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NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
P.O. Box 182150
Columbus, Ohio 43218-2150
(800) 547-7548, TDD (800) 238-3035
CORPORATE FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICIES
ISSUED BY NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
THROUGH ITS NATIONWIDE VL SEPARATE ACCOUNT-D
The life insurance policies offered by this prospectus are corporate flexible
premium variable universal life insurance policies (the "Policies"). The
Policies are designed for use by corporations and employers, to provide life
insurance coverage and the flexibility to vary the amount and frequency of
premium payments. The Policies also may provide a Cash Surrender Value if the
Policy is terminated during the lifetime of the Insured. The death benefit and
Cash Value of the Policies may vary to reflect the experience of Nationwide VL
Separate Account-D (the "Variable Account") or the Fixed Account to which Cash
Values are allocated.
The Policies described in this prospectus meet the definition of "life
insurance" under Section 7702 of the Internal Revenue Code (the "Code").
The Policy Owner may allocate Net Premiums and Cash Value to one or more of the
Sub-Accounts and the Fixed Account. The assets of each Sub-Account will be used
to purchase, at Net Asset Value, shares of a designated Underlying Mutual Fund
in the following series:
DREYFUS VARIABLE INVESTMENT FUND
- Quality Bond Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
- Overseas Portfolio: Service Class
GOLDMAN SACHS VARIABLE INSURANCE TRUST
- Goldman Sachs VIT Global Income Fund
INVESCO VARIABLE INVESTMENT FUNDS, INC.
- INVESCO VIF - Dynamics Portfolio
- INVESCO VIF - Growth Portfolio
- INVESCO VIF - Health Sciences Portfolio
- INVESCO VIF - High Yield Portfolio
- INVESCO VIF - Industrial Income Portfolio
- INVESCO VIF - Realty Portfolio
- INVESCO VIF - Small Company Growth Portfolio
- INVESCO VIF - Technology Portfolio
- INVESCO VIF - Total Return Portfolio
- INVESCO VIF - Utilities Portfolio
NATIONWIDE SEPARATE ACCOUNT TRUST ("NSAT")
- Capital Appreciation Fund
- Government Bond Fund
- Money Market Fund
- Total Return Fund
- Nationwide Balanced Fund
- Nationwide Equity Income Fund
- Nationwide Global Equity Fund
- Nationwide High Income Bond Fund*
- Nationwide Multi Sector Bond Fund
- Nationwide Select Advisers Mid Cap Fund
- Nationwide Small Cap Value Fund
- Nationwide Small Company Fund
- Nationwide Strategic Growth Fund
- Nationwide Strategic Value Fund
SALOMON BROTHERS VARIABLE SERIES FUNDS INC.
- Investors Fund
*These underlying mutual funds may invest in lower quality debt securities
commonly referred to as junk bonds.
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In the future, additional underlying mutual funds managed by certain financial
institutions or brokerage firms may be added to the variable account. These
additional underlying mutual funds may be offered exclusively to purchasing
customers of the particular financial institution or brokerage firm.
The Company may limit the number of Underlying Mutual Funds available to
corporate purchasers and employers.
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (THE "COMPANY") GUARANTEES THAT
THE DEATH BENEFIT FOR A POLICY WILL NEVER BE LESS THAN THE SPECIFIED AMOUNT
STATED ON THE POLICY DATA PAGES AS LONG AS THE POLICY IS IN FORCE. THERE IS NO
GUARANTEED CASH SURRENDER VALUE. IF THE CASH SURRENDER VALUE IS INSUFFICIENT TO
COVER THE CHARGES UNDER THE POLICY, THE POLICY WILL LAPSE WITHOUT VALUE. THIS
PROSPECTUS GENERALLY DESCRIBES ONLY THAT PORTION OF THE CASH VALUE ALLOCATED TO
THE VARIABLE ACCOUNT. FOR A BRIEF SUMMARY OF THE FIXED ACCOUNT, SEE "THE FIXED
ACCOUNT OPTION."
INVESTMENTS IN THESE POLICIES ARE NOT DEPOSITS OR OBLIGATIONS OF, AND ARE NOT
GUARANTEED OR ENDORSED BY, ANY ADVISER OF THE UNDERLYING MUTUAL FUNDS, THE U.S.
GOVERNMENT, OR ANY BANK OR BANK AFFILIATE. INVESTMENTS ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENTAL AGENCY. ANY INVESTMENT IN THE POLICY INVOLVES CERTAIN
INVESTMENT RISK WHICH MAY INCLUDE THE POSSIBLE LOSS OF PRINCIPAL.
THE BENEFITS DESCRIBED IN THIS PROSPECTUS MAY NOT BE AVAILABLE IN EVERY
JURISDICTION. PLEASE REFER TO YOUR POLICY FOR SPECIFIC BENEFIT INFORMATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES AND EXCHANGE COMMISSION MAINTAINS A WEB SITE, www.sec.gov, THAT
CONTAINS ANY MATERIAL INCORPORATED BY REFERENCE RELATING TO THIS PROSPECTUS.
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. A PROSPECTUS
FOR THE UNDERLYING MUTUAL FUND OPTIONS(S) BEING CONSIDERED MUST ACCOMPANY THIS
PROSPECTUS AND SHOULD BE READ IN CONJUNCTION HEREWITH.
THE DATE OF THIS PROSPECTUS IS JANUARY 5, 1999.
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GLOSSARY OF TERMS
ATTAINED AGE- The Insured's age on the Policy Date, plus the number of full
years since the Policy Date.
ACCUMULATION UNIT- An accounting unit of measure used to calculate the Cash
Value of the Variable Account.
BENEFICIARY- The person to whom the Death Proceeds are paid.
CASH VALUE- The sum of the Policy values in the Variable Account, Fixed Account
and any associated value in the Policy Loan Account.
CASH SURRENDER VALUE- The Policy's Cash Value, less any Indebtedness under the
Policy.
CODE- The Internal Revenue Code of 1986, as amended.
COMPANY- Nationwide Life and Annuity Insurance Company.
DEATH PROCEEDS- The amount of money payable to the Beneficiary if the Insured
dies while the Policy is in force prior to the Maturity Date.
FIXED ACCOUNT- An investment option which is funded by the General Account of
the Company.
GENERAL ACCOUNT- All assets of the Company other than those of the Variable
Account or in other separate accounts that have been or may be established by
the Company.
GUIDELINE LEVEL PREMIUM- The amount of level annual premium calculated in
accordance with the provisions of the Code. It represents the level annual
premiums required to mature the Policy under guaranteed mortality and current
expense charges, and an interest rate of 4%.
HOME OFFICE- The main office of the Company located in Columbus, Ohio.
INDEBTEDNESS- Amounts owed the Company as a result of Policy loans, including
both principal and accrued interest.
INITIAL PREMIUM- The premium required for coverage to become effective on the
Policy Date. It is shown on the Policy Data Page.
INSURED- The person whose life is covered by the Policy, and who is named on the
Policy Data Page.
MATURITY DATE- The Policy Anniversary on or following the Insured's 100th
birthday.
MONTHLY ANNIVERSARY DAY- The same day as the Policy Date for each succeeding
month.
NET AMOUNT AT RISK- For any Policy month, the Net Amount at Risk is the death
benefit at the beginning of the Policy month minus the Cash Value calculated at
the beginning of the Policy month prior to deduction of the base Policy cost of
insurance charge.
NET ASSET VALUE- The value of one share of an Underlying Mutual Fund at the end
of a market day or at the close of the New York Stock Exchange. Net Asset Value
is computed by adding the value of all portfolio holdings plus other assets,
deducting liabilities and then dividing the result by the number of shares
outstanding.
NET PREMIUMS- Net Premiums are equal to the actual premiums minus the percent of
premium charges. The percent of premium charges are shown on the Policy Data
Page.
POLICY ANNIVERSARY- The same day and month as the Policy Date for succeeding
years.
POLICY CHARGES- All deductions made from the value of the Variable Account or
the Policy Cash Value.
POLICY DATE- The date the provisions of the Policy take effect, as shown on the
Policy Data Page.
POLICY LOAN ACCOUNT- The portion of the Cash Value which results from Policy
Indebtedness.
POLICY OWNER- The person designated in the Policy application as the Owner.
POLICY YEAR- Each year commencing with the Policy Date, and each Policy
Anniversary thereafter.
SCHEDULED PREMIUM- The Scheduled Premium is shown on the Policy Data Page.
SPECIFIED AMOUNT- A dollar amount used to determine the death benefit under a
Policy. It is shown on the Policy Data Page.
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SUB-ACCOUNTS- Separate and distinct divisions of the Variable Account, to which
specific Underlying Mutual Fund shares are allocated and for which Accumulation
Units are separately maintained.
SURRENDER CHARGE- An amount deducted from the Cash Value if the Policy is
surrendered. This amount is zero.
TARGET PREMIUM- The level annual premium at which the sales load is reduced on a
current basis.
UNDERLYING MUTUAL FUNDS- The underlying mutual funds which correspond to the
Sub-Accounts of the Variable Account.
VALUATION DATE- Each day the New York Stock Exchange and the Home Office are
open for business or any other day during which there is sufficient degree of
trading that the Cash Value might be materially affected.
VALUATION PERIOD- A period commencing with the close of business on a Valuation
Date and ending at the close of business on the next succeeding Valuation Date.
VARIABLE ACCOUNT- Nationwide VL Separate Account-D, a separate investment
account of the Company.
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TABLE OF CONTENTS
GLOSSARY OF TERMS........................................3
SUMMARY OF THE POLICIES..................................7
Variable Life Insurance.............................7
The Variable Account and its Sub-Accounts...........7
The Fixed Account...................................7
Deductions and Charges..............................7
Premiums............................................8
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY............8
THE VARIABLE ACCOUNT.....................................8
Investments of the Variable Account.................9
Reinvestment........................................9
Transfers..........................................10
Dollar Cost Averaging..............................11
Changes Within the Variable Account................11
Voting Rights......................................12
INFORMATION ABOUT THE POLICIES..........................12
Underwriting and Issuance..........................12
-Minimum Requirements for Issuance of a Policy...12
-Premium Payments................................13
Allocation of Net Premium and Cash Value...........13
Short-Term Right to Cancel Policy..................13
POLICY CHARGES..........................................13
Deductions from Premiums...........................13
Deductions from Cash Value.........................14
-Monthly Cost of Insurance.......................14
-Monthly Administrative Charge...................14
Deductions from the Sub-Accounts...................15
Reduction of Charges (Policy and Sub-Accounts).....15
UNDERLYING MUTUAL FUND ANNUAL EXPENSES..................16
HOW THE CASH VALUE VARIES...............................17
How the Investment Experience is Determined........17
Net Investment Factor..............................17
Determining the Cash Value.........................18
Valuation Periods and Valuation Dates..............18
SURRENDERING THE POLICY FOR CASH........................18
Right to Surrender.................................18
Cash Surrender Value...............................18
Partial Surrenders.................................19
-Preferred Partial Surrenders....................19
-Reduction of the Specified Amount...............19
Maturity Proceeds..................................19
Income Tax Withholding.............................19
POLICY LOANS............................................20
Taking a Policy Loan...............................20
Effect on Investment Performance...................20
Interest...........................................20
Effect on Death Benefit and Cash Value.............21
Repayment..........................................21
HOW THE DEATH BENEFIT VARIES............................21
Calculation of the Death Benefit...................21
Proceeds Payable on Death..........................23
RIGHT OF CONVERSION.....................................23
CHANGES OF INVESTMENT POLICY............................23
GRACE PERIOD............................................23
REINSTATEMENT...........................................23
THE FIXED ACCOUNT OPTION................................24
CHANGES IN EXISTING INSURANCE COVERAGE..................24
Specified Amount Increases.........................24
Specified Amount Decreases.........................25
Changes in the Death Benefit Option................25
OTHER POLICY PROVISIONS.................................25
Policy Owner.......................................25
Beneficiary........................................25
Assignment.........................................26
Incontestability...................................26
Error in Age ......................................26
Suicide............................................26
Nonparticipating Policies..........................26
Riders.............................................26
LEGAL CONSIDERATIONS....................................26
DISTRIBUTION OF THE POLICIES............................26
CUSTODIAN OF ASSETS.....................................27
TAX MATTERS.............................................27
Policy Proceeds....................................27
-Withholding.....................................28
-Non-Resident Aliens.............................28
-Federal Estate and Generation
Skipping Transfer Taxes 29
Taxation of the Company............................29
Tax Changes........................................30
THE COMPANY.............................................30
COMPANY MANAGEMENT......................................31
Directors of the Company...........................32
Executive Officers of the Company..................33
OTHER CONTRACTS ISSUED BY THE COMPANY...................33
STATE REGULATION........................................33
REPORTS TO POLICY OWNERS................................34
ADVERTISING.............................................34
YEAR 2000 COMPLIANCE ISSUES.............................34
LEGAL PROCEEDINGS.......................................35
EXPERTS.................................................35
REGISTRATION STATEMENT..................................35
LEGAL OPINIONS..........................................35
APPENDIX A..............................................36
APPENDIX B..............................................46
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This prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made. No person is authorized to make any
representations in connection with this offering other than those contained in
this prospectus.
THE PRIMARY PURPOSE OF THE POLICIES IS TO PROVIDE LIFE INSURANCE PROTECTION FOR
THE BENEFICIARY NAMED IN THE POLICY. NO CLAIM IS MADE THAT THE POLICIES ARE IN
ANY WAY SIMILAR OR COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND.
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SUMMARY OF THE POLICIES
VARIABLE LIFE INSURANCE
The variable life insurance Policies offered by Nationwide Life and Annuity
Insurance Company (the "Company") provide for life insurance coverage on the
Insured. The Policies may provide for a Cash Surrender Value which is payable if
the Policy is terminated during the Insured's lifetime.
The death benefit and Cash Value of the Policies may increase or decrease to
reflect the investment performance of the Sub-Accounts or the Fixed Account to
which Cash Values are allocated (see "How the Death Benefit Varies"). There is
no guaranteed Cash Surrender Value (see "How the Cash Value Varies"). If the
Cash Surrender Value is insufficient to pay the Policy Charges, the Policy will
lapse without value.
Under certain conditions, a Policy may become a modified endowment contract as a
result of a material change or a reduction in benefits as defined by the
Internal Revenue Code ("Code"). Excess premiums paid may also cause the Policy
to become a modified endowment contract. The Company will monitor premiums paid
and other policy transactions and will notify the Policy Owner when the Policy's
non-modified endowment contract status is in jeopardy (see "Tax Matters").
THE VARIABLE ACCOUNT AND ITS SUB-ACCOUNTS
The Company places the Policy's Net Premiums in the Variable Account or the
Fixed Account at the time the Policy is issued. The Policy Owner selects the
Sub-Accounts or the Fixed Account into which the Cash Value will be allocated.
In such states which require a return of premiums to those Policy Owners
exercising their short-term right to cancel (see "Short Term Right to Cancel
Policy"), Net Premiums will be allocated to the Nationwide Separate Account
Trust ("NSAT")- Money Market Fund (for any Net Premiums allocated to a
Sub-Account on the application) or the Fixed Account until the expiration of the
period in which the Policy Owner may exercise his or her short-term right to
cancel the Policy. Assets of each Sub-Account are invested at Net Asset Value in
shares of corresponding Underlying Mutual Funds (see "Allocation of Net Premium
and Cash Value"). For a description of the Underlying Mutual Fund options and
their investment objectives, see "Investments of the Variable Account."
THE FIXED ACCOUNT
The Fixed Account is funded by the assets of the General Account. Cash Values
allocated to the Fixed Account are credited with interest daily at a rate
declared by the Company. The interest rate declared is at the Company's sole
discretion, but may never be less than an effective annual rate of 3%. The Fixed
Account is not available for Policies issued in the State of Texas.
DEDUCTIONS AND CHARGES
The Company deducts certain charges from the assets of the Variable Account and
the Cash Value of the Policy. These charges are made for administrative and
sales expenses, state premium taxes, providing life insurance protection and
assuming the mortality and expense risks. For a discussion of any charges
imposed by the Underlying Mutual Fund options, see the prospectuses of the
respective Underlying Mutual Funds.
The Company deducts a sales load from each premium payment received which is
guaranteed never to exceed 5.5% of such premium payment during the first seven
Policy Years and 2% thereafter. On a current basis, the sales load is 5.5% of
the Target Premium plus 3% of premiums in excess of the Target Premium during
the first seven Policy Years, and 0% on all premiums thereafter.
The Company also deducts from premium payments a tax expense charge of 3.5%, on
both a current and guaranteed basis, of all premium payments. This charge
reimburses the Company for premium taxes imposed by various state and local
jurisdictions and for federal taxes imposed under Section 848 of the Code. The
3.5% tax expense rate consists of the following components: (1) a state premium
tax rate of 2.25%; and (2) a federal tax rate of 1.25%.
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The Company also deducts the following charges from the Policy's Cash Value on
the Policy Date and each subsequent Monthly Anniversary Day:
1. monthly cost of insurance; plus
2. monthly cost of any additional benefits provided by riders to the
Policy; plus
3. an administrative expense charge. This charge is currently $5.00 per
month. The charge may be increased at the sole discretion of the
Company but is guaranteed not to exceed $10.00 per month.
The Company also deducts on a daily basis from the assets of the Variable
Account a charge to provide for mortality and expense risks. This charge is
guaranteed not to exceed an annual effective rate of 0.75% of the daily net
assets of the Variable Account. On a current basis this annual effective rate
will be 0.60% in the first through fourth Policy Years, 0.40% in fifth through
twentieth Policy Years, and 0.25% thereafter.
There are no Surrender Charges.
Underlying Mutual Fund shares are purchased at Net Asset Value, which reflects
the deduction of investment management fees and certain other expenses. The
management fees are charged by each Underlying Mutual Fund's investment adviser
for managing the Underlying Mutual Fund and selecting its portfolio of
securities. Other Underlying Mutual Fund expenses can include such items as
interest expense on loans and contracts with transfer agents, custodians, and
other companies that provide services to the Underlying Mutual Fund (see
"Expenses of the Underlying Mutual Funds").
PREMIUMS
The minimum Initial Premium for which a Policy may be issued is equal to three
monthly deductions. A Policy may be issued to an Insured up to age 80. For a
limited time, the Policy Owner has the right to cancel the Policy and the
Company will refund the amount prescribed by the state in which the Policy was
issued (see "Short-Term Right to Cancel Policy"). The Initial Premium is due and
will be credited on the Policy Date. Any due and unpaid monthly deductions will
be subtracted from the Cash Value at this time. Insurance will not be effective
until the Initial Premium is paid. The Initial Premium is shown on the Policy
Data Page. Premiums other than the Initial Premium may be made at any time while
the Policy is in force.
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
The Company is a stock life insurance company organized under the laws of the
State of Ohio in February, 1981. The Company is a member of the "Nationwide
Insurance Enterprise" with its Home Office at One Nationwide Plaza, Columbus,
Ohio 43215.
The Company is a provider of life insurance, annuities and retirement products.
It is admitted to do business in 48 states and the District of Columbia (for
additional information, see "The Company").
THE VARIABLE ACCOUNT
The Variable Account was established by the Company on May 22, 1998. The Company
has caused the Variable Account to be registered with the Securities and
Exchange Commission as a unit investment trust pursuant to the provisions of the
Investment Company Act of 1940 (the "1940 Act"). Such registration does not
involve supervision of the management of the Variable Account or of the Company
by the Securities and Exchange Commission.
The Variable Account is a separate investment account of the Company and as
such, is not chargeable with liabilities arising out of any other business the
Company may conduct. The Company does not guarantee the investment performance
of the Variable Account. The death benefit and Cash Value under the Policy may
vary with the investment performance of the investments of the Variable Account
(see "How the Death Benefit Varies" and "How Cash Value Varies").
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Premium payments and Cash Value are allocated within the Variable Account among
one or more Sub-Accounts. The assets of each Sub-Account are used to purchase
shares of the Underlying Mutual Funds designated by the Policy Owner. Thus, the
investment performance of a Policy depends upon the investment performance of
the Underlying Mutual Fund options designated by the Policy Owner.
INVESTMENTS OF THE VARIABLE ACCOUNT
At the time of application, the Policy Owner elects to have the Net Premiums
allocated among one or more of the Sub-Accounts and the Fixed Account (see
"Allocation of Net Premium and Cash Value"). In such states which require a
return of premiums to those Policy Owners exercising their short-term right to
cancel (see "Short Term Right to Cancel Policy"), Net Premiums will be allocated
to the NSAT-Money Market Fund (for any Net Premiums allocated to a Sub-Account
on the application) or the Fixed Account until the expiration of the period in
which the Policy Owner may exercise his or her short-term right to cancel the
Policy. Any Net Premiums received after this period will be allocated based on
the fund allocation factors.
No less than 1% of Net Premiums may be allocated to any one Sub-Account or the
Fixed Account. The Policy Owner may change the allocation of Net Premiums or may
transfer Cash Value from one Sub-Account to another, subject to such terms and
conditions as may be imposed by each Underlying Mutual Fund and as set forth in
this prospectus (see "Transfers," "Allocation of Cash Value," and "Short-Term
Right to Cancel Policy").
Each Underlying Mutual Fund is a registered investment company which receives
investment advice from a registered investment adviser.
The Underlying Mutual Funds are NOT available to the general public directly.
The Underlying Mutual Funds are available as investment options in variable life
insurance policies or variable annuity contracts issued by life insurance
companies or, in some cases, through participation in certain qualified pension
or retirement plans.
Some of the Underlying Mutual Funds have been established by investment advisers
which manage publicly traded mutual funds having similar names and investment
objectives. While some of the Underlying Mutual Funds may be similar to, and may
in fact be modeled after, publicly traded mutual funds, purchasers should
understand that the Underlying Mutual Funds are not otherwise directly related
to any publicly traded mutual fund. Consequently, the investment performance of
publicly traded mutual funds and any corresponding Underlying Mutual Funds may
differ substantially.
A summary of investment objectives and advisers for each Underlying Mutual Fund
is contained in an appendix to this prospectus (see "Appendix B - Participating
Underlying Mutual Funds"). These Underlying Mutual Funds are available only to
serve as the underlying investment for variable annuity and variable life
contracts issued through separate accounts of life insurance companies which may
or may not be affiliated, also known as "mixed and shared funding." There are
certain risks associated with mixed and shared funding, which are disclosed in
the Underlying Mutual Funds' prospectuses. A full description of the Underlying
Mutual Funds, their investment policies and restrictions, risks and charges are
contained in the prospectuses of the respective Underlying Mutual Funds. A
prospectus for the Underlying Mutual Fund(s) being considered must accompany
this prospectus and should be read in conjunction herewith.
A copy of each prospectus may be obtained without charge from the Company by
calling 1-800-547-7548, TDD 1-800-238-3035, or by writing P.O. Box 182150,
Columbus, Ohio 43218-2150. There can be no assurance that the investment
objectives will be achieved.
REINVESTMENT
The Underlying Mutual Funds have as a policy the distribution of dividends in
the form of additional shares (or fractions thereof) of the Underlying Mutual
Funds. The distribution of additional shares will not affect the number of
Accumulation Units attributable to a particular Policy (see "Allocation of Net
Premium and Cash Value").
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TRANSFERS
The Policy Owner may transfer amounts between the Fixed Account and the
Sub-Accounts without penalty or adjustment subject to the following
requirements. During any Policy Year, the Company reserves the right to restrict
such transfers between the Fixed Account and the Sub-Accounts to one transfer
per Policy Year.
Transfers made from the Fixed Account must be made within 45 days after the end
of an interest rate guarantee period (the period of time for which the current
interest crediting rate is guaranteed by the Company). The Company reserves the
right to restrict the amount transferred from the Fixed Account to 20% of that
portion of the Cash Value attributable to the Fixed Account as of the end of the
previous Policy Year.
Transfers made to the Fixed Account may not be made: (a) prior to the first
Policy Anniversary; or (b) within 12 months subsequent to a prior transfer. The
Company reserves the right to restrict the amount transferred to the Fixed
Account to 20% of that portion of the Cash Value attributable to the
Sub-Accounts as of the close of business of the prior Valuation Period. The
Company further reserves the right to refuse a transfer to the Fixed Account, in
the event the Cash Value attributable to the Fixed Account should be greater
than or equal to 30% of the Cash Value.
Transfers may be made either in writing or, in states allowing such transfers,
by telephone. In states allowing telephone transfers, and if the Policy Owner so
elects, the Company will also permit the Policy Owner to utilize the telephone
exchange privilege for exchanging amounts among Sub-Account options. The Company
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Such procedures may include any or all of the following:
requesting identifying information, such as name, Policy number, Social Security
Number, and/or personal identification number; tape recording all telephone
transactions; providing written confirmation thereof to both the Policy Owner
and any agent of record at the last address of record; or such other procedures
as the Company may deem reasonable. Although failure to follow reasonable
procedures may result in the Company's liability for any losses due to
unauthorized or fraudulent telephone transfers, the Company will not be liable
for following instructions communicated by telephone which it reasonably
believes to be genuine. Any losses incurred pursuant to actions taken by the
Company in reliance on telephone instructions reasonably believed to be genuine
will be borne by the Policy Owner.
Policy Owners who have entered into a Dollar Cost Averaging agreement with the
Company (see "Dollar Cost Averaging") may transfer from the Fixed Account to the
Variable Account under the terms of that agreement.
Policies described in this prospectus may, in some cases, be sold to individuals
who independently utilize the services of a firm or individual engaged in market
timing. Generally, such firms or individuals obtain authorization from multiple
Policy Owners to make transfers and exchanges among the Sub-Accounts on the
basis of perceived market trends. Because of the unusually large transfers of
funds associated with some of these transactions, the ability of the Company or
Underlying Mutual Funds to process such transactions may be compromised, and the
execution of such transactions may possibly disadvantage or work to the
detriment of other Policy Owners not utilizing market timing services.
Accordingly, the right to exchange Cash Surrender Values among the Sub-Accounts
may be subject to modification if such rights are exercised by a market timing
firm or any other third party authorized to initiate transfer or exchange
transactions on behalf of multiple Policy Owners. THE RIGHTS OF INDIVIDUAL
POLICY OWNERS TO EXCHANGE CASH SURRENDER VALUES WILL NOT BE MODIFIED IN ANY WAY
WHEN INSTRUCTIONS ARE SUBMITTED DIRECTLY BY THE POLICY OWNER, OR BY THE POLICY
OWNER'S REPRESENTATIVE OF RECORD AS AUTHORIZED BY THE EXECUTION OF A VALID
NATIONWIDE LIMITED POWER OF ATTORNEY FORM. In modifying such rights, the Company
may, among other things, not accept: (1) the transfer or exchange
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instructions of any agent acting under a power of attorney on behalf of more
than one Policy Owner; or (2) the transfer or exchange instructions of
individual Policy Owners who have executed pre-authorized transfer or exchange
forms which are submitted by market timing firms or other third parties on
behalf of more than one Policy Owner at the same time. The Company will not
impose any such restrictions or otherwise modify exchange rights unless such
action is reasonably intended to prevent the use of such rights in a manner that
will disadvantage or potentially impair the contract rights of other Policy
Owners.
