-------------- ----------- ------------- ------------- -----------
Contract transactions:
Cova payments 100 100 100 100 2,000
Cova redemptions - - - - (102)
Payments received from contract
owners - - - - 1,654,000
Transfers between sub-accounts, net - - - - -
Transfers for contract benefits,
terminations and insurance charges - - - - (18,536)
Net increase (decrease) in net
assets from contract -------------- ----------- ------------- ------------- -----------
transactions 100 100 100 100 1,637,362
-------------- ----------- ------------- ------------- -----------
Net increase (decrease) in net
assets 141 110 108 123 1,752,122
Net assets at beginning of period - - - - -
-------------- ----------- ------------- ------------- -----------
Net assets at end of period $ 141 110 108 123 1,752,122
============== =========== ============= ============= ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
(1) ORGANIZATION
Cova Variable Life Account Five (the Separate Account), a unit
investment trust registered under the Investment Company Act of 1940 as
amended, was established by Cova Financial Life Insurance Company
(CFLIC) and exists in accordance with the regulations of the California
Department of Insurance. The Separate Account is a funding vehicle for
single premium variable life (SPVL) and flexible premium variable
universal life insurance policies (FPVUL) offered by CFLIC.
On August 26, 1999, CFLIC's ultimate parent company, GenAmerica
Corporation, entered into a definitive agreement to be acquired by
Metropolitan Life Insurance Company. The acquisition occurred on
January 6, 2000.
The Separate Account is divided into sub-accounts with the assets of
each sub-account invested in corresponding portfolios of the following
investment companies. Each investment company is a diversified,
open-end, management investment company registered under the Investment
Company Act of 1940 as amended. The sub-accounts available for
investment may vary between variable life insurance policies offered by
CFLIC.
<TABLE>
<S> <C>
Cova Series Trust (Cova) 10 portfolios
General American Capital Company (GACC) 1 portfolios
Russell Insurance Funds (Russell) 5 portfolios
AIM Variable Insurance Funds, Inc. (AIM) 3 portfolios
Alliance Variable Products Series Fund, Inc. (Alliance) 2 portfolios
Liberty Variable Investment Trust (Liberty) 1 portfolios
Goldman Sachs Variable Insurance Trust (Goldman Sachs) 3 portfolios
Investors Fund Series (Kemper) 3 portfolios
MFS Variable Insurance Trust (MFS) 5 portfolios
Oppenheimer Variable Account Funds (Oppenheimer) 5 portfolios
Putnam Variable Trust (Putnam) 5 portfolios
Templeton Variable Products Series Fund (Templeton) 7 portfolios
</TABLE>
<TABLE>
<CAPTION>
The Separate Account commenced operations on March 1, 1999. The
sub-accounts commenced operations as follows:
<S> <C>
Cova Lord Abbett Growth and Income April 29, 1999
Cova Bond Debenture April 29, 1999
Cova Developing Growth July 17, 1999
Cova Large Cap Research July 12, 1999
Cova Mid-Cap Value July 12, 1999
Cova Quality Bond July 19, 1999
Cova Small Cap Stock April 29, 1999
Cova Large Cap Stock April 29, 1999
Cova Select Equity June 29, 1999
Cova International Equity May 4, 1999
AIM V.I. Value May 3, 1999
AIM V.I. Capital Appreciation May 3, 1999
GACC Money Market March 1, 1999
Templeton Bond July 19, 1999
Franklin Small Cap Investments July 19, 1999
Templeton Stock July 19, 1999
Templeton International July 19, 1999
Franklin Growth Investments July 19, 1999
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
(2) SIGNIFICANT ACCOUNTING POLICIES
(A) INVESTMENT VALUATION
Investments made in the portfolios of the investment companies are
valued at the reported net asset value of such portfolios, which
value their investment securities at fair value. The average cost
method is used to compute the realized gains and losses on the
sale of portfolio owned by the sub-accounts. Income from dividends
and gains from realized capital gain distributions are recorded on
the ex-distribution date.
(B) REINVESTMENT OF DISTRIBUTIONS
With the exception of the GACC Money Market Fund, dividends and
gains from realized gain distributions are reinvested in
additional shares of the portfolios.
GACC follows the Federal income tax practice known as consent
dividending, whereby substantially all of its net investment
income and realized capital gains are deemed to pass through to
the Separate Account. As a result, GACC does not distribute
dividends and realized capital gains. During December of each
year, the accumulated net investment income and realized capital
gains of the GACC Money Market Fund are allocated to the Separate
Account by increasing the cost basis and recognizing a gain in the
Separate Account.
(C) FEDERAL INCOME TAXES
The operations of the Separate Account are included in the federal
income tax return of CFLIC which is taxed as a Life Insurance
Company under the provisions of the Internal Revenue Code (IRC).
Under current IRC provisions, CFLIC believes it will be treated as
the owner of the Separate Account assets for federal income tax
purposes and does not expect to incur federal income taxes on the
earnings of the Separate Account to the extent the earnings are
credited to the variable life policies. Based on this, no charge
has been made to the Separate Account for federal income taxes. A
charge may be made in future years for any federal income taxes
that would be attributable to the variable life policies.
(3) CONTRACT FEES
There are fees associated with the variable life insurance
policies that are deducted from the policy account value and
Separate Account that reduce the return on investment. The type,
amount, and timing of the fees may vary between the variable life
policies offered by CFLIC and include mortality and expense risk,
administrative, selection and issue expense, cost of insurance,
tax expense (premium and federal taxes), contingent deferred sales
(surrender) and transfer charges.
(4) SEPARATE ACCOUNT EXPENSES
The mortality and expense fees for FPVUL policies are deducted
from the separate account and are reflected in the accumulation
unit value. There were no fees incurred in 1999.
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
(5) COST BASIS OF INVESTMENTS
The cost basis of each sub-account's investment follows:
Cova Lord Abbett Growth and Income $ 207,592
Cova Bond Debenture 105,692
Cova Developing Growth 100
Cova Large Cap Research 106,554
Cova Mid-Cap Value 64,425
Cova Quality Bond 102
Cova Small Cap Stock 96,800
Cova Large Cap Stock 434,385
Cova Select Equity 149,513
Cova International Equity 104,252
AIM V.I. Value 59,591
AIM V.I. Capital Appreciation 20,563
GACC Money Market 313,832
Templeton Bond 100
Franklin Small Cap Investments 100
Templeton Stock 100
Templeton International 100
Franklin Growth Investments 100
----------
$ 1,663,901
==========
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(6) UNIT FAIR VALUE
A summary of the total return for each sub-account follows:
Commenced Total
Operations Return
--------------- ------------
SPVL policies:
<S> <C> <C>
Cova Lord Abbett Growth and Income 4/29/99 4.60%
Cova Bond Debenture 4/29/99 0.70%
Cova Developing Growth 7/17/99 12.75%
Cova Large Cap Research 7/12/99 9.95%
Cova Mid-Cap Value 7/12/99 -5.60%
Cova Quality Bond 7/19/99 -0.23%
Cova Small Cap Stock 4/29/99 44.89%
Cova Large Cap Stock 4/29/99 6.90%
Cova Select Equity 6/29/99 -0.35%
Cova International Equity 5/4/99 20.84%
AIM V.I. Value 5/3/99 17.74%
AIM V.I. Capital Appreciation 5/3/99 28.36%
GACC Money Market 3/1/99 4.34%
Templeton Bond 7/19/99 -0.30%
Franklin Small Cap Investments 7/19/99 41.36%
Templeton Stock 7/19/99 10.11%
Templeton International 7/19/99 8.27%
Franklin Growth Investments 7/19/99 23.34%
FPVUL policies:
GACC Money Market 11/29/99 0.47%
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(7) REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION
The realized gain (loss) on the sale of fund shares and the change in
unrealized appreciation for each sub-account during the period ended
December 31, 1999 follows:
Realized Gain (Loss)
----------------------------------------------------------------
Aggregate Aggregate Cost
Proceeds from Sales of Portfolio Shares Realized
of Portfolio Shares Redeemed Gain (Loss)
--------------------- --------------------- --------------
<S> <C> <C> <C>
Cova Lord Abbett Growth and Income $ 1,940 $ 1,990 $ (50)
Cova Bond Debenture 727 725 2
Cova Developing Growth - - -
Cova Large Cap Research 1,159 1,172 (13)
Cova Mid-Cap Value 715 761 (46)
Cova Quality Bond - - -
Cova Small Cap Stock 1,150 1,073 77
Cova Large Cap Stock 3,539 3,655 (116)
Cova Select Equity 1,195 1,362 (167)
Cova International Equity 1,062 1,031 31
AIM V.I. Value 246 240 6
AIM V.I. Capital Appreciation 134 117 17
GACC Money Market 1,342,862 1,336,722 6,140
Templeton Bond - - -
Franklin Small Cap Investments - - -
Templeton Stock - - -
Templeton International - - -
Franklin Growth Investments - - -
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(7) REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION, CONTINUED
Unrealized Appreciation (Depreciation)
----------------------------------------------------------------
Appreciation Appreciation
(Depreciation) (Depreciation)
End of Period Beginning of Period Change
----------------- ------------------------ -------------
<S> <C> <C> <C>
Cova Lord Abbett Growth and Income $ 6,653 $ - $ 6,653
Cova Bond Debenture 3,004 - 3,004
Cova Developing Growth 13 - 13
Cova Large Cap Research 10,559 - 10,559
Cova Mid-Cap Value (3,680) - (3,680)
Cova Quality Bond (2) - (2)
Cova Small Cap Stock 34,574 - 34,574
Cova Large Cap Stock 16,032 - 16,032
Cova Select Equity (10,304) - (10,304)
Cova International Equity 16,888 - 16,888
AIM V.I. Value 4,069 - 4,069
AIM V.I. Capital Appreciation 6,608 - 6,608
GACC Money Market 3,725 - 3,725
Templeton Bond - - -
Franklin Small Cap Investments 41 - 41
Templeton Stock 10 - 10
Templeton International 8 - 8
Franklin Growth Investments 23 - 23
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS
The change in the number of units for each sub-account follows:
Cova
-----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/98 - - - - - - -
Cova units purchased 8 9 9 8 9 9 10
Cova units redeemed - - - - - - -
Contract units purchased - - - - - - -
Contract units transferred, net 17,386 10,301 - 8,590 6,065 - 10,327
Contract units redeemed (183) (70) - (94) (71) - (113)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Unit balance at 12/31/99 17,211 10,240 9 8,504 6,003 9 10,224
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS, CONTINUED
Cova AIM GACC Templeton
------------------------------------ -------------------------- ----------- -----------
Large V.I.
Cap Select International V.I. Capital Money
Stock Equity Equity Value Appreciation Market Bond
---------- ----------- ------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/98 - - - - - - -
Cova units purchased 7 8 8 9 9 19 10
Cova units redeemed - - - - - (10) -
Contract units purchased - - - - - 155,502 -
Contract units transferred, net 31,815 11,141 9,019 5,421 1,954 (124,311) -
Contract units redeemed (287) (101) (101) (23) (12) (2,374) -
---------- ----------- ------------ ----------- ------------- ----------- -----------
Unit balance at 12/31/99 31,535 11,048 8,926 5,407 1,951 28,826 10
========== =========== ============ =========== ============= =========== ===========
FPVUL policies:
Unit balance at 12/31/98 -
Cova units purchased 10
Cova units redeemed -
Contract units purchased -
Contract units transferred, net -
Contract units redeemed -
-----------
Unit balance at 12/31/99 10
===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS, CONTINUED
Templeton
------------------------------------------------------------
Franklin Franklin
Small Cap Growth
Investments Stock International Investments
-------------- ----------- --------------- --------------
<S> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/98 - - - -
Cova units purchased 10 10 10 10
Cova units redeemed - - - -
Contract units purchased - - - -
Contract units transferred, net - - - -
Contract units redeemed - - - -
-------------- ----------- --------------- --------------
Unit balance at 12/31/99 10 10 10 10
============== =========== =============== ==============
</TABLE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services
Life Insurance Company)
Financial Statements
December 31, 1999, 1998, and 1997
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
Cova Financial Life Insurance Company:
We have audited the accompanying balance sheets of Cova Financial Life
Insurance Company (a wholly owned subsidiary of Cova Financial Services
Life Insurance Company) (the Company) as of December 31, 1999 and 1998, and
the related statements of income, shareholder's equity, and cash flows for
each of the years in the three-year period ended December 31, 1999. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cova Financial Life
Insurance Company as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
February 4, 2000
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life
Insurance Company)
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
----------- -----------
(in thousands)
Investments:
<S> <C> <C>
Debt securities available-for-sale, at fair value
(cost of $101,690 in 1999 and $99,228 in 1998) $ 95,568 100,658
Mortgage loans, net of allowance for potential loan
loss of $40 in 1999 and $10 in 1998 5,439 5,245
Policy loans 938 1,223
----------- -----------
Total investments 101,945 107,126
Cash and cash equivalents - interest-bearing 751 5,789
Cash - noninterest-bearing 1,448 1,200
Accrued investment income 1,624 1,641
Deferred policy acquisition costs 15,093 9,142
Present value of future profits 1,740 854
Goodwill 1,631 1,813
Deferred tax asset, net 1,232 585
Receivable from OakRe 18,890 35,312
Federal and state income taxes recoverable 75 --
Reinsurance receivables 9 118
Other assets 24 398
Separate account assets 186,040 127,873
----------- -----------
Total assets $ 330,502 291,851
=========== ===========
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets, Continued
December 31, 1999 and 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY 1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Policyholder deposits $ 116,184 135,106
Future policy benefits 6,707 6,191
Payable on purchase of securities 85 27
Accounts payable and other liabilities 1,589 1,653
Federal and state income taxes payable -- 172
Future purchase price payable to OakRe 172 342
Guaranty fund assessments 1,100 1,000
Separate account liabilities 186,035 127,871
----------- -----------
Total liabilities 311,872 272,362
----------- -----------
Shareholder's equity:
Common stock, $233.34 par value, (authorized
30,000 shares; issued and outstanding
12,000 shares in 1999 and 1998) 2,800 2,800
Additional paid-in capital 15,523 14,523
Retained earnings 1,993 1,833
Accumulated other comprehensive (loss) income,
net of tax (1,686) 333
----------- -----------
Total shareholder's equity 18,630 19,489
----------- -----------
Total liabilities and shareholder's equity $ 330,502 291,851
=========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- -----------
(in thousands)
Revenues:
<S> <C> <C> <C>
Premiums $ 1,041 1,308 1,191
Net investment income 7,663 7,516 6,761
Net realized (losses) gains on sales of
investments (452) 178 158
Separate account fees 2,215 1,392 599
Other income 382 66 45
----------- ---------- -----------
Total revenues 10,849 10,460 8,754
----------- ---------- -----------
Benefits and expenses:
Interest on policyholder deposits 6,064 5,486 4,837
Current and future policy benefits 1,479 1,549 1,481
Operating and other expenses 2,336 1,548 1,134
Amortization of purchased intangible
assets 233 260 234
Amortization of deferred policy
acquisition costs 383 530 320
----------- ---------- -----------
Total benefits and expenses 10,495 9,373 8,006
----------- ---------- -----------
Income before income taxes 354 1,087 748
----------- ---------- -----------
Income tax expense (benefit):
Current (246) (80) 310
Deferred 440 357 (5)
----------- ---------- -----------
Total income tax expense 194 277 305
----------- ---------- -----------
Net income $ 160 810 443
=========== ========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Shareholder's Equity
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- ----------
(in thousands)
<S> <C> <C> <C>
Common stock, at beginning
and end of period $ 2,800 2,800 2,800
---------- ----------- ----------
Additional paid-in capital:
Balance at beginning of period 14,523 13,523 13,523
Capital contribution 1,000 1,000 --
---------- ----------- ----------
Balance at end of period 15,523 14,523 13,523
---------- ----------- ----------
Retained earnings:
Balance at beginning of period 1,833 1,023 580
Net income 160 810 443
---------- ----------- ----------
Balance at end of period 1,993 1,833 1,023
---------- ----------- ----------
Accumulated other comprehensive income:
Balance at beginning of period 333 145 1
Change in unrealized (depreciation) appreciation
of debt securities (7,552) 794 630
Deferred federal income tax impact 1,087 (101) (77)
Change in deferred policy acquisition costs
attributable to unrealized depreciation (appreciation) 3,519 (513) (144)
Change in present value of future profits
attributable to unrealized depreciation (appreciation) 927 8 (265)
---------- ----------- ----------
Balance at end of period (1,686) 333 145
---------- ----------- ----------
Total shareholder's equity $ 18,630 19,489 17,491
========== =========== ==========
Total comprehensive income:
Net income $ 160 810 443
Other comprehensive (loss) income (change in net unrealized
(depreciation) appreciation of debt and equity securities) (2,019) 188 144
---------- ----------- ----------
Total comprehensive (loss) income $ (1,859) 998 587
========== =========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by (used in) operating activities:
Net income $ 160 810 443
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Increase in future policy benefits 516 810 820
Increase (decrease) in payables and
accrued liabilities 94 126 (815)
Decrease (increase) in accrued
investment income 17 185 (704)
Amortization of intangible assets and
deferred policy acquisition costs 616 790 554
Amortization and accretion of
securities, premiums, and discounts (7) (87) (10)
Decrease (increase) in other assets 374 (384) 30
Net realized loss (gain) on sale of investments 452 (178) (158)
Interest on policyholder deposits 6,064 5,486 4,837
(Decrease) increase in current and
deferred federal income taxes 193 423 101
Decrease in recapture commissions payable to OakRe (170) (223) (159)
Commissions and expenses deferred (2,815) (3,411) (3,917)
Other 499 702 290
----------- ----------- -----------
Net cash provided by operating activities 5,993 5,049 1,312
----------- ----------- -----------
Cash flows from investing activities:
Cash used in the purchase of
investment securities (29,365) (56,673) (53,534)
Proceeds from investment securities
sold and matured 26,689 50,661 25,379
Other (128) (121) (81)
----------- ----------- -----------
Net cash used in investing activities (2,804) (6,133) (28,236)
----------- ----------- -----------
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows, Continued
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Policyholder deposits $ 55,181 69,459 81,788
Transfers from OakRe 19,050 35,590 25,060
Transfer to separate accounts (36,544) (60,181) (56,144)
Return of policyholder deposits (46,666) (39,943) (28,267)
Capital contributions received 1,000 1,000 --
----------- ----------- -----------
Net cash (used) provided by financing activities (7,979) 5,925 22,437
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (4,790) 4,841 (4,487)
Cash and cash equivalents - beginning of period 6,989 2,148 6,635
----------- ----------- -----------
Cash and cash equivalents - end of period $ 2,199 6,989 2,148
=========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life
Insurance Company)
Notes to Financial Statements
December 31, 1999, 1998, and 1997
(1) NATURE OF BUSINESS AND ORGANIZATION
NATURE OF THE BUSINESS
Cova Financial Life Insurance Company (the Company) markets and
services single premium deferred annuities, immediate annuities,
variable annuities, term life, single premium variable universal
life, and single premium whole life insurance policies. The
Company is licensed to conduct business in the state of
California. Most of the policies issued present no significant
mortality or longevity risk to the Company, but rather represent
investment deposits by the policyholders. Life insurance policies
provide policy beneficiaries with mortality benefits amounting to
a multiple, which declines with age, of the original premium.
Under the deferred fixed annuity contracts, interest rates
credited to policyholder deposits are guaranteed by the Company
for periods from one to ten years, but in no case may renewal
rates be less than 3%. The Company may assess surrender fees
against amounts withdrawn prior to scheduled rate reset and adjust
account values based on current crediting rates. Policyholders
also may incur certain federal income tax penalties on
withdrawals.
Under the variable annuity contracts, policyholder deposits are
allocated to various separate account sub-accounts or the general
account. A sub-account is valued at the sum of market values of
the securities in its underlying investment portfolio. The
contract value allocated to a sub-account will fluctuate based on
the performance of the sub-accounts. The contract value allocated
to the general account is credited with a fixed interest rate for
a specified period. The Company may assess surrender fees against
amounts withdrawn prior to the end of the withdrawal charge
period. Policyholders may also incur certain federal income tax
penalties on withdrawals.
Under the single premium variable life contracts, policyholder
deposits are allocated to various separate account sub-accounts.
The account value allocated to a sub-account will fluctuate based
on the performance of the sub-accounts. The Company guarantees a
minimum death benefit to be paid to the beneficiaries upon the
death of the insured. The Company may assess surrender fees
against amounts withdrawn prior to the end of the surrender charge
period. A deferred premium tax may also be assessed against
amounts withdrawn in the first ten years. Policyholders may also
incur certain federal income tax penalties on withdrawals.
Under the term life insurance policies, policyholders pay a level
premium over a certain period of time to guarantee a death benefit
will be paid to the beneficiaries upon the death of the insured.
This policy has no cash accumulation available to the
policyholder.
Although the Company markets its products through numerous
distributors, including regional brokerage firms, national
brokerage firms, and banks, approximately 94%, 97%, and 85% of the
Company's sales have been through two specific brokerage firms, A.
G. Edwards & Sons, Incorporated, and Edward Jones & Company,
Incorporated, in 1999, 1998, and 1997, respectively.
<PAGE>
ORGANIZATION
The Company is a wholly owned subsidiary of Cova Financial
Services Life Insurance Company (CFSLIC). CFSLIC is a wholly owned
subsidiary of Cova Corporation, which is a wholly owned subsidiary
of General American Life Insurance Company (GALIC), a Missouri
domiciled life insurance company. GALIC is a wholly owned
subsidiary of GenAmerica Corporation, which in turn is a wholly
owned by the ultimate parent, General American Mutual Holding
Company (GAMHC).
On August 26, 1999, GAMHC entered into a definitive agreement
whereby Metropolitan Life Insurance Company (MetLife), a New York
domiciled life insurance company, will acquire GenAmerica
Corporation and all its holdings for $1.2 billion in cash. The
purchase was approved by the Missouri Director of Insurance on
November 10, 1999. The purchase, however, was not consummated as
of December 31, 1999 and as a result, these financial statements
do not reflect purchase accounting treatment of this transaction.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP)
and include the accounts and operations of the Company. The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the amounts reported. Actual results could differ from these
estimates.
DEBT SECURITIES
Investments in all debt securities with readily determinable
market values are classified into one of three categories:
held-to-maturity, trading, or available-for-sale. Classification
of investments is based on management's current intent. All debt
securities at December 31, 1999 and 1998 were classified as
available-for-sale. Securities available-for-sale are carried at
fair value, with unrealized holding gains and losses reported as
accumulated other comprehensive income in the shareholder's
equity, net of deferred effects of income tax and related effects
on deferred acquisition costs and present value of future profits.
Amortization of the discount or premium from the purchase of
mortgage-backed bonds is recognized using a level-yield method
which considers the estimated timing and amount of prepayments of
the underlying mortgage loans. Actual prepayment experience is
periodically reviewed and effective yields are recalculated when
differences arise between the prepayments previously anticipated
and the actual prepayments received and currently anticipated.
When such a difference occurs, the net investment in the
mortgage-backed bond is adjusted to the amount that would have
existed had the new effective yield been applied since the
acquisition of the bond, with a corresponding charge or credit to
interest income (the "retrospective method").
Investment income is recorded when earned. Realized capital gains
and losses on the sale of investments are determined on the basis
of specific costs of investments and are credited or charged to
income.
A realized loss is recognized and charged against income if the
Company's carrying value in a particular investment in the
available-for-sale category has experienced a significant decline
in market value that is deemed to be other than temporary.
<PAGE>
MORTGAGE LOANS AND POLICY LOANS
Mortgage loans and policy loans are carried at their unpaid
principal balances. An allowance for mortgage loan losses is
established based on an evaluation of the mortgage loan portfolio,
past credit loss experience, and current economic conditions.
Reserves for loans are established when the Company determines
that collection of all amounts due under the contractual terms is
doubtful and are calculated in conformity with Statement of
Financial Accounting Standards (SFAS) No. 114, Accounting by
Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures.
The Company had no impaired loans, and the valuation allowance for
potential losses on mortgage loans was $40,000 and $10,000, at
December 31, 1999 and 1998, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include currency and demand deposits in
banks, U.S. Treasury bills, money market accounts, and commercial
paper with maturities under 90 days, which are not otherwise
restricted.
SEPARATE ACCOUNT ASSETS
Separate accounts contain segregated assets of the Company that
are specifically assigned to variable annuity policyholders in the
separate accounts and are not available to other creditors of the
Company. The earnings of separate account investments are also
assigned to the policyholders in the separate accounts, and are
not guaranteed or supported by the other general investments of
the Company. The Company earns mortality and expense risk fees
from the separate accounts and assesses withdrawal charges in the
event of early withdrawals. Separate accounts assets are valued at
fair market value.
In order to provide for optimum policyholder returns and to allow
for the replication of the investment performance of existing
"cloned" mutual funds, the Company has periodically transferred
capital to the separate accounts to provide for the initial
purchase of investments in new portfolios. As additional funds
have been received through policyholder deposits, the Company has
periodically reduced its capital investment in the separate
accounts. The Company's capital investment in the separate
accounts as of December 31, 1999 and 1998, is presented in note 3.
<PAGE>
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business which vary with and are
directly related to the production of new business, principally
commissions, premium taxes, sales costs, and certain policy
issuance and underwriting costs, are deferred. The Company sets a
limit on the deferral of acquisition costs incurred from internal
marketing and wholesaling operations in any year at 1% to 1.5% of
premiums and deposits receipts, varying according to specific
product. This limit is based on typical market rates of
independent marketing service and wholesaling organizations. This
practice also avoids possible deferral of costs in excess of
amounts recoverable.
The costs deferred are amortized in proportion to estimated future
gross profits derived from investment income, realized gains and
losses on sales of securities, unrealized securities gains and
losses, interest credited to accounts, surrender fees, mortality
costs, and policy maintenance expenses. The estimated gross profit
streams are periodically reevaluated and the unamortized balance
of deferred policy acquisition costs is adjusted to the amount
that would have existed had the actual experience and revised
estimates been known and applied from the inception of the
policies and contracts. The amortization and adjustments resulting
from unrealized gains and losses are not recognized currently in
income but as an offset to the accumulated other comprehensive
income component of shareholder's equity. The amortization period
is the remaining life of the policies, which is estimated to be 20
years from the date of original policy issue.
<TABLE>
<CAPTION>
The components of deferred policy acquisition costs are shown
below:
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred policy acquisition costs, beginning of period
$ 9,142 6,774 3,321
Commissions and expenses deferred 2,815 3,411 3,917
Amortization (383) (530) (320)
Deferred policy acquisition costs attributable to
unrealized depreciation (appreciation) 3,519 (513) (144)
------------ ------------ ------------
Deferred policy acquisition costs, end
of period $ 15,093 9,142 6,774
============ ============ ============
Costs expensed that exceeded the established deferred
limit $ 382 231 6
=========== ============ =============
</TABLE>
PURCHASE RELATED INTANGIBLE ASSETS AND LIABILITIES
In accordance with the purchase method of accounting for business
combinations, two intangible assets and a future payable related
to accrued purchase price consideration were established as of the
date the Company was purchased by GALIC.
<PAGE>
Present Value of Future Profits
The Company established an intangible asset which represents
the present value of future profits (PVFP) to be derived from
both the purchased and transferred blocks of business. Certain
estimates were utilized in the computation of this asset,
including estimates of future policy retention, investment
income, interest credited to policyholders, surrender fees,
mortality costs, and policy maintenance costs, discounted at a
pretax rate of 18% (12% net after tax).
In addition, as the Company has the option of retaining its
single premium deferred annuity (SPDA) policies after they
reach their next interest rate reset date and are recaptured
from OakRe, a component of this asset represents estimates of
future profits on recaptured business. This asset will be
amortized in proportion to estimated future gross profits
derived from investment income, realized gains and losses on
sales of securities, unrealized securities appreciation and
depreciation, interest credited to accounts, surrender fees,
mortality costs, and policy maintenance expenses. The
estimated gross profit streams are periodically reevaluated
and the unamortized balance of PVFP will be adjusted to the
amount that would have existed had the actual experience and
revised estimates been known and applied from the inception.
The amortization and adjustments resulting from unrealized
appreciation and depreciation is not recognized currently in
income but as an offset to the accumulated other comprehensive
income of shareholder's equity. The amortization period is the
remaining life of the policies, which is estimated to be 20
years from the date of original policy issue.
Based on current assumptions, amortization of the original
in-force PVFP asset, expressed as a percentage of the original
in-force asset, is projected to be 5.5%, 4.9%, 4.5%, 4.2%, and
4.2% for the years ended December 31, 2000 through 2004,
respectively. Actual amortization incurred during these years
may be more or less as assumptions are modified to incorporate
actual results. The average crediting rate on the original
in-force PVFP asset is 6.4% for 1999, 1998 and 1997.
<TABLE>
<CAPTION>
The components of PVFP are shown below:
1999 1998 1997
------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
PVFP - beginning of period $ 854 900 1,178
Interest credited 62 66 69
Amortization (103) (120) (82)
PVFP attributable to unrealized
depreciation (appreciation) 927 8 (265)
------------ ---------- ------------
PVFP - end of period $ 1,740 854 900
============ ========== ============
</TABLE>
<PAGE>
Goodwill
Under the push-down method of purchase accounting, the excess
of purchase price over the fair value of tangible and
intangible assets and liabilities acquired is established as
an asset and referred to as goodwill. The Company has elected
to amortize goodwill on the straight-line basis over a 20-year
period.
<TABLE>
<CAPTION>
The components of goodwill are shown below:
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill - beginning of period $ 1,813 1,923 2,034
Amortization (111) (110) (111)
Experience adjustment to future purchase price
payable to OakRe (71) -- --
------------ ------------ ------------
Goodwill - end of period $ 1,631 1,813 1,923
============ ============ ============
</TABLE>
Future Payable
Pursuant to the financial reinsurance agreement with OakRe,
the receivable from OakRe becomes due in installments when the
SPDA policies reach their next crediting rate reset date. For
any recaptured policies that continue in force with OakRe into
the next rate guarantee period, the Company will pay a
commission to OakRe of 1.75% up to 40% of policy account
values originally reinsured and 3.5% thereafter. On policies
that are recaptured and subsequently exchanged to a variable
annuity policy, the Company will pay a commission to OakRe of
0.50%.
The Company has recorded a future payable that represents the
present value of the anticipated future commission payments
payable to OakRe over the remaining life of the financial
reinsurance agreement discounted at an estimated borrowing
rate of 6.5%. This liability represents a contingent purchase
price payable for the policies transferred to OakRe on the
purchase date and has been pushed down to the Company through
the financial reinsurance agreement. The Company expects that
this payable will be substantially extinguished by the end of
the year 2000.
<PAGE>
<TABLE>
<CAPTION>
The components of this future payable are shown below:
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future payable - beginning of period $ 342 565 683
Interest added 20 29 41
Payment to Oak Re (119) (252) (159)
Experience adjustment to future purchase price payable
to OakRe (71) -- --
---------- ---------- ----------
Future payable - end of period $ 172 342 565
========== ========== ==========
</TABLE>
DEFERRED TAX ASSETS AND LIABILITIES
Xerox Financial Services, Inc. (XFSI) (previous parent of the
company) and GALIC agreed to file an election to treat the
acquisition of the Company as an asset acquisition under the
provisions of Internal Revenue Code Section 338(h)(10). As a
result of that election, the tax basis of the Company's assets as
of the date of acquisition was revalued based upon fair market
values as of June 1, 1995. The principal effect of the election
was to establish a tax asset on the tax-basis balance sheet of
approximately $2.9 million for the value of the business acquired
that is amortizable for tax purposes over ten to fifteen years.
POLICYHOLDER DEPOSITS
The Company recognizes its liability for policy amounts that are
not subject to policyholder mortality nor longevity risk at the
stated contract value, which is the sum of the original deposit
and accumulated interest, less any withdrawals. The average
weighted interest crediting rate on the Company's policyholder
deposits as of December 31, 1999 was 5.96%.
FUTURE POLICY BENEFITS
Reserves are held for future policy annuity benefits that subject
the Company to risks to make payments contingent upon the
continued survival of an individual or couple (longevity risk).
These reserves are valued at the present value of estimated future
benefits discounted for interest, expenses, and mortality. The
assumed mortality is the 1983 Individual Annuity Mortality Tables
discounted at 4.50% to 8.00%, depending upon year of issue.
Current mortality benefits payable are recorded for reported
claims and estimates of amounts incurred but not reported.
PREMIUM REVENUE
The Company recognizes premium revenue at the time of issue on
annuity policies that subject it to longevity risks. Amounts
collected on annuity policies not subject to longevity risk are
recorded as increases in the policyholder deposits liability. For
term and single premium variable life products, premiums are
recognized as revenue when due.
<PAGE>
OTHER INCOME
Other income consists primarily of policy surrender charges.
FEDERAL INCOME TAXES
Beginning in 1997, the Company files a consolidated income tax
return with its immediate parent, CFSLIC. Allocations of federal
income taxes are based upon separate return calculations.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
COMPREHENSIVE INCOME
The Company reports and presents comprehensive income and its
components in accordance with SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 has no impact on the Company's
consolidated net income or shareholder's equity. The Company's
only component of accumulated other comprehensive income relates
to unrealized appreciation and depreciation on debt and equity
securities held as available-for-sale.
RISKS AND UNCERTAINTIES
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ significantly
from those estimates.
The following elements of the financial statements are most
affected by the use of estimates and assumptions:
- Investment valuation
- Amortization of deferred policy acquisition costs
- Amortization of present value of future profits
- Recoverability of goodwill
The fair value of the Company's investments is subject to the risk
that interest rates will change and cause a temporary increase or
decrease in the liquidation value of debt securities. To the
extent that fluctuations in interest rates cause the cash flows of
assets and liabilities to change, the Company might have to
liquidate assets prior to their maturity and recognize a gain or
loss. Interest rate exposure for the investment portfolio is
managed through asset/liability management techniques which
attempt to control the risks presented by differences in the
probable cash flows and reinvestment of assets with the timing of
crediting rate changes in the Company's policies and contracts.
