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SUPPLEMENT DATED AUGUST 25, 1998
TO PROSPECTUS
DATED AUGUST 25, 1998
for
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
issued by
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
EquiTrust Marketing Services, Inc. serves as the principal underwriter of
the above referenced policies on a temporary basis. American Equity
Investment Life Insurance Company anticipates that American Equity Capital,
Inc. ("AEC") will assume responsibility as the principal underwriter of the
policies on a permanent basis once AEC receives registration approval as a
broker-dealer from the National Association of Securities Dealers, Inc. Such
registration approval is expected to occur on or about October 1, 1998. The
following disclosures are supplemental to the prospectus until such time as
AEC is registered as a broker-dealer and commences its services as principal
underwriter of the policies.
At page 9, in the section titled "Summary of the Policy," the paragraph
describing the "Distribution of the Policies" is replaced with the following:
The Policies will be distributed by registered representatives of
broker-dealers who have entered into selling agreements with EquiTrust
Marketing Services, Inc. ("EquiTrust Marketing"), the principal
underwriter of the Policies. EquiTrust Marketing (formerly FBL Marketing
Services, Inc.) is registered as a broker-dealer with the Securities and
Exchange Commission and is a member of the National Association of
Securities Dealers, Inc.
At page 33, in the section titled "Distribution of the Contracts," the
first paragraph is replaced with the following:
The Policies will be sold by individuals who in addition to being
licensed as life insurance agents for the Company, are registered
representatives of broker-dealers who have entered in to selling
agreements with EquiTrust Marketing Services, Inc. (formerly FBL Marketing
Services, Inc.) the principal underwriter of the Policies. EquiTrust
Marketing Services, Inc. is registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1933 as a broker-dealer and
is a member of the National Association of Securities Dealers. EquiTrust
Marketing Services, Inc. is engaged in the sale and distribution of other
variable life policies and other variable annuity contracts.
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PROSPECTUS
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AMERICAN EQUITY LIFE VARIABLE ACCOUNT
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
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This Prospectus describes a flexible premium variable life insurance policy (the
"Policy") issued by American Equity Investment Life Insurance Company (the
"Company"). This type of life insurance is also commonly called variable
universal life. The Policy is designed to provide lifetime insurance protection
to age 115. The Policy permits the policyowner to vary premium payments and
adjust the death proceeds payable under the Policy. The Policy has been designed
for maximum flexibility in meeting changing insurance needs.
The minimum specified amount for which a Policy will be issued is normally
$50,000. The Policy provides for the payment of the death proceeds upon the
death of the insured and for a net surrender value or net accumulated value that
can be obtained upon surrender or partial withdrawal of the Policy. Death
proceeds may, and accumulated value will, vary with the investment experience of
American Equity Life Variable Account (the "Variable Account"). THE POLICYOWNER
BEARS THE ENTIRE INVESTMENT RISK; THERE IS NO GUARANTEED MINIMUM ACCUMULATED
VALUE. The Policy also provides for loans using the Policy as collateral. The
Policy will remain in force so long as net accumulated value or net surrender
value is sufficient to pay certain monthly charges imposed in connection with
the Policy.
A policyowner may allocate net premiums under a Policy to one or more of the
subaccounts of the Variable Account. Each Subaccount invests exclusively in
shares of the corresponding Investment Options of EquiTrust Variable Insurance
Series Fund: Value Growth Portfolio, High Grade Bond Portfolio, High Yield Bond
Portfolio, Money Market Portfolio and Blue Chip Portfolio; T. Rowe Price Equity
Series, Inc.: Equity Income Portfolio, Mid-Cap Growth Portfolio, New America
Growth Portfolio and Personal Strategy Balanced Portfolio; T. Rowe Price
International Series, Inc.: International Stock Portfolio; or Dreyfus Variable
Investment Fund: Capital Appreciation Portfolio, Dreyfus Variable Investment
Fund: Disciplined Stock Portfolio, Dreyfus Variable Investment Fund: Growth and
Income Portfolio, Dreyfus Variable Investment Fund: International Equity
Portfolio and Dreyfus Variable Investment Fund: Small Cap Portfolio. The
accompanying prospectus for each Fund describes the investment objectives and
attendant risks of each Investment Option.
A policyowner may also allocate net premiums to the Declared Interest Option.
The Declared Interest Option is supported by the Company's General Account.
Accumulated value allocated to the Declared Interest Option is credited with
interest at a declared annual rate guaranteed to be at least 4.0%.
This Prospectus generally describes only the portion of the Policy involving the
Variable Account. For a brief summary of the Declared Interest Option, see "THE
DECLARED INTEREST OPTION."
A policy may be treated as a modified endowment contract depending upon the
amount of premiums paid in relation to the death benefit provided under such
Policy. If a contract is a modified endowment contract, any loan, partial
withdrawal, surrender and/or assignment of the policy could result in adverse
tax consequences and/or penalties. (See "FEDERAL TAX MATTERS.")
It may not be advantageous to purchase a Policy as a replacement for another
type of life insurance or as a means to obtain additional insurance protection
if the purchaser already owns another flexible premium variable life insurance
policy.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR EACH
FUND'S INVESTMENT OPTIONS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
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Issued By
American Equity Investment Life Insurance Company
5000 Westown Parkway, Suite 440
West Des Moines, Iowa 50266
1-888-349-4650
THE DATE OF THIS PROSPECTUS IS AUGUST 25, 1998.
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TABLE OF CONTENTS
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DEFINITIONS............................................................... 3
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SUMMARY OF THE POLICY..................................................... 5
The Policy...................................................... 5
The Variable Account............................................ 5
The Declared Interest Option.................................... 5
Premiums........................................................ 5
Policy Benefits................................................. 6
Charges......................................................... 7
Distribution of the Policies.................................... 9
Tax Treatment................................................... 9
Cancellation Privilege.......................................... 9
Illustrations................................................... 9
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AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY AND THE VARIABLE 9
ACCOUNT...................................................................
American Equity Investment Life Insurance Company............... 9
The Variable Account............................................ 10
Investment Options.............................................. 10
Addition, Deletion or Substitution of Investments............... 13
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THE POLICY................................................................ 13
Purpose of the Policy........................................... 13
Purchasing the Policy........................................... 14
Premiums........................................................ 14
Policy Lapse and Reinstatement.................................. 16
Examination of Policy (Cancellation Privilege).................. 17
Special Transfer Privilege...................................... 17
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POLICY BENEFITS........................................................... 17
Accumulated Value Benefits...................................... 17
Transfers....................................................... 20
Loan Benefits................................................... 20
Death Proceeds.................................................. 22
Accelerated Payments of Death Proceeds.......................... 24
Benefits at Maturity............................................ 25
Payment Options................................................. 25
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CHARGES AND DEDUCTIONS.................................................... 26
Premium Expense Charge.......................................... 26
Monthly Deduction............................................... 27
Transfer Charge................................................. 29
Partial Withdrawal Fee.......................................... 29
Surrender Charge................................................ 29
Variable Account Charges........................................ 29
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THE DECLARED INTEREST OPTION.............................................. 30
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GENERAL PROVISIONS........................................................ 31
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DISTRIBUTION OF THE POLICIES.............................................. 33
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FEDERAL TAX MATTERS....................................................... 34
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ADDITIONAL INFORMATION.................................................... 38
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FINANCIAL STATEMENTS...................................................... 42
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APPENDIX A................................................................ A-1
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APPENDIX B................................................................ B-1
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APPENDIX C................................................................ C-1
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The Policy is not available in all States.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THE PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE INSURANCE
PROTECTION. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR COMPARABLE
TO AN INVESTMENT IN A MUTUAL FUND.
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DEFINITIONS
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ACCUMULATED VALUE............. The total amount invested under the Policy. It is the sum of
the values of the Policy in each subaccount of the Variable
Account, the value of the Policy in the Declared Interest
Option and any outstanding Policy Debt.
ADMINISTRATIVE OFFICE......... The administrative offices of the Company at 5400 University
Avenue, West Des Moines, Iowa 50266.
ATTAINED AGE.................. The Insured's age on his or her last birthday on the Policy
Date plus the number of Policy Years since the Policy Date.
BENEFICIARY................... The person or entity named by the Policyowner in the
application or by later designation to receive the death
proceeds upon the death of the Insured.
BUSINESS DAY.................. Each day that the New York Stock Exchange is open for
trading, except the day after Thanksgiving, the day before
Christmas (in 1998) and any day on which the Home Office is
closed because of a weather-related or comparable type of
emergency and is unable to segregate orders and redemption
requests received on that day.
COMPANY....................... American Equity Investment Life Insurance Company located at
5000 Westown Parkway, Suite 440, West Des Moines, Iowa 50266
DECLARED INTEREST OPTION...... A part of the Company's General Account. Net Premiums may be
allocated, and Accumulated Value may be transferred, to the
Declared Interest Option. Accumulated Value in the Declared
Interest Option is credited with interest at a declared
annual rate guaranteed to be at least 4.0%.
DELIVERY DATE................. The date which the Policy is issued and mailed to the
Policyowner.
DUE PROOF OF DEATH............ Proof of death that is satisfactory to the Company. Such
proof may consist of the following if acceptable to the
Company:
(a) A certified copy of the death certificate;
(b) A certified copy of a court decree reciting a
finding of death; or
(c) Any other proof satisfactory to the Company.
FUND.......................... An open-end diversified management investment company in
which the Variable Account invests.
GENERAL ACCOUNT............... The assets of the Company other than those allocated to the
Variable Account or any other separate account.
GRACE PERIOD.................. The 61-day period beginning on the date the Company sends
notice to the Policyowner that Net Accumulated Value or Net
Surrender Value is insufficient to cover the monthly
deduction.
INSURED....................... The person upon whose life the Policy is issued.
INVESTMENT OPTION............. A separate investment portfolio of a Fund.
MATURITY DATE................. The Insured's Attained Age 115. It is the date on which the
Policy terminates and the Policy's Accumulated Value less
Policy Debt becomes payable to the Policyowner or the
Policyowner's estate.
MONTHLY DEDUCTION DAY......... The same date in each month as the Policy Date. The monthly
deduction is made on the Business Day coinciding with or
immediately following the Monthly Deduction Day. (See
"CHARGES AND DEDUCTIONS--Monthly Deduction.")
NET ASSET VALUE............... The total current value of each Subaccount's securities,
cash, receivables and other assets less liabilities.
NET ACCUMULATED VALUE......... The Accumulated Value of the Policy reduced by any
outstanding Policy Debt and increased by any unearned loan
interest.
NET PREMIUM................... The amount of premium remaining after the premium expense
charge (see "CHARGES AND DEDUCTIONS--Premium Expense
Charge") has been deducted. This amount will be allocated,
according to the Policyowner's instructions, among the
Subaccounts of the Variable Account and the Declared
Interest Option.
NET SURRENDER VALUE........... The Surrender Value minus any Policy Debt plus any unearned
loan interest.
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PARTIAL WITHDRAWAL FEE........ A fee assessed at the time of any partial withdrawal, equal
to the lesser of $25 or 2% of the amount withdrawn.
POLICY........................ The flexible premium variable life insurance policy offered
by the Company and described in this Prospectus, which term
includes the Policy described in this Prospectus, the Policy
application, any supplemental applications and any
endorsements.
POLICY ANNIVERSARY............ The same date in each year as the Policy Date.
POLICY DATE................... The date set forth on the Policy data page which is used to
determine Policy Years, Policy Months and Policy
Anniversaries. The Policy Date may, but will not always,
coincide with the effective date of insurance coverage under
the Policy. (See "THE POLICY--Purchasing the Policy.")
POLICY DEBT................... The sum of all outstanding Policy Loans and any due and
unpaid Policy Loan interest.
POLICY LOAN................... An amount borrowed by the Policyowner from the Company for
which the Policy serves as the sole security. Interest on
Policy Loans is payable in advance (for the remainder of the
Policy Year) upon taking a Policy Loan and upon each Policy
Anniversary thereafter (for the following Policy Year) until
the Policy Loan is repaid.
POLICY MONTH.................. A one-month period beginning on a Monthly Deduction Day and
ending on the day immediately preceding the next Monthly
Deduction Day.
POLICYOWNER................... The person who owns a Policy. The original Policyowner is
named in the application.
POLICY YEAR................... A twelve-month period that starts on the Policy Date or on a
Policy Anniversary.
SPECIFIED AMOUNT.............. The minimum death benefit payable under a Policy so long as
the Policy remains in force. The Specified Amount as of the
Policy Date is set forth on the data page in each Policy.
SUBACCOUNT.................... A subdivision of the Variable Account which invests
exclusively in shares of a designated Investment Option of a
Fund.
SURRENDER CHARGE.............. A charge assessed at the time of any surrender during the
first ten Policy Years and for ten years following an
increase in Specified Amount.
SURRENDER VALUE............... The Accumulated Value minus the Surrender Charge.
TARGET PREMIUM................ A premium amount specified by the Company. It is used to
calculate the premium expense charge during time periods
when the Company has declared a premium expense charge less
than the 7.0% guaranteed premium expense charge. The Company
may declare a lower percentage of premium expense charge on
premiums paid in excess of the Target Premium during a
Policy Year. It is also used to calculate compensation to
registered representatives.
UNIT VALUE.................... The value determined by dividing each Subaccount's Net Asset
Value by the number of units outstanding at the time of
calculation.
VALUATION PERIOD.............. The period between the close of business (3:00 p.m. central
time) on a Business Day and the close of business on the
next Business Day.
VARIABLE ACCOUNT.............. American Equity Life Variable Account, a separate investment
account established by the Company to receive and invest the
Net Premiums paid under the Policies.
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SUMMARY OF THE POLICY
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THE FOLLOWING SUMMARY OF PROSPECTUS INFORMATION SHOULD
BE READ IN CONJUNCTION WITH THE DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, THE DESCRIPTION OF THE POLICY CONTAINED IN
THIS PROSPECTUS ASSUMES THAT THE POLICY IS IN FORCE AND
THAT THERE IS NO OUTSTANDING POLICY DEBT.
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THE POLICY Under the Policy, subject to certain limitations, the
Policyowner has flexibility in determining the frequency
and amount of premiums. (See "THE POLICY-- Premiums.")
The amount and/or duration of the life insurance coverage
and the Accumulated Value of the Policy is not guaranteed
and may increase or decrease, depending upon the
investment experience of the assets supporting the
Policy. Accordingly, the Policyowner bears the investment
risk of any depreciation of, but reaps the benefit of any
appreciation in, the value of the underlying assets. As
long as the Policy remains in force, the Policy will
provide for death proceeds payable to the Beneficiary
upon the Insured's death, the accumulation of Accumulated
Value, withdrawal and surrender options and policy loan
privileges. The minimum Specified Amount for which a
Policy will be issued is normally $50,000, although the
Company may in its discretion issue Policies with
Specified Amounts of less than $50,000.
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THE VARIABLE ACCOUNT Net Premiums will be allocated to the Declared Interest
Option if they are received either before the date the
Company obtains a signed notice from the Policyowner that
the Policy has been received, or before the end of
25-days after the Delivery Date. Upon the earlier of (i)
the date the Company obtains a signed notice from the
Policyowner that the Policy has been received, or (ii) 25
days after the Delivery Date, the Accumulated Value in
the Declared Interest Option automatically will be
allocated, without charge, among the Subaccounts and
Declared Interest Option in accordance with the
Policyowner's allocation instructions. Net Premiums
received on or after (i) or (ii) above are allocated in
accordance with the instructions of the Policyowner, to
the Variable Account, the Declared Interest Option, or
both. (See "THE POLICY--Premiums--ALLOCATIONS OF NET
PREMIUMS.") The Variable Account consists of fifteen
Subaccounts: the Value Growth Subaccount, the High Grade
Bond Subaccount, the High Yield Bond Subaccount, the
Money Market Subaccount, the Blue Chip Subaccount, the
Equity Income Subaccount, the Mid-Cap Growth Subaccount,
the New America Growth Subaccount, the Personal Strategy
Balanced Subaccount, the International Stock Subaccount,
the Capital Appreciation Subaccount, the Disciplined
Stock Subaccount, the Growth and Income Subaccount, the
International Equity Subaccount and the Small Cap
Subaccount. Each Subaccount invests exclusively in shares
of the corresponding Investment Option.
Accumulated Value will, and death proceeds may, vary with
the investment experience of the Subaccounts, as well as
with the frequency and amount of premium payments, any
partial withdrawals and any charges imposed in connection
with the Policy. (See "POLICY BENEFITS--Accumulated Value
Benefits.")
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THE DECLARED INTEREST OPTION
As an alternative to the Variable Account, the
Policyowner may allocate or transfer all or a portion of
the Accumulated Value to the Declared Interest Option,
which guarantees a specified minimum rate of return. (See
"THE DECLARED INTEREST OPTION.")
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PREMIUMS The Company may require the Policyowner to pay an initial
premium that, when reduced by the premium expense charge
(see "CHARGES AND DEDUCTIONS-- Premium Expense Charge"),
will be sufficient to pay the monthly deduction for the
first Policy Month. Each Policyowner will determine a
planned periodic premium schedule. The Policyowner is not
required to pay premiums in accordance with the planned
periodic premium schedule. (See "THE
POLICY--Premiums--PLANNED PERIODIC PREMIUMS.") The
schedule will provide for a premium payment of a level
amount at a fixed interval over a specified period of
time. Failure to pay premiums in accordance with the
schedule will not itself cause the Policy to lapse. (See
"THE
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POLICY--Policy Lapse and Reinstatement--LAPSE.") Subject
to certain restrictions, unscheduled premium payments may
also be made. (See "THE POLICY-- Premiums--UNSCHEDULED
PREMIUMS.")
A Policy will lapse during the first three Policy Years
when Net Accumulated Value is insufficient on a Monthly
Deduction Day to cover the monthly deduction, or after
three Policy Years when Net Surrender Value is
insufficient on a Monthly Deduction Day to cover the
monthly deduction (see "CHARGES AND DEDUCTIONS--Monthly
Deduction"), and a Grace Period expires without a
sufficient payment (see "THE POLICY--Policy Lapse and
Reinstatement--LAPSE"). With respect to premiums,
therefore, the Policy differs in two important ways from
a conventional life insurance policy. First, the failure
to pay a planned periodic premium will not in itself
automatically cause the Policy to lapse. Second, a Policy
can lapse even if planned periodic premiums or premiums
in other amounts have been paid.
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POLICY BENEFITS ACCUMULATED VALUE BENEFITS. The Policy provides for an
Accumulated Value. The Accumulated Value will reflect the
amount and frequency of premium payments, the investment
experience of the chosen subaccounts of the Variable
Account, the interest earned on the Accumulated Value in
the Declared Interest Option, any Policy Loans, any
partial surrenders and the charges imposed in connection
with the Policy. The entire investment risk for amounts
allocated to the Variable Account is borne by the
Policyowner; the Company does not guarantee a minimum
Accumulated Value. (See "POLICY BENEFITS--Accumulated
Value Benefits--CALCULATION OF ACCUMULATED VALUE.")
The Policyowner may, at any time, surrender a Policy and
receive the Net Surrender Value. Subject to certain
limitations, the Policyowner may also obtain a partial
withdrawal of Net Accumulated Value (minimum $500) at any
time prior to the Maturity Date. Partial withdrawals will
reduce both the Accumulated Value and death proceeds
payable under the Policy. (See "POLICY
BENEFITS--Accumulated Value Benefits--SURRENDER AND
WITHDRAWAL PRIVILEGES.") A charge will be assessed upon
surrender or partial withdrawal. (See "CHARGES AND
DEDUCTIONS--Partial Withdrawal Fee, and --Surrender
Charge.")
TRANSFERS. A Policyowner may transfer amounts (minimum
$100) among the subaccounts of the Variable Account an
unlimited number of times in a Policy Year; however, only
one transfer per Policy Year may be made between the
Declared Interest Option and the Variable Account. The
first transfer in a Policy Year is free; subsequent
transfers in that Policy Year will be assessed a charge
of $25. The transfer charge, unless paid in cash, will be
deducted from the amount transferred. (See "POLICY
BENEFITS--Transfers.") A transfer from the Variable
Account to the Declared Interest Option requested in
connection with the exercise of the special transfer
privilege under the Policy (see "THE POLICY--Special
Transfer Privilege") will not be considered a transfer
for purposes of the one-transfer limit or the $25 charge.
A transfer made in connection with the initial allocation
of Net Premiums (see "THE POLICY--Premiums--ALLOCATION OF
NET PREMIUMS") will not be considered a transfer for
purposes of the one-transfer limit or the $25 charge.
POLICY LOANS. So long as a Policy is in force and has a
positive Net Surrender Value, the Policyowner may borrow
up to 90% of the Policy's Net Surrender Value as of the
end of the Valuation Period during which the request for
the Policy Loan is received at the Home Office, less any
previously outstanding Policy Debt. (See "POLICY
BENEFITS-- Loan Benefits.") A loan taken from, or secured
by, a Policy may have federal income tax consequences.
(See "FEDERAL TAX MATTERS--Policy Proceeds.")
DEATH PROCEEDS. The Policies provide for the payment of
death proceeds following receipt by the Company (at its
Home Office) of Due Proof of Death of the Insured. The
Policy contains two death benefit options. Under Option
A, the death benefit is the greater of the sum of the
Specified Amount and the Policy's Accumulated Value, or
the Accumulated Value multiplied by the specified amount
factor for the Insured's Attained Age, as set forth in
the Policy. Under Option B, the death benefit is the
greater of the Specified Amount, or the Accumulated Value
multiplied by the specified
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amount factor for the Insured's Attained Age, as set
forth in the Policy. For this purpose, all calculations
are made as of the end of the Business Day coinciding
with or immediately following the date of death.
Under either death benefit option, so long as the Policy
remains in force, the death benefit will not be less than
the Specified Amount of the Policy on the date of death.
The death benefit may, however, exceed the Specified
Amount. The amount by which the death benefit exceeds the
Specified Amount depends upon the death benefit option
chosen and the Accumulated Value of the Policy. (See
"POLICY BENEFITS-- Death Proceeds.") To determine the
death proceeds, the death benefit will be reduced by any
outstanding Policy Debt and increased by any unearned
loan interest and any premiums paid after the date of
death. The proceeds may be paid in a lump sum or in
accordance with a payment option. (See "POLICY
BENEFITS--Payment Options.")
Anytime after the first Policy Year, the Policyowner may,
subject to certain restrictions, adjust the death benefit
payable under the Policy by increasing or decreasing the
Specified Amount. (See "POLICY BENEFITS--Death
Proceeds--CHANGE IN EXISTING COVERAGE.") In addition, the
Policyowner may, at any time, change the death benefit
option in effect. (See "POLICY BENEFITS--Death
Proceeds--CHANGE IN DEATH BENEFIT OPTION.")
BENEFITS AT MATURITY. If the Insured is alive and the
Policy is in force on the Maturity Date, the Policyowner
will be paid the Accumulated Value of the Policy as of
the end of the Business Day coinciding with or
immediately following the Maturity Date, reduced by any
outstanding Policy Debt.
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CHARGES PREMIUM EXPENSE CHARGE. The Net Premium equals the
premium paid less a premium expense charge. The premium
expense charge is 7.0% of each premium up to the Target
Premium (or 2% for each premium over the Target Premium)
and is used to compensate the Company for expenses
incurred in connection with the distribution of the
Policies and for premium taxes imposed by various states
and subdivisions thereof. (See "CHARGES AND
DEDUCTIONS--Premium Expense Charge.")
ACCUMULATED VALUE CHARGES. Accumulated Value will be
reduced each Policy Month on the Monthly Deduction Day by
a monthly deduction equal to the sum of a cost of
insurance charge, the cost of any additional insurance
benefits added by rider and a policy expense charge of
$5.00 per month (guaranteed not to exceed $7.00 per
month). In addition, during the first twelve Policy
Months and during the twelve Policy Months immediately
following an increase in Specified Amount, the monthly
deduction will include a first year monthly
administrative charge. This charge is $0.05 per $1,000 of
Specified Amount or increase in Specified Amount and is
guaranteed not to exceed $0.07 per $1,000 of Specified
Amount. Also, during the first twelve Policy Months, the
monthly deduction will include a first year monthly
expense charge of $5.00 per month (guaranteed not to
exceed $7.00 per month). The monthly deduction will vary
in amount from month to month. (See "CHARGES AND
DEDUCTIONS--Monthly Deduction.")
Upon partial withdrawal of a Policy, a fee of the lesser
of $25 or 2% of the amount withdrawn will be assessed. At
the time of surrender, a charge will apply during the
first ten Policy Years, as well as during the first ten
Policy Years following an increase in Specified Amount.
The surrender charge is an amount per $1,000 of Specified
Amount which varies by age, sex, underwriting category
and Policy Year. The surrender charge applicable to each
Policyowner will be listed in the Policy. (See "CHARGES
AND DEDUCTIONS--Partial Withdrawal Fee, and --Surrender
Charge.") During a Policy Year, a $25 charge may be
assessed for the second and subsequent transfers of
assets among the Subaccounts and between the Variable
Account and the Declared Interest Option. (See "CHARGES
AND DEDUCTIONS--Transfer Charge.")
CHARGES AGAINST THE VARIABLE ACCOUNT. A daily charge at
the rate of .0024548% of the average daily net assets of
each Subaccount will be imposed to compensate the Company
for certain mortality and expense risks incurred in
connection with the Policies. (See "CHARGES AND
DEDUCTIONS--Variable Account Charges.") This
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corresponds to an effective annual rate of 0.90%. (This
charge is guaranteed not to exceed .0028618% of the
average daily net assets of each Subaccount, which
corresponds to an effective annual rate of 1.05%.)
Currently, no charge is made to the Variable Account for
federal income taxes that may be attributable to the
Variable Account. The Company may, however, make such a
charge in the future.
INVESTMENT OPTION EXPENSES. In addition, because the
Variable Account purchases shares of the selected
Investment Options, the value of the net assets of the
Variable Account will reflect the investment advisory fee
and other expenses incurred by each Investment Option.
The fees and expenses for 1997 were as indicated in the
table below. (See "CHARGES AND DEDUCTIONS--Variable
Account Charges--INVESTMENT OPTION EXPENSES.")
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OTHER EXPENSES TOTAL EXPENSES
ADVISORY (AFTER WAIVER OR (AFTER WAIVER OR
INVESTMENT OPTION FEE REIMBURSEMENT) REIMBURSEMENT)
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EquiTrust Variable Insurance
Series Fund*
Value Growth 0.45% 0.10% 0.55%(1)
High Grade Bond 0.30% 0.22% 0.52%
High Yield Bond 0.45% 0.12% 0.57%(1)
Money Market 0.25% 0.33% 0.48%(1)
Blue Chip 0.20% 0.13% 0.33%
T. Rowe Price Equity Series, Inc.
Equity Income 0.85% 0.00% 0.85%(2)
Mid-Cap Growth 0.85% 0.00% 0.85%(2)
New America Growth 0.85% 0.00% 0.85%(2)
Personal Strategy Balanced 0.90% 0.00% 0.90%(2)
T. Rowe Price International Series,
Inc.
International Stock 1.05% 0.00% 1.05%(2)
Dreyfus Variable Investment Fund
Capital Appreciation Portfolio 0.75%(3) 0.05% 0.80%(4)
Disciplined Stock Portfolio 0.75% 0.27% 1.02%(4)
Growth and Income Portfolio 0.75% 0.05% 0.80%(4)
International Equity Portfolio 0.75% 0.31% 1.06%(4)
Small Cap Portfolio 0.75% 0.03% 0.78%(4)
</TABLE>
* The annual investment option expenses for each
Investment Option of the Fund are net of certain
reimbursements by the Fund's investment adviser.
Operating expense (including the investment
advisory fee but excluding brokerage, interest,
taxes and extraordinary expenses) of an
Investment Option that exceed 1.50% of the
Investment Option's average daily net assets for
any fiscal year are reimbursed by the Fund's
investment adviser up to the amount of the
advisory fee. In addition, the investment
adviser has voluntarily agreed to reimburse each
Portfolio for expenses that exceed 0.65%. Absent
the reimbursements, the total expenses for the
Investment Options for the 1997 fiscal year
would have been: Value Growth 0.58%, High Grade
Bond 0.57%, High Yield Bond 0.65% and Money
Market 0.55%.
(1) Total annual investment option expenses have
been restated for the reduction in management
fees from 0.50% to 0.45% for the Value Growth
and High Yield Bond Investment Options and 0.30%
to 0.25% for the Money Market Investment Option,
effective May 1, 1997.
(2) Total annual investment option expenses are an
all-inclusive fee and pay for investment
management services and other operating costs.
8
<PAGE>
(3) The advisory fee is a combined investment
advisory and sub-investment advisory fee.
(4) Total expenses were not reduced for the 1997
fiscal year by any waiver or reimbursement.
- --------------------------------------------------------------------------------
DISTRIBUTION OF THE POLICIES
The Policies will be distributed by registered
representatives of broker-dealers who have entered into
written selling agreements with American Equity Capital,
Inc., the principal underwriter of the Policies. American
Equity Capital, Inc. is registered as a broker-dealer
with the Securities and Exchange Commission and is a
member of the National Association of Securities Dealers,
Inc.