DOLLAR COST AVERAGING
The Policy Owner may direct the Company to automatically transfer amounts from
the NSAT-Money Market Fund or the Fixed Account to any other Sub-Account. Dollar
Cost Averaging will occur on a monthly basis or on another frequency permitted
by the Company. Dollar Cost Averaging is a long-term investment program which
provides for regular, level investments over time. There is no guarantee that
Dollar Cost Averaging will result in a profit or protect against loss. To
qualify for Dollar Cost Averaging, there must be a minimum total Cash Value,
less Policy Indebtedness, of $15,000. The minimum monthly transfer is $100. In
addition, Dollar Cost Averaging monthly transfers from the Fixed Account must be
equal to or less than 1/30th of the Fixed Account value when the program is
requested. Transfers will be processed until either the value in the originating
Sub-Account or the Fixed Account is exhausted or the Policy Owner instructs the
Home Office to cancel the transfers.
The Company reserves the right to discontinue establishing new Dollar Cost
Averaging programs. The Company also reserves the right to assess a processing
fee for this service.
CHANGES WITHIN THE VARIABLE ACCOUNT
The Company, may from time to time, create additional Sub-Accounts in the
Variable Account. These Sub-Accounts may not be available to all Policy Owners.
The Company also has the right to eliminate Sub-Accounts from the Variable
Account, to combine two or more investment divisions, or to substitute a new
Underlying Mutual Fund for the Underlying Mutual Fund in which a Sub-Account
invests. A substitution may become necessary if, in the Company's judgment, an
Underlying Mutual Fund no longer suits the purposes of the Policies. This may
happen due to a change in laws or regulations, a change in the Underlying Mutual
Fund's investment objectives or restrictions, because a fund is no longer
available for investment, or for some other reason.
In general, the Company may consider substituting an Underlying Mutual Fund in
which one of the Sub-Accounts invests under the following circumstances: if a
conflict of interest arises with the Underlying Mutual Fund's investment manager
or other investors in the same Underlying Mutual Fund; if the personnel of the
Underlying Mutual Fund's manager changes in a way the Company deems unfavorable;
if the Underlying Mutual Fund's manager does not control risks consistent with
the Underlying Mutual Fund's investment objectives and methods; if an Underlying
Mutual Fund's investment performance is unsatisfactory over a period of time
compared to relevant benchmarks, taking into account the Underlying Mutual
Fund's investment objectives and methods; or if an Underlying Mutual Fund's
investment manager resigns or otherwise ceases to manage the Underlying Mutual
Fund's assets.
The approval of Policy Owners is not required for such a substitution, and
Policy Owners have no legal right to compel such a substitution. No substitution
of securities in the Variable Account may take place without the prior approval
of the Securities and Exchange Commission, and under such requirements as it and
any state insurance department may impose.
Subject to any required regulatory approvals, the Company reserves the right to
transfer assets of the Variable Account or of any of the Sub-Accounts to another
separate account or Sub-Account, which the Company determines to be associated
with the class of policies to which the Policy belongs, to another separate
account or investment division.
11
<PAGE> 12
Where permitted by law, the Company reserves the right to:
1. Register or deregister the Variable Account under the Investment
Company Act of 1940, subject to the approval of the Securities and
Exchange Commission;
2. Operate the Variable Account as a managed separate account or any other
form of organization permitted by applicable law;
3. Reserve, restrict, or eliminate any voting rights of Policy Owners, or
other persons who have voting rights through the Variable Account; and
4. Combine the Variable Account with other separate accounts, subject to
the approval of the Securities and Exchange Commission.
VOTING RIGHTS
Voting rights under the Policies apply ONLY with respect to amounts allocated to
the Sub-Accounts.
In accordance with its view of applicable law, the Company will vote the shares
of the Underlying Mutual Funds at regular and special meetings of the
shareholders. These shares will be voted in accordance with instructions
received from Policy Owners. If the 1940 Act or any regulation thereunder should
be amended, or if the present interpretation changes permitting the Company to
vote the shares of the Underlying Mutual Funds in its own right, the Company may
elect to do so.
The Policy Owner is the person who has voting interest under the Policy. The
number of Underlying Mutual Fund shares attributable to each Policy Owner is
determined by dividing any portion of the Cash Value derived from participation
in that Underlying Mutual Fund by the Net Asset Value of one share of that
Underlying Mutual Fund.
The number of shares which may be voted will be determined as of a date chosen
by the Company, but not more than 90 days prior to the meeting of the Underlying
Mutual Fund. Voting instructions will be solicited by written communication at
least 21 days prior to such meeting. Each person having a voting interest will
receive periodic reports relating to the Underlying Mutual Fund, proxy material,
and a form with which to give such voting instructions. Underlying Mutual Fund
shares to which no timely instructions are received will be voted by the Company
in the same proportion as the voting instructions which are received.
Notwithstanding contrary Policy Owner voting instructions, the Company may vote
Underlying Mutual Fund shares in any manner necessary to enable the Underlying
Mutual Fund to: (1) make or refrain from making any change in the investments or
investment policies for any of the Underlying Mutual Funds, if required by an
insurance regulatory authority; (2) refrain from making any change in the
investment policies or any investment adviser or principal underwriter of any
portfolio which may be initiated by Policy Owners or the Underlying Mutual
Fund's Board of Directors, provided the Company's disapproval of the change is
reasonable and, in the case of a change in the investment policies or investment
adviser, based on a good faith determination that such change would be contrary
to state law or otherwise inappropriate in light of the portfolio's objective
and purposes; or (3) enter into or refrain from entering into any advisory
agreement or underwriting contract, if required by any insurance regulatory
authority.
INFORMATION ABOUT THE POLICIES
UNDERWRITING AND ISSUANCE
- -Minimum Requirements for Issuance of a Policy
The Policies are designed to provide life insurance coverage and the flexibility
to vary the amount and frequency of premium payments. At issue, the Policy Owner
selects the Specified Amount and premium. The minimum Specified Amount is
$50,000 ($100,000 in Pennsylvania and New Jersey). Policies may be issued to
Insureds who are 80 or younger at the time of issue. Before issuing any Policy,
the Company requires satisfactory evidence of insurability which may include a
medical examination.
12
<PAGE> 13
- -Premium Payments
The Initial Premium for a Policy is payable in full at the Home Office or to an
authorized agent. Upon payment of an Initial Premium, temporary insurance may be
provided, subject to a maximum amount. The effective date of permanent insurance
coverage is dependent upon completion of all underwriting requirements, payment
of Initial Premium, and delivery of the Policy while the Insured is still
living.
Premiums, other than the Initial Premium, may be made at any time while the
Policy is in force. Each premium payment must be at least $50. The Company
reserves the right to require satisfactory evidence of insurability before
accepting any premium payment which results in an increase in the Net Amount at
Risk. The Company will refund any portion of any premium payment which is
determined to be in excess of the premium limit established by law to qualify
the Policy as a contract for life insurance. The Company may also require that
any existing Policy Indebtedness be repaid prior to accepting any additional
premium payments. Additional premium payments or other changes to the contract
may jeopardize the Policy's non-modified endowment status. The Company will
monitor premiums paid and other policy transactions and will notify the Policy
Owner when non-modified endowment contract status is in jeopardy (see "Tax
Matters").
ALLOCATION OF NET PREMIUM AND CASH VALUE
The designation of investment allocations will be made by the prospective Policy
Owner at the time of application for a Policy. The Policy Owner may change the
way in which future Net Premiums are allocated by giving written notice to the
Company. All percentage allocations and changes must be in whole numbers, and
must be at least 1%. The sum of allocations must equal 100%. At the time a
Policy is issued, its Cash Value will be determined as if the Policy had been
issued and the Initial Premium is invested on the date such premium was received
in good order by the Company.
In such states which require a return of premiums to those Policy Owners
exercising their short-term right to cancel (see "Short-Term Right to Cancel
Policy"), Net Premiums will be allocated to the NSAT-Money Market Fund (for any
Net Premiums allocated to a Sub-Account on the application) or the Fixed Account
until the expiration of the period in which the Policy Owner may exercise his or
her short-term right to cancel the Policy. At the expiration of the period in
which the Policy Owner may exercise his or her short-term right to cancel the
Policy, shares of the Underlying Mutual Funds specified by the Policy Owner are
purchased at Net Asset Value for the respective Sub-Account(s). The Policy Owner
may change the allocation of Net Premiums or may transfer Cash Value from one
Sub-Account to another, subject to such terms and conditions as may be imposed
by each Underlying Mutual Fund and as set forth in this prospectus.
SHORT-TERM RIGHT TO CANCEL POLICY
A Policy may be returned for cancellation within 10 days after the Policy is
received, within 45 days after the application for insurance is signed, or
within 10 days after the Company mails or delivers a Notice of Right of
Withdrawal, whichever is latest. The Policy can be mailed or delivered to the
registered representative who sold it, or to the Company. Immediately after such
mailing or delivery, the Policy will be deemed void from the beginning. The
Company will refund either the total premiums paid or the Cash Value less
Indebtedness, as prescribed by the state in which the Policy was issued, within
seven days after it receives the Policy. The scope of this right varies by
state.
POLICY CHARGES
DEDUCTIONS FROM PREMIUMS
The Company deducts a sales load from each premium payment received which is
guaranteed never to exceed 5.5% of such premium payment during the first seven
Policy Years and 2% thereafter. On a current basis, the sales load is 5.5% of
the Target Premium plus 3% of premiums in excess of the Target Premium during
the first seven Policy Years, and 0% on all premiums thereafter. The Target
Premium is a premium level based upon a percentage of the Guideline Level
Premium. The Target Premium
13
<PAGE> 14
is the level annual premium amount at which the sales load is reduced on a
current basis.
The Company also deducts from premium payments a tax expense charge of 3.5%, on
both a current and guaranteed basis, of all premium payments. This charge
reimburses the Company for premium taxes imposed by various state and local
jurisdictions and for federal taxes imposed under Section 848 of the Code. The
3.5% tax expense rate consists of the following components: (1) a state premium
tax rate of 2.25%; and (2) a federal tax rate of 1.25%.
The Company expects to pay an average state premium tax rate of approximately
2.25% of premiums for all states, although such tax rates range by state from 0%
to 4%. To reimburse the Company for the payment of state premium taxes
associated with the Policies, the Company deducts a charge for state premium
taxes equal to 2.25% of all premium payments received. This charge may be more
or less than the amount actually assessed by the state in which a particular
Policy Owner lives. The 1.25% federal tax component is designed to reimburse the
Company for expenses incurred from federal taxes imposed under Section 848 of
the Code (enacted by the Omnibus Budget Reconciliation Act of 1990). The Company
does not expect to make a profit from this charge.
DEDUCTIONS FROM CASH VALUE
The Company also deducts the following charges from the Policy's Cash Value on
the Policy Date and each subsequent Monthly Anniversary Day:
1. monthly cost of insurance charges; plus
2. monthly cost of any additional benefits provided by riders; plus
3. monthly administrative expense charge.
These deductions will be charged proportionately to the Cash Value in each
Sub-Account and the Fixed Account.
- -Monthly Cost of Insurance
The monthly cost of insurance charge for each Policy month is determined by
multiplying the monthly cost of insurance rate by the Net Amount at Risk. If
death benefit Option 1 is in effect and there have been increases in the
Specified Amount, then the Cash Value shall first be considered a part of the
initial Specified Amount. If the Cash Value exceeds the initial Specified
Amount, it shall then be considered a part of the additional increases in
Specified Amount resulting from the increases in the order of the increases.
Monthly cost of insurance rates will be unisex and will not exceed those
guaranteed in the Policy. Guaranteed cost of insurance rates are based on the
1980 Commissioners Standard Ordinary Male Mortality Table, Age Last Birthday,
aggregate as to tobacco status (1980 CSO). Guaranteed cost of insurance rates
for Policies issued on a substandard basis are based on appropriate percentage
multiples of the 1980 CSO.
The rate class of an Insured may affect the cost of insurance rate. The Company
currently places Insureds into both standard rate classes and substandard rate
classes that involve a higher mortality risk. In an otherwise identical Policy,
an Insured in the standard rate class will have a lower cost of insurance than
an Insured in a rate class with higher mortality risks. The Company may also
issue certain Policies on a "non-medical," guaranteed issue, or simplified issue
basis to certain categories of individuals. Due to the underwriting criteria
established for Policies issued on a non-medical basis, actual rates will be
higher than the current cost of insurance rates being charged under Policies
that are medically underwritten.
- -Monthly Administrative Charge
The Company deducts a monthly administrative expense charge to reimburse it for
certain expenses related to maintenance of the Policies, accounting and record
keeping, and periodic reporting to Policy Owners. This charge is designed only
to reimburse the Company for actual administrative expenses. The Company does
not expect to recover from this charge any amount in excess of aggregate
maintenance expenses. On a current basis, this charge is $5.00 per month in all
Policy Years. On a guaranteed basis, this charge is $10.00 per month in all
Policy Years.
14
<PAGE> 15
DEDUCTIONS FROM THE SUB-ACCOUNTS
The Company assumes certain risks for guaranteeing the mortality and expense
charges. The mortality risk assumed under the Policies is that the Insured may
not live as long as expected. The expense risk assumed is that the actual
expenses incurred in issuing and administering the Policies may be greater than
expected. In addition, the Company assumes risks associated with the
non-recovery of policy issue, underwriting, and other administrative expenses
due to Policies which lapse or are surrendered in the early Policy Years.
To compensate the Company for assuming these risks associated with the Policies,
the Company deducts on a daily basis from the assets of the Variable Account a
charge to provide for mortality and expense risks. This charge is guaranteed not
to exceed an annual effective rate of 0.75% of the daily net assets of the
Variable Account. On a current basis, this rate will be 0.60% during the first
through fourth Policy Years, 0.40% during the fifth through twentieth Policy
Years, and 0.25% thereafter. To the extent that future levels of mortality and
expenses are less than or equal to those expected, the Company may realize a
profit from this charge. Unrecovered expenses are borne by the Company's general
assets which may include profits, if any, from mortality and expense risk
charges.
The Company does not currently assess any charge for income taxes incurred by
the Company as a result of the operations of the Sub-Accounts (see "Taxation of
the Company"). The Company reserves the right to assess a charge for such taxes
against the Variable Account if the Company determines that such taxes will be
incurred.
REDUCTION OF CHARGES (POLICY AND SUB-ACCOUNTS)
The Policy is available for purchase by individuals, corporations, and other
groups. For group or sponsored arrangements (including employees of the Company
and their family members) and for special exchange programs which the Company
may make available from time to time, the Company reserves the right to reduce
or eliminate the sales load, mortality and expense risk charges, monthly
administrative charge, monthly cost of insurance charges, or other charges
normally assessed on certain multiple life cases where it is expected that the
size or nature of such cases will result in savings of sales, underwriting,
administrative, or other costs.
Eligibility for, and the amount of, these reductions will be determined by a
number of factors, including the number of Insureds, the total premium expected
to be paid, total assets under management for the Policy Owner, the nature of
the relationship among individual Insureds, the purpose for which the Policies
are being purchased, the expected persistency of individual Policies, and any
other circumstances which, in the opinion of the Company are rationally related
to the expected reduction in expenses. The extent and nature of reductions may
change from time to time. Any variations in the charge structure will be
determined in a uniform manner reflecting differences in costs of services and
not unfairly discriminatory to Policy Owners.
15
<PAGE> 16
UNDERLYING MUTUAL FUND ANNUAL EXPENSES
(AFTER EXPENSE REIMBURSEMENT)
<TABLE>
<CAPTION>
----------------------------------------------------
Management Other 12b-1 Total Mutual
Fees Expenses Fees Fund Expenses
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dreyfus Variable Investment Fund - Quality Bond Portfolio 0.65% 0.10% 0.00% 0.75%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio: Service Class 0.75% 0.16% 0.10% 1.01%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT Global Income Fund* 0.90% 2.34% 0.00% 3.24%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Dynamics Portfolio 0.60% 0.30% 0.00% 0.90%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Growth Portfolio 0.85% 0.40% 0.00% 1.25%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Health Sciences Portfolio 0.75% 0.25% 0.00% 1.00%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
INVESCO VIF - High Yield Portfolio 0.60% 0.20% 0.00% 0.80%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Industrial Income Portfolio 0.75% 0.16% 0.00% 0.91%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Realty Portfolio 0.30% 1.05% 0.00% 1.35%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Small Company Growth Portfolio 0.75% 0.25% 0.00% 1.00%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Technology Portfolio 0.75% 0.25% 0.00% 1.00%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Total Return Portfolio 0.75% 0.35% 0.00% 1.10%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Utilities Portfolio 0.60% 0.39% 0.00% 0.99%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
NSAT Capital Appreciation Fund 0.60% 0.09% 0.00% 0.69%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
NSAT Government Bond Fund 0.50% 0.08% 0.00% 0.58%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
NSAT Money Market Fund 0.40% 0.08% 0.00% 0.48%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
NSAT Total Return Fund 0.60% 0.07% 0.00% 0.67%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Balanced Fund 0.75% 0.15% 0.00% 0.90%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Equity Income Fund 0.80% 0.15% 0.00% 0.95%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Global Equity Fund 1.00% 0.20% 0.00% 1.20%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
NSAT Nationwide High Income Bond Fund 0.80% 0.15% 0.00% 0.95%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Multi-Sector Bond Fund 0.75% 0.15% 0.00% 0.90%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Select Advisers Mid Cap Fund 1.05% 0.15% 0.00% 1.20%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Small Cap Value Fund 0.90% 0.15% 0.00% 1.05%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Small Company Fund 1.00% 0.11% 0.00% 1.11%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Strategic Growth Fund 0.90% 0.10% 0.00% 1.00%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Strategic Value Fund 0.90% 0.10% 0.00% 1.00%
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Salomon Brothers Investors Fund 0.70% 0.30% 0.00% 1.00%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annual expenses are estimated for the current fiscal year.
The expenses shown above are deducted by the underlying mutual fund before it
provides Nationwide with the daily net asset value. Nationwide then deducts
applicable variable account charges from the net asset value to calculate the
unit value of the corresponding sub-account. The management fees and other
expenses are more fully described in the prospectus for each underlying mutual
fund. Information relating to the underlying mutual funds was provided by the
underlying mutual funds and not independently verified by Nationwide.
16
<PAGE> 17
Some underlying mutual funds are subject to fee waivers and expense
reimbursements. The following chart shows what the expenses would have been for
such funds without fee waivers and expense reimbursements.
<TABLE>
<CAPTION>
------------------------------------------------------------
Management Other 12b-1 Total Mutual
Fees Expenses Fees Fund Expenses
-------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fidelity VIP Overseas Portfolio: Service Class 0.75% 0.17% 0.10% 1.02%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT Global Income Fund 0.90% 2.37% 0.00% 3.27%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Dynamics Portfolio 0.60% 33.58% 0.00% 34.18%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Growth Portfolio 0.85% 26.91% 0.00% 27.76%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Health Sciences Portfolio 0.75% 20.70% 0.00% 21.45%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
INVESCO VIF - High Yield Portfolio 0.60% 0.34% 0.00% 0.94%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Industrial Income Portfolio 0.75% 0.22% 0.00% 0.97%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Small Company Growth Portfolio 0.75% 35.24% 0.00% 35.99%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Technology Portfolio 0.75% 18.50% 0.00% 19.25%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
INVESCO VIF - Utilities Portfolio 0.60% 1.47% 0.00% 2.07%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Balanced Fund 0.75% 4.15% 0.00% 4.90%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Equity Income Fund 0.80% 4.83% 0.00% 5.63%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Global Equity Fund 1.00% 1.84% 0.00% 2.84%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
NSAT Nationwide High Income Bond Fund 0.80% 1.38% 0.00% 2.18%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Multi Sector Bond Fund 0.75% 3.66% 0.00% 4.41%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Select Advisers Mid Cap Fund 1.05% 2.26% 0.00% 3.31%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Small Cap Value Fund 0.90% 5.41% 0.00% 6.31%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Strategic Growth Fund 0.90% 5.43% 0.00% 6.33%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
NSAT Nationwide Strategic Value Fund 0.90% 4.64% 0.00% 5.54%
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Salomon Brothers Investors Fund 0.70% 1.23% 0.00% 1.93%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
HOW THE CASH VALUE VARIES
On any date during the Policy Year, the Cash Value equals the Cash Value on the
preceding Valuation Date, plus any Net Premium applied since the previous
Valuation Date, minus any partial surrenders, plus or minus any investment
results, and less any Policy Charges.
There is no guaranteed Cash Value. The Cash Value will vary with the investment
experience of the Variable Account and/or the daily crediting of interest in the
Fixed Account and Policy Loan Account, depending on the allocation of Cash Value
by the Policy Owner.
HOW THE INVESTMENT EXPERIENCE IS DETERMINED
The Cash Value in each Sub-Account is converted to Accumulation Units of that
Sub-Account. The conversion is accomplished by dividing the amount of Cash Value
allocated to a Sub-Account by the value of an Accumulation Unit for the
Sub-Account of the Valuation Period during which the allocation occurs.
The value of an Accumulation Unit for each Sub-Account was arbitrarily set
initially at $10 when the Underlying Mutual Fund shares in that Sub-Account were
available for purchase. The value for any subsequent Valuation Period is
determined by multiplying the Accumulation Unit value for each Sub-Account for
the immediately preceding Valuation Period by the net investment factor for the
Sub-Account during the subsequent Valuation Period. The value of an Accumulation
Unit may increase or decrease from Valuation Period to Valuation Period. The
number of Accumulation Units will not change as a result of investment
experience.
NET INVESTMENT FACTOR
The net investment factor for any Valuation Period is determined by dividing (a)
by (b) and subtracting (c) from the result where:
(a) is the net of:
(1) the Net Asset Value per share of the Underlying Mutual Fund held
in the
17
<PAGE> 18
Sub-Account determined at the end of the current Valuation
Period; and
(2) the per share amount of any dividend or income distributions
made by the Underlying Mutual Fund held in the Sub-Account if
the ex-dividend date occurs during the current Valuation Period.
(b) is the Net Asset Value per share of the Underlying Mutual Fund held in
the Sub-Account determined at the end of the immediately preceding
Valuation Period.
(c) is a factor representing the daily mortality and expense risk charge
deducted from the Variable Account. Such factor is guaranteed not to
exceed an annual effective rate of 0.75% of the daily net assets of the
Variable Account. On a current basis, this annual effective rate will
be 0.60% during the first through fourth Policy Years, 0.40% during the
fifth through twentieth Policy Years, and 0.25% thereafter.
The net investment factor may be greater or less than one; therefore, the value
of an Accumulation Unit may increase or decrease. It should be noted that
changes in the net investment factor may not be directly proportional to changes
in the Net Asset Value of Underlying Mutual Fund shares, because of the
deduction for mortality and expense risk charge.
DETERMINING THE CASH VALUE
The sum of the value of all Accumulation Units attributable to the Policy and
amounts credited to the Fixed Account and the Policy Loan Account is the Cash
Value. The number of Accumulation Units credited to each Sub-Account is
determined by dividing the net amount allocated to the Sub-Account by the
Accumulation Unit value for the Sub-Account for the Valuation Period during
which the premium is received by the Company. In the event part or all of the
Cash Value is surrendered, or charges or deductions are made against the Cash
Value, an appropriate number of Accumulation Units from the Variable Account and
an appropriate amount from the Fixed Account will be deducted in the same
proportion that the Policy Owner's interest in the Variable Account and the
Fixed Account bears to the total Cash Value.
The Cash Value in the Fixed Account and the Policy Loan Account is credited with
interest daily at an effective annual rate which the Company periodically
declares. The annual effective rate will never be less than 3%. Upon request,
the Company will inform the Policy Owner of the then applicable rates for each
account.
VALUATION PERIODS AND VALUATION DATES
A Valuation Period is the period commencing at the close of business on a
Valuation Date and ending at the close of business for the next succeeding
Valuation Date. A Valuation Date is each day that the New York Stock Exchange
and the Home Office are open for business or any other day during which there is
sufficient degree of trading that the current Cash Value might be materially
affected.
SURRENDERING THE POLICY FOR CASH
RIGHT TO SURRENDER
The Policy Owner may surrender the Policy in full at any time while the Insured
is living and receive its Cash Surrender Value. The cancellation will be
effective as of the date the Company receives a proper written request for
cancellation and the Policy. Such written request must be signed. Where
permitted, the Company will require the signature to be guaranteed by a member
firm of the New York, American, Boston, Midwest, Philadelphia or Pacific Stock
Exchange, or by a commercial bank or a savings and loan, which is a member of
the Federal Deposit Insurance Corporation. In some cases, the Company may
require additional documentation of a customary nature.
CASH SURRENDER VALUE
The Cash Surrender Value increases or decreases daily to reflect the investment
experience of the Variable Account and the daily crediting of interest in the
Fixed Account and the Policy Loan Account. The Cash Surrender Value equals the
Policy's Cash Value, next
18
<PAGE> 19
computed after the date the Company receives a proper written request for
surrender and the Policy, minus any charges, Indebtedness or other deductions
due on that date, plus 3% of the current year's premium in excess of the Target
Premium if that date occurs during the first two Policy Years.
PARTIAL SURRENDERS
After the Policy has been in force for one year, the Policy Owner may request a
partial surrender. Partial surrenders will be permitted only if they satisfy the
following requirements:
1. the minimum partial surrender is $500;
2. the partial surrender may not reduce the Specified Amount to less than
$50,000;
3. after the partial surrender, the Cash Surrender Value is greater than
$500 or an amount equal to three times the current monthly deduction,
if higher; and
4. after the partial surrender, the Policy continues to qualify as life
insurance.
When a partial surrender is made, the Cash Value will be reduced by the amount
of the partial surrender. Further, the Specified Amount will be reduced by the
amount necessary to prevent any increase to the Net Amount at Risk, unless the
Policy Owner elects to have the partial surrender be treated as a preferred
partial surrender (any such reduction to the Specified Amount will be done in
the manner as set forth below).
- -Preferred Partial Surrenders
A partial surrender may be considered a preferred partial surrender if the
following conditions are met: (1) such surrender occurs before the 15th Policy
Anniversary; and (2) the surrender amount plus the amount of any previous
preferred Policy surrenders in that same Policy Year does not exceed 10% of the
Cash Surrender Value as of the beginning of the Policy Year.
- -Reduction of the Specified Amount
When a partial surrender is made, in addition to the Cash Value being reduced by
the amount of the partial surrender, the Specified Amount also is reduced,
except for a preferred partial surrender. The reduction to the Specified Amount
will be made in the following order: (1) against the most recent increase in the
Specified Amount; (2) against the next most recent increases in the Specified
Amount in succession; and (3) against the Specified Amount under the original
application.
MATURITY PROCEEDS
The Maturity Date is the Policy Anniversary on or next following the Insured's
100th birthday. The maturity proceeds will be payable to the Policy Owner on the
Maturity Date provided the Policy is still in force. The maturity proceeds will
be equal to the amount of the Policy's Cash Value, less any Indebtedness.