Changes in the estimated prepayments of mortgage-backed securities
also may cause retrospective changes in the amortization period of
securities and the related recognition of income.
<PAGE>
The amortization of deferred policy acquisition costs is based on
estimates of long-term future gross profits from existing
policies. These gross profits are dependent upon policy retention
and lapses, the spread between investment earnings and crediting
rates, and the level of maintenance expenses. Changes in
circumstances or estimates may cause retrospective adjustment to
the periodic amortization expense and the carrying value of the
deferred expense.
In a similar manner, the amortization of PVFP is based on
estimates of long-term future profits from existing and recaptured
policies. These gross profits are dependent upon policy retention
and lapses, the spread between investment earnings and crediting
rates, and the level of maintenance expenses. Changes in
circumstances or estimates may cause retrospective adjustment to
the periodic amortization expense and the carrying value of the
asset.
The Company has considered the recoverability of goodwill and has
concluded that no circumstances have occurred which would give
rise to impairment of goodwill at December 31, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, applies fair value disclosure practices with regard
to financial instruments, both assets and liabilities, for which
it is practical to estimate fair value. In cases where quoted
market prices are not readily available, fair values are based on
estimates that use present value or other valuation techniques.
These techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash
flows. Although fair value estimates are calculated using
assumptions that management believes are appropriate, changes in
assumptions could cause these estimates to vary materially. In
that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many
cases, might not be realized in the immediate settlement of the
instruments. SFAS No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements.
Because of this, and further because a value of a business is also
based upon its anticipated earning power, the aggregate fair value
amounts presented do not represent the underlying value of the
Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents, Short-term Investments,
and Accrued Investment Income
The carrying value amounts reported in the balance sheets for
these instruments approximate their fair values. Short-term
debt securities are considered "available-for-sale" and are
carried at fair value.
<PAGE>
Investments Securities and Mortgage Loans
(Including Mortgage-backed Securities)
Fair values of debt securities are based on quoted market
prices, where available. For debt securities not actively
traded, fair value estimates are obtained from independent
pricing services. In some cases, such as private placements,
certain mortgage-backed securities, and mortgage loans, fair
values are estimated by discounting expected future cash flows
using a current market rate applicable to the yield, credit
quality, and maturity of the investments (see note 3 for fair
value disclosures).
Policy Loans
Fair values of policy loans approximate carrying value as the
interest rates on the majority of policy loans are reset
periodically and therefore approximate current interest rates.
Investment Contracts
The Company's policy contracts require the beneficiaries to
commence receipt of payments by the later of age 85 or 10
years after purchase, and substantially all contracts permit
earlier surrenders, generally subject to fees and adjustments.
Fair values for the Company's liabilities for investment type
contracts (policyholder deposits) are estimated as the amount
payable on demand. As of December 31, 1999 and 1998, the cash
surrender value of policyholder deposits was $4,058,740 and
$4,707,689, respectively, less than their stated carrying
value. Of the contracts permitting surrender, substantially
all provide the option to surrender without fee or adjustment
during the 30 days following reset of guaranteed crediting
rates. The Company has not determined a practical method to
determine the present value of this option.
All of the Company's deposit obligations are fully guaranteed
by its parent GALIC, and the receivable from OakRe equal to
the SPDA obligations is guaranteed by OakRe's parent, XFSI.
REINSURANCE
Effective July 25, 1999, the Company entered into a modified
coinsurance reinsurance agreement with Metropolitan Life Insurance
Company (MetLife). Under the reinsurance agreement, the Company
ceded life insurance and annuity business that was issued or
renewed from July 25, 1999 through December 31, 1999 to MetLife
amounting to $15 million. Net earnings to MetLife from that
business are experience refunded to the Company. The agreement
does not meet the conditions for reinsurance accounting under
GAAP. In substance, the agreement represents a guarantee by
MetLife of new business and renewed SPDA business during this
period. There was no impact on the Company's financial statements
resulting from the reinsurance transaction with MetLife.
On June 1, 1995, when Cova Corporation purchased the Company, then
known as Xerox Financial Life Insurance Company (XFLIC), from
XFSI, a wholly owned subsidiary of Xerox Corporation, it entered
into a financing reinsurance transaction with OakRe Life Insurance
Company (OakRe), then a subsidiary of XFLIC, for OakRe to assume
the economic benefits and risks of the existing SPDA deposits of
XFLIC. Ownership of OakRe was retained by XFSI subsequent to the
sale of XFLIC and other affiliates.
<PAGE>
In substance, terms of the agreement have allowed the seller,
XFSI, to retain substantially all of the existing financial
benefits and risks of the existing business, while the purchaser,
GALIC, obtained the corporate operating and product licenses,
marketing, and administrative capabilities of the Company and
access to the retention of the policyholder deposit base that
persists beyond the next crediting rate reset date.
The financing reinsurance agreement entered into with OakRe as
condition to the purchase of the Company does not meet the
criteria for reinsurance accounting under GAAP. The net assets
initially transferred to OakRe were established as a receivable
and are subsequently increased as interest accrued on the
underlying deposits and decrease as funds are transferred back to
the Company when policies reach their crediting rate reset date or
benefits are claimed. The receivable from OakRe to the Company
that was created by this transaction will be liquidated over the
remaining crediting rate guaranty periods which will be
substantially expired by mid-year 2000, and completely by mid-year
2002. The liquidations transfer cash daily in the amount of the
then current account value, less a recapture commission fee to
OakRe on policies retained beyond their 30-day-no-fee surrender
window by the Company, upon the next crediting rate reset date of
each annuity policy. The Company may then reinvest that cash for
those policies that are retained and thereafter assume the
benefits and risks of those deposits.
In the event that both OakRe and XFSI default on the receivable,
the Company may draw funds from a standby bank irrevocable letter
of credit established by XFSI in the amount of $500 million. No
funds were drawn on this letter of credit since inception of the
agreement.
The impact of reinsurance on the December 31, 1999 financial
statements is not considered material.
RECENTLY ISSUED ACCOUNTING STANDARD
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, issued in June 1998, requires all derivative financial
instruments to be recorded on the balance sheet at estimated fair
value. The Company's present accounting policies applies such
accounting treatment only to marketable securities as defined
under SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, and to off-balance sheet derivative
instruments. SFAS No. 133 will broaden the definition of
derivative instruments to include all classes of financial assets
and liabilities. It also will require separate disclosure of
identifiable derivative instruments embedded in hybrid securities.
The change in the fair value of derivative instruments is to be
recorded each period either in current earnings or other
comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if it is, on the type
of hedge transaction.
In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133. SFAS No. 137 defers for one year
the effective date of Statement of SFAS No 133, Accounting for
Derivative Instruments and Hedging Activities. The Company plans
to adopt the provision of SFAS No. 133 effective January 1, 2001.
At this time the Company does not believe it will have a material
effect on the Company's consolidated financial position or results
of operations.
<PAGE>
OTHER
Certain 1998 and 1997 amounts have been reclassified to conform to
the 1999 presentation.
(3) INVESTMENTS
The Company's investments in debt securities and short-term investments
are considered available-for-sale and carried at estimated fair value,
with the aggregate unrealized appreciation or depreciation being
recorded as a separate component of shareholder's equity. The amortized
cost, estimated fair value, and carrying value of investments at
December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------------- -------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Debt securities:
Government agency
obligations $ 1,702 19 -- 1,721 1,721
Corporate securities 76,444 30 (4,756) 71,718 71,718
Mortgage-backed
securities 8,272 1 (202) 8,071 8,071
Asset backed securities 15,272 -- (1,214) 14,058 14,058
--------------- -------------- -------------- -------------- --------------
Total debt securities 101,690 50 (6,172) 95,568 95,568
Mortgage loans (net) 5,439 -- (70) 5,369 5,439
Policy loans 938 -- -- 938 938
--------------- -------------- -------------- -------------- --------------
Total investments $ 108,067 50 (6,242) 101,875 101,945
=============== ============== ============== ============== ==============
Company's beneficial
interest in separate
accounts $ 5 -- -- 5 5
=============== ============== ============== ============== ==============
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life
Insurance Company)
Notes to Financial Statements
December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------------- -------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Debt securities:
U.S. treasury securities $ 100 1 -- 101 101
Government agency
obligations 3,471 74 -- 3,545 3,545
Corporate securities 70,883 1,384 (406) 71,861 71,861
Mortgage-backed
securities 11,789 87 (32) 11,844 11,844
Asset-backed securities 12,985 349 (27) 13,307 13,307
--------------- -------------- -------------- -------------- --------------
Total debt securities 99,228 1,895 (465) 100,658 100,658
Mortgage loans (net) 5,245 204 -- 5,449 5,245
Policy loans 1,223 -- -- 1,223 1,223
--------------- -------------- -------------- -------------- --------------
Total investments $ 105,696 2,099 (465) 107,330 107,126
=============== ============== ============== ============== ==============
Company's beneficial
interest in separate
accounts $ 2 -- -- 2 2
=============== ============== ============== ============== ==============
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1999, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties. Maturities of mortgage-backed securities will be
substantially shorter than their contractual maturity because they
require monthly principal installments and mortgagees may prepay
principal.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Less than one year $ 3,573 3,573
Due after one year through five years 33,093 31,752
Due after five years through ten years 39,035 35,583
Due after ten years 17,717 16,589
Mortgage-backed securities 8,272 8,071
--------------- ---------------
Total $ 101,690 95,568
=============== ===============
</TABLE>
<PAGE>
At December 31, 1999, approximately 94.2% of the Company's debt
securities are investment grade or are nonrated but considered to be of
investment grade. Of the 5.8% noninvestment grade debt securities, 5.7%
are rated as BB or its equivalent, and 0.1% are rated B or its
equivalent.
The Company had one impaired debt security, which became nonincome
producing in 1999. The Company had no impaired investments, and all debt
securities were income producing in 1998
<TABLE>
<CAPTION>
The components of investment income, realized gains (losses), and
unrealized appreciation are as follows:
1999 1998 1997
------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income on debt securities $ 7,119 6,928 6,575
Income on cash and cash equivalents 185 305 186
Interest on mortgage loans 401 308 32
Income on policy loans 82 92 83
Miscellaneous interest 1 2 --
------------ ------------- ------------
Total investment income 7,788 7,635 6,876
Investment expenses (125) (119) (115)
------------ ------------- ------------
Net investment income $ 7,663 7,516 6,761
============ ============= ============
Net realized capital (losses) gains -
debt securities $ (452) 178 158
============ ============= ============
Unrealized (depreciation) appreciation is as follows:
Debt securities $ (6,122) 1,430 633
Short-term investments -- -- 3
Effects on deferred acquisition
costs amortization 2,793 (726) (213)
Effects on PVFP amortization 735 (192) (200)
------------ ------------- ------------
Unrealized (depreciation) appreciation
before income tax (2,594) 512 223
Unrealized income tax benefit (expense) 908 (179) (78)
------------ ------------- ------------
Net unrealized appreciation (depreciation) on
investments $ (1,686) 333 145
============ ============= ============
</TABLE>
<PAGE>
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1999 were $25,986,787. Gross gains of $165,919 and
gross losses of $618,025 were realized on those sales. Included in these
amounts were $25,816 of gross gains and $19,890 of gross losses realized
on the sale of noninvestment grade securities. Net realized losses
include a 1999 impairment adjustment totaling approximately $493,244
related to one debt security held by the Company.
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1998 were $50,660,583. Gross gains of $591,755 and
gross losses of $413,588 were realized on those sales. Included in these
amounts were $133,138 of gross gains and $106,165 of gross losses
realized on the sale of noninvestment grade securities.
Proceeds from sales, redemptions, and paydowns for investments in debt
securities during 1997 were $25,379,783. Gross gains of $166,335 and
gross losses of $8,658 were realized on those sales. Included in these
amounts were $47,391 of gross gains and $7,300 of gross losses realized
on the sale of noninvestment grade securities.
(4) SECURITY GREATER THAN 10% OF SHAREHOLDER'S EQUITY
As of December 31, 1999 and 1998, the Company held the following
individual mortgage loan which exceeded 10% of shareholder's equity:
<TABLE>
1999 1998
--------------- ---------------
<S> <C> <C>
Colonial Realty, at carrying value $ 1,998,296 1,997,287
=============== ===============
</TABLE>
<PAGE>
(5) COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
The components of comprehensive income are as follows:
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income $ 160 810 443
------------ ------------ ------------
Other comprehensive income (loss), before tax -
Unrealized appreciation (depreciation) on
Investments arising during period:
Unrealized (depreciation) appreciation
on investments (7,100) 616 472
Adjustment to deferred acquisition
costs attributable to unrealized
depreciation (appreciation) 3,308 (398) (108)
Adjustment to PVFP attributable to
unrealized depreciation (appreciation) 872 6 (198)
------------ ------------ ------------
Total unrealized (depreciation) appreciation on
investments arising during period (2,920) 224 166
------------ ------------ ------------
Less reclassification adjustments for realized losses (gains) included
in net income:
Adjustment for losses (gains) included in
net realized (losses) gains on sales
of investments 452 (178) (158)
Adjustment for (gains) losses included in
amortization of deferred acquisition costs (211) 115 36
Adjustment for (gains) losses included in
amortization of PVFP (55) (2) 67
------------ ------------ ------------
Total reclassification adjustments for losses (gains)
included in net income 186 (65) (55)
------------ ------------ ------------
Other comprehensive (loss) income, before related income tax
(benefits) expense (3,106) 289 221
Related income tax (benefit) expense (1,087) 101 77
------------ ------------ ------------
Other comprehensive (loss) income, net of tax (2,019) 188 144
------------ ------------ ------------
Comprehensive (loss) income $ (1,859) 998 587
============ ============ ============
</TABLE>
<PAGE>
(6) POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company has no direct employees and no retired employees. All
personnel used to support the operations of the Company are supplied by
contract by Cova Life Management Company (CLMC), a wholly owned
subsidiary of Cova Corporation. The Company is allocated a portion of
certain health care and life insurance benefits for future retired
employees of CLMC. In 1999, 1998, and 1997, the Company was allocated a
portion of benefit costs including severance pay, accumulated vacations,
and disability benefits. At December 31, 1999, CLMC had no retired
employees nor any employees fully eligible for retirement, and had no
disbursements for such benefit commitments. The expense arising from
these allocations is not material.
(7) INCOME TAXES
<TABLE>
<CAPTION>
The Company will file a consolidated federal income tax return with its
immediate parent, CFSLIC. Income taxes are recorded in the statements of
earnings and directly in certain shareholder's equity accounts. Income
tax expense for the years ended December 31 was allocated as follows:
1999 1998 1997
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Statements of income:
Operating income (excluding realized investment gains) $ 179 215 250
Realized investment gains 15 62 55
----------- --------- ---------
Income tax expense included in the statements of
income 194 277 305
Shareholder's equity - change in deferred federal income taxes
related to unrealized (depreciation) appreciation on securities (1,087) 101 77
----------- --------- ---------
Total income tax (benefit) expense $ (893) 378 382
=========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
The actual federal income tax expense differed from the expected tax
expense computed by applying the U.S. federal statutory rate to income
before taxes on income as follows:
1999 1998 1997
-------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $ 124 35.0% $ 380 35.0% $ 262 35.0%
Dividends received deduction - separate
account (115) (32.5) (150) (13.9) -- --
Amortization of intangible assets 39 11.0 39 3.6 39 5.2
Valuation allowance for permanent
impairments 173 48.9 -- -- -- --
Other (27) (7.6) 8 0.8 4 0.5
-------- ---------- -------- ---------- -------- ----------
Total $ 194 54.8% $ 277 25.5% $ 305 40.7%
======== ========== ======== ========== ======== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are as follows:
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Tax basis of intangible assets purchased $ 569 624
Liability for commission on recaptures 60 120
Policy reserves 2,678 2,477
DAC "Proxy Tax" 1,383 1,252
Permanent impairments 173 --
Unrealized depreciation in investments 908 --
Other deferred tax assets 165 (359)
------------ ------------
Total deferred tax assets 5,936 4,114
Valuation allowance (173) --
------------ ------------
Total deferred tax assets, net of valuation allowance 5,763 4,114
------------ ------------
Deferred tax liabilities:
Unrealized appreciation in investments -- 179
PVFP 226 150
Deferred acquisition costs 4,305 3,200
------------ ------------
Total deferred tax liabilities 4,531 3,529
------------ ------------
Net deferred tax asset $ 1,232 585
============ ============
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. As of
December 31, 1999, the Company has provided a 100% valuation allowance
against the deferred tax asset related to the permanent impairments.
<PAGE>
(8) RELATED-PARTY TRANSACTIONS
On December 31, 1997, Cova Life Management Company (CLMC) and Navisys
Incorporated (Navisys), both affiliated companies, purchased certain
assets of Johnson & Higgins/Kirke Van Orsdel, Inc. (J&H/KVI), an
unaffiliated Delaware corporation, for $2,500,000, and merged them into
Cova Life Administrative Service Company (CLASC), a joint subsidiary of
CLMC and Navisys. Navisys purchased 51% of CLASC, and the remaining 49%
was purchased by CLMC. The purchased assets are the administrative and
service systems and organization that provide the policy service
functions for the Company's life and annuity products. On October 31,
1999, CLMC purchased the remaining 51% interest in CLASC from Navisys
for $1,184,414.
The Company has entered into management, operations, and servicing
agreements with its affiliated companies. The affiliated companies are
CLMC, a Delaware corporation, which provides management services and the
employees necessary to conduct the activities of the Company; Conning
Asset Management, which provides investment advice; and CLASC, which
provides underwriting, policy issuance, claims, and other policy
administration functions. Additionally, a portion of overhead and other
corporate expenses is allocated by the Company's parent, GALIC. Expenses
and fees paid to affiliated companies in 1999, 1998, and 1997 by the
Company were $2,496,782, $1,587,833, and $396,806, respectively.
(9) STATUTORY SURPLUS AND DIVIDEND RESTRICTION
GAAP differs in certain respects from accounting practices prescribed or
permitted by insurance regulatory authorities (statutory accounting
principles).
The major differences arise principally from the immediate expense
recognition of policy acquisition costs and intangible assets for
statutory reporting, determination of policy reserves based on different
discount rates and methods, the recognition of deferred taxes under GAAP
reporting, the nonrecognition of financial reinsurance for GAAP
reporting, and the establishment of an asset valuation reserve as a
contingent liability based on the credit quality of the Company's
investment securities and an interest maintenance reserve as an unearned
liability to defer the realized gains and losses of fixed income
investments presumably resulting from changes to interest rates and
amortize them into income over the remaining life of the investment sold
under statutory accounting principles. In addition, adjustments to
record the carrying values of debt securities and certain equity
securities at estimated fair value are applied only under GAAP reporting
and capital contributions in the form of notes receivable from an
affiliated company are not recognized under GAAP reporting.
Purchase accounting creates another difference as it requires the
restatement of GAAP assets and liabilities to their established fair
values at the date of purchase, and shareholder's equity to the net
purchase price.
Statutory accounting does not recognize the purchase method of
accounting.
<PAGE>
<TABLE>
<CAPTION>
As of December 31, the differences between statutory capital and surplus
and shareholder's equity determined in conformity with GAAP were as
follows:
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Statutory capital and surplus $ 9,826 10,411
Reconciling items:
Statutory asset valuation reserve 827 1,078
Statutory interest maintenance reserve 187 190
GAAP investment adjustments to fair value (6,122) 1,430
GAAP deferred policy acquisition costs 15,093 9,142
GAAP basis policy reserves (4,480) (4,670)
GAAP deferred federal income taxes (net) 1,232 585
GAAP guarantee assessment adjustment (1,100) (1,000)
GAAP goodwill 1,631 1,813
GAAP present value of future profits 1,740 854
GAAP future purchase price payable (172) (342)
GAAP investment valuation reserves (40) (10)
Other 8 8
------------ ------------
GAAP shareholder's equity $ 18,630 19,489
============ ============
</TABLE>
Statutory net loss for the years ended December 31, 1999, 1998,
and 1997 was $1,478,513, $142,046, and $461,118, respectively.
The maximum amount of dividends which can be paid by State of California
insurance companies to shareholders without prior approval of the
insurance commissioner is the greater of 10% of statutory surplus or
statutory net gain from operations for the preceding year. The maximum
dividend permissible during 2000 will be $702,615, which is 10% of the
Company's December 31, 1999 statutory surplus of $7,026,153.
The National Association of Insurance Commissioners has developed
certain risk based capital (RBC) requirements for life insurers. If
prescribed levels of RBC are not maintained, certain actions may be
required on the part of the Company or its regulators. At December 31,
1999, the Company's Total Adjusted Capital and Authorized Control Level
RBC were $10,653,128 and $1,705,480, respectively. This level of
adjusted capital qualifies under all tests.
(10) GUARANTY FUND ASSESSMENTS
The Company participates with life insurance companies licensed in
California in an association formed to guaranty benefits to
policyholders of insolvent life insurance companies. Under state law, as
a condition for maintaining the Company's authority to issue new
business, the Company is contingently liable for its share of claims
covered by the guaranty association for insolvencies incurred through
1999, but for which assessments have not yet been determined or
assessed, to a maximum generally of 1% of statutory premiums per annum.
In November 1999, the National Organization of Life and Health Guaranty
Associations distributed a study of the major outstanding industry
insolvencies, with estimates of future assessments by state. Based on
this study, the Company has accrued a liability for $1.1 million in
future assessments on insolvencies that occurred before December 31,
1999. Under the coinsurance agreement between the Company and OakRe (see
note 1), OakRe is required to reimburse the Company for any future
assessments that it pays which relate to insolvencies occurring prior to
June 1, 1995. The Company paid $8,000, $33,505, and $460,167 in guaranty
fund assessment in 1999, 1998, and 1997, respectively. These payments
were substantially reimbursed by OakRe.
At the same time, the Company is liable to OakRe for 80% of any future
premium tax recoveries that are realized from any such assessments and
may retain the remaining 20%. The credits to be retained were not
material.
(11) SUBSEQUENT EVENT
The purchase of GenAmerica Corporation and subsidiary, including the
Company, by MetLife was completed on January 6, 2000. On that date also,
the Company's modified coinsurance agreement with MetLife was suspended
for subsequent new business.
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 50 and 60. Our hypothetical insureds are
non-smokers and in good health which means the Policy would be issued with
preferred rates. For each of the two examples, we have illustrated all three
available Death Benefit Options: Option A, Option B and Option C. We assumed
ongoing annual premiums paid of $6,000 for the 50-year-old example and $9,000
for the 60-year-old example.
All of the illustrations that follow are based on the above. We also assumed the
underlying investment portfolio had gross rates of return of 0%, 6% and 12 %.
This means that the underlying investment portfolio would earn these rates of
return before the deduction of the Mortality and Expense Risk Charge (equivalent
to .55% for Policy Years 1-10, .45% for Policy Years 11-20 and .35% thereafter)
and advisory fee and operating expenses (equal to approximately .91%). When
these costs are taken into account, the net annual investment return rates (net
of an average of 1.46% for these charges) are approximately -1.46%, 4.54% and
10.54%. The Policy will lapse if you do not make additional premiums where 0% is
used in the illustrations.
It is important to be aware that these illustrations assume a level rate of
return for all years. If the actual rate of return moves up and down over the
years instead of remaining level, this may make a big difference in the
long-term investment results of your Policy. In order to properly show you how
the Policy actually works, we calculated values for the Accumulation Account
Value, Cash Surrender Value and Death Benefit.
We used the charges we described in the Expenses Section of the prospectus.
These charges are:
(1) A Federal Tax Charge of 1.3% and a Premium Tax Charge of 2.35% of each
premium paid;
(2) A first year Sales Charge of 15% of premium up to Target Premium, 5% of
premium above Target Premium. (The Sales Charge decreases to 5% of premium
paid in Policy Years 2-10 and 2% of premium paid in Policy Years 11 and
thereafter);
(3) A Monthly Policy Charge of $25 for the first Policy Year, decreasing to $6
per month thereafter;
(4) During the first ten years, a monthly Selection and Issue Expense Charge,
generally ranging from four cents to one dollar per $1,000 of Face Amount;
(5) The Monthly Cost of Insurance Charge, based on both the current charges and
the guaranteed charges;
(6) Any Surrender Charge which may be applicable in determining the Cash
Surrender Values.
There is also a column labeled "Premiums Accumulated at 5% Interest Per Year."
This shows how the annual premiums paid would grow if invested at 5% per year.
We will furnish you, upon request, a comparable personalized illustration
reflecting the proposed insured's age, risk classification, Face Amount,
premiums paid and reflecting both the current cost of insurance and guaranteed
cost of insurance.
<TABLE>
<CAPTION>
APPENDIX A --
ILLUSTRATION OF POLICY VALUES (continued)
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,300 3,886 2,164 250,000 2,997 1,276 250,000
2 12,915 8,207 6,486 250,000 6,464 4,743 250,000
3 19,861 12,383 10,662 250,000 9,779 8,057 250,000
4 27,154 16,424 14,703 250,000 12,930 11,209 250,000
5 34,811 20,339 18,618 250,000 15,904 14,183 250,000
6 42,852 24,145 22,615 250,000 18,688 17,158 250,000
7 51,295 27,842 26,694 250,000 21,271 20,124 250,000
8 60,159 31,440 30,675 250,000 23,646 22,881 250,000
9 69,467 34,930 34,548 250,000 25,804 25,421 250,000
10 79,241 38,308 38,308 250,000 27,722 27,722 250,000
15 135,945 56,981 56,981 250,000 36,594 36,594 250,000
20 208,316 70,470 70,470 250,000 34,557 34,557 250,000
25 300,681 78,166 78,166 250,000 12,899 12,899 250,000
30 418,565 76,620 76,620 250,000 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 6,300 4,155 2,433 250,000 3,237 1,516 250,000
2 12,915 9,018 7,297 250,000 7,165 5,444 250,000
3 19,861 14,018 12,297 250,000 11,169 9,448 250,000
4 27,154 19,173 17,452 250,000 15,243 13,522 250,000
5 34,811 24,496 22,775 250,000 19,374 17,653 250,000
6 42,852 30,013 28,483 250,000 23,555 22,025 250,000
7 51,295 35,733 34,586 250,000 27,775 26,628 250,000
8 60,159 41,677 40,912 250,000 32,034 31,269 250,000
9 69,467 47,847 47,465 250,000 36,326 35,943 250,000
10 79,241 54,250 54,250 250,000 40,634 40,634 250,000
15 135,945 94,503 94,503 250,000 66,332 66,332 250,000
20 208,316 142,918 142,918 250,000 91,070 91,070 250,000
25 300,681 205,052 205,052 250,000 112,287 112,287 250,000
30 418,565 287,721 287,721 302,107 122,549 122,549 250,000
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 6,300 4,424 2,703 250,000 3,479 1,758 250,000
2 12,915 9,862 8,141 250,000 7,898 6,176 250,000
3 19,861 15,789 14,068 250,000 12,681 10,959 250,000
4 27,154 22,269 20,548 250,000 17,859 16,138 250,000
5 34,811 29,369 27,648 250,000 23,463 21,742 250,000
6 42,852 37,177 35,647 250,000 29,531 28,001 250,000
7 51,295 45,770 44,622 250,000 36,108 34,960 250,000
8 60,159 55,246 54,481 250,000 43,252 42,487 250,000
9 69,467 65,696 65,313 250,000 51,028 50,645 250,000
10 79,241 77,226 77,226 250,000 59,499 59,499 250,000
15 135,945 161,294 161,294 250,000 121,018 121,018 250,000
20 208,316 302,116 302,116 350,455 225,642 225,642 261,745
25 300,681 536,532 536,532 574,090 405,112 405,112 433,470
30 418,565 925,270 925,270 971,533 700,559 700,559 735,587
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 6,300 3,880 2,159 253,880 2,977 1,256 252,977
2 12,915 8,187 6,465 258,187 6,405 4,684 256,405
3 19,861 12,335 10,614 262,335 9,657 7,935 259,657
4 27,154 16,335 14,614 266,335 12,720 10,999 262,720
5 34,811 20,192 18,470 270,192 15,576 13,854 265,576
6 42,852 23,923 22,393 273,923 18,209 16,679 268,209
7 51,295 27,526 26,378 277,526 20,604 19,456 270,604
8 60,159 31,010 30,245 281,010 22,751 21,986 272,751
9 69,467 34,365 33,982 284,365 24,637 24,254 274,637
10 79,241 37,581 37,581 287,581 26,235 26,235 276,235
15 135,945 54,844 54,844 304,844 32,464 32,464 282,464
20 208,316 64,905 64,905 314,905 25,697 25,697 275,697
25 300,681 66,135 66,135 316,135 0 0 0
30 418,565 53,865 53,865 303,865 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 6,300 4,149 2,427 254,149 3,216 1,495 253,216
2 12,915 8,995 7,274 258,995 7,100 5,378 257,100
3 19,861 13,963 12,242 263,963 11,029 9,308 261,029
4 27,154 19,066 17,345 269,066 14,991 13,270 264,991
5 34,811 24,314 22,592 274,314 18,965 17,244 268,965
6 42,852 29,727 28,197 279,727 22,933 21,403 272,933
7 51,295 35,311 34,163 285,311 26,874 25,727 276,874
8 60,159 41,080 40,315 291,080 30,775 30,010 280,775
9 69,467 47,029 46,646 297,029 34,615 34,232 284,615
10 79,241 53,155 53,155 303,155 38,361 38,361 288,361
15 135,945 90,612 90,612 340,612 58,527 58,527 308,527
20 208,316 130,664 130,664 380,664 69,337 69,337 319,337
25 300,681 171,937 171,937 421,937 59,365 59,365 309,365
30 418,565 208,510 208,510 458,510 6,844 6,844 256,844
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 6,300 4,418 2,697 254,418 3,457 1,735 253,457
2 12,915 9,837 8,116 259,837 7,825 6,104 257,825
3 19,861 15,727 14,005 265,727 12,520 10,799 262,520
4 27,154 22,143 20,422 272,143 17,560 15,839 267,560
5 34,811 29,145 27,424 279,145 22,957 21,236 272,957
6 42,852 36,812 35,282 286,812 28,731 27,201 278,731
7 51,295 45,208 44,061 295,208 34,900 33,753 284,900
8 60,159 54,420 53,655 304,420 41,494 40,729 291,494
9 69,467 64,517 64,135 314,517 48,537 48,154 298,537
10 79,241 75,584 75,584 325,584 56,046 56,046 306,046
15 135,945 154,153 154,153 404,153 106,256 106,256 356,256
20 208,316 276,475 276,475 526,475 172,836 172,836 422,836
25 300,681 470,121 470,121 720,121 257,038 257,038 507,038
30 418,565 774,857 774,857 1,024,857 351,249 351,249 601,249
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 6,300 3,886 2,164 250,000 2,997 1,276 250,000
2 12,915 8,207 6,486 250,000 6,464 4,743 250,000
3 19,861 12,383 10,662 250,000 9,779 8,057 250,000
4 27,154 16,424 14,703 250,000 12,930 11,209 250,000
5 34,811 20,339 18,618 250,000 15,904 14,183 250,000
6 42,852 24,145 22,615 250,000 18,688 17,158 250,000
7 51,295 27,842 26,694 250,000 21,271 20,124 250,000
8 60,159 31,440 30,675 250,000 23,646 22,881 250,000
9 69,467 34,930 34,548 250,000 25,804 25,421 250,000
10 79,241 38,308 38,308 250,000 27,722 27,722 250,000
15 135,945 56,981 56,981 250,000 36,594 36,594 250,000
20 208,316 70,470 70,470 250,000 34,557 34,557 250,000
25 300,681 78,166 78,166 250,000 12,899 12,899 250,000
30 418,565 76,620 76,620 250,000 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 6,300 4,155 2,433 250,000 3,237 1,516 250,000
2 12,915 9,018 7,297 250,000 7,165 5,444 250,000
3 19,861 14,018 12,297 250,000 11,169 9,448 250,000
4 27,154 19,173 17,452 250,000 15,243 13,522 250,000
5 34,811 24,496 22,775 250,000 19,374 17,653 250,000
6 42,852 30,013 28,483 250,000 23,555 22,025 250,000
7 51,295 35,733 34,586 250,000 27,775 26,628 250,000
8 60,159 41,677 40,912 250,000 32,034 31,269 250,000
9 69,467 47,847 47,465 250,000 36,326 35,943 250,000
10 79,241 54,250 54,250 250,000 40,634 40,634 250,000
15 135,945 94,503 94,503 250,000 66,332 66,332 250,000
20 208,316 142,918 142,918 250,000 91,070 91,070 250,000
25 300,681 203,747 203,747 287,702 112,287 112,287 250,000
30 418,565 275,764 275,764 358,314 122,549 122,549 250,000
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 6,300 4,424 2,703 250,000 3,479 1,758 250,000
2 12,915 9,862 8,141 250,000 7,898 6,176 250,000
3 19,861 15,789 14,068 250,000 12,681 10,959 250,000
4 27,154 22,269 20,548 250,000 17,859 16,138 250,000
5 34,811 29,369 27,648 250,000 23,463 21,742 250,000
6 42,852 37,177 35,647 250,000 29,531 28,001 250,000
7 51,295 45,770 44,622 250,000 36,108 34,960 250,000
8 60,159 55,246 54,481 250,000 43,252 42,487 250,000
9 69,467 65,696 65,313 250,000 51,028 50,645 250,000
10 79,241 77,226 77,226 250,000 59,499 59,499 250,000
15 135,945 161,146 161,146 284,331 121,012 121,018 250,000
20 208,316 295,516 295,516 462,699 220,189 220,189 344,756
25 300,681 509,426 509,426 719,335 367,576 367,576 519,036
30 418,565 845,005 845,005 1,097,957 577,576 577,576 750,473
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 9,450 5,731 2,840 250,000 3,169 278 250,000
2 19,373 12,053 9,162 250,000 6,890 3,999 250,000
3 29,791 18,034 15,142 250,000 10,258 7,367 250,000
4 40,731 23,784 20,893 250,000 13,235 10,344 250,000
5 52,217 29,272 26,381 250,000 15,779 12,888 250,000
6 64,278 34,643 32,073 250,000 17,853 15,283 250,000
7 76,942 39,824 37,897 250,000 19,425 17,498 250,000
8 90,239 44,804 43,519 250,000 20,456 19,171 250,000
9 104,201 49,590 48,948 250,000 20,905 20,262 250,000
10 118,861 54,121 54,121 250,000 20,711 20,711 250,000
15 203,917 78,955 78,955 250,000 12,308 12,308 250,000
20 312,473 91,945 91,945 250,000 0 0 0
25 451,021 92,871 92,871 250,000 0 0 0
30 627,847 71,408 71,408 250,000 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 9,450 6,130 3,239 250,000 3,486 595 250,000
2 19,373 13,254 10,362 250,000 7,772 4,881 250,000
3 29,791 20,449 17,558 250,000 11,957 9,066 250,000
4 40,731 27,832 24,941 250,000 15,997 13,105 250,000
5 52,217 35,380 32,489 250,000 19,845 16,953 250,000
6 64,278 43,248 40,678 250,000 23,458 20,888 250,000
7 76,942 51,383 49,455 250,000 26,800 24,872 250,000
8 90,239 59,788 58,503 250,000 29,824 28,539 250,000
9 104,201 68,494 67,852 250,000 32,483 31,841 250,000
10 118,861 77,464 77,464 250,000 34,712 34,712 250,000
15 203,917 134,708 134,708 250,000 42,665 42,665 250,000
20 312,473 205,115 205,115 250,000 17,382 17,382 250,000
25 451,021 302,603 302,603 317,733 0 0 0
30 627,847 422,536 422,536 443,663 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 9,450 6,529 3,638 250,000 3,806 915 250,000
2 19,373 14,504 11,613 250,000 8,698 5,807 250,000
3 29,791 23,067 20,175 250,000 13,815 10,923 250,000
4 40,731 32,397 29,506 250,000 19,147 16,256 250,000
5 52,217 42,553 39,661 250,000 24,690 21,799 250,000
6 64,278 53,775 51,205 250,000 30,445 27,875 250,000
7 76,942 66,121 64,194 250,000 36,431 34,503 250,000
8 90,239 79,715 78,430 250,000 42,664 41,379 250,000
9 104,201 94,721 94,079 250,000 49,172 48,530 250,000
10 118,861 111,272 111,272 250,000 55,981 55,981 250,000
15 203,917 235,127 235,127 251,586 104,448 104,448 250,000
20 312,473 444,341 444,341 466,558 181,717 181,717 250,000
25 451,021 788,822 788,822 828,263 342,424 342,424 359,546
30 627,847 1,347,291 1,347,291 1,414,656 601,688 601,688 631,772
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 9,450 5,718 2,827 255,718 3,101 210 253,101
2 19,373 12,002 9,111 262,002 6,695 3,804 256,695
3 29,791 17,906 15,015 267,906 9,870 6,979 259,870
4 40,731 23,539 20,648 273,539 12,582 9,690 262,582
5 52,217 28,856 25,964 278,856 14,781 11,890 264,781
6 64,278 34,014 31,444 284,014 16,427 13,857 266,427
7 76,942 38,927 36,999 288,927 17,488 15,560 267,488
8 90,239 43,570 42,285 293,570 17,925 16,640 267,925
9 104,201 47,947 47,304 297,947 17,702 17,060 267,702
10 118,861 51,971 51,971 301,971 16,772 16,772 266,772
15 203,917 72,010 72,010 322,010 3,818 3,818 253,818
20 312,473 72,624 72,624 322,624 0 0 0
25 451,021 52,615 52,615 302,615 0 0 0
30 627,847 2,552 2,552 252,552 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 9,450 6,116 3,224 256,116 3,413 522 253,413
2 19,373 13,198 10,307 263,198 7,555 4,664 257,555
3 29,791 20,304 17,413 270,304 11,507 8,616 261,507
4 40,731 27,541 24,650 277,541 15,207 12,316 265,207
5 52,217 34,865 31,974 284,865 18,588 15,697 268,588
6 64,278 42,439 39,869 292,439 21,583 19,013 271,583
7 76,942 50,180 48,253 300,180 24,135 22,207 274,135
8 90,239 58,069 56,784 308,069 26,175 24,890 276,175
9 104,201 66,111 65,469 316,111 27,633 26,991 277,633
10 118,861 74,220 74,220 324,220 28,422 28,422 278,422
15 203,917 121,994 121,994 371,994 23,912 23,912 273,912
20 312,473 161,070 161,070 411,070 0 0 0
25 451,021 186,927 186,927 436,927 0 0 0
30 627,847 183,446 183,446 433,446 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 9,450 6,514 3,623 256,514 3,728 837 253,728
2 19,373 14,443 11,552 264,443 8,458 5,567 258,458
3 29,791 22,901 20,010 272,901 13,298 10,406 263,298
4 40,731 32,052 29,161 282,052 18,202 15,311 268,202
5 52,217 41,920 39,028 291,920 23,120 20,229 273,120
6 64,278 52,741 50,171 302,741 28,002 25,432 278,002
7 76,942 64,522 62,595 314,522 32,801 30,873 282,801
8 90,239 77,334 76,049 327,334 37,458 36,173 287,458
9 104,201 91,285 90,642 341,285 41,911 41,268 291,911
10 118,861 106,399 106,399 356,399 46,075 46,075 296,075
15 203,917 211,680 211,680 461,680 64,995 64,995 314,995
20 312,473 362,217 362,217 612,217 50,448 50,448 300,448
25 451,021 586,718 586,718 836,718 0 0 0
30 627,847 919,061 919,061 1,169,061 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 9,450 5,731 2,840 250,000 3,169 278 250,000
2 19,373 12,053 9,162 250,000 6,890 3,999 250,000
3 29,791 18,034 15,142 250,000 10,258 7,367 250,000
4 40,731 23,784 20,893 250,000 13,235 10,344 250,000
5 52,217 29,272 26,381 250,000 15,779 12,888 250,000
6 64,278 34,643 32,073 250,000 17,853 15,283 250,000
7 76,942 39,824 37,897 250,000 19,425 17,498 250,000
8 90,239 44,804 43,519 250,000 20,456 19,171 250,000
9 104,201 49,590 48,948 250,000 20,905 20,262 250,000
10 118,861 54,121 54,121 250,000 20,711 20,711 250,000
15 203,917 78,955 78,955 250,000 12,308 12,308 250,000
20 312,473 91,945 91,945 250,000 0 0 0
25 451,021 92,871 92,871 250,000 0 0 0
30 627,847 71,408 71,408 250,000 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 9,450 6,130 3,239 250,000 3,486 595 250,000
2 19,373 13,254 10,362 250,000 7,772 4,881 250,000
3 29,791 20,449 17,558 250,000 11,957 9,066 250,000
4 40,731 27,832 24,941 250,000 15,997 13,105 250,000
5 52,217 35,380 32,489 250,000 19,845 16,953 250,000
6 64,278 43,248 40,678 250,000 23,458 20,888 250,000
7 76,942 51,383 49,455 250,000 26,800 24,872 250,000
8 90,239 59,788 58,503 250,000 29,824 28,539 250,000
9 104,201 68,494 67,852 250,000 32,483 31,841 250,000
10 118,861 77,464 77,464 250,000 34,712 34,712 250,000
15 203,917 134,708 134,708 250,000 42,665 42,665 250,000
20 312,473 204,687 204,687 265,959 17,382 17,382 250,000
25 451,021 290,628 290,628 353,153 0 0 0
30 627,847 390,376 390,376 451,158 0 0 0
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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.
