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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
REGISTRATION NO. 333-45815
811-08643
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2 /X/
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AMERICAN EQUITY LIFE VARIABLE ACCOUNT
(Exact Name of Registrant)
AMERICAN EQUITY INVESTMENT
LIFE INSURANCE COMPANY
(Name of Depositor)
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5000 WESTOWN PARKWAY, SUITE 440
WEST DES MOINES, IOWA 50266
(Address of Principal Executive Office)
DEBRA J. RICHARDSON
5000 WESTOWN PARKWAY, SUITE 440
WEST DES MOINES, IOWA 50266
(Name and Address of Agent for Service of Process)
------------------------
COPY TO:
STEPHEN E. ROTH, ESQUIRE
SUTHERLAND ASBILL & BRENNAN LLP
1275 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-2415
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER
THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE
BOX):
/X/ IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (b) OF RULE 485;
/ / ON (DATE) PURSUANT TO PARAGRAPH (b) OF RULE 485;
/ / DAYS AFTER FILING PURSUANT TO PARAGRAPH (a) OF RULE 485;
/ / ON (DATE) PURSUANT TO PARAGRAPH (a) OF RULE 485.
TITLE OF SECURITIES BEING REGISTERED: FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICIES
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AMERICAN EQUITY LIFE VARIABLE ACCOUNT
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
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PROSPECTUS
May 1, 1999
American Equity Investment Life Insurance Company is offering a flexible premium
variable life insurance policy described in this prospectus. American Equity
("we," "us" or "our") designed the policy: (1) to provide lifetime insurance
protection to age 115; and (2) to permit the purchaser of a policy ("you," or
"your") to vary premium payments and adjust the death proceeds payable under the
policy.
Under the policy, we will pay:
- death proceeds upon the insured's death, and
- a net surrender value or net accumulated value upon complete surrender or
partial withdrawal of the policy.
You may allocate net premiums under a policy to one or more of the subaccounts
of American Equity Life Variable Account (the "Variable Account"). Death
proceeds may, and accumulated value will, vary with the investment experience of
the Variable Account. Each subaccount invests exclusively in shares of the
investment options listed below. Current prospectuses that describe the
investment objectives and risks of each investment option must accompany or
precede this prospectus.
<TABLE>
<S> <C>
EquiTrust Variable Insurance Series Fund: T. Rowe Price Equity Series, Inc.:
Value Growth Portfolio Equity Income Portfolio
High Grade Bond Portfolio Mid-Cap Growth Portfolio
High Yield Bond Portfolio New America Growth Portfolio
Money Market Portfolio Personal Strategy Balanced Portfolio
Blue Chip Portfolio T. Rowe Price International Series,
Inc.:
International Stock Portfolio
</TABLE>
Dreyfus Variable Investment Fund:
Capital Appreciation Portfolio
Disciplined Stock Portfolio
Growth & Income Portfolio
International Equity Portfolio
Small Cap Portfolio
You may also allocate net premiums to the Declared Interest Option, which is
supported by our General Account. We credit amounts allocated to the Declared
Interest Option with at least a 4% annual interest rate.
Please carefully consider replacing any existing insurance with the policy.
American Equity does not claim that investing in the policy is similar or
comparable to investing in a mutual fund.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE SECURITIES
OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Please read this prospectus carefully and retain it for future reference.
Issued By:
American Equity Investment Life Insurance Company
5000 Westown Parkway, Suite 440
West Des Moines, Iowa 50266
1-888-349-4650
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
DEFINITIONS................................................................................................... 3
SUMMARY OF THE POLICY......................................................................................... 5
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY AND THE VARIABLE ACCOUNT.................................... 9
American Equity Investment Life Insurance Company....................................................... 9
The Variable Account.................................................................................... 9
Investment Options...................................................................................... 10
Addition, Deletion or Substitution of Investments....................................................... 12
THE POLICY.................................................................................................... 13
Purchasing the Policy................................................................................... 13
Premiums................................................................................................ 14
Examination of Policy (Cancellation Privilege).......................................................... 15
Policy Lapse and Reinstatement.......................................................................... 16
Special Transfer Privilege.............................................................................. 16
POLICY BENEFITS............................................................................................... 17
Accumulated Value Benefits.............................................................................. 17
Transfers............................................................................................... 19
Loan Benefits........................................................................................... 20
Death Proceeds.......................................................................................... 22
Accelerated Payments of Death Proceeds.................................................................. 24
Benefits at Maturity.................................................................................... 25
Payment Options......................................................................................... 25
CHARGES AND DEDUCTIONS........................................................................................ 27
Premium Expense Charge.................................................................................. 27
Monthly Deduction....................................................................................... 27
Transfer Charge......................................................................................... 29
Partial Withdrawal Fee.................................................................................. 30
Surrender Charge........................................................................................ 30
Variable Account Charges................................................................................ 30
THE DECLARED INTEREST OPTION.................................................................................. 31
General Description..................................................................................... 31
Declared Interest Option Accumulated Value.............................................................. 31
Transfers, Partial Withdrawals, Surrenders and Policy Loans............................................. 32
GENERAL PROVISIONS............................................................................................ 32
The Contract............................................................................................ 32
Incontestability........................................................................................ 32
Change of Provisions.................................................................................... 32
Misstatement of Age or Sex.............................................................................. 33
Suicide Exclusion....................................................................................... 33
Annual Report........................................................................................... 33
Non-Participation....................................................................................... 33
Ownership of Assets..................................................................................... 33
Written Notice.......................................................................................... 33
Postponement of Payments................................................................................ 33
Continuance of Insurance................................................................................ 34
Ownership............................................................................................... 34
The Beneficiary......................................................................................... 34
Changing the Policyowner or Beneficiary................................................................. 35
Additional Insurance Benefits........................................................................... 35
</TABLE>
1
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
DISTRIBUTION OF THE POLICIES.................................................................................. 35
FEDERAL TAX MATTERS........................................................................................... 36
Introduction............................................................................................ 36
Tax Status of the Policy................................................................................ 36
Tax Treatment of Policy Benefits........................................................................ 36
Possible Tax Law Change................................................................................. 38
Taxation of the Company................................................................................. 38
Employment-Related Benefit Plans........................................................................ 38
ADDITIONAL INFORMATION........................................................................................ 38
FINANCIAL STATEMENTS.......................................................................................... 42
</TABLE>
The Policy is not available in all States.
This prospectus constitutes an offering only in those jurisdictions where such
offering may lawfully be made.
American Equity has not authorized any dealer, salesman or other person to give
any information or make any representations in connection with this offering
other than those contained in this prospectus. Do not rely on any such other
information or representations.
2
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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 Company's administrative offices 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 the Policyowner named in the application, or
by later designation, to receive the death proceeds upon the Insured's death.
BUSINESS DAY: Each day that the New York Stock Exchange is open for trading,
except the day after Thanksgiving, the weekdays before and after Christmas (in
1999), the weekday after New Year's Day (in 2000) and any day on which the
Administrative 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, WE, US, OUR: 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. Policyowners
may allocate Net Premiums and transfer Accumulated Value to the Declared
Interest Option. The Company credits Accumulated Value in the Declared Interest
Option with interest at an annual rate guaranteed to be at least 4%.
DELIVERY DATE: The date when the Company issues the Policy and mails it 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 Company issues a Policy.
INVESTMENT OPTION: A separate investment portfolio of a Fund.
MATURITY DATE: The Insured's Attained Age 115. It is the date when 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
Company makes the monthly deduction on the Business Day coinciding with or
immediately following the Monthly Deduction Day. (See "CHARGES AND
DEDUCTIONS--Monthly Deduction.")
NET ACCUMULATED VALUE: The Accumulated Value of the Policy reduced by any
outstanding Policy Debt and increased by any unearned loan interest.
3
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NET ASSET VALUE: The total current value of each Subaccount's securities, cash,
receivables and other assets less liabilities.
NET PREMIUM: The amount of premium remaining after we deduct the premium expense
charge (see "CHARGES AND DEDUCTIONS--Premium Expense Charge"). The Company will
allocate this amount, 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.
PARTIAL WITHDRAWAL FEE: A fee we assess at the time of any parital withdrawal
equal to the lesser of $25 or 2% of the amount withdrawn.
POLICY: The flexible premium variable life insurance policy we offer and
describe in this prospectus, which term includes the Policy described in this
prospectus, the Policy application, and 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 we use 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 the Policyowner borrows from the Company using the Policy
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, YOU, YOUR: 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 we assess 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. We use this amount to
calculate the premium expense charge during periods when we declare a premium
expense charge less than the 7% guaranteed premium expense charge. We may
declare a lower percentage of premium expense charge on premiums paid in excess
of the Target Premium during a Policy Year. We also use Target Premium to
calculate registered representatives' compensation.
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 the Company established to receive and invest the Net Premiums paid
under the Policies.
4
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SUMMARY OF THE POLICY
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The following is a summary of the Policy's features. Please read the entire
Prospectus and the Policy for more detailed information. 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.
THE POLICY
- The Policy is a flexible premium variable life insurance policy
providing for:
- death proceeds payable to the Beneficiary upon the Insured's death,
- the accumulation of Accumulated Value,
- withdrawal and surrender options, and
- loan privileges.
- We normally issue a Policy for a minimum Specified Amount of $50,000,
but we may issue Policies for lower Specified Amounts.
- You have flexibility in determining the frequency and amount of
premiums. (See "THE POLICY--Premiums.")
- We do not guarantee the amount and/or duration of the life insurance
coverage.
- Accumulated Value may increase or decrease, depending upon the
investment experience of the assets supporting the Policy. You bear the
investment risk of any depreciation of, and reap the benefit of any
appreciation in, the value of the underlying assets.
- If the Insured is alive and the Policy is in force on the Maturity Date,
we will pay you the Accumulated Value as of the end of the Business Day
coinciding with or immediately following the Maturity Date, reduced by
any outstanding Policy Debt.
- CANCELLATION PRIVILEGE. You may examine and cancel the Policy by
returning the Policy to us before midnight of the 20th day after you
received the Policy. We will refund you the greater of:
- premiums paid, or
- the Accumulated Value on the Business Day we receive the Policy
plus any charges we deducted. (See "THE POLICY--Examination of
Policy (Cancellation Privilege).")
THE VARIABLE ACCOUNT
- The Variable Account has 15 Subaccounts, each of which invests
exclusively in one of the following Investment Options offered by the
Funds:
<TABLE>
<S> <C>
- Value Growth Portfolio - Personal Strategy Balanced Portfolio
- High Grade Bond Portfolio - International Stock Portfolio
- High Yield Bond Portfolio - Capital Appreciation Portfolio
- Money Market Portfolio - Disciplined Stock Portfolio
- Blue Chip Portfolio - International Equity Portfolio
- Equity Income Portfolio - Small Cap Portfolio
- Mid-Cap Growth Portfolio - Growth & Income Portfolio
- New America Growth Portfolio
</TABLE>
- You may instruct us to allocate Net Premiums and transfer Accumulated
Values to any of the Subaccounts.
- We will allocate your initial premium to the Declared Interest Option.
5
<PAGE>
- We will automatically allocate, without charge, your Accumulated Value
in the Declared Interest Option according to your allocation
instructions upon the earlier of:
(1) the date we receive a signed notice that you have received the
Policy, or
(2) 25 days after the Delivery Date.
- If we receive Net Premiums before (1) or (2) above, we will allocate
those monies to the Declared Interest Option.
- We will allocate Net Premiums received after (1) or (2) above according
to your allocation instructions.
THE DECLARED INTEREST OPTION
- You 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 (at least 4% annually). (See "THE DECLARED INTEREST
OPTION.")
PREMIUMS
- You choose when to pay and how much to pay.
- You must pay an initial premium that (when reduced by the premium
expense charge) is enough to pay the first monthly deduction.
- We deduct a premium expense charge from each payment. (See "CHARGES and
DEDUCTIONS--Premium Expense Charge.")
POLICY BENEFITS
ACCUMULATED VALUE BENEFITS (SEE "POLICY BENEFITS--ACCUMULATED VALUE BENEFITS.")
- Your Policy provides for a Accumulated Value. A Policy's Accumulated
Value varies to reflect
- the amount and frequency of premium payments,
- the investment experience of the Subaccounts,
- interest earned on Accumulated Value in the Declared Interest
Option,
- Policy Loans,
- partial withdrawals and
- charges we assess under the Policy.
- You may fully surrender your Policy and receive the Net Accumulated
Value.
- You may obtain a partial withdrawal of your Net Accumulated Value
(minimum $500) at any time before the Maturity Date.
- A partial withdrawal or surrender may have federal income tax
consequences. (See "FEDERAL TAX MATTERS".)
TRANSFERS (SEE "POLICY BENEFITS--TRANSFERS.")
- You may transfer amounts (minimum $100) among the Subaccounts an
unlimited number of times in a Policy Year.
- You may make one transfer per Policy Year between the Subaccounts and
the Declared Interest Option.
- The first transfer in a Policy Year is free. We may deduct a $25 charge
from the amount transferred on subsequent transfers in that Policy Year.
6
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- We do not count certain transfers for purposes of the one free transfer
limit. (See "THE POLICY--Special Transfer Privilege"; and "THE
POLICY--Premiums--Allocation of Net Premiums.")
LOANS (SEE POLICY BENEFITS--"LOAN BENEFITS.")
- You may borrow up to 90% of the Policy's Accumulated Value, less any
previously outstanding Policy Debt.
- We charge you a maximum annual interest rate of 5.5%.
- We secure your loan by segregating in the Declared Interest Option an
amount equal to the Policy Loan. We credit this amount with an effective
annual rate of interest equal to the greater of 4% or the current
effecitve loan interest rate minus no more than 3%.
- Policy Loans may have federal income tax consequences. (See "FEDERAL TAX
MATTERS.")
DEATH PROCEEDS (SEE "POLICY BENEFITS--DEATH PROCEEDS.")
- The Policy contains two death benefit options:
- 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.
- Option B--the death benefit is the greater of the Specified Amount,
or the Accumulated Value multiplied by the specified amount factor
for the Insured's Attained Age, as set forth in the Policy.
- 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.
- To determine the death proceeds, we reduce the death benefit by any
outstanding Policy Debt and increase the death benefit by any unearned
loan interest and any premiums paid after the date of death. We may pay
the proceeds in a lump sum or in accordance with a payment option.
- You may change the Specified Amount or the death benefit option.
CHARGES (SEE "CHARGES AND DEDUCTIONS")
PREMIUM EXPENSE CHARGE
- We deduct a Premium Expense Charge equal to 7% of each premium up to the
Target Premium (or 2% for each premium over the Target Premium). The
remaining amount is the Net Premium.
ACCUMULATED VALUE CHARGES
- Each month, we make a monthly deduction (that varies from month to
month) equal to the sum of:
- a cost of insurance charge,
- the cost of any additional insurance benefits added by rider, and
- a $5 policy expense charge.
- During the first 12 Policy Months and during the 12 Policy Months
immediately following an increase in Specified Amount, the monthly
deduction will include a first year monthly administrative charge of
$0.05 per $1,000 of Specified Amount.
- We apply a $5 first year monthly expense charge during the first 12
Policy Months.
- Upon partial withdrawal of a Policy, we assess a charge equal to the
lesser of $25 or 2.0% of the amount surrendered.
7
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- Upon surrender of a Policy during the first ten Policy Years, as well as
during the first ten Policy Years following an increase in Specified
Amount, we assess a charge per $1,000 of Specified Amount which varies
by age, sex, underwriting category and Policy Year (see "APPENDIX C--
Maximum Surrender Charges").
- We may deduct a $25 charge from the amount transferred on the second and
subsequent transfers in a Policy Year.
CHARGES AGAINST THE VARIABLE ACCOUNT
- We deduct a daily mortality and expense risk charge from the average
daily net assets of each Subaccount. The charge equals an effective
annual rate of .90%.
- We may assess a charge against the Variable Account for federal income
taxes that may be attributable to the Variable Account.
- Because the Variable Account purchases shares of the Investment Options,
the value of the average net assets of the Variable Account will reflect
the investment advisory fee and other expenses incurred by each
Investment Option. The following table indicates the Investment Options'
fees and expenses for 1998.
<TABLE>
<CAPTION>
OTHER TOTAL
EXPENSES EXPENSES
(AFTER WAIVER (AFTER WAIVER
ADVISORY OR OR
INVESTMENT OPTION FEE REIMBURSEMENT) REIMBURSEMENT)
<S> <C> <C> <C>
EquiTrust Variable Insurance Series Fund
Value Growth 0.45% 0.11% 0.56%
High Grade Bond 0.30% 0.20% 0.50%
High Yield Bond 0.45% 0.16% 0.61%
Money Market 0.25% 0.27% 0.52%
Blue Chip 0.20% 0.10% 0.30%
T. Rowe Price Equity Series, Inc.
Equity Income 0.85% 0.00% 0.85%(1)
Mid-Cap Growth 0.85% 0.00% 0.85%(1)
New America Growth 0.85% 0.00% 0.85%(1)
Personal Strategy Balanced 0.90% 0.00% 0.90%(1)
T. Rowe Price International Series, Inc.
International Stock 1.05% 0.00% 1.05%(1)
Dreyfus Variable Investment Fund
Capital Appreciation Portfolio 0.75% 0.06% 0.81%
Disciplined Stock Portfolio 0.75% 0.13% 0.88%
Growth & Income Portfolio 0.75% 0.03% 0.78%
International Equity Portfolio 0.75% 0.24% 0.99%
Small Cap Portfolio 0.75% 0.02% 0.77%
</TABLE>
(1) Total annual investment option expenses are an all-inclusive fee and
pay for investment management services and other operating costs.
8
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TAX TREATMENT (SEE "FEDERAL TAX MATTERS")
- If we issue a Policy on the basis of a standard premium class, we
believe that the Policy should qualify as a life insurance contract for
federal income tax purposes.
- If we issue a Policy 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.
- If 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--the Policyowner is not deemed to be
in constructive receipt of Accumulated Values under a Policy until there
is a distribution from the Policy.
- 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.
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AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY AND THE VARIABLE ACCOUNT
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AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
American Equity Investment Life Insurance Company was incorporated in the
State of Iowa on December 19, 1980. We are a full service underwriter of
annuity and insurance products through a network of over 13,000 independent
agents in the states of Alabama, Alaska, Arizona, Arkansas, California,
Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana,
Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota,
Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota,
Ohio, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas,
Utah, Washington, West Virginia, Wisconsin, Wyoming and the District of
Columbia. Our principal offices are at 5000 Westown Parkway, Suite 440, West
Des Moines, Iowa 50266.
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THE VARIABLE ACCOUNT
We established the Variable Account as a separate account on January 12,
1998. The Variable Account receives and invests the Net Premiums under the
Policy, and may receive and invest net premiums for any other variable life
insurance policies we issue.
The Variable Account's assets are our property, and they are available to
cover our general liabilities only to the extent that the Variable Account's
assets exceed its liabilities arising under the Policies and any other
policies it supports. The portion of the Variable Account's assets
attributable to the Policies generally are not chargeable with liabilities
arising out of any other business that we may conduct. We may transfer to
the General Account any Variable Account assets which are in excess of such
reserves and other Policy liabilities.
The Variable Account currently has 15 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.
We registered the Variable Account as a unit investment trust under the
Investment Company Act of 1940. The Variable Account meets the definition of
a separate account under the federal securities laws. Registration with the
Securities and Exchange Commission does not mean that the Commission
supervises the management or investment practices or policies of the
Variable Account or the Company. The Variable Account is also subject to the
laws of the State of Iowa which regulate the operations of insurance
companies domiciled in Iowa.
9
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INVESTMENT OPTIONS
The Variable Account invests in shares of the Investment Options described
below. Each of these Investment Options was formed as an investment vehicle
for insurance company separate accounts. Each Investment Option has its own
investment objectives and separately determines the income and losses for
that Investment Option. While you may be invested in all Subaccounts, we
only permit you to "actively participate" in a maximum of 10 Investment
Options at any one time.
The investment objectives and policies of certain Investment Options are
similar to the investment objectives and policies of other portfolios that
the same investment adviser, investment sub-adviser or manager may manage.