INCOME TAX WITHHOLDING
Federal law requires the Company to withhold income tax from any portion of
surrender proceeds that is subject to tax, unless the Policy Owner advises the
Company, in writing, not to withhold.
If the Policy Owner requests that the Company not withhold taxes, or if the
taxes withheld are insufficient, the Policy Owner may be liable for payment of
an estimated tax. The Policy Owner should consult his or her tax advisor.
In certain employer-sponsored life insurance arrangements, including equity
split dollar arrangements, participants may be required to report for income tax
purposes, one or more of the following: (1) the value each year of the life
insurance protection provided; (2) an amount equal to any employer-paid
premiums; or (3) some or all of the amount by which the current value exceeds
the employer's interest in the Contract. Participants should consult with the
sponsor or the administrator of the plan and/or with their personal tax or legal
advisor to determine the tax consequences, if any, of their employer-sponsored
life insurance arrangements.
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<PAGE> 20
POLICY LOANS
TAKING A POLICY LOAN
Policy Owners may request a loan at any time while the Policy is in force.
Maximum Policy Indebtedness is limited to 90% of the Cash Value in the
Sub-Accounts plus 100% of the Cash Value in the Fixed Account plus 100% of the
Cash Value in the Policy Loan Account. The Company will not grant a loan for an
amount less than $500 (unless otherwise required by state law). Should the Death
Proceeds become payable, the Policy be surrendered, or the Policy mature while a
loan is outstanding, the amount of Policy Indebtedness will be deducted from the
death benefit, Cash Surrender Value, or the maturity value, respectively.
Any request for a Policy loan must be in written form satisfactory to the
Company. The request must be signed. Where permitted, the Company will require
the signature to be guaranteed by a member firm of the New York, American,
Boston, Midwest, Philadelphia or Pacific Stock Exchange; or by a commercial bank
or a savings and loan which is a member of the Federal Deposit Insurance
Corporation. Certain Policy loans may result in currently taxable income and tax
penalties (see "Tax Matters").
A Policy Owner considering the use of Policy loans in connection with his or her
retirement income plan should consult his or her personal tax adviser regarding
potential tax consequences that may arise if necessary payments are not made to
keep the Policy from lapsing. The amount of such payments necessary to prevent
the Policy from lapsing would increase with age (see "Tax Matters").
EFFECT ON INVESTMENT PERFORMANCE
When a loan is made, an amount equal to the amount of the loan is transferred
from the Variable Account to the Policy Loan Account. If the assets relating to
a Policy are held in more than one Sub-Account, withdrawals from Sub-Accounts
will be made in proportion to the assets in each Sub-Account at the time of the
loan. Policy loans will be transferred from the Fixed Account only when
insufficient amounts are available in the Sub-Accounts. The amount taken out of
the Variable Account will not be affected by the Variable Account's investment
experience while the loan is outstanding.
INTEREST
On a current and guaranteed basis, any Cash Value allocated to the Policy Loan
Account will be credited with an annual effective rate of 3.0% in Policy Years 2
and thereafter. The loan interest rate is guaranteed to not exceed 3.75% per
year for all Policy loans. On a current basis, the loan interest rate is 3.6% in
Policy Years one through four, 3.4% in Policy Years five through twenty, and
3.25% thereafter. In the event that it is determined that such loans will be
treated, as a result of the differential between the interest crediting rate and
the loan interest rate, as taxable distributions under any applicable ruling,
regulation, or court decision, the Company retains the right to increase the net
cost (by decreasing the interest crediting rate) on all subsequent Policy loans
to an amount that would result in the transaction being treated as a loan under
federal tax law. If this amount is not prescribed by such ruling, regulation, or
court decision, the amount will be that which the Company considers to be more
likely to result in the transaction being treated as a loan under federal tax
law.
Amounts transferred to the Policy Loan Account will earn interest daily from the
date of transfer. The earned interest is transferred from the Policy Loan
Account to the Variable Account or the Fixed Account on each Policy Anniversary,
at the time a new loan is requested, or at the time of loan repayment. It will
be allocated according to the Underlying Mutual Fund allocation factors in
effect at the time of the transfer.
Interest is charged daily and is payable at the end of each Policy Year or at
the time of loan repayment. Unpaid interest will be added to the existing Policy
Indebtedness as of the due date and will be charged interest at the same rate as
the rest of the Indebtedness.
Whenever the total Policy Indebtedness exceeds the Cash Value, the Company will
send a notice to the Policy Owner and the assignee, if any. The Policy will
terminate without value 61 days
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<PAGE> 21
after the mailing of the notice unless a sufficient repayment is made during
that period. A repayment is sufficient if it is large enough to reduce the total
Policy Indebtedness to an amount equal to the total Cash Value plus an amount
sufficient to continue the Policy in force for 3 months.
EFFECT ON DEATH BENEFIT AND CASH VALUE
A Policy loan, whether or not repaid, will have a permanent effect on the death
benefit and Cash Value because the investment results of the Variable Account or
the Fixed Account will apply only to the non-loaned portion of the Cash Value.
The longer the loan is outstanding, the greater the effect is likely to be.
Depending on the investment results of the Variable Account or the Fixed Account
while the loan is outstanding, the effect could be favorable or unfavorable.
REPAYMENT
All or part of the Indebtedness may be repaid at any time while the Policy is in
force during the Insured's lifetime. Any payment intended as a loan repayment,
rather than a premium payment, must be identified as such. Loan repayments will
be credited to the Sub-Accounts and the Fixed Account in proportion to the
Underlying Mutual Fund allocation factors in effect at the time of the
repayment. Each repayment may not be less than $50. The Company reserves the
right to require that any loan repayments resulting from Policy loans
transferred from the Fixed Account must be first allocated to the Fixed Account.
HOW THE DEATH BENEFIT VARIES
CALCULATION OF THE DEATH BENEFIT
At issue, the Policy Owner selects the Specified Amount, death benefit option,
and definition of life insurance (Guideline Premium/Cash Value Corridor Test or
the Cash Value Accumulation Test) pursuant to Section 7702 of the Code.
While the Policy is in force, the death benefit will never be less than the
Specified Amount. The death benefit may vary with the Cash Value of the Policy,
which depends on investment performance.
The Policy Owner may choose one of three death benefit options.
Under Option 1, the death benefit will be the greater of the Specified Amount or
the applicable percentage of Cash Value. Under Option 1, the amount of the death
benefit will ordinarily not change for several years to reflect the investment
performance and may not change at all. If investment performance is favorable,
the amount of the death benefit may increase. To see how and when investment
performance will begin to affect death benefits, please see the illustrations.
Under Option 2, the death benefit will be the greater of the Specified Amount
plus the Cash Value as of the date of death, or the applicable percentage of
Cash Value and will vary directly with the investment performance.
Under Option 3, the death benefit is the greater of: (a) the applicable
percentage of the Cash Value (see Table below) as of the date of death; or (b)
the Specified Amount plus the lesser of either: (i) the maximum increase amount
shown on the Policy, or (ii) the amount of all premium payments and interest
accrued at the Option 3 interest rate as shown in the Policy, accumulated up to
the date of death, less any partial surrenders and applicable interest accrued
at the Option 3 interest rate as shown in the Policy. Once elected, Option 3 is
irrevocable.
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<PAGE> 22
APPLICABLE PERCENTAGE OF CASH VALUE TABLE
The "applicable percentage" for the Guideline Premium/Cash Value Corridor Test
is in the table below:
<TABLE>
<CAPTION>
Attained Percentage Attained Percentage Attained Percentage
Age of Cash Value Age of Cash Value Age of Cash Value
<S> <C> <C> <C> <C> <C>
0-40 250% 60 130% 80 105%
41 243% 61 128% 81 105%
42 236% 62 126% 82 105%
43 229% 63 124% 83 105%
44 222% 64 122% 84 105%
45 215% 65 120% 85 105%
46 209% 66 119% 86 105%
47 203% 67 118% 87 105%
48 197% 68 117% 88 105%
49 191% 69 116% 89 105%
50 185% 70 115% 90 105%
51 178% 71 113% 91 104%
52 171% 72 111% 92 103%
53 164% 73 109% 93 102%
54 157% 74 107% 94 101%
55 150% 75 105% 95 101%
56 146% 76 105% 96 101%
57 142% 77 105% 97 101%
58 138% 78 105% 98 101%
59 134% 79 105% 99 101%
</TABLE>
The "applicable percentage" for the Cash Value Accumulation Test is in the table
below:
<TABLE>
<CAPTION>
Attained Percentage Attained Percentage Attained Percentage
Age of Cash Value Age of Cash Value Age of Cash Value
<S> <C> <C> <C> <C> <C>
44 292.29% 72 141.69%
45 283.37% 73 139.10%
18 667.85% 46 274.79% 74 136.66%
19 648.73% 47 266.55% 75 134.38%
20 630.14% 48 258.61% 76 133.56%
21 611.94% 49 250.98% 77 132.83%
22 594.06% 50 243.65% 78 132.18%
23 576.45% 51 236.59% 79 131.58%
24 559.07% 52 229.82% 80 131.04%
25 541.95% 53 223.34% 81 130.55%
26 525.08% 54 217.13% 82 130.12%
27 508.52% 55 211.19% 83 127.37%
28 492.32% 56 205.51% 84 124.75%
29 476.49% 57 200.06% 85 122.27%
30 461.08% 58 194.84% 86 119.90%
31 446.10% 59 189.84% 87 117.63%
32 431.57% 60 185.03% 88 115.44%
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
Attained Percentage Attained Percentage Attained Percentage
Age of Cash Value Age of Cash Value Age of Cash Value
<S> <C> <C> <C> <C> <C>
33 417.50% 61 180.43% 89 113.31%
34 403.89% 62 176.02% 90 112.35%
35 390.73% 63 171.81% 91 111.38%
36 378.03% 64 167.80% 92 110.38%
37 365.79% 65 163.98% 93 109.32%
38 354.01% 66 160.34% 94 108.18%
39 342.67% 67 156.86% 95 106.94%
40 331.77% 68 153.54% 96 105.62%
41 321.30% 69 150.37% 97 104.27%
42 311.24% 70 147.33% 98 102.99%
43 301.57% 71 144.44% 99 100.00%
</TABLE>
In the event the Policy Owner has a substandard rating, the preceding
percentages will differ.
PROCEEDS PAYABLE ON DEATH
The actual Death Proceeds payable on the Insured's death will be the death
benefit as described above, less any Policy Indebtedness and less any unpaid
Policy Charges. Under certain circumstances, the Death Proceeds may be adjusted
(see "Incontestability," "Error in Age," and "Suicide").
RIGHT OF CONVERSION
The Policy Owner may, at any time, upon written request to the Company within 24
months of the Policy Date, make an irrevocable, one-time election to transfer
all Sub-Account Cash Values to the Fixed Account. The Right of Conversion
provision is subject to state availability.
CHANGES OF INVESTMENT POLICY
The Company may materially change the investment policy of the Variable Account.
The Company must inform the Policy Owners and obtain all necessary regulatory
approvals. Any change must be submitted to the various state insurance
departments which may disapprove it if deemed detrimental to the interests of
the Policy Owners or if it renders the Company's operations hazardous to the
public. If a Policy Owner objects, the Policy Owner may elect to transfer all
Sub-Account Cash Values to the Fixed Account. No transfer charges will be
assessed. The Policy Owner has the later of 60 days (6 months in Pennsylvania)
from the date of the investment policy change or 60 days (6 months in
Pennsylvania) from being informed of such change to make this conversion. The
Company will not require evidence of insurability for this conversion.
The new policy will not be affected by the investment experience of any separate
account. The new policy will be for an amount of insurance not exceeding the
death benefit of the Policy converted on the date of such conversion.
GRACE PERIOD
If the Cash Surrender Value on a Monthly Anniversary Day is not sufficient to
cover the current Policy Charges, a grace period of 61 days from the Monthly
Anniversary Day will be allowed for the payment of a premium equal to three
times the current monthly deduction. The Company will send a notice at the start
of the grace period to the Policy Owner's address as indicated on the
application or the last address specified. If the required premium is not paid
by the end of the grace period, the Policy will terminate without value. If the
Insured dies during the grace period, the Company will pay the Death Proceeds.
REINSTATEMENT
If the grace period ends and the Policy Owner has neither paid the required
premium nor surrendered the Policy for its Cash Surrender Value, the Policy
Owner may reinstate the Policy by:
23
<PAGE> 24
1. submitting a written request at any time within 3 years after the end
of the grace period and prior to the Maturity Date;
2. providing evidence of insurability satisfactory to the Company;
3. paying sufficient premium to cover all Policy Charges that were due and
unpaid during the grace period;
4. paying sufficient premium to keep the Policy in force for 3 months from
the date of reinstatement; and
5. paying or reinstating any Indebtedness against the Policy which existed
at the end of the grace period.
The effective date of a reinstated Policy will be the Monthly Anniversary Day on
or next following the date the application for reinstatement is approved by the
Company. If the Policy is reinstated, the Cash Value on the date of
reinstatement, but prior to applying any premiums or loan repayments received,
will be set equal to the Cash Value at the end of the grace period.
Unless the Policy Owner has provided otherwise, all amounts will be allocated
based on the Underlying Mutual Fund allocation factors in effect at the start of
the grace period.
THE FIXED ACCOUNT OPTION
Under exemptive and exclusionary provisions, interests in the General Account
have not been registered under the Securities Act of 1933 and the General
Account has not been registered as an investment company under the Investment
Company Act of 1940 (the "1940 Act"). Accordingly, neither the General Account
nor any interests therein is subject to the provisions of these Acts, and the
Company has been advised that the staff of the SEC has not reviewed the
disclosures in this prospectus relating to the Fixed Account option. Disclosures
regarding the General Account may, however, be subject to certain generally
applicable provisions of the federal securities laws concerning the accuracy and
completeness of statements made in prospectuses.
As explained earlier, a Policy Owner may elect to allocate or transfer all or
part of the Cash Value to the Fixed Account and the amount allocated or
transferred becomes part of the General Account. The General Account consists of
all assets of the Company other than those in the Variable Account and in other
separate accounts that have been or may be established by the Company. Subject
to applicable law, the Company has sole discretion over the investment of the
assets of the General Account, and Policy Owners do not share in the investment
experience of those assets. The Company guarantees that the part of the Cash
Value invested in the Fixed Account will accrue interest daily at an effective
annual rate that the Company declares periodically. The Fixed Account crediting
rate will not be less than an effective annual rate of 3%. Upon request, the
Company will inform a Policy Owner of the then applicable rate. The Company is
not obligated to credit interest at a higher rate.
The Fixed Account is not available for Policies issued in the State of Texas.
CHANGES IN EXISTING INSURANCE COVERAGE
The Policy Owner may request certain changes in the insurance coverage under the
Policy. Any request must be in writing and received at the Home Office. No
change will take effect unless the Cash Surrender Value, after the change, is
sufficient to keep the Policy in force for at least 3 months.
SPECIFIED AMOUNT INCREASES
After the first Policy Year, the Policy Owner may request an increase to the
Specified Amount. Any increase will be subject to the following conditions:
1. the request must be applied for in writing;
2. satisfactory evidence of insurability must be provided;
3. the increase must be for a minimum of $10,000;
4. the Cash Surrender Value is sufficient to continue the Policy in
force for at least 3 months; and
5. age limits are the same as for a new issue.
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<PAGE> 25
Any approved increase will have an effective date of the Monthly Anniversary Day
on or next following the date the Company approves the supplemental application,
unless a different date is requested by the Policy Owner. The Company reserves
the right to limit the number of Specified Amount increases to one each Policy
Year.
SPECIFIED AMOUNT DECREASES
After the first Policy Year, the Policy Owner may also request a decrease to the
Specified Amount. Any approved decrease will be effective on the Monthly
Anniversary Day on or next following the date the Company receives the request.
Any such decrease will reduce insurance in the following order:
1. against insurance provided by the most recent increase;
2. against the next most recent increases successively; and
3. against insurance provided under the original application.
The Company reserves the right to limit the number of Specified Amount decreases
to one each Policy Year. The Company will refuse a request for a decrease which
would:
1. reduce the Specified Amount to less than $50,000 ($100,000 in New
Jersey and Pennsylvania); or
2. disqualify the Policy as a contract for life insurance.
CHANGES IN THE DEATH BENEFIT OPTION
After the first Policy Year, the Policy Owner may elect to change the death
benefit option under the Policy from either Option 1 to Option 2, or from Option
2 to Option 1. Initial elections to Option 3 are irrevocable. Accordingly, such
changes to or from Option 3 are not permitted. Only one change of death benefit
option is permitted per Policy Year. The effective date of such change will be
the Monthly Anniversary Day following the date such change is approved by the
Company.
In order for any such change in the death benefit option to become effective,
the Cash Surrender Value, after such change, must be sufficient to keep the
Policy in force for at least three months subsequent to said change.
The Company will adjust the Specified Amount such that the Net Amount at Risk
remains constant. Any such change which would result in the Specified Amount
being reduced to an amount in which the total premiums paid exceed the premium
limit required by applicable state law to qualify the Policy as a contract for
life insurance will not be permitted.
OTHER POLICY PROVISIONS
POLICY OWNER
While the Insured is living, all rights in this Policy are vested in the Policy
Owner named in the application or as subsequently changed, subject to
assignment, if any.
The Policy Owner may name a contingent Policy Owner or a new Policy Owner while
the Insured is living. Any change must be in a written form satisfactory to the
Company and recorded at the Home Office. Once recorded, the change will be
effective when signed. The change will not affect any payment made or action
taken by the Company before it was recorded. The Company may require that the
Policy be submitted for endorsement before making a change.
If the Policy Owner is other than the Insured, names no contingent Policy Owner,
and dies before the Insured, the Policy Owner's rights in this Policy belong to
the Policy Owner's estate.
BENEFICIARY
The Beneficiary(ies) will be as named in the application or as subsequently
changed, subject to assignment, if any.
The Policy Owner may name a new Beneficiary while the Insured is living. Any
change must be in a written form satisfactory to the Company and recorded at the
Home Office. Once recorded, the change will be effective when signed. The change
will not affect any payment made or action taken by the Company before it was
recorded.
If any Beneficiary predeceases the Insured, that Beneficiary's interest passes
to any surviving Beneficiary(ies), unless otherwise provided.
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<PAGE> 26
Multiple Beneficiaries will be paid in equal shares, unless otherwise provided.
If no named Beneficiary survives the Insured, the Death Proceeds will be paid to
the Policy Owner or the Policy Owner's estate.
ASSIGNMENT
While the Insured is living, the Policy Owner may assign his or her rights in
the Policy. The assignment must be in writing, signed by the Policy Owner and
recorded by the Home Office. Any assignment will not affect any payments made or
actions taken by the Company before it was recorded. The Company is not
responsible for any assignment not submitted for recording, nor is the Company
responsible for the sufficiency or validity of any assignment. The assignment
will be subject to any Indebtedness owed to the Company before it was recorded.
INCONTESTABILITY
The Company will not contest payment of the Death Proceeds based on the initial
Specified Amount after the Policy has been in force during the Insured's
lifetime for 2 years from the Policy Date. For any increase in Specified Amount
requiring evidence of insurability, the Company will not contest payment of the
Death Proceeds based on such an increase after it has been in force during the
Insured's lifetime for 2 years from its effective date.
ERROR IN AGE
If the age of the Insured has been misstated, the affected benefits will be
adjusted. The amount of the death benefit will be (1) multiplied by (2) and then
the result added to (3), where:
1. is the amount of the death benefit at the time of the Insured's death
reduced by the amount of the Cash Value at the time of the Insured's
death;
2. is the ratio of the monthly cost of insurance applied in the Policy
month of death and the monthly cost of insurance that should have been
applied at the true age in the Policy month of death; and
3. is the Cash Value at the time of the Insured's death.
SUICIDE
If the Insured dies by suicide, while sane or insane, within two years from the
Policy Date, the Company will pay no more than the sum of the premiums paid,
less any Indebtedness. If the Insured dies by suicide, while sane or insane,
within two years from the date an application is accepted for an increase in the
Specified Amount, the Company will pay no more than the amount paid for such
additional benefit.
NONPARTICIPATING POLICIES
These are nonparticipating Policies on which no dividends are payable. These
Policies do not share in the profits or surplus earnings of the Company.
RIDERS
A rider may be added as an addition to the Policy. Riders currently include:
1. Base Insured Term Rider;
2. Change of Insured Rider; and
3. Additional Protection Rider.
Rider availability varies by state.
LEGAL CONSIDERATIONS
On July 6, 1983, the U.S. Supreme Court held in Arizona Governing Committee v.
Norris that certain annuity benefits provided by employers' retirement and
fringe benefit programs may not vary between men and women on the basis of sex.
This decision applies only to benefits derived from premiums made on or after
August 1, 1983. The Policies offered by this prospectus are based upon actuarial
tables which distinguish between men and women and thus the Policies provide
different benefits to men and women of the same age. Accordingly, employers and
employee organizations should consider, in consultation with legal counsel, the
impact of Norris on any employment related insurance or benefit program before
purchasing this Policy.
DISTRIBUTION OF THE POLICIES
The Policies will be sold by licensed insurance agents in those states where the
Policies may lawfully be sold. Such agents will be registered representatives of
broker dealers registered
26
<PAGE> 27
under the Securities Exchange Act of 1934 who are members of the National
Association of Securities Dealers, Inc. ("NASD"). The Policies will be
distributed by the General Distributor, Nationwide Advisory Services, Inc.
("NAS").
NAS is a corporation which was organized under the laws of the State of Ohio on
April 8, 1965. NAS is both a broker-dealer and registered investment adviser. As
such, it is the principal underwriter for several open-end investment companies
and for a number of separate accounts issued by the Company and Nationwide Life
Insurance Company to fund the benefits of variable insurance and annuity
policies. NAS also currently acts as the investment adviser and/or administrator
for the mutual fund portfolios sold through NAS's registered representatives and
for some of the mutual fund portfolios which act as underlying investment
options for the variable insurance and annuity policies issued by the Company or
Nationwide Life Insurance Company.
NAS acts as general distributor for the Nationwide Multi-Flex Variable Account,
DCVA-II, Nationwide Variable Account-II, Nationwide Variable Account-5,
Nationwide Variable Account-6, Nationwide Variable Account-8, Nationwide
Variable Account-9,
Nationwide VA Separate Account-A,
Nationwide VA Separate Account-B,
Nationwide VA Separate Account-C,
Nationwide VL Separate Account-A,
Nationwide VL Separate Account-B,
Nationwide VL Separate Account-C,
Nationwide VL Separate Account-D,
Nationwide VLI Separate Account-2,
Nationwide VLI Separate Account-3,
Nationwide VLI Separate Account-4,
Nationwide VLI Separate Account-5, and the Nationwide Variable Account, all of
which are separate investment accounts of the Company or its affiliates. NAS is
a wholly owned subsidiary of the Company.
NAS also acts as principal underwriter for the, Nationwide Separate Account
Trust, Financial Horizons Investment Trust, Nationwide Mutual Funds, and
Nationwide Asset Allocation Trust, which are open-end management investment
companies.
Gross first year commissions plus any expense allowance payments made by the
Company on the sale of these Policies distributed by the General Distributor
will not exceed 40% of the Target Premium plus 5% of any excess premium payments
in year one and 25% of the Target Premium plus 5% on the excess premium in years
two through four. Gross renewal commissions paid at the beginning of Policy Year
five and beyond by the Company will not exceed 2.5% of actual premium payments
plus an annual effective rate of 0.20%, paid quarterly, of the Cash Value as of
the end of the prior quarter.
CUSTODIAN OF ASSETS
The Company serves as the custodian of the assets of the Variable Account.
TAX MATTERS
POLICY PROCEEDS
Section 7702 of the Code provides that if certain tests are met, a policy will
be treated as a life insurance policy for federal tax purposes. The Company will
monitor compliance with these tests. The Policy should thus receive the same
federal income tax treatment as fixed benefit life insurance. As a result, the
Death Proceeds payable under a Policy are excludable from gross income of the
Beneficiary under Section 101 of the Code.
Section 7702A of the Code defines modified endowment contracts as those policies
issued or materially changed on or after June 21, 1988 on which the total
premiums paid during the first seven years exceed the amount that would have
been paid if the policy provided for paid up benefits after seven level annual
premiums (see "Information about the Policies"). The Code provides that taxation
of surrenders, partial surrenders, loans, collateral assignments and other
pre-death distributions from modified endowment contracts (other than certain
distributions to terminally ill individuals) are subject to federal income taxes
a manner similar to the way annuities are taxed. Modified endowment contract
distributions are defined by the Code as amounts not received as an annuity and
are taxable to the extent the cash value of
27
<PAGE> 28
the policy exceeds, at the time of distribution, the premiums paid into the
policy. A 10% tax penalty generally applies to the taxable portion of such
distributions unless the policy owner is over age 59 1/2 or disabled or the
distribution is part of an annuity to the policy owner as defined in the Code.
Under certain circumstances, certain distributions made under a policy on the
life of a "terminally ill individual", as that term is defined in the Code, are
excludable from gross income.
The Policies offered by this prospectus may or may not be issued as modified
endowment contracts. The Company will monitor premiums paid and will notify the
Policy Owner when the Policy's non-modified endowment status is in jeopardy. If
a Policy is not a modified endowment contract, a cash distribution during the
first 15 years after a Policy is issued which causes a reduction in death
benefits may still become fully or partially taxable to the Policy Owner
pursuant to Section 7702(f)(7) of the Code. The Policy Owner should carefully
consider this potential effect and seek further information before initiating
any changes in the terms of the Policy. Under certain conditions, a Policy may
become a modified endowment as a result of a material change or a reduction in
benefits as defined by Section 7702A(c) of the Code.
In addition to meeting the tests required under Section 7702, Section 817(h) of
the Code requires that the investments of separate accounts such as the Variable
Account be adequately diversified. Regulations under 817(h) provide that a
variable life policy that fails to satisfy the diversification standards will
not be treated as life insurance unless such failure was inadvertent, is
corrected, and the policy owner or the company pays an amount to the IRS. The
amount will be based on the tax that would have been paid by the policy owner if
the income, for the period the policy was not diversified, had been received by
the policy owner. If the failure to diversify is not corrected in this manner,
the policy owner will be deemed the owner of the underlying securities and taxed
on the earnings of his or her account.
Representatives of the IRS have suggested, from time to time, that the number of
underlying mutual funds available or the number of transfer opportunities
available under a variable product may be relevant in determining whether the
product qualifies for the desired tax treatment. No formal guidance has been
issued in this area. Should the Secretary of the Treasury issue additional rules
or regulations limiting the number of underlying mutual funds, transfers between
underlying mutual funds, exchanges of underlying mutual funds or changes in
investment objectives of underlying mutual funds such that the Policy would no
longer qualify as life insurance under Section 7702 of the Code, the Company
will take whatever steps are available to remain in compliance.