Cova Financial Life Insurance Company
Flexible Premium Variable Life Insurance
Hypothetical Illustration
Single Life
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
Accumulated
End of at 5% Cash Cash
Policy Interest Cash Surrender Death Cash Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
1 9,450 6,529 3,638 250,000 3,806 915 250,000
2 19,373 14,504 11,613 250,000 8,698 5,807 250,000
3 29,791 23,067 20,175 250,000 13,815 10,923 250,000
4 40,731 32,397 29,506 250,000 19,147 16,256 250,000
5 52,217 42,553 39,661 250,000 24,690 21,799 250,000
6 64,278 53,775 51,205 250,000 30,445 27,875 250,000
7 76,942 66,121 64,194 250,000 36,431 34,503 250,000
8 90,239 79,715 78,430 250,000 42,664 41,379 250,000
9 104,201 94,721 94,079 250,000 49,172 48,530 250,000
10 118,861 111,272 111,272 250,000 55,981 55,981 250,000
15 203,917 233,367 233,367 329,526 104,448 104,448 250,000
20 312,473 424,216 424,216 551,205 181,717 181,717 250,000
25 451,021 723,355 723,355 878,977 316,109 316,109 384,117
30 627,847 1,185,926 1,185,926 1,370,574 502,676 502,676 580,942
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance rates.
THE HYPOTHETICAL INVESTMENT RESULTS SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY
AND DO NOT REPRESENT PAST OR FUTURE INVESTMENT RESULTS. THE DEATH BENEFIT, CASH 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>
APPENDIX B
PARTICIPATING INVESTMENT FUNDS
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. 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.
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.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.:
Alliance Variable Products Series Fund, Inc. is a mutual fund with multiple
portfolios. Alliance Capital Management L.P. is the investment adviser to each
portfolio. The following portfolios are available under the contract:
PREMIER GROWTH PORTFOLIO (Class A)
Investment Objective: The Portfolio's investment objective is growth of capital
by pursuing aggressive investment policies. The Portfolio invests primarily
in equity securities of U.S. companies. Normally, the Portfolio invests in
about 40-50 companies, with the 25 most highly regarded of these companies
usually constituting approximately 70% of the Portfolio's net assets.
REAL ESTATE INVESTMENT PORTFOLIO (Class A)
Investment Objective: The Portfolio's investment objective is total return from
long-term growth of capital and income principally through investing in equity
securities of companies that are primarily engaged in or related to the real
estate industry.
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 Small Cap Fund, Franklin Mutual Advisers, LLC is the investment adviser
for the Mutual Shares Securities Fund, Templeton Investment Counsel, Inc. is the
investment adviser for the Templeton International Securities Fund, and
Templeton Asset Management Ltd. is the investment adviser for the Templeton
Developing Markets Securities Fund. The following portfolios are available under
the contract:
MUTUAL SHARES SECURITIES FUND (the surviving fund of the merger with Mutual
Shares Investments Fund)
Investment Objective and Principal Investments: The Fund's principal goal is
capital appreciation. Its secondary goal is income. Under normal market
conditions, the Fund will invest at least 65% of its total assets in equity
securities of companies that the manager believes are available at market prices
less than their value based on certain recognized or objective criteria
(intrinsic value).
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 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 DEVELOPING MARKETS SECURITIES FUND (formerly, Templeton
Developing Markets Fund)
Investment Objective: The Fund's investment goal is long-term capital
appreciation. Under normal market conditions, the Fund will invest at least 65%
of its total assets in emerging market equity securities. Emerging market equity
securities generally include equity securities that trade in emerging markets or
are issued by companies that derive revenue from goods or services produced, or
that have their principal activities or assets in, emerging market countries.
TEMPLETON GROWTH SECURITIES FUND (the surviving fund of the merger
with Templeton Stock Fund)
Investment Objective: 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.
GOLDMAN SACHS VARIABLE INSURANCE TRUST:
Goldman Sachs Variable Insurance Trust is a mutual fund with multiple
portfolios. Goldman Sachs Asset Management, a unit of the Investment Management
Division of Goldman, Sachs & Co., is the investment adviser for the Goldman
Sachs VIT Growth and Income Fund and Goldman Sachs VIT Internet Tollkeeper Fund
and Goldman Sachs Asset Management International is the investment adviser for
the Goldman Sachs VIT International Equity Fund and the Goldman Sachs VIT Global
Income Fund. The following portfolios are available under the contract:
GOLDMAN SACHS VIT GLOBAL INCOME FUND
Investment Objective: The Fund seeks a high total return, emphasizing current
income, and, to a lesser extent, providing opportunities for capital
appreciation. The Fund invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and enters into
transactions in foreign currencies.
GOLDMAN SACHS VIT INTERNET TOLLKEEPER FUND
Investment Objective: The Fund seeks long-term growth of capital by investing,
under normal circumstances, at least 90% of its total assets in equity
securities and at least 65% of its total assets in equity securities of
"Internet Tollkeeper" companies, which are companies in the media,
telecommunications, technology and Internet sectors which provide access,
infrastructure, content and services to Internet companies and Internet users.
GOLDMAN SACHS VIT GROWTH AND INCOME FUND
Investment Objective: The Fund seeks long-term growth of capital and growth of
income by investing in large capitalization U.S. stocks that are believed to
be undervalued or undiscovered in the marketplace.
GOLDMAN SACHS VIT INTERNATIONAL EQUITY FUND
Investment Objective: The Fund seeks long-term capital appreciation by investing
primarily in equity securities of companies organized outside the United States
or whose securities are principally traded outside the United States. The Fund
intends to invest in companies with public stock market capitalizations that are
larger than $1 billion at the time of investment.
KEMPER VARIABLE SERIES
Kemper Variable Series is a mutual fund with multiple portfolios. Scudder Kemper
Investments, Inc. is the investment adviser for the Kemper Government Securities
Portfolio, the Kemper Small Cap Growth Portfolio and the Kemper Small Cap Value
Portfolio. The following portfolios are available under the contract:
KEMPER GOVERNMENT SECURITIES PORTFOLIO
Investment Objective: Kemper Government Securities seeks high current return
consistent with preservation of capital. The Portfolio pursues its objective
by investing at least 65% of its total assets in U.S. Government securities
and repurchase agreements of U.S. Government securities.
KEMPER SMALL CAP GROWTH PORTFOLIO
Investment Objective: Kemper Small Cap Growth Portfolio seeks maximum
appreciation of investors' capital. The Portfolio pursues its objective by
investing at least 65% of its total assets in small capitalization stocks
similar in size to those companies comprising the Russell 2000 Index. Many
of these companies would be in the early stages of their life cycle. Equity
securities in which the Portfolio invests consist primarily of common stocks,
but may include convertible securities, including warrants and rights.
KEMPER SMALL CAP VALUE PORTFOLIO
Investment Objective: Kemper Small Cap Value Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in a diversified portfolio of the stocks of small U.S. companies,
which are those similar in size to those comprising the Russell 2000 Index and
that the investment manager believes to be undervalued. Under normal market
conditions, the Portfolio invests at least 65% of its assets in small
capitalization stocks similar in size to those comprising the Russell 2000
Index.
LIBERTY VARIABLE INVESTMENT TRUST:
Liberty Variable Investment Trust is a mutual fund with multiple portfolios.
Liberty Advisory Services Corp. (LASC) is the investment manager to the Trust.
LASC has engaged Newport Fund Management, Inc. as sub-adviser to provide
investment advice for the Newport Tiger Fund, Variable Series. The following
portfolio is available under the contract:
NEWPORT TIGER FUND, VARIABLE SERIES
Investment Objective: The Fund seeks long-term capital appreciation. Under
normal market conditions, the Fund invests primarily in stocks of companies
located in the nine Tiger countries of Asia. The Tigers of Asia are Hong Kong,
Singapore, South Korea, Taiwan, Malaysia, Thailand, Indonesia, The People's
Republic of China and the Philippines. The Fund typically invests in stocks of
larger, well-established companies.
MFS VARIABLE INSURANCE TRUST:
MFS Variable Insurance Trust is a mutual fund with multiple portfolios.
Massachusetts Financial Services Company is the investment adviser to each
portfolio. The following portfolios are available under the contract:
MFS EMERGING GROWTH SERIES
Investment Objective: The Series' investment objective is long term growth of
capital. The Series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities of emerging growth
companies.
MFS GLOBAL GOVERNMENTS SERIES
Investment Objective: The Series' investment objective is to provide income
and capital appreciation. The Series invests primarily in U.S. and foreign
government securities.
MFS GROWTH WITH INCOME SERIES
Investment Objective: The Series' investment objective is to provide reasonable
current income and long-term growth of capital and income. The Series invests,
under normal market conditions, at least 65% of its total assets in common
stocks and related securities.
MFS HIGH INCOME SERIES
Investment Objective: The Series' investment objective is to provide high
current income by investing primarily in a professionally managed diversified
portfolio of fixed income securities, some of which may involve equity features.
The Series invests, under normal market conditions, at least 80% of its total
assets in high yield fixed income securities which generally are lower rated
bonds commonly known as junk bonds. Junk bonds are subject to a substantially
higher degree of risk than higher rated bonds.
MFS RESEARCH SERIES
Investment Objective: The Series' investment objective is long-term growth of
capital and future income. The Series invests, under normal market conditions,
at least 80% of its total assets in common stocks and related securities, such
as preferred stocks, convertible securities and depositary receipts.
OPPENHEIMER VARIABLE ACCOUNT FUNDS:
Oppenheimer Variable Account Funds is a mutual fund with multiple portfolios.
OppenheimerFunds, Inc. is the investment adviser to each portfolio. The
following portfolios are available under the contract:
OPPENHEIMER BOND FUND/VA
Investment Objective: The Fund's main objective is to seek a high level of
current income. As a secondary objective, the Fund seeks capital appreciation
when consistent with its primary objective. Normally, the Fund invests at least
65% of its total assets in investment-grade debt securities, U.S. Government
securities and money market instruments.
OPPENHEIMER CAPITAL APPRECIATION FUND/VA
Investment Objective: The Fund seeks capital appreciation by investing in
securities of well-known established companies. The Fund invests mainly in
common stocks of established and well-known U.S. companies.
OPPENHEIMER HIGH INCOME FUND/VA
Investment Objective: The Fund seeks a high level of current income from
investment in high-yield fixed income securities. The Fund invests mainly
in a variety of high-yield fixed-income securities of domestic and foreign
issuers.
OPPENHEIMER MAIN STREET GROWTH & INCOME FUND/VA
Investment Objective: The Fund's objective is to seek high total return (which
includes growth in the value of its shares as well as current income) from
equity and debt securities. The Fund invests mainly in common stocks of U.S.
companies, and can also invest in other equity securities such as preferred
stocks and securities convertible into common stocks.
OPPENHEIMER STRATEGIC BOND FUND/VA
Investment Objective: The Fund seeks a high level of current income. The Fund
invests mainly in debt securities of issuers in three market sectors: foreign
governments and companies, U.S. government securities and lower-grade high-yield
securities of U.S. companies.
PUTNAM VARIABLE TRUST:
Putnam Variable Trust is a mutual fund with multiple portfolios. Putnam
Investment Management, Inc. is the investment adviser to each portfolio. The
following portfolios are available under the contract:
PUTNAM VT GROWTH AND INCOME FUND-CLASS IA SHARES
Investment Objective: The Fund seeks capital growth and current income.
PUTNAM VT INTERNATIONAL GROWTH FUND-CLASS IA SHARES
Investment Objective: The Fund seeks capital appreciation.
PUTNAM VT INTERNATIONAL NEW OPPORTUNITIES FUND-CLASS IA SHARES
Investment Objective: The Fund seeks long-term capital appreciation.
PUTNAM VT NEW VALUE FUND-CLASS IA SHARES
Investment Objective: The Fund seeks long-term capital appreciation.
PUTNAM VT VISTA FUND-CLASS IA SHARES
Investment Objective: The Fund seeks capital appreciation.
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
VARIABLE INSURANCE PRODUCTS FUND III
Variable Insurance Products Fund, Variable Insurance Products Fund II and
Variable Insurance Products Fund II are each a mutual fund with multiple
portfolios managed by Fidelity Management & Research Company. The following
portfolios are available under the policy:
VARIABLE INSURANCE PRODUCTS FUND
VIP GROWTH PORTFOLIO
Investment Objective: The Growth Portfolio seeks to achieve capital
appreciation.
VIP EQUITY-INCOME PORTFOLIO
Investment Objective: The Equity-Income Portfolio seeks reasonable income. The
Fund will also consider the potential for capital appreciation. The Fund's goal
is to achieve a yield which exceeds the composite yield on the securities
comprising the S&P 500.
VARIABLE INSURANCE PRODUCTS FUND II
VIP II CONTRAFUND(R) PORTFOLIO
Investment Objective: The Contrafund(R) Portfolio seeks long-term capital
appreciation.
VARIABLE INSURANCE PRODUCTS FUND III
VIP III GROWTH OPPORTUNITIES PORTFOLIO
Investment Objective: The Growth Opportunities Portfolio seeks to provide
capital growth.
VIP III GROWTH & INCOME PORTFOLIO
Investment Objective: The Growth & Income Portfolio seeks high total return
through a combination of current income and capital appreciation.
PROSPECTUS - VERSION B
Flexible Premium Variable Life Insurance Policy
issued by
COVA FINANCIAL LIFE
INSURANCE COMPANY
COVA VARIABLE LIFE
ACCOUNT FIVE
This prospectus describes the Flexible Premium Variable Life Insurance Policy
that we are offering.
We have designed the Policy for use in estate and retirement planning and other
insurance needs of individuals. The Policy provides for maximum flexibility by
allowing you to vary your premium payments and to change the level of death
benefits payable.
You, the policyowner, have a number of investment choices in the Policy. These
investment choices include a General Account as well as the following 6
Investment Funds listed below which are offered through our Separate Account.
When you purchase a Policy, you bear the complete investment risk. This means
that the Accumulation Account Value of your Policy may increase and decrease
depending upon the investment performance of the Investment Fund(s) you select.
The duration of the Policy and, under some circumstances, the death benefit will
increase and decrease depending upon investment performance.
General American Capital Company:
Advisor: Conning Asset Management Company
Money Market Fund
Russell Insurance Funds:
Advisor: Frank Russell Investment Management Company
Multi-Style Equity Fund
Aggressive Equity Fund
Non-U.S. Fund
Real Estate Securities Fund
Core Bond Fund
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the Flexible Premium Variable
Life Insurance Policy. The Securities and Exchange Commission maintains a Web
site (http://www.sec.gov) that contains information regarding registrants that
file electronically with the Commission.
The Policy:
o is not a bank deposit.
o is not federally insured.
o is not endorsed by any bank or government agency.
The Policy is subject to investment risk. You may be subject to loss of
principal.
The SEC has not approved the Policy or determined that this prospectus is
accurate or complete. Any representation that it has is a criminal offense.
DATE: May 1, 2000
TABLE OF CONTENTS Page
SPECIAL TERMS
SUMMARY
The Variable Life Insurance Policy
Purchases
Investment Choices
Expenses
Death Benefit
Taxes
Access to Your Money
Other Information
Inquiries
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
2. PURCHASES
Application for a Policy
Premiums
Unscheduled Premiums
Lapse and Grace Period
Reinstatement
Allocation of Premium
Accumulation Account Value of Your Policy
Method of Determining Accumulation Account
Value of an Investment Fund
Net Investment Factor
Our Right to Reject or Return a Premium Payment
3. INVESTMENT FUNDS
Substitution and Limitations on Further Investments
Transfers
Dollar Cost Averaging
Portfolio Rebalancing
Approved Asset Allocation Programs
4. EXPENSES
Tax Charges
Sales Charge
Selection and Issue Expense Charge
Monthly Policy Charge
Monthly Cost of Insurance Charge
Charges for Additional Benefit Riders
Mortality and Expense Risk Charge
Surrender Charge
Transaction Charges
Investment Fund Expenses
5. DEATH BENEFIT
Change of Death Benefit
Change in Face Amount
6. TAXES
Life Insurance in General
Taking Money Out of Your Policy
Diversification
7. ACCESS TO YOUR MONEY
Policy Loans
Loan Interest Charged
Security
Repaying Policy Debt
Partial Withdrawals
Pro-Rata Surrender
Full Surrenders
8. OTHER INFORMATION
Cova
Distribution
The Separate Account
Suspension of Payments or Transfers
Ownership
Adjustment of Charges
PART II
Executive Officers and Directors
Voting
Disregard of Voting Instructions
Legal Opinions
Our Right to Contest
Additional Benefits
Federal Tax Status
Introduction
Diversification
Tax Treatment of the Policy
Policy Proceeds
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 - Illustration of Policy Values
SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you as
possible. However, by the very nature of the Policy certain technical words or
terms are unavoidable. We have identified some of these terms and provided you
with a definition.
Accumulation Account Value -- The total of the amounts credited to the Owner in
the Separate Account, the General Account and the Loan Account.
Attained Age -- The Issue Age of the Insured plus the number of completed Policy
years.
Beneficiary -- The person(s) named in the application or by later designation to
receive Policy proceeds in the event of the Insured's death. A Beneficiary may
be changed as set forth in the Policy and this prospectus.
Cash Surrender Value -- The Accumulation Account Value of a Policy on the date
of surrender, less any Indebtedness, less any unpaid selection and issue expense
charge due for the remainder of the first Policy year, less any unpaid monthly
Policy charge due for the remainder of the first Policy year, and less any
surrender charge.
Face Amount -- The minimum death benefit under the Policy so long as the Policy
remains in force before the Insured's Attained Age 100.
General Account -- Our assets other than those allocated to the Separate Account
or any other separate account.
Indebtedness -- The sum of all unpaid Policy loans and accrued interest on
loans.
Insured -- The person whose life is insured under the Policy.
Investment Funds -- Investments within the Separate Account which we make
available under the Policy.
Investment Start Date -- The date the initial premium is applied to the General
Account and/or the Investment Funds. This date is the later of the Issue Date or
the date the initial premium is received at our Service Office. Issue Age -- The
age of the Insured at his or her nearest birthday as of the Issue Date.
Issue Date -- The date as of which insurance coverage begins under a Policy. It
is also the date from which Policy anniversaries, Policy years, and Policy
months are measured. It is the Effective Date of coverage under the Policy.
Loan Account -- The account of Cova to which amounts securing Policy Loans are
allocated. The Loan Account is part of Cova's General Account.
Loan Subaccount -- A Loan Subaccount has been established for the General
Account and for each Investment Fund. Any Accumulation Account Value transferred
to the Loan Account will be allocated to the appropriate Loan Subaccount to
reflect the origin of the Accumulation Account Value. At any point in time, the
Loan Account will equal the sum of all the Loan Subaccounts.
Monthly Anniversary -- The same date in each succeeding month as the Issue Date
except that whenever the Monthly Anniversary falls on a date other than a
Valuation Date, the Monthly Anniversary will be deemed the next Valuation Date.
If any Monthly Anniversary would be the 29th, 30th, or 31st day of a month that
does not have that number of days, then the Monthly Anniversary will be the last
day of that month.
Net Premium -- The premium paid, less the premium tax charge, less the Federal
tax charge, less the sales charge.
Owner -- The owner of a Policy, as designated in the application or as
subsequently changed.
Policy -- The flexible premium variable life insurance Policy offered by us and
described in this prospectus.
Pro-Rata Surrender -- A requested reduction of both the Face Amount and the
Accumulation Account Value by a given percentage.
Separate Account -- Cova Variable Life Account Five, a separate investment
account established by Cova to receive and invest the Net Premiums paid under
the Policy, and certain other variable life policies, and allocated by you to
provide variable benefits.
Service Office -- Cova Financial Life Insurance Company, P.O. Box 66757, St.
Louis, MO 63166-6757.
Target Premium -- A premium calculated when a Policy is issued, based on the
Insured's age, sex (except in unisex policies) and risk class. The Target
Premium is used to calculate the first year's premium expense charge, the
surrender charge, and agent compensation under the Policy.
Valuation Date -- Each day that the New York Stock Exchange (NYSE) is open for
trading and Cova is open for business. Cova is open for business every day that
the NYSE is open for trading.
Valuation Period -- The period between two successive Valuation Dates,
commencing at the close of the NYSE (usually 4:00 p.m. Eastern Standard Time) on
a Valuation Date and ending with the close of the NYSE on the next succeeding
Valuation Date.
The prospectus is divided into three sections: the Summary, Part I and Part II.
The sections in the Summary correspond to sections in Part I of this prospectus
which discuss the topics in more detail. Part II contains even more detailed
information.
SUMMARY
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance Policy is a contract between you, the owner, and us,
an insurance company. The Policy provides for the payment of a death benefit to
your selected Beneficiary upon the death of the person insured. This death
benefit is distributed free from Federal income taxes. The Policy can be used as
part of your estate planning or used to save for retirement. The Insured is the
person you choose to have insured under the Policy. You, the owner, can be the
Insured, but you do not have to be.
The Policy described in this prospectus is a flexible premium variable life
insurance policy. The Policy is "flexible" because:
o the frequency and amount of premium payments can vary;
o you can choose between death benefit options; and
o you can change the amount of insurance coverage.
The Policy is "variable" because the Accumulation Account Value of your Policy,
when allocated to the Investment Funds, may increase or decrease depending upon
the investment results of the selected Investment Funds. The duration of your
Policy may vary and, under certain circumstances, so may your death benefit.
So long as the Insured is alive, you can surrender the Policy for all or part of
its Cash Surrender Value. You may also obtain a Policy loan, using the Policy as
security. We will pay a death benefit when the Insured dies.
We make available a number of riders to meet a variety of your estate planning
needs. The minimum Face Amount of insurance that we offer is $50,000.
2. PURCHASES
You purchase the Policy by completing the proper forms. Your registered
representative can help you. In some circumstances, we may contact you for
additional information regarding the Insured. We may require the Insured to
provide us with medical records, physician's statement or a complete paramedical
examination.
The minimum initial premium we accept is computed for you based on the Face
Amount you request. The Policy is designed for the payment of subsequent
premiums. You can establish planned annual premiums. The minimum subsequent
premium that we accept is $10.
3. INVESTMENT CHOICES
You can put your money in our General Account or in any or all of the Investment
Funds. A detailed description of the Investment Funds, their investment
policies, restrictions, risks, and charges is contained in the prospectuses for
each Investment Fund. You should read the prospectuses carefully.
4. EXPENSES
We make certain deductions from your premiums, your Accumulation Account Value
and from the Investment Funds. These deductions are made for taxes, mortality
and expense risks, administrative expenses, sales charges, the cost of providing
life insurance protection and for the cost associated with the management and
investment operations of the Investment Funds. These deductions are summarized
as follows:
o Deductions from each premium payment.
Tax Charges. We currently deduct 1.3% of each premium payment to pay the Federal
Tax Charge. We also deduct a Premium Tax Charge currently equal to 2.35% to pay
the state and local premium taxes.
Sales Charge. The Sales Charge, which is also referred to as the percent of
premium charge, is determined as follows:
(1) in the first Policy year, 15% of the amount you pay up to the Target
Premium, and 5% of the amount you pay over the Target Premium;
(2) in the 2nd through 10th Policy years, 5% of the actual premium you pay; and
(3) in the 11th Policy year and later, 2% of the actual premium you pay.
o Monthly deductions from your Accumulation Account Value.
Selection and Issue Expense Charge. During the first 10 Policy years, we assess
a charge of up to 1% per $1000 of Face Amount. This charge varies by Issue Age,
risk class and sex (except in unisex policies) of the Insured.
Monthly Policy Charge. This charge is equal to $25 per month for the first
Policy year, and $6 per Policy month thereafter. This amount is deducted from
the Accumulation Account Value of your Policy on the Investment Start Date and
each Monthly Anniversary date.
Monthly Cost of Insurance. This amount is deducted monthly from your
Accumulation Account Value on the Investment Start Date and each Monthly
Anniversary date. The amount of the deduction varies with the age, sex (except
in unisex policies), risk class of the Insured, duration and the amount of death
benefit at risk.
Charges for Additional Benefit Riders. On each Monthly Anniversary date, the
amount of the charge, if any, for additional benefit riders is determined in
accordance with the rider and is shown on the specifications page of your
Policy.
o Deductions from the Investment Funds.
Mortality and Expense Risk Charge. This risk charge is guaranteed not to exceed,
on an annual basis, 0.55% of the average value of each of your Investment Funds
and is deducted each Valuation Date.
The current risk charge depends on the number of years your Policy has been in
force and is as follows:
Years Daily Charge Factor Annual Equivalent
-------- -------------------- -------------------
1-10 .0015027% 0.55%
11-20 .0012301% 0.45%
21+ .0009572% 0.35%
This deduction is guaranteed not to increase while the Policy is in force. We
will not increase the mortality and expense risk charge to .55% in years 11 and
beyond.
<TABLE>
<CAPTION>
Investment Fund Expenses
Annual Fund Operating Expenses (as a percentage of average net assets)
Total Annual
Management Fees Fund Expenses
(after reimbursement (after reimbursement
and/or waivers as and/or waivers
Investment Funds noted) Other Fund Expenses as noted)
- ------------------------------------------------------------------------------------------------------------------------------
General American Capital Company
Advisor: Conning Asset Management Company
<S> <C> <C> <C>
Money Market Fund 0.125% 0.08% 0.205%
- ------------------------------------------------------------------------------------------------------------------------------
Russell Insurance Funds (1)
Advisor: Frank Russell Investment Management Company
Multi-Style Equity Fund 0.77% 0.15% 0.92%
Aggressive Equity Fund 0.86% 0.39% 1.25%
Non-U.S. Fund 0.75% 0.55% 1.30%
Real Estate Securities Fund 0.85% 0.30% 1.15%
Core Bond Fund 0.54% 0.26% 0.80%
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The manager of Russell Insurance Funds, Frank Russell Investment Management
Company, has contractually agreed to waive, at least until April 30, 2001,
a portion of the management fee, up to the full amount of that fee, equal to
the amount by which the Fund's total operating expenses exceed the amounts
set forth above under "Total Annual Fund Expenses" and to reimburse the
Fund for all remaining expenses, after fee waivers which exceed the amount
set forth above for each Fund under "Total Annual Fund Expenses." Absent
such waiver and reimbursement, the management fees and total operating
expenses would be .78% and .93% for the Multi-Style Equity Fund; .95% and
1.34% for the Aggressive Equity Fund; .95% and 1.50% for the Non-U.S. Fund;
and .60% and .66% for the Core Bond Fund.