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,
investment sub-adviser or manager.
The paragraphs below summarize each Investment Option's investment
objectives and policies. There is no assurance that any Investment Option
will achieve its stated objectives. Please refer to the prospectus for each
Investment Option for more detailed information, including a description of
risks, for each Investment Option. The Investment Option prospectuses must
accompany or precede this Prospectus and you should read them carefully and
retain them for future reference.
EQUITRUST VARIABLE INSURANCE SERIES FUND. Equitrust Investment Management
Services, Inc. is this Fund's investment adviser. The Fund is comprised of six
portfolios, the following five of which are available under the Policy.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Value Growth Portfolio - This Portfolio seeks long-term capital appreciation.
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.
Portfolio pursues this objective by investing primarily in
debt securities rated AAA, AA or A by Standard & Poor's,
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 (commonly known as
"junk bonds"). 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, or in unrated securities of
comparable quality. An investment in this Portfolio may
entail greater than ordinary financial risk. (See the Fund
Prospectus "HIGHER RISK SECURITIES AND INVESTMENT
STRATEGIES--Lower Rated Debt Securities.")
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Money Market Portfolio - This Portfolio seeks maximum current income consistent with
liquidity and stability of principal. Portfolio pursues this
objective by investing in high quality short-term money
market instruments. The United States Government and its
agencies do not insure or guarantee an investment in the
Money Market Portfolio. There is no assurance that the
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. 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.
</TABLE>
T. ROWE PRICE EQUITY SERIES, INC. T. Rowe Price Associates, Inc. is the
investment adviser to the Fund.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
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.
Personal Strategy Balanced - This Portfolio seeks the highest total return over time
Portfolio consistent with an emphasis on both capital appreciation and
income.
</TABLE>
T. ROWE PRICE INTERNATIONAL SERIES, INC. Rowe Price-Fleming International, Inc.
is the investment adviser to the Fund.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
International Stock Portfolio - This Portfolio seeks to provide capital appreciation through
investments primarily in established companies based outside
the United States.
</TABLE>
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.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Dreyfus Variable Investment - This Portfolio primarily seeks long-term capital growth,
Fund: Capital Appreciation consistent with the preservation of capital; current income
Portfolio is a secondary investment objective. This Portfolio invests
primarily in the common stocks of domestic and foreign
issuers.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Dreyfus Variable Investment - This Portfolio seeks to provide investment results that are
Fund: Disciplined Stock greater than the total return performance of publicly-traded
Portfolio 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 - This Portfolio seeks to provide long-term capital growth,
Fund: Growth and Income current income and growth of income, consistent with
Portfolio reasonable investment risk by investing primarily in equity
securities, debt securities and money market instruments of
domestic and foreign issuers.
Dreyfus Variable Investment - This Portfolio seeks to maximize capital growth through
Fund: International Equity investments in equity securities of foreign issuers located
Portfolio throughout the world.
Dreyfus Variable Investment - This Portfolio seeks maximum capital appreciation by
Fund: Small Cap Portfolio 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.
</TABLE>
The Funds currently sell shares: (1) 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 (2) to separate accounts to serve as the
underlying investment for both variable life insurance policies and variable
annuity contracts. We currently do not foresee any disadvantage to
Policyowners arising from the sale of shares to support variable life
insurance policies and variable annuity contracts, or from shares being sold
to separate accounts of insurance companies that may or may not be
affiliated with the Company. However, we will monitor events in order to
identify any material irreconcilable conflicts that might possibly arise. In
that event, we would determine what action, if any, should be taken in
response to those events or conflicts. In addition, if we believe that a
Fund's response to any of those events or conflicts insufficiently protects
Policyowners, we will take appropriate action on our own, including
withdrawing the Variable Account's investment in that Fund. (See the Fund
prospectuses for more detail.)
We may receive compensation from an affiliate(s) of one or more of the Funds
based upon an annual percentage of the average assets we hold in the
Investment Options. These amounts are intended to compensate us for
administrative and other services we provide 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
We reserve the right, subject to compliance with applicable law, to make
additions to, deletions from or substitutions for the shares of the
Investment Options that the Variable Account holds or that the Variable
Account may purchase. If the shares of an Investment Option are no longer
available for investment or if, in our judgment, further investment in any
Investment Option should become inappropriate in view of the purposes of the
Variable Account, we reserve the right to dispose of the shares of any
Investment Option and to substitute shares of another Investment Option. We
will not
12
<PAGE>
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. In the event of any such substitution
or change, we may, by appropriate endorsement, make such changes in these
and other policies as may be necessary or appropriate to reflect such
substitution or change. 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.
We also reserve 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. We may establish new
subaccounts when, in our sole discretion, marketing, tax or investment
conditions warrant, and we may make any new subaccounts available to
existing Policyowners on a basis we determine. Subject to obtaining any
approvals or consents required by applicable law, we may transfer the assets
of one or more Subaccounts to any other Subaccount(s), or one or more
Subaccounts may be eliminated or combined with any other Subaccount(s) if,
in our sole discretion, marketing, tax or investment conditions warrant.
If we deem it to be in the best interests of persons having voting rights
under the Policies, we may
- operate the Variable Account as a management company under the
Investment Company Act of 1940,
- deregister the Variable Account under that Act in the event such
registration is no longer required, or,
- subject to obtaining any approvals or consents required by
applicable law, combine the Variable Account with other Company
separate accounts.
To the extent permitted by applicable law, we may also transfer the Variable
Account's assets associated with the Policies to another separate account.
In addition, we 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
- --------------------------------------------------------------------------------
PURCHASING THE POLICY
In order to issue a Policy, we must receive a completed application,
including payment of the initial premium, at our Administrative Office. We
ordinarily will issue a Policy 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 our underwriting rules
and we may, in our sole discretion, reject any application or premium for
any lawful reason. The minimum Specified Amount for which we will issue a
Policy is normally $50,000, although we may, in our discretion, issue
Policies with Specified Amounts of less than $50,000.
The effective date of insurance coverage under the Policy will be the later
of:
- the Policy Date,
- the date the Insured signs the last of any amendments to the initial
application required by our underwriting rules, or
- the date when we receive the full initial premium at the
Administrative Office.
The Policy Date will be the later of:
(1) the date of the initial application, or
13
<PAGE>
(2) the date we receive any additional information at the
Administrative Office if our underwriting rules require additional
medical or other information.
The Policy Date may also be any other date mutually agreed to by you and the
Company. If the later of (1) or (2) above is the 29th, 30th or 31st of any
month, the Policy Date will be the 28th of such month. We use the Policy
Date 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.
- --------------------------------------------------------------------------------
PREMIUMS
Subject to certain limitations, a Policyowner has flexibility in determining
the frequency and amount of premiums.
PREMIUM FLEXIBILITY. We do not require you to pay premiums in accordance
with a rigid and inflexible premium schedule. We may require you to pay an
initial premium that, when reduced by the 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, you 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 period of time on a quarterly, semi-annual or annual basis.
We may, at our discretion, permit you to make planned periodic premium
payments on a monthly basis. We ordinarily will send periodic reminder
notices 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.")
You are not required to pay premiums in accordance with the planned periodic
premium schedule. Furthermore, you have considerable flexibility to alter
the amount, frequency and the time period over which you pay planned
periodic premiums; however, we must consent to any periodic payment less
than $100. Changes in the planned premium schedule may have federal income
tax consequences. (See "FEDERAL TAX MATTERS.")
Paying 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 you do pay planned periodic premiums, 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, we may, in our discretion, waive this minimum requirement. We
reserve 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
you pay a premium that would result in total premiums exceeding the
applicable maximum premium limitation, we will accept only that portion of
the premium which will make total premiums equal the maximum. We will return
any part of the premium in excess of that amount and we will not accept
further premiums until allowed by the applicable maximum premium limitation.
14
<PAGE>
PAYMENT OF PREMIUMS. We will treat any payments you make first as payment of
any outstanding Policy Debt unless you indicate that the payment should be
treated otherwise. Where you make no indication, we will treat any portion
of a payment that exceeds the amount of any outstanding Policy Debt 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.")
ALLOCATING NET PREMIUMS. In the application for a Policy, you can allocate
Net Premiums or portions thereof to the Subaccounts, to the Declared
Interest Option, or both. We will allocate Net Premiums to the Declared
Interest Option if we receive them either
(1) before the date we obtain a signed notice from you that you
have received the Policy, or
(2) before the end of 25 days after the Delivery Date (the date we
issue and mail the Policy to you).
Upon the earlier of (1) or (2) above, we will automatically allocate the
Accumulated Value in the Declared Interest Option, without charge, among the
Subaccounts and Declared Interest Option in accordance with your allocation
instructions.
We allocate Net Premiums received on or after (1) or (2) above in accordance
with your instructions, to the Variable Account, the Declared Interest
Option, or both. You do not waive your cancellation privilege by sending us
the signed notice of receipt of the Policy (see "THE POLICY--Examination of
Policy (Cancellation Privilege)").
The following additional rules apply to Net Premium allocations:
- You must allocate at least 10% of each premium to any subaccount of
the Variable Account or to the Declared Interest Option.
- Your allocation percentages must be in whole numbers (we do not
permit fractional percentages).
- You may change the allocation percentages for future Net Premiums
without charge, at any time while the Policy is in force, by
providing us with a written notice signed by you on a form we
accept. The change will take effect on the date we receive the
written notice at the Administrative Office and will have no effect
on prior accumulated values.
- --------------------------------------------------------------------------------
EXAMINATION OF POLICY (CANCELLATION PRIVILEGE)
You may cancel the Policy by delivering or mailing written notice or sending
a telegram to us at the Administrative Office, and returning the Policy to
us at the Administrative Office before midnight of the 20th day you receive
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, we will refund, within seven days after
receipt of satisfactory notice of cancellation and the returned Policy at
our Administrative Office, an amount equal to the greater of:
- premiums paid, or
- the Accumulated Value on the Business Day on or next following the
date we receive the Policy at the Administrative Office, plus
- any premium expense charges we deducted, plus
- monthly deductions made on the Policy Date and any Monthly Deduction
Day, and
- amounts approximating the daily mortality and expense risk charges
against the Variable Account.
15
<PAGE>
- --------------------------------------------------------------------------------
POLICY LAPSE AND REINSTATEMENT
LAPSE. Your Policy may lapse (terminate without value) during the first
three Policy Years if the Net Accumulated Value, or after three Policy Years
if 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 we will deem the Policy 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.
A Grace Period of 61 days will commence on the date we send you a notice of
any insufficiency, at which time the Accumulated Value in each Subaccount
will be automatically transferred without charge to the Declared Interest
Option.
To avoid lapse and termination of the Policy without value, we must receive
from you 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"). If your Policy enters a Grace
Period, the amount transferred to the Declared Interest Option will remain
there unless and until you provide us with allocation instructions.
REINSTATEMENT. Prior to the Maturity Date, you may reinstate a lapsed Policy
at any time within five years of the Monthly Deduction Day immediately
preceding the Grace Period which expired without payment of the required
premium. You must submit the following items to us:
- A written application for reinstatement signed by the Policyowner
and the Insured;
- Evidence of insurability we deem satisfactory;
- 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
- 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 we did not deduct the first
year monthly administrative charge for a total of twelve Policy Months prior
to lapse, we will continue to deduct such charge following reinstatement of
the Policy until we have assessed such charge, both before and after the
lapse, for a total of 12 Policy Months. (See "CHARGES AND
DEDUCTIONS--Monthly Deduction.") We 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 we approve the application
for reinstatement. Upon reinstatement of your Policy, the amount tranferred
to the Declared Interest Option during the Grace Period will remain there
unless and until you provide us with allocation instructions.
- --------------------------------------------------------------------------------
SPECIAL TRANSFER PRIVILEGE
A Policyowner may, at any time prior to the Maturity Date while the Policy
is in force, operate the Policy as a flexible premium fixed-benefit life
insurance policy by requesting that we transfer all of the Accumulated Value
in the Variable Account to the Declared Interest Option. You may exercise
this special transfer privilege once each Policy Year. Once you exercise the
special transfer privilege, we automatically will credit all future premium
payments to the Declared Interest Option, until you request a change in
allocation to convert the Policy back to a flexible premium variable life
insurance policy. The Company will not impose any charge for transfers
resulting from the exercise of the special transfer privilege.
16
<PAGE>
- --------------------------------------------------------------------------------
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 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").
- --------------------------------------------------------------------------------
ACCUMULATED VALUE BENEFITS
SURRENDER AND WITHDRAWAL PRIVILEGES. At any time prior to the Maturity Date
while the Policy is in force, you may surrender the Policy or make a partial
withdrawal by sending a written request to the Company at our Administrative
Office. A Surrender Charge will apply to any surrender during the first ten
Policy Years, as well as during the first ten Policy Years following an
increase in Specified Amount. A Partial Withdrawal Fee equal to the lesser
of $25 or 2% of the amount withdrawn will be payable upon each partial
withdrawal. (See "CHARGES AND DEDUCTIONS--Surrender Charge, and --Partial
Withdrawal Fee"). We ordinarily mail surrender proceeds to the Policyowner
within seven days after we receive a signed request for a surrender at our
Administrative Office, although we may postpone payments under certain
circumstances. (See "GENERAL PROVISIONS-- Postponement of Payments.")
SURRENDERS. The amount payable upon surrender of the Policy is the Net
Accumulated Value at the end of the Valuation Period when we receive the
request. We may pay this amount 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"). If you surrender the entire Policy, all
insurance in force will terminate. See "FEDERAL TAX MATTERS" for a
discussion of the tax consequences associated with complete surrenders.
PARTIAL WITHDRAWALS. A Policyowner may obtain a portion of the Policy's Net
Accumulated Value upon partial withdrawal of the Policy.
- A partial surrender must be at least $500.
- A partial surrender cannot exceed the lesser of (1) the Net
Accumulated Value less $500 or (2) 90% of the Net Accumulated Value.
We deduct the Partial Withdrawal Fee from the remaining Accumulated Value.
The Policyowner may request that we pay the proceeds of a partial surrender
in a lump sum or under one of the payment options specified in the Policy.
(See "POLICY BENEFITS--Payment Options").
We will allocate a partial withdrawal (together with the Partial Withdrawal
Fee) among the Subaccounts and the Declared Interest Option in accordance
with the Policyowner's written instructions. If we do not receive any such
instructions with the request for partial withdrawal, we will allocate the
partial withdrawal 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 we
receive the request at the Administrative Office.
Partial withdrawals will affect both the Policy's Accumulated Value and the
death proceeds payable under the Policy. (See "POLICY BENEFITS--Death
Proceeds.")
- The Policy's Accumulated Value will be reduced by the amount of the
partial surrender.
17
<PAGE>
- If the death benefit payable under either death benefit option both
before and after the partial surrender is equal to the Accumulated
Value multiplied by the specified amount factor set forth in the
Policy, a partial surrender will result in a reduction in death
proceeds equal to the amount of the partial surrender, 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
surrender.
If Option B is in effect at the time of surrender, partial surrenders will
reduce the Policy's Specified Amount by the amount of Accumulated Value
surrendered. If Option A is in effect at the time of the surrender, 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 surrender may not be less than the minimum Specified Amount
for the Policy in effect on the date of the partial surrender, as published
by the Company. As a result, the Company will not process any partial
surrender that would reduce the Specified Amount below this minimum.
If increases in the Specified Amount previously have occurred, a partial
surrender 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 surrender 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 surrenders, 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.
CALCULATING ACCUMULATED VALUE. The Policy provides for the accumulation of
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. We determine Accumulated
Value on each Business Day, and there is no guaranteed minimum Accumulated
Value.
- Accumulated Value will reflect a number of factors, including
- Net Premiums paid,
- partial withdrawals,
- Policy Loans,
- charges assessed in connection with the Policy,
- interest earned on the Accumulated Value in the Declared
Interest Option, and
- investment performance of the Subaccounts to which the
Accumulated Value is allocated.
As of the Policy Date, the 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 we
receive notice that the Policyowner has received the Policy, but no later
than 25 days after the Delivery Date, we will automatically transfer the
Accumulated Value (all of which is in the Declared Interest Option) among
the Subaccounts and the Declared Interest Option in accordance with your
percentage allocation instructions. At the end of each Valuation Period
thereafter, the Accumulated Value in a Subaccount will equal:
- 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
18
<PAGE>
- Any Net Premiums received during the current Valuation Period which
are allocated to the Subaccount; PLUS
- All Accumulated Values transferred to the Subaccount from the
Declared Interest Option or from another Subaccount during the
current Valuation Period; MINUS
- 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
- All partial surrenders (and any portion of the Surrender Charge)
from the Subaccount during the current Valuation Period; MINUS
- 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 you allocate Net Premiums
or transfer other amounts into a Subaccount, we purchase a number of units
based on the Unit Value of the Subaccount as of the end of the Valuation
Period during which the allocation or 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, we initially set the Unit Value set at $10 when the
Subaccount first purchased shares of the designated Investment Option. We
calculate the Unit Value for each subsequent valuation period by dividing
(a) by (b) where:
(a) is (1) the Net Asset Value of the net assets 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 we set aside during the Valuation Period as a provision
for taxes attributable to the operation or maintenance of that
Subaccount, minus
(5) a charge no greater than 0.0024548% of the average daily net
assets of the Subaccount for each day in the Valuation Period.
This corresponds to an effective annual rate of .90% of the
average daily net assets of the Subaccount for mortality and
expense risks incurred in connection with the Policies.
(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. We
value the assets in the Variable Account at their fair market value in
accordance with accepted accounting practices and applicable laws and
regulations.
- --------------------------------------------------------------------------------
TRANSFERS
The following features apply to transfers under the Policy:
- You may transfer amounts among the Subaccounts an unlimited number
of times in a Policy Year; however, you may only make one transfer
per Policy Year between the Declared Interest Option and the
Variable Account.
19
<PAGE>
- You may make transfers by written request to the Administrative
Office or, if you 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 if less than
$100, 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). 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 we receive the request at the Administrative Office.
- The first transfer in each Policy Year is free. Each time you
subsequently transfer amounts in that Policy Year, we may assess a
transfer charge of $25. We will deduct the transfer charge from the
amount transferred unless you submit payment for the charge at the
time of your request. Once we issue a Policy, we will not increase
this charge. (See "CHARGES AND DEDUCTIONS--Transfer Charge.")
- For purposes of these limitations and charges, we consider all
transfers effected on the same day as a single transfer.
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LOAN BENEFITS
POLICY LOANS. So long as the Policy remains in force and has a positive Net
Accumulated Value, you 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 you may borrow at any time is 90% of the Accumulated
Value as of the end of the Valuation Period during which we receive the
request for the Policy Loan at the Administrative Office, less any
previously outstanding Policy Debt. 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, we will treat
payments you make first as payment of outstanding Policy Debt, unless you
indicate that we should treat the payment otherwise. Where no indication is
made, we will treat as a premium payment any portion of a payment that
exceeds the amount of any outstanding Policy Debt.
ALLOCATION OF POLICY LOAN. When you take a Policy Loan, we segregate an
amount equal to the Policy Loan 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, we will transfer
the difference 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. We will determine Accumulated Values as of the end of
the Valuation Period during which we receive the request for the Policy Loan
at the Administrative Office.
We normally will mail loan proceeds to you 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 we charge will be the higher of
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%. We may elect to change the interest rate at
any time, of which you will be
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<PAGE>
notified. 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 you make any Policy Loan (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. We will
subtract interest payable at the time you make a Policy Loan from the loan
proceeds. Thereafter, we will add interest not paid when due to the existing
Policy Debt and it will bear interest at the same rate charged for Policy
Loans. We will segregate the amount equal to unpaid interest 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 we charge interest in advance, we will add any interest that has not
been earned to the death benefit payable at the Insured's death and to the
Accumulated Value upon complete surrender, and we will credit it 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. We will credit all amounts
held in the Declared Interest Option as security for Policy Debt with
interest on each Monthly Deduction Day at an effective annual rate equal to
the greater of 4% or the current effective loan interest rate minus no more
than 3%, as determined and declared by the Company. We will not credit
additional interest 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, we may allow a loan spread of 0% on the gain in a Policy
in effect a minimum of ten years.