The Company will monitor compliance with these regulations and, to the extent
necessary, will change the objectives or assets of the Sub-Account investments
to remain in compliance.
A total surrender or cancellation of the Policy by lapse or the maturity of the
Policy on its Maturity Date may have adverse tax consequences. If the amount
received by the Policy Owner plus total Policy Indebtedness exceeds the premiums
paid into the Policy, the excess generally will be treated as taxable income,
regardless of whether or not the Policy is a modified endowment contract.
- - Withholding
Distributions of income from a modified endowment contract are subject to
federal income tax withholding; however, the recipient may elect not to have the
withholding taken from the distribution. A distribution of income from a
modified endowment contract may be subject to mandatory back-up withholding
(which cannot be waived). The mandatory back-up withholding rate is 31% of the
income that is distributed and will arise of no taxpayer identification number
is provided to the Company, or if the IRS notifies the Company that back-up
withholding is required.
- - Non-Resident Aliens
Pre-death distributions from modified endowment contracts of income to
nonresident aliens ("NRAs") are generally subject to federal
28
<PAGE> 29
income tax and tax withholding at a statutory rate of 30% of the amount of
income that is distributed. The Company is required to withhold such amount from
the distribution and remit it to the IRS. Distributions to certain NRAs may be
subject to lower, or in certain instances zero, tax and withholding rates, if
the United States has entered into an applicable treaty. However, in order to
obtain the benefits of such treaty provisions, the NRA must give to the Company
sufficient proof of his or her residency and citizenship in the form and manner
prescribed by the IRS. In addition, the NRA must obtain an individual taxpayer
identification number from the IRS, and furnish that number to the Company prior
to the distribution. If the Company does not have the proper proof of
citizenship or residency and a proper individual taxpayer identification number
prior to any distribution, the Company will be required to withhold 30% of the
income, regardless of any treaty provision.
A pre-death distribution may not be subject to withholding where the recipient
sufficiently establishes to the Company that such payment is effectively
connected to the recipient's conduct of a trade or business in the United States
and that such payment is includable in the recipient's gross income for United
States federal income tax purposes. Any such distributions may be subject to
back-up withholding at the statutory rate (currently 31%) if no taxpayer
identification number, or an incorrect taxpayer identification number, is
provided.
- - Federal Estate and Generation-Skipping Transfer Taxes
The federal estate tax is integrated with the federal gift tax under a unified
tax rate schedule. In general, in 1998, an estate of less than $625,000
(inclusive of certain pre-death gifts) will not incur a federal estate tax
liability. In addition, an unlimited marital deduction may be available for
federal estate tax purposes, for certain amounts that pass to the surviving
spouse.
The death benefit will generally be included in such Insured's federal gross
estate if: (1) the Death Proceeds were payable to or for the benefit of such
Insured's estate; or (2) such Insured held any "incident of ownership" in the
Policy at death or at any time within three years of death. An incident of
ownership is, in general, any right that may be exercised by the Policy, such as
the right to borrow on the Policy, or the right to name a new Beneficiary.
If the Policy Owner (whether or not he or she is an Insured) transfers ownership
of the Policy to another person, such transfer may be subject to a federal gift
tax. In addition, if such Policy Owner transfers the Policy to someone two or
more generations younger than the Policy Owner, the transfer may be subject to
the federal generation-skipping transfer tax ("GSTT"), the taxable amount being
the value of the Policy.
Similarly, if the Beneficiary is two or more generations younger than an
Insured, the payment of the Death Proceeds at the death of such Insured may be
subject to the GSTT. Pursuant to regulations recently promulgated by the U.S.
Treasury Department, the Company may be required to withhold a portion of the
Death Proceeds and pay them directly to the IRS as the GSTT liability.
The GSTT provisions generally apply to the same transfers that are subject to
estate or gift taxes.
The tax rate is a flat rate equal to the maximum estate tax rate (currently
55%), and there is a provision for an aggregate $1 million exemption. Due to the
complexity of these rules, the Policy Owner should consult with counsel and
other competent advisors regarding these taxes.
State and local estate, inheritance income and other tax consequences of
ownership or receipt of Policy proceeds depend on the circumstances of each
Policy Owner or Beneficiary. A Policy Owner should consult with a competent tax
adviser for specific information regarding the applicability of such taxes.
TAXATION OF THE COMPANY
The Company is taxed as a life insurance company under the Code. The Variable
Account will not be taxed separately from the Company as a "regulated investment
company" under Sub-chapter M of the Code. Investment income and realized capital
gains on the assets of the
29
<PAGE> 30
Variable Account are reinvested and taken into account in determining the value
of Accumulation Units. As a result, such investment income and realized capital
gains are automatically applied to increase reserves under the Policies. Under
Ohio law, in general, variable account assets are immune from the claims of the
general creditors of the Company to the extent of the reserves and other policy
liabilities.
The Company does not initially expect to incur any federal income tax liability
that would be chargeable to the Variable Account. Based upon these expectations,
no charge is currently being made against the Variable Account for federal
income taxes. If, however, the Company determines that on a separate company
basis such taxes may be incurred, it reserves the right to assess a charge for
such taxes against the Variable Account.
The Company may also incur state and local taxes (in addition to premium taxes)
in several states. At present, these taxes are not significant. If they
increase, however, charges for such taxes may be made.
TAX CHANGES
The foregoing discussion, which is based on the Company's understanding of
federal tax laws as they are currently interpreted by the IRS, is general and is
not intended as tax advice.
In the recent past, the Code has been subjected to numerous amendments and
changes, and it is reasonable to believe that it will continue to be revised.
The United States Congress has, in the past, considered numerous legislative
proposals that, if enacted, could change the tax treatment of the Policies. It
is reasonable to believe that such proposals and other proposals may be enacted
into law. In addition, the U.S. Treasury Department may amend existing
regulations, issue new regulations, or adopt new interpretations of existing law
that may be at variance with its current positions on these matters. In
addition, current state law (which is not discussed herein), and future
amendments to state law, may affect the tax consequences of the Policy.
If the Policy Owner, Insured, Beneficiary, or other person receiving any benefit
or interest in or from the Policy is not both a resident and citizen of the
United States, there may be a tax imposed by a foreign country, in addition to
any tax imposed by the United States. The foreign law (including regulations,
rulings, and case law) may change and impose additional taxes on the Policy, the
death benefit, or other distributions and/or ownership of the Policy, or a
treaty may be amended and all or part of the favorable treatment may be
eliminated.
Any or all of the foregoing may change from time to time without any notice, and
the tax consequences arising out of a Policy may be changed retroactively. There
is no way of predicting if, when, and to what extent any such change may take
place. No representation is made as to the likelihood of the continuation of
these current laws, interpretations, and policies.
The foregoing is a general explanation as to certain tax matters pertaining to
insurance policies. It is not intended to be legal or tax advice, and should not
take the place of your independent legal, tax and/or financial advisor.
THE COMPANY
The life insurance business, which includes product lines in health insurance,
annuities and retirement products is the only business in which the Company is
engaged.
The Company markets its Policies through independent insurance brokers, general
agents, and registered representatives of registered NASD broker-dealer firms.
The Company, in common with other insurance companies, is subject to regulation
and supervision by the regulatory authorities of the states in which it is
licensed to do business. A license from the state insurance department is a
prerequisite to the transaction of insurance business in that state. In general,
all states have statutory administrative powers. Such regulation relates, among
other things, to licensing of insurers and their agents, the approval of policy
forms, the methods of computing reserves, the form and content of statutory
financial statements, the amount of
30
<PAGE> 31
policyholders' and stockholders' dividends, and the type of distribution of
investments permitted.
The Company operates in the highly competitive field of life insurance. There
are approximately 2,300 stock, mutual and other types of insurers in the life
insurance business in the United States, and a large number of them compete with
the registrant in the sale of insurance policies.
As is customary in insurance company groups, employees are shared with the other
insurance companies in the group. In addition to its direct salaried employees,
the Company shares employees with Nationwide Mutual Insurance Company and
Nationwide Mutual Fire Insurance Company.
The Company serves as depositor for
Nationwide VL Separate Account-A,
Nationwide VL Separate Account-B,
Nationwide VL Separate Account-C,
Nationwide VL Separate Account-D,
Nationwide VA Separate Account-A,
Nationwide VA Separate Account-B, and
Nationwide VA Separate Account-C, each of which is a registered investment
company.
The Company does not presently own or lease any materially important physical
properties when its property holdings are viewed in relation to its total
assets. The Company shares the Home Office, other facilities and equipment with
Nationwide Mutual Insurance Company.
COMPANY MANAGEMENT
Nationwide Life and Annuity Insurance Company, together with Nationwide Mutual
Insurance Company, Nationwide Mutual Fire Insurance Company, Nationwide
Indemnity Company, Nationwide Life Insurance Company, Nationwide Property and
Casualty Insurance Company, National Casualty Company, Scottsdale Indemnity
Company and Nationwide General Insurance Company and their affiliated companies
comprise the Nationwide Insurance Enterprise.
The companies comprising the Nationwide Insurance Enterprise have substantially
common boards of directors and officers. Nationwide Financial Services, Inc. is
the sole shareholder of Nationwide Life.
31
<PAGE> 32
<TABLE>
<CAPTION>
DIRECTORS OF THE COMPANY
- ----------------------------------------- ----------------------------- --------------------------------------------
DIRECTORS OF THE DEPOSITOR NAME AND POSITIONS AND OFFICERS WITH PRINCIPAL OCCUPATION
PRINCIPAL BUSINESS ADDRESS DEPOSITOR
- ----------------------------------------- ----------------------------- --------------------------------------------
<S> <C> <C>
Lewis J. Alphin Director Farm Owner and Operator (1)
519 Bethel Church Road
Mount Olive, NC 28365
- ----------------------------------------- ----------------------------- --------------------------------------------
A. I. Bell Director Farm Owner and Operator (1)
4121 North River Road West
Zanesville, OH 43701
- ----------------------------------------- ----------------------------- --------------------------------------------
Keith W. Eckel Director Partner, Fred W. Eckel Sons; President,
1647 Falls Road Eckel Farms, Inc. (1)
Clarks Summit, PA 18411
- ----------------------------------------- ----------------------------- --------------------------------------------
Willard J. Engel Director Retired General Manager, Lyon County
301 East Marshall Street Co-operative Oil Company (1)
Marshall, MN 44691
- ----------------------------------------- ----------------------------- --------------------------------------------
Fred C. Finney Director Owner and Operator, Moreland Fruit Farm;
1558 West Moreland Road Operator, Melrose Orchard (1)
Wooster, OH 44691
- ----------------------------------------- ----------------------------- --------------------------------------------
Charles L. Fuellgraf, Jr. Director Chief Executive Officer, Fuellgraf
600 South Washington Street Electric Company (1)
Butler, PA 16001
- ----------------------------------------- ----------------------------- --------------------------------------------
Joseph J. Gasper President and Chief President and Chief Operating Officer,
One Nationwide Plaza Operating Officer and Nationwide Life Insurance Company and
Columbus, OH 43215 Director Nationwide Life and Annuity Insurance
Company (2)
- ----------------------------------------- ----------------------------- --------------------------------------------
Dimon R. McFerson Chairman and Chief Chairman and Chief Executive
One Nationwide Plaza Executive Officer-Nationwide Insurance Enterprise (2)
Columbus, OH 43215 Officer-Nationwide
Insurance Enterprise and
Director
- ----------------------------------------- ----------------------------- --------------------------------------------
David O. Miller Chairman of the Board and President, Owen Potato Farm, Inc.;
115 Sprague Drive Director Partner, M&M Enterprises (1)
Hebron, OH 43025
- ----------------------------------------- ----------------------------- --------------------------------------------
Yvonne L. Montgomery Director Senior Vice President-General Manager
Suite 1600 Southern Customer Operations for U.S.
2859 Paces Ferry Road Customer Operations, Xerox Corporation (2)
Atlanta, GA 30339
- ----------------------------------------- ----------------------------- --------------------------------------------
James F. Patterson Director Vice President, Pattersons, Inc.;
8765 Mulberry Road President, Patterson Farms, Inc. (1)
Chesterland, OH 44026
- ----------------------------------------- ----------------------------- --------------------------------------------
Arden L. Shisler Director President and Chief Executive Officer, K&B
1356 North Wenger Road Transport, Inc. (1)
Dalton, OH 44618
- ----------------------------------------- ----------------------------- --------------------------------------------
Robert L. Stewart Director Owner and Operator Sunnydale Farms and
88740 Fairview Road Mining (1)
Jewett, OH 43986
- ----------------------------------------- ----------------------------- --------------------------------------------
Nancy C. Thomas Director Farm Owner and Operator, Da-Ma-Lor Farms
10835 Georgetown Street NE (1)
Louisville, OH 44641
- ----------------------------------------- ----------------------------- --------------------------------------------
Harold W. Weihl Director Farm Owner and Operator, Weihl Farms (1)
14282 King Road
Bowling Green, OH 43402
- ----------------------------------------- ----------------------------- --------------------------------------------
</TABLE>
1) Principal Occupation for last 5 years
2) Prior to assuming this current position, held other executive management
positions with the same or affiliated companies.
Each of the directors is a director of the other major insurance affiliates of
the Nationwide Insurance Enterprise, except Mr. Gasper who is a director only of
the Company and Nationwide Life Insurance Company. Messrs. McFerson and Gasper
are directors of Nationwide Advisory Services, Inc., a registered broker-dealer.
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<PAGE> 33
Messrs. McFerson, Miller, Patterson, Shisler and Fuellgraf are directors of
Nationwide Financial Services, Inc. Messrs. Fuellgraf, McFerson, Ms. Thomas and
Mr. Weihl are trustees of Nationwide Investing Foundation, and Nationwide
Investing Foundation III, registered investment companies. Messrs. McFerson,
Gasper and Woodward are trustees of Nationwide Separate Account Trust and
Nationwide Asset Allocation Trust, registered investment companies. Mr. McFerson
is trustee of Financial Horizons Investment Trust and Nationwide Investing
Foundation II, registered investment companies. Mr. Engel is a director of
Western Cooperative Transport.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE COMPANY
- -------------------------------------------------------------------------------------------------------------------
OFFICERS OF THE DEPOSITOR OFFICES OF THE DEPOSITOR
NAME AND PRINCIPAL BUSINESS ADDRESS
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Robert A. Oakley Executive Vice President-Chief Financial Officer
One Nationwide Plaza
Columbus, OH 43215
- -------------------------------------------------------------------------------------------------------------------
Robert J. Woodward, Jr. Executive Vice President-Chief Investment Officer
One Nationwide Plaza
Columbus, OH 43215
- -------------------------------------------------------------------------------------------------------------------
Harvey S. Galloway, Jr. Senior Vice President and Chief Actuary, Health and Annuities
One Nationwide Plaza
Columbus, OH 43215
- -------------------------------------------------------------------------------------------------------------------
Richard A. Karas Senior Vice President - Sales and Financial Services
One Nationwide Plaza
Columbus, OH 43215
- -------------------------------------------------------------------------------------------------------------------
Susan A. Wolken Senior Vice President - Life Company Operations
One Nationwide Plaza
Columbus, OH 43215
- -------------------------------------------------------------------------------------------------------------------
Matthew S. Easley Vice President-Life Marketing and Administrative Services
One Nationwide Plaza
Columbus, OH 43215
- -------------------------------------------------------------------------------------------------------------------
Timothy E. Murphy Vice President-Strategic Marketing
One Nationwide Plaza
Columbus, OH 43215
- -------------------------------------------------------------------------------------------------------------------
R. Dennis Noice Vice President Retail Operations
One Nationwide Plaza
Columbus, OH 43215
- -------------------------------------------------------------------------------------------------------------------
Joseph P. Rath Vice President-Product and Market Compliance
One Nationwide Plaza
Columbus, OH 43215
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
OTHER CONTRACTS ISSUED BY THE COMPANY
The Company does presently and will, from time to time, offer variable contracts
and policies with benefits which vary in accordance with the investment
experience of a separate account of the Company.
STATE REGULATION
The Company is subject to the laws of Ohio governing insurance companies and to
regulation by the Ohio Insurance Department. An annual statement in a prescribed
form is filed with the Insurance Department each year covering the operation of
the Company for the preceding year and its financial condition as of the end of
such year. Regulation by the Insurance Department includes periodic examination
to determine the Company's contract liabilities and reserves so that the
Insurance Department may certify the items are correct. The Company's books and
accounts are subject to review by the Insurance Department at all times and a
full examination of its operations is conducted periodically by the National
Association of Insurance Commissioners. Such regulation does not, however,
involve any supervision of management or investment practices or policies. In
addition, the Company is subject to regulation under the insurance laws of other
jurisdictions in which it may operate.
33
<PAGE> 34
REPORTS TO POLICY OWNERS
The Company will mail to the Policy Owner, at the address specified on the
application or any address provided subsequent to the application, an annual
statement showing the amount of the current death benefit, the Cash Value, Cash
Surrender Value, premiums paid and monthly charges deducted since the last
report, amounts invested in the Fixed Account and in the Variable Account and in
each Sub-Account, and any Policy Indebtedness.
The Company also shall send Policy Owners annual and semi-annual reports
containing all applicable information and financial statements, or their
equivalent, which must be sent to Underlying Mutual Fund shareholders as
required by the rules under the 1940 Act.
In addition, Policy Owners will receive statements of significant transactions,
such as changes in Specified Amount, changes in death benefit option, changes in
future premium allocation, transfers among Sub-Accounts, premium payments,
loans, loan repayments, reinstatement and termination.
ADVERTISING
The Company is ranked and rated by independent financial rating services,
including Moody's, Standard & Poor's and A.M. Best Company. The purpose of these
ratings is to reflect the financial strength or claims-paying ability of the
Company. The ratings are not intended to reflect the investment experience or
financial strength of the Variable Account. The Company may advertise these
ratings from time to time. In addition, the Company may include in certain
advertisements, endorsements in the form of a list of organizations, individuals
or other parties which recommend the Company or the Contracts. Furthermore, the
Company may occasionally include in advertisements comparisons of currently
taxable and tax deferred investment programs, based on selected tax brackets, or
discussions of alternative investment vehicles and general economic conditions.
YEAR 2000 COMPLIANCE ISSUES
The Company has developed and implemented a plan to address issues related to
the Year 2000. The problem relates to many existing computer systems using only
two digits to identify a year in a date field. These systems were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected, many computer systems could fail or create erroneous results
when processing information dated after December 31, 1999. Like many
organizations, the Company is required to renovate or replace many computer
systems so that the systems will function properly after December 31, 1999. The
Company has completed an inventory and assessment of all computer systems and
has developed a plan to renovate or replace all applications that were
identified as not Year 2000 compliant. As of the end of July 1998, the Company
has renovated 97% of all applications that required renovation. Testing of the
renovated programs is in process, including running each application with the
date moved forward to Year 2000. The Company expects to complete the testing of
all renovated applications by the end of 1998. For applications being replaced,
the Company anticipates all replacement systems to be in place and functioning
by the end of 1998. Contingency plans are substantially completed which identify
actions to be taken should the Company's renovation and replacement strategies
fall behind schedule.
The Company is also completing an inventory and assessment of all vendor
products. As of the end of July 1998, 83% of products had been assessed and 69%
were Year 2000 compliant. The Company is certifying that each vendor product is
Year 2000 compliant. At the end of July 1998, 24% of vendor products that were
identified as Year 2000 compliant had been certified. The Company anticipates
having all vendor products assessed and certified by the end of 1998. Any vendor
products that can not be certified as Year 2000 compliant will be replaced or
eliminated.
In addition to resolving internal Year 2000 readiness issues, the Company is
working with
34
<PAGE> 35
all external organizations (business partners) to assess Year 2000 issues
associated with the exchange of electronic data. The Company has completed an
inventory and assessment of all interfaces with business partners and is in the
process of testing those interfaces. The Company has also initiated plans to
survey producer business partners to ascertain their Year 2000 readiness.
Operating expenses in 1997 and in the first six months of 1998 include
approximately $45 million and $22.6 million, respectively, for technology
projects, including costs related to Year 2000. In the second half of 1998, the
Company anticipates spending an amount comparable to expense for the first half
of 1998. At this time, no significant Year 2000 costs are anticipated in 1999.
Management does not anticipate that the completion of Year 2000 renovation and
replacement activities will result in a reduction in operating expenses. Rather,
personnel and resources currently allocated to Year 2000 issues will be assigned
to other technology-related projects. These expenses do not have an effect on
the assets of the Variable Account and are not charged through to the Contract
Owner.
LEGAL PROCEEDINGS
There are no material legal proceedings, other than ordinary routine litigation
incidental to the business to which the Company and the Variable Account are
parties or to which any of their property is the subject.
The General Distributor, Nationwide Advisory Services, Inc., is not engaged in
any litigation of any material nature.
From time to time the Company is a party to litigation and arbitration
proceedings in the ordinary course of its business, none of which is expected to
have a material adverse effect on the Company.
EXPERTS
The audited financial statements and schedules have been included herein in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, and upon the authority of said firm as experts in accounting and
auditing.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Policies offered hereby. This prospectus does not contain all the information
set forth in the Registration Statement and amendments thereto and exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning the Variable Account, the Company, and the Policies
offered hereby. Statements contained in this prospectus as to the content of
Policies and other legal instruments are summaries. For a complete statement of
the terms thereof, reference is made to such instruments as filed.
LEGAL OPINIONS
Legal matters in connection with the Policies described herein are being passed
upon by Druen, Dietrich, Reynolds & Koogler, One Nationwide Plaza, Columbus,
Ohio 43215. All the members of such firm are employed by the Nationwide Mutual
Insurance Company.
35
<PAGE> 36
APPENDIX A
ILLUSTRATIONS OF CASH VALUES,
CASH SURRENDER VALUES,
AND DEATH BENEFITS
The illustrations in this prospectus have been prepared to help show how values
under the Policies change with investment performance. The illustrations
illustrate how Cash Values, Cash Surrender Values and death benefits under a
Policy would vary over time if the hypothetical gross investment rates of return
were a uniform annual effective rate of either 0%, 6% or 12%. If the
hypothetical gross investment rate of return averages 0%, 6% or 12% over a
period of years, but fluctuates above or below those averages for individual
years, the Cash Values, Cash Surrender Values and death benefits may be
different. For hypothetical returns of 0% and 6%, the illustrations also
illustrate when the Policies would go into default, at which time additional
premium payments would be required to continue the Policy in force. The
illustrations also assume there is no Policy Indebtedness, no additional premium
payments are made, no Cash Values are allocated to the Fixed Account, and there
are no changes in the Specified Amount or death benefit option.
The amounts shown for the Cash Value, Cash Surrender Value and death benefit as
of each Policy Anniversary reflect the fact that the net investment return on
the assets held in the Sub-Accounts is lower than the gross return. This is due
to the daily charges made against the assets of the Sub-Accounts for assuming
mortality and expense risks. Beginning in the third Policy Year, Cash Surrender
Value equals Cash Value less Indebtedness, or other deductions. In Policy Years
one and two only, Cash Surrender Value equals Cash Value less Indebtedness or
other deductions increased by 3% of the current premium in excess of Target
Premium. The guaranteed mortality and expense risk charges for Policy Years one
through four are equivalent to an annual effective rate of 0.75% of the daily
net asset value of the Variable Account. The current mortality and expense risk
charges for Policy Years one through four are equivalent to an annual effective
rate of 0.60% of the daily net assets of the Variable Account. The current
mortality and expense risk charges for Policy Years five through twenty are
equivalent to an annual effective rate of 0.40% of the daily net assets of the
Variable Account. The current mortality and expense risk charges for Policy
Years twenty-one and beyond are equivalent to an annual effective rate of 0.25%
of the daily net assets of the Variable Account. In addition, the net investment
returns also reflect the deduction of Underlying Mutual Fund investment advisory
fees and other expenses which are equivalent to an annual effective rate of
0.90% of the daily net assets of the Variable Account. This effective rate is
based on the average of the fund expenses for the preceding year for all
Underlying Mutual Fund options available under the policy as of March 13, 1998.
Considering current charges for mortality and expense risks and Underlying
Mutual Fund expenses, gross annual rates of return of 0%, 6% and 12% correspond
to net investment experience at constant annual rates of -1.50%, 4.50% and
10.50%, for Policy Years one through four, and rates of -1.30%, 4.70% and
10.70%, for Policy Years five through twenty, and rates of -1.15%, 4.85% and
10.85%, for Policy Years twenty-one and beyond. Considering guaranteed charges
for mortality and expense risks and Underlying Mutual Fund expenses, gross
annual rates of return of 0%, 6% and 12% correspond to net investment experience
at constant annual rates of -1.65%, 4.35% and 10.35%, for all Policy Years.
The illustrations also reflect the fact that Nationwide makes monthly charges
for providing insurance protection. Current values reflect current cost of
insurance charges and guaranteed values reflect the maximum cost of insurance
charges guaranteed in the Policy. The values shown are for Policies which are
issued as standard. Policies issued on a substandard basis would result in lower
Cash Values and Death benefits than those illustrated.
The illustrations also reflect the fact that Nationwide deducts a sales load
from each premium payment received guaranteed not to exceed 5.5% of each premium
payment for the first seven Policy Years and 2% thereafter. On a current basis,
the sales load is 5.5% of the Target
36
<PAGE> 37
Premium plus 3% of premiums in excess of the Target Premium in the first seven
Policy Years, and 0% on all premiums thereafter. The Company also deducts a tax
expense charge of 3.5%, both current and guaranteed, from all premium payments.
The illustrations also reflect the fact that the Company deducts a charge for
state premium taxes at a rate of 2.25% and for federal tax at a rate of 1.25%
(imposed under Section 848 of the Code) of all premium payments.
In addition, the illustrations reflect the fact that the Company deducts a
monthly administrative charge at the beginning of each Policy Month. This
monthly administrative expense charge is currently $5.00 per month and
guaranteed not to exceed $10.00. The illustrations also reflect the fact that no
charges for federal or state income taxes are currently made against the
Variable Account. If such a charge is made in the future, it will require a
higher gross investment return than illustrated in order to produce the net
after-tax returns shown in the illustrations.
Upon request, the Company will furnish a comparable illustration based on the
proposed Insured's age, smoking classification, rating classification and
premium payment requested.