</FN>
</TABLE>
o Deductions for surrenders, partial withdrawals and transfers.
Surrender Charge. A Surrender Charge may be deducted in the event you make a
full or partial withdrawal of your Policy. If you surrender your Policy or let
it lapse during the first ten Policy years, we will keep part of the
Accumulation Account Value of your Policy to help us recover the costs of
selling and issuing the Policy.
The Surrender Charge is 45% of the Target Premium if you surrender the Policy or
let it lapse during the first five Policy years. Afterwards, the amount of the
Surrender Charge goes down each month. After the 10th Policy year there is no
charge. A Surrender Charge will apply to any decrease in Face Amount.
There is a table in your Policy that shows the amount of the Target Premium and
the percentage of the Surrender Charge for each month.
If you make a partial withdrawal from your Policy, we will charge a pro-rated
portion of the Surrender Charge. There may also be a Partial Withdrawal Fee
charged.
Partial Withdrawal Fee and Transfer Fee. The first 12 requested transfers or
partial withdrawals in a Policy year are free. For each partial withdrawal or
transfer in excess of 12 in a Policy year, there is a fee assessed which is
currently equal to $25.
5. DEATH BENEFIT
The amount of the death benefit depends on:
o the Face Amount of your Policy;
o the death benefit option in effect at the time of the Insured's death; and
o under some circumstances the Accumulation Account Value of your Policy.
There are three death benefit options: Option A, Option B and Option C. If death
benefit Option A is in effect, the death benefit is the greater of your total
Face Amount in effect or the Accumulation Account Value of your Policy on the
date of the Insured's death multiplied by the applicable factor. Under this
option, the amount of the death benefit is fixed, except when we use the factor
to determine the benefit percentage.
If death benefit Option B is in effect, the death benefit is the greater of your
total Face Amount in effect plus the Accumulation Account Value of your Policy,
or the Accumulation Account Value of your Policy multiplied by the applicable
factor. Under this option, the amount of the death benefit is variable (but will
never be less than the Face Amount).
If death benefit Option C is in effect, the death benefit is the greater of your
total Face Amount in effect or the Accumulation Account Value multiplied by an
Attained Age factor.
So long as the Policy remains in force, prior to the Insured's Attained Age 100,
the minimum death benefit will be at least the current Face Amount.
Under certain circumstances you can change death benefit options. You can also
change the Face Amount under certain circumstances.
At the time of application for a Policy, you designate a Beneficiary who is the
person or persons who will receive the death proceeds. You can change your
Beneficiary unless you have designated an irrevocable Beneficiary. The
Beneficiary does not have to be a natural person.
6. TAXES
Your Policy has been designed to comply with the definition of life insurance in
the Internal Revenue Code. As a result, the death proceeds paid under the Policy
should be excludable from the gross income of your Beneficiary. However, estate
taxes may apply. Any earnings in your Policy are not taxed until you take them
out. The tax treatment of the loan proceeds and surrender proceeds will depend
on whether the Policy is considered a Modified Endowment Contract (MEC).
Proceeds taken out of a MEC are considered to come from earnings first and are
includible in taxable income. If you are younger than 59 1/2 when you take money
out of a MEC, you may also be subject to a 10% Federal tax penalty on the
earnings withdrawn.
7. ACCESS TO YOUR MONEY
You can terminate your Policy at any time during the lifetime of the Insured and
we will pay you the Cash Surrender Value of your Policy. At any time during the
Insured's lifetime and before the Policy has terminated, you may withdraw a part
of your Accumulation Account Value subject to the requirements of the Policy.
When you terminate your Policy or make a partial withdrawal, a surrender charge
and partial withdrawal fee may be assessed.
You can also borrow against the Accumulation Account Value of your Policy.
8. OTHER INFORMATION
Free Look. You can cancel the Policy within 20 days after you receive it or the
45th day after you sign your application, whichever period ends later. We will
refund all premiums paid. In the state of California, if you are 60 years or
older on the Issue Date, you can cancel your Policy within 30 days after you
receive it in which case we will refund your Policy's Account Value plus fees
and charges (i.e., premium tax charge, Federal tax charge, selection and issue
expense charge, cost of insurance, monthly Policy charge, percent of premium
charge and mortality and expense risk charge) deducted from the Account Value as
of the day we receive your returned Policy. Upon completion of the underwriting
process, we will allocate your initial Net Premium to the Money Market Fund
until the reallocation date, which occurs upon the expiration of the free look
period. After that, we will invest your Policy's Accumulation Account Value and
any subsequent premiums as you requested.
Who Should Purchase the Policy? The Policy is designed for individuals and
businesses that have a need for death protection but who also desire to
potentially increase the values in their policies through investment in the
Investment Funds. The Policy offers the following to individuals:
o create or conserve one's estate;
o supplement retirement income; and
o access to funds through loans and surrenders.
If you currently own a variable life insurance policy on the life of the
Insured, you should consider whether the purchase of the Policy is appropriate.
Also, you should carefully consider whether the Policy should be used to replace
an existing Policy on the life the Insured.
Additional Features. The following additional features are offered:
o you can arrange to have a regular amount of money automatically transferred
from the Money Market Fund to selected Investment Funds each month,
theoretically giving you a lower average cost per unit over time than a
single one time purchase. We call this feature Dollar Cost Averaging.
o you can arrange to automatically readjust your Accumulation Account Value
between Investment Funds periodically to keep the allocation you select. We
call this feature Portfolio Rebalancing.
o we also offer a number of additional riders that are common to life
insurance policies.
These features and riders may not be available in your state and may not be
suitable for your particular situation.
9. INQUIRIES
If you need more information about purchasing a Policy, please contact us at:
Cova Life Sales Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
800-523-1661
If you need Policyowner service (such as changes in Policy information, inquiry
into Policy values, or to make a loan), please contact us at our service center:
Cova Financial Life Insurance Company
P.O. Box 66757
St. Louis, MO 63166-6757
877-357-4419
PART I
1. THE VARIABLE LIFE INSURANCE POLICY
The variable life insurance Policy is a contract between you, the owner, and us,
an insurance company. This kind of Policy is most commonly used for retirement
planning and/or estate planning.
The Policy provides for life insurance coverage on the Insured. It has an
Accumulation Account Value, a death benefit, surrender rights, loan privileges
and other characteristics associated with traditional and universal life
insurance. However, since the Policy is a variable life insurance policy, the
value of your Policy will increase or decrease depending upon the investment
experience of the Investment Funds you choose. The duration or amount of the
death benefit may also vary based on the investment performance of the
underlying Investment Funds. To the extent you select any of the Investment
Funds, you bear the investment risk. If your Accumulation Account Value less any
loans, loan interest accrued, unpaid selection and issue charge due for the
remainder of the first Policy year and, if surrender charges and any Partial
Withdrawal Fee is insufficient to pay the monthly deductions, the Policy may
terminate.
Because the Policy is like traditional and universal life insurance, it provides
a death benefit which is paid to your named Beneficiary. When the Insured dies,
the death proceeds are paid to your Beneficiary which should be excludable from
the gross income of the Beneficiary. The tax-free death proceeds make this an
excellent way to accumulate money you do not think you will use in your
lifetime. It is also a tax-efficient way to provide for those you leave behind.
If you need access to your money, you can borrow from the Policy, make a total
surrender or a partial withdrawal.
2. PURCHASES
Application for a Policy
In order to purchase a Policy, you must submit an application to us that
requests information about the proposed Insured. In some cases, we will ask for
additional information. We may request that the proposed Insured provide us with
medical records, a physician's statement or possibly require other medical
tests.
Premiums
Before coverage begins under a Policy, the application and the premium must be
in good order as determined by our administrative rules. You may receive a copy
of a Policy before that time for examination but there will be no coverage. Each
premium after the initial premium must be at least $10. The Policy is not
designed for professional market timing organizations, other entities, or
persons using programmed, large, or frequent transfers.
You can establish a schedule of planned premiums. We will send you billing
notices for these premium payments. A failure to pay such a premium payment will
not itself cause the Policy to lapse.
Unscheduled Premiums
You can make additional unscheduled premium payments at any time while the
Policy is in force. However, in order to preserve the favorable tax status of
the Policy, we may limit the amount of the premiums and may return any premiums
that exceed the limits stated under the Internal Revenue Code.
If Cova receives a premium payment which would cause the death benefit to
increase by an amount that exceeds the Net Premium portion of the payment, then
Cova reserves the right to:
(1) refuse that premium payment; or
(2) require additional evidence of insurability before it accepts the premium.
Lapse and Grace Period
During the first 5 Policy years, your Policy will not lapse if the Cash
Surrender Value of your Policy is insufficient to pay for the monthly deductions
when:
o the sum of all premiums paid on the Policy (reduced by any partial
withdrawals and any outstanding loan balance) is at least equal to the sum
of the No Lapse Monthly Premiums for the elapsed months since the Issue
Date.
The No Lapse Monthly Premium amount is found on the specifications page of your
Policy. This amount may be modified if you change your Face Amount, make a
change in the premium class of the Insured within 5 years of the Issue Date, or
if there is an addition or deletion of a rider.
Lapse will occur if:
o the Cash Surrender Value is not sufficient to cover the monthly deduction
(except for reasons stated above);
o the sum of all the premiums you paid into the Policy (reduced by any
partial withdrawal or any outstanding loan balance) is less than the No
Lapse Monthly Premium; and
o a grace period expires without a sufficient premium payment.
When a Policy is about to terminate, the Policy provides a grace period in order
for you to make a premium payment or a loan repayment to keep your Policy in
force. The grace period, which is 62 days, begins on the Monthly Anniversary on
which the Cash Surrender Value is insufficient to meet the next monthly
deduction. We will notify you by mail of the amount of additional premium that
must be paid to keep the Policy from terminating. If we do not receive the
required amount within the grace period, the Policy will lapse and terminate
without Accumulation Account Value.
If the Insured dies during the grace period, any overdue monthly deductions will
be deducted from the death benefit otherwise payable.
Reinstatement
If your Policy terminated at the end of a grace period, you can request that we
reinstate it (restore your insurance coverage) anytime within 5 years after its
termination. To reinstate your Policy you must:
o submit a written request for reinstatement;
o submit proof satisfactory to us that the Insured is still insurable at the
risk class that applies for the latest Face Amount portion then in effect;
o pay a Net Premium large enough to cover the monthly deductions that were
due at the time of lapse and 2 times the monthly deduction due at the time
of reinstatement; and
o pay an amount large enough to cover any loan interest due and unpaid at the
time of lapse.
The reinstatement date is the date on or following the day we approve the
application for reinstatement. The Accumulation Account Value of your Policy on
the reinstatement date is equal to:
o the amount of any Policy loan reinstated;
o increased by the Net Premiums paid at reinstatement, any Policy loan paid
at the time of reinstatement, and the amount of any surrender charge paid
at the time of lapse.
The Policy may not be reinstated if it has been surrendered or if the Insured
dies before the reinstatement date. There will be a full monthly deduction for
the Policy month which includes the reinstatement date.
Allocation of Premium
When we receive a premium from you, we deduct:
o a Tax Charge for premium taxes and Federal taxes; and
o a Sales Charge.
The premium less these charges is referred to as the Net Premium. Your Net
Premium is allocated to the General Account or one or more of the Investment
Funds, as selected by you.
When we issue you a Policy, we automatically allocate your initial premium to
the Money Market Fund. Once the free look period expires, the Accumulation
Account Value of your Policy is allocated to the General Account and/or the
Investment Funds in accordance with your selections requested in the
application. For any chosen allocation, the minimum percentage that may be
allocated is 5% of the Net Premium and the percentages must be in whole numbers.
This allocation is not subject to the transfer fee provision. However, we
reserve the right to limit the number of selections that you may invest in at
any one time.
Accumulation Account Value of Your Policy
The Accumulation Account Value equals the sum of the amounts in the General
Account, the Investment Funds you have selected, and the Loan Account.
Method of Determining Accumulation
Account Value of an Investment Fund
The value of your Policy will go up or down depending upon the investment
performance of the Investment Fund(s) you choose and the charges and deductions
made against your Policy.
The Accumulation Account Value of the Investment Funds is determined for each
Valuation Period. When we apply your initial premium to an Investment Fund, the
Accumulation Account Value equals the Net Premium allocated to the Investment
Fund, minus the monthly deduction(s) due from the Issue Date through the
Investment Start Date. Thereafter, on each Valuation Date, the Accumulation
Account Value in an Investment Fund will equal:
(1) The Accumulation Account Value in the Investment Fund on the preceding
Valuation Date, multiplied by the Investment Fund's Net Investment Factor
(defined below) for the current Valuation Period; plus
(2) Any Net Premium payments received during the current Valuation Period which
are allocated to the Investment Fund; plus
(3) Any loan repayments allocated to the Investment Fund during the current
Valuation Period; plus
(4) Any amounts transferred to the Investment Fund from the General Account or
from another Investment Fund during the current Valuation Period; plus
(5) That portion of the interest credited on outstanding loans which is
allocated to the Investment Fund during the current Valuation Period; minus
(6) Any amounts transferred from the Investment Fund to the General Account,
Loan Account, or to another Investment Fund during the current Valuation
Period (including any transfer charges); minus
(7) Any partial withdrawals from the Investment Fund during the current
Valuation Period; minus
(8) Any withdrawal due to a Pro-Rata Surrender from the Investment Fund during
the current Valuation Period; minus
(9) Any withdrawal or surrender charges incurred during the current Valuation
Period attributed to the Investment Fund in connection with a partial
withdrawal or Pro-Rata Surrender; minus
(10) If a Monthly Anniversary occurs during the current Valuation Period, the
portion of the monthly deduction allocated to the Investment Fund during
the current Valuation Period to cover the Policy month which starts during
that Valuation Period.
Net Investment Factor
The Net Investment Factor measures the investment performance of an Investment
Fund during a Valuation Period. The Net Investment Factor for each Investment
Fund for a Valuation Period is calculated as follows:
(1) The value of the assets at the end of the preceding Valuation Period; plus
(2) The investment income and capital gains, realized or unrealized, credited
to the assets in the Valuation Period for which the Net Investment Factor
is being determined; minus
(3) The capital losses, realized or unrealized, charged against those assets
during the Valuation Period; minus
(4) Any amount charged against each Investment Fund for taxes, including any
tax or other economic burden resulting from the application of the tax laws
determined by us to be properly attributable to the Investment Funds, or
any amount set aside during the Valuation Period as a reserve for taxes
attributable to the operation or maintenance of each Investment Fund; minus
(5) The mortality and expense risk charge equal to a percentage of the average
net assets for each day in the Valuation Period. This charge, for mortality
and expense risks, is determined by the length of time the Policy has been
in force. It will not exceed the amounts shown in the following table:
Policy Percentage of Effective
Years Avg. Net Assets Annual Rate
--------- ---------------- ----------------
1-10 0.0015027 0.55%
11-20 0.0012301 0.45%
21+ 0.0009572 0.35%
divided by
(6) The value of the assets at the end of the preceding Valuation Period.
Our Right to Reject or Return a Premium Payment
In order to receive the tax treatment for life insurance under the Internal
Revenue Code (Code), a Policy must initially qualify and continue to qualify as
life insurance under the Code. To maintain this qualification, we have reserved
the right under the Policy to return any premiums paid which we have determined
will cause the Policy to fail as life insurance. We also have the right to make
changes in the Policy or to make a distribution to the extent we determine this
is necessary to continue to qualify the Policy as life insurance. Such
distributions may have current income tax consequences to you.
If subsequent premiums will cause your Policy to become a Modified Endowment
Contract (MEC) we will contact you prior to applying the premium to your Policy.
If you elect to have the premium applied, we require that you acknowledge in
writing that you understand the tax consequences of a MEC before we will apply
the premiums.
3. INVESTMENT FUNDS
There are currently 6 Investment Funds available in connection with the Policy
we are offering here. The Investment Funds are offered through one of two
open-end, diversified management investment companies: General American Capital
Company and Russell Insurance Funds.
Purchasers should read this prospectus and the prospectuses for the above-listed
investment companies carefully before investing.
The following is a list of the Investment Funds and investment managers
available under the Policy:
GENERAL AMERICAN CAPITAL COMPANY
Advisor: Conning Asset Management Company
Money Market Fund
RUSSELL INSURANCE FUNDS
Advisor: Frank Russell Investment Management Company
Multi-Style Equity Fund
Aggressive Equity Fund
Non-U.S. Fund
Real Estate Securities Fund
Core Bond Fund
The investment objectives and policies of certain of the Investment Funds are
similar to the investment objectives and policies of other mutual funds that
certain of the investment advisers manage. Although the objectives and policies
may be similar, the investment results of the Investment Funds may be higher
or lower than the results of such other mutual funds. The investment advisers
cannot guarantee, and make no representation, that the investment results
of similar funds will be comparable even though the 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 Funds may be offered in connection with certain
variable annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with us. Certain
Investment Funds may also be sold directly to qualified plans. The Funds believe
that offering their shares in this manner will not be disadvantageous to you.
We may enter into certain arrangements under which we are reimbursed by the
Investment Funds' advisers, distributors and/or affiliates for the
administrative services which we provide to the Funds.
Substitution and Limitations on Further Investments
We may substitute one of the Investment Funds you have selected with another
Investment Fund. We will not do this without the prior approval of the
Securities and Exchange Commission. We may also limit further investment in an
Investment Fund. We will give you notice of our intention to do this.
Transfers
At your request, we will transfer amounts in your Policy from any Investment
Fund to another Investment Fund, or to and from the General Account (subject to
restrictions). The minimum amount that can be transferred is the lesser of the
minimum transfer amount (currently $500), or the total value in an Investment
Fund or the General Account. You can make twelve transfers or partial
withdrawals in a Policy year without charge. We currently charge a transfer fee
of $25 for additional transfers in a Policy year.
You cannot make a transfer out of our General Account in the first Policy year.
The maximum amount you can transfer from the General Account in any Policy year
after the 1st is the greater of:
(a) 25% of a Policy's Cash Surrender Value in the General Account at the
beginning of the Policy year; or
(b) the previous Policy year's General Account maximum withdrawal amount not to
exceed the total Cash Surrender Value of the Policy.
Transfers resulting from Policy loans will not be counted for purposes of the
limitations on the amount or frequency of transfers allowed in each Policy year.
We have not designed this Policy or the underlying Investment Funds for use by
professional market timing organizations, other entities, or persons using
programmed, large, or frequent transfers. If it appears that there is a pattern
of exchanges that coincides with a "market timing" strategy and are disruptive
to the Investment Funds, the transfer will be refused. Policies under common
ownership or control may be aggregated for purposes of transfer limits. We will
coordinate with the Fund managers to restrict the transfer privilege or reject
any specific premium allocation request for any person, if, in the Investment
Fund manager's judgment, the Investment Fund would be unable to invest
effectively in accordance with its investment objectives and policies, or would
otherwise potentially be adversely affected.
Although we currently intend to continue to permit transfers for the foreseeable
future, the Policy provides that we may at any time revoke, modify, or limit the
transfer privilege.
Dollar Cost Averaging
Dollar cost averaging is a program which enables you to allocate specified
dollar amounts from the Money Market Fund to other Investment Funds on a monthly
basis. By allocating amounts on a monthly basis, you may be less susceptible to
the impact of market fluctuations.
Dollar cost averaging may be selected by completing the proper forms. The
minimum transfer amount is $100. The minimum amount that can be allocated to an
Investment Fund is 5% of the amount transferred. You can elect to participate in
this program at any time by properly completing the dollar cost averaging
election form.
Dollar cost averaging will terminate when any of the following occurs:
1) the value of the Money Market Fund is completely depleted; or
2) you request termination in writing.
There is no current charge for dollar cost averaging but we reserve the right to
charge for this program in the future. Transfers made under dollar cost
averaging do not count against the total of 12 transfers allowed without charge
in a Policy year. Dollar cost averaging cannot be used simultaneously with the
portfolio rebalancing program.
Portfolio Rebalancing
Over time, the funds in the General Account and the Investment Funds will
accumulate at different rates as a result of different investment returns. You
may direct us to automatically restore the balance of the Accumulation Account
Value in the General Account and in the Investment Funds to the percentages
determined in advance. There are two methods of rebalancing available --
periodic and variance.
Periodic Rebalancing. Under this option you elect a frequency (monthly,
quarterly, semiannually or annually), measured from the Policy anniversary. On
each date elected, we will rebalance the Investment Funds and/or General Account
to reallocate the Accumulation Account Value according to the investment
percentages you elected.
Variance Rebalancing. Under this option you elect a specific allocation
percentage for the General Account and each Investment Fund. For each such
account, the allocation percentage (if not zero) must be a whole percentage and
must not be less than five percent. You also elect a maximum variance percentage
(5%, 10%, 15%, or 20% only), and can exclude specific Investment Funds and/or
the General Account from being rebalanced. On each Monthly Anniversary we will
review the current balances to determine whether any Investment Fund balance is
outside of the variance range (either above or below) as a percentage of the
specified allocation percentage. If any Investment Fund is outside of the
variance range, we will generate transfers to rebalance all of the specified
Investment Funds and/or the General Account back to the predetermined
percentages.
Transfers resulting from portfolio rebalancing will not be counted against the
total number of transfers allowed in a Policy year before a charge is applied.
You may elect either method of portfolio rebalancing by specifying it on the
Policy application, or may elect it later for an in force Policy, or may cancel
it, by submitting a change form acceptable to us.
We reserve the right to suspend portfolio rebalancing at any time on any class
of policies on a nondiscriminatory basis, or to charge an administrative fee for
election changes in excess of a specified number in a Policy year in accordance
with our administrative rules. Portfolio rebalancing cannot be used
simultaneously with the dollar cost averaging program.
Approved Asset Allocation Programs
We recognize the value to certain Owners of having available, on a continuous
basis, advice for the allocation of their money among the Investment Funds
available under the Policy. Certain providers of these types of services have
agreed to provide such services to Owners in accordance with our administrative
rules regarding such programs.
We have made no independent investigation of these programs. We have only
established that these programs are compatible with our administrative systems
and rules.
Even though we permit the use of approved asset allocation programs, the Policy
was not designed for professional market timing organizations. Repeated patterns
of frequent transfers are disruptive to the operations of the Investment Funds,
and should we become aware of such disruptive practices, we may modify the
transfer privilege either on an individual or class basis.
If you participate in an approved asset allocation program, the transfers made
under the program are not taken into account in determining any transaction
charges.
4. EXPENSES
There are charges and other expenses associated with the Policy that reduce the
return on your investment in the Policy. The charges and expenses are:
Tax Charges
There are charges for Federal taxes, and state and local premium taxes which are
deducted from each premium payment. The Federal tax charge is currently 1.3% of
each premium. The premium tax charge is currently 2.35% of premium payments. If
the tax rates change, we may change the amount of the deduction to cover the new
rate.
Sales Charge
A sales charge will be deducted from each premium payment to partially
compensate us for expenses incurred in distributing the Policy and any
additional benefits provided by riders. We currently intend to deduct a sales
charge determined according to the following schedule:
Policy Year 1: 15% of premium up to Target Premium; 5%
of premium above Target Premium
Policy Years 2-10: 5% of all premium paid
Policy Years 11+: 2% of all premium paid
The expenses covered by the sales charge include agent sales commissions, the
cost of printing prospectuses and sales literature, and any advertising costs.
Where policies are issued to Insureds with higher mortality risks or to Insureds
who have selected additional insurance benefits, a portion of the amount
deducted for the sales charge is used to pay distribution expenses and other
costs associated with these additional coverages.
To the extent that sales expenses are not recovered from the sales charge and
the surrender charge, those expenses may be recovered from other sources,
including the mortality and expense risk charge described below.
Selection and Issue Expense Charge
During the first ten Policy years, we generally assess a monthly selection and
issue expense charge to cover the costs associated with the underwriting and
issue of the Policy. The monthly charge per $1,000 of Face Amount ranges from
approximately 4 cents to one dollar, and varies by Issue Age, risk class, and
(except on unisex Policies) sex of the Insured.
Monthly Policy Charge
We deduct a monthly Policy charge on the Investment Start Date and each Monthly
Anniversary date. The charge is equal to $25 per Policy month for the first
Policy year. Thereafter, it is $6 per Policy month guaranteed not to increase
while the Policy is in force.
The charge reimburses us for expenses incurred in the administration of the
Policies. Such expenses include: confirmations, annual reports and account
statements, maintenance of Policy records, maintenance of Separate Account
records, administrative personnel costs, mailing costs, data processing costs,
legal fees, accounting fees, filing fees, the costs of other services necessary
for policyowner servicing and all accounting, valuation, regulatory and updating
requirements.
Monthly Cost of Insurance Charge
This charge compensates us for the insurance coverage we provide in the month
following the charge. The monthly cost of insurance charge for each Policy month
equals the total of the insurance risk charges for the Policy month for each
Face Amount portion then in effect.
The monthly cost of insurance charge is deducted on each Monthly Anniversary for
the following Policy month. The monthly cost of insurance charge is determined
in a manner that reflects the anticipated mortality of the Insured and the fact
that the death benefit is not payable until the death of the Insured. Because
the monthly cost of insurance charge depends upon a number of variables, the
charge will vary for each Policy month. We will determine the cost of insurance
charge by multiplying the applicable cost of insurance rate or rates by the net
amount at risk (defined below) for each Policy month.
The monthly cost of insurance rates are determined at the beginning of each
Policy year. The rates will be based on the Attained Age, duration, rate class,
and (except for unisex policies) sex of the Insured at issue. The monthly cost
of insurance rates generally increase as the Insured's Attained Age increases.
The rate class of an Insured also will affect the cost of insurance rate. For
the initial Face Amount, we will use the rate class on the Issue Date. If the
death benefit equals a percentage of Accumulation Account Value, an increase in
Accumulation Account Value will cause an automatic increase in the death
benefit. The rate class for such increase will be the same as that used for the
initial Face Amount.
We currently place the Insured into a preferred rate class, a standard rate
class, or into rate classes involving a higher mortality risk.
Actual monthly cost of insurance rates may change, and the actual monthly cost
of insurance charge will be determined by us based on our expectations as to
future mortality experience. However, the actual monthly cost of insurance rates
will not be greater than the guaranteed cost of insurance rates set forth in the
Policy. For Policies which are not in a substandard risk class, the guaranteed
cost of insurance rates are equal to 100% of the rates set forth in the
male/female smoker/non-smoker 1980 CSO Mortality Tables (1980 CSO Tables NA and
SA and 1980 CSO Tables NG and SG for sex distinct policies and policies issued
in qualified pension plans). All Policies are based on the Attained Age of the
Insured. Higher rates apply if the Insured is determined to be in a substandard
risk class.
In two otherwise identical policies, an Insured in the preferred rate class will
have a lower cost of insurance than an Insured in a rate class involving higher
mortality risk. Each rate class is also divided into two categories: smokers and
nonsmokers. Non-smoker Insureds will generally incur a lower cost of insurance
than similarly situated Insureds who smoke. (Insureds under Attained Age 20 are
automatically assigned to the non-smoker rate class.)
The net amount at risk for a Policy month is:
(1) the death benefit at the beginning of the Policy month divided by 1.0032737
(which reduces the net amount at risk, solely for purposes of computing the
cost of insurance, by taking into account assumed monthly earnings at an
annual rate of 4%); less
(2) the Accumulation Account Value at the beginning of the Policy month.
In calculating the monthly cost of insurance charges, the cost of insurance rate
for a Face Amount is applied to the net amount at risk for that Face Amount.
Charges for Additional Benefit Riders
The amount of the charge, if any, each Policy month for additional benefit
riders is determined in accordance with the rider and is shown on the
specifications page of your Policy.
Mortality and Expense Risk Charge
We will deduct a daily charge from the Investment Funds. The amount of the
deduction is determined as a percentage of the average net assets of each
Investment Fund. The current daily deduction percentages, and the equivalent
effective annual rates, are:
Daily
Policy Charge Annual
Years Factor Equivalent
-------- ----------- -----------
1-10 .0015027% 0.55%
11-20 .0012301% 0.45%
21+ .0009572% 0.35%
This deduction is guaranteed not to increase while the Policy is in force. This
risk charge compensates us for assuming the mortality and expense risks under
the Policy. The mortality risk assumed by us is that the Insureds, as a group,
may not live as long as expected. The expense risk assumed by us is that actual
expenses may be greater than those assumed.
We expect to profit from this charge.
Surrender Charge
For up to 10 years after the Issue Date, we will impose a contingent deferred
sales charge, also referred to as a surrender charge, when the following occur:
o upon surrender or lapse of the Policy;
o upon a partial withdrawal;
o upon a Pro-Rata Surrender; or
o upon a decrease in Face Amount.
The amount of the charge assessed will depend upon a number of factors,
including the type of event (a full surrender, lapse, or partial withdrawal),
the amount of any premium payments made under the Policy prior to the event, and
the number of Policy years having elapsed since the Policy was issued.
The surrender charge compensates us for expenses relating to the distribution of
the Policy, including agents' commissions, advertising, and the printing of the
prospectus and sales literature.
The surrender charge percentage is shown in the following table.
If surrender or lapse occurs in The percentage of the annual
the last month of Policy year: Target Premium payable is:
------------------------------ ----------------------------
1 through 5 45%
6 40%
7 30%
8 20%
9 10%
10 and later 0%
The Target Premium (on which we base the surrender charge) is shown in your
Policy. As shown above, the maximum surrender charge is 45% of the annual Target
Premium payable.
In addition, the percentages are reduced equally for each Policy month during
the years shown. For example, during the seventh year, the percentage is reduced
equally each month from 40% at the end of the sixth year to 30% at the end of
the seventh year. This table may be modified if required by law or regulation of
the governing jurisdiction.
The amount of the surrender charge deducted upon a partial withdrawal or
Pro-Rata Surrender will equal a fraction of the charge that would be deducted if
the Policy were surrendered at that time. The fraction will be determined by
dividing the amount of the withdrawal by the Accumulation Account Value before
the withdrawal and multiplying the result by the surrender charge. Immediately
after a withdrawal, the Policy's remaining surrender charge will equal the
amount of the surrender charge immediately before the withdrawal less the amount
deducted in connection with the withdrawal.
A surrender charge will apply when there is a decrease in Face Amount for up to
10 years from the Policy's Issue Date. A partial withdrawal may cause a decrease
in Face Amount and therefore, we may deduct a surrender charge. If the Face
Amount is decreased by some fraction of any previous increases in Face Amount
and/or the Face Amount at issue, the surrender charge deducted will be the
previously defined surrender charge multiplied by the fraction.
Transaction Charges
There is no transaction charge for the first twelve partial withdrawals or
requested transfers in a Policy year. We will impose a charge of $25 for each
partial withdrawal or requested transfer in excess of twelve in a Policy year.
We may revoke or modify the privilege of transferring amounts to or from the
General Account at any time. Partial withdrawals and Pro-Rata Surrenders will
result in the imposition of the applicable surrender charge.
Investment Fund Expenses
The expenses of the Investment Funds are shown in the Summary.
The value of the net assets of the Investment Funds will reflect the investment
advisory fee and other expenses incurred by the underlying investment companies.
The Investment Fund expenses are collected from the underlying Investment Fund,
and are not direct charges against the Separate Account assets or reductions
from the Policy's Accumulation Account Value. Expenses of the Funds are not
fixed or specified under the terms of the Policy, and actual expenses may vary.
These underlying Investment Fund expenses are taken into consideration in
computing each Investment Fund's net asset value, which is used to calculate the
unit values in the Separate Account. The management fees and other expenses are
more fully described in the prospectus of each individual Investment Fund. The
information relating to the Investment Fund expenses was provided by the
Investment Fund and was not independently verified by us. Except as otherwise
specifically noted, the management fees and other expenses are not currently
subject to fee waivers or expense reimbursements.
5. DEATH BENEFIT
The amount of the death benefit depends on the total Face Amount, the
Accumulation Account Value of your Policy on the date of death and the death
benefit option (Option A, Option B, or Option C) in effect at that time. The
actual amount we will pay the Beneficiary will be reduced by any Indebtedness.
The initial Face Amount and the death benefit option in effect on the Issue Date
are shown on the specifications page of your Policy.
Option A. The amount of the death benefit under Option A is the greater of:
o the Face Amount; or
o the Accumulation Account Value of your Policy on the date of death
multiplied by the applicable multiple percentage shown in the "Applicable
Percentage of Accumulation Account Value Table For Insureds Less than Age
100" shown below.
Option B. The amount of the death benefit under Option B is the greater of:
o the Face Amount plus the Accumulation Account Value of your Policy on the
date of death; or
o the Accumulation Account Value of your Policy on the date of death
multiplied by the applicable multiple percentage shown in the "Applicable
Percentage of Accumulation Account Value Table For Insureds Less than Age
100" shown below.
Applicable Percentage of Accumulation Account Value Table
For Insureds Less Than Age 100
Insured Policy Accumulation Account Value
Person's Age Multiple Percentage
---------------- ----------------------------------
40 or under 250%
45 215%
50 185%
55 150%
60 130%
65 120%
70 115%
78 to 90 105%
95 to 99 101%
For ages that are not shown on this table the applicable percentage multiples
will decrease by a ratable portion for each full year.
Option C. The amount of the death benefit under Option C is the greater of:
o the Face Amount; or
o the Accumulation Account Value of your Policy on the date of the Insured's
death multiplied by the applicable factor from the Table of Attained Age
Factors shown in your Policy.
If your Policy is in force after the Insured's Attained Age is 100, then the
Death Benefit will be 101% of the Policy's Accumulation Account Value.
Change of Death Benefit
If the Policy was issued with either death benefit Option A or death benefit
Option B, the death benefit option may be changed. A Policy issued under death
benefit Option C may not be changed for the entire lifetime of the Policy.
Similarly, a Policy issued under either death benefit Option A or B may not
change to death benefit Option C for the lifetime of the Policy. A request for
change must be made to us in writing. The Effective Date of such a change will
be the Monthly Anniversary on or following the date we receive the change
request.