Even though you may repay Policy Debt 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 higher
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.
REPAYMENT OF POLICY DEBT. You may repay Policy Debt 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. We subtract any Policy Debt not repaid from the death
benefit payable at the Insured's death, from Accumulated Value upon complete
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
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<PAGE>
otherwise. Upon partial or full repayment of Policy Debt, we will no longer
segregate within the Declared Interest Option the portion of the Accumulated
Value securing the repaid portion of the Policy Debt, but that amount will
remain in the Declared Interest Option unless and until transferred to the
Variable Account by the Policyowner. We will notify you when your Policy
Debt is repaid in full.
For a discussion of the tax consequences associated with Policy Loans and
lapses, see "FEDERAL TAX MATTERS."
- --------------------------------------------------------------------------------
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.
- You may name one or more primary Beneficiaries or contingent
Beneficiaries and we will pay proceeds to the primary Beneficiary or
a contingent Beneficiary.
- If no Beneficiary survives the Insured, we will pay the death
proceeds to the Policyowner or his estate. We may pay death proceeds
in a lump sum or under a payment option. (See "POLICY
BENEFITS--Payment Options.")
To determine the death proceeds, we will reduce the death benefit by any
outstanding Policy Debt and increase it by any unearned loan interest and
any premiums paid after the date of death. We will ordinarily mail proceeds
within seven days after receipt by the Company of Due Proof of Death. We may
postpone payment, however, under certain circumstances. (See "GENERAL
PROVISIONS-- Postponement of Payments.") We pay 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
(1) the sum of the current Specified Amount and the Accumulated Value,
or
(2) the Accumulated Value multiplied by the specified amount factor.
We will determine Accumulated Value 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.
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<PAGE>
Appendix B shows examples illustrating Option A and Option B.
CHANGING THE DEATH BENEFIT OPTION. You may change the death benefit option
in effect at any time by sending a written request to the Company at our
Administrative Office. The effective date of such a change will be the
Monthly Deduction Day coinciding with or immediately following the date we
approve the change. A change in death benefit options may have federal
income tax consequences. (See "FEDERAL TAX MATTERS.")
If you change the death benefit option from Option A to Option B, the
current Specified Amount will not change. If you change the death benefit
option from Option B to Option A, we will reduce the current Specified
Amount by an amount equal to the Accumulated Value on the effective date of
the change. You may not make a change in the death benefit option 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.
We impose no charges 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, you may adjust the existing insurance coverage by increasing or
decreasing the Specified Amount. To make a change, you must send us a
written request at our Administrative 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.")
Any decrease in the Specified Amount will become effective on the Monthly
Deduction Day coinciding with or immediately following the date we approve
the request. 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, you must provide us with evidence of insurability
we deem satisfactory. Any approved increase will become effective on the
Monthly Deduction Day coinciding with or immediately following the date we
approve the request. 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.
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 surrendering Accumulated Value.
Although the consequences of each of these methods will depend upon the
individual circumstances, they may be summarized as follows:
- 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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- 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.
- If you elect Option B, 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.
- If you elect Option B, 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.
- A partial surrender will reduce the death benefit. (See "POLICY
BENEFITS-- Accumulated Value Benefits--SURRENDER 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
surrender 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. A change in insurance
protection may have federal income tax consequences. (See "FEDERAL TAX
MATTERS.")
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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, we reduce the
accelerated death benefit 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 you request 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
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<PAGE>
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.
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.
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.
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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.") We may pay benefits at
maturity in a lump sum or under a payment option. The Maturity Date is
Attained Age 115.
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PAYMENT OPTIONS
We may pay death proceeds and Accumulated Value due at maturity, or upon
surrender or partial withdrawal of a Policy, in whole or in part under a
payment option. There are currently five payment options available. We also
may make payments under any new payment option available at the time
proceeds become payable. In addition, we may pay proceeds in any other
manner acceptable to us.
You may designate an option in the application or notify us in writing at
our 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.
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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,
(1) the proceeds are less than $2,000;
(2) periodic payments would be less than $50; or
(3) 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 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 PERIOD. Periodic payments will be made for a
fixed period 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, we may settle
the accumulated value, cash surrender value or death benefit, as applicable,
under any other payment option we make available or under any other payment
option you request and we agree to.
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CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
We deduct certain charges in connection with the Policy to compensate us for
(1) the services and benefits we provide; (2) the costs and expenses we
incur; and (3) the risks we assume, some of which are described below.
<TABLE>
<S> <C> <C>
SERVICES AND BENEFITS WE PROVIDE: - the death benefit, cash and loan benefits
under the Policy
- investment options, including premium
allocations
- administration of elective options
- the distribution of reports to Policyowners
COSTS AND EXPENSES WE INCUR: - costs associated with processing and
underwriting applications, issuing and
administering the Policy (including any
Policy riders)
- overhead and other expenses for providing
services and benefits
- sales and marketing expenses
- other costs of doing business, such as
collecting premiums, maintaining records,
processing claims, effecting transactions,
and paying Federal, state and local premium
and other taxes and fees
RISKS WE ASSUME: - that the cost of insurance charges we may
deduct are insufficient to meet our actual
claims because Insureds die sooner than we
estimate
- that the costs of providing the services
and benefits under the Policies exceed the
charges we deduct
</TABLE>
The nature and amount of these charges are described more fully below.
- --------------------------------------------------------------------------------
PREMIUM EXPENSE CHARGE
Before allocating Net Premiums among the Subaccounts and the Declared
Interest Option, we reduce premiums paid by a premium expense charge
consisting of a sales charge and a charge for premium taxes. The premium
less the premium expense charge equals the Net Premium.
The premium expense charge is 7% of each premium up to the Target Premium
(or 2% for each premium over the Target Premium) and is used to compensate
us for expenses incurred in distributing the Policy, including agent sales
commissions, the cost of printing prospectuses and sales literature,
advertising costs and charges we consider necessary to pay all taxes imposed
by states and subdivisions thereof (which currently range from 1% to 3%).
- --------------------------------------------------------------------------------
MONTHLY DEDUCTION
We deduct certain charges monthly from the Accumulated Value of each Policy
("monthly deduction") to compensate us 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. We deduct the monthly deduction on the Policy Date and on each
Monthly Deduction Day. We deduct it from the
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<PAGE>
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, we determine Accumulated
Values as of the end of the Business Day coinciding with or immediately
following the Monthly Deduction 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.
During the first 12 Policy Months and during the 12 Policy Months
immediately following an increase in Specified Amount, the monthly deduction
will include a first year monthly administrative charge.
We make the monthly deduction on the Business Day coinciding with or
immediately following each Monthly Deduction Day and it will equal:
- the cost of insurance for the Policy; plus
- the cost of any optional insurance benefits added by rider; plus
- the monthly policy expense charge.
COST OF INSURANCE. This charge is designed to compensate us for the
anticipated cost of paying death proceeds to Beneficiaries of those Insureds
who die prior to the Maturity Date. We determine the cost of insurance on a
monthly basis, and we determine it separately for the initial Specified
Amount and for any subsequent increases in Specified Amount. We 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.
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.
We determine the Specified Amount and the Accumulated Value as of the end of
the Business Day coinciding with or immediately following the Monthly
Deduction Day.
We determine the net amount at risk separately for the initial Specified
Amount and any increases in Specified Amount. In determining the net amount
at risk for each Specified Amount, we first consider the Accumulated Value a
part of the initial Specified Amount. If the Accumulated Value exceeds the
initial Specified Amount, we will consider it to be a part of any increase
in the Specified Amount in the same order as the increases occurred.
COST OF INSURANCE RATE. We base the cost of insurance rate for the initial
Specified Amount on the Insured's sex, premium class and Attained Age. For
any increase in Specified Amount, we base the cost of insurance rate 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 we will
determine the actual monthly cost of insurance rates 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.
- ------------------------
(1) Dividing by this number 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%.
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<PAGE>
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.
We determine the cost of insurance rate separately for the initial Specified
Amount and for the amount of any increase in Specified Amount. In
calculating the cost of insurance charge, we apply the rate for the premium
class on the Policy Date to the net amount at risk for the initial Specified
Amount; for each increase in Specified Amount, we use the rate for the
premium class applicable to the increase. However, if we calculate the death
benefit as the Accumulated Value times the specified amount factor, we will
use the rate for the premium class for the most recent increase that
required evidence of insurability 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.")
MONTHLY POLICY EXPENSE CHARGE. We have primary responsibility for the
administration of the Policy and the Variable Account. Administrative
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 administrative expenses
related to the maintenance of each Policy and the Variable Account, we
assess a $5 monthly administrative charge against each Policy. We guarantee
this charge will not exceed $7 per Policy Month.
FIRST YEAR MONTHLY ADMINISTRATIVE CHARGE. We deduct monthly administrative
charges 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 us 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 is $0.05 per
$1,000 of Specified Amount, or increase in Specified Amount. We guarantee
this charge will not exceed $0.07 per $1,000 of Specified Amount.
FIRST YEAR MONTHLY EXPENSE CHARGE. We will deduct a monthly expense charge
of $5 from Accumulated Value during the first twelve Policy Months. We
guarantee this charge will not exceed $7 per Policy Month.
----------------------------------------------------------------------------
TRANSFER CHARGE
We may impose a transfer charge of $25 for the second and each subsequent
transfer during a Policy Year to compensate us for the costs in making the
transfer.
- Unless paid in cash, we will deduct the transfer charge from the
amount transferred.
- Once we issue a Policy, we will not increase this charge for the
life of the Policy.
- We will not impose a transfer charge 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.
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<PAGE>
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PARTIAL WITHDRAWAL FEE
Upon partial withdrawal of a Policy, we assess a charge equal to the lesser
of $25 or 2% of the amount withdrawn to compensate us for costs incurred in
accomplishing the withdrawal. We deduct this fee from Accumulated Value.
- --------------------------------------------------------------------------------
SURRENDER CHARGE
We apply a Surrender Charge during the first ten Policy Years, as well as
during the first ten years following an increase in Specified Amount. This
charge is an amount per $1,000 of Specified Amount which declines to $0 in
the eleventh year and varies by age, sex, underwriting category and Policy
Year. We have listed below the maximum Surrender Charge for select ages in
various underwriting categories in the first Policy Year.
<TABLE>
<CAPTION>
ISSUE AGE MALE, TOBACCO FEMALE, TOBACCO UNISEX, TOBACCO
<S> <C> <C> <C>
30 17.48 11.40 16.26
50 44.66 25.82 40.68
70 57.48 57.48 57.48
</TABLE>
The Surrender Charge is level within each Policy Year. (See "APPENDIX
C--Maximum Surrender Charges.")
If you are 76 years of age or younger on the date your Policy is issued, we
reserve the right to waive the Surrender Charge after the first Policy Year
if the Insured is terminally ill or stays in a qualified nursing care center
for 90 days.
- --------------------------------------------------------------------------------
VARIABLE ACCOUNT CHARGES
MORTALITY AND EXPENSE RISK CHARGE. We deduct a daily mortality and expense
risk charge from each Subaccount at an effective annual rate of .90% of the
average daily net assets of the Subaccounts. We guarantee this charge will
not exceed 1.05% of the average daily net assets of the Subaccounts. We may
realize a profit from this charge and may use such profit for any lawful
purpose, including payment of our distribution expenses.
The mortality risk we assume is that Insureds may die sooner than
anticipated and therefore, we 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.
FEDERAL TAXES. Currently no charge is made to the Variable Account for
federal income taxes that may be attributable to the Variable Account. We
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.
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<PAGE>
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THE DECLARED INTEREST OPTION
- --------------------------------------------------------------------------------
Policyowners may allocate Net Premiums and transfer Accumulated Value to the
Declared Interest Option. Because of exemptive and exclusionary provisions,
we have not registered interests in the Declared Interest Option under the
Securities Act of 1933 and we have not registered the Declared Interest
Option 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. Please
refer to the Policy for complete details regarding the Declared Interest
Option.
- --------------------------------------------------------------------------------
GENERAL DESCRIPTION
Our General Account supports the Declared Interest Option. The General
Account consists of all assets we own other than those in the Variable
Account and other separate accounts. Subject to applicable law, we have sole
discretion over the investment of the General Account's assets.
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. Allocating or
transferring funds to the Declared Interest Option does not entitle a
Policyowner to share in the investment experience of the General Account.
Instead, we guarantee that Accumulated Value in the Declared Interest Option
will accrue interest at an effective annual rate of at least 4%, independent
of the actual investment experience of the General Account.
- --------------------------------------------------------------------------------
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%. 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% 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% 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% 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%, but will in no event be greater
than the current effective loan interest rate minus no more than 3%. From
time to time, we may allow 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% 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 surrenders or
transfers to the Variable Account.
31
<PAGE>
- --------------------------------------------------------------------------------
TRANSFERS, PARTIAL WITHDRAWALS, SURRENDERS AND POLICY LOANS
You may transfer amounts between the Subaccounts and the Declared Interest
Option. However, only one transfer between the Variable Account and the
Declared Interest Option is permitted in each Policy Year. We may impose a
transfer charge of $25 in connection with the transfer unless such transfer
is the first transfer requested by the Policyowner during such Policy Year.
Unless you submit the transfer charge in cash with your request, we will
deduct the charge from the amount transferred. 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, you may transfer the full Net Accumulated Value in the Declared
Interest Option. A Policyowner may also make surrenders and obtain Policy
Loans from the Declared Interest Option at any time prior to the Policy's
Maturity Date.
We may delay transfers, partial withdrawals and surrenders from, and
payments of Policy Loans allocated to, the Declared Interest Option for up
to six months.
- --------------------------------------------------------------------------------
GENERAL PROVISIONS
- --------------------------------------------------------------------------------
THE CONTRACT
We issue the Policy 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, we will treat the statements made in an application or
supplemental application as representations and not as warranties. We will
not use any statement to void the Policy or in defense of a claim unless the
statement is 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.
32
<PAGE>
- --------------------------------------------------------------------------------
MISSTATEMENT OF AGE OR SEX
If the Insured's age or sex was misstated in the application, we will adjust
each benefit and any amount to be paid under the Policy 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, we will limit life insurance
proceeds payable under the Policy 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 the Insured commits
suicide, while sane or insane, within one year from the effective date of
any increase in Specified Amount, we will not pay any increase in the death
benefit resulting from the requested increase in Specified Amount. Instead,
we 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, we will send an annual report 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 surrenders 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
You should send any written notice to the Company at our Administrative
Office. The notice should include the policy number and the Insured's full
name. Any notice we send to a Policyowner will be sent to the address shown
in the application unless you filed an appropriate address change form 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 we receive the
Policyowner's signed request 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,
we may postpone
33
<PAGE>
payment of any amount upon complete or partial surrender, payment of any
Policy Loan, and payment of death proceeds or benefits at maturity whenever:
- 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;
- the Securities and Exchange Commission by order permits postponement
for the protection of Policyowners; or
- 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.
We also may postpone transfers 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:
- 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;
- the date the Policyowner surrenders the Policy for its entire Net
Accumulated Value;
- the death of the Insured; or
- the Maturity Date.
Any rider to a Policy will terminate on the date specified in the rider.
- --------------------------------------------------------------------------------
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 us unless in writing and
until we receive notice of the assignment at the Administrative Office. The
assignment is subject to any payment or action we may have taken before we
received notice of the assignment at the Administrative Office. Assigning
the Policy may have federal income tax consequences. [See "FEDERAL TAX
MATTERS."]
- --------------------------------------------------------------------------------
THE BENEFICIARY
The Policyowner designates the primary Beneficiaries and contingent
Beneficiaries 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
34
<PAGE>
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, we will pay the proceeds payable at the
Insured's death in a lump sum to the primary Beneficiary. If the primary
Beneficiary dies before the Insured, we will pay the proceeds to the
contingent Beneficiary. If no Beneficiary survives the Insured, we will pay
the proceeds 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, you must send a written request to the Company at
our Administrative Office. The request and the change must be in a form
satisfactory to the Company and we must actually receive and record the
request. The change will take effect as of the date you sign the request.
The change will be subject to any payment made before the Company recorded
the change. The Company may require return of the Policy for endorsement.
- --------------------------------------------------------------------------------
ADDITIONAL INSURANCE BENEFITS
Subject to certain requirements, you may add one or more of the following
additional insurance benefits to a Policy by rider:
- Universal Cost of Living Increase;
- Universal Waiver of Charges;
- Universal Adult Term Insurance;
- Universal Children's Term Insurance; and
- Universal Guaranteed Insurability Option.
We will deduct the cost of any additional insurance benefits as part of the
monthly deduction. (See "CHARGES AND DEDUCTIONS--Monthly Deduction.") You
may obtain detailed information concerning available riders 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 also registered
representatives of broker-dealers who have entered into 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 1934 as a
broker-dealer and is a member of the National Association of Securities
Dealers, Inc.
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 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."
35
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL TAX MATTERS
- --------------------------------------------------------------------------------
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the policy and does not purport to be
complete or to cover all tax situations. This discussion is not intended as
tax advice. Counsel or other competent tax advisors should be consulted for
more complete information. This discussion is based upon our understanding
of the present Federal income tax laws. No representation is made as to the
likelihood of continuation of the present Federal income tax laws or as to
how they may be interpreted by the Internal Revenue Service.
- --------------------------------------------------------------------------------
TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for Federal income tax
purposes and to receive the tax treatment normally accorded life insurance
contracts under Federal tax law, a life insurance policy must satisfy
certain requirements which are set forth in the Internal Revenue Code.
Guidance as to how these requirements are to be applied is limited.
Nevertheless, we believe that a Policy issued on the basis of a standard
rate class should satisfy the applicable requirements. There is less
guidance, however, with respect to a Policy issued on a substandard basis
(I.E., a premium class involving higher than standard mortality risk) and it
is not clear whether such a policy will in all cases satisfy the applicable
requirements, particularly if you pay the full amount of premiums permitted
under the Policy. If it is subsequently determined that a policy does not
satisfy the applicable requirements, we may take appropriate steps to bring
the policy into compliance with such requirements and we reserve the right
to modify the Policy as necessary in order to do so.
In certain circumstances, owners of variable life insurance policies have
been considered for Federal income tax purposes to be the owners of the
assets of variable account supporting their contracts due to their ability
to exercise investment control over those assets. Where this is the case,
the policyowners have been currently taxed on income and gains attributable
to variable account assets. There is little guidance in this area, and some
features of the Policy, such as the flexibility to allocate premium payments
and Accumulated Values, have not been explicitly addressed in published
rulings. While we believe that the Policy does not give the Policyowner
investment control over Variable Account assets, we reserve the right to
modify the Policy as necessary to prevent the Policyowner from being treated
as the owner of the Variable Account assets supporting the Policy.
In addition, the Code requires that the investments of the Subaccounts be
"adequately diversified" in order for the Policy to be treated as a life
insurance contract for Federal income tax purposes. It is intended that the
Subaccounts, through the funds, will satisfy these diversification
requirements.
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 death benefit under a Policy
should be excludible from the gross income of the beneficiary. Federal,
state and local estate, inheritance, transfer, and other tax consequences of
ownership or receipt of policy proceeds depend on the circumstances of each
Policyowner or beneficiary. A tax adviser should be consulted on these
consequences.
Generally, a Policyowner will not be deemed to be in constructive receipt of
the Accumulated Value until there is a distribution. When distributions from
a Policy occur, or when loans are taken out from or secured by a Policy, the
tax consequences depend on whether the Policy is classified as a "modified
endowment contract."
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<PAGE>
MODIFIED ENDOWMENT CONTRACTS. Under the Internal Revenue Code, certain life
insurance contracts are classified as "modified endowment contracts," with
less favorable tax treatment than other life insurance contracts. Due to the
flexibility of the Policy as to premium payments and benefits, the
individual circumstances of each Policy will determine whether it is
classified as a modified endowment contract. The rules are too complex to be
summarized here, but generally depend on the amount of premium payments made
during the first seven Policy years. Certain changes in a Policy after it is
issued could also cause it to be classified as a modified endowment
contract. You should consult with a competent tax adviser to determine
whether a Policy transaction will cause the Policy to be classified as a
modified contract.
