P R O S P E C T U S
August 6, 1999
LEGACY BUILDER II(SM)
issued through
Legacy Builder Variable Life Separate Account
by
PFL Life Insurance Company
4333 Edgewood Road NE
Cedar Rapids, Iowa 52499-0001
1-800-525-6205
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY JOINT
SURVIVORSHIP MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
CONSIDER CAREFULLY THE RISK FACTORS
BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
An investment in this Policy is not a bank
deposit. The Policy is not insured or
guaranteed by the Federal Deposit
Insurance Corporation or any other
government agency.
Prospectuses for the portfolios of:
[ ] AIM Variable Insurance Funds, Inc.
THE SECURITIES AND EXCHANGE [ ] Dreyfus Stock Index Fund
COMMISSION HAS NOT APPROVED [ ] Dreyfus Variable Investment Fund
OR DISAPPROVED THESE SECURITIES [ ] MFS Variable Insurance Trust
OR PASSED UPON THE ADEQUACY [ ] Oppenheimer Variable Account Funds and
OF THIS PROSPECTUS. ANY [ ] WRL Series Fund, Inc.
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE. must accompany this prospectus. Certain
portfolios may not be available in all
states. Please read these documents
before investing and save them for future
reference.
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Glossary .............................................................. 1
Policy Summary ........................................................ 4
Risk Summary .......................................................... 9
Portfolio Annual Expense Table ........................................ 13
PFL and the Fixed Account ............................................. 14
PFL Life Insurance Company ........................................ 14
The Fixed Account Options ......................................... 14
The Separate Account and the Portfolios ............................... 15
The Separate Account .............................................. 15
The Portfolios .................................................... 15
Addition, Deletion, or Substitution of Investments ................ 19
Your Right to Vote Portfolio Shares ............................... 20
The Policy ............................................................ 20
Purchasing a Policy ............................................... 20
Underwriting Standards ............................................ 21
When Insurance Coverage Takes Effect .............................. 21
Ownership Rights .................................................. 22
Policy Split Option ............................................... 24
Canceling a Policy ................................................ 25
Premiums .............................................................. 26
Initial Premium ................................................... 26
Additional Premiums ............................................... 27
Allocating Premiums ............................................... 27
Policy Values ......................................................... 29
Cash Value ........................................................ 29
Net Surrender Value ............................................... 29
Subaccount Value .................................................. 29
Subaccount Unit Value ............................................. 29
Fixed Account Value ............................................... 30
Transfers ............................................................. 30
General ........................................................... 30
Standard Fixed Account Transfers .................................. 32
Conversion Rights ................................................. 32
Standard Dollar Cost Averaging .................................... 32
Fixed DCA Account ................................................. 33
Asset Rebalancing Program ......................................... 34
Third Party Asset Allocation Services ............................. 35
Charges and Deductions ................................................ 35
Premium Deductions ................................................ 36
Monthly Deduction ................................................. 36
Daily Charge ...................................................... 37
Surrender Charge .................................................. 39
Transfer Charge ................................................... 39
Portfolio Expenses ................................................ 39
Guaranteed Minimum Death Benefit Rider Charge ..................... 40
Death Benefit ......................................................... 40
Death Benefit Proceeds ............................................ 40
Death Benefit ..................................................... 40
Effects of Partial Withdrawals on the Death Benefit ............... 41
This Policy is not available in all states
i
<PAGE>
Guaranteed Minimum Death Benefit Rider ............................ 41
Changing the Specified Amount ..................................... 42
Payment Options ................................................... 42
Surrenders and Partial Withdrawals .................................... 42
Surrenders ........................................................ 42
Partial Withdrawals ............................................... 42
Loans ................................................................. 43
General ........................................................... 43
Interest Rate Charged ............................................. 44
Loan Reserve Interest Rate Credited ............................... 45
Preferred Loans ................................................... 45
Effect of Policy Loans ............................................ 45
Policy Lapse and Reinstatement ........................................ 46
Lapse ............................................................. 46
Reinstatement ..................................................... 46
Federal Income Tax Considerations ..................................... 47
Tax Status of the Policy .......................................... 47
Tax Treatment of Policy Benefits .................................. 48
Other Policy Information .............................................. 50
Our Right to Contest the Policy ................................... 50
Suicide Exclusion ................................................. 50