A death benefit Option A Policy may be changed to have death benefit Option B.
The Face Amount will be decreased to equal the death benefit less the
Accumulation Account Value on the Effective Date of the change. Satisfactory
evidence of insurability must be submitted to us in connection with a request
for a change from death benefit Option A to death benefit Option B. A change may
not be made if it would result in a Face Amount of less than the minimum Face
Amount.
A death benefit Option B Policy may be changed to have death benefit Option A.
The Face Amount will be increased to equal the death benefit on the Effective
Date of the change.
A change in death benefit option may have Federal income tax consequences.
Change in Face Amount
Subject to certain limitations set forth below, you may decrease or increase the
Face Amount of a Policy once each Policy year after the first Policy year. A
written request is required for a change in the Face Amount. A change in Face
Amount may affect the cost of insurance rate and the net amount at risk, both of
which affect your cost of insurance charge. A reduction in the Face Amount of a
Policy may have Federal income tax consequences.
Any decrease in the Face Amount will become effective on the Monthly Anniversary
on or following receipt of the written request by us. The amount of the
requested change must be at least $5,000 ($2,000 for Policies issued in
qualified pension plans) and the Face Amount remaining in force after any
requested decrease may not be less than the minimum Face Amount. If you decrease
the Face Amount and the Policy does not comply with the maximum premium
limitations required by Federal tax law, the decrease may be limited or the
Accumulation Account Value may be returned to you (at your election), to the
extent necessary to meet these requirements. If you want to increase the Face
Amount, you must submit proof that the Insured is insurable by our standards on
the date the requested increase is submitted and the Insured must have an
Attained Age not greater than age 80 on the Policy Anniversary that the increase
will become effective.
6. TAXES
NOTE: We have prepared the following information on Federal income taxes as a
general discussion of the subject. It is not intended as tax advice to anyone.
You should consult your own tax adviser about your own circumstances. We have
included an additional discussion regarding taxes in Part II.
Life Insurance in General
Life insurance, such as this Policy, is a means of providing for death
protection and setting aside money for future needs. Congress recognized the
importance of such planning and provided special rules in the Internal Revenue
Code for life insurance.
Simply stated, these rules provide that you will not be taxed on the earnings on
the money held in your life insurance Policy until you take the money out.
Beneficiaries generally are not taxed when they receive the death proceeds upon
the death of the Insured. However, estate taxes may apply.
Taking Money Out of Your Policy
You, as the Owner, will not be taxed on increases in the value of your Policy
until a distribution occurs either as a surrender or as a loan. If your Policy
is a MEC, any loans or surrenders from the Policy will be treated as first
coming from earnings and then from your investment in the Policy. Consequently,
these earnings are included in taxable income.
The Internal Revenue Code (Code) also provides that any amount received from a
MEC which is included in income may be subject to a 10% penalty. The penalty
will not apply if the income received is: (1) paid on or after the taxpayer
reaches age 59 1/2 ; (2) paid if the taxpayer becomes totally disabled (as that
term is defined in the Code); or (3) in a series of substantially equal payments
made annually (or more frequently) for the life (or life expectancy) of the
taxpayer.
If your Policy is not a MEC, any surrender proceeds will be treated as first a
recovery of the investment in the Policy and to that extent will not be included
in taxable income. Furthermore, any loan will be treated as Indebtedness under
the Policy and not as a taxable distribution. See "Tax Status" in Part II for
more details.
Diversification
The Code provides that the underlying investments for a variable life insurance
policy must satisfy certain diversification requirements in order to be treated
as a life insurance contract. We believe that the Investment Funds are being
managed so as to comply with such requirements.
Under current Federal tax law, it is unclear as to the circumstances under which
you, because of the degree of control you exercise over the underlying
investments, and not us would be considered the owner of the shares of the
Investment Funds. If you are considered the owner of the investments, it will
result in the loss of the favorable tax treatment for the Policy. It is unknown
to what extent owners are permitted to select Investment Funds, to make
transfers among the Investment Funds or the number and type of Investment Funds
owners may select from. If guidance from the Internal Revenue Service is
provided which is considered a new position, the guidance would generally be
applied prospectively. However, if such guidance is considered not to be a new
position, it may be applied retroactively. This would mean that you, as the
owner of the Policy, could be treated as the owner of the Investment Funds. Due
to the uncertainty in this area, we reserve the right to modify the Policy in an
attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
Policy Loans
We will loan money to you at the loan interest rate we establish. The request by
you for a loan must be in writing.
You may borrow an amount up to the loan value of the Policy. The loan value is:
o the Accumulation Account Value of the Policy on the date the loan request
is received; less
o interest to the next loan interest due date; less
o anticipated monthly deductions to the next loan interest due date; less
o any existing loan; less
o any surrender charge; plus
o interest expected to be earned on the loan balance to the next loan
interest due date.
Policy loan interest is payable on each Policy anniversary. The minimum amount
that you can borrow is $500. The loan may be completely or partially repaid at
any time while the Insured is living. When a Policy loan is made, we will deduct
Accumulation Account Value from your Policy equal to the amount of the loan,
plus interest due and place it in the Loan Subaccount as security for the loan.
This Accumulation Account Value amount is expected to earn interest at a rate
("the earnings rate") which is lower than the rate charged on the Policy loan
("the borrowing rate"). The Accumulation Account Value that we use as security
will accrue interest daily at an annual earnings rate of 4%.
Unless the Owner requests a different allocation, the Accumulation Account Value
amount used as security for the loan will be transferred from the Investment
Funds and the General Account on a pro-rata basis to the Loan Account. This will
reduce the Policy's Accumulation Account Value in the General Account and the
Investment Fund(s). These transactions will not be considered transfers for
purposes of the limitations on transfers between Investment Funds or to or from
the General Account.
A Policy loan, whether or not repaid, will have a permanent effect on the death
benefits and Policy values because the values transferred to the Loan Account
will not share in the investment results of the Investment Funds while the loan
is outstanding. If the Loan Account earnings rate is less than the investment
performance of the selected Investment Funds and/or the General Account, the
values and benefits under the Policy will be reduced as a result of the loan. In
addition, if the Indebtedness exceeds the Accumulation Account Value minus the
surrender charge on any Monthly Anniversary, the Policy will lapse, subject to a
grace period. (See "Purchases -- Lapse and Grace Period".) A lapse of the Policy
with a loan outstanding may have Federal income tax consequences. (See "Federal
Tax Status".)
Interest credited to the Accumulation Account Value held in the Loan Subaccount
as security for the loan will be allocated on Policy anniversaries to the
General Account and the Investment Funds. The interest credited will also be
transferred: (1) when a new loan is made; (2) when a loan is partially or fully
repaid; and (3) when an amount is needed to meet a monthly deduction.
Policy loans may have Federal income tax consequences. (See "Federal Tax
Status".)
Loan Interest Charged
The borrowing rate we charge for Policy loan interest will be based on the
following schedule:
For Loans Annual
Outstanding During Interest Rate
--------------------- ---------------
Policy Years 1-10 4.50%
Policy Years 11-20 4.25%
Policy Years 21+ 4.15%
We will inform you of the current borrowing rate when a Policy loan is
requested.
Policy loan interest is due and payable annually on each Policy anniversary. If
you do not pay the interest when it is due, the unpaid loan interest will be
added to the outstanding Indebtedness as of the due date and you will be charged
interest at the same rate as the rest of the Indebtedness.
Security
The Policy will be the only security for the loan.
Repaying Policy Debt
You may repay the loan at any time prior to the death of the Insured and as long
as the Policy is in force. Any Indebtedness outstanding will be deducted before
any benefit proceeds are paid or applied under a payment option.
Repayments will be allocated to the General Account and the Investment Funds
based on how the Accumulation Account Value used for security was allocated.
Unpaid loans and loan interest will be deducted from any settlement of your
Policy.
Any payments received from you will be applied as premiums, unless you clearly
request in writing that it be used as repayment of Indebtedness.
Partial Withdrawals
After the first Policy year, you may make partial withdrawals from the Policy's
Cash Surrender Value. Each Policy year you are allowed 12 free partial
withdrawals. For each partial withdrawal after 12, we impose a $25 fee. A
partial withdrawal may be subject to a surrender charge and have Federal income
tax consequences.
The minimum amount of a partial withdrawal request, net of any applicable fees
and surrender charges, is the lesser of:
(1) $500 from an Investment Fund or the General Account; or
(2) the Policy's Accumulation Account Value in an Investment Fund.
Partial withdrawals made during a Policy year are subject to the following
limitations. The maximum amount that may be withdrawn from an Investment Fund is
the Policy's Accumulation Account Value net of any applicable surrender charges
and fees in that Investment Fund. The total partial withdrawals and transfers
from the General Account over the Policy year may not exceed a maximum amount
equal to the greater of the following:
(1) 25% of the Cash Surrender Value in the General Account at the beginning of
the Policy year, multiplied by the withdrawal percentage limit shown in the
Policy; or
(2) the previous Policy year's maximum amount.
You may allocate the amount withdrawn plus any applicable surrender charges and
fees, subject to the above conditions, among the Investment Funds and the
General Account. If no allocation is specified, then the partial withdrawal will
be allocated among the Investment Funds and the General Account in the same
proportion that the Policy's Accumulation Account Value in each Investment Fund
and the General Account bears to the total Accumulation Account Value of the
Policy, less the Accumulation Account Value in the Loan Account, on the date the
request was received. If the limitations on withdrawals from the General Account
will not permit this pro-rata allocation, you will be requested to provide an
alternate allocation.
No amount may be withdrawn that would result in there being insufficient
Accumulation Account Value to meet any surrender charge and applicable fees that
would be payable immediately following the withdrawal upon the surrender of the
remaining Accumulation Account Value.
The death benefit will be affected by a partial withdrawal, unless death benefit
Option A or Option C is in effect and the withdrawal is made under the terms of
an anniversary partial withdrawal rider. If death benefit Option A or death
benefit Option C is in effect and the death benefit equals the Face Amount, then
a partial withdrawal will decrease the Face Amount by an amount equal to the
partial withdrawal plus the applicable surrender charge resulting from that
partial withdrawal. If the death benefit is based on a percentage of the
Accumulation Account Value, then a partial withdrawal will decrease the Face
Amount by an amount by which the partial withdrawal plus the applicable
surrender charge and fees exceeds the difference between the death benefit and
the Face Amount. If death benefit Option B is in effect, the Face Amount will
not change.
The Face Amount remaining in force after a partial withdrawal may not be less
than the minimum Face Amount. Any request for a partial withdrawal that would
reduce the Face Amount below this amount will not be implemented.
Partial withdrawals may affect the way in which the cost of insurance charge is
calculated and the amount of pure insurance protection afforded under a Policy.
We may change the minimum amount required for a partial withdrawal or the number
of times partial withdrawals may be made.
Pro-Rata Surrender
After the first Policy year, you can make a Pro-Rata Surrender of the Policy.
The Pro-Rata Surrender will reduce the Face Amount and the Accumulation Account
Value by a percentage chosen by you. This percentage must be any whole number. A
Pro-Rata Surrender may have Federal income tax consequences. The percentage will
be applied to the Face Amount and the Accumulation Account Value on the Monthly
Anniversary on or following our receipt of the request.
You may allocate the amount of decrease in Accumulation Account Value plus any
applicable surrender charge and fees among the Investment Funds and the General
Account. If no allocation is specified, then the decrease in Accumulation
Account Value and any applicable surrender charge and fees will be allocated
among the Investment Funds and the General Account in the same proportion that
the Policy's Accumulation Account Value in each Investment Fund and the General
Account bears to the total Accumulation Account Value of the Policy, less the
Accumulation Account Value in the Loan Account, on the date the request for
Pro-Rata Surrender is received.
A Pro-Rata Surrender cannot be processed if it will reduce the Face Amount below
the minimum Face Amount of the Policy. No Pro-Rata Surrender will be processed
for more Cash Surrender Value than is available on the date of the Pro-Rata
Surrender. A cash payment will be made to you for the amount of Accumulation
Account Value reduction less any applicable surrender charges and fees.
Pro-Rata Surrenders may affect the way in which the cost of insurance charge is
calculated and the amount of the pure insurance protection afforded under the
Policy.
Full Surrenders
To effect a full surrender, either the Policy must be returned to us along with
the request, or the request must be accompanied by a completed affidavit of
loss, which is available from us. Upon surrender, we will pay the Cash Surrender
Value to you in a single sum. We will determine the Cash Surrender Value as of
the date that we receive your written request at our Service Office. If the
request is received on a Monthly Anniversary, the monthly deduction otherwise
deductible will be included in the amount paid. Coverage under a Policy will
terminate as of the date of surrender. The Insured must be living at the time of
a surrender. A surrender may have Federal income tax consequences.
8. OTHER INFORMATION
Cova
Cova Financial Life Insurance Company (Cova) was originally incorporated on
September 6, 1972 as Industrial Indemnity Life Insurance Company, a California
corporation, and changed its name to Xerox Financial Life Insurance Company in
1986. On June 1, 1995, a wholly-owned subsidiary of General American Life
Insurance Company (General American Life) purchased Cova, which on that date
changed its name to Cova Financial Life Insurance Company. On January 6, 2000,
Metropolitan Life Insurance Company (MetLife) acquired GenAmerica Corporation,
the ultimate parent company of Cova Financial Services Life Insurance Company
(Cova Life), the parent company of Cova. The acquisition of GenAmerica
Corporation does not affect policy benefits or any other terms or conditions
under your Policy. MetLife, headquartered in New York city since 1868, is a
leading provider of insurance and financial products and services to individual
and group customers.
Cova is presently licensed to do business in the state of California.
Distribution
Cova Life Sales Company (Life Sales), One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644, acts as the distributor of the Policies. Life
Sales is our affiliate.
Commissions will be paid to broker-dealers who sell the Policies. Currently,
broker-dealers will be paid first-year commissions equal up to 90% of Target
Premium and 4.0% of excess premiums paid in Policy year 1. In renewal years, the
commissions will equal up to 5.0% of premiums paid in Policy years 2-10 and 2.0%
in Policy years 11 and beyond. In addition, broker-dealers will receive
annually, asset-based compensation equal up to .25% of Accumulation Account
Value for all Policy years beginning the 13th month. Sometimes, Cova enters into
an agreement with the broker-dealer to pay the broker-dealer persistency bonuses
in addition to the standard commission.
The Separate Account
We established a separate account, Cova Variable Life Account Five (Separate
Account), to hold the assets that underlie the policies.
The assets of the Separate Account are held in our name on behalf of the
Separate Account and legally belong to us. However, those assets that underlie
the Policies, are not chargeable with liabilities arising out of any other
business we may conduct. All the income, gains and losses (realized or
unrealized) resulting from those assets are credited to or against the Policies
and not against any other policies we may issue.
Suspension of Payments or Transfers
We may be required to suspend or postpone any payments or transfers for any
period when:
1) the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2) trading on the New York Stock Exchange is restricted;
3) an emergency exists as a result of which disposal of shares of the
Investment Funds is not reasonably practicable or we cannot reasonably
value the shares of the Investment Funds;
4) during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
We may defer the portion of any transfer, amount payable or surrender, or Policy
Loan from the General Account for not more than 6 months.
Ownership
Owner. The Insured is the Owner of the Policy unless another person or entity is
shown as the Owner in the application. The Owner is entitled to all rights
provided by the Policy. If there is more than one Owner at a given time, all
owners must exercise the rights of ownership by joint action. If the Owner dies,
and the Owner is not the Insured, the Owner's interest in the Policy becomes the
property of his or her estate unless otherwise provided. Unless otherwise
provided, the Policy is jointly owned by all Owners named in the Policy or by
the survivors of those joint Owners. Unless otherwise stated in the Policy, the
final Owner is the estate of the last joint Owner to die.
Beneficiary. The Beneficiary is the person(s) or entity you name to receive any
death proceeds. The Beneficiary is named at the time the Policy is issued unless
changed at a later date. You can name a contingent Beneficiary prior to the
death of the Insured. Unless an irrevocable Beneficiary has been named, you can
change the Beneficiary at any time before the Insured dies. If there is an
irrevocable Beneficiary, all Policy changes except premium allocations and
transfers require the consent of the Beneficiary.
Primary and contingent Beneficiaries are as named in the application, unless you
make a change. To change a Beneficiary, you must submit a written request to us.
We may require the Policy to record the change. The request will take effect
when signed, subject to any action we may take before receiving it.
One or more irrevocable Beneficiaries may be named.
If a Beneficiary is a minor, we will make payment to the guardian of his or her
estate. We may require proof of age of any Beneficiary.
Proceeds payable to a Beneficiary will be free from the claims of creditors, to
the extent allowed by law.
Assignment. You can assign the Policy. A copy of any assignment must be filed
with our Service Office. We are not responsible for the validity of any
assignment. If you assign the Policy, your rights and those of any
revocably-named person will be subject to the assignment. An assignment will not
affect any payments we may make or actions we may take before such assignment
has been recorded at our Service Office. This may be a taxable event. You should
consult a tax adviser if you wish to assign the Policy.
Adjustment of Charges
The Policy is available for purchase by individuals, corporations, and other
institutions. For certain individuals and certain corporate or other groups or
sponsored arrangements purchasing one or more policies, we may waive or adjust
the amount of the sales charge, contingent deferred sales charge, monthly
administrative charge, or other charges where the expenses associated with the
sale of the Policy or policies or the underwriting or other administrative costs
associated with the Policy or policies warrant an adjustment.
Sales, underwriting, or other administrative expenses may be reduced for reasons
such as expected economies resulting from a corporate purchase or a group or
sponsored arrangement, from the amount of the initial premium payment or
payments, or from the amount of projected premium payments. We will determine in
our discretion if, and in what amount, an adjustment is appropriate. We may
modify the criteria for qualification for adjustment of charges as experience is
gained, subject to the limitation that such adjustments will not be unfairly
discriminatory against the interests of any owner.
PART II
Executive Officers and Directors
The directors and executive officers of Cova and their principal occupations for
the past five years are as follows:
<TABLE>
<CAPTION>
Principal Occupation During
Name the Past Five Years
- ---- -------------------
<S> <C>
John W. Barber*** Director of Cova - June, 1995 to present; Director of First Cova Life Insurance Company (FCLIC) -
June, 1995 to present; Director of Cova Financial Services Life Insurance Company (CFSLIC) - June,
1995 to present; Vice President and Controller of General American Life Insurance Company -
December, 1984 to present; President and Director of Equity Intermediary Company - October, 1988 to
present.
William P. Boscow* Vice President of Cova and CFSLIC - 1996 to present; Senior Vice President of Cova Life Management
Company (CLMC), February, 1999 to present; First Vice President of CLMC, 1996 - January 1999.
Constance A. Doern**** Vice President of Cova - 1997 to present, prior thereto Assistant Vice President from 1990 to
1995; Vice President of CFSLIC - 1997 to present, prior thereto Assistant Vice President from 1990
to 1995; Vice President of FCLIC - 1997 to present, prior thereto Assistant Vice President from
1993 to 1995; Vice President of J&H/KVI - 1989 to 1998; Vice President of Cova Life Administration
Services Company (CLASC) - 1998 to present.
Patricia E. Gubbe* Vice President of Cova - 1989 to present; Vice President of CFSLIC - 1989 to present; Vice
President of FCLIC - 1992 to present; First Vice President of CLMC - 1996 to present, prior thereto
Vice President from 1989 to 1996; President and Chief Compliance Officer of Cova Life Sales Company
(CLSC) from February, 1999 to present; Vice President and Chief Compliance Officer of CLSC -1989 to
January, 1999.
Philip A. Haley* Executive Vice President of Cova - May 1997 to present, prior thereto Vice President from 1990 to
1997 and Assistant Vice President from 1989 to 1990; Executive Vice President of FCLIC - May, 1997
to present, prior thereto Vice President from 1995 to 1997; Executive Vice President of CFSLIC -
May 1997 to present, prior thereto Vice President from 1990 to 1997 and Assistant Vice President
from 1989 to 1990; Executive Vice President of CLMC from May, 1997 to present, prior thereto Senior
Vice President from 1996 to 1997 and Vice President from 1990 to 1996 and Assistant Vice President
from 1989 to 1990; Vice President of CLSC from 1991 to present, prior thereto Assistant Vice
President from 1989 to 1991.
J. Robert Hopson* Vice President, Chief Actuary and Director of Cova and CFSLIC - 1991 to present; Vice President,
Chief Actuary and Director of FCLIC - 1992 to present; Senior Vice President, Chief Actuary and
Director of CLMC - 1996 to present, prior thereto Vice President and Director from 1993 to 1996 and
Vice President from 1991 to 1993.
E. Thomas Hughes, Jr.** Treasurer and Director of Cova - June, 1995 to present; Treasurer and Director of CFSLIC -
June, 1995 to present; Treasurer of FCLIC - June, 1995 to present; Corporate Actuary and Treasurer
of General American Life Insurance Company - October, 1994 to present. Formerly, Executive Vice
President - Group Pensions, General American Life Insurance Company - March, 1990 to October, 1994.
In addition to the Cova companies, Director of the following General American subsidiary companies:
Paragon Life Insurance Company and RGA Reinsurance Company - October, 1994 to present. Treasurer of
the following General American subsidiary companies: Paragon Life Insurance Company, General Life
Insurance Company of America, General Life Insurance Company, General American Holding Company, Red
Oak Realty Company, Gen Mark Incorporated, Walnut Street Securities, Inc., Walnut Street Advisers
Inc., White Oak Royalty Company, Walnut Street Funds, Inc., and RGA Reinsurance Company -October,
1994 to present.
Douglas E. Jacobs* Vice President of Cova, CFSLIC and CLMC - 1985 to present.
Lisa O. Kirchner**** Vice President of Cova - 1997 to present, prior thereto Assistant Vice President from 1990 to 1995;
Vice President of CFSLIC - 1997 to present, prior thereto Assistant Vice President from 1988 to
1995; Vice President of FCLIC - 1997 to present, prior thereto Assistant Vice President from 1993
to 1995; Vice President of J&H/KVI - 1985 to 1998; Vice President of CLASC - 1998 to present.
James W. Koeger** Assistant Treasurer of Cova
Richard A. Liddy** Chairman of the Board of Directors of Cova, CFSLIC, FCLIC, CLMC, Cova Investment Advisory
Corporation (Advisory) and Cova Investment Allocation Corporation (Allocation) - April, 1997 to
present; Chairman of the Board, President and Chief Executive Officer of General American Life
Insurance Company - May, 1992 to present; Mr. Liddy also holds various positions with the General
American subsidiaries as follows: Chairman of the Board and President of General American Mutual
Holding Company, GenAmerica Corporation and General American Holding Company; Chairman of the Board
of Security Equity Life Insurance Company, Conning Corporation, The Walnut Street Funds, Inc.,
General American Capital Company, Reinsurance Group of America, Inc., RGA Life Reinsurance Company
of Canada, and RGA Reinsurance Company.
William C. Mair* Vice President and Director of Cova, CFSLIC and FCLIC from 1995 to present; Vice President,
Controller and Director of Cova from 1995 to 1998, prior thereto Vice President, Controller,
Treasurer and Director. Vice President, Controller and Director of CFSLIC from 1995 to 1998, prior
thereto Vice President, Controller, Treasurer and Director; Director of FCLIC from 1993 to present;
Vice President, Controller and Director of FCLIC from 1992 to 1998; Secretary of FCLIC from 1992 to
1995; Vice President, Treasurer, Controller and Director of Advisory - 1993 to present; Vice
President, Treasurer, Controller and Director of Allocation - 1994 to present; Director of CLSC -
1992 to present; Senior Vice President, Treasurer, Controller and Director of CLMC - 1989 to
present; Vice President, Treasurer, Controller, Chief Financial Officer, Chief Accounting Officer
and Trustee of Cova Series Trust - 1996 to present.
Matthew P. McCauley** Assistant Secretary and Director of Cova, CFSLIC and FCLIC - June, 1995 to present; Associate
General Counsel and Vice President of General American Life Insurance Company - 1973 to present;
also, Director, Vice President, General Counsel and Secretary for several other General American
subsidiaries including Equity Intermediary Company, Red Oak Realty Company, and White Oak Royalty
Company; General American Holding Company and Paragon Life Insurance Company. General Counsel and
Secretary, Reinsurance Group of America, Incorporated. Director and Secretary, General American
Capital Company. General Counsel and Secretary, Conning Corporation. General Counsel, Conning Asset
Management Company. Director of RGA Reinsurance Company, Walnut Street Securities, Inc. Secretary
to the Walnut Street Funds, Inc.
Mark E. Reynolds* Executive Vice President and Director of Cova and CFSLIC - May, 1997 to present; Executive Vice
President, Chief Financial Officer and Director of FCLIC - May, 1997 to present; Executive Vice
President of CLMC - May, 1997 to present; Executive Vice President and Director of Advisory -
December, 1996 to present; Executive Vice President and Director of Allocation - December, 1996 to
present.
Myron H. Sandberg* Vice President of Cova and CFSLIC - 1985 to present; and Vice President of CLMC - 1989 to present.
John W. Schaus* Vice President of Cova and CFSLIC - 1988 to present; First Vice President of CLMC from January,
1999 to present; prior thereto, Vice President of CLMC - 1989 to 1998.
Bernard J. Spaulding* Senior Vice President and General Counsel of Cova, CFSLIC, FCLIC and CLMC since March, 1999;
Secretary of Cova, CFSLIC, FCLIC - September 1999 to present.
Lorry J. Stensrud* President and Director of Cova, CFSLIC, FCLIC and CLMC from June, 1995 to present, prior thereto
Executive Vice President; President and Director of Advisory from 1993 to present; President and
Director of Allocation from 1994 to present. Director of CLSC from 1989 to present; President,
Chief Executive Officer and Trustee of Cova Series Trust - 1996 to present.
Joann T. Tanaka* Senior Vice President of Cova and CFSLIC - January, 1999 to present; prior thereto, Vice President
of Cova and CFSLIC from July, 1998 to December, 1998; Senior Vice President, Conning Asset
Management, General American - June, 1987 to June, 1998. Director of CFSLIC, Cova and FCLIC from
September, 1999 to present.
Patricia M. Wersching** Assistant Treasurer of Cova
Peter L. Witkewiz* Vice President and Controller of Cova, CFSLIC and FCLIC - July, 1998 to present; Vice President of
Cova, CFSLIC and FCLIC - 1993 to June, 1998.
<FN>
* Business Address: Cova, One Tower Lane, Suite 3000, Oakbrook Terrace, IL 60181
** Business Address: General American, 700 S. Market Street, St. Louis, MO 63101
*** Business Address: General American, 13045 Tesson Ferry Road, St. Louis, MO 63128
**** Business Address: Cova Life Administration Services Company, 4700 Westown Parkway, Bldg. 4, Suite 200, West Des
Moines, IA 50266
</FN>
</TABLE>
Voting
In accordance with our view of present applicable law, we will vote the shares
of the Investment Funds at special meetings of shareholders in accordance with
instructions received from Owners having a voting interest. We will vote shares
for which we have not received instructions in the same proportion as we vote
shares for which we have received instructions. We will vote shares we own in
the same proportion as we vote shares for which we have received instructions.
The funds do not hold regular meetings of shareholders.
If the Investment Company Act of 1940 or any regulation thereunder should be
amended or if the present interpretation thereof should change, and as a result
we determine that we are permitted to vote the shares of the funds in our own
right, we may elect to do so.
The voting interests of the Owner in the funds will be determined as follows:
Owners may cast one vote for each $100 of Accumulation Account Value of a Policy
which is allocated to an Investment Fund on the record date. Fractional votes
are counted.
The number of shares which a person has a right to vote will be determined as of
the date to be chosen by us not more than sixty (60) days prior to the meeting
of the fund. Voting instructions will be solicited by written communication at
least fourteen (14) days prior to such meeting.
Each Owner having such a voting interest will receive periodic reports relating
to the Investment Funds in which he or she has an interest, proxy material and a
form with which to give such voting instructions.
Disregard of Voting Instructions
We may, when required to do so by state insurance authorities, vote shares of
the funds without regard to instructions from owners if such instructions would
require the shares to be voted to cause an Investment Fund to make, or refrain
from making, investments which would result in changes in the sub-classification
or investment objectives of the Investment Fund. We may also disapprove changes
in the investment policy initiated by owners or trustees/directors of the funds,
if such disapproval is reasonable and is based on a good faith determination by
us that the change would violate state or Federal law or the change would not be
consistent with the investment objectives of the Investment Funds or which
varies from the general quality and nature of investments and investment
techniques used by other funds with similar investment objectives underlying
other variable contracts offered by us or of an affiliated company. In the event
we disregard voting instructions, a summary of this action and the reasons for
such action will be included in the next annual report to Owners.
Legal Opinions
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice on
certain matters relating to the Federal securities and income tax laws in
connection with the Policies.
Our Right to Contest
We cannot contest the validity of the Policy except in the case of fraud after
it has been in effect during the Insured's lifetime for two years. If the Policy
is reinstated, the two-year period is measured from the date of reinstatement.
In addition, if the Insured commits suicide in the two-year period, or such
period as specified in state law, the benefit payable will be limited to
premiums paid less Indebtedness and less any surrenders. We also have the right
to adjust any benefits under the Policy if the answers in the application
regarding the use of tobacco are not correct.
Additional Benefits
Subject to certain requirements, one or more of the following additional
insurance benefits may be added to a Policy by rider. The descriptions below are
intended to be general; the terms of the Policy riders providing the additional
benefits may vary from state to state, and the Policy rider should be consulted.
In addition, certain riders may not be available in your state. The cost of any
additional riders will be determined in accordance with the rider and shown on
the specifications page of your Policy. (See "Expenses -- Charge for Additional
Benefit Riders".) Certain restrictions may apply and are described in the
applicable rider.
Accelerated Benefit Rider -- This rider provides a benefit to the Owner if the
Insured becomes terminally ill and is not expected to live more then twelve
months. The Owner may receive 25%, 50% or 75% (but no more than $250,000) of the
eligible proceeds in a lump sum. "Eligible proceeds" means the death benefit
that would have been payable had the Insured died on the date the rider is
exercised.
The receipt of an accelerated amount may adversely affect the recipient's
eligibility for Medicaid or other government benefits.
Anniversary Partial Withdrawal Rider -- This rider allows the Owner to withdraw
up to 15% of the Policy's Cash Surrender Value on any Policy Anniversary without
reducing the Face Amount. A contingent deferred sales charge will still apply.
Guaranteed Survivor Purchase Option (GSPO-Plus) -- This rider grants the Policy
Owner or the Insured's Beneficiary the option to purchase, upon the death of the
Insured, on the 10th anniversary of the rider, and on the rider anniversary
nearest the Designated Life's 65th birthday, a specified amount of additional
insurance coverage on the Designated Life (or Lives) without furnishing evidence
of insurability.
Lifetime Coverage Rider -- This rider provides the continuation of the Policy's
Face Amount beyond age 100, provided the Policy remains in force to age 100 with
a positive Cash Surrender Value. If the Policy is in force after the Insured's
Attained Age 100, the death benefit will be the greater of the Face Amount or
101% of the Accumulation Account Value.
Secondary Guarantee Rider -- This rider guarantees that if, during the secondary
guarantee period, the sum of all premiums paid on the Policy, reduced by any
partial withdrawals and any outstanding loan balance, is greater than or equal
to the sum of the secondary guarantee premiums required since the Issue Date,
the Policy will not lapse as a result of an Accumulation Account Value less any
loans, loan interest due, and any surrender charge being insufficient to pay the
monthly deduction.
The secondary guarantee period is the lesser of twenty Policy years, or the
number of Policy years until the Insured reaches Attained Age 70. For Policies
issued after Attained Age 60, the secondary guarantee period is ten Policy
years.
Supplemental Coverage Term Rider -- This rider provides level term insurance on
the life of the Insured under the base policy. It can be added only at issue. It
cannot be increased or added to an existing Policy.
Waiver of Monthly Deduction Rider -- This rider provides for the waiver of the
monthly deductions while the Insured is totally disabled, subject to certain
limitations described in the rider. The Insured must have become disabled after
age 5 and before age 65.
Waiver of Specified Premium Rider -- This rider provides for crediting the
Policy's Accumulation Account Value with a specified monthly premium while the
Insured is totally disabled. The monthly premium selected at issue is not
guaranteed to keep the Policy in force. The Insured must have become disabled
after age 5 and before age 65.
Federal Tax Status
NOTE: The following description is based upon our understanding of current
Federal income tax law applicable to life insurance in general. We cannot
predict the probability that any changes in such laws will be made. Purchasers
are cautioned to seek competent tax advice regarding the possibility of such
changes. Section 7702 of the Internal Revenue Code of 1986, as amended ("Code"),
defines the term "life insurance contract" for purposes of the Code. We believe
that the Policies to be issued will qualify as "life insurance contracts" under
section 7702. We do not guarantee the tax status of the Policies. Purchasers
bear the complete risk that the Policies may not be treated as "life insurance"
under Federal income tax laws. Purchasers should consult their own tax advisers.
It should be further understood that the following discussion is not exhaustive
and that special rules not described in this prospectus may be applicable in
certain situations.
Introduction. The discussion contained herein is general in nature and is not
intended as tax advice. Each person concerned should consult a competent tax
adviser. No attempt is made to consider any applicable state or other tax laws.
Moreover, the discussion herein is based upon our understanding of current
Federal income tax laws as they are currently interpreted. No representation is
made regarding the likelihood of continuation of those current Federal income
tax laws or of the current interpretations by the Internal Revenue Service.
We are taxed as a life insurance company under the Code. For Federal income tax
purposes, the Separate Account is not a separate entity from us and its
operations form a part of us.