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT
CONTRACTS. Policies classified as modified endowment contracts are subject
to the following tax rules:
(1) All distributions other than death benefits from a modified
endowment contract, including distributions upon surrender and
withdrawals, will be treated first as distributions of gain taxable
as ordinary income and as tax-free recovery of the Policyowner's
investment in the Policy only after all gain has been distributed.
(2) Loans taken from or secured by a Policy classified as a modified
endowment contract are treated as distributions and taxed
accordingly.
(3) A 10 percent additional income tax is imposed on the amount subject
to tax except where the distribution or loan is made when the
Policyowner has attained age 59 1/2 or is disabled, or where the
distribution is part of a 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 or designated beneficiary.
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS. Distributions other than death benefits from a Policy
that is not classified as a modified endowment contract are generally
treated first as a recovery of the Policyowner's investment in the Policy,
and only after the recovery of all investment in the Policy, as taxable
income. However, certain distributions which must be made in order to enable
the Policy to continue to qualify as a life insurance contract for Federal
income tax purposes if Policy benefits are reduced during the first 15
Policy years may be treated in whole or in part as ordinary income subject
to tax.
Loans from or secured by a Policy that is not a modified endowment contract
will generally not be treated as taxable distributions.
Finally, neither distributions from, nor loans from or secured by, a Policy
that is not a modified endowment contract are subject to the 10 percent
additional income tax.
INVESTMENT IN THE POLICY. Your investment in the Policy is generally your
aggregate premiums. When a distribution is taken from the Policy, your
investment in the Policy is reduced by the amount of the distribution that
is tax-free.
POLICY LOAN INTEREST. In general, interest on a Policy Loan will not be
deductible.
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 includible in the Policyowner's income when a taxable
distribution occurs.
ACCELERATED DEATH BENEFITS. 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, you 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.
37
<PAGE>
EXCHANGES. The Company 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 an amount of such loan (including any due and unpaid
interest on such loan). An exchanging Policyowner should consult a tax
adviser as to whether an exchange of a fixed-benefit policy for the Policy
will have adverse tax consequences.
OTHER POLICYOWNER TAX MATTERS. Businesses can use the Policy in various
arrangements, including nonqualified deferred compensation or salary
continuance plans, split dollar insurance plans, executive bonus plans, tax
exempt and nonexempt welfare benefit plans, retiree medical benefit plans
and others. The tax consequences of such plans may vary depending on the
particular facts and circumstances. If you are purchasing the Policy for any
arrangement the value of which depends in part on its tax consequences, you
should consult a qualified tax adviser. In recent years, moreover, Congress
has adopted new rules relating to life insurance owned by businesses. Any
business contemplating the purchase of a new Policy or a change in an
existing Policy should consult a tax adviser.
- --------------------------------------------------------------------------------
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is always
the possibility that the tax treatment of the Policy could change by
legislation or otherwise. Consult a tax adviser with respect to legislative
developments and their effect on the Policy.
- --------------------------------------------------------------------------------
TAXATION OF THE COMPANY
At the present time, the Company makes no charge for any Federal, state or
local taxes (other than the charge for state premium taxes) that may be
attributable to the Variable Account or to the policies. The Company
reserves the right to charge the Subaccounts of the Variable Account for any
future taxes or economic burden the Company may incur.
- --------------------------------------------------------------------------------
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 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.
38
<PAGE>
- --------------------------------------------------------------------------------
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 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 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.
39
<PAGE>
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 our outstanding Common Stock, par value $1 per share,
is owned by American Equity Investment Life Holding Company (the "Holding
Company"). As of January 15, 1999, the following individuals and entities
benefically own the specified percentages of the Holding Company's Common
Stock, par value $1 per share: David J. Noble, President and
Director--24.7%; Farm Bureau Life Insurance Company--34.1%; Conseco, Inc.,
through its wholly-owned subsidiaries--9.96%. Additionally, 14.1% 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 which 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.
- --------------------------------------------------------------------------------
OFFICERS AND DIRECTORS OF AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
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.
<TABLE>
<CAPTION>
NAME AND POSITION
WITH THE COMPANY PRINCIPAL OCCUPATION LAST FIVE YEARS
<S> <C>
David J. Noble President, Chairman, President and Director, American Equity Investment Life
President and Director Holding Company; Chairman, President & CEO, The Statesman Group,
Inc.; Vice Chairman and Director, American Life & Casualty
Insurance Company
James M. Gerlach, Executive Executive Vice President and Director, American Equity Investment
Vice President, Chief Life Holding Company; Executive Vice President, Secretary and
Marketing Officer and Director Director, American Life & Casualty Insurance Company
David S. Mulcahy, Director Director, American Equity Investment Life Holding Company;
400 Locust Street Principal, MABSCO Capital, Inc.; President, Monarch Manufacturing
160 Capital Square Company; Partner, Ernst & Young LLP
Des Moines, Iowa 50309
William J. Oddy, Director Chief Operating Officer, FBL Financial Group, Inc.
5400 University Avenue
West Des Moines, Iowa 50266
Terry A. Reimer, Executive Executive Vice President, American Equity Investment Life Holding
Vice President, Treasurer, Company; Executive Vice President, Chief Operating Officer and
Chief Operating Officer and Director, American Life & Casualty Insurance Company
Director
Debra J. Richardson, Senior Vice President and Secretary, American Equity Investment Life
Vice President, Secretary and Holding Company; Vice President and Assistant Secretary, The
Director Statesman Group, Inc.; Vice President and Assistant Secretary,
American Life & Casualty Insurance Company
Jack W. Schroeder, Vice President and Director, American Life & Casualty Insurance Company
Chairman and Director
</TABLE>
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 Whitfield & Eddy, P.L.C. of Des
Moines, Iowa.
- --------------------------------------------------------------------------------
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 or the Company.
- --------------------------------------------------------------------------------
EXPERTS
The financial statements and schedules of the Company at December 31, 1998
and 1997 and for each of the three years in the period ended December 31,
1998, appearing herein, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein
and is 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, MAAA, Life Product Development and Pricing Vice
President, as stated in the opinion filed as an exhibit to the registration
statement.
- --------------------------------------------------------------------------------
YEAR 2000
Like other investment funds, financial and business organizations and
individuals around the world, the Variable Account could be adversely
affected if the computer systems used by the Company and other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. The Company has completed a
comprehensive assessment of the Year 2000 issue and developed a plan to
address the issue in a timely manner. The Company has and will utilize both
internal and external resources to reprogram, or replace, and test the
software for Year 2000 modifications. The Company anticipates completing the
Year 2000 project prior to any anticipated impact on its operating systems.
The date on which the Company believes it will complete the Year 2000
modifications is based on management's best estimates, which were derived
utilizing numerous assumptions of future events. The Company also recognizes
there are outside influences and dependencies relative to its Year 2000
effort, over which it has little or no control. However, the Company is
putting effort into ensuring these considerations will have minimal impact.
These would include the continued availability of certain resources,
third-party modification plans and many other factors. However, there can be
no guarantee that these estimates will be achieved and actual results could
differ from those anticipated.
- --------------------------------------------------------------------------------
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
41
<PAGE>
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.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The balance sheets of the Company at December 31, 1998 and 1997 and the
related statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998,
appearing herein, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their respective reports thereon appearing
elsewhere herein. At December 31, 1998, there are no policies outstanding;
accordingly, no financial statements for the Variable Account are available
or presented herein.
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 (the Company, a wholly-owned subsidiary of American
Equity Investment Life Holding Company) as of December 31, 1998 and 1997, and
the related statements of operations, changes in stockholder's equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Des Moines, Iowa
March 2, 1999
43
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Cash and investments:
Available-for-sale fixed maturity securities, at market (amortized cost:
1998--$600,300,562; 1997--$201,624,365) $ 601,897,562 $ 202,315,960
Mortgage loans on real estate -- 700,000
Derivative instruments 16,171,621 2,065,549
Policy loans 192,184 183,353
Cash and cash equivalents 12,421,353 4,125,117
-------------- --------------
Total cash and investments 630,682,720 209,389,979
Receivable from other insurance companies 616,737 622,094
Premiums due and uncollected 1,684,698 1,336,336
Accrued investment income 2,946,796 1,820,376
Property, furniture and equipment, less accumulated
depreciation of $405,158 in 1998 and $159,306 in 1997 724,147 540,550
Value of insurance in force acquired 1,068,906 1,343,000
Deferred policy acquisition costs 32,005,772 4,282,491
Goodwill, less accumulated amortization of $157,500
in 1998 and $87,500 in 1997 542,500 612,500
Deferred income tax asset 8,288,049 3,845,497
Receivable from affiliates 64,427 142,983
Other assets 89,336 138,041
Assets held in separate account 151,450 --
-------------- --------------
Total assets $ 678,865,538 $ 224,073,847
-------------- --------------
-------------- --------------
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy benefit reserves:
Traditional life insurance and accident and health products $ 11,317,156 $ 9,687,379
Annuity products 529,765,023 146,310,889
Other policy funds and contract claims 6,315,598 2,355,156
Provision for experience rating refunds 833,679 535,655
Amounts due under repurchase agreements 49,000,000 --
Note payable to parent 8,000,000 2,500,000
Federal income taxes payable 1,648,822 2,562,742
Other liabilities 6,403,193 2,687,604
Liabilities related to separate account 151,450 --
-------------- --------------
Total liabilities 613,434,921 166,639,425
Commitments and contingencies (NOTES 6, 9 AND 11)
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
Additional paid-in capital 62,900,235 56,400,235
Accumulated other comprehensive income 420,035 210,300
Retained-earnings deficit (389,653) (1,676,113)
-------------- --------------
Total stockholder's equity 65,430,617 57,434,422
-------------- --------------
Total liabilities and stockholder's equity $ 678,865,538 $ 224,073,847
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
45
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
-------------------------------------------
Revenues:
Traditional life and accident and health insurance premiums $ 10,528,108 $ 11,424,907 $ 14,540,707
Annuity product charges 642,547 11,896 14,007
Net investment income 26,235,923 4,028,628 857,015
Realized gains on investments 151,750 -- --
-------------------------------------------
Total revenues 37,558,328 15,465,431 15,411,729
Benefits and expenses:
Insurance policy benefits and change in future policy benefits 6,084,893 7,440,080 8,787,700
Interest credited to account balances 15,837,912 2,129,686 77,831
Interest expense on notes payable 200,000 134,077 41,266
Interest expense on amounts due under repurchase agreements 1,528,718 291,547 --
Amortization of deferred policy acquisition costs and value of
insurance in force acquired 3,946,133 1,143,032 879,916
Amortization of goodwill 70,000 70,000 17,500
Other operating costs and expenses 7,843,729 6,804,652 6,124,343
-------------------------------------------
Total benefits and expenses 35,511,385 18,013,074 15,928,556
-------------------------------------------
Income (loss) before income taxes 2,046,943 (2,547,643) (516,827)
Income tax benefit (expense):
Current (5,311,080) (2,565,057) --
Deferred 4,550,597 3,953,833 --
-------------------------------------------
(760,483) 1,388,776 --
-------------------------------------------
Net income (loss) $ 1,286,460 $ (1,158,867) $ (516,827)
-------------------------------------------
-------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
46
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER RETAINED- TOTAL
COMMON PAID-IN COMPREHENSIVE EARNINGS STOCKHOLDER'S
STOCK CAPITAL INCOME (LOSS) DEFICIT EQUITY
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $2,500,000 $ 4,499,000 $ -- $ (419) $ 6,998,581
Comprehensive loss:
Net loss for year -- -- -- (516,827) (516,827)
Change in net unrealized
depreciation of
available-for-sale fixed
maturity securities -- -- (201,556) -- (201,556)
-------------------------------------------------------------------
Total 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
Comprehensive loss:
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
-------------------------------------------------------------------
Total 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
Comprehensive income:
Net income for year -- -- -- 1,286,460 1,286,460
Change in net unrealized
appreciation of
available-for-sale fixed
maturity securities -- -- 209,735 -- 209,735
-------------------------------------------------------------------
Total comprehensive income 1,496,195
Cash contributions from American
Equity Investment Life Holding
Company -- 6,500,000 -- -- 6,500,000
-------------------------------------------------------------------
Balance at December 31, 1998 $2,500,000 $62,900,235 $ 420,035 $ (389,653) $ 65,430,617
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
47
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,286,460 $ (1,158,867) $ (516,827)
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 15,837,912 2,129,686 77,831
Charges for mortality and administration (642,547) (11,896) (14,007)
Increase in traditional life insurance and
accident and health reserves 1,629,777 287,197 439,216
Policy acquisition costs deferred (26,073,266) (4,142,926) (245,226)
Amortization of deferred policy acquisition
costs 3,672,039 761,032 6,995
Amortization of discount and premiums on
available-for-sale fixed maturity securities
and derivative instruments (12,975,476) (997,853) 36,148
Provisions for depreciation and other
amortization 589,946 591,461 910,266
Realized gains on investments (151,750) -- --
Deferred income taxes (4,550,597) (3,953,833) --
Change in other operating assets and
liabilities:
Federal income taxes payable (913,920) 2,562,742 --
Accrued investment income (1,126,420) (1,405,521) (345,194)
Other policy funds and contract claims 3,960,442 1,279,542 225,000
Other liabilities 3,715,589 2,193,458 363,707
Other 120,889 331,342 (685,162)
------------- ------------- -------------
Net cash provided by (used in) operating
activities (15,620,922) (1,534,436) 252,747
INVESTING ACTIVITIES
Maturities or repayments of investments:
Available-for-sale fixed maturity securities 222,745,031 22,591,487 3,779,185
Mortgage loan on real estate 700,000 -- --
Policy loans -- -- 12,580
------------- ------------- -------------
223,445,031 22,591,487 3,791,765
Acquisitions of investments:
Available-for-sale fixed maturity securities (602,830,456) (200,181,267) (19,223,611)
Mortgage loan on real estate -- -- (700,000)
Derivative instruments (11,539,179) (1,815,674) --
Policy loans (8,831) (26,830) (169,103)
------------- ------------- -------------
(614,378,466) (202,023,771) (20,092,714)
Cash received pursuant to reinsurance assumption
agreements -- -- 3,805,969
Purchases of property, furniture and equipment (429,449) (490,887) (208,969)
Acquisition of Century Life Insurance Company, net
of cash equivalents received -- -- (885,837)
------------- ------------- -------------
Net cash used in investing activities (391,362,884) (179,923,171) (13,589,786)
</TABLE>
48
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Receipts from interest sensitive products credited
to policyholder account balances $ 377,917,332 $ 141,853,600 $ 2,456,054
Return of policyholder account balances on
interest sensitive products (23,637,290) (2,419,197) (217,532)
Proceeds from note payable to parent 5,500,000 -- 2,500,000
Change in amounts due under repurchase agreements 49,000,000 -- --
Cash contributions by parent 6,500,000 42,500,000 9,401,235
------------- ------------- -------------
Net cash provided by financing activities 415,280,042 181,934,403 14,139,757
------------- ------------- -------------
Increase in cash and cash equivalents 8,296,236 476,796 802,718
Cash and cash equivalents at beginning of year 4,125,117 3,648,321 2,845,603
------------- ------------- -------------
Cash and cash equivalents at end of year $ 12,421,353 $ 4,125,117 $ 3,648,321
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during year for:
Interest $ 1,728,718 $ 425,624 $ --
Federal income taxes 6,225,000 2,315 --
Non-cash financing and investing activities:
Bonus interest deferred as policy acquisition
costs 5,909,679 1,035,325 --
Assets and liabilities acquired pursuant to
reinsurance assumption agreements:
Premiums due and uncollected (41,284)
Value of insurance in force acquired (1,097,921)
Universal life and annuity policy reserves 871,580
Traditional life and accident and health
policy reserves 3,982,118
Policy and contract claims 91,476
-------------
Cash received pursuant to reinsurance assumption
agreements 3,805,969
</TABLE>
SEE ACCOMPANYING NOTES.
49
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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. The
Company is licensed to sell insurance products in 39 states and the District of
Columbia at December 31, 1998. The Company offers a broad array of insurance
products including single premium deferred annuities, flexible premium deferred
annuities, interest-sensitive life insurance products and traditional life
insurance products. In 1998, the Company began offering variable life and
variable annuity 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.
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the 1998 financial statement presentation.
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 a special component of 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.
Amortization/accrual of premiums and discounts on mortgage and asset-backed
securities incorporate prepayment assumptions to estimate 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 amounts 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 deferred annuity products with an additional benefit provision
based on the increase, if any, 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. The
underlying cost of the option is amortized over the life of the contracts and is
recorded, net of proceeds received upon expiration, as a component of net
investment income.
These options are reported at fair value in the balance sheets. The options are
purchased at the time the related annuity policies are issued, with similar
maturity dates and benefit features that fluctuate as the
50
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
value of the options change. Accordingly, changes in the unrealized appreciation
of the options ($8,061,627 and $839,359 during the years ended December 31, 1998
and 1997, respectively) are offset by changes to the policy benefit liabilities
in the statements of operations.
The Company's hedging strategy attempts to mitigate any potential risk of loss
under these agreements through a regular monitoring process which evaluates the
program's effectiveness. The Company is exposed to risk of loss in the event of
nonperformance by the counterparties and, accordingly, the Company purchases its
option contracts from multiple counterparties and evaluates the creditworthiness
of all counterparties prior to purchase of the contracts.
POLICY LOANS
Policy loans are reported at unpaid principal.
CASH AND CASH EQUIVALENTS
For purposes of the statements 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 3. 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 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, principally using 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 3), and is being amortized over 10 years using a straight-line method.
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.
SEPARATE ACCOUNTS
The separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered, principally for the
benefit of variable life and variable annuity policyholders who bear the
underlying investment risk. The separate account assets and liabilities are
carried at fair value. Revenues and expenses related to the separate account
assets and liabilities, to the extent of benefits paid or provided to the
separate account policyholders, are excluded from the amounts
51
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported in the statements of operations. The Company receives various fees that
are included in the statements of operations.
FUTURE POLICY BENEFITS
Future policy benefit reserves for 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 annuity products ranged
from 3.0% to 12.0% in 1998, from 3.0% to 12.4% in 1997 and from 3.0% to 8.4% in
1996. A portion of this amount ($5,909,679 and $1,035,325 during the years ended
December 31, 1998 and 1997, respectively) 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 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 annuity and separate account products consist of surrender charges
assessed against policyholder account balances during the period. Expenses
related to these products include interest credited to policyholder account
balances (annuity products only) 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.
52
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME, and restated prior
years' financial statements to conform to the new reporting standard. SFAS 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 or stockholder's equity. Comprehensive income includes all
changes in stockholder's equity during a period except those resulting from
investments by and distributions to stockholders.
Other comprehensive income excludes net realized investment gains (losses)
included in net income which merely represent transfers from unrealized to
realized gains and losses. These amounts totaled $35,886 in 1998. Such amounts,
which have been measured through the date of sale, are net of adjustments to
deferred policy acquisition costs and income taxes totaling $115,864 in 1998.
PENDING ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Accounting for gains or losses resulting
from changes in the values of those derivatives is dependent on the use of the
derivative and whether it qualifies for hedge accounting. The Statement is
effective for the Company in the year 2000, with earlier adoption encouraged.
The Company has not yet estimated the effect that this new Statement will have
on earnings or the financial position of the Company.
2. 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 sheets, 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 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
53
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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
sheets for these instruments approximate their fair values.
SEPARATE ACCOUNT ASSETS AND LIABILITIES: Separate account assets and
liabilities are reported at estimated fair value in the Company's balance
sheets.
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.
NOTES PAYABLE TO PARENT AND AMOUNTS DUE UNDER REPURCHASE AGREEMENTS: As
all agreements carry variable interest rate provisions, the carrying
amounts reported in the balance sheets for these instruments approximate
their fair values.