Misstatement of Age or Gender ..................................... 50
Modifying the Policy .............................................. 50
Benefits at Maturity .............................................. 51
Payments We Make .................................................. 51
Reports to Owners ................................................. 52
Records ........................................................... 52
Policy Termination ................................................ 52
IMSA .................................................................. 52
Performance Data ...................................................... 52
Rates of Return ................................................... 52
Hypothetical Illustrations Based on Adjusted Portfolio Performance 53
Other Performance Data in Advertising Sales Literature ............ 64
PFL's Published Ratings ........................................... 64
Additional Information ................................................ 65
Sale of the Policies .............................................. 65
Legal Matters ..................................................... 65
Legal Proceedings ................................................. 65
Variations in Policy Provisions ................................... 65
Year 2000 Readiness Disclosure .................................... 65
Experts ........................................................... 66
Financial Statements .............................................. 66
Additional Information about PFL .................................. 66
PFL's Executive Directors and Officers ............................ 67
Additional Information about the Separate Account ................. 68
Appendix A -- Illustrations ........................................... 69
Appendix B -- Wealth Indices of Investments in the U.S. Capital Market 75
Appendix C -- Surrender Charge Table .................................. 77
Index to Financial Statements ......................................... 79
PFL Life Insurance Company ........................................ 80
ii
<PAGE>
GLOSSARY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
accounts The options to which you can allocate your money. The
accounts include the standard fixed account, the fixed DCA
account and the subaccounts in the separate account.
------------------------------------------------------------
age The age of the person insured on his or her last birthday
before the Policy date, plus the number of completed years
since the Policy date.
------------------------------------------------------------
beneficiary(ies) The person or persons you select to receive the death
benefit from this Policy. You name the primary beneficiary
and contingent beneficiaries.
------------------------------------------------------------
cash value The sum of your Policy's value in the subaccounts and the
fixed account options. If there is a Policy loan
outstanding, the cash value includes any amounts held in our
general account to secure the Policy loan.
------------------------------------------------------------
daily charge The amount we deduct each valuation date from assets in the
subaccounts as part of the calculation of the unit value for
each subaccount.
------------------------------------------------------------
death benefit The amount we will pay to the beneficiary on the insured's
proceeds (or surviving insured's) death. We will reduce the death
benefit proceeds by the amount of any outstanding loan
amount (including any interest you owe on the Policy
loan(s)), and plus any due and unpaid monthly deductions.
------------------------------------------------------------
fixed account A set of options to which you may allocate premiums and cash
options value. We guarantee that any amounts you allocate to the
fixed account options will earn interest at a declared rate.
The fixed account options are the standard fixed account and
the fixed dollar cost averaging account ("fixed DCA
account").
------------------------------------------------------------
free look period The period during which you may return the Policy and
receive a refund as described in this prospectus. The length
of the free look period varies by state. The free look
period is listed in the Policy.
------------------------------------------------------------
funds Investment companies which are registered with the U.S.
Securities and Exchange Commission. The Policy allows you to
invest in the portfolios of the funds through our
subaccounts.
------------------------------------------------------------
in force While coverage under the Policy is active and the insured's
life remains insured.
------------------------------------------------------------
initial premium The amount you must pay before insurance coverage begins
under this Policy. The initial premium is shown on the
schedule page of your Policy.
------------------------------------------------------------
insured(s) The person or persons whose lives are insured by this
(joint insureds) Policy.
------------------------------------------------------------
Joint Policy A Policy that pays the death benefit to the beneficiary on
the death of the last-to-die of the two named insureds.
------------------------------------------------------------
1
<PAGE>
lapse When life insurance coverage ends because you do not have
enough cash value in the Policy to pay the monthly
deduction, the surrender charge and any outstanding loan
amount (including any interest you owe on the Policy
loan(s)), and you have not made a sufficient payment by the
end of a grace period. The Policy will not lapse if you have
purchased the Guaranteed Minimum Death Benefit rider and the
rider is in effect.
------------------------------------------------------------
loan amount The total amount of all outstanding Policy loans, including
both principal and interest due.
------------------------------------------------------------
loan reserve A part of the general account to which amounts are
transferred as collateral for Policy loans.
------------------------------------------------------------
maturity date The Policy anniversary nearest the insured's (or younger
joint insured's) 100th birthday, if the insured (or either
joint insured) is living and the Policy is still in force.