37
<PAGE> 38
<TABLE>
<CAPTION>
$100,000 ANNUAL PREMIUM FOR FIRST 7 YEARS $1,703,050 SPECIFIED AMOUNT
CASH VALUE ACCUMULATION TEST
UNISEX: REGULAR ISSUE/NONTOBACCO PREFERRED, AGE 45
DEATH BENEFIT OPTION 1: CURRENT VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PREMIUMS
PAID PLUS CASH CASH CASH
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 105,000 87,786 89,929 1,703,050 93,212 95,354 1,703,050 98,639 100,782 1,703,050
2 215,250 173,990 176,133 1,703,050 190,334 192,477 1,703,050 207,332 209,475 1,703,050
3 331,013 258,969 258,969 1,703,050 291,904 291,904 1,703,050 327,522 327,522 1,703,050
4 452,563 342,694 342,694 1,703,050 398,092 398,092 1,703,050 460,407 460,407 1,703,050
5 580,191 425,967 425,967 1,703,050 510,080 510,080 1,703,050 608,516 608,516 1,703,050
6 714,201 508,108 508,108 1,703,050 627,380 627,380 1,703,050 772,363 772,363 1,881,786
7 854,911 589,184 589,184 1,703,050 750,216 750,216 1,774,935 952,732 952,732 2,254,069
8 897,656 577,278 577,278 1,703,050 781,428 781,428 1,795,878 1,049,061 1,049,061 2,410,953
9 942,539 565,129 565,129 1,703,050 813,828 813,828 1,817,521 1,154,975 1,154,975 2,579,406
10 989,666 552,688 552,688 1,703,050 847,440 847,440 1,839,962 1,271,389 1,271,389 2,760,439
11 1,039,150 539,943 539,943 1,703,050 882,327 882,327 1,863,298 1,399,358 1,399,358 2,955,163
12 1,091,107 526,847 526,847 1,703,050 918,524 918,524 1,887,568 1,539,999 1,539,999 3,164,698
13 1,145,662 513,383 513,383 1,703,050 956,098 956,098 1,912,769 1,694,584 1,694,584 3,390,184
14 1,202,945 499,505 499,505 1,703,050 995,094 995,094 1,938,841 1,864,473 1,864,473 3,632,740
15 1,263,093 485,021 485,021 1,703,050 1,035,455 1,035,455 1,965,603 2,050,949 2,050,949 3,893,316
16 1,326,247 469,833 469,833 1,703,050 1,077,198 1,077,198 1,993,140 2,255,544 2,255,544 4,173,433
17 1,392,560 453,822 453,822 1,703,050 1,120,339 1,120,339 2,021,316 2,479,917 2,479,917 4,474,266
18 1,462,188 436,818 436,818 1,703,050 1,164,863 1,164,863 2,050,275 2,725,803 2,725,803 4,797,686
19 1,535,297 418,637 418,637 1,703,050 1,210,755 1,210,755 2,080,198 2,995,078 2,995,078 5,145,844
20 1,612,062 399,103 399,103 1,703,050 1,258,023 1,258,023 2,110,837 3,289,824 3,289,824 5,519,995
21 1,692,665 380,192 380,192 1,703,050 1,309,635 1,309,635 2,147,409 3,620,457 3,620,457 5,936,464
22 1,777,298 361,292 361,292 1,703,050 1,363,911 1,363,911 2,186,758 3,985,915 3,985,915 6,390,617
23 1,866,163 341,267 341,267 1,703,050 1,420,297 1,420,297 2,227,878 4,387,832 4,387,832 6,882,754
24 1,959,471 319,592 319,592 1,703,050 1,478,645 1,478,645 2,270,311 4,829,068 4,829,068 7,414,551
25 2,057,445 296,056 296,056 1,703,050 1,539,010 1,539,010 2,314,055 5,313,360 5,313,360 7,989,169
26 2,160,317 270,400 270,400 1,703,050 1,601,437 1,601,437 2,359,397 5,844,752 5,844,752 8,611,073
27 2,268,333 242,377 242,377 1,703,050 1,666,004 1,666,004 2,406,210 6,427,770 6,427,770 9,283,628
28 2,381,750 211,669 211,669 1,703,050 1,732,764 1,732,764 2,455,153 7,067,266 7,067,266 10,013,609
29 2,500,837 177,875 177,875 1,703,050 1,801,760 1,801,760 2,506,068 7,768,491 7,768,491 10,805,194
30 2,625,879 140,522 140,522 1,703,050 1,873,019 1,873,019 2,559,668 8,537,076 8,537,076 11,666,768
</TABLE>
(1) no policy loans and no partial withdrawals have been made.
(2) current values reflect current cost of insurance charges and a monthly $5.00
administrative expense charge all the time. Current values reflect a premium
charge of 9% of target premium and 6.5% of excess-of-target premium for the
first 7 years and 3.5% of all premium from eighth year and on.
(3) net investment returns are calculated as the hypothetical gross investment
return less all charges and deductions shown in the prospectus appendix.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus 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, prevailing rates and rates of
inflation. The death benefit and cash value for a policy would be different from
those shown if the actual rates of return averaged 0%, 6%, and 12% over a period
of years but also fluctuated above or below those averages for individual policy
years. No representation can be made by the company or the trust that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
38
<PAGE> 39
<TABLE>
<CAPTION>
$100,000 ANNUAL PREMIUM FOR FIRST 7 YEARS $1,703,050 SPECIFIED AMOUNT
CASH VALUE ACCUMULATION TEST
UNISEX: NONTOBACCO, AGE 45
DEATH BENEFIT OPTION 1: GUARANTEED VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PREMIUMS
PAID PLUS CASH CASH CASH
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 105,000 83,858 86,000 1,703,050 89,106 91,248 1,703,050 94,357 96,500 1,703,050
2 215,250 166,199 168,342 1,703,050 181,945 184,087 1,703,050 198,326 200,468 1,703,050
3 331,013 247,061 247,061 1,703,050 278,717 278,717 1,703,050 312,964 312,964 1,703,050
4 452,563 326,469 326,469 1,703,050 379,626 379,626 1,703,050 439,449 439,449 1,703,050
5 580,191 404,454 404,454 1,703,050 484,902 484,902 1,703,050 579,107 579,107 1,703,050
6 714,201 481,028 481,028 1,703,050 594,775 594,775 1,703,050 733,316 733,316 1,786,652
7 854,911 556,200 556,200 1,703,050 709,497 709,497 1,703,050 901,980 901,980 2,133,995
8 897,656 539,922 539,922 1,703,050 733,836 733,836 1,703,050 986,652 986,652 2,267,525
9 942,539 523,086 523,086 1,703,050 758,771 758,771 1,703,050 1,078,886 1,078,886 2,409,476
10 989,666 505,593 505,593 1,703,050 784,294 784,294 1,703,050 1,179,290 1,179,290 2,560,475
11 1,039,150 487,328 487,328 1,703,050 810,395 810,395 1,711,393 1,288,511 1,288,511 2,721,077
12 1,091,107 468,181 468,181 1,703,050 837,069 837,069 1,720,176 1,407,260 1,407,260 2,891,919
13 1,145,662 448,065 448,065 1,703,050 864,327 864,327 1,729,172 1,536,345 1,536,345 3,073,611
14 1,202,945 426,821 426,821 1,703,050 892,141 892,141 1,738,248 1,676,566 1,676,566 3,266,621
15 1,263,093 404,256 404,256 1,703,050 920,467 920,467 1,747,323 1,828,760 1,828,760 3,471,536
16 1,326,247 380,153 380,153 1,703,050 949,252 949,252 1,756,400 1,993,813 1,993,813 3,689,153
17 1,392,560 354,265 354,265 1,703,050 978,442 978,442 1,765,306 2,172,670 2,172,670 3,919,931
18 1,462,188 326,231 326,231 1,703,050 1,007,955 1,007,955 1,774,101 2,366,221 2,366,221 4,164,785
19 1,535,297 295,662 295,662 1,703,050 1,037,711 1,037,711 1,782,892 2,575,413 2,575,413 4,424,817
20 1,612,062 262,148 262,148 1,703,050 1,067,657 1,067,657 1,791,422 2,801,292 2,801,292 4,700,289
21 1,692,665 225,251 225,251 1,703,050 1,097,750 1,097,750 1,799,981 3,044,996 3,044,996 4,992,880
22 1,777,298 184,506 184,506 1,703,050 1,127,968 1,127,968 1,808,472 3,307,782 3,307,782 5,303,367
23 1,866,163 139,405 139,405 1,703,050 1,158,308 1,158,308 1,816,922 3,591,044 3,591,044 5,632,912
24 1,959,471 89,294 89,294 1,703,050 1,188,748 1,188,748 1,825,203 3,896,216 3,896,216 5,982,250
25 2,057,445 33,297 33,297 1,703,050 1,219,230 1,219,230 1,833,235 4,224,700 4,224,700 6,352,259
26 2,160,317 (*) (*) (*) 1,249,651 1,249,651 1,841,110 4,577,785 4,577,785 6,744,450
27 2,268,333 (*) (*) (*) 1,279,878 1,279,878 1,848,528 4,956,693 4,956,693 7,158,952
28 2,381,750 (*) (*) (*) 1,309,724 1,309,724 1,855,748 5,362,403 5,362,403 7,597,989
29 2,500,837 (*) (*) (*) 1,339,039 1,339,039 1,862,469 5,796,012 5,796,012 8,061,673
30 2,625,879 (*) (*) (*) 1,367,727 1,367,727 1,869,136 6,258,808 6,258,808 8,553,287
</TABLE>
(1) no policy loans and no partial withdrawals have been made.
(2) guaranteed values reflect guaranteed cost of insurance charges and a monthly
$10.00 administrative expense charge all the time. Guaranteed values reflect a
premium charge of 9% of premium for the first 7 years and 5.5% of premium from
eighth year and on.
(3) net investment returns are calculated as the hypothetical gross investment
return less all charges and deductions shown in the prospectus appendix.
(*) unless additional premium is paid, the policy will not stay in force.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus 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, prevailing rates and rates of
inflation. The death benefit and cash value for a policy would be different from
those shown if the actual rates of return averaged 0%, 6%, and 12% over a period
of years but also fluctuated above or below those averages for individual policy
years. No representation can be made by the company or the trust that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
39
<PAGE> 40
<TABLE>
<CAPTION>
$100,000 ANNUAL PREMIUM FOR FIRST 7 YEARS $1,703,050 SPECIFIED AMOUNT
CASH VALUE ACCUMULATION TEST
UNISEX: REGULAR ISSUE/NONTOBACCO PREFERRED, AGE 45
DEATH BENEFIT OPTION 2: CURRENT VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PREMIUMS
PAID PLUS CASH CASH CASH
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 105,000 87,587 89,730 1,790,637 93,000 95,143 1,796,050 98,415 100,558 1,801,465
2 215,250 173,348 175,491 1,876,398 189,626 191,769 1,892,676 206,555 208,698 1,909,605
3 331,013 257,648 257,648 1,960,698 290,389 290,389 1,993,439 325,795 325,795 2,028,845
4 452,563 340,430 340,430 2,043,480 395,392 395,392 2,098,442 457,208 457,208 2,160,258
5 580,191 422,441 422,441 2,125,491 505,707 505,707 2,208,757 603,133 603,133 2,306,183
6 714,201 502,957 502,957 2,206,007 620,742 620,742 2,323,792 764,156 764,156 2,467,206
7 854,911 582,021 582,021 2,285,071 740,741 740,741 2,443,791 941,909 941,909 2,644,959
8 897,656 568,009 568,009 2,271,059 768,746 768,746 2,471,796 1,035,437 1,035,437 2,738,487
9 942,539 553,650 553,650 2,256,700 797,516 797,516 2,500,566 1,138,373 1,138,373 2,841,423
10 989,666 538,882 538,882 2,241,932 827,019 827,019 2,530,069 1,251,650 1,251,650 2,954,700
11 1,039,150 523,701 523,701 2,226,751 857,281 857,281 2,560,331 1,376,362 1,376,362 3,079,412
12 1,091,107 508,057 508,057 2,211,107 888,277 888,277 2,591,327 1,513,665 1,513,665 3,216,715
13 1,145,662 491,938 491,938 2,194,988 920,027 920,027 2,623,077 1,664,887 1,664,887 3,367,937
14 1,202,945 475,298 475,298 2,178,348 952,509 952,509 2,655,559 1,831,439 1,831,439 3,568,376
15 1,263,093 457,889 457,889 2,160,939 985,495 985,495 2,688,545 2,014,515 2,014,515 3,824,154
16 1,326,247 439,600 439,600 2,142,650 1,018,886 1,018,886 2,721,936 2,215,474 2,215,474 4,099,292
17 1,392,560 420,303 420,303 2,123,353 1,052,554 1,052,554 2,755,604 2,435,861 2,435,861 4,394,780
18 1,462,188 399,807 399,807 2,102,857 1,086,303 1,086,303 2,789,353 2,677,377 2,677,377 4,712,452
19 1,535,297 377,915 377,915 2,080,965 1,119,918 1,119,918 2,822,968 2,941,868 2,941,868 5,054,423
20 1,612,062 354,459 354,459 2,057,509 1,153,198 1,153,198 2,856,248 3,231,375 3,231,375 5,421,925
21 1,692,665 331,815 331,815 2,034,865 1,189,821 1,189,821 2,892,871 3,556,134 3,556,134 5,830,993
22 1,777,298 309,431 309,431 2,012,481 1,228,216 1,228,216 2,931,266 3,915,097 3,915,097 6,277,075
23 1,866,163 285,878 285,878 1,988,928 1,266,997 1,266,997 2,970,047 4,309,873 4,309,873 6,760,466
24 1,959,471 260,563 260,563 1,963,613 1,305,557 1,305,557 3,008,607 4,743,268 4,743,268 7,282,813
25 2,057,445 233,317 233,317 1,936,367 1,343,688 1,343,688 3,046,738 5,218,954 5,218,954 7,847,220
26 2,160,317 203,933 203,933 1,906,983 1,381,135 1,381,135 3,084,185 5,740,903 5,740,903 8,458,073
27 2,268,333 172,244 172,244 1,875,294 1,417,665 1,417,665 3,120,715 6,313,561 6,313,561 9,118,676
28 2,381,750 138,026 138,026 1,841,076 1,452,977 1,452,977 3,156,027 6,941,693 6,941,693 9,835,685
29 2,500,837 101,002 101,002 1,804,052 1,486,695 1,486,695 3,189,745 7,630,457 7,630,457 10,613,203
30 2,625,879 60,857 60,857 1,763,907 1,518,384 1,518,384 3,221,434 8,385,385 8,385,385 11,459,468
</TABLE>
(1) no policy loans and no partial withdrawals have been made.
(2) current values reflect current cost of insurance charges and a monthly $5.00
administrative expense charge all the time. Current values reflect a premium
charge of 9% of target premium and 6.5% of excess-of-target premium for the
first 7 years and 3.5% of all premium from eighth year and on.
(3) net investment returns are calculated as the hypothetical gross investment
return less all charges and deductions shown in the prospectus appendix.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus 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, prevailing rates and rates of
inflation. The death benefit and cash value for a policy would be different from
those shown if the actual rates of return averaged 0%, 6%, and 12% over a period
of years but also fluctuated above or below those averages for individual policy
years. No representation can be made by the company or the trust that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
40
<PAGE> 41
<TABLE>
<CAPTION>
$100,000 ANNUAL PREMIUM FOR FIRST 7 YEARS $1,703,050 SPECIFIED AMOUNT
CASH VALUE ACCUMULATION TEST
UNISEX: NONTOBACCO, AGE 45
DEATH BENEFIT OPTION 2: GUARANTEED VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PREMIUMS
PAID PLUS CASH CASH CASH
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 105,000 83,557 85,700 1,786,607 88,787 90,930 1,791,837 94,020 96,163 1,797,070
2 215,250 165,271 167,414 1,868,321 180,921 183,063 1,883,971 197,201 199,344 1,900,251
3 331,013 245,138 245,138 1,948,188 276,510 276,510 1,979,560 310,447 310,447 2,013,497
4 452,563 323,137 323,137 2,026,187 375,652 375,652 2,078,702 434,740 434,740 2,137,790
5 580,191 399,247 399,247 2,102,297 478,447 478,447 2,181,497 571,159 571,159 2,274,209
6 714,201 473,415 473,415 2,176,465 584,965 584,965 2,288,015 720,863 720,863 2,423,913
7 854,911 545,570 545,570 2,248,620 695,263 695,263 2,398,313 885,107 885,107 2,588,157
8 897,656 526,118 526,118 2,229,168 714,448 714,448 2,417,498 964,905 964,905 2,667,955
9 942,539 505,932 505,932 2,208,982 733,374 733,374 2,436,424 1,051,785 1,051,785 2,754,835
10 989,666 484,904 484,904 2,187,954 751,909 751,909 2,454,959 1,146,349 1,146,349 2,849,399
11 1,039,150 462,912 462,912 2,165,962 769,892 769,892 2,472,942 1,249,240 1,249,240 2,952,290
12 1,091,107 439,851 439,851 2,142,901 787,177 787,177 2,490,227 1,361,187 1,361,187 3,064,237
13 1,145,662 415,652 415,652 2,118,702 803,645 803,645 2,506,695 1,483,028 1,483,028 3,186,078
14 1,202,945 390,163 390,163 2,093,213 819,081 819,081 2,522,131 1,615,599 1,615,599 3,318,649
15 1,263,093 363,198 363,198 2,066,248 833,230 833,230 2,536,280 1,759,783 1,759,783 3,462,833
16 1,326,247 334,557 334,557 2,037,607 845,804 845,804 2,548,854 1,916,534 1,916,534 3,619,584
17 1,392,560 304,026 304,026 2,007,076 856,484 856,484 2,559,534 2,086,887 2,086,887 3,789,937
18 1,462,188 271,273 271,273 1,974,323 864,816 864,816 2,567,866 2,271,839 2,271,839 3,998,663
19 1,535,297 235,970 235,970 1,939,020 870,321 870,321 2,573,371 2,472,261 2,472,261 4,247,592
20 1,612,062 197,810 197,810 1,900,860 872,516 872,516 2,575,566 2,689,005 2,689,005 4,511,881
21 1,692,665 156,505 156,505 1,859,555 870,914 870,914 2,573,964 2,922,935 2,922,935 4,792,736
22 1,777,298 111,789 111,789 1,814,839 865,022 865,022 2,568,072 3,175,182 3,175,182 5,090,769
23 1,866,163 63,414 63,414 1,766,464 854,341 854,341 2,557,391 3,447,084 3,447,084 5,407,096
24 1,959,471 11,048 11,048 1,714,098 838,260 838,260 2,541,310 3,740,017 3,740,017 5,742,422
25 2,057,445 (*) (*) (*) 815,993 815,993 2,519,043 4,055,327 4,055,327 6,097,589
26 2,160,317 (*) (*) (*) 786,536 786,536 2,489,586 4,394,251 4,394,251 6,474,050
27 2,268,333 (*) (*) (*) 748,671 748,671 2,451,721 4,757,963 4,757,963 6,871,926
28 2,381,750 (*) (*) (*) 700,900 700,900 2,403,950 5,147,401 5,147,401 7,293,353
29 2,500,837 (*) (*) (*) 641,662 641,662 2,344,712 5,563,620 5,563,620 7,738,439
30 2,625,879 (*) (*) (*) 569,479 569,479 2,272,529 6,007,855 6,007,855 8,210,335
</TABLE>
(1) no policy loans and no partial withdrawals have been made.
(2) guaranteed values reflect guaranteed cost of insurance charges and a monthly
$10.00 administrative expense charge all the time. Guaranteed values reflect a
premium charge of 9% of premium for the first 7 years and 5.5% of premium from
eighth year and on.
(3) net investment returns are calculated as the hypothetical gross investment
return less all charges and deductions shown in the prospectus appendix.
(*) unless additional premium is paid, the policy will not stay in force.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus 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, prevailing rates and rates of
inflation. The death benefit and cash value for a policy would be different from
those shown if the actual rates of return averaged 0%, 6%, and 12% over a period
of years but also fluctuated above or below those averages for individual policy
years. No representation can be made by the company or the trust that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
41
<PAGE> 42
<TABLE>
<CAPTION>
$38,872.05 ANNUAL PREMIUM FOR 20 YEARS $1,703,050 SPECIFIED AMOUNT
GUIDELINE PREMIUM AND CORRIDOR TEST
UNISEX: GUARANTEED ISSUE/NONTOBACCO, AGE 45
DEATH BENEFIT OPTION 1: CURRENT VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PREMIUMS
PAID PLUS CASH CASH CASH
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 40,816 31,065 31,374 1,703,050 33,063 33,372 1,703,050 35,063 35,372 1,703,050
2 83,672 60,300 60,609 1,703,050 66,205 66,514 1,703,050 72,355 72,663 1,703,050
3 128,671 87,990 87,990 1,703,050 99,708 99,708 1,703,050 112,409 112,409 1,703,050
4 175,921 114,855 114,855 1,703,050 134,318 134,318 1,703,050 156,280 156,280 1,703,050
5 225,532 141,515 141,515 1,703,050 170,769 170,769 1,703,050 205,142 205,142 1,703,050
6 277,625 167,891 167,891 1,703,050 209,040 209,040 1,703,050 259,399 259,399 1,703,050
7 332,321 193,822 193,822 1,703,050 249,065 249,065 1,703,050 319,495 319,495 1,703,050
8 389,753 220,728 220,728 1,703,050 292,471 292,471 1,703,050 387,752 387,752 1,703,050
9 450,056 246,871 246,871 1,703,050 337,607 337,607 1,703,050 463,166 463,166 1,703,050
10 513,375 272,461 272,461 1,703,050 384,776 384,776 1,703,050 546,767 546,767 1,703,050
11 579,859 297,401 297,401 1,703,050 434,002 434,002 1,703,050 639,430 639,430 1,703,050
12 649,668 321,318 321,318 1,703,050 485,066 485,066 1,703,050 741,944 741,944 1,703,050
13 722,967 344,184 344,184 1,703,050 538,075 538,075 1,703,050 855,521 855,521 1,703,050
14 799,931 365,931 365,931 1,703,050 593,117 593,117 1,703,050 981,530 981,530 1,703,050
15 880,743 386,483 386,483 1,703,050 650,293 650,293 1,703,050 1,121,547 1,121,547 1,703,050
16 965,596 405,708 405,708 1,703,050 709,684 709,684 1,703,050 1,277,385 1,277,385 1,703,050
17 1,054,691 423,596 423,596 1,703,050 771,496 771,496 1,703,050 1,450,526 1,450,526 1,856,673
18 1,148,242 439,981 439,981 1,703,050 835,849 835,849 1,703,050 1,641,423 1,641,423 2,068,193
19 1,246,469 454,691 454,691 1,703,050 902,907 902,907 1,703,050 1,851,857 1,851,857 2,296,303
20 1,349,608 467,579 467,579 1,703,050 972,901 972,901 1,703,050 2,083,849 2,083,849 2,542,296
21 1,417,089 443,589 443,589 1,703,050 1,008,939 1,008,939 1,703,050 2,302,456 2,302,456 2,762,947
22 1,487,943 419,516 419,516 1,703,050 1,047,290 1,047,290 1,703,050 2,544,383 2,544,383 3,027,816
23 1,562,341 395,360 395,360 1,703,050 1,088,104 1,088,104 1,703,050 2,812,159 2,812,159 3,318,348
24 1,640,458 371,121 371,121 1,703,050 1,131,538 1,131,538 1,703,050 3,108,589 3,108,589 3,637,049
25 1,722,480 346,116 346,116 1,703,050 1,177,473 1,177,473 1,703,050 3,436,508 3,436,508 3,986,349
26 1,808,604 318,911 318,911 1,703,050 1,225,583 1,225,583 1,703,050 3,798,740 3,798,740 4,368,551
27 1,899,035 289,234 289,234 1,703,050 1,276,107 1,276,107 1,703,050 4,199,685 4,199,685 4,745,645
28 1,993,986 256,754 256,754 1,703,050 1,329,318 1,329,318 1,703,050 4,643,768 4,643,768 5,154,582
29 2,093,686 221,055 221,055 1,703,050 1,385,539 1,385,539 1,703,050 5,135,998 5,135,998 5,598,238
30 2,198,370 181,622 181,622 1,703,050 1,445,151 1,445,151 1,703,050 5,682,084 5,682,084 6,079,830
</TABLE>
(1) no policy loans and no partial withdrawals have been made.
(2) current values reflect current cost of insurance charges and a monthly $5.00
administrative expense charge all the time. Current values reflect a premium
charge of 9% of target premium and 6.5% of excess-of-target premium for the
first 7 years and 3.5% of all premium from eighth year and on.
(3) net investment returns are calculated as the hypothetical gross investment
return less all charges and deductions shown in the prospectus appendix.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus 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, prevailing rates and rates of
inflation. The death benefit and cash value for a policy would be different from
those shown if the actual rates of return averaged 0%, 6%, and 12% over a period
of years but also fluctuated above or below those averages for individual policy
years. No representation can be made by the company or the trust that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
42
<PAGE> 43
<TABLE>
<CAPTION>
$38,872.05 ANNUAL PREMIUM FOR 20 YEARS $1,703,050 SPECIFIED AMOUNT
GUIDELINE PREMIUM AND CORRIDOR TEST
UNISEX: NONTOBACCO, AGE 45
DEATH BENEFIT OPTION 1: GUARANTEED VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12%HYPOTHETICAL
GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PREMIUMS
PAID PLUS CASH CASH CASH
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 40,816 28,953 29,262 1,703,050 30,875 31,184 1,703,050 32,800 33,109 1,703,050
2 83,672 57,073 57,382 1,703,050 62,724 63,033 1,703,050 68,613 68,921 1,703,050
3 128,671 84,353 84,353 1,703,050 95,578 95,578 1,703,050 107,746 107,746 1,703,050
4 175,921 110,772 110,772 1,703,050 129,455 129,455 1,703,050 150,531 150,531 1,703,050
5 225,532 136,312 136,312 1,703,050 164,381 164,381 1,703,050 197,344 197,344 1,703,050
6 277,625 160,923 160,923 1,703,050 200,353 200,353 1,703,050 248,576 248,576 1,703,050
7 332,321 184,546 184,546 1,703,050 237,363 237,363 1,703,050 304,661 304,661 1,703,050
8 389,753 208,457 208,457 1,703,050 276,821 276,821 1,703,050 367,594 367,594 1,703,050
9 450,056 231,213 231,213 1,703,050 317,349 317,349 1,703,050 436,577 436,577 1,703,050
10 513,375 252,752 252,752 1,703,050 358,956 358,956 1,703,050 512,278 512,278 1,703,050
11 579,859 273,002 273,002 1,703,050 401,647 401,647 1,703,050 595,456 595,456 1,703,050
12 649,668 291,904 291,904 1,703,050 445,454 445,454 1,703,050 687,005 687,005 1,703,050
13 722,967 309,430 309,430 1,703,050 490,449 490,449 1,703,050 787,984 787,984 1,703,050
14 799,931 325,482 325,482 1,703,050 536,655 536,655 1,703,050 899,565 899,565 1,703,050
15 880,743 339,936 339,936 1,703,050 584,092 584,092 1,703,050 1,023,110 1,023,110 1,703,050
16 965,596 352,654 352,654 1,703,050 632,791 632,791 1,703,050 1,160,217 1,160,217 1,703,050
17 1,054,691 363,484 363,484 1,703,050 682,799 682,799 1,703,050 1,312,778 1,312,778 1,703,050
18 1,148,242 372,177 372,177 1,703,050 734,119 734,119 1,703,050 1,481,780 1,481,780 1,867,043
19 1,246,469 378,481 378,481 1,703,050 786,796 786,796 1,703,050 1,667,181 1,667,181 2,067,304
20 1,349,608 382,144 382,144 1,703,050 840,927 840,927 1,703,050 1,870,592 1,870,592 2,282,123
21 1,417,089 345,962 345,962 1,703,050 857,475 857,475 1,703,050 2,053,501 2,053,501 2,464,201
22 1,487,943 306,230 306,230 1,703,050 873,030 873,030 1,703,050 2,253,775 2,253,775 2,681,993
23 1,562,341 262,469 262,469 1,703,050 887,447 887,447 1,703,050 2,473,052 2,473,052 2,918,201
24 1,640,458 214,065 214,065 1,703,050 900,528 900,528 1,703,050 2,713,114 2,713,114 3,174,343
25 1,722,480 160,197 160,197 1,703,050 911,986 911,986 1,703,050 2,975,894 2,975,894 3,452,036
26 1,808,604 99,762 99,762 1,703,050 921,424 921,424 1,703,050 3,263,480 3,263,480 3,753,002
27 1,899,035 31,330 31,330 1,703,050 928,322 928,322 1,703,050 3,579,619 3,579,619 4,044,969
28 1,993,986 (*) (*) (*) 931,993 931,993 1,703,050 3,927,578 3,927,578 4,359,611
29 2,093,686 (*) (*) (*) 931,653 931,653 1,703,050 4,311,237 4,311,237 4,699,248
30 2,198,370 (*) (*) (*) 926,448 926,448 1,703,050 4,735,269 4,735,269 5,066,738
</TABLE>
(1) no policy loans and no partial withdrawals have been made.