The following sets forth a comparison of the fair values and carrying amounts of
the Company's financial instruments:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Available-for-sale fixed maturity
securities $ 601,897,562 $ 601,897,562 $ 202,315,960 $ 202,315,960
Mortgage loans on real estate -- -- 700,000 700,000
Derivative instruments 16,171,621 16,171,621 2,065,549 2,065,549
Policy loans 192,184 192,184 183,353 183,353
Cash and cash equivalents 12,421,353 12,421,353 4,125,117 4,125,177
Separate account assets 151,450 151,450 -- --
LIABILITIES
Annuity policy reserves 529,765,023 458,253,796 146,310,889 129,660,303
Amounts due under repurchase agreements 49,000,000 49,000,000 -- --
Notes payable to parent 8,000,000 8,000,000 2,500,000 2,500,000
Separate account liabilities 151,450 151,450 -- --
</TABLE>
54
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. 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 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 statements of operations includes results of the acquired company and for
the acquired blocks of business subsequent to their purchase dates.
55
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
FIXED MATURITY SECURITIES
The following table contains amortized cost and market value information on
available-for-sale fixed maturities at December 31, 1998:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds:
United States Government and agencies $ 385,393,461 $ 854,292 $ (23,637) $ 386,224,116
State, municipal and other governments 4,227,231 -- (3,231) 4,224,000
Public utilities 9,869,720 194,810 -- 10,064,530
Corporate securities 191,393,819 1,036,268 (525,097) 191,904,990
Mortgage and asset-backed securities 9,416,331 64,400 (805) 9,479,926
----------------------------------------------------------
$ 600,300,562 $2,149,770 $ (552,770) $ 601,897,562
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
At December 31, 1997, available-for-sale fixed maturity securities, which
consisted entirely of bonds, were comprised entirely of United States Government
and agencies obligations. Net unrealized appreciation on bonds of $691,595
included gross unrealized appreciation of $736,523 and gross unrealized
depreciation of $44,928 at December 31, 1997.
The carrying value and estimated fair value of available-for-sale fixed maturity
securities at December 31, 1998, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
-------------- --------------
<S> <C> <C>
Due after one year through five years $ 111,095,370 $ 111,096,900
Due after five years through ten years 6,174,732 6,241,955
Due after ten years through twenty years 208,864,193 209,270,079
Due after twenty years 264,749,936 265,808,702
------------------------------
590,884,231 592,417,636
Mortgage-backed and asset-backed securities 9,416,331 9,479,926
------------------------------
Total $ 600,300,562 $ 601,897,562
------------------------------
------------------------------
</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
required as a charge or credit to income had such amounts been realized, and a
56
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
provision for deferred income taxes. Net unrealized appreciation of
available-for-sale fixed maturity securities as reported were comprised of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
Unrealized appreciation on available-for-sale fixed maturity securities $ 1,597,000 $ 691,595
Adjustments for assumed changes in amortization pattern of deferred policy
acquisition costs (960,583) (372,959)
Related deferred income taxes (216,382) (108,336)
-------------------------
Net unrealized appreciation of available-for-sale fixed maturity securities $ 420,035 $ 210,300
-------------------------
-------------------------
</TABLE>
NET INVESTMENT INCOME
Components of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
------------- ------------ -----------
<S> <C> <C> <C>
Available-for-sale fixed maturity securities $ 28,304,437 $ 5,131,361 $ 913,636
Derivative instruments (1,767,580) (589,484) --
Policy loans 8,338 12,281 9,849
Cash and cash equivalents 210,981 73,047 62,302
Other invested assets 55,109 61,357 --
----------------------------------------
26,811,285 4,688,562 985,787
Less investments expenses (575,362) (659,934) (128,772)
----------------------------------------
Net investment income $ 26,235,923 $ 4,028,628 $ 857,015
----------------------------------------
----------------------------------------
</TABLE>
REALIZED AND UNREALIZED GAINS AND LOSSES
An analysis of sales, maturities, and principal repayments of the Company's
fixed maturities portfolio for the year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED REALIZED REALIZED PROCEEDS
COST GAINS LOSSES FROM SALE
-------------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Scheduled principal repayments, calls
and tenders $ 157,731,977 $ -- $ -- $ 157,731,977
Sales 64,861,304 163,865 (12,115) 65,013,054
-------------------------------------------------------
Total $ 222,593,281 $ 163,865 $ (12,115) $ 222,745,031
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
The changes in unrealized appreciation/depreciation on investments, which are
entirely attributable to available-for-sale fixed maturity securities,
aggregated $905,405, $893,151 and $(201,556) for the years ended December 31,
1998, 1997 and 1996, respectively. The change in net unrealized appreciation/
depreciation is recorded net of adjustments to deferred policy acquisition costs
and deferred income taxes totaling $695,670 in 1998 and $481,295 in 1997.
REPURCHASE AGREEMENTS
As part of its investment strategy, the Company enters into securities lending
programs to increase its return on investments and improve liquidity. These
transactions are accounted for as amounts due under repurchase agreements. These
amounts are collateralized by investment securities with fair values
57
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
approximately equal to the amount due. At December 31, 1998, amounts outstanding
aggregated $49,000,000. At December 31, 1997, no amounts were outstanding.
OTHER
At December 31, 1998, affidavits of deposits covering fixed maturity securities
and short-term investments with a carrying value of $602,089,746
(1997--$201,494,229) were on deposit with state agencies to meet regulatory
requirements.
At December 31, 1998, the following investments in any person or its affiliates
(other than bonds issued by agencies of the United States Government) exceeded
10% of stockholders' equity: corporate bonds with carrying values of $12,161,587
issued by Nationsbank and $6,860,000 issued by Unocal Corp.
5. 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 years ended December 31, 1998, 1997 and 1996
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 1,343,000 $ 1,725,000 $ 1,500,000
Acquired during the year -- -- 1,097,921
Accretion of interest during the year 71,000 91,000 130,000
Amortization of asset (345,094) (473,000) (1,002,921)
-------------------------------------------
Balance at end of year $ 1,068,906 $ 1,343,000 $ 1,725,000
-------------------------------------------
-------------------------------------------
</TABLE>
Amortization of the value of insurance in force acquired for the next five years
ending December 31 is expected to be as follows: 1999--$318,000; 2000--$232,000;
2001--$104,000; 2002--$104,000; and 2003-- $103,000.
6. 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 have been reduced by $567,027, $722,545 and $742,088
and insurance benefits have been reduced by $375,592, $503,154 and $455,472
during the years ended December 31, 1998, 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.
During 1998, the Company entered into a modified coinsurance agreement to cede
70% of its variable life and variable annuity business to an insurance company
that has an equity position in the Company's parent. Amounts paid pursuant to
this arrangement were immaterial during 1998.
58
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. REINSURANCE AND POLICY PROVISIONS (CONTINUED)
Unpaid claims on accident and health insurance 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, 1998, 1997 and 1996, net of reinsurance, is summarized as
follows:
<TABLE>
<CAPTION>
UNPAID UNPAID
CLAIMS CLAIMS
LIABILITY AT CLAIMS LIABILITY AT
BEGINNING OF RESERVE CLAIMS CLAIMS END OF
YEAR ASSUMED INCURRED PAID YEAR
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
1998 $ -- $ -- $ 580,845 $ 318,507 $ 262,338
1997 and prior 667,287 -- (133,100) 123,864 410,323
---------------------------------------------------------------
667,287 $ -- $ 447,745 $ 442,371 672,661
---------------------------------------------------------------
---------------------------------------------------------------
Active life reserve 1,406,694 1,518,222
---------------------------------------------------------------
Total accident and health reserves $ 2,073,981 $ 2,190,883
---------------------------------------------------------------
---------------------------------------------------------------
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
---------------------------------------------------------------
---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
UNPAID UNPAID
CLAIMS CLAIMS
LIABILITY AT CLAIMS LIABILITY AT
BEGINNING OF RESERVE CLAIMS CLAIMS END OF
YEAR ASSUMED INCURRED PAID YEAR
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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>
7. 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,
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 taxes were provided
since timing differences were not sufficient to offset operating loss
carryforwards.
59
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The effective tax rate on income (loss) before income taxes is different than
the prevailing federal income tax rate, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes $ 2,046,943 $ (2,547,643) $ (516,827)
----------------------------------------
----------------------------------------
Tax effect at federal statutory rate (34%) $ (695,961) $ 866,199 $ 175,721
Tax effect (decrease) of:
Small company deduction -- 331,000 --
Change in valuation allowance -- 171,000 (171,000)
Other (64,522) 20,577 (4,721)
----------------------------------------
Income tax benefit (expense) $ (760,483) $ 1,388,776 $ --
----------------------------------------
----------------------------------------
</TABLE>
The tax effect of individual temporary differences giving rise to the Company's
deferred tax assets at December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Deferred income tax assets:
Policy benefit reserves $ 17,810,000 $ 5,239,000
Provision for experience rating refunds 283,000 182,000
Other 57,000 52,000
----------------------------
18,150,000 5,473,000
Deferred income tax liabilities:
Unrealized appreciation of fixed maturity securities (216,382) (108,336)
Deferred policy acquisition costs (8,939,000) (727,000)
Value of insurance in force acquired (363,000) (457,000)
Other (343,569) (335,167)
----------------------------
(9,861,951) (1,627,503)
----------------------------
Deferred income tax asset $ 8,288,049 $ 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.
8. NOTE PAYABLE TO PARENT
On December 31, 1998 and October 18, 1996, the Company borrowed $5,500,000 and
$2,500,000, respectively, from its parent, American Equity Investment Life
Holding Company, in the form of surplus notes. The notes call for the Company to
pay the principal amount of the note and interest 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.
60
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RETIREMENT PLAN AND STOCK COMPENSATION 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 $10,000 in 1998 and $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's related expenses were $25,231 and $19,434 with respect
to this plan during the years ended December 31, 1998 and 1997, respectively. No
contributions were made during 1996 to the plan.
During 1997, the Company established the American Equity Investment NMO Deferred
Compensation Plan whereby agents can earn common stock of the Company's parent,
American Equity Investment Life Holding Company, in addition to their normal
commissions. Awards are calculated using formulas determined annually by the
Company's Board of Directors and are generally based upon new annuity deposits.
For the years ended December 31, 1998 and 1997, agents earned the right to
receive 83,861 and 13,131 shares, respectively. These shares will be awarded at
the end of the vesting period, 4 years for the 1998 program and 3 years for the
1997 program. A portion of the awards may be subject to forfeiture if certain
production levels are not met over the remaining vesting period. The Company
recognizes commission expense as the awards vest. For the year ended December
31, 1998, agents vested 25,342 shares of common stock and the Company recorded
commission expense (which was subsequently capitalized as deferred policy
acquisition costs) of $295,354 with respect to this plan. Amounts accrued are
reported as other liabilities until the stock has been issued.
10. 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 1999, the
Company could pay dividends to its parent of approximately $7,845,000 without
prior approval from regulatory authorities.
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
61
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STATUTORY FINANCIAL INFORMATION (CONTINUED)
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 for the Company as determined in accordance with statutory accounting
practices was $4,803,545, $4,470,284 and $1,174,811 in 1998, 1997 and 1996,
respectively, and total statutory capital and surplus of the Company was
$80,947,913 and $64,709,809 at December 31, 1998 and 1997, respectively.
In 1998, the NAIC adopted codified statutory accounting principles
(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 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, Department of Commerce, of
the State of Iowa. At this time it is unclear whether the State of Iowa will
adopt Codification. However, based on current guidance, management believes that
the impact of Codification will not be material to the Company's statutory-basis
financial statements.
11. COMMITMENTS AND CONTINGENCIES
The Company has a General Agency Commission and Servicing Agreement with
American Equity Investment Service Company (the Service Company), wholly-owned
by the Company's chairman, whereby, the Service Company acts as a national
supervisory agent with responsibility for paying commissions to agents of the
Company. Under the terms of the original agreement, the Service Company was
required to pay the greater of (a) 5% of the premiums collected by the Company
on the sale of certain annuity products, or (b) 50% of the agent's commissions
payable by the Company on the sale of those same policies. In return, the
Company agreed to pay quarterly renewal commissions to the Service Company equal
to .3875% of the premiums received by the Company on policies that still remain
inforce. In addition, the Company has agreed to pay supplemental commissions
should lapses in any quarter exceed 1.88%, or certain other circumstances arise.
The Agreement terminates on January 31, 2005.
On December 31, 1997, the Service Company and the Company amended the Agreement
to provide for the payment of 100% of the agents' commissions by the Service
Company for policies issued from July 1, 1997 through December 31, 1997. In
return, the Company agreed to pay the Service Company quarterly renewal
commissions of .7% of the premiums received by the Company before January 1,
1998 that still remain inforce, and .325% for inforce amounts received
thereafter. The revised quarterly renewal commission schedule commenced December
31, 1997.
62
<PAGE>
AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
During the years ended December 31, 1998 and 1997, the Service Company paid
$19,933,480 and $11,470,576, respectively, to agents of the Company and the
Company paid renewal commissions to the Service Company of $6,781,288 and
$1,360,410, respectively. At December 31, 1998 and 1997, accounts payable to the
Service Company aggregated $2,438,600 and $985,194, respectively, and is
included in other liabilities.
The Company leases its home office space and certain other equipment under
operating leases which expire through June 2004. During the years ended December
31, 1998, 1997 and 1996, rent expense totaled $335,382, $341,982 and $147,662,
respectively. At December 31, 1998, 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:
1999 $ 434,000
2000 422,000
2001 420,000
2002 413,000
2003 405,000
Thereafter, through June 2004 189,000
-----------
$ 2,283,000
-----------
-----------
</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.
12. 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 and have tested it to be
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.
The Company also recognizes there are outside influences and dependencies
relative to its Year 2000 effort, over which it has little or no control. The
Company is putting effort into ensuring these considerations will have minimal
impact. This includes the continued availability of certain resources, assessing
third-party modification plans and developing contingency/recovery plans aimed
at ensuring the continuity of critical business functions before and after
December 31, 1999. However, there can be no assurances that these steps will be
sufficient to avoid any adverse impact to the Company's business or its
consolidated financial statements.
63
<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 0.75% 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 1998 the total fees and expenses ranged from
an annual rate of 0.30% to an annual rate of 1.05% of average daily net
assets. For information on Investment Option expenses, see "SUMMARY AND
DIAGRAM OF THE POLICY" and 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 0.75% 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 -1.80%, 2.20%, 6.20% and 10.20%, respectively, on a guaranteed
basis, and -1.65%, 2.35%, 6.35% and 10.35%, 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 surrenders 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
GUARANTEED MAXIMUM COST OF INSURANCE CHARGES, INSURANCE CHARGES, AND NON-GUARANTEED
AND GUARANTEED MAXIMUM EXPENSE CHARGES CURRENT 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 0 100,106 241 0 100,241
2..................... 1,190 368 0 100,368 590 102 100,590
3..................... 1,831 612 0 100,612 927 537 100,927
4..................... 2,503 * * * 1,252 959 101,252
5..................... 3,209 * * * 1,562 1,367 101,562
6..................... 3,950 * * * 1,858 1,774 101,858
7..................... 4,728 * * * 2,139 2,139 102,139
8..................... 5,545 * * * 2,404 2,404 102,404
9..................... 6,403 * * * 2,655 2,655 102,655
10..................... 7,304 * * * 2,891 2,891 102,891
15..................... 12,530 * * * 3,800 3,800 103,800
20..................... 19,200 * * * 4,136 4,136 104,136
25..................... 27,713 * * * 3,789 3,789 103,789
30..................... 38,578 * * * 2,544 2,544 102,544
35..................... * * * * * * *
40..................... * * * * * * *
45..................... * * * * * * *
50..................... * * * * * * *
55..................... * * * * * * *
60..................... * * * * * * *
65..................... * * * * * * *
70..................... * * * * * * *
75..................... * * * * * * *
80..................... * * * * * * *
Age 65..................... 38,578 * * * 2,544 2,544 102,544
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 -1.80% ON A GUARANTEED BASIS AND -1.65% 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
GUARANTEED MAXIMUM COST OF INSURANCE CHARGES, INSURANCE CHARGES, AND NON-GUARANTEED
AND GUARANTEED MAXIMUM EXPENSE CHARGES CURRENT 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 0 100,118 255 0 100,255
2..................... 1,190 399 0 100,399 632 144 100,632
3..................... 1,831 674 0 100,674 1,011 621 101,011
4..................... 2,503 * * * 1,391 1,098 101,391
5..................... 3,209 * * * 1,772 1,577 101,772
6..................... 3,950 * * * 2,152 2,068 102,152
7..................... 4,728 * * * 2,530 2,530 102,530
8..................... 5,545 * * * 2,906 2,906 102,906
9..................... 6,403 * * * 3,281 3,281 103,281
10..................... 7,304 * * * 3,654 3,654 103,654
15..................... 12,530 * * * 5,422 5,422 105,422
20..................... 19,200 * * * 6,858 6,858 106,858
25..................... 27,713 * * * 7,746 7,746 107,746
30..................... 38,578 * * * 7,729 7,729 107,729
35..................... 52,445 * * * 5,999 5,999 105,999
40..................... 70,143 * * * 1,424 1,424 101,424
45..................... * * * * * * *
50..................... * * * * * * *
55..................... * * * * * * *
60..................... * * * * * * *
65..................... * * * * * * *
70..................... * * * * * *
75..................... * * * * * * *
80..................... * * * * * * *
Age 65..................... 38,578 * * * 7,729 7,729 107,729
Age 70..................... 52,445 * * * 5,999 5,999 105,999
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 2.20% ON A GUARANTEED BASIS AND 2.35% 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
CHARGES, AND GUARANTEED MAXIMUM EXPENSE INSURANCE CHARGES, AND NON-GUARANTEED
CHARGES CURRENT 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 0 100,130 270 0 100,270
2..................... 1,190 432 0 100,432 676 188 100,676
3..................... 1,831 740 0 100,740 1,100 710 101,100
4..................... 2,503 1,054 78 101,054 1,543 1,250 101,543
5..................... 3,209 1,372 396 101,372 2,006 1,811 102,006
6..................... 3,950 1,693 857 101,693 2,488 2,404 102,488
7..................... 4,728 2,016 1,363 102,016 2,990 2,990 102,990
8..................... 5,545 2,339 1,861 102,339 3,513 3,513 103,513
9..................... 6,403 2,665 2,354 102,665 4,058 4,058 104,058
10..................... 7,304 2,992 2,840 102,992 4,627 4,627 104,627
15..................... 12,530 4,590 4,590 104,590 7,815 7,815 107,815
20..................... 19,200 5,863 5,863 105,863 11,545 11,545 111,545
25..................... 27,713 6,306 6,306 106,306 15,821 15,821 115,821
30..................... 38,578 4,959 4,959 104,959 20,528 20,528 120,528
35..................... 52,445 * * * 25,047 25,047 125,047
40..................... 70,143 * * * 28,316 28,316 128,316
45..................... 92,730 * * * 27,264 27,264 127,264
50..................... * * * * 17,437 17,437 117,437
55..................... * * * * * * *
60..................... * * * * * * *
65..................... * * * * * * *
70..................... * * * * * * *
75..................... * * * * * * *
80..................... * * * * * * *
Age 65..................... 38,578 4,959 4,959 104,959 20,528 20,528 120,528
Age 70...................... 52,445 * * * 25,047 25,047 125,047
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 6.20% ON A GUARANTEED BASIS AND 6.35% 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 CHARGES, AND NON-GUARANTEED CURRENT
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...................... 581 142 0 100,142 285 0 100,285
2...................... 1,190 466 0 100,466 720 232 100,720
3...................... 1,831 810 0 100,810 1,193 803 101,193
4...................... 2,503 1,175 199 101,175 1,707 1,414 101,707
5...................... 3,209 1,563 587 101,563 2,265 2,070 102,265
6...................... 3,950 1,972 1,136 101,972 2,871 2,787 102,871
7...................... 4,728 2,405 1,752 102,405 3,529 3,529 103,529
8...................... 5,545 2,862 2,384 102,862 4,243 4,243 104,243
9...................... 6,403 3,348 3,037 103,348 5,020 5,020 105,020
10...................... 7,304 3,863 3,711 103,863 5,867 5,867 105,867
15...................... 12,530 6,954 6,954 106,954 11,346 11,346 111,346
