<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 2, 1998
REGISTRATION NO. 333-57681
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
PRE-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
WRL SERIES LIFE
CORPORATE ACCOUNT
(EXACT NAME OF TRUST)
WESTERN RESERVE LIFE ASSURANCE
CO. OF OHIO
(NAME OF DEPOSITOR)
201 HIGHLAND AVENUE
LARGO, FLORIDA 33770
(COMPLETE ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
COPY TO:
<TABLE>
<S> <C>
THOMAS E. PIERPAN, ESQ. STEPHEN E. ROTH, ESQ.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO SUTHERLAND ASBILL & BRENNAN LLP
201 HIGHLAND AVENUE 1275 PENNSYLVANIA AVENUE, N.W.
LARGO, FLORIDA 33770 WASHINGTON, DC 20004-2415
(NAME AND COMPLETE ADDRESS OF AGENT FOR
SERVICE)
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement
SECURITIES BEING OFFERED: Variable Adjustable Life Insurance Policies
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
WRL SERIES LIFE CORPORATE ACCOUNT
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
CROSS REFERENCE TO ITEMS REQUIRED BY FORM N-8B-2
<TABLE>
<CAPTION>
N-8B-2
ITEM CAPTION IN PROSPECTUS
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<C> <S>
1 Cover Page
2 Western Reserve
3 Not applicable
4 Sale of the Policies
5 The Separate Account
6 The Separate Account
7 Not applicable
8 The Separate Account
9 Legal Proceedings
10 Summary; Premiums; Allocation of Net Premiums and Cash
Value; Life Insurance Benefits; Other Policy Provisions
and Benefits; Surrenders and Withdrawals; Loans; The
Separate Account; Voting Privileges
11 The Separate Account
12 The Separate Account; Sale of the Policies
13 Charges and Deductions
14 Facts About the Policy -- Applying for a Policy
15 Premiums; Allocation of Net Premiums and Cash Value
16 Allocation of Net Premiums and Cash Value
17 Free-Look Period; Surrenders and Partial Withdrawals; Loans;
Other Policy Provisions and Benefits
18 The Separate Account; Other Policy Provisions and Benefits
19 Reports to Owners
20 Not applicable
21 Loans
22 Other Policy Provisions and Benefits
23 Western Reserve's Directors and Executive Officers
24 Not applicable
25 Western Reserve
26 Not applicable
27 Western Reserve
28 Western Reserve's Directors and Executive Officers
29 Western Reserve
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
35 Western Reserve and the Separate Account
36 Not applicable
37 Not applicable
38 Sale of the Policies
39 Sale of the Policies
40 Not applicable
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
N-8B-2
ITEM CAPTION IN PROSPECTUS
- ------ ---------------------
<C> <S>
41 Sale of the Policies
42 Not applicable
43 Not applicable
44 Policy Values
45 Not applicable
46 Policy Values
47 Allocation of Net Premiums and Cash Value
48 Not applicable
49 Not applicable
50 Not applicable
51 Premiums; Allocation of Net Premiums and Cash Value; Charges
and Deductions; Surrenders and Partial Withdrawals
52 The Separate Account; Western Reserve
53 Federal Tax Considerations
54 Not applicable
55 Illustrations of Cash Value, Net Cash Value and Life
Insurance Benefits
56 Not applicable
57 Not applicable
58 Not applicable
59 Financial Statements
</TABLE>
<PAGE> 4
PART I
<PAGE> 5
VARIABLE ADJUSTABLE LIFE INSURANCE POLICY
ISSUED BY
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
AND
WRL SERIES LIFE CORPORATE ACCOUNT
This prospectus describes a variable adjustable life insurance policy (the
"Policy") offered by Western Reserve Life Assurance Co. of Ohio ("Western
Reserve"). The Policy is designed to provide insurance protection on the life of
the Insured named in the Policy, and at the same time provide the Owner with the
flexibility to vary the amount and timing of premium payments and, within
certain limits, to change the amount of Life Insurance Benefits payable under
the Policy.
An Owner may allocate Net Premiums and Cash Value to one or more of the 8
Subaccounts of the WRL Series Life Corporate Account (the "Separate Account").
The assets of each Subaccount are invested in one of the following corresponding
mutual fund portfolios (each, a "Portfolio"):
<TABLE>
<CAPTION>
BT INSURANCE FUNDS TRUST: RUSSELL INSURANCE FUNDS: FEDERATED INSURANCE SERIES:
- ------------------------- ------------------------ ---------------------------
<S> <C> <C>
Small Cap Index Fund Multi-Style Equity Fund Prime Money Fund II
Equity 500 Index Fund Aggressive Equity Fund
EAFE(R) Equity Index Fund Non-U.S. Fund
Core Bond Fund
</TABLE>
The prospectuses describing the Portfolios accompany this prospectus and
provide information on the investment objectives and risks of investing in the
Portfolios. The Owner bears the entire investment risk for Cash Value allocated
to a Subaccount. The Policy has no guaranteed minimum Cash Value.
The Policy provides a Life Insurance Benefit payable after the Insured's
death, and a Cash Value that can be obtained by partially withdrawing amounts
from the Policy or by completely surrendering the Policy. The amount of the Life
Insurance Benefit may, and the Cash Value will, vary daily with the investment
results of the Subaccounts and any additional premium payments. However, as long
as the Policy remains in force, Western Reserve guarantees that the Life
Insurance Benefit will never be less than the Face Amount of the Policy. While
additional premium payments are not required under the Policy, additional
premium payments may be necessary to prevent lapse if there is insufficient Cash
Value.
The Policy provides a free-look period whereby an Owner may cancel the
Policy within 20 days after receiving it. Certain states may require a free-look
period longer than 20 days. It may not be to your advantage to replace existing
insurance with this Policy.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY THE CURRENT PROSPECTUSES
FOR THE PORTFOLIOS. PLEASE READ THIS PROSPECTUS AND THE PROSPECTUSES FOR THE
PORTFOLIOS CAREFULLY AND RETAIN BOTH FOR FUTURE REFERENCE. CERTAIN PORTFOLIOS
MAY NOT BE AVAILABLE IN ALL STATES.
THE POLICY IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK OR DEPOSITORY INSTITUTION, AND THE POLICY IS NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE
POLICY INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PREMIUMS INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated , 1998
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
DEFINITIONS................................................. 4
SUMMARY..................................................... 6
INVESTMENT EXPERIENCE INFORMATION........................... 10
Rates of Return........................................... 10
Illustrations of Cash Value, Net Cash Value and Life
Insurance Benefits..................................... 11
WESTERN RESERVE AND THE SEPARATE ACCOUNT.................... 14
Western Reserve........................................... 14
The Separate Account...................................... 14
FACTS ABOUT THE POLICY...................................... 16
Availability of the Policy................................ 16
Applying for a Policy..................................... 16
Free-Look Period.......................................... 16
Premiums.................................................. 16
Policy Lapse and Reinstatement............................ 17
Allocation of Net Premiums and Cash Value................. 18
Policy Values............................................. 18
Transfer Privileges....................................... 19
Surrenders and Partial Withdrawals........................ 21
Loans..................................................... 21
Life Insurance Benefits................................... 22
Duration of the Policy.................................... 26
When Insurance Coverage Takes Effect...................... 26
Payment Options........................................... 27
CHARGES AND DEDUCTIONS...................................... 27
Percent of Premium Load................................... 27
Deferred Sales Charge..................................... 28
Monthly Deductions........................................ 28
Administrative Charges.................................... 29
Portfolio Expenses........................................ 29
OTHER POLICY PROVISIONS AND BENEFITS........................ 29
Ownership................................................. 29
Assignment................................................ 30
Western Reserve's Right to Contest the Policy............. 30
Suicide Exclusion......................................... 30
Misstatement of Age or Sex................................ 30
Modification of the Policy................................ 31
Payments by Western Reserve............................... 31
Reports to Owners......................................... 31
Claims of Creditors....................................... 32
Dividends................................................. 32
Supplemental Benefits and/or Riders....................... 32
FEDERAL TAX CONSIDERATIONS.................................. 32
Tax Status of the Policies................................ 32
Tax Treatment of Policy Benefits.......................... 33
</TABLE>
2
<PAGE> 7
<TABLE>
<S> <C>
OTHER INFORMATION ABOUT THE POLICIES AND WESTERN RESERVE.... 35
Sale of the Policies...................................... 35
Voting Privileges......................................... 36
Western Reserve's Directors and Executive Officers........ 36
Additional Information.................................... 38
Experts................................................... 38
Legal Matters............................................. 38
Legal Proceedings......................................... 38
Year 2000 Matters......................................... 38
Financial Statements...................................... 38
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESPERSON OR OTHER
PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
3
<PAGE> 8
DEFINITIONS
Accumulation Unit -- A unit of measurement used to calculate values under
the Policy.
Administrative Office -- The administrative office of Western Reserve
located at 4333 Edgewood Road NE, Cedar Rapids, Iowa 52499, (610) 439-5253.
Attained Age -- The Insured's age on the Effective Date, plus the number of
complete Policy Years since the Effective Date.
Beneficiary -- The person(s) to whom the Life Insurance Benefit proceeds
are paid upon the death of the Insured.
Cash Value -- During the free look period, the Cash Value is the amount in
the General Account. After the free look period, the Cash Value is the sum of
the value of the Policy's accumulation units in each Subaccount and the Loan
Account.
Code -- The Internal Revenue Code of 1986, as amended.
Due Proof of Death -- Proof of death satisfactory to Western Reserve. Due
Proof of Death may consist of the following: (a) a certified copy of the death
record; (b) a certified copy of a court decree reciting a finding of death; or
(c) any other proof satisfactory to Western Reserve.
Effective Date -- The date shown in the Policy when insurance coverage is
effective and monthly deductions commence under the Policy. The Effective Date
is used to determine Policy Months, Policy Years, and Policy Anniversaries. If
the Effective Date would fall on the 29th, 30th or 31st day of any month, the
Effective Date will be the 28th day of the month.
Face Amount -- A dollar amount selected by the Owner and shown in the
Policy that is used to determine the Life Insurance Benefit.
General Account -- Western Reserve's assets other than those allocated to
the Separate Account or any other separate account established by Western
Reserve.
Indebtedness -- The Loan Amount plus any accrued loan interest.
Insured -- The person whose life is insured by the Policy.
Issue Age -- The Insured's age on the Effective Date.
Lapse -- Termination of the Policy at the expiration of the Late Period
while the Insured is still living.
Late Period -- A 62-day period during which an Owner may make premium
payments to cover the overdue (and other specified) monthly deductions and
thereby prevent the Policy from lapsing.
Life Insurance Benefit -- The amount payable to the Beneficiary under a
Life Insurance Benefit Option before adjustments if the Insured dies while the
Policy is in force.
Life Insurance Benefit Option -- One of three options that an Owner may
select for the computation of the Life Insurance Benefit Proceeds.
Life Insurance Benefit Proceeds -- The total amount payable to the
Beneficiary if the Insured dies while the Policy is in force. The Life Insurance
Benefit Proceeds includes reductions for any outstanding Indebtedness and any
due and unpaid charges.
Loan Account -- A portion of Western Reserve's General Account to which
Cash Value is transferred to provide collateral for any loan taken under the
Policy.
Loan Account Value -- The Cash Value in the Loan Account.
Loan Amount -- The Loan Amount on the last Policy Anniversary plus any new
loans minus any loan repayments. On each Policy Anniversary, unpaid loan
interest is added to the Loan Amount.
4
<PAGE> 9
Monthly Deduction Day -- The same date in each succeeding month as the
Effective Date. Whenever the Monthly Deduction Day falls on a date other than a
Valuation Day, the Monthly Deduction Day will be deemed to be the next Valuation
Day.
Net Cash Value -- The amount payable on surrender of the Policy. It is
equal to the Cash Value as of the date of surrender minus any outstanding Policy
loan and any loan interest due.
Net Premium -- The portion of any premium available for allocation to the
Subaccounts equal to the premium paid less the applicable percent of premium
load.
1940 Act -- The Investment Company Act of 1940, as amended.
NYSE -- New York Stock Exchange.
Owner -- The owner of the Policy, as shown in Western Reserve's records.
All of the rights and benefits of the Policy belong to the Owner, unless
otherwise stated in the Policy.
Planned Premium -- The premium selected by the Owner as a level amount that
he or she plans to pay on a quarterly, semi-annual or annual basis over the life
of the Policy.
Policy Anniversary -- The same date in each Policy Year as the Effective
Date.
Policy Month -- A one-month period beginning on the Monthly Deduction Day.
Policy Year -- A twelve-month period beginning on the Effective Date or on
a Policy Anniversary.
SEC -- U.S. Securities and Exchange Commission.
Separate Account -- WRL Series Life Corporate Account, a separate
investment account established by Western Reserve to receive and invest Net
Premiums allocated under the Policy.
Settlement Option -- The manner in which an Owner or Beneficiary elects to
receive the amount of any surrender or partial withdrawal or the Life Insurance
Benefit Proceeds.
Subaccount -- A subdivision of the Separate Account, the assets of which
are invested in a corresponding Portfolio.
Subaccount Value -- The Cash Value in a Subaccount.
Target Premium -- An amount of premium used to determine the percent of
premium load. It is equal to the seven-pay limit defined in Section 7702(A) of
the Code.
Valuation Day -- For each Subaccount, each day on which the New York Stock
Exchange is open for business except for days that a Subaccount's corresponding
Portfolio does not value its shares.
Valuation Period -- The period that starts at the close of regular trading
on the New York Stock Exchange on any Valuation Day and ends at the close of
regular trading on the next succeeding Valuation Day.
5
<PAGE> 10
SUMMARY
The following summary of prospectus information is intended to provide a
brief overview of the more significant aspects of the Policy and should be read
in conjunction with the detailed information appearing elsewhere in this
prospectus.
Under Western Reserve's current rules, the Policy will be offered to
corporations and partnerships that meet the following conditions at issue:
- a minimum of five (5) Policies are issued, each on the life of a
different Insured; or
- the aggregate annualized first-year planned periodic premium for all
Policies is at least $100,000.
1. WHAT IS THE POLICY'S OBJECTIVE?
The Policy's objective is to provide for: (1) the payment of a minimum Life
Insurance Benefit to a Beneficiary upon the Insured's death; (2) the
accumulation of Cash Value; and (3) surrender rights and Policy loan privileges.
The Policy allows Owners to allocate Net Premiums to one or more Subaccounts of
the Separate Account. Each Subaccount invests in a designated Portfolio. The
amount and/or duration of the life insurance coverage and the Cash Value of the
Policy are not guaranteed and may increase or decrease depending upon the
investment experience of the Subaccounts. Accordingly, the Owner bears the
investment risk of any depreciation in value of the underlying assets of the
Separate Account but reaps the benefits of any appreciation in value. (See
Allocation of Net Premiums and Cash Value -- Allocation of Net Premiums, p.
.)
2. WHAT LIFE INSURANCE BENEFIT OPTIONS ARE AVAILABLE UNDER THE POLICY?
The Policy provides the payment of benefits upon the death of the Insured.
The Policy contains three Life Insurance Benefit (also known as death benefit)
options. Under Life Insurance Benefit Option 1, the Life Insurance Benefit is
the greater of the Face Amount of the Policy, or a specified percentage
multiplied by the Cash Value of the Policy on the date of death of the Insured.
Under Life Insurance Benefit Option 2, the Life Insurance Benefit is the greater
of the Face Amount of the Policy plus the Cash Value of the Policy on the date
of death of the Insured, or a specified percentage multiplied by the Cash Value
of the Policy on the date of death of the Insured. Under Life Insurance Benefit
Option 3, the Life Insurance Benefit is the greater of the Face Amount of the
Policy plus the cumulative premiums paid less cumulative partial withdrawals, or
a specified percentage multiplied by the Cash Value of the Policy on the date of
death of the Insured. Benefits under the Policy may be paid in a lump sum or
under one of the settlement options set forth in the Policy. (See Payment of
Policy Benefits -- Settlement Options, p. .)
Certain optional insurance benefits are available under the Policy. The
cost of these optional insurance benefits will be deducted from Cash Value as
part of the monthly deduction. (See Charges and Deductions -- Monthly Deductions
From Your Cash Value, p. .)
3. HOW MAY THE AMOUNT OF THE LIFE INSURANCE BENEFIT AND CASH VALUE VARY?
Under any Life Insurance Benefit Option, as long as the Policy remains in
force, the Life Insurance Benefit will not be less than the current Face Amount
of the Policy. The Life Insurance Benefit may, however, exceed the Face Amount
under certain circumstances. The amount by which the Life Insurance Benefit
exceeds the Face Amount depends upon the option chosen and the Cash Value of the
Policy. The amount of Life Insurance Benefit Proceeds will reflect reductions
for any outstanding Indebtedness and any due and unpaid charges, and additions
for any additional insurance benefits added by rider. (See Facts About the
Policy -- Life Insurance Benefits, p. .)
The Policy's Cash Value will reflect the amount and frequency of premium
payments, the investment experience of the chosen Subaccounts, any partial
withdrawals, and any charges imposed in connection with the Policy. The Owner
bears the entire investment risk for amounts allocated to the Separate Account.
6
<PAGE> 11
Western Reserve does not guarantee a minimum Cash Value. (See Facts About the
Policy -- Policy Values, p. .)
4. MAY AN OWNER ADJUST THE AMOUNT OF THE LIFE INSURANCE BENEFIT?
The Owner has significant flexibility to adjust the Life Insurance Benefit
payable by changing the Life Insurance Benefit Option type, and by increasing or
decreasing the Face Amount of the Policy or adding riders to increase the total
Life Insurance Benefit payable. The Life Insurance Benefit Option type may not
be changed during the first Policy Year. (See Life Insurance
Benefits -- Changing the Life Insurance Benefit Option, p. .) Owners also
may not change the Face Amount during the first Policy Year. Any increase in the
Face Amount will require additional evidence of insurability satisfactory to
Western Reserve, and will result in additional charges. (See Facts About the
Policy -- Life Insurance Benefits, p. ; and Monthly Deductions From Your
Cash Value -- Cost of Insurance, p. .)
5. WHAT FLEXIBILITY DOES AN OWNER HAVE REGARDING PREMIUMS?
An Owner has considerable flexibility concerning the amount and frequency
of premiums. Western Reserve will require the Owner to pay an initial premium
before insurance coverage is in force. Thereafter, an Owner may, subject to
certain restrictions, make premium payments in any amount and at any frequency.
(See Premiums, p. .) Each Owner will determine a schedule for premium
payments ("Planned Periodic Premium"). The schedule will provide a premium
payment of a level amount at a fixed interval over a specified period of time.
The amount and frequency of Planned Periodic Premiums will be prescribed in the
Policy and may be changed upon written request. (See Premiums, p. .)
Failing to pay Planned Periodic Premiums will not itself cause the Policy to
lapse, and paying Planned Periodic Premiums will not guarantee that the Policy
remains in force. Additional premiums may be necessary to prevent lapse if the
Net Cash Value is insufficient to pay certain monthly charges, and a Late Period
expires without a sufficient payment. (See Policy Lapse and
Reinstatement -- Lapse, p. .)
6. WHEN WILL THE POLICY LAPSE?
The Policy will Lapse when Net Cash Value is insufficient to pay the
monthly deduction, and a Late Period expires without a sufficient payment by the
Owner. (See Charges and Deductions -- Monthly Deductions From Your Cash Value,
p. ; and Policy Lapse and Reinstatement, p. .) Such a Lapse could
happen if the investment experience has been sufficiently unfavorable to have
resulted in a decrease in the Net Cash Value, or the Net Cash Value has
decreased because not enough premiums have been paid to offset the monthly
charges.
7. HOW ARE NET PREMIUMS ALLOCATED?
The portion of the premium available for allocation ("Net Premium") equals
the premium paid less the applicable percent of premium load. (See Charges and
Deductions -- Charges Deducted From Premiums, p. .) The Owner initially
determines the allocation of the Net Premium among the Subaccounts of the
Separate Account, each of which invests in shares of a designated Portfolio.
Each Portfolio has a different investment objective. (See Investments of the
Separate Account, p. .) Until the end of the free-look period, all premiums
will be allocated to the General Account, notwithstanding the allocation
instructions in the application. (See Free-Look Period, p. ) The allocation
of future Net Premiums may be changed without charge at any time by providing
Western Reserve with written notification from the Owner, or by calling the
Administrative Office at (610) 439-5253.
An Owner may transfer Cash Value among the Subaccounts, subject to certain
restrictions. The transfer will be effective on the first Valuation Date on or
following the day appropriate notice of such transfer is received at the
Administrative Office. (See Transfers, p. .)
7
<PAGE> 12
8. IS THERE A "FREE-LOOK" PERIOD?
The Policy provides a free-look period whereby the Owner may cancel the
Policy within 20 days after receiving it. Certain states require a free-look
period longer than 20 days, either for all Owners or for certain classes of
Owners. In most states, Western Reserve will refund the greater of the Policy's
Cash Value as of the date the Policy is returned or the amount of premiums paid,
less any partial withdrawals. (See Free-Look Period, p. .)
9. MAY THE POLICY BE SURRENDERED?
The Owner may totally surrender the Policy at any time and receive the Net
Cash Value of the Policy. Subject to certain limitations, the Owner may also
make partial withdrawals from the Policy at any time after the first Policy
Year. (See Surrenders and Partial Withdrawals, p. .) If Life Insurance
Benefit Option 1 is in effect, partial withdrawals will reduce the Policy's Face
Amount by the amount of the partial withdrawal. If Life Insurance Benefit Option
3 is in effect and total partial withdrawals are greater than the sum of the
premiums, the Face Amount is reduced by the amount of the partial withdrawals
minus the sum of the premiums; otherwise the Face Amount is not reduced.
10. WHAT IS THE LOAN PRIVILEGE?
After the first Policy Anniversary, an Owner may obtain a Policy loan in
any amount (minimum $500) which is not greater than 90% of the Cash Value less
any already outstanding loan. Western Reserve reserves the right to permit a
Policy loan prior to the first Policy Anniversary for certain Policies. A loan
taken from, or secured by, a Policy may be treated as a taxable distribution,
and also may be subject to a penalty tax. (See Federal Tax Considerations, p.
.) The interest rate on a Policy loan is 6.0% and is due in arrears on each
Policy Anniversary and on the date the loan is repaid. The requested amount of a
loan, plus interest for one year in advance, will be transferred from the
Subaccounts to the Loan Account and credited at the end of each Policy Year with
interest at a rate of 4% per year. Upon repayment of a loan, amounts in the Loan
Account in excess of the outstanding value of the loan are currently transferred
to the Subaccounts in the same manner as Net Premium allocations. There are
risks involved in taking a Policy loan, a few of which include the potential for
a Policy to lapse if projected earnings, taking into account any outstanding
loans, are not achieved, as well as adverse tax consequences which occur if a
Policy lapses with loans outstanding. (See Federal Tax Considerations -- Tax
Treatment of Policy Benefits, p. .)
11. WHAT CHARGES AND DEDUCTIONS ARE ASSESSED UNDER THE POLICY?
Certain charges and deductions are assessed under the Policy to compensate
Western Reserve for services and benefits provided, costs and expenses incurred,
and risks assumed by Western Reserve in connection with the Policies. Some
charges are assessed as percentages of Cash Value or premium payments, and
others are assessed as a flat dollar amount. The charges and deductions under
the Policy include the following:
PERCENT OF PREMIUM LOAD. During the first Policy Year, Western Reserve
deducts 11.5% of each premium received up to the Target Premium, and 4.5% of
each premium received in excess of the Target Premium. After the first Policy
Year, Western Reserve deducts 11.5% of each premium received up to the Target
Premium, and 7.5% of each premium received in excess of the Target Premium.
DEFERRED SALES CHARGE. On each Policy Anniversary during Policy Years
2 - 7, Western Reserve deducts a deferred sales charge equal to 1.5% of all
premiums paid during the first Policy Year.
MONTHLY DEDUCTION. Each month, Western Reserve makes a Monthly Deduction
from the Cash Value to cover the cost of administering the Policies (Monthly
Policy Charge), the cost of providing insurance protection under the Policy
(including any insurance benefits provided by rider), and the mortality and
expense risk charge.
8
<PAGE> 13
MONTHLY POLICY CHARGE. A monthly charge equal to $16.50 in the first
Policy Year, and $4.00 (current, $10 maximum) in subsequent Policy Years is
deducted to compensate Western Reserve for the cost of administering the
Policies.
MORTALITY AND EXPENSE RISK CHARGE. On each Monthly Deduction Day, Western
Reserve deducts a mortality and expense risk charge equal to an annual rate of
0.45% (current, 0.90% maximum) of the Cash Value in the Subaccounts.
TRANSFER CHARGE. Western Reserve reserves the right to apply a $25
transfer charge for each transfer after the first 12 transfers in any Policy
Year.
PARTIAL WITHDRAWAL CHARGE. A charge equal to the lesser of $25 or 2% of
the amount requested is deducted to cover administrative expenses associated
with each partial withdrawal.
PORTFOLIO EXPENSES. The Portfolios incur investment advisory fees and
other expenses that are reflected as an annual rate of the average daily net
assets of each Portfolio. The levels of the fees and expenses for the year ended
December 31, 1997 vary among the Portfolios and are described below and in the
prospectuses for the Portfolios:
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER TOTAL
(AFTER WAIVER EXPENSES (AFTER WAIVER ANNUAL
PORTFOLIO OR REIMBURSEMENT) OR REIMBURSEMENT) EXPENSES
--------- ----------------- ---------------------- --------
<S> <C> <C> <C>
Small Cap Index*............... 0.22% 0.23% 0.45%
Equity 500 Index*.............. 0.11% 0.19% 0.30%
EAFE(R) Equity Index*.......... 0.34% 0.31% 0.65%
Multi-Style Equity**........... 0.22% 0.70% 0.92%
Aggressive Equity**............ 0.26% 0.99% 1.25%
Non-U.S.**..................... 0.0% 1.30% 1.30%
Core Bond**.................... 0.0% 0.80% 0.80%
Prime Money II***.............. 0.30% 0.50% 0.80%
</TABLE>
- ---------------
* For the year ended December 31, 1997, the investment adviser voluntarily
agreed to waive a portion of its management fee with respect to each
Portfolio. Without such waiver, each Portfolio's management fee would have
been equal to the following: Small Cap Index -- 0.35%; Equity 500
Index -- 0.20%; and EAFE(R) Equity Index -- 0.45%. The expense table
reflects a voluntary undertaking by the investment adviser to waive or
reimburse expenses such that the total annual expenses of the Portfolio for
the fiscal year would not exceed the following percentages of the
Portfolios' average daily net assets: Small Cap Index -- 0.45%; Equity 500
Index -- 0.30%; and EAFE(R) Equity Index -- 0.65%. Absent this undertaking,
Total Annual Expenses would be the following: Small Cap Index -- 0.73%;
Equity 500 Index -- 0.54%; and EAFE(R) Equity Index -- 0.85%.
** For the year ended December 31, 1997, the investment adviser of these
Portfolios voluntarily agreed to waive a portion of the management fee, up
to the full amount of the fee, equal to the amount by which the Portfolio's
total operating expenses exceed the amounts set forth under "Total Annual
Expenses." Additionally, the investment adviser voluntarily agreed to
reimburse each of these Portfolios for all remaining expenses after fee
waivers which exceeded the amounts set forth above for each Portfolio under
"Total Annual Expenses." Absent such waiver and reimbursement, the
management fees and total annual expenses would have been 0.78% and 1.68%
for Multi-Style Equity; 0.95% and 2.31% for Aggressive Equity; 0.95% and
5.31% for Non-U.S.; and 0.60% and 2.36% for Core Bond.
*** For the year ended December 31, 1997, the investment adviser voluntarily
agreed to waive a portion of its management fee. Without this waiver, the
Portfolio's management fee would have been equal to 0.50%, and total annual
expenses would have been 1.00%.
12. ARE TRANSFERS PERMITTED AMONG THE SUBACCOUNTS?
An Owner may transfer Cash Value among the Subaccounts of the Separate
Account. Each Policy Year, you may make 12 Cash Value transfers without
incurring any charge. Each additional transfer in a Policy Year
9
<PAGE> 14
may be subject to a transfer charge of $25. Western Reserve may at any time
revoke or modify the transfer privilege. (See Transfers, p. .)
13. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF PURCHASING A POLICY?
Western Reserve intends for the Policy to satisfy the definition of a life
insurance contract under Section 7702 of the Code. Under certain circumstances,
a Policy may be treated as a "modified endowment contract" depending upon the
amount of premiums paid in relation to the Life Insurance Benefit. (See Tax
Treatment of Policy Benefits -- Modified Endowment Contracts, p.
.) If the Policy is a modified endowment contract, then all
pre-death distributions, including Policy loans and loans secured by a Policy,
will be treated first as a distribution of taxable income to the extent of any
gain and then as a return of basis or investment in the contract. In addition,
any distributions of gains generally will be subject to a 10% penalty tax.
If the Policy is not a modified endowment contract, distributions generally
will be treated first as a return of basis or investment in the Policy and then
as disbursing taxable income. Moreover, loans and loans secured by a Policy will
not be treated as distributions. Finally, neither distributions nor loans from a
Policy that is not a modified endowment contract are subject to the 10% penalty
tax. For further elaboration on the tax consequences of a Policy, see Federal
Tax Considerations, p. .
In recent years, Congress has adopted new rules relating to life insurance
owned by businesses and the President's Budget Proposal for 1999 has recommended
additional restrictions on such life insurance. Any business contemplating the
purchase of a new life insurance contract or a change in an existing life
insurance contract should consult a tax adviser. The President's Budget Proposal
for 1999 also recommends legislation that would adversely modify the tax
treatment of variable life insurance and annuity contracts. These changes would
restrict the flexibility currently available to holders of these products. You
should consult a tax adviser with respect to legislative developments and their
effect on the Policy. (See Federal Tax Considerations, p. .)
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Portfolios and hypothetical illustrations of the Policy based
on the historical investment experience of the Portfolios. It does not represent
or project future investment performance.
The Policies became available for sale and the Separate Account began
operations in of 1998. The Portfolios' dates of inception are
indicated in the table below. The rates of return shown below depict the actual
investment experience of each Portfolio for the periods shown. The actual rate
of return in each calendar year was assumed to be uniformly earned throughout
that year. The actual performance of the Portfolios has and will vary throughout
the year.
Rates of Return
The rates of return shown below are based on the Portfolios' actual
investment performance, after the deduction of investment advisory fees and
other expenses of the Portfolios. The rates are average annual compounded rates
of return for the periods ended on December 31, 1997.
These rates of return do not reflect the percent of premium load, deferred
sales loads, or monthly deductions from Cash Value. Accordingly, these rates of
return do not illustrate how actual investment performance will affect benefits
under the Policies. Moreover, these rates of return are not an estimate,
projection or guarantee of future performance.
10
<PAGE> 15
AVERAGE ANNUAL COMPOUNDED RATES OF RETURN FOR THE PERIODS ENDED DECEMBER 31,
1997
<TABLE>
<CAPTION>
SINCE
PORTFOLIO (DATE OF INCEPTION) INCEPTION 1 YEAR
----------------------------- --------- ------
<S> <C> <C>
Small Cap Index (8/25/97)................................. 4.79% N/A
Equity 500 Index (10/1/97)................................ 1.90% N/A
EAFE(R) Equity Index (10/1/97)............................ -6.60% N/A
Multi-Style Equity (1/2/97)............................... 28.53% N/A
Aggressive Equity (1/2/97)................................ 35.07% N/A
Non-U.S. (1/2/97) ........................................ 0.30% N/A
Core Bond (1/2/97)........................................ 9.73% N/A
Prime Money II (11/21/94)................................. 4.95% 4.93%
</TABLE>
Additional information regarding the Portfolios' investment performance
appears in the prospectuses for the Portfolios.
ILLUSTRATIONS OF CASH VALUE, NET CASH VALUE AND LIFE INSURANCE BENEFITS
The following illustrations have been prepared to show how certain values
under a hypothetical Policy would change with varying levels of assumed
investment performance over an extended period of time. In particular, the
illustrations show how the Cash Value, Net Cash Value and Life Insurance Benefit
under a Policy with Life Insurance Benefit Option 3 covering an Insured of the
male sex, non-tobacco and Age 35 on the Effective Date, would vary over time if
premiums were paid annually and the return on the assets in the Portfolios were
a uniform gross annual rate (before any expenses) of 0%, 6% or 12%. THE
HYPOTHETICAL INVESTMENT RATES OF RETURN ARE FOR PURPOSES OF ILLUSTRATION ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF
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 an Owner, prevailing rates
and rates of inflation. Also, values would be different from those shown if the
gross annual investment returns averaged 0%, 6%, and 12% over a period of years
but fluctuated above and below those averages for individual Policy Years.
The illustrations assume that the assets in the Portfolios are subject to
an annual expense ratio of 0.862% of the average daily net assets. This annual
expense ratio is based on the average of the expense ratios of each of the
Portfolios for the last fiscal year and take into account current expense
reimbursement arrangements. For information on Portfolio expenses, see the
prospectuses for the Portfolios.
The illustrations also reflect the application of the percent of premium
load, the monthly Policy charge, the deduction of the deferred sales load, and
the monthly deduction from Cash Value for the hypothetical Insured. Western
Reserve's current cost of insurance charge, mortality and expense risk charges,
and monthly Policy charge and the higher guaranteed maximum cost of insurance,
mortality and expense risk and monthly Policy charges Western Reserve has the
contractual right to charge are reflected in separate illustrations on each of
the following pages. All the illustrations reflect the fact that no other
charges for Federal or state income taxes are currently made against the
Separate Account and assume no Loan Account Value or charges for supplemental
benefits.
After deduction of Portfolio expenses, the illustrated gross annual
investment rates of return of 0%, 6% and 12% would correspond to approximate net
annual rates for the Separate Account of -.862%, 5.138% and 11.138%,
respectively. Net annual rates of return for the Separate Account are not equal
to net annual rates of return for the Policy because the Separate Account rates
do not reflect all charges to the Policy.
The illustrations are based on Western Reserve's sex distinct rates for
non-tobacco users. Upon request, Western Reserve will furnish a comparable
illustration based upon the proposed Insured's individual circumstances. Such
illustrations may assume different hypothetical rates of return than those
illustrated in the following illustrations.
11
<PAGE> 16
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
<TABLE>
<S> <C> <C>
Specified Amount: $250,000 Guaranteed Issue Class
Annual Premium: $13,615 Life Insurance Benefit Option III
</TABLE>
USING CURRENT COST OF INSURANCE RATES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIFE INSURANCE BENEFIT
---------------------------------------------
ASSUMING HYPOTHETICAL GROSS AND NET
ANNUAL INVESTMENT RETURN OF
END OF PREMIUMS ---------------------------------------------
POLICY ACCUMULATED 0% (GROSS) 6% (GROSS) 12% (GROSS)
YEAR AT 5% -.862% (NET) 5.138% (NET) 11.138% (NET)
------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
1.................... $ 14,296 $263,615 $ 263,615 $ 263,615
2.................... 29,306 277,230 277,230 277,230
3.................... 45,067 290,845 290,845 290,845
4.................... 61,616 304,460 304,460 304,460
5.................... 78,993 318,075 318,075 318,075
6.................... 97,238 331,690 331,690 338,040
7.................... 116,396 345,305 345,305 404,028
8.................... 136,512 358,920 360,787 473,547
9.................... 157,633 372,535 402,531 545,864
10................... 179,810 386,150 444,400 623,079
15................... 308,482 454,225 641,442 1,072,945
20................... 472,703 522,300 833,154 1,687,030
30................... 949,793 658,450 1,201,251 3,697,464
40................... 1,726,923 794,600 1,603,268 7,791,980
50................... 2,992,787 930,750 2,089,195 16,467,840
60................... 5,054,744 lapse 2,735,971 35,635,523
</TABLE>
<TABLE>
<CAPTION>
CASH VALUE NET CASH VALUE
--------------------------------------------- ---------------------------------------------
ASSUMING HYPOTHETICAL GROSS AND NET ASSUMING HYPOTHETICAL GROSS AND NET
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF --------------------------------------------- ---------------------------------------------
POLICY 0% (GROSS) 6% (GROSS) 12% (GROSS) 0% (GROSS) 6% (GROSS) 12% (GROSS)
YEAR -.862% (NET) 5.138% (NET) 11.138% (NET) -.862% (NET) 5.138% (NET) 11.138% (NET)
------ ------------ ------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
1.................... $ 11,847 $ 12,466 $ 13,187 $ 11,847 $ 12,466 $ 13,187
2.................... 23,468 25,331 27,583 23,468 25,331 27,583
3.................... 34,985 38,744 43,458 34,985 38,744 43,458
4.................... 46,415 52,753 60,995 46,415 52,753 60,995
5.................... 57,769 67,393 80,380 57,769 67,393 80,380
6.................... 69,049 82,701 101,819 69,049 82,701 101,819
7.................... 80,250 98,701 125,475 80,250 98,701 125,475
8.................... 91,570 115,637 151,778 91,570 115,637 151,778
9.................... 102,786 133,289 180,750 102,786 133,289 180,750
10................... 113,898 151,672 212,655 113,898 151,672 212,655
15................... 167,789 255,554 427,468 167,789 255,554 427,468
20................... 218,468 382,181 773,867 218,468 382,181 773,867
30................... 301,336 715,030 2,200,872 301,336 715,030 2,200,872
40................... 321,076 1,170,268 5,687,577 321,076 1,170,268 5,687,577
50................... 76,908 1,755,626 13,838,521 76,908 1,755,626 13,838,521
60................... lapse 2,510,066 32,693,140 lapse 2,510,066 32,693,140
</TABLE>
- ---------------
The hypothetical rates of return shown above are illustrative only and should
not be deemed a representation of past or future investment rates of return.
Actual rates of return may be more or less than those shown and will depend on a
number of factors, including the investment allocations made by an Owner and the
actual investment experience of the Portfolios. The Cash Value, Net Cash Value
and Life Insurance Benefit for a Policy would be different from those shown if
the actual rates of return averaged 0.00%, 6.00%, and 12.00% over a period of
years, but also fluctuated above or below those averages for individual Policy
Years. No representations can be made that these hypothetical rates of return
can be achieved for any one year or sustained over any period of time.
12
<PAGE> 17
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
<TABLE>
<S> <C> <C>
Specified Amount: $250,000 Guaranteed Issue Class
Annual Premium: $13,615 Life Insurance Benefit Option III
</TABLE>
USING GUARANTEED COST OF INSURANCE RATES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIFE INSURANCE BENEFIT
---------------------------------------------
ASSUMING HYPOTHETICAL GROSS AND
NET ANNUAL INVESTMENT RETURN OF
END OF PREMIUMS ---------------------------------------------
POLICY ACCUMULATED 0% (GROSS) 6% (GROSS) 12% (GROSS)
YEAR AT 5% -.862% (NET) 5.138% (NET) 11.138% (NET)
- ------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
1.................... $ 14,296 $263,615 $ 263,615 $ 263,615
2.................... 29,306 277,230 277,230 277,230
3.................... 45,067 290,845 290,845 290,845
4.................... 61,616 304,460 304,460 304,460
5.................... 78,993 318,075 318,075 318,075
6.................... 97,238 331,690 331,690 331,690
7.................... 116,396 345,305 345,305 381,052
8.................... 136,512 358,920 358,920 444,632
9.................... 157,633 372,535 376,088 510,014
10................... 179,810 386,150 413,530 579,054
15................... 308,482 454,225 582,228 966,206
20................... 472,703 522,300 732,267 1,459,685
30................... 949,793 658,450 973,477 2,891,647
40................... 1,726,923 794,600 1,170,617 5,354,665
50................... 2,992,787 lapse 1,344,181 9,683,626
60................... 5,054,744 lapse 1,540,237 17,749,994
</TABLE>
<TABLE>
<CAPTION>
CASH VALUE NET CASH VALUE
--------------------------------------------- ---------------------------------------------
ASSUMING HYPOTHETICAL GROSS AND NET ASSUMING HYPOTHETICAL GROSS AND NET
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF --------------------------------------------- ---------------------------------------------
POLICY 0% (GROSS) 6% (GROSS) 12% (GROSS) 0% (GROSS) 6% (GROSS) 12% (GROSS)
YEAR -.862% (NET) 5.138% (NET) 11.138% (NET) -.862% (NET) 5.138% (NET) 11.138% (NET)
- ------ ------------ ------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
1.................... $ 11,430 $ 12,036 $ 12,744 $ 11,430 $ 12,036 $ 12,744
2.................... 22,490 24,299 26,487 22,490 24,299 26,487
3.................... 33,401 37,030 41,581 33,401 37,030 41,581
4.................... 44,158 50,243 58,162 44,158 50,243 58,162
5.................... 54,751 63,954 76,379 54,751 63,954 76,379
6.................... 65,175 78,176 96,396 65,175 78,176 96,396
7.................... 75,422 92,927 118,339 75,422 92,927 118,339
8.................... 85,689 108,442 142,510 85,689 108,442 142,510
9.................... 95,764 124,532 168,879 95,764 124,532 168,879
10................... 105,638 141,136 197,629 105,638 141,136 197,629
15................... 151,702 231,963 384,943 151,702 231,963 384,943
20................... 190,590 335,902 669,580 190,590 335,902 669,580
30................... 227,384 579,451 1,721,218 227,384 579,451 1,721,218
40................... 101,148 854,465 3,908,515 101,148 854,465 3,908,515
50................... lapse 1,129,564 8,137,504 lapse 1,129,564 8,137,504
60................... lapse 1,413,048 16,284,398 lapse 1,413,048 16,284,398
</TABLE>
- ---------------
The hypothetical rates of return shown above are illustrative only and should
not be deemed a representation of past or future investment rates of return.
Actual rates of return may be more or less than those shown and will depend on a
number of factors, including the investment allocations made by an Owner and the
actual investment experience of the Portfolios. The Cash Value, Net Cash Value
and Life Insurance Benefit for a Policy would be different from those shown if
the actual rates of return averaged 0.00%, 6.00%, and 12.00% over a period of
years, but also fluctuated above or below those averages for individual Policy
Years. No representations can be made that these hypothetical rates of return
can be achieved for any one year or sustained over any period of time.
13
<PAGE> 18
WESTERN RESERVE AND THE SEPARATE ACCOUNT
WESTERN RESERVE
Western Reserve was originally incorporated under the laws of Ohio on
October 1, 1957. Western Reserve is engaged in the business of writing life
insurance policies and annuity contracts. Western Reserve is admitted to do
business in 49 states and the District of Columbia. Western Reserve's main
office is located at 201 Highland Avenue, Largo, Florida 33770; however, the
mailing address is P.O. Box 5068, Clearwater, FL 33758-5068. Western Reserve's
Administrative Office for this Policy is located at 4333 Edgewood Road NE, Cedar
Rapids, Iowa 52499. Western Reserve is a wholly owned subsidiary of First AUSA
Life Insurance Company ("First AUSA"), a stock life insurance company which is a
wholly owned subsidiary of AEGON USA, Inc. ("AEGON"). AEGON is a financial
services holding company whose primary emphasis is on life and health insurance
and annuity and investment products. AEGON is a wholly owned indirect subsidiary
of AEGON nv, a Netherlands corporation, which is a publicly traded international
insurance group.
PUBLISHED RATINGS. Western Reserve may from time to time publish in
advertisements, sales literature and reports to Owners, the ratings and other
information assigned to it by one or more independent rating organizations such
as A.M. Best Company ("A.M. Best"), Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Insurance Rating Services ("Standard & Poor's"), and Duff &
Phelps Credit Rating Co. ("Duff & Phelps"). A.M. Best's and Moody's ratings
reflect their current opinion of the relative financial strength and operating
performance of an insurance company in comparison to the norms of the
life/health insurance industry. Standard & Poor's and Duff & Phelps provide
ratings which measure the claims-paying ability of insurance companies. These
ratings are opinions of an operating insurance company's financial capacity to
meet the obligations of its insurance policies in accordance with their terms
and should not be considered as bearing on the investment performance of assets
held in the Separate Account. Claims-paying ability ratings do not refer to an
insurer's ability to meet non-policy obligations (i.e., debt/commercial paper).
The ratings also do not relate to the performance of the Portfolios.
THE SEPARATE ACCOUNT
WRL Series Life Corporate Account (the "Separate Account") was established
by Western Reserve as a separate account on December 8, 1997. The Separate
Account meets the definition of a "separate account" under the Federal
securities laws and its fiscal year ends on December 31. The Separate Account
will receive and invest the Net Premiums paid under this Policy.
The assets of the Separate Account are the property of Western Reserve. The
Code of Ohio, under which the Separate Account was established, provides that
the assets in the Separate Account attributable to the Policies are not
chargeable with liabilities arising out of any other business which Western
Reserve may conduct. The assets of the Separate Account shall, however, be
available to cover the liabilities of the General Account of Western Reserve to
the extent that the Separate Account's assets exceed its liabilities arising
under the Policies supported by it.
The Separate Account is currently divided into 8 Subaccounts. Each
Subaccount invests exclusively in shares of a single Portfolio. Income and both
realized and unrealized gains or losses from the assets of each Subaccount of
the Separate Account are credited to or charged against that Subaccount without
regard to income, gains or losses from any other Subaccount of the Separate
Account or arising out of any other business Western Reserve may conduct.
Where permitted by applicable law, Western Reserve may make the following
changes to the Separate Account:
1. Any changes required by the 1940 Act or other applicable law or
regulation;
2. Combine separate accounts, including the Separate Account;
3. Add new subaccounts to or remove existing subaccounts from the
Separate Account or combine Subaccounts;
4. Make Subaccounts (including new subaccounts) available to such
classes of Policies as Western Reserve may determine;
5. Add new portfolios or remove existing Portfolios;
14
<PAGE> 19
6. Substitute new portfolios for any existing Portfolios if shares of
the Portfolio are no longer available for investment or if Western Reserve
determines that investment in a Portfolio is no longer appropriate in light
of the purposes of the Separate Account;
7. Deregister the Separate Account under the 1940 Act if such
registration is no longer required; and
8. Operate the Separate Account as a management investment company
under the 1940 Act or as any other form permitted by law.
No such changes will be made without any necessary approval of the SEC and
applicable state insurance departments. Owners will be notified of any changes.
INVESTMENTS OF THE SEPARATE ACCOUNT. The Subaccounts of the Separate
Account invest in shares of the corresponding Portfolios. Each Portfolio is part
of a series mutual fund which is registered with the SEC as an open-end
diversified management investment company. Such registration does not involve
supervision of the management or investment practices or policies of the
Portfolios by the SEC.