It is the date when life insurance coverage under this
Policy ends. You may continue coverage, at your option,
under the Policy's extended maturity date benefit provision.
------------------------------------------------------------
monthly The same date each month as the Policy date. If there is no
anniversary or valuation date in the calendar month that coincides with the
Monthiversary Policy date, the Monthiversary is the next valuation date.
------------------------------------------------------------
monthly Policy The charge deducted from the cash value (less the loan
charge amount) on each Monthiversary.
------------------------------------------------------------
net surrender The amount we will pay you if you surrender the Policy while
value it is in force. The net surrender value on the date you
surrender is equal to: the cash value, minus any surrender
charge, and minus any outstanding loan amount (including any
interest you owe on Policy loan(s)).
------------------------------------------------------------
office Our administrative office and mailing address is P.O. Box
3183, Cedar Rapids, Iowa 52406-3183. Our street address is
4333 Edgewood Road NE, Cedar Rapids, Iowa 52499-0001. Our
phone number is 1-800-525-6205.
------------------------------------------------------------
Policy date The date when our underwriting process is complete, full
life insurance coverage goes into effect, we issue the
Policy, and we begin to deduct the monthly Policy charge.
The Policy date is shown on the schedule page of your
Policy. It is also the date when, depending on your state of
residence, we allocate your premium either to the
reallocation account or to the subaccounts and fixed account
options you selected on your application. We measure Policy
months, years, and anniversaries from the Policy date.
------------------------------------------------------------
portfolio One of the separate investment portfolios of a fund.
------------------------------------------------------------
premiums All payments you make under the Policy other than loan
repayments.
------------------------------------------------------------
reallocation The standard fixed account.
account
------------------------------------------------------------
2
<PAGE>
reallocation date The date shown on the schedule page of your Policy when we
reallocate any premium (plus interest) held in the
reallocation account to the subaccounts and fixed account
options you selected on your application. We place your
premium in the reallocation account only if your state
requires us to return the full premium in the event you
exercise your free look right. In all other states, the
reallocation date is the Policy date.
------------------------------------------------------------
separate The Legacy Builder Variable Life Separate Account. It is a
account separate investment account that is divided into
subaccounts. We established the separate account to receive
and invest premiums under the Policy and other variable life
insurance policies we may issue.
------------------------------------------------------------
specified amount The death benefit under the Policy, as shown on the Policy
schedule page. The specified amount varies by the insured's
(or joint insureds') age, gender and rate class. Any partial
withdrawal proportionately decreases the specified amount.
------------------------------------------------------------
subaccount A subdivision of the separate account that invests
exclusively in shares of one investment portfolio of a fund.
------------------------------------------------------------
surrender If, during the first nine Policy years, you fully surrender
charge the Policy, we will deduct a surrender charge from the cash
value.
------------------------------------------------------------
surviving insured The joint insured who remains alive after the other joint
insured has died.
------------------------------------------------------------
termination When the insured's (or either of the joint insured's) life
is no longer insured under the Policy.
------------------------------------------------------------
valuation date Each day the New York Stock Exchange is open for trading.
PFL is open for business whenever the New York Stock
Exchange is open.
------------------------------------------------------------
valuation The period of time over which we determine the change in the
period value of the subaccounts in order to price accumulation
units and annuity units. Each valuation period begins at the
close of normal trading on the New York Stock Exchange
(currently 4:00 p.m. Eastern time on each valuation date)
and ends at the close of normal trading of the New York
Stock Exchange on the next valuation date.
------------------------------------------------------------
we, us, our PFL Life Insurance Company.
(PFL)
------------------------------------------------------------
written notice The written notice you must sign and send us to request or
exercise your rights as owner under the Policy. To be
complete, it must: (1) be in a form we accept, (2) contain
the information and documentation that we determine we need
to take the action you request, and (3) be received at our
office.
------------------------------------------------------------
you, your The person(s) who owns the Policy, and who may exercise all
(owner(s) or rights under the Policy while the insured (or either or both
policyowner(s)) joint insureds) are living. If two owners are named, the
Policy will be owned jointly and the consent of
policyowner(s)) each owner will be required to exercise
ownership rights.
------------------------------------------------------------
3
<PAGE>
POLICY SUMMARY PFL LEGACY BUILDER II(SM)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The sections in this summary correspond to sections in this prospectus,
which discuss the topics in more detail.