Diversification. Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable life insurance policies. The Code
provides that a variable life insurance policy will not be treated as life
insurance for any period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification of
the Policy as a life insurance contract would result in imposition of Federal
income tax to the owner with respect to earnings allocable to the Policy prior
to the receipt of payments under the Policy. The Code contains a safe harbor
provision which provides that life insurance policies, such as these Policies,
will meet the diversification requirements if, as of the close of each quarter,
the underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five (55%) percent of the total assets
consist of cash, cash items, U.S. Government securities and securities of other
regulated investment companies. There is an exception for securities issued by
the U.S. Treasury in connection with variable life insurance policies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
Section 1.817-5), which established diversification requirements for the
investment funds underlying variable contracts such as the Policies. The
regulations amplify the diversification requirements for variable contracts set
forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment fund will be deemed
adequately diversified if: (i) no more than 55% of the value of the total assets
of the fund is represented by any one investment; (ii) no more than 70% of the
value of the total assets of the fund is represented by any two investments;
(iii) no more than 80% of the value of the total assets of the fund is
represented by any three investments; and (iv) no more than 90% of the value of
the total assets of the fund is represented by any four investments. For
purposes of these regulations, all securities of the same issuer are treated as
a single investment. The Code provides that, for purposes of determining whether
or not the diversification standards imposed on the underlying assets of
variable contracts by Section 817(h) of the Code have been met, "each United
States government agency or instrumentality shall be treated as a separate
issuer."
We intend that each Investment Fund underlying the Policies will be managed by
the managers in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification regulations do
not provide guidance regarding the circumstances in which owner control of the
investments of the Separate Account will cause the owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Policy. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of owner control which may be exercised under the Policy is different
in some respects from the situations addressed in published rulings issued by
the Internal Revenue Service in which it was held that the Policyowner was not
the owner of the assets of the separate account. It is unknown whether these
differences, such as the owner's ability to transfer among investment choices or
the number and type of investment choices available, would cause the owner to be
considered the owner of the assets of the Separate Account.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in you being retroactively
determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, we reserve the right to modify the Policy
in an attempt to maintain favorable tax treatment.
Tax Treatment of the Policy. The Policy has been designed to comply with the
definition of life insurance contained in Section 7702 of the Code. Although
some interim guidance has been provided and proposed regulations have been
issued, final regulations have not been adopted. Section 7702 of the Code
requires that the amount of mortality and other expense charges be reasonable.
In establishing these charges, we have relied on the interim guidance provided
in IRS Notice 88-128 and proposed regulations issued on July 5, 1991. Currently,
there is even less guidance as to a Policy issued on a substandard risk basis
and thus it is even less clear whether a Policy issued on such basis would meet
the requirements of Section 7702 of the Code.
While we have attempted to comply with Section 7702, the law in this area is
very complex and unclear. There is a risk, therefore, that the Internal Revenue
Service will not concur with our interpretations of Section 7702 that were made
in determining such compliance. In the event the Policy is determined not to so
comply, it would not qualify for the favorable tax treatment usually accorded
life insurance policies. You should consult your own tax advisers with respect
to the tax consequences of purchasing the Policy.
Policy Proceeds. The tax treatment accorded to loan proceeds and/or surrender
payments from the policies will depend on whether the Policy is considered to be
a MEC. (See "Tax Treatment of Loans and Surrenders.") Otherwise, we believe that
the Policy should receive the same Federal income tax treatment as any other
type of life insurance. As such, the death benefit thereunder is excludable from
the gross income of the Beneficiary under Section 101(a) of the Code. Also, you
are not deemed to be in constructive receipt of the Cash Surrender Value,
including increments thereon, under a Policy until there is a distribution of
such amounts.
Federal, state and local estate, inheritance and other tax consequences of
ownership, or receipt of Policy proceeds, depend on the circumstances of each
Owner or Beneficiary.
Tax Treatment of Loans And Surrenders. Section 7702A of the Code sets forth the
rules for determining when a life insurance Policy will be deemed to be a MEC. A
MEC is a contract which is entered into or materially changed on or after June
21, 1988 and fails to meet the 7-pay test. A Policy fails to meet the 7-pay test
when the cumulative amount paid under the Policy at any time during the first 7
Policy years exceeds the sum of the net level premiums which would have been
paid on or before such time if the Policy provided for paid-up future benefits
after the payment of seven (7) level annual premiums. A material change would
include any increase in the future benefits or addition of qualified additional
benefits provided under a Policy unless the increase is attributable to: (1) the
payment of premiums necessary to fund the lowest death benefit and qualified
additional benefits payable in the first seven Policy years; or (2) the
crediting of interest or other earnings with respect to such premiums.
Furthermore, any Policy received in exchange for a Policy classified as a MEC
will be treated as a MEC regardless of whether it meets the 7-pay test. However,
an exchange under Section 1035 of the Code of a life insurance policy entered
into before June 21, 1988 for the Policy will not cause the Policy to be treated
as a MEC if no additional premiums are paid.
Due to the flexible premium nature of the Policy, the determination of whether
it qualifies for treatment as a MEC depends on the individual circumstances of
each Policy.
If the Policy is classified as a MEC, then surrenders and/or loan proceeds are
taxable to the extent of income in the Policy. Such distributions are deemed to
be on a last-in, first-out basis, which means the taxable income is distributed
first. Loan proceeds and/or surrender payments, including those resulting from
the lapse of the Policy, may also be subject to an additional 10% Federal income
tax penalty applied to the income portion of such distribution. The penalty
shall not apply, however, to any distributions: (1) made on or after the date on
which the taxpayer reaches age 59 1/2; (2) which is attributable to the taxpayer
becoming disabled (within the meaning of Section 72(m)(7) of the Code); or (3)
which is part of a series of substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy) of the taxpayer or
the joint lives (or joint life expectancies) of such taxpayer and his
Beneficiary.
If a Policy is not classified as a MEC, then any surrenders shall be treated
first as a recovery of the investment in the Policy which would not be received
as taxable income. However, if a distribution is the result of a reduction in
benefits under the Policy within the first fifteen years after the Policy is
issued in order to comply with Section 7702, such distribution will, under rules
set forth in Section 7702, be taxed as ordinary income to the extent of income
in the Policy.
Any loans from a Policy which is not classified as a MEC, will be treated as
Indebtedness of the owner and not a distribution. Upon complete surrender, if
the amount received plus loan Indebtedness exceeds the total premiums paid that
are not treated as previously surrendered by the Policy owner, the excess
generally will be treated as ordinary income.
Personal interest payable on a loan under a Policy owned by an individual is
generally not deductible. Furthermore, no deduction will be allowed for interest
on loans under policies covering the life of any employee or officer of the
taxpayer or any person financially interested in the business carried on by the
taxpayer to the extent the Indebtedness for such employee, officer or
financially interested person exceeds $50,000. The deductibility of interest
payable on Policy loans may be subject to further rules and limitations under
Sections 163 and 264 of the Code.
Policyowners should seek competent tax advice on the tax consequences of taking
loans, distributions, exchanging or surrendering any Policy.
Multiple Policies. The Code further provides that multiple MECs that are issued
within a calendar year period to the same owner by one company or its affiliates
are treated as one MEC for purposes of determining the taxable portion of any
loans or distributions. Such treatment may result in adverse tax consequences
including more rapid taxation of the loans or distributed amounts from such
combination of policies. You should consult a tax adviser prior to purchasing
more than one MEC in any calendar year period.
Tax Treatment of Assignments. An assignment of a Policy or the change of
ownership of a Policy may be a taxable event. You should therefore consult a
competent tax adviser should you wish to assign or change the owner of your
Policy.
Qualified Plans. The Policies may be used in conjunction with certain Qualified
Plans. Because the rules governing such use are complex, you should not do so
until you have consulted a competent Qualified Plans consultant.
Income Tax Withholding. All distributions or the portion thereof which is
includible in gross income of the Policy owner are subject to Federal income tax
withholding. However, in most cases you may elect not to have taxes withheld.
You may be required to pay penalties under the estimated tax rules, if
withholding and estimated tax payments are insufficient.
Reports to Owners
Each year a report will be sent to you which shows the current Policy values,
premiums paid and deductions made since the last report, and any outstanding
loans.
Legal Proceedings
There are no legal proceedings to which the Separate Account or the Distributor
is a party or to which the assets of the Separate Account are subject. We are
not involved in any litigation that is of material importance in relation to our
total assets or that relates to the Separate Account.
Experts The balance sheets of the Company as of December 31, 1999 and 1998, and
the related statements of income, shareholder's equity, and cash flows for each
of the years in the three-year period ended December 31, 1999, and the statement
of assets and liabilities of the Separate Account as of December 31, 1999, and
the related statements of operations and changes in net assets for the period
from commencement of operations through December 31, 1999 have been included
herein in reliance upon the reports of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon authority of said firm as
experts in accounting and auditing.
Financial Statements
Financial statements of the Separate Account and of the Company are provided
below.
COVA VARIABLE LIFE ACCOUNT FIVE
Financial Statements
December 31, 1999
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Contract Owners of Cova Variable
Life Account Five, Board of Directors
and Shareholder of Cova Financial Life
Insurance Company:
We have audited the accompanying statement of assets and liabilities of each of
the sub-accounts comprising Cova Variable Life Account Five of Cova Financial
Life Insurance Company (the Separate Account), as of December 31, 1999, and the
related statements of operations and changes in net assets for the year then
ended. These financial statements are the responsibility of the Separate
Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1999 by correspondence with
transfer agents. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the sub-accounts of Cova
Variable Life Account Five of Cova Financial Life Insurance Company as of
December 31, 1999, and the results of their operations and the changes in their
net assets for the year then ended, in conformity with generally accepted
accounting principles.
Chicago, Illinois
March 20, 2000
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
Assets:
Investments:
Cova Series Trust (Cova):
<S> <C> <C> <C>
Lord Abbett Growth and Income Portfolio 8,901 shares at a net asset value of $24.070563 per share $214,245
Bond Debenture Portfolio 8,713 shares at a net asset value of $12.474609 per share 108,696
Developing Growth Portfolio 8 shares at a net asset value of $14.885144 per share 113
Large Cap Research Portfolio 7,812 shares at a net asset value of $14.991245 per share 117,113
Mid-Cap Value Portfolio 5,439 shares at a net asset value of $11.168093 per share 60,745
Quality Bond Portfolio 9 shares at a net asset value of $10.669328 per share 100
Small Cap Stock Portfolio 7,608 shares at a net asset value of $17.268582 per share 131,374
Large Cap Stock Portfolio 21,786 shares at a net asset value of $20.674865 per share 450,417
Select Equity Portfolio 8,640 shares at a net asset value of $16.112437 per share 139,209
International Equity Portfolio 7,466 shares at a net asset value of $16.225039 per share 121,140
AIM Variable Insurance Funds, Inc. (AIM):
AIM V.I. Value Fund 1,900 shares at a net asset value of $33.50 per share 63,660
AIM V.I. Capital Appreciation Fund 764 shares at a net asset value of $35.58 per share 27,171
General American Capital Company (GACC):
Money Market Fund 15,680 shares at a net asset value of $20.252283 per share 317,557
Templeton Variable Products Series
Fund (Templeton):
Templeton Bond Fund 10 shares at a net asset value of $9.99 per share 100
Franklin Small Cap Investments Fund 9 shares at a net asset value of $15.79 per share 141
Templeton Stock Fund 5 shares at a net asset value of $24.39 per share 110
Templeton International Fund 5 shares at a net asset value of $22.25 per share 108
Franklin Growth Investments Fund 7 shares at a net asset value of $16.70 per share 123
------------
Total assets $1,752,122
============
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
Net Assets:
Accumulation units:
Single premium variable life policies (SPVL):
<S> <C> <C> <C>
Cova Lord Abbett Growth and Income 17,211 accumulation units at $12.448204 per unit $214,245
Cova Bond Debenture 10,240 accumulation units at $10.614338 per unit 108,696
Cova Developing Growth 9 accumulation units at $13.050371 per unit 113
Cova Large Cap Research 8,504 accumulation units at $13.771430 per unit 117,113
Cova Mid-Cap Value 6,003 accumulation units at $10.119059 per unit 60,745
Cova Quality Bond 9 accumulation units at $10.551764 per unit 100
Cova Small Cap Stock 10,224 accumulation units at $12.850204 per unit 131,374
Cova Large Cap Stock 31,535 accumulation units at $14.283064 per unit 450,417
Cova Select Equity 11,048 accumulation units at $12.600289 per unit 139,209
Cova International Equity 8,926 accumulation units at $13.571289 per unit 121,140
AIM V.I. Value 5,407 accumulation units at $11.774189 per unit 63,660
AIM V.I. Capital Appreciation 1,951 accumulation units at $13.925402 per unit 27,171
GACC Money Market 28,826 accumulation units at $11.013039 per unit 317,457
Templeton Bond 10 accumulation units at $9.970060 per unit 100
Franklin Small Cap Investments 10 accumulation units at $14.136079 per unit 141
Templeton Stock 10 accumulation units at $11.011283 per unit 110
Templeton International 10 accumulation units at $10.827249 per unit 108
Franklin Growth Investments 10 accumulation units at $12.333825 per unit 123
------------
1,752,022
Flexible premium variable universal life policies (FPVUL):
GACC Money Market 10 accumulation units at $10.047103 per unit 100
------------
Total net assets $1,752,122
============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Operations
Period ended December 31, 1999
<TABLE>
<CAPTION>
Cova
-----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ - 242 - 156 78 1 213
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of
portfolio shares (50) 2 - (13) (46) - 77
Realized gain distributions - 78 - - - 1 -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss) (50) 80 - (13) (46) 1 77
----------- ----------- ----------- ----------- ----------- ----------- -----------
Change in unrealized appreciation 6,653 3,004 13 10,559 (3,680) (2) 34,574
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets from operations $ 6,603 3,326 13 10,702 (3,648) - 34,864
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Operations
Period ended December 31, 1999
<TABLE>
<CAPTION>
Cova AIM GACC Templeton
------------------------------------ ------------------------- ----------- -----------
Large V.I.
Cap Select International V.I. Capital Money
Stock Equity Equity Value Appreciation Market Bond
---------- ----------- ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 329 275 415 110 18 - -
---------- ----------- ------------ ----------- ------------ ----------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of
portfolio shares (116) (167) 31 6 17 6,140 -
Realized gain distributions 7,182 9,317 1,110 575 558 - -
---------- ----------- ------------ ----------- ------------ ----------- -----------
Net realized gain (loss) 7,066 9,150 1,141 581 575 6,140 -
---------- ----------- ------------ ----------- ------------ ----------- -----------
Change in unrealized appreciation 16,032 (10,304) 16,888 4,069 6,608 3,725 -
---------- ----------- ------------ ----------- ------------ ----------- -----------
Net increase (decrease) in net
assets from operations $ 23,427 (879) 18,444 4,760 7,201 9,865 -
========== =========== ============ =========== ============ =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Operations
Period ended December 31, 1999
<TABLE>
<CAPTION>
Templeton
-------------------------------------------------------
Franklin Franklin
Small Cap Growth
Investments Stock International Investments Total
----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends $ - - - - 1,837
----------- ----------- -------------- ------------- -----------
Net realized gain (loss) on investments:
Realized gain (loss) on sale of portfolio
shares - - - - 5,881
Realized gain distributions - - - - 18,821
----------- ----------- -------------- ------------- -----------
Net realized gain (loss) - - - - 24,702
----------- ----------- -------------- ------------- -----------
Change in unrealized appreciation 41 10 8 23 88,221
----------- ----------- -------------- ------------- -----------
Net increase (decrease) in net
assets from operations $ 41 10 8 23 114,760
=========== =========== ============== ============= ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Changes in Net Assets
Period ended December 31, 1999
<TABLE>
<CAPTION>
Cova
----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ - 242 - 156 78 1 213
Net realized gain (loss) (50) 80 - (13) (46) 1 77
Change in unrealized appreciation 6,653 3,004 13 10,559 (3,680) (2) 34,574
Net increase (decrease) from ----------- ----------- ----------- ----------- ----------- ----------- -----------
operations 6,603 3,326 13 10,702 (3,648) - 34,864
----------- ----------- ----------- ----------- ----------- ----------- -----------
Contract transactions:
Cova payments 100 100 100 100 100 100 100
Cova redemptions - - - - - - -
Payments received from contract
owners - - - - - - -
Transfers between sub-accounts, net 209,709 105,997 - 107,473 65,008 - 97,560
Transfers for contract benefits,
terminations and insurance charges (2,167) (727) - (1,162) (715) - (1,150)
Net increase (decrease) in net
assets from contract ----------- ----------- ----------- ----------- ----------- ----------- -----------
transactions 207,642 105,370 100 106,411 64,393 100 96,510
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets 214,245 108,696 113 117,113 60,745 100 131,374
Net assets at beginning of period - - - - - - -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net assets at end of period $ 214,245 108,696 113 117,113 60,745 100 131,374
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Changes in Net Assets
Period ended December 31, 1999
<TABLE>
<CAPTION>
Cova AIM GACC Templeton
-------------------------------------- ------------------------- ----------- -----------
Large V.I.
Cap Select International V.I. Capital Money
Stock Equity Equity Value Appreciation Market Bond
----------- ---------- ------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ 329 275 415 110 18 - -
Net realized gain (loss) 7,066 9,150 1,141 581 575 6,140 -
Change in unrealized appreciation 16,032 (10,304) 16,888 4,069 6,608 3,725 -
Net increase (decrease) from ----------- ---------- ------------- ----------- ------------ ----------- -----------
operations 23,427 (879) 18,444 4,760 7,201 9,865 -
----------- ---------- ------------- ----------- ------------ ----------- -----------
Contract transactions:
Cova payments 100 100 100 100 100 300 100
Cova redemptions - - - - - (102) -
Payments received from contract
owners - - - - - 1,654,000 -
Transfers between sub-accounts, net 430,747 141,193 103,808 59,046 20,004 (1,340,545) -
Transfers for contract benefits,
terminations and insurance charges (3,857) (1,205) (1,212) (246) (134) (5,961) -
Net increase (decrease) in net
assets from contract ----------- ---------- ------------- ----------- ------------ ----------- -----------
transactions 426,990 140,088 102,696 58,900 19,970 307,692 100
----------- ---------- ------------- ----------- ------------ ----------- -----------
Net increase (decrease) in net
assets 450,417 139,209 121,140 63,660 27,171 317,557 100
Net assets at beginning of period - - - - - - -
----------- ---------- ------------- ----------- ------------ ----------- -----------
Net assets at end of period $ 450,417 139,209 121,140 63,660 27,171 317,557 100
=========== ========== ============= =========== ============ =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Statement of Changes in Net Assets
Period ended December 31, 1999
<TABLE>
<CAPTION>
Templeton
---------------------------------------------------------
Franklin Franklin
Small Cap Growth
Investments Stock International Investments Total
-------------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets from
operations:
Investment income $ - - - - 1,837
Net realized gain (loss) - - - - 24,702
Change in unrealized appreciation 41 10 8 23 88,221
Net increase (decrease) from -------------- ----------- ------------- ------------- -----------
operations 41 10 8 23 114,760
-------------- ----------- ------------- ------------- -----------
Contract transactions:
Cova payments 100 100 100 100 2,000
Cova redemptions - - - - (102)
Payments received from contract
owners - - - - 1,654,000
Transfers between sub-accounts, net - - - - -
Transfers for contract benefits,
terminations and insurance charges - - - - (18,536)
Net increase (decrease) in net
assets from contract -------------- ----------- ------------- ------------- -----------
transactions 100 100 100 100 1,637,362
-------------- ----------- ------------- ------------- -----------
Net increase (decrease) in net
assets 141 110 108 123 1,752,122
Net assets at beginning of period - - - - -
-------------- ----------- ------------- ------------- -----------
Net assets at end of period $ 141 110 108 123 1,752,122
============== =========== ============= ============= ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
(1) ORGANIZATION
Cova Variable Life Account Five (the Separate Account), a unit
investment trust registered under the Investment Company Act of 1940 as
amended, was established by Cova Financial Life Insurance Company
(CFLIC) and exists in accordance with the regulations of the California
Department of Insurance. The Separate Account is a funding vehicle for
single premium variable life (SPVL) and flexible premium variable
universal life insurance policies (FPVUL) offered by CFLIC.
On August 26, 1999, CFLIC's ultimate parent company, GenAmerica
Corporation, entered into a definitive agreement to be acquired by
Metropolitan Life Insurance Company. The acquisition occurred on
January 6, 2000.
The Separate Account is divided into sub-accounts with the assets of
each sub-account invested in corresponding portfolios of the following
investment companies. Each investment company is a diversified,
open-end, management investment company registered under the Investment
Company Act of 1940 as amended. The sub-accounts available for
investment may vary between variable life insurance policies offered by
CFLIC.
<TABLE>
<S> <C>
Cova Series Trust (Cova) 10 portfolios
General American Capital Company (GACC) 1 portfolios
Russell Insurance Funds (Russell) 5 portfolios
AIM Variable Insurance Funds, Inc. (AIM) 3 portfolios
Alliance Variable Products Series Fund, Inc. (Alliance) 2 portfolios
Liberty Variable Investment Trust (Liberty) 1 portfolios
Goldman Sachs Variable Insurance Trust (Goldman Sachs) 3 portfolios
Investors Fund Series (Kemper) 3 portfolios
MFS Variable Insurance Trust (MFS) 5 portfolios
Oppenheimer Variable Account Funds (Oppenheimer) 5 portfolios
Putnam Variable Trust (Putnam) 5 portfolios
Templeton Variable Products Series Fund (Templeton) 7 portfolios
</TABLE>
<TABLE>
<CAPTION>
The Separate Account commenced operations on March 1, 1999. The
sub-accounts commenced operations as follows:
<S> <C>
Cova Lord Abbett Growth and Income April 29, 1999
Cova Bond Debenture April 29, 1999
Cova Developing Growth July 17, 1999
Cova Large Cap Research July 12, 1999
Cova Mid-Cap Value July 12, 1999
Cova Quality Bond July 19, 1999
Cova Small Cap Stock April 29, 1999
Cova Large Cap Stock April 29, 1999
Cova Select Equity June 29, 1999
Cova International Equity May 4, 1999
AIM V.I. Value May 3, 1999
AIM V.I. Capital Appreciation May 3, 1999
GACC Money Market March 1, 1999
Templeton Bond July 19, 1999
Franklin Small Cap Investments July 19, 1999
Templeton Stock July 19, 1999
Templeton International July 19, 1999
Franklin Growth Investments July 19, 1999
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
(2) SIGNIFICANT ACCOUNTING POLICIES
(A) INVESTMENT VALUATION
Investments made in the portfolios of the investment companies are
valued at the reported net asset value of such portfolios, which
value their investment securities at fair value. The average cost
method is used to compute the realized gains and losses on the
sale of portfolio owned by the sub-accounts. Income from dividends
and gains from realized capital gain distributions are recorded on
the ex-distribution date.
(B) REINVESTMENT OF DISTRIBUTIONS
With the exception of the GACC Money Market Fund, dividends and
gains from realized gain distributions are reinvested in
additional shares of the portfolios.
GACC follows the Federal income tax practice known as consent
dividending, whereby substantially all of its net investment
income and realized capital gains are deemed to pass through to
the Separate Account. As a result, GACC does not distribute
dividends and realized capital gains. During December of each
year, the accumulated net investment income and realized capital
gains of the GACC Money Market Fund are allocated to the Separate
Account by increasing the cost basis and recognizing a gain in the
Separate Account.
(C) FEDERAL INCOME TAXES
The operations of the Separate Account are included in the federal
income tax return of CFLIC which is taxed as a Life Insurance
Company under the provisions of the Internal Revenue Code (IRC).
Under current IRC provisions, CFLIC believes it will be treated as
the owner of the Separate Account assets for federal income tax
purposes and does not expect to incur federal income taxes on the
earnings of the Separate Account to the extent the earnings are
credited to the variable life policies. Based on this, no charge
has been made to the Separate Account for federal income taxes. A
charge may be made in future years for any federal income taxes
that would be attributable to the variable life policies.
(3) CONTRACT FEES
There are fees associated with the variable life insurance
policies that are deducted from the policy account value and
Separate Account that reduce the return on investment. The type,
amount, and timing of the fees may vary between the variable life
policies offered by CFLIC and include mortality and expense risk,
administrative, selection and issue expense, cost of insurance,
tax expense (premium and federal taxes), contingent deferred sales
(surrender) and transfer charges.
(4) SEPARATE ACCOUNT EXPENSES
The mortality and expense fees for FPVUL policies are deducted
from the separate account and are reflected in the accumulation
unit value. There were no fees incurred in 1999.
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
(5) COST BASIS OF INVESTMENTS
The cost basis of each sub-account's investment follows:
Cova Lord Abbett Growth and Income $ 207,592
Cova Bond Debenture 105,692
Cova Developing Growth 100
Cova Large Cap Research 106,554
Cova Mid-Cap Value 64,425
Cova Quality Bond 102
Cova Small Cap Stock 96,800
Cova Large Cap Stock 434,385
Cova Select Equity 149,513
Cova International Equity 104,252
AIM V.I. Value 59,591
AIM V.I. Capital Appreciation 20,563
GACC Money Market 313,832
Templeton Bond 100
Franklin Small Cap Investments 100
Templeton Stock 100
Templeton International 100
Franklin Growth Investments 100
----------
$ 1,663,901
==========
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(6) UNIT FAIR VALUE
A summary of the total return for each sub-account follows:
Commenced Total
Operations Return
--------------- ------------
SPVL policies:
<S> <C> <C>
Cova Lord Abbett Growth and Income 4/29/99 4.60%
Cova Bond Debenture 4/29/99 0.70%
Cova Developing Growth 7/17/99 12.75%
Cova Large Cap Research 7/12/99 9.95%
Cova Mid-Cap Value 7/12/99 -5.60%
Cova Quality Bond 7/19/99 -0.23%
Cova Small Cap Stock 4/29/99 44.89%
Cova Large Cap Stock 4/29/99 6.90%
Cova Select Equity 6/29/99 -0.35%
Cova International Equity 5/4/99 20.84%
AIM V.I. Value 5/3/99 17.74%
AIM V.I. Capital Appreciation 5/3/99 28.36%
GACC Money Market 3/1/99 4.34%
Templeton Bond 7/19/99 -0.30%
Franklin Small Cap Investments 7/19/99 41.36%
Templeton Stock 7/19/99 10.11%
Templeton International 7/19/99 8.27%
Franklin Growth Investments 7/19/99 23.34%
FPVUL policies:
GACC Money Market 11/29/99 0.47%
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(7) REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION
The realized gain (loss) on the sale of fund shares and the change in
unrealized appreciation for each sub-account during the period ended
December 31, 1999 follows:
Realized Gain (Loss)
----------------------------------------------------------------
Aggregate Aggregate Cost
Proceeds from Sales of Portfolio Shares Realized
of Portfolio Shares Redeemed Gain (Loss)
--------------------- --------------------- --------------
<S> <C> <C> <C>
Cova Lord Abbett Growth and Income $ 1,940 $ 1,990 $ (50)
Cova Bond Debenture 727 725 2
Cova Developing Growth - - -
Cova Large Cap Research 1,159 1,172 (13)
Cova Mid-Cap Value 715 761 (46)
Cova Quality Bond - - -
Cova Small Cap Stock 1,150 1,073 77
Cova Large Cap Stock 3,539 3,655 (116)
Cova Select Equity 1,195 1,362 (167)
Cova International Equity 1,062 1,031 31
AIM V.I. Value 246 240 6
AIM V.I. Capital Appreciation 134 117 17
GACC Money Market 1,342,862 1,336,722 6,140
Templeton Bond - - -
Franklin Small Cap Investments - - -
Templeton Stock - - -
Templeton International - - -
Franklin Growth Investments - - -
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(7) REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION, CONTINUED
Unrealized Appreciation (Depreciation)
----------------------------------------------------------------
Appreciation Appreciation
(Depreciation) (Depreciation)
End of Period Beginning of Period Change
----------------- ------------------------ -------------
<S> <C> <C> <C>
Cova Lord Abbett Growth and Income $ 6,653 $ - $ 6,653
Cova Bond Debenture 3,004 - 3,004
Cova Developing Growth 13 - 13
Cova Large Cap Research 10,559 - 10,559
Cova Mid-Cap Value (3,680) - (3,680)
Cova Quality Bond (2) - (2)
Cova Small Cap Stock 34,574 - 34,574
Cova Large Cap Stock 16,032 - 16,032
Cova Select Equity (10,304) - (10,304)
Cova International Equity 16,888 - 16,888
AIM V.I. Value 4,069 - 4,069
AIM V.I. Capital Appreciation 6,608 - 6,608
GACC Money Market 3,725 - 3,725
Templeton Bond - - -
Franklin Small Cap Investments 41 - 41
Templeton Stock 10 - 10
Templeton International 8 - 8
Franklin Growth Investments 23 - 23
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS
The change in the number of units for each sub-account follows:
Cova
-----------------------------------------------------------------------------------------
Lord Abbett
Growth Large Small
and Bond Developing Cap Mid-Cap Quality Cap
Income Debenture Growth Research Value Bond Stock
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/98 - - - - - - -
Cova units purchased 8 9 9 8 9 9 10
Cova units redeemed - - - - - - -
Contract units purchased - - - - - - -
Contract units transferred, net 17,386 10,301 - 8,590 6,065 - 10,327
Contract units redeemed (183) (70) - (94) (71) - (113)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Unit balance at 12/31/99 17,211 10,240 9 8,504 6,003 9 10,224
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS, CONTINUED
Cova AIM GACC Templeton
------------------------------------ -------------------------- ----------- -----------
Large V.I.
Cap Select International V.I. Capital Money
Stock Equity Equity Value Appreciation Market Bond
---------- ----------- ------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/98 - - - - - - -
Cova units purchased 7 8 8 9 9 19 10
Cova units redeemed - - - - - (10) -
Contract units purchased - - - - - 155,502 -
Contract units transferred, net 31,815 11,141 9,019 5,421 1,954 (124,311) -
Contract units redeemed (287) (101) (101) (23) (12) (2,374) -
---------- ----------- ------------ ----------- ------------- ----------- -----------
Unit balance at 12/31/99 31,535 11,048 8,926 5,407 1,951 28,826 10
========== =========== ============ =========== ============= =========== ===========
FPVUL policies:
Unit balance at 12/31/98 -
Cova units purchased 10
Cova units redeemed -
Contract units purchased -
Contract units transferred, net -
Contract units redeemed -
-----------
Unit balance at 12/31/99 10
===========
</TABLE>
<PAGE>
COVA VARIABLE LIFE ACCOUNT FIVE
Notes to Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
(8) UNIT TRANSACTIONS, CONTINUED
Templeton
------------------------------------------------------------
Franklin Franklin
Small Cap Growth
Investments Stock International Investments
-------------- ----------- --------------- --------------
<S> <C> <C> <C> <C>
Accumulation units:
SPVL policies:
Unit balance at 12/31/98 - - - -
Cova units purchased 10 10 10 10
Cova units redeemed - - - -
Contract units purchased - - - -
Contract units transferred, net - - - -
Contract units redeemed - - - -
-------------- ----------- --------------- --------------
Unit balance at 12/31/99 10 10 10 10
============== =========== =============== ==============
</TABLE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services
Life Insurance Company)
Financial Statements
December 31, 1999, 1998, and 1997
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
Cova Financial Life Insurance Company:
We have audited the accompanying balance sheets of Cova Financial Life
Insurance Company (a wholly owned subsidiary of Cova Financial Services
Life Insurance Company) (the Company) as of December 31, 1999 and 1998, and
the related statements of income, shareholder's equity, and cash flows for
each of the years in the three-year period ended December 31, 1999. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cova Financial Life
Insurance Company as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
February 4, 2000
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life
Insurance Company)
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
----------- -----------
(in thousands)
Investments:
<S> <C> <C>
Debt securities available-for-sale, at fair value
(cost of $101,690 in 1999 and $99,228 in 1998) $ 95,568 100,658
Mortgage loans, net of allowance for potential loan
loss of $40 in 1999 and $10 in 1998 5,439 5,245
Policy loans 938 1,223
----------- -----------
Total investments 101,945 107,126
Cash and cash equivalents - interest-bearing 751 5,789
Cash - noninterest-bearing 1,448 1,200
Accrued investment income 1,624 1,641
Deferred policy acquisition costs 15,093 9,142
Present value of future profits 1,740 854
Goodwill 1,631 1,813
Deferred tax asset, net 1,232 585
Receivable from OakRe 18,890 35,312
Federal and state income taxes recoverable 75 --
Reinsurance receivables 9 118
Other assets 24 398
Separate account assets 186,040 127,873
----------- -----------
Total assets $ 330,502 291,851
=========== ===========
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets, Continued
December 31, 1999 and 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY 1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Policyholder deposits $ 116,184 135,106
Future policy benefits 6,707 6,191
Payable on purchase of securities 85 27
Accounts payable and other liabilities 1,589 1,653
Federal and state income taxes payable -- 172
Future purchase price payable to OakRe 172 342
Guaranty fund assessments 1,100 1,000
Separate account liabilities 186,035 127,871
----------- -----------
Total liabilities 311,872 272,362
----------- -----------
Shareholder's equity:
Common stock, $233.34 par value, (authorized
30,000 shares; issued and outstanding
12,000 shares in 1999 and 1998) 2,800 2,800
Additional paid-in capital 15,523 14,523
Retained earnings 1,993 1,833
Accumulated other comprehensive (loss) income,
net of tax (1,686) 333
----------- -----------
Total shareholder's equity 18,630 19,489
----------- -----------
Total liabilities and shareholder's equity $ 330,502 291,851
=========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Income
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- -----------
(in thousands)
Revenues:
<S> <C> <C> <C>
Premiums $ 1,041 1,308 1,191
Net investment income 7,663 7,516 6,761
Net realized (losses) gains on sales of
investments (452) 178 158
Separate account fees 2,215 1,392 599
Other income 382 66 45
----------- ---------- -----------
Total revenues 10,849 10,460 8,754
----------- ---------- -----------
Benefits and expenses:
Interest on policyholder deposits 6,064 5,486 4,837
Current and future policy benefits 1,479 1,549 1,481
Operating and other expenses 2,336 1,548 1,134
Amortization of purchased intangible
assets 233 260 234
Amortization of deferred policy
acquisition costs 383 530 320
----------- ---------- -----------
Total benefits and expenses 10,495 9,373 8,006
----------- ---------- -----------
Income before income taxes 354 1,087 748
----------- ---------- -----------
Income tax expense (benefit):
Current (246) (80) 310
Deferred 440 357 (5)
----------- ---------- -----------
Total income tax expense 194 277 305
----------- ---------- -----------
Net income $ 160 810 443
=========== ========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Shareholder's Equity
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- ----------
(in thousands)
<S> <C> <C> <C>
Common stock, at beginning
and end of period $ 2,800 2,800 2,800
---------- ----------- ----------
Additional paid-in capital:
Balance at beginning of period 14,523 13,523 13,523
Capital contribution 1,000 1,000 --
---------- ----------- ----------
Balance at end of period 15,523 14,523 13,523
---------- ----------- ----------
Retained earnings:
Balance at beginning of period 1,833 1,023 580
Net income 160 810 443
---------- ----------- ----------
Balance at end of period 1,993 1,833 1,023
---------- ----------- ----------
Accumulated other comprehensive income:
Balance at beginning of period 333 145 1
Change in unrealized (depreciation) appreciation
of debt securities (7,552) 794 630
Deferred federal income tax impact 1,087 (101) (77)
Change in deferred policy acquisition costs
attributable to unrealized depreciation (appreciation) 3,519 (513) (144)
Change in present value of future profits
attributable to unrealized depreciation (appreciation) 927 8 (265)
---------- ----------- ----------
Balance at end of period (1,686) 333 145
---------- ----------- ----------
Total shareholder's equity $ 18,630 19,489 17,491
========== =========== ==========
Total comprehensive income:
Net income $ 160 810 443
Other comprehensive (loss) income (change in net unrealized
(depreciation) appreciation of debt and equity securities) (2,019) 188 144
---------- ----------- ----------
Total comprehensive (loss) income $ (1,859) 998 587
========== =========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by (used in) operating activities:
Net income $ 160 810 443
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Increase in future policy benefits 516 810 820
Increase (decrease) in payables and
accrued liabilities 94 126 (815)
Decrease (increase) in accrued
investment income 17 185 (704)
Amortization of intangible assets and
deferred policy acquisition costs 616 790 554
Amortization and accretion of
securities, premiums, and discounts (7) (87) (10)
Decrease (increase) in other assets 374 (384) 30
Net realized loss (gain) on sale of investments 452 (178) (158)
Interest on policyholder deposits 6,064 5,486 4,837
(Decrease) increase in current and
deferred federal income taxes 193 423 101
Decrease in recapture commissions payable to OakRe (170) (223) (159)
Commissions and expenses deferred (2,815) (3,411) (3,917)
Other 499 702 290
----------- ----------- -----------
Net cash provided by operating activities 5,993 5,049 1,312
----------- ----------- -----------
Cash flows from investing activities:
Cash used in the purchase of
investment securities (29,365) (56,673) (53,534)
Proceeds from investment securities
sold and matured 26,689 50,661 25,379
Other (128) (121) (81)
----------- ----------- -----------
Net cash used in investing activities (2,804) (6,133) (28,236)
----------- ----------- -----------
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows, Continued
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Policyholder deposits $ 55,181 69,459 81,788
Transfers from OakRe 19,050 35,590 25,060
Transfer to separate accounts (36,544) (60,181) (56,144)
Return of policyholder deposits (46,666) (39,943) (28,267)
Capital contributions received 1,000 1,000 --
----------- ----------- -----------
Net cash (used) provided by financing activities (7,979) 5,925 22,437
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (4,790) 4,841 (4,487)
Cash and cash equivalents - beginning of period 6,989 2,148 6,635
----------- ----------- -----------
Cash and cash equivalents - end of period $ 2,199 6,989 2,148
=========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life
Insurance Company)
Notes to Financial Statements
December 31, 1999, 1998, and 1997
(1) NATURE OF BUSINESS AND ORGANIZATION
NATURE OF THE BUSINESS
Cova Financial Life Insurance Company (the Company) markets and
services single premium deferred annuities, immediate annuities,
variable annuities, term life, single premium variable universal
life, and single premium whole life insurance policies. The
Company is licensed to conduct business in the state of
California. Most of the policies issued present no significant
mortality or longevity risk to the Company, but rather represent
investment deposits by the policyholders. Life insurance policies
provide policy beneficiaries with mortality benefits amounting to
a multiple, which declines with age, of the original premium.