20...................... 19,200 11,004 11,004 111,004 19,643 19,643 119,643
25...................... 27,713 16,180 16,180 116,180 32,341 32,341 132,341
30...................... 38,578 22,467 22,467 122,467 51,901 51,901 151,901
35...................... 52,445 28,535 28,535 128,535 81,832 81,832 181,832
40...................... 70,143 31,534 31,534 131,534 127,663 127,663 227,663
45...................... 92,730 22,390 22,390 122,390 196,615 196,615 296,615
50...................... 121,558 * * * 300,233 300,233 400,233
55...................... 158,351 * * * 455,804 455,804 555,804
60...................... 205,309 * * * 690,165 690,165 790,165
65...................... 265,240 * * * 995,312 995,312 1,095,312
70...................... 341,730 * * * 1,411,986 1,411,986 1,511,986
75...................... 439,352 * * * 2,066,760 2,066,760 2,166,760
80...................... 563,945 * * * 3,120,613 3,120,613 3,220,613
Age 65...................... 38,578 22,467 22,467 122,467 51,901 51,901 151,901
Age 70...................... 52,445 28,535 28,535 128,535 81,832 81,832 181,832
Age 115...................... 563,945 * * * 3,120,613 3,120,613 3,220,613
</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 10.20% ON A GUARANTEED BASIS AND 10.35% 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,
GUARANTEED MAXIMUM COST OF INSURANCE NON-GUARANTEED CURRENT COST OF
CHARGES, AND GUARANTEED MAXIMUM EXPENSE INSURANCE CHARGES, AND NON-GUARANTEED
CHARGES CURRENT 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 0 100,000 241 0 100,000
2..................... 1,190 369 0 100,000 591 103 100,000
3..................... 1,831 614 0 100,000 929 539 100,000
4..................... 2,503 * * * 1,255 962 100,000
5..................... 3,208 * * * 1,568 1,373 100,000
6..................... 3,950 * * * 1,866 1,782 100,000
7..................... 4,728 * * * 2,149 2,149 100,000
8..................... 5,545 * * * 2,418 2,418 100,000
9..................... 6,403 * * * 2,673 2,673 100,000
10..................... 7,303 * * * 2,914 2,914 100,000
15..................... 12,530 * * * 3,860 3,860 100,000
20..................... 19,200 * * * 4,257 4,257 100,000
25..................... 27,713 * * * 3,998 3,998 100,000
30..................... 38,578 * * * 2,854 2,854 100,000
35..................... 52,445 * * * 219 219 100,000
40..................... * * * * * * *
45..................... * * * * * * *
50..................... * * * * * * *
55..................... * * * * * * *
60..................... * * * * * * *
65..................... * * * * * * *
70..................... * * * * * * *
75..................... * * * * * * *
80..................... * * * * * * *
Age 65..................... 38,578 * * * 2,854 2,854 100,000
Age 70..................... 52,445 * * * 219 219 100,000
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 0% SHOWN ABOVE CORRESPOND TO NET ANNUAL
RATES OF RETURN OF -1.80% ON A GUARANTEED BASIS AND -1.65% 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
GUARANTEED MAXIMUM COST OF INSURANCE CHARGES, INSURANCE CHARGES, AND NON-GUARANTEED
AND GUARANTEED MAXIMUM EXPENSE CHARGES CURRENT 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 0 100,000 256 0 100,000
2..................... 1,190 401 0 100,000 633 145 100,000
3..................... 1,831 677 0 100,000 1,013 623 100,000
4..................... 2,503 * * * 1,395 1,102 100,000
5..................... 3,208 * * * 1,778 1,583 100,000
6..................... 3,950 * * * 2,161 2,077 100,000
7..................... 4,728 * * * 2,543 2,543 100,000
8..................... 5,545 * * * 2,924 2,924 100,000
9..................... 6,403 * * * 3,304 3,304 100,000
10..................... 7,303 * * * 3,684 3,684 100,000
15..................... 12,530 * * * 5,512 5,512 100,000
20..................... 19,200 * * * 7,069 7,069 100,000
25..................... 27,713 * * * 8,175 8,175 100,000
30..................... 38,578 * * * 8,510 8,510 100,000
35..................... 52,445 * * * 7,303 7,303 100,000
40..................... 70,143 * * * 3,345 3,345 100,000
45..................... * * * * * * *
50..................... * * * * * * *
55..................... * * * * * * *
60..................... * * * * * * *
65..................... * * * * * * *
70..................... * * * * * * *
75..................... * * * * * * *
80..................... * * * * * * *
Age 65..................... 38,578 * * * 8,510 8,510 100,000
Age 70..................... 52,445 * * * 7,303 7,303 100,000
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 2.20% ON A GUARANTEED BASIS AND 2.35% 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
CHARGES, AND GUARANTEED MAXIMUM EXPENSE INSURANCE CHARGES, AND NON-GUARANTEED
CHARGES CURRENT 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 0 100,000 271 0 100,000
2..................... 1,190 433 0 100,000 677 189 100,000
3..................... 1,831 743 0 100,000 1,102 712 100,000
4..................... 2,503 1,059 83 100,000 1,547 1,254 100,000
5..................... 3,208 1,381 405 100,000 2,013 1,818 100,000
6..................... 3,950 1,707 871 100,000 2,498 2,414 100,000
7..................... 4,728 2,035 1,382 100,000 3,005 3,005 100,000
8..................... 5,545 2,366 1,888 100,000 3,535 3,535 100,000
9..................... 6,403 2,701 2,390 100,000 4,088 4,088 100,000
10..................... 7,303 3,040 2,888 100,000 4,667 4,667 100,000
15..................... 12,530 4,741 4,741 100,000 7,950 7,950 100,000
20..................... 19,200 6,237 6,237 100,000 11,917 11,917 100,000
25..................... 27,713 7,108 7,108 100,000 16,710 16,710 100,000
30..................... 38,578 6,493 6,493 100,000 22,482 22,482 100,000
35..................... 52,445 1,927 1,927 100,000 29,173 29,173 100,000
40..................... 70,143 * * * 36,770 36,770 100,000
45..................... 92,730 * * * 44,521 44,521 100,000
50..................... 121,558 * * * 51,835 51,835 100,000
55..................... 158,351 * * * 57,582 57,582 100,000
60..................... 205,309 * * * 59,472 59,472 100,000
65..................... 265,240 * * * 15,333 15,333 100,000
70..................... * * * * * * *
75..................... * * * * * * *
80..................... * * * * * * *
Age 65..................... 38,578 6,493 6,493 100,000 22,482 22,482 100,000
Age 70..................... 52,445 1,927 1,927 100,000 29,173 29,173 100,000
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 6.20% ON A GUARANTEED BASIS AND 6.35% 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,
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................... 581 143 0 100,000 285 0 100,000
2................... 1,190 467 0 100,000 721 233 100,000
3................... 1,831 813 0 100,000 1,196 806 100,000
4................... 2,503 1,181 205 100,000 1,712 1,419 100,000
5................... 3,208 1,573 597 100,000 2,273 2,078 100,000
6................... 3,950 1,988 1,152 100,000 2,884 2,800 100,000
7................... 4,728 2,428 1,775 100,000 3,547 3,547 100,000
8................... 5,545 2,896 2,418 100,000 4,270 4,270 100,000
9................... 6,403 3,394 3,083 100,000 5,059 5,059 100,000
10................... 7,303 3,927 3,775 100,000 5,920 5,920 100,000
15................... 12,530 7,186 7,186 100,000 11,551 11,551 100,000
20................... 19,200 11,689 11,689 100,000 20,298 20,298 100,000
25................... 27,713 17,980 17,980 100,000 34,187 34,187 100,000
30................... 38,578 26,911 26,911 100,000 56,759 56,759 100,000
35................... 52,445 39,355 39,355 100,000 94,296 94,296 109,383
40................... 70,143 57,703 57,703 100,000 156,184 156,184 167,117
45................... 92,730 87,667 87,667 100,000 257,112 257,112 269,968
50................... 121,558 141,908 141,908 149,003 419,747 419,747 440,735
55................... 158,351 224,886 224,886 236,131 679,605 679,605 713,586
60................... 205,309 355,945 355,945 359,504 1,100,825 1,100,825 1,111,834
65................... 265,240 563,031 563,031 568,661 1,784,557 1,784,557 1,802,403
70................... 341,730 869,427 869,427 878,121 2,873,803 2,873,803 2,902,541
75................... 439,352 1,341,022 1,341,022 1,354,432 4,616,545 4,616,545 4,662,711
80................... 563,945 2,066,885 2,066,885 2,087,553 7,404,434 7,404,434 7,478,478
Age 65................... 38,578 26,911 26,911 100,000 56,759 56,759 100,000
Age 70................... 52,445 39,355 39,355 100,000 94,296 94,296 109,383
Age 115.................. 563,945 2,066,885 2,066,885 2,087,553 7,404,434 7,404,434 7,478,478
</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 10.20% ON A GUARANTEED BASIS AND 10.35% 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
CHARGES, AND GUARANTEED MAXIMUM EXPENSE INSURANCE CHARGES, AND NON-GUARANTEED
CHARGES CURRENT 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 0 100,227 371 0 100,371
2..................... 1,526 608 0 100,608 849 205 100,849
3..................... 2,347 970 0 100,970 1,312 797 101,312
4..................... 3,209 1,312 24 101,312 1,761 1,375 101,761
5..................... 4,114 1,635 504 101,635 2,193 1,967 102,193
6..................... 5,064 1,935 1,015 101,935 2,609 2,517 102,609
7..................... 6,061 2,211 1,493 102,211 3,008 3,008 103,008
8..................... 7,109 2,464 1,938 102,464 3,389 3,389 103,389
9..................... 8,209 2,692 2,350 102,692 3,752 3,752 103,752
10..................... 9,364 2,893 2,726 102,893 4,096 4,096 104,096
15..................... 16,064 3,426 3,426 103,426 5,451 5,451 105,451
20..................... 24,616 2,879 2,879 102,879 6,006 6,006 106,006
25..................... 35,530 549 549 100,549 5,370 5,370 105,370
30..................... 49,460 * * * 3,007 3,007 103,007
35..................... * * * * * * *
40..................... * * * * * * *
45..................... * * * * * * *
50..................... * * * * * * *
55..................... * * * * * * *
60..................... * * * * * * *
65..................... * * * * * * *
70..................... * * * * * * *
75..................... * * * * * * *
80..................... * * * * * * *
Age 65..................... 49,460 * * * 3,007 3,007 103,007
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 -1.80% ON A GUARANTEED BASIS AND -1.65% 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
CHARGES, AND GUARANTEED MAXIMUM EXPENSE INSURANCE CHARGES, AND NON-GUARANTEED
CHARGES CURRENT 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 0 100,244 391 0 100,391
2..................... 1,526 655 0 100,655 907 263 100,907
3..................... 2,347 1,063 0 101,063 1,429 914 101,429
4..................... 3,209 1,466 178 101,466 1,955 1,569 101,955
5..................... 4,114 1,864 733 101,864 2,485 2,259 102,485
6..................... 5,064 2,254 1,334 102,254 3,017 2,925 103,017
7..................... 6,061 2,634 1,916 102,634 3,552 3,552 103,552
8..................... 7,109 3,004 2,478 103,004 4,088 4,088 104,088
9..................... 8,209 3,360 3,018 103,360 4,624 4,624 104,624
10..................... 9,364 3,701 3,534 103,701 5,159 5,159 105,159
15..................... 16,064 5,071 5,071 105,071 7,730 7,730 107,730
20..................... 24,616 5,467 5,467 105,467 9,857 9,857 109,857
25..................... 35,530 3,897 3,897 103,897 10,988 10,988 110,988
30..................... 49,460 * * * 10,300 10,300 110,300
35..................... 67,239 * * * 6,631 6,631 106,631
40..................... * * * * * * *
45..................... * * * * * * *
50..................... * * * * * * *
55..................... * * * * * * *
60..................... * * * * * * *
65..................... * * * * * * *
70..................... * * * * * * *
75..................... * * * * * * *
70..................... * * * * * * *
Age 65..................... 49,460 * * * 10,300 10,300 110,300
Age 70..................... 67,239 * * * 6,631 6,631 106,631
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 2.20% ON A GUARANTEED BASIS AND 2.35% 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
CHARGES, AND GUARANTEED MAXIMUM INSURANCE CHARGES, AND NON-GUARANTEED
EXPENSE CHARGES CURRENT 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 0 100,262 411 0 100,411
2..................... 1,526 704 0 100,704 967 323 100,967
3..................... 2,347 1,161 0 101,161 1,552 1,037 101,552
4..................... 3,209 1,633 345 101,633 2,165 1,779 102,165
5..................... 4,114 2,120 989 102,120 2,809 2,583 102,809
6..................... 5,064 2,620 1,700 102,620 3,484 3,392 103,484
7..................... 6,061 3,132 2,414 103,132 4,191 4,191 104,191
8..................... 7,109 3,657 3,131 103,657 4,931 4,931 104,931
9..................... 8,209 4,192 3,850 104,192 5,706 5,706 105,706
10..................... 9,364 4,737 4,570 104,737 6,516 6,516 106,516
15..................... 16,064 7,527 7,527 107,527 11,084 11,084 111,084
20..................... 24,616 10,055 10,055 110,055 16,464 16,464 116,464
25..................... 35,530 11,263 11,263 111,263 22,401 22,401 122,401
30..................... 49,460 9,193 9,193 109,193 28,328 28,328 128,328
35..................... 67,239 78 78 100,078 33,204 33,204 133,204
40..................... 89,929 * * * 34,993 34,993 134,993
45..................... 118,889 * * * 30,115 30,115 130,115
50..................... 155,849 * * * 14,012 14,012 114,012
55..................... * * * * * * *
60..................... * * * * * * *
65..................... * * * * * * *
70..................... * * * * * * *
75..................... * * * * * * *
80..................... * * * * * * *
Age 65..................... 49,460 9,193 9,193 109,193 28,328 28,328 128,328
Age 70..................... 67,239 78 78 100,078 33,204 33,204 133,204
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 6.20% ON A GUARANTEED BASIS AND 6.35% 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 CHARGES, AND NON-GUARANTEED CURRENT
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........................ 744 279 0 100,279 432 0 100,432
2........................ 1,526 754 0 100,754 1,029 385 101,029
3........................ 2,347 1,265 0 101,265 1,681 1,166 101,681
4........................ 3,209 1,815 527 101,815 2,393 2,007 102,393
5........................ 4,114 2,406 1,275 102,406 3,169 2,943 103,169
6........................ 5,064 3,039 2,119 103,039 4,016 3,924 104,016
7........................ 6,061 3,718 3,000 103,718 4,939 4,939 104,939
8........................ 7,109 4,446 3,920 104,446 5,946 5,946 105,946
9........................ 8,209 5,226 4,884 105,226 7,045 7,045 107,045
10........................ 9,364 6,062 5,895 106,062 8,243 8,243 108,243
15........................ 16,064 11,187 11,187 111,187 16,025 16,025 116,025
20........................ 24,616 18,158 18,158 118,158 27,843 27,843 127,843
25........................ 35,530 27,065 27,065 127,065 45,665 45,665 145,665
30........................ 49,460 37,484 37,484 137,484 72,463 72,463 172,463
35........................ 67,239 47,481 47,481 147,481 112,810 112,810 212,810
40........................ 89,929 52,236 52,236 152,236 173,515 173,515 273,515
45........................ 118,889 40,857 40,857 140,857 264,795 264,795 364,795
50........................ 155,849 * * * 403,751 403,751 503,751
55........................ 203,020 * * * 617,356 617,356 717,356
60........................ 263,225 * * * 949,799 949,799 1,049,799
65........................ 340,062 * * * 1,419,749 1,419,749 1,519,749
70........................ 438,129 * * * 2,107,098 2,107,098 2,207,098
75........................ 563,290 * * * 3,204,728 3,204,728 3,304,728
80........................ 723,030 * * * 4,983,195 4,983,195 5,083,195
Age 65........................ 49,460 37,484 37,484 137,484 72,463 72,463 172,463
Age 70........................ 67,239 47,481 47,481 147,481 112,810 112,810 212,810
Age 115........................ 723,030 * * * 4,983,195 4,983,195 5,083,195
</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 10.20% ON A GUARANTEED BASIS AND 10.35% 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
CHARGES, AND GUARANTEED MAXIMUM EXPENSE INSURANCE CHARGES, AND NON-GUARANTEED
CHARGES CURRENT 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 0 100,000 371 0 100,000
2..................... 1,526 610 0 100,000 850 206 100,000
3..................... 2,347 974 0 100,000 1,315 800 100,000
4..................... 3,209 1,319 31 100,000 1,766 1,380 100,000
5..................... 4,114 1,646 515 100,000 2,202 1,976 100,000
6..................... 5,064 1,951 1,031 100,000 2,621 2,529 100,000
7..................... 6,061 2,233 1,515 100,000 3,024 3,024 100,000
8..................... 7,109 2,493 1,967 100,000 3,411 3,411 100,000
9..................... 8,209 2,729 2,387 100,000 3,780 3,780 100,000
10..................... 9,364 2,940 2,773 100,000 4,131 4,131 100,000
15..................... 16,064 3,540 3,540 100,000 5,546 5,546 100,000
20..................... 24,616 3,096 3,096 100,000 6,211 6,211 100,000
25..................... 35,530 864 864 100,000 5,753 5,753 100,000
30..................... 49,460 * * * 3,605 3,605 100,000
35..................... * * * * * * *
40..................... * * * * * * *
45..................... * * * * * * *
50..................... * * * * * * *
55..................... * * * * * * *
60..................... * * * * * * *
65..................... * * * * * * *
70..................... * * * * * * *
75..................... * * * * * * *
80..................... * * * * * * *
Age 65..................... 49,460 * * * 3,605 3,605 100,000
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 -1.80% ON A GUARANTEED BASIS AND -1.65% 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
CHARGES, AND GUARANTEED MAXIMUM EXPENSE INSURANCE CHARGES, AND NON-GUARANTEED
CHARGES CURRENT 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 0 100,000 391 0 100,000
2..................... 1,526 657 0 100,000 909 265 100,000
3..................... 2,347 1,067 0 100,000 1,432 917 100,000
4..................... 3,209 1,474 186 100,000 1,961 1,575 100,000
5..................... 4,114 1,877 746 100,000 2,494 2,268 100,000
6..................... 5,064 2,273 1,353 100,000 3,031 2,939 100,000
7..................... 6,061 2,661 1,943 100,000 3,572 3,572 100,000
8..................... 7,109 3,040 2,514 100,000 4,115 4,115 100,000
9..................... 8,209 3,408 3,066 100,000 4,660 4,660 100,000
10..................... 9,364 3,762 3,595 100,000 5,206 5,206 100,000
15..................... 16,064 5,245 5,245 100,000 7,872 7,872 100,000
20..................... 24,616 5,858 5,858 100,000 10,211 10,211 100,000
25..................... 35,530 4,639 4,639 100,000 11,765 11,765 100,000
30..................... 49,460 * * * 11,823 11,823 100,000
35..................... 67,239 * * * 9,252 9,252 100,000
40..................... 89,929 * * * 1,835 1,835 100,000
45..................... * * * * * * *
50..................... * * * * * * *
55..................... * * * * * * *
60..................... * * * * * * *
65..................... * * * * * * *
70..................... * * * * * * *
75..................... * * * * * * *
80..................... * * * * * * *
Age 65..................... 49,460 * * * 11,823 11,823 100,000
Age 70..................... 67,239 * * * 9,252 9,252 100,000
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 2.20% ON A GUARANTEED BASIS AND 2.35% 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
CHARGES, AND GUARANTEED MAXIMUM INSURANCE CHARGES, AND NON-GUARANTEED
EXPENSE CHARGES CURRENT 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..................... 744 263 0 100,000 412 0 100,000
2..................... 1,526 706 0 100,000 969 325 100,000
3..................... 2,347 1,166 0 100,000 1,555 1,040 100,000
4..................... 3,209 1,643 355 100,000 2,172 1,786 100,000
5..................... 4,114 2,135 1,004 100,000 2,820 2,594 100,000
6..................... 5,064 2,643 1,723 100,000 3,500 3,408 100,000
7..................... 6,061 3,165 2,447 100,000 4,215 4,215 100,000
8..................... 7,109 3,702 3,176 100,000 4,965 4,965 100,000
9..................... 8,209 4,253 3,911 100,000 5,752 5,752 100,000
10..................... 9,364 4,818 4,651 100,000 6,577 6,577 100,000
15..................... 16,064 7,793 7,793 100,000 11,298 11,298 100,000
20..................... 24,616 10,762 10,762 100,000 17,081 17,081 100,000
25..................... 35,530 12,934 12,934 100,000 23,998 23,998 100,000
30..................... 49,460 12,737 12,737 100,000 32,143 32,143 100,000
35..................... 67,239 6,560 6,560 100,000 41,736 41,736 100,000
40..................... 89,929 * * * 53,205 53,205 100,000
45..................... 118,889 * * * 67,687 67,687 100,000
50..................... 155,849 * * * 89,000 89,000 100,000
55..................... 203,020 * * * 122,180 122,180 128,289
60..................... 263,225 * * * 167,456 167,456 169,130
65..................... 340,062 * * * 228,892 228,892 231,181
70..................... 438,129 * * * 309,720 309,720 312,817
75..................... 563,290 * * * 416,967 416,967 421,135
80..................... 723,030 * * * 559,367 559,367 561,959
Age 65..................... 49,460 12,737 12,737 100,000 32,143 32,143 100,000
Age 70..................... 67,239 6,560 6,560 100,000 41,736 41,736 100,000
Age 115..................... 723,030 * * * 559,367 559,367 561,959
</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 6.20% ON A GUARANTEED BASIS AND 6.35% 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,
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..................... 744 280 0 100,000 432 0 100,000
2..................... 1,526 757 0 100,000 1,031 387 100,000
3..................... 2,347 1,271 0 100,000 1,685 1,170 100,000
4..................... 3,209 1,825 537 100,000 2,400 2,014 100,000
5..................... 4,114 2,423 1,292 100,000 3,182 2,956 100,000
6..................... 5,064 3,066 2,146 100,000 4,036 3,944 100,000
7..................... 6,061 3,757 3,039 100,000 4,968 4,968 100,000
8..................... 7,109 4,503 3,977 100,000 5,988 5,988 100,000
9..................... 8,209 5,305 4,963 100,000 7,104 7,104 100,000
10..................... 9,364 6,169 6,002 100,000 8,323 8,323 100,000
15..................... 16,064 11,594 11,594 100,000 16,348 16,348 100,000
20..................... 24,616 19,433 19,433 100,000 28,924 28,924 100,000
25..................... 35,530 30,728 30,728 100,000 48,961 48,961 100,000
30..................... 49,460 47,488 47,488 100,000 81,926 81,926 100,000
35..................... 67,239 74,142 74,142 100,000 136,270 136,270 158,073
40..................... 89,929 120,731 120,731 129,182 224,227 224,227 239,922
45..................... 118,889 196,402 196,402 206,222 367,644 367,644 386,026
50..................... 155,849 313,608 313,608 329,289 597,763 597,763 627,651
55..................... 203,020 490,340 490,340 514,857 964,248 964,248 1,012,461
60..................... 263,225 770,759 770,759 778,466 1,599,378 1,599,378 1,574,972
65..................... 340,062 1,216,508 1,216,508 1,228,673 2,527,371 2,527,371 2,552,645
70..................... 438,129 1,876,184 1,876,184 1,894,945 4,069,590 4,069,590 4,110,286
75..................... 563,290 2,891,535 2,891,535 2,920,450 6,536,971 6,536,971 6,602,341
80..................... 723,030 4,454,330 4,454,330 4,498,873 10,483,917 10,483,917 10,588,757
Age 65..................... 49,460 47,488 47,488 100,000 81,926 81,926 100,000
Age 70..................... 67,239 74,142 74,142 100,000 136,270 136,270 158,073
Age 115..................... 723,030 4,454,330 4,454,330 4,498,873 10,483,917 10,483,917 10,588,757
</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 10.20% ON A GUARANTEED BASIS AND 10.35% 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 surrenders, 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 surrenders, 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
B-1
<PAGE>
each dollar then added to or taken from the Accumulated Value would change
the life insurance proceeds by $1.85 (rather than $2.50).