(2) guaranteed values reflect guaranteed cost of insurance charges and a monthly
$10.00 administrative expense charge all the time. Guaranteed values reflect a
premium charge of 9% of premium for the first 7 years and 5.5% of premium from
eighth year and on.
(3) net investment returns are calculated as the hypothetical gross investment
return less all charges and deductions shown in the prospectus appendix.
(*) unless additional premium is paid, the policy will not stay in force.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus 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, prevailing rates and rates of
inflation. The death benefit and cash value for a policy would be different from
those shown if the actual rates of return averaged 0%, 6%, and 12% over a period
of years but also fluctuated above or below those averages for individual policy
years. No representation can be made by the company or the trust that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
43
<PAGE> 44
<TABLE>
<CAPTION>
$38,872.05 ANNUAL PREMIUM FOR 20 YEARS $1,703,050 SPECIFIED AMOUNT
GUIDELINE PREMIUM AND CORRIDOR TEST
UNISEX: GUARANTEED ISSUE/NONTOBACCO, AGE 45
DEATH BENEFIT OPTION 2: CURRENT VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PREMIUMS
PAID PLUS CASH CASH CASH
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 40,816 30,986 31,295 1,734,036 32,978 33,287 1,736,028 34,973 35,282 1,738,023
2 83,672 60,014 60,323 1,763,064 65,889 66,198 1,768,939 72,008 72,317 1,775,058
3 128,671 87,338 87,338 1,790,388 98,961 98,961 1,802,011 111,557 111,557 1,814,607
4 175,921 113,695 113,695 1,816,745 132,934 132,934 1,835,984 154,641 154,641 1,857,691
5 225,532 139,716 139,716 1,842,766 168,533 168,533 1,871,583 202,386 202,386 1,905,436
6 277,625 165,335 165,335 1,868,385 205,733 205,733 1,908,783 255,154 255,154 1,958,204
7 332,321 190,373 190,373 1,893,423 244,418 244,418 1,947,468 313,281 313,281 2,016,331
8 389,753 216,165 216,165 1,919,215 286,080 286,080 1,989,130 378,860 378,860 2,081,910
9 450,056 240,978 240,978 1,944,028 329,026 329,026 2,032,076 450,742 450,742 2,153,792
10 513,375 265,043 265,043 1,968,093 373,543 373,543 2,076,593 529,834 529,834 2,232,884
11 579,859 288,231 288,231 1,991,281 419,562 419,562 2,122,612 616,757 616,757 2,319,807
12 649,668 310,068 310,068 2,013,118 466,650 466,650 2,169,700 711,828 711,828 2,414,878
13 722,967 330,488 330,488 2,033,538 514,774 514,774 2,217,824 815,829 815,829 2,518,879
14 799,931 349,381 349,381 2,052,431 563,846 563,846 2,266,896 929,572 929,572 2,632,622
15 880,743 366,614 366,614 2,069,664 613,756 613,756 2,316,806 1,053,936 1,053,936 2,756,986
16 965,596 381,985 381,985 2,085,035 664,310 664,310 2,367,360 1,189,813 1,189,813 2,892,863
17 1,054,691 395,450 395,450 2,098,500 715,471 715,471 2,418,521 1,338,361 1,338,361 3,041,411
18 1,148,242 406,756 406,756 2,109,806 766,977 766,977 2,470,027 1,500,632 1,500,632 3,203,682
19 1,246,469 415,641 415,641 2,118,691 818,548 818,548 2,521,598 1,677,783 1,677,783 3,380,833
20 1,349,608 421,878 421,878 2,124,928 869,918 869,918 2,572,968 1,871,123 1,871,123 3,574,173
21 1,417,089 391,612 391,612 2,094,662 885,762 885,762 2,588,812 2,046,617 2,046,617 3,749,667
22 1,487,943 361,693 361,693 2,064,743 902,373 902,373 2,605,423 2,241,108 2,241,108 3,944,158
23 1,562,341 332,117 332,117 2,035,167 919,787 919,787 2,622,837 2,456,653 2,456,653 4,159,703
24 1,640,458 302,881 302,881 2,005,931 938,044 938,044 2,641,094 2,695,531 2,695,531 4,398,581
25 1,722,480 273,121 273,121 1,976,171 956,298 956,298 2,659,348 2,959,354 2,959,354 4,662,404
26 1,808,604 241,108 241,108 1,944,158 972,756 972,756 2,675,806 3,248,976 3,248,976 4,952,026
27 1,899,035 206,654 206,654 1,909,704 987,111 987,111 2,690,161 3,566,960 3,566,960 5,270,010
28 1,993,986 169,532 169,532 1,872,582 998,999 998,999 2,702,049 3,916,109 3,916,109 5,619,159
29 2,093,686 129,462 129,462 1,832,512 1,007,977 1,007,977 2,711,027 4,299,461 4,299,461 6,002,511
30 2,198,370 86,095 86,095 1,789,145 1,013,512 1,013,512 2,716,562 4,720,314 4,720,314 6,423,364
</TABLE>
(1) no policy loans and no partial withdrawals have been made.
(2) current values reflect current cost of insurance charges and a monthly $5.00
administrative expense charge all the time. Current values reflect a premium
charge of 9% of target premium and 6.5% of excess-of-target premium for the
first 7 years and 3.5% of all premium from eighth year and on.
(3) net investment returns are calculated as the hypothetical gross investment
return less all charges and deductions shown in the prospectus appendix.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus 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, prevailing rates and rates of
inflation. The death benefit and cash value for a policy would be different from
those shown if the actual rates of return averaged 0%, 6%, and 12% over a period
of years but also fluctuated above or below those averages for individual policy
years. No representation can be made by the company or the trust that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
44
<PAGE> 45
<TABLE>
<CAPTION>
$38,872.05 ANNUAL PREMIUM FOR 20 YEARS $1,703,050 SPECIFIED AMOUNT
GUIDELINE PREMIUM AND CORRIDOR TEST
UNISEX: NONTOBACCO, AGE 45
DEATH BENEFIT OPTION 2: GUARANTEED VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PREMIUMS
PAID PLUS CASH CASH CASH
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 40,816 28,842 29,151 1,731,892 30,757 31,066 1,733,807 32,676 32,984 1,735,726
2 83,672 56,738 57,047 1,759,788 62,354 62,663 1,765,404 68,206 68,514 1,771,256
3 128,671 83,669 83,669 1,786,719 94,791 94,791 1,797,841 106,847 106,847 1,809,897
4 175,921 109,598 109,598 1,812,648 128,052 128,052 1,831,102 148,865 148,865 1,851,915
5 225,532 134,493 134,493 1,837,543 162,121 162,121 1,865,171 194,554 194,554 1,897,604
6 277,625 158,285 158,285 1,861,335 196,943 196,943 1,899,993 244,199 244,199 1,947,249
7 332,321 180,889 180,889 1,883,939 232,447 232,447 1,935,497 298,099 298,099 2,001,149
8 389,753 203,545 203,545 1,906,595 269,957 269,957 1,973,007 358,065 358,065 2,061,115
9 450,056 224,777 224,777 1,927,827 308,002 308,002 2,011,052 423,074 423,074 2,126,124
10 513,375 244,489 244,489 1,947,539 346,480 346,480 2,049,530 493,519 493,519 2,196,569
11 579,859 262,569 262,569 1,965,619 385,268 385,268 2,088,318 569,812 569,812 2,272,862
12 649,668 278,923 278,923 1,981,973 424,257 424,257 2,127,307 652,426 652,426 2,355,476
13 722,967 293,494 293,494 1,996,544 463,366 463,366 2,166,416 741,920 741,920 2,444,970
14 799,931 306,138 306,138 2,009,188 502,423 502,423 2,205,473 838,817 838,817 2,541,867
15 880,743 316,682 316,682 2,019,732 541,212 541,212 2,244,262 943,661 943,661 2,646,711
16 965,596 324,936 324,936 2,027,986 579,491 579,491 2,282,541 1,057,028 1,057,028 2,760,078
17 1,054,691 330,695 330,695 2,033,745 616,987 616,987 2,320,037 1,179,537 1,179,537 2,882,587
18 1,148,242 333,637 333,637 2,036,687 653,292 653,292 2,356,342 1,311,742 1,311,742 3,014,792
19 1,246,469 333,444 333,444 2,036,494 687,980 687,980 2,391,030 1,454,253 1,454,253 3,157,303
20 1,349,608 329,819 329,819 2,032,869 720,618 720,618 2,423,668 1,607,756 1,607,756 3,310,806
21 1,417,089 286,351 286,351 1,989,401 712,454 712,454 2,415,504 1,732,516 1,732,516 3,435,566
22 1,487,943 239,507 239,507 1,942,557 699,715 699,715 2,402,765 1,865,750 1,865,750 3,568,800
23 1,562,341 189,039 189,039 1,892,089 681,893 681,893 2,384,943 2,008,006 2,008,006 3,711,056
24 1,640,458 134,614 134,614 1,837,664 658,361 658,361 2,361,411 2,159,793 2,159,793 3,862,843
25 1,722,480 75,763 75,763 1,778,813 628,322 628,322 2,331,372 2,321,523 2,321,523 4,024,573
26 1,808,604 11,844 11,844 1,714,894 590,757 590,757 2,293,807 2,493,459 2,493,459 4,196,509
27 1,899,035 (*) (*) (*) 544,434 544,434 2,247,484 2,675,713 2,675,713 4,378,763
28 1,993,986 (*) (*) (*) 487,839 487,839 2,190,889 2,868,176 2,868,176 4,571,226
29 2,093,686 (*) (*) (*) 419,396 419,396 2,122,446 3,070,731 3,070,731 4,773,781
30 2,198,370 (*) (*) (*) 337,611 337,611 2,040,661 3,283,401 3,283,401 4,986,451
</TABLE>
(1) no policy loans and no partial withdrawals have been made.
(2) guaranteed values reflect guaranteed cost of insurance charges and a monthly
$10.00 administrative expense charge all the time. Guaranteed values reflect a
premium charge of 9% of premium for the first 7 years and 5.5% of premium from
eighth year and on.
(3) net investment returns are calculated as the hypothetical gross investment
return less all charges and deductions shown in the prospectus appendix.
(*) unless additional premium is paid, the policy will not stay in force.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus 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, prevailing rates and rates of
inflation. The death benefit and cash value for a policy would be different from
those shown if the actual rates of return averaged 0%, 6%, and 12% over a period
of years but also fluctuated above or below those averages for individual policy
years. No representation can be made by the company or the trust that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
45
<PAGE> 46
APPENDIX B
PARTICIPATING UNDERLYING MUTUAL FUNDS
The Company may limit the number of Underlying Mutual Funds available to
corporate purchasers and employers.
A summary of investment objectives is contained in the descriptions of each
Underlying Mutual Fund below. More detailed information may be found in the
current prospectus for each Underlying Mutual Fund. Such a prospectus for the
Underlying Mutual Fund(s) being considered should accompany this prospectus and
should be read in conjunction herewith. A copy of each prospectus may be
obtained without charge from Nationwide Life and Annuity Insurance Company, P.O.
Box 182150, Columbus, Ohio, 43218-2150, 1-800-547-7548 (TDD 1-800-238-3035).
DREYFUS VARIABLE INVESTMENT FUND
Dreyfus Variable Investment Fund ("Fund") is an open-end, management investment
company. It was organized as an unincorporated business trust under the laws of
the Commonwealth of Massachusetts on October 29, 1986 and commenced operations
on August 31, 1990. The Fund offers its shares only as investment vehicles for
variable annuity and variable life insurance products of insurance companies.
The Dreyfus Corporation ("Dreyfus") serves as the Fund's manager.
-QUALITY BOND PORTFOLIO
Investment Objective: The Portfolio's investment objective is to
provide the maximum amount of current income to the extent consistent
with the preservation of capital and the maintenance of liquidity. This
Series invests principally in debt obligations of corporations, the
U.S. Government and its agencies and instrumentalities, and U.S. major
banking institutions.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
The Fidelity Variable Insurance Products Fund (VIP) is an open-end, diversified,
management investment company organized as a Massachusetts business trust on
November 13, 1981. Shares of VIP are purchased by insurance companies to fund
benefits under variable life insurance policies and variable annuity contracts.
Fidelity Management & Research Company ("FMR") is the manager for VIP and its
portfolios.
-VIP OVERSEAS PORTFOLIO: SERVICE CLASS
Investment Objective: Long-term capital growth primarily through
investments in foreign securities. This Portfolio provides a means for
investors to diversify their own portfolios by participating in
companies and economies outside the United States.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
The Goldman Sachs Variable Insurance Trust (the "Trust") is an open-end,
management investment company (mutual fund) providing a series of equity and
fixed-income investment options. Shares of the Trust may be purchased and held
by the separate account of participating life insurance companies for the
purpose of funding variable annuity contracts and variable life insurance
policies. Shares of the Trust are not offered directly to the general public.
-GOLDMAN SACHS VIT GLOBAL INCOME FUND
Investment Objective: To seek high total return, emphasizing current
income and, to a lesser extent, providing opportunities for capital
appreciation. The Fund invests primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers and foreign
currencies. Goldman Sachs Asset Management International serves as the
Fund's investment adviser.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO Variable Investment Funds, Inc., a Maryland Corporation, is an open-end
management investment company that offers shares of common stock of ten
diversified investment portfolios. The Company's shares are not offered directly
to the public, but are sold exclusively to life insurance companies as a pooled
funding vehicle for variable annuity and variable life insurance contracts
issued by separate accounts of participating insurance companies.
46
<PAGE> 47
-INVESCO VIF - DYNAMICS PORTFOLIO
Investment Objective: The Dynamics Fund seeks appreciation of capital
through aggressive investment policies. The Fund invests primarily in
common stocks of U.S. companies traded on national securities exchanges
and over-the-counter. INVESCO Funds Group, Inc. is the Fund's
investment adviser.
-INVESCO VIF - GROWTH PORTFOLIO
Investment Objective: The Growth Fund seeks long-term capital growth.
The Fund also seeks, as a secondary objective, to obtain investment
income through the purchase of securities of carefully selected
companies representing major fields of business and industrial
activity. In pursuing its objectives, the Fund invests primarily in
common stocks, but may also invest in other kinds of securities,
including convertible and straight issues of debentures and preferred
stock. INVESCO Funds Group, Inc. is the Fund's investment adviser.
-INVESCO VIF - HEALTH SCIENCES PORTFOLIO
Investment Objective: The Health Sciences Fund seeks capital
appreciation. The Fund normally invests at least 80% of its total
assets in equity securities of companies that develop, produce, or
distribute products or services related to health care. INVESCO Funds
Group, Inc. is the Fund's investment adviser.
-INVESCO VIF - HIGH YIELD PORTFOLIO
Investment Objective: The High Yield Fund seeks a high level of current
income by investing substantially all of its assets in lower-rated
bonds and other debt securities and in preferred stock. The Fund
pursues its investment objective through investment in a variety of
long-term, intermediate-term, and short-term bonds. Potential capital
appreciation is a factor in the selection of investments, but is
secondary to the Fund's primary objective.
-INVESCO VIF - INDUSTRIAL INCOME PORTFOLIO
Investment Objective: The Industrial Income Fund seeks the best
possible current income while following sound investment practices.
Capital growth potential is an additional consideration in the
selection of portfolio securities. The Fund normally invests at least
65% of its total assets in dividend-paying common stocks. Up to 10% of
the Fund's total assets may be invested in equity securities that do
not pay regular dividends. The remaining assets are invested in other
income-producing securities, such as corporate bonds. The Fund also has
the flexibility to invest in other types of securities. INVESCO Funds
Group, Inc. is the Fund's investment adviser.
-INVESCO VIF - REALTY PORTFOLIO
Investment Objective: The Realty Fund seeks to provide long-term
capital growth. Above-average current income is an additional
consideration in selecting securities for the Fund's investment
portfolio. The Fund normally invests at least 65% of its total assets
in publicly-traded stocks of companies principally engaged in the real
estate industry. The remaining assets are invested in other
income-producing securities such as corporate bonds. INVESCO Funds
Group, Inc. is the Fund's investment adviser.
-INVESCO VIF - SMALL COMPANY GROWTH PORTFOLIO
Investment Objective: The Small Company Growth Fund seeks long-term
capital growth. The Fund invests primarily in equity securities of
small-capitalization U.S. companies traded "over-the-counter. INVESCO
Funds Group, Inc. is the Fund's investment adviser.
-INVESCO VIF - TECHNOLOGY PORTFOLIO
Investment Objective: The Technology Fund seeks capital appreciation.
The Fund normally invests at least 80% of its total assets in equity
securities of companies in technology-related industries such as
computers, communications, video, electronics, oceanography, office and
47
<PAGE> 48
factory automation, and robotics. INVESCO Funds Group, Inc. is the
Fund's investment adviser.
-INVESCO VIF - TOTAL RETURN PORTFOLIO
Investment Objective: The Total Return Fund seeks a high total return
of investment through capital appreciation and current income. The Fund
seeks to achieve its investment objective by investing in a combination
of equity securities (consisting of common stocks and, to a lesser
degree, securities convertible into common stock) and fixed income
securities.
-INVESCO VIF - UTILITIES PORTFOLIO
Investment Objective: The Utilities Fund seeks capital appreciation and
income. The assets of the Fund are invested primarily in equity
securities of companies principally engaged in business as public
utilities. INVESCO Funds Group, Inc. is the Fund's investment adviser.
NATIONWIDE SEPARATE ACCOUNT TRUST
Nationwide Separate Account Trust ("NSAT") is a diversified open-end management
investment company created under the laws of Massachusetts. NSAT offers shares
in the funds listed below, each with its own investment objectives. Shares of
NSAT will be sold primarily to life insurance company separate accounts to fund
the benefits under variable life insurance policies and variable annuity
contracts issued by life insurance companies. The assets of NSAT are managed by
Nationwide Advisory Services, Inc. ("NAS"), a wholly-owned subsidiary of
Nationwide Life Insurance Company.
-CAPITAL APPRECIATION FUND
Investment Objective: Long-term growth by primarily investing in a
diversified portfolio of the common stock of companies which the NAS
determines have a better-than-average potential for sustained capital
growth over the long term.
-GOVERNMENT BOND FUND
Investment Objective: As high a level of income as is consistent with
the preservation of capital by investing in a diversified portfolio of
securities issued or backed by the U.S. Government, its agencies or
instrumentalities.
-MONEY MARKET FUND
Investment Objective: As high a level of current income as is
considered consistent with the preservation of capital and liquidity by
investing primarily in money market instruments.
-TOTAL RETURN FUND
Investment Objective: Capital growth by investing in common stocks of
companies that NAS believes will have above-average earnings or
otherwise provide investors with above-average potential for capital
appreciation. To maximize this potential, NAS may also utilize from
time to time, securities convertible into common stock, warrants and
options to purchase such stocks.
SUBADVISED NSAT FUNDS
-NATIONWIDE BALANCED FUND
Subadviser: Salomon Brothers Asset
Management, Inc.
Investment Objective: Primarily seeks above-average income compared to
a portfolio entirely invested in equity securities. The Fund's
secondary objective is to take advantage of opportunities for growth of
capital and income. The Fund seeks its objective primarily through
investments in a broad variety of securities, including equity
securities, fixed-income securities and short term obligations. Under
normal market conditions, it is anticipated that the Fund will invest
at least 40% of the Fund's total assets in equity securities and at
least 25% in fixed-income senior securities. The Fund's subadviser,
Salomon Brothers Asset Management, Inc., will have discretion to invest
in the full range of maturities of fixed-income securities. Generally,
most of the Fund's long-term debt investments will consist of
"investment grade" securities, but the Fund may invest up to 20% of its
net assets in non-convertible fixed-income securities rated below
investment grade or determined by the subadviser to be of comparable
quality. These securities are commonly known as
48
<PAGE> 49
junk bonds. In addition, the Fund may invest an unlimited amount in
convertible securities rated below investment grade.
-NATIONWIDE EQUITY INCOME FUND
Subadviser: Federated Investment
Counseling
Investment Objective: Seeks above average income and capital
appreciation by investing at least 65% of its assets in
income-producing equity securities. Such equity securities include
common stocks, preferred stocks, and securities (including debt
securities) that are convertible into common stocks. The portion of the
Fund's total assets invested in each type of equity security will vary
according to the Fund's subadviser's assessment of market, economic
conditions and outlook.
-NATIONWIDE GLOBAL EQUITY FUND
Subadviser: J. P. Morgan Investment
Management Inc.
Investment Objective To provide high total return from a globally
diversified portfolio of equity securities. Total return will consist
of income plus realized and unrealized capital gains and losses. The
Fund seeks its investment objective through country allocation, stock
selection and management of currency exposure. Under normal market
conditions, J.P. Morgan Investment Management Inc., intends to keep the
Fund essentially fully invested with at least 65% of the value of its
total assets in equity securities consisting of common stocks and other
securities with equity characteristics such as preferred stocks,
warrants, rights, convertible securities, trust certificates, limited
partnership interests and equity participations. The Fund's primary
equity instruments are the common stock of companies based in the
developed countries around the world. The assets of the Fund will
ordinarily be invested in the securities of at least five different
countries.
-NATIONWIDE HIGH INCOME BOND FUND
Subadviser: Federated Investment
Counseling
Investment Objective: Seeks to provide high current income by investing
primarily in a professionally managed, diversified portfolio of fixed
income securities. To meet its objective, the Fund intends to invest at
least 65% of its assets in lower-rated fixed income securities such as
preferred stocks, bonds, debentures, notes, equipment lease
certificates and equipment trust certificates which are rated BBB or
lower by Standard & Poor's or Fitch Investors Service or Baa or lower
by Moody's (or if not rated, are determined by the Fund's subadviser to
be of a comparable quality). Such investments are commonly referred to
as "junk bonds." For a further discussion of lower-rated securities,
please see the "High Yield Securities" section of the Fund's
prospectus.
-NATIONWIDE MULTI SECTOR BOND FUND
Subadviser: Salomon Brothers Asset
Management, Inc. with Salomon Brothers
Asset Management Limited
Investment Objective: Primarily seeks a high level of current income.
Capital appreciation is a secondary objective. The Fund seeks to
achieve its objectives by investing in a globally diverse portfolio of
fixed-income investments and by giving the subadviser, Salomon Brothers
Asset Management, Inc. broad discretion to deploy the Fund's assets
among certain segments of the fixed-income market that the subadviser
believes will best contribute to achievement of the Fund's investment
objectives. The Fund reserves the right to invest predominantly in
securities rated in medium or lower categories, or as determined by the
subadviser to be of comparable quality, commonly referred to as "junk
bonds." Although the subadviser has the ability to invest up to 100% of
the Fund's assets in lower-rated securities, the subadviser does not
anticipate investing in excess of 75% of the Fund's assets in such
securities. The Subadviser has entered into a subadvisory agreement
with its London based affiliate, Salomon Brothers Asset Management
Limited, pursuant to which the subadviser has delegated to Salomon
Brothers Asset Management Limited responsibility for management of the
Fund's investments in
49
<PAGE> 50
non-dollar denominated debt securities and currency transactions.
-NATIONWIDE SELECT ADVISERS MID CAP FUND
Subadvisers: First Pacific Advisors, Inc.,
Pilgrim Baxter & Associates, Ltd., and Rice,
Hall, James & Associates
Investment Objective: Capital appreciation by investing primarily in
equity securities of medium-sized companies (market capitalization
between $500 million and $7 billion). Under normal market conditions,
the Fund will invest in equity securities consisting of common stock,
preferred stock and securities convertible into common stocks,
including convertible preferred stock and convertible bonds. NAS has
chosen the Fund's subadvisers because they utilize a number of
different investment styles. In utilizing these different styles, NAS
hopes to increase prospects for investment return and to reduce market
risk and volatility.
-NATIONWIDE SMALL CAP VALUE FUND
Subadviser: The Dreyfus Corporation
Investment Objective: Capital appreciation through investment in a
diversified portfolio of equity securities of companies with a median
market capitalization of approximately $1 billion. Under normal market
conditions, at least 75% of the Fund's total assets will be invested in
equity securities of companies with market capitalizations at the time
of purchase of between $200 million and $2.5 billion. The Fund will
invest in equity securities of domestic and foreign issuers
characterized as "value" companies according to criteria established by
The Dreyfus Corporation, the Fund's subadviser.
-NATIONWIDE SMALL COMPANY FUND
Subadvisers: The Dreyfus Corporation,
Neuberger & Berman, L.P., Lazard Asset
Management, Strong Capital Management,
Inc. and Warburg Pincus Asset Management, Inc.
Investment Objective: Long-term growth of capital by investing
primarily in equity securities of domestic and foreign companies with
market capitalizations of less than $1 billion at the time of purchase.
The subadvisers were chosen because they utilize a number of different
investment styles when investing in small company stocks. By utilizing
different investment styles, NAS hopes to increase prospects for
investment return and to reduce market risk and volatility.
-NATIONWIDE STRATEGIC GROWTH FUND
Subadviser: Strong Capital Management Inc.
Investment Objective: Capital growth by investing primarily in equity
securities that the Fund's subadviser believes have above-average
growth prospects. The Fund will generally invest in companies whose
earnings are believed to be in a relatively strong growth trend, and to
a lesser extent, in companies in which significant further growth is
not anticipated but whose market value is thought to be undervalued.
Under normal market conditions, the Fund will invest at least 65% of
its total assets in equity securities, including common stocks,
preferred stocks, and securities convertible into common or preferred
stocks, such as warrants and convertible bonds. The Fund may invest up
to 35% of its total assets in debt obligations, including intermediate-
to long-term corporate or U.S. Government debt securities.