Under the deferred fixed annuity contracts, interest rates
credited to policyholder deposits are guaranteed by the Company
for periods from one to ten years, but in no case may renewal
rates be less than 3%. The Company may assess surrender fees
against amounts withdrawn prior to scheduled rate reset and adjust
account values based on current crediting rates. Policyholders
also may incur certain federal income tax penalties on
withdrawals.
Under the variable annuity contracts, policyholder deposits are
allocated to various separate account sub-accounts or the general
account. A sub-account is valued at the sum of market values of
the securities in its underlying investment portfolio. The
contract value allocated to a sub-account will fluctuate based on
the performance of the sub-accounts. The contract value allocated
to the general account is credited with a fixed interest rate for
a specified period. The Company may assess surrender fees against
amounts withdrawn prior to the end of the withdrawal charge
period. Policyholders may also incur certain federal income tax
penalties on withdrawals.
Under the single premium variable life contracts, policyholder
deposits are allocated to various separate account sub-accounts.
The account value allocated to a sub-account will fluctuate based
on the performance of the sub-accounts. The Company guarantees a
minimum death benefit to be paid to the beneficiaries upon the
death of the insured. The Company may assess surrender fees
against amounts withdrawn prior to the end of the surrender charge
period. A deferred premium tax may also be assessed against
amounts withdrawn in the first ten years. Policyholders may also
incur certain federal income tax penalties on withdrawals.
Under the term life insurance policies, policyholders pay a level
premium over a certain period of time to guarantee a death benefit
will be paid to the beneficiaries upon the death of the insured.
This policy has no cash accumulation available to the
policyholder.
Although the Company markets its products through numerous
distributors, including regional brokerage firms, national
brokerage firms, and banks, approximately 94%, 97%, and 85% of the
Company's sales have been through two specific brokerage firms, A.
G. Edwards & Sons, Incorporated, and Edward Jones & Company,
Incorporated, in 1999, 1998, and 1997, respectively.
<PAGE>
ORGANIZATION
The Company is a wholly owned subsidiary of Cova Financial
Services Life Insurance Company (CFSLIC). CFSLIC is a wholly owned
subsidiary of Cova Corporation, which is a wholly owned subsidiary
of General American Life Insurance Company (GALIC), a Missouri
domiciled life insurance company. GALIC is a wholly owned
subsidiary of GenAmerica Corporation, which in turn is a wholly
owned by the ultimate parent, General American Mutual Holding
Company (GAMHC).
On August 26, 1999, GAMHC entered into a definitive agreement
whereby Metropolitan Life Insurance Company (MetLife), a New York
domiciled life insurance company, will acquire GenAmerica
Corporation and all its holdings for $1.2 billion in cash. The
purchase was approved by the Missouri Director of Insurance on
November 10, 1999. The purchase, however, was not consummated as
of December 31, 1999 and as a result, these financial statements
do not reflect purchase accounting treatment of this transaction.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP)
and include the accounts and operations of the Company. The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the amounts reported. Actual results could differ from these
estimates.
DEBT SECURITIES
Investments in all debt securities with readily determinable
market values are classified into one of three categories:
held-to-maturity, trading, or available-for-sale. Classification
of investments is based on management's current intent. All debt
securities at December 31, 1999 and 1998 were classified as
available-for-sale. Securities available-for-sale are carried at
fair value, with unrealized holding gains and losses reported as
accumulated other comprehensive income in the shareholder's
equity, net of deferred effects of income tax and related effects
on deferred acquisition costs and present value of future profits.
Amortization of the discount or premium from the purchase of
mortgage-backed bonds is recognized using a level-yield method
which considers the estimated timing and amount of prepayments of
the underlying mortgage loans. Actual prepayment experience is
periodically reviewed and effective yields are recalculated when
differences arise between the prepayments previously anticipated
and the actual prepayments received and currently anticipated.
When such a difference occurs, the net investment in the
mortgage-backed bond is adjusted to the amount that would have
existed had the new effective yield been applied since the
acquisition of the bond, with a corresponding charge or credit to
interest income (the "retrospective method").
Investment income is recorded when earned. Realized capital gains
and losses on the sale of investments are determined on the basis
of specific costs of investments and are credited or charged to
income.
A realized loss is recognized and charged against income if the
Company's carrying value in a particular investment in the
available-for-sale category has experienced a significant decline
in market value that is deemed to be other than temporary.
<PAGE>
MORTGAGE LOANS AND POLICY LOANS
Mortgage loans and policy loans are carried at their unpaid
principal balances. An allowance for mortgage loan losses is
established based on an evaluation of the mortgage loan portfolio,
past credit loss experience, and current economic conditions.
Reserves for loans are established when the Company determines
that collection of all amounts due under the contractual terms is
doubtful and are calculated in conformity with Statement of
Financial Accounting Standards (SFAS) No. 114, Accounting by
Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures.
The Company had no impaired loans, and the valuation allowance for
potential losses on mortgage loans was $40,000 and $10,000, at
December 31, 1999 and 1998, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include currency and demand deposits in
banks, U.S. Treasury bills, money market accounts, and commercial
paper with maturities under 90 days, which are not otherwise
restricted.
SEPARATE ACCOUNT ASSETS
Separate accounts contain segregated assets of the Company that
are specifically assigned to variable annuity policyholders in the
separate accounts and are not available to other creditors of the
Company. The earnings of separate account investments are also
assigned to the policyholders in the separate accounts, and are
not guaranteed or supported by the other general investments of
the Company. The Company earns mortality and expense risk fees
from the separate accounts and assesses withdrawal charges in the
event of early withdrawals. Separate accounts assets are valued at
fair market value.
In order to provide for optimum policyholder returns and to allow
for the replication of the investment performance of existing
"cloned" mutual funds, the Company has periodically transferred
capital to the separate accounts to provide for the initial
purchase of investments in new portfolios. As additional funds
have been received through policyholder deposits, the Company has
periodically reduced its capital investment in the separate
accounts. The Company's capital investment in the separate
accounts as of December 31, 1999 and 1998, is presented in note 3.
<PAGE>
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business which vary with and are
directly related to the production of new business, principally
commissions, premium taxes, sales costs, and certain policy
issuance and underwriting costs, are deferred. The Company sets a
limit on the deferral of acquisition costs incurred from internal
marketing and wholesaling operations in any year at 1% to 1.5% of
premiums and deposits receipts, varying according to specific
product. This limit is based on typical market rates of
independent marketing service and wholesaling organizations. This
practice also avoids possible deferral of costs in excess of
amounts recoverable.
The costs deferred are amortized in proportion to estimated future
gross profits derived from investment income, realized gains and
losses on sales of securities, unrealized securities gains and
losses, interest credited to accounts, surrender fees, mortality
costs, and policy maintenance expenses. The estimated gross profit
streams are periodically reevaluated and the unamortized balance
of deferred policy acquisition costs is adjusted to the amount
that would have existed had the actual experience and revised
estimates been known and applied from the inception of the
policies and contracts. The amortization and adjustments resulting
from unrealized gains and losses are not recognized currently in
income but as an offset to the accumulated other comprehensive
income component of shareholder's equity. The amortization period
is the remaining life of the policies, which is estimated to be 20
years from the date of original policy issue.
<TABLE>
<CAPTION>
The components of deferred policy acquisition costs are shown
below:
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred policy acquisition costs, beginning of period
$ 9,142 6,774 3,321
Commissions and expenses deferred 2,815 3,411 3,917
Amortization (383) (530) (320)
Deferred policy acquisition costs attributable to
unrealized depreciation (appreciation) 3,519 (513) (144)
------------ ------------ ------------
Deferred policy acquisition costs, end
of period $ 15,093 9,142 6,774
============ ============ ============
Costs expensed that exceeded the established deferred
limit $ 382 231 6
=========== ============ =============
</TABLE>
PURCHASE RELATED INTANGIBLE ASSETS AND LIABILITIES
In accordance with the purchase method of accounting for business
combinations, two intangible assets and a future payable related
to accrued purchase price consideration were established as of the
date the Company was purchased by GALIC.
<PAGE>
Present Value of Future Profits
The Company established an intangible asset which represents
the present value of future profits (PVFP) to be derived from
both the purchased and transferred blocks of business. Certain
estimates were utilized in the computation of this asset,
including estimates of future policy retention, investment
income, interest credited to policyholders, surrender fees,
mortality costs, and policy maintenance costs, discounted at a
pretax rate of 18% (12% net after tax).
In addition, as the Company has the option of retaining its
single premium deferred annuity (SPDA) policies after they
reach their next interest rate reset date and are recaptured
from OakRe, a component of this asset represents estimates of
future profits on recaptured business. This asset will be
amortized in proportion to estimated future gross profits
derived from investment income, realized gains and losses on
sales of securities, unrealized securities appreciation and
depreciation, interest credited to accounts, surrender fees,
mortality costs, and policy maintenance expenses. The
estimated gross profit streams are periodically reevaluated
and the unamortized balance of PVFP will be adjusted to the
amount that would have existed had the actual experience and
revised estimates been known and applied from the inception.
The amortization and adjustments resulting from unrealized
appreciation and depreciation is not recognized currently in
income but as an offset to the accumulated other comprehensive
income of shareholder's equity. The amortization period is the
remaining life of the policies, which is estimated to be 20
years from the date of original policy issue.
Based on current assumptions, amortization of the original
in-force PVFP asset, expressed as a percentage of the original
in-force asset, is projected to be 5.5%, 4.9%, 4.5%, 4.2%, and
4.2% for the years ended December 31, 2000 through 2004,
respectively. Actual amortization incurred during these years
may be more or less as assumptions are modified to incorporate
actual results. The average crediting rate on the original
in-force PVFP asset is 6.4% for 1999, 1998 and 1997.
<TABLE>
<CAPTION>
The components of PVFP are shown below:
1999 1998 1997
------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
PVFP - beginning of period $ 854 900 1,178
Interest credited 62 66 69
Amortization (103) (120) (82)
PVFP attributable to unrealized
depreciation (appreciation) 927 8 (265)
------------ ---------- ------------
PVFP - end of period $ 1,740 854 900
============ ========== ============
</TABLE>
<PAGE>
Goodwill
Under the push-down method of purchase accounting, the excess
of purchase price over the fair value of tangible and
intangible assets and liabilities acquired is established as
an asset and referred to as goodwill. The Company has elected
to amortize goodwill on the straight-line basis over a 20-year
period.
<TABLE>
<CAPTION>
The components of goodwill are shown below:
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill - beginning of period $ 1,813 1,923 2,034
Amortization (111) (110) (111)
Experience adjustment to future purchase price
payable to OakRe (71) -- --
------------ ------------ ------------
Goodwill - end of period $ 1,631 1,813 1,923
============ ============ ============
</TABLE>
Future Payable
Pursuant to the financial reinsurance agreement with OakRe,
the receivable from OakRe becomes due in installments when the
SPDA policies reach their next crediting rate reset date. For
any recaptured policies that continue in force with OakRe into
the next rate guarantee period, the Company will pay a
commission to OakRe of 1.75% up to 40% of policy account
values originally reinsured and 3.5% thereafter. On policies
that are recaptured and subsequently exchanged to a variable
annuity policy, the Company will pay a commission to OakRe of
0.50%.
The Company has recorded a future payable that represents the
present value of the anticipated future commission payments
payable to OakRe over the remaining life of the financial
reinsurance agreement discounted at an estimated borrowing
rate of 6.5%. This liability represents a contingent purchase
price payable for the policies transferred to OakRe on the
purchase date and has been pushed down to the Company through
the financial reinsurance agreement. The Company expects that
this payable will be substantially extinguished by the end of
the year 2000.
<PAGE>
<TABLE>
<CAPTION>
The components of this future payable are shown below:
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future payable - beginning of period $ 342 565 683
Interest added 20 29 41
Payment to Oak Re (119) (252) (159)
Experience adjustment to future purchase price payable
to OakRe (71) -- --
---------- ---------- ----------
Future payable - end of period $ 172 342 565
========== ========== ==========
</TABLE>
DEFERRED TAX ASSETS AND LIABILITIES
Xerox Financial Services, Inc. (XFSI) (previous parent of the
company) and GALIC agreed to file an election to treat the
acquisition of the Company as an asset acquisition under the
provisions of Internal Revenue Code Section 338(h)(10). As a
result of that election, the tax basis of the Company's assets as
of the date of acquisition was revalued based upon fair market
values as of June 1, 1995. The principal effect of the election
was to establish a tax asset on the tax-basis balance sheet of
approximately $2.9 million for the value of the business acquired
that is amortizable for tax purposes over ten to fifteen years.
POLICYHOLDER DEPOSITS
The Company recognizes its liability for policy amounts that are
not subject to policyholder mortality nor longevity risk at the
stated contract value, which is the sum of the original deposit
and accumulated interest, less any withdrawals. The average
weighted interest crediting rate on the Company's policyholder
deposits as of December 31, 1999 was 5.96%.
FUTURE POLICY BENEFITS
Reserves are held for future policy annuity benefits that subject
the Company to risks to make payments contingent upon the
continued survival of an individual or couple (longevity risk).
These reserves are valued at the present value of estimated future
benefits discounted for interest, expenses, and mortality. The
assumed mortality is the 1983 Individual Annuity Mortality Tables
discounted at 4.50% to 8.00%, depending upon year of issue.
Current mortality benefits payable are recorded for reported
claims and estimates of amounts incurred but not reported.
PREMIUM REVENUE
The Company recognizes premium revenue at the time of issue on
annuity policies that subject it to longevity risks. Amounts
collected on annuity policies not subject to longevity risk are
recorded as increases in the policyholder deposits liability. For
term and single premium variable life products, premiums are
recognized as revenue when due.
<PAGE>
OTHER INCOME
Other income consists primarily of policy surrender charges.
FEDERAL INCOME TAXES
Beginning in 1997, the Company files a consolidated income tax
return with its immediate parent, CFSLIC. Allocations of federal
income taxes are based upon separate return calculations.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
COMPREHENSIVE INCOME
The Company reports and presents comprehensive income and its
components in accordance with SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 has no impact on the Company's
consolidated net income or shareholder's equity. The Company's
only component of accumulated other comprehensive income relates
to unrealized appreciation and depreciation on debt and equity
securities held as available-for-sale.
RISKS AND UNCERTAINTIES
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ significantly
from those estimates.
The following elements of the financial statements are most
affected by the use of estimates and assumptions:
- Investment valuation
- Amortization of deferred policy acquisition costs
- Amortization of present value of future profits
- Recoverability of goodwill
The fair value of the Company's investments is subject to the risk
that interest rates will change and cause a temporary increase or
decrease in the liquidation value of debt securities. To the
extent that fluctuations in interest rates cause the cash flows of
assets and liabilities to change, the Company might have to
liquidate assets prior to their maturity and recognize a gain or
loss. Interest rate exposure for the investment portfolio is
managed through asset/liability management techniques which
attempt to control the risks presented by differences in the
probable cash flows and reinvestment of assets with the timing of
crediting rate changes in the Company's policies and contracts.
Changes in the estimated prepayments of mortgage-backed securities
also may cause retrospective changes in the amortization period of
securities and the related recognition of income.
<PAGE>
The amortization of deferred policy acquisition costs is based on
estimates of long-term future gross profits from existing
policies. These gross profits are dependent upon policy retention
and lapses, the spread between investment earnings and crediting
rates, and the level of maintenance expenses. Changes in
circumstances or estimates may cause retrospective adjustment to
the periodic amortization expense and the carrying value of the
deferred expense.
In a similar manner, the amortization of PVFP is based on
estimates of long-term future profits from existing and recaptured
policies. These gross profits are dependent upon policy retention
and lapses, the spread between investment earnings and crediting
rates, and the level of maintenance expenses. Changes in
circumstances or estimates may cause retrospective adjustment to
the periodic amortization expense and the carrying value of the
asset.
The Company has considered the recoverability of goodwill and has
concluded that no circumstances have occurred which would give
rise to impairment of goodwill at December 31, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, applies fair value disclosure practices with regard
to financial instruments, both assets and liabilities, for which
it is practical to estimate fair value. In cases where quoted
market prices are not readily available, fair values are based on
estimates that use present value or other valuation techniques.
These techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash
flows. Although fair value estimates are calculated using
assumptions that management believes are appropriate, changes in
assumptions could cause these estimates to vary materially. In
that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many
cases, might not be realized in the immediate settlement of the
instruments. SFAS No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements.
Because of this, and further because a value of a business is also
based upon its anticipated earning power, the aggregate fair value
amounts presented do not represent the underlying value of the
Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents, Short-term Investments,
and Accrued Investment Income
The carrying value amounts reported in the balance sheets for
these instruments approximate their fair values. Short-term
debt securities are considered "available-for-sale" and are
carried at fair value.
<PAGE>
Investments Securities and Mortgage Loans
(Including Mortgage-backed Securities)
Fair values of debt securities are based on quoted market
prices, where available. For debt securities not actively
traded, fair value estimates are obtained from independent
pricing services. In some cases, such as private placements,
certain mortgage-backed securities, and mortgage loans, fair
values are estimated by discounting expected future cash flows
using a current market rate applicable to the yield, credit
quality, and maturity of the investments (see note 3 for fair
value disclosures).
Policy Loans
Fair values of policy loans approximate carrying value as the
interest rates on the majority of policy loans are reset
periodically and therefore approximate current interest rates.
Investment Contracts
The Company's policy contracts require the beneficiaries to
commence receipt of payments by the later of age 85 or 10
years after purchase, and substantially all contracts permit
earlier surrenders, generally subject to fees and adjustments.
Fair values for the Company's liabilities for investment type
contracts (policyholder deposits) are estimated as the amount
payable on demand. As of December 31, 1999 and 1998, the cash
surrender value of policyholder deposits was $4,058,740 and
$4,707,689, respectively, less than their stated carrying
value. Of the contracts permitting surrender, substantially
all provide the option to surrender without fee or adjustment
during the 30 days following reset of guaranteed crediting
rates. The Company has not determined a practical method to
determine the present value of this option.
All of the Company's deposit obligations are fully guaranteed
by its parent GALIC, and the receivable from OakRe equal to
the SPDA obligations is guaranteed by OakRe's parent, XFSI.
REINSURANCE
Effective July 25, 1999, the Company entered into a modified
coinsurance reinsurance agreement with Metropolitan Life Insurance
Company (MetLife). Under the reinsurance agreement, the Company
ceded life insurance and annuity business that was issued or
renewed from July 25, 1999 through December 31, 1999 to MetLife
amounting to $15 million. Net earnings to MetLife from that
business are experience refunded to the Company. The agreement
does not meet the conditions for reinsurance accounting under
GAAP. In substance, the agreement represents a guarantee by
MetLife of new business and renewed SPDA business during this
period. There was no impact on the Company's financial statements
resulting from the reinsurance transaction with MetLife.
On June 1, 1995, when Cova Corporation purchased the Company, then
known as Xerox Financial Life Insurance Company (XFLIC), from
XFSI, a wholly owned subsidiary of Xerox Corporation, it entered
into a financing reinsurance transaction with OakRe Life Insurance
Company (OakRe), then a subsidiary of XFLIC, for OakRe to assume
the economic benefits and risks of the existing SPDA deposits of
XFLIC. Ownership of OakRe was retained by XFSI subsequent to the
sale of XFLIC and other affiliates.
<PAGE>
In substance, terms of the agreement have allowed the seller,
XFSI, to retain substantially all of the existing financial
benefits and risks of the existing business, while the purchaser,
GALIC, obtained the corporate operating and product licenses,
marketing, and administrative capabilities of the Company and
access to the retention of the policyholder deposit base that
persists beyond the next crediting rate reset date.
The financing reinsurance agreement entered into with OakRe as
condition to the purchase of the Company does not meet the
criteria for reinsurance accounting under GAAP. The net assets
initially transferred to OakRe were established as a receivable
and are subsequently increased as interest accrued on the
underlying deposits and decrease as funds are transferred back to
the Company when policies reach their crediting rate reset date or
benefits are claimed. The receivable from OakRe to the Company
that was created by this transaction will be liquidated over the
remaining crediting rate guaranty periods which will be
substantially expired by mid-year 2000, and completely by mid-year
2002. The liquidations transfer cash daily in the amount of the
then current account value, less a recapture commission fee to
OakRe on policies retained beyond their 30-day-no-fee surrender
window by the Company, upon the next crediting rate reset date of
each annuity policy. The Company may then reinvest that cash for
those policies that are retained and thereafter assume the
benefits and risks of those deposits.
In the event that both OakRe and XFSI default on the receivable,
the Company may draw funds from a standby bank irrevocable letter
of credit established by XFSI in the amount of $500 million. No
funds were drawn on this letter of credit since inception of the
agreement.
The impact of reinsurance on the December 31, 1999 financial
statements is not considered material.
RECENTLY ISSUED ACCOUNTING STANDARD
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, issued in June 1998, requires all derivative financial
instruments to be recorded on the balance sheet at estimated fair
value. The Company's present accounting policies applies such
accounting treatment only to marketable securities as defined
under SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, and to off-balance sheet derivative
instruments. SFAS No. 133 will broaden the definition of
derivative instruments to include all classes of financial assets
and liabilities. It also will require separate disclosure of
identifiable derivative instruments embedded in hybrid securities.
The change in the fair value of derivative instruments is to be
recorded each period either in current earnings or other
comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if it is, on the type
of hedge transaction.
In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133. SFAS No. 137 defers for one year
the effective date of Statement of SFAS No 133, Accounting for
Derivative Instruments and Hedging Activities. The Company plans
to adopt the provision of SFAS No. 133 effective January 1, 2001.
At this time the Company does not believe it will have a material
effect on the Company's consolidated financial position or results
of operations.
<PAGE>
OTHER
Certain 1998 and 1997 amounts have been reclassified to conform to
the 1999 presentation.
(3) INVESTMENTS
The Company's investments in debt securities and short-term investments
are considered available-for-sale and carried at estimated fair value,
with the aggregate unrealized appreciation or depreciation being
recorded as a separate component of shareholder's equity. The amortized
cost, estimated fair value, and carrying value of investments at
December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------------- -------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Debt securities:
Government agency
obligations $ 1,702 19 -- 1,721 1,721
Corporate securities 76,444 30 (4,756) 71,718 71,718
Mortgage-backed
securities 8,272 1 (202) 8,071 8,071
Asset backed securities 15,272 -- (1,214) 14,058 14,058
--------------- -------------- -------------- -------------- --------------
Total debt securities 101,690 50 (6,172) 95,568 95,568
Mortgage loans (net) 5,439 -- (70) 5,369 5,439
Policy loans 938 -- -- 938 938
--------------- -------------- -------------- -------------- --------------
Total investments $ 108,067 50 (6,242) 101,875 101,945
=============== ============== ============== ============== ==============
Company's beneficial
interest in separate
accounts $ 5 -- -- 5 5
=============== ============== ============== ============== ==============
</TABLE>
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life
Insurance Company)
Notes to Financial Statements
December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------------- -------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Debt securities:
U.S. treasury securities $ 100 1 -- 101 101
Government agency
obligations 3,471 74 -- 3,545 3,545
Corporate securities 70,883 1,384 (406) 71,861 71,861
Mortgage-backed
securities 11,789 87 (32) 11,844 11,844
Asset-backed securities 12,985 349 (27) 13,307 13,307
--------------- -------------- -------------- -------------- --------------
Total debt securities 99,228 1,895 (465) 100,658 100,658
Mortgage loans (net) 5,245 204 -- 5,449 5,245
Policy loans 1,223 -- -- 1,223 1,223
--------------- -------------- -------------- -------------- --------------
Total investments $ 105,696 2,099 (465) 107,330 107,126
=============== ============== ============== ============== ==============
Company's beneficial
interest in separate
accounts $ 2 -- -- 2 2
=============== ============== ============== ============== ==============
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1999, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties. Maturities of mortgage-backed securities will be
substantially shorter than their contractual maturity because they
require monthly principal installments and mortgagees may prepay
principal.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Less than one year $ 3,573 3,573
Due after one year through five years 33,093 31,752
Due after five years through ten years 39,035 35,583
Due after ten years 17,717 16,589
Mortgage-backed securities 8,272 8,071
--------------- ---------------
Total $ 101,690 95,568
=============== ===============
</TABLE>
<PAGE>
At December 31, 1999, approximately 94.2% of the Company's debt
securities are investment grade or are nonrated but considered to be of
investment grade. Of the 5.8% noninvestment grade debt securities, 5.7%
are rated as BB or its equivalent, and 0.1% are rated B or its
equivalent.
The Company had one impaired debt security, which became nonincome
producing in 1999. The Company had no impaired investments, and all debt
securities were income producing in 1998
<TABLE>
<CAPTION>
The components of investment income, realized gains (losses), and
unrealized appreciation are as follows:
1999 1998 1997
------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income on debt securities $ 7,119 6,928 6,575
Income on cash and cash equivalents 185 305 186
Interest on mortgage loans 401 308 32
Income on policy loans 82 92 83
Miscellaneous interest 1 2 --
------------ ------------- ------------
Total investment income 7,788 7,635 6,876
Investment expenses (125) (119) (115)
------------ ------------- ------------
Net investment income $ 7,663 7,516 6,761
============ ============= ============
Net realized capital (losses) gains -
debt securities $ (452) 178 158
============ ============= ============
Unrealized (depreciation) appreciation is as follows:
Debt securities $ (6,122) 1,430 633
Short-term investments -- -- 3
Effects on deferred acquisition
costs amortization 2,793 (726) (213)
Effects on PVFP amortization 735 (192) (200)
------------ ------------- ------------
Unrealized (depreciation) appreciation
before income tax (2,594) 512 223
Unrealized income tax benefit (expense) 908 (179) (78)
------------ ------------- ------------
Net unrealized appreciation (depreciation) on
investments $ (1,686) 333 145
============ ============= ============
</TABLE>
<PAGE>
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1999 were $25,986,787. Gross gains of $165,919 and
gross losses of $618,025 were realized on those sales. Included in these
amounts were $25,816 of gross gains and $19,890 of gross losses realized
on the sale of noninvestment grade securities. Net realized losses
include a 1999 impairment adjustment totaling approximately $493,244
related to one debt security held by the Company.
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1998 were $50,660,583. Gross gains of $591,755 and
gross losses of $413,588 were realized on those sales. Included in these
amounts were $133,138 of gross gains and $106,165 of gross losses
realized on the sale of noninvestment grade securities.
Proceeds from sales, redemptions, and paydowns for investments in debt
securities during 1997 were $25,379,783. Gross gains of $166,335 and
gross losses of $8,658 were realized on those sales. Included in these
amounts were $47,391 of gross gains and $7,300 of gross losses realized
on the sale of noninvestment grade securities.
(4) SECURITY GREATER THAN 10% OF SHAREHOLDER'S EQUITY
As of December 31, 1999 and 1998, the Company held the following
individual mortgage loan which exceeded 10% of shareholder's equity:
<TABLE>
1999 1998
--------------- ---------------
<S> <C> <C>
Colonial Realty, at carrying value $ 1,998,296 1,997,287
=============== ===============
</TABLE>
<PAGE>
(5) COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
The components of comprehensive income are as follows:
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income $ 160 810 443
------------ ------------ ------------
Other comprehensive income (loss), before tax -
Unrealized appreciation (depreciation) on
Investments arising during period:
Unrealized (depreciation) appreciation
on investments (7,100) 616 472
Adjustment to deferred acquisition
costs attributable to unrealized
depreciation (appreciation) 3,308 (398) (108)
Adjustment to PVFP attributable to
unrealized depreciation (appreciation) 872 6 (198)
------------ ------------ ------------
Total unrealized (depreciation) appreciation on
investments arising during period (2,920) 224 166
------------ ------------ ------------
Less reclassification adjustments for realized losses (gains) included
in net income:
Adjustment for losses (gains) included in
net realized (losses) gains on sales
of investments 452 (178) (158)
Adjustment for (gains) losses included in
amortization of deferred acquisition costs (211) 115 36
Adjustment for (gains) losses included in
amortization of PVFP (55) (2) 67
------------ ------------ ------------
Total reclassification adjustments for losses (gains)
included in net income 186 (65) (55)
------------ ------------ ------------
Other comprehensive (loss) income, before related income tax
(benefits) expense (3,106) 289 221
Related income tax (benefit) expense (1,087) 101 77
------------ ------------ ------------
Other comprehensive (loss) income, net of tax (2,019) 188 144
------------ ------------ ------------
Comprehensive (loss) income $ (1,859) 998 587
============ ============ ============
</TABLE>
<PAGE>
(6) POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company has no direct employees and no retired employees. All
personnel used to support the operations of the Company are supplied by
contract by Cova Life Management Company (CLMC), a wholly owned
subsidiary of Cova Corporation. The Company is allocated a portion of
certain health care and life insurance benefits for future retired
employees of CLMC. In 1999, 1998, and 1997, the Company was allocated a
portion of benefit costs including severance pay, accumulated vacations,
and disability benefits. At December 31, 1999, CLMC had no retired
employees nor any employees fully eligible for retirement, and had no
disbursements for such benefit commitments. The expense arising from
these allocations is not material.