The assets of each Portfolio are held separate from the assets of the other
Portfolios, and each Portfolio has investment objectives and policies which are
different from those of the other Portfolios. Thus, each Portfolio operates as a
separate investment fund, and the income or losses of one Portfolio generally
have no effect on the investment performance of any other Portfolio. Certain
Subaccounts and corresponding Portfolios may not be available to residents of
some states.
The investment objectives and policies of each Portfolio are summarized
below. There is no assurance that any of the Portfolios will achieve its stated
objective. The information below also identifies the investment adviser (and,
where applicable, the investment sub-adviser) to each Portfolio. More detailed
information, including a description of risks, can be found in the prospectuses
for the Portfolios which should be read carefully.
BT INSURANCE FUNDS TRUST (each Portfolio managed by Bankers Trust Global
Investment Management):
Small Cap Index seeks to replicate as closely as possible (before expenses)
the return of the Russell 2000 Small Stock Index(R) ("Russell 2000"), an index
consisting of 2,000 small-capitalization common stocks. This Portfolio will
include the common stock of companies included in the Russell 2000, on the basis
of computer-generated statistical data, that are deemed representative of the
industry diversification of the entire Russell 2000.
Equity 500 Index seeks to replicate as closely as possible (before
deduction of expenses) the total return of the Standard & Poor's 500 Composite
Stock Price Index(R) ("S&P 500"), an index emphasizing large-capitalization
stocks. This Portfolio will include the common stock of those companies included
in the S&P 500, other than Bankers Trust New York Corporation, selected on the
basis of computer generated statistical data, that are deemed representative of
the industry diversification of the entire S&P 500.
EAFE(R) Equity Index seeks to replicate as closely as possible (before
deduction of expenses) the total return of the Europe, Australia, Far East Index
(the "EAFE Index"), a capitalization-weighted index containing approximately
1,100 equity securities of companies located outside the United States.
RUSSELL INSURANCE FUNDS (each Portfolio managed by Frank Russell Investment
Management Company):
Multi-Style Equity seeks to provide income and capital growth by investing
principally in equity securities.
Aggressive Equity seeks to provide capital appreciation by assuming a
higher level of volatility than is ordinarily expected from Multi-Style Equity
by investing in equity securities.
Non-U.S. seeks to provide favorable total return and additional
diversification for U.S. investors by investing primarily in equity and
fixed-income securities of non-U.S. companies, and securities issued by non-
U.S. governments.
Core Bond seeks to maximize total return, through capital appreciation and
income by assuming a level of volatility consistent with the broad fixed-income
market, by investing in fixed-income securities.
FEDERATED INSURANCE SERIES (Portfolio managed by Federated Advisors):
Prime Money II seeks current income consistent with stability of principal
and liquidity by investing in high-quality money market instruments.
15
<PAGE> 20
Shares of certain Portfolios are sold to separate accounts of insurance
companies that may or may not be affiliated with Western Reserve or each other.
In addition, shares of certain Portfolios are also sold to separate accounts to
serve as the underlying investment for both variable life insurance policies and
variable annuity contracts. It is possible that a material conflict may arise
between the interests of Owners of the Policies and owners of other variable
life insurance policies or variable annuity contracts whose accumulation values
are allocated to a Portfolio. Although neither Western Reserve nor the
Portfolios currently foresee any such disadvantages, Western Reserve and each
Portfolio's Board of Directors intend to monitor events in order to identify any
material conflicts and to determine what action to take. Such action could
include the sale of Portfolio shares by one or more of the separate accounts,
which could have adverse consequences. Material conflicts could result from, for
example, (1) changes in state insurance laws, (2) changes in Federal income tax
laws, or (3) differences in voting instructions between those given by variable
life insurance policy owners and those given by variable annuity contract
owners. If the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity separate accounts, Western
Reserve will bear the attendant expenses, but variable life insurance policy
owners and variable annuity contract owners would no longer have the economies
of scale resulting from a larger combined fund.
FACTS ABOUT THE POLICY
AVAILABILITY OF THE POLICY
Under Western Reserve's current rules, the Policy will be offered to
corporations and partnerships that meet the following conditions at issue:
- a minimum of five (5) Policies are issued, each on the life of a
different Insured; or
- the aggregate annualized first-year planned periodic premium for all
Policies is at least $100,000.
APPLYING FOR A POLICY
To purchase a Policy, a completed application must be sent to the
Administrative Office. Under Western Reserve's current rules, the minimum Face
Amount of a Policy is generally $25,000. Policies will generally be issued to
Insureds who supply satisfactory evidence of insurability sufficient to Western
Reserve. Acceptance is subject to Western Reserve's underwriting rules and
Western Reserve reserves the right to reject an application for any reason
permitted by law.
FREE-LOOK PERIOD
An Owner may cancel a Policy for a refund during the "free-look period" by
returning it to Western Reserve or to the sales representative who sold it. The
free-look period expires 20 days after delivery of the Policy. Certain states
may require a free-look period longer than 20 days. If you decide to cancel the
Policy, the Policy is treated as if it had never been issued. Within seven
calendar days after receiving the returned Policy, Western Reserve will refund
an amount equal to the greater of the Cash Value as of the date the Policy is
returned, or the premiums paid less any partial withdrawals.
PREMIUMS
PREMIUM FLEXIBILITY. Owners are not required to adhere to any rigid and
inflexible premium schedule. Western Reserve may require the Owner to pay an
initial premium. Thereafter, up to age 100 and subject to the maximum premium
limitations described below, an Owner may make unscheduled premium payments at
any time in any amount. When making premium payments during the first Policy
Year, an Owner should consider the effect of the sales charge and the deferred
sales charge. See Charges and Deductions -- Percent of Premium Load; and
Deferred Sales Charge.
PLANNED PERIODIC PREMIUMS. Each Owner will determine a Planned Periodic
Premium schedule that provides for the payment of a level premium at a fixed
interval over a specified period of time. The Owner is not required to pay
premiums in accordance with this schedule. Furthermore, the Owner has
considerable flexibility to alter the amount, frequency, and the time period
over which Planned Periodic Premiums are paid.
The payment of a Planned Periodic Premium will not guarantee that the
Policy remains in force. Instead, the duration of the Policy depends upon the
Policy's Net Cash Value. Thus, even if Planned Periodic
16
<PAGE> 21
Premiums are paid by the Owner, the Policy will nonetheless lapse any time Net
Cash Value is insufficient to pay certain monthly charges, and a Late Period
expires without a sufficient payment being made.
PREMIUM LIMITATIONS. In no event may the total of all premiums paid, both
scheduled and unscheduled, exceed the current maximum premium limitations which
qualify the Policy as life insurance according to Federal tax laws. If at any
time a premium is paid which would result in total premiums exceeding the
current maximum premium limitation, Western Reserve will only accept that
portion of the premium which will make total premiums equal the maximum. Any
part of the premium in excess of that amount will be returned and no further
premiums will be accepted until allowed by the current maximum premium
limitations allowed by Federal tax laws.
PAYMENT OF PREMIUMS. Any payment made by check or money order must be
payable to Western Reserve Life Assurance Co. of Ohio. Payments made by the
Owner will be treated as a premium payment unless clearly marked as loan
repayments. Certain charges will be deducted from each premium payment. See
Charges and Deductions. As an accommodation to Owners, Western Reserve will
accept transmittal of initial and subsequent premiums of at least $1,000 by wire
transfer. For an initial premium, the wire transfer must be accompanied by a
simultaneous telephone facsimile transmission ("fax") of a completed
application. An initial premium accepted via wire transfer with fax will be
allocated in accordance with current procedures explained in the section
entitled Allocation of Net Premiums and Cash Value -- Allocation of Net
Premiums. An initial premium made by wire transfer not accompanied by a
simultaneous fax, or accompanied by a fax of an incomplete application will be
applied at the unit value next determined not later than two business days after
receipt of an appropriate fax or a complete application. However, if Western
Reserve cannot obtain the fax or essential information within five business
days, Western Reserve shall inform the applicant of the reasons for the delay,
and will return the initial premium to the applicant unless the applicant
specifically consents to allow Western Reserve to retain the initial premium
until the required fax or essential information is received.
If the application with original signature is later received and the
allocation instructions in that application, for any reason, are inconsistent
with those previously designated on the fax, the initial premium will be
reallocated on the first Valuation Day on or following the date the Policy is
issued, in accordance with the allocation instructions in the application with
original signature.
Owners wishing to make payments via bank wire should instruct their banks
to wire Federal Funds as follows: .
First National Bank of Maryland
ABA #052000113
For credit to account of Western Reserve #89487643
Include your name and Policy number on all correspondence.
POLICY LAPSE AND REINSTATEMENT
LAPSE. The failure to make a Planned Periodic Premium payment will not
itself cause the Policy to Lapse. Lapse will only occur where Net Cash Value is
insufficient to cover the monthly deduction, and a Late Period expires without a
sufficient payment by the Owner. If the Net Cash Value is insufficient to cover
the monthly deduction, the Owner must pay during the Late Period a payment at
least sufficient to provide a Net Premium to cover the sum of the monthly
deductions due within the Late Period. Such a lapse could happen if the
investment experience has been sufficiently unfavorable to have resulted in a
decrease in the Net Cash Value, or the Net Cash Value has decreased because not
enough premiums have been paid to offset the monthly charges.
If Net Cash Value is insufficient to cover the monthly deduction, Western
Reserve will notify the Owner and any assignee of record of the minimum payment
needed to keep the Policy in force. The Owner will then have a Late Period of 62
days, measured from the date notice is sent to the Owner, for Western Reserve to
receive sufficient payments. If Western Reserve does not receive a sufficient
payment within the Late Period, the Policy will lapse. If a sufficient payment
is received during the Late Period, any resulting Net Premium will be allocated
among the Subaccounts, and any monthly deductions due will be charged to such
Subaccounts, in accordance with the Owner's then current instructions. (See
Allocation of Premiums and Cash Value -- Allocation of Net Premiums, and Charges
and Deductions -- Cash Value Charges.) If the
17
<PAGE> 22
Insured dies during the Late Period, the Life Insurance Benefit Proceeds will
equal the amount of the Life Insurance Benefit Proceeds immediately prior to the
commencement of the Late Period, reduced by any due and unpaid charges.
REINSTATEMENT. A lapsed Policy may be reinstated any time within five
years after the date of Lapse by submitting the following items to Western
Reserve:
1. A written application for reinstatement from the Owner;
2. Evidence of insurability satisfactory to Western Reserve; and
3. A premium that, after the charges against premiums, is large enough
to cover the next two monthly deductions that will become due after the
time of reinstatement.
Western Reserve reserves the right to decline a reinstatement request. Upon
approval of the application for reinstatement, the effective date of
reinstatement will be the first Monthly Deduction Day on or next following the
date Western Reserve approves the application for reinstatement.
ALLOCATION OF NET PREMIUMS AND CASH VALUE
NET PREMIUMS. The Net Premium equals the premium paid less any applicable
percent of premium load. (See Charges and Deductions -- Percent of Premium
Load). When an initial premium accompanies the application, monthly deductions
from the Cash Value of the Policy commence on the Effective Date.
ALLOCATION OF NET PREMIUMS. In the application for a Policy, the Owner
will allocate Net Premiums to one or more of the Subaccounts of the Separate
Account. Notwithstanding the allocation in the application, the initial premium,
less charges, will be allocated during the free-look period to the General
Account and will earn interest at an annual rate (minimum 4%) declared by
Western Reserve. At the end of the free-look period, the Net Premium, including
interest earned during the free-look period, is allocated to the Subaccounts as
directed in the application. Western Reserve deems the Policy to be delivered
four days after it is mailed for the purpose of allocating the Net Premium
(including interest) at the end of the free-look period. (See Facts About The
Policy -- Free-Look Period.) The minimum percentage of each premium that may be
allocated to any Subaccount is 1%; percentages must be in whole numbers. The
allocation of future Net Premiums may be changed without charge at any time by
providing Western Reserve with written notification from the Owner, or by
calling the Administrative Office. Western Reserve will employ the same
procedures to confirm that such telephone instructions are genuine as it employs
regarding telephone instructions for transfers among Subaccounts. See Transfer
Privileges. Upon instructions from the Owner, the registered representative or
agent of record may also change the allocation of future Net Premiums. Western
Reserve reserves the right to limit the number of changes to the allocation of
Net Premiums. Investment returns from the amounts allocated to Subaccounts of
the Separate Account will vary with the investment experience of these
Subaccounts and the Owner bears the entire investment risk.
POLICY VALUES
CASH VALUE. The Cash Value serves as the starting point for calculating
certain values under a Policy. The Cash Value is the sum of all Subaccount
Values and the Loan Account Value and therefore varies to reflect the investment
experience of the Subaccounts to which it is allocated. The Cash Value is
determined on the date the Policy is issued and on each Valuation Day
thereafter. The Cash Value may be more or less than premiums paid. THERE IS NO
GUARANTEED MINIMUM CASH VALUE.
NET CASH VALUE. The Net Cash Value is the amount payable on surrender of
the Policy. It is equal to the Cash Value as of the date of surrender minus any
outstanding Indebtedness.
SUBACCOUNT VALUE. The Subaccount Value of any Subaccount as of the end of
the free-look period is equal to the amount of the initial Net Premium allocated
to that Subaccount (including any interest credited during the free-look
period). On subsequent Valuation Days, the Subaccount Value is equal to that
part of any Net Premium allocated to the Subaccount and any Cash Value
transferred to that Subaccount, adjusted by interest income, dividends, net
capital gains or losses, realized or unrealized, and decreased by partial
withdrawals and any Cash Value transferred out of that Subaccount.
ACCUMULATION UNITS. For each Subaccount, Net Premiums allocated to a
Subaccount or amounts of Cash Value transferred to a Subaccount are converted
into Accumulation Units. The number of Accumulation Units credited to a Policy
is determined by dividing the dollar amount of any Net Premium or transfer
18
<PAGE> 23
directed to each Subaccount by the value of an Accumulation Unit for that
Subaccount on the transaction date. Therefore, Net Premiums allocated to or
amounts transferred to a Subaccount under a Policy increase the number of
Accumulation Units of that Subaccount credited to the Policy.
Certain events reduce the number of Accumulation Units of a Subaccount
credited to a Policy. Partial withdrawals or transfers of Subaccount Value from
a Subaccount result in the cancellation of the appropriate number of
Accumulation Units of that Subaccount as do: surrender of the Policy; payment of
the Life Insurance Benefit Proceeds; Policy loans; and the deduction of the
monthly deduction. Accumulation Units are canceled as of the end of the
Valuation Period in which Western Reserve receives written notice regarding the
event. These events are referred to as "Policy transactions."
Accumulation Units are bought and sold each time there is a Policy
transaction. The number of Accumulation Units in any Subaccount on any day is
determined as follows:
1. From the Accumulation Units as of the prior Monthly Deduction Day,
subtract the Accumulation Units sold to pay any partial withdrawals;
2. Add Accumulation Units bought with Net Premiums received since the
prior Monthly Deduction Day;
3. Subtract Accumulation Units sold to transfer amounts into the Loan
Account;
4. Add Accumulation Units bought with loan repayments;
5. Subtract Accumulation Units sold to transfer amounts to other
Subaccounts;
6. Add Accumulation Units bought from amounts transferred from other
Subaccounts.
The number of Accumulation Units on a Monthly Deduction Day is the result
of steps 1 through 6 above, minus the number of Accumulation Units sold to pay
the monthly deduction charge. If the Monthly Deduction Day is a Policy
Anniversary, the number of Accumulation Units will be increased by Accumulation
Units bought with any amounts transferred from the Loan Account.
ACCUMULATION UNIT VALUE. The value of an Accumulation Unit on any
Valuation Day is determined by multiplying the value of that Accumulation Unit
on the immediately preceding Valuation Day by the Net Investment Factor for the
Valuation Period.
NET INVESTMENT FACTOR. The Net Investment Factor is an index applied to
measure the investment performance of Accumulation Units of a Subaccount from
one Valuation Period to the next. The Net Investment Factor for any Subaccount
for any Valuation Period is determined by dividing 1 by 2, where:
1. is the result of:
a. the net asset value per share of the Portfolio held in the
Subaccount, determined at the end of the current Valuation Period; plus
b. the per share amount of any dividend or capital gain
distributions made by the Portfolio held in the Subaccount, if the
"ex-dividend" date occurs during the current Valuation Period; and
2. is the net asset value per share of the Portfolio held in the
Subaccount, determined at the end of the immediately preceding Valuation
Period.
The Net Investment Factor may be greater or less than one; therefore, the
value of an Accumulation Unit may increase or decrease.
TRANSFER PRIVILEGES
GENERAL. Cash Value may be transferred among the Subaccounts. The amount
of Cash Value available for transfer from any Subaccount is determined at the
end of the Valuation Period during which the transfer request is received at the
Administrative Office. The net asset value for each share of the corresponding
Portfolio of any Subaccount is determined, once daily, as of the close of the
regular business session of the New York Stock Exchange ("NYSE") (usually 4:00
p.m. Eastern time), which coincides with the end of each Valuation Period. (See
Policy Benefits -- Cash Value -- Valuation Day and Valuation Period.) Therefore,
any transfer request received after the close of the regular business session of
the NYSE, on any day the NYSE is open, will be processed using the net asset
value for each share of the applicable Portfolio determined as of the close of
the regular business session of the NYSE, on the next day the NYSE is open for
business.
19
<PAGE> 24
The minimum amount that may be transferred is the lesser of $500 or the
value of all remaining Accumulation Units in a Subaccount, unless Western
Reserve agrees otherwise. The Subaccount from which a transfer is made must
maintain a minimum balance of $500 after the transfer is completed. If the value
of the remaining Accumulation Units in a Subaccount would be less than $500,
Western Reserve has the right to include that amount as part of the transfer.
Owners may make up to 12 transfers of Cash Value without charge during any
one Policy Year. After these 12 transfers in a Policy Year, Western Reserve
reserves the right to impose a charge of $25 for each subsequent transfer. The
transfer charge will not be increased. All transfers made in any one day will be
considered a single transfer and any transfer charges will be deducted on a
pro-rata basis from each Subaccount from which a transfer was made. Transfers
resulting from Policy loans, the exercise of exchange privileges, and the
reallocation of Cash Value immediately after the free-look period, will not be
treated as a transfer for the purpose of this charge.
Owners may make transfer requests in writing, or by telephone. Written
requests must be in a form acceptable to Western Reserve. The registered
representative or agent of record for the Policy may, upon instructions from the
Owner for each transfer, make telephone transfers upon request without the
necessity for the Owner to have previously authorized telephone transfers in
writing. Transfer requests made by telephone must be verified by a facsimile
sent to the Administrative Office before the transfer is made. If, for any
reason, an Owner does not want the ability to make transfers by telephone, the
Owner should provide written notice to Western Reserve at the Administrative
Office. All telephone transfers should be made by calling the Administrative
Office.
Western Reserve will not be liable for complying with telephone
instructions it reasonably believes to be authentic, nor for any loss, damage,
cost or expense in acting on such telephone instructions, and Owners will bear
the risk of any such loss. Western Reserve will employ reasonable procedures to
confirm that telephone instructions are genuine. If Western Reserve does not
employ such procedures, it may be liable for losses due to unauthorized or
fraudulent instructions. Such procedures may include, among others, requiring
forms of personal identification prior to acting upon such telephone
instructions, providing written confirmation of such transactions to Owners,
and/or tape recording telephone instructions received from Owners.
Western Reserve may, at any time, revoke or modify the transfer privilege.
Under Western Reserve's current procedures, it will effect transfers and
determine all values in connection with transfers at the end of the Valuation
Period during which the transfer request is received at the Administrative
Office.
ASSET REBALANCING PROGRAM. Western Reserve offers a program under which
the Owner may authorize Western Reserve to transfer Cash Value periodically to
maintain a particular percentage allocation among the Subaccounts. The Cash
Value allocated to each Subaccount will grow or decline in value at different
rates. The asset rebalancing program automatically reallocates the Cash Value in
the Subaccounts at the end of each period to match the Policy's currently
effective Net Premium allocation schedule. The asset rebalancing program is
intended to transfer Cash Value from those Subaccounts that have increased in
value to those Subaccounts that have declined in value. Over time, this method
of investing may help an Owner buy low and sell high. This investment method
does not guarantee gains, nor does it assure that any Subaccount will not have
losses.
To qualify for the asset rebalancing program, a minimum Cash Value of
$10,000 for an existing Policy, or a minimum initial premium of $10,000 for a
new Policy, is required. To participate in the asset rebalancing program, a
properly completed asset rebalancing request form, which is available upon
request, must be received by Western Reserve.
Owners may elect rebalancing to occur on each quarterly, semi-annual or
annual anniversary of the Effective Date. Following receipt of the asset
rebalancing request form, Western Reserve will effect the initial rebalancing of
Cash Value on the next such anniversary, in accordance with the Policy's current
Net Premium allocation schedule. The amounts transferred will be credited at the
unit value next determined on the dates the transfers are made. If a day on
which rebalancing would ordinarily occur falls on a day on which the NYSE is
closed, rebalancing will occur on the next day the NYSE is open.
There is no charge for the asset rebalancing program. Any reallocation
which occurs under the asset rebalancing program will not be counted towards the
12 free transfers allowed during each Policy Year.
20
<PAGE> 25
The Owner may terminate participation at any time in the asset rebalancing
program by oral or written request to Western Reserve. Participating in the
asset rebalancing program will terminate automatically if any transfer is made
to, or from, any Subaccount, other than on account of a scheduled rebalancing.
If the Owner wishes to resume the asset rebalancing program after it has been
canceled, a new asset rebalancing request form must be completed and sent to
Western Reserve. The Owner may start and stop participation in the asset
rebalancing program at any time; however, Western Reserve reserves the right to
restrict entry into the asset rebalancing program to once per Policy Year.
Western Reserve may discontinue, modify, or suspend, the asset rebalancing
program at any time.
SURRENDERS AND PARTIAL WITHDRAWALS
SURRENDERS. At any time while the Insured is still living and the Policy
is in force, the Owner may, by written request, surrender the Policy for its Net
Cash Value. A surrender is effective as of the date on which a written request
for surrender is received by Western Reserve. The Net Cash Value of the Policy
is the Cash Value less any Indebtedness. Once the Policy is surrendered, all
coverage and other benefits under it cease and it cannot be reinstated. A
surrender may have tax consequences. See Federal Tax Considerations.
PARTIAL WITHDRAWALS. After the first Policy Year, while the Insured is
still living and the Policy is in force, an Owner may apply for a partial
withdrawal. The request must be made in writing to the Administrative Office and
the amount requested must be at least $500. The maximum amount that may be
requested is the amount that would leave at least $500 remaining in the
Subaccount from which the partial withdrawal is made. The amount withdrawn is
deducted from each of the Subaccounts on a pro rata basis unless you specify
otherwise in a written notice to the Administrative Office. Western Reserve
generally will pay a partial withdrawal request within seven days following the
Valuation Day the request is received.
There is no limit on the number of partial withdrawals that may be made
during a Policy Year. On each partial withdrawal, Western Reserve imposes a
processing charge equal to the lesser of $25 or 2% of the amount requested. This
charge is deducted on a pro-rata basis from each of the Subaccounts unless you
provide other written instructions to the Administrative Office.
If the Owner has selected Life Insurance Benefit Option 1, Western Reserve
will reduce the Face Amount by the amount of the partial withdrawal. If Life
Insurance Benefit Option 2 is in effect, the Face Amount will not be changed by
the amount of the partial withdrawal. If Life Insurance Benefit Option 3 is in
effect and the partial withdrawal is greater than the sum of the premiums paid,
the Face Amount is reduced by the amount of the partial withdrawal minus the sum
of the premiums paid; otherwise the Face Amount is not reduced. Western Reserve
may reject any partial withdrawal if it would cause the Policy to fail to
qualify as a life insurance contract under the Code or regulations or rulings
thereunder. A partial withdrawal may have tax consequences. See Federal Tax
Considerations.
LOANS
After the first Policy Year as long as the Policy remains in force, the
Owner may borrow money from Western Reserve using the Policy as the only
security for the loan. Western Reserve permits a Policy loan prior to the first
Policy Anniversary for Policies issued pursuant to a transfer of cash values
from another life insurance policy under Section 1035(a) of the Code. The
maximum amount that may be borrowed is 90% of the Cash Value, less any already
outstanding Policy loan. Western Reserve reserves the right to limit the amount
of any Policy loan to not less than $500. Outstanding loans have priority over
the claims of any assignee or other person. The loan may be repaid totally or in
part. A loan which is taken from, or secured by, a Policy may have Federal
income tax consequences. See Federal Tax Considerations.
When a loan is requested, an amount equal to the requested loan amount plus
interest in advance for one year will be withdrawn from each of the Subaccounts
on a pro-rata basis, unless you specify otherwise in a written notice to the
Administrative Office, and transferred to the Loan Account until the loan is
repaid.
The amount of the loan will normally be paid within seven days after
receipt of a proper request in a manner permitted by Western Reserve.
Postponement of loans may take place under certain conditions. Under Western
Reserve's current procedures, at each Policy Anniversary, Western Reserve will
compare the amount of the outstanding loan (including loan interest in advance
until the next Policy Anniversary, if not paid) to the amount in the Loan
Account (including interest credited to the Loan Account during the previous
Policy Year). Western Reserve will also make this comparison any time the Owner
repays all of the
21
<PAGE> 26
loan, or makes a request to borrow an additional amount. At each such time, if
the amount of the outstanding loan exceeds the amount in the Loan Account,
Western Reserve will withdraw the difference from the Subaccounts and transfer
it to the Loan Account in the same manner as when a loan is made. If the amount
in the Loan Account exceeds the amount of the outstanding loan, Western Reserve
will withdraw the difference from the Loan Account and transfer it to the
Subaccounts in the same manner as current Net Premiums are allocated. No charge
will be imposed for these transfers, and these transfers are not treated as
transfers in calculating the transfer charge.
INTEREST RATE CHARGED. The annual interest rate on a Policy loan is 6.0%
and is due in arrears on each Policy Anniversary for the prior Policy Year and
on the day the loan is repaid. Loan interest that is unpaid when due will be
added to the amount of the loan and will bear interest at the same rate. On the
date of the Insured's death, the date the Policy ends, the date of a loan
repayment, or any other date Western Reserve specifies, any necessary adjustment
will be made in the loan to reflect any interest accrued since the last Policy
Anniversary. If an annual interest rate lower than 6% is set, any subsequent
increase in the interest rate shall be subject to the following conditions:
(1) The effective date of any increase in the interest rate for Policy
loans shall not be earlier than one year after the effective date of the
establishment of the previous rate.
(2) The amount by which the interest rate may be increased shall not
exceed 1% per year, but the maximum annual interest rate will be 6%.
(3) Western Reserve will give notice of the interest rate in effect
when a loan is made and when sending notice of loan interest due.
(4) If a loan is outstanding 40 days or more before the effective date
of an increase in the annual interest rate, Western Reserve will notify you
of that increase at least 30 days prior to the effective date of the
increase.
(5) Western Reserve will give notice of any increase in the annual
interest rate whenever a loan is made during the 40 days before the
effective date of the increase.
LOAN ACCOUNT INTEREST RATE CREDITED. The amount in the Loan Account will
accrue interest at an effective annual rate of 4%. Western Reserve may credit a
higher rate, but it is not obligated to do so.
EFFECT OF POLICY LOANS. A Policy loan affects the Policy, because the Life
Insurance Benefit Proceeds and Net Cash Value under the Policy are reduced by
the amount of the loan. Repayment of the loan causes the Life Insurance Benefit
Proceeds and Net Cash Value to increase by the amount of the repayment. As long
as a loan is outstanding, an amount equal to the loan plus interest in advance
until the next Policy Anniversary is held in the Loan Account. This amount will
not be affected by the Separate Account's investment performance. Amounts
transferred from the Separate Account to the Loan Account will affect the
Separate Account value because such amounts will be credited with an interest
rate declared by Western Reserve rather than a rate of return reflecting the
investment performance of the Separate Account. There are risks involved in
taking a Policy loan, a few of which include the potential for a Policy to lapse
if projected earnings, taking into account outstanding loans, are not achieved,
as well as possible adverse tax consequences which could occur if a Policy
lapses with loans outstanding.
INDEBTEDNESS. Indebtedness equals the total of all Policy loans plus any
loan interest accrued on the loans. If indebtedness exceeds the Cash Value,
Western Reserve will notify the Owner and any assignee of record. If a
sufficient payment equal to excess indebtedness is not received by Western
Reserve within 31 days from the date notice is sent, the Policy will Lapse and
terminate without value. The Policy, however, may later be reinstated.
REPAYMENT OF INDEBTEDNESS. Indebtedness may be repaid any time. Payments
made by the Owner while there is indebtedness will be treated as premium
payments unless the Owner indicates that the payment should be treated as a loan
repayment. If not repaid, Western Reserve may deduct indebtedness from any
amount payable under the Policy. As indebtedness is repaid, the Policy's value
in the Loan Account securing the indebtedness repaid will be transferred from
the Loan Account to the Subaccounts in the same manner as current Net Premiums
are allocated. Western Reserve will allocate the repayment of indebtedness at
the end of the Valuation Period during which the repayment is received.
22
<PAGE> 27
LIFE INSURANCE BENEFITS
GENERAL. Owners designate in the initial application one of three Life
Insurance Benefit Options offered under the Policy: Life Insurance Benefit
Option 1 ("Option 1"), Life Insurance Benefit Option 2 ("Option 2"), and Life
Insurance Benefit Option 3 ("Option 3"). As long as the Policy remains in force,
Western Reserve will, upon receiving due proof of the Insured's death, pay the
Life Insurance Benefit Proceeds of a Policy to the named Beneficiary in
accordance with the designated Life Insurance Benefit Option. The amount of the
Life Insurance Benefit Proceeds payable will be determined at the end of the
Valuation Period during which the Insured dies. The proceeds may be paid in a
lump sum or under one or more of the settlement options set forth in the Policy.
Western Reserve guarantees that as long as the Policy remains in force, the Life
Insurance Benefit under any option will never be less than the Face Amount of
the Policy, but the Life Insurance Benefit Proceeds will reflect reductions for
any outstanding Indebtedness and any due and unpaid charges. These proceeds will
be increased by any additional insurance provided by rider. To qualify the
Policy as life insurance under the Code, Owners may choose between two Life
Insurance Benefit Compliance Tests -- either the Guideline Premium Test or the
Cash Value Accumulation Test. The limitation percentages vary from one test to
the other. (See Appendix A.)
OPTION 1. The Life Insurance Benefit is the greater of the Face Amount of
the Policy or the applicable percentage (the "limitation percentage") times the
Cash Value on the date of death. Accordingly, under Option 1 the Life Insurance
Benefit will remain level unless the limitation percentage times the Cash Value
exceeds the Face Amount, in which case the amount of the Life Insurance Benefit
will vary as the Cash Value varies.
ILLUSTRATION OF OPTION 1. For purposes of this illustration, assume that
the Insured's Attained Age is under 40, that there is no outstanding
indebtedness, and that the Guideline Premium Test is chosen. Under Option 1, a
Policy with a $50,000 Face Amount will generally pay $50,000 in Life Insurance
Benefits. However, because the Life Insurance Benefit must be equal to or be
greater than 250% of Cash Value, any time the Cash Value of the Policy exceeds
$20,000, the Life Insurance Benefit will exceed the $50,000 Face Amount. Each
additional dollar added to Cash Value above $20,000 will increase the Life
Insurance Benefit by $2.50. Similarly, so long as Cash Value exceeds $20,000,
each dollar taken out of Cash Value will reduce the Life Insurance Benefit by
$2.50.
If at any time, however, the Cash Value multiplied by the limitation
percentage is less than the Face Amount, the Life Insurance Benefit will equal
the Face Amount of the Policy.
OPTION 2. The Life Insurance Benefit is equal to the greater of the Face
Amount plus the Cash Value of the Policy or the limitation percentage times the
Cash Value on the date of death. Accordingly, under Option 2 the amount of the
Life Insurance Benefit will always vary as the Cash Value varies.
ILLUSTRATION OF OPTION 2. For purposes of this illustration, assume that
the Insured is under the age of 40, that there is no outstanding indebtedness,
and that the Guideline Premium Test is chosen. Under Option 2, a Policy with a
Face Amount of $50,000 will generally pay a Life Insurance Benefit of $50,000
plus Cash Value. Thus, for example, a Policy with a Cash Value of $10,000 will
have a Life Insurance Benefit of $60,000 ($50,000 + $10,000). The Life Insurance
Benefit under the Guideline Premium Test, however, must be at least 250% of Cash
Value. As a result, if the Cash Value of the Policy exceeds $33,333, the Life
Insurance Benefit will be greater than the Face Amount plus Cash Value. Each
additional dollar of Cash Value above $33,333 will increase the Life Insurance
Benefit by $2.50. Similarly, any time Cash Value exceeds $33,333, each dollar
taken out of Cash Value will reduce the Life Insurance Benefit by $2.50.
If at any time, however, Cash Value multiplied by the limitation percentage
is less than the Face Amount plus the Cash Value, then the Life Insurance
Benefit will be the Face Amount plus the Cash Value of the Policy.
OPTION 3. The Life Insurance Benefit is equal to the greater of the Face
Amount plus cumulative premiums paid less cumulative partial withdrawals, or the
corridor percentage times the Cash Value. Accordingly, under Option 3, the
amount of Life Insurance Benefit will always vary with the premiums paid and
partial withdrawals taken, and may vary as the Cash Value varies.
ILLUSTRATION OF OPTION 3. For purposes of this illustration, assume that
the Insured is under the age of 40, that there is no outstanding indebtedness,
and that the Guideline Premium Test is chosen. Under
23
<PAGE> 28
Option 3, a Policy with a Face Amount of $50,000 will generally pay a Life
Insurance Benefit of $50,000 plus premiums. Thus, for example, a Policy with
premiums paid of $10,000 will have a Life Insurance Benefit of $60,000 ($50,000
+ $10,000). The Life Insurance Benefit under the Guideline Premium Test,
however, must be at least 250% of Cash Value. As a result, if the Cash Value of
the Policy exceeds $24,000, the Life Insurance Benefit will be greater than the
Face Amount plus Cash Value. Each additional dollar of Cash Value above $24,000
will increase the Life Insurance Benefit by $2.50. Similarly, any time Cash
Value exceeds $24,000, each dollar taken out of Cash Value will reduce the Life
Insurance Benefit by $2.50.
LIMITATION PERCENTAGES TABLE -- GUIDELINE PREMIUM TEST
<TABLE>
<CAPTION>
INSURED'S AGE
ON POLICY LIMITATION
ANNIVERSARY PERCENTAGE
------------- ----------
<S> <C>
0-40................. 250
41................. 243
42................. 236
43................. 229
44................. 222
45................. 215
46................. 209
47................. 203
48................. 197
49................. 191
50................. 185
51................. 178
52................. 171
53................. 164
54................. 157
55................. 150
56................. 146
57................. 142
58................. 138
</TABLE>
<TABLE>
<CAPTION>
INSURED'S AGE
ON POLICY LIMITATION
ANNIVERSARY PERCENTAGE
------------- ----------
<S> <C>
59................. 134
60................. 130
61................. 128
62................. 126
63................. 124
64................. 122
65................. 120
66................. 119
67................. 118
68................. 117
69................. 116
70................. 115
71................. 113
72................. 111
73................. 109
74................. 107
75................. 105
76................. 105
77................. 105
</TABLE>
<TABLE>
<CAPTION>
INSURED'S AGE
ON POLICY LIMITATION
ANNIVERSARY PERCENTAGE
------------- ----------
<S> <C>
78................. 105
79................. 105
80................. 105
81................. 105
82................. 105
83................. 105
84................. 105
85................. 105
86................. 105
87................. 105
88................. 105
89................. 105
90................. 105
91................. 104
92................. 103
93................. 102
94-99................ 101
100 and older........ 100
</TABLE>
24
<PAGE> 29
LIMITATION PERCENTAGES TABLE -- CASH VALUE ACCUMULATION TEST
<TABLE>
<CAPTION>
INSURED'S AGE
ON POLICY LIMITATION
ANNIVERSARY PERCENTAGE
- --------------------- --------------
MALE FEMALE
---- ------
<S> <C> <C>
20................... 631 751
21................... 612 727
22................... 595 704
23................... 577 681
24................... 560 659
25................... 542 638
26................... 526 617
27................... 509 597
28................... 493 578
29................... 477 559
30................... 462 541
31................... 447 523
32................... 432 506
33................... 418 489
34................... 404 473
35................... 391 458
36................... 379 443
37................... 366 428
38................... 355 414
39................... 343 401
40................... 332 388
41................... 322 376
42................... 312 364
43................... 302 353
44................... 293 342
45................... 284 332
46................... 275 322
</TABLE>
<TABLE>
<CAPTION>
INSURED'S AGE
ON POLICY LIMITATION
ANNIVERSARY PERCENTAGE
- --------------------- --------------
MALE FEMALE
---- ------
<S> <C> <C>
47................... 267 312
48................... 259 303
49................... 251 294
50................... 244 285
51................... 237 276
52................... 230 268
53................... 224 261
54................... 218 253
55................... 212 246
56................... 206 239
57................... 201 232
58................... 195 226
59................... 190 219
60................... 186 213
61................... 181 207
62................... 177 201
63................... 172 196
64................... 168 191
65................... 164 186
66................... 161 181
67................... 157 176
68................... 154 172
69................... 151 167
70................... 148 163
71................... 145 159
72................... 142 155
73................... 140 152
</TABLE>
<TABLE>
<CAPTION>
INSURED'S AGE
ON POLICY LIMITATION
ANNIVERSARY PERCENTAGE
- --------------------- --------------
MALE FEMALE
---- ------
<S> <C> <C>
74................... 137 148
75................... 135 145
76................... 133 142
77................... 131 139
78................... 129 136
79................... 127 134
80................... 125 131
81................... 124 129
82................... 122 127
83................... 121 125
84................... 119 123
85................... 118 121
86................... 117 119
87................... 116 118
88................... 115 117
89................... 114 115
90................... 113 114
91................... 112 113
92................... 111 111
93................... 110 110
94................... 109 109
95................... 107 108
96................... 106 106
97................... 105 105
98................... 103 103
99................... 102 102
100.................. 100 100
</TABLE>
CHOOSING A LIFE INSURANCE BENEFIT OPTION. As described above and assuming
the Life Insurance Benefit is not determined by reference to the limitation
percentage, Option 1 will provide a Face Amount of Life Insurance Benefit which
does not vary with changes in Cash Value. Thus, under Option 1, as Cash Value
increases, Western Reserve's net amount at risk under the Policy will decline.
In contrast, Option 2 involves a constant net amount at risk, assuming that the
Life Insurance Benefit is not determined by reference to the limitation
percentage. The net amount at risk under the Policy for Option 3 is dependent
upon the amount and timing of premiums paid. Consequently, there is no
generalized pattern as with Options 1 and 2. Therefore, assuming sufficiently
positive investment experience, the deduction for cost of insurance under a
Policy with an Option 1 Life Insurance Benefit will be less than under a
corresponding Policy with an Option 2 or 3 Life Insurance Benefit. Because of
this, if investment performance is positive, Cash Value under Option 1 will
increase faster than under Options 2 or 3 but the total Life Insurance Benefit
under Options 2 or 3 will generally be greater. Thus, Option 1 could be
considered more suitable for Owners whose goal is increasing Cash Value based
upon positive investment experience while Options 2 and 3 could be considered
more suitable for Owners whose goal is increasing total Life Insurance Benefit.
CHANGING THE LIFE INSURANCE BENEFIT OPTION. Generally, the Life Insurance
Benefit Option in effect may be changed by the Owner after the first Policy Year
by sending Western Reserve a written request for change. Western Reserve may
require proof of insurability. A change in Life Insurance Benefit Option may
have Federal income tax consequences. Under Western Reserve's current rules, no
change may be made if it would result in a Face Amount less than the minimum
Face Amount set forth in the Policy, or if the Policy would not continue to
qualify as life insurance as defined under Section 7702 of the Code. The
effective date of any
25
<PAGE> 30
change will be the Monthly Deduction Day on or after Western Reserve approves
the request. No charges will be imposed for making a change in Life Insurance
Benefit Option. If the Life Insurance Benefit Option is changed from Option 2 to
Option 1, the Face Amount will be increased by an amount equal to the Cash Value
on the effective date of change. If the Life Insurance Benefit Option is changed
from Option 1 to Option 2, the Face Amount will be decreased by an amount equal
to the Cash Value on the effective date of the change. If the Life Insurance
Benefit Option is changed from Option 3 to Option 1, the Face Amount will be
increased by the sum of the premiums paid less the sum of partial withdrawals.
If the Life Insurance Benefit Option is changed from Option 1 to Option 3, the
Face Amount will be decreased by the sum of the premiums paid less the sum of
partial withdrawals. Western Reserve will not allow changes between Options 2
and 3.
HOW LIFE INSURANCE BENEFITS MAY VARY IN AMOUNT. As long as the Policy
remains in force, Western Reserve guarantees that the Life Insurance Benefit
will never be less than the Face Amount of the Policy. These proceeds will be
reduced by any outstanding indebtedness and any due and unpaid charges. The Life
Insurance Benefit may, however, vary with the Policy's Cash Value. Under Option
1, the Life Insurance Benefit will only vary when the Cash Value multiplied by
the limitation percentage exceeds the Face Amount of the Policy. The Life
Insurance Benefit under Option 2 will always vary with the Cash Value because
the Life Insurance Benefit equals either the Face Amount plus the Cash Value or
the limitation percentage times the Cash Value. The Life Insurance Benefit under
Option 3 will always vary with the premiums paid and partial withdrawals taken
and will also vary whenever the Cash Value multiplied by the limitation
percentage exceeds the Face Amount plus cumulative premiums paid less cumulative
partial withdrawals.
CHANGING THE FACE AMOUNT. Subject to certain limitations, an Owner may
increase or decrease the Face Amount of a Policy. A change in Face Amount may
affect the net amount at risk, which may affect an Owner's cost of insurance
charge. A change in Face Amount could also have Federal income tax consequences.
DECREASES. Any decrease in the Face Amount will become effective on the
Monthly Deduction Day on or following receipt of a written request from the
Owner by Western Reserve at the Administrative Office. No requested decrease in
the Face Amount will be permitted during the first Policy Year. The Face Amount
remaining in force after any requested decrease may not be less than $25,000.
If, following the decrease in Face Amount, the Policy would not comply with the
maximum premium limitations required by Federal tax law, the decrease may be
limited to the extent necessary to meet these requirements.
INCREASES. For an increase in the Face Amount, written application must be
submitted. Western Reserve will also require that additional evidence of
insurability be submitted. Western Reserve reserves the right to decline any
increase request. Any increase will become effective on the Monthly Deduction
Day after Western Reserve approves the request for the increase. No increase in
the Face Amount will be permitted during the first Policy Year. An increase need
not be accompanied by an additional premium, but there must be sufficient Net
Cash Value to cover the next monthly deduction after the increase becomes
effective.
DURATION OF THE POLICY
The Policy's duration depends upon the Net Cash Value. The Policy will
remain in force so long as the Net Cash Value is sufficient to pay the monthly
deduction. If the Net Cash Value is insufficient to pay the monthly deduction,
and a Late Period expires without an adequate payment by the Owner, the Policy
will lapse and terminate without value.
WHEN INSURANCE COVERAGE TAKES EFFECT
No life insurance coverage shall take effect unless the proposed Insured is
alive, in the same condition of health as described in the application when the
Policy is delivered to the Owner, and the full initial premium is paid.
26
<PAGE> 31
PAYMENT OPTIONS
The Policy offers a variety of optional ways of receiving proceeds under
the Policy, other than in a lump sum. Any agent authorized to sell the Policy
can explain these options upon request. None of these options vary with the
investment performance of a separate account.
CHARGES AND DEDUCTIONS
The following charges will apply to your Policy under the circumstances
described. The charges are for the services and benefits provided, costs and
expenses incurred and risks assumed by Western Reserve in connection with the
Policies.
Services and benefits provided by Western Reserve include:
- the Life Insurance Benefits, cash and loan benefits provided by the
Policy;
- investment options, including Net Premium allocations;
- administration of elective options under the Policy; and
- the distribution of reports to Owners.
Costs and expenses Western Reserve incurs include:
- those associated with underwriting applications and changes in Face
Amount and riders;
- various overhead and other expenses associated with providing the
services and benefits relating to the Policy;
- sales and marketing expenses; and
- other costs of doing business, such as federal, state and local premium
and other taxes and fees.
Risks assumed by Western Reserve include the risks that:
- Insureds may live for a shorter period of time than estimated resulting
in the payment of greater Life Insurance Benefits than expected; and
- the costs of providing the services and benefits under the Policies will
exceed the charges deducted.
PERCENT OF PREMIUM LOAD
Certain expenses are deducted at the time you make premium payments. The
remainder of each premium (the Net Premium) is then allocated to the Subaccounts
as you direct. The expenses deducted from your premium are intended to
compensate Western Reserve for sales expenses and federal and state tax charges.
Premium tax charges imposed by different states range from 0.0% to 3.5% of
premiums.
During the first Policy Year, Western Reserve deducts 11.5% of each premium
received up to the Target Premium, and 4.5% of each premium received in excess
of the Target Premium. After the first Policy Year, Western Reserve deducts
11.5% of each premium received up to the Target Premium, and 7.5% of each
premium received in excess of the Target Premium.
Since 4.5% is deducted from each premium in excess of the Target Premium
received by Western Reserve during the first Policy Year, it may be advantageous
to pay such premiums during the first Policy Year rather than after the first
Policy Year. However, higher premium amounts paid during the first Policy Year
will result in higher amounts being subject to the deferred sales charge in
Policy Years 2 through 7 (See Deferred Sales Charge, below). An Owner deciding
the appropriate amount and timing of premium payments should consider the
combined effect of the percent of premium load and the deferred sales charge.
27
<PAGE> 32
DEFERRED SALES CHARGE
On each Policy Anniversary during Policy Years 2 through 7, Western Reserve
deducts from the Cash Value a deferred sales charge equal to 1.5% of premiums
paid during the first Policy Year to compensate Western Reserve for a portion of
Policy sales expenses. If the Policy is surrendered, this charge is not deducted
for Policy Anniversaries not yet reached.
MONTHLY DEDUCTIONS
The charges listed below are deducted from your Cash Value as of the
Effective Date and on each Monthly Deduction Day. The deductions are made from
the Subaccounts in the same proportion that the Subaccount Value in each
Subaccount bears to the total Cash Value as of the Monthly Deduction Day. The
monthly deduction consists of (1) a monthly Policy charge, (2) the monthly cost
of insurance charge, (3) the cost of any supplemental benefits provider by
riders, and (4) a factor representing the mortality and expense risk charge.