-NATIONWIDE STRATEGIC VALUE FUND
Subadviser: Strong Capital Management
Inc./Schafer Capital Management Inc.
Investment Objective: Primarily long-term capital appreciation; current
income is a secondary objective. The Fund seeks to meet its objectives
by investing in securities which are believed to offer the possibility
of increase in value, primarily common stocks of established companies
having a strong financial position and a low stock market valuation at
the time of purchase in relation to investment value. Other than
considered appropriate for cash reserves, the Fund will generally
maintain a fully invested position in common stocks of publicly held
companies, primarily in stocks of companies listed on a national
securities exchange or other equity securities (common stock or
50
<PAGE> 51
securities convertible into common stock). Investments may also be made
in debt securities which are convertible into common stocks and in
warrants or other rights to purchase common stock, which in such case
are considered equity securities by the Fund. Strong Capital
Management, Inc. has subcontracted with Schafer Capital Management,
Inc. to subadvise the Fund.
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
The Salomon Brothers Variable Series Funds is an open-end investment company
incorporated in Maryland on October 1, 1997. Shares of the Funds are sold only
to separate accounts of insurance companies to fund benefits for variable
annuity contracts and variable life insurance policies, and to qualified pension
and retirement plans. Salomon Brothers Asset Management, Inc. ("SBAM") serves as
the Variable Series Funds investment adviser.
-INVESTORS FUND
Investment Objective: The primary investment objective of the Fund is
to seek long-term growth of capital. Current income is a secondary
objective. The Fund seeks to achieve its objectives primarily through
investments in common stocks of well-known companies.
51
<PAGE> 52
NATIONWIDE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Statements of Income
(Unaudited)
($000's omitted)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Policy charges $ 8,658 $ 2,968 $ 20,649 $ 7,407
Life insurance premiums 4 173 36 337
Net investment income 2,844 2,778 8,316 8,687
Realized gains (losses) on investments -- (326) 606 (958)
Other income 291 264 873 792
-------- -------- -------- --------
11,797 5,857 30,480 16,265
-------- -------- -------- --------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 1,319 1,013 3,264 2,856
Other benefits and claims 243 271 (16) 623
Amortization of deferred policy acquisition costs 1,299 1,075 3,283 3,085
Other operating expenses 2,145 3,185 7,316 6,289
-------- -------- -------- --------
5,006 5,544 13,847 12,853
-------- -------- -------- --------
Income before federal tax expense 6,791 313 16,633 3,412
Federal tax expense 2,376 85 5,828 1,208
-------- -------- -------- --------
Net income $ 4,415 $ 228 $ 10,805 $ 2,204
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 53
<TABLE>
<CAPTION>
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Balance Sheets
($000's omitted)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 1997
1998
------------------ ------------------
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $825,702 in 1998; $779,969 in 1997) $ 857,492 $ 796,919
Equity securities (cost $14,621 in 1998; $11,704 in 1997) 18,559 14,767
Mortgage loans on real estate, net 258,287 218,852
Real estate, net 2,263 2,824
Policy loans 312 215
Short-term investments 23,969 18,968
------------------ ------------------
1,160,882 1,052,545
------------------ ------------------
Cash - 5,163
Accrued investment income 11,833 10,778
Deferred policy acquisition costs 42,305 30,087
Other assets 9,562 15,624
Assets held in Separate Accounts 1,250,856 891,101
------------------ ------------------
$ 2,475,438 $ 2,005,298
================== ==================
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $ 1,102,369 $ 986,191
Other liabilities 7,499 29,426
Liabilities related to Separate Accounts 1,250,856 891,101
------------------ ------------------
2,360,724 1,906,718
------------------ ------------------
Shareholder's equity:
Common stock, $40 par value. Authorized, issued and outstanding 66,000 shares 2,640 2,640
Additional paid-in capital 52,960 52,960
Retained earnings 46,617 35,812
Accumulated other comprehensive income 12,497 7,168
------------------ ------------------
114,714 98,580
------------------ ------------------
$ 2,475,438 $ 2,005,298
================== ==================
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 54
<TABLE>
<CAPTION>
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Statements of Shareholder's Equity
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
($000's omitted)
ACCUMULATED OTHER
ADDITIONAL COMPREHENSIVE TOTAL
COMMON PAID-IN RETAINED INCOME SHAREHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
----------- -------------------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
1997
BALANCE, JANUARY 1, 1997 $ 2,640 $ 52,960 $ 25,209 $ 3,228 $ 84,037
Comprehensive income:
Net income - - 2,204 - 2,204
Unrealized net gains on
securities available-for-sale
arising during the period - - - 2,870 2,870
----------------
Total comprehensive income 5,074
----------- ------------- ------------ ----------------- ----------------
BALANCE, SEPTEMBER 30, 1997 $ 2,640 $ 52,960 $ 27,413 $ 6,098 $ 89,111
=========== ============= ============ ================= ================
1998
BALANCE, JANUARY 1, 1998 $ 2,640 $ 52,960 $ 35,812 $ 7,168 $ 98,580
Comprehensive income:
Net income - - 10,805 - 10,805
Unrealized net gains on
securities available-for-sale
arising during the period - - - 5,329 5,329
----------------
Total comprehensive income 16,134
----------- ------------- ------------ ----------------- ----------------
BALANCE, SEPTEMBER 30, 1998 $ 2,640 $ 52,960 $ 46,617 $ 12,497 $ 114,714
=========== ============= ============ ================= ================
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 55
<TABLE>
<CAPTION>
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, 1998 and 1997
($000's omitted)
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,805 $ 2,204
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 3,264 2,856
Capitalization of deferred policy acquisition costs (23,019) (9,067)
Amortization of deferred policy acquisition costs 3,283 3,085
Amortization and depreciation (356) 1,060
Realized (gains) losses on investments, net (606) 958
Increase in accrued investment income (1,055) (2,376)
Decrease in other assets 6,062 32,510
Increase in policy liabilities and funds withheld on coinsurance agreement
with affiliate 89,667 190,047
Decrease in other liabilities (23,923) (8,663)
Other, net (421) -
--------------- ---------------
Net cash provided by operating activities 63,701 212,614
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 93,610 65,683
Proceeds from sale of securities available-for-sale 11,257 -
Proceeds from maturity of securities held to maturity - -
Proceeds from repayments of mortgage loans on real estate 16,608 5,003
Proceeds from sale of real estate 707 -
Proceeds from repayments of policy loans and sale of other invested assets 72 55
Cost of securities available-for-sale acquired (153,602) (223,084)
Cost of mortgage loans on real estate acquired (55,590) (47,162)
Cost of real estate acquired (3) (11)
Policy loans issued and other invested assets acquired (169) (101)
Short-term investments, net (5,001) (4,012)
--------------- ---------------
Net cash used in investing activities (92,111) (203,629)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in investment product and universal life insurance product account balances 46,924 4,713
Decrease in investment product and universal life insurance product account balances (23,677) (9,817)
--------------- ---------------
Net cash provided by (used in) financing activities 23,247 (5,104)
--------------- ---------------
Net (decrease) increase in cash (5,163) 3,881
Cash, beginning of period 5,163 4,296
--------------- ---------------
Cash, end of period $ - $ 8,177
=============== ===============
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 56
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Unaudited Financial Statements
Nine Months Ended September 30, 1998
(1) Basis of Presentation
---------------------
The accompanying unaudited financial statements of Nationwide Life and
Annuity Insurance Company (the Company) have been prepared in
accordance with generally accepted accounting principles, which differ
from statutory accounting practices prescribed or permitted by
regulatory authorities, for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all information and footnotes required
by generally accepted accounting principles for complete financial
statements. The financial information included herein reflects all
adjustments (all of which are normal and recurring in nature) which
are, in the opinion of management, necessary for a fair presentation of
financial position and results of operations. Operating results for all
periods presented are not necessarily indicative of the results that
may be expected for the full year. The accompanying unaudited financial
statements should be read in conjunction with the audited financial
statements and related notes for the year ended December 31, 1997.
(2) Comprehensive Income
--------------------
Pursuant to the Financial Accounting Standards Board (FASB) Statement
No. 130, "Reporting Comprehensive Income", the Consolidated Statements
of Shareholder's Equity include a new measure called "Comprehensive
Income". Comprehensive Income includes net income as well as certain
items that are reported directly within a separate component of
shareholder's equity that bypass net income. Currently, the Company's
only component of Other Comprehensive Income is unrealized gains
(losses) on securities available-for-sale. The related before and after
federal tax amounts are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
($000's omitted) SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------------------------------- -------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Unrealized gains on securities available-for-sale
arising during the period:
Gross $ 13,928 $ 8,373 $ 15,296 $ 7,253
Adjustment to deferred policy acquisition (7,660) (4,641) (7,517) (3,848)
costs
Related federal tax expense (2,194) (1,306) (2,178) (1,192)
--------------- --------------- --------------- ---------------
Net 4,074 2,426 5,601 2,213
--------------- --------------- --------------- ---------------
Reclassification adjustment for net (gains) losses
on securities available-for-sale realized
during the period:
Gross - 326 (419) 1,011
Related federal tax expense (benefit) - (114) 147 (354)
---------------
--------------- --------------- ---------------
Net - 212 (272) 657
--------------- --------------- --------------- ---------------
Total Other Comprehensive Income $ 4,074 $ 2,638 $ 5,329 $ 2,870
=============== =============== =============== ===============
</TABLE>
<PAGE> 57
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Unaudited Financial Statements, Continued
(3) Accounting Pronouncements
-------------------------
On January 1, 1998 the Company adopted FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(FAS 131). FAS 131 superseded FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise." FAS 131 establishes
standards for public business enterprises to report information about
operating segments in annual financial statements and selected
information about operating segments in interim financial reports. FAS
131 also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The adoption of
FAS 131 did not affect results of operations or financial position, nor
did it affect the manner in which the Company defines its operating
segments. The segment information required for interim periods is
included in note 4.
In March 1998, The American Institute of Certified Public Accountant's
Accounting Standards Executive Committee issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance intended to
standardize accounting practices for costs incurred to develop or
obtain computer software for internal use. Specifically, SOP 98-1
provides guidance for determining whether computer software is for
internal use and when costs incurred for internal use software are to
be capitalized. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998 with earlier application
encouraged. The adoption of SOP 98-1, planned for the first quarter of
1999, is not expected to have a material impact on the Company's
financial statements.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. Contracts that contain embedded
derivatives, such as certain insurance contracts, are also addressed by
the Statement. FAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 with earlier application permitted. The
Company is currently evaluating the impact of this Statement on results
of operations and financial condition.
(4) Segment Disclosures
-------------------
The Company uses differences in products as the basis for defining its
reportable segments. The Company reports three product segments:
Variable Annuities, Fixed Annuities and Life Insurance.
The Variable Annuities segment consists of annuity contracts that
provide the customer with the opportunity to invest in mutual funds
managed by independent investment managers and the Company, with
investment returns accumulating on a tax-deferred basis. The Company's
variable annuity products consist almost entirely of flexible premium
deferred variable annuity contracts.
The Fixed Annuities segment consists of annuity contracts that generate
a return for the customer at a specified interest rate, fixed for a
prescribed period, with returns accumulating on a tax-deferred basis.
Such contracts consist of single premium deferred annuities, flexible
premium deferred annuities and single premium immediate annuities. The
Fixed Annuities segment includes the fixed option under variable
annuity contracts.
The Life Insurance segment consists of insurance products, including
variable universal life insurance and corporate-owned life insurance
products, that provide a death benefit and may also allow the customer
to build cash value on a tax-deferred basis.
<PAGE> 58
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Unaudited Financial Statements, Continued
In addition to the product segments, the Company reports corporate
revenue and expenses, investments and related investment income
supporting capital not specifically allocated to its product segments
and all realized gains and losses on investments in a Corporate and
Other segment.
The following table summarizes the financial results of the Company's
business segments for the three months ended September 30, 1998 and
1997.
<TABLE>
<CAPTION>
VARIABLE FIXED LIFE CORPORATE
($000's omitted) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
------------------------------------ --------------- --------------- --------------- ------------------------------
<S> <C> <C> <C> <C> <C>
1998
Operating revenue (1) $ 4,596 $ 2,528 $ 3,240 $ 1,433 $ 11,797
Benefits and expenses 1,049 2,230 1,727 - 5,006
--------------- --------------- --------------- -------------- ---------------
Operating income (loss)
before federal income tax 3,547 298 1,513 1,433 6,791
Realized gains on investments - - - - -
--------------- --------------- --------------- -------------- ---------------
Income before federal tax expense $ 3,547 $ 298 $ 1,513 $ 1,433 $ 6,791
=============== =============== =============== ============== ===============
1997
Operating revenue (1) $ 2,550 $ 1,918 $ 47 $ 1,668 $ 6,183
Benefits and expenses 2,717 2,631 196 - 5,544
--------------- --------------- --------------- -------------- ---------------
Operating income before federal
income tax (167) (713) (149) 1,668 639
Realized losses on investments - - - (326) (326)
--------------- --------------- --------------- -------------- ---------------
Income (loss) before federal
tax expense $ (167) $ (713) $ (149) $ 1,342 $ 313
=============== =============== =============== ============== ===============
<FN>
----------
(1) Excludes realized gains and losses on investments.
</TABLE>
<PAGE> 59
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Unaudited Financial Statements, Continued
<TABLE>
<CAPTION>
The following table summarizes the financial results of the Company's business segments for the nine months ended September
30, 1998 and 1997.
VARIABLE FIXED LIFE CORPORATE
($000's omitted) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL
------------------------------------ --------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
1998
Operating revenue (1) $ 12,092 $ $ 6,200 $ 4,574 $ 29,874
7,008
Benefits and expenses 6,599 4,927 2,321 - 13,847
--------------- --------------- --------------- -------------- ---------------
Operating income before federal
income tax 5,493 2,081 3,879 4,574 16,027
Realized gains on investments - - - 606 606
--------------- --------------- --------------- -------------- ---------------
Income before federal tax expense $ 5,493 $ 2,081 $ 3,879 $ 5,180 $ 16,633
=============== =============== =============== ============== ===============
Assets as of period end $ 1,245,121 $ 1,104,526 $ 62,385 $ 63,406 $ 2,475,438
=============== =============== =============== ============== ===============
1997
Operating revenue (1) $ $ $ $ 5,204 $ 17,223
6,285 5,589 145
Benefits and expenses 3,546 8,948 359 - 12,853
--------------- --------------- --------------- -------------- ---------------
Operating income (loss)
before federal income tax 2,739 (3,359) (214) 5,204 4,370
Realized losses on investments - - - (958) (958)
--------------- --------------- --------------- -------------- ---------------
Income before federal tax expense $ 2,739 $ (3,359) $ (214) $ 4,246 $ 3,412
=============== =============== =============== ============== ===============
Assets as of period end $ 852,534 $ 949,251 $ 2,633 $ 90,306 $ 1,894,724
=============== =============== =============== ============== ===============
<FN>
----------
(1) Excludes realized gains and losses on investments.
</TABLE>
<PAGE> 60
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Life and Annuity Insurance Company:
We have audited the accompanying balance sheets of Nationwide Life and Annuity
Insurance Company, a wholly owned subsidiary of Nationwide Life Insurance
Company, as of December 31, 1997 and 1996, and the related statements of income,
shareholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nationwide Life and Annuity
Insurance Company as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Columbus, Ohio
January 30, 1998
<PAGE> 2
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Balance Sheets
December 31, 1997 and 1996
($000's omitted)
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---------- ------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $ 796,919 $ 648,076
Equity securities 14,767 12,254
Mortgage loans on real estate, net 218,852 150,997
Real estate, net 2,824 1,090
Policy loans 215 126
Short-term investments 18,968 492
---------- ----------
1,052,545 813,035
---------- ----------
Cash 5,163 4,296
Accrued investment income 10,778 9,189
Deferred policy acquisition costs 30,087 16,168
Other assets 15,624 37,482
Assets held in Separate Accounts 891,101 486,251
---------- ----------
$2,005,298 $1,366,421
========== ==========
Liabilities and Shareholder's Equity
------------------------------------
Future policy benefits and claims $ 986,191 $ 80,720
Funds withheld under coinsurance agreement with affiliate -- 679,571
Other liabilities 29,426 35,842
Liabilities related to Separate Accounts 891,101 486,251
---------- ----------
1,906,718 1,282,384
---------- ----------
Commitments (notes 6 and 7)
Shareholder's equity:
Common stock, $40 par value. Authorized, issued and outstanding 66,000 shares 2,640 2,640
Additional paid-in capital 52,960 52,960
Retained earnings 35,812 25,209
Unrealized gains on securities available-for-sale, net 7,168 3,228
---------- ----------
98,580 84,037
---------- ----------
$2,005,298 $1,366,421
========== ==========
</TABLE>
See accompanying notes to finanacial statements.
<PAGE> 3
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Statements of Income
Years ended December 31, 1997, 1996 and 1995
($000's omitted)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Investment product and universal life insurance product policy charges $ 11,244 $ 6,656 $ 4,322
Traditional life insurance premiums 363 246 674
Net investment income 11,577 51,045 49,108
Realized losses on investments (246) (3) (702)
Other income 1,057 -- --
-------- -------- --------
23,995 57,944 53,402
-------- -------- --------
Benefits and expenses:
Interest credited to policyholder account balances 3,948 34,711 33,276
Other benefits and claims 433 813 904
Amortization of deferred policy acquisition costs 1,402 7,380 5,508
Other operating expenses 1,860 7,247 6,567
-------- -------- --------
7,643 50,151 46,255
-------- -------- --------
Income before federal income tax expense 16,352 7,793 7,147
Federal income tax expense 5,749 2,707 2,373
-------- -------- --------
Net income $ 10,603 $ 5,086 $ 4,774
======== ======== ========
</TABLE>
See accompanying notes to finanacial statements.
<PAGE> 4
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Statements of Shareholder's Equity
Years ended December 31, 1997, 1996 and 1995
($000's omitted)
<TABLE>
<CAPTION>
Unrealized
gains (losses)
Additional on securities Total
Common paid-in Retained available-for- shareholder's
stock capital earnings sale, net equity
----- ------- -------- --------- ------
<S> <C> <C> <C> <C> <C>
December 31, 1994 $2,640 $52,960 $15,349 $(3,703) $ 67,246
Net income -- -- 4,774 -- 4,774
Unrealized gains on securities available-
for-sale, net -- -- -- 8,157 8,157
------ ------- ------- ------- --------
December 31, 1995 2,640 52,960 20,123 4,454 80,177
Net income -- -- 5,086 -- 5,086
Unrealized losses on securities available-
for-sale, net -- -- -- (1,226) (1,226)
------ ------- ------- ------- --------
December 31, 1996 2,640 52,960 25,209 3,228 84,037
Net income -- -- 10,603 -- 10,603
Unrealized gains on securities available-
for-sale, net -- -- -- 3,940 3,940
------ ------- ------- ------- --------
December 31, 1997 $2,640 $52,960 $35,812 $ 7,168 $ 98,580
====== ======= ======= ======= ========
</TABLE>
See accompanying notes to finanacial statements.
<PAGE> 5
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
($000's omitted)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,603 $ 5,086 $ 4,774
Adjustments to reconcile net income to net cash provided by
operating activities:
Interest credited to policyholder account balances 3,948 34,711 33,276
Capitalization of deferred policy acquisition costs (20,099) (19,987) (6,754)
Amortization of deferred policy acquisition costs 1,402 7,380 5,508
Commission and expense allowances under coinsurance
agreement with affiliate -- 26,473 --
Amortization and depreciation 250 1,721 878
Realized losses on invested assets, net 246 3 702
Increase in accrued investment income (1,589) (725) (423)
Decrease (increase) in other assets 21,858 (32,539) 62
Increase (decrease) in policy liabilities and funds withheld
on coinsurance agreement with affiliate 228,898 (7,101) 627
(Decrease) increase in other liabilities (7,488) 23,198 1,427
--------- --------- --------
Net cash provided by operating activities 238,029 38,220 40,077
--------- --------- --------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 95,366 73,966 41,729
Proceeds from sale of securities available-for-sale 30,431 2,480 3,070
Proceeds from maturity of fixed maturity securities held-to-maturity -- -- 11,251
Proceeds from repayments of mortgage loans on real estate 15,199 10,975 8,673
Proceeds from sale of real estate -- -- 655
Proceeds from repayments of policy loans 67 23 50
Cost of securities available-for-sale acquired (267,899) (179,671) (79,140)
Cost of fixed maturity securities held-to maturity acquired -- -- (8,000)
Cost of mortgage loans on real estate acquired (84,736) (57,395) (18,000)
Cost of real estate acquired (13) -- (10)
Policy loans issued (155) (55) (66)
Short-term investments, net (18,476) 4,352 (4,479)
--------- --------- --------
Net cash used in investing activities (230,216) (145,325) (44,267)
--------- --------- --------
Cash flows from financing activities:
Increase in investment product and universal life insurance
product account balances 6,952 200,575 46,247
Decrease in investment product and universal life insurance
product account balances (13,898) (89,174) (42,057)
--------- --------- --------
Net cash (used in) provided by financing activities (6,946) 111,401 4,190
--------- --------- --------
Net increase in cash 867 4,296 --
Cash, beginning of year 4,296 -- --
--------- --------- --------
Cash, end of year $ 5,163 $ 4,296 $
========= ========= ========
</TABLE>
See accompanying notes to finanacial statements.
<PAGE> 6
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements
December 31, 1997, 1996 and 1995
($000's omitted)
(1) Organization and Description of Business
Nationwide Life and Annuity Insurance Company (the Company) is a wholly
owned subsidiary of Nationwide Life Insurance Company (NLIC).
The Company sells primarily fixed and variable rate annuities through
banks and other financial institutions. In addition, the Company sells
universal life insurance and other interest-sensitive life insurance
products and is subject to competition from other financial services
providers throughout the United States. The Company is subject to
regulation by the Insurance Departments of states in which it is
licensed, and undergoes periodic examinations by those departments.
(2) Summary of Significant Accounting Policies
The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below. The
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles, which differ from statutory
accounting practices prescribed or permitted by regulatory authorities.
An Annual Statement, filed with the Department of Insurance of the
State of Ohio (the Department), is prepared on the basis of accounting
practices prescribed or permitted by the Department. Prescribed
statutory accounting practices include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as
state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not
so prescribed. The Company has no material permitted statutory
accounting practices.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosures of contingent assets and
liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses for the reporting period.
Actual results could differ significantly from those estimates.
The most significant estimates include those used in determining
deferred policy acquisition costs, valuation allowances for mortgage
loans on real estate and real estate investments and the liability for
future policy benefits and claims. Although some variability is
inherent in these estimates, management believes the amounts provided
are adequate.
(a) Valuation of Investments and Related Gains and Losses
The Company is required to classify its fixed maturity securities
and equity securities as either held-to-maturity,
available-for-sale or trading. Fixed maturity securities are
classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity and are
stated at amortized cost. Fixed maturity securities not classified
as held-to-maturity and all equity securities are classified as
available-for-sale and are stated at fair value, with the
unrealized gains and losses, net of adjustments to deferred policy
acquisition costs and deferred federal income tax, reported as a
separate component of shareholder's equity. The adjustment to
deferred policy acquisition costs represents the change in
amortization of deferred policy acquisition costs that would have
been required as a charge or credit to operations had such
unrealized amounts been realized. The Company has no fixed
maturity securities classified as held-to-maturity or trading as
of December 31, 1997 or 1996.
<PAGE> 7
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
Mortgage loans on real estate are carried at the unpaid principal
balance less valuation allowances. The Company provides valuation
allowances for impairments of mortgage loans on real estate based
on a review by portfolio managers. The measurement of impaired
loans is based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the fair value of the collateral, if the
loan is collateral dependent. Loans in foreclosure and loans
considered to be impaired are placed on non-accrual status.
Interest received on non-accrual status mortgage loans on real
estate is included in interest income in the period received.
Real estate is carried at cost less accumulated depreciation and
valuation allowances. Impairment losses are recorded on long-lived
assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount.
Realized gains and losses on the sale of investments are
determined on the basis of specific security identification.
Estimates for valuation allowances and other than temporary
declines are included in realized gains and losses on investments.
(b) Revenues and Benefits
Investment Products and Universal Life Insurance Products:
Investment products consist primarily of individual variable and
fixed annuities. Universal life insurance products include
universal life insurance, variable universal life insurance and
other interest-sensitive life insurance policies. Revenues for
investment products and universal life insurance products consist
of net investment income, asset fees, cost of insurance, policy
administration and surrender charges that have been earned and
assessed against policy account balances during the period. Policy
benefits and claims that are charged to expense include interest
credited to policy account balances and benefits and claims
incurred in the period in excess of related policy account
balances.
Traditional Life Insurance Products: Traditional life insurance
products include those products with fixed and guaranteed premiums
and benefits and consist primarily of certain annuities with life
contingencies. Premiums for traditional life insurance products
are recognized as revenue when due. Benefits and expenses are
associated with earned premiums so as to result in recognition of
profits over the life of the contract. This association is
accomplished by the provision for future policy benefits and the
deferral and amortization of policy acquisition costs.
(c) Deferred Policy Acquisition Costs
The costs of acquiring new business, principally commissions,
certain expenses of the policy issue and underwriting department
and certain variable sales expenses have been deferred. For
investment products and universal life insurance products,
deferred policy acquisition costs are being amortized with
interest over the lives of the policies in relation to the present
value of estimated future gross profits from projected interest
margins, asset fees, cost of insurance, policy administration and
surrender charges. For years in which gross profits are negative,
deferred policy acquisition costs are amortized based on the
present value of gross revenues. Deferred policy acquisition costs
are adjusted to reflect the impact of unrealized gains and losses
on fixed maturity securities available-for-sale as described in
note 2(a).
(d) Separate Accounts
Separate Account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. The investment income and gains or losses
of these accounts accrue directly to the contractholders. The
activity of the Separate Accounts is not reflected in the
statements of income and cash flows except for the fees the
Company receives.
<PAGE> 8
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
(e) Future Policy Benefits
Future policy benefits for investment products in the accumulation
phase, universal life insurance and variable universal life
insurance policies have been calculated based on participants'
contributions plus interest credited less applicable contract
charges.
(f) Federal Income Tax
The Company files a consolidated federal income tax return with
Nationwide Mutual Insurance Company (NMIC). The members of the
consolidated tax return group have a tax sharing agreement which
provides, in effect, for each member to bear essentially the same
federal income tax liability as if separate tax returns were
filed.
The Company utilizes the asset and liability method of accounting
for income tax. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under this method, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the
deferred tax assets to the amounts expected to be realized.
(g) Reinsurance Ceded
Reinsurance revenues ceded and reinsurance recoveries on benefits
and expenses incurred are deducted from the respective income and
expense accounts. Assets and liabilities related to reinsurance
ceded are reported on a gross basis.
(h) Statements of Cash Flows
The Company routinely invests its available cash balances in
highly liquid, short-term investments with affiliated companies.