(7) INCOME TAXES
<TABLE>
<CAPTION>
The Company will file a consolidated federal income tax return with its
immediate parent, CFSLIC. Income taxes are recorded in the statements of
earnings and directly in certain shareholder's equity accounts. Income
tax expense for the years ended December 31 was allocated as follows:
1999 1998 1997
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Statements of income:
Operating income (excluding realized investment gains) $ 179 215 250
Realized investment gains 15 62 55
----------- --------- ---------
Income tax expense included in the statements of
income 194 277 305
Shareholder's equity - change in deferred federal income taxes
related to unrealized (depreciation) appreciation on securities (1,087) 101 77
----------- --------- ---------
Total income tax (benefit) expense $ (893) 378 382
=========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
The actual federal income tax expense differed from the expected tax
expense computed by applying the U.S. federal statutory rate to income
before taxes on income as follows:
1999 1998 1997
-------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $ 124 35.0% $ 380 35.0% $ 262 35.0%
Dividends received deduction - separate
account (115) (32.5) (150) (13.9) -- --
Amortization of intangible assets 39 11.0 39 3.6 39 5.2
Valuation allowance for permanent
impairments 173 48.9 -- -- -- --
Other (27) (7.6) 8 0.8 4 0.5
-------- ---------- -------- ---------- -------- ----------
Total $ 194 54.8% $ 277 25.5% $ 305 40.7%
======== ========== ======== ========== ======== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are as follows:
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Tax basis of intangible assets purchased $ 569 624
Liability for commission on recaptures 60 120
Policy reserves 2,678 2,477
DAC "Proxy Tax" 1,383 1,252
Permanent impairments 173 --
Unrealized depreciation in investments 908 --
Other deferred tax assets 165 (359)
------------ ------------
Total deferred tax assets 5,936 4,114
Valuation allowance (173) --
------------ ------------
Total deferred tax assets, net of valuation allowance 5,763 4,114
------------ ------------
Deferred tax liabilities:
Unrealized appreciation in investments -- 179
PVFP 226 150
Deferred acquisition costs 4,305 3,200
------------ ------------
Total deferred tax liabilities 4,531 3,529
------------ ------------
Net deferred tax asset $ 1,232 585
============ ============
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. As of
December 31, 1999, the Company has provided a 100% valuation allowance
against the deferred tax asset related to the permanent impairments.
<PAGE>
(8) RELATED-PARTY TRANSACTIONS
On December 31, 1997, Cova Life Management Company (CLMC) and Navisys
Incorporated (Navisys), both affiliated companies, purchased certain
assets of Johnson & Higgins/Kirke Van Orsdel, Inc. (J&H/KVI), an
unaffiliated Delaware corporation, for $2,500,000, and merged them into
Cova Life Administrative Service Company (CLASC), a joint subsidiary of
CLMC and Navisys. Navisys purchased 51% of CLASC, and the remaining 49%
was purchased by CLMC. The purchased assets are the administrative and
service systems and organization that provide the policy service
functions for the Company's life and annuity products. On October 31,
1999, CLMC purchased the remaining 51% interest in CLASC from Navisys
for $1,184,414.
The Company has entered into management, operations, and servicing
agreements with its affiliated companies. The affiliated companies are
CLMC, a Delaware corporation, which provides management services and the
employees necessary to conduct the activities of the Company; Conning
Asset Management, which provides investment advice; and CLASC, which
provides underwriting, policy issuance, claims, and other policy
administration functions. Additionally, a portion of overhead and other
corporate expenses is allocated by the Company's parent, GALIC. Expenses
and fees paid to affiliated companies in 1999, 1998, and 1997 by the
Company were $2,496,782, $1,587,833, and $396,806, respectively.
(9) STATUTORY SURPLUS AND DIVIDEND RESTRICTION
GAAP differs in certain respects from accounting practices prescribed or
permitted by insurance regulatory authorities (statutory accounting
principles).
The major differences arise principally from the immediate expense
recognition of policy acquisition costs and intangible assets for
statutory reporting, determination of policy reserves based on different
discount rates and methods, the recognition of deferred taxes under GAAP
reporting, the nonrecognition of financial reinsurance for GAAP
reporting, and the establishment of an asset valuation reserve as a
contingent liability based on the credit quality of the Company's
investment securities and an interest maintenance reserve as an unearned
liability to defer the realized gains and losses of fixed income
investments presumably resulting from changes to interest rates and
amortize them into income over the remaining life of the investment sold
under statutory accounting principles. In addition, adjustments to
record the carrying values of debt securities and certain equity
securities at estimated fair value are applied only under GAAP reporting
and capital contributions in the form of notes receivable from an
affiliated company are not recognized under GAAP reporting.
Purchase accounting creates another difference as it requires the
restatement of GAAP assets and liabilities to their established fair
values at the date of purchase, and shareholder's equity to the net
purchase price.
Statutory accounting does not recognize the purchase method of
accounting.
<PAGE>
<TABLE>
<CAPTION>
As of December 31, the differences between statutory capital and surplus
and shareholder's equity determined in conformity with GAAP were as
follows:
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Statutory capital and surplus $ 9,826 10,411
Reconciling items:
Statutory asset valuation reserve 827 1,078
Statutory interest maintenance reserve 187 190
GAAP investment adjustments to fair value (6,122) 1,430
GAAP deferred policy acquisition costs 15,093 9,142
GAAP basis policy reserves (4,480) (4,670)
GAAP deferred federal income taxes (net) 1,232 585
GAAP guarantee assessment adjustment (1,100) (1,000)
GAAP goodwill 1,631 1,813
GAAP present value of future profits 1,740 854
GAAP future purchase price payable (172) (342)
GAAP investment valuation reserves (40) (10)
Other 8 8
------------ ------------
GAAP shareholder's equity $ 18,630 19,489
============ ============
</TABLE>
Statutory net loss for the years ended December 31, 1999, 1998,
and 1997 was $1,478,513, $142,046, and $461,118, respectively.
The maximum amount of dividends which can be paid by State of California
insurance companies to shareholders without prior approval of the
insurance commissioner is the greater of 10% of statutory surplus or
statutory net gain from operations for the preceding year. The maximum
dividend permissible during 2000 will be $702,615, which is 10% of the
Company's December 31, 1999 statutory surplus of $7,026,153.
The National Association of Insurance Commissioners has developed
certain risk based capital (RBC) requirements for life insurers. If
prescribed levels of RBC are not maintained, certain actions may be
required on the part of the Company or its regulators. At December 31,
1999, the Company's Total Adjusted Capital and Authorized Control Level
RBC were $10,653,128 and $1,705,480, respectively. This level of
adjusted capital qualifies under all tests.
(10) GUARANTY FUND ASSESSMENTS
The Company participates with life insurance companies licensed in
California in an association formed to guaranty benefits to
policyholders of insolvent life insurance companies. Under state law, as
a condition for maintaining the Company's authority to issue new
business, the Company is contingently liable for its share of claims
covered by the guaranty association for insolvencies incurred through
1999, but for which assessments have not yet been determined or
assessed, to a maximum generally of 1% of statutory premiums per annum.
In November 1999, the National Organization of Life and Health Guaranty
Associations distributed a study of the major outstanding industry
insolvencies, with estimates of future assessments by state. Based on
this study, the Company has accrued a liability for $1.1 million in
future assessments on insolvencies that occurred before December 31,
1999. Under the coinsurance agreement between the Company and OakRe (see
note 1), OakRe is required to reimburse the Company for any future
assessments that it pays which relate to insolvencies occurring prior to
June 1, 1995. The Company paid $8,000, $33,505, and $460,167 in guaranty
fund assessment in 1999, 1998, and 1997, respectively. These payments
were substantially reimbursed by OakRe.
At the same time, the Company is liable to OakRe for 80% of any future
premium tax recoveries that are realized from any such assessments and
may retain the remaining 20%. The credits to be retained were not
material.
(11) SUBSEQUENT EVENT
The purchase of GenAmerica Corporation and subsidiary, including the
Company, by MetLife was completed on January 6, 2000. On that date also,
the Company's modified coinsurance agreement with MetLife was suspended
for subsequent new business.
APPENDIX --
ILLUSTRATION OF POLICY VALUES
In order to show you how the Policy works, we created some hypothetical
examples. We chose two males ages 50 and 60. Our hypothetical insureds are
non-smokers and in good health which means the Policy would be issued with
preferred rates. For each of the two examples, we have illustrated all three
available Death Benefit Options: Option A, Option B and Option C. We assumed
ongoing annual premiums paid of $6,000 for the 50-year-old example and $9,000
for the 60-year-old example.
All of the illustrations that follow are based on the above. We also assumed the
underlying investment portfolio had gross rates of return of 0%, 6% and 12 %.
This means that the underlying investment portfolio would earn these rates of
return before the deduction of the Mortality and Expense Risk Charge (equivalent
to .55% for Policy Years 1-10, .45% for Policy Years 11-20 and .35% thereafter)
and advisory fee and operating expenses (equal to approximately .94%). When
these costs are taken into account, the net annual investment return rates (net
of an average of 1.49% for these charges) are approximately -1.49, 4.51% and
10.51%. The Policy will lapse if you do not make additional premiums where 0% is
used in the illustrations.
It is important to be aware that these illustrations assume a level rate of
return for all years. If the actual rate of return moves up and down over the
years instead of remaining level, this may make a big difference in the
long-term investment results of your Policy. In order to properly show you how
the Policy actually works, we calculated values for the Accumulation Account
Value, Cash Surrender Value and Death Benefit.
We used the charges we described in the Expenses Section of the prospectus.
These charges are:
(1) A Federal Tax Charge of 1.3% and a Premium Tax Charge of 2.35% of each
premium paid;
(2) A first year Sales Charge of 15% of premium up to Target Premium, 5% of
premium above Target Premium. (The Sales Charge decreases to 5% of premium
paid in Policy Years 2-10 and 2% of premium paid in Policy Years 11 and
thereafter);
(3) A Monthly Policy Charge of $25 for the first Policy year, decreasing to $6
per month thereafter;
(4) During the first ten years, a monthly Selection and Issue Expense Charge,
generally ranging from four cents to one dollar per $1,000 of Face Amount;
(5) The Monthly Cost of Insurance Charge, based on both the current charges and
the guaranteed charges;
(6) Any Surrender Charge which may be applicable in determining the Cash
Surrender Values.
There is also a column labeled "Premiums Accumulated at 5% Interest Per Year."
This shows how the annual premiums paid would grow if invested at 5% per year.
We will furnish you, upon request, a comparable personalized illustration
reflecting the proposed Insured's age, risk classification, Face Amount,
premiums paid and reflecting both the current cost of insurance and guaranteed
cost of insurance.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,300 3,884 2,163 250,000 2,996 1,275 250,000
2 12,915 8,204 6,482 250,000 6,461 4,740 250,000
3 19,861 12,376 10,655 250,000 9,773 8,051 250,000
4 27,154 16,413 14,692 250,000 12,921 11,199 250,000
5 34,811 20,322 18,601 250,000 15,890 14,168 250,000
6 42,852 24,121 22,591 250,000 18,669 17,139 250,000
7 51,295 27,811 26,663 250,000 21,246 20,098 250,000
8 60,159 31,400 30,635 250,000 23,614 22,849 250,000
9 69,467 34,881 34,499 250,000 25,764 25,382 250,000
10 79,241 38,249 38,249 250,000 27,675 27,675 250,000
15 135,945 56,857 56,857 250,000 36,498 36,498 250,000
20 208,316 70,257 70,257 250,000 34,399 34,399 250,000
25 300,681 77,842 77,842 250,000 12,674 12,674 250,000
30 418,565 76,153 76,153 250,000 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,300 4,153 2,432 250,000 3,236 1,515 250,000
2 12,915 9,044 7,293 250,000 7,162 5,441 250,000
3 19,861 14,011 12,289 250,000 11,163 9,442 250,000
4 27,154 19,160 17,439 250,000 15,232 13,511 250,000
5 34,811 24,476 22,755 250,000 19,357 17,636 250,000
6 42,852 29,984 28,454 250,000 23,530 22,000 250,000
7 51,295 35,694 34,546 250,000 27,742 26,595 250,000
8 60,159 41,625 40,860 250,000 31,991 31,226 250,000
9 69,467 47,780 47,397 250,000 36,270 35,888 250,000
10 79,241 54,166 54,166 250,000 40,565 40,565 250,000
15 135,945 94,283 94,283 250,000 66,155 66,155 250,000
20 208,316 142,451 142,451 250,000 90,693 90,693 250,000
25 300,681 204,145 204,145 250,000 111,527 111,527 250,000
30 418,565 286,172 286,172 300,481 120,968 120,968 250,000
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,300 4,423 2,702 250,000 3,478 1,757 250,000
2 12,915 9,859 8,137 250,000 7,894 6,173 250,000
3 19,861 15,781 14,060 250,000 12,674 10,952 250,000
4 27,154 22,254 20,533 250,000 17,847 16,126 250,000
5 34,811 29,346 27,625 250,000 23,443 21,722 250,000
6 42,852 37,142 35,612 250,000 29,502 27,972 250,000
7 51,295 45,719 44,572 250,000 36,066 34,919 250,000
8 60,159 55,176 54,411 250,000 43,194 42,429 250,000
9 69,467 65,602 65,220 250,000 50,951 50,568 250,000
10 79,241 77,103 77,103 250,000 59,399 59,399 250,000
15 135,945 160,901 160,901 250,000 120,693 120,693 250,000
20 208,316 301,105 301,105 349,282 224,760 224,760 260,722
25 300,681 534,233 534,233 571,629 403,204 403,204 431,428
30 418,565 920,366 920,366 966,384 696,608 696,608 731,438
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,300 3,879 2,158 253,879 2,976 1,255 252,976
2 12,915 8,183 6,462 258,183 6,402 4,681 256,402
3 19,861 12,328 10,607 262,328 9,651 7,930 259,651
4 27,154 16,323 14,602 266,323 12,711 10,989 262,711
5 34,811 20,175 18,453 270,175 15,562 13,840 265,562
6 42,852 23,899 22,369 273,899 18,190 16,660 268,190
7 51,295 27,495 26,348 277,495 20,579 19,432 270,579
8 60,159 30,972 30,207 280,972 22,720 21,955 272,720
9 69,467 34,317 33,934 284,317 24,599 24,217 274,599
10 79,241 37,523 37,523 287,523 26,191 26,191 276,191
15 135,945 54,725 54,725 304,725 32,379 32,379 282,379
20 208,316 64,712 64,712 314,712 25,575 25,575 275,575
25 300,681 65,863 65,863 315,863 0 0 0
30 418,565 53,526 53,526 303,526 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,300 4,148 2,426 254,148 3,215 1,494 253,215
2 12,915 8,992 7,270 258,992 7,096 5,375 257,096
3 19,861 13,956 12,235 263,956 11,023 9,301 261,023
4 27,154 19,053 17,332 269,053 14,981 13,259 264,981
5 34,811 24,294 22,572 274,294 18,949 17,227 269,949
6 42,852 29,699 28,169 279,699 22,910 21,380 272,910
7 51,295 35,272 34,124 285,272 26,843 25,695 276,843
8 60,159 41,028 40,263 291,028 30,734 29,969 280,734
9 69,467 46,963 46,580 296,963 34,563 34,180 284,563
10 79,241 53,073 53,073 303,073 38,297 38,297 288,297
15 135,945 90,403 90,403 340,403 58,372 58,372 308,372
20 208,316 130,240 130,240 380,240 69,046 69,046 319,046
25 300,681 171,183 171,183 421,183 58,899 58,899 308,899
30 418,565 207,284 207,284 457,284 6,200 6,200 256,200
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,300 4,417 2,696 254,417 3,456 1,734 253,456
2 12,915 9,834 8,112 259,834 7,822 6,101 257,822
3 19,861 15,718 13,997 265,718 12,513 10,792 262,513
4 27,154 22,128 20,407 272,128 17,548 15,826 267,548
5 34,811 29,122 27,401 279,122 22,938 21,216 272,938
6 42,852 36,777 35,247 286,777 28,702 27,172 278,702
7 51,295 45,159 44,011 295,159 34,860 33,712 284,860
8 60,159 54,351 53,586 304,351 41,438 40,673 291,438
9 69,467 64,426 64,043 314,426 48,464 48,081 298,464
10 79,241 75,464 75,464 325,464 55,951 55,951 305,951
15 135,945 153,780 153,780 403,780 105,971 105,971 355,971
20 208,316 275,527 275,527 525,527 172,148 172,148 422,148
25 300,681 467,974 467,974 717,974 255,557 255,557 505,557
30 418,565 770,334 770,334 1,020,334 348,308 348,308 598,308
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,300 3,884 2,163 250,000 2,996 1,275 250,000
2 12,915 8,204 6,482 250,000 6,461 4,740 250,000
3 19,861 12,376 10,655 250,000 9,773 8,051 250,000
4 27,154 16,413 14,692 250,000 12,921 11,199 250,000
5 34,811 20,322 18,601 250,000 15,890 14,168 250,000
6 42,852 24,121 22,591 250,000 18,669 17,139 250,000
7 51,295 27,811 26,663 250,000 21,246 20,098 250,000
8 60,159 31,400 30,635 250,000 23,614 22,849 250,000
9 69,467 34,881 34,499 250,000 25,764 25,382 250,000
10 79,241 38,249 38,249 250,000 27,675 27,675 250,000
15 135,945 56,857 56,857 250,000 36,498 36,498 250,000
20 208,316 70,257 70,257 250,000 34,399 34,399 250,000
25 300,681 77,842 77,842 250,000 12,674 12,674 250,000
30 418,565 76,153 76,153 250,000 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,300 4,153 2,432 250,000 3,236 1,515 250,000
2 12,915 9,014 7,293 250,000 7,162 5,441 250,000
3 19,861 14,011 12,289 250,000 11,163 9,442 250,000
4 27,154 19,160 17,439 250,000 15,232 13,511 250,000
5 34,811 24,476 22,755 250,000 19,357 17,636 250,000
6 42,852 29,984 28,454 250,000 23,530 22,000 250,000
7 51,295 35,694 34,546 250,000 27,742 26,595 250,000
8 60,159 41,625 40,860 250,000 31,991 31,226 250,000
9 69,467 47,780 47,397 250,000 36,270 35,888 250,000
10 79,241 54,166 54,166 250,000 40,565 40,565 250,000
15 135,945 94,283 94,283 250,000 66,155 66,155 250,000
20 208,316 142,451 142,451 250,000 90,693 90,693 250,000
25 300,681 202,909 202,909 286,518 111,527 111,527 250,000
30 418,565 274,422 274,422 356,570 120,968 120,968 250,000
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 50, Preferred Rate Class
$6,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,300 4,423 2,702 250,000 3,478 1,757 250,000
2 12,915 9,859 8,137 250,000 7,894 6,173 250,000
3 19,861 15,781 14,060 250,000 12,674 10,952 250,000
4 27,154 22,254 20,533 250,000 17,847 16,126 250,000
5 34,811 29,346 27,625 250,000 23,443 21,722 250,000
6 42,852 37,142 35,612 250,000 29,502 27,972 250,000
7 51,295 45,719 44,572 250,000 36,066 34,919 250,000
8 60,159 55,176 54,411 250,000 43,194 42,429 250,000
9 69,467 65,602 65,220 250,000 50,951 50,568 250,000
10 79,241 77,103 77,103 250,000 59,399 59,399 250,000
15 135,945 160,758 160,758 283,645 120,693 120,693 250,000
20 208,316 294,553 294,553 461,191 219,410 219,410 343,538
25 300,681 507,287 507,287 716,315 365,976 365,976 516,776
30 418,565 840,609 840,609 1,092,245 574,534 574,534 746,521
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,450 5,730 2,838 250,000 3,168 277 250,000
2 19,373 12,048 9,156 250,000 6,868 3,995 250,000
3 29,791 18,023 15,132 250,000 10,251 7,360 250,000
4 40,731 23,767 20,876 250,000 13,224 10,333 250,000
5 52,217 29,247 26,356 250,000 15,763 12,872 250,000
6 64,278 34,608 32,038 250,000 17,831 15,261 250,000
7 76,942 39,779 37,852 250,000 19,396 17,469 250,000
8 90,239 44,746 43,461 250,000 20,421 19,136 250,000
9 104,201 49,519 48,876 250,000 20,862 20,220 250,000
10 118,861 54,035 54,035 250,000 20,661 20,661 250,000
15 203,917 78,772 78,772 250,000 12,217 12,217 250,000
20 312,473 91,621 91,621 250,000 0 0 0
25 451,021 92,342 92,342 250,000 0 0 0
30 627,847 70,555 70,555 250,000 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,450 6,128 3,237 250,000 3,485 594 250,000
2 19,373 13,248 10,357 250,000 7,768 4,877 250,000
3 29,791 20,438 17,547 250,000 11,949 9,058 250,000
4 40,731 27,813 24,922 250,000 15,983 13,092 250,000
5 52,217 35,351 32,460 250,000 19,825 16,934 250,000
6 64,278 43,206 40,636 250,000 23,430 20,860 250,000
7 76,942 51,325 49,367 250,000 26,762 24,835 250,000
8 90,239 59,712 58,427 250,000 29,775 28,490 250,000
9 104,201 68,395 67,753 250,000 32,422 31,779 250,000
10 118,861 77,339 77,339 250,000 34,636 34,636 250,000
15 203,917 134,380 134,380 250,000 42,475 42,475 250,000
20 312,473 204,374 204,374 250,000 16,973 16,973 250,000
25 451,021 301,245 301,245 316,307 0 0 0
30 627,847 420,341 420,341 441,358 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option A Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,450 6,528 3,636 250,000 3,804 913 250,000
2 19,373 14,499 11,608 250,000 8,694 5,803 250,000
3 29,791 23,054 20,163 250,000 13,806 10,915 250,000
4 40,731 32,375 29,484 250,000 19,132 16,241 250,000
5 52,217 42,518 39,627 250,000 24,666 21,775 250,000
6 64,278 53,723 51,153 250,000 30,411 27,841 250,000
7 76,942 66,047 64,120 250,000 36,382 34,454 250,000
8 90,239 79,613 78,328 250,000 42,597 41,312 250,000
9 104,201 94,584 93,942 250,000 49,083 48,441 250,000
10 118,861 111,092 111,092 250,000 55,865 55,865 250,000
15 203,917 234,534 234,534 250,951 104,067 104,067 250,000
20 312,473 442,852 442,852 464,995 180,544 180,544 250,000
25 451,021 785,443 785,443 824,715 339,689 339,689 356,674
30 627,847 1,340,161 1,340,161 1,407,169 596,630 596,630 626,462
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,450 5,716 2,825 255,716 3,100 208 253,100
2 19,373 11,997 9,106 261,997 6,691 3,800 256,691
3 29,791 17,896 15,005 267,896 9,863 6,972 259,863
4 40,731 23,522 20,631 273,522 12,571 9,680 262,571
5 52,217 28,831 25,940 278,831 14,766 11,874 264,766
6 64,278 33,980 31,410 283,980 16,407 13,837 266,407
7 76,942 38,882 36,955 288,882 17,462 15,534 267,462
8 90,239 43,514 42,229 293,514 17,896 16,608 267,893
9 104,201 47,879 47,236 297,879 17,666 17,023 267,666
10 118,861 51,889 51,889 301,889 16,730 16,730 266,730
15 203,917 71,845 71,845 321,845 3,752 3,758 253,758
20 312,473 72,369 72,369 322,369 0 0 0
25 451,021 52,287 52,287 302,287 0 0 0
30 627,847 2,199 2,199 252,199 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,450 6,114 3,223 256,114 3,412 521 253,412
2 19,373 13,192 10,301 263,192 7,551 4,660 257,551
3 29,791 20,293 17,401 270,293 11,500 8,608 261,500
4 40,731 27,522 24,631 277,522 15,195 12,304 265,195
5 52,217 34,836 31,945 284,836 18,569 15,678 268,569
6 64,278 42,397 39,827 292,397 21,558 18,988 271,558
7 76,942 50,124 48,196 300,124 24,101 22,174 274,101
8 90,239 57,994 56,709 307,994 26,132 24,847 276,132
9 104,201 66,016 65,374 316,016 27,580 26,938 277,580
10 118,861 74,101 74,101 324,101 28,359 28,359 278,359
15 203,917 121,700 121,700 371,700 23,786 23,786 273,786
20 312,473 160,493 160,493 410,493 0 0 0
25 451,021 185,943 185,943 435,943 0 0 0
30 627,847 181,932 181,932 431,932 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option B Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,450 6,512 3,621 256,512 3,727 836 253,727
2 19,373 14,437 11,546 264,437 8,454 5,563 258,454
3 29,791 22,889 19,997 272,889 13,289 10,398 263,289
4 40,731 32,031 29,140 282,031 18,188 15,296 268,188
5 52,217 41,886 38,994 291,886 23,098 20,207 273,098
6 64,278 52,690 50,120 302,690 27,970 25,400 277,970
7 76,942 64,450 62,522 314,450 32,757 30,829 282,757
8 90,239 77,235 75,950 327,235 37,399 36,114 287,399
9 104,201 91,153 90,511 341,153 41,835 41,193 291,835
10 118,861 106,227 106,227 356,227 45,979 45,979 295,979
15 203,917 211,151 211,151 461,151 64,741 64,741 314,741
20 312,473 360,899 360,899 610,899 49,924 49,924 299,924
25 451,021 583,795 583,795 833,795 0 0 0
30 627,847 913,042 913,042 1,163,042 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 0%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,450 5,730 2,838 250,000 3,168 277 250,000
2 19,373 12,048 9,156 250,000 6,868 3,995 250,000
3 29,791 18,023 15,132 250,000 10,251 7,360 250,000
4 40,731 23,767 20,876 250,000 13,224 10,333 250,000
5 52,217 29,247 26,356 250,000 15,763 12,872 250,000
6 64,278 34,608 32,038 250,000 17,831 15,261 250,000
7 76,942 39,779 37,852 250,000 19,396 17,469 250,000
8 90,239 44,746 43,461 250,000 20,421 19,136 250,000
9 104,201 49,519 48,876 250,000 20,862 20,220 250,000
10 118,861 54,035 54,035 250,000 20,661 20,661 250,000
15 203,917 78,772 78,772 250,000 12,217 12,217 250,000
20 312,473 91,621 91,621 250,000 0 0 0
25 451,021 92,342 92,342 250,000 0 0 0
30 627,847 70,555 70,555 250,000 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 6%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,450 6,128 3,237 250,000 3,485 594 250,000
2 19,373 13,248 10,357 250,000 7,768 4,877 250,000
3 29,791 20,438 17,547 250,000 11,949 9,058 250,000
4 40,731 27,813 24,922 250,000 15,983 13,092 250,000
5 52,217 35,351 32,460 250,000 19,825 16,934 250,000
6 64,278 43,206 40,636 250,000 23,430 20,860 250,000
7 76,942 51,325 49,367 250,000 26,762 24,835 250,000
8 90,239 59,712 58,427 250,000 29,775 28,490 250,000
9 104,201 68,395 67,753 250,000 32,422 31,779 250,000
10 118,861 77,339 77,339 250,000 34,636 34,636 250,000
15 203,917 134,380 134,380 250,000 42,475 42,475 250,000
20 312,473 203,978 203,978 265,038 16,973 16,973 250,000
25 451,021 289,436 289,436 351,705 0 0 0
30 627,847 388,492 388,492 448,980 0 0 0
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
<TABLE>
<CAPTION>
APPENDIX --
ILLUSTRATION OF POLICY VALUES (continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
Flexible Premium Variable Life Insurance
Hypothetical Illustration
SINGLE LIFE
Male, Issue Age 60, Preferred Rate Class
$9,000 Annual Premium Death Benefit Option C Face Amount of $250,000
Assuming Hypothetical Gross Annual Investment Return of 12%
CURRENT CHARGES* GUARANTEED CHARGES**
Premiums
End of Accumulated Accumulation Cash Accumulation Cash
Policy at 5% Interest Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit
------- --------------- ------------ -------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,450 6,528 3,636 250,000 3,804 913 250,000
2 19,373 14,499 11,608 250,000 8,694 5,803 250,000
3 29,791 23,054 20,163 250,000 13,806 10,915 250,000
4 40,731 32,375 29,484 250,000 19,132 16,241 250,000
5 52,217 42,518 39,627 250,000 24,666 21,775 250,000
6 64,278 53,723 51,153 250,000 30,411 27,841 250,000
7 76,942 66,047 64,120 250,000 36,382 34,454 250,000
8 90,239 79,613 78,328 250,000 42,597 41,312 250,000
9 104,201 94,584 93,942 250,000 49,083 48,441 250,000
10 118,861 111,092 111,092 250,000 55,865 55,865 250,000
15 203,917 232,802 232,802 328,728 104,067 104,067 250,000
20 312,473 422,835 422,835 549,410 180,544 180,544 250,000
25 451,021 720,331 720,331 875,304 313,969 313,969 381,516
30 627,847 1,179,792 1,179,792 1,363,486 499,044 499,044 576,745
<FN>
* These values reflect investment results using current cost of insurance rates.
** These values reflect investment results using guaranteed cost of insurance
rates.
</FN>
</TABLE>
The hypothetical investment results shown above and elsewhere in this prospectus
are illustrative only and do not represent past or future investment results.
The death benefit, Accumulation Account Value and Cash Surrender Value for a
Policy may be more or less than those shown depending upon actual investment
results. No representation can be made that this hypothetical rate of return can
be achieved for any one year or sustained over any period of time.
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. Flexible Premium Variable Life Insurance Policy++
5.a. Accelerated Benefit Rider++
5.b. Anniversary Partial Withdrawal Rider++
5.c. Guaranteed Survivor Plus Purchase Option Rider++
5.d. Lifetime Coverage Rider++
5.e. Secondary Guarantee Rider++
5.f. Supplemental Coverage Rider++
5.g. Waiver of Monthly Deduction Rider++
5.h. Waiver of Specified Premium Rider++
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****
9.c. Form of Fund Participation Agreement among Oppenheimer Variable
Account Funds, OppenheimerFunds, Inc. and Cova Financial Life
Insurance Company***
9.d. Form of Fund Participation Agreement among Putnam Variable Trust,
Putnam Mutual Funds Corp. and Cova Financial Life Insurance
Company***
9.e. Form of Fund Participation Agreement among Investors Fund Series,
Zurich Kemper Investments, Inc., Zurich Kemper Distributors, Inc.
and Cova Financial Life Insurance Company***
9.f. Form of Participation Agreement by and between Goldman Sachs
Variable Insurance Trust, Goldman, Sachs & Co. and Cova Financial
Life Insurance Company***
9.g. Form of Participation Agreement among Liberty Variable
Investment Trust, Liberty Financial Investments, Inc. and Cova
Financial Life Insurance Company***
9.h. Form of Fund Participation Agreement among Cova Financial Life
Insurance Company, Cova Life Sales Company, Alliance Capital
Management LP and Alliance Fund Distributors, Inc.+
9.i. Form of Participation Agreement among Russell Insurance Funds,
Russell Fund Distributors, Inc. and Cova Financial Life Insurance
Company***
9.j. Form of Fund Participation Agreement among MFS Variable Insurance
Trust, Cova Financial Life Insurance Company and Massachusetts
Financial Services Company+
9.k. Form of Participation Agreement among Variable Insurance
Products Fund, Fidelity Distributors Corporation and Cova
Financial Life Insurance Company++++
9.l. Form of Participation Agreement among Variable Insurance
Products Fund II, Fidelity Distributors Corporation and
Cova Financial Life Insurance Company++++
9.m. Form of Participation Agreement among Variable Insurance
Products Fund III, Fidelity Distributors Corporation and
Cova Financial Life Insurance Company++++
10. Application Forms++
11. Powers of Attorney*
B. Opinion and Consent of Counsel
C. Consent of Actuary
D. Consent of Independent Auditors
*Incorporated by reference to initial Form S-6 filed electronically on October
9, 1997.
**Incorporated by reference to 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
(File No. 333-37559) as filed electronically on April 30, 1999.
+Incorporated by reference to Pre-Effective Amendment No. 1 to Form N-4
(File No. 333-34817) as filed electronically on November 19, 1997.
++Incorporated by reference to Form S-6
(File No. 333-83183) as electronically filed on July 19, 1999.
+++Incorporated by reference to Pre-Effective Amendment No. 1 to Form S-6
(File No. 333-83183) as electronically filed on October 22, 1999.
++++Incorporated by reference to Post-Effective Amendment No. 6 to Form
N-4 (File No. 33-50174) as electronically on April 29, 1998.
SIGNATURES
As required by the Securities Act of 1933, the Registrant certifies that it
meets the requirements of Securities Act 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 /s/MARK E. REYNOLDS
________________________ By: ______________________________
Controller Executive Vice President
- ------------------------
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 Controller 4-28-00
- ---------------------- -------
Peter L. Witkewiz Date
</TABLE>
*By: /s/LORRY J. STENSRUD
______________________________________
Lorry J. Stensrud, Attorney-in-Fact
INDEX TO EXHIBITS
EX-99.B Opinion and Consent of Counsel
EX-99.C Consent of Actuary
EX-99.D 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. 1 to a Registration Statement on Form
S-6 for the Flexible 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/LYNN KORMAN STONE
-----------------------------
Lynn Korman Stone
To the United States Securities and Exchange Commission:
In my capacity as Product Actuary for General American Life Insurance
Company, I have provided actuarial advice to Cova Financial Life Insurance
Company, a General American affiliate, concerning a variable life insurance
product funded through Cova Variable Life Account Five.
It is my professional opinion that:
1. The fees and charges deducted under the contract, in the aggregate,
are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the insurance
company.
2. The illustrations of cash values, death benefits, and accumulated
premiums in the Appendix to the prospectus contained in the
Registration Statement are based on the assumptions stated in the
illustration, and are consistent with the provisions of the Policy.
The rate structure of the Policy has not been designed so as to make
the relationship between premium and benefits, as shown in the
illustrations, appear to be more favorable to prospective purchasers
of Policies at the ages shown in the rate class illustrated than to
prospective purchasers of Policies at other ages.
3. The information contained in the examples set forth in the section of
the prospectus entitled "Death Benefits" is based on the assumptions
stated in the examples, and is consistent with the provisions of the
Policy.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of my name under the heading "Experts" in the
prospectus.
/s/D. KENT HOLBROOK
- -------------------------------------------
D. Kent Holbrook
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. 1 to the Registration Statement (Form S-6, File No. 333-83183)
of Cova Variable Life Account Five.
/s/KPMG LLP
------------
KPMG LLP
Chicago, Illinois
April 28, 2000