<TABLE>
<CAPTION>
SPECIFIED AMOUNT
ATTAINED AGE 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-Tob
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-Tob
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
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore, or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Article XII of the Company's By-Laws provides for the indemnification by the
Company of any person who is a party or who is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that he is or was a director or
officer of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. Article
XII also provides for the indemnification by the Company of any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company to procure a judgment
in its factor by reason of the fact that he is or was a director or officer of
the Company, or is or was serving at the request of the Company as a director,
offer, employee or agent of another corporation, partnership, joint venture,
trust or another enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, except that no indemnification will be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his duty to the Company
unless and only to the extent that the court in which such action or suit was
brought determines upon application that, despite the adjudication of liability
but in view of all circumstances of the case, such person is fairly and
reasonable entitled to indemnity for such expenses which such court shall deem
proper.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
REPRESENTATIONS PURSUANT TO SECTION 26(E)(2)A
The Company represents that the aggregate charges under the Contracts are
reasonable in relation to the services rendered, the expenses to be incurred and
the risks assumed by the Company.
II-1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
A reconciliation and tie-in of information shown in the Prospectus with the
items of Form N-8B-2.
The Prospectus consisting of 83 pages.
The undertaking to file reports.
The undertaking pursuant to Rule 484.
Representations pursuant to Section 26(a)(2)(A).
The signatures.
Written consents of the following persons:
Wendy L. Carlson.
Messrs. Sutherland Asbill & Brennan LLP.
Ernst & Young LLP, Independent Auditors.
Christopher G. Daniels, FSA, MSAA, Consulting Actuary.
The following exhibits:
<TABLE>
<C> <C> <S>
1.A. 1. Certified Resolution of the Board of Directors of the Company
establishing the Variable Account. (1)
2. None.
3. *(a) Principal Underwriting Agreement.
(b) Form of Sales Agreement. (2)
(c) Form of Wholesaling Agreement. (2)
4. None.
5. (a) Revised Policy Form. (3)
(b) Revised Application Form. (3)
6. (a) Articles of Incorporation of the Company. (1)
(b) By-Laws of the Company. (1)
7. None.
8. None.
9. (a) Participation Agreement relating to EquiTrust Variable Insurance
Series Fund. (2)
(b) Participation Agreement relating to Dreyfus Variable Investment
Fund. (2)
(c) Participation Agreement relating to T. Rowe Price Equity Series,
Inc. and T. Rowe Price International Series, Inc. (2)
10. Form of Application (see Exhibit 1.A.(5)(b) above.)
2. *Opinion and Consent of Wendy L. Carlson.
3. *Financial Statement Schedules.
4. Not applicable.
5. Not applicable.
6. *Opinion and Consent of Christopher G. Daniels, FSA, MSAA, Consulting
Actuary.
7. *(a) Consent of Ernst & Young LLP.
*(b) Consent of Messrs. Sutherland, Asbill & Brennan LLP.
8. Memorandum describing the Company's conversion procedure (included in
Exhibit 9 hereto).
9. Revised Memorandum describing the Company's issuance, transfer and
redemption procedures for the Policy. (3)
10. Powers of Attorney (1)
</TABLE>
- ------------------------
* Attached as an exhibit.
(1) Incorporated herein by reference to the initial filing of this Registration
Statement (File No. 333-45815) filed on February 6, 1998.
(2) Incorporated herein by reference to pre-effective amendment No. 1 of this
Registration Statement (File No. 333-45815) filed on June 17, 1998.
(3) Incorporated herein by reference to pre-effective amendment No. 2 of this
Registration Statement (File No. 333-45815) filed on August 13, 1998.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
American Equity Life Variable Account, certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized in the City of West Des Moines, State of Iowa, on the 22nd day of
April, 1999.
<TABLE>
<S> <C> <C>
American Equity Investment Life
Insurance Company
American Equity Life Variable Account
By: /s/ D.J. NOBLE
------------------------------------------
D.J. Noble
Chairman
American Equity Investment Life
Insurance Company
</TABLE>
<TABLE>
<S> <C> <C>
Attest: /s/ TERRY A. REIMER
-----------------------------------------
Terry A. Reimer
Chief Financial Officer
American Equity Investment Life
Insurance Company
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities indicated
on the dates set forth below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ D.J. NOBLE Chairman and Director
- ------------------------------ [Principal Executive April 22, 1999
D.J. Noble Officer]
Chief Financial Officer
/s/ TERRY A. REIMER [Principal Financial
- ------------------------------ Officer] [Principal April 22, 1999
Terry A. Reimer Accounting Officer]
- ------------------------------ Director April 22, 1999
James M. Gerlach*
- ------------------------------ Director April 22, 1999
David S. Mulcahy*
- ------------------------------ Director April 22, 1999
William J. Oddy*
- ------------------------------ Director April 22, 1999
Debra J. Richardson
- ------------------------------ Director April 22, 1999
Jack W. Schroeder*
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ DEBRA J. RICHARDSON
------------------------- pursuant to Power of
Debra J. Richardson Attorney.
</TABLE>
<PAGE>
UNDERWRITING AGREEMENT
AGREEMENT dated as of this 1st day of May, 1999, by and between American
Equity Investment Life Insurance Company, an Iowa corporation ("INSURER"), on
its behalf and on behalf of American Equity Life Variable Account and American
Equity Life Annuity Account (the "SEPARATE ACCOUNTS"); and American Equity
Capital, Inc., ("DISTRIBUTOR"), an Iowa corporation which is a registered
broker-dealer with the Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934 (the "1934 ACT") and a member of the National
Association of Securities Dealers, Inc. ("NASD").
RECITALS
A. Distributor is a broker-dealer that engages in the distribution of
variable insurance products and other investment products; and
B. Insurer desires to issue certain variable insurance products described
more fully below to the public through Distributor acting as principal
underwriter;
NOW, THEREFORE, in consideration of the premises and of the mutual promises
and covenants hereinafter set forth, the parties agree as follows:
1. DEFINITIONS
A. CONTRACTS-- The class or classes of variable insurance products set
forth on Schedule 1 to this Agreement as in effect at the time this
Agreement is executed, and such other classes of variable products
that may be added to Schedule 1 from time to time in accordance with
Section 11.b of this Agreement, and including any riders to such
contracts and any other contracts offered in connection therewith. For
the purpose of this Agreement, a "CLASS OF CONTRACTS" shall mean those
Contracts issued by Insurer on the same policy form or forms and
covered by the same registration statement.
B. REGISTRATION STATEMENT -- With respect to each Class of Contracts, the
most recent post-effective registration statement filed with the SEC
or the most recent effective post-effective amendment thereto,
including financial statements included therein and all exhibits
thereto. For purposes of Section 9 of this Agreement, the term
"Registration Statement" means any document which is or at any time
was a Registration Statement within the meaning of this Section 1.B.
C. PROSPECTUS -- With respect to each Class of Contracts, the prospectus
for such Class of Contracts included within the Registration Statement
for such Class of Contracts; provided, however, that if the most
recently filed prospectus filed pursuant to Rule 497 under the 1933
Act subsequent to the date on which the Registration Statement became
effective differs from the prospectus on file at the time the
Registration Statement became effective, the term "Prospectus"
<PAGE>
shall refer to the most recently filed prospectus filed under Rule 497
from and after the date on which it shall have been filed. For
purposes of Section 9 the term "any Prospectus" means any document
which is or at any time was a Prospectus within the meaning of this
Section 1.C.
D. FUNDS -- The registered investment companies in which the Separate
Accounts invest.
E. VARIABLE ACCOUNTS -- The separate accounts supporting any Class of
Contracts and specified in Schedule 1 as in effect at the time this
Agreement is executed, or as it may be amended from time to time in
accordance with Section 11.B of this Agreement.
F. 1933 ACT -- The Securities Act of 1933, as amended.
G. 1934 ACT -- The Securities Exchange Act of 1934, as amended.
H. 1940 Act -- The Investment Company Act of 1940, as amended.
I. SEC -- The Securities and Exchange Commission.
J. NASD -- The National Association of Securities Dealers, Inc. and any
affiliates.
K. REGULATIONS -- The rules and regulations promulgated by the SEC under
the 1933 Act, the 1934 Act and the 1940 Act as in effect at the time
this Agreement is executed or thereafter promulgated.
L. SELLING BROKER-DEALER -- A person registered as a broker-dealer and
licensed as a life insurance agent or affiliated with a person so
licensed, and authorized to distribute the Contracts pursuant to a
sales agreement as provided for in Section 4 of this Agreement.
M. REPRESENTATIVE -- When used with reference to Distributor or a Selling
Broker-Dealer, an individual who is an associated person, as that term
is defined in the 1934 Act, thereof.
N. APPLICATION - An application for a Contract.
O. PREMIUM -- A payment made under a Contract to purchase benefits under
the Contract.
P. ADMINISTRATIVE OFFICE -- The administrative office of the Insurer
identified in the most recently filed prospectus filed pursuant to
Rule 497.
-2-
<PAGE>
2. AUTHORIZATION AND APPOINTMENT OF DISTRIBUTOR.
A. SCOPE AND AUTHORITY. Insurer hereby authorizes Distributor on an
exclusive basis, and Distributor accepts such authority, subject to
the requirements and provisions of the 1933 Act, the 1934 Act and the
1940 Act, as well as all terms and conditions of this Agreement, to be
the distributor and principal underwriter for the sale of the
Contracts to the public in each state and other jurisdiction in which
the Contracts may lawfully be sold during the term of this Agreement.
Insurer hereby authorizes Distributor to grant authority to Selling
Broker-Dealers to solicit Applications and Premiums to the extent the
Distributor deems appropriate and consistent with the marketing
program for the Contracts or a Class of Contracts, subject to the
conditions set forth in Section 4 of this Agreement. The Contracts
shall be offered for sale and distribution at premium rates set from
time to time by Insurer. Distributor shall use its best efforts to
market the Contracts actively through Selling Broker-Dealers in
accordance with Section 4 of this Agreement, subject to compliance
with applicable laws, including rules of the NASD.
B. LIMITS ON AUTHORITY. Distributor shall act as an independent
contractor and nothing herein contained shall constitute Distributor
or its agents, officers, or employees as agents, officers or employees
of Insurer solely by virtue of their activities in connection with the
sale of Contracts hereunder. Distributor and its Representatives shall
not have authority, on behalf of Insurer to make, alter, or discharge
any Contract or other insurance policy or annuity entered into
pursuant to a Contract; to waive any Contract forfeiture provision; to
extend due date for payment of any Premium; or to receive monies or
Premiums (except for the sole purpose of forwarding monies or Premiums
to Insurer). Distributor shall not expend, nor contract for the
expenditure of, funds of the Insurer. Distributor shall not possess or
exercise any authority on behalf of Insurer other than that expressly
conferred on Distributor by this Agreement.
3. SOLICITATION ACTIVITIES.
A. NO SALES BY DISTRIBUTOR REPRESENTATIVES. The Distributor will not
solicit applications from the public for Contracts through Distributor
Representatives.
B. REPRESENTATIONS AND WARRANTIES OF DISTRIBUTOR. Distributor represents
and warrants to Insurer that Distributor is and shall remain during
the term of this Agreement (i) registered as a broker-dealer under the
1934 Act; (ii) a member of the NASD; (iii) duly registered under
applicable state securities laws; and (iv) in compliance with Section
9(a) of the 1940 Act.
-3-
<PAGE>
4. SELLING BROKER-DEALERS. Insurer and Distributor shall insure that sales of
the contracts by Selling Broker-Dealers comply with the following
conditions, and any additional conditions Insurer may specify from time to
time.
A. DUAL REGISTRATION/LICENSING. Every Selling Broker-Dealer shall be (i)
registered as a broker-dealer with the SEC; (ii) a member of the NASD;
and (iii) if required, licensed as an insurance agent with authority
to sell variable products or associated with an insurance agent so
licensed. Any individuals to be authorized to act on behalf of Selling
Broker-Dealer shall be (i) duly registered with the NASD as
representatives of Selling Broker-Dealer with authority to sell
variable products; and (ii) licensed as insurance agents with
authority to sell variable products. Insurer shall verify that Selling
Broker-Dealer and its Representatives are duly licensed under
applicable state insurance law to sell the Contracts or, if
Broker-Dealer is not so licensed, that it is associated with an entity
so licensed.
B. APPOINTMENT OF REPRESENTATIVES. Every Selling Broker-Dealer (or, if
applicable, its associated insurance agency) and each of its
Representatives shall have been appointed by Insurer; provided that
Insurer reserves the right to refuse to appoint any proposed person,
or once appointed, to terminate such appointment.
C. WRITTEN SALES AGREEMENT. Every Selling Broker-Dealer must enter into a
written sales agreement with Distributor and Insurer which sales
agreement, among other things, will require such Selling Broker-Dealer
to use its best efforts to solicit Applications for the Contracts and
to comply with applicable laws and regulations, including the
Insurer's rules and regulations as reflected in any written rules,
regulations and procedures provided by Insurer to insurance agents
appointed to sell its insurance contracts, as revised from time to
time.
D. SUITABILITY. In view of the fact that Insurer and Distributor want to
ensure that Contracts will be sold to purchasers for whom the
Contracts will be suitable, the written Sales Agreement shall require
that Selling Broker-Dealers and their Representatives not make
recommendations to an applicant to purchase a Contract in the absence
of reasonable grounds to believe that the purchase of the Contract is
suitable for the applicant. While not limited to the following, a
determination of suitability shall be based on information supplied by
an applicant after reasonable inquiry concerning the applicant's other
security holdings, insurance and investment objectives, financial
situation and needs, and the likelihood that the applicant will
continue to make premium payments contemplated by the Contract applied
for and will keep the Contract in force for a sufficient period of
time so that Insurer's acquisition costs are amortized over a
reasonable period of time.
-4-
<PAGE>
5. MARKETING MATERIALS
A. PREPARATION AND FILING. Subject to Section 11.J below, Insurer shall
be primarily responsible for the design and preparation of all
promotional, sales and advertising material related to the Contracts.
Distributor shall be responsible for filing such material as required,
with the NASD and any state securities regulatory authorities at
Insurer's expense. Insurer shall be responsible for filing all
promotional, sales or advertising material, as required, with any
state insurance regulatory authorities. Insurer shall be responsible
for preparing the Contract forms and filing them with applicable state
insurance regulatory authorities, and for preparing the Prospectuses
and Registration Statements and filing them with the SEC and state
regulatory authorities, to the extent required. The parties shall
notify each other expeditiously of any comments provided by the SEC,
NASD or any securities or insurance regulatory authority on such
material, and will cooperate expeditiously in resolving and
implementing any comments, as applicable.
B. USE IN SOLICITATION ACTIVITIES. Subject to Section 11.J below, Insurer
shall be responsible for furnishing Distributor with such
Applications, Prospectuses and other materials for use by Distributor
and Selling Broker-Dealers in their solicitation activities with
respect to the Contracts. Insurer shall notify Distributor of those
states or jurisdictions which require delivery of a statement of
additional information with a prospectus to a prospective purchaser.
6. COMPENSATION AND EXPENSES.
A. COMPENSATION. Subject to Section 11.J below, Insurer shall pay
compensation for sales of the Contracts in accordance with Schedule 2
hereto. Upon Distributor's request, Insurer shall pay compensation
directly to Selling-Broker-Dealers, on Distributor's behalf, subject
to the provisions of Section 7 of this Agreement.