- --------------------------------------------------------------------------------
TAX TREATMENT If a Policy is issued on the basis of a standard premium
class, while there is some uncertainty, the Company
believes that the Policy should qualify as a life
insurance contract for federal income tax purposes. If a
Policy is issued on a substandard basis, it is not clear
whether or not the Policy would qualify as a life
insurance contract for federal income tax purposes.
Assuming that a Policy qualifies as a life insurance
contract for federal income tax purposes, the Accumulated
Value under a Policy should be subject to the same
federal income tax treatment as Accumulated value under a
conventional fixed-benefit Policy. Under existing tax
law, the Policyowner is not deemed to be in constructive
receipt of Accumulated Values under a Policy until there
is a distribution from the Policy. Like death benefits
payable under conventional life insurance policies, death
proceeds payable under a Policy should be completely
excludable from the gross income of the Beneficiary. As a
result, the Beneficiary generally will not be taxed on
these proceeds. (See "FEDERAL TAX MATTERS.")
- --------------------------------------------------------------------------------
CANCELLATION PRIVILEGE The Policyowner is granted a 20-day period following
receipt of the Policy in which to examine and return the
Policy. The Policyowner will receive the greater of
premiums paid or the Policy's Accumulated Value plus an
amount equal to any charges which have been deducted from
premiums, Accumulated Value and the Variable Account.
(See "THE POLICY--Examination of Policy (Cancellation
Privilege).")
- --------------------------------------------------------------------------------
ILLUSTRATIONS Sample projections of hypothetical Policy values are
included starting at page A-1 of this Prospectus. These
projections of hypothetical values may be helpful in
understanding the long-term effects of different levels
of investment performance, charges and deductions,
electing one or the other death benefit option and
generally in comparing this Policy to other life
insurance policies. NONETHELESS, THE ILLUSTRATIONS ARE
BASED ON HYPOTHETICAL INVESTMENT RATES OF RETURN AND ARE
NOT A REPRESENTATION OF PAST OR FUTURE PERFORMANCE.
Actual rates of return may be more or less than those
reflected in the illustrations and, therefore, actual
values will be different from those illustrated.
This Prospectus describes only those aspects of the
Policy that relate to the Variable Account, except where
Declared Interest Option matters are specifically
mentioned. For a brief summary of the aspects of the
Policy relating to the Declared Interest Option, see "THE
DECLARED INTEREST OPTION."
- --------------------------------------------------------------------------------
AMERICAN EQUITY INVESTMENT LIFE INSURANCE
COMPANY AND THE VARIABLE ACCOUNT
- --------------------------------------------------------------------------------
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
The Company is a full service underwriter of annuity and
insurance products which was incorporated in the State of
Iowa on December 19, 1980. The Company markets its
products through a network of over 4,500 independent
agents in the states of Alabama, Arizona, Arkansas,
California, Colorado, Delaware, Florida, Georgia, Hawaii,
Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Maryland, Michigan, Minnesota, Missouri,
Montana, Nebraska, Nevada, New Mexico, North Dakota,
Ohio, Oregon, Pennsylvania, South Carolina, South Dakota,
Texas, Utah, Washington, West Virginia, Wisconsin,
Wyoming and the District of Columbia.
9
<PAGE>
- --------------------------------------------------------------------------------
THE VARIABLE ACCOUNT The Variable Account was established by the Company as a
separate account on January 12, 1998. The Variable
Account will receive and invest the Net Premiums paid
under the Policies. In addition, the Variable Account may
receive and invest net premiums for any other variable
life insurance policies issued in the future by the
Company.
Although the assets in the Variable Account are the
property of the Company, the assets in the Variable
Account attributable to the Policies generally are not
chargeable with liabilities arising out of any other
business which the Company may conduct. The assets of the
Variable Account are available to cover the general
liabilities of the Company only to the extent that the
Variable Account's assets exceed its liabilities arising
under the Policies and any other policies supported by
the Variable Account. The Company has the right to
transfer to the General Account any assets of the
Variable Account which are in excess of such reserves and
other policy liabilities.
The Variable Account currently is divided into fifteen
Subaccounts but may, in the future, include additional
subaccounts. Each Subaccount invests exclusively in
shares of a single corresponding Investment Option.
Income and realized and unrealized gains or losses from
the assets of each Subaccount are credited to or charged
against, that Subaccount without regard to income, gains
or losses from any other Subaccount.
The Variable Account has been registered as a unit
investment trust under the Investment Company Act of 1940
and meets the definition of a separate account under the
federal securities laws. Registration with the Securities
and Exchange Commission does not involve supervision of
the management or investment practices or policies of the
Variable Account or the Company by the Commission. The
Variable Account is also subject to the laws of the State
of Iowa which regulate the operations of insurance
companies domiciled in Iowa.
- --------------------------------------------------------------------------------
INVESTMENT OPTIONS The Variable Account invests in shares of the Investment
Options. The Investment Options currently include the
Value Growth Portfolio, High Grade Bond Portfolio, High
Yield Bond Portfolio, Money Market Portfolio and Blue
Chip Portfolio of EquiTrust Variable Insurance Series
Fund; the Equity Income Portfolio, Mid-Cap Growth
Portfolio, New America Portfolio and Personal Strategy
Balanced Portfolio of T. Rowe Price Equity Series, Inc.
and International Stock Portfolio of T. Rowe Price
International Series, Inc.; and the Dreyfus Variable
Investment Fund: Capital Appreciation Portfolio, Dreyfus
Variable Investment Fund: Disciplined Stock Portfolio,
Dreyfus Variable Investment Fund: Growth and Income
Portfolio, Dreyfus Variable Investment Fund:
International Equity Portfolio and Dreyfus Variable
Investment Fund: Small Cap Portfolio. The Variable
Account may, in the future, provide for additional
investment options. Each Investment Option has its own
investment objectives and the income and losses for each
Investment Option will be determined separately.
Each of these Investment Options was formed as an
investment vehicle for insurance company separate
accounts. The investment objectives and policies of
certain Investment Options are similar to the investment
objectives and policies of other portfolios that may be
managed by the same investment adviser, sub-investment
adviser or manager. The investment results of the
Investment Options, however, may be higher or lower than
the results of such other portfolios. There can be no
assurance, and no representation is made, that the
investment results of any of the Investment Options will
be comparable to the investment results of any other
portfolio, even if the other portfolio has the same
investment adviser, sub-investment adviser or manager.
The investment objectives and policies of each Investment
Option are summarized below. There is no assurance that
any Investment Option will achieve its stated objectives.
More detailed information, including a description of
risks, may be found in the prospectus for each Investment
Option, which must accompany or precede this Prospectus
and which should be read carefully and retained for
future reference.
10
<PAGE>
EQUITRUST VARIABLE INSURANCE SERIES FUND
EquiTrust Investment Management Services, Inc. is the
investment adviser to the Fund. The Fund is comprised of
six portfolios, the following five of which are available
under the Contract:
VALUE GROWTH PORTFOLIO. This Portfolio seeks
long-term capital appreciation. The Portfolio pursues
its objective by investing primarily in equity
securities of companies that the investment adviser
believes have a potential to earn a high return on
equity and/or in equity securities that the
investment adviser believes are undervalued by the
market place. Such equity securities may include
common stock, preferred stock and securities
convertible or exchangeable into common stock.
HIGH GRADE BOND PORTFOLIO. This Portfolio seeks as
high a level of current income as is consistent with
a high grade portfolio of debt securities. The
Portfolio will pursue this objective by investing
primarily in debt securities rated AAA, AA or A by
Standard & Poor's Corporation and/or Aaa, Aa or A by
Moody's Investors Service, Inc., and in securities
issued or guaranteed by the United States government
or its agencies or instrumentalities.
HIGH YIELD BOND PORTFOLIO. This Portfolio seeks, as a
primary objective, as high a level of current income
as is consistent with investment in a portfolio of
fixed-income securities rated in the lower categories
of established rating services. As a secondary
objective, the Portfolio seeks capital appreciation
when consistent with its primary objective. The
Portfolio pursues these objectives by investing
primarily in fixed-income securities rated Baa or
lower by Moody's Investors Service, Inc. and/or BBB
or lower by Standard & Poor's Corporation, or in
unrated securities of comparable quality. AN
INVESTMENT IN THIS PORTFOLIO MAY ENTAIL GREATER THAN
ORDINARY FINANCIAL RISK. (See the Fund Prospectus
"PRINCIPAL RISK FACTORS--Special Considerations--High
Yield Bonds.")
MONEY MARKET PORTFOLIO. This Portfolio seeks maximum
current income consistent with liquidity and
stability of principal. The Portfolio will pursue
this objective by investing in high quality
short-term money market instruments. AN INVESTMENT IN
THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO
ASSURANCE THAT THE MONEY MARKET PORTFOLIO WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE.
BLUE CHIP PORTFOLIO. This Portfolio seeks growth of
capital and income. The Portfolio pursues this
objective by investing primarily in common stocks of
well-capitalized, established companies. Because this
Portfolio may be invested heavily in particular
stocks or industries, an investment in this Portfolio
may entail relatively greater risk of loss.
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Associates, Inc. is the investment adviser
to the Fund.
EQUITY INCOME PORTFOLIO. This Portfolio seeks to
provide substantial dividend income and long-term
capital appreciation by investing primarily in
established companies considered by the adviser to
have favorable prospects for both increasing
dividends and capital appreciation.
MID-CAP GROWTH PORTFOLIO. This Portfolio seeks
long-term capital appreciation by investing primarily
in common stocks of medium-sized (mid-cap) growth
companies which offer the potential for above-average
earnings growth.
NEW AMERICA GROWTH PORTFOLIO. This Portfolio seeks
long-term capital growth by investing primarily in
common stocks of U.S. growth companies operating in
service industries.
11
<PAGE>
PERSONAL STRATEGY BALANCED PORTFOLIO. This Portfolio
seeks the highest total return over time consistent
with an emphasis on both capital appreciation and
income.
T. ROWE PRICE INTERNATIONAL SERIES, INC.
Rowe Price-Fleming International, Inc. is the investment
adviser to the Fund.
INTERNATIONAL STOCK PORTFOLIO. This Portfolio seeks
to provide capital appreciation through investments
primarily in established companies based outside the
United States.
DREYFUS VARIABLE INVESTMENT FUND
The Dreyfus Corporation serves as the investment adviser
to the Fund. Fayez Sarofim and Co. serves as the
sub-investment adviser to the Dreyfus Variable Investment
Fund: Capital Appreciation Portfolio. The following Fund
portfolios are available under the Contract.
DREYFUS VARIABLE INVESTMENT FUND: CAPITAL
APPRECIATION PORTFOLIO. This Portfolio primarily
seeks long-term capital growth, consistent with the
preservation of capital; current income is a
secondary investment objective. This Portfolio
invests primarily in the common stocks of domestic
and foreign issuers.
DREYFUS VARIABLE INVESTMENT FUND: DISCIPLINED STOCK
PORTFOLIO. This Portfolio seeks to provide investment
results that are greater than the total return
performance of publicly-traded common stocks in the
aggregate, as represented by the Standard & Poor's
500 Composite Stock Price Index. The Portfolio will
use quantitative statistical modeling techniques to
construct a portfolio in an attempt to achieve its
investment objective, without assuming undue risk
relative to the broad stock market.
DREYFUS VARIABLE INVESTMENT FUND: GROWTH AND INCOME
PORTFOLIO. This Portfolio seeks to provide long-term
capital growth, current income and growth of income,
consistent with reasonable investment risk by
investing primarily in equity securities, debt
securities, and money market instruments of domestic
and foreign issuers.
DREYFUS VARIABLE INVESTMENT FUND: INTERNATIONAL
EQUITY PORTFOLIO. This Portfolio seeks to maximize
capital growth through investments in equity
securities of foreign issuers located throughout the
world.
DREYFUS VARIABLE INVESTMENT FUND: SMALL CAP
PORTFOLIO. This Portfolio seeks maximum capital
appreciation by investing primarily in common stocks
of domestic and foreign issuers. The Portfolio will
be particularly alert to companies considered by the
adviser to be emerging smaller-sized companies which
are believed to be characterized by new or innovative
products, services or processes which should enhance
prospects for growth in future earnings.
The Funds currently sell shares: (a) to the Variable
Account as well as to separate accounts of insurance
companies that may or may not be affiliated with the
Company or each other; and (b) to separate accounts to
serve as the underlying investment for both variable
insurance policies and variable annuity contracts. The
Company currently does not foresee any disadvantages to
Policyowners arising from the sale of shares to support
variable annuity contracts and variable life insurance
policies, or from shares being sold to separate accounts
of insurance companies that may or may not be affiliated
with the Company. However, the Company intends to monitor
events in order to identify any material irreconcilable
conflicts that might possibly arise. In that event, it
would determine what action, if any, should be taken in
response to those events or conflicts. In addition, if
the Company believes that a Fund's response to any of
those events or conflicts insufficiently protects
Policyowners, it will take appropriate action on its own,
including withdrawing the Variable Account's investment
in that Fund. (See the Fund prospectuses for more
detail.)
12
<PAGE>
The Company may receive compensation from an affiliate(s)
of one or more of the Funds based upon an annual
percentage of the average assets held in the Investment
Options by the Company. These amounts are intended to
compensate the Company for administrative and other
services provided by the Company to the Funds and/or
affiliate(s).
Each Fund is registered with the Securities and Exchange
Commission as an open-end, diversified management
investment company. Such registration does not involve
supervision of the management or investment practices or
policies of the Fund by the Securities and Exchange
Commission.
- --------------------------------------------------------------------------------
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to compliance
with applicable law, to make additions to, deletions from
or substitutions for the shares of the Investment Options
that are held by the Variable Account or that the
Variable Account may purchase. If the shares of an
Investment Option are no longer available for investment
or if, in its judgment, further investment in any
Investment Option should become inappropriate in view of
the purposes of the Variable Account, the Company
reserves the right to dispose of the shares of any
Investment Option and to substitute shares of another
Investment Option. The Company will not substitute any
shares attributable to a Policyowner's Accumulated Value
in the Variable Account without notice to and prior
approval of the Securities and Exchange Commission, to
the extent required by the Investment Company Act of 1940
or other applicable law. Nothing contained in this
Prospectus shall prevent the Variable Account from
purchasing other securities for other series or classes
of policies, or from permitting a conversion between
series or classes of policies on the basis of requests
made by Policyowners.
The Company also reserves the right to establish
additional subaccounts of the Variable Account, each of
which would invest in shares of a new Investment Option
with a specified investment objective. New subaccounts
may be established when, in the sole discretion of the
Company, marketing, tax or investment conditions warrant,
and any new subaccounts may be made available to existing
Policyowners on a basis to be determined by the Company.
Subject to obtaining any approvals or consents required
by applicable law, the assets of one or more Subaccounts
may be transferred to any other Subaccount(s), or one or
more Subaccounts may be eliminated or combined with any
other Subaccount(s) if, in the sole discretion of the
Company, marketing, tax or investment conditions warrant.
In the event of any such substitution or change, the
Company may, by appropriate endorsement, make such
changes in these and other policies as may be necessary
or appropriate to reflect such substitution or change. If
deemed by the Company to be in the best interests of
persons having voting rights under the Policies, the
Variable Account may be operated as a management company
under the Investment Company Act of 1940, may be
deregistered under that Act in the event such
registration is no longer required, or, subject to
obtaining any approvals or consents required by
applicable law, may be combined with other Company
separate accounts. To the extent permitted by applicable
law, the Company may also transfer the assets of the
Variable Account associated with the Policies to another
separate account. In addition, the Company may, when
permitted by law, restrict or eliminate any voting rights
of Policyowners or other persons who have voting rights
as to the Variable Account. (See "ADDITIONAL
INFORMATION--Voting Rights.")
- --------------------------------------------------------------------------------
THE POLICY
- --------------------------------------------------------------------------------
PURPOSE OF THE POLICY The Policy is designed to provide the Policyowner with
both lifetime insurance protection and significant
flexibility in connection with the amount and frequency
of premium payments and the level of death proceeds
payable under a Policy. Unlike conventional life
insurance, the Policyowner is not required to pay
scheduled premiums to keep a Policy in force, but may,
subject to certain limitations, vary the frequency and
amount of premium payments. Moreover, the Policy allows a
Policyowner to adjust the level of death proceeds payable
under a Policy, without
13
<PAGE>
having to purchase a new policy, by increasing or
decreasing the Specified Amount. Thus, as insurance needs
or financial conditions change, the Policyowner has the
flexibility to adjust death proceeds and vary premium
payments.
The Policy varies from conventional fixed-benefit life
insurance in a number of additional respects. Because the
death proceeds may, and the Accumulated Value will, vary
with the investment experience of the chosen Subaccounts,
the Policyowner bears the investment risk of any
depreciation of, but reaps the benefit of any
appreciation in, the value of the underlying assets. As a
result, whether or not a Policy continues in force may
depend in part upon the investment experience of the
chosen Subaccounts. The failure to pay a planned periodic
premium will not necessarily cause the Policy to lapse,
but the Policy could lapse even if planned periodic
premiums have been paid, depending upon the investment
experience of the Variable Account.
Life Insurance is not a short-term investment.
Prospective policyowners should consider their need for
insurance coverage and the Policy's long-term investment
potential. A prospective policyowner who already has life
insurance coverage should consider whether or not
changing or adding to existing coverage would be
advantageous. Generally, it is not advisable to purchase
another policy to replace an existing policy.
- --------------------------------------------------------------------------------
PURCHASING THE POLICY Before it will issue a Policy, the Company must receive a
completed application, including payment of the initial
premium, at its Administrative Office. A Policy
ordinarily will be issued only for Insureds who are 0 to
80 years of age at their last birthday and who supply
satisfactory evidence of insurability to the Company.
Acceptance is subject to the Company's underwriting rules
and the Company may, in its sole discretion, reject any
application or premium for any reason. The minimum
Specified Amount for which a Policy will be issued is
normally $50,000, although the Company may, in its
discretion, issue Policies with Specified Amounts of less
than $50,000.
The Policy Date will be the later of (i) the date of the
initial application, or (ii) if additional medical or
other information is required pursuant to the Company's
underwriting rules, the date all such additional
information is received by the Company at its
Administrative Office. The Policy Date may also be any
other date mutually agreed to by the Company and the
Policyowner. If the later of (i) and (ii) above is the
29th, 30th or 31st of any month, the Policy Date will be
the 28th of such month. The Policy Date is the date used
to determine Policy Years, Policy Months and Policy
Anniversaries. The Policy Date may, but will not always,
coincide with the effective date of insurance coverage
under the Policy.
The effective date of insurance coverage under the Policy
will be the later of (i) the Policy Date, (ii) if an
amendment to the initial application is required pursuant
to the Company's underwriting rules, the date the Insured
signs the last such amendment, or (iii) the date on which
the full initial premium is received by the Company at
its Administrative Office.
- --------------------------------------------------------------------------------
PREMIUMS Subject to certain limitations, a Policyowner has
flexibility in determining the frequency and amount of
premiums.
PREMIUM FLEXIBILITY. Unlike conventional insurance
policies, the Policy frees the Policyowner from the
requirement that premiums be paid in accordance with a
rigid and inflexible premium schedule. The Company may
require the Policyowner to pay an initial premium that,
when reduced by the premium expense charge (see "CHARGES
AND DEDUCTIONS--Premium Expense Charge"), will be
sufficient to pay the monthly deduction for the first
Policy Month. Thereafter, subject to the minimum and
maximum premium limitations described below, a
Policyowner may also make unscheduled premium payments at
any time prior to the Maturity Date.
PLANNED PERIODIC PREMIUMS. Each Policyowner will
determine a planned periodic premium schedule that
provides for the payment of a level premium over a
specified
14
<PAGE>
period of time on a quarterly, semi-annual or annual
basis. The Company may, at its discretion, permit planned
periodic payments to be made on a monthly basis. Periodic
reminder notices ordinarily will be sent to the
Policyowner for each planned periodic premium. Depending
on the duration of the planned periodic premium schedule,
the timing of planned payments could affect the tax
status of the Policy. (See "FEDERAL TAX MATTERS.")
The Policyowner is not required to pay premiums in
accordance with the planned periodic premium schedule.
Furthermore, the Policyowner has considerable flexibility
to alter the amount, frequency and the time period over
which planned periodic premiums are paid; however, no
planned periodic payment may be less than $100 without
the Company's consent. Changes in the planned premium
schedule may have federal income tax consequences. (See
"FEDERAL TAX MATTERS.")
The payment of a planned periodic premium will not
guarantee that the Policy remains in force. Instead, the
duration of the Policy depends upon the Policy's
Accumulated Value. Thus, even if planned periodic
premiums are paid by the Policyowner, the Policy will
nevertheless lapse if, during the first three Policy
Years, Net Accumulated Value or, after three Policy
Years, Net Surrender Value is insufficient on a Monthly
Deduction Day to cover the monthly deduction (see
"CHARGES AND DEDUCTIONS--Monthly Deduction") and a Grace
Period expires without a sufficient payment (see "THE
POLICY--Policy Lapse and Reinstatement--LAPSE").
UNSCHEDULED PREMIUMS. Each unscheduled premium payment
must be at least $100; however, the Company may, in its
discretion, waive this minimum requirement. The Company
reserves the right to limit the number and amount of
unscheduled premium payments. An unscheduled premium
payment may have federal income tax consequences. (See
"FEDERAL TAX MATTERS.")
PREMIUM LIMITATIONS. In no event may the total of all
premiums paid, both planned periodic and unscheduled,
exceed the applicable maximum premium limitation imposed
by federal tax laws. Because the maximum premium
limitation is in part dependent upon the Specified Amount
for each Policy, changes in the Specified Amount may
affect this limitation. If at any time a premium is paid
which would result in total premiums exceeding the
applicable maximum premium limitation, the Company will
accept only that portion of the premium which will make
total premiums equal the maximum. Any part of the premium
in excess of that amount will be returned and no further
premiums will be accepted until allowed by the applicable
maximum premium limitation.
PAYMENT OF PREMIUMS. Payments made by the Policyowner
will be treated first as payment of any outstanding
Policy Debt unless the Policyowner indicates that the
payment should be treated otherwise. Where no indication
is made, any portion of a payment that exceeds the amount
of any outstanding Policy Debt will be treated as a
premium payment.
NET PREMIUMS. The Net Premium is the amount available for
investment. The Net Premium equals the premium paid less
the premium expense charge. (See "CHARGES AND
DEDUCTIONS--Premium Expense Charge.")
ALLOCATION OF NET PREMIUMS. In the application for a
Policy, the Policyowner can allocate Net Premiums or
portions thereof to the Subaccounts, to the Declared
Interest Option, or both. Net Premiums will be allocated
to the Declared Interest Option if they are received
either before the date the Company obtains a signed
notice from the Policyowner that the Policy has been
received, or before the end of 25-days after the Delivery
Date. Upon the earlier of (i) the date the Company
obtains a signed notice from the Policyowner that the
Policy has been received, or (ii) 25 days after the
Delivery Date, the Accumulated Value in the Declared
Interest Option automatically will be allocated, without
charge, among the Subaccounts and Declared Interest
Option in accordance with the Policyowner's allocation
instructions. Net Premiums received on or after (i) or
(ii) above are allocated in accordance with the
instructions of the Policyowner, to the Variable Account,
the Declared Interest
15
<PAGE>
Option, or both. The Policyowner does not waive his
cancellation privilege by sending the signed notice of
receipt of the Policy to the Company (see "THE POLICY--
Examination of Policy (Cancellation Privilege)").
The minimum percentage of each premium that may be
allocated to any subaccount of the Variable Account or to
the Declared Interest Option is 10%; no fractional
percentages will be permitted. The allocation for future
Net Premiums may be changed without charge, at any time
while the Policy is in force, by providing the Company
with written notice on a form acceptable to the Company
signed by the Policyowner. The change will take effect on
the date the written notice is received at the
Administrative Office and will have no effect on prior
cash values.
- --------------------------------------------------------------------------------
POLICY LAPSE AND REINSTATEMENT
LAPSE. Unlike conventional life insurance policies, the
failure to make a planned periodic premium payment will
not itself cause a Policy to lapse. Lapse will only occur
during the first three Policy Years when Net Accumulated
Value is insufficient on a Monthly Deduction Day to cover
the monthly deduction, or after three Policy Years when
Net Surrender Value is insufficient on a Monthly
Deduction Day to cover the monthly deduction (see
"CHARGES AND DEDUCTIONS--Monthly Deduction"), and a Grace
Period expires without a sufficient payment. Insurance
coverage will continue during the Grace Period, but the
Policy will be deemed to have no Accumulated Value for
purposes of Policy Loans and surrenders during such Grace
Period. The death proceeds payable during the Grace
Period will equal the amount of the death proceeds
payable immediately prior to the commencement of the
Grace Period, reduced by any due and unpaid monthly
deductions.
To avoid lapse and termination of the Policy without
value, the Company must receive from the Policyowner
during the Grace Period a premium payment that, when
reduced by the premium expense charge (see "CHARGES AND
DEDUCTIONS-- Premium Expense Charge"), will be at least
equal to three times the monthly deduction due on the
Monthly Deduction Day immediately preceding the Grace
Period (see "CHARGES AND DEDUCTIONS--Monthly Deduction").
A Grace Period of 61 days will commence on the date the
Company sends a notice of any insufficiency to the
Policyowner.
REINSTATEMENT. Prior to the Maturity Date, a lapsed
Policy may be reinstated at any time within five years of
the Monthly Deduction Day immediately preceding the Grace
Period which expired without payment of the required
premium. Reinstatement is effected by submitting the
following items to the Company:
1. A written application for reinstatement signed
by the Policyowner and the Insured;
2. Evidence of insurability satisfactory to the
Company;
3. A premium that, after the deduction of the
premium expense charge, is at least sufficient
to keep the Policy in force for three months;
and
4. An amount equal to the monthly cost of insurance
for the two Policy Months prior to lapse.
(State law may limit the premium to be paid on
reinstatement to an amount less than that described.) To
the extent that the first year monthly administrative
charge was not deducted for a total of twelve Policy
Months prior to lapse, such charge will continue to be
deducted following reinstatement of the Policy until such
charge has been assessed, both before and after the
lapse, for a total of 12 Policy Months. (See "CHARGES AND
DEDUCTIONS--Monthly Deduction.") The Company will not
reinstate a Policy surrendered for its Net Surrender
Value. The lapse of a Policy with loans outstanding may
have adverse tax consequences (see "FEDERAL TAX
MATTERS--Policy Proceeds").
The effective date of the reinstated Policy will be the
Monthly Deduction Day coinciding with or next following
the date the Company approves the application for
reinstatement.
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<PAGE>
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EXAMINATION OF POLICY (CANCELLATION PRIVILEGE)
The Policyowner may cancel the Policy by delivering or
mailing written notice or sending a telegram to the
Company at its Administrative Office, and returning the
Policy to the Company at its Administrative Office before
midnight of the twentieth day after the Policyowner
receives the Policy. Notice given by mail and return of
the Policy by mail are effective on being postmarked,
properly addressed and postage prepaid.
With respect to all Policies, the Company will refund,
within seven days after receipt of satisfactory notice of
cancellation and the returned Policy at its
Administrative Office, the greater of premiums paid or
the Policy's Accumulated Value plus an amount equal to
any charges which have been deducted from premiums,
Accumulated Value and the Variable Account.
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SPECIAL TRANSFER PRIVILEGE
A Policyowner may, at any time prior to the Maturity Date
while the Policy is in force, convert the Policy to a
flexible premium fixed-benefit life insurance policy by
requesting that all of the Accumulated Value in the
Variable Account be transferred to the Declared Interest
Option. The Policyowner may exercise this special
transfer privilege once each Policy Year. Once a
Policyowner exercises the special transfer privilege, all
future premium payments automatically will be credited to
the Declared Interest Option, until such time as the
Policyowner requests a change in allocation. No charge
will be imposed for any transfers resulting from the
exercise of the special transfer privilege.
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POLICY BENEFITS
- --------------------------------------------------------------------------------
While a Policy is in force, it provides for certain
benefits prior to the Maturity Date. Subject to certain
limitations, the Policyowner may at any time obtain all
or a portion of the Net Accumulated Value by surrendering
or taking a partial withdrawal from the Policy. (See
"POLICY BENEFITS--Accumulated Value Benefits--SURRENDER
AND WITHDRAWAL PRIVILEGES.") In addition, the Policyowner
has certain policy loan privileges under the Policies.
(See "POLICY BENEFITS--Loan Benefits--POLICY LOANS.") The
Policy also provides for the payment of death proceeds
upon the death of the Insured under one of two death
benefit options selected by the Policyowner (see "POLICY
BENEFITS--Death Proceeds--DEATH BENEFIT OPTIONS"), and
benefits upon the maturity of a Policy (see "POLICY
BENEFITS--Benefits at Maturity").