MONTHLY POLICY CHARGE. During the first Policy Year, the monthly Policy
charge is $16.50 per month. During subsequent Policy Years, the monthly Policy
charge currently is $4 per month and is guaranteed not to exceed $10 per month.
The monthly Policy charge is paid to Western Reserve for performing
administrative services relating to the Policy.
MONTHLY COST OF INSURANCE CHARGE. The monthly cost of insurance charge
compensates Western Reserve for the anticipated cost of paying the amount of the
Life Insurance Benefit that exceeds your Cash Value upon the death of the
Insured. The cost of insurance charge is calculated monthly, and depends on a
number of variables that cause the charge to vary from Policy to Policy and from
Monthly Deduction Day to Monthly Deduction Day. The cost of insurance charge is
calculated for the Face Amount at issue and for any increase in Face Amount. The
monthly cost of insurance charge is equal to (1) multiplied by the result of (2)
minus (3), where:
(1) is the monthly cost of insurance rate per $1,000 of insurance;
(2) is the number of thousands of Life Insurance Benefit for the
Policy (as defined in the applicable Option 1, Option 2 or Option 3)
divided by 1.0032737; and
(3) is the number of thousands of Cash Value as of the Monthly
Deduction Day (before this cost of insurance, and after the mortality and
expense risk charge, any applicable Policy charge and the cost of any
riders are subtracted).
The monthly cost of insurance rate for a Policy is based on the sex,
Attained Age, risk class, and number of years that the Policy or increment of
Face Amount has been in force. Western Reserve reviews monthly cost of insurance
rates on an ongoing basis (at least once every year) based on its expectations
as to future mortality experience, investment earnings, persistency, taxes and
other expenses. Any changes in cost of insurance rates are made on a uniform
basis for Insureds of the same class as defined by sex, Attained Age, risk
class, and Policy duration. Western Reserve guarantees that the cost of
insurance rates used to calculate the monthly cost of insurance charge will not
exceed the Guaranteed Maximum Cost of Insurance Rates set forth in the Policy.
In connection with the cost of insurance rates guaranteed in the Policy,
Western Reserve places Insureds into standard tobacco and standard non-tobacco
risk classes. The guaranteed rates for standard classes are based on the 1980
Commissioners' Standard Ordinary Mortality Tables, Male or Female, Tobacco or
Non-Tobacco Mortality Rates ("1980 CSO Tables"). The guaranteed rates for
substandard classes are based on multiples of or additions to the 1980 CSO
Tables. In connection with current cost of insurance rates, Western Reserve
places Insureds into the following risk classes: age, sex, tobacco habit and
health status, medical issue, simplified issue and guaranteed issue.
Cost of insurance rates (whether guaranteed or current) for an Insured in a
non-tobacco class are less than or equal to rates for an Insured of the same age
and sex in a tobacco class. Cost of insurance rates
28
<PAGE> 33
(whether guaranteed or current) for an Insured in a non-tobacco or tobacco
standard class are generally lower than guaranteed rates for an Insured of the
same age and sex and tobacco status in a substandard class.
Western Reserve does, however, also offer Policies based on unisex
mortality tables if required by state law. Employers and employee organizations
considering purchase of a Policy should consult with their legal advisors to
determine whether purchase of a Policy based on sex-distinct actuarial tables is
consistent with Title VII of the Civil Rights Act of 1964 or other applicable
law. Upon request, Western Reserve may offer Policies with unisex mortality
tables to such prospective purchasers.
SUPPLEMENTAL BENEFIT (RIDER) CHARGES. If any additional benefits are added
to your Policy, charges for these benefits will be deducted as part of the
monthly deduction.
MORTALITY AND EXPENSE RISK CHARGE. Western Reserve deducts a monthly
charge from the Cash Value to compensate it for mortality and expense risks that
it assumes under the Policy. The monthly charge is equivalent to an effective
annual rate of 0.45%. The charge is calculated as a percentage of the average
Cash Value on each Valuation Day during the Policy Month preceding the Monthly
Deduction Day. The guaranteed rate for this charge is equivalent to an effective
annual rate of 0.90%.
The mortality risk that Western Reserve assumes is the risk that Insureds,
as a group, will live for a shorter period of time than Western Reserve
estimated when it established the guaranteed costs of insurance rates in the
Policy. Because of these guarantees, each Owner is assured that the morbidity of
a particular Insured will not have an adverse effect on the Life Insurance
Benefit Proceeds that a Beneficiary would receive. The expense risk that Western
Reserve assumes is the risk that the monthly Policy charge (and any transfer
charge imposed) may be insufficient to cover the actual expenses of
administering the Policies. Western Reserve may make a profit from the mortality
and expense risk Charge.
ADMINISTRATIVE CHARGES
PARTIAL WITHDRAWAL CHARGE. After the first Policy Year, you may apply for
a partial withdrawal. On each partial withdrawal, Western Reserve imposes a
processing charge equal to the lesser of $25 or 2% of the amount requested. This
charge is deducted on a pro-rata basis from the Subaccounts unless you provide
other instructions.
TRANSFER CHARGE. The first 12 transfers during each Policy Year are free.
Western Reserve reserves the right to assess a transfer charge of $25 for each
transfer in excess of 12 during a Policy Year. For the purposes of assessing the
transfer charge, each written request of transfer is considered to be one
transfer, regardless of the number of Subaccounts affected by the transfer. The
transfer charge is deducted from the amount being transferred. Transfers due to
automatic asset rebalancing, loans or the expiration of the free-look period do
not count as transfers for the purpose of assessing this charge.
PORTFOLIO EXPENSES
The value of the net assets of each Subaccount reflects the investment
advisory fees and other expenses incurred by the corresponding Portfolio in
which the Subaccount invests. See the prospectuses for the Portfolios and the
Summary of this prospectus for further information on these fees and expenses.
OTHER POLICY PROVISIONS AND BENEFITS
OWNERSHIP
GENERAL. The Policy belongs to the Owner named in the application. An
Owner may exercise all of the rights and options described in the Policy. The
Insured is the Owner unless the application specifies a different person as
Owner.
CHANGING THE OWNER. The Owner may change the Owner by providing written
notice to Western Reserve at any time while the Insured is alive and the Policy
is in force. A change of ownership is effective as of the date that the written
notice is signed; however, Western Reserve is not liable for payments it makes
29
<PAGE> 34
before it receives a written notice of a change in ownership. Changing the Owner
does not automatically change the Beneficiary. A change in Owner may have
significant tax consequences. (See Federal Tax Considerations.)
SELECTING THE BENEFICIARY. The Owner designates the Beneficiary in the
application. Any Beneficiary designation is revocable unless otherwise stated in
the designation. Where more than one Beneficiary is designated, each Beneficiary
shares in any Life Insurance Benefit Proceeds equally unless the Beneficiary
designation states otherwise.
CHANGING THE BENEFICIARY. The Owner may change the Beneficiary by
providing a written notice to Western Reserve at any time while the Insured is
alive and the Policy is in force. Any change of Beneficiary is effective as of
the date the written notice is signed by the Owner but Western Reserve is not
liable for any payments it makes under the Policy prior to the time it receives
written notice of any Beneficiary change.
ASSIGNMENT
While the Insured is living, the Owner may assign his or her rights under
this Policy. Western Reserve is not bound by the assignment unless it receives a
duplicate of the original assignment at the Administrative Office. Western
Reserve is not responsible for the validity or sufficiency of any assignment and
is not liable for any payment it makes before receipt of the duplicate original
assignment. The Owner will maintain any rights of ownership that have not been
assigned. An assignee may not change the Owner or the Beneficiary, and may not
elect or change an optional method of payment. Any amount payable to the
assignee will be paid in one sum. Any claim under any assignment is subject to
proof of interest and the extent of the assignment. An assignment is subject to
any Loan Amount.
WESTERN RESERVE'S RIGHT TO CONTEST THE POLICY
Western Reserve has the right to contest the validity of the Policy or to
resist a claim under it on the basis of any material misrepresentation of a fact
stated in the application or any supplemental application. Western Reserve also
has the right to contest the validity of any increase of Face Amount or other
change to the Policy on the basis of any material misrepresentation of a fact
stated in the application (or supplemental application) for such increase in
coverage or change. In issuing this Policy, Western Reserve relies on all
statements made by or for the Insured in the application or in a supplemental
application. In the absence of fraud, Western Reserve considers statements made
in the application(s) to be representations and not warranties.
In the absence of fraud, Western Reserve cannot bring any legal action to
contest the validity of the Policy after it has been in force during the
lifetime of the Insured for two years from the Effective Date, or if reinstated,
for two years from the date of reinstatement. Likewise, Western Reserve cannot
contest any increase in coverage effective after the Effective Date, or any
reinstatement thereof, after such increase or reinstatement has been in force
during the lifetime of the Insured for two years from its effective date.
SUICIDE EXCLUSION
If the Insured commits suicide, while sane or insane, within two years of
the Effective Date, Western Reserve's liability is limited to an amount equal to
the premiums paid, less any indebtedness and less any partial withdrawals paid.
Western Reserve will pay this amount to the Beneficiary in one sum.
If the Insured commits suicide, while sane or insane, within two years from
the effective date of any increase in Face Amount or additional coverage rider,
Western Reserve's liability with respect to that increase is limited to an
amount equal to the cost of insurance attributable to the increase from the
effective date of the increase to the date of death.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Insured has been stated incorrectly in the
application or any supplemental application, Western Reserve will adjust the
Life Insurance Benefit and any benefits provided by rider or endorsement it pays
under this Policy to the amount that would have been payable at the correct age
and sex
30
<PAGE> 35
based on the most recent deduction for cost of insurance and the cost of any
benefits provided by rider or endorsement. If the age of the Insured has been
overstated or understated, Western Reserve will calculate future monthly
deductions using the cost of insurance (and the cost of benefits provided by
rider or endorsement) based on the Insured's correct age and sex.
MODIFICATION OF THE POLICY
Only the President, one of the Vice Presidents, Secretary or an officer of
Western Reserve may modify this Policy or waive any of Western Reserve's rights
or requirements under this Policy. Any modification or waiver must be in
writing. No agent may bind Western Reserve by making any promise not contained
in this Policy.
Upon notice to the Owner, Western Reserve may modify the Policy to:
1. conform the Policy, Western Reserve's operations, or the Separate
Account's operations to the requirements of any law (or regulation issued
by a government agency) to which the Policy, Western Reserve or the
Separate Account is subject;
2. assure continued qualification of the Policy as a life insurance
contract under the Code; or
3. reflect a change (permitted by the Policy) in the Separate
Account's operation.
In the event of any such modification, Western Reserve will make
appropriate endorsements to the Policy. If any provision of the Policy conflicts
with the laws of a jurisdiction that govern the Policy, the Policy provides that
such provision be deemed to be amended to conform with such laws.
PAYMENTS BY WESTERN RESERVE
Western Reserve usually pays the amounts of any surrender, partial
withdrawals, Life Insurance Benefit Proceeds, or settlement options within seven
business days after receipt of all applicable written notices and/or due proofs
of death. However, Western Reserve can postpone such payments if:
1. the NYSE is closed, other than customary weekend and holiday
closing, or trading on the NYSE is restricted as determined by the SEC; or
2. the SEC permits, by an order, the postponement for the protection
of Owners; or
3. the SEC determines that an emergency exists that would make the
disposal of securities held in the Separate Account or the determination of
their value not reasonably practicable.
If a recent check or draft has been submitted, Western Reserve has the
right to defer payment of surrenders, partial withdrawals, Life Insurance
Benefit Proceeds, or payments under a settlement option until such check or
draft has been honored.
REPORTS TO OWNERS
Within 30 days after each Policy Anniversary, or more often as required by
law, Western Reserve will mail to Owners at their last known address a report
showing the following items as of the end of the report period:
1. the period covered by the report;
2. the current Cash Value and Net Cash Value;
3. the current Subaccount Values, and Loan Account Value;
4. the current Loan Amount;
5. any premium payments, partial withdrawals, or surrenders made,
Life Insurance Benefit Proceeds paid and charges deducted since the last
report;
6. current Net Premium allocations; and
31
<PAGE> 36
7. any other information required by law.
Owners may request additional copies of reports from Western Reserve, but
Western Reserve reserves the right to charge a fee for such additional copies.
In addition, Western Reserve will send written confirmations of premium payments
and other financial transactions requested by Owners. Owners will also be sent
copies of the annual and semi-annual report to shareholders for each Portfolio
in which they are indirectly invested.
CLAIMS OF CREDITORS
Except as described in the Assignment section above, payments Western
Reserve makes under the Policy are, to the extent permitted by law, exempt from
the claims, attachments, or levies of any creditors.
DIVIDENDS
The Policy is a non-participating policy on which no dividends are payable.
SUPPLEMENTAL BENEFITS AND/OR RIDERS
The following supplemental benefits and/or riders are available and may be
added to a Policy. Monthly charges for these benefits and/or riders are deducted
from Cash Value as part of the monthly deduction. The supplemental benefits
and/or riders available with the Policies provide fixed benefits that do not
vary with the investment experience of the Separate Account.
Term Insurance Rider. The Term Insurance Rider provides term insurance
coverage for the Insured on a basis different from the coverage provided under
the Policy. The Term Insurance Rider may be purchased at the time of application
for the Policy or after the Policy is issued. The Term Insurance Rider increases
the death benefit provided under the Policy by the Face Amount of the rider. The
Term Insurance Rider terminates at age 100. Owners may reduce or cancel coverage
under the Term Insurance Rider separately from reducing the Face Amount of a
Policy. Likewise, the Face Amount of a Policy may be decreased, subject to
certain minimums, without reducing the coverage under the Term Insurance Rider.
Western Reserve reserves the right to discontinue the availability of any
riders for new Policies at any time, and also reserves the right to modify the
terms of any riders for new Policies, subject to approval by the state insurance
departments.
FEDERAL TAX CONSIDERATIONS
The following summary provides a general description of the Federal income
tax considerations associated with a Policy and does not purport to be complete
or to cover all situations. This discussion is not intended as tax advice.
Please consult counsel or other qualified tax advisors for more complete
information. This discussion is based upon Western Reserve's understanding of
the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service (the "IRS"). Western Reserve makes no representation as
to the likelihood of continuation of the present federal income tax laws or of
the current interpretations by the IRS.
TAX STATUS OF THE POLICIES
Section 7702 of the Code sets forth a definition of a life insurance
contract for federal income tax purposes. However, guidance as to how Section
7702 is to be applied is limited. If a Policy were determined not to be a life
insurance contract for purposes of Section 7702, the Policy would not provide
the tax advantages normally provided by a life insurance policy.
With respect to a Policy issued on a standard basis, Western Reserve
believes that such a Policy should meet the Section 7702 definition of a life
insurance contract. With respect to a Policy that is issued on a substandard
basis (i.e., a premium class with extra rating involving higher than standard
mortality risk), there is less guidance, in particular as to how the mortality
requirements of Section 7702 are to be applied in
32
<PAGE> 37
determining whether such a Policy meets the Section 7702 definition of a life
insurance contract. Thus, it is not clear whether or not a Policy issued on a
substandard basis would satisfy Section 7702.
If it is subsequently determined that a Policy does not satisfy Section
7702, Western Reserve may take whatever steps are appropriate and reasonable to
attempt to cause such a Policy to comply with Section 7702, including refunding
any premiums that exceed the limits allowed under Section 7702 (together with
interest or other earnings on such premiums refunded as required by law). For
these reasons, Western Reserve reserves the right to modify the Policy or to
restrict Policy transactions as necessary to attempt to qualify it as a life
insurance contract under Section 7702.
Section 817(h) of the Code requires that the investments of each of the
Subaccounts must be "adequately diversified" in accordance with U.S. Department
of the Treasury ("Treasury") regulations in order for the Policy to qualify as a
life insurance contract under Section 7702 of the Code. The Subaccounts, through
the Portfolios, intend to comply with the diversification requirements
prescribed in Treas. Reg. Section 1.817-5, which affect how each Portfolio's
assets are to be invested. Western Reserve believes that the Subaccounts will be
operated in compliance with the Treasury's prescribed requirements and Western
Reserve will monitor continued compliance with these requirements.
In certain circumstances, owners of variable life insurance policies may be
considered the owners, for Federal income tax purposes, of the assets of the
separate accounts used to support their policies. In those circumstances, income
and gains from the separate account assets would be includible in the variable
policy owner's gross income. The IRS has stated in published rulings that a
variable policy owner will be considered the owner of separate account assets if
the policy owner possesses incidents of ownership in those assets, such as the
ability to exercise investment control over the assets. The Treasury has also
announced, in connection with the issuance of regulations concerning
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the policy owner), rather than the
insurance company, to be treated as the owner of the assets in the account."
This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular sub-accounts without being treated as owners of the
underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, an Owner has additional flexibility in allocating Net Premiums and
transferring Cash Value. These differences could result in an Owner being
treated as the owner of a pro-rata portion of the assets of the Separate
Account. In addition, Western Reserve does not know what standards will be set
forth, if any, in the regulations or rulings which the Treasury has stated it
expects to issue. Western Reserve therefore reserves the right to modify the
Policy as necessary to attempt to prevent an Owner from being considered the
Owner of a pro-rata share of the assets of the Separate Account.
The following discussion assumes that the Policy will qualify as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. Western Reserve believes that the Life Insurance Benefit
Proceeds and Cash Value increases of a Policy should be treated in a manner
consistent with a fixed-benefit life insurance policy for Federal income tax
purposes. Thus, the Life Insurance Benefit Proceeds under the Policy should be
excludible from the gross income of the Beneficiary under Section 101(a)(1) of
the Code.
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's Life Insurance Benefit Option, a Policy loan, a partial withdrawal, a
surrender, a change in ownership, or an assignment of the Policy may have
Federal income tax consequences. In addition, federal, state and local transfer,
and other tax consequences of ownership or receipt of distributions from a
Policy depend on the circumstances of each Owner or Beneficiary.
33
<PAGE> 38
Generally, the Owner will not be deemed to be in constructive receipt of
the Cash Value, including increments thereof, until there is a distribution. The
tax consequences of distributions from, and loans taken from or secured by, a
Policy depend on whether the Policy is classified as a "Modified Endowment
Contract" (discussed below). Whether a Policy is or is not a Modified Endowment
Contract, upon a surrender or Lapse of a Policy, if the amount received plus the
Loan Amount exceeds the total investment in the Policy, the excess will
generally be treated as ordinary income subject to tax.
The Policy may also be used in various arrangements, including nonqualified
deferred compensation or salary continuance plans, split dollar insurance plans,
executive bonus plans, retiree medical benefit plans and others. The tax
consequences of such plans may vary depending on the particular facts and
circumstances of each individual arrangement. Therefore, Owners contemplating
the use of a Policy in any arrangement the value of which depends in part on its
tax consequences, should be sure to consult a qualified tax advisor regarding
the tax attributes of the particular arrangement.
In recent years, Congress has adopted new rules relating to life insurance
owned by businesses. Any business contemplating the purchase of a new life
insurance contract or a change in an existing life insurance contract should
consult a tax advisor. Moreover, the President's 1999 Budget Proposal has
recommended that legislation be enacted disallowing a portion of a taxpayer's
otherwise deductible interest expense based on all life insurance policies owned
by such taxpayer. (Current law provides for such disallowance based only on life
insurance policies owned by a taxpayer on the lives of individuals who are not
20% owners, officers, directors or employees of the taxpayer.) This proposal
would apply to all taxpayers other than natural persons. Prospective purchasers
of the Policy that are not natural persons should be aware of this proposal and
should take into account the impact it could have on their taxes in deciding
whether to purchase the Policy.
The President's Budget Proposal has also recommended legislation in 1998
that, if enacted, would adversely modify the federal taxation of certain
insurance and annuity contracts. For example, one proposal would tax transfers
among investment options and tax exchanges involving variable contracts. A
second proposal would reduce the "investment in the contract" under cash value
life insurance and certain annuity contracts, thereby increasing the amount of
income for purposes of computing gain. 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 other means. Moreover, it is also
possible that any change could be retroactive (that is, effective prior to the
date of the change). You should consult a tax advisor with respect to
legislative developments and their effect on the Policy.
MODIFIED ENDOWMENT CONTRACTS. Section 7702A establishes a class of life
insurance contracts designated as "Modified Endowment Contracts." The rules
relating to whether a Policy will be treated as a Modified Endowment Contract
are extremely complex and cannot be completely described in this summary. In
general, a Policy will be a Modified Endowment Contract if the accumulated
premiums made at any time during the first seven Policy Years exceeds the sum of
the net level premiums which would have been paid on or before such time if the
Policy provided for paid-up future benefits after the payment of seven level
annual premiums. A Policy may also become a Modified Endowment Contract after a
material change. The determination of whether a Policy will be a Modified
Endowment Contract after a material change generally depends upon the
relationship of the Life Insurance Benefit and Cash Value at the time of such
change and the additional premiums made in the seven years following the
material change.
Due to the Policy's flexibility, classification as a Modified Endowment
Contract will depend on the individual circumstances of each Policy. In view of
the foregoing, a current or prospective Owner should consult with a tax advisor
to determine whether a Policy transaction will cause the Policy to be treated as
a Modified Endowment Contract. However, at the time that a premium is credited
which, in Western Reserve's view, would cause the Policy to become a Modified
Endowment Contract, Western Reserve will notify the Owner that unless a refund
of the excess premium (with any appropriate interest) is requested by the Owner,
the Policy will become a Modified Endowment Contract.
DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Policies classified as Modified Endowment Contracts will be subject
to the following tax rules: First, all distributions, including distributions
upon surrender and partial withdrawal from such a Policy are treated as ordinary
income subject
34
<PAGE> 39
to tax up to the amount equal to the excess (if any) of the Cash Value
immediately before the distribution over the investment in the Policy (described
below) at such time. Second, loans taken from or secured by such a Policy, are
treated as distributions from the Policy and taxed accordingly. Past due loan
interest that is added to the loan amount will be treated as a loan. Third, a
10% additional income tax is imposed on the portion of any distribution from, or
loan taken from or secured by, such a Policy that is included in income except
where the distribution or loan is made on or after the Owner attains age 59 1/2,
is attributable to the Owner's becoming disabled, or is part of a series of
substantially equal periodic payments for the life (or life expectancy) of the
Owner or the joint lives (or joint life expectancies) of the Owner and the
Beneficiary.
DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Distributions from a Policy that is not a Modified Endowment
Contract are generally treated as first, recovering the investment in the Policy
(described below) and then, only after the return of all such investment in the
Policy, as distributing taxable income. An exception to this general rule occurs
in the case of a decrease in the Policy's Life Insurance Benefit or any other
change that reduces benefits under the Policy in the first 15 years after the
Policy is issued and that results in a cash distribution to the Owner in order
for the Policy to continue complying with the Section 7702 definitional limits.
Such a distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a Modified Endowment
Contract are not treated as distributions. Instead, such loans are treated as
Loan Amounts.
Finally, neither distributions (including distributions upon surrender) nor
loans from, or secured by, a Policy that is not a Modified Endowment Contract
are subject to the 10% additional income tax rule. If a Policy which is not a
Modified Endowment Contract becomes a Modified Endowment Contract, then any
distributions made from the Policy within two years prior to the change in such
status will become taxable in accordance with the Modified Endowment Contract
rules discussed above.
POLICY LOAN INTEREST. Generally, interest paid on any loan under, or
secured by, a Policy which is owned by an individual is not deductible. Consult
a qualified tax advisor before deducting any Policy loan interest.
INVESTMENT IN THE POLICY. Investment in the Policy means: (i) the
aggregate amount of any premiums or other consideration paid for a Policy, minus
(ii) the aggregate amount received under the Policy which is excluded from gross
income of the Owner (except that the amount of any loan from, or secured by, a
Policy that is a Modified Endowment Contract, to the extent such amount is
excluded from gross income, will be disregarded), plus (iii) the amount of any
loan from, or secured by, a Policy that is a Modified Endowment Contract to the
extent that such amount is included in the gross income of the Owner.
MULTIPLE POLICIES. All Modified Endowment Contracts that are issued by
Western Reserve (or its affiliates) to the same Owner during any calendar year
are treated as one Modified Endowment Contract for purposes of determining the
amount includible in an Owner's gross income under Section 72(e) of the Code.
OTHER INFORMATION ABOUT THE POLICIES AND WESTERN RESERVE
SALE OF THE POLICIES
The Policy will be sold by individuals who, in addition to being licensed
as life insurance agents for Western Reserve, are also registered
representatives of AFSG Securities Corporation ("AFSG"), the principal
underwriter of the Policies, or of broker-dealers who have entered into written
sales agreements with the principal underwriter. AFSG, which is located at 4425
North River Blvd., NE, Cedar Rapids, Iowa 52402, was incorporated in
Pennsylvania on March 12, 1986, is registered with the SEC under the Securities
Exchange Act of 1934 as a broker-dealer, and is a member of the National
Association of Securities Dealers, Inc. No amounts will be retained by AFSG for
acting as principal underwriter for the Policies. The maximum sales commission
payable to Western Reserve agents or other registered representatives will be
approximately 13% of all premiums up to the Target Premium and 5% of all
premiums in excess thereof. In addition, certain production, persistency and
managerial bonuses may be paid.
35
<PAGE> 40
VOTING PRIVILEGES
Western Reserve is the legal owner of shares held by the Subaccounts and as
such has the right to vote on all matters submitted to shareholders of the
Portfolios. However, as required by law, Western Reserve votes Portfolio shares
held in the Subaccounts at regular and special shareholder meetings of the
Portfolios in accordance with instructions received from persons having voting
interests in the corresponding Subaccounts.
The number of votes that an Owner has the right to instruct is calculated
separately for each Subaccount, and may include fractional votes. While the
Insured is still living and the Policy is in force, an Owner holds a voting
interest in each Subaccount to which Net Premiums are allocated. For each Owner,
the number of votes attributable to a Subaccount is determined by dividing the
Owner's Subaccount Value by the net asset value per share of the Portfolio in
which that Subaccount invests. The net asset value per share of each Portfolio
is the value for each share of a Portfolio on any Valuation Day. The method of
computing the net asset value per share is described in the prospectuses for the
Portfolios.
The number of votes available to an Owner or person receiving payments
under the Policy is determined as of the date coinciding with the date
established by the Portfolio for determining shareholders eligible to vote at
the relevant meeting of the Portfolio's shareholders. Voting instructions will
be solicited by written communication prior to such meeting in accordance with
procedures established for the Portfolio. Each Owner or other person having a
voting interest in a Subaccount will receive proxy materials and reports
relating to any meeting of shareholders of the Portfolio in which that
Subaccount invests.
Portfolio shares as to which no timely instructions are received and shares
held by Western Reserve in a Subaccount as to which no Owner or other person has
a beneficial interest are voted in proportion to the voting instructions that
are received with respect to all Policies participating in that Subaccount.
Voting instructions to abstain on any item to be voted upon will be applied to
reduce the total number of votes eligible to be cast on a matter. Certain
actions affecting the Separate Account may require Owner approval. In that case,
an Owner will be entitled to vote in proportion to his or her Subaccount Value.
Western Reserve may, if required by state insurance regulators, disregard
voting instructions if such instructions would require Portfolio shares to be
voted so as to cause a change in sub-classification or investment objectives of
a Portfolio, or to approve or disapprove an investment management agreement or
an investment advisory agreement. In addition, Western Reserve may under certain
circumstances disregard voting instructions that would require changes in an
investment management agreement, investment manager, an investment advisory
agreement or an investment adviser of a Portfolio, provided that Western Reserve
reasonably disapproves of such changes in accordance with applicable regulations
under the 1940 Act. If Western Reserve ever disregards voting instructions, you
will be advised of that action and of the reasons for such action in the next
semi-annual report for the appropriate Portfolio.
WESTERN RESERVE'S DIRECTORS AND EXECUTIVE OFFICERS
Western Reserve is managed by a board of directors. The following table
sets forth the name, address and principal occupations during the past five
years of each of Western Reserve's directors and executive officers.
EXECUTIVE OFFICERS AND DIRECTORS OF WESTERN RESERVE
JOHN R. KENNEY(1), CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND PRESIDENT. Chairman of the Board of Directors (1987 -- present) and
Chief Executive Officer (1982 -- present), President (1978 -- 1987 and December,
1992 -- present), Director (1978 -- present), Western Reserve Life Assurance Co.
of Ohio; Chairman of the Board of Directors (1985 -- present), President (March,
1993 -- present), WRL Series Fund, Inc.; Chairman of the Board (September,
1996 -- present), WRL Investment Management, Inc.; Chairman of the Board
(September, 1996 -- present), WRL Investment Services, Inc.; Chairman of the
Board of Directors (February, 1997 -- present), AEGON Asset Management Services,
Inc., Largo, Florida; Chairman of the Board of Directors and Chief Executive
Officer (1988 -- February, 1991), President (1988 -- 1989), Director
(1976 -- February, 1991), Executive Vice President (1972 -- 1988), Pioneer
Western Corporation (financial services), Largo, Florida; Trustee
(1987 -- present), Chairman
36
<PAGE> 41
(December, 1989 to September, 1990 and November, 1990 to present) and President
and Chief Executive Officer (November, 1986 to September, 1990), IDEX Series
Fund; former Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3
(investment companies), all of Largo, Florida.
ALAN M. YAEGER(1), EXECUTIVE VICE PRESIDENT, ACTUARY AND CHIEF FINANCIAL
OFFICER. Executive Vice President (June, 1993 -- present), Chief Financial
Officer (December, 1995 -- present), Senior Vice President (1981 -- June, 1993)
and Actuary (1972 -- present), Western Reserve Life Assurance Co. of Ohio;
Director (September, 1996 -- present), WRL Investment Management, Inc.; Director
(September, 1996 -- present), WRL Investment Services, Inc.; Executive Vice
President (September, 1993 -- present), WRL Series Fund, Inc.
LAWRENCE G. BROWN(1), SENIOR VICE PRESIDENT, GENERAL COUNSEL AND
SECRETARY. Senior Vice President, General Counsel and Secretary (January,
1995 -- present), Western Reserve Life Assurance Co. of Ohio; Senior Vice
President, General Counsel and Secretary (January, 1989 -- December, 1994),
AEGON USA, Inc.
G. JOHN HURLEY(1), EXECUTIVE VICE PRESIDENT. Executive Vice President
(June, 1993 -- present), Western Reserve Life Assurance Co. of Ohio; Executive
Vice President (June, 1993 -- present), Director (March, 1994 -- present), WRL
Series Fund, Inc.; Director (September, 1996 -- present), WRL Investment
Management, Inc.; Director (September, 1996 -- present), WRL Investment
Services, Inc.; Director, President and Chief Executive Officer (February,
1997 -- present), AEGON Asset Management Services, Inc., Largo, Florida;
President and Chief Executive Officer (September, 1990 -- present), Trustee
(June, 1990 -- present) and Executive Vice President (June, 1988 -- September,
1990) of IDEX Series Fund, former Trustee and Executive Vice President of IDEX
Fund, IDEX II Series Fund and IDEX Fund 3 (investment companies); Assistant Vice
President of AEGON USA Managed Portfolios, Inc. (September, 1991 -- August,
1992); Vice President (May, 1988 -- February, 1991) Pioneer Western Corporation
(financial services).
ALLAN J. HAMILTON(1), VICE PRESIDENT, TREASURER AND CONTROLLER. Vice
President and Controller (1987 -- present), Treasurer (February,
1997 -- present), Assistant Vice President and Assistant Controller (1983 --
1987), Western Reserve Life Assurance Co. of Ohio; Treasurer and Principal
Financial Officer (February, 1997 -- present), WRL Series Fund, Inc.; Vice
President and Controller (1988 to February 1991), Pioneer Western Corporation
(financial services), Largo, Florida.
PATRICK S. BAIRD, DIRECTOR, 4333 Edgewood Road, NE, Cedar Rapids, Iowa
52499, Director (February, 1991 to present), Western Reserve Life Assurance Co.
of Ohio; Vice President and Chief Tax Officer (1984 -- present), Chief Financial
Officer (1992 -- present) AEGON USA, Inc., formerly known as Life Investors,
Inc., (financial services holding company), Cedar Rapids, Iowa.
JACK E. ZIMMERMAN, DIRECTOR, 507 St. Michel Circle, Kettering, Ohio 45429,
Director (1987 -- present), Western Reserve Life Assurance Co. of Ohio; Trustee,
IDEX Series Fund, former Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund
3 (investment companies); Director, Regional Marketing (1986 -- January, 1993),
Martin Marietta Corporation, Dayton, Ohio.
LYMAN H. TREADWAY, DIRECTOR, 30195 Chagrin Blvd. Ste. 210N, Cleveland,
Ohio 44124, Director (September, 1994 -- present), Western Reserve Life
Assurance Co. of Ohio; Consultant (1988 -- 1993), Cleveland, Ohio.
JAMES R. WALKER, DIRECTOR, 3320 Office Park Dr., Dayton, Ohio 45439,
Director (June, 1996 -- present) Western Reserve Life Assurance Co. of Ohio;
Self-employed, Public Accountant (1996 -- present); Partner, C.P.A.
(1990 -- 1995), Walker-Davis C.P.A.'s, Dayton, Ohio.
- ----------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 33758-5068.
37
<PAGE> 42
ADDITIONAL INFORMATION
A registration statement under the Securities Act of 1933 has been filed
with the SEC relating to the offering described in this prospectus. This
prospectus does not include all the information set forth in the registration
statement. The omitted information may be obtained at the SEC's principal office
in Washington, D.C. by paying the SEC's prescribed fees.
EXPERTS
The statutory-basis balance sheets of Western Reserve as of December 31,
1997 and 1996, and the related statutory-basis statements of operations, changes
in capital and surplus, and cash flows for each of the three years in the period
ended December 31, 1997, have been audited by Ernst & Young LLP, independent
accountants, whose report thereon is set forth elsewhere herein. Such financial
statements are included in this prospectus 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 Frederick J. Garland,
Jr., FSA whose opinion is filed as an exhibit to the registration statement.
LEGAL MATTERS
Sutherland Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain matters relating to the federal securities laws.
LEGAL PROCEEDINGS
Western Reserve, like other life insurance companies, is involved in
lawsuits. Western Reserve is not aware of any class action lawsuits naming it as
a defendant or involving the Separate 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, Western Reserve 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 Separate Account or Western Reserve.
YEAR 2000 MATTERS
In October 1996, Western Reserve adopted and presently has in place a Year
2000 Assessment and Planning Project (the "Plan") to review and analyze existing
hardware and software systems, as well as voice and data communications systems,
to determine if they are Year 2000 compatible, Western Reserve has also engaged
the services of a third-party provider that is specialized in Year 2000 issues
to work on the Plan.
As of the date of this prospectus, Western Reserve has identified and made
available what it believes are the appropriate resources of hardware, people and
dollars, including the engagement of outside third parties, to ensure that the
Plan will be completed.
The Year 2000 computer problem, and its resolution, is complex and
multifaceted, and success of a response plan cannot be conclusively known until
the Year 2000 is reached (or an earlier date to the extent that the systems or
equipment addresses Year 2000 data prior to the Year 2000). Even with the
appropriate and diligent pursuit of a well-conceived response plan, including
testing procedures, there is no certainty that any company will achieve complete
success. Further, notwithstanding its efforts or results, Western Reserve's
ability to function unaffected to and through the Year 2000 may be adversely
affected by actions (or failure to act) of third parties beyond our knowledge or
control. See the Portfolios' prospectuses for information on the Portfolios'
preparation for Year 2000.
FINANCIAL STATEMENTS
No financial statements of the Separate Account are included herein
because, as of the date of this Prospectus, the Separate Account had not yet
commenced operations, had no assets, and had incurred no liabilities. The
financial statements of Western Reserve appear on the following pages. The
financial statements of Western Reserve should be distinguished from financial
statements of the Separate Account and should be considered only as bearing upon
Western Reserve's ability to meet its obligations under the Policies.
38
<PAGE> 43
FINANCIAL STATEMENTS - STATUTORY BASIS
WESTERN RESEVE LIFE ASSURANCE CO. OF OHIO
SIX MONTHS ENDED JUNE 30, 1998
<PAGE> 44
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
BALANCE SHEET - STATUTORY BASIS
AS OF JUNE 30, 1998
(IN THOUSANDS)(UNAUDITED)
<TABLE>
<S> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 45,156
Bonds 216,253
Common stock, at market 966
Mortgage loans on real estate 4,650
Home office properties, at cost less
accumulated depreciation 32,421
Investment real estate 11,594
Policy loans 94,612
----------
Total cash and invested assets 405,652
Premiums deferred and uncollected 44,235
Accrued investment income 2,948
Transfers from separate accounts 326,877
Other assets 5,314
Separate account assets 6,141,082
----------
Total admitted assets 6,926,108
==========
</TABLE>
<PAGE> 45
<TABLE>
<S> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life 215,343
Annuity 267,196
Policy and contract claim reserves 12,242
Other policyholders' funds 4,348
Remittances and items not allocated 133,244
Federal income taxes payable 169
Asset valuation reserve 2,613
Interest maintenance reserve 9,672
Short-term note payable to affiliate 9,600
Payable to affiliate 2,335
Payable for securities 1,342
Other liabilities 24,080
Separate account liabilities 6,137,273
---------
Total liabilities 6,819,457
Capital and surplus:
Common stock, $1.00 par value, 1,500 shares
authorized, issued and outstanding 1,500
Paid-in surplus 88,107
Unassigned surplus 17,044
---------
Total capital and surplus 106,651
---------
Total liabilities and capital and surplus 6,926,108
=========
</TABLE>
<PAGE> 46
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENT OF OPERATIONS - STATUTORY BASIS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)(UNAUDITED)
<TABLE>
<S> <C>
Revenues:
Premiums and other considerations, net of reinsurance
Life $233,882
Annuity 387,235
Net investment income 17,579
Amortization of interest maintenance reserve (218)
Commissions and expense allowances on
reinsurance ceded 1,787
Other income 25,389
--------
665,654
Benefits and expenses:
Benefits paid or provided for:
Life 23,900
Surrender benefits 287,820
Other benefits 14,810
Increase (decrease) in aggregate reserves for
policies and contracts:
Life 28,820
Annuity (29,095)
Other 3,165
---------
329,420
Insurance expenses:
Commissions 102,420
General insurance expenses 47,602
Taxes, licenses and fees 8,349
Transfer to separate accounts 186,434
Other expenses 75
---------
344,880
---------
674,300
---------
Loss from operations before federal income
taxes and realized capital gains on
investments (8,646)
Federal income tax expense 100
---------
Loss from operations before realized
capital gains on investments (8,746)
Net realized capital gains on investments
(net of related federal income taxes and
amounts transferred to interest maintenance
reserve) 1,163
---------
Net loss (7,583)
=========
</TABLE>
<PAGE> 47
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENT OF CHANGES IN CAPITAL AND SURPLUS - STATUTORY BASIS
(IN THOUSANDS)(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
CAPITAL
COMMON PAID-IN UNASSIGNED AND
STOCK SURPLUS SURPLUS SURPLUS
------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $ 1,500 $ 88,015 $25,348 $114,863
Net loss 0 0 (7,583) (7,583)
Net unrealized gains 0 0 126 126
Increase in non-admitted assets 0 0 (857) (857)
Increase in asset valuation
reserve 0 0 (177) (177)
Decrease in surplus in separate
accounts 0 0 (2,010) (2,010)
Other adjustments 0 92 2,197 2,289
------------------------------------
Balance at June 30, 1998 1,500 88,107 17,044 106,651
====================================
</TABLE>
<PAGE> 48
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENT OF CASH FLOW - STATUTORY BASIS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)(UNAUDITED)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Premiums and other considerations, net of reinsurance $ 649,395
Net investment income 18,274
Life and accident and health claims (22,611)
Surrender benefits to policyholders (288,039)
Other benefits to policyholders (14,537)
Commissions, other expenses and other taxes (158,309)
Federal income taxes (2,213)
Other, net 80,652
Net transfers to separate accounts (232,542)
---------
Net cash used by operating activities 30,070
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks 106,771
Mortgage loans on real estate 174
---------
106,945
Cost of investments acquired:
Bonds and preferred stocks 64,654
Real estate 24,051
Policy loans 17,871
---------
106,576
Net tax on capital gains 670
---------
Net cash provided by investing activities (301)
---------
FINANCING ACTIVITIES
Borrowed money 1,491
---------
Net cash provided by financing activities 1,491
Increase in cash and short-term investments 31,260
Cash and short-term investments at beginning of year 13,896
---------
Cash and short-term investments at end of year 45,156
=========
</TABLE>
<PAGE> 49
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY BASIS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited staturory basis financial statements have
been prepared in accordance with statutory accounting principles for interim
financial information and the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. For further information, refer to the accompanying statutory
basis financial statements and notes thereto for the year ended December 31,
1997.
<PAGE> 50
FINANCIAL STATEMENTS - STATUTORY BASIS
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 51
Western Reserve Life Assurance Co. of Ohio
Financial Statements - Statutory Basis
Years ended December 31, 1997, 1996 and 1995
CONTENTS
Report of Independent Auditors.................................................1
Audited Financial Statements
Balance Sheets - Statutory Basis...............................................3
Statements of Operations - Statutory Basis.....................................5
Statements of Changes in Capital and Surplus - Statutory Basis.................6
Statements of Cash Flows - Statutory Basis.....................................7
Notes to Financial Statements - Statutory Basis................................8
<PAGE> 52
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Western Reserve Life Assurance Co. of Ohio
We have audited the accompanying statutory-basis balance sheets of Western
Reserve Life Assurance Co. of Ohio as of December 31, 1997 and 1996, and the
related statutory-basis statements of operations, changes in capital and
surplus, and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the statutory-basis financial statement
schedules required by Regulation S-X, Article 7. These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits. We
did not audit the "Separate Account Assets" and "Separate Account Liabilities"
in the balance sheets of the Company. The Separate Account financial statements
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the data included for the Separate Account, is
based solely upon the reports of the other auditors.
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 and the reports of other auditors provide a
reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Department of the State of Ohio, which practices
differ from generally accepted accounting principles. The variances between such
practices and generally accepted accounting principles are also described in
Note 1. The effects on the financial statements of these variances are not
reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Western Reserve Life Assurance Co. of Ohio at December 31, 1997 and 1996, or
the results of its operations or its cash flows for each of the three years in
the period ended December 31, 1997.
1
<PAGE> 53
Also, in our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Western Reserve Life Assurance Co. of Ohio at December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
accounting practices prescribed or permitted by the Insurance Department of the
State of Ohio. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic statutory-basis financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
/s/ ERNST & YOUNG LLP
Des Moines, Iowa
February 27, 1998
2
<PAGE> 54
Western Reserve Life Assurance Co. of Ohio
Balance Sheets - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 13,896 $ 2,480
Bonds 255,919 359,579
Common stocks:
Affiliated entities (cost: 1997 - $150) 319 -
Other (cost: 1997 and 1996 - $302) 428 597
Mortgage loans on real estate 4,824 6,049
Home office properties 19,964 7,962
Policy loans 76,741 52,604
----------------------------
Total cash and invested assets 372,091 429,271
Premiums deferred and uncollected 1,928 1,943
Accrued investment income 4,088 5,940
Receivable from affiliates - 1,165
Transfers from separate accounts 279,958 204,181
Other assets 5,221 3,962
Separate account assets 4,814,594 3,527,145
----------------------------
Total admitted assets $5,477,880 $4,173,607
============================
</TABLE>
See accompanying notes.
3
<PAGE> 55
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 186,523 $ 155,166
Annuity 296,290 332,230
Policy and contract claim reserves 10,929 8,584
Other policyholders' funds 3,877 3,104
Remittances and items not allocated 9,184 9,107
Federal income taxes payable 2,283 1,266
Asset valuation reserve 2,436 5,710
Interest maintenance reserve 9,134 7,451
Short-term note payable to affiliate 8,200 -
Payable to affiliate 1,925 20,463
Other liabilities 19,257 13,082
Separate account liabilities 4,812,979 3,521,888
----------------------------
Total liabilities 5,363,017 4,078,051
Commitments and contingencies
Capital and surplus:
Common stock, $1.00 par value, 1,500 shares
authorized, issued and outstanding 1,500 1,500
Paid-in surplus 88,015 68,015
Unassigned surplus 25,348 26,041
----------------------------
Total capital and surplus 114,863 95,556
----------------------------
Total liabilities and capital and surplus $5,477,880 $4,173,607
============================
</TABLE>
See accompanying notes.
4
<PAGE> 56
Western Reserve Life Assurance Co. of Ohio
Statements of Operations - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of reinsurance:
Life $ 394,370 $ 293,590 $191,508
Annuity 822,149 740,125 378,390
Net investment income 40,013 36,067 40,891
Amortization of interest maintenance reserve 1,576 1,335 882
Commissions and expense allowances on reinsurance ceded 11 11 11
Other income 3,016 13,398 8,237
----------------------------------------------
1,261,135 1,084,526 619,919
Benefits and expenses:
Benefits paid or provided for:
Life 28,060 21,256 17,844
Surrender benefits 431,939 286,406 206,250
Other benefits 28,112 23,270 19,530
Increase (decrease) in aggregate reserves for policies
and contracts:
Life 29,485 80,139 (15,132)
Annuity (35,940) 12,877 5,229
Other 794 422 109
----------------------------------------------
482,450 424,370 233,830
Insurance expenses:
Commissions 179,106 140,261 82,903
General insurance expenses 70,546 47,406 37,246
Taxes, licenses and fees 13,101 10,848 8,919
Transfer to separate accounts 519,214 452,471 242,427
Other expenses 21 60 34
----------------------------------------------
781,988 651,046 371,529
----------------------------------------------
1,264,438 1,075,416 605,359
----------------------------------------------
Gain (loss) from operations before federal income taxes
and realized capital gains (losses) on investments (3,303) 9,110 14,560
Federal income tax expense 469 9,297 8,917
----------------------------------------------
Gain (loss) from operations before realized capital gains
(losses) on investments (3,772) (187) 5,643
Net realized capital gains (losses) on investments (net of
related federal income taxes and amounts transferred to
interest maintenance reserve) 747 (811) (1,678)
----------------------------------------------
Net income (loss) $ (3,025) $ (998) $ 3,965
==============================================
</TABLE>
See accompanying notes.