B. EXPENSES. Subject to Section 11.J below, Insurer shall pay all
expenses in connection with:
(1) the preparation and filing of each registration statement
(including each pre-effective and post-effective amendment
thereto) and the preparation and filing of each Prospectus
(including any preliminary and each definitive Prospectus);
(2) the preparation, underwriting, issuance and administration of the
Contracts;
-5-
<PAGE>
(3) any registration, qualification or approval or other filing of
the Contracts or Contract forms required under the securities or
insurance laws of the states in which the Contracts will be
offered;
(4) all registration fees for the Contracts payable to the SEC;
(5) the printing of promotional materials, definitive Prospectuses
for the Contracts and any supplements thereto for distribution;
(6) any applicable postage costs; and
(7) any out-of-pocket expenses incurred by Distributor in carrying
out its obligations under this Agreement.
7. COMPLIANCE.
A. MAINTAINING REGISTRATION AND APPROVALS. Subject to Section 11.J below,
Insurer shall be responsible for maintaining the registration of the
Contracts with the SEC and any state securities regulatory authority
with which such registration is required, and for gaining and
maintaining the approval of the Contract forms where required under
the insurance laws and regulations of each state or other jurisdiction
in which the Contracts are to be offered.
B. CONFIRMATIONS AND THE 1934 ACT COMPLIANCE. Distributor, shall confirm
to each applicant for and purchaser of a Contract in accordance with
Rule 10b-10 under the 1934 Act acceptance of premiums and such other
transactions as are required by Rule 10b-10 or administrative
interpretations thereunder. Distributor shall maintain and preserve
such books and records with respect to such confirmations in
conformity with the requirements of Rules 17a-3 and 17a-4 under the
1934 Act to the extent such requirements apply. Distributor
acknowledges that such books and records are at all times subject to
inspection by the SEC in accordance with Section 17(a) of the 1934
Act.
C. ISSUANCE AND ADMINISTRATION OF CONTRACTS. Insurer shall be responsible
for issuing the Contracts and administering the Contracts and the
Variable Account, provided, however, that Distributor shall have full
responsibility for the securities activities of all persons employed
by the Insurer, engaged directly or indirectly in the Contract
operations, and for the training, supervision and control of such
persons to the extent of such activities.
8. INVESTIGATIONS AND PROCEEDINGS.
A. COOPERATION. Distributor and Insurer shall cooperate fully in any
securities or insurance regulatory investigation or proceeding or
judicial proceeding arising in connection with the offering, sale or
distribution of the Contracts distributed
-6-
<PAGE>
under this Agreement. Without limiting the forgoing, Insurer and
Distributor shall notify each other promptly of any customer complaint
or notice of any regulatory investigation or proceeding or judicial
proceeding received by either party with respect to the Contracts.
B. CUSTOMER COMPLAINTS. In the case of any customer complaints,
Distributor and Insurer will cooperate in investigating such complaint
and any response by Distributor or Insurer to such complaint will be
sent to the other party for review and approval not less than five
business days prior to its being sent to the customer or regulatory
authority, except that if a more prompt response is required, the
response shall be communicated by telephone or electronic mail.
9. INDEMNIFICATION.
A. BY INSURER. Insurer shall indemnify and hold harmless Distributor and
each person who controls or is associated with Distributor within the
meaning of such terms under the federal securities laws, and any
officer, director, employee or agent of the foregoing, against any and
all losses, claims, damages or liabilities, joint or several
(including any investigative, legal and other expenses reasonably
incurred in connection with, and any amounts paid in settlement of,
any action, suit or proceeding or any claim asserted), to which
Distributor and/or any such person may become subject, under any
statute or regulation, any NASD rule or interpretation, at common law
or otherwise, insofar as such losses, claims, damages or liabilities:
(1) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact or omission or alleged
omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, in
light of the circumstances in which they were made, contained in
any (i) Registration Statement or in any Prospectus or (ii) blue
sky application or other document executed by Insurer
specifically for the purpose of qualifying any or all of the
Contracts for sale under the securities laws of any jurisdiction;
provided that Insurer shall not be liable in any such case to the
extent that such loss, claim, damage or liability arises out of,
or is based upon, an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon information
furnished in writing to Insurer by Distributor specifically for
use in the preparation of any such Registration Statement or any
such blue sky application or any amendment thereof or supplement
thereto;
(2) result from any breach by Insurer of any provision of this
Agreement.
-7-
<PAGE>
This indemnification agreement shall be in addition to any
liability that Insurer may otherwise have; provided, however,
that no person shall be entitled to indemnification pursuant
to this provision if such loss, claim, damage or liability is
due to the willful misfeasance, bad faith, gross negligence or
reckless disregard of duty by the person seeking
indemnification.
B. BY DISTRIBUTOR. Distributor shall indemnify and hold harmless
Insurer and each person who controls or is associated with the
Insurer within the meaning of such terms under the federal
securities laws, and any officer, director, employee or agent of
the foregoing, against any and all losses, claims, damages or
liabilities, joint or several (including any investigative, legal
and other expenses reasonably incurred in connection with, and
any amounts paid in settlement of, any action, suit or proceeding
or any claim asserted), to which Insurer and/or any such person
may become subject under any statute or regulation, any NASD rule
or interpretation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities:
(1) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact or omission or
alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein
not misleading, in light of the circumstances in which they
were made, contained in any (i) Registration Statement or in
any Prospectus or (ii) blue sky application or other
document executed by Insurer specifically for the purpose of
qualifying any or all of the Contracts for sale under the
securities laws of any jurisdiction; in each case to the
extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission
was made in reliance upon information furnished in writing
by Distributor to Insurer specifically for use in the
preparation of any such Registration Statement or any such
blue sky application or any amendment thereof or supplement
thereto;
(2) result from any breach by Distributor of any provision of
this Agreement.
This indemnification shall be in addition to any liability that
Distributor may otherwise have; provided, however, that no person
shall be entitled to indemnification pursuant to this provision
if such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of
duty by the person seeking indemnification.
C. GENERAL. Promptly after receipt by a party entitled to
indemnification ("Indemnified Person") under this Section 9 of
notice of the commencement of any action as to which a claim will
be made against any person obligated to provide indemnification
under this Section 9 ("Indemnifying Party"), such indemnified
person shall notify the indemnifying party in writing of the
-8-
<PAGE>
commencement thereof as soon as practicable thereafter, but
failure to so notify the indemnifying party shall not relieve the
indemnifying party from any liability which it may have to the
indemnified person otherwise than on account of this Section 9.
The indemnifying party will be entitled to participate in the
defense of the indemnified person but such participation will not
relieve such indemnifying party of the obligation to reimburse
the indemnified person for reasonable legal and other expense
incurred by such indemnified person in defending himself or
herself.
The indemnification provisions contained in this Section 9 shall
remain operative in full force and effect, regardless of any
termination of this Agreement. A successor by law of Distributor
or Insurer, as the case may be, shall be entitled to the benefits
of the indemnification provisions contained in this Section 9.
10. TERMINATION. This Agreement shall terminate automatically if it is assigned
by a party without the prior written consent of the other party. (The term
"assigned" shall not include any transaction exempted from Section 15(b)(2)
of the 1940 Act.) This Agreement may be terminated at any time for any
reason by either party upon 90 days' written notice to the other party,
without payment of any penalty. This Agreement may be terminated at the
option of either party to this Agreement upon the other party's material
breach of any provision of this Agreement or of any representation or
warranty made in this Agreement, unless such breach has been cured within
30 days after receipt of notice of breach from the non-breaching party.
Upon termination of this Agreement all authorizations, rights and
obligations shall cease except the obligation to settle accounts hereunder,
including commissions on Premiums subsequently received for Contracts in
effect at the time of termination or issued pursuant to Applications
received by Insurer prior to termination.
11. MISCELLANEOUS.
A. BINDING EFFECT. This Agreement shall be binding on and shall inure to
the benefit of the respective successors and assigns of the parties
hereto provided that neither party shall assign this Agreement or any
rights or obligations hereunder without the prior written consent of
the other party.
B. SCHEDULES. The parties to this Agreement may amend Schedule 1 to this
Agreement from time to time to reflect the addition of any class of
Contracts and Variable Accounts. The provisions of this Agreement
shall be equally applicable to each such class of Contracts and each
Variable Account that may be added to the Schedule, unless the context
otherwise requires. Insurer may amend Schedule 2 unilaterally, from
time to time. Any other change in the terms or provisions of this
Agreement shall be by written agreement between Insurer and
Distributor.
-9-
<PAGE>
C. RIGHTS, REMEDIES, ETC. ARE CUMULATIVE. The rights, remedies and
obligations contained in this Agreement are cumulative and are in
addition to any and all rights, remedies and obligations, at law or in
equity, which the parties hereto are entitled to under state and
federal laws. Failure of either party to insist upon strict compliance
with any conditions of this Agreement shall not be construed as a
waiver of any of the conditions, but the same shall remain in full
force and effect. No waiver of any of the provisions of this Agreement
shall be deemed, or shall constitute, a waiver of any other
provisions, whether or not similar, nor shall any waiver constitute a
continuing waiver.
D. NOTICES. All notices hereunder are to be made in writing and shall be
given to the address set forth below or to such other address as such
party may hereafter specify by a notice complying with this Section.
Each such notice to a party shall be either hand delivered, sent by
fax with written confirmation of transmission or sent by registered or
certified United States mail with return receipt requested, or by
overnight mail by a nationally recognized courier, and shall be
effective upon delivery.
-10-
<PAGE>
1.) If to Insurer, to:
American Equity Investment Life Insurance Company
5000 Westown Parkway, Suite 440
West Des Moines, Iowa 50266
Fax No. 515-221-9989
2.). If to Distributor, to:
American Equity Capital, Inc.
5000 Westown Parkway, Suite 440
West Des Moines, Iowa 50266
Fax No. 515-221-9989
E. INTERPRETATION; JURISDICTION. Except as set forth in Section 11.J
below, this Agreement constitutes the whole Agreement between the
parties hereto with respect to the subject matter hereof, and
supersedes all prior written or oral understandings, agreements or
negotiations between the parties with respect to such subject matter.
No prior writings by or between the parties with respect to the
subject matter hereof shall be used by either party in connection with
the interpretation of any provision of this Agreement. This Agreement
shall be construed and its provisions interpreted under and in
accordance with the laws of the state of Iowa without giving effect to
principles of conflict of laws.
F. SEVERABILITY. In the event that any provision of this Agreement would
require a party to take action prohibited by applicable federal or
state law or prohibit a party from taking action required by
applicable federal or state law, then it is the intention of the
parties hereto that such provision shall be enforced to the extent
permitted under the law, and, in any event, that all other provisions
of this Agreement shall remain valid and duly enforceable as if the
provision at issue had never been a part hereof.
G. SECTION AND OTHER HEADINGS. The headings in this Agreement are
included for convenience of reference only and in no way define or
delineate any of the provisions hereof or otherwise affect their
construction or effect.
H. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which taken together shall constitute one and
the same instrument.
I. REGULATION. This Agreement shall be subject to the provisions of the
1933 Act, 1934 Act and the 1940 Act and the rules and regulations of
the NASD, from time to time in effect, including such exemptions from
the 1940 Act as the SEC
-11-
<PAGE>
may grant, and the terms hereof shall be interpreted and construed in
accordance therewith.
J. Any obligation of Insurer pursuant to this Agreement may be performed
by Insurer or Insurer may contract with qualified third parties to
provide those services or assume those responsibilities necessary to
satisfy Insurer's obligations under this Agreement. Insurer has
entered into agreements with EquiTrust Marketing Services, Inc.,
EquiTrust Investment Management Services, Inc. and EquiTrust Life
Insurance Company, to provide all or part of the services and meet
certain obligations of Insurer under this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by such authorized officers on the date specified below.
INSURER:
AMERICAN EQUITY INVESTMENT
LIFE INSURANCE COMPANY
By: /s/ D.J. Noble, President Date: May 1, 1999
DISTRIBUTOR:
AMERICAN EQUITY CAPITAL, INC.
By: /s/ Terry A. Reimer, CFO Date: May 1, 1999
-12-
<PAGE>
SCHEDULE 1
Separate Accounts
Effective __________________
American Equity Life Variable Account
American Equity Life Annuity Account
-13-
<PAGE>
SCHEDULE 2
Compensation
Effective ___________________
NONE
-14-
<PAGE>
April 27, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen,
With reference to the Registration Statement on Form S-6 filed by American
Equity Investment Life Insurance Company ("Company") and its American Equity
Life Variable Account with the Securities and Exchange Commission covering
certain variable universal life insurance policies, I have examined such
documents and such law as I considered necessary and appropriate, and on the
basis of such examinations, it is my opinion that:
(1) Company is duly organized and validly existing under the laws of the State
of Iowa.
(2) The variable universal life policies, when issued as contemplated by the
said Form S-6 Registration Statement will constitute legal, validly issued
and binding obligations of American Equity Investment Life Insurance
Company.
I hereby consent to the filing of this opinion as an exhibit to the said Form
S-6 Registration Statement and to the reference to my name under the caption
"Legal Matters" in the Prospectus contained in the said Registration Statement.
In giving this consent, I am not admitting that I am in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
/s/ Wendy L. Carlson
Wendy L. Carlson
Whitfield & Eddy, P.L.C.
<PAGE>
Exhibit 3
The following financial statement schedules are included as part of this
Form S-6:
Schedule I -- Summary of Investments -- Other than Investments in Related
Parties
Schedule III -- Supplementary Insurance Information
Schedule IV -- Reinsurance
All other schedules to the financial statements required by Article 7 of
Regulation S-X are omitted because they are not applicable or because the
information is included elsewhere in the financial statements or notes thereto.
<PAGE>
American Equity Investment Life Insurance Company
Schedule I
Summary of Investments -- Other Than Investments in Related Parties
December 31, 1998
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- ------------------------------------------------------------------------------------------------------------
Amount at
Which Shown
in the
Type of Investment Cost (1) Value Balance Sheet
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities, available for sale:
Bonds:
United States Government and
agencies $385,393,461 $386,224,116 $386,224,116
State, municipal and other
governments 4,227,231 4,224,000 4,224,000
Public utilities 9,869,720 10,064,530 10,064,530
Corporate securities 191,393,819 191,904,990 191,904,990
Mortgage and asset-backed
securities 9,416,331 9,479,926 9,479,926
----------------------------------------------------
Total fixed maturities, available for
sale $600,300,562 $601,897,562 601,897,562
------------
------------
Derivative financial instruments 7,270,635 16,171,621
Policy loans 192,184 192,184
Short-term investments 45,000 45,000
------------ ------------
Total investments $607,808,381 $618,306,367
------------ ------------
------------ ------------
</TABLE>
(1) On the basis of cost adjusted for repayments and amortization of premiums
and accrual of discounts for fixed maturities.
<PAGE>
<TABLE>
<CAPTION>
American Equity Investment Life Insurance Company
Schedule III
Supplementary Insurance Information
December 31, 1998
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -----------------------------------------------------------------------------------------------------------------------------
FUTURE POLICY
DEFERRED BENEFITS, OTHER POLICY
POLICY LOSSES, UNEARNED CLAIMS AND INSURANCE
ACQUISITION CLAIMS AND REVENUE BENEFITS PREMIUMS
SEGMENT COSTS LOSS EXPENSES RESERVE PAYABLE AND CHARGES
- ------------------------------------------------------------------------------------------------------ ----------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Life insurance $32,005,772 $641,082,179 $- $6,315,598 $11,170,655
Year ended December 31, 1997:
Life insurance 4,282,491 155,998,268 - 2,355,156 11,436,803
Year ended December 31, 1996:
Life insurance 238,231 11,846,566 - 1,075,614 14,554,714
<CAPTION>
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
- --------------------------------------------------------------------------------------------------------------------
BENEFITS AMORTIZATION
CLAIMS, OF DEFERRED
NET LOSSES AND POLICY OTHER
INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUM
SEGMENT INCOME EXPENSES COSTS EXPENSES WRITTEN
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Life insurance $26,235,923 $21,922,805 $3,672,039 $9,916,541 $-
Year ended December 31, 1997:
Life insurance 4,028,628 9,569,766 761,032 7,682,276 -
Year ended December 31, 1996:
Life insurance 857,015 8,865,531 6,995 7,056,030 -
</TABLE>
<PAGE>
American Equity Investment Life Insurance Company
Schedule IV
Reinsurance
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ---------------------------------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED ASSUMED FROM OF AMOUNT
GROSS TO OTHER OTHER ASSUMED
AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Life insurance in force $1,407,000 $ - $2,398,544,000 $2,399,951,000 99.9%
Insurance premiums and
other considerations:
Annuity product charges $ 642,547 $ - $ - $ 642,547 -%
Traditional life and
accident and health
insurance premiums 19,174 567,027 11,075,961 10,528,108 105.2%
-------------------------------------------------------------------------------------
$ 661,721 $ 567,027 $ 11,075,961 $ 11,170,655 99.2%
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
At December 31, 1997:
Life insurance in force $ - $ - $2,427,796,000 $2,427,796,000 100.0%
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Insurance premiums and
other considerations:
Annuity product charges $ 11,896 $ - $ - $ 11,896 -%
Traditional life and
accident and health
insurance premiums $ - 722,545 12,147,452 11,424,907 106.3%
-------------------------------------------------------------------------------------
$ 11,896 $ 722,545 $ 12,147,452 $ 11,436,803 106.2%
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
At December 31, 1996:
Life insurance in force $ - $ - $2,912,219,000 $2,912,219,000 100.0%
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Insurance premiums and
other considerations:
Annuity product charges $ 14,007 $ - $ - $ 14,007 -%
Traditional life and
accident and health
insurance premiums 98,722 742,088 15,184,073 14,540,707 104.4%
-------------------------------------------------------------------------------------
$ 112,729 $ 742,088 $ 15,184,073 $ 14,554,714 104.3%
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
<PAGE>
April 27, 1999
American Equity Investment Life Insurance Company
5000 Westown Parkway; Suite 440
West Des Moines, Iowa 50266
Gentlemen:
This opinion is furnished in connection with the registration by American Equity
Investment Life Insurance Company of a flexible premium variable life insurance
policy ("Policy") under the Securities Act of 1933, as amended. The prospectus
included in Post-Effective Amendment No. 1 to the Registration Statement on Form
S-6 (File No. 333-45815) describes the Policy. I have provided actuarial advice
concerning the preparation of the policy form described in the Registration
Statement, and I am familiar with the Registration Statement and exhibits
thereto.
It is my professional opinion that:
(1) The illustrations of death benefits and cash values included in Appendix A
of the Prospectus, based on the assumptions stated in the illustrations,
are consistent with the provisions of the Policy. The rate structure of the
Policy has not been designed so as to make the relationship between
premiums and benefits, as shown in the illustrations, appear more favorable
for policyowners at the ages illustrated than for policyowners at other
ages.
(2) The information contained in the examples set forth in Appendix B of the
Prospectus, based on the assumptions stated in the examples, is consistent
with the provisions of the Policy.
(3) The fees and charges deducted under the Policy, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to
be incurred and the risks assumed by the insurance company.
I hereby consent to the use of this opinion as an exhibit to Post-Effective
Amendment No. 1 to the Registration Statement and to the reference to my name
under the heading "Experts" in the Prospectus.
Sincerely,
/s/ Christopher G. Daniels
Christopher G. Daniels, FSA, MAAA
Consulting Actuary
American Equity Investment Life Insurance Company
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Experts"
and "Financial Statements" and to the use of our report dated March 2, 1999 with
respect to the financial statements of American Equity Investment Life
Insurance Company, in Post-Effective Amendment No. 1 to the Registration
Statement (Form S-6 No. 333-45815) and related Prospectus of American Equity
Life Variable Account dated May 1, 1999.
Our audits also included the financial statement schedules of American Equity
Investment Life Insurance Company included in Exhibit 3. These schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, the financial
statement schedules referred to above, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Des Moines, Iowa
April 26, 1999
<PAGE>
[Sutherland, Asbill & Brennan LLP letterhead]
April 26, 1999
American Equity Investment Life Insurance Company
5000 Westown Parkway, Suite 440
West Des Moines, Iowa 50266
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the prospectus filed as part of the registration statement on Form
S-6 for American Equity Life Variable Account (File No. 333-45815). In giving
this consent, we do not admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act of 1933.
Sincerely,
SUTHERLAND, ASBILL & BRENNAN LLP
By: /s/ Stephen E. Roth
Stephen E. Roth, Esq.