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ACCUMULATED VALUE BENEFITS
SURRENDER AND WITHDRAWAL PRIVILEGES. At any time prior to
the Maturity Date while the Policy is in force, a
Policyowner may surrender the Policy or make a partial
withdrawal by sending a written request to the Company at
its Administrative Office. A surrender charge will apply
to any surrender during the first ten Policy Years, as
well as during the first ten years following an increase
in Specified Amount. A Partial Withdrawal Fee to cover
the cost of processing a withdrawal will be payable upon
each partial withdrawal. (See "CHARGES AND
DEDUCTIONS--Partial Withdrawal Fee, and --Surrender
Charge.") Surrender and withdrawal proceeds ordinarily
will be mailed to the Policyowner within seven days after
the Company receives a signed request for a surrender at
its Administrative Office, although payments may be
postponed under certain circumstances. (See "GENERAL
PROVISIONS--Postponement of Payments.")
SURRENDERS. The amount payable upon surrender of the
Policy is the Net Surrender Value at the end of the
Valuation Period during which the request is received.
This amount may be paid in a lump sum or under one of the
payment options specified in the Policy, as requested by
the Policyowner. (See "POLICY BENEFITS--Payment
Options.") Upon surrender, all insurance in force will
terminate. For a discussion of the tax consequences
associated with Surrenders, see "FEDERAL TAX MATTERS."
PARTIAL WITHDRAWALS. A Policyowner may obtain a portion
of the Policy's Net Surrender Value. The amount requested
for partial withdrawal must be at least $500 and cannot
exceed the lesser of (1) the Net Surrender Value less
$500, or (2) 90% of the Net Surrender Value. The Partial
Withdrawal Fee will be deducted from the remaining
17
<PAGE>
Accumulated Value. The Policyowner may request that the
proceeds of a partial withdrawal be paid in a lump sum or
under one of the payment options specified in the Policy.
(See "POLICY BENEFITS--Payment Options.")
A partial withdrawal (together with the Partial
Withdrawal Fee) will be allocated among the Subaccounts
and the Declared Interest Option in accordance with the
written instructions of the Policyowner. If no such
instructions are received with the request for partial
withdrawal, the partial withdrawal will be allocated
among the Subaccounts and the Declared Interest Option in
the same proportion that the Accumulated Value in each of
the Subaccounts and the Accumulated Value in the Declared
Interest Option, reduced by any outstanding Policy Debt,
bears to the total Accumulated Value on the date the
request is received at the Administrative Office.
Partial withdrawals will affect both the Policy's
Accumulated Value and the death proceeds payable under
the Policy. The Policy's Accumulated Value will be
reduced by the amount of the partial withdrawal. If the
death benefit payable under either death benefit option
both before and after the partial withdrawal is equal to
the Accumulated Value multiplied by the specified amount
factor set forth in the Policy, a partial withdrawal will
result in a reduction in death proceeds equal to the
amount of the partial withdrawal, multiplied by the
specified amount factor then in effect. If the death
benefit is not so affected by the specified amount
factor, the reduction in death proceeds will be equal to
the partial withdrawal. (See "POLICY BENEFITS--Death
Proceeds.")
Partial withdrawals will reduce the Policy's Specified
Amount by the amount of Accumulated Value withdrawn if
Option B is in effect at the time of the withdrawal. If
Option A is in effect at the time of the withdrawal,
there will be no effect on Specified Amount. (See "POLICY
BENEFITS--Death Proceeds--DEATH BENEFIT OPTIONS.") The
Specified Amount remaining in force after a partial
withdrawal may not be less than the minimum Specified
Amount for the Policy in effect on the date of the
partial withdrawal, as published by the Company. As a
result, the Company will not process any partial
withdrawal that would reduce the Specified Amount below
this minimum. If increases in the Specified Amount
previously have occurred, a partial withdrawal will first
reduce the Specified Amount of the most recent increase,
then the next most recent increases successively, then
the coverage under the original application. Thus, a
partial withdrawal may either increase or decrease the
amount of the cost of insurance charge, depending upon
the particular circumstances. (See "CHARGES AND
DEDUCTIONS--Monthly Deduction--COST OF INSURANCE.") For a
discussion of the tax consequences associated with
partial withdrawals, see "FEDERAL TAX MATTERS."
NET ACCUMULATED VALUE. Net Accumulated Value equals the
Policy's Accumulated Value reduced by any outstanding
Policy Debt and increased by any unearned loan interest.
CALCULATION OF ACCUMULATED VALUE. The Policy provides for
the accumulation of Accumulated Value. Accumulated Value
will be determined on each Business Day. A Policy's
Accumulated Value will reflect a number of factors,
including Net Premiums paid, partial withdrawals, Policy
Loans, charges assessed in connection with the Policy,
the interest earned on the Accumulated Value in the
Declared Interest Option and the investment performance
of the Subaccounts to which the Accumulated Value is
allocated. There is no guaranteed minimum Accumulated
Value. The Accumulated Value of the Policy is equal to
the sum of the Accumulated Values in each Subaccount,
plus the Accumulated Value in the Declared Interest
Option, including amounts transferred to the Declared
Interest Option to secure outstanding Policy Debt.
As of the Policy Date, the Policy's Accumulated Value
equals the initial Net Premium less the monthly deduction
made on the Policy Date.
On the Business Day coinciding with or immediately
following the date the Company receives notice that the
Policy has been received by the Policyowner, but no later
than 25 days after the Delivery Date, the Policy's
Accumulated Value (all of which is in the Declared
Interest Option) will be transferred automatically among
the Subaccounts
18
<PAGE>
and the Declared Interest Option in accordance with such
percentage allocation instructions. At the end of each
Valuation Period thereafter, the Accumulated Value in a
Subaccount will equal:
(1) The total Subaccount units represented by
the accumulated value at the end of the
preceding valuation period, multiplied by
the Subaccount's unit value for the current
valuation period; PLUS
(2) Any Net Premiums received during the current
Valuation Period which are allocated to the
Subaccount; PLUS
(3) All Accumulated Values transferred to the
Subaccount from the Declared Interest Option
or from another Subaccount during the
current Valuation Period; MINUS
(4) All Accumulated Values transferred from the
Subaccount to another Subaccount or to the
Declared Interest Option during the current
Valuation Period, including amounts
transferred to the Declared Interest Option
to secure Policy Debt; MINUS
(5) All partial withdrawals (and any portion of
the Partial Withdrawal Fee) deducted from
the Subaccount during the current Valuation
Period; MINUS
(6) The portion of any monthly deduction charged
to the Subaccount during the current
Valuation Period to cover the Policy Month
following the Monthly Deduction Day.
The Policy's total Accumulated Value in the Variable
Account equals the sum of the Policy's Accumulated Value
in each Subaccount.
UNIT VALUE. Each Subaccount has a Unit Value. When Net
Premiums are allocated to, or other amounts are
transferred into, a Subaccount, a number of units are
purchased based on the Unit Value of the Subaccount as of
the end of the Valuation Period during which the transfer
is made. Likewise, when amounts are transferred out of a
Subaccount, units are redeemed on the same basis. On any
day, a Policy's Accumulated Value in a Subaccount is
equal to the number of units held in such Subaccount,
multiplied by the Unit Value of such Subaccount on that
date.
For each Subaccount, the Unit Value was initially set at
$10 when the Subaccount first purchased shares of the
designated Investment Option. The Unit Value for each
subsequent valuation period is calculated by dividing (a)
by (b) where:
(a) is (1) the Net Asset Value of the Subaccount
at the end of the preceding Valuation
Period, plus (2) the investment income and
capital gains, realized or unrealized,
credited to the net assets of that
Subaccount during the Valuation Period for
which the Unit Value 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 the Subaccount for
taxes, or any amount set aside during the
Valuation Period by the Company as a
provision for taxes attributable to the
operation or maintenance of that Subaccount;
and minus (5) a charge equal to .0024548% of
the average daily net assets of the
Subaccount for each day in the Valuation
Period. This corresponds to an effective
annual rate of 0.90% of the average daily
net assets of the Subaccount for mortality
and expense risks incurred in connection
with the Policies. (This charge is
guaranteed not to exceed .0028618% of the
average daily net assets on each Subaccount,
which corresponds to an effective annual
rate of 1.05%.)
(b) is the number of units outstanding at the
end of the preceding Valuation Period.
The Unit Value for a Valuation Period applies for each
day in the period. The assets in the Variable Account
will be valued at their fair market value in accordance
with accepted accounting practices and applicable laws
and regulations.
19
<PAGE>
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TRANSFERS Policyowners may transfer amounts among the Subaccounts
an unlimited number of times in a Policy Year; however,
only one transfer per Policy Year may be made between the
Declared Interest Option and the Variable Account.
Transfers are made by written request to the
Administrative Office or, if the Policyowner has elected
the "Telephone Transfer Authorization" on the
supplemental application, by calling the Administrative
Office toll-free at 888-349-4650. The amount of the
transfer must be at least $100 or the total Accumulated
Value in the Subaccount or in the Declared Interest
Option (reduced, in the case of the Declared Interest
Option, by any outstanding Policy Debt), if less than
$100. The Company may, at its discretion, waive the $100
minimum requirement. The transfer will be effective as of
the end of the Valuation Period during which the request
is received at the Administrative Office.
The first transfer in each Policy Year will be made
without charge; each time amounts are subsequently
transferred in that Policy Year, a transfer charge of $25
may be assessed. The transfer charge, unless paid in
cash, will be deducted from the amount transferred. Once
a Policy is issued, the amount of the transfer charge is
guaranteed for the life of the Policy. (See "CHARGES AND
DEDUCTIONS--Transfer Charge.")
For purposes of these limitations and charges, all
transfers effected on the same day will be considered a
single transfer.
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LOAN BENEFITS POLICY LOANS. So long as the Policy remains in force and
has a positive Net Surrender Value, a Policyowner may
borrow money from the Company at any time using the
Policy as the sole security for the Policy Loan. A loan
taken from, or secured by, a Policy may have federal
income tax consequences. (See "FEDERAL TAX MATTERS.")
The maximum amount that may be borrowed at any time is
90% of the Net Surrender Value as of the end of the
Valuation Period during which the request for the Policy
Loan is received at the Administrative Office. The
Company's claim for repayment of Policy Debt has priority
over the claims of any assignee or other person.
During any time that there is outstanding Policy Debt,
payments made by the Policyowner will be treated first as
payment of outstanding Policy Debt, unless the
Policyowner indicates that the payment should be treated
otherwise. Where no indication is made, any portion of a
payment that exceeds the amount of any outstanding Policy
Debt will be treated as a premium payment.
ALLOCATION OF POLICY LOAN. When a Policy Loan is made, an
amount equal to the Policy Loan will be segregated within
the Declared Interest Option as security for the Policy
Loan. If, immediately prior to the Policy Loan, the
Accumulated Value in the Declared Interest Option less
Policy Debt outstanding is less than the amount of such
Policy Loan, the difference will be transferred from the
subaccounts of the Variable Account, which have
Accumulated Value, in the same proportions that the
Policy's Accumulated Value in each Subaccount bears to
the Policy's total Accumulated Value in the Variable
Account. Accumulated Values will be determined as of the
end of the Valuation Period during which the request for
the Policy Loan is received at the Administrative Office.
Loan proceeds will normally be mailed to the Policyowner
within seven days after receipt of a written request.
Postponement of a Policy Loan may take place under
certain circumstances. (See "GENERAL
PROVISIONS--Postponement of Payments.")
Amounts segregated within the Declared Interest Option as
security for Policy Debt will bear interest at an
effective annual rate set by the Company. (See "POLICY
BENEFITS--Loan Benefits--EFFECT ON INVESTMENT
PERFORMANCE.")
LOAN INTEREST CHARGED. The interest rate charged on
Policy Loans is not fixed. The maximum annual loan
interest rate will be no greater than the "Published
Monthly Average of the Composite Yield on Seasoned
Corporate Bonds" as published by Moody's Investors
Service, Inc. or any successor thereto for the calendar
month ending two months before the date on which the rate
is determined; or 5.5%. The
20
<PAGE>
Company may at any time elect to change the interest
rate. The Company will send notice of any change in rate
to the Policyowner. The new rate will take effect on the
Policy Anniversary coinciding with or next following the
date the rate is changed.
Interest is payable in advance at the time any Policy
Loan is made (for the remainder of the Policy Year) and
on each Policy Anniversary thereafter (for the entire
Policy Year) so long as there is Policy Debt outstanding.
Interest payable at the time a Policy Loan is made will
be subtracted from the loan proceeds. Thereafter,
interest not paid when due will be added to the existing
Policy Debt and bear interest at the same rate charged
for Policy Loans. The amount equal to unpaid interest
will be segregated within the Declared Interest Option in
the same manner that amounts for Policy Loans are
segregated within the Declared Interest Option. (See
"POLICY BENEFITS-- Loan Benefits--ALLOCATION OF POLICY
LOAN.")
Because interest is charged in advance, any interest that
has not been earned will be added to the death benefit
payable at the Insured's death and to the Accumulated
Value upon complete surrender, and will be credited to
the Accumulated Value in the Declared Interest Option
upon repayment of Policy Debt.
EFFECT ON INVESTMENT PERFORMANCE. Amounts transferred
from the Variable Account as security for Policy Debt
will no longer participate in the investment performance
of the Variable Account. All amounts held in the Declared
Interest Option as security for Policy Debt will be
credited with interest on each Monthly Deduction Day at
an effective annual rate equal to the greater of 4.0% or
the current effective loan interest rate minus no more
than 3.0%, as determined and declared by the Company. No
additional interest will be credited to these amounts.
The interest credited will remain in the Declared
Interest Option unless and until transferred by the
Policyowner to the Variable Account, but will not be
segregated within the Declared Interest Option as
security for Policy Debt.
From time to time, the Company may allow, by Company
practice, a loan spread of 0% on the gain in a Policy in
effect a minimum of ten years.
Even though Policy Debt may be repaid in whole or in part
at any time prior to the Maturity Date if the Policy is
still in force, Policy Loans will affect the Accumulated
Value of a Policy and may affect the death proceeds
payable. The effect could be favorable or unfavorable
depending upon whether the investment performance of the
Subaccount(s) from which the Accumulated Value was
transferred is less than or greater than the interest
rates actually credited to the Accumulated Value
segregated within the Declared Interest Option as
security for Policy Debt while Policy Debt is
outstanding. In comparison to a Policy under which no
Policy Loan was made, Accumulated Value will be lower
where such interest rates credited were less than the
investment performance of the Subaccount(s), but will be
greater where such interest rates were greater than the
performance of the Subaccount(s). In addition, death
proceeds will reflect a reduction of the death benefit by
any outstanding Policy Debt.
POLICY DEBT. Policy Debt equals the sum of all unpaid
Policy Loans and any due and unpaid policy loan interest.
Policy Debt is not included in Net Accumulated Value,
which is equal to Accumulated Value less Policy Debt. If,
during the first three Policy Years, Net Accumulated
Value or, after three Policy Years, Net Surrender Value
is insufficient on a Monthly Deduction Day to cover the
monthly deduction (see "Charges and Deductions--Monthly
Deduction"), the Company will notify the Policyowner. To
avoid lapse and termination of the Policy without value
(see "THE POLICY--Policy Lapse and
Reinstatement--LAPSE"), the Policyowner must, during the
Grace Period, make a premium payment that, when reduced
by the premium expense charge (see "CHARGES AND
DEDUCTIONS--Premium Expense Charge"), will be at least
equal to three times the monthly deduction due on the
Monthly Deduction Day immediately preceding the Grace
Period (see "CHARGES AND DEDUCTIONS--Monthly Deduction").
Therefore the greater the Policy Debt under a Policy, the
more likely it would be to lapse.
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<PAGE>
REPAYMENT OF POLICY DEBT. Policy Debt may be repaid in
whole or in part any time during the Insured's life and
before the Maturity Date so long as the Policy is in
force. Any Policy Debt not repaid is subtracted from the
death benefit payable at the Insured's death, from
Surrender Value upon surrender or from the maturity
benefit. Any payments made by a Policyowner will be
treated first as the repayment of any outstanding Policy
Debt, unless the Policyowner indicates otherwise. Upon
repayment of Policy Debt, the portion of the Accumulated
Value in the Declared Interest Option securing the repaid
portion of the Policy Debt will no longer be segregated
within the Declared Interest Option as security for
Policy Debt, but will remain in the Declared Interest
Option unless and until transferred to the Variable
Account by the Policyowner.
For a discussion of the tax consequences associated with
Policy Loans and lapses, see "FEDERAL TAX MATTERS."
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DEATH PROCEEDS So long as the Policy remains in force, the Policy
provides for the payment of death proceeds upon the death
of the Insured. Proceeds will be paid to the primary
Beneficiary or a contingent Beneficiary. One or more
primary Beneficiaries or contingent Beneficiaries may be
named. If no Beneficiary survives the Insured, the death
proceeds will be paid to the Policyowner or his estate.
Death proceeds may be paid in a lump sum or under a
payment option. (See "POLICY BENEFITS--Payment Options.")
To determine the death proceeds, the death benefit will
be reduced by any outstanding Policy Debt and increased
by any unearned loan interest and any premiums paid after
the date of death. Proceeds will ordinarily be mailed
within seven days after receipt by the Company of Due
Proof of Death. Payment may, however, be postponed under
certain circumstances. (See "GENERAL PROVISIONS--
Postponement of Payments.") The Company pays interest on
those proceeds, at an annual rate of no less than 3.0% or
any rate required by law, from the date of death to the
date payment is made.
DEATH BENEFIT OPTIONS. Policyowners designate in the
initial application one of two death benefit options
offered under the Policy. The amount of the death benefit
payable under a Policy will depend upon the option in
effect at the time of the Insured's death. Under Option
A, the death benefit will be equal to the greater of (i)
the sum of the current Specified Amount and the
Accumulated Value, or (ii) the Accumulated Value
multiplied by the specified amount factor. Accumulated
Value will be determined as of the end of the Business
Day coinciding with or immediately following the date of
death. The specified amount factor is 2.50 for an Insured
Attained Age 40 or below on the date of death. For
Insureds with an Attained Age over 40 on the date of
death, the factor declines with age as shown in the
Specified Amount Factor Table in Appendix B. Accordingly,
under Option A, the death proceeds will always vary as
the Accumulated Value varies (but will never be less than
the Specified Amount). Policyowners who prefer to have
favorable investment performance and additional premiums
reflected in increased death benefits generally should
select Option A.
Under Option B, the death benefit will be equal to the
greater of the current Specified Amount or the
Accumulated Value (determined as of the end of the
Business Day coinciding with or immediately following the
date of death) multiplied by the specified amount factor.
The specified amount factor is the same as under Option
A. Accordingly, under Option B the death benefit will
remain level at the Specified Amount unless the
Accumulated Value multiplied by the specified amount
factor exceeds the current Specified Amount, in which
case the amount of the death benefit will vary as the
Accumulated Value varies. Policyowners who are satisfied
with the amount of their insurance coverage under the
Policy and who prefer to have favorable investment
performance and additional premiums reflected in higher
Accumulated Value, rather than increased death benefits,
generally should select Option B.
Examples illustrating Option A and Option B can be found
in Appendix B.
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<PAGE>
CHANGE IN DEATH BENEFIT OPTION. The death benefit option
in effect may be changed at any time by sending a written
request for the change to the Company at its
Administrative Office. The effective date of such a
change will be the Monthly Deduction Day coinciding with
or immediately following the date the change is approved
by the Company. A change in death benefit options may
have federal income tax consequences. (See "FEDERAL TAX
MATTERS.")
If the death benefit option is changed from Option A to
Option B, the current Specified Amount will not change.
If the benefit option is changed from Option B to Option
A, the current Specified Amount will be reduced by an
amount equal to the Accumulated Value on the effective
date of the change. A change in the death benefit option
may not be made if it would result in a Specified Amount
which is less than the minimum Specified Amount in effect
on the effective date of the change or if after the
change the Policy would no longer qualify as life
insurance under federal tax law.
No charges will be imposed in connection with a change in
death benefit option; however, a change in death benefit
option will affect the cost of insurance charges. (See
"CHARGES AND DEDUCTIONS--Monthly Deduction--COST OF
INSURANCE.")
CHANGE IN EXISTING COVERAGE. After a Policy has been in
force for one Policy Year, a Policyowner may adjust the
existing insurance coverage by increasing or decreasing
the Specified Amount. To make a change, the Policyowner
must send a written request to the Company at its Home
Office. Any change in the Specified Amount may affect the
cost of insurance rate and the net amount at risk, both
of which will affect a Policyowner's cost of insurance
charge. (See "CHARGES AND DEDUCTIONS-- Monthly
Deduction--COST OF INSURANCE RATE, and --NET AMOUNT AT
RISK.") If decreases in the Specified Amount cause the
premiums paid to exceed the maximum premium limitations
imposed by federal tax law (see "THE POLICY--Premiums--
PREMIUM LIMITATIONS"), the decrease will be limited to
the extent necessary to meet these requirements. A change
in existing coverage may have federal income tax
consequences. (See "FEDERAL TAX MATTERS--Tax Treatment of
Policy Benefits.")
Any decrease in the Specified Amount will become
effective on the Monthly Deduction Day coinciding with or
immediately following the date the request is approved by
the Company. The decrease will first reduce the Specified
Amount provided by the most recent increase, then the
next most recent increases successively, then the
Specified Amount under the original application. The
Specified Amount following a decrease can never be less
than the minimum Specified Amount for the Policy in
effect on the date of the decrease. A Specified Amount
decrease will not reduce the Surrender Charge.
To apply for an increase, evidence of insurability
satisfactory to the Company must be provided. Any
approved increase will become effective on the Monthly
Deduction Day coinciding with or immediately following
the date the request is approved by the Company. An
increase will not become effective, however, if the
Policy's Accumulated Value on the effective date would
not be sufficient to cover the deduction for the
increased cost of the insurance for the next Policy
Month. A Specified Amount increase is subject to its own
Surrender Charge.
CHANGES IN INSURANCE PROTECTION. A Policyowner may
increase or decrease the pure insurance protection
provided by a Policy--the difference between the death
benefit and the Accumulated Value--in one of several ways
as insurance needs change. These ways include increasing
or decreasing the Specified Amount of insurance, changing
the level of premium payments and, to a lesser extent,
partially withdrawing Accumulated Value. Although the
consequences of each of these methods will depend upon
the individual circumstances, they may be summarized as
follows:
(a) A decrease in the Specified Amount will,
subject to the applicable specified amount
factor limitations (see "POLICY
BENEFITS--Death Proceeds-- DEATH BENEFIT
OPTIONS"), decrease the pure insurance
protection and the cost of insurance charges
under the Policy without generally reducing
the Accumulated Value.
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<PAGE>
(b) An increase in the Specified Amount may
increase the amount of pure insurance
protection, depending on the amount of
Accumulated Value and the resultant
applicable specified amount factor. If the
insurance protection is increased, the cost
of insurance charge generally will increase
as well.
(c) If Option B is elected, an increased level
of premium payments will increase the
Accumulated Value and reduce the pure
insurance protection, until the Accumulated
Value multiplied by the applicable specified
amount factor exceeds the Specified Amount.
Increased premiums should also increase the
amount of funds available to keep the Policy
in force.
(d) If Option B is elected, a reduced level of
premium payments generally will increase the
amount of pure insurance protection,
depending on the applicable specified amount
factor. It also will result in a reduced
amount of Accumulated Value and will
increase the possibility that the Policy
will lapse.
(e) A partial withdrawal will reduce the death
benefit. (See "POLICY BENEFITS--Accumulated
Value Benefits--SURRENDER AND WITHDRAWAL
PRIVILEGES.") However, it only affects the
amount of pure insurance protection if the
death benefit payable is based on the
specified amount factor, because otherwise
the decrease in the benefit is offset by the
amount of Accumulated Value withdrawn. The
primary use of a partial withdrawal is to
withdraw cash and reduce Accumulated Value.
In comparison, an increase in the death benefit due to
the operation of the specified amount factor occurs
automatically and is intended to help assure that the
Policy remains qualified as life insurance under federal
tax law. The calculation of the death benefit based upon
the specified amount factor occurs only when the
Accumulated Value of a Policy reaches a certain
proportion of the Specified Amount (which may or may not
occur). Additional premium payments, favorable investment
performance and large initial premiums tend to increase
the likelihood of the specified amount factor becoming
operational after the first few Policy Years. Such
increases will be temporary, however, if the investment
performance becomes unfavorable and/or premium payments
are stopped or decreased.
- --------------------------------------------------------------------------------
ACCELERATED PAYMENTS OF DEATH PROCEEDS
In the event that the Insured becomes terminally ill (as
defined below), the Policyowner (if residing in a state
that has approved such an endorsement) may, by written
request and subject to the conditions stated below, have
the Company pay all or a portion of the accelerated death
benefit immediately to the Policyowner. If not attached
to the Policy beforehand, the Company will issue an
accelerated death benefit endorsement (the "Endorsement")
providing for this right.
For this purpose, an Insured is terminally ill when a
physician (as defined by the Endorsement) certifies that
he or she has a life expectancy of 12 months or less.
The accelerated death benefit is equal to the Policy's
death benefit as described on page 6, up to a maximum of
$250,000 (the $250,000 maximum applies in aggregate to
all policies issued by the Company on the Insured), less
an amount representing a discount for 12 months at the
interest rate charged for loans under the Policy. The
accelerated death benefit does not include the amount of
any death benefit payable under a rider that covers the
life of someone other than the Insured.
In the event that there is a loan outstanding under the
Policy on the date that the Policyowner requests a
payment under the Endorsement, the accelerated death
benefit is reduced by a portion of the outstanding loan
in the same proportion that the requested payment under
the Endorsement bears to the total death benefit under
the Policy. If the amount requested by the Policyowner to
be paid under the Endorsement is less than the total
death benefit under the Policy and the Specified Amount
of the Policy is equal to or greater than the minimum
Specified Amount, the Policy will remain in force with
all values and benefits under the Policy being reduced in
the same proportion that the new Policy benefit bears to
the Policy benefit before exercise of the Endorsement.
24
<PAGE>
There are several other restrictions associated with the
Endorsement. These are: (1) the Endorsement is not valid
if the Policy is within five years of being matured, (2)
the consent of any irrevocable beneficiary or assignee is
required to exercise the Endorsement, (3) the Company
reserves the right, in its sole discretion, to require
the consent of the Insured or of any beneficiary,
assignee, spouse or other party of interest before
permitting the exercise of the Endorsement, (4) the
Company reserves the right to obtain the concurrence of a
second medical opinion as to whether any Insured is
terminally ill and (5) the Endorsement is not effective
where (a) the Insured or the Policyowner would be
otherwise required by law to use the Endorsement to meet
the claims of creditors, or (b) the Insured would be
otherwise required by any government agency to exercise
the Endorsement in order to apply for, obtain or keep a
government benefit or entitlement.
The Endorsement will terminate at the earlier of the end
of the grace period for which any premium is unpaid, upon
receipt in the Administrative Office of a written request
from the Policyowner to cancel the Endorsement or upon
termination of the Policy.
Pursuant to the recently enacted Health Insurance
Portability and Accountability Act of 1996, the Company
believes that for federal income tax purposes, an
accelerated death benefit payment received under an
accelerated death benefit endorsement should be fully
excludable from the gross income of the beneficiary, as
long as the beneficiary is the insured under the Policy.
However, the Policyowner should consult a qualified tax
adviser about the consequences of adding this Endorsement
to a Policy or requesting an accelerated death benefit
payment under this Endorsement.
- --------------------------------------------------------------------------------
BENEFITS AT MATURITY If the Insured is alive and the Policy is in force on the
Maturity Date, the Company will pay to the Policyowner
the Policy's Accumulated Value as of the end of the
Business Day coinciding with or immediately following the
Maturity Date, reduced by any outstanding Policy Debt.
(See "POLICY BENEFITS--Loan Benefits--REPAYMENT OF POLICY
DEBT.") Benefits at maturity may be paid in a lump sum or
under a payment option. The Maturity Date is Attained Age
115.
- --------------------------------------------------------------------------------
PAYMENT OPTIONS Death proceeds and Accumulated Value paid at maturity, or
upon surrender or partial withdrawal of a Policy, may be
paid in whole or in part under a payment option. There
are currently five payment options available. Payments
may also be made under any new payment option available
at the time proceeds become payable. In addition,
proceeds may be paid in any other manner acceptable to
the Company.
An option may be designated in the application or by
notifying the Company in writing at its Administrative
Office. During the life of the Insured, the Policyowner
may select a payment option; in addition, during that
time the Policyowner may change a previously selected
option by sending written notice to the Company
requesting the cancellation of the prior option and the
designation of a new option. If the Policyowner has not
chosen an option prior to the Insured's death, the
Beneficiary may choose an option. The Beneficiary may
change a payment option by sending a written request to
the Company, provided that a prior option chosen by the
Policyowner is not in effect.
If no option is chosen, the Company will pay the proceeds
of the Policy in one sum. The Company will also pay the
proceeds in one sum if, (i) the proceeds are less than
$2,000; (ii) periodic payments would be less than $50; or
(iii) the payee is an assignee, estate, trustee,
partnership, corporation or association.
Amounts paid under a payment option are paid pursuant to
a payment contract and will not depend upon the
investment performance of the Variable Account. Proceeds
applied under a payment option earn interest at a rate
guaranteed to be no less than 3.0% compounded yearly. The
Company may be crediting higher interest rates on the
effective date of the payment contract. The Company may,
but is not obligated to, declare additional interest to
be applied to such funds.