5
<PAGE> 57
Western Reserve Life Assurance Co. of Ohio
Statements of Changes in Capital and Surplus - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN UNASSIGNED CAPITAL AND
STOCK SURPLUS SURPLUS SURPLUS
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $1,500 $68,015 $25,505 $ 95,020
Net income for 1995 - - 3,965 3,965
Net unrealized capital losses - - (500) (500)
Decrease in non-admitted assets - - 903 903
Decrease in asset valuation reserve - - 2,901 2,901
Increase in surplus in separate accounts - - 541 541
Change in reserve valuation - - (3,496) (3,496)
Other adjustments - - (1,395) (1,395)
-----------------------------------------------------------
Balance at December 31, 1995 1,500 68,015 28,424 97,939
Net loss for 1996 - - (998) (998)
Net unrealized capital gains - - 1,294 1,294
Decrease in non-admitted assets - - 199 199
Increase in asset valuation reserve - - (120) (120)
Increase in surplus in separate accounts - - 237 237
Change in reserve valuation - - (2,995) (2,995)
-----------------------------------------------------------
Balance at December 31, 1996 1,500 68,015 26,041 95,556
Net loss for 1997 - - (3,025) (3,025)
Increase in non-admitted assets - - (702) (702)
Decrease in asset valuation reserve - - 3,274 3,274
Decrease in surplus in separate accounts - - (2,115) (2,115)
Change in reserve valuation - - (1,872) (1,872)
Capital contribution - 20,000 - 20,000
Tax effect of capital loss carry-forward utilized by
affiliates - - 3,747 3,747
-----------------------------------------------------------
Balance at December 31, 1997 $1,500 $88,015 $25,348 $114,863
===========================================================
</TABLE>
See accompanying notes.
6
<PAGE> 58
Western Reserve Life Assurance Co. of Ohio
Statements of Cash Flows - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums and other considerations, net of reinsurance $1,224,228 $1,046,548 $577,986
Net investment income 43,802 38,666 42,359
Life and accident and health claims (26,005) (20,655) (16,759)
Surrender benefits and other fund withdrawals (431,939) (286,406) (206,250)
Other benefits to policyholders (28,147) (22,129) (19,041)
Commissions, other expenses and other taxes (261,352) (196,373) (128,341)
Net transfers to separate accounts (596,347) (658,326) (242,427)
Federal income taxes paid (5,006) (9,449) (7,531)
Interest paid (731) - -
Other, net (6,768) 28,325 (4,284)
-------------------------------------------------
Net cash used in operating activities (88,265) (79,799) (4,288)
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks 146,963 122,820 108,554
Common stocks - - 2,108
Mortgage loans on real estate 2,116 132 1,954
Real estate - 4,304 -
Other - 175 -
-------------------------------------------------
149,079 127,431 112,616
Cost of investments acquired
Bonds and preferred stocks (40,418) (26,826) (139,402)
Common stocks (150) (4) (589)
Mortgage loans on real estate (891) - (6)
Real estate (12,002) (7,837) (449)
Policy loans (24,137) (15,479) (9,605)
Other - (5) -
-------------------------------------------------
(77,598) (50,151) (150,051)
-------------------------------------------------
Net cash provided by (used in) investing activities 71,481 77,280 (37,435)
FINANCING ACTIVITIES
Issuance of short-term note payable to affiliate 8,200 - -
Capital contribution 20,000 - -
-------------------------------------------------
Net cash provided by financing activities 28,200 - -
-------------------------------------------------
Increase (decrease) in cash and short-term investments 11,416 (2,519) (41,723)
Cash and short-term investments at beginning of year 2,480 4,999 46,722
-------------------------------------------------
Cash and short-term investments at end of year $ 13,896 $ 2,480 $ 4,999
=================================================
</TABLE>
See accompanying notes.
7
<PAGE> 59
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis
(Dollars in thousands)
December 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Western Reserve Life Assurance Co. of Ohio ("the Company") is a stock life
insurance company and is a wholly-owned subsidiary of First AUSA Life Insurance
Company which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of the Netherlands.
NATURE OF BUSINESS
The Company operates predominantly in the variable universal life and variable
annuity areas of the life insurance business. The Company is licensed in 49
states and the District of Columbia. Sales of the Company's products are through
financial planners, independent representatives, financial institutions and
stockbrokers. The majority of the Company's new life insurance written and a
substantial portion of new annuities written is done through one marketing
organization; the Company expects to maintain this relationship for the
foreseeable future.
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could impact
the amounts reported and disclosed herein.
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Insurance Department of the
State of Ohio, which practices differ from generally accepted accounting
principles. The more significant of these differences are as follows: (a) bonds
are generally carried at amortized cost rather than segregating the portfolio
into held-to-maturity (reported at amortized cost), available-for-sale (reported
at fair value), and trading (reported at fair value) classifications; (b)
acquisition costs of acquiring new business are expensed as incurred rather than
deferred and amortized over the life of the policies; (c) policy reserves on
traditional life products are based on statutory mortality rates and interest
which may differ from reserves based on reasonable assumptions of expected
mortality, interest, and withdrawals which include a provision for possible
unfavorable deviation from such assumptions; (d) policy reserves on certain
investment products use discounting methodologies utilizing statutory interest
rates rather than full account values; (e) reinsurance amounts are netted
against the corresponding asset or liability rather than
8
<PAGE> 60
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shown as gross amounts on the balance sheet; (f) deferred income taxes are not
provided for the difference between the financial statement amounts and income
tax bases of assets and liabilities; (g) net realized gains or losses attributed
to changes in the level of interest rates in the market are deferred and
amortized over the remaining life of the bond or mortgage loan, rather than
recognized as gains or losses in the statement of operations when the sale is
completed; (h) declines in the estimated realizable value of investments are
provided for through the establishment of a formula-determined statutory
investment reserve (reported as a liability) changes to which are charged
directly to surplus, rather than through recognition in the statement of
operations for declines in value, when such declines are judged to be other than
temporary; (i) certain assets designated as "non-admitted assets" have been
charged to surplus rather than being reported as assets; (j) revenues for
universal life and investment products consist of the entire premiums received
rather than policy charges for the cost of insurance, policy administration
charges, amortization of policy initiation fees and surrender charges assessed;
(k) pension expense is recorded as amounts are paid rather than accrued and
expensed during the periods in which the employers provide service; and (l) the
financial statements of wholly-owned affiliates are not consolidated with those
of the Company. The effects of these variances have not been determined by the
Company.
The National Association of Insurance Commissioners (NAIC) currently is in the
process of recodifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in 1998,
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. The impact of any such changes
on the Company's statutory surplus cannot be determined at this time and could
be material.
Other significant statutory accounting practices are as follows:
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with remaining maturities of one year or less when purchased
to be cash equivalents.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office of
the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortization is computed using methods which result in a
level yield over the expected
9
<PAGE> 61
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
life of the security. The Company reviews its prepayment assumptions on mortgage
and other asset backed securities at regular intervals and adjusts amortization
rates retrospectively when such assumptions are changed due to experience and/or
expected future patterns. Common stocks of unaffiliated companies are carried at
market and include shares of mutual funds (money market and other), and the
related unrealized capital gains/(losses) are reported in unassigned surplus
without any adjustment for federal income taxes. Common stocks of the Company's
wholly-owned affiliates are recorded at the equity in net assets. Home office
property is reported at cost less allowances for depreciation. Depreciation is
computed principally by the straight-line method. Policy loans are reported at
unpaid principal. Other "admitted assets" are valued, principally at cost, as
required or permitted by Ohio Insurance Laws.
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for anticipated
losses in the event of default by issuers of certain invested assets. These
amounts are determined using a formula prescribed by the NAIC and are reported
as a liability. The formula for the AVR provides for a corresponding adjustment
for realized gains and losses. Under a formula prescribed by the NAIC, the
Company defers, in the Interest Maintenance Reserve (IMR), the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the security.
During 1997, 1996 and 1995, net realized capital gains of $3,259, $2,394 and
$554, respectively, were credited to the IMR rather than being immediately
recognized in the statements of operations. Amortization of these net gains
aggregated $1,576, $1,335 and $882 for the years ended December 31, 1997, 1996
and 1995, respectively.
Interest income is recognized on an accrual basis. The Company does not accrue
income on bonds in default, mortgage loans on real estate in default and/or
foreclosure or which are delinquent more than twelve months, or real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. No investment income due and accrued has
been excluded for the years ended December 31, 1997, 1996 and 1995, with respect
to such practices.
10
<PAGE> 62
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AGGREGATE RESERVES FOR POLICIES
Life and annuity reserves are developed by actuarial methods and are determined
based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are greater
than or equal to the minimum required by law.
The aggregate policy reserves for life insurance policies are based principally
upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality and
American Experience Mortality Tables. The reserves are calculated using interest
rates ranging from 2.25 to 5.50 percent and are computed principally on the Net
Level Premium Valuation and the Commissioners' Reserve Valuation Methods.
Reserves for universal life policies are based on account balances adjusted for
the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners' Annuity
Reserve Valuation Method including excess interest reserves to cover situations
where the future interest guarantees plus the decrease in surrender charges are
in excess of the maximum valuation rates of interest. Reserves for immediate
annuities and supplementary contracts with life contingencies are equal to the
present value of future payments assuming interest rates ranging from 5.75 to
8.75 percent and mortality rates, where appropriate, from a variety of tables.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims reported to
the Company and claims incurred but not yet reported through the statement date.
These reserves are estimated using either individual case-basis valuations or
statistical analysis techniques. These estimates are subject to the effects of
trends in claim severity and frequency. The estimates are continually reviewed
and adjusted as necessary as experience develops or new information becomes
available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of variable universal life and variable
annuity contracts and the Company's corresponding obligation to the contract
owners are shown separately in the balance sheets. The assets in the separate
accounts are valued at market. Income and gains and losses with respect to the
assets in the separate accounts accrue to the benefit of the policyholders and,
accordingly, the operations of the separate accounts are not included in the
accompanying financial statements. The separate accounts do not have any minimum
guarantees and the investment risks associated with market value changes are
borne entirely by the policyholders. The Company received variable contract
premiums of $1,164,013, $997,513 and $466,822 in 1997, 1996 and 1995,
respectively. All variable account contracts are subject to discretionary
withdrawal by the policyholder at the market value of the underlying assets less
the current surrender charge. Separate account contractholders have no claim
against the assets of the general account.
11
<PAGE> 63
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other 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 comparisons to independent markets and, in many
cases, could not be realized in immediate settlement of the instrument.
Statement of Financial Accounting Standards No. 107 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
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and Short-Term Investments: The carrying amounts reported in the
statutory-basis balance sheet for these instruments approximate their fair
values.
Investment Securities: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values are
estimated using values obtained from independent pricing services or (in the
case of private placements) are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality,
and maturity of the investments. The fair values for equity securities are
based on quoted market prices.
Mortgage Loans and Policy Loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.
Investment Contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
12
<PAGE> 64
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of Statement of
Financial Accounting Standards No. 107:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------ ------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds $ 255,919 $ 267,763 $ 359,579 $ 372,319
Common stocks 747 747 597 597
Mortgage loans on real estate 4,824 5,143 6,049 6,134
Policy loans 76,741 76,741 52,604 52,604
Cash and short-term investments 13,896 13,896 2,480 2,480
Separate account assets 4,814,594 4,814,594 3,527,145 3,527,145
LIABILITIES
Investment contract liabilities 280,121 276,113 321,293 314,748
Separate account annuities 3,615,255 3,565,557 2,692,614 2,647,266
</TABLE>
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
United States Government and agencies $ 3,675 $ 9 $ 30 $ 3,654
State, municipal and other government 3,855 360 - 4,215
Public utilities 15,794 904 403 16,295
Industrial and miscellaneous 121,513 7,700 710 128,503
Mortgage-backed securities 111,082 4,198 184 115,096
------------------------------------------------------
Total bonds $255,919 $13,171 $1,327 $267,763
======================================================
</TABLE>
13
<PAGE> 65
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government and agencies $ 11,422 $ 13 $ 292 $ 11,143
State, municipal and other government 5,504 274 - 5,778
Public utilities 14,808 848 80 15,576
Industrial and miscellaneous 173,097 8,889 910 181,076
Mortgage-backed securities 154,748 4,617 619 158,746
------------------------------------------------------------------
Total bonds $359,579 $14,641 $1,901 $372,319
==================================================================
</TABLE>
The carrying value and fair value of bonds at December 31, 1997 by contractual
maturity are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalties.
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
VALUE VALUE
----------------------------
<S> <C> <C>
Due in one year or less $ 18,310 $ 18,467
Due one through five years 67,005 70,952
Due five through ten years 29,508 30,621
Due after ten years 30,014 32,627
----------------------------
144,837 152,667
Mortgage and other asset backed securities 111,082 115,096
----------------------------
$255,919 $267,763
============================
</TABLE>
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Interest on bonds $25,723 $33,969 $38,624
Dividends on equity investments 10,855 - 30
Interest on mortgage loans 478 559 573
Rental income on real estate 1,371 919 1,014
Interest on policy loans 4,656 3,339 2,353
Other investment income 26 9 328
--------------------------------------------
Gross investment income 43,109 38,795 42,922
Investment expenses (3,096) (2,728) (2,031)
--------------------------------------------
Net investment income $40,013 $36,067 $40,891
============================================
</TABLE>
14
<PAGE> 66
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
Proceeds from sales and maturities of debt securities and related gross realized
gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Proceeds $146,963 $122,820 $108,554
======================================
Gross realized gains $ 3,921 $ 2,984 $ 1,631
Gross realized losses 626 791 1,346
--------------------------------------
Net realized gains $ 3,295 $ 2,193 $ 285
======================================
</TABLE>
At December 31, 1997, bonds with an aggregate carrying value of $5,474 were on
deposit with certain state regulatory authorities or were restrictively held in
bank custodial accounts for benefit of such state regulatory authorities, as
required by statute.
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
-----------------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Debt securities $3,295 $2,193 $ 285
Mortgage loans - - (1,409)
Real estate - (606) -
Other invested assets - (4) -
-----------------------------------------
3,295 1,583 (1,124)
Tax benefit (711) - -
Transfer to interest maintenance reserve (3,259) (2,394) (554)
-----------------------------------------
Net realized gains (losses) $ 747 $ (811) $(1,678)
=========================================
</TABLE>
<TABLE>
<CAPTION>
CHANGES IN UNREALIZED
-----------------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Debt securities $(896) $(14,442) $36,399
Common stock - (66) (236)
-----------------------------------------
Change in unrealized appreciation (depreciation) $(896) $(14,508) $36,163
=========================================
</TABLE>
15
<PAGE> 67
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
Gross unrealized gains (losses) on common stocks were as follows:
<TABLE>
<CAPTION>
UNREALIZED
-------------------------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
Unrealized gains $295 $295 $361
Unrealized losses - - -
-------------------------------------------------
Net unrealized gains $295 $295 $361
=================================================
</TABLE>
During 1997, the Company issued one mortgage loan with an interest rate of
8.07%. The maximum percentage of any one mortgage loan to the value of the
underlying real estate at origination was 69%. The Company requires all
mortgagees to carry fire insurance equal to the value of the underlying
property.
During 1997, 1996 and 1995, no mortgage loans were foreclosed and transferred to
real estate. During 1997 and 1996, the Company held a mortgage loan loss reserve
in the asset valuation reserve of $54 and $138, respectively.
At December 31, 1997, the Company had no investments (excluding U. S. Government
guaranteed or insured issues) which individually represented more than ten
percent of capital and surplus and the asset valuation reserve.
4. REINSURANCE
The Company reinsures portions of certain insurance policies which exceed its
established limits, thereby providing a greater diversification of risk and
minimizing exposure on larger risks. The Company remains contingently liable
with respect to any insurance ceded, and this would become an actual liability
in the event that the assuming insurance company became unable to meet its
obligations under the reinsurance treaty.
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------
<S> <C> <C> <C>
Direct premiums $1,219,271 $1,034,757 $570,413
Reinsurance assumed 2,389 2,063 1,569
Reinsurance ceded (5,141) (3,105) (2,084)
----------------------------------------------------------------
Net premiums earned $1,216,519 $1,033,715 $569,898
================================================================
</TABLE>
16
<PAGE> 68
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
4. REINSURANCE (CONTINUED)
The Company received reinsurance recoveries in the amount of $2,288, $2,156 and
$512 during 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996,
estimated amounts recoverable from reinsurers that have been deducted from
policy and contract claim reserves totaled $2,721 and $974, respectively. The
aggregate reserves for policies and contracts were reduced for reserve credits
for reinsurance ceded at December 31, 1997 and 1996 of $1,369 and $1,140,
respectively.
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax return
filing with certain affiliated companies. Under the terms of a tax-sharing
agreement between the Company and its affiliates, the Company computes federal
income tax expense as if it were filing a separate income tax return, except
that tax credits and net operating loss carryforwards are determined on the
basis of the consolidated group. Additionally, the alternative minimum tax is
computed for the consolidated group and the resulting tax, if any, is allocated
back to the separate companies on the basis of the separate companies'
alternative minimum taxable income.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital gains (losses) for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
Computed tax at federal statutory rate (35%) $(1,156) $3,189 $5,096
Deferred acquisition costs - tax basis 9,164 7,172 4,241
Tax reserve valuation (194) (696) (34)
Excess tax depreciation (127) (65) (49)
Amortization of IMR (552) (467) (309)
Dividend received deduction (5,326) - -
Other, net (1,340) 164 (28)
-----------------------------------------------------
Federal income tax expense $ 469 $9,297 $8,917
=====================================================
</TABLE>
For the year ended December 31, 1997, federal income tax benefit differs from
the amount computed by applying the statutory federal income tax rate to
realized gains due to the recognition for tax purposes of a deferred loss
previously incurred on a transfer of bonds from the Company to an affiliate.
17
<PAGE> 69
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
5. INCOME TAXES (CONTINUED)
Prior to 1984, as provided for under the Life Insurance Company Tax Act of 1959,
a portion of statutory income was not subject to current taxation, but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($293 at December 31, 1997). To the extent dividends are paid from the
amount accumulated in the policyholders' surplus account, net earnings would be
reduced by the amount of tax required to be paid. Should the entire amount in
the policyholders' surplus account become taxable, the tax thereon computed at
current rates would amount to approximately $103.
In 1995, the Company reached a final settlement with the Internal Revenue
Service for 1987 through 1993 resulting in taxes of $1,275 and interest of $120
(net of $65 tax effect). The assessment was charged to surplus as a prior period
adjustment. An examination is currently underway for years 1994 through 1995.
At December 31, 1996, the Company had capital loss carryforwards of
approximately $10,705, which were utilized by the Company's affiliates in the
consolidated tax return filing in 1997. This transaction resulted in a receipt
from the Company's affiliate of $3,747, which was credited directly to
unassigned surplus.
6. POLICY AND CONTRACT ATTRIBUTES
Participating life insurance policies are issued by the Company which entitle
policyholders to a share in the earnings of the participating policies, provided
that a dividend distribution, which is determined annually based on mortality
and persistency experience of the participating policies, is authorized by the
Company. Participating insurance constituted approximately .03% and .04% of life
insurance in force at December 31, 1997 and 1996, respectively.
A portion of the Company's policy reserves and other policyholders' funds relate
to liabilities established on a variety of the Company's products, primarily
separate accounts, that are not subject to significant mortality or morbidity
risk; however, there may be certain restrictions placed upon the amount of funds
that can be withdrawn without penalty. The amount of reserves on these products,
by withdrawal characteristics are summarized as follows:
18
<PAGE> 70
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------- --------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------------------- --------------------------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment $ 13,812 1% $ 14,881 1%
Subject to discretionary withdrawal at
book value less surrender charge 68,376 2 63,619 2
Subject to discretionary withdrawal at
market value 3,615,255 91 2,692,614 89
Subject to discretionary withdrawal at
book value (minimal or no charges or
adjustments) 201,457 5 239,204 7
Not subject to discretionary withdrawal
provision 16,572 1 17,603 1
------------------------- -------------------------
3,915,472 100% 3,027,921 100%
======= ========
Less reinsurance ceded - -
----------- -----------
Total policy reserves on annuities and
deposit fund liabilities $3,915,472 $3,027,921
=========== ===========
</TABLE>
A reconciliation of the amounts transferred to and from the separate accounts is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Transfers as reported in the summary of
operations of the separate accounts
statement:
Transfers to separate accounts $1,164,013 $997,513 $466,882
Transfers from separate accounts 646,477 339,523 224,416
----------------------------------------------
Net transfers to separate accounts 517,536 657,990 242,466
Reconciling adjustments - change in accruals
for investment management, administration
fees and contract guarantees, and separate
account surplus 1,678 (205,519) (39)
----------------------------------------------
Transfers as reported in the summary of
operations of the life, accident and health
annual statement $ 519,214 $452,471 $242,427
==============================================
</TABLE>
19
<PAGE> 71
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next anniversary
date. At December 31, 1997 and 1996, these assets (which are reported as
premiums deferred and uncollected) and the amounts of the related gross premiums
and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
--------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1997
Ordinary direct first year business $ 2 $ 1 $ 1
Ordinary direct renewal business 1,350 140 1,210
Group life direct business 717 - 717
--------------------------------------------
$2,069 $141 $1,928
============================================
DECEMBER 31, 1996
Ordinary direct first year business $ 40 $ 9 $ 31
Ordinary direct renewal business 1,431 225 1,206
Group life direct business 622 - 622
Annuity renewal business 94 10 84
--------------------------------------------
$2,187 $244 $1,943
============================================
</TABLE>
At December 31, 1997 and 1996, the Company had insurance in force aggregating
$1,710 and $1,904, respectively, in which the gross premiums are less than the
net premiums required by the standard valuation standards established by the
Insurance Department of the State of Ohio. The Company established policy
reserves of $26 and $27 to cover these deficiencies at December 31, 1997 and
1996, respectively.
In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in reserving
methodologies over five years. A direct charge to surplus of $1,872, $2,995 and
$3,496 was made for the years ended December 31, 1997, 1996 and 1995,
respectively, related to the change in reserve methodology.
7. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.
20
<PAGE> 72
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit plan sponsored by
AEGON. The Company has no legal obligation for the plan. The Company recognizes
pension expense equal to its allocation from AEGON. The pension expense is
allocated among the participating companies based on the FASB Statement No. 87
expense as a percent of salaries. The benefits are based on years of service and
the employee's compensation during the highest five consecutive years of
employment. Pension expense aggregated $659, $581 and $505 for the years ended
December 31, 1997, 1996 and 1995, respectively. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement and Income
Security Act of 1974.
The Company's employees also participate in a contributory defined contribution
plan sponsored by AEGON which is qualified under Section 401(k) of the Internal
Revenue Service Code. Employees of the Company who customarily work at least
1,000 hours during each calendar year and meet the other eligibility
requirements are participants of the plan. Participants may elect to contribute
up to fifteen percent of their salary to the plan. The Company will match an
amount up to three percent of the participant's salary. Participants may direct
all of their contributions and plan balances to be invested in a variety of
investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement and Income Security Act of 1974. Pension
expense related to this plan was $448, $184 and $305 for the years ended
December 31, 1997, 1996 and 1995, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Code. In addition, AEGON has established incentive deferred compensation
plans for certain key employees of the Company. AEGON also sponsors an employee
stock option plan for individuals employed at least three years and a stock
purchase plan for its producers, with the participating affiliated companies
establishing their own eligibility criteria, producer contribution limits and
company matching formula. These plans have been accrued or funded as deemed
appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans sponsored by
AEGON that provide postretirement medical, dental and life insurance benefits to
employees meeting certain eligibility requirements. Portions of the medical and
dental plans are contributory. The expenses of the postretirement plans
calculated on the pay-as-you-go basis are charged to affiliates in accordance
with an intercompany cost sharing arrangement. The Company expensed $99, $98 and
$86 for the years ended December 31, 1997, 1996 and 1995, respectively.
21
<PAGE> 73
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
9. RELATED PARTY TRANSACTIONS
The Company shares certain officers, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1997, 1996
and 1995, the Company paid $10,040, $10,038 and $8,825, respectively, for such
services, which approximates their costs to the affiliates. The Company provides
office space, marketing and administrative services to certain affiliates.
During 1997, 1996 and 1995, the Company received $4,395, $3,271 and $4,545,
respectively, for such services, which approximates their cost. The Company had
a net payable with affiliates of $1,925 and $19,298 at December 31, 1997 and
1996, respectively.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.33% at December 31, 1997. During 1997,
1996 and 1995, the Company paid (received) net interest of $364, $138 and
$(294), respectively, to (from) affiliates.
The Company received capital contributions of $20,000 from its parent in 1997.
At December 31, 1997, the Company has a $8,200 short-term note payable to an
affiliate. Interest on this note accrues at 5.60 %.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. Although
such litigation sometimes includes substantial demands for compensatory and
punitive damages in addition to contract liability, it is management's opinion,
after consultation with counsel and a review of available facts, that damages
arising from such demands will not be material to the Company's financial
position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. Assessments are charged to operations when received
by the Company except where right of offset against other taxes paid is allowed
by law; amounts available for future offsets are recorded as an asset on the
Company's balance sheet. The future obligation has been based on the most recent
information available from the National Organization of Life and Health
Insurance Guaranty Association. Potential future obligations for unknown
22
<PAGE> 74
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
insolvencies are not determinable by the Company. The Company has established a
reserve of $4,007 and $4,344 and an offsetting premium tax benefit of $1,070 and
$1,218 at December 31, 1997 and 1996, respectively, for its estimated share of
future guaranty fund assessments related to several major insurer insolvencies.
The guaranty fund expense was $0, $212 and $1,950 at December 31, 1997, 1996 and
1995, respectively.
11. YEAR 2000 (UNAUDITED)
AEGON has adopted and has in place a Year 2000 Assessment and Planning Project
(the "Project") to review and analyze its information technology and systems to
determine if they are Year 2000 compatible. The Company has begun to convert or
modify, where necessary, critical data processing systems. It is contemplated
that the plan will be substantially completed by early 1999. The Company does
not expect this project to have a significant effect on operations. However, to
mitigate the effect of outside influences upon the success of the project, the
Company has undertaken communications with its significant customers, suppliers
and other third parties to determine their Year 2000 compatibility and
readiness. Management believes that the issues associated with the Year 2000
will be resolved with no material financial impact on the Company.
Since the Year 2000 computer problem, and its resolution is complex and
multifaceted, the success of a response plan cannot be conclusively known until
the Year 2000 is reached (or an earlier date to the extent that systems or
equipment addresses Year 2000 date data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well-conceived Project, including testing
procedures, there is no certainty that any company will achieve complete
success. Notwithstanding the efforts or results of the Company, its ability to
function unaffected to and through the Year 2000 may be adversely affected by
actions (or failure to act) of third parties beyond its knowledge or control.
23
<PAGE> 75
Western Reserve Life Assurance Co. of Ohio
Summary of Investments Other Than
Investments in Related Parties
(Dollars in thousands)
December 31, 1997
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and government
agencies and authorities $ 65,611 $ 68,452 $ 65,611
States, municipalities and political
subdivisions 1,840 1,974 1,840
Foreign governments 2,015 2,241 2,015
Public utilities 15,794 16,295 15,794
All other corporate bonds 170,659 178,801 170,659
---------------------------------------------
Total fixed maturities 255,919 267,763 255,919
EQUITY SECURITIES
Common stocks:
Industrial, miscellaneous and all other 452 747 747
---------------------------------------------
Total equity securities 452 747 747
Mortgage loans on real estate 4,824 4,824
Real estate 19,964 19,964
Policy loans 76,741 76,741
Cash and short-term investments 13,896 13,896
-------------- ---------------
Total investments $371,796 $372,091
============== ===============
</TABLE>
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accruals of discounts.
24
<PAGE> 76
Western Reserve Life Assurance Co. of Ohio
Supplementary Insurance Information
(Dollars in thousands)
SCHEDULE III
<TABLE>
<CAPTION>
BENEFITS,
CLAIMS,
FUTURE POLICY POLICY AND NET LOSSES AND OTHER
BENEFITS AND CONTRACT PREMIUM INVESTMENT SETTLEMENT OPERATING
EXPENSES LIABILITIES REVENUE INCOME* EXPENSES EXPENSES*
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1997
Individual life $177,088 $ 9,533 $ 390,452 $13,742 $ 88,738 $176,303
Group life 9,435 805 3,918 810 3,986 3,292
Annuity 296,290 591 822,149 25,461 389,726 83,179
---------------------------------------------------------------------------------------------------
$482,813 $10,929 $1,216,519 $40,013 $482,450 $262,774
===================================================================================================
YEAR ENDED DECEMBER 31,
1996
Individual life $145,964 $ 7,017 $ 289,375 $ 8,228 $125,861 $124,181
Group life and health 9,202 713 4,215 3,940 3,828 2,818
Annuity 332,230 854 740,125 23,899 294,681 71,576
---------------------------------------------------------------------------------------------------
$487,396 $ 8,584 $1,033,715 $36,067 $424,370 $198,575
===================================================================================================
YEAR ENDED DECEMBER 31,
1995
Individual life $ 64,128 $ 5,811 $ 188,143 $ 9,470 $ 20,048 $ 83,709
Group life 7,904 701 3,365 1,054 2,774 946
Annuity 319,353 100 378,390 30,367 211,008 44,447
---------------------------------------------------------------------------------------------------
$391,385 $ 6,612 $ 569,898 $40,891 $233,830 $129,102
===================================================================================================
</TABLE>
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
25
<PAGE> 77
Western Reserve Life Assurance Co. of Ohio
Reinsurance
(Dollars in thousands)
SCHEDULE IV
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1997
Life insurance in force $40,221,361 $6,776,447 $2,692,822 $36,137,736 7.5%
============================================================================================
Premiums:
Individual life $ 395,361 $ 4,910 $ - $ $390,452 0.0%
Group life and health 1,761 231 2,389 3,918 61.0
Annuity 822,149 - - 822,149 0.0
--------------------------------------------------------------------------------------------
$ 1,219,271 $ 5,141 $ 2,389 $ 1,216,519 0.2%
============================================================================================
YEAR ENDED DECEMBER 31,
1996
Life insurance in force $28,168,880 $4,463,986 $2,210,601 $25,915,495 8.5%
============================================================================================
Premiums:
Individual life $ 292,239 $ 2,863 $ - $ 289,376 0.0%
Group life and health 2,393 242 2,063 4,214 49.0
Annuity 740,125 - - 740,125 0.0
--------------------------------------------------------------------------------------------
$ 1,034,757 $ 3,105 $ 2,063 $ 1,033,715 0.2%
============================================================================================
YEAR ENDED DECEMBER 31,
1995
Life insurance in force $19,438,203 $1,365,119 $1,619,378 $19,692,462 8.2%
============================================================================================
Premiums:
Individual life $ 189,870 $ 1,727 $ - $ 188,143 0.0%
Group life 2,153 357 1,569 3,365 46.6
Annuity 378,390 - - 378,390 0.0
--------------------------------------------------------------------------------------------
$ 570,413 $ 2,084 $ 1,569 $ 569,898 0.2%
============================================================================================
</TABLE>
26
<PAGE> 78
PART II.
OTHER INFORMATION
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.
REPRESENTATION PURSUANT TO SECTION 26(e) (2) (A)
Western Reserve Life Assurance Co. of Ohio ("Western Reserve") hereby
represents that the fees and charges deducted under the Policies, in the
aggregate, are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by Western Reserve.
STATEMENT WITH RESPECT TO INDEMNIFICATION
Provisions exist under the Ohio General Corporation Law, the Second
Amended Articles of Incorporation of Western Reserve and the Amended Code of
Regulations of Western Reserve whereby Western Reserve may indemnify certain
persons against certain payments incurred by such persons. The following
excerpts contain the substance of these provisions.
Ohio General Corporation Law
SECTION 1701.13 AUTHORITY OF CORPORATION.
(E)(1) A corporation may indemnify or agree to indemnify any person
who was or is a party or 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 corporation, by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, trustee, officer, employee, or agent of another
corporation (including a subsidiary of this corporation), domestic or foreign,
nonprofit or for profit, partnership, joint venture, trust, or other
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 corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful.
(2) A corporation may indemnify or agree to indemnify 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 corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, trustee, officer, employee, or
agent of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other 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 corporation, except that no indemnification shall be
made in respect of any of the following:
1
<PAGE> 79
(a) 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 corporation unless, and only to the extent that
the court of common pleas, or the court in which such action or suit was
brought determines upon application that, despite the adjudication of
liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses as the court of
common pleas or such other court shall deem proper;
(b) Any action or suit in which the only liability
asserted against a director is pursuant to section 1701.95 of the Revised Code.
(3) To the extent that a director, trustee, officer, employee, or
agent has been successful on the merits or otherwise in defense of any action,
suit, or proceeding referred to in divisions (E)(1) and (2) of this section, or
in defense of any claim, issue, or matter therein, he shall be indemnified
against expenses, including attorneys' fees, actually and reasonably incurred
by him in connection therewith.
(4) Any indemnification under divisions (E)(1) and (2) of this
section, unless ordered by a court, shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of
the director, trustee, officer, employee, or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in divisions (E)(1 ) and (2) of this section. Such determination shall be made
as follows:
(a) By a majority vote of a quorum consisting of
directors of the indemnifying corporation who were not and are not parties to
or threatened with any such action, suit, or proceeding;
(b) If the quorum described in division (E)(4)(a) of this
section is not obtainable or if a majority vote of a quorum of disinterested
directors so directs, in a written opinion by independent legal counsel other
than an attorney, or a firm having associated with it an attorney, who has been
retained by or who has performed services for the corporation, or any person to
be indemnified within the past five years;
(c) By the shareholders;
(d) By the court of common pleas or the court in which
such action, suit, or proceeding was brought.
Any determination made by the disinterested directors under division
(E)(4)(a) or by independent legal counsel under division (E)(4)(b) of this
section shall be promptly communicated to the person who threatened or brought
the action or suit by or in the right of the corporation under division (E)(2)
of this section, and within ten days after receipt of such notification, such
person shall have the right to petition the court of common pleas or the court
in which such action or suit was brought to review the reasonableness of such
determination.
(5)(a) Unless at the time of a director's act or omission that is the
subject of an action, suit or proceeding referred to in divisions (E)(1) and
(2) of this section, the articles or the regulations of a corporation state by
specific reference to this division that the provisions of this division do not
apply to the corporation and unless the only liability asserted against a
director in an action, suit, or proceeding referred to in divisions (E)(1) and
(2) of this section is pursuant to section 1701.95 of the Revised Code,
expenses, including attorney's fees, incurred by a director in defending the
action, suit, or proceeding shall be paid by the corporation as they are
incurred, in advance of the final disposition of the action, suit, or
proceeding upon receipt of an undertaking by or on behalf of the director in
which he agrees to do both of the following:
(i) Repay such amount if it is proved by
clear and convincing evidence in a court of competent jurisdiction that his
action or failure to act involved an act or omission
2
<PAGE> 80
undertaken with deliberate intent to cause injury to the corporation or
undertaken with reckless disregard for the best interests of the corporation;
(ii) Reasonably cooperate with the
corporation concerning the action, suit, or proceeding.
(b) Expenses, including attorneys' fees incurred by a
director, trustee, officer, employee, or agent in defending any action, suit,
or proceeding referred to in divisions (E)(1) and (2) of this section, may be
paid by the corporation as they are incurred, in advance of the final
disposition of the action, suit, or proceeding as authorized by the directors
in the specific case upon receipt of an undertaking by or on behalf of the
director, trustee, officer, employee, or agent to repay such amount, if it
ultimately is determined that he is entitled to be indemnified by the
corporation.
(6) The indemnification authorized by this section shall not be
exclusive of, and shall be in addition to, any other rights granted to those
seeking indemnification under the articles or the regulations or any agreement,
vote of shareholders or disinterested directors, or otherwise, both as to
action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, trustee, officer, employee, or agent and shall inure to the benefit
of the heirs, executors, and administrators of such a person.
(7) A corporation may purchase and maintain insurance or furnish
similar protection, including but not limited to trust funds, letters of
credit, or self-insurance on behalf of or for any person who is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, trustee, officer, employee, or
agent of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section. Insurance may be
purchased from or maintained with a person in which the corporation has a
financial interest.
(8) The authority of a corporation to indemnify persons pursuant
to divisions (E)(1 ) and (2) of this section does not limit the payment of
expenses as they are incurred, indemnification, insurance, or other protection
that may be provided pursuant to divisions (E)(5), (6), and (7) of this
section. Divisions (E)(1) and (2) of this section do not create any obligation
to repay or return payments made by the corporation pursuant to divisions
(E)(5), (6), or (7).
(9) As used in this division, references to "corporation" include
all constituent corporations in a consolidation or merger and the new or
surviving corporation, so that any person who is or was a director, officer,
employee, or agent of such a constituent corporation, or is or was serving at
the request of such constituent corporation as a director, trustee, officer,
employee or agent of another corporation, domestic or foreign, nonprofit or for
profit, partnership, joint venture, trust, or other enterprise, shall stand in
the same position under this section with respect to the new or surviving
corporation as he would if he had served the new or surviving corporation in
the same capacity.
Second Amended Articles of Incorporation of Western Reserve
ARTICLE EIGHTH
EIGHTH: (1) The corporation may indemnify or agree to indemnify any
person who was or is a party or 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 corporation, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, or agent
of another corporation (including a subsidiary of this corporation), domestic
or foreign, nonprofit
3
<PAGE> 81
or for profit, partnership, joint venture, trust, or other 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
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of itself create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
(2) The corporation may indemnify or agree to indemnify 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 corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, trustee, officer, employee, or
agent of another corporation (including a subsidiary of this corporation),
domestic or foreign, nonprofit or for profit, partnership, joint venture,
trust, or other 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
corporation, except that no indemnification shall 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
corporation unless, and only to the extent that the court of common pleas, or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability, but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court of common pleas or such other court
shall deem proper.
(3) To the extent that a director, trustee, officer, employee, or
agent has been successful on the merits or otherwise in defense of any action,
suit, or proceeding referred to in sections (1) and (2) of this article, or in
defense of any claim, issue, or matter therein, he shall be indemnified against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection therewith.
(4) Any indemnification under sections (1) and (2) of this
article, unless ordered by a court, shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of
the director, trustee, officer, employee, or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in sections (1) and (2) of this article. Such determination shall be made (a)
by a majority vote of a quorum consisting of directors of the indemnifying
corporation who were not and are not parties to or threatened with any such
action, suit, or proceeding, or (b) if such a quorum is not obtainable or if a
majority vote of a quorum of disinterested directors so directs, in a written
opinion by independent legal counsel other than an attorney, or a firm having
associated with it an attorney, who has been retained by or who has performed
services for the corporation, or any person to be indemnified within the past
five years, or (c) by the shareholders, or (d) by the court of common pleas or
the court in which such action, suit, or proceeding was brought. Any
determination made by the disinterested directors under section (4)(a) or by
independent legal counsel under section (4)(b) of this article shall be
promptly communicated to the person who threatened or brought the action or
suit by or in the right of the corporation under section (2) of this article,
and within ten days after receipt of such notification, such person shall have
the right to petition the court of common pleas or the court in which such
action or suit was brought to review the reasonableness of such determination.
(5) Expenses, including attorneys' fees incurred in defending any
action, suit, or proceeding referred to in sections (1) and (2) of this
article, may be paid by the corporation in advance of the final disposition of
such action, suit, or proceeding as authorized by the directors in the specific
case upon receipt of a written undertaking by or on behalf of the director,
trustee, officer, employee, or agent to repay such amount, unless it shall
ultimately be determined that he is entitled to be indemnified by the
4
<PAGE> 82
corporation as authorized in this article. If a majority vote of a quorum of
disinterested directors so directs by resolution, said written undertaking need
not be submitted to the corporation. Such a determination that a written
undertaking need not be submitted to the corporation shall in no way affect the
entitlement of indemnification as authorized by this article.
(6) The indemnification provided by this article shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under the articles or the regulations or any agreement, vote of
shareholders or disinterested directors, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
trustee, officer, employee, or agent and shall inure to the benefit of the
heirs, executors, and administrators of such a person.
(7) The Corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, trustee, officer, employee, or agent of another corporation
(including a subsidiary of this corporation), domestic or foreign, nonprofit or
for profit, partnership, joint venture, trust, or other enterprise against any
liability asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation would have
the power to indemnify him against such liability under this section.
(8) As used in this section, references to "the corporation"
include all constituent corporations in a consolidation or merger and the new
or surviving corporation, so that any person who is or was a director, officer,
employee, or agent of such a constituent corporation, or is or was serving at
the request of such constituent corporation as a director, trustee, officer,
employee or agent of another corporation (including a subsidiary of this
corporation), domestic or foreign, nonprofit or for profit, partnership, joint
venture, trust, or other enterprise shall stand in the same position under this
article with respect to the new or surviving corporation as he would if he had
served the new or surviving corporation in the same capacity.
(9) The foregoing provisions of this article do not apply to any
proceeding against any trustee, investment manager or other fiduciary of an
employee benefit plan in such person's capacity as such, even though such
person may also be an agent of this corporation. The corporation may indemnify
such named fiduciaries of its employee benefit plans against all costs and
expenses, judgments, fines, settlements or other amounts actually and
reasonably incurred by or imposed upon said named fiduciary in connection with
or arising out of any claim, demand, action, suit or proceeding in which the
named fiduciary may be made a party by reason of being or having been a named
fiduciary, to the same extent it indemnifies an agent of the corporation. To
the extent that the corporation does not have the direct legal power to
indemnify, the corporation may contract with the named fiduciaries of its
employee benefit plans to indemnify them to the same extent as noted above. The
corporation may purchase and maintain insurance on behalf of such named
fiduciary covering any liability to the same extent that it contracts to
indemnify.
Amended Code of Regulations of Western Reserve
ARTICLE V
Indemnification of Directors and Officers
Each Director, officer and member of a committee of this Corporation,
and any person who may have served at the request of this Corporation as a
Director, officer or member of a committee of any other corporation in which
this Corporation owns shares of capital stock or of which this Corporation is a
creditor (and his heirs, executors and administrators) shall be indemnified by
the Corporation against all expenses, costs, judgments, decrees, fines or
penalties as provided by, and to the extent allowed by, Article Eighth of the
Corporation's Articles of Incorporation, as amended.
5
<PAGE> 83
RULE 484 UNDERTAKING
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "Act") 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.
CONTENTS OF REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
The facing sheet
The Prospectus, consisting of __ pages
The undertaking to file reports
Representation Pursuant to Section 26(e) (2) (A)
The statement with respect to indemnification
The Rule 484 undertaking
The signatures
Written consent of the following persons:
(a) Sutherland, Asbill & Brennan LLP
(b) Ernst & Young LLP
The following exhibits:
1. The following exhibits correspond to those required by paragraph A to
the instructions as to exhibits in Form N-8B-2:
A. (1) Resolution of the Board of Directors of Western
Reserve establishing the Separate Account *
(2) Not Applicable
(3) (a) Principal Underwriting Agreement
(b) Selected Broker Agreement
(4) Not Applicable
(5) Specimen Variable Adjustable Life Insurance Policy *
(6) (a) Second Amended Articles of Incorporation of
Western Reserve **
(b) Amended Code of Regulations (By-Laws) of
Western Reserve **
(7) Not Applicable
(8) (a) Form of Participation Agreement regarding BT
Insurance Funds Trust
(b) Form of Participation Agreement regarding
Russell Insurance Funds
(c) Form of Participation Agreement regarding
Federated Insurance Series
(9) Not Applicable
(10) Application for Variable Adjustable Life Insurance
Policy *
(11) Memorandum describing issuance, transfer and
redemption procedures
2. Opinion of Counsel as to the legality of the securities being
registered *
6
<PAGE> 84
3. Not Applicable
4. Not Applicable
5. Opinion and consent as to actuarial matters pertaining to the
securities being registered *
6. Consent of Sutherland, Asbill & Brennan LLP
7. Consent of Ernst & Young LLP
8. Powers of Attorney
- ----------------------------------
* Incorporated herein by reference to the initial filing of this Form
S-6 registration statement on June 25, 1998 (File No. 333-57681).
** Incorporated herein by reference to Post-Effective Amendment No. 11 to
Form N-4 Registration Statement dated April 20, 1998 (File No.
33-49556).
7
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant,
WRL Series Life Corporate Account has duly caused this Registration Statement to
be signed on its behalf by the undersigned thereunto duly authorized, and its
seal to be hereunto affixed and attested, all in the City of Largo and State of
Florida on this 20th day of October, 1998.
<TABLE>
<S> <C>
(SEAL) WRL Series Life Corporate Account
-----------------------------------------------------
Registrant
Western Reserve Life Assurance Co. of Ohio
-----------------------------------------------------
Depositor
ATTEST:
/s/ THOMAS E. PIERPAN By: /s/ JOHN R. KENNEY
- -------------------------------------------- -------------------------------------------------
Thomas E. Pierpan John R. Kenney
Vice President, Assistant Secretary Chairman of the Board,
and Associate General Counsel Chief Executive Officer and President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
------------------- ----
<S> <C>
/s/ JOHN R. KENNEY October 20, 1998
- -----------------------------------------------------
John R. Kenney, Chairman of the Board, Chief
Executive Officer and President
/s/ ALLAN J. HAMILTON October 20, 1998
- -----------------------------------------------------
Allan J. Hamilton, Vice President, Treasurer and
Controller
/s/ ALAN M. YAEGER October 20, 1998
- -----------------------------------------------------
Alan M. Yaeger, Executive Vice President, Actuary and
Chief Financial Officer
* , 1998
- -----------------------------------------------------
Patrick S. Baird, Director
* , 1998
- -----------------------------------------------------
James R. Walker, Director
* , 1998
- -----------------------------------------------------
Lyman H. Treadway, Director
* , 1998
- -----------------------------------------------------
Jack E. Zimmerman, Director
/s/ PETER H. GILMAN October 20, 1998
- -----------------------------------------------------
*Signed by: Peter H. Gilman
as Attorney-in-fact
</TABLE>
<PAGE> 86
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Description
No. of Exhibit
- ------- ----------
<S> <C>
1.A.(3)(a) Participation Agreement
1.A.(3)(b) Selected Broker Agreement
1.A.(8)(a) Form of Participation Agreement regarding BT Insurance Funds Trust
1.A.(8)(b) Form of Participation Agreement regarding Russell Insurance Funds
1.A.(8)(c) Form of Participation Agreement regarding Federated Insurance Series
1.A.(11) Memorandum describing issuance, transfer and redemption procedures
6. Consent of Sutherland, Asbill & Brennan LLP
7. Consent of Ernst & Young LLP
8. Power of Attorney
</TABLE>
<PAGE> 1
EXHIBIT 23
[Letterhead of Sutherland Asbill & Brennan LLP]
September 18, 1998
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, Florida 33770
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the prospectus filed as part of Pre-Effective Amendment No.1 to the
Form S-6 registration statement for WRL Series Life Corporate Account (File No.
333-57681). 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.