See note 11. As such, the Company had no cash balance as of
December 31, 1995.
(i) Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 130 - Reporting
Comprehensive Income was issued in June 1997 and is effective for
fiscal years beginning after December 15, 1997. The statement
establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements.
Comprehensive income includes all changes in equity during a
period except those resulting from investments by shareholders and
distributions to shareholders and includes net income.
Comprehensive income would be reported in addition to earnings
amounts currently presented. The Company will adopt the statement
and begin reporting comprehensive income in the first quarter of
1998.
(j) Reclassification
Certain items in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 presentation.
<PAGE> 9
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
(3) Investments
The amortized cost, gross unrealized gains and losses and estimated
fair value of securities available-for-sale as of December 31, 1997 and
1996 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
December 31, 1997:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 5,923 $ 109 $ (27) $ 6,005
Obligations of states and political subdivisions 267 5 -- 272
Debt securities issued by foreign governments 6,077 57 (1) 6,133
Corporate securities 482,478 10,964 (509) 492,933
Mortgage-backed securities 285,224 6,458 (106) 291,576
-------- -------- --------- --------
Total fixed maturity securities 779,969 17,593 (643) 796,919
Equity securities 11,704 3,063 -- 14,767
-------- -------- --------- --------
$791,673 $ 20,656 $ (643) $811,686
======== ======== ========= ========
December 31, 1996:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 3,695 $ 7 $ (78) $ 3,624
Obligations of states and political subdivisions 269 -- (2) 267
Debt securities issued by foreign governments 6,129 133 (8) 6,254
Corporate securities 393,371 5,916 (1,824) 397,463
Mortgage-backed securities 236,839 4,621 (992) 240,468
-------- -------- --------- --------
Total fixed maturity securities 640,303 10,677 (2,904) 648,076
Equity securities 10,854 1,540 (140) 12,254
-------- -------- --------- --------
$651,157 $ 12,217 $ (3,044) $660,330
======== ======== ========= ========
</TABLE>
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 1997, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
cost fair value
---- ----------
<S> <C> <C>
Fixed maturity securities available-for-sale:
Due in one year or less $ 31,421 $ 31,623
Due after one year through five years 231,670 235,764
Due after five years through ten years 175,633 180,174
Due after ten years 56,021 57,782
-------- --------
494,745 505,343
Mortgage-backed securities 285,224 291,576
-------- --------
$779,969 $796,919
======== ========
</TABLE>
<PAGE> 10
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
The components of unrealized gains on securities available-for-sale,
net, were as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Gross unrealized gains $20,013 $ 9,173
Adjustment to deferred policy acquisition costs (8,985) (4,207)
Deferred federal income tax (3,860) (1,738)
------- -------
$ 7,168 $ 3,228
======= =======
</TABLE>
An analysis of the change in gross unrealized gains (losses) on
securities available-for-sale and fixed maturity securities
held-to-maturity follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Securities available-for-sale:
Fixed maturity securities $ 9,177 $(8,764) $30,647
Equity securities 1,663 249 1,283
Fixed maturity securities held-to-maturity -- -- 3,941
------- ------- -------
$10,840 $(8,515) $35,871
======= ======= =======
</TABLE>
Proceeds from the sale of securities available-for-sale during 1997,
1996 and 1995 were $30,431, $2,480 and $3,070, respectively. During
1997, gross gains of $825 ($181 and $64 in 1996 and 1995, respectively)
and gross losses of $1,124 (none and $6 in 1996 and 1995, respectively)
were realized on those sales. See note 11.
During 1995, the Company transferred fixed maturity securities
classified as held-to-maturity with amortized cost of $2,000 to
available-for-sale securities due to evidence of a significant
deterioration in the issuer's creditworthiness. The transfer of those
fixed maturity securities resulted in a gross unrealized loss of $600.
As permitted by the Financial Accounting Standards Board's Special
Report, A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities, issued in November
1995, the Company transferred all of its fixed maturity securities
previously classified as held-to-maturity to available-for-sale. As of
December 14, 1995, the date of transfer, the fixed maturity securities
had amortized cost of $77,405, resulting in a gross unrealized gain of
$1,709.
The Company had no investments in mortgage loans on real estate
considered to be impaired as of December 31, 1997. The recorded
investment of mortgage loans on real estate considered to be impaired
as of December 31, 1996 was $955, for which the related valuation
allowance was $184. During 1997, the average recorded investment in
impaired mortgage loans on real estate was approximately $386 ($964 in
1996) and no interest income was recognized on those loans ($16 in
1996), which is equal to interest income recognized using a cash-basis
method of income recognition.
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Allowance, beginning of year $ 934 $750
(Reductions) additions charged to operations (53) 184
Direct write-downs charged against the allowance (131) --
----- ----
Allowance, end of year $ 750 $934
===== ====
</TABLE>
<PAGE> 11
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
Real estate is presented at cost less accumulated depreciation of $153
as of December 31, 1997 ($108 as of December 31, 1996) and valuation
allowances of $229 as of December 31, 1997 ($229 as of December 31,
1996).
The Company has no investments which were non-income producing for the
twelve month periods preceding December 31, 1997 and 1996.
An analysis of investment income by investment type follows for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $53,491 $40,552 $35,093
Equity securities 375 598 713
Fixed maturity securities held-to-maturity -- -- 4,530
Mortgage loans on real estate 14,862 9,991 9,106
Real estate 318 214 273
Short-term investments 899 507 348
Other 90 57 41
------- ------- -------
Total investment income 70,035 51,919 50,104
Less:
Investment expenses 1,386 874 996
Net investment income ceded (note 11) 57,072 -- --
------- ------- -------
Net investment income $11,577 $51,045 $49,108
======= ======= =======
</TABLE>
An analysis of realized gains (losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fixed maturity securities available-for-sale $(299) $ 181 $(822)
Mortgage loans on real estate 53 (184) 110
Real estate and other -- -- 10
----- ----- -----
$(246) $ (3) $(702)
===== ===== =====
</TABLE>
Fixed maturity securities with an amortized cost of $3,383 and $3,403
as of December 31, 1997 and 1996, respectively, were on deposit with
various regulatory agencies as required by law.
(4) Future Policy Benefits
The liability for future policy benefits for investment contracts has
been established based on policy terms, interest rates and various
contract provisions. The average interest rate credited on investment
product policies was approximately 5.1%, 5.6% and 5.6% for the years
ended December 31, 1997, 1996 and 1995, respectively.
<PAGE> 12
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
(5) Federal Income Tax
The Company's current federal income tax liability was $806 and $7,914
as of December 31, 1997 and 1996, respectively.
The tax effects of temporary differences that give rise to significant
components of the net deferred tax asset (liability) as of December 31,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Future policy benefits $ 13,168 $ 1,070
Liabilities in Separate Accounts 8,080 5,311
Mortgage loans on real estate and real estate 336 407
Other assets and other liabilities 48 3,836
-------- -------
Total gross deferred tax assets 21,632 10,624
-------- -------
Deferred tax liabilities:
Fixed maturity securities 7,186 3,268
Deferred policy acquisition costs 6,159 2,131
Equity securities 1,072 490
Other 7,892 --
-------- -------
Total gross deferred tax liabilities 22,309 5,889
-------- -------
$ (677) $ 4,735
======== =======
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion of the
total gross deferred tax assets will not be realized. All future
deductible amounts can be offset by future taxable amounts or recovery
of federal income tax paid within the statutory carryback period. The
Company has determined that valuation allowances are not necessary as
of December 31, 1997, 1996 and 1995 based on its analysis of future
deductible amounts.
Federal income tax expense for the years ended Decmber 31 was as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Currently payable $2,458 $ 9,612 $2,012
Deferred tax expense (benefit) 3,291 (6,905) 361
------ ------- ------
$5,749 $ 2,707 $2,373
====== ======= ======
</TABLE>
Total federal income tax expense for the years ended December 31, 1997,
1996 and 1995 differs from the amount computed by applying the U.S.
federal income tax rate to income before tax as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ---------------- ----------------
Amount % Amount % Amount %
------------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Computed (expected) tax expense $5,723 35.0 $2,728 35.0 $2,501 35.0
Tax exempt interest and dividends
received deduction -- (0.0) (175) (2.3) (150) (2.1)
Other, net 26 (0.2) 154 2.0 22 0.3
------ ---- ------ ---- ------ ----
Total (effective rate of each year) $5,749 35.2 $2,707 34.7 $2,373 33.2
====== ==== ====== ==== ====== ====
</TABLE>
Total federal income tax paid was $9,566, $2,335 and $1,314 during the
years ended December 31, 1997, 1996 and 1995, respectively.
<PAGE> 13
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
(6) Fair Value of Financial Instruments
The following disclosures summarize the carrying amount and estimated
fair value of the Company's financial instruments. Certain assets and
liabilities are specifically excluded from the disclosure requirements
of financial instruments. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The fair value of a financial instrument is defined as the amount at
which the financial instrument could be exchanged in a current
transaction between willing parties. In cases where quoted market
prices are not available, fair value is based on estimates using
present value or other valuation techniques. Many of the Company's
assets and liabilities subject to the disclosure requirements are not
actively traded, requiring fair values to be estimated by management
using present value or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Although fair value estimates
are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in the immediate settlement of the instruments.
Although insurance contracts, other than policies such as annuities
that are classified as investment contracts, are specifically exempted
from the disclosure requirements, estimated fair value of policy
reserves on life insurance contracts is provided to make the fair value
disclosures more meaningful.
The tax ramifications of the related unrealized gains and losses can
have a significant effect on fair value estimates and have not been
considered in the estimates.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
Fixed maturity and equity securities: The fair value for fixed
maturity securities is based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair
value is estimated using values obtained from independent pricing
services or, in the case of private placements, is 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 value for equity securities is based on
quoted market prices.
Mortgage loans on real estate: The fair value for mortgage loans
on real estate is estimated using discounted cash flow analyses,
using interest rates currently being offered for similar loans to
borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Fair value for mortgages in default is the estimated fair value of
the underlying collateral.
Policy loans, short-term investments and cash: The carrying amount
reported in the balance sheets for these instruments approximates
their fair value.
Separate Account assets and liabilities: The fair value of assets
held in Separate Accounts is based on quoted market prices. The
fair value of liabilities related to Separate Accounts is the
amount payable on demand, which includes certain surrender
charges.
Investment contracts: The fair value for the Company's liabilities
under investment type contracts is disclosed using two methods.
For investment contracts without defined maturities, fair value is
the amount payable on demand. For investment contracts with known
or determined maturities, fair value is estimated using discounted
cash flow analysis. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining
for the contracts being valued.
<PAGE> 14
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
Policy reserves on life insurance contracts: The estimated fair
value is the amount payable on demand. Also included are
disclosures for the Company's limited payment policies, which the
Company has used discounted cash flow analyses similar to those
used for investment contracts with known maturities to estimate
fair value.
Commitments to extend credit: Commitments to extend credit have
nominal value because of the short-term nature of such
commitments. See note 7.
Carrying amount and estimated fair value of financial instruments
subject to disclosure requirements and policy reserves on life
insurance contracts were as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------ -----------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------------------ -----------------------
<S> <C> <C> <C> <C>
Assets:
Investments:
Securities available-for-sale:
Fixed maturity securities $796,919 $796,919 $648,076 $648,076
Equity securities 14,767 14,767 12,254 12,254
Mortgage loans on real estate, net 218,852 229,881 150,997 152,496
Policy loans 215 215 126 126
Short-term investments 18,968 18,968 492 492
Cash 5,163 5,163 4,296 4,296
Assets held in Separate Accounts 891,101 891,101 486,251 486,251
Liabilities
Investment contracts 980,263 950,105 75,417 72,262
Policy reserves on life insurance contracts 5,928 6,076 5,303 5,390
Liabilities related to Separate Accounts 891,101 868,056 486,251 471,125
</TABLE>
(7) Risk Disclosures
The following is a description of the most significant risks facing
life insurers and how the Company mitigates those risks:
Legal/Regulatory Risk: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased
competition, reduced demand for a company's products, or create
additional expenses not anticipated by the insurer in pricing its
products. The Company mitigates this risk by operating throughout the
United States, thus reducing its exposure to any single jurisdiction,
and also by employing underwriting practices which identify and
minimize the adverse impact of this risk.
Credit Risk: The risk that issuers of securities owned by the Company
or mortgagors on mortgage loans on real estate owned by the Company
will default or that other parties which owe the Company money, will
not pay. The Company minimizes this risk by adhering to a conservative
investment strategy, by maintaining credit and collection policies and
by providing for any amounts deemed uncollectible.
<PAGE> 15
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
Interest Rate Risk: The risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in
rates may cause certain interest-sensitive products to become
uncompetitive or may cause disintermediation. The Company mitigates
this risk by charging fees for non-conformance with certain policy
provisions, by offering products that transfer this risk to the
purchaser, and/or by attempting to match the maturity schedule of its
assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would
have to borrow funds or sell assets prior to maturity and potentially
recognize a gain or loss.
Financial Instruments with Off-Balance-Sheet Risk: The Company is a
party to financial instruments with off-balance-sheet risk in the
normal course of business through management of its investment
portfolio. These financial instruments include commitments to extend
credit in the form of loans. These instruments involve, to varying
degrees, elements of credit risk in excess of amounts recognized on the
balance sheets.
Commitments to fund fixed rate mortgage loans on real estate are
agreements to lend to a borrower, and are subject to conditions
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment
of a deposit. Commitments extended by the Company are based on
management's case-by-case credit evaluation of the borrower and the
borrower's loan collateral. The underlying mortgage property represents
the collateral if the commitment is funded. The Company's policy for
new mortgage loans on real estate is to lend no more than 75% of
collateral value. Should the commitment be funded, the Company's
exposure to credit loss in the event of nonperformance by the borrower
is represented by the contractual amounts of these commitments less the
net realizable value of the collateral. The contractual amounts also
represent the cash requirements for all unfunded commitments.
Commitments on mortgage loans on real estate of $61,200 extending into
1998 were outstanding as of December 31, 1997. The Company also had
$4,000 of commitments to purchase fixed maturity securities as of
December 31, 1997.
Significant Concentrations of Credit Risk: The Company grants mainly
commercial mortgage loans on real estate to customers throughout the
United States. The Company has a diversified portfolio with no more
than 29% (31% in 1996) in any geographic area and no more than 3% (5%
in 1996) with any one borrower as of December 31, 1997. As of December
31, 1997 37% (42% in 1996) of the remaining principal balance of the
Company's commercial mortgage loan portfolio financed apartment
building properties.
(8) Pension Plan
The Company is a participant, together with other affiliated companies,
in a pension plan covering all employees who have completed at least
one year of service. Benefits are based upon the highest average annual
salary of a specified number of consecutive years of the last ten years
of service. The Company funds an allocation of pension costs accrued
for employees of affiliates whose work efforts benefit the Company.
Effective January 1, 1995, the plan was amended to provide enhanced
benefits for participants who met certain eligibility requirements and
elected early retirement no later than March 15, 1995. The entire cost
of the enhanced benefit was borne by NMIC and certain of its property
and casualty insurance company affiliates.
Effective December 31, 1995, the Nationwide Insurance Companies and
Affiliates Retirement Plan was merged with the Farmland Mutual
Insurance Company Employees' Retirement Plan and the Wausau Insurance
Companies Pension Plan to form the Nationwide Insurance Enterprise
Retirement Plan (the Retirement Plan). Immediately prior to the merger,
the plans were amended to provide consistent benefits for service after
January 1, 1996. These amendments had no significant impact on the
accumulated benefit obligation or projected benefit obligation as of
December 31, 1995.
Pension costs charged to operations by the Company during the years
ended December 31, 1997, 1996 and 1995 were $257, $189 and $214,
respectively.
<PAGE> 16
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
The net periodic pension cost for the Retirement Plan as a whole for
the years ended December 31, 1997 and 1996 and for the Nationwide
Insurance Companies and Affiliates Retirement Plan as a whole for the
year ended December 31, 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 77,303 $ 75,466 $ 64,524
Interest cost on projected benefit obligation 118,556 105,511 95,283
Actual return on plan assets (327,965) (210,583) (249,294)
Net amortization and deferral 196,366 101,795 143,353
--------- --------- ---------
$ 64,260 $ 72,189 $ 53,866
========= ========= =========
</TABLE>
Basis for measurements, net periodic pension cost:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate 6.50% 6.00% 7.50%
Rate of increase in future compensation levels 4.75% 4.25% 6.25%
Expected long-term rate of return on plan assets 7.25% 6.75% 8.75%
</TABLE>
Information regarding the funded status of the Retirement Plan as a
whole as of December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accumulated benefit obligation:
Vested $1,547,462 $1,338,554
Nonvested 13,531 11,149
---------- ----------
$1,560,993 $1,349,703
========== ==========
Net accrued pension expense:
Projected benefit obligation for services rendered to date $2,033,761 $1,847,828
Plan assets at fair value 2,212,848 1,947,933
---------- ----------
Plan assets in excess of projected benefit obligation 179,087 100,105
Unrecognized prior service cost 34,658 37,870
Unrecognized net gains (330,656) (201,952)
Unrecognized net asset at transition 33,337 37,158
---------- ----------
$ (83,574) $ (26,819)
========== ==========
</TABLE>
Basis for measurements, funded status of plan:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Weighted average discount rate 6.00% 6.50%
Rate of increase in future compensation levels 4.25% 4.75%
</TABLE>
Assets of the Retirement Plan are invested in group annuity contracts
of NLIC and Employers Life Insurance Company of Wausau, an affiliate.
<PAGE> 17
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
(9) Postretirement Benefits Other Than Pensions
In addition to the defined benefit pension plan, the Company, together
with other affiliated companies, participates in life and health care
defined benefit plans for qualifying retirees. Postretirement life and
health care benefits are contributory and generally available to full
time employees who have attained age 55 and have accumulated 15 years
of service with the Company after reaching age 40. Postretirement
health care benefit contributions are adjusted annually and contain
cost-sharing features such as deductibles and coinsurance. In addition,
there are caps on the Company's portion of the per-participant cost of
the postretirement health care benefits. These caps can increase
annually, but not more than three percent. The Company's policy is to
fund the cost of health care benefits in amounts determined at the
discretion of management. Plan assets are invested primarily in group
annuity contracts of NLIC.
The Company elected to immediately recognize its estimated accumulated
postretirement benefit obligation (APBO), however, certain affiliated
companies elected to amortize their initial transition obligation over
periods ranging from 10 to 20 years.
The Company's accrued postretirement benefit expense as of December 31,
1997 and 1996 was $891 and $840, respectively, and the net periodic
postretirement benefit cost (NPPBC) for 1997, 1996 and 1995 was $94,
$78 and $66, respectively.
Information regarding the funded status of the plan as a whole as of
December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accrued postretirement benefit expense:
Retirees $ 93,327 $ 92,954
Fully eligible, active plan participants 31,580 23,749
Other active plan participants 112,951 83,986
--------- ---------
Accumulated postretirement benefit obligation 237,858 200,689
Plan assets at fair value 69,165 63,044
--------- ---------
Plan assets less than accumulated postretirement
benefit obligation (168,693) (137,645)
Unrecognized transition obligation of affiliates 1,481 1,654
Unrecognized net gains 1,576 (23,225)
--------- ---------
$(165,636) $(159,216)
========= =========
</TABLE>
The amount of NPPBC for the plan as a whole for the years ended
December 31, 1997, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost (benefits attributed to employee
service during the year) $ 7,077 $ 6,541 $ 6,235
Interest cost on accumulated postretirement
benefit obligation 14,029 13,679 14,151
Actual return on plan assets (3,619) (4,348) (2,657)
Amortization of unrecognized transition
obligation of affiliates 173 173 2,966
Net amortization and deferral (528) 1,830 (1,619)
------- ------- -------
$17,132 $17,875 $19,076
======= ======= =======
</TABLE>
<PAGE> 18
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
Actuarial assumptions used for the measurement of the APBO as of
December 31, 1997, 1996 and 1995 and the NPPBC for 1997, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
APBO:
Discount rate 6.70% 7.25% 6.75%
Assumed health care cost trend rate:
Initial rate 12.13% 11.00% 11.00%
Ultimate rate 6.12% 6.00% 6.00%
Uniform declining period 12 Years 12 Years 12 Years
NPPBC:
Discount rate 7.25% 6.65% 8.00%
Long term rate of return on plan assets, net of tax 5.89% 4.80% 8.00%
Assumed health care cost trend rate:
Initial rate 11.00% 11.00% 10.00%
Ultimate rate 6.00% 6.00% 6.00%
Uniform declining period 12 Years 12 Years 12 Years
</TABLE>
For the plan as a whole, a one percentage point increase in the assumed
health care cost trend rate would increase the APBO as of December 31,
1997 by $410 and the NPPBC for the year ended December 31, 1997 by $46.
(10) Regulatory Risk-Based Capital and Dividend Restriction
Ohio, the Company's state of domicile, imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level
risk-based capital, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. The Company exceeds the
minimum risk-based capital requirements.
The statutory capital shares and surplus of the Company as reported to
regulatory authorities as of December 31, 1997, 1996 and 1995 was
$74,820, $71,390 and $54,978, respectively. The statutory net income of
the Company as reported to regulatory authorities for the years ended
December 31, 1997, 1996 and 1995 was $7,446, $670 and $8,023,
respectively.
The Company is limited in the amount of shareholder dividends it may
pay without prior approval by the Department. As of December 31, 1997,
the maximum amount available for dividend payment from the Company to
its shareholder without prior approval of the Department was $7,482.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and stockholder dividends
in the future.
<PAGE> 19
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
(11) Transactions With Affiliates
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 1997, 1996 and 1995, the
Company made lease payments to NMIC and its subsidiaries of $703, $410
and $287, respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its
direct and indirect subsidiaries, including the Company, NMIC provides
certain operational and administrative services, such as sales support,
advertising, personnel and general management services, to those
subsidiaries. Expenses covered by this agreement are subject to
allocation among NMIC, the Company and other affiliates. Amounts
allocated to the Company were $2,564, $2,682 and $2,596 in 1997, 1996
and 1995, respectively. The allocations are based on techniques and
procedures in accordance with insurance regulatory guidelines. Measures
used to allocate expenses among companies include individual employee
estimates of time spent, special cost studies, salary expense,
commissions expense and other methods agreed to by the participating
companies that are within industry guidelines and practices. The
Company believes these allocation methods are reasonable. In addition,
the Company does not believe that expenses recognized under the
inter-company agreements are materially different than expenses that
would have been recognized had the Company operated on a stand alone
basis. Amounts payable to NMIC from the Company under the cost sharing
agreement were $4,981 and $2,275 as of December 31, 1997 and 1996,
respectively.
Effective December 31, 1996, the Company entered into an intercompany
reinsurance agreement with NLIC whereby certain inforce and
subsequently issued fixed individual deferred annuity contracts are
ceded on a 100% coinsurance with funds withheld basis. On December 31,
1997, the agreement was amended to a modified coinsurance basis. Under
modified coinsurance agreements, invested assets and liabilities for
future policy benefits are retained by the ceding company and net
investment earnings on the invested assets are paid to the assuming
company. Under terms of the Company's agreement, the investment risk
associated with changes in interest rates is borne by NLIC. Risk of
asset default is retained by the Company, although a fee is paid by
NLIC to the Company for the Company's retention of such risk. The
agreement will remain inforce until all contract obligations are
settled. The ceding of risk does not discharge the original insurer
from its primary obligation to the contractholder. The Company believes
that the terms of the modified coinsurance agreement are consistent in
all material respects with what the Company could have obtained with
unaffiliated parties. Amounts ceded to NLIC in 1997 are included in
NLIC's results of operations for 1997 and include premiums of $300,617,
net investment income of $57,072 and benefits, claims and other
expenses of $343,426.
Under the 100% coinsurance with funds withheld agreement, the Company
recorded a liability equal to the amount due to NLIC as of December 31,
1996 for $679,571, which represents the future policy benefits of the
fixed individual deferred annuity contracts ceded. In consideration for
the initial inforce business reinsured, NLIC paid the Company $26,473
in commission and expense allowances which were applied to the
Company's deferred policy acquisition costs as of December 31, 1996. No
significant gain or loss was recognized as a result of the agreement.
During 1997, the Company sold fixed maturity securities
available-for-sale at fair value of $27,253 to NLIC. The Company
recognized a $693 gain on the transactions.
The Company and various affiliates entered into agreements with
Nationwide Cash Management Company (NCMC), an affiliate, under which
NCMC acts as common agent in handling the purchase and sale of
short-term securities for the respective accounts of the participants.
Amounts on deposit with NCMC were $18,968 and $492 as of December 31,
1997 and 1996, respectively, and are included in short-term investments
on the accompanying balance sheets.
Certain annuity products are sold through an affiliated company. Total
commissions paid to the affiliate for the three years ended December
31, 1997 were $8,053, $14,644 and $5,949, respectively.
<PAGE> 20
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY
(a wholly owned subsidiary of Nationwide Life Insurance Company)
Notes to Financial Statements, Continued
(12) Segment Information
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. The Variable Annuities segment consists
of annuity contracts that provide the customer with the opportunity to
invest in mutual funds managed by an affiliated company and independent
investment managers, with the investment returns accumulating on a
tax-deferred basis. The Fixed Annuities segment consists of annuity
contracts that generate a return for the customer at a specified
interest rate, fixed for a prescribed period, with returns accumulating
on a tax-deferred basis. The Fixed Annuities segment also includes the
fixed option under the Company's variable annuity contracts. The Life
Insurance segment consists of insurance products that provide a death
benefit and may also allow the customer to build cash value on a
tax-deferred basis. In addition, the Company reports corporate expenses
and investments, and the related investment income supporting capital
not specifically allocated to its product segments in a Corporate and
Other segment. In addition, all realized gains and losses are reported
in the Corporate and Other segment.
The following table summarizes the revenues and income (loss) before
federal income tax expense for the years ended December 31, 1997, 1996
and 1995 and assets as of December 31, 1997, 1996 and 1995, by segment.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Variable Annuities $ 9,950 $ 4,591 $ 2,927
Fixed Annuities 7,752 51,643 50,056
Life Insurance 182 165 185
Corporate and Other 6,111 1,545 234
----------- ----------- ---------
$ 23,995 $ 57,944 $ 53,402
=========== =========== =========
Income (loss) before federal income tax expense:
Variable Annuities $ 7,267 $ 1,094 $ 1,196
Fixed Annuities 3,202 5,156 5,633
Life Insurance (228) (1) (381)
Corporate and Other 6,111 1,544 699
----------- ----------- ---------
$ 16,352 $ 7,793 $ 7,147
=========== =========== =========
Assets:
Variable Annuities $ 925,021 $ 503,111 $ 267,097
Fixed Annuities 989,116 787,682 643,313
Life Insurance 2,228 2,597 2,665
Corporate and Other 88,933 73,031 54,507
----------- ----------- ---------
$ 2,005,298 $ 1,366,421 $ 967,582
=========== =========== =========
</TABLE>