If a payee dies, any remaining payments will be paid to a
contingent payee. At the death of the last payee, the
commuted value of any remaining payments will be paid
25
<PAGE>
to the last payee's estate. A payee may not withdraw
funds under a payment option unless the Company has
agreed to such withdrawal in the payment contract. The
Company reserves the right to defer a withdrawal for up
to six months and to refuse to allow partial withdrawals
of less than $250.
Payments under Options 2, 3, 4 or 5 will begin as of the
date of the Insured's death, on surrender or on the
Maturity Date. Payments under Option 1 will begin at the
end of the first interest period after the date proceeds
are otherwise payable.
OPTION 1--INTEREST INCOME. Periodic payments of
interest earned from the proceeds will be paid.
Payments can be annual, semi-annual, quarterly or
monthly, as selected by the payee, and will begin at
the end of the first period chosen. Proceeds left
under this plan will earn interest at a rate
determined by the Company, in no event less than 3.0%
compounded yearly. The payee may withdraw all or part
of the proceeds at any time.
OPTION 2--INCOME FOR A FIXED TERM. Periodic payments
will be made for a fixed term not longer than 30
years. Payments can be annual, semi-annual, quarterly
or monthly. Guaranteed amounts payable under the plan
will earn interest at a rate determined by the
Company, in no event less than 3.0% compounded
yearly.
OPTION 3--LIFE INCOME WITH TERM CERTAIN. Equal
periodic payments will be made for a guaranteed
minimum period elected. If the payee lives longer
than the minimum period, payments will continue for
his or her life. The minimum period can be 0, 5, 10,
15 or 20 years. Guaranteed amounts payable under this
plan will earn interest at a rate determined by the
Company, in no event less than 3.0% compounded
yearly.
OPTION 4--INCOME OF A FIXED AMOUNT. Equal periodic
payments of a definite amount will be paid. Payments
can be annual, semi-annual, quarterly or monthly. The
amount paid each period must be at least $20 for each
$1,000 of proceeds. Payments will continue until the
proceeds are exhausted. The last payment will equal
the amount of any unpaid proceeds. Unpaid proceeds
will earn interest at a rate determined by the
Company, in no event less than 3.0% compounded
yearly.
OPTION 5--JOINT AND TWO-THIRDS SURVIVOR MONTHLY LIFE
INCOME. Equal monthly payments will be made for as
long as two payees live. The guaranteed amount
payable under this plan will earn interest at a
minimum rate of 3.0% compounded yearly. When one
payee dies, payments of two-thirds of the original
monthly payment will be made to the surviving payee.
Payments will stop when the surviving payee dies.
ALTERNATE PAYMENT OPTION. In lieu of one of the above
options, the accumulated value, net surrender value
or death benefit, as applicable, may be settled under
any other payment option made available by the
Company or requested and agreed to by the Company.
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CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
Charges will be deducted in connection with the Policy to
compensate the Company for providing the insurance
benefits set forth in the Policy and any additional
benefits added by rider, for distributing and
administering the Policy, for applicable taxes and for
assuming certain risks in connection with the Policy. The
nature and amount of these charges are described more
fully below.
- --------------------------------------------------------------------------------
PREMIUM EXPENSE CHARGE Prior to allocation of Net Premiums among the Subaccounts
and the Declared Interest Option, premiums paid will be
reduced by a premium expense charge. The premium less the
premium expense charge equals the Net Premium.
The premium expense charge is 7.0% of each premium up to
the Target Premium (or 2% for each premium over the
Target Premium) and is intended to compensate the Company
for expenses incurred in distributing the Policy,
including agent sales commissions, the cost of printing
prospectuses and sales literature, and advertising
26
<PAGE>
costs and to compensate for the amount the Company
considers necessary to pay all taxes on premiums received
by insurance companies imposed by various states and
subdivisions thereof. Premium taxes charged by the
various states currently range from 1% to 3%.
The premium expense charge in any Policy Year is not
necessarily related to actual distribution expenses in
that year. Instead, the Company expects to incur the
majority of distribution expenses in the early Policy
Years and to recover any deficiency over the life of the
Policy and from the Company's general assets, including
amounts derived from the mortality and expense risk
charge.
- --------------------------------------------------------------------------------
MONTHLY DEDUCTION Charges will be deducted monthly from the Accumulated
Value of each Policy ("monthly deduction") to compensate
the Company for the cost of insurance coverage and any
additional benefits added by rider (See "GENERAL
PROVISIONS-- Additional Insurance Benefits"), for
underwriting and start-up expenses in connection with
issuing a Policy and for certain administrative costs.
The monthly deduction will be deducted on the Policy Date
and on each Monthly Deduction Day. (If the Monthly
Deduction Day falls on Thanksgiving, the Friday following
Thanksgiving or the weekend following Thanksgiving; or on
the 27th or 28th day of February, 1999, the monthly
deduction will be deducted on the preceding Business
Day.) It will be deducted from the Declared Interest
Option and each Subaccount in the same proportion that
the Policy's Net Accumulated Value in the Declared
Interest Option and the Policy's Accumulated Value in
each Subaccount bear to the total Net Accumulated Value
of the Policy. For purposes of making deductions from the
Declared Interest Option and the Subaccounts, Accumulated
Values will be determined as of the end of the Business
Day coinciding with or immediately following the Monthly
Deduction Day. (If the Monthly Deduction Day falls on
Thanksgiving, the Friday following Thanksgiving or the
weekend following Thanksgiving; or on the 27th or 28th
day of February, 1999, Accumulated Values will be
determined as of the end of the preceding Business Day.)
Because portions of the monthly deduction, such as the
cost of insurance, can vary from month to month, the
monthly deduction itself will vary in amount from month
to month.
The monthly deduction will be made on the Business Day
coinciding with or immediately following each Monthly
Deduction Day and will equal:
(a) the cost of insurance for the Policy; plus
(b) the cost of any optional insurance benefits
added by rider; plus
(c) the monthly policy expense charge.
During the first twelve Policy Months and during the
twelve Policy Months immediately following an increase in
Specified Amount, the monthly deduction will include a
first year monthly administrative charge.
COST OF INSURANCE. This charge is designed to compensate
the Company for the anticipated cost of paying death
proceeds to Beneficiaries of those Insureds who die prior
to the Maturity Date. The cost of insurance is determined
on a monthly basis, and is determined separately for the
initial Specified Amount and for any subsequent increases
in Specified Amount. The Company will determine the
monthly cost of insurance charge by dividing the
applicable cost of insurance rate, or rates, by 1,000 and
multiplying the result by the net amount at risk for each
Policy Month.
27
<PAGE>
NET AMOUNT AT RISK. Under Option A the net amount at risk
for a Policy Month is equal to (a) divided by (b), and
under Option B the net amount at risk for a Policy Month
is equal to (a) divided by (b), minus (c), where:
(a) is the Specified Amount;
(b) is 1.0032737;(1) and
(c) is the Accumulated Value.
The Specified Amount and the Accumulated Value will be
determined as of the end of the Business Day coinciding
with or immediately following the Monthly Deduction Day.
The net amount at risk is determined separately for the
initial Specified Amount and any increases in Specified
Amount. In determining the net amount at risk for each
Specified Amount, the Accumulated Value will be first
considered a part of the initial Specified Amount. If the
Accumulated Value exceeds the initial Specified Amount,
it will be considered to be a part of any increase in the
Specified Amount in the same order as the increases
occurred.
COST OF INSURANCE RATE. The cost of insurance rate for
the initial Specified Amount will be based on the
Insured's sex, premium class and Attained Age. For any
increase in Specified Amount, the cost of insurance rate
will be based on the Insured's sex, premium class and age
at last birthday on the effective date of the increase.
Actual cost of insurance rates may change and will be
determined by the Company based on its expectations as to
future mortality experience. However, the actual cost of
insurance rates will never be greater than the guaranteed
maximum cost of insurance rates set forth in the Policy.
These guaranteed rates are based on the 1980
Commissioners' Standard Ordinary Non-Smoker and Smoker
Mortality Table. Current cost of insurance rates are
generally less than the guaranteed maximum rates. Any
change in the cost of insurance rates will apply to all
persons of the same age, sex and premium class whose
Policies have been in force the same length of time.
The cost of insurance rates generally increase as the
Insured's Attained Age increases. The premium class of an
Insured also will affect the cost of insurance rate. The
Company currently places Insureds into a standard premium
class or into premium classes involving a higher
mortality risk. In an otherwise identical Policy,
Insureds in the standard premium class will have a lower
cost of insurance rate than those in premium classes
involving higher mortality risk. The standard premium
class is also divided into two categories: tobacco and
non-tobacco. (The Company may offer preferred classes in
addition to the standard tobacco and non-tobacco
classes.) Non-tobacco-using Insureds will generally have
a lower cost of insurance rate than similarly situated
Insureds who use tobacco, and preferred Insureds will
generally have a lower cost of insurance rate than
similarly situated standard Insureds.
The cost of insurance rate is determined separately for
the initial Specified Amount and for the amount of any
increase in Specified Amount. In calculating the cost of
insurance charge, the rate for the premium class on the
Policy Date will be applied to the net amount at risk for
the initial Specified Amount; for each increase in
Specified Amount, the rate for the premium class
applicable to the increase will be used. However, if the
death benefit is calculated as the Cash Value times the
specified amount factor, the rate for the premium class
for the most recent increase that required evidence of
insurability will be used for the amount of death benefit
in excess of the total Specified Amount.
ADDITIONAL INSURANCE BENEFITS. The monthly deduction will
include charges for any additional benefits provided by
rider. (See "GENERAL PROVISIONS--Additional Insurance
Benefits.")
- --------------
(1)Dividing by 1.0032737 reduces the net amount at risk, solely for the purposes
of computing the cost of insurance, by taking into account assumed monthly
earnings at an annual rate of 4.0%.
28
<PAGE>
MONTHLY POLICY EXPENSE CHARGE. The Company has primary
responsibility for the administration of the Policy and
the Variable Account. Policy expenses include premium
billing and collection, recordkeeping, processing death
benefit claims, cash withdrawals, surrenders and Policy
changes, and reporting and overhead costs. As
reimbursement for policy expenses related to the
maintenance of each Policy and the Variable Account, the
Company assesses a monthly policy expense charge against
each Policy. This charge currently is $5.00 per Policy
Month and is guaranteed not to exceed $7 per Policy
Month.
FIRST YEAR MONTHLY ADMINISTRATIVE CHARGE. Monthly
administrative charges will be deducted from Accumulated
Value as part of the monthly deduction during the first
twelve Policy Months and during the twelve Policy Months
immediately following an increase in Specified Amount.
The charge will compensate the Company for first year
underwriting, processing and start-up expenses incurred
in connection with the Policy and the Variable Account.
These expenses include the cost of processing
applications, conducting medical examinations,
determining insurability and the Insured's premium class,
and establishing policy records. The first year monthly
administrative charge currently is $0.05 per $1,000 of
Specified Amount, or increase in Specified Amount and is
guaranteed not to exceed $0.07 per $1,000 of Specified
Amount.
FIRST YEAR MONTHLY EXPENSE CHARGE. A monthly expense
charge will be deducted from Accumulated Value as part of
the monthly deduction during the first twelve Policy
Months. This charge currently is $5 per Policy Month and
is guaranteed not to exceed $7 per Policy Month.
- --------------------------------------------------------------------------------
TRANSFER CHARGE A transfer charge of $25 may be imposed for the second
and each subsequent transfer during a Policy Year to
compensate the Company for the costs in effectuating the
transfer. The transfer charge, unless paid in cash, will
be deducted from the amount transferred. Once a Policy is
issued, the amount of this charge is guaranteed for the
life of the Policy. The transfer charge will not be
imposed on transfers that occur as a result of Policy
Loans, the exercise of the special transfer privilege or
the initial allocation of Accumulated Value among the
Subaccounts and the Declared Interest Option following
acceptance of the Policy by the Policyowner.
Currently there is no charge for changing the net premium
allocation instructions.
- --------------------------------------------------------------------------------
PARTIAL WITHDRAWAL FEE Upon partial withdrawal of a Policy, a fee equal to the
lesser of $25 or 2% of the amount withdrawn will be
assessed to compensate the Company for costs incurred in
accomplishing the withdrawal. The fee will be deducted
from Accumulated Value.
- --------------------------------------------------------------------------------
SURRENDER CHARGE At the time of surrender, a Surrender Charge will apply
during the first ten Policy Years, as well as during the
first ten years following an increase in Specified
Amount. The Surrender Charge is an amount per $1,000 of
Specified Amount, declining to $0 in the eleventh year.
The Surrender Charge varies by age, sex, underwriting
category and Policy Year. The Surrender Charge is level
within each Policy Year. (See "Appendix C--Maximum
Surrender Charges.") At the time of a requested decrease
in Specified Amount, the full original Surrender Charge
stays in place. For issue ages below 76, the Surrender
Charge may be waived after the first Policy Year if the
insured is terminally ill or stays in a qualified nursing
care center for 90 days.
At the time of a partial withdrawal, no Surrender Charge
applies.
- --------------------------------------------------------------------------------
VARIABLE ACCOUNT CHARGES
MORTALITY AND EXPENSE RISK CHARGE. The Company deducts a
daily mortality and expense risk charge from each
Subaccount at an effective annual rate of 0.90% of the
average daily net assets of the Subaccounts and is
guaranteed not to exceed 1.05% of the average daily net
assets of the Subaccounts.
The mortality risk assumed by the Company is that
Insureds may die sooner than anticipated and therefore,
the Company may pay an aggregate amount of life insurance
proceeds greater than anticipated. The expense risk
assumed is that expenses incurred in issuing and
administering the Policies will exceed the amounts
realized from the administrative charges assessed against
the Policies.
29
<PAGE>
FEDERAL TAXES. Currently no charge is made to the
Variable Account for federal income taxes that may be
attributable to the Variable Account. The Company may,
however, make such a charge in the future. Charges for
other taxes, if any, attributable to the Account may also
be made. (See "FEDERAL TAX MATTERS--Taxation of the
Company.")
INVESTMENT OPTION EXPENSES. The value of net assets of
the Variable Account will reflect the investment advisory
fee and other expenses incurred by each Investment
Option. The investment advisory fee and other expenses
applicable to each Investment Option are listed in the
"SUMMARY OF THE POLICY" and described in the prospectus
for each Fund's Investment Option.
- --------------------------------------------------------------------------------
THE DECLARED INTEREST OPTION
- --------------------------------------------------------------------------------
Policyowners may allocate Net Premiums and transfer
Accumulated Value to the Declared Interest Option.
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS,
INTERESTS IN THE DECLARED INTEREST OPTION HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND THE
DECLARED INTEREST OPTION HAS NOT BEEN REGISTERED AS AN
INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF
1940. ACCORDINGLY, NEITHER THE DECLARED INTEREST OPTION
NOR ANY INTERESTS THEREIN ARE SUBJECT TO THE PROVISIONS
OF THESE ACTS AND, AS A RESULT, THE STAFF OF THE
SECURITIES AND EXCHANGE COMMISSION HAS NOT REVIEWED THE
DISCLOSURES IN THIS PROSPECTUS RELATING TO THE DECLARED
INTEREST OPTION. DISCLOSURES REGARDING THE DECLARED
INTEREST OPTION MAY, HOWEVER, BE SUBJECT TO CERTAIN
GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES
LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF
STATEMENTS MADE IN PROSPECTUSES.
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION The Declared Interest Option is supported by the General
Account. The General Account consists of all assets owned
by the Company other than those in the Variable Account
and other separate accounts. Subject to applicable law,
the Company has sole discretion over the investment of
the assets of the General Account.
A Policyowner may elect to allocate Net Premiums to the
Declared Interest Option, the Variable Account, or both.
The Policyowner may also transfer Accumulated Value from
the Subaccounts to the Declared Interest Option, or from
the Declared Interest Option to the Subaccounts. The
allocation or transfer of funds to the Declared Interest
Option does not entitle a Policyowner to share in the
investment experience of the General Account. Instead,
the Company guarantees that Accumulated Value in the
Declared Interest Option will accrue interest at an
effective annual rate of at least 4.0%, independent of
the actual investment experience of the General Account.
- --------------------------------------------------------------------------------
THE POLICY This Prospectus describes a flexible premium variable
life insurance policy. This Prospectus is generally
intended to serve as a disclosure document for the
aspects of the Policy involving the Variable Account. For
complete details regarding the Declared Interest Option,
see the Policy itself.
- --------------------------------------------------------------------------------
DECLARED INTEREST OPTION ACCUMULATED VALUE
Net premiums allocated to the Declared Interest Option
are credited to the Policy. The Company bears the full
investment risk for these amounts. The Company guarantees
that interest credited to each Policyowner's Accumulated
Value in the Declared Interest Option will not be less
than an effective annual rate of 4.0%. The Company may,
in its sole discretion, credit a higher rate of interest,
although it is not obligated to credit interest in excess
of 4.0% per year, and might not do so. Any interest
credited on the Policy's Accumulated Value in the
Declared Interest Option in excess of the guaranteed rate
of 4.0% per year will be determined in the sole
discretion of the Company and may be changed at any time
by the Company, in its sole discretion. The Policyowner
assumes the risk that the interest credited may not
exceed the guaranteed minimum rate of 4.0% per year. The
interest credited to the Policy's Accumulated Value in
the Declared Interest Option that equals Policy Debt may
be greater than 4.0%, but will in no event be greater
than the current effective loan interest rate minus no
more than 3.0%. From time to time, the Company may
30
<PAGE>
allow, by Company practice, a loan spread of 0% on the
gain in a Policy in effect a minimum of ten years. The
Accumulated Value in the Declared Interest Option will be
calculated no less frequently than each Monthly Deduction
Day.
The Company guarantees that, at any time prior to the
Maturity Date, the Accumulated Value in the Declared
Interest Option will not be less than the amount of the
Net Premiums allocated or Accumulated Value transferred
to the Declared Interest Option, plus interest at the
rate of 4.0% per year, plus any excess interest which the
Company credits, less the sum of all policy charges
allocable to the Declared Interest Option and any amounts
deducted from the Declared Interest Option in connection
with partial withdrawals or transfers to the Variable
Account.
- --------------------------------------------------------------------------------
TRANSFERS, PARTIAL WITHDRAWALS, SURRENDERS AND POLICY LOANS
Amounts may be transferred between the Subaccounts and
the Declared Interest Option. A transfer charge of $25
may be imposed in connection with the transfer unless
such transfer is the first transfer requested by the
Policyowner during such Policy Year. Unless paid in cash,
the transfer charge will be deducted from the amount
transferred. A Policyowner may make only one transfer
between the Variable Account and the Declared Interest
Option in each Policy Year. No more than 50% of the Net
Accumulated Value in the Declared Interest Option may be
transferred from the Declared Interest Option unless the
balance in the Declared Interest Option immediately after
the transfer will be less than $1,000. If the balance in
the Declared Interest Option after a transfer would be
less than $1,000, the full Net Accumulated Value in the
Declared Interest Option may be transferred. A
Policyowner may also make partial withdrawals, surrenders
and obtain Policy Loans from the Declared Interest Option
at any time prior to the Policy's Maturity Date.
Transfers, partial withdrawals and surrenders from, and
payments of Policy Loans allocated to, the Declared
Interest Option may be delayed for up to six months.
- --------------------------------------------------------------------------------
GENERAL PROVISIONS
- --------------------------------------------------------------------------------
THE CONTRACT The Policy is issued in consideration of the statements
in the application and the payment of the initial
premium. The Policy, the application, and any
supplemental applications and endorsements make up the
entire contract. In the absence of fraud, the statements
made in an application or supplemental application will
be treated as representations and not as warranties. No
statement will void the Policy or be used in defense of a
claim unless contained in the application or any
supplemental application.
- --------------------------------------------------------------------------------
INCONTESTABILITY The Policy is incontestable, except for fraudulent
statements made in the application or supplemental
applications, after it has been in force during the
lifetime of the Insured for two years from the Policy
Date or date of reinstatement. Any increase in Specified
Amount will be incontestable only after it has been in
force during the lifetime of the Insured for two years
from the effective date of the increase.
- --------------------------------------------------------------------------------
CHANGE OF PROVISIONS The Company reserves the right to change the Policy, in
the event of future changes in the federal tax law, to
the extent required to maintain the Policy's
qualification as life insurance under federal tax law.
Except as provided in the foregoing paragraph, no one can
change any part of the Policy except the Policyowner and
the President, a Vice President, the Secretary, an
Assistant Secretary or a designated officer of the
Company. Both must agree to any change and such change
must be in writing. No agent may change the Policy or
waive any of its provisions.
- --------------------------------------------------------------------------------
MISSTATEMENT OF AGE OR SEX
If the Insured's age or sex was misstated in the
application, each benefit and any amount to be paid under
the Policy will be adjusted to reflect the correct age
and sex.
- --------------------------------------------------------------------------------
SUICIDE EXCLUSION If the Policy is in force and the Insured commits
suicide, while sane or insane, within one year from the
Policy Date, life insurance proceeds payable under the
Policy will be limited to all premiums paid, reduced by
any outstanding Policy Debt and any partial withdrawals,
and increased by any unearned loan interest. If the
Policy is in force and
31
<PAGE>
the Insured commits suicide, while sane or insane, within
one year from the effective date of any increase in
Specified Amount, any increase in the death benefit
resulting from the requested increase in specified amount
will not be paid. Instead, the Company will refund to the
Policyowner an amount equal to the total cost of
insurance applied to the increase.
- --------------------------------------------------------------------------------
ANNUAL REPORT At least once each year, an annual report will be sent to
each Policyowner. The report will show the current death
benefit, the Accumulated Value in each Subaccount and in
the Declared Interest Option, outstanding Policy Debt and
premiums paid, partial withdrawals made and charges
assessed since the last report. The report will also
include any other information required by state law or
regulation. Further, the Company will send the
Policyowner the reports required by the Investment
Company Act of 1940.
- --------------------------------------------------------------------------------
NON-PARTICIPATION The Policy does not participate in the Company's profits
or surplus earnings. No dividends are payable.
- --------------------------------------------------------------------------------
OWNERSHIP OF ASSETS The Company shall have the exclusive and absolute
ownership and control over assets, including the assets
of the Variable Account.
- --------------------------------------------------------------------------------
WRITTEN NOTICE Any written notice should be sent to the Company at its
Administrative Office. The notice should include the
policy number and the Insured's full name. Any notice
sent by the Company to a Policyowner will be sent to the
address shown in the application unless an appropriate
address change form has been filed with the Company.
- --------------------------------------------------------------------------------
POSTPONEMENT OF PAYMENTS
The Company will usually mail the proceeds of complete
surrenders, partial withdrawals and Policy Loans within
seven days after the Policyowner's signed request is
received at the Administrative Office. The Company will
usually mail death proceeds within seven days after
receipt of Due Proof of Death and maturity benefits
within seven days of the Maturity Date. However, payment
of any amount upon surrender or partial withdrawal,
payment of any Policy Loan, and payment of death proceeds
or benefits at maturity may be postponed whenever:
a) the New York Stock Exchange is closed other
than customary weekend and holiday closings,
or trading on the New York Stock Exchange is
restricted as determined by the Securities
and Exchange Commission;
b) the Securities and Exchange Commission by
order permits postponement for the
protection of Policyowners; or
c) an emergency exists, as determined by the
Securities and Exchange Commission, as a
result of which disposal of the securities
is not reasonably practicable or it is not
reasonably practicable to determine the
value of the net assets of the Variable
Account.
Transfers may also be postponed under these
circumstances.
Payments under the Policy which are derived from any
amount paid to the Company by check or draft may be
postponed until such time as the Company is satisfied
that the check or draft has cleared the bank upon which
it is drawn.
- --------------------------------------------------------------------------------
CONTINUANCE OF INSURANCE
The insurance under a Policy will continue until the
earlier of:
a) the end of the Grace Period following the
Monthly Deduction Day on which the Net
Accumulated Value during the first three
Policy Years, or Net Surrender Value after
three Policy Years, is less than the monthly
deduction for the following Policy Month;
b) the date the Policyowner surrenders the
Policy for its entire Net Accumulated Value;
c) the death of the Insured; or
d) the Maturity Date.
Any rider to a Policy will terminate on the date
specified in the rider.
32
<PAGE>
- --------------------------------------------------------------------------------
OWNERSHIP The Policy belongs to the Policyowner. The original
Policyowner is the person named as owner in the
application. Ownership of the Policy may change according
to the ownership option selected as part of the original
application or by a subsequent endorsement to the Policy.
During the Insured's lifetime, all rights granted by the
Policy belong to the Policyowner, except as otherwise
provided for in the Policy.
Special ownership rules may apply if the Insured is under
legal age (as defined by state law in the state in which
the Policy is delivered) on the Policy Date.
The Policyowner may assign the Policy as collateral
security. The Company assumes no responsibility for the
validity or effect of any collateral assignment of the
Policy. No assignment will bind the Company unless in
writing and until received by the Company at its
Administrative Office. The assignment is subject to any
payment or action taken by the Company before it received
the assignment at the Administrative Office.
- --------------------------------------------------------------------------------
THE BENEFICIARY The primary Beneficiaries and contingent Beneficiaries
are designated by the Policyowner in the application. If
changed, the primary Beneficiary or contingent
Beneficiary is as shown in the latest change filed with
the Company. One or more primary or contingent
Beneficiaries may be named in the application. In such
case, the proceeds will be paid in equal shares to the
survivors in the appropriate beneficiary class, unless
requested otherwise by the Policyowner.
Unless a payment option is chosen, the proceeds payable
at the Insured's death will be paid in a lump sum to the
primary Beneficiary. If the primary Beneficiary dies
before the Insured, the proceeds will be paid to the
contingent Beneficiary. If no Beneficiary survives the
Insured, the proceeds will be paid to the Policyowner or
the Policyowner's estate.
- --------------------------------------------------------------------------------
CHANGING THE POLICYOWNER OR BENEFICIARY
During the Insured's life, the Policyowner and the
Beneficiary may be changed. To make a change, written
request must be sent to the Company at its Administrative
Office. The request and the change must be in a form
satisfactory to the Company and must actually be received
and recorded by the Company. The change will take effect
as of the date the request is signed by the Policyowner.
The change will be subject to any payment made before the
change is recorded by the Company. The Company may
require return of the Policy for endorsement.
- --------------------------------------------------------------------------------
ADDITIONAL INSURANCE
BENEFITS Subject to certain requirements, one or more of the
following additional insurance benefits may be added to a
Policy by rider: (i) Cost of Living Increase; (ii) Waiver
of Charges; (iii) Other Adult Universal Life Insurance;
(iv) Children's Term Insurance and (v) Guaranteed
Insurability Option. The cost of any additional insurance
benefits will be deducted as part of the monthly
deduction. (See "CHARGES AND DEDUCTIONS--Monthly
Deduction.") Detailed information concerning available
riders may be obtained from the agent selling the Policy.
- --------------------------------------------------------------------------------
DISTRIBUTION OF THE POLICIES
- --------------------------------------------------------------------------------
The Policies will be sold by individuals who in addition
to being licensed as life insurance agents for the
Company, are registered representatives of broker-dealers
who have entered into written selling agreements with
American Equity Capital, Inc., the principal underwriter
of the Policies. American Equity Capital, Inc. is
registered with the Securities and Exchange Commission
under the Securities Exchange Act of 1933 as a
broker-dealer and is a member of the National Association
of Securities Dealers. American Equity Capital, Inc. is
engaged in the sale and distribution or other variable
life policies.
The maximum sales commission payable to broker-dealers
will be 115% of premiums up to the first-year Target
Premium and 3% of excess premium in the first year and
renewal premiums. These commissions (and other
distribution expenses, such as production incentive
bonuses, agent's insurance and pensions benefits, agency
33
<PAGE>
management compensation and bonuses and expense
allowances) are paid by the Company. They do not result
in any additional charges against the Policy that are not
described above under "CHARGES AND DEDUCTIONS."
- --------------------------------------------------------------------------------
FEDERAL TAX MATTERS
- --------------------------------------------------------------------------------
INTRODUCTION The following discussion is general and is not intended
as tax advice. Any person concerned about these tax
considerations should consult a competent tax adviser.
This discussion is based on the Company's understanding
of the present federal income tax laws as they are
currently interpreted by the Internal Revenue Service. No
representation is made as to the likelihood of
continuation of these current laws and interpretations,
and various changes have been proposed that would alter
these laws in ways that would have significant adverse
impacts. It should be further understood that the
following discussion is not exhaustive and does not
purport to be complete or to cover all situations and
that special rules not described in this Prospectus may
be applicable in certain situations. Moreover, no attempt
has been made to consider any applicable state or other
tax laws.
- --------------------------------------------------------------------------------
TAX STATUS OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as
amended (the "Code") includes a definition of a life
insurance contract for federal tax purposes. The
Secretary of the Treasury (the "Treasury") is authorized
to prescribe regulations interpreting and implementing
section 7702 and has issued proposed regulations on
certain aspects of section 7702. If a Policy were
determined not to be a life insurance contract for
purposes of section 7702, such Policy would not provide
most of the tax advantages normally provided by a life
insurance policy.