<PAGE> 1
EXHIBIT 24
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant,
WRL Series Life Corporate Account has duly caused this Registration Statement to
be signed on its behalf by the undersigned thereunto duly authorized, and its
seal to be hereunto affixed and attested, all in the City of Largo and State of
Florida on this 17th day of June, 1998.
<TABLE>
<S> <C>
(SEAL) WRL Series Life Corporate Account
-----------------------------------------------------
Registrant
Western Reserve Life Assurance Co. of Ohio
-----------------------------------------------------
Depositor
ATTEST:
- -------------------------------------------- -------------------------------------------------
Thomas E. Pierpan John R. Kenney
Vice President, Assistant Secretary Chairman of the Board,
and Associate General Counsel Chief Executive Officer and President
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby makes,
constitutes and appoints THOMAS E. PIERPAN, PRISCILLA HECHLER, ALAN M. YAEGER,
PETER H. GILMAN, and FREDERICK J. GARLAND, JR. and each of them, severally, his
true and lawful attorneys and agents in his name, place and stead and on his
behalf (a) to sign and cause to be filed registration statements of WRL Series
Life Corporate Account under the Securities Act of 1933 and the Investment
Company Act of 1940, and all amendments, consents and exhibits thereto; (b) to
withdraw such statements or any amendments or exhibits and make requests for
acceleration in connection therewith; (c) to take all other action of whatever
kind or nature in connection with such registration statements which said
attorneys may deem advisable; and (d) to make, file, execute, amend and withdraw
documents of every kind, and to take other action of whatever kind they may
elect, for the purpose of complying with the laws of any state relating to the
sale of securities of WRL Series Life Corporate Account, hereby ratifying and
confirming all actions of any of said attorneys hereunder. Said attorneys may
act jointly or severally, and the action of one shall bind the undersigned as
fully as if two or more had acted together.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
------------------- ----
<S> <C>
, 1998
- -----------------------------------------------------
John R. Kenney, Chairman of the Board, Chief
Executive Officer and President
, 1998
- -----------------------------------------------------
Allan J. Hamilton, Vice President, Treasurer and
Controller
, 1998
- -----------------------------------------------------
Alan M. Yaeger, Executive Vice President, Actuary and
Chief Financial Officer
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
------------------- ----
<S> <C>
/s/ PATRICK S. BAIRD June 26, 1998
- -----------------------------------------------------
Patrick S. Baird, Director
, 1998
- -----------------------------------------------------
James R. Walker, Director
, 1998
- -----------------------------------------------------
Lyman H. Treadway, Director
, 1998
- -----------------------------------------------------
Jack E. Zimmerman, Director
, 1998
- -----------------------------------------------------
Signed by:
as Attorney-in-fact
</TABLE>
<PAGE> 1
EXHIBIT 1.A.(3)(a)
PRINCIPAL UNDERWRITING AGREEMENT
THIS PRINCIPAL UNDERWRITING AGREEMENT made and effective as of the 1st
day of October, 1998, by and between AFSG SECURITIES CORPORATION ("AFSG"), a
Pennsylvania corporation, and WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
("WRL"), an Ohio corporation, on its own behalf and on behalf the separate
investment accounts of WRL set forth in Exhibit A attached hereto and made a
part hereof (collectively, the "Account").
WITNESSETH:
WHEREAS, the Account was established or acquired by WRL under the laws
of the State of Ohio, pursuant to a resolution of WRL's Board of Directors in
order to set aside the investment assets attributable to certain variable life
insurance and annuity contracts ("Contracts") issued by WRL;
WHEREAS, WRL has registered or will register the Account with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, WRL has registered or will register the Contracts under the
Securities Act of 1933, as amended (the "1933 Act");
WHEREAS, AFSG is and will continue to be registered as a broker-dealer
with the SEC under the Securities Exchange Act of 1934, as amended (the "1934
Act"), and a member of the National Association of Securities Dealers, Inc.
(the "NASD") prior to the offer and sale of the Contracts; and
WHEREAS, WRL proposes to have the Contracts sold and distributed
through AFSG, and AFSG is willing to sell and distribute such Contracts under
the terms stated herein;
NOW, THEREFORE, the parties, intending to be legally bound, hereby
agree as follows:
1. Appointment as Distributor/Principal Underwriter. WRL grants
to AFSG the exclusive right to be, and AFSG agrees to serve as, distributor and
principal underwriter of the Contracts during the term of this Agreement. AFSG
agrees to use its best efforts to solicit applications for the Contracts and
otherwise perform all duties and functions which are necessary and proper for
the distribution of the Contracts.
<PAGE> 2
2. Prospectus. AFSG agrees to offer the Contracts for sale in
accordance with the registration statements and prospectus therefor then in
effect. AFSG is not authorized to give any information or to make any
representations concerning the Contracts other than those contained in the
current prospectus therefor filed with the SEC or in such sales literature as
may be authorized by WRL.
3. Considerations. All premiums, purchase payments or other
moneys payable under the Contracts shall be remitted promptly in full together
with such application, forms and any other required documentation to WRL or its
designated servicing agent and shall become the exclusive property of WRL.
Checks or money orders in payment under the Contracts shall be drawn to the
order of "WRL Life Insurance Company" and funds may be remitted by wire if
prior written approval is obtained from WRL.
4. Copies of Information. On behalf of the Account, WRL shall
furnish AFSG with copies of all prospectuses, financial statements and other
documents which AFSG reasonably requests for use in connection with the
distribution of the Contracts.
5. Representations. AFSG represents that it is (a) duly
registered as a broker-dealer under the 1934 Act, (b) a member in good standing
of the NASD and (c) to the extent necessary to offer the Contracts, duly
registered or otherwise qualified under the securities laws of any state or
other jurisdiction. AFSG shall be responsible for carrying out its sales and
underwriting obligations hereunder in continued compliance with the NASD Rules
and federal and state securities and insurance laws and regulations. Further,
AFSG represents and warrants that it will adopt, abide by and enforce the
principles set forth in the Principles and Code of Ethical Market Conduct of
the Insurance Marketplace Standards Association as adopted by the Company.
6. Other Broker-Dealer Agreements. AFSG is hereby authorized to
enter into written sales agreements with other independent broker-dealers for
the sale of the Contracts. All such sales agreements entered into by AFSG
shall provide that each independent broker-dealer will assume full
responsibility for continued compliance by itself and by its associated persons
with the NASD Rules and applicable federal and state securities and insurance
laws, shall provide that each independent broker-dealer will adopt, abide by
and enforce the principles set forth in the Principles and Code of Ethical
Market Conduct of the Insurance Marketplace Standards Association as adopted by
the Company, and shall be in such form and
2
<PAGE> 3
contain such other provisions as WRL may from time to time require. All
associated persons of such independent broker-dealers soliciting applications
for the Contracts shall be duly and appropriately registered by the NASD and
licensed and appointed by WRL for the sale of Contracts under the insurance
laws of the applicable states or jurisdictions in which such Contracts may be
lawfully sold. All applications for Contracts solicited by such broker-dealers
through their representatives, together with any other required documentation
and premiums, purchase payments and other moneys, shall be handled as set forth
in paragraph 3 above.
7. Insurance Licensing and Appointments. WRL shall apply for the
proper insurance licenses and appointments in appropriate states or
jurisdictions for the designated persons associated with AFSG or with other
independent broker-dealers that have entered into sales agreements with AFSG
for the sale of Contracts, provided that WRL reserves the right to refuse to
appoint any proposed registered representative as an agent or broker, and to
terminate an agent or broker once appointed.
8. Recordkeeping. WRL and AFSG shall cause to be maintained and
preserved for the periods prescribed such accounts, books, and other documents
as are required of them by the 1940 Act, and 1934 Act, and any other applicable
laws and regulations. The books, accounts and records of WRL, of the Account,
and of AFSG as to all transactions hereunder shall be maintained so as to
disclose clearly and accurately the nature and details of the transactions.
WRL (or such other entity engaged by WRL for this purpose), on behalf of and as
agent for AFSG, shall maintain AFSG's books and records pertaining to the sale
of Contracts to the extent as mutually agreed upon from time to time by WRL and
AFSG; provided that such books and records shall be the property of AFSG, and
shall at all times be subject to such reasonable periodic, special or other
audit or examination by the SEC, NASD, any state insurance commissioner and/or
all other regulatory bodies having jurisdiction. WRL shall be responsible for
sending on behalf of and as agent for AFSG all required confirmations on
customer transactions in compliance with applicable regulations, as modified by
an exemption or other relief obtained by WRL. AFSG shall cause WRL to be
furnished with such reports as WRL may reasonably request for the purpose of
meeting its reporting and recordkeeping requirements under the insurance laws
of the State of Ohio and any other applicable states or jurisdictions. WRL
agrees that its records relating to the sale of Contracts shall be
3
<PAGE> 4
subject to such reasonable periodic, special or other audit or examination by
the SEC, NASD, and any state insurance commissioner and/or all other regulatory
bodies having jurisdiction.
9. Commissions. WRL shall have the responsibility for paying on
behalf of AFSG (a) any compensation to other independent broker-dealers and
their associated persons due under the terms of any sales agreements entered
into pursuant to paragraph 6 above, between AFSG and such broker-dealers as
agreed to by WRL and (b) all commissions or other fees to associated persons of
AFSG which are due for the sale of the Contracts in the amounts and on such
terms and conditions as WRL and AFSG determine. Notwithstanding the preceding
sentence, no broker-dealer, associated person or other individual or entity
shall have an interest in any deductions or other fees payable to AFSG as set
forth herein.
10. Expense Reimbursement. WRL shall reimburse AFSG for all costs
and expenses incurred by AFSG in furnishing the services, materials, and
supplies required by the terms of this Agreement.
11. Indemnification. WRL agrees to indemnify AFSG for any losses
incurred as a result of any action taken or omitted by AFSG, or any of its
officers, agents or employees, in performing their responsibilities under this
Agreement in good faith and without willful misfeasance, gross negligence, or
reckless disregard of such obligations.
12. Regulatory Investigations. AFSG and WRL agree to cooperate
fully in any insurance or judicial regulatory investigation or proceeding
arising in connection with Contracts distributed under this Agreement. AFSG
and WRL further agree to cooperate fully in any securities regulatory
inspection, inquiry, investigation or proceeding or any judicial proceeding
with respect to WRL, AFSG, their affiliates and their representatives to the
extent that such inspection, inquiry, investigation or proceeding or judicial
proceeding is in connection with Contracts distributed under this Agreement.
Without limiting the foregoing:
(a) AFSG will be notified promptly of any customer complaint or
notice of any regulatory inspection, inquiry investigation or proceeding or
judicial proceeding received by WRL with respect to AFSG or any representative
or which may affect WRL's issuance of any Contracts marketed under this
Agreement; and
4
<PAGE> 5
(b) AFSG will promptly notify WRL of any customer complaint or
notice of any regulatory inspection, inquiry, investigation or judicial
proceeding received by AFSG or any representative with respect to WRL or its
affiliates in connection with any Contracts distributed under this Agreement.
In the case of a customer complaint, AFSG and WRL will cooperate in
investigating such complaint and shall arrive at a mutually satisfactory
response.
13. Termination.
(a) This Agreement may be terminated by either party
hereto upon 60 days' prior written notice to the other party.
(b) This Agreement may be terminated upon written notice
of one party to the other party hereto in the event of bankruptcy or insolvency
of such party to which notice is given.
(c) This Agreement may be terminated at any time upon the
mutual written consent of the parties hereto.
(d) AFSG shall not assign or delegate its
responsibilities under this Agreement without the written consent of WRL.
(e) Upon termination of this Agreement, all
authorizations, rights and obligations shall cease except the obligations to
settle accounts hereunder, including payments or premiums or contributions
subsequently received for Contracts in effect at the time of termination or
issued pursuant to applications received by WRL prior to termination.
14. Regulatory Impact. This Agreement shall be subject to, among
other laws, the provisions of the 1940 Act and the 1934 Act and the rules,
regulations, and rulings thereunder and of the NASD, from time to time in
effect, including such exemptions from the 1940 Act as the SEC may grant, and
the terms hereof shall be interpreted and construed in accordance therewith.
AFSG shall submit to all regulatory and administrative bodies having
jurisdiction over the operations of the Account, present or future; and will
provide any information, reports or other material which any such body by
reason of this Agreement may request or require pursuant to applicable laws or
regulations.
5
<PAGE> 6
15. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
16. Choice of Law. This Agreement shall be construed, enforced
and governed by the laws of the State of Florida.
17. No Assignment. Neither party may assign its interest in this
Agreement without the prior written consent of the other party, which consent
shall not be unreasonably withheld or delayed.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their respective duly authorized officials as of the day and year
first above written.
AFSG SECURITIES CORPORATION
By: /s/ LISA A. WACHENDORF
-----------------------------
Title: Lisa A. Wachendorf
-----------------------------
Vice President
WESTERN RESERVE LIFE ASSURANCE
CO. OF OHIO
By: /s/ JOHN R. KENNEY
-----------------------------
Title: John R. Kenny
-----------------------------
President
6
<PAGE> 7
EXHIBIT A
WRL Series Life Corporate Account
7
<PAGE> 1
EXHIBIT 1.A.(3)(b)
SELECTED BROKER AGREEMENT
This Agreement, dated__________________________,19____, is made by and between
AFSG Securities Corporation ("Distributor"), a Pennsylvania corporation,
Western Reserve Life Assurance Co. of Ohio ("Company"), an Ohio corporation,
and____________________________________________________________("Broker"), a
____________corporation. This Agreement supersedes and replaces any prior
Selected Broker Agreement regarding the subject matter between the parties
hereto.
WITNESSETH:
In consideration of the mutual promises contained herein, the parties hereto
agree as follows:
A. Definitions
(1) Contracts--Variable life insurance contracts and/or variable annuity
contracts described in Schedule A attached hereto and issued by
Western Reserve Life Assurance Co. of Ohio and for which Distributor
has been appointed the principal underwriter pursuant to Distribution
Agreements, copies of which have been furnished to Broker.
(2) Account--A separate account established and maintained by Company
pursuant to the laws of ___________, as applicable, to fund the
benefits under the Contracts.
(3) The Funds--open-end management investment companies registered under
the 1940 Act, shares of which are sold to the Account in connection
with the sale of the Contracts, as described in the Prospectus for
the Contracts.
(4) Registration Statement--The registration statement and amendments
thereto relating to the Contracts, the Account, and the Funds,
including financial statements and all exhibits.
(5) Prospectus--The prospectuses included within the Registration
Statement.
(6) 1933 Act--The Securities Act of 1933, as amended.
(7) 1934 Act--The Securities Exchange Act of 1934, as amended.
(8) 1940 Act--The Investment Company Act of 1940, as amended.
(9) SEC--The Securities and Exchange Commission.
(10) NASD--The National Association of Securities Dealers, Inc.
B. Agreements of Distributor
(1) Pursuant to the authority delegated to it by Company, Distributor
hereby authorizes Broker during the term of this Agreement to solicit
applications for Contracts from eligible persons provided that there
is an effective Registration Statement relating to such Contracts and
provided further that Broker has been notified by Distributor that the
Contracts are qualified for sale under all applicable securities and
insurance laws of the state or jurisdiction in which the application
will be solicited. In connection with the solicitation of
applications for Contracts, Broker is hereby authorized to offer
riders that are available with the Contracts in accordance with
instructions furnished by Distributor or Company.
(2) Distributor, during the term of this Agreement, will notify Broker of
the issuance by the SEC of any stop order with respect to the
Registration Statement or any amendments thereto or the initiation of
any proceedings for that purpose or for any other purpose relating to
the registration and/or offering of the Contracts and of any other
action or circumstance that may prevent the lawful sale of the
Contracts in any state or jurisdiction.
(3) During the term of this Agreement, Distributor shall advise Broker of
any amendment to the Registration Statement or any amendment or
supplement to any Prospectus.
C. Agreements of Broker
(1) It is understood and agreed that Broker is a registered broker/dealer
under the 1934 Act and a member of the NASD and that the agents or
representatives of Broker who will be soliciting applications for the
Contracts also will be duly registered representative of Broker. If an
agent or representative ceases to be a registered representative of
Broker, is disqualified from continued NASD registration or has his or
her registration suspended by the NASD or otherwise fails to meet the
rules and standards imposed by this Agreement or by Broker, Broker
shall immediately notify such agent or representative that he or she
is no longer authorized to solicit applications for the sale of the
Contracts. Broker shall immediately notify Distributor of such
termination or suspension or failure to abide by the rules and
standards.
(2) Commencing at such time as Distributor and Broker shall agree upon,
Broker agrees to use commercially reasonable efforts to find
purchasers for the Contracts acceptable to Company. In meeting its
obligation to use its commercially reasonable efforts to solicit
applications for Contracts, Broker shall, during the term of this
Agreement, engage in the following activities:
(a) Regularly utilize only training, sales and promotional materials
relating to the Contracts which have been approved by Company.
<PAGE> 2
(b) Establish and implement reasonable procedures for periodic
inspection and supervision of sales practices of its agents or
representatives and submit periodic reports to Distributor as may be
requested on the results of such inspections and the compliance with
such procedures.
(c) Broker shall take reasonable steps to ensure that the various
representatives appointed by it shall 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 such
applicant. While not limited to the following, a determination of
suitability shall be based on information furnished to a
representative after reasonable inquiry of such applicant concerning
the applicant's insurance and investment objectives, financial
situation and needs, and, if applicable, the likelihood that the
applicant will make the premium payments contemplated by the Contract.
(d) Broker shall adopt, abide by, and enforce the principles set forth
in the Principles and Code of Ethical market Conduct of the Insurance
Marketplace Standards Association as adopted by the Company and
provided to Broker with this Agreement.
(3) All payments for Contracts collected by agents or representatives of
Broker shall be held at all times in a fiduciary capacity and shall be
remitted promptly in full together with such applications, forms and
other required documentation to an office of the Company designated by
Distributor. Checks or money orders in payment of initial premiums
shall be drawn to the order of "Western Reserve Life Assurance Co.
of Ohio." Broker acknowledges that the Company retains the ultimate
right to control the sale of the Contracts and that the Distributor or
Company shall have the unconditional right to reject, in whole or
part, any application for the Contract. In the event Company or
Distributor rejects an application, Company immediately will return
all payments directly to the purchaser and Broker will be notified of
such action. In the event that any purchaser of a Contract elects to
return such Contract pursuant to the free look right, the purchaser
will receive a refund of either premium payments or the value of the
invested portion of such premiums as set forth in the Contract and
according to applicable state law. The Broker will be notified of any
such action.
(4) Broker shall act as an independent contractor, and nothing herein
contained shall constitute Broker, its agents or representatives, or
any employees thereof as employees of Company or Distributor in
connection with solicitation of applications for Contracts. Broker,
its agents or representatives, and its employees shall not hold
themselves out to be employees of Company or Distributor in this
connection or in any dealings with the public.
(5) Broker agrees that any material, including material it develops,
approves or uses for sales, training, explanatory or other purposes in
connection with the solicitation of applications for Contracts
hereunder (other than generic advertising materials which do not make
specific reference to the Company or the Contracts) will only be used
after receiving the written consent of Distributor to such material
and, where appropriate, the endorsement of Company to be obtained by
Distributor.
(6) Solicitation and other activities by Broker shall be undertaken only
in accordance with applicable Company procedures, ethical principles
and manuals, and applicable laws and regulations. No agent or
representative of Broker shall solicit applications for the contracts
until duly licensed and appointed by Company (such appointment not to
be unreasonably withheld by the Company) as a life insurance and
variable contract broker or agent of Company in the appropriate states
or other jurisdictions. Broker shall ensure that such agents or
representatives fulfill any training requirements necessary to be
licensed and that such agents or representatives are properly
supervised and controlled pursuant to the rules and regulations of the
SEC and the NASD. Broker shall certify agents' and representatives'
qualifications to the satisfaction of Distributor, including
certifying a General Letter of Recommendation set forth in Exhibit A
hereto. Broker shall provide, from time to time as requested by
Distributor, copies of insurance licenses for all states in which the
Broker holds the licenses and/or insurance licenses for any states in
which the Broker's affiliated insurance agency holds the licenses.
Broker understands and acknowledges that neither it nor its agents or
representatives is authorized by Distributor or Company to give any
information or make any representation in connection with this
Agreement or the offering of the Contracts other than those contained
in the Prospectus or other solicitation material authorized in writing
by Distributor or Company.
(7) Broker shall not have authority on behalf of Distributor or Company
to: make, alter or discharge any Contract or other form; waive any
forfeiture, extend the time of paying any premium; receive any monies
or premiums due, or to become due, to Company, except as set forth in
Section C(3) of this Agreement. Broker shall not expend, nor contract
for the expenditure of the funds of Distributor, nor shall Broker
possess or exercise any authority on behalf of Broker by this
Agreement.
(8) Broker shall have the responsibility for maintaining the records of
its representatives who are licensed, registered and otherwise
qualified to sell the Contracts. Broker shall maintain such other
records as are required of it by applicable laws and regulations. The
books, accounts and records of the Company, the Account, Distributor
and Broker relating to the sale of the Contracts shall be maintained
so as to clearly and accurately disclose the nature and details of the
transactions. All records maintained by the Broker in connection with
this Agreement shall be the property of the Company and shall be
returned to the Company
<PAGE> 3
upon termination of this Agreement, free from any claims or retention
of rights by the Broker. Nothing in this Section C(8) shall be
interpreted to prevent the Broker from retaining copies of any such
records relating to contract owner transactions which Broker is
required to maintain in order to comply with applicable federal, NASD,
and state regulation. The Broker shall keep confidential any
information obtained pursuant to this Agreement and shall disclose
such information only if the Company has authorized such disclosure or
if such disclosure is expressly required by any regulatory authority
or court of competent jurisdiction. Broker acknowledges that
information regarding the Contracts is proprietary information and
that in connection with the offer and sale of the Contracts, Broker
may be required to execute confidentiality agreements with third
parties. Broker acknowledges and agrees that monetary damages would
not be a sufficient or adequate remedy for breach of the
confidentiality provisions of this Section C(8) and that Company or
Distributor shall be entitled to specific performance or injunctive
relief, in addition to any other legal or equitable remedy which may
be available. The confidentiality provisions of this Section C(8)
shall survive the termination of this Agreement.
D. Compensation
(1) Pursuant to the Principal Underwriting Agreement between Distributor
and Company, Distributor shall cause Company to arrange for the
payment of compensation for the sale of each Contract sold by an agent
or representative of Broker in accordance with the Company's agreement
with the agent or representative, as the case may be, and the
commission schedules attached thereto. Such amounts shall be paid to
Broker, or if state insurance law requires, to an affiliated insurance
agency, provided, that with respect to payments to an affiliated
insurance agency, the Broker (a) has obtained a letter from the staff
of the SEC that the staff will not recommend enforcement action if the
affiliated insurance agency is not registered as a broker-dealer with
the SEC; or (b) has obtained from counsel a representation, which
shall be provided to Distributor, that (i) Broker is entitled to rely
on a no-action letter issued by the staff, a copy of which shall be
provided to Distributor, which granted no action relief to a
broker-dealer with respect to the distribution activities of the
broker-dealer's affiliated insurance agency when the insurance agency
was not registered as a broker-dealer with the SEC and (ii) such
no-action letter has not been rescinded or modified. All terms and
conditions of the Company's agreement with the agent or
representative, as the case may be, shall be incorporated by reference
herein to the extent such terms and conditions do not conflict with
this Agreement. Company shall identify to Broker with each such
payment the name of the agent or representative of Broker who
solicited each Contract covered by the payment.
(2) Neither Broker nor any of its agents or representatives shall have any
right to withhold or deduct any part of any premium it shall receive
for purposes of payment of commission or otherwise. Neither Broker
nor any of its agents or representatives shall have an interest in any
compensation paid by Company to Distributor, now or hereafter, in
connection with the sale of any Contracts hereunder.
E. Complaints and Investigations
(1) Broker and Distributor jointly agree to cooperate fully in any
insurance or securities regulatory investigation or proceeding or
judicial proceeding arising in connection with the Contracts marketed
under this Agreement. Broker, upon receipt, will notify Distributor
of any customer complaint or notice of any regulatory investigation or
proceeding or judicial proceeding in connection with the Contracts.
Broker and Distributor further agree to cooperate fully in any
securities regulatory investigation or proceeding or judicial
proceeding with respect to Broker, Distributor, their affiliates and
their agents or representatives to the extent that such investigation
or proceeding is in connection with Contracts marketed under this
Agreement. Broker shall furnish applicable federal and state
regulatory authorities with any information or reports in connection
with its services under this Agreement which such authorities may
request in order to ascertain whether the Company's operations are
being conducted in a manner consistent with any applicable law or
regulation. Each party shall bear its own costs and expenses of
complying with any regulatory requests, subject to any right of
indemnification that may be available pursuant to Section G of this
Agreement.
(2) Broker shall report promptly in writing to Distributor all customer
complaints or inquiries relating to the offer and sale of the
Contracts or made by or on behalf of any owner of a Contract, whether
written or oral, and shall assist Distributor and Company in resolving
those complaints to the satisfaction of all parties.
F. Term of Agreement
(1) This Agreement shall continue in force for one year from its effective
date and thereafter shall automatically be renewed every year for a
further one year period; provided that either party may unilaterally
terminate this Agreement upon thirty (30) days' written notice to the
other party of its intention to do so. This Agreement shall
automatically terminate without notice upon (a) the bankruptcy or
dissolution of Broker; (b) any fraud or gross negligence by Broker in
the performance of any duties imposed by this Agreement or if Broker
wrongfully withholds or misappropriates, for Broker's own use, funds
of Company, its policyholders or applicants; (c) any material
breaches by Broker of this Agreement; (d) any material violation of
any applicable state or federal law and/or administrative regulation
in a jurisdiction where Broker transacts business; or (e) any failure
to maintain a
<PAGE> 4
necessary license in any jurisdiction, but only as to that
jurisdiction and only until Broker reinstates its license in such
jurisdiction.
(2) Upon termination of this Agreement, all authorizations, rights and
obligations shall cease except (a) the agreements contained in
Sections C(8) and E hereof; (b) the indemnity set forth in Section G
hereof; and (c) the obligations to settle accounts hereunder,
including commission payments on premiums subsequently received for
Contracts in effect at the time of termination or issued pursuant to
applications received by Broker prior to termination.
(3) Distributor and Company reserve the right, without notice to Broker,
to suspend, withdraw or modify the offering of the Contracts or to
change the conditions of their offering.
G. Indemnity
(1) Broker shall be held to the exercise of reasonable care in carrying
out the provisions of this Agreement.
(2) Distributor agrees to indemnify and hold harmless Broker and each
officer or director of Broker against any losses, claims, damages or
liability, joint or several, to which Broker or such officer or
director become subject under applicable law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any allegedly untrue statement, or alleged
omission, of a material fact, when it would be necessary to include a
true statement of such fact in the Registration Statement or any
post-effective amendment thereto or in the Prospectus or any amendment
or supplement to the Prospectus, or any sales literature provided by
the Company or by the Distributor in order to make the statements
contained therein not misleading.
(3) Broker agrees to indemnify and hold harmless Company and Distributor
and each of their current and former directors and officers and each
person, if any, who controls or has controlled Company or Distributor
within the meaning of the 1933 Act or the 1934 Act, against any
losses, claims, damages or liabilities to which Company or Distributor
and any such director or officer or controlling person may become
subject, under the 1933 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon:
(a) any (i) breach by Broker of any representation, warranty, covenant
or agreement contained in this Agreement; (ii) negligent act or
omission or willful misconduct by Broker or any of its agents,
employees, representatives or affiliates with respect to this
Agreement; (iii) failure by Broker or any of its agents, employees, or
affiliates to comply with applicable law; (iv) unauthorized use of
sales material or any verbal or written misrepresentations or any
unlawful sales practice concerning the Contracts by Broker, agents,
employees, representatives or affiliates; or
(b) Claims by agents or representatives or employees of Broker for
commissions, service fees, development allowances or other
compensation or remuneration of any type;
(c) The failure of Broker, its officers, employees, or agents to
comply with the provisions of this Agreement;
and Broker will reimburse Company and Distributor and any director
or officer or controlling person of either for any legal or other
expenses reasonably incurred by Company, Distributor, or such
director, officer of controlling person in connection with
investigating or defending any such loss, claims, damage, liability
or action. This indemnity agreement will be in addition to any
liability which Broker may otherwise have.
(4) Any request for indemnification against a party (the "Indemnitor")
arising out of a claim from a third party must be made in writing
within a reasonable time after notice of a claim or receipt of a claim
from a third party ("Claim") has been received by the party seeking
indemnification (the "Indemnitee"). At any time after such request,
Indemnitor may deliver to the Indemnitee its written acknowledgment
that Indemnitee is entitled to indemnification. The Indemnitor shall
thereafter be entitled to assume the defense of the Claim and shall
bear all expenses associated therewith, including without limitation,
payment on a current basis of all previous expenses incurred by the
Indemnitee in relation to the Claim from the date the Claim was
brought. Until such time as Indemnitee receives notice of an
Indemnitor's election to assume the defense of any Claim, Indemnitee
may defend itself against the Claim and may hire counsel and other
experts of its choice and Indemnitor shall be liable for payment of
counsel and other expert fees on a current basis as the same are
billed. Indemnitor and Indemnitee shall cooperate with one another in
the defense of any such Claim and if either party becomes aware of any
significant developments, it shall notify the other party as soon as
practical. Neither party shall agree to any settlement of a Claim
unless the other party agrees in writing.
(5) The provisions of this Section shall survive the termination of this
Agreement.
H. Assignability
This Agreement shall not be assigned by either party without the
written consent of the other.
<PAGE> 5
I. Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the State of Iowa without regard to its law concerning
conflicts of law.
J. Notices
All communications under the Agreement shall be in writing and shall
be deemed delivered on the third business day after being mailed by
certified mail, postage prepaid. Alternatively, communications shall
be deemed delivered on the first business day after being transmitted
timely, delivery charges prepaid, to a third party company or
governmental entity providing delivery services in the ordinary course
of business, which guarantees delivery to the other party on the next
business day. Notices shall be sent to the following addresses unless
and until the addressee notifies the other party of a change in
address according to the terms of this Section:
<TABLE>
<S> <C>
If to Broker, to: if to the Distributor or Company, to:
--------------------------------------------
Company WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
C/O LIFE INVESTORS INSURANCE COMPANY OF AMERICA
-------------------------------------------- EXTRAORDINARY MARKETS, INDIVIDUAL DIVISION
Street address 4333 EDGEWOOD ROAD NE
CEDAR RAPIDS, IOWA 52499
-------------------------------------------- Telephone: (319) 297-8208
City, State, Zip Telecopy: (319) 297-8132
--------------------------------------------
Attention
--------------------------------------------
Telephone
--------------------------------------------
Telecopy
</TABLE>
K. Arbitration
Any disagreement, dispute, claim or controversy solely between Broker
and Distributor arising out of or relating to this Agreement shall be
subject to mandatory arbitration under the auspices, rules and bylaws
of the NASD, to the full extent applicable and as may be amended from
time to time.
In Witness Whereof, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
---------------------------------------------------
(Broker Name)
By:
------------------------------------------------
Title:
---------------------------------------------
AFSG SECURITIES CORPORATION
(Distributor)
By:
------------------------------------------------
Title:
---------------------------------------------
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
(Company)
By:
------------------------------------------------
Title:
---------------------------------------------
<PAGE> 6
EXHIBIT A
GENERAL LETTER OF RECOMMENDATION
BROKER-DEALER ("we," "our" or "us") hereby certifies to the Company that all
the following requirements will be fulfilled in conjunction with the submission
of licensing/appointment papers for all applicants as agents of the Company
submitted by BROKER-DEALER. BROKER-DEALER will, upon request, forward proof of
compliance with same to the Company in a timely manner.
1. We have made a thorough and diligent inquiry and investigation
relative to each applicant's identity, residence and business
reputation and declare that each applicant is personally known to us,
has been examined by us, is known to be of good moral character, has a
good business reputation, is reliable, is financially responsible and
is worthy of a license. Each individual is trustworthy, competent and
qualified to act as an agent for the Company to hold himself out in
good faith to the general public.
2. We have on file a U-4 form which was completed (and has been amended,
as required) by each applicant. We have fulfilled all the necessary
investigative requirements for the registration of each applicant as a
registered representative through our NASD member firm, including but
not limited to: (i) checking for and investigating criminal arrest and
conviction records available to Broker-Dealer on the CRD system; and
(ii) communicating with each employer of the applicant for 3 years
prior to the applicant's registration with our firm. Each applicant is
presently registered as an NASD registered representative.
The above information in our files indicates no fact or condition which
would disqualify the applicant from receiving a license and all the findings
of all investigative information is favorable.
At the time of application, in those states required by the Company,
we shall provide the Company with a copy of the entire U-4 form, or
designated pages, thereof, completed by each applicant, including any
amendments or updates thereto, and we certify those items are true
copies of the original.
3. We certify that all educational requirements have been met for the
specified state each applicant is requesting a license in, and that
all such persons have fulfilled the appropriate examination, education
and training requirements.
4. If the applicant is required to submit his picture, his signature, and
securities registration in the state in which he is applying for a
license, we certify that those items forwarded to the Company are
those of the applicant and the securities registration is a true copy
of the original.
5. We hereby warrant that the applicant is not applying for a license
with the Company in order to place insurance chiefly and solely on his
life or property, or lives or property of his relatives, or property
or liability of his associates.
6. We will not permit any applicant to transact insurance in a state as
an agent until duly licensed and appointed therefor with the
appropriate State Insurance Department. No applicants have been given
a contract or furnished supplies, nor have any applicants been
permitted to write, solicit business, or act as an agent in any
capacity, and they will not be so permitted until the certificate of
authority or license applied for is received.
<PAGE> 7
SCHEDULE A
Advantage IV Variable Adjustable Life Insurance Policy
<PAGE> 1
EXHIBIT 1.A(8)(a)
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT made as of the 1st day of October, 1998, by and
between BT Insurance Funds Trust ("TRUST"), a Massachusetts business trust,
Bankers Trust Company ("ADVISER"), a New York banking corporation, and Western
Reserve Life Assurance Co. of Ohio ("LIFE COMPANY"), a life insurance company
organized under the laws of the State of Ohio.
WHEREAS, TRUST is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940, as amended (the
"'40 Act"), as an open-end, diversified management investment company; and
WHEREAS, TRUST is comprised of several series funds (each a
"Portfolio"), with those Portfolios currently available being listed on
Appendix A hereto; and
WHEREAS, TRUST was organized to act as the funding vehicle for certain
variable life insurance and/or variable annuity contracts ("Variable
Contracts") offered by life insurance companies through separate accounts
("Separate Accounts") of such life insurance companies ("Participating
Insurance Companies"); and
WHEREAS, TRUST may also offer its shares to certain qualified pension
and retirement plans ("Qualified Plans"); and
WHEREAS, TRUST has received an order from the SEC, granting
Participating Insurance Companies and their separate accounts exemptions from
the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the '40 Act, and
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit shares of the Portfolios of the TRUST to be sold to and held by Variable
Contract Separate Accounts of both affiliated and unaffiliated Participating
Insurance Companies and Qualified Plans ("Exemptive Order"); and
WHEREAS, LIFE COMPANY has established or will establish one or more
Separate Accounts to offer Variable Contracts and is desirous of having TRUST
as one of the underlying funding vehicles for such Variable Contracts; and
WHEREAS, ADVISER is a "bank" as defined in the Investment Advisers Act
of 1940, as amended (the "Advisers Act") and as such is excluded from the
definition of "Investment Adviser" and is not required to register as an
investment adviser pursuant to the Advisers Act; and
WHEREAS, ADVISER serves as the TRUST's investment adviser; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, LIFE COMPANY intends to purchase shares of TRUST to fund the
aforementioned Variable Contracts and TRUST is authorized to sell such shares
of the Portfolio named in Appendix B to LIFE COMPANY at such shares' net asset
value;
1
<PAGE> 2
NOW, THEREFORE, in consideration of their mutual promises, LIFE
COMPANY, TRUST, and ADVISER agree as follows:
Article I. SALE OF TRUST SHARES
1.1 TRUST agrees to make available to the Separate Accounts of LIFE
COMPANY shares of the selected Portfolios as listed on Appendix B for
investment of purchase payments of Variable Contracts allocated to the
designated Separate Accounts as provided in TRUST's Registration Statement.
1.2 TRUST agrees to sell to LIFE COMPANY those shares of the
selected Portfolios of TRUST which LIFE COMPANY orders, executing such orders
on a daily basis at the net asset value next computed after receipt by TRUST or
its designee of the order for the shares of TRUST. For purposes of this
Section 1.2, LIFE COMPANY shall be the designee of TRUST for receipt of such
orders from the designated Separate Account and receipt by such designee shall
constitute receipt by TRUST; provided that LIFE COMPANY receives the order by
4:00 p.m. New York time and TRUST receives notice from LIFE COMPANY by
telephone or facsimile (or by such other means as TRUST and LIFE COMPANY may
agree in writing) of such order by 9:30 a.m. New York time on the next
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which TRUST calculates its net asset value
pursuant to the rules of the SEC.
1.3 TRUST agrees to redeem on LIFE COMPANY's request, any full or
fractional shares of TRUST held by LIFE COMPANY, executing such requests on a
daily basis at the net asset value next computed after receipt by TRUST or its
designee of the request for redemption, in accordance with the provisions of
this Agreement and TRUST's Registration Statement. (In the event of a conflict
between the provisions of this Agreement and the Trust's Registration
Statement, the provisions of the Registration Statement shall govern.) For
purposes of this Section 1.3, LIFE COMPANY shall be the designee of TRUST for
receipt of requests for redemption from the designated Separate Account and
receipt by such designee shall constitute receipt by TRUST; provided that LIFE
COMPANY receives the request for redemption by 4:00 p.m. New York time and
TRUST receives notice from LIFE COMPANY by telephone or facsimile (or by such
other means as TRUST and LIFE COMPANY may agree in writing) of such request for
redemption by 9:30 a.m. New York time on the next Business Day.
1.4 TRUST shall furnish, on or before each ex-dividend date, notice
to LIFE COMPANY of any income dividends or capital gain distributions payable
on the shares of any Portfolio of TRUST. LIFE COMPANY hereby elects to receive
all such income dividends and capital gain distributions as are payable on a
Portfolio's shares in additional shares of the Portfolio. TRUST shall notify
LIFE COMPANY or its designee of the number of shares so issued as payment of
such dividends and distributions. Life Company reserves the right to revoke
this election and to receive all such dividends and distributions in cash.
1.5 TRUST shall make the net asset value per share for the selected
Portfolio(s) available to LIFE COMPANY on a daily basis as soon as reasonably
practicable after the net asset value per share
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is calculated but shall use its best efforts to make such net asset value
available by 6:00 p.m. New York time each Business Day. If TRUST provides LIFE
COMPANY with materially incorrect share net asset value information through no
fault of LIFE COMPANY, LIFE COMPANY on behalf of the Separate Accounts, shall
be entitled to an adjustment to the number of shares purchased or redeemed to
reflect the correct share net asset value. Any material error in the
calculation of net asset value per share, dividend or capital gain information
shall be reported promptly upon discovery to LIFE COMPANY.
1.6 Each purchase, redemption and exchange order placed by LIFE
COMPANY shall be placed separately for each Portfolio and shall not be netted
with respect to any Portfolio. However, with respect to payment of the
purchase price by LIFE COMPANY and redemption of proceeds by the TRUST, LIFE
COMPANY and TRUST shall net purchase and redemption orders with respect to each
Portfolio and shall transmit one net payment for all Portfolios in accordance
with Section 1.7 hereof.
1.7 In the event net purchases, LIFE COMPANY shall pay for TRUST
shares by 3:00 p.m. New York time on the next Business Day after an order to
purchase the Shares is deemed to be received in accordance with the provisions
of Section 1.2 hereof. In the event of net redemptions, TRUST shall pay the
redemption proceeds by 3:00 p.m. New York time on the next Business Day after
an order to redeem the shares is deemed to be received in accordance with the
provisions of Section 1.3 hereof. All such payments shall be in federal funds
transmitted by wire. In any event, proceeds shall be wired to LIFE COMPANY
within the time period permitted by the '40 Act or the rules, orders or
regulations thereunder, and TRUST shall notify the person designated in writing
by LIFE COMPANY as the recipient for such notice of any delay by 3:00 p.m. New
York Time on the same Business Day that LIFE COMPANY transmits the redemption
order to TRUST. If LIFE COMPANY's order requests the application of redemption
proceeds from the redemption of shares to the purchase of shares of another
Fund advised by ADVISER, TRUST shall so apply such proceeds on the same
Business Day that LIFE COMPANY transmits such order to TRUST.
1.8 TRUST agrees that all shares of the Portfolios of TRUST will be
sold only to Participating Insurance Companies which have agreed to
participate in TRUST to fund their Separate Accounts and/or to Qualified Plans,
all in accordance with the requirements of Section 817(h)(4) of the Internal
Revenue Code of 1986, as amended ("Code") and Treasury Regulation 1.817-5.
Shares of the TRUST's Portfolios will not be sold directly to the general
public.
1.9 The TRUST will not sell shares of any Portfolio to any insurance
company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, and VI of this Agreement are in
effect to govern such sales. The TRUST shall make available upon written
request from the Life Company a list of all other Participating Insurance
Companies. TRUST may refuse to sell shares of any Portfolio to any person, or
suspend or terminate the offering of the shares of or liquidate any Portfolio
of TRUST if such action is required by law or by regulatory authorities having
jurisdiction or is, in the sole discretion of the Board of Trustees of the
TRUST (the "Board"), acting in good faith and in light of its duties under
federal and any applicable state laws, deemed necessary, desirable or
appropriate and in the best interests of the shareholders of such Portfolios.
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1.10 Issuance and transfer of Portfolio shares will be by book entry
only. Stock certificates will not be issued to LIFE COMPANY or the Separate
Accounts. Shares ordered from Portfolio will be recorded in appropriate book
entry titles for the Separate Accounts.
Article II. REPRESENTATIONS AND WARRANTIES
2.1 LIFE COMPANY represents and warrants that it is an insurance
company duly organized and in good standing under the laws of Ohio and that it
has legally and validly established each Separate Account as a segregated asset
account under such laws, and that AFSG Securities Corporation, the principal
underwriter for the Variable Contracts, is registered as a broker-dealer under
the Securities Exchange Act of 1934 (the "'34 Act").
2.2 LIFE COMPANY represents and warrants that it has registered or,
prior to any issuance or sale of the Variable Contracts, will register each
Separate Account as a unit investment trust ("UIT") in accordance with the
provisions of the '40 Act and cause each Separate Account to remain so
registered to serve as a segregated asset account for the Variable Contracts,
unless an exemption from registration is available.
2.3 LIFE COMPANY represents and warrants that the Variable Contracts
will be registered under the Securities Act of 1933 (the "'33 Act") unless an
exemption from registration is available prior to any issuance or sale of the
Variable Contracts, and that the Variable Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
and further that the sale of the Variable Contracts shall comply in all
material respects with applicable state insurance law suitability requirements.
2.4 With respect to Sections 2.6 and 2.7 hereof, LIFE COMPANY
represents and warrants that the Variable Contracts are currently and at the
time of issuance will be treated as life insurance, endowment or annuity
contracts under applicable provisions of the Code, that it will use its best
efforts to maintain such treatment and that it will notify TRUST immediately
upon having a reasonable basis for believing that the Variable Contracts have
ceased to be so treated or that they might not be so treated in the future.
2.5 TRUST represents and warrants that the Fund shares offered and
sold pursuant to this Agreement will be registered under the '33 Act and sold
in accordance with all applicable federal laws, and TRUST shall be registered
under the '40 Act prior to and at the time of any issuance or sale of such
shares. TRUST, subject to Section 1.9 above, shall amend its registration
statement under the '33 Act and the '40 Act from time to time as required in
order to effect the continuous offering of its shares. TRUST shall register
and qualify its shares for sale in accordance with the laws of the various
states only if and to the extent deemed advisable by TRUST.
2.6 TRUST represents and warrants that each Portfolio will comply
with the diversification requirements set forth in Section 817(h) of the Code,
and the rules and regulations thereunder, including without limitation Treasury
Regulation 1.817-5, and will notify LIFE COMPANY immediately upon having a
reasonable basis for believing any Portfolio has ceased to comply and will
immediately take all reasonable steps to adequately diversify the Portfolio to
achieve compliance.
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2.7 TRUST represents and warrants that each Portfolio invested in by
the Separate Account will be treated as a "regulated investment company" under
Subchapter M of the Code, and will notify LIFE COMPANY immediately upon having
a reasonable basis for believing it has ceased to so qualify or might not so
qualify in the future.
2.8. TRUST in its discretion will make reasonable efforts consistent
with market conditions and its investment objectives, to comply with applicable
state investment laws.
2.9 TRUST represents that it is lawfully organized and validly
existing under the laws of Massachusetts and that it does and will comply with
applicable provisions of the 1940 Act.
2.10 ADVISER represents and warrants that it shall perform its
obligations hereunder in compliance in all material respects with any
applicable state and federal laws.
2.11 TRUST and Adviser represent and warrant that all of their
directors, officers, partners and employees dealing with the money and/or
securities of the TRUST are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the TRUST. The
bond shall be in an amount required by the applicable rules of the National
Association of Securities Dealers, Inc. ("NASD") and the federal securities
laws. The aforesaid bond shall include coverage for larceny and embezzlement
and shall be issued by a reputable bonding company. All parties shall make all
reasonable efforts to see that this bond or another bond containing these
provisions is always in effect, shall provide evidence thereof promptly to any
other party upon written notice requested therefor, and shall notify the other
parties promptly in the event that such coverage no longer applies.
2.12 (a) LIFE COMPANY acknowledges that TRUST's computer systems
which it will use in performing its duties under this Agreement (the "Trust
Systems") utilize ADVISOR-developed software code as well as interfaces, code
and data from other third party service providers and that neither TRUST nor
ADVISOR can ensure that such third parties will take action necessary to make
changes or enhancements required so that their software will be Year 2000
Compliant (as defined below) by December 31, 1998. However, ADVISOR warrants
that it will use all commercially reasonable efforts with the aim of having the
Trust Systems Year 2000 Compliant (as defined below) by December 31, 1998. The
determination of whether the Trust Systems are Year 2000 Compliant shall be
made by ADVISOR in good faith based upon its tests of the Trust System within
ADVISOR's own environment as well as in scenarios designed to duplicate certain
industry environments.
(b) For purposes of this Section, Year 2000 Compliant
shall mean that the Trust Systems shall be able to accurately process date
data, without creating any logical or mathematical inconsistencies, from, into
and between the twentieth and twenty-first centuries and after December 31,
1999, for any purpose under this Agreement.