With respect to a Policy issued exclusively on the basis
of a standard premium class, while there is some
uncertainty due to the limited guidance on section 7702,
the Company believes that in light of the proposed
regulations such a Policy should meet the section 7702
definition of a life insurance contract. However, with
respect to a Policy issued in whole or in part on a
substandard basis (i.e., a premium class involving higher
than standard mortality risk), it is not clear whether or
not such a Policy would satisfy section 7702,
particularly if the Policyowner pays the full amount of
premiums permitted under the Policy. If it is
subsequently determined that a Policy does not satisfy
section 7702, the Company will take whatever steps are
appropriate and necessary to attempt to cause such a
Policy to comply with section 7702, including possibly
refunding any premiums paid that exceed the limitations
allowable under section 7702 (together with interest or
other earnings on any such premiums refunded as required
by law). For these reasons, the Company reserves the
right to modify the Policy as necessary to attempt to
qualify it as a life insurance contract under section
7702.
Section 817(h) of the Code authorizes the Treasury to set
standards by regulation or otherwise for the investments
of the Account to be "adequately diversified" in order
for the Policy to be treated as a life insurance contract
for federal tax purposes. The Variable Account, through
each Fund, intends to comply with the diversification
requirements prescribed in Regulations section 1.817-5,
which affect how each Fund's assets may be invested.
Although the investment adviser of EquiTrust Variable
Insurance Series Fund is an affiliate of the Company, the
Company does not have control over the Fund or its
investments. Nonetheless, the Company believes that each
Investment Option in which the Variable Account owns
shares will be operated in compliance with the
requirements prescribed by the Treasury.
In certain circumstances, owners of variable life
insurance contracts may be considered the owners, for
federal income tax purposes, of the assets of the
separate account used to support their contracts. In
those circumstances, income and gains from the separate
account assets would be includable in the variable
contract owner's gross income. The IRS has stated in
published rulings that a variable contract owner will be
considered the owner of separate account assets if the
contract owner possesses incidents of ownership in those
assets, such as the ability to exercise
34
<PAGE>
investment control over the assets. The Treasury
Department also announced, in connection with the
issuance of regulations concerning diversification, that
those regulations "do not provide guidance concerning the
circumstances in which investor control of the
investments of a segregated asset account may cause the
investor (I.E., the Policyowner), rather than the
insurance company, to be treated as the owner of the
assets in the account." This announcement also stated
that guidance would be issued by way of regulations or
rulings on the "extent to which policyholders may direct
their investments to particular subaccounts without being
treated as owners of the underlying assets."
The ownership rights under the Policy are similar to, but
different in certain respects from, those described by
the IRS in rulings in which it was determined that policy
owners were not owners of separate account assets. For
example, a Policyowner has additional flexibility in
allocating premium payments and policy values. These
differences could result in a Policyowner being treated
as the owner of a pro rata portion of the assets of the
Variable Account. In addition, the Company does not know
what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has
stated it expects to issue. The Company therefore
reserves the right to modify the Policy as necessary to
attempt to prevent a Policyowner from being considered
the owner of a pro rata share of the assets of the
Variable Account.
The following discussion assumes that the Policy will
qualify as a life insurance contract for federal income
tax purposes.
- --------------------------------------------------------------------------------
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. The Company believes that the proceeds and
cash value increases of a Policy should be treated in a
manner consistent with a fixed-benefit life insurance
policy for federal income tax purposes. Thus, the death
benefit under the Policy should be excludable from the
gross income of the Beneficiary under section 101(a)(l)
of the Code.
A change in a Policy's Specified Amount, the payment of
an unscheduled premium, a Policy loan, a partial
withdrawal, a surrender, a lapse with outstanding
indebtedness, a change in death benefit options, the
exchange of a Policy for a fixed-benefit policy (see "THE
POLICY--Special Transfer Privilege") and the assignment
of a Policy or the exercise of the right to change
Policyowners (see "GENERAL PROVISIONS-- Changing the
Policyowner or Beneficiary") may have tax consequences
depending upon the circumstances. In addition, federal
estate and state and local estate, inheritance, and other
tax consequences of ownership or receipt of Policy
proceeds depend upon the circumstances of each
Policyowner or Beneficiary. A competent tax adviser
should be consulted for further information.
Pursuant to the recently enacted Health Insurance
Portability and Accountability Act of 1996, the Company
believes that for federal income tax purposes, an
accelerated death benefit payment received under an
accelerated death benefit endorsement should be fully
excludable from the gross income of the beneficiary, as
long as the beneficiary is the insured under the Policy.
However, the Policyowner should consult a qualified tax
adviser about the consequences of adding this Endorsement
to a Policy or requesting an accelerated death benefit
payment under this Endorsement.
The Company further believes that an exchange of a
fixed-benefit policy issued by the Company for a Policy
as provided under "THE POLICY--Exchange Privilege"
generally should be treated as a non-taxable exchange of
life insurance policies within the meaning of section
1035 of the Code. However, in certain circumstances, the
exchanging owner may receive a cash distribution that
might have to be recognized as income to the extent there
was gain in the fixed-benefit policy. Moreover, to the
extent a fixed-benefit policy with an outstanding loan is
exchanged for an unencumbered Policy, the exchanging
owner could recognize income at the time of the exchange
up to the amount of such loan (including any due and
unpaid interest on such loan). An exchanging owner should
consult a tax adviser as to whether an exchange of a
fixed-benefit policy for the Policy will have tax
consequences to such owner.
35
<PAGE>
The Policies may be used in various arrangements,
including nonqualified deferred compensation or salary
continuance plans, split dollar insurance plans,
executive bonus plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary
depending on the particular facts and circumstances of
each individual arrangement. Therefore, if it is
contemplated that a Policy may be used in any arrangement
the value of which depends in part on its tax
consequences, a qualified tax adviser should be consulted
regarding the tax attributes of the particular
arrangement.
Generally, the Policyowner will not be deemed to be in
constructive receipt of the cash value, including
increments thereof, under the Policy until there is a
distribution. The tax consequences of distributions from,
and loans taken from or secured by, a Policy depend on
whether the Policy is classified as a "modified endowment
contract."
Whether a Policy is or is not a modified endowment
contract, upon a complete surrender or lapse of a Policy,
or when benefits are paid at such Policy's maturity date,
if the amount received plus the amount of indebtedness
exceeds the total investment in the Policy, the excess
will generally be treated as ordinary income subject to
tax.
MODIFIED ENDOWMENT CONTRACTS. A Policy may be treated as
a modified endowment contract depending upon the amount
of premiums paid in relation to the death benefit
provided under such Policy. The premium limitation rules
for determining whether a Policy is a modified endowment
contract are extremely complex. In general, however, a
Policy will be a modified endowment contract if the
accumulated premiums paid at any time during the first
seven 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 level annual premiums. In
addition, if a Policy is "materially changed," it may
cause such Policy to be treated as a modified endowment
contract. The material change rules for determining
whether a Policy is a modified endowment contract are
also extremely complex. In general, however, the
determination whether a Policy will be a modified
endowment contract after a material change generally
depends upon the relationship among the death benefit at
the time of such change, the cash value at the time of
such change and the additional premiums paid in the seven
policy years starting with the date on which the material
change occurs.
Due to the Policy's flexibility, classification of a
Policy as a modified endowment contract will depend upon
the circumstances of each Policy. Accordingly, a
prospective Policyowner should contact a competent tax
adviser before purchasing a Policy to determine the
circumstances under which the Policy would be a modified
endowment contract. In addition, a Policyowner should
contact a competent tax adviser before paying any
unscheduled premiums or changing the planned premium
schedule or making any other change to, including an
exchange of, a Policy to determine whether such premium
or change would cause the Policy (or the new Policy in
the case of an exchange) to be treated as a modified
endowment contract.
DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED
ENDOWMENT CONTRACTS. Policies classified as modified
endowment contracts are subject to the following tax
rules: First, all distributions, including distributions
upon surrender and benefits paid at maturity, from such a
Policy are treated as ordinary income subject to tax up
to the amount equal to the excess (if any) of the cash
value immediately before the distribution over the
investment in the Policy (described below) at such time.
Second, loans taken from, or secured by, such a Policy
are treated as distributions from such a Policy and taxed
accordingly. In this regard, the Internal Revenue Service
could take the position that capitalized interest on such
loans are to be treated as a taxable distribution. Third,
a 10 percent additional tax is imposed on the portion of
any distribution from, or loan taken from or secured by,
such a Policy that is included in income except where the
distribution or loan is made on or after the Policyowner
attains age 59 1/2, is attributable to the Policyowner's
becoming disabled, or is part of a
36
<PAGE>
series of substantially equal periodic payments for the
life (or life expectancy) of the Policyowner or the joint
lives (or joint life expectancies) of the Policyowner and
the Policyowner's Beneficiary.
If a Policy becomes a modified endowment contract after
it is issued, distributions made during the policy year
in which it becomes a modified endowment contract,
distributions in any subsequent policy year and
distributions within two years before the Policy becomes
a modified endowment contract will be subject to the tax
treatment described above. This means that a distribution
from a Policy that is not a modified endowment contract
could later become taxable as a distribution from a
modified endowment contract.
DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED
ENDOWMENT CONTRACTS. Distributions from a Policy that is
not classified as a modified endowment contract are
generally treated as first recovering the investment in
the policy (described below) and then, only after the
return of all such investment in the policy, as
distributing taxable income. An exception to this general
rule occurs in the case of a partial withdrawal, a
decrease in the Specified Amount, or any other change
that reduces benefits under the Policy in the first 15
years after the Policy is issued and that results in a
cash distribution to the Policyowner in order for the
Policy to continue complying with the section 7702
definitional limits. In that case, such distribution will
be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed
in section 7702.
Loans from, or secured by, a Policy that is not a
modified endowment contract are not treated as
distributions. Instead, such loans are treated as
indebtedness of the Policyowner.
Finally, neither distributions (including distributions
upon surrender or lapse) nor loans from, or secured by, a
Policy that is not a modified endowment contract are
subject to the 10 percent additional tax.
POLICY LOAN INTEREST. Interest paid on any loan under a
Policy may not be deductible. Therefore, a Policyowner
should consult a competent tax adviser before deducting
any Policy loan interest.
INVESTMENT IN THE POLICY. Investment in the policy means
(i) the aggregate amount of any premiums or other
consideration paid for a Policy, minus (ii) the aggregate
amount received under the Policy which is excluded from
the gross income of the Policyowner (except that the
amount of any loan from, or secured by, a Policy that is
a modified endowment contract, to the extent such amount
is excluded from gross income, will be disregarded), plus
(iii) the amount of any loan from, or secured by, a
Policy that is a modified endowment contract to the
extent that such amount is included in the gross income
of the Policyowner.
MULTIPLE POLICIES. All modified endowment contracts that
are issued by the Company (or its affiliates) to the same
Policyowner during any calendar year are treated as one
modified endowment contract for purposes of determining
the amount includable in gross income under section
72(e).
- --------------------------------------------------------------------------------
TAXATION OF THE COMPANYAt the present time, the Company makes no charge to the
Variable Account, or to the Policy for any Federal, state
or local taxes (other than state premium taxes) that it
incurs that may be attributable to such Account or to the
Policies. The Company, however, reserves the right in the
future to make a charge for any such tax or other
economic burden resulting from the application of the tax
laws that it determines to be properly attributable to
the Variable Account or to the Policies.
- --------------------------------------------------------------------------------
EMPLOYMENT-RELATED BENEFIT PLANS
The Supreme Court held in ARIZONA GOVERNING COMMITTEE V.
NORRIS that optional annuity benefits provided under an
employer's deferred compensation plan could not, under
Title VII of the Civil Rights Act of 1964, vary between
men and women on the basis of sex. In addition,
legislative, regulatory or decisional authority of some
states may prohibit use of sex-distinct mortality tables
under certain circumstances. The Policy described in this
Prospectus contains guaranteed cost of insurance rates
37
<PAGE>
and guaranteed purchase rates for certain payment options
that distinguish between men and women. Accordingly,
employers and employee organizations should consider, in
consultation with legal counsel, the impact of NORRIS,
and Title VII generally, on any employment-related
insurance or benefit program for which a Policy may be
purchased.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
SAFEKEEPING OF THE VARIABLE ACCOUNT'S ASSETS
The Company holds the assets of the Variable Account. The
assets are kept physically segregated and held separate
and apart from the General Account. The Company maintains
records of all purchases and redemptions of shares by
each Investment Option for each corresponding Subaccount.
Additional protection for the assets of the Variable
Account is afforded by a blanket fidelity bond issued by
TransAmerica in the amount of $2,500,000 covering all the
officers and employees of the Company.
- --------------------------------------------------------------------------------
VOTING RIGHTS To the extent required by law, the Company will vote the
Fund shares held in the Variable Account at regular and
special shareholder meetings of the Funds in accordance
with instructions received from persons having voting
interests in the corresponding Subaccounts. If, however,
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,
the Company determines that it is permitted to vote the
Fund shares in its own right, it may elect to do so.
The number of votes which a Policyowner has the right to
instruct are calculated separately for each Subaccount
and are determined by dividing a Policy's Accumulated
Value in a Subaccount by the net asset value per share of
the corresponding Investment Option in which the
Subaccount invests. Fractional shares will be counted.
The number of votes of the Investment Option which the
Policyowner has the right to instruct will be determined
as of the date coincident with the date established by
that Investment Option for determining shareholders
eligible to vote at such meeting of the Fund. Voting
instructions will be solicited by written communications
prior to such meeting in accordance with procedures
established by each Fund. Each person having a voting
interest in a Subaccount will receive proxy materials,
reports and other materials relating to the appropriate
Investment Option.
The Company will vote Fund shares attributable to
Policies as to which no timely instructions are received
(as well as any Fund shares held in the Variable Account
which are not attributable to Policies) in proportion to
the voting instructions which are received with respect
to all Policies participating in each Investment Option.
Voting instructions to abstain on any item to be voted
upon will be applied on a PRO RATA basis to reduce the
votes eligible to be cast on a matter.
Fund shares may also be held by separate accounts of
other affiliated and unaffiliated insurance companies.
The Company expects that those shares will be voted in
accordance with instructions of the owners of insurance
policies and contracts issued by those other insurance
companies. Voting instructions given by owners of other
insurance policies will dilute the effect of voting
instructions of Policyowners.
DISREGARD OF VOTING INSTRUCTIONS. The Company may, when
required by state insurance regulatory authorities,
disregard voting instructions if the instructions require
that the shares be voted so as to cause a change in the
sub-classification or investment objective of an
Investment Option or to approve or disapprove an
investment advisory contract for an Investment Option. In
addition, the Company itself may disregard voting
instructions in favor of changes initiated by a
Policyowner in the investment policy or the investment
adviser of an Investment Option if the Company reasonably
disapproves of such changes. A change would be
disapproved only if the proposed change is contrary to
state law or prohibited by state regulatory authorities,
or the Company determined that the change would have an
adverse effect on the General Account in that the
proposed investment policy for an Investment Option
38
<PAGE>
may result in overly speculative or unsound investments.
In the event the Company does disregard voting
instructions, a summary of that action and the reasons
for such action will be included in the next annual
report to Policyowners.
- --------------------------------------------------------------------------------
STATE REGULATION AND OWNERSHIP OF THE COMPANY
The Company, a stock life insurance company organized
under the laws of Iowa, is subject to regulation by the
Iowa Insurance Department. An annual statement is filed
with the Iowa Insurance Department on or before March lst
of each year covering the operations and reporting on the
financial condition of the Company as of December 31st of
the preceding year. Periodically, the Iowa Insurance
Department examines the liabilities and reserves of the
Company and the Variable Account and certifies their
adequacy, and a full examination of operations is
conducted periodically by the National Association of
Insurance Commissioners.
In addition, the Company is subject to the insurance laws
and regulations of other states within which it is
licensed or may become licensed to operate. Generally,
the insurance department of any other state applies the
laws of the state of domicile in determining permissible
investments.
One hundred percent of the outstanding Common Stock, par
value $1 per share, of the Company is owned by American
Equity Investment Life Holding Company (the "Holding
Company"). As of January 15, 1998, the following persons
and entities beneficially own the following specified
percentages of the Common Stock, par value $1 per share,
of the Holding Company: David J. Noble, President and
Director of the Company -- 22.3%; Farm Bureau Life
Insurance Company -- 20%; Conseco, Inc., through its
wholly-owned subsidiaries -- 9.4%. Additionally, 15.4% of
the outstanding Common Stock is held in a voting trust
under which David J. Noble, Debra J. Richardson and David
S. Mulcahy, Trustees, have legal title and voting control
and Farm Bureau Life Insurance Company beneficially owns
all of the economic value. The Holding Company develops,
markets, issues and administers annuity contracts and
life insurance policies through the Company. The
principal offices of the Company and Holding Company are
at 5000 Westown Parkway, Suite 440, West Des Moines, Iowa
50266.
39
<PAGE>
- --------------------------------------------------------------------------------
OFFICERS AND DIRECTORS OF
AMERICAN EQUITY
INVESTMENT LIFE
INSURANCE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION
WITH THE COMPANY* LAST FIVE YEARS**
- --------------------------------------------- --------------------------------------------------
<S> <C>
David J. Noble President, President and Chairman, President and Director, American Equity
Director Investment Life Holding Company; Chairman,
President & CEO, The Statesman Group, Inc.; Vice
Chairman and Director, American Life & Casualty
Insurance Company
James M. Gerlach, Executive Vice President, Executive Vice President and Director, American
Chief Marketing Officer and Director Equity Investment Life Holding Company; Executive
Vice President, Secretary and Director, American
Life & Casualty Insurance Company
David S. Mulcahy, Director Director, American Equity Investment Life Holding
400 Locust Street: Company; Principal, MABSCO Capital, Inc.;
160 Capital Square President, Monarch Manufacturing Company; Partner,
Des Moines, Iowa 50309 Ernst & Young LLP
William J. Oddy, Director Chief Operating Officer, FBL Financial Group, Inc.
5400 University Avenue
West Des Moines, Iowa 50266
Terry A. Reimer, Executive Vice President, Executive Vice President, American Equity
Treasurer, Chief Operating Officer and Investment Life Holding Company; Executive Vice
Director President, Chief Operating Officer and Director,
American Life & Casualty Insurance Company
Debra J. Richardson, Vice President, Vice President and Secretary, American Equity
Secretary and Director Investment Life Holding Company; Vice President
and Assistant Secretary, The Statesman Group,
Inc.; Vice President and Assistant Secretary,
American Life & Casualty Insurance Company
Jack W. Schroeder, Vice Chairman President and Director, American Life & Casualty
and Director Insurance Company
</TABLE>
- --------------
* The principal business address of each person listed, unless otherwise
indicated, is 5000 Westown Parkway,
Suite 440, West Des Moines, Iowa 50266.
** The principal occupation shown reflects the principal employment of each
individual during the past five years.
Corporate positions may, in some instances, have changed during the period.
40
<PAGE>
- --------------------------------------------------------------------------------
LEGAL MATTERS Sutherland, Asbill & Brennan LLP of Washington, D.C. has
provided advice on certain legal matters relating to
federal securities laws applicable to the issuance of the
flexible premium variable life insurance policy described
in this Prospectus. All matters of Iowa law pertaining to
the Policy, including the validity of the Policy and the
Company's right to issue the Policy under Iowa Insurance
Law, have been passed upon by Wendy L. Carlson of the
firm Whitfield & Eddy, P.L.C. of Des Moines, Iowa, legal
counsel to the Company.
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS The Company, like other insurance companies, is involved
in lawsuits. Currently, there are no class action
lawsuits naming the Company as a defendant or involving
the Variable Account. In some lawsuits involving other
insurers, substantial damages have been sought and/or
material settlement payments have been made. Although the
outcome of any litigation cannot be predicted with
certainty, the Company believes that at the present time,
there are no pending or threatened lawsuits that are
reasonably likely to have a material adverse impact on
the Variable Account of the Company.
- --------------------------------------------------------------------------------
EXPERTS The financial statements of the Company at December 31,
1997 and 1996, and for the years then ended, and for the
period from December 28, 1995 (date operations commenced)
through December 31, 1995, appearing herein, have been
audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report
given upon the authority of such firm as experts in
accounting and auditing.
Actuarial matters included in this Prospectus have been
examined by Christopher G. Daniels, FSA, MSAA, Consulting
Actuary as stated in the opinion filed as an exhibit to
the registration statement.
- --------------------------------------------------------------------------------
YEAR 2000 The Company has developed a plan to assess its
information technology needs to be ready for the Year
2000. During 1996, the Company purchased a new policy
administration system which the vendor has represented is
Year 2000 compliant. Additionally, the Company has begun
converting any remaining non-compliant data processing
systems. The Company currently expects the project to be
substantially completed by early 1999 and does not expect
the cost to modify systems used in the normal course of
business to be significant. While additional testing will
be conducted on its systems through the Year 2000, the
Company does not expect this project to have a
significant effect on operating activities.
To mitigate the effect of outside influences and other
dependencies relative to the Year 2000, the Company's
plan includes procedures to contact significant
customers, suppliers and other third parties whose
success in addressing their own Year 2000 issue will
impact the Company's initiative. To the extent these
third parties would be unable to transact business in the
Year 2000 and thereafter, it could adversely affect the
Company's operations.
- --------------------------------------------------------------------------------
OTHER INFORMATION A registration statement has been filed with the
Securities and Exchange Commission under the Securities
Act of 1933, as amended, with respect to the Policy
offered hereby. This Prospectus does not contain all the
information set forth in the registration statement and
the amendments and exhibits to the registration
statement, to all of which reference is made for further
information concerning the Variable Account, the Company
and the Policy offered hereby. Statements contained in
this Prospectus as to the contents of the Policy and
other legal instruments are summaries. For a complete
statement of the terms thereof, reference is made to such
instruments as filed.
41
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The balance sheets of the Company at December 31, 1997
and 1996 and the related statements of operations,
changes in stockholder's equity and cash flows for the
years then ended, and for the period from December 28,
1995 (date operations commenced) through December 31,
1995, appearing herein, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein. The unaudited
balance sheet of the Company at June 30, 1998, and the
related unaudited statements of operations, changes in
stockholder's equity and cash flows for the six months
ended June 30, 1998 and 1997 also appear herein.
It is anticipated that the Variable Account will commence
operations in 1998; accordingly, no financial statements
currently exist for the Variable Account.
42
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
American Equity Investment Life Insurance Company
We have audited the accompanying balance sheets of American Equity Investment
Life Insurance Company as of December 31, 1997 and 1996, and the related
statements of operations, changes in stockholder's equity, and cash flows for
the years ended December 31, 1997 and 1996, and for the period from December 28,
1995 (commencement of operations) through December 31, 1995. 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 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. 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 American Equity Investment Life
Insurance Company at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1996,
and for the period from December 28, 1995 through December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
April 8, 1998
43
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1998 1997 1996
------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Available-for-sale fixed maturity securities, at market
(amortized cost: 1998--$382,519,816;
1997-- $201,624,365; 1996-- $22,397,478) $ 384,078,816 $ 202,315,960 $22,195,922
Mortgage loans on real estate--affiliate -- 700,000 700,000
Derivative instruments 6,882,241 2,065,549 --
Policy loans 201,104 183,353 156,523
Cash and cash equivalents 1,595,338 4,125,117 3,648,321
Receivable from other insurance companies 551,241 622,094 509,656
Premiums due and uncollected 1,393,324 1,336,336 1,253,587
Accrued investment income 1,845,200 1,820,376 414,855
Property, furniture and equipment, less accumulated
depreciation of $253,305 in 1998, $159,306 in 1997 and
$19,845 in 1996 620,929 540,550 189,124
Value of insurance in force acquired 1,198,802 1,343,000 1,725,000
Deferred policy acquisition costs 15,444,824 4,282,491 238,231
Goodwill, less accumulated amortization of $122,500 in 1998,
$87,500 in 1997 and $17,500 in 1996 557,500 612,500 682,500
Deferred income tax asset 5,868,647 3,845,497 --
Receivable from affiliates 1,774,397 142,983 744,045
Other assets 101,275 138,041 37,524
------------- ------------- -----------
Total assets $ 422,113,638 $ 224,073,847 $32,495,288
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1998 1997 1996
------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy benefit reserves:
Traditional life insurance and accident and health
products $ 9,291,525 $ 8,959,837 $ 8,672,640
Universal life and annuity products 315,408,812 147,038,431 3,173,926
Other policy funds and contract claims 4,942,427 2,355,156 1,075,614
Provision for experience rating refunds 184,183 535,655 897,529
Note payable to parent and other short-term borrowings 26,726,750 2,500,000 2,500,000
Federal income taxes payable 10,031 2,562,742 --
Due to affiliates 1,063,078 -- --
Other liabilities 6,738,537 2,687,604 494,146
------------- ------------- -----------
Total liabilities 364,365,343 166,639,425 16,813,855
Commitments and contingencies (NOTES 7, 10 AND 12)
Stockholder's equity:
Series preferred stock, par value $1.00 per
share--authorized 500,000 shares -- -- --
Common stock, par value $1.00 per share--authorized
4,000,000 shares, issued and outstanding 2,500,000 shares
(all owned by American Equity Investment Life Holding
Company) 2,500,000 2,500,000 2,500,000
Additional paid-in capital 56,400,235 56,400,235 13,900,235
Accumulated other comprehensive income--net unrealized
appreciation (depreciation) of available-for-sale fixed
maturity securities 404,635 210,300 (201,556)
Retained-earnings deficit (1,536,575) (1,676,113) (517,246)
------------- ------------- -----------
Total stockholder's equity 57,768,295 57,434,422 15,681,433
------------- ------------- -----------
Total liabilities and stockholder's equity $ 422,133,638 $ 224,073,847 $32,495,288
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
45
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 28,
1995
(COMMENCEMENT
OF
SIX MONTHS ENDED YEAR ENDED OPERATIONS)
JUNE 30, DECEMBER 31, THROUGH
----------------------------- ----------------------------- DECEMBER 31,
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Traditional life and accident and
health insurance premiums $ 5,633,604 $ 6,019,558 $ 11,424,907 $ 14,540,707 $ 1,820
Universal life and annuity product
charges 115,635 -- 11,896 14,007 --
Net investment income 10,312,042 1,192,602 4,028,628 857,015 4,010
Realized gains on investments 25,495 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total revenues 16,086,776 7,212,160 15,465,431 15,411,729 5,830
Benefits and expenses:
Insurance policy benefits and change
in future policy benefit 3,659,415 4,151,331 7,440,080 8,787,700 --
Interest credited to account balances 5,272,914 268,785 2,129,686 77,831 --
Interest expense on notes payable 99,726 101,845 134,077 41,266 --
Interest expense on short-term
borrowings 820,307 -- 291,547 -- --
Amortization of deferred policy
acquisition costs and value of
insurance in force acquired 1,320,779 205,008 1,143,032 879,916 --
Amortization of goodwill 35,000 35,000 70,000 17,500 --
Agency and product development costs
(NOTE 2) 1,300,000 613,600 1,872,217 -- --
Other operating costs and expenses 3,465,071 2,501,939 4,932,435 6,124,343 6,249
------------- ------------- ------------- ------------- -------------
Total benefits and expenses 15,973,212 7,877,508 18,013,074 15,928,556 6,249
Income (loss) before federal income
taxes 113,564 (665,348) (2,547,643) (516,827) (419)
Federal income tax benefit (expense):
Current (2,097,289) -- (2,565,057) -- --
Deferred 2,123,263 -- 3,953,833 -- --
------------- ------------- ------------- ------------- -------------
25,974 -- 1,388,776 -- --
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 139,538 $ (665,348) $ (1,158,867) $ (516,827) $ (419)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
46
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
APPRECIATION
(DEPRECIATION)
OF AVAILABLE-
FOR-SALE
ADDITIONAL FIXED RETAINED- TOTAL
PAID-IN MATURITY EARNINGS STOCKHOLDER'S
COMMON STOCK CAPITAL SECURITIES DEFICIT EQUITY
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Initial capitalization of 2,500,000 shares of
common stock on December 28, 1995 $ 2,500,000 $ 4,499,000 $ -- $ -- $ 6,999,000
Net loss for period and comprehensive loss -- -- -- (419) (419)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1995 2,500,000 4,499,000 -- (419) 6,998,581
Net loss for year -- -- -- (516,827) (516,827)
Change in net unrealized depreciation of
available-for-sale fixed maturity securities -- -- (201,556) -- (201,556)
-------------
Comprehensive loss (718,383)
Cash contributions from American Equity
Investment Life Holding Company -- 9,401,235 -- -- 9,401,235
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1996 2,500,000 13,900,235 (201,556) (517,246) 15,681,433
Net loss for year -- -- -- (1,158,867) (1,158,867)
Change in net unrealized appreciation of
available-for-sale fixed maturity securities -- -- 411,856 -- 411,856
-------------
Comprehensive loss (747,011)
Cash contributions from American Equity
Investment Life Holding Company -- 42,500,000 -- -- 42,500,000
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1997 2,500,000 56,400,235 210,300 (1,676,113) 57,434,422
Net income for six months ended June 30, 1998 -- -- -- 139,538 139,538
Change in net unrealized appreciation of
available-for-sale fixed maturity securities -- -- 194,335 -- 194,335
-------------
Comprehensive income 333,873
------------- ------------- ------------- ------------- -------------
Balance at June 30, 1998 (unaudited) $ 2,500,000 $ 56,400,235 $ 404,635 $ (1,536,575) $ 57,768,295
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Balance at January 1, 1997 $ 2,500,000 $ 13,900,235 $ (201,556) $ (517,246) $ 15,681,433
Cash contributions from American Equity
Investment Life Holding Company -- 5,500,000 -- -- 5,500,000
Net loss for six months ended June 30, 1997 -- -- -- (655,348) (655,348)
Change in net unrealized appreciation
(depreciation) of available-for-sale fixed
maturity securities -- -- (138,935) -- (138,935)
-------------
Comprehensive loss (794,283)
------------- ------------- ------------- ------------- -------------
Balance at June 30, 1997 (unaudited) $ 2,500,000 $ 19,400,235 $ (340,491) $ (1,172,594) $ 20,387,150
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
47
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 28,
1995
(COMMENCEMENT
OF OPERATIONS)
SIX MONTHS ENDED YEAR ENDED THROUGH
JUNE 30, DECEMBER 31, DECEMBER 31
------------------------------ ----------------------------- ---------------
1998 1997 1997 1996 1995
--------------- ------------- -------------- ------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 139,538 $ (655,348) $ (1,158,867) $ (516,827) $ (419)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Adjustments related to interest sensitive
products:
Interest credited to account balances 5,272,914 268,785 2,129,686 77,831 --
Charges for mortality and administration (115,635) -- (11,896) (14,007) --
Increase (decrease) in traditional life
insurance and accident and health reserves 331,688 113,369 287,197 439,216 --
Policy acquisition costs deferred (12,926,173) (1,105,611) (5,178,251) (245,226) --
Amortization of deferred policy acquisition
costs 1,176,581 7,008 761,032 6,995 --
Amortization of value of insurance in force
acquired 144,198 198,000 382,000 872,921 --
Depreciation of property, furniture and
equipment 93,999 93,790 139,461 19,845 --
Amortization of goodwill 35,000 35,000 70,000 17,500 --
Amortization of discount and premiums on
available-for-sale fixed maturity
securities and derivative instruments (6,219,529) (3,168) (997,853) 36,148 --
Deferred income taxes (2,123,263) -- (3,953,833) -- --
Increase (decrease) in federal income taxes
payable (2,552,711) -- 2,562,742 -- --
Other 8,287,019 44,238 2,241,873 (441,649) (730)
--------------- ------------- -------------- ------------- ---------------
Net cash provided by (used in) operating
activities (8,456,374) (1,092,413) (2,726,709) 252,747 (1,149)
INVESTING ACTIVITIES
Maturities or repayments of investments:
Available-for-sale fixed maturity
securities 82,502,323 -- 22,591,487 3,779,185 --
Mortgage loans on real estate 700,000 -- -- -- --
Policy loans -- -- -- 12,580 --
--------------- ------------- -------------- ------------- ---------------
83,202,323 -- 22,591,487 3,791,765 --
Acquisitions of investments:
Available-for-sale fixed maturity
securities (255,489,901) (27,620,656) (200,181,267) (19,223,611) (6,899,015)
Mortgage loan on real estate -- -- -- (700,000) --
Derivative instruments (3,318,470) (256,621) (1,815,674) -- --
Policy loans (17,751) (8,923) (26,830) (169,103) --
--------------- ------------- -------------- ------------- ---------------
(258,826,122) (27,886,200) (202,023,771) (20,092,714) (6,899,015)
Cash received pursuant to reinsurance
assumption agreements -- -- -- 3,805,969 2,746,767
Purchases of property, furniture and
equipment (174,378) (220,031) (490,887) (208,969) --
Acquisition of Century Life Insurance
Company, net of cash equivalents received -- -- -- (885,837) --
--------------- ------------- -------------- ------------- ---------------
Net cash used in investing activities (115,798,177) (28,106,231) (179,923,171) (13,589,786) (4,152,248)
</TABLE>
48
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 28,
1995
(COMMENCEMENT
OF OPERATIONS)
SIX MONTHS ENDED YEAR ENDED THROUGH
JUNE 30, DECEMBER 31, DECEMBER 31,
------------------------------ ----------------------------- ---------------
1998 1997 1997 1996 1995
--------------- ------------- -------------- ------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES
Receipts from interest sensitive products
credited to policyholder account balances $ 165,215,893 $ 20,423,387 $ 141,802,051 $ 2,456,054 $ --
Return of policyholder account balances on
interest sensitive products (7,717,871) (281,053) (1,175,375) (217,532) --
Proceeds from note payable to parent and
other short-term borrowings 24,226,750 1,982,500 -- 2,500,000 --
Net proceeds from issuance of common stock -- -- -- -- 6,999,000
Cash contributions by parent -- 5,500,000 42,500,000 9,401,235 --
--------------- ------------- -------------- ------------- ---------------
Net cash provided by financing activities 181,724,772 27,624,834 183,126,676 14,139,757 6,999,000
--------------- ------------- -------------- ------------- ---------------
Increase (decrease) in cash and cash
equivalents (2,529,779) (1,573,810) 476,796 802,718 2,845,603
Cash and cash equivalents at beginning of
period 4,125,117 3,648,321 3,648,321 2,845,603 --
--------------- ------------- -------------- ------------- ---------------
Cash and cash equivalents at end of period $ 1,595,338 $ 2,074,511 $ 4,125,117 $ 3,648,321 $ 2,845,603
--------------- ------------- -------------- ------------- ---------------
--------------- ------------- -------------- ------------- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during period for:
Interest $ 920,033 $ 108,541 $ 291,547 $ -- $ --
Federal income taxes 4,650,000 -- 2,315 -- --
Non-cash financing and investing activities:
Assets and liabilities acquired pursuant to
reinsurance assumption agreements:
Receivable from ceding company -- -- -- -- (386,113)
Premiums due and uncollected -- -- -- (41,284) (1,116,548)
Reinsurance recoverables -- -- -- -- (473,146)
Value of insurance in force acquired -- -- -- (1,097,921) (1,500,000)
Universal life and annuity policy reserves -- -- -- 871,580 --
Traditional life and accident and health
policy reserves -- -- -- 3,982,118 4,251,306
Policy and contract claims -- -- -- 91,476 657,610
Provision for experience rating refunds -- -- -- -- 1,188,318
Other liabilities -- -- -- -- 125,340
--------------- ------------- -------------- ------------- ---------------
Cash received pursuant to reinsurance
assumption agreements -- -- -- 3,805,969 2,746,767
</TABLE>
SEE ACCOMPANYING NOTES.