Article III. PROSPECTUS, PROXY STATEMENTS AND OTHER INFORMATION
3.1 TRUST shall prepare and be responsible for filing with the SEC
and any state regulators requiring such filing all shareholder reports,
notices, proxy materials (or similar materials such as
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voting instruction solicitation materials), prospectuses, statements of
additional information and Registration Statements of TRUST. TRUST shall bear
the costs of registration and qualification of shares of the Portfolios,
preparation and filing of the documents listed in this Section 3.1 and all
taxes and filing fees to which an issuer is subject on the issuance and
transfer of its shares.
3.2 TRUST or its designee shall provide LIFE COMPANY, free of charge,
with as many copies of the current prospectus (or prospectuses), statements of
additional information, annual and semi-annual reports and proxy statements for
the shares of the Portfolios as LIFE COMPANY may reasonably request for
distribution to then-existing Variable Contract owners whose Variable Contracts
are funded by such shares. TRUST or its designee shall provide LIFE COMPANY, at
LIFE COMPANY's expense, with as many copies of the current prospectus (or
prospectuses) for the shares as LIFE COMPANY may reasonably request for
distribution to prospective purchasers of Variable Contracts. If requested by
LIFE COMPANY, TRUST or its designee shall provide such documentation (including
a "camera ready" copy of the current prospectus (or prospectuses) as set in
type or, at the request of LIFE COMPANY, as a diskette in the form sent to the
financial printer) and other assistance as is reasonably necessary in order for
the parties hereto once a year (or more frequently if the prospectus (or
prospectuses) for the shares is supplemented or amended) to have the prospectus
for the Variable Contracts and the prospectus (or prospectuses) for the TRUST
shares printed together in one document. The expenses of such printing will be
apportioned between LIFE COMPANY and TRUST in proportion to the number of pages
of the Variable Contract and TRUST prospectus, taking account of other relevant
factors affecting the expense of printing, such as covers, columns, graphs and
charts; TRUST shall only bear the cost of printing the TRUST prospectus portion
of such document for distribution only to owners of then-existing Variable
Contracts funded by the TRUST shares; provided, however, LIFE COMPANY shall
bear all printing expenses of such combined documents where used for
distribution to prospective purchasers. In the event that LIFE COMPANY
requests that TRUST or its designee provide TRUST's prospectus in a "camera
ready" or diskette format, TRUST shall be responsible for providing the
prospectus (or prospectuses) in the format in which it is accustomed to
formatting prospectuses and shall bear the expense of providing the prospectus
(or prospectuses) in such format (e.g. typesetting expenses), and LIFE COMPANY
shall bear the expense of adjusting or changing the format to conform with any
of its prospectuses.
3.3 TRUST will provide LIFE COMPANY with at least one complete copy
of all registration statements, prospectuses, statements of additional
information, annual and semi-annual reports and other shareholder
communications, proxy statements, sales literature and other promotional
materials, requests for no-action letters, exemptive applications and all
amendments or supplements to any of the above that relate to the Portfolios
promptly after the filing of each such document with the SEC or other
regulatory authority. LIFE COMPANY will provide TRUST with at least one
complete copy of all prospectuses, statements of additional information, annual
and semi-annual reports, proxy statements, exemptive applications and all
amendments or supplements to any of the above that relate to a Separate Account
promptly after the filing of each such document with the SEC or other
regulatory authority.
3.4 TRUST agrees to provide LIFE COMPANY within ten Business Days
after the end of a calendar month the following information with respect to
each Portfolio of the TRUST set forth in Appendix B, each as of the last
Business Day of such calendar month: the Portfolio's ten largest
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portfolio holdings (based on the percentage of the Portfolio's net assets) and
the industry sectors in which the Portfolio's investments are most heavily
weighted or the geographic regions in which the Portfolio's investments are
most heavily weighted (International funds only) and within 3 business days
after the end of a calendar month the year-to-date SEC standardized performance
data. In addition, TRUST agrees to provide to LIFE COMPANY a market commentary
from the Portfolio manager within approximately 45 days after the end of
calendar quarter, with respect to each Portfolio of the TRUST set forth in
Appendix B as of the last Business Day of such quarter and will provide upon
reasonable request after the end of a calendar quarter a list of the Portfolio
holdings (not audited or reconciled against the Fund's books or records) with
respect to each Portfolio set forth in Appendix B as of the last Business Day
of each such year. Also, the TRUST agrees to provide LIFE COMPANY, within ten
Business Days after a reasonable request is submitted to the TRUST by LIFE
COMPANY, the following information, each as of the date or dates specified in
such request: net asset value; net asset value per share, and other share
information. Trust acknowledges that such information may be furnished to LIFE
COMPANY's internal or independent auditors and to the insurance departments of
the various jurisdictions in which LIFE COMPANY does business.
Article IV. SALES MATERIALS
4.1 LIFE COMPANY will furnish, or will cause to be furnished, to
TRUST and ADVISER, each piece of sales literature or other promotional material
in which TRUST or ADVISER is named, at least fifteen (15) Business Days prior
to its intended use. No such material will be used if TRUST or ADVISER
reasonably objects to its use in writing within ten (10) Business Days after
receipt of such material.
4.2 TRUST and ADVISER will furnish, or will cause to be furnished, to
LIFE COMPANY, each piece of sales literature or other promotional material in
which LIFE COMPANY or its Separate Accounts are named, at least fifteen (15)
Business Days prior to its intended use. No such material will be used if LIFE
COMPANY reasonably objects to its use in writing within ten (10) Business Days
after receipt of such material.
4.3 TRUST and its affiliates and agents shall not give any
information or make any representations on behalf of LIFE COMPANY or concerning
LIFE COMPANY, the Separate Accounts, or the Variable Contracts issued by LIFE
COMPANY, other than the information or representations contained in a
registration statement or prospectus for such Variable Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in reports of the Separate Accounts or reports prepared for
distribution to owners of such Variable Contracts, or in sales literature or
other promotional material approved by LIFE COMPANY or its designee, except
with the written permission of LIFE COMPANY.
4.4 LIFE COMPANY and its affiliates and agents shall not give any
information or make any representations on behalf of TRUST or concerning TRUST
other than the information or representations contained in a registration
statement or prospectus for TRUST, as such registration statement and
prospectus may be amended or supplemented from time to time, or in sales
literature or other promotional material approved by TRUST or its designee, or
in reports or proxy materials
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for the TRUST, except with the written permission of TRUST.
4.5 For purposes of this Agreement, the phrase "sales literature or
other promotional material" or words of similar import include, without
limitation, advertisements (such as material published, or designed for use, in
a newspaper, magazine or other periodical, radio, television, telephone or tape
recording, videotape display, signs or billboards, motion pictures or other
public media), sales literature (such as any written communication distributed
or made generally available to customers or the public, including brochures,
circulars, research reports, market letters, form letters, seminar texts, or
reprints or excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications distributed
or made generally available to some or all agents or employees, registration
statements, prospectuses, statements of additional information, shareholder
reports and proxy materials, and any other material constituting sales
literature or advertising under NASD rules, the '40 Act, the '33 Act or rules
thereunder.
4.6 No party shall use any other party's names, logos, trademarks or
service marks, whether registered or unregistered, without the prior written
consent of such other party, or after written consent therefor has been
revoked. TRUST and Adviser shall not use in advertising, publicity or
otherwise the name of LIFE COMPANY, or any of its affiliates nor any trade
name, trademark, trade device, service mark, symbol or any abbreviation,
contraction or simulation thereof of LIFE COMPANY, or its affiliates without
the prior written consent of LIFE COMPANY in each instance.
Article V. POTENTIAL CONFLICTS
5.1 The parties acknowledge that TRUST has received an order from the
SEC granting relief from various provisions of the '40 Act and the rules
thereunder to the extent necessary to permit TRUST shares to be sold to and
held by Variable Contract separate accounts of both affiliated and unaffiliated
Participating Insurance Companies and Qualified Plans. The Exemptive Order
requires TRUST and each Participating Insurance Company to comply with
conditions and undertakings substantially as provided in this Section 5. The
TRUST will not enter into a participation agreement with any other
Participating Insurance Company unless it imposes the same conditions and
undertakings as are imposed on LIFE COMPANY hereby.
5.2 The Board will monitor TRUST for the existence of any material
irreconcilable conflict between the interests of Variable Contract owners of
all separate accounts and with participants of Qualified Plans investing in
TRUST. An irreconcilable material conflict may arise for a variety of reasons,
which may include: (a) an action by any state insurance regulatory authority;
(b) a change in applicable federal or state insurance, tax, or securities laws
or regulations, or a public ruling, private letter ruling or any similar action
by insurance, tax or securities regulatory authorities; (c) an administrative
or judicial decision in any relevant proceeding; (d) the manner in which the
investments of TRUST are being managed; (e) a difference in voting instructions
given by Variable Contract owners; (f) a decision by a Participating Insurance
Company to disregard the voting instructions of Variable Contract owners and
(g) if applicable, a decision by a Qualified Plan to disregard the voting
instructions of plan participants.
5.3 LIFE COMPANY will report any potential or existing conflicts of
which it becomes
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aware to the Board. LIFE COMPANY will be responsible for assisting the Board
in carrying out its duties in this regard by providing the Board with all
information reasonably necessary for the Board to consider any issues raised.
The responsibility includes, but is not limited to, an obligation by the LIFE
COMPANY to inform the Board whenever it has determined to disregard Variable
Contract owner voting instructions. These responsibilities of LIFE COMPANY
will be carried out with a view only to the interests of the Variable Contract
owners.
5.4 If a majority of the Board or majority of its disinterested
Trustees, determines that a material irreconcilable conflict exists affecting
LIFE COMPANY, LIFE COMPANY, at its expense and to the extent reasonably
practicable (as determined by a majority of the Board's disinterested
Trustees), will take any steps necessary to remedy or eliminate the
irreconcilable material conflict, including; (a) withdrawing the assets
allocable to some or all of the Separate Accounts from TRUST or any Portfolio
thereof and reinvesting those assets in a different investment medium, which
may include another Portfolio of TRUST, or another investment company; (b)
submitting the question as to whether such segregation should be implemented to
a vote of all affected Variable Contract owners and as appropriate, segregating
the assets of any appropriate group (i.e variable annuity or variable life
insurance Contract owners of one or more Participating Insurance Companies)
that votes in favor of such segregation, or offering to the affected Variable
Contract owners the option of making such a change; and (c) establishing a new
registered management investment company (or series thereof) or managed
separate account. If a material irreconcilable conflict arises because of LIFE
COMPANY's decision to disregard Variable Contract owner voting instructions,
and that decision represents a minority position or would preclude a majority
vote, LIFE COMPANY may be required, at the election of TRUST, to withdraw the
Separate Account's investment in TRUST, and no charge or penalty will be
imposed as a result of such withdrawal. The responsibility to take such
remedial action shall be carried out with a view only to the interests of the
Variable Contract owners.
For the purposes of this Section 5.4, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
TRUST or ADVISER (or any other investment adviser of TRUST) be required to
establish a new funding medium for any Variable Contract. Further, LIFE
COMPANY shall not be required by this Section 5.4 to establish a new funding
medium for any Variable Contracts if any offer to do so has been declined by a
vote of a majority of Variable Contract owners materially and adversely
affected by the irreconcilable material conflict.
5.5 The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and in
writing to LIFE COMPANY.
5.6 No less than annually, LIFE COMPANY shall submit to the Board
such reports, materials or data as the Board may reasonably request so that the
Board may fully carry out its obligations. Such reports, materials, and data
shall be submitted more frequently if deemed appropriate by the Board.
Article VI. VOTING
6.1 LIFE COMPANY will provide pass-through voting privileges to all
Variable Contract
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owners so long as the SEC continues to interpret the '40 Act as requiring
pass-through voting privileges for Variable Contract owners. Accordingly, LIFE
COMPANY, where applicable, will vote shares of the Portfolio held in its
Separate Accounts in a manner consistent with voting instructions timely
received from its Variable Contract owners. LIFE COMPANY will be responsible
for assuring that each of its Separate Accounts that participates in TRUST
calculates voting privileges in a manner consistent with other Participating
Insurance Companies. LIFE COMPANY will vote shares for which it has not
received timely voting instructions, as well as shares it owns, in the same
proportion as its votes those shares for which it has received voting
instructions.
LIFE COMPANY reserves the right to vote TRUST shares held in any
segregated asset account in its own right, to the extent permitted by law.
Participating Insurance Companies shall be responsible for assuring that each
of their separate accounts participating in the TRUST calculates voting
privileges in a manner consistent with other Participating Insurance Companies
and as required by the Exemptive Order.
6.2 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or
if Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
'40 Act or the rules thereunder with respect to mixed and shared funding on
terms and conditions materially different from any exemptions granted in the
Exemptive Order, then TRUST, and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rule 6e-2
and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
Rules are applicable.
Article VII. INDEMNIFICATION
7.1 Indemnification by LIFE COMPANY. Except to the extent provided
in sections 7.2 and 7.3 hereof, LIFE COMPANY agrees to indemnify and hold
harmless TRUST, ADVISER and each of their Trustees, directors, principals,
officers, employees and agents and each person, if any, who controls TRUST or
ADVISER within the meaning of Section 15 of the '33 Act (collectively, the
"Indemnified Parties") against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of LIFE
COMPANY, which consent shall not be unreasonably withheld) or litigation or
threatened litigation (including reasonable legal and other expenses), to which
the Indemnified Parties may become subject under any statute, regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of TRUST's shares or the Variable Contracts and:
(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in
the Registration Statement or prospectus for the Variable
Contracts or contained in the Variable Contracts (or any
amendment or supplement to any of the foregoing), or arise out
of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as
to any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and in
conformity with information furnished in writing to LIFE
COMPANY by or on behalf of TRUST
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for use in the registration statement or prospectus for the
Variable Contracts or in the Variable Contracts or sales
literature (or any amendment or supplement) or otherwise for
use in connection with the sale of the Variable Contracts or
TRUST shares; or
(b) arise out of or result from (i) statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature of
TRUST not supplied by LIFE COMPANY, or persons under its
control) or (ii) wrongful conduct of LIFE COMPANY or persons
under its control, with respect to the sale or distribution of
the Variable Contracts or TRUST shares; or
(c) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a registration statement,
prospectus, or sales literature of TRUST or any amendment
thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished in writing to TRUST by
or on behalf of LIFE COMPANY; or
(d) arise as a result of any failure by LIFE COMPANY to provide
substantially the services and furnish the materials under the
terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by LIFE COMPANY in this
Agreement or arise out of or result from any other material
breach of this Agreement by LIFE COMPANY.
7.2 LIFE COMPANY shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party to the extent that
such losses, claims, damages, liabilities or litigation are attributable to
such Indemnified Party's willful misfeasance, bad faith, or gross negligence in
the performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations or duties under this
Agreement.
7.3 LIFE COMPANY shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified LIFE COMPANY in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify LIFE COMPANY of
any such claim shall not relieve LIFE COMPANY from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against an Indemnified Party, LIFE COMPANY shall be entitled to
participate at its own expense in the defense of such action. LIFE COMPANY
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from LIFE COMPANY to such party
of LIFE COMPANY's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
LIFE COMPANY will not be liable to such
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party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation, unless (i) the indemnifying party
and the Indemnified Party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified
party and representation of both parities by the same counsel would be
inappropriate due to actual or potential differing interests between them. The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the Indemnified Party from and against any loss or liability by
reason of such settlement or judgment.
7.4 Indemnification by ADVISER. ADVISER agrees to indemnify and
hold harmless LIFE COMPANY and each of its directors, officers, employees, and
agents and each person, if any, who controls LIFE COMPANY within the meaning of
Section 15 of the '33 Act (collectively, the "Indemnified Parties") against any
and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of ADVISER which consent shall not be
unreasonably withheld) or litigation or threatened litigation (including legal
and other expenses) to which the Indemnified Parties may become subject under
any statute, or regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of TRUST's shares or the
Variable Contracts and:
(a) arise out of or based upon any untrue statement or alleged
untrue statement of any material fact contained in the
registration statement or prospectus or sales literature of
TRUST (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with information
furnished in writing to ADVISER or TRUST by or on behalf of
LIFE COMPANY for use in the registration statement or
prospectus for TRUST or in sales literature (or any amendment
or supplement) or otherwise for use in connection with the
sale of the Variable Contracts or TRUST shares; or
(b) arise out of or result from (i) statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for the
Variable Contracts not supplied by ADVISER or TRUST or persons
under its control) or (ii) gross negligence or wrongful
conduct or willful misfeasance of TRUST or ADVISER or persons
under its control, with respect to the sale or distribution of
the Variable Contracts or TRUST shares; or
(c) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a registration statement,
prospectus, or sales literature covering the Variable
Contracts, or any amendment thereof or supplement thereto or
the omission
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<PAGE> 13
or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading, if such statement or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished in writing to LIFE
COMPANY for inclusion therein by or on behalf of TRUST or
ADVISER; or
(d) arise as a result of (i) a failure by TRUST or ADVISER to
provide substantially the services and furnish the materials
under the terms of this Agreement; or (ii) a failure by a
Portfolio(s) invested in by the Separate Account to comply
with the diversification requirements of Section 817(h) of the
Code; or (iii) a failure by a Portfolio(s) invested in by the
Separate Account to qualify as a "regulated investment
company" under Subchapter M of the Code; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by TRUST or ADVISER in
this Agreement or arise out of or result from any other
material breach of this Agreement by TRUST or ADVISER.
7.5 ADVISER shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party to the extent that such losses,
claims, damages, liabilities or litigation are attributable to such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
7.6 ADVISER shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified ADVISER in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or
after such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify ADVISER of any such claim shall not
relieve ADVISER from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, ADVISER shall be entitled to participate at its own
expense in the defense thereof. ADVISER also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from ADVISER to such party of ADVISER's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and ADVISER will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation, unless (i) the indemnifying party and the
Indemnified Party shall have mutually agreed to the retention of such counsel
or (ii) the named parties to any such proceeding (including any impleaded
parties) include both the indemnifying party and the Indemnified Party and
representation of both parties by the same counsel would be inappropriate due
to actual or potential differing interests between them. The indemnifying
party shall not be liable for any settlement of any proceeding effected without
its written consent but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
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<PAGE> 14
Indemnified Party from and against any loss or liability by reason of such
settlement or judgment.
7.7 Indemnification by TRUST. TRUST agrees to indemnify and hold
harmless LIFE COMPANY and each of its directors, officers, employees, and
agents and each person, if any, who controls LIFE COMPANY within the meaning of
Section 15 of the '33 Act (collectively, the "Indemnified Parties") against any
and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of TRUST which consent shall not be
unreasonably withheld) or litigation or threatened litigation (including legal
and other expenses) to which the Indemnified Parties may become subject under
any statute, or regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of TRUST's shares or the
Variable Contracts and:
(i) arise as a result of any failure by the TRUST to provide the
services and furnish the materials under the terms of this
Agreement (including a failure to comply with the
diversification requirements of Section 817 (h) of the Code);
or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by TRUST in this Agreement
or arise out of or result from any other material breach of
this Agreement by TRUST.
7.8 TRUST shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified TRUST in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify TRUST of any such claim shall not relieve TRUST
from any liability which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified Parties, TRUST shall
be entitled to participate at its own expense in the defense thereof. TRUST
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from TRUST to such party of
TRUST's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and TRUST
will not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation, unless (i)
the indemnifying party and the Indemnified Party shall have mutually agreed to
the retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
Indemnified Party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
The indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the Indemnified Party from and against any loss or liability by
reason of such settlement or judgment.
Article VIII. TERM; TERMINATION
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<PAGE> 15
8.1 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions herein.
8.2 This Agreement shall terminate in accordance with the following
provisions:
(a) At the option of LIFE COMPANY or TRUST at any time from the
date hereof upon 90 days' notice, unless a shorter time is
agreed to by the parties;
(b) At the option of LIFE COMPANY, if TRUST shares are not
reasonably available to meet the requirements of the
Variable Contracts as determined by LIFE COMPANY. Prompt
notice of election to terminate shall be furnished by LIFE
COMPANY with said termination to be effective upon receipt
of notice;
(c) At the option of LIFE COMPANY, upon the institution of
formal proceedings against TRUST or ADVISER by the SEC, the
NASD, or any other regulatory body, the expected or
anticipated ruling, judgment or outcome of which would, in
LIFE COMPANY's reasonable judgment, materially impair
TRUST's or ADVISER's ability to meet and perform TRUST's or
ADVISER's obligations and duties hereunder. Prompt notice
of election to terminate shall be furnished by LIFE COMPANY
with said termination to be effective upon receipt of
notice;
(d) At the option of TRUST, upon the institution of formal
proceedings against LIFE COMPANY and/or its broker-dealer
affiliates by the SEC, the NASD, or any other regulatory
body, the expected or anticipated ruling, judgment or
outcome of which would, in TRUST's reasonable judgment,
materially impair LIFE COMPANY's ability to meet and perform
its obligations and duties hereunder. Prompt notice of
election to terminate shall be furnished by TRUST with said
termination to be effective upon receipt of notice;
(e) In the event TRUST's shares are not registered, issued or
sold in accordance with applicable state or federal law, or
such law precludes the use of such shares as the underlying
investment medium of Variable Contracts issued or to be
issued by LIFE COMPANY. Termination shall be effective upon
such occurrence without notice;
(f) At the option of TRUST if the Variable Contracts cease to
qualify as annuity contracts or life insurance contracts, as
applicable, under the Code, or if TRUST reasonably believes
that the Variable Contracts may fail to so qualify.
Termination shall be effective upon receipt of notice by
LIFE COMPANY;
(g) At the option of LIFE COMPANY, upon TRUST's or ADVISER's
material
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<PAGE> 16
breach of any provision of this Agreement, which breach has
not been cured to the satisfaction of LIFE COMPANY within
ten days after written notice of such breach is delivered to
TRUST or ADVISER;
(h) At the option of TRUST, upon LIFE COMPANY's material breach
of any provision of this Agreement, which breach has not
been cured to the satisfaction of TRUST within ten days
after written notice of such breach is delivered to LIFE
COMPANY;
(i) At the option of TRUST, if the Variable Contracts are not
registered, issued or sold in accordance with applicable
federal and/or state law. Termination shall be effective
immediately upon such occurrence without notice;
(j) At the option of LIFE COMPANY upon the receipt of any
necessary regulatory approvals or the vote of the Contract
owners having an interest in a Separate Account (or any
subaccount) to substitute the shares of another investment
company for the corresponding Portfolio shares of the TRUST
in accordance with the terms of the Contracts for which
those Portfolio shares have been selected to serve as the
underlying investment media. LIFE COMPANY shall give 60
days prior written notice to TRUST of the date of any
proposed vote or other action taken to replace TRUST's
shares;
(k) At the option of TRUST, upon a determination of TRUST's
Board, or a majority of the disinterested Board members,
that an irreconcilable material conflict exists;
(l) In the event this Agreement is assigned without the prior
written consent of LIFE COMPANY, TRUST, and ADVISER,
termination shall be effective immediately upon such
occurrence without notice.
8.3 Notwithstanding any termination of this Agreement pursuant to
Section 8.2 hereof, COMPANY may require TRUST to continue to make available
additional TRUST shares, as provided below, pursuant to the terms and
conditions of this Agreement, for all Variable Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, without limitation, the owners of the
Existing Contracts, shall be permitted to reallocate investments in TRUST,
redeem investments in TRUST and/or invest in TRUST upon the payment of
additional premiums under the Existing Contracts. In the event of a
termination of this Agreement pursuant to Section 8.2 hereof, LIFE COMPANY as
promptly as is practicable under the circumstances, shall notify TRUST whether
LIFE COMPANY elects to continue to make TRUST shares available after such
termination. If LIFE COMPANY shares continue to be made available after such
termination, the provisions of this Agreement shall remain in effect and
thereafter either TRUST or LIFE COMPANY may terminate the Agreement, as so
continued pursuant to this Section 8.3, upon sixty (60) days prior written
notice to the other party.
8.4 Except as necessary to implement Variable Contract owner initiated
transactions, or as required by state insurance laws or regulations, LIFE
COMPANY shall not redeem the shares
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<PAGE> 17
attributable to the Variable Contracts (as opposed to the shares attributable
to LIFE COMPANY's assets held in the Separate Accounts), and LIFE COMPANY shall
not prevent Variable Contract owners from allocating payments to a Portfolio
that was otherwise available under the Variable Contracts until thirty (30)
days after the LIFE COMPANY shall have notified TRUST of its intention to do
so.
Article IX. NOTICES
Any notice hereunder shall be given by registered or certified mail
return receipt requested to the other party at the address of such party set
forth below or at such other address as such party may from time to time
specify in writing to the other party.
If to TRUST:
BT Insurance Funds Trust
c/o First Data Investors Services Group, Inc.
1 Exchange Place
53 State Street, Mail Stop B05865
Boston, MA 02109
Attn: Elizabeth Russell, Legal Department
Copy to:
BT Alex Brown
1 South Street
Mail Stop 1-18-6
Baltimore, Maryland 21202
Attn: Brian Wixted, Mutual Fund Services
If to ADVISER:
Bankers Trust Company - U.S. Investment Management
130 Liberty Street
New York, NY 10006
Attn.: Vinay Mendiratta, Mail Stop 2355
If to LIFE COMPANY:
Western Reserve Life Insurance Company of Ohio
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499
Attn: Extraordinary Markets Individual Division
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<PAGE> 18
Notice shall be deemed given on the date of receipt by the addressee
as evidenced by the return receipt.
Article X. MISCELLANEOUS
10.1 The captions 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.
10.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
10.3 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
10.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC granting
exemptive relief therefrom and the conditions of such orders.
10.5 It is understood and expressly stipulated that neither the
shareholders of shares of any Portfolio nor the Trustees or officers of TRUST
or any Portfolio shall be personally liable hereunder. No Portfolio shall be
liable for the liabilities of any other Portfolio. All persons dealing with
TRUST or a Portfolio must look solely to the property of TRUST or that
Portfolio, respectively, for enforcement of any claims against TRUST or that
Portfolio. It is also understood that each of the Portfolios shall be deemed
to be entering into a separate Agreement with LIFE COMPANY so that it is as if
each of the Portfolios had signed a separate Agreement with LIFE COMPANY and
that a single document is being signed simply to facilitate the execution and
administration of the Agreement.
10.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
10.7 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.
10.8 If the Agreement terminates, the parties agree that Article 7
and Sections 10.5, 10.6 and 10.7 shall remain in effect after termination.
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<PAGE> 19
10.9 Each party represents that the execution and delivery of this
Agreement and the consummation of the transactions contemplated herein have
been duly authorized by all necessary corporate or trust action, as applicable,
by such party, and when so executed and delivered this Agreement will be the
valid and binding obligation of such party enforceable in accordance with its
terms.
10.10 No provision of this Agreement may be amended or modified in
any manner except by a written agreement properly authorized and executed by
TRUST, ADVISER and the LIFE COMPANY.
10.11 No failure or delay by a party in exercising any right or remedy
under this Agreement will operate as a waiver thereof and no single or partial
exercise of rights shall preclude a further or subsequent exercise. The rights
and remedies provided in this Agreement are cumulative and not exclusive of any
rights or remedies provided by law.
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Fund Participation Agreement as of the date and year
first above written.
BT INSURANCE FUNDS TRUST
By: /s/ ELIZABETH RUSSELL
--------------------------------
Name:
Title: Securtary
BANKERS TRUST COMPANY
By: /s/ IRENE S. GREENBERG
--------------------------------
Name: Irene S. Greenberg
Title: Vice President
WESTERN RESERVE LIFE ASSURANCE CO.
OF OHIO
By: /s/ JOHN R. KENNEY
--------------------------------
Name: John R. Kenney
Title: President
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<PAGE> 20
APPENDIX A
Small Cap Fund
International Equity Fund
EAFE Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
20
<PAGE> 21
APPENDIX B
Small Cap Fund
International Equity Fund
EAFE Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
21
<PAGE> 1
EXHIBIT 1.A.(8)(b)
PARTICIPATION AGREEMENT
AMONG
RUSSELL INSURANCE FUNDS,
RUSSELL FUND DISTRIBUTORS, INC.
AND
WESTERN RESERVE LIFE ASSURANCE COMPANY OF OHIO
THIS AGREEMENT is made and entered into as of this 9th day of
October, 1998, by and among Western Reserve Life Assurance Company of Ohio an
Ohio life insurance company (hereinafter the "Company"), on its own behalf and
on behalf of each segregated asset account of the Company set forth on Schedule
A hereto as such schedule may be amended from time to time (each such account
hereinafter referred to as the "Account" and collectively as the "Accounts"),
and RUSSELL INSURANCE FUNDS, a Massachusetts Business Trust (hereinafter the
"Investment Company"), and RUSSELL FUND DISTRIBUTORS, INC. a Washington
corporation (hereinafter the "Underwriter").
WHEREAS, Investment Company engages in business as a diversified
open-end management investment company and is available to act as the
investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts (collectively, the "Variable
Insurance Products") to be issued by insurance companies that have entered into
participation agreements with the Investment Company ("Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Investment Company is divided
into several series of shares, referred to individually as "Funds" and
representing the interest in a particular managed portfolio of securities and
other assets; and
WHEREAS, Investment Company is registered with the Securities and
Exchange Commission ("SEC") as an open-end management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), and its shares
are registered under the Securities Act of 1933, as amended (hereinafter the
"1933 Act"); and
WHEREAS, Frank Russell Investment Management Company (the "Adviser")
is registered as an investment adviser under the Investment Advisers Act of
1940 and any applicable state securities law; and
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<PAGE> 2
WHEREAS, the Company has registered or will register certain variable
life insurance policies or variable annuity contracts or both under the 1933
Act; and
WHEREAS, each Account is a duly organized, validly existing,
segregated asset account, established by resolution of the Board of Directors
of the Company, on the date shown for such Account on Schedule A hereto, to set
aside and invest assets attributable to one or more variable life insurance
policies or variable annuity contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, Investment Company has received a "mixed and shared funding"
order of exemptive relief from the SEC permitting it to offer its shares to
life insurers in connection with variable annuity contracts and variable life
insurance policies offered by such insurers which may or may not be affiliated
with each other (SEC Release IC-16160, Dec. 7, 1987); and
WHEREAS, the Underwriter is registered as a broker/dealer with the SEC
under the Securities Exchange Act of 1934, as amended (hereinafter the "1934
Act") and is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter the "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Funds listed on
Schedule B to this Agreement on behalf of each Account to fund certain of the
Variable Insurance Products, and the Underwriter is authorized to sell such
shares to unit investment trusts such as each Account at net asset value.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and other good and valuable consideration the
receipt of which is hereby acknowledged, the parties hereto, intending to be
legally bound hereby, agree as follows:
2
<PAGE> 3
ARTICLE I. SALE OF INVESTMENT COMPANY SHARES
1.1 The Underwriter agrees to sell to the Company those shares of each
Fund of the Investment Company which each Account orders, executing such orders
on a daily basis at the net asset value next computed after receipt by the
Investment Company or its designee of the order for the shares of the
Investment Company. For purposes of this Section 1.1, the Company shall be the
designee of the Investment Company for receipt of such orders from each Account
and receipt by such designee shall constitute receipt by the Investment
Company; provided that the Company receives the orders by 1:00 p.m. Pacific
time, and provided that the Investment Company receives notice of such order by
8:00 a.m. Pacific time on the next following Business Day. "Business Day"
shall mean any day on which the New York Stock Exchange is open for trading and
on which Investment Company calculated its net asset value pursuant to the
rules of the SEC.
1.2 The Investment Company agrees to make its shares of its Funds
available indefinitely for purchase at the applicable net asset value per share
by the Company and its Accounts on those days on which the Investment Company
calculates its net asset value pursuant to rules of the SEC. The Investment
Company shall calculate such net asset value for each Fund on each day which
the New York Stock Exchange is open for trading and on which each Fund
calculates its net asset value pursuant to the rules of the SEC.
Notwithstanding the foregoing, the Board of Trustees of the Investment Company
(hereinafter the "Board") may refuse to sell shares of any Fund, or suspend or
terminate the offering of shares of any Fund if such action is required by law
or by regulatory authorities having jurisdiction or is, in the sole discretion
of the Board acting in good faith and in light of their fiduciary duties under
federal and any applicable state laws, necessary in the best interests of the
shareholders of such Fund.
1.3 The Investment Company and the Underwriter agree that shares of each
Fund will be sold only to Participating Insurance Companies and their separate
accounts, qualified pension and retirement plans or such other persons as are
permitted under applicable provisions of the Internal Revenue Code of 1986, as
amended, (the "Code"), and regulations promulgated thereunder, the sale to
which does not impair the tax treatment currently afforded the contracts. The
Investment Company and the Underwriter agree that no shares of any Fund will be
sold to the general public.
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<PAGE> 4
1.4 The Investment Company and the Underwriter will not sell Fund shares
to any insurance company or separate account unless an agreement containing
provisions substantially the same as Articles I, III, V, and VI of this
Agreement are in effect to govern such sales. The Investment Company shall
make available upon written request from the Company (i) a list of all other
Participating Insurance Companies and (ii) a copy of the participation
agreement executed by any other Participating Insurance Company provided that
Company agrees to keep confidential any information provided pursuant to this
Section and not to disclose such information to any third party.
1.5 The Investment Company agrees to redeem for cash, on the Company's
request, any full or fractional shares of the Investment Company held by the
Company, executing such requests on a daily basis at the net asset value next
computed after receipt by the Investment Company or its designee of the request
for redemption. For purposes of this Section 1.5, the Company shall be the
designee of the Investment Company for receipt of requests for redemption from
each Account, and receipt by such designee shall constitute receipt by the
Investment Company; provided that the Investment Company receives notice of
such request for redemption by 8:00 a.m. Pacific time on the next following
Business Day.
1.6 The Company agrees to purchase and redeem the shares of selected Funds
offered by the then-current prospectus of the Investment Company and in
accordance with the provisions of such prospectus. The Company agrees that all
net amounts available under the variable life insurance policies and variable
annuity contracts with the form number(s) which are listed on Schedule B
attached hereto and incorporated herein by this reference, as such Schedule B
may be amended from time to time hereafter by mutual written agreement of all
the parties hereto (the "Contracts"), may be invested in the Investment
Company, in such other investment companies advised by the Adviser as may be
mutually agreed to in writing by the parties hereto, in the Company's general
account or in other separate accounts of the Company managed by the Company or
an affiliate, provided that such amounts may also be invested in an investment
company other than the Investment Company if the Company gives the Investment
Company and the Underwriter 45 days written notice of its intention to make
such other investment company available as a funding vehicle for the Contracts.
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<PAGE> 5
1.7 The Company shall pay for Investment Company shares on the next
Business Day after an order to purchase Investment Company shares is made in
accordance with the provisions of Section 1.1 hereof. The Investment Company
will use its best efforts to pay redemption proceeds on the next Business Day
after an order to redeem Investment Company shares is made in accordance with
the provisions of Section 1.5 hereof. Payment shall be in federal funds
transmitted by wire.
1.8 Issuance and transfer of the Investment Company's shares will be by
book entry only. Stock certificates will not be issued to the Company or any
Account. Shares ordered from the Investment Company will be recorded in an
appropriate title for each Account.
1.9 The Investment Company shall furnish same day notice (by wire or
telephone, followed by written confirmation) to the Company of any income
dividends or capital gain distributions payable on the Investment Company's
shares. The Company hereby elects to receive all such income dividends and
capital gain distributions as are payable on the Fund shares in additional
shares of that Fund. The Company reserves the right to revoke this election
and to receive all such income dividends and capital gain distributions in
cash. Investment Company shall notify the Company of the number of shares so
issued as payment of such dividends and distributions.
1.10 The Investment Company shall make the net asset value per share for
each Fund available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and shall use its
best efforts to make such net asset value per share available by 3:00 p.m.
pacific time, each business day. If the Investment Company provides the
Company with materially incorrect share net asset value information through no
fault of the Company, the Company on behalf of the Accounts, shall be entitled
to an adjustment in the number of shares purchased or redeemed to reflect the
correct share net asset value. Any material error in the calculation of net
asset value per share, dividend or capital gain information shall be reported
promptly upon discovery to the Company.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1 The Company represents and warrants that the Contracts are registered
under the 1933 Act and that the Contracts will be issued and sold in compliance
in all material
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<PAGE> 6
respects with all applicable Federal and State laws and that the sale of the
Contracts shall comply in all material respects with state insurance
suitability requirements. The Company further represents and warrants that it
is an insurance company duly organized and in good standing under applicable
law and that it has legally and validly established each Account prior to any
issuance or sale thereof as a segregated asset account under applicable state
insurance law and that each Account is or will be registered as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as
a segregated investment account for the Contracts.
2.2 The Investment Company represents and warrants that Investment Company
shares sold pursuant to this Agreement shall be registered under the 1933 Act,
duly authorized for issuance and sold in compliance with the laws of the State
of Washington and all applicable federal and state securities laws and that the
Investment Company is and shall remain registered under the 1940 Act. The
Investment Company shall amend the Registration Statement for its shares under
the 1933 and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Investment Company shall register and
qualify the shares for sale in accordance with the laws of the various states
only if and to the extent deemed advisable by the Investment Company or the
Underwriter.
2.3 The Investment Company represents that it is currently qualified as a
Regulated Investment Company under Subchapter M of the Code and that it shall
maintain such qualification (under Subchapter M or any successor or similar
provision) and that it will notify the Company immediately upon having a
reasonable basis for believing that it has ceased to so qualify or that it
might not so qualify in the future.
2.4 Subject to Article VII, The Company represents that the Contracts are
currently treated as endowment, variable annuity contracts or variable life
insurance policies, under applicable provisions of the Code and that it shall
maintain such treatment and that it will notify the Investment Company and the
Underwriter immediately upon having a reasonable basis for believing that the
Contracts have ceased to be so treated or that they might not be so treated in
the future.
2.5 The Investment Company currently does not intend to make any payments
to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or
otherwise, although it may make such payments in the future. To the extent
that it decides to
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finance distribution expenses pursuant to Rule 12b-1, the Investment Company
undertakes to have a board of trustees, a majority of whom are not interested
persons of the Investment Company, formulate and approve any plan under Rule
12b-1 to finance distribution expenses.
2.6 The Investment Company represents that each Fund's investment
objectives, policies and restrictions comply with applicable state investment
laws as they may apply to each Fund. To the extent feasible and consistent
with market conditions, each Fund will adjust its investments to comply with
the insurance and other applicable laws of the Company's state of domicile upon
written notice from the Company of such laws and proposed adjustments, it being
agreed and understood that in any such case each Fund shall be allowed a
reasonable period of time under the circumstances after receipt of such notice
to make any adjustment. The Company alone shall be responsible for informing
each Fund of any restrictions imposed by state laws which are applicable to the
Fund. However, the Investment Company otherwise makes no representation as to
whether any aspect of its operations (including, but not limited to, fees and
expenses and investment policies) complies with the insurance laws or
regulations of the various states.
2.7 The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Investment
Company shares in accordance with any applicable state laws and federal
securities laws, including without limitation the 1933 Act, the 1934 Act, and
the 1940 Act.
2.8 The Investment Company represents that it is lawfully organized and
validly existing under the laws of the Commonwealth of Massachusetts and that
it does and will comply in all material respects with the 1940 Act.
2.9 The Underwriter represents and warrants that the Adviser is and shall
remain duly registered in all material respects under all applicable federal
and state securities laws and that the Adviser shall perform its obligations
for the Investment Company in compliance in all material respects any
applicable state laws and federal securities laws.
2.10 The Investment Company and Underwriter represent and warrant that all
of their directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money or securities of the Investment
Company are and shall continue to be at all times covered by a blanket fidelity
bond or similar coverage for the benefit of the
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Investment Company in an amount not less than the minimal coverage as required
currently by Rule 17g-(1) of the 1940 Act or related provisions as may be
promulgated from time to time. The aforesaid Bond shall include coverage for
larceny and embezzlement and shall be issued by a reputable bonding company.
ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS: VOTING
3.1 The Underwriter shall provide the Company with as many printed copies
of the Investment Company's current prospectus and Statement of Additional
Information as the Company may reasonably request. If requested by the
Company in lieu thereof, the Investment Company shall provide camera-ready
film or computer diskettes containing the Investment Company's prospectus and
Statement of Additional Information and such other assistance as is reasonably
necessary in order for the Company once each year (or more frequently if the
prospectus and/or Statement of Additional Information for the Investment
Company is amended during the year) to have the prospectus for the Contracts
and the Investment Company's prospectus printed together in one document, and
to have the Statement of Additional Information for the Investment Company and
the Statement of Additional Information for the Contracts printed together in
one document. Alternatively, the Company may print the Investment Company's
prospectus and/or its Statement of Additional Information in combination with
other fund companies' prospectuses approved pursuant to Section 1.5 and
statements of additional information. Except as provided in the following
three sentences, all expenses of printing and distributing Investment Company
prospectuses and Statements of Additional Information shall be the expense of
the Company. For Prospectuses and Statement of Additional Information
provided by the Company to its existing owners of Contracts in order to update
disclosure as required by the 1933 Act and/or the 1940 Act, the cost of
printing shall be borne by the Investment Company. If the Company chooses to
receive camera-ready film or computer diskettes in lieu of receiving printed
copies of the Investment Company's prospectus, the Investment Company will
reimburse the Company in an amount equal to the product of A and B where A is
the number of such prospectuses distributed to owners of the Contracts, and B
is the Investment Company's per unit cost of typesetting and printing the
Investment Company's prospectus. The same procedures shall be followed with
respect to the Investment Company's Statement of Additional Information.
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The Company agrees to provide the Investment Company or its designee
with such information as may be reasonably requested by the Investment Company
to assure that the Investment Company's expenses do not include the cost of
printing any prospectuses or Statements of Additional Information other than
those actually distributed to existing owners of the Contracts.
3.2 The Investment Company's prospectus shall state that the Statement of
Additional Information for the Investment Company is available from the
Underwriter or the Company (or in the Fund's discretion, the Prospectus shall
state that such Statement is available from the Investment Company). The
Underwriter (or the Investment Company) shall provide such Statements of
Additional Information, at its expense, to the Company.
3.3 The Investment Company, at its expense, shall provide the Company with
copies of its proxy statements, reports to shareholders, and other required
communications (except for prospectuses and Statement of Additional
Information, which are covered in Section 3.1) to shareholders in such quantity
as the Company shall reasonably require for distributing to Contract owners.
3.4 The Company will provide pass-through voting privileges to all
Contract owners as required by the 1940 Act. Accordingly, the Company, where
applicable, will vote shares of the Fund held in its Separate Accounts in a
manner consistent with voting instructions timely received from its Contract
owners. The Company will be responsible for assuring that each of its separate
accounts that participates in the Investment Company calculates voting
privileges in a manner consistent with other Participating Insurance Companies.
The Company will vote shares for which it has not received timely voting
instructions, as well as shares it owns, in the same proportion as it votes
those shares for which it has received voting instructions.
3.5 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or if
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules thereunder with respect to mixed and shared funding on
terms and conditions materially different from any exemptions granted in the
Investment Company's mixed and shared funding exemptive order, then the
Investment Company, and/or the Company, as appropriate, shall take such steps
as may be necessary to comply with Rule 6e-2 and Rule 6e-3(T), as amended, and
Rule 6e-3, as adopted, to the extent such Rules are applicable.
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3.6 The Investment Company will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Investment Company
will either provide for annual or special meetings or comply with the
requirements of Section 16(c) of the 1940 Act (although the Investment Company
is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, 16(b). Further, the
Investment Company will act in accordance with the SEC's interpretation of the
requirements of Section 16(a) with respect to periodic elections of directors
and with whatever rules the SEC may promulgate with respect thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1 The Company shall furnish, or shall cause to be furnished, to the
Investment Company or its designee, each piece of sales literature or other
promotional material, or component thereof, in which the Investment Company,
the Adviser, or the Underwriter is named, at least fifteen Business Days prior
to its use. No such material shall be used if the Investment Company or its
designee objects to such use within fifteen Business Days after receipt of such
material.
4.2 The Company shall not give any information or make any representations
or statements on behalf of the Investment Company or concerning the Investment
Company in connection with the sale of the Contracts other than the information
or representations contained in the registration statement or prospectus for
the Investment Company shares, as such registration statement and prospectus
may be amended or supplemented from time to time, or in reports or proxy
statements for the Investment Company, or in sales literature or other
promotional material approved by the Investment Company or its designee or by
the Underwriter, except with the permission of the Investment Company or the
Underwriter or the designee of either. The Investment Company and the
Underwriter agree to respond to any request for approval on a prompt and timely
basis.
4.3 The Investment Company, the Underwriter, or their designees shall
furnish, or shall cause to be furnished, to the Company or its designee, each
piece of sales literature or other promotional material, or component thereof,
in which the Company or its separate Accounts are named at least fifteen
Business Days prior to its use. No such material shall be used if the Company
or its designee objects to such use within fifteen Business Days after receipt
of such material.
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4.4 The Investment Company and the Underwriter shall not give any
information or make any representations on behalf of the Company or concerning
the Company, each Account, or the Contracts other than the information or
representations contained in a registration statement, prospectus for the
Contracts, as such may be amended or supplemented from time to time, or in
published reports for each Account which are in the public domain or approved
by the Company for distribution to Contract owners, or in sales literature or
other promotional material approved by the Company or its designee, except with
the permission of the Company. The Company agrees to respond to any request
for approval on a prompt and timely basis.
4.5 The Investment Company will provide to the Company at least one
complete copy of all registration statements, prospectuses, Statements of
Additional Information, reports, proxy statements, sales literature and other
promotional materials, applications for exemptions, requests for no-action
letters, and all amendments to any of the above, that relate to the Investment
Company or its shares, contemporaneously with the filing of such document with
the SEC or other regulatory authorities.
4.6 The Company will provide to the Investment Company at least one
complete copy of all registration statements, prospectuses, Statements of
Additional Information, reports, solicitations for voting instructions, sales
literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments to any of the above, that
relate to the Contracts or each Account, contemporaneously with the filing of
such document with the SEC or other regulatory authorities.
4.7 For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, electronic media, or other public media),
sales literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational
or training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional
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Information, shareholder reports, and proxy materials and any other material
constituting sales literature or advertising under the NASD rules, the 1933 Act
or the 1940 Act.
4.8 No party shall use any other party's names, logos, trademarks or
service marks, whether registered or unregistered, without the prior written
consent of such other party, or after written consent therefor has been
revoked. No party shall use in advertising, publicity or otherwise the name of
any other party, or any of that party's affiliates nor any trade name,
trademark, trade device, service mark, symbol or any abbreviation, contraction
or simulation thereof of such other party, or its affiliates without the prior
written consent of the other party in each instance.
4.9 The Investment Company agrees to provide to the Company, within ten
Business Days after the end of a calendar month, the following information with
respect to each Fund of the Investment Company set forth on Schedule B, each as
of the last Business Day of such calendar month: the Fund's ten largest
portfolio holdings (based on the percentage of the Fund's net assets); the five
industry sectors in which the Fund's investments are most heavily weighted; the
relative proportion of the Fund's net assets invested in equity, bonds, and
cash instruments, respectively; the geographic regions in which the Portfolio's
investments are most heavily weighted; and the year-to-date SEC standardized
performance data. In addition, the Investment Company agrees to provide to the
Company, within 30 calendar days after the end of the calendar quarter, the
following information with respect to each Fund of the Investment Company set
forth on Schedule B, each as of the last Business day of such quarter: a
market commentary from the portfolio manager or such Fund; and a complete list
of the portfolio holdings (which will not be audited or reconciled against the
Fund's books or records). Also, the Investment Company agrees to provide the
Company, within a reasonable time frame after a request is submitted to the
Investment Company by the Company, the following information with respect to
each Fund set forth on Schedule B, each as of the date or dates specified in
such request; net asset value; net asset value per share, and other share
information may be furnished to the Company's internal or independent auditors
and to the insurance departments of the various jurisdictions in which the
Company does business.
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ARTICLE V. POTENTIAL CONFLICTS
5.1 The parties acknowledge that Investment Company has received a "mixed
and shared funding" exemptive order from the SEC granting relief from various
provisions of the 1940 Act and the rules thereunder to the extent necessary to
permit Investment Company shares to be sold to and held by Variable Insurance
Products separate accounts of both affiliated and unaffiliated participating
insurance companies. The exemptive order requires the Investment Company and
each participating insurance company to comply with conditions and undertakings
substantially as provided in this Article V. The Investment Company will not
enter into a participation agreement with any other participating insurance
company unless it imposes the same conditions and undertakings as are imposed
on the Company.
5.2 The Investment Company's Board of Trustees ("Board") will monitor the
Investment Company for the existence of any material irreconcilable conflict
between the interests of Contract owners of all separate accounts investing in
the Investment Company. An irreconcilable material conflict may arise for a
variety of reasons, which may include: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling or any similar action by insurance, tax or securities regulatory
authorities; (c) an administrative or judicial decision in any relevant
proceeding; (d) the manner in which the investments of the Investment Company
are being managed; (e) a difference in voting instructions given by Contract
owners; and (f) a decision by a participating insurance company to disregard
the voting instructions of Contract owners.
5.3 The Company will report any potential or existing conflicts to the
Investment Company's Board. The Company will be responsible for assisting the
Board in carrying out its duties in this regard by providing the Board with all
information reasonably necessary for the Board to consider any issues raised.
The responsibility includes, but is not limited to, an obligation by the
Company to inform the Board whenever it has determined to disregard Contract
owner voting instructions. These responsibilities of the Company will be
carried out with a view only to the interests of the Contract owners.
5.4 If a majority of the Board or majority of its disinterested Trustees,
determines that a material irreconcilable conflict exists affecting the
Company, then the Company, at its expense and to the extent reasonably
practicable (as determined by a majority of the
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Board's disinterested Trustees), will take any steps necessary to remedy or
eliminate the irreconcilable material conflict, including: (a) withdrawing the
assets allocable to some or all of the separate accounts from the Investment
Company or any Fund thereof and reinvesting those assets in a different
investment medium, which may include another Fund of the Investment Company, or
another investment company; (b) submitting the question as to whether such
segregation should be implemented to a vote of all affected Contract owners and
as appropriate, segregating the assets of any appropriate group (i.e., variable
annuity or variable life insurance contract owners of one or more participating
insurance companies) that votes in favor of such segregation, or offering to
the affected Contract owners the option of making such a change; and (c)
establishing a new registered management investment company (or series thereof)
or managed separate account. If a material irreconcilable conflict arises
because of the Company's decision to disregard Contract owner voting
instructions, and that decision represents a minority position or would
preclude a majority vote, the Company may be required at the election of the
Investment Company, to withdraw its separate accounts' investment in the
Investment Company, and no charge or penalty will be imposed as a result of
such withdrawal. The responsibility to take such remedial action shall be
carried out with a view only to the interests of the Contract owners.
For the purposes of this Section 5.4, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any irreconcilable material conflict but in no event will
the Investment Company or any investment adviser of the Investment Company be
required to establish a new funding medium for any Contract. Further, the
Company shall not be required by this Section 5.4 to establish a new funding
medium for any Contract if any offer to do so has been declined by a vote of a
majority of Contract owners materially and adversely affected by the
irreconcilable material conflict.
5.5 The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and in
writing to the Company.
5.6. No less than annually, the Company shall submit to the Board such
reports, materials or data as the Board may reasonably request so that the
Board may fully carry out its obligations. Such reports, materials, and data
shall be submitted more frequently if deemed appropriate by the Board.
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ARTICLE VI. FEES AND EXPENSES
6.1 The Investment Company and the Underwriter shall pay no fee or other
compensation to the Company under this Agreement, except that if the Investment
Company or any Fund adopts and implements a plan pursuant to Rule 12b-1 to
finance distribution expenses, then the Underwriter may make payments to the
Company or to the underwriter for the Contracts if and in amounts agreed to by
the Underwriter in writing and such payments will be made out of existing fees
otherwise payable to the Underwriter, past profits of the Underwriter, or other
resources available to the Underwriter. No such payments shall be made
directly by the Investment Company. Currently, no such payments are
contemplated.
6.2 All expenses incident to performance by the Investment Company under
this Agreement shall be paid by the Investment Company. The Investment Company
shall ensure that all its shares are registered and authorized for issuance in
accordance with applicable federal law and, if and to the extent deemed
advisable by the Investment Company, in accordance with applicable state laws
prior to their sale. The Investment Company shall bear the expenses for the
cost of registration and qualification of the Investment Company's shares,
preparation and filing of the Investment Company's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type,
setting in type and printing the proxy materials and reports to shareholders
(including the costs of printing a prospectus that constitutes an annual
report), the preparation of all statements and notices required by any federal
or state law, all taxes on the issuance or transfer of the Investment
Company's shares, and any expenses permitted to be paid and assumed by the
Investment Company pursuant to a plan, if any, under Rule 12b-1 of the 1940
Act.
6.3 The Company shall bear the expenses of distributing the Investment
Company's prospectus, proxy materials, and reports to owners of Contracts
issued by the Company.
ARTICLE VII. DIVERSIFICATION
7.1 The Investment Company will at all times invest money from the
Contracts in such a manner as to ensure that the Contracts will be treated as
variable contracts under the Code and the regulations issued thereunder.
Without limiting the scope of the foregoing, the Investment Company will at all
times comply with Section 817(h) of the
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Code and Treasury Regulation 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations. In the
event of a breach of this Section 7.1 by the Investment Company, the Investment
Company will notify the Company of such breach and it will take all reasonable
steps to adequately diversify the Investment Company so as to achieve
compliance within the grace period afforded by Treasury Regulation 1.817-5;
provided, however, that the Investment Company's failure to give such notice
shall not be deemed to be a breach of this Agreement.
7.2 Each Fund of the Investment Company shall maintain the qualification
of the Fund as a registered investment company (under Subchapter M or any
successor or similar provision), and the Investment Company shall (i) notify
the Company immediately upon having a reasonable basis for believing that a
Fund has ceased to so qualify or that it might not so qualify in the future,
and (ii) take all reasonable steps to maintain qualification and to requalify
the Fund as a registered investment company under Subchapter M.
ARTICLE VIII. INDEMNIFICATION
8.1 INDEMNIFICATION BY THE COMPANY
8.1(a). The Company agrees to indemnify and hold harmless the Investment
Company and each member of the Board and officers and each person, if any, who
controls the Investment Company within the meaning of Section 15 of the 1933
Act (collectively, the "Indemnified Parties" for purposes of this Section 8.1)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or litigation
(including reasonable legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
action in respect thereof) or settlements are related to the sale or
acquisition of the Investment Company's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in any Registration
Statement, or prospectus for the Contracts or contained in the
Contracts or sales literature for the Contracts (or any amendment or
supplement to any of the foregoing), or arise
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out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified Party if
such statement or omission or such alleged statement or omission was
made in reliance upon and in conformity with information furnished to
the Company by or on behalf of the Investment Company for use in any
Registration Statement or prospectus for the Contracts or in the
Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or
Investment Company's shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature of the
Investment Company not supplied by the Company, or persons under its
control) or wrongful conduct of the Company or persons under its
control, with respect to the sale or distribution of the Contracts or
Investment Company shares; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a Registration Statement, prospectus, or
sales literature of the Investment Company or any amendment thereof or
supplement thereto or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading if such a statement or
omission was made in reliance upon information furnished to the
Investment Company by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement;
or
(v) arise out of a result from any material breach of any
representation or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this
Agreement by the Company, as limited by and in accordance with the
provisions of Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an
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Indemnified Party as such may arise from such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement or to the Investment
Company, whichever is applicable.
8.1(c). The Company shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Company of
any such claim shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense of such action. The Company
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from the Company to such party
of the Company's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the Company will not be liable to such party under this Agreement for any legal
or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation, unless (i) the Indemnifying Party and the Indemnified Party
shall have mutually agreed to the retention of such counsel or (ii) the named
parties to any such proceeding (including any impleaded parties) include both
the Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. The Indemnifying Party shall not be liable
for any settlement of any proceeding effected without its written consent but
if settled with such consent or if there be a final judgment for the plaintiff,
the Indemnifying Party agrees to indemnify the Indemnified Party from and
against any loss or liability by reason of such settlement or judgment.
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8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Investment Company shares or the Contracts or the
operation of the Investment Company.
8.2 INDEMNIFICATION BY THE UNDERWRITER
8.2(a). The Underwriter agrees to indemnify and hold harmless the Company and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.2) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Underwriter) or litigation (including reasonable
legal and other expenses) to which the Indemnified Parties may become subject
under any statute, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the sale or acquisition of the Investment Company's shares or
the Contracts and;
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement or prospectus or sales literature of the Investment Company
(or any amendment or supplement to any of the foregoing), or arise out
of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified Party if
such statement or omission or such alleged statement or omission was
made in reliance upon and in conformity with information furnished to
the Underwriter or Investment Company by or on behalf of the Company
for use in the Registration Statement or prospectus for the Investment
Company or in the sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or
Investment Company shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in any
Registration Statement, prospectus, or sales literature for the
Contracts not supplied by the Underwriter or persons
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under its control) or wrongful conduct of the Investment Company,
Adviser, or Underwriter or persons under their control, with respect
to the sale or distribution of the Contracts or Investment Company
shares; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in any Registration Statement, prospectus,
or sales literature covering the Contracts, or any amendment thereof
or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if such
statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Investment Company; or
(iv) arise as a result of any failure by the Investment Company to
provide the services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in good faith
or otherwise, to comply with the diversification requirements
specified in Article VII of this Agreement); or
(v) arise out of or result from any material breach of any
representation or warranty made by the Underwriter in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Underwriter; as limited by and in accordance with the
provisions of Sections 8.2(b) and 8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation to which an Indemnified Party would otherwise be subject by reason
of such Indemnified Party's willful misfeasance, bad faith, or gross negligence
in the performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations and duties under this
Agreement or to the Company or each Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Underwriter
of
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any such claim shall not relieve the Underwriter from any liability which it
may have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by
it, and the Underwriter will not be liable to such party under this Agreement
for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable
costs of investigation, unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the Indemnifying Party and the Indemnified Party and representation of
both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. The Indemnifying Party shall not
be liable for any settlement of any proceeding effected without its written
consent but if settled with such consent or if there be a final judgment for
the plaintiff, the Indemnifying Party agrees to indemnify the Indemnified Party
from and against any loss or liability by reason of such settlement or
judgment.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of any Account.
8.3 INDEMNIFICATION BY THE INVESTMENT COMPANY
8.3(a). The Investment Company agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Investment Company) or
litigation (including legal and other expenses) to which the Indemnified
Parties may become subject under any statute, at common law or otherwise,
insofar as
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such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements, are related to the sale or acquisition of the of the
Investment Company's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement or prospectus or sales literature of the Investment Company
(or any amendment or supplement to any of the foregoing), or arise out
of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified Party if
such statement or omission or such alleged statement or omission was
made in reliance upon and in conformity with information furnished to
the Underwriter or Investment Company by or on behalf of the Company
for use in the Registration Statement or prospectus for the Investment
Company or in the sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or
Investment Company shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in any
Registration Statement, prospectus, or sales literature for the
Contracts not supplied by the Underwriter or persons under its
control) or wrongful conduct of the Investment Company, Adviser, or
Underwriter or persons under their control, with respect to the sale
or distribution of the Contracts or Investment Company shares; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in any Registration Statement, prospectus,
or sales literature covering the Contracts, or any amendment thereof
or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if such
statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Investment Company; or
(iv) arise as a result of any failure by the Investment Company to
provide the services and furnish the materials under the terms of this
Agreement (including a
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failure by the Investment Company to comply with the diversification
requirements specified in Article VII of this Agreement); or
(v) arise out of or result from any material breach of any
representation or warranty made by the Investment Company in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Investment Company, as limited by and in
accordance with the provisions of Sections 8.3(b) and 8.3(c) hereof.
8.3(b). The Investment Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as such may arise
from such Indemnified Party's will misfeasance, bad faith, or gross negligence
in the performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations and duties under this
Agreement or to the Company, the Investment Company, the Underwriter or any
Account, which ever is applicable.
8.3(c). The Investment Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Investment Company in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Investment
Company of any such claim shall not relieve the Investment Company from any
liability which it may have to the Indemnified Party against whom such action
is brought otherwise than on account of this indemnification provision. In case
any such action is brought against the Indemnified Parties, the Investment
Company will be entitled to participate, at its own expense, in the defense
thereof. The Investment Company also shall be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the action. After
notice from the Investment Company to such party of the Investment Company's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Investment
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with
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<PAGE> 24
the defense thereof other than reasonable costs of investigation, unless (i)
the Indemnifying Party and the Indemnified Party shall have mutually agreed to
the retention of such counsel or (ii) the name of parties to any such
proceeding (including any impleaded parties) include both the Indemnifying
Party and the Indemnified Party and representation of both parties by the same
counsel would be appropriate due to actual or potential differing interests
between them. The Indemnifying Party shall not be liable for any settlement of
any proceeding effected without its written consent but if settled with such
consent of if there by a final judgment for the plaintiff, the Indemnifying
Party agrees to indemnify the Indemnified Party from and against any loss or
liability by reason of such settlement or judgment.
8.3(d). The Company and the Underwriter agree promptly to notify the
Investment Company of the commencement of any litigation or proceeding against
it or any of its respective officers or directors in connection with this
Agreement, the issuance or sale of the Contracts, with respect to the operation
of any Account, or the sale or acquisition of shares of the Investment Company.
ARTICLE IX. APPLICABLE LAW
9.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Washington.
9.2 To the extent they are applicable, this Agreement shall be subject to
the provisions of the 1933, 1934 and 1940 Acts, and the rules and regulations
and rulings thereunder, including such exemptions from those statutes, rules
and regulations as the SEC may grant and the terms hereof shall be interpreted
and construed in accordance therewith.
ARTICLE X. TERMINATION OF AGREEMENT
10.1 This Agreement shall continue in full force and effect until the first
to occur of:
(a) termination by any party for any reason by ninety (90) days
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Investment
Company and the Underwriter with respect to any Fund based upon the Company's
determination
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that shares of such Fund are not reasonable available to meet the requirements
of the Contracts; or
(c) termination by the Company by written notice to the Investment
Company and the Underwriter with respect to any Fund in the event any of the
Fund's shares are not registered, issued, or sold materially in accordance with
applicable state or federal law or such law precludes the use of such shares as
the underlying investment media of the Contracts issued or to be issued by the
Company; or
(d) termination by the Company upon institution of formal
proceedings against the Investment Company or the Underwriter by the NASD, the
SEC or any state securities or insurance department or any other regulatory
body, which would have a material adverse effect on the Investment Company's or
the Underwriter's ability to perform its obligations under this Agreement; or
(e) termination by the Investment Company or the Underwriter upon
institution of formal proceedings against the Company by the NASD, the SEC or
any state securities or insurance department or any other regulatory body,
which would have a material adverse effect on the Company's ability to perform
its obligations under this Agreement; or
(f) termination by the Company by written notice to the Investment
Company and the Underwriter with respect to any Fund in the event that such
Fund ceases to qualify as a Regulated Investment Company under Subchapter M of
the Code or under any successor or similar provision, or if the Company
reasonably believes that the Investment Company may fail to so qualify; or
(g) termination by the Company by written notice to the Investment
Company and the Underwriter with respect to any Fund in the event that such
Fund fails to meet the diversification requirements specified in Article VII
hereof or if the Company reasonably believes that the Investment Company may
fail to meet such requirements; or
(h) termination by the Investment Company upon a determination of
the Investment Company's Board, or a majority of the disinterested Board
members, that an irreconcilable material conflict exists; or
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<PAGE> 26
(i) termination by either the Investment Company or the
Underwriter by written notice to the Company, if either one or both of the
Investment Company or the Underwriter respectively, shall determine, in their
sole judgment exercised in good faith, that the Company has suffered a material
adverse change in its business, operations, financial condition, or prospects
since the date of this Agreement or is the subject of material adverse
publicity which is likely to have a material adverse impact upon the business
and operations of the Company; or
(j) termination by the Company by written notice to the Investment
Company and the Underwriter, if the Company shall determine, in its sole
judgment exercised in good faith, that either the Investment Company or the
Underwriter has suffered a material adverse change in its business, operations,
financial condition, or prospects since the date of this Agreement or is the
subject of material adverse publicity; or
(k) termination by the Investment Company or the Underwriter by
written notice to the Company if the Company gives the Investment Company and
the Underwriter the written notice specified in Section 1.6 hereof and at the
time such notice was given there was no notice of termination outstanding under
any other provision of this Agreement; provided, however, any termination under
this Section 10.1(h) shall be effective forty-five (45) days after the notice
specified in Section 1.6 was given.
(l) termination by any party to this Agreement, upon the other
party's material breach of any provision of this Agreement; or
(m) termination by any party upon the assignment of this
Agreement, except under the condition specified in Section 12.8 of this
Agreement; or
10.2 Notwithstanding any termination of this Agreement, the Investment
Company and the Underwriter shall at the option of the Company, continue to
make available additional shares of the Investment Company pursuant to the
terms and conditions of this Agreement, for all Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, without limitation, the owners of the
Existing Contracts shall be permitted to reallocate investment in the
Investment Company, redeem investments in the Investment Company, or invest in
the Investment Company upon the making of additional purchase payments
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<PAGE> 27
under the Existing Contracts, except as otherwise provided in Article V of this
Agreement.
10.3 The Company shall not redeem Investment Company shares attributable to
the Contracts except (i) as necessary to implement Contract Owner initiated
transactions, or (ii) as required by state or federal laws or regulations or
judicial or other legal precedent of general application. Furthermore, except
in cases where permitted under the terms of the Contracts, the Company shall
not prevent Contract Owners from allocating payments to a Fund that was
otherwise available under the Contracts without first giving the Investment
Company or the Underwriter ninety (90) days notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Investment Company:
909 A Street
Tacoma, Washington 98402
Attention: Karl J. Ege, Esq.
If to the Company:
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499
Attention: Extraordinary Markets, Individual Division
If to the Underwriter:
909 A. Street
Tacoma, Washington 98402
Attention: Karl J. Ege, Esq.
ARTICLE XII. MISCELLANEOUS
12.1 All persons dealing with the Investment Company must look solely to
the property of the Investment Company for the enforcement of any claims
against the Investment Company as neither the Board, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of the Investment Company.
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12.2 Subject to the requirements of legal process and regulatory authority,
each party hereto shall treat as confidential the names and addresses of the
owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come
into the public domain without the express written consent of the affected
party.
12.3 The captions 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.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provisions of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the variable life
insurance operations of the Company are being conducted in a manner consistent
with the California Variable Life Insurance Regulations and any other
applicable law or regulations.
12.7 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.
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12.8 This Agreements or any of the rights and obligations hereunder may not
be assigned by any party without the prior written consent of all parties
hereto.
12.9 The Company shall furnish, or shall cause to be furnished, to the
Investment Company or its designee upon request copies of the following
reports:
(a) the Company's annual statement prepared under statutory
accounting principles;
(b) the Company's quarterly statement (statutory); and
(c) any financial statement, proxy statement, notice or report of
the Company sent to stockholders or policyholders;
provided, however, that the Company's failure to furnish, or cause to be
furnished, such materials shall not be deemed to be a breach of this Agreement.
12.10 The Master Trust Agreement dated 11 July 1996, as amended from time
to time, establishing the Investment Company, which is hereby referred to and
a copy of which is on file with the Secretary of The Commonwealth of
Massachusetts, provides that the name Russell Insurance Funds means the
Trustees from time to time serving (as Trustees but not personally) under said
Master Trust Agreement. It is expressly acknowledged and agreed that the
obligations of the Investment Company hereunder shall not be binding upon any
of the shareholders, Trustees, officers, employees or agents of the Investment
Company, personally, but shall bind only the trust property of the Investment
Company as provided in its Master Trust Agreement. The execution and delivery
of this Agreement have been authorized by the Trustees of the Investment
Company and signed by the President of the Investment Company, acting as such,
and neither such authorization by such Trustees nor such execution and
delivery by such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but shall
bind only the trust property of the Investment Company as provided in its
Master Trust Agreement.
IN WITNESS WHEREOF, each of the parties hereto have caused this
Agreement to be executed in its name and on behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date first
written above.
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WESTERN RESERVE LIFE ASSURANCE
COMPANY OF OHIO
ATTEST: BY:
/s/ JOHN R. KENNEY
- ---------------------------------- -----------------------------------
Secretary President
RUSSELL INSURANCE FUNDS
ATTEST: BY:
/s/ GREGORY J. LYONS /s/ RANDALL P. LERT
- ---------------------------------- -----------------------------------
Assistant Secretary Director of Investments - Randall P. Lert
Gregory J. Lyons
RUSSELL FUND DISTRIBUTORS, INC.
ATTEST: BY:
/s/ GREGORY J. LYONS /s/ GREGORY DENK
- ---------------------------------- -----------------------------------
Assistant Secretary National Director - Sales
Gregory J. Lyons Gregory Denk
30
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SCHEDULE A
ACCOUNTS
Name of Account Date of Resolution of Company's
Board which Established the Account
WRL Series Life Corporate Account 12-08-1997
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<PAGE> 32
SCHEDULE B
CONTRACTS
1. Contract Form Numbers:
WL694 136 82 698
2. Funds currently available to act as investment vehicles for certain of
the above-listed contracts:
Russell Insurance Funds: Multi-Style Equity Fund
Aggressive Equity Fund
Non-U.S. Fund
Core Bond Fund
32
<PAGE> 1
EXHIBIT 1.A.(8)(c)
FUND PARTICIPATION AGREEMENT
This AGREEMENT is made this 1 day of October, 1998, by and between
Western Reserve Life Assurance Co. of Ohio (the "Insurer"), a life insurance
company domiciled in Ohio, on its behalf and on behalf of the segregated asset
accounts of the Insurer listed on Exhibit A to this Agreement (the "Separate
Accounts"); Insurance Series (the "Fund"), a Massachusetts business trust; and
Federated Securities Corp. (the "Distributor"), a Pennsylvania corporation.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange
Commission ("SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended ("1940 Act") and the Fund is
authorized to issue separate classes of shares of beneficial interest
("shares"), each representing an interest in a separate portfolio of assets
known as a "portfolio" and each portfolio has its own investment objective,
policies, and limitations; and
WHEREAS, the Fund is available to offer shares of one or more of its
portfolios to separate accounts of insurance companies that fund variable
annuity contracts ("Variable Contracts") and to serve as an investment medium
for Variable Contracts offered by insurance companies that have entered into
participation agreements substantially similar to this agreement ("Participating
Insurance Companies"), and the Fund will be made available in the future to
offer shares of one or more of its portfolios to separate accounts of insurance
1
<PAGE> 2
companies that fund variable life insurance policies (at which time such
policies would also be "Variable Contracts" hereunder), and
WHEREAS, the Fund is currently comprised of eight separate
portfolios, and other portfolios may be established in the future; and
WHEREAS, the Fund has obtained an order from the SEC dated December
29, 1993 (File No. 812-8620), granting Participating Insurance Companies and
variable annuity and variable life insurance separate accounts exemptions from
the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act and
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit shares of the Fund to be sold to and held by variable annuity and
variable life insurance separate accounts of life insurance companies that may
or may not be affiliated with one another (hereinafter the "Mixed and Shared
Funding Exemptive Order"); and
WHEREAS, the Distributor is registered as a broker-dealer with the
SEC under the Securities Exchange Act of 1934, as amended ("1934 Act"), and is a
member in good standing of the National Association of Securities Dealers, Inc.
("NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Insurer wishes to purchase shares of one or more of the Fund's
portfolios on behalf of its Separate Accounts to serve as an investment medium
for Variable Contracts funded by the Separate Accounts, and the Distributor is
authorized to sell shares of the Fund's portfolios;
2
<PAGE> 3
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants hereinafter set forth, the parties hereby agree as
follows:
ARTICLE I. Sale of Fund Shares
1.1 The Distributor agrees to sell to the Insurer those shares of the
portfolios offered and made available by the Fund and identified on Exhibit B
("Portfolios") that the Insurer orders on behalf of its Separate Accounts, and
agrees to execute such orders on each day on which the Fund calculates its net
asset value pursuant to rules of the SEC ("business day") at the net asset value
next computed after receipt and acceptance by the Fund or its agent of the order
for the shares of the Fund.
1.2 The Fund agrees to make available on each business day shares of
the Portfolios for purchase at the applicable net asset value per share by the
Insurer on behalf of its Separate Accounts; provided, however, that the Board of
Trustees of the Fund may refuse to sell shares of any Portfolio to any person,
or suspend or terminate the offering of shares of any Portfolio, if such action
is required by law or by regulatory authorities having jurisdiction or is, in
the sole discretion of the Trustees, acting in good faith and in light of the
Trustees' fiduciary duties under applicable law, necessary in the best interests
of the shareholders of any Portfolio.
1.3 The Fund and the Distributor agree that shares of the Portfolios
of the Fund will be sold only to Participating Insurance Companies, their
separate accounts, and other persons consistent with each Portfolio being
adequately diversified pursuant to Section 817(h) of the Internal Revenue Code
of 1986, as
3
<PAGE> 4
amended ("Code"), and the regulations thereunder. No shares of any Portfolio
will be sold directly to the general public to the extent not permitted by
applicable tax law.
1.4 The Fund and the Distributor will not sell shares of the
Portfolios to any insurance company or separate account unless an agreement
containing provisions substantially the same as the provisions in Article IV and
Article V of this Agreement is in effect to govern such sales.
1.5 Upon receipt of a request for redemption in proper form from the
Insurer, the Fund agrees to redeem any full or fractional shares of the
Portfolios held by the Insurer, ordinarily executing such requests on each
business day at the net asset value next computed after receipt and acceptance
by the Fund or its agent of the request for redemption, except that the Fund
reserves the right to suspend the right of redemption, consistent with Section
22(e) of the 1940 Act and any rules thereunder. Such redemption shall be paid
consistent with applicable rules of the SEC and procedures and policies of the
Fund as described in the current prospectus.
1.6 For purposes of Sections 1.2 and 1.5, the Insurer shall be the
agent of the Fund for the limited purpose of receiving and accepting purchase
and redemption orders from each Separate Account and receipt of such orders by
4:00 p.m. Eastern time by the Insurer shall be deemed to be receipt by the Fund
for purposes of Rule 22c-1 of the 1940 Act; provided that the Fund receives
notice of such orders on the next following business day prior to 4:00 p.m.
Eastern time on such day, although the Insurer will use its best efforts to
provide such notice by 9:00 a.m. Eastern time.
4
<PAGE> 5
1.7 The Insurer agrees to purchase and redeem the shares of each
Portfolio in accordance with the provisions of the current prospectus for the
Fund.
1.8 The Insurer shall pay for shares of the Portfolio on the next
business day after it places an order to purchase shares of the Portfolio.
Payment shall be in federal funds transmitted by wire.
1.9 Issuance and transfer of shares of the Portfolios will be by book
entry only unless otherwise agreed by the Fund. Stock certificates will not be
issued to the Insurer or the Separate Accounts unless otherwise agreed by the
Fund. Shares ordered from the Fund will be recorded in an appropriate title for
the Separate Accounts or the appropriate subaccounts of the Separate Accounts.
1.10 The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Insurer of any income dividends or
capital gain distributions payable on the shares of the Portfolios. The Insurer
hereby elects to reinvest in the Portfolio all such dividends and distributions
as are payable on a Portfolio's shares and to receive such dividends and
distributions in additional shares of that Portfolio. The Insurer reserves the
right to revoke this election in writing and to receive all such dividends and
distributions in cash. The Fund shall notify the Insurer of the number of shares
so issued as payment of such dividends and distributions.
1.11 The Fund shall instruct its recordkeeping agent to advise the
Insurer on each business day of the net asset value per share for each Portfolio
as
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<PAGE> 6
soon as reasonably practical after the net asset value per share is calculated
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m. Eastern time.
1.12 The Fund agrees to provide to the Insurer at the Insurer's
request, within ten business days after the end of a calendar quarter, the
following information with respect to the Fund, each as of the last business day
of such calendar quarter: the Fund's ten largest portfolio holdings (based on
the percentage of the Fund's net assets): the five industry sectors in which the
Fund's investments are most heavily weighted; the relative proportion of the
Fund's net assets invested in equity, bonds, and cash instruments, respectively;
the geographic regions in which the Portfolio's investments are most heavily
weighted; and the year-to-date SEC standardized performance data. In addition,
the Fund agrees to provide to the Insurer, within 30 calendar days after the end
of the calendar quarter, the following information with respect to each
portfolio of the Fund, each as of the last business day of such quarter: a
market commentary from the portfolio manager of such Fund; and a complete list
of the portfolio holdings (which will not be audited or reconciled against the
Fund's books or records). Also, the Fund agrees to provide the Insurer, within a
reasonable time frame after a request is submitted to the Fund by the Insurer,
the following information with respect to the Fund, each as of the date or dates
specified in such request; net asset value; net asset value per share, and other
share information may be furnished to the Insurer's internal or independent
6
<PAGE> 7
auditors and to the insurance departments of the various jurisdictions in which
the Insurer does business.
ARTICLE II. Representations and Warranties
2.1 The Insurer represents and warrants that it is an insurance
company duly organized and in good standing under applicable law and that it is
taxed as an insurance company under Subchapter L of the Code.
2.2 The Insurer represents and warrants that it has legally and
validly established each of the Separate Accounts as a segregated asset account
under the ____________________ Insurance Code, and that each of the Separate
Accounts is a validly existing segregated asset account under applicable state
law.
2.3 The Insurer represents and warrants that the Variable Contracts
issued by the Insurer (1) are or, prior to issuance, will be registered as
securities under the Securities Act of 1933 ("1933 Act") or, alternatively, (2)
are not registered because they are properly exempt from registration under the
1933 Act or will be offered exclusively in transactions that are properly exempt
from registration under the 1933 Act.
2.4 The Insurer represents and warrants that each of the Separate
Accounts (1) has been registered as a unit investment trust in accordance with
the provisions of the 1940 Act or, alternatively, (2) has not been registered in
proper reliance upon an exclusion from registration under the 1940 Act.
7
<PAGE> 8
2.5 The Insurer represents that it believes, in good faith, that the
Variable Contracts issued by the Insurer are currently treated as annuity
contracts or life insurance policies (which may include modified endowment
contracts), whichever is appropriate, under applicable provisions of the Code.
2.6 The Fund represents and warrants that it is duly organized as a
business trust under the laws of the Commonwealth of Massachusetts, and is in
good standing under applicable law.
2.7 The Fund represents and warrants that the shares of the
Portfolios are duly authorized for issuance in accordance with applicable law
and that the Fund is registered as an open-end management investment company
under the 1940 Act.
2.8 The Fund represents that it believes, in good faith, that the
Portfolios currently comply with the diversification provisions of Section
817(h) of the Code and the regulations issued thereunder relating to the
diversification requirements for variable life insurance policies and variable
annuity contracts.
2.9 The Distributor represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC.
ARTICLE III. General Duties
3.1 The Fund shall take all such actions as are necessary to permit
the sale of the shares of each Portfolio to the Separate Accounts, including
maintaining its registration as an investment company under the 1940 Act, and
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<PAGE> 9
registering the shares of the Portfolios sold to the Separate Accounts under the
1933 Act for so long as required by applicable law. The Fund shall amend its
Registration Statement filed with the SEC under the 1933 Act and the 1940 Act
from time to time as required in order to effect the continuous offering of the
shares of the Portfolios. The Fund shall register and qualify the shares for
sale in accordance with the laws of the various states to the extent deemed
necessary by the Fund or the Distributor.
3.2 The Fund shall make every effort to maintain qualification of
each Portfolio as a Regulated Investment Company under Subchapter M of the Code
(or any successor or similar provision) and shall notify the Insurer immediately
upon having a reasonable basis for believing that a Portfolio has ceased to so
qualify or that it might not so qualify in the future.
3.3 The Fund shall make every effort to enable each Portfolio to
comply with the diversification provisions of Section 817(h) of the Code and the
regulations issued thereunder relating to the diversification requirements for
variable life insurance policies and variable annuity contracts and any
prospective amendments or other modifications to Section 817 or regulations
thereunder, and shall notify the Insurer immediately upon having a reasonable
basis for believing that any Portfolio has ceased to comply.
3.4 The Insurer shall take all such actions as are necessary under
applicable federal and state law to permit the sale of the Variable Contracts
issued by the Insurer, including registering each Separate Account as an
investment company to the extent required under the 1940 Act, and registering
the Variable Contracts or interests in the Separate Accounts under the Variable
9
<PAGE> 10
Contracts to the extent required under the 1933 Act, and obtaining all necessary
approvals to offer the Variable Contracts from state insurance commissioners.
3.5 The Insurer shall make every effort to maintain the treatment of
the Variable Contracts issued by the Insurer as annuity contracts or life
insurance policies, whichever is appropriate, under applicable provisions of the
Code, and shall notify the Fund and the Distributor immediately upon having a
reasonable basis for believing that such Variable Contracts have ceased to be so
treated or that they might not be so treated in the future.
3.6 The Insurer shall offer and sell the Variable Contracts issued by
the Insurer in accordance with applicable provisions of the 1933 Act, the 1934
Act, the 1940 Act, the NASD Rules of Fair Practice, and state law respecting the
offering of variable life insurance policies and variable annuity contracts.
3.7 The Distributor shall sell and distribute the shares of the
Portfolios of the Fund in accordance with the applicable provisions of the 1933
Act, the 1934 Act, the 1940 Act, the NASD Rules of Fair Practice, and state law.
3.8 During such time as the Fund engages in Mixed Funding or Shared
Funding, a majority of the Board of Trustees of the Fund shall consist of
persons who are not "interested persons" of the Fund ("disinterested Trustees"),
as defined by Section 2(a)(19) of the 1940 Act and the rules thereunder, and as
modified by any applicable orders of the SEC, except that if this provision of
this Section 3.8 is not met by reason of the death, disqualification, or bona
fide resignation of any Trustee or Trustees, then the operation of this
provision shall be suspended (a) for a period of 45 days if the vacancy or
vacancies may be filled
10
<PAGE> 11
by the Fund's Board; (b) for a period of 60 days if a vote of shareholders is
required to fill the vacancy or vacancies; or (c) for such longer period as the
SEC may prescribe by order upon application.
3.9 The Insurer and its agents will not in any way recommend any
proposal or oppose or interfere with any proposal submitted by the Fund at a
meeting of owners of Variable Contracts or shareholders of the Fund, and will in
no way recommend, oppose, or interfere with the solicitation of proxies for Fund
shares held by Contract Owners, without the prior written consent of the Fund,
which consent may be withheld in the Fund's sole discretion.
3.10 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities having jurisdiction (including, without
limitation, the SEC, the NASD, and state insurance regulators) and shall permit
such authorities reasonable access to its books and records in connection with
any investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
ARTICLE IV. Potential Conflicts
4.1 During such time as the Fund engages in Mixed Funding or Shared
Funding, the parties hereto shall comply with the conditions in this Article IV.
4.2 The Fund's Board of Trustees shall monitor the Fund for the
existence of any material irreconcilable conflict (1) between the interests of
owners of variable annuity contracts and variable life insurance policies, and
(2) between the interests of owners of Variable Contracts ("Variable Contract
11
<PAGE> 12
Owners") issued by different Participating Life Insurance Companies that invest
in the Fund. A material irreconcilable conflict may arise for a variety of
reasons, including: (a) an action by any state insurance regulatory authority;
(b) a change in applicable federal or state insurance, tax, or securities laws
or regulations, or a public ruling, private letter ruling, no-action or
interpretive letter, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of any Portfolio of
the Fund are being managed; (e) a difference in voting instructions given by
variable annuity and variable life insurance contract owners; or (f) a decision
by a Participating Insurance Company to disregard the voting instructions of
Variable Contract Owners.
4.3 The Insurer agrees that it shall report any potential or existing
conflicts of which it is aware to the Fund's Board of Trustees. The Insurer will
be responsible for assisting the Board of Trustees of the Fund in carrying out
its responsibilities under the Mixed and Shared Funding Exemptive Order, or, if
the Fund is engaged in Mixed Funding or Shared Funding in reliance on Rule 6e-2,
6e-3(T), or any other regulation under the 1940 Act, the Insurer will be
responsible for assisting the Board of Trustees of the Fund in carrying out its
responsibilities under such regulation, by providing the Board with all
information reasonably necessary for the Board to consider any issues raised.
This includes, but is not limited to, an obligation by the Insurer to inform the
Board whenever Variable Contract Owner voting instructions are disregarded. The
Insurer shall carry out its responsibility under this Section 4.3 with a view
only to the interests of the Variable Contract Owners.
12
<PAGE> 13
4.4 The Insurer agrees that in the event that it is determined by a
majority of the Board of Trustees of the Fund or a majority of the Fund's
disinterested Trustees that a material irreconcilable conflict exists, the
Insurer shall, at its expense and to the extent reasonably practicable (as
determined by a majority of the disinterested Trustees of the Board of the
Fund), take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, up to and including: (1) withdrawing the
assets allocable to some or all of the Separate Accounts from the Fund or any
Portfolio and reinvesting such assets in a different investment medium,
including another portfolio of the Fund, or submitting the question as to
whether such segregation should be implemented to a vote of all affected
Variable Contract Owners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners or life insurance contract
owners of contracts issued by one or more Participating Insurance Companies),
that votes in favor of such segregation, or offering to the affected Variable
Contract Owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account. If a
material irreconcilable conflict arises because of the Insurer's decision to
disregard Variable Contract Owners' voting instructions and that decision
represents a minority position or would preclude a majority vote, the Insurer
shall be required, at the Fund's election, to withdraw the Separate Accounts'
investment in the Fund, provided, however, that such withdrawal and termination
shall be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees, and no
charge or penalty will be imposed as a result of such withdrawal. These
responsibilities shall be carried out with a view only to the interests of the
Variable Contract Owners. A majority of the disinterested Trustees of the Fund
shall determine whether or not any proposed action adequately remedies any
13
<PAGE> 14
material irreconcilable conflict, but in no event will the Fund or its
investment adviser or the Distributor be required to establish a new funding
medium for any Variable Contract. The Insurer shall not be required by this
Section 4.4 to establish a new funding medium for any Variable Contract if any
offer to do so has been declined by vote of a majority of Variable Contract
Owners materially adversely affected by the material irreconcilable conflict.
4.5 The Insurer, at least annually, shall submit to the Fund's Board
of Trustees such reports, materials, or data as the Board reasonably may request
so that the Trustees of the Fund may fully carry out the obligations imposed
upon the Board by the conditions contained in the application for the Mixed and
Shared Funding Exemptive Order and said reports, materials, and data shall be
submitted more frequently if deemed appropriate by the Board.
4.6 All reports of potential or existing conflicts received by the
Fund's Board of Trustees, and all Board action with regard to determining the
existence of a conflict, notifying Participating Insurance Companies of a
conflict, and determining whether any proposed action adequately remedies a
conflict, shall be properly recorded in the minutes of the Board of Trustees of
the Fund or other appropriate records, and such minutes or other records shall
be made available to the SEC upon request.
4.7 The Board of Trustees of the Fund shall promptly notify the
Insurer in writing of its determination of the existence of an irreconcilable
material conflict and its implications.
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<PAGE> 15
ARTICLE V. Prospectuses and Proxy Statements; Voting
5.1 The Insurer shall distribute such prospectuses, proxy statements
and periodic reports of the Fund to the owners of Variable Contracts issued by
the Insurer as required to be distributed to such Variable Contract Owners under
applicable federal or state law.
5.2 The Distributor shall provide the Insurer with as many copies of
the current prospectus of the Fund as the Insurer may reasonably request. If
requested by the Insurer in lieu thereof, the Fund shall provide such
documentation (including a final copy of the Fund's prospectus as set in type or
in camera-ready copy) and other assistance as is reasonably necessary in order
for the Insurer to either print a stand-alone document or print together in one
document the current prospectus for the Variable Contracts issued by the Insurer
and the current prospectus for the Fund, or a document combining the Fund
prospectus with prospectuses of other funds in which the Variable Contracts may
be invested. The Fund shall bear the expense of printing copies of its current
prospectus that will be distributed to existing Variable Contract Owners, and
the Insurer shall bear the expense of printing copies of the Fund's prospectus
that are used in connection with offering the Variable Contracts issued by the
Insurer.
5.3 The Fund and the Distributor shall provide, at the Fund's
expense, such copies of the Fund's current Statement of Additional Information
("SAI") as may reasonably be requested, to the Insurer and to any owner of a
Variable Contract issued by the Insurer who requests such SAI.
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<PAGE> 16
5.4 The Fund, at its expense, shall provide the Insurer with copies
of its proxy materials, periodic reports to shareholders, and other
communications to shareholders in such quantity as the Insurer shall reasonably
require for purposes of distributing to owners of Variable Contracts issued by
the Insurer. The Fund, at the Insurer's expense, shall provide the Insurer with
copies of its periodic reports to shareholders and other communications to
shareholders in such quantity as the Insurer shall reasonably request for use in
connection with offering the Variable Contracts issued by the Insurer. If
requested by the Insurer in lieu thereof, the Fund shall provide such
documentation (including a final copy of the Fund's proxy materials, periodic
reports to shareholders, and other communications to shareholders, as set in
type or in camera-ready copy) and other assistance as reasonably necessary in
order for the Insurer to print such shareholder communications for distribution
to owners of Variable Contracts issued by the Insurer.
5.5 For so long as the SEC interprets the 1940 Act to require
pass-through voting by Participating Insurance Companies whose Separate Accounts
are registered as investment companies under the 1940 Act, the Insurer shall
vote shares of each Portfolio of the Fund held in a Separate Account or a
subaccount thereof, whether or not registered under the 1940 Act, at regular and
special meetings of the Fund in accordance with instructions timely received by
the Insurer (or its designated agent) from owners of Variable Contracts funded
by such Separate Account or subaccount thereof having a voting interest in the
Portfolio. The Insurer shall vote shares of a Portfolio of the Fund held in a
Separate Account or a subaccount thereof that are attributable to the Variable
Contracts as to which no timely instructions are received, as well as shares
held
16
<PAGE> 17
in such Separate Account or subaccount thereof that are not attributable to the
Variable Contracts and owned beneficially by the Insurer (resulting from charges
against the Variable Contracts or otherwise), in the same proportion as the
votes cast by owners of the Variable Contracts funded by that Separate Account
or subaccount thereof having a voting interest in the Portfolio from whom
instructions have been timely received. The Insurer shall vote shares of each
Portfolio of the Fund held in its general account, if any, in the same
proportion as the votes cast with respect to shares of the Portfolio held in all
Separate Accounts of the Insurer or subaccounts thereof, in the aggregate.
5.6 During such time as the Fund engages in Mixed Funding or Shared
Funding, the Fund shall disclose in its prospectus that (1) the Fund is intended
to be a funding vehicle for variable annuity and variable life insurance
contracts offered by various insurance companies, (2) material irreconcilable
conflicts possibly may arise, and (3) the Board of Trustees of the Fund will
monitor events in order to identify the existence of any material irreconcilable
conflicts and to determine what action, if any, should be taken in response to
any such conflict. The Fund hereby notifies the Insurer that prospectus
disclosure may be appropriate regarding potential risks of offering shares of
the Fund to separate accounts funding both variable annuity contracts and
variable life insurance policies and to separate accounts funding Variable
Contracts of unaffiliated life insurance companies.
ARTICLE VI. Sales Material and Information
6.1 The Insurer shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in
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<PAGE> 18
which the Fund (or any Portfolio thereof) or its investment adviser or the
Distributor is named at least 15 days prior to the anticipated use of such
material, and no such sales literature or other promotional material shall be
used unless the Fund and the Distributor or the designee of either approve the
material or do not respond with comments on the material within 10 days from
receipt of the material.
6.2 The Insurer agrees that neither it nor any of its affiliates or
agents shall give any information or make any representations or statements on
behalf of the Fund or concerning the Fund other than the information or
representations contained in the Registration Statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee and by the Distributor or its designee, except with the permission of
the Fund or its designee and the Distributor or its designee.
6.3 The Fund or the Distributor or the designee of either shall
furnish to the Insurer or its designee, each piece of sales literature or other
promotional material in which the Insurer or its Separate Accounts are named at
least 15 days prior to the anticipated use of such material, and no such
material shall be used unless the Insurer or its designee approves the material
or does not respond with comments on the material within 10 days from receipt of
the material.
6.4 The Fund and the Distributor agree that each and the affiliates
and agents of each shall not give any information or make any representations on
behalf of the Insurer or concerning the Insurer, the Separate Accounts, or the
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<PAGE> 19
Variable Contracts issued by the Insurer, other than the information or
representations contained in a registration statement or prospectus for such
Variable Contracts, as such registration statement and prospectus may be amended
or supplemented from time to time, or in reports for the Separate Accounts or
prepared for distribution to owners of such Variable Contracts, or in sales
literature or other promotional material approved by the Insurer or its
designee, except with the permission of the Insurer.