49
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
American Equity Investment Life Insurance Company (the Company) is a
wholly-owned subsidiary of American Equity Investment Life Holding Company
(parent). The Company is licensed to sell insurance products in 32 states and
the District of Columbia at December 31, 1997. The Company offers a broad array
of insurance products including single premium deferred annuities, flexible
premium deferred annuities, interest-sensitive life insurance products
(including universal life insurance) and traditional life insurance products.
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates and assumptions are utilized in the calculation of value
of insurance in force acquired, deferred policy acquisition costs, policyholder
liabilities and accruals and valuation allowances on investments. It is
reasonably possible that actual experience could differ from the estimates and
assumptions utilized.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six-month period ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998.
INVESTMENTS
The Company has classified all of its fixed maturity securities (bonds) as
available-for-sale. Available-for-sale securities are reported at market value
and unrealized gains and losses, if any, on these securities are included
directly in stockholder's equity, net of certain adjustments. Premiums and
discounts are amortized/accrued using methods which result in a constant yield
over the securities' expected lives. Mortgage loans on real estate are stated at
the aggregate unpaid principal balance.
The carrying amounts of all the Company's investments are reviewed on an ongoing
basis for credit deterioration, and if this review indicates a decline in market
value that is other than temporary, the Company's carrying amount in the
investment is reduced to its estimated realizable value and a specific writedown
is taken. Such reductions in carrying amount are recognized as realized losses
and charged to income. Realized gains and losses on sales are determined on the
basis of specific identification of investments.
Market values, as reported herein, of publicly traded fixed maturity securities
are based on the latest quoted market prices, or for those not readily
marketable, at values which are representative of the market values of issues of
comparable yield and quality.
DERIVATIVE INSTRUMENTS
The Company sells single premium deferred annuity products with an additional
benefit provision based on the growth in the Standard & Poor's 500 Index. The
Company has analyzed the characteristics of these benefits and has purchased
one-year option contracts with similar characteristics to hedge these risks.
These options are reported at fair value in the balance sheet.
The options are purchased at the time the related annuity policies are issued,
with similar maturity dates and benefit features that fluctuate as the value of
the options change. Accordingly, changes in the value of the options ($839,359
during the year ended December 31, 1997) are offset by changes to the policy
benefit liabilities in the statements of operations.
50
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
POLICY LOANS
Policy loans are reported at unpaid principal.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE ACQUIRED
To the extent recoverable from future policy revenues and gross profits, certain
costs of acquiring new insurance business, principally commissions, first-year
bonus interest and other expenses related to the production of new business,
have been deferred. The value of insurance in force acquired is an asset that
arose with the acquisition of two blocks of business discussed in Note 4. The
initial values are determined by an actuarial study using expected future
profits as a measurement of the net present value of the insurance acquired.
Interest accrues on the unamortized balance at a rate of 6%.
For universal life and annuity products, these costs are being amortized
generally in proportion to expected gross profits from surrender charges and
investment, mortality, and expense margins. That amortization is adjusted
retrospectively when estimates of current future gross profits/margins
(including the impact of investment gains and losses) to be realized from a
group of products are revised. For traditional life and accident and health
insurance, such costs are being amortized over the premium-paying period of the
related policies in proportion to premium revenues recognized, using principally
the same assumptions for interest, mortality and withdrawals that are used for
computing liabilities for future policy benefits subject to traditional
"lock-in" concepts.
GOODWILL
Goodwill consists of the excess of the purchase price paid over net assets
acquired in connection with the purchase of Century Life Insurance Company (see
Note 4), and is being amortized over 10 years.
PROPERTY, FURNITURE AND EQUIPMENT
Property and furniture and equipment, comprised primarily of office furniture
and equipment, data processing equipment and capitalized software costs, are
reported at cost less allowances for depreciation. Depreciation expense is
compiled primarily using the straight-line method over the estimated useful
lives of the assets.
FUTURE POLICY BENEFITS
Future policy benefit reserves for universal life insurance and annuity products
are computed using the retrospective deposit method and represent policy account
balances before applicable surrender charges. Policy benefits and claims that
are charged to expense include benefit claims incurred in the period in excess
of related policy account balances. Interest crediting rates for universal life
and investment products ranged from 3.0% to 12.4% in 1997 and from 3.0% to 8.4%
in 1996. A portion of this amount ($1,035,325 during the year ended December 31,
1997) represents an additional interest credit on first-year premiums payable
until the first contract anniversary date (first-year bonus interest). Such
amounts have been offset against interest credited to account balances and
deferred as policy acquisitions costs.
The liability for future policy benefits for traditional life insurance is based
on net level premium reserves, including assumptions as to interest, mortality,
and other assumptions underlying the guaranteed policy cash values. Reserve
interest assumptions are level and range from 3.0% to 6.0%. The liabilities for
future policy benefits for accident and health insurance are computed using a
net level premium method, including assumptions as to morbidity and other
assumptions based on the Company's experience, modified as necessary to give
effect to anticipated trends and to include provisions for possible unfavorable
deviations. Policy benefit claims are charged to expense in the period that the
claims are incurred.
Unpaid claims include amounts for losses and related adjustment expenses and are
determined using individual claim evaluations and statistical analysis. Unpaid
claims represent estimates of the ultimate net costs of all losses, reported and
unreported, which remain unpaid at December 31 of each year. These estimates are
necessarily subject to the
51
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
impact of future changes in claim severity, frequency and other factors. In
spite of the variability inherent in such situations, management believes that
the unpaid claim amounts are adequate. The estimates are continuously reviewed
and as adjustments to these amounts become necessary, such adjustments are
reflected in current operations.
Certain policies of the Company include provisions for refunds of premiums based
upon annual experience of the underlying business. The Company has recorded a
liability for expected refunds based on experience.
DEFERRED INCOME TAXES
Deferred income tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
RECOGNITION OF PREMIUM REVENUES AND COSTS
Revenues for universal life and annuity products consist of policy charges for
the cost of insurance, administration charges, amortization of policy initiation
fees and surrender charges assessed against policyholder account balances during
the period. Expenses related to these products include interest credited to
policyholder account balances and benefit claims incurred in excess of
policyholder account balances.
Life and accident and health premiums are recognized as revenues over the
premium-paying period. Future policy benefits and policy acquisition costs are
recognized as expenses over the life of the policy by means of the provision for
future policy benefits and amortization of deferred policy acquisition costs.
All insurance-related revenues, benefits, losses and expenses are reported net
of reinsurance ceded.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement No. 130, REPORTING
COMPREHENSIVE INCOME. Statement No. 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Company's net income of stockholders'
equity. Statement No. 130 requires unrealized gains and losses on the Company's
available-for-sale securities to be included in other comprehensive income.
2. NEW ACCOUNTING STANDARD FOR AGENCY DEVELOPMENT COSTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES. SOP No. 98-5 generally establishes the accounting guidance related
to introducing new products or services, conducting business in a new territory,
or conducting business with a new class of customers. These types of costs are
typically incurred by a life insurance company in connection with agency
development activities. SOP No. 98-5 now requires that such costs be expensed in
the year incurred rather than be capitalized and expensed over a number of
years.
While the adoption of the standard is not mandated until January 1, 1999, the
Company has elected to adopt its provisions, effective January 1, 1997, for the
purposes of preparing its 1997 financial statements. This election will
eliminate the need to record a cumulative effect adjustment on January 1, 1999
to write-off previously capitalized costs. The Company had previously deferred
these costs in its interim 1997 financial statements; however, for these
statements the change was effected as of January 1, 1997 in accordance with
transition rules included within SOP No. 98-5. Costs capitalized prior to
January 1, 1997 were not material.
The Company disagrees with the new standard and continues to believe that
deferral of these costs is appropriate. The Company believes that the new
standard puts start-up operations, such as itself, at a competitive disadvantage
to those entities which acquire existing agency forces in business combinations
accounted for as purchases, which would result in comparable cost deferrals
through the recording of goodwill. The Company believes these inequities should
be considered when reviewing the Company's financial statements.
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other
52
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. SFAS No. 107 also excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements and allows companies to forego the disclosures when those estimates
can only be made at excessive cost. Accordingly, the aggregate fair value
amounts presented herein are limited by each of these factors and do not purport
to 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:
FIXED MATURITY SECURITIES: Fair values for fixed maturity securities are based
on quoted market prices, when available, or price matrices for securities which
are not actively traded, developed using yield data and other factors relating
to instruments or securities with similar characteristics.
MORTGAGE LOANS ON REAL ESTATE: Fair values are estimated by discounting
expected cash flows using interest rates currently being offered for similar
loans.
DERIVATIVE INSTRUMENTS: Fair values for derivative instruments are based on
quoted market prices from related counterparties.
POLICY LOANS: The Company has not attempted to determine the fair values
associated with its policy loans, as management believes any differences between
the Company's carrying amount and the fair values afforded these instruments are
immaterial to the Company's financial position and, accordingly, the cost to
provide such disclosure is not worth the benefit to be derived.
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet
for these instruments approximate their fair values.
ANNUITY POLICY RESERVES: Fair values of the Company's liabilities under
contracts not involving significant mortality or morbidity risks (principally
deferred annuities), are stated at the cost the Company would incur to
extinguish the liability (i.e., the cash surrender value). The Company is not
required to and has not estimated the fair value of its liabilities under other
contracts.
The following sets forth a comparison of the fair values and carrying amounts of
the Company's financial instruments:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1997 1996
---------------------------- ------------------------
CARRYING FAIR CARRYING
AMOUNT VALUE AMOUNT FAIR VALUE
---------------------------- ------------------------
<S> <C> <C> <C> <C>
ASSETS
Available-for-sale fixed maturity securities $ 202,315,960 $ 202,315,960 $22,195,922 $22,195,922
Mortgage loans on real estate 700,000 700,000 700,000 700,000
Derivative instruments 2,065,549 2,065,549 -- --
Policy loans 183,353 183,353 156,523 156,523
Cash and cash equivalents 4,125,117 4,125,177 3,648,321 3,648,321
LIABILITIES
Annuity policy reserves $ 146,310,889 $ 129,660,303 $ 2,884,102 $ 2,814,701
</TABLE>
4. PURCHASE OF BUSINESS AND REINSURANCE ASSUMPTION AGREEMENTS
On September 30, 1996, the Company purchased Century Life Insurance Company, an
inactive life insurance company licensed to transact business in 22 states and
the District of Columbia for $5,900,047. The transaction was accounted for as a
purchase and the excess of the purchase price over the fair value of the net
assets received, generally attributed
53
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PURCHASE OF BUSINESS AND REINSURANCE ASSUMPTION AGREEMENTS (CONTINUED)
to the licenses received and other intangibles, aggregated $700,000 and has been
allocated to goodwill. Goodwill will be amortized on the straight-line method
over ten years. The following summarizes the assets and liabilities received in
connection with the purchase:
<TABLE>
<S> <C>
Available-for-sale fixed maturity securities $ 155,837
Cash equivalents 5,014,210
Accrued investments income 30,000
Intangibles 700,000
Other assets 6,785
Other liabilities (6,785)
-----------
Net purchase price $ 5,900,047
-----------
-----------
</TABLE>
On December 31, 1995, the Company acquired a block of individual and group
insurance policies from American Life and Casualty Insurance Company, pursuant
to a reinsurance agreement. Under the agreement, the Company received cash of
$3,132,880, of which $2,746,767 had been received prior to December 31, 1995,
and assumed the related assets and liabilities, including the value of insurance
in force acquired in the amount of $1,500,000.
On January 2, 1996, the Company acquired an additional block of individual life
business from American Life and Casualty Insurance Company pursuant to a second
reinsurance agreement. Under this agreement, the Company received cash of
$3,805,969, and assumed the related assets and liabilities, including the value
of insurance in force acquired in the amount of $1,097,921.
The statement of operations includes results of the acquired company and for the
acquired blocks of business subsequent to their purchase dates.
5. INVESTMENTS
At December 31, 1997 and 1996, bonds are comprised entirely of United States
Government and agencies obligations. Net unrealized appreciation (depreciation)
on bonds included gross unrealized appreciation of $736,523 and $1,764 and gross
unrealized depreciation of $44,928 and $203,320 for the years ended December 31,
1997 and 1996, respectively.
The amortized cost and estimated fair value of debt securities at December 31,
1997, 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.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
-----------------------------------
<S> <C> <C>
Due after one year through five years $ 55,029,072 $ 55,005,750
Due after five years through ten years 19,046,971 19,093,110
Due after ten years through twenty years 125,316,243 125,929,600
Due after twenty years 2,232,079 2,287,500
-----------------------------------
$ 201,624,365 $ 202,315,960
-----------------------------------
-----------------------------------
</TABLE>
The unrealized appreciation or depreciation on available-for-sale fixed maturity
securities is reported as a separate component of stockholder's equity, reduced
by adjustments to deferred policy acquisition costs that would have been
54
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
required as a charge or credit to income had such amounts been realized, and a
provision for deferred income taxes. Net unrealized appreciation (depreciation)
of available-for-sale fixed maturity securities as reported were comprised of
the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1997 1996
---------------------------
<S> <C> <C>
Unrealized appreciation (depreciation) on
available-for-sale fixed maturity securities $ 691,595 $ (201,556)
Adjustments for assumed changes in amortization
pattern of deferred policy acquisition costs (372,959) --
Provision for deferred income taxes (108,336) --
---------------------------
Net unrealized appreciation (depreciation) of
available-for-sale fixed maturity securities $ 210,300 $ (201,556)
---------------------------
---------------------------
</TABLE>
Components of net investment income are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 28, 1995
YEAR ENDED DECEMBER 31 (COMMENCEMENT OF
---------------------------- OPERATIONS) THROUGH
1997 1996 DECEMBER 31, 1995
---------------------------- --------------------
<S> <C> <C> <C>
Available-for-sale fixed maturity securities $ 5,131,361 $ 913,636 $ 2,926
Mortgage loans on real estate 61,357 -- --
Derivative instruments (589,484) -- --
Policy loans 12,281 9,849 --
Cash and cash equivalents 73,047 62,302 1,084
---------------------------- -------
4,688,562 985,787 4,010
Less investment expenses (659,934) (128,772) --
---------------------------- -------
Net investment income $ 4,028,628 $ 857,015 $ 4,010
---------------------------- -------
---------------------------- -------
</TABLE>
As part of the investment strategy, the Company enters into securities lending
programs to increase its return on investments and improve liquidity. These
transactions are accounted for as short-term borrowings. The borrowings are
collateralized by investment securities with fair values approximately equal to
the loan value. No amounts were outstanding at December 31, 1997 or 1996. At
June 30, 1998, $24,226,750 was outstanding under this arrangement.
At December 31, 1997, affidavits of deposits covering fixed maturity securities
and short-term investments with a carrying value of $200,954,937 (1996 -
$19,293,142) were on deposit with state agencies to meet regulatory
requirements. In addition, fixed maturity securities and short-term investments
with a carrying amount of $539,292 (1996 - $5,156,565) were held on deposit with
state agencies to meet similar requirements.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States Government) exceeded 10% of stockholder's equity
at December 31, 1997 or 1996.
55
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. VALUE OF INSURANCE IN FORCE ACQUIRED
The value of insurance in force acquired is an asset that represents the present
value of future profits on business acquired. An analysis of the value of
insurance in force acquired for the periods ended December 31, 1997, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 28, 1995
YEAR ENDED DECEMBER 31 (COMMENCEMENT OF
------------------------------ OPERATIONS) THROUGH
1997 1996 DECEMBER 31, 1995
----------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 1,725,000 $ 1,500,000 $ --
Acquired during the period -- 1,097,921 1,500,000
Accretion of interest during the period 91,000 130,000 --
Amortization of asset (473,000) (1,002,921) --
----------------------------------------------------
Balance at end of period $ 1,343,000 $ 1,725,000 $ 1,500,000
----------------------------------------------------
----------------------------------------------------
</TABLE>
Amortization of the value of insurance in force acquired for the next five years
ending December 31 is expected to be as follows: 1998 - $317,000; 1999 -
$268,000; 2000 - $232,000; 2001 - $104,000; and 2002 - $104,000.
7. REINSURANCE AND POLICY PROVISIONS
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers. Reinsurance coverages
for life insurance vary according to the age and risk classification of the
insured. The Company does not use financial or surplus relief reinsurance.
Reinsurance contracts do not relieve the Company of its obligations to its
policyholders. To the extent that reinsuring companies are later unable to meet
obligations under reinsurance agreements, the Company would be liable for these
obligations, and payment of these obligations could result in losses to the
Company. To limit the possibility of such losses, the Company evaluates the
financial condition of its reinsurers, and monitors concentrations of credit
risk. Insurance premiums and product charges have been reduced by $722,545 and
$742,088 and insurance benefits have been reduced by $503,154 and $455,472
during the years ended December 31, 1997 and 1996, respectively, as a result of
cession agreements.
No allowance for uncollectible amounts has been established against the
Company's asset for amounts due from other insurance companies since none of the
receivables are deemed by management to be uncollectible.
56
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REINSURANCE AND POLICY PROVISIONS (CONTINUED)
Unpaid claims on accident and health include amounts for losses and related
adjustment expense and are estimates of the ultimate net costs of all losses,
reported and unreported. These estimates are subject to the impact of future
changes in claim severity, frequency and other factors. The activity in the
liability for unpaid claims and related adjustment expense for the years ended
December 31, 1997 and 1996, net of reinsurance, is summarized as follows:
<TABLE>
<CAPTION>
UNPAID CLAIMS
LIABILITY AT CLAIMS UNPAID CLAIMS
BEGINNING OF RESERVE CLAIMS LIABILITY AT
YEAR ASSUMED INCURRED CLAIMS PAID END OF YEAR
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
1997 $ -- $ -- $ 556,302 $ 296,060 $ 260,242
1996 and prior 629,651 -- (107,471) 115,135 407,045
---------------------------------------------------------------------
629,651 $ -- $ 448,831 $ 411,195 667,287
---------------------------------------
---------------------------------------
Active life reserve 1,350,132 1,406,694
------------- -------------
Total accident and health reserves $ 1,979,783 $ 2,073,981
------------- -------------
------------- -------------
YEAR ENDED DECEMBER 31, 1996
1996 $ -- $ -- $ 421,841 $ 90,844 $ 330,997
1995 and prior -- 501,589 44,347 247,282 298,654
---------------------------------------------------------------------
-- $ 501,589 $ 466,188 $ 338,126 629,651
---------------------------------------
---------------------------------------
Active life reserve -- 1,350,132
------------- -------------
Total accident and health reserves $ -- $ 1,979,783
------------- -------------
------------- -------------
</TABLE>
8. FEDERAL INCOME TAXES
The Company files a separate federal income tax return.
Deferred income taxes are established by the Company based upon the temporary
differences among financial reporting and tax bases of assets and liabilities
within each entity, the reversal of which will result in taxable or deductible
amounts in future years when the related asset or liability is recovered or
settled, measured using the enacted tax rates. Prior to 1997, no deferred income
taxes were provided since timing differences were not sufficient to offset
operating loss carryforwards.
The effective tax rate on loss before federal income taxes is different than the
prevailing federal income tax rate, as follows:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 28, 1995
YEAR ENDED DECEMBER 31 (COMMENCEMENT OF
----------------------------- OPERATIONS) THROUGH
1997 1996 DECEMBER 31, 1995
----------------------------- ---------------------
<S> <C> <C> <C>
Loss before income taxes $ (2,547,643) $ (516,827) $ (419)
----------------------------- ------
----------------------------- ------
Tax effect at federal statutory rate (34%) $ 866,199 $ 175,721 $ 142
Tax effect (decrease) of:
Small company deduction 331,000 -- --
Change in valuation allowance 171,000 (171,000) --
Other 20,577 (4,721) (142)
----------------------------- ------
Income tax benefit $ 1,388,776 $ -- $ --
----------------------------- ------
----------------------------- ------
</TABLE>
57
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. FEDERAL INCOME TAXES (CONTINUED)
The tax effect of individual temporary differences and the amount of the related
valuation allowance established against the Company's deferred income tax assets
at December 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1997 1996
-----------------------------
<S> <C> <C>
Deferred income tax assets:
Unrealized depreciation of fixed maturity
securities $ -- $ 69,000
Deferred policy acquisition costs -- 152,000
Policy benefit reserves 5,239,000 187,000
Provision for experience rating refunds 182,000 305,000
Net operating loss carryforwards -- 124,000
Other 52,000 3,000
-----------------------------
5,473,000 840,000
Deferred income tax liabilities:
Unrealized appreciation of fixed maturity
securities (108,336) --
Deferred policy acquisition costs (727,000) --
Value of insurance in force acquired (457,000) (587,000)
Other (335,167) (13,000)
-----------------------------
(1,627,503) (600,000)
Valuation allowance on deferred income tax assets,
including amounts attributable to unrealized
depreciation on available-for-sale fixed
maturity securities of $69,000 at December 31,
1996 -- (240,000)
-----------------------------
Deferred income tax asset $ 3,845,497 $ --
-----------------------------
-----------------------------
</TABLE>
The Company regularly reviews its needs for a valuation allowance against its
deferred income tax assets. During the year ended December 31, 1997, the Company
became taxable and it is expected that it will continue to pay federal income
taxes in the foreseeable future. As a result, the valuation allowance pertaining
to deferred income tax assets was removed at December 31, 1997.
9. NOTE PAYABLE TO PARENT
On October 18, 1996, the Company borrowed $2,500,000 from its parent, American
Equity Investment Life Holding Company, in the form of a surplus note. The note
calls for the Company to pay the principal amount of the note and interest
guarantee at an 8% annual rate. Any scheduled payment of interest or repayment
of principal may be paid only out of the Company's earnings, subject to approval
by the Insurance Division, Department of Commerce, of the State of Iowa.
10. RETIREMENT PLAN
During 1996, the Company adopted a contributory defined contribution plan which
is qualified under Section 401(k) of the Internal Revenue Service Code. The plan
covers substantially all full-time employees of the Company, subject to minimum
eligibility requirements. Employees can contribute up to 15% of their annual
salary (with a maximum contribution of $9,500 in 1997) to the plan. The Company
contributes an additional amount, subject to limitations, based on the voluntary
contribution of the employee. Further, the plan provides for additional employer
contributions based on the discretion of the Board of Directors. The Company
contributed $19,434 with respect to this plan during the year ended December 31,
1997. No contributions were made during 1996 to the plan.
11. STATUTORY FINANCIAL INFORMATION
CAPITAL RESTRICTIONS
Iowa Insurance Laws require domestic insurers to maintain a minimum of $5.0
million capital and surplus.
Prior approval of statutory authorities is required for the payment of dividends
to the Company's stockholder which exceed an annual limitation. During 1998, the
Company could pay dividends to its parent of approximately $6,471,000 without
prior approval from regulatory authorities.