6.5 The Fund will provide to the Insurer at least one complete copy
of the Mixed and Shared Funding Exemptive Application and any amendments
thereto, all prospectuses, Statements of Additional Information, reports, proxy
statements and other voting solicitation materials, and all amendments and
supplements to any of the above, that relate to the Fund or its shares, promptly
after the filing of such document with the SEC or other regulatory authorities.
6.6 The Insurer will provide to the Fund all prospectuses (which
shall include an offering memorandum if the Variable Contracts issued by the
Insurer or interests therein are not registered under the 1933 Act), Statements
of Additional Information, reports, solicitations for voting instructions
relating to the Fund, and all amendments or supplements to any of the above that
relate to the Variable Contracts issued by the Insurer or the Separate Accounts
which utilize the Fund as an underlying investment medium, promptly after the
filing of such document with the SEC or other regulatory authority.
6.7 For purposes of this Article VI, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use, in a newspaper, magazine, or
other
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periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, computerized media, or other public
media), sales literature (i.e., any written communication distributed or made
generally available to customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts, reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees.
ARTICLE VII. Indemnification
7.1 Indemnification by the Insurer
7.1(a) The Insurer agrees to indemnify and hold harmless
the Fund, each of its Trustees and officers, any affiliated person of the Fund
within the meaning of Section 2(a)(3) of the 1940 Act, and the Distributor
(collectively, the "Indemnified Parties" for purposes of this Section 7.1)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Insurer) or litigation
expenses (including legal and other expenses), to which the Indemnified Parties
may become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or litigation expenses are
related to the sale or acquisition of the Fund's shares or the Variable
Contracts issued by the Insurer and:
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact
contained in the registration statement or prospectus
(which shall include an offering memorandum) for the
Variable Contracts issued by the Insurer or sales
literature for such Variable Contracts (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
20
<PAGE> 21
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance
upon and in conformity with information furnished to the
Insurer by or on behalf of the Fund for use in the
registration statement or prospectus for the Variable
Contracts issued by the Insurer or sales literature (or any
amendment or supplement) or otherwise for use in connection
with the sale of such Variable Contracts or Fund shares; or
(ii) arise out of or as a result of any statement
or representation (other than statements or representations
contained in the registration statement, prospectus or
sales literature of the Fund not supplied by the Insurer or
persons under its control) or wrongful conduct of the
Insurer or any of its affiliates, employees or agents with
respect to the sale or distribution of the Variable
Contracts issued by the Insurer or the Fund shares; or
(iii) arise out of any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus, or sales literature of
the Fund or any amendment thereof or supplement thereto or
the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading if such a
statement or omission was made in reliance upon information
furnished to the Fund by or on behalf of the Insurer; or
(iv) arise out of or result from any material
breach of any representation and/or warranty made by the
Insurer in this Agreement or arise out of or result from
any other material breach of this Agreement by the Insurer;
except to the extent provided in Sections 7.1(b) and 7.1(c) hereof.
7.1(b) The Insurer shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation expenses to which an Indemnified Party would otherwise
be subject by reason of willful misfeasance, bad faith, or gross negligence in
the performance of the
21
<PAGE> 22
Indemnified Party's duties or by reason of the Indemnified Party's reckless
disregard of obligations or duties under this Agreement or to the Fund.
7.1(c) The Insurer shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Party shall have notified the Insurer in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Party shall have received notice of such
service on any designated agent), but failure to notify the Insurer of any such
claim shall not relieve the Insurer from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise than on account
of this indemnification provision. In case any such action is brought against
the Indemnified Parties, the Insurer shall be entitled to participate, at its
own expense, in the defense of such action. The Insurer also shall be entitled
to assume the defense thereof, with counsel satisfactory to the party named in
the action. After notice from the Insurer to such party of the Insurer's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Insurer will
not be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
7.1(d) The Indemnified Parties shall promptly notify the
Insurer of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund shares or the Variable
Contracts issued by the Insurer or the operation of the Fund.
22
<PAGE> 23
7.2 Indemnification By the Distributor
7.2(a) The Distributor agrees to indemnify and hold
harmless the Insurer, its affiliated principal underwriter of the Variable
Contracts, and each of their directors and officers and any affiliated person of
the Insurer within the meaning of Section 2(a)(3) of the 1940 Act (collectively,
the "Indemnified Parties" for purposes of this Section 7.2) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Distributor) or litigation expenses (including legal
and other expenses) to which the Indemnified Parties may become subject under
any statute or regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or litigation expenses are related to the sale or
acquisition of the Fund's shares or the Variable Contracts issued by the Insurer
and:
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact
contained in the registration statement or prospectus or
sales literature of the Fund (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance
upon and in conformity with information furnished to the
Distributor or the Fund or the designee of either by or on
behalf of the Insurer for use in the registration statement
or prospectus for the Fund or in sales literature (or any
amendment or supplement) or otherwise for use in the
registration statement or prospectus for the Fund or in
sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Variable Contracts issued by the Insurer or Fund shares; or
(ii) arise out of or as a result of any statement
or representations (other than statements or
representations contained in the registration statement,
prospectus or sales literature for the
23
<PAGE> 24
Variable Contracts not supplied by the Distributor or any
employees or agents thereof) or wrongful conduct of the
Fund or Distributor, or the affiliates, employees, or
agents of the Fund or the Distributor with respect to the
sale or distribution of the Variable Contracts issued by
the Insurer or Fund shares; or
(iii) arise out of any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus, or sales literature
covering the Variable Contracts issued by the Insurer, or
any amendment thereof or supplement thereto, or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statement or statements therein not misleading, if such
statement or omission was made in reliance upon information
furnished to the Insurer by or on behalf of the Fund; or
(iv) arise out of or result from any material
breach of any representation and/or warranty made by the
Distributor in this Agreement or arise out of or result
from any other material breach of this Agreement by the
Distributor;
except to the extent provided in Sections 7.2(b) and 7.2(c) hereof.
7.2(b) The Distributor shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation expenses to which an Indemnified Party would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of the Indemnified Party's duties or by reason of
the Indemnified Party's reckless disregard of obligations or duties under this
Agreement or to the Insurer or the Separate Accounts.
7.2(c) The Distributor shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Party shall have notified the Distributor in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of
24
<PAGE> 25
the claim shall have been served upon such Indemnified Party (or after such
Party shall have received notice of such service on any designated agent), but
failure to notify the Distributor of any such claim shall not relieve the
Distributor from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Distributor will be entitled to participate, at is own
expense, in the defense thereof. The Distributor also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Distributor to such party of the Distributor's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Distributor
will not be liable to such party under this Agreement for any legal or other
expense subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
7.2(d) The Insurer shall promptly notify the Distributor
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the Variable
Contracts issued by the Insurer or the operation of the Separate Accounts.
7.3 Indemnification by the Fund
7.3(a) The Fund agrees to indemnify and hold harmless the
Insurer, its affiliated principal underwriter of the Variable Contracts, and
each of their directors and officers and any affiliated person of the Insurer
within the meaning of Section 2(a)(3) of the 1940 Act (collectively, the
"Indemnified Parties" for purposes of this Section 7.3) against any and all
losses, claims, damages,
25
<PAGE> 26
liabilities (including amounts paid in settlement with the written consent of
the Fund) or litigation expenses (including legal and other expenses) to which
the Indemnified Parties may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
litigation expenses are related to the sale or acquisition of the Fund's shares
or the Variable Contracts issued by the Insurer and:
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact
contained in the registration statement or prospectus or
sales literature of the Fund (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance
upon and in conformity with information furnished to the
Distributor or the Fund or the designee of either by or on
behalf of the Insurer for use in the registration statement
or prospectus for the Fund or in sales literature (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Variable Contracts issued by the
Insurer or Fund shares; or
(ii) arise out of or as a result of any statement
or representation (other than statements or representations
contained in the registration statement, prospectus or
sales literature for the Variable Contracts not supplied by
the Distributor or any employees or agents thereof) or
wrongful conduct of the Fund, or the affiliates, employees,
or agents of the Fund, with respect to the sale or
distribution of the Variable Contracts issued by the
Insurer or Fund shares; or
(iii) arise out of any untrue statement or
alleged untrue statement of a material fact contained in a
registration statement, prospectus or sales literature
covering the Variable Contracts issued by the Insurer, or
any amendment thereof or supplement thereto, or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statement or statements therein not misleading, if such
statement or
26
<PAGE> 27
omission was made in reliance upon information furnished
to the Insurer by or on behalf of the Fund; or
(iv) arise out of or result from any material
breach of any representation and/or warranty made by the
Fund in this Agreement or arise out of or result from any
other material breach of this Agreement by the Fund;
except to the extent provided in Sections 7.3(b) and 7.3(c) hereof.
7.3(b) The Fund shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation expenses to which an Indemnified Party would otherwise
be subject by reason of willful misfeasance, bad faith, or gross negligence in
the performance of the Indemnified Party's duties or by reason of the
Indemnified Party's reckless disregard of obligations or duties under this
Agreement or to the Insurer or the Separate Accounts.
7.3(c) The Fund shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Party shall have received notice of such
service on any designated agent), but failure to notify the Fund of any such
claim shall not relieve the Fund from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise than on account
of this indemnification provision. In case any such action is brought against
the Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party
27
<PAGE> 28
named in the action. After notice from the Fund to such party of the Fund's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Fund will
not be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
7.3(d) The Insurer shall promptly notify the Fund of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Variable Contracts
issued by the Insurer or the sale of the Fund's shares.
ARTICLE VIII. Applicable Law
8.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Pennsylvania.
8.2 This Agreement shall be subject to the provisions of the 1933,
1934, and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant (including, but not limited to, the Mixed and Shared Funding Exemptive
Order), and the terms hereof shall be interpreted and construed in accordance
therewith.
ARTICLE IX. Termination
9.1 This Agreement shall terminate:
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<PAGE> 29
(a) at the option of any party upon 60 days advance written
notice to the other parties; or
(b) at the option of the Insurer if shares of the
Portfolios are not reasonably available to meet the requirements of the Variable
Contracts issued by the Insurer, as determined by the Insurer, and upon prompt
notice by the Insurer to the other parties; or
(c) at the option of the Fund or the Distributor upon
institution of formal proceedings against the Insurer or its agent by the NASD,
the SEC, or any state securities or insurance department or any other regulatory
body regarding the Insurer's duties under this Agreement or related to the sale
of the Variable Contracts issued by the Insurer, the operation of the Separate
Accounts, or the purchase of the Fund shares; or
(d) at the option of the Insurer upon institution of formal
proceedings against the Fund or the Distributor by the NASD, the SEC, or any
state securities or insurance department or any other regulatory body; or
(e) upon requisite vote of the Variable Contract Owners
having an interest in the Separate Accounts (or any subaccounts thereof) to
substitute the shares of another investment company for the corresponding shares
of the Fund or a Portfolio in accordance with the terms of the Variable
Contracts for which those shares had been selected or serve as the underlying
investment media; or
(f) in the event any of the shares of a Portfolio are not
registered, issued or sold in accordance with applicable state and/or federal
law, or such
29
<PAGE> 30
law precludes the use of such shares as the underlying investment media of the
Variable Contracts issued or to be issued by the Insurer; or
(g) by any party to the Agreement upon a determination by a
majority of the Trustees of the Fund, or a majority of its disinterested
Trustees, that an irreconcilable conflict, as described in Article IV hereof,
exists; or
(h) at the option of the Insurer if the Fund or a Portfolio
fails to meet the requirements under Subchapter M of the Code for qualification
as a Regulated Investment Company specified in Section 3.2 hereof or the
diversification requirements specified in Section 3.3 hereof.
9.2 Each party to this Agreement shall promptly notify the other
parties to the Agreement of the institution against such party of any such
formal proceedings as described in Sections 9.1(c) and (d) hereof. The Insurer
shall give 60 days prior written notice to the Fund of the date of any proposed
vote of Variable Contract Owners to replace the Fund's shares as described in
Section 9.1(e) hereof.
9.3 Except as necessary to implement Variable Contract Owner
initiated transactions, or as required by state insurance laws or regulations,
the Insurer shall not redeem Fund shares attributable to the Variable Contracts
issued by the Insurer (as opposed to Fund shares attributable to the Insurer's
assets held in the Separate Accounts), and the Insurer shall not prevent
Variable Contract Owners from allocating payments to a Portfolio, until 60 days
after the Insurer shall have notified the Fund or Distributor of its intention
to do so.
30
<PAGE> 31
9.4 Notwithstanding any termination of this Agreement, the Fund and
the Distributor shall at the option of the Insurer continue to make available
additional shares of the Fund pursuant to the terms and conditions of this
Agreement, for all Variable Contracts in effect on the effective date of
termination of this Agreement (hereinafter referred to as "Existing Contracts").
Specifically, without limitation, based upon instructions from the owners of the
Existing Contracts, the Separate Accounts shall be permitted to reallocate
investments in the Portfolios of the Fund and redeem investments in the
Portfolios, and shall be permitted to invest in the Portfolios in the event that
owners of the Existing Contracts make additional purchase payments under the
Existing Contracts. If this Agreement terminates, the parties agree that
Sections 3.10, 7.1, 7.2, 7.3, 8.1, and 8.2, and, to the extent that all or a
portion of the assets of the Separate Accounts continue to be invested in the
Fund or any Portfolio of the Fund, Articles I, II, and IV and Sections 5.5 and
5.6 will remain in effect after termination.
ARTICLE X. Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Insurance Series
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Attn.: John W. McGonigle
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<PAGE> 32
If to the Distributor:
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Attn.: John W. McGonigle
If to the Insurer:
Western Reserve Life Assurance Co. of Ohio
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52499
Attn: Extraordinary Markets, Individual Division
ARTICLE XI: Miscellaneous
11.1 The Fund and the Insurer agree that if and to the extent Rule
6e-2 or Rule 6e-3(T) under the 1940 Act is amended or if Rule 6e-3 is adopted in
final form, to the extent applicable, the Fund and the Insurer shall each take
such steps as may be necessary to comply with the Rule as amended or adopted in
final form.
11.2 A copy of the Fund's Agreement and Declaration of Trust is on
file with the Secretary of the Commonwealth of Massachusetts and notice is
hereby given that any agreements that are executed on behalf of the Fund by any
Trustee or officer of the Fund are executed in his or her capacity as Trustee or
officer and not individually. The obligations of this Agreement shall only be
binding upon the assets and property of the Fund and shall not be binding upon
any Trustee, officer or shareholder of the Fund individually.
11.3 Nothing in this Agreement shall impede the Fund's Trustees or
shareholders of the shares of the Fund's Portfolios from exercising any of the
32
<PAGE> 33
rights provided to such Trustees or shareholders in the Fund's Agreement and
Declaration of Trust, as amended, a copy of which will be provided to the
Insurer upon request.
11.4 Administrative services to Variable Contract Owners shall be the
responsibility of Insurer. Insurer, on behalf of its separate accounts will be
the sole shareholder of record of Fund shares. Fund and Distributor recognize
that they will derive a substantial savings in administrative expense by virtue
of having a sole shareholder rather than multiple shareholders. In consideration
of the administrative savings resulting from having a sole shareholder rather
than multiple shareholders, Distributor agrees to pay to Insurer an amount
computed at an annual rate of .25 of 1% of the average daily net asset value of
shares held in subaccounts for which Insurer provides administrative services.
Distributor's payments to Insurer are for administrative services only and do
not constitute payment in any manner for investment advisory services.
11.5 It is understood that the name "Federated" or any derivative
thereof or logo associated with that name is the valuable property of the
Distributor and its affiliates, and that the Insurer has the right to use such
name (or derivative or logo) only so long as this Agreement is in effect. Upon
termination of this Agreement the Insurer shall forthwith cease to use such name
(or derivative or logo).
11.6 The captions 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.
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<PAGE> 34
11.7 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
11.8 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
11.9 This Agreement may not be assigned by any party to the
Agreement except with the written consent of the other parties to the
Agreement.
34
<PAGE> 35
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
INSURANCE SERIES
ATTEST: BY:
------------------------------- ------------------------------
Name: Name:
--------------------------------- ----------------------------
Title: Title:
-------------------------------- ---------------------------
FEDERATED SECURITIES CORP.
ATTEST: BY:
------------------------------- ------------------------------
Name: Name:
--------------------------------- ----------------------------
Title: Title:
-------------------------------- ---------------------------
WESTERN RESERVE LIFE
ASSURANCE CO. OF OHIO
ATTEST: BY: /s/ JOHN R. KENNEY
------------------------------- ------------------------------
Name: Name: John R. Kenney
--------------------------------- ----------------------------
Title: Title: President
-------------------------------- ---------------------------
35
<PAGE> 36
EXHIBIT A AND EXHIBIT B TO FUND PARTICIPATION AGREEMENT
DATED AS OF OCTOBER 1, 1998 BY AND BETWEEN
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO,
INSURANCE SERIES AND FEDERATED SECURITIES CORP.
ACCOUNT(S), POLICY(IES) AND PORTFOLIO(S)
SUBJECT TO THE FUND PARTICIPATION AGREEMENT
Account WRL Series Life Corporate Account
Policies Advantage IV Variable Adjustable Life Insurance
Portfolios Prime Money Fund II
33
<PAGE> 1
EXHIBIT 1.A.(11)
DESCRIPTION OF ISSUANCE,
TRANSFER AND REDEMPTION PROCEDURES
FOR VARIABLE ADJUSTABLE LIFE INSURANCE POLICIES
ISSUED BY
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
This document sets forth the administrative procedures that will be
followed by Western Reserve Life Assurance Co. of Ohio (the "Company" or
"Western Reserve") in connection with issuing its variable adjustable life
insurance policy ("Policy") and accepting payments thereunder, transferring
assets held thereunder, and redeeming the interests of owners of the Policies
("Owners"). Capitalized terms used herein have the same definition as in the
prospectus for the Policy that is included in the current registration statement
on Form S-6 for the Policy (File No. 333-57681) as filed with the Securities and
Exchange Commission ("Commission" or "SEC").
PROCEDURES RELATING TO PURCHASE AND ISSUANCE OF THE POLICIES AND
ACCEPTANCE OF PREMIUMS
OFFER OF THE POLICIES, APPLICATION, INITIAL PREMIUMS, AND ISSUANCE
Offer of the Policies. The Policies are offered and issued for premiums
pursuant to underwriting standards in accordance with state insurance laws.
Premiums for the Policies are not the same for all Owners selecting the same
Face Amount. Insurance is based on the principle of pooling and distribution of
mortality risks, which assumes that each Owner pays premiums commensurate with
the Insured's mortality risk as actuarially determined utilizing factors such as
age, sex, and risk class of the Insured. Uniform premiums for all Insureds would
discriminate unfairly in favor of those Insureds representing greater risk.
Although there is no uniform premium for all Insureds, there is a uniform
premium for all Insureds of the same risk class, age, and sex and same Face
Amount.
Application. The Policy will be offered to corporations and partnerships
that meet the following conditions at issue:
- a minimum of five (5) Policies are issued, each on the life of a
different Insured; or
- the aggregate annualized first-year planned periodic premium for all
Policies is at least $100,000.
Persons wishing to purchase a Policy must complete an application and
submit it to the Administrative Office. The application must specify the name of
the Insured and provide certain required information about the Insured. The
application also must specify a premium payment plan, which contemplates level
premiums at specified intervals, designate Net Premium allocation percentages,
select the initial Face Amount (minimum $25,000), and name the Beneficiary.
Before an application will be deemed complete so that underwriting will
<PAGE> 2
proceed, the application must include the applicant's signature and the
Insured's date of birth, a signed authorization, and suitability information.
The premium and Face Amount selected must meet certain minimums for the Policy.
Receipt of Application and Underwriting. Upon receipt of a completed
application in good order from an applicant, the Company will follow its
established insurance underwriting procedures for life insurance designed to
determine whether the proposed Insured is insurable. This process may involve
such verification procedures as medical examinations and may require that
further information be provided about the proposed Insured before a
determination can be made.
The underwriting process determines the risk class to which the Insured is
assigned if the application is accepted. The Company currently places Insureds
in the following risk classes, based on the Company's underwriting: a male or
female or unisex risk class, and a tobacco or nontobacco risk class. This
original risk class applies to the initial Face Amount.
The risk class may change upon an increase in Face Amount.
The Company reserves the right to reject an application for any reason
permitted by law. If an application is rejected, any premium received will be
returned, without interest.
Issuing a Policy. The Policy is issued when the underwriting procedure has
been completed, the application has been approved, and an initial premium of
sufficient amount has been received.
Initial Premium. The Company may require an applicant to pay an initial
premium of sufficient amount which, if not submitted with the application or
during the underwriting period, must be submitted before the Policy will be
issued. The minimum initial premium for a Policy depends on a number of factors,
such as the age, sex, and risk class of the proposed Insured, the requested Face
Amount, and any supplemental benefits. Coverage becomes effective as of the date
the Company receives the premium. The Effective Date is used to measure Policy
Months, Policy Years, and Policy Anniversaries. If the Policy is issued as
applied for and the Company receives the premium in good order, the Effective
Date is the later of the application date or the date the Company receives the
premium. If the Effective Date would have occurred on the 29th, 30th or 31st day
of any month, the Company will designate the 28th day of the month as the
Effective Date. For a premium to be received in "good order," it must be
received in cash (U.S. currency) or by check payable in U.S. currency, and must
clearly identify the purpose for the payment.
ADDITIONAL PREMIUMS
Additional Premiums Permitted. Additional premiums may be paid in any
amount, and at any time, however, total premiums paid in a Policy Year may not
exceed guideline premium limitations for life insurance set forth in the
Internal Revenue Code.
2
<PAGE> 3
Refund of Excess Premium Amounts. If at any time a premium is paid that
would result in total premiums exceeding limits established by law to qualify a
Policy as a life insurance policy, the Company will only accept premium that
would make total premiums equal at most the maximum amount that may be paid
under the Policy. The Company may either refuse the entire premium, or refund
the excess premium.
The Company will also monitor Policies and will attempt to notify an Owner
on a timely basis if the Owner's Policy is in jeopardy of becoming a modified
endowment contract under the Internal Revenue Code.
Planned Premiums. At the time of application, an Owner may select a plan
for paying premiums at specified intervals. The Owner may change the planned
premium frequency and amount by providing a written notice to the Company. Any
such change must comply with the premium limits for additional premiums
discussed above.
CREDITING PREMIUMS
Initial Premium. The initial premium will be credited to the Policy on the
Effective Date.
Additional Premiums. Additional premiums received by the Company prior to
the presumed end of the free-look period will be credited to the Policy on the
date it is received by the Company. Any additional premium received after the
presumed end of the free-look period will be credited to the Policy on the
Valuation Day it is received by the Company. The free-look period expires 20
days after the Owner receives the Policy (some states may require a longer
period).
Overpayments and Underpayments In accordance with industry practice, the
Company will establish procedures to handle errors in initial and additional
premium payments to refund overpayments and collect underpayments, except for de
minimis amounts. The Company will issue a refund check for any minimal
overpayment in excess of the Guideline (Annual and Single) Premium amount. For
larger overpayments, the Company will place the premium in a suspense account to
determine whether the premium actually is in excess of the Guideline (Annual and
Single) Premium or whether the premium was intended for another policy issued by
the Company. In the case of an underpayment, if the Net Cash Value on a Monthly
Deduction Day is less than the monthly deduction to be made on that day, the
Policy will be in default and a late period will begin. The Company will notify
Owners of the required premium that must be paid prior to the end of the late
period.
PREMIUMS UPON INCREASE IN FACE AMOUNT, PREMIUMS DURING A LATE PERIOD, AND
PREMIUMS UPON REINSTATEMENT
- -------------------------------------------------------------------------
Premiums Upon Increase in Face Amount. Generally, no premium is required
for an increase in Face Amount. However, depending on the Cash Value at the time
of an increase
3
<PAGE> 4
in the Face Amount and the amount of the increase requested, an additional
premium or change in the amount of planned premiums may be advisable.
Premiums During a Late period. If the Net Cash Value on a Monthly
Deduction Day is less than the amount of the monthly deduction due on that date,
the Policy will be in default and a late period will begin.
- The late period will end 62 days after the date on which the Company
sends a late period notice stating the amount required to be paid
during the late period to the Owner's last known address and to any
assignee of record. The Policy does not lapse, and the insurance
coverage continues, until the expiration of this late period.
- Failure to make a sufficient payment within the late period will
result in lapse of the Policy without value or benefits payable.
Premiums Upon Reinstatement. A Policy that lapses without value may be
reinstated at any time within five years after lapse by submitting: a written
application for reinstatement by the Owner; evidence of the Insured's
insurability satisfactory to the Company; and payment of a premium that, after
deducting charges against the premium, is large enough to cover the next two
monthly deduction that will become due after the time of reinstatement.
- Upon reinstatement, the Cash Value will be the Cash Value at the
date of lapse minus any decrease in the amount of any charges
between the date of lapse and the date of reinstatement.
- The amount of any Indebtedness on the date of lapse will be
reinstated when reinstatement takes effect. No interest from the
date of lapse to the date of reinstatement is included in that
amount.
ALLOCATIONS OF NET PREMIUMS
Net Premium. The Net Premium is equal to the premium paid less the
applicable percent of premium load.
The Separate Account. An Owner may allocate Net Premiums to one or more of
the Subaccounts of WRL Series Life Corporate Account (the "Separate Account").
The Separate Account currently consists of eight Subaccounts, the assets of
which are used to purchase shares of a designated corresponding investment
portfolio of BT Insurance Funds Trust, Russell Insurance Fund, or
________________________________ (each a "Fund," together, the "Funds"). Each
Fund is registered under the Investment Company Act of 1940 as an open-end
management investment company. Additional Subaccounts may be added from time to
time to invest in any of the available portfolios of a Fund or any other
investment company.
4
<PAGE> 5
When an Owner allocates an amount to a Subaccount (either by Net Premium
allocation, transfer of Cash Value or repayment of a Policy loan) the Policy is
credited with units in that Subaccount. The number of units is determined by
dividing the amount allocated, transferred or repaid to the Subaccount by the
Subaccount's unit value for the Valuation Day when the allocation, transfer or
repayment is effected. A Subaccount's unit value is determined for each
Valuation Period by multiplying the value of a unit for a Subaccount for the
prior Valuation Period by the net investment factor for the Subaccount for the
current Valuation Period. On the first Valuation Day, the unit value is started
with a nominal value of $1. The net investment factor is an index used to
measure the investment performance of a Subaccount from one Valuation Period to
the next.
Allocations to the Separate Account. Net Premiums are allocated to the
Subaccounts in accordance with the following procedures:
General. In the application for the Policy, the Owner will specify the
percentage of Net Premium to be allocated to each Subaccount of the Separate
Account. The percentage of each Net Premium that may be allocated to any
Subaccount must be a whole number, and the sum of the allocation percentages
must be 100%. Such allocation percentages may be changed at any time by the
Owner submitting a written notice to the Administrative Office, provided that
the requirements described above are met.
Allocation During Free-Look Period. Until the free-look period expires,
all Net Premiums will be allocated to the General Account. The free-look period
is a period expiring 20 days after an Owner receives a Policy (some states may
require a longer period), during which an Owner may cancel the Policy and
receive a refund equal to the greater of the Cash Value as of the date the
Policy is returned, or the premiums paid. At the end of the free-look period,
the Cash Value is transferred to and allocated to the Subaccounts based on the
Net Premium allocation percentages then in effect. For this purpose, the Company
assumes the free-look period starts 4 days after the Policy is sent to the
Owner.
Allocation After Free-Look Period. Additional Net Premiums received after
the free- look period expires will be credited to the Policy and allocated to
the Subaccounts in accordance with the allocation percentages in effect on the
Valuation Day that the premium is received at the Administrative Office.
Allocation percentages can be changed at any time.
LOAN REPAYMENTS AND INTEREST PAYMENTS
Repaying Indebtedness. The Owner may repay all or part of any Indebtedness
at any time while the Policy is in force and the Insured is living. Indebtedness
is equal to the sum of all outstanding Policy loans including both principal
plus any accrued interest. Loan repayments must be sent to the Administrative
Office and will be credited as of the date received. Loan repayments will not be
subject to a premium charge. If the Death Benefit becomes payable while a Policy
loan is outstanding, Indebtedness will be deducted in calculating the Death
Benefit.
5
<PAGE> 6
Allocation for Repayment of Policy Loans. On the date the Company receives
a repayment of all or part of a loan, an amount equal to the repayment will be
transferred from the Loan Account to the Subaccounts and allocated as directed
by the Owner when submitting the repayment. If no direction is provided, the
amount will be allocated in accordance with the Owner's current Net Premium
allocation percentages.
Interest on Loan Account. On each Monthly Deduction Day, the amount in the
Loan Account will be credited with interest at a minimum guaranteed annual
effective rate of 4%. On each Policy Anniversary, the interest earned is
transferred to the Subaccounts in accordance with the instructions for Net
Premium allocations then in effect.
Notice of Excessive Indebtedness. If Indebtedness exceeds the Cash Value
on any Monthly Deduction Day, the Policy will be in default. The Company will
send Owners and any assignee of record, notice of the default. The notice will
specify the amount that must be paid to prevent lapse. This amount must be paid
to the Administrative Office within a 31-day late period to avoid lapse. A
Policy that lapses due to excessive Indebtedness can be reinstated.
TRANSFERS
TRANSFERS AMONG THE SUBACCOUNTS
After the free-look period, by written request to the Administrative
Office, the Owner may transfer Cash Value between and among the Subaccounts of
the Separate Account. For this purpose, the Company assumes the free-look period
ends 24 days after the Policy is mailed to the Owner.
In any Policy Year, the Owner may make an unlimited number of transfers;
however, the Company reserves the right to impose a transfer charge of $25 for
each transfer in excess of 12 during any Policy Year. For purposes of the
transfer charge, each transfer request is considered one transfer, regardless
of the number of Subaccounts affected by the transfer. Any unused "free"
transfers do not carry over to the next year.
The minimum amount that may be transferred from each Subaccount is $500
or, if less, the balance in the Subaccount. The minimum amount that must remain
in a Subaccount following a transfer is $500. If a transfer request does not
conform to this provision, the transfer will be rejected.
The Company reserves the right to modify, restrict, suspend, or eliminate
the transfer privileges at any time and for any reason.
6
<PAGE> 7
ASSET REBALANCING
An Owner may instruct the Company to automatically rebalance (on a
quarterly, semi-annual or annual basis) the Cash Value to return to the
percentages specified in the Owner's allocation instructions. An Owner may elect
to participate in the asset rebalancing program at any time by sending the
Company a written request at the Administrative Office. The percentage
allocations must be in whole percentages. Subsequent changes to the percentage
allocations may be made at any time by written instructions to the
Administrative Office. Once elected, asset rebalancing remains in effect until
the Owner instructs the Company to discontinue asset rebalancing. There is no
additional charge for using asset rebalancing, and an asset rebalancing transfer
is not considered a transfer for purposes of assessing a transfer charge. The
Company reserves the right to discontinue offering the asset rebalancing program
at any time and for any reason.
TRANSFER ERRORS
In accordance with industry practice, the Company will establish
procedures to address and to correct errors in amounts transferred among the
Subaccounts, except for de minimis amounts. The Company will correct non-de
minimis errors it makes and will assume any risk associated with the error.
Owners will not be penalized in any way for errors made by the Company. The
Company will take any gain resulting from the error.
REDEMPTION PROCEDURES
"FREE-LOOK" RIGHTS
The Policy provides for an initial free-look right during which an Owner
may cancel the Policy by returning it to the Company or to an agent of the
Company before the end of the 20 day free-look period. The Company deems the
free-look period to being 4 days after the Policy is mailed to the Owner. The
free-look period may be longer in some states. Upon returning the Policy to the
Company, the Policy will be deemed void from the beginning. Within seven days
after the Company or the Administrative Office receives the cancellation request
and Policy, the Company or the Administrative Office will pay a refund equal to
the greater of the Cash Value as of the date the Policy is returned, or the
total premiums received.
SURRENDERS
Requests for Net Cash Value. The Owner may surrender the Policy at any
time for its Net Cash Value. The Net Cash Value on any Valuation Day is the Cash
Value less any Indebtedness. The Net Cash Value will be determined by the
Company on the Valuation Day the Administrative Office receives all required
documents, including a satisfactory written request signed by the Owner. The
written request must include the Policy number, signature of the Owner, and
clear instructions regarding the request. The Company will cancel the Policy as
of the date the written request is received at the Administrative Office and the
7
<PAGE> 8
Company will ordinarily pay the Net Cash Value within seven days following
receipt of the written request and all other required documents. The Policy
cannot be reinstated after it is surrendered.
WITHDRAWALS
When Withdrawals are Permitted. At any time after the first Policy Year,
the Owner may withdraw a portion of the Net Cash Value subject to the following
conditions by submitting a written request to the Administrative Office:
- The minimum amount that may be withdrawn is $500.
- The maximum amount withdrawn is the amount that would leave at least
$500 in the Subaccount from which the withdrawal is made.
- A withdrawal processing fee equal to the lesser of $25 or 2% of the
amount withdrawn will be assessed on each withdrawal made during a
Policy Year. The withdrawal processing fee will be deducted from the
Net Cash Value along with the amount requested to be withdrawn.
- When the Owner requests a withdrawal, the Owner may direct how the
withdrawal will be deducted from the Net Cash Value. If no
directions are provided, the withdrawal will be deducted from the
Net Cash Value in the Subaccounts on a pro-rata basis.
- The Company generally will pay a withdrawal request within seven
days after receipt by the Administrative Office of all the documents
required for such a payment.
- The Company may delay making a payment if: (1) the disposal or
valuation of the Separate Account's assets is not reasonably
practicable because the New York Stock Exchange is closed for other
than a regular holiday or weekend, trading is restricted by the SEC,
or the SEC declares that an emergency exists; or (2) the SEC by
order permits postponement of payment to protect Owners. The Company
also may defer making payments attributable to a check that has not
cleared.
- If Life Insurance Benefit Option 1 is in effect, a withdrawal will
reduce the Face Amount dollar-for-dollar. If the Face Amount
reflects increases in the Initial Face Amount, the withdrawal will
reduce first the most recent increase, and then the next most recent
increase, if any, in reverse order, and finally the Initial Face
Amount. If Life Insurance Benefit Option 2 is in effect, the Face
Amount is unaffected by the withdrawal. If Life Insurance Benefit
Option 3 is in effect and the withdrawal is greater than the sum of
the premiums paid, the
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<PAGE> 9
Face Amount is reduced by the amount of the withdrawal minus the sum
of the premiums paid; otherwise the Face Amount is not reduced.
LAPSES
If a sufficient premium has not been received by the 62nd day after a late
period notice is sent, the Policy will lapse without value and no amount will be
payable to the Owner.
MONTHLY DEDUCTIONS
On each Monthly Deduction Day, redemptions in the form of deductions will
be made from the Cash Value for the monthly deduction, which is a charge
compensating the Company for the services and benefits provided, costs and
expenses incurred, and risks assumed by the Company in connection with the
Policy. The monthly deduction consists of four components: (a) the cost of
insurance charge; (b) a monthly Policy charge; (c) any charges for additional
benefits added by riders to the Policy; and (d) a factor representing the
mortality and expense risk charge. The monthly deduction will be deducted from
the Subaccounts of the Separate Account on a pro rata basis.
Cost of Insurance Charge. The cost of insurance charge is the primary
charge for the life insurance benefit provided by the Policy. The cost of
insurance charges are calculated monthly, and depend on a number of variables,
including the age, sex and risk class of the Insured. The charge varies from
Policy to Policy and from Monthly Deduction Day to Monthly Deduction Day. The
charge is calculated separately for the Face Amount at issue and for any
increase in the Face Amount.
The cost of insurance charge is calculated for the Face Amount at issue
and for any increase in Face Amount. The monthly cost of insurance charge is
equal to (1) multiplied by the result of (2) minus (3), where:
(1) is the monthly cost of insurance rate per $1,000 of insurance;
(2) is the number of thousands of Life Insurance Benefit for the Policy
(as defined in the applicable Option 1, Option 2 or Option 3)
divided by 1.0032737; and
(3) is the number of thousands of Cash Value as of the Monthly Deduction
Day (before this cost of insurance, and after the mortality and
expense risk charge, any applicable Policy charge and the cost of
any riders are subtracted).
The Company's current cost of insurance rates may be less than the
guaranteed rates. Current cost of insurance rates will be determined based on
the Company's expectations as to future mortality, investment earnings, expenses
and persistency. These rates may change from time to time, but they will never
be more than the guaranteed maximum rates set forth in the Owner's Policy. The
Company can change the rates without notice to Owners. The maximum cost of
insurance rates are based on the Insured's age last birthday at the start of
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the Policy Year, sex, and tobacco use. The Commissioners 1980 Standard Ordinary
Non-Smoker Table applies if the Insured is classified as non-tobacco; otherwise,
the Commissioners 1980 Standard Ordinary Smoker Mortality Table applies.
Modifications are made for risk classes other than standard.
Monthly Policy Charge. During the first Policy Year, the monthly Policy
charge is $16.50 per month. During subsequent Policy Years, the monthly Policy
charge currently is $4 per month and is guaranteed never to exceed $10 a month.
This charge is designed to reimburse the Company for expenses associated with
underwriting applications, increases in Face Amount, and riders, various
overhead and other expenses associated with providing the services and benefits
provided by the Policy, sales and marketing expenses, and other costs of doing
business, such as federal, state and local premium and other taxes and fees.
Supplemental Benefit Charges. An Owner may add supplemental benefits to
the Policy. Such benefits are made available by the Company through riders to
the Policy. If any additional benefits are added to a Policy, charges for these
benefits will be deducted monthly as part of the monthly deduction.
Mortality and Expense Risk Charge. The Company deducts a monthly charge
from the Cash Value to compensate it for mortality and expense risks that it
assumes under the Policy. The monthly charge is approximately equivalent to an
effective annual rate of 0.45% of an average of the Cash Value during the Policy
Month preceding the Monthly Deduction Day. The guaranteed rate for this charge
is approximately equivalent to an effective annual rate of 0.90% of an average
of the Cash Value during the Policy Month preceding the Monthly Deduction Day.
LIFE INSURANCE BENEFITS
Payment of Life Insurance Benefit Proceeds. As long as the Policy remains
in force, the Company will pay the life insurance benefit to the Beneficiary
upon receipt at the Administrative Office of due proof of the Insured's death.
The life insurance benefit is equal to the amount of insurance determined under
the Life Insurance Benefit Option in effect on the date of the Insured's death,
plus any supplemental life insurance benefit provided by riders, minus any
Indebtedness on that date and, if the date of death occurred during a late
period, minus the past due monthly deductions. The life insurance benefit will
be paid to the Beneficiary in a lump sum generally within seven days after the
Valuation Day by which the Company has received at the Administrative Office all
materials necessary to constitute due proof of death. If a payment option is
elected, the death benefit will be applied to the option within seven days after
the Valuation Day by which the Company received due proof of death and payments
will begin under that option when provided by the option.
Life Insurance Benefit Options. The Cash Value on the Insured's date of
death is used in determining the amount of insurance.
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- Under Option 1, the Life Insurance Benefit is the greater of the
Face Amount of the Policy or the applicable percentage (the
"limitation percentage") times the Cash Value on the date of death.
Accordingly, under Option 1 the Life Insurance Benefit will remain
level unless the limitation percentage times the Cash Value exceeds
the Face Amount, in which case the amount of the Life Insurance
Benefit will vary as the Cash Value varies.
- Under Option 2, the Life Insurance Benefit is equal to the greater
of the Face Amount plus the Cash Value of the Policy or the
limitation percentage times the Cash Value on the date of death.
Accordingly, under Option 2 the amount of the Life Insurance Benefit
will always vary as the Cash Value varies.
- Under Option 3, the Life Insurance Benefit is equal to the greater
of the Face Amount plus cumulative premiums paid less cumulative
partial withdrawals, or the corridor percentage times the Cash
Value. Accordingly, under Option 3, the amount of Life Insurance
Benefit will always vary with the premiums paid and partial
withdrawals taken, and may vary as the Cash Value varies.
Changing the Life Insurance Benefit Option. The Life Insurance Benefit
Option is selected in the application for the Policy. The Owner, by written
request submitted to the Company or the Administrative Office, may change the
Life Insurance Benefit Option on the Policy subject to the certain rules;
however, no change will be permitted that may result in the Policy being
disqualified as a life insurance policy under Section 7702 of the Code. The
effective date of any change will be the Monthly Deduction Day on or after the
Company approves the request. No charges will be imposed for making a change in
Life Insurance Benefit Option. If the Life Insurance Benefit Option is changed
from Option 2 to Option 1, the Face Amount will be increased by an amount equal
to the Cash Value on the effective date of change. If the Life Insurance Benefit
Option is changed from Option 1 to Option 2, the Face Amount will be decreased
by an amount equal to the Cash Value on the effective date of the change. If the
Life Insurance Benefit Option is changed from Option 3 to Option 1, the Face
Amount will be increased by the sum of the premiums paid less the sum of partial
withdrawals. If the Life Insurance Benefit Option is changed from Option 1 to
Option 3, the Face Amount will be decreased by the sum of the premiums paid less
the sum of partial withdrawals. The Company will not allow changes between
Options 2 and 3.
Changing the Face Amount. Subject to certain limitations, an Owner may
increase or decrease the Face Amount of a Policy. A change in Face Amount may
affect the net amount at risk, which may affect an Owner's cost of insurance
charge. A change in Face Amount could also have Federal income tax consequences.
Decreases. Any decrease in the Face Amount will become effective on the
Monthly Deduction Day on or following receipt of a written request from the
Owner by the Company at the Administrative Office. No requested decrease in the
Face Amount will be permitted during the first Policy Year. The Face Amount
remaining in force after any requested
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decrease may not be less than $25,000. If, following the decrease in Face
Amount, the Policy would not comply with the maximum premium limitations
required by Federal tax law, the decrease may be limited to the extent necessary
to meet these requirements.
Increases. For an increase in the Face Amount, written application must be
submitted. The Company will also require that additional evidence of
insurability be submitted. The Company reserves the right to decline any
increase request. Any increase will become effective on the Monthly Deduction
Day after the Company approves the request for the increase. No increase in the
Face Amount will be permitted during the first Policy Year. An increase need not
be accompanied by an additional premium, but there must be sufficient Net Cash
Value to cover the next Monthly Deduction after the increase becomes effective.
The initial Face Amount is set at the time the Policy is issued. The minimum
initial Face Amount is $50,000. The Owner may increase or decrease the Face
Amount from time to time, however, no change will be permitted that may result
in the Policy being disqualified as a life insurance policy under Section 7702
of the Code:
POLICY LOANS
Policy Loans. The Owner may obtain a Policy loan from the Company at any
time after the first Policy Year by submitting a written request to the
Administrative Office. The maximum loan amount is 90% of the Cash Value at the
time of the loan. Policy loans will be processed as of the Valuation Day the
request is received and loan proceeds generally will be sent to the Owner within
seven days thereafter.
Collateral for Policy Loans. When a Policy loan is made, an amount equal
to the requested loan amount plus interest in advance for one year is withdrawn
from each of the Subaccounts on a pro-rata basis (unless you specify otherwise)
and transferred to the Loan Account until the loan is repaid.
Interest on Policy Loans. The Company charges interest daily on any
outstanding Policy loan at an effective annual interest rate of 6%. Interest is
due and payable at the end of each Policy Year while a Policy loan is
outstanding. On each Policy Anniversary, any unpaid amount of loan interest
accrued since the last Policy Anniversary becomes part of the outstanding loan.
An amount equal to the unpaid amount of interest is transferred to the Loan
Account from each Subaccount on a pro-rata basis according to the respective
values in each Subaccount.
Effect on Life Insurance Benefit. If the life insurance benefit becomes
payable while a Policy loan is outstanding, the Indebtedness will be deducted in
calculating the life insurance benefit. If the Indebtedness exceeds the Cash
Value on any Monthly Deduction Day, the Policy will be in default. The Company
will send the Owner, and any assignee of record, notice of the default. The
Owner will have a 31-day late period to submit a sufficient payment to avoid
lapse.
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PAYMENT OPTIONS
The Policy offers four methods of receiving proceeds payable under the
Policy. In addition to these methods, which are described below, payment may be
made by any other method to which the Company agrees. If proceeds from a
surrender or life insurance benefits are to be applied to a payment option, the
proceeds will usually be applied within seven days of the Valuation Day on which
the Company receives the request and all required documentation at the
Administrative Office.
- Fixed Period Method. The Company will make equal payments, including
interest at the rate of at least 4% per year, at the end of each
monthly interval for a fixed number of years. The present value of
any unpaid payments may be withdrawn at any time.
- Life Income Method. The Company will make equal payments at the end
of each monthly interval for as long as the payee is alive. The
amount of each payment is based on the payee's age and sex at the
start of the first monthly interval. The Company may require proof
of the payee's age and sex. The payee may not withdraw the present
value of the payments. If the payee dies during a certain period,
the Company will continue the payments to the successor payee to the
end of the certain period, or the successor payee may have the
present value of any remaining payments paid in one sum.
- Joint Life Income Method. The Company will make equal payments at
the end of each monthly interval as long as at least one of the two
payees is alive. The Company will base each payment on the age and
sex of both payees at the start of the first monthly interval, and
may require proof of the Age and sex of each payee. The payees may
not withdraw the present value of any payments.
REDEMPTION ERRORS
In accordance with industry practice, the Company will establish
procedures to address and to correct errors in amounts redeemed from the
Subaccounts, except for de minimis amounts. The Company will assume the risk of
any non de minimus errors caused by the Company.
MISSTATEMENT OF AGE OR SEX
If the Insured's age or sex has been misstated in the application, the
Life Insurance Benefit under the Policy will be the amount that would have been
provided by the correct age and sex. The adjustment will be based on the ratio
of the correct cost of insurance for the most recent Monthly Deduction Day for
that benefit to the cost of insurance charge that was made.
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INCONTESTABILITY
The Policy limits the Company's right to contest the Policy as issued or
as increased, for reasons of material misstatements contained in the
application, after it has been in force during the Insured's lifetime for a
minimum period, generally for two years from the Effective Date of the Policy or
effective date of the increase.
LIMITED LIFE INSURANCE BENEFIT
The Policy limits the Life Insurance Benefit if the Insured dies by
suicide generally within two years after the Effective Date of the Policy or
effective date of the increase.
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[ERNST & YOUNG LETTERHEAD]
EX-99.C1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 27, 1998 with respect to the statutory-basis
financial statements and schedules of Western Reserve Life Assurance Co. of Ohio
included in Pre-effective Amendment No. 1 to the Registration Statement (Form
S-6 No. 333-57681) and related Prospectus of WRL Series Life Corporate Account.
/s/ ERNST & YOUNG LLP
-----------------
Ernst & Young LLP
Des Moines, Iowa
October 28, 1998