58
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STATUTORY FINANCIAL INFORMATION (CONTINUED)
STATUTORY ACCOUNTING POLICIES
The financial statements of the Company included herein differ from related
statutory-basis principally as follows: (a) the bond portfolio is segregated
into held-for-investment (carried at amortized cost), available-for-sale
(carried at fair value), and trading (reported at fair value) classifications
rather than generally being carried at amortized cost; (b) acquisition costs of
acquiring new business are deferred and amortized over the life of the policies
rather than charged to operations as incurred; (c) the excess of purchase price
over net assets acquired in business combinations is allocated to identifiable
intangibles such as value of insurance in force acquired, rather than being
entirely attributable to goodwill (a portion of which may be non-admitted); (d)
policy reserves on traditional life and accident and health products are based
on reasonable assumptions of expected mortality, morbidity, interest and
withdrawals which include a provision for possible adverse deviation from such
assumptions which may differ from reserves based on statutory mortality rates
and interest; (e) future policy benefit reserves on certain universal life and
annuity products are based on full account values, rather than discounting
methodologies utilizing statutory interest rates; (f) reinsurance amounts are
shown as gross amounts, net of an allowance for uncollectible amounts, on the
balance sheet rather than netted against the corresponding receivable or
payable; (g) deferred income taxes are provided for the difference between the
financial statement and income tax bases of assets and liabilities; (h) net
realized gains or losses attributed to changes in the level of interest rates in
the market are recognized as gains or losses in the statement of operations when
the sale is completed rather than deferred and amortized over the remaining life
of the fixed maturity security or mortgage loan; (i) declines in the estimated
realizable value of investments are charged to the statement of operations for
declines in value, when such declines in value are judged to be other than
temporary rather than through the establishment of a formula-determined
statutory investment reserve (carried as a liability), changes in which are
charged directly to surplus, (j) agents' balances and certain other assets
designated as "non-admitted assets" for statutory purposes are reported as
assets rather than being charged to surplus; (k) revenues for universal life and
annuity products consist of policy charges for the cost of insurance, policy
administration charges, amortization of policy initiation fees and surrender
charges assessed rather than premiums received; and (l) pension income or
expense is recognized in accordance with SFAS No. 87, EMPLOYERS' ACCOUNTING FOR
PENSIONS, rather than in accordance with rules and regulations permitted by the
Employee Retirement Income Security Act of 1974; (m) surplus notes are reported
as a liability rather than as a component of capital and surplus; and (n) assets
and liabilities are restated to fair values when a change in ownership occurs,
rather than continuing to be presented at historical cost.
Net income (loss) for the Company as determined in accordance with statutory
accounting practices was $4,470,284, $1,174,811 and $(419) in 1997, 1996 and
1995, respectively, and total statutory capital and surplus of the Company was
$64,709,809 and $17,302,272 at December 31, 1997 and 1996, respectively.
The National Association of Insurance Commissioners (NAIC) is in the process of
codifying statutory accounting practices (Codification). Codification will
likely change, to some extent, prescribed statutory accounting practices and may
result in changes to the accounting practices that the Company uses to prepare
its statutory-basis financial statements. Codification, which was approved by
the NAIC in March 1998, will require adoption by the various states before it
becomes the prescribed statutory basis of accounting for insurance companies
domesticated within those states. Accordingly, before Codification becomes
effective for the Company, the State of Iowa must adopt Codification as the
prescribed basis of accounting on which domestic insurers must report their
statutory-basis results to the Insurance Division. At this time, it is unclear
whether the State of Iowa will adopt Codification.
12. COMMITMENTS AND CONTINGENCIES
The Company has entered into General Agency Commission and Servicing Agreement
with American Equity Investment Service Company (the Service Company),
wholly-owned by the Company's chairman. Under the agreement, the Service Company
acts as a national supervisory agent with responsibility for paying commissions
to agents of the Company. The Service Company is obligated to pay a specified
percentage of all commissions due to sales agents with the Company paying the
remainder. The Company then pays renewal commissions to the Service Company
(which are deferred as policy acquisition costs) over a six-year period on all
policies remaining in force. During the year ended December 31, 1997, the
Service Company paid $11,470,576 to agents of the Company and the Company paid
renewal commissions to the Service Company of $1,360,410. At December 31, 1997,
accounts payable to the Service Company aggregated $985,194 and is included in
other liabilities.
59
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company leases its home office space and certain other equipment under
operating leases which expire through October 2002. During the years ended
December 31, 1997 and 1996, rent expense totaled $341,982 and $147,662,
respectively. At December 31, 1997, minimum rental payments due under all
noncancelable operating leases with initial terms of one year or more are:
<TABLE>
<S> <C>
Year ending December 31:
1998 $ 176,000
1999 176,000
2000 176,000
2001 176,000
2002 103,000
---------
$ 807,000
---------
---------
</TABLE>
Assessments are, from time to time, levied on the Company by life and health
guaranty associations by most states in which the Company is licensed to cover
losses to policyholders of insolvent or rehabilitated companies. In some states,
these assessments can be partially recovered through a reduction in future
premium taxes. Given the short period since inception, management believes that
assessments against the Company for failure known to date will be minimal.
13. IMPACT OF YEAR 2000 (UNAUDITED)
The Company has developed a plan to assess its information technology needs to
be ready for the Year 2000. During 1996, the Company purchased a new policy
administration system which the vendor has represented is Year 2000 compliant.
Additionally, the Company has begun converting any remaining non-compliant data
processing systems. The Company currently expects the project to be
substantially completed by early 1999 and does not expect the cost to modify
systems used in the normal course of business to be significant. While
additional testing will be conducted on its systems through the Year 2000, the
Company does not expect this project to have a significant effect on operating
activities.
To mitigate the effect of outside influences and other dependencies relative to
the Year 2000, the Company's plan includes procedures to contact significant
customers, suppliers and other third parties whose success in addressing their
own Year 2000 issue will impact the Company's initiative. To the extent these
third parties would be unable to transact business in the Year 2000 and
thereafter, it could adversely affect the Company's operations.
60
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
- --------------------------------------------------------------------------------
ILLUSTRATIONS OF DEATH BENEFITS AND ACCUMULATED VALUES
The following tables illustrate how the death benefits,
Accumulated Values and Surrender Values of a Policy may
vary over an extended period of time at certain ages,
assuming hypothetical gross rates of investment return
for the Investment Options equivalent to constant gross
annual rates of 0%, 4%, 8% and 12%. The hypothetical
rates of investment return are for purposes of
illustration only and should not be deemed a
representation of past or future rates of investment
return. Actual rates of return for a particular Policy
may be more or less than the hypothetical investment
rates of return and will depend on a number of factors
including the investment allocations made by a
Policyowner. Also, values would be different from those
shown if the gross annual investment returns averaged 0%,
4%, 8% and 12% over a period of years but fluctuated
above and below those averages for individual Policy
Years.
The amounts shown are as of the end of each Policy Year.
The tables assume that the assets in the Investment
Options are subject to an annual expense ratio of 0.77%
of the average daily net assets. This annual expense
ratio is based on the average of the expense ratios of
each of the Investment Options available under the Policy
for the last fiscal year and takes into account current
expense reimbursement arrangements. The fees and expenses
of each Investment Option vary, and in 1997 the total
fees and expenses ranged from an annual rate of 0.33% to
an annual rate of 1.06% of average daily net assets. For
information on Investment Option expenses, see the
prospectuses for the Investment Options.
The tables reflect deduction of the premium expense
charge, the monthly Policy expenses charge, the
first-year monthly administrative charge, the first-year
monthly expense charge, the daily charge for the
Company's assumption of mortality and expense risks, and
cost of insurance charges for the hypothetical Insured.
The surrender values illustrated in the tables also
reflect deduction of applicable surrender charges. The
current charges and the higher guaranteed maximum charges
the Company may charge are reflected in separate tables
on each of the following pages.
Applying the current charges and the average Investment
Option fees and expenses of 0.77% of average net assets,
the gross annual rates of investment return of 0%, 4%, 8%
and 12% would produce net annual rates of return of
-1.82%, 2.18%, 6.18% and 10.18%, respectively, on a
guaranteed basis, and -1.67%, 2.33%, 6.33% and 10.33%,
respectively, on a current basis.
The hypothetical values shown in the tables do not
reflect any charges for federal income taxes against the
Variable Account since the Company is not currently
making such charges. However, such charges may be made in
the future and, in that event, the gross annual
investment rate of return would have to exceed 0%, 4%, 8%
or 12% by an amount sufficient to cover tax charges in
order to produce the death benefits and Accumulated
Values illustrated. (See "FEDERAL TAX MATTERS--Taxation
of the Company.")
The tables illustrate the Policy values that would result
based upon the hypothetical investment rates of return if
premiums are paid as indicated, if all Net Premiums are
allocated to the Variable Account and if no Policy Loans
have been made. The tables are also based on the
assumptions that the Policyowner has not requested an
increase or decrease in Specified Amount, and that no
partial withdrawals or transfers have been made.
For comparative purposes, the second column of each table
shows the amount to which the premiums would accumulate
if an amount equal to those premiums were invested to
earn interest at 5% compounded annually.
* * *
Upon request, the Company will provide a comparable
illustration based upon the proposed insured's age, sex
and premium class, the Specified Amount or premium
requested, and the proposed frequency of premium
payments.
A-1
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
FEMALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION A
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $553
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING
ASSUMING 0% HYPOTHETICAL GROSS RETURN,
0% HYPOTHETICAL GROSS RETURN, NON-GUARANTEED CURRENT COST OF INSURANCE
GUARANTEED MAXIMUM COST OF INSURANCE CHARGES, CHARGES, AND NON-GUARANTEED CURRENT
AND GUARANTEED MAXIMUM EXPENSE CHARGES EXPENSE CHARGES
PREMIUMS ------------------------------------------------ -----------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
----------- ------------- --------------- ----------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1............... $ 581 $ 106 $ 0 $ 100,106 $ 227 $ 0 $ 100,227
2............... 1,190 367 0 100,367 563 0 100,563
3............... 1,831 612 0 100,612 886 0 100,886
4............... 2,503 * * * 1,194 218 101,194
5............... 3,208 * * * 1,488 512 101,488
6............... 3,950 * * * 1,766 930 101,766
7............... 4,728 * * * 2,028 1,375 102,028
8............... 5,545 * * * 2,273 1,795 102,273
9............... 6,403 * * * 2,502 2,191 102,502
10............... 7,303 * * * 2,715 2,563 102,715
15............... 12,530 * * * 3,482 3,482 103,482
20............... 19,200 * * * 3,611 3,611 103,611
25............... 27,713 * * * 2,976 2,976 102,976
30............... 38,578 * * * 1,329 1,329 101,329
35............... * * * * * * *
40............... * * * * * * *
45............... * * * * * * *
50............... * * * * * * *
55............... * * * * * * *
60............... * * * * * * *
65............... * * * * * * *
70............... * * * * * * *
75............... * * * * * * *
80............... * * * * * * *
Age 65............... 38,578 * * * 1,329 1,329 101,329
Age 70............... * * * * * * *
Age 115............... * * * * * * *
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 0% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF -1.82% ON A GUARANTEED BASIS AND -1.67% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-2
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
FEMALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION A
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $553
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING
ASSUMING 4% HYPOTHETICAL GROSS RETURN,
4% HYPOTHETICAL GROSS RETURN, NON-GUARANTEED CURRENT COST OF INSURANCE
GUARANTEED MAXIMUM COST OF INSURANCE CHARGES, CHARGES, AND NON-GUARANTEED CURRENT
AND GUARANTEED MAXIMUM EXPENSE CHARGES EXPENSE CHARGES
PREMIUMS ------------------------------------------------ -----------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
----------- ------------- --------------- ----------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1............... $ 581 $ 118 $ 0 $ 100,118 $ 242 $ 0 $ 100,242
2............... 1,190 399 0 100,399 604 0 100,604
3............... 1,831 674 0 100,674 967 0 100,967
4............... 2,503 * * * 1,329 353 101,329
5............... 3,208 * * * 1,691 715 101,691
6............... 3,950 * * * 2,049 1,213 102,049
7............... 4,728 * * * 2,404 1,751 102,404
8............... 5,545 * * * 2,754 2,276 102,754
9............... 6,403 * * * 3,101 2,790 103,101
10............... 7,303 * * * 3,443 3,291 103,443
15............... 12,530 * * * 5,013 5,013 105,013
20............... 19,200 * * * 6,141 6,141 106,141
25............... 27,713 * * * 6,575 6,575 106,575
30............... 38,578 * * * 5,895 5,895 105,895
35............... 52,445 * * * 3,166 3,166 103,166
40............... * * * * * * *
45............... * * * * * * *
50............... * * * * * * *
55............... * * * * * * *
60............... * * * * * * *
65............... * * * * * * *
70............... * * * * * * *
75............... * * * * * * *
80............... * * * * * * *
Age 65............... 38,578 * * * 5,895 5,895 105,895
Age 70............... 52,445 * * * 3,166 3,166 103,166
Age 115............... * * * * * * *
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 4% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF 2.18% ON A GUARANTEED BASIS AND 2.33% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 4%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-3
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
FEMALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION A
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $553
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING ASSUMING
8% HYPOTHETICAL GROSS RETURN, 8% HYPOTHETICAL GROSS RETURN,
GUARANTEED MAXIMUM COST OF INSURANCE NON-GUARANTEED CURRENT COST OF INSURANCE
CHARGES, AND GUARANTEED MAXIMUM EXPENSE CHARGES, AND NON-GUARANTEED CURRENT
CHARGES EXPENSE CHARGES
PREMIUMS ----------------------------------------- -----------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
----------- ------------- ------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1............... $ 581 $ 130 $ 0 $ 100,130 $ 257 $ 0 $ 100,257
2............... 1,190 432 0 100,432 647 0 100,647
3............... 1,831 740 0 100,740 1,053 77 101,053
4............... 2,503 1,053 77 101,053 1,476 500 101,476
5............... 3,208 1,371 395 101,371 1,916 940 101,916
6............... 3,950 1,692 856 101,692 2,373 1,537 102,373
7............... 4,728 2,014 1,361 102,014 2,846 2,193 102,846
8............... 5,545 2,337 1,859 102,337 3,336 2,858 103,336
9............... 6,403 2,662 2,351 102,662 3,845 3,534 103,845
10............... 7,303 2,988 2,836 102,988 4,374 4,222 104,374
15............... 12,530 4,581 4,581 104,581 7,279 7,279 107,279
20............... 19,200 5,844 5,844 105,844 10,530 10,530 110,530
25............... 27,713 6,274 6,274 106,274 14,032 14,032 114,032
30............... 38,578 4,908 4,908 104,908 17,513 17,513 117,513
35............... 52,445 * * * 20,079 20,079 120,079
40............... 70,143 * * * 20,259 20,259 120,259
45............... 92,730 * * * 14,180 14,180 114,180
50............... 121,558 * * * * * *
55............... * * * * * * *
60............... * * * * * * *
65............... * * * * * * *
70............... * * * * * * *
75............... * * * * * * *
80............... * * * * * * *
Age 65............... 38,578 4,908 4,908 104,908 17,513 17,513 117,513
Age 70............... 52,445 * * * 20,079 20,079 120,079
Age 115............... * * * * * * *
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 8% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF 6.18% ON A GUARANTEED BASIS AND 6.33% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 8%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-4
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
FEMALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION A
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $553
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING ASSUMING
12% HYPOTHETICAL GROSS RETURN, 12% HYPOTHETICAL GROSS RETURN,
GUARANTEED MAXIMUM COST OF INSURANCE NON-GUARANTEED CURRENT COST OF INSURANCE
CHARGES, AND GUARANTEED MAXIMUM EXPENSE CHARGES, AND NON-GUARANTEED CURRENT EXPENSE
CHARGES CHARGES
PREMIUMS ----------------------------------------- ----------------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
----------- ------------- ------------- ------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1............. $ 581 $ 142 $ 0 $ 100,142 $ 271 $ 0 $ 100,271
2............. 1,190 466 0 100,466 690 0 100,690
3............. 1,831 809 0 100,809 1,144 168 101,144
4............. 2,503 1,174 198 101,174 1,635 659 101,635
5............. 3,208 1,562 586 101,562 2,167 1,191 102,167
6............. 3,950 1,971 1,135 101,971 2,742 1,906 102,742
7............. 4,728 2,403 1,750 102,403 3,364 2,711 103,364
8............. 5,545 2,859 2,381 102,859 4,038 3,560 104,038
9............. 6,403 3,344 3,033 103,344 4,768 4,457 104,768
10............. 7,303 3,858 3,706 103,858 5,561 5,409 105,561
15............. 12,530 6,940 6,940 106,940 10,633 10,633 110,633
20............. 19,200 10,970 10,970 110,970 18,157 18,157 118,157
25............. 27,713 16,109 16,109 116,109 29,447 29,447 129,447
30............. 38,578 22,330 22,330 122,330 46,504 46,504 146,504
35............. 52,445 28,283 28,283 128,283 72,006 72,006 172,006
40............. 70,143 31,088 31,088 131,088 110,081 110,081 210,081
45............. 92,730 21,633 21,633 121,633 165,382 165,382 265,382
50............. 121,558 * * * 245,204 245,204 345,204
55............. 158,351 * * * 359,631 359,631 459,631
60............. 205,309 * * * 523,479 523,479 623,479
65............. 265,240 * * * 701,287 701,287 801,287
70............. 341,730 * * * 896,995 896,995 996,995
75............. 439,352 * * * 1,185,875 1,185,875 1,285,875
80............. 563,945 * * * 1,637,969 1,637,969 1,737,969
Age 65............. 38,578 22,330 22,330 122,330 46,504 46,504 146,504
Age 70............. 52,445 28,283 28,283 128,283 72,006 72,006 172,006
Age 115............. 563,945 * * * 1,637,969 1,637,969 1,737,969
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 12% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF 10.18% ON A GUARANTEED BASIS AND 10.33% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-5
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
FEMALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION B
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $553
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING
ASSUMING 0% HYPOTHETICAL GROSS RETURN,
0% HYPOTHETICAL GROSS RETURN, NON-GUARANTEED CURRENT COST OF INSURANCE
GUARANTEED MAXIMUM COST OF INSURANCE CHARGES, CHARGES, AND NON-GUARANTEED CURRENT
AND GUARANTEED MAXIMUM EXPENSE CHARGES EXPENSE CHARGES
PREMIUMS ---------------------------------------------- -----------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
----------- ------------- ------------- ----------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1............... $ 581 $ 107 $ 0 $ 100,000 $ 228 $ 0 $ 100,000
2............... 1,190 369 0 100,000 565 0 100,000
3............... 1,831 614 0 100,000 888 0 100,000
4............... 2,503 * * * 1,198 222 100,000
5............... 3,208 * * * 1,494 518 100,000
6............... 3,950 * * * 1,775 939 100,000
7............... 4,728 * * * 2,039 1,386 100,000
8............... 5,545 * * * 2,288 1,810 100,000
9............... 6,403 * * * 2,522 2,211 100,000
10............... 7,303 * * * 2,740 2,588 100,000
15............... 12,500 * * * 3,546 3,546 100,000
20............... 19,200 * * * 3,740 3,740 100,000
25............... 27,713 * * * 3,190 3,190 100,000
30............... 38,578 * * * 1,624 1,624 100,000
35............... * * * * * * *
40............... * * * * * * *
45............... * * * * * * *
50............... * * * * * * *
55............... * * * * * * *
60............... * * * * * * *
Age 65............... 38,578 * * * 1,624 1,624 100,000
Age 70............... * * * * * * *
Age 115............... * * * * * * *
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 0% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF -1.82% ON A GUARANTEED BASIS AND -1.67% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-6
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
FEMALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION B
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $553
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING
ASSUMING 4% HYPOTHETICAL GROSS RETURN,
4% HYPOTHETICAL GROSS RETURN, NON-GUARANTEED CURRENT COST OF INSURANCE
GUARANTEED MAXIMUM COST OF INSURANCE CHARGES, CHARGES, AND NON-GUARANTEED CURRENT
AND GUARANTEED MAXIMUM EXPENSE CHARGES EXPENSE CHARGES
PREMIUMS ------------------------------------------------ -----------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
----------- ------------- --------------- ----------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1............... $ 581 $ 119 $ 0 $ 100,000 $ 242 $ 0 $ 100,000
2............... 1,190 400 0 100,000 605 0 100,000
3............... 1,831 676 0 100,000 969 0 100,000
4............... 2,503 * * * 1,334 358 100,000
5............... 3,208 * * * 1,698 722 100,000
6............... 3,950 * * * 2,059 1,223 100,000
7............... 4,728 * * * 2,418 1,765 100,000
8............... 5,545 * * * 2,774 2,296 100,000
9............... 6,403 * * * 3,126 2,815 100,000
10............... 7,303 * * * 3,477 2,325 100,000
15............... 12,530 * * * 5,110 5,110 100,000
20............... 19,200 * * * 6,367 6,367 100,000
25............... 27,713 * * * 7,023 7,023 100,000
30............... 38,578 * * * 6,683 6,683 100,000
35............... 52,445 * * * 4,404 4,404 100,000
40............... 70,143 * * * * * *
45............... * * * * * * *
50............... * * * * * * *
55............... * * * * * * *
60............... * * * * * * *
65............... * * * * * * *
70............... * * * * * * *
75............... * * * * * * *
80............... * * * * * * *
Age 65............... 38,578 * * * 6,683 6,683 100,000
Age 70............... 52,445 * * * 4,404 4,404 100,000
Age 115............... * * * * * * *
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 4% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF 2.18% ON A GUARANTEED BASIS AND 2.33% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 4%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-7
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
FEMALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION B
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $553
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING ASSUMING
8% HYPOTHETICAL GROSS RETURN, 8% HYPOTHETICAL GROSS RETURN,
GUARANTEED MAXIMUM COST OF INSURANCE NON-GUARANTEED CURRENT COST OF INSURANCE
CHARGES, AND GUARANTEED MAXIMUM EXPENSE CHARGES, AND NON-GUARANTEED CURRENT
CHARGES EXPENSE CHARGES
PREMIUMS ----------------------------------------- -----------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
----------- ------------- ------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1............... $ 581 $ 131 $ 0 $ 100,000 $ 257 $ 0 $ 100,000
2............... 1,190 433 0 100,000 648 0 100,000
3............... 1,831 743 0 100,000 1,056 80 100,000
4............... 2,503 1,058 82 100,000 1,481 505 100,000
5............... 3,208 1,380 404 100,000 1,924 948 100,000
6............... 3,950 1,705 869 100,000 2,385 1,549 100,000
7............... 4,728 2,033 1,380 100,000 2,863 2,210 100,000
8............... 5,545 2,364 1,886 100,000 3,360 2,882 100,000
9............... 6,403 2,698 2,387 100,000 3,878 3,567 100,000
10............... 7,303 3,036 2,884 100,000 4,418 4,266 100,000
15............... 12,530 4,731 4,731 100,000 7,426 7,426 100,000
20............... 19,200 6,217 6,217 100,000 10,930 10,930 100,000
25............... 27,713 7,073 7,073 100,000 14,975 14,975 100,000
30............... 38,578 6,434 6,434 100,000 19,552 19,552 100,000
35............... 52,445 1,834 1,834 100,000 24,290 24,290 100,000
40............... 70,143 * * * 28,619 28,619 100,000
45............... 92,730 * * * 32,407 30,407 100,000
50............... 121,558 * * * 25,872 25,872 100,000
55............... * * * * 4,724 4,724 100,000
60............... * * * * * * *
65............... * * * * * * *
70............... * * * * * * *
75............... * * * * * * *
80............... * * * * * * *
Age 65............... 38,578 6,434 6,434 100,000 19,552 19,552 100,000
Age 70............... 52,445 1,834 1,834 100,000 24,290 24,290 100,000
Age 115............... * * * * * * *
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 8% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF 6.18% ON A GUARANTEED BASIS AND 6.33% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 8%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-8
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
FEMALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION B
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $553
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING
ASSUMING 12% HYPOTHETICAL GROSS RETURN,
12% HYPOTHETICAL GROSS RETURN, NON-GUARANTEED CURRENT COST OF INSURANCE
GUARANTEED MAXIMUM COST OF INSURANCE CHARGES, CHARGES, AND NON-GUARANTEED CURRENT EXPENSE
AND GUARANTEED MAXIMUM EXPENSE CHARGES CHARGES
PREMIUMS ---------------------------------------------- ----------------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------------- ------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1........ $ 581 $ 143 $ 0 $ 100,000 $ 272 $ 0 $ 100,000
2........ 1,190 467 0 100,000 691 0 100,000
3........ 1,831 813 0 100,000 1,146 170 100,000
4........ 2,503 1,180 204 100,000 1,640 664 100,000
5........ 3,208 1,572 596 100,000 2,176 1,200 100,000
6........ 3,950 1,987 1,151 100,000 2,756 1,920 100,000
7........ 4,728 2,426 1,773 100,000 3,385 2,732 100,000
8........ 5,545 2,893 2,415 100,000 4,068 3,590 100,000
9........ 6,403 3,390 3,079 100,000 4,810 4,499 100,000
10........ 7,303 3,922 3,770 100,000 5,619 5,467 100,000
15........ 12,530 7,171 7,171 100,000 10,856 10,856 100,000
20........ 19,200 11,653 11,653 100,000 18,865 18,865 100,000
25........ 27,713 17,902 17,902 100,000 31,429 31,429 100,000
30........ 38,578 26,751 26,751 100,000 51,677 51,677 100,000
35........ 52,445 39,032 39,032 100,000 85,218 85,218 100,000
40........ 70,143 57,039 57,039 100,000 141,152 141,152 151,032
45........ 92,730 86,186 86,186 100,000 232,243 232,243 243,855
50........ 121,558 139,258 139,258 146,220 378,555 378,555 397,483
55........ 158,351 220,540 220,540 231,567 611,274 611,274 641,838
60........ 205,309 348,805 348,805 352,293 987,640 987,640 997,517
65........ 265,240 551,296 551,296 556,809 1,597,290 1,597,290 1,613,263
70........ 341,730 850,593 850,593 859,099 2,563,667 2,563,667 2,589,304
75........ 439,352 1,310,844 1,310,844 1,323,952 4,103,173 4,103,173 4,144,205
80........ 563,945 2,018,604 2,018,604 2,038,790 6,555,314 6,555,314 6,620,867
Age 65........ 38,578 26,751 26,751 100,000 51,677 51,677 100,000
Age 70........ 52,445 39,032 39,032 100,000 85,218 85,218 100,000
Age 115........ 563,945 2,018,604 2,018,604 2,038,790 6,555,314 6,555,314 6,620,867
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 12% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF 10.18% ON A GUARANTEED BASIS AND 10.33% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-9
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION A
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $709
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING ASSUMING
0% HYPOTHETICAL GROSS RETURN, 0% HYPOTHETICAL GROSS RETURN,
GUARANTEED MAXIMUM COST OF INSURANCE NON-GUARANTEED CURRENT COST OF INSURANCE
CHARGES, AND GUARANTEED MAXIMUM EXPENSE CHARGES, AND NON-GUARANTEED CURRENT
CHARGES EXPENSE CHARGES
PREMIUMS ----------------------------------------- -----------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
----------- ------------- ------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1............... $ 744 $ 227 $ 0 $ 100,227 $ 356 $ 0 $ 100,356
2............... 1,526 608 0 100,608 818 0 100,818
3............... 2,347 969 0 100,969 1,265 0 101,265
4............... 3,209 1,311 23 101,311 1,696 408 101,696
5............... 4,114 1,634 503 101,634 2,110 979 102,110
6............... 5,064 1,933 1,013 101,933 2,507 1,587 102,507
7............... 6,061 2,209 1,491 102,209 2,884 2,166 102,884
8............... 7,109 2,462 1,936 102,462 3,243 2,717 103,243
9............... 8,209 2,689 2,347 102,689 3,582 3,240 103,582
10............... 9,364 2,890 2,723 102,890 3,900 3,733 103,900
15............... 16,064 3,419 3,419 103,419 5,091 5,091 105,091
20............... 24,616 2,870 2,870 102,870 5,391 5,391 105,391
25............... 35,530 539 539 100,539 4,348 4,348 104,348
30............... 49,460 * * * 1,345 1,345 101,345
35............... * * * * * * *
40............... * * * * * * *
45............... * * * * * * *
50............... * * * * * * *
55............... * * * * * * *
60............... * * * * * * *
65............... * * * * * * *
70............... * * * * * * *
75............... * * * * * * *
80............... * * * * * * *
Age 65............... 49,460 * * * 1,345 1,345 101,345
Age 70............... * * * * * * *
Age 115............... * * * * * * *
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 0% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF -1.82% ON A GUARANTEED BASIS AND -1.67% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-10
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION A
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $709
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING ASSUMING
4% HYPOTHETICAL GROSS RETURN, 4% HYPOTHETICAL GROSS RETURN,
GUARANTEED MAXIMUM COST OF INSURANCE NON-GUARANTEED CURRENT COST OF INSURANCE
CHARGES, AND GUARANTEED MAXIMUM EXPENSE CHARGES, AND NON-GUARANTEED CURRENT
CHARGES EXPENSE CHARGES
PREMIUMS ----------------------------------------- -----------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
----------- ------------- ------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1............... $ 744 $ 244 $ 0 $ 100,244 $ 376 $ 0 $ 100,376
2............... 1,526 655 0 100,655 875 0 100,875
3............... 2,347 1,062 0 101,062 1,379 91 101,379
4............... 3,209 1,465 177 101,465 1,885 597 101,885
5............... 4,114 1,863 732 101,863 2,393 1,262 102,393
6............... 5,064 2,252 1,332 102,252 2,902 1,982 102,902
7............... 6,061 2,632 1,914 102,632 3,411 2,693 103,411
8............... 7,109 3,001 2,475 103,001 3,918 3,392 103,918
9............... 8,209 3,356 3,014 103,356 4,424 4,082 104,424
10............... 9,364 3,696 3,529 103,696 4,925 4,758 104,925
15............... 16,064 5,061 5,061 105,061 7,268 7,268 107,268
20............... 24,616 5,450 5,450 105,450 9,023 9,023 109,023
25............... 35,530 3,872 3,872 103,872 9,545 9,545 109,545
30............... 49,460 * * * 7,882 7,882 107,882
35............... 67,239 * * * 2,685 2,685 102,685
40............... * * * * * * *
45............... * * * * * * *
50............... * * * * * * *
55............... * * * * * * *
60............... * * * * * * *
65............... * * * * * * *
70............... * * * * * * *
75............... * * * * * * *
80............... * * * * * * *
Age 65............... 49,460 * * * 7,882 7,882 107,882
Age 70............... 67,239 * * * 2,685 2,685 102,685
Age 115............... * * * * * * *
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 4% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF 2.18% ON A GUARANTEED BASIS AND 2.33% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 4%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-11
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION A
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $709
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING ASSUMING
8% HYPOTHETICAL GROSS RETURN, 8% HYPOTHETICAL GROSS RETURN,
GUARANTEED MAXIMUM COST OF INSURANCE NON-GUARANTEED CURRENT COST OF INSURANCE
CHARGES, AND GUARANTEED MAXIMUM EXPENSE CHARGES, AND NON-GUARANTEED CURRENT
CHARGES EXPENSE CHARGES
PREMIUMS ----------------------------------------- -----------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
----------- ------------- ------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1............... $ 744 $ 262 $ 0 $ 100,262 $ 396 $ 0 $ 100,396
2............... 1,526 704 0 100,704 934 0 100,934
3............... 2,347 1,161 0 101,161 1,499 211 101,499
4............... 3,209 1,632 344 101,632 2,090 802 102,090
5............... 4,114 2,119 988 102,119 2,708 1,577 102,708
6............... 5,064 2,618 1,698 102,618 3,355 2,435 103,355
7............... 6,061 3,130 2,412 103,130 4,029 3,311 104,029
8............... 7,109 3,653 3,127 103,653 4,734 4,208 104,734
9............... 8,209 4,187 3,845 104,187 5,468 5,126 105,468
10............... 9,364 4,731 4,564 104,731 6,234 6,067 106,234
15............... 16,064 7,512 7,512 107,512 10,479 10,479 110,479
20............... 24,616 10,025 10,025 110,025 15,290 15,290 115,290
25............... 35,530 11,210 11,210 111,210 20,241 20,241 120,241
30............... 49,460 9,110 9,110 109,110 24,497 24,497 124,497
35............... 67,239 * * * 26,620 26,620 126,620
40............... 89,929 * * * 23,935 23,935 123,935
45............... 118,889 * * * 11,882 11,882 111,882
50............... * * * * * * *
55............... * * * * * * *
60............... * * * * * * *
65............... * * * * * * *
70............... * * * * * * *
75............... * * * * * * *
80............... * * * * * * *
Age 65............... 49,460 9,110 9,110 109,110 24,497 24,497 124,497
Age 70............... 67,239 * * * 26,620 26,620 126,620
Age 115............... * * * * * * *
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 8% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF 6.18% ON A GUARANTEED BASIS AND 6.33% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 8%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-12
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION A
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $709
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING ASSUMING
12% HYPOTHETICAL GROSS RETURN, 12% HYPOTHETICAL GROSS RETURN,
GUARANTEED MAXIMUM COST OF INSURANCE NON-GUARANTEED CURRENT COST OF INSURANCE
CHARGES, AND GUARANTEED MAXIMUM EXPENSE CHARGES, AND NON-GUARANTEED CURRENT EXPENSE
CHARGES CHARGES
PREMIUMS ----------------------------------------- ----------------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
----------- ------------- ------------- ------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1............... $ 744 $ 279 $ 0 $ 100,279 $ 416 $ 0 $ 100,416
2............... 1,526 754 0 100,754 995 0 100,995
3............... 2,347 1,265 0 101,265 1,625 337 101,625
4............... 3,029 1,814 526 101,814 2,311 1,023 102,311
5............... 4,114 2,404 1,273 102,404 3,059 1,928 103,059
6............... 5,064 3,037 2,117 103,037 3,871 2,951 103,871
7............... 6,061 3,715 2,997 103,715 4,755 4,037 104,755
8............... 7,109 4,442 3,916 104,442 5,717 5,191 105,717
9............... 8,209 5,221 4,879 105,221 6,763 6,421 106,763
10............... 9,364 6,055 5,888 106,055 7,901 7,734 107,901
15............... 16,064 11,166 11,166 111,166 15,221 15,221 115,221
20............... 24,616 18,106 18,106 118,106 26,134 26,134 126,134
25............... 35,530 26,953 26,953 126,953 42,232 42,232 142,232
30............... 49,460 37,265 37,265 137,265 65,833 65,833 165,833
35............... 67,239 47,076 47,076 147,076 100,390 100,390 200,390
40............... 89,929 51,519 51,519 151,519 150,776 150,776 250,776
45............... 118,889 39,636 39,636 139,636 223,892 223,892 323,892
50............... 155,849 * * * 331,464 331,464 431,464
55............... 203,020 * * * 491,497 491,497 591,497
60............... 263,225 * * * 733,492 733,492 833,492
65............... 340,062 * * * 1,044,009 1,044,009 1,144,009
70............... 438,129 * * * 1,457,833 1,457,833 1,557,833
75............... 563,290 * * * 2,103,237 2,103,237 2,203,237
80............... 723,030 * * * 3,138,146 3,138,146 3,238,146
Age 65............... 49,460 37,265 37,265 137,265 65,833 65,833 165,833
Age 70............... 67,239 47,076 47,076 147,076 100,390 100,390 200,390
Age 115............... 723,030 * * * 3,138,146 3,138,146 3,238,146
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 12% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF 10.18% ON A GUARANTEED BASIS AND 10.33% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-13
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION B
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $709
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING ASSUMING
0% HYPOTHETICAL GROSS RETURN, 0% HYPOTHETICAL GROSS RETURN,
GUARANTEED MAXIMUM COST OF INSURANCE NON-GUARANTEED CURRENT COST OF INSURANCE
CHARGES, AND GUARANTEED MAXIMUM EXPENSE CHARGES, AND NON-GUARANTEED CURRENT
CHARGES EXPENSE CHARGES
PREMIUMS ----------------------------------------- -----------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
----------- ------------- ------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1............... $ 744 $ 228 $ 0 $ 100,000 $ 356 $ 0 $ 100,000
2............... 1,526 610 0 100,000 820 0 100,000
3............... 2,347 973 0 100,000 1,269 0 100,000
4............... 3,209 1,319 31 100,000 1,702 414 100,000
5............... 4,114 1,645 514 100,000 2,120 989 100,000
6............... 5,064 1,949 1,029 100,000 2,520 1,600 100,000
7............... 6,061 2,231 1,513 100,000 2,903 2,185 100,000
8............... 7,109 2,491 1,965 100,000 3,267 2,741 100,000
9............... 8,209 2,726 2,384 100,000 3,613 3,271 100,000
10............... 9,364 2,936 2,769 100,000 3,940 3,773 100,000
15............... 16,064 3,533 3,533 100,000 5,195 5,195 100,000
20............... 24,616 3,086 3,086 100,000 5,611 5,611 100,000
25............... 35,530 852 852 100,000 4,746 4,746 100,000
30............... 49,460 * * * 1,920 1,920 100,000
35............... * * * * * * *
40............... * * * * * * *
45............... * * * * * * *
50............... * * * * * * *
55............... * * * * * * *
60............... * * * * * * *
Age 65............... 49,460 * * * 1,920 1,920 100,000
Age 70............... * * * * * * *
Age 115............... * * * * * * *
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 0% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF -1.82% ON A GUARANTEED BASIS AND -1.67% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-14
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION B
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $709
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING ASSUMING
4% HYPOTHETICAL GROSS RETURN, 4% HYPOTHETICAL GROSS RETURN,
GUARANTEED MAXIMUM COST OF INSURANCE NON-GUARANTEED CURRENT COST OF INSURANCE
CHARGES, AND GUARANTEED MAXIMUM EXPENSE CHARGES, AND NON-GUARANTEED CURRENT
CHARGES EXPENSE CHARGES
PREMIUMS ----------------------------------------- -----------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
----------- ------------- ------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1............... $ 744 $ 245 $ 0 $ 100,000 $ 376 $ 0 $ 100,000
2............... 1,526 657 0 100,000 877 0 100,000
3............... 2,347 1,067 0 100,000 1,382 94 100,000
4............... 3,209 1,473 185 100,000 1,891 603 100,000
5............... 4,114 1,876 745 100,000 2,404 1,273 100,000
6............... 5,064 2,271 1,351 100,000 2,918 1,998 100,000
7............... 6,061 2,659 1,941 100,000 3,433 2,715 100,000
8............... 7,109 3,037 2,511 100,000 3,949 3,423 100,000
9............... 8,209 3,404 3,062 100,000 4,464 4,122 100,000
10............... 9,364 3,758 3,591 100,000 4,977 4,810 100,000
15............... 16,064 5,235 5,235 100,000 7,424 7,424 100,000
20............... 24,616 5,840 5,840 100,000 9,407 9,407 100,000
25............... 35,530 4,612 4,612 100,000 10,371 10,371 100,000
30............... 49,460 * * * 9,442 9,442 100,000
35............... 67,239 * * * 5,185 5,185 100,000
40............... * * * * * * *
45............... * * * * * * *
50............... * * * * * * *
55............... * * * * * * *
60............... * * * * * * *
65............... * * * * * * *
70............... * * * * * * *
75............... * * * * * * *
80............... * * * * * * *
Age 65............... 49,460 * * * 9,442 9,442 100,000
Age 70............... 67,239 * * * 5,185 5,185 100,000
Age 115............... * * * * * * *
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 4% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF 2.18% ON A GUARANTEED BASIS AND 2.33% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 4%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-15
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION B
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $709
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING ASSUMING
8% HYPOTHETICAL GROSS RETURN, 8% HYPOTHETICAL GROSS RETURN,
GUARANTEED MAXIMUM COST OF INSURANCE NON-GUARANTEED CURRENT COST OF INSURANCE
CHARGES, AND GUARANTEED MAXIMUM EXPENSE CHARGES, AND NON-GUARANTEED CURRENT
CHARGES EXPENSE CHARGES
PREMIUMS ----------------------------------------- -----------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
----------- ------------- ------------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1............... $ 744 $ 262 $ 0 $ 100,000 $ 396 $ 0 $ 100,000
2............... 1,526 706 0 100,000 936 0 100,000
3............... 2,347 1,166 0 100,000 1,503 215 100,000
4............... 3,209 1,642 354 100,000 2,097 809 100,000
5............... 4,114 2,134 1,003 100,000 2,721 1,590 100,000
6............... 5,064 2,641 1,721 100,000 3,373 2,453 100,000
7............... 6,061 3,162 2,444 100,000 4,056 3,338 100,000
8............... 7,109 3,698 3,172 100,000 4,771 4,245 100,000
9............... 8,209 4,248 3,906 100,000 5,519 5,177 100,000
10............... 9,364 4,812 4,645 100,000 6,302 6,135 100,000
15............... 16,064 7,777 7,777 100,000 10,715 10,715 100,000
20............... 24,616 10,370 10,370 100,000 15,964 15,964 100,000
25............... 35,530 12,875 12,875 100,000 21,964 21,964 100,000
30............... 49,460 12,634 12,634 100,000 28,543 28,543 100,000
35............... 67,239 6,389 6,389 100,000 35,461 35,461 100,000
40............... 89,929 * * * 42,205 42,205 100,000
45............... 118,889 * * * 47,783 47,783 100,000
50............... 155,849 * * * 51,074 51,074 100,000
55............... 203,020 * * * 48,862 48,862 100,000
60............... 263,225 * * * 31,665 31,665 100,000
65............... * * * * * * *
70............... * * * * * * *
75............... * * * * * * *
80............... * * * * * * *
Age 65............... 49,460 12,634 12,634 100,000 28,543 28,543 100,000
Age 70............... 67,239 6,389 6,389 100,000 35,461 35,461 100,000
Age 115............... * * * * * *
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 8% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF 6.18% ON A GUARANTEED BASIS AND 6.33% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 8%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-16
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE AGE 35 AT LAST BIRTHDAY
DEATH BENEFIT OPTION B
INITIAL SPECIFIED AMOUNT $100,000--ANNUAL PREMIUM OF $709
NON-TOBACCO PREMIUM CLASS
<TABLE>
<CAPTION>
ASSUMING
ASSUMING 12% HYPOTHETICAL GROSS RETURN,
12% HYPOTHETICAL GROSS RETURN, NON-GUARANTEED CURRENT COST OF INSURANCE
GUARANTEED MAXIMUM COST OF INSURANCE CHARGES, CHARGES, AND NON-GUARANTEED CURRENT EXPENSE
AND GUARANTEED MAXIMUM EXPENSE CHARGES CHARGES
PREMIUMS ---------------------------------------------- ----------------------------------------------
END OF ACCUMULATED END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR END OF YEAR
POLICY AT 5% ACCUMULATED SURRENDER DEATH ACCUMULATED SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ----------------- ------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1.......... $ 744 $ 280 $ 0 $ 100,000 $ 416 $ 0 $ 100,000
2.......... 1,526 757 0 100,000 997 0 100,000
3.......... 2,347 1,270 0 100,000 1,630 342 100,000
4.......... 3,209 1,824 536 100,000 2,320 1,032 100,000
5.......... 4,114 2,421 1,290 100,000 3,073 1,942 100,000
6.......... 5,064 3,063 2,143 100,000 3,893 2,973 100,000
7.......... 6,061 3,754 3,036 100,000 4,787 4,069 100,000
8.......... 7,109 4,498 3,972 100,000 5,763 5,237 100,000
9.......... 8,209 5,299 4,957 100,000 6,828 6,486 100,000
10.......... 9,364 6,161 5,994 100,000 7,991 7,824 100,000
15.......... 16,064 11,570 11,570 100,000 15,577 15,577 100,000
20.......... 24,616 19,375 19,375 100,000 27,319 27,319 100,000
25.......... 35,530 30,601 30,601 100,000 45,823 45,823 100,000
30.......... 49,460 47,217 47,217 100,000 76,063 76,063 100,000
35.......... 67,239 73,564 73,564 100,000 126,351 126,351 146,567
40.......... 89,929 119,623 119,623 127,997 207,621 207,621 222,154
45.......... 118,889 194,460 194,460 204,183 339,949 339,949 356,946
50.......... 155,849 310,265 310,265 325,778 551,451 551,451 579,024
55.......... 203,020 484,714 484,714 508,949 886,595 886,595 930,925
60.......... 263,225 761,269 761,269 768,882 1,429,750 1,429,750 1,444,047
65.......... 340,062 1,200,489 1,200,489 1,212,494 2,311,648 2,311,648 2,334,764
70.......... 438,129 1,849,850 1,849,850 1,868,348 3,709,698 3,709,698 3,746,795
75.......... 563,290 2,848,418 2,848,418 2,876,902 5,936,787 5,936,787 5,996,154
80.......... 723,030 4,383,986 4,383,986 4,427,826 9,483,956 9,483,956 9,578,795
Age 65.......... 49,460 47,217 47,217 100,000 76,063 76,063 100,000
Age 70.......... 67,239 73,564 73,564 100,000 126,351 126,351 146,567
Age 115.......... 723,030 4,383,986 4,383,986 4,427,826 9,483,956 9,483,956 9,578,795
</TABLE>
- ------------------------------
* In the absence of an additional premium, the Policy would lapse.
The values illustrated assume the premium is paid at the beginning of the Policy
Year. Values would be different if premiums are paid with a different frequency
or in different amounts.
The values and benefits are as of the Policy Year shown. They assume that no
Policy Loans or partial withdrawals have been made. Excessive Policy Loans or
partial withdrawals may cause this Policy to lapse because of insufficient Net
Accumulated Value.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE ARE
ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST, OR A
PREDICTION OF FUTURE, INVESTMENT RATES OF RETURN. THE ACTUAL INVESTMENT RATES OF
RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF INFLATION AND THE
ALLOCATIONS MADE BY A POLICYOWNER AMONG THE SUBACCOUNTS. THE GROSS HYPOTHETICAL
ANNUAL INVESTMENT RATES OF RETURN OF 12% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF 10.18% ON A GUARANTEED BASIS AND 10.33% ON A CURRENT BASIS,
RESPECTIVELY. THE DEATH BENEFIT AND ACCUMULATED VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 12%
OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED FOR ANY PERIOD OF TIME.
A-17
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
DEATH BENEFIT OPTIONS OPTION A EXAMPLE. For purposes of this example, assume
that the Insured's Attained Age is between 0 and 40 and
that there is no outstanding Policy Debt. Under Option A,
a Policy with a Specified Amount of $50,000 will
generally provide a death benefit of $50,000 plus
Accumulated Value. Thus, for example, a Policy with a
Accumulated Value of $5,000 will have a death benefit of
$55,000 ($50,000 + $5,000); a Accumulated Value of
$10,000 will provide a death benefit of $60,000 ($50,000
+ $10,000). The death benefit, however, must be at least
2.50 multiplied by the Accumulated Value. As a result, if
the Accumulated Value of the Policy exceeds $33,333, the
death benefit will be greater than the Specified Amount
plus Accumulated Value. Each additional dollar of
Accumulated Value above $33,333 will increase the death
benefit by $2.50. A Policy with a Specified Amount of
$50,000 and a Accumulated Value of $40,000 will provide a
death benefit of $100,000 ($40,000 x 2.50); a Accumulated
Value of $60,000 will provide a death benefit of $150,000
($60,000 x 2.50).
Similarly, any time Accumulated Value exceeds $33,333,
each dollar taken out of Accumulated Value will reduce
the death benefit by $2.50. If, for example, the
Accumulated Value is reduced from $40,000 to $35,000
because of partial withdrawals, charges, or negative
investment performance, the death benefit will be reduced
from $100,000 to $87,500. If at any time, however,
Accumulated Value multiplied by the specified amount
factor is less than the Specified Amount plus the
Accumulated Value, then the death benefit will be the
current Specified Amount plus Accumulated Value of the
Policy.
The specified amount factor becomes lower as the
Insured's Attained Age increases. If the Attained Age of
the Insured in the example above were, for example, 50
(rather than under 40), the specified amount factor would
be 1.85. The amount of the death benefit would be the sum
of the Accumulated Value plus $50,000 unless the
Accumulated Value exceeded $58,824 (rather than $33,333),
and each dollar then added to or taken from the
Accumulated Value would change the death benefit by $1.85
(rather than $2.50).
OPTION B EXAMPLE. For purposes of this example, assume
that the Insured's Attained Age is between 0 and 40 and
that there is no outstanding Policy Debt. Under Option B,
a Policy with a $50,000 Specified Amount will generally
pay $50,000 in death benefits. However, because the death
benefit must be equal to or be greater than 2.50
multiplied by the Accumulated Value, any time the
Accumulated Value of the Policy exceeds $20,000, the
death benefit will exceed the $50,000 Specified Amount.
Each additional dollar added to Accumulated Value above
$20,000 will increase the death benefit by $2.50. A
Policy with a $50,000 Specified Amount and a Accumulated
Value of $30,000 will provide death proceeds of $75,000
($30,000 x 2.50); a Accumulated Value of $40,000 will
provide a death benefit of $100,000 ($40,000 x 2.50); a
Accumulated Value of $50,000 will provide a death benefit
of $125,000 ($50,000 x 2.50).
Similarly, so long as Accumulated Value exceeds $20,000,
each dollar taken out of Accumulated Value will reduce
the death benefit by $2.50. If, for example, the
Accumulated Value is reduced from $25,000 to $20,000
because of partial withdrawals, charges, or negative
investment performance, the death benefit will be reduced
from $62,500 to $50,000. If at any time, however, the
Accumulated Value multiplied by the specified amount
factor is less than the Specified Amount, the death
benefit will equal the current Specified Amount of the
Policy.
The specified amount factor becomes lower as the
Insured's Attained Age increases. If the Attained Age of
the Insured in the example above were, for example, 50
(rather than between 0 and 40), the specified amount
factor would be 1.85. The death proceeds would not exceed
the $50,000 Specified Amount unless the Accumulated Value
exceeded approximately $27,028 (rather than $20,000), and
each dollar then added to or taken from the Accumulated
Value would change the life insurance proceeds by $1.85
(rather than $2.50).
B-1
<PAGE>
<TABLE>
<CAPTION>
SPECIFIED AMOUNT FACTOR TABLE
- ---------------------------------------------------------
ATTAINED AGE SPECIFIED AMOUNT FACTOR
- ------------------------ -------------------------------
<S> <C>
40 or younger 2.50
41 2.43
42 2.36
43 2.29
44 2.22
45 2.15
46 2.09
47 2.03
48 1.97
49 1.91
50 1.85
51 1.78
52 1.71
53 1.64
54 1.57
55 1.50
56 1.46
57 1.42
58 1.38
59 1.34
60 1.30
61 1.28
62 1.26
63 1.24
64 1.22
65 1.20
66 1.19
67 1.18
68 1.17
69 1.16
70 1.15
71 1.13
72 1.11
73 1.09
74 1.07
75 to 90 1.05
91 1.04
92 1.03
93 1.02
94 to 114 1.01
115 1.00
</TABLE>
B-2
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX C
- --------------------------------------------------------------------------------
MAXIMUM SURRENDER CHARGES
The chart below reflects the maximum surrender charge per
$1,000 of Specified Amount for selected issue ages as
policy years increase.
Male, Non-Tobacco
<TABLE>
<CAPTION>
POLICY YEAR
ISSUE AGE 1 2 3 4 5 6 7 8
- ------------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10 5.50 5.50 5.50 5.50 5.50 5.50 4.30 3.15
20 7.46 7.46 7.46 7.46 7.46 6.46 5.05 3.70
30 10.48 10.48 10.48 10.48 9.85 8.01 6.26 4.59
40 16.08 16.08 16.08 15.81 13.22 10.75 8.39 6.14
50 25.74 25.74 25.74 22.86 19.06 15.46 12.03 8.77
60 56.18 48.88 41.98 35.48 29.36 23.61 18.21 13.17
70 57.48 49.03 41.24 34.10 27.56 21.62 16.26 11.44
80 57.48 46.35 36.74 28.53 21.60 15.82 11.08 7.25
Male, Tobacco
<CAPTION>
POLICY YEAR
ISSUE AGE 1 2 3 4 5 6 7 8
- ------------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10 N/A N/A N/A N/A N/A N/A N/A N/A
20 12.00 12.00 12.00 10.90 9.12 7.42 5.79 4.24
30 17.48 17.48 16.34 13.95 11.66 9.49 7.41 5.42
40 27.74 26.34 22.80 19.43 16.22 13.16 10.25 7.49
50 44.66 39.17 33.75 28.62 23.76 19.18 14.86 10.79
60 57.48 49.60 42.24 35.39 29.02 23.12 17.67 12.65
70 57.48 48.27 39.97 32.50 25.84 19.94 14.74 10.20
80 57.48 45.30 35.12 26.68 19.79 14.22 9.78 6.30
Female, Non-Tobacco
<CAPTION>
POLICY YEAR
ISSUE AGE 1 2 3 4 5 6 7 8
- ------------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10 5.30 5.30 5.30 5.30 5.30 5.15 4.03 2.95
20 5.66 5.66 5.66 5.66 5.66 5.66 4.69 3.44
30 8.04 8.04 8.04 8.04 8.04 7.37 5.76 4.22
40 11.98 11.98 11.98 11.98 11.84 9.63 7.52 5.50
50 17.96 17.96 17.96 17.96 16.44 13.34 10.40 7.60
60 43.60 40.26 34.72 29.46 24.49 19.79 15.34 11.15
70 57.48 49.61 42.25 35.38 28.99 23.06 17.59 12.56
80 57.48 47.51 38.62 30.77 23.90 17.97 12.92 8.67
Female, Tobacco
<CAPTION>
POLICY YEAR
ISSUE AGE 1 2 3 4 5 6 7 8
- ------------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10 N/A N/A N/A N/A N/A N/A N/A N/A
20 7.76 7.76 7.76 7.76 7.76 6.47 5.06 3.71
30 11.40 11.40 11.40 11.40 9.97 8.11 6.34 4.64
40 17.34 17.34 17.34 15.90 13.28 10.79 8.41 6.15
50 25.82 25.82 25.82 22.19 18.49 14.97 11.65 8.49
60 51.72 45.03 38.72 32.76 27.14 21.86 16.89 12.24
70 57.48 49.36 41.81 34.82 28.36 22.43 17.01 12.07
80 57.48 47.10 37.97 29.99 23.11 17.24 12.29 8.19
Unisex, Non-Tobacco
<CAPTION>
POLICY YEAR
ISSUE AGE 1 2 3 4 5 6 7 8
- ------------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10 5.50 5.50 5.50 5.50 5.50 5.43 4.24 3.11
20 7.10 7.10 7.10 7.10 7.10 6.37 4.98 3.65
30 9.98 9.98 9.98 9.98 9.69 7.88 6.16 4.51
40 15.24 15.24 15.24 15.24 12.94 10.52 8.21 6.01
50 24.16 24.16 24.16 22.20 18.51 15.01 11.69 8.53
60 53.96 46.98 40.38 34.16 28.29 22.77 17.59 12.73
70 57.48 49.17 41.48 34.39 27.89 21.95 16.56 11.70
80 57.48 46.67 37.26 29.15 22.24 16.42 11.60 7.65
Unisex, Tobacco
<CAPTION>
POLICY YEAR
ISSUE AGE 1 2 3 4 5 6 7 8
- ------------------------------------------ --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10 N/A N/A N/A N/A N/A N/A N/A N/A
20 11.14 11.14 11.14 10.61 8.88 7.23 5.64 4.13
30 16.26 16.26 15.85 13.53 11.32 9.20 7.19 5.26
40 25.60 25.32 21.92 18.68 15.59 12.66 9.86 7.20
50 40.68 37.18 32.05 27.19 22.60 18.25 14.15 10.28
60 57.48 49.70 42.42 35.62 29.28 23.38 17.91 12.86
70 57.48 48.56 40.46 33.12 26.52 20.61 15.35 10.70
80 57.48 45.95 36.14 27.88 20.98 15.30 10.69 6.98
<CAPTION>
ISSUE AGE 9 10 11+
- ------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
10 2.05 1.00 0.00
20 2.41 1.18 0.00
30 2.99 1.46 0.00
40 3.99 1.95 0.00
50 5.69 2.77 0.00
60 8.46 4.07 0.00
70 7.14 3.34 0.00
80 4.21 1.83 0.00
Male, Tobacco
ISSUE AGE 9 10 11+
- ------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
10 N/A N/A N/A
20 2.76 1.35 0.00
30 3.53 1.72 0.00
40 4.86 2.37 0.00
50 6.96 3.37 0.00
60 8.04 3.83 0.00
70 6.26 2.88 0.00
80 3.60 1.55 0.00
Female, Non-Tobacco
ISSUE AGE 9 10 11+
- ------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
10 1.92 0.94 0.00
20 2.24 1.10 0.00
30 2.75 1.34 0.00
40 3.58 1.75 0.00
50 4.93 2.40 0.00
60 7.20 3.49 0.00
70 7.96 3.78 0.00
80 5.15 2.29 0.00
Female, Tobacco
ISSUE AGE 9 10 11+
- ------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
10 N/A N/A N/A
20 2.41 1.18 0.00
30 3.02 1.48 0.00
40 4.00 1.95 0.00
50 5.50 2.67 0.00
60 7.88 3.80 0.00
70 7.60 3.59 0.00
80 4.83 2.13 0.00
Unisex, Non-Tobacco
ISSUE AGE 9 10 11+
- ------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
10 2.02 0.99 0.00
20 2.38 1.16 0.00
30 2.94 1.43 0.00
40 3.91 1.91 0.00
50 5.53 2.69 0.00
60 8.18 3.95 0.00
70 7.33 3.44 0.00
80 4.47 1.96 0.00
Unisex, Tobacco
ISSUE AGE 9 10 11+
- ------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
10 N/A N/A N/A
20 2.69 1.32 0.00
30 3.42 1.67 0.00
40 4.68 2.28 0.00
50 6.64 3.22 0.00
60 8.20 3.92 0.00
70 6.62 3.07 0.00
80 4.05 1.76 0.00
</TABLE>
C-1