THE POLICY IN GENERAL
The Legacy Builder II(SM) is a modified single premium variable life
insurance policy. You may purchase it either as a single life or a Joint Policy.
A Joint Policy insures two lives with a death benefit payable on the death of
the surviving insured. Joint insureds may be both male, both female or male and
female. The insured will be the surviving insured of the joint insureds stated
in the Policy.
The Policy is designed to be long-term in nature in order to provide
significant life insurance benefits for the insured(s) named in the Policy.
However, purchasing this Policy involves certain risks. (See Risk Summary, p.
9.) You should consider the Policy in conjunction with other insurance you own.
The Policy is not suitable as a short-term savings vehicle.
A few of the Policy features listed below are not available in all states,
may vary depending upon when your Policy was issued and may not be suitable for
your particular situation. Certain states place restrictions on some of the
Policy features. Please consult your agent and refer to your Policy for details.
PREMIUMS
o If the insured (or joint insureds) qualifies for simplified underwriting,
conditional life insurance coverage begins as soon as you complete an
application and pay an initial premium of at least $20,000. Once we
determine that the insured (or joint insureds) meets our underwriting
requirements, full insurance coverage begins and we will issue your Policy
and begin to deduct monthly and daily insurance charges from your premium.
This date is the Policy date. On that date, we will allocate your premium
to either the reallocation account or to the subaccounts and fixed account
options, depending on the state in which you live.
o If the insured qualifies for simplified underwriting, the maximum premium
you can pay at the time of your application is:
-- $50,000 (for ages 35-49)
-- $100,000 (for ages 50-80)
Other limits apply for Joint Policies and Policies with full underwriting.
o Once we deliver your Policy, the FREE LOOK PERIOD begins. You may return
the Policy during this period and receive a refund. Depending on your state
of residence, we will either allocate your premium to the accounts you
indicated on your application, or we will place your premium in the
reallocation account until the reallocation date. See Reallocation Account,
p. 28.
o We will accept additional premiums only in certain limited circumstances.
4
<PAGE>
DEDUCTIONS FROM PREMIUM BEFORE WE PLACE IT IN SUBACCOUNTS AND/OR FIXED ACCOUNT
OPTIONS
o From the initial premium: None
o From additional premiums: None
INVESTMENT OPTIONS
SUBACCOUNTS. You may direct the money in your Policy to any of the
subaccounts of the Legacy Builder Variable Life Separate Account. Each
subaccount invests exclusively in one investment portfolio of a fund. THE MONEY
YOU PLACE IN THE SUBACCOUNTS IS NOT GUARANTEED. THE VALUE OF EACH SUBACCOUNT
WILL INCREASE OR DECREASE, DEPENDING ON INVESTMENT PERFORMANCE OF THE
CORRESPONDING PORTFOLIO. YOU COULD LOSE SOME OR ALL OF YOUR MONEY.
The portfolios available to you are:
<TABLE>
<S> <C>
AIM VARIABLE INSURANCE FUNDS, INC. OPPENHEIMER VARIABLE ACCOUNT FUNDS
[ ] AIM V.I. Capital Appreciation Fund [ ] Oppenheimer Capital Appreciation Fund
[ ] AIM V.I. Government Securities Fund [ ] Oppenheimer Global Securities Fund
[ ] AIM V.I. Growth and Income Fund [ ] Oppenheimer High Income Fund
[ ] AIM V.I. Value Fund [ ] Oppenheimer Main Street Growth & Income
Fund
DREYFUS STOCK INDEX FUND [ ] Oppenheimer Strategic Bond Fund
DREYFUS VARIABLE INVESTMENT FUND WRL SERIES FUND, INC.
[ ] Dreyfus -- Money Market Portfolio
[ ] Dreyfus -- Small Company Stock [ ] WRL VKAM Emerging Growth
Portfolio [ ] WRL Janus Global
[ ] WRL Janus Growth
MFS VARIABLE INSURANCE TRUST
[ ] MFS Emerging Growth Series
[ ] MFS Research Series
[ ] MFS Total Return Series
[ ] MFS Utilities Series
</TABLE>
FIXED ACCOUNT OPTIONS. You may also direct the money in your Policy to the
fixed account options -- the standard fixed account option and the fixed dollar
cost averaging ("fixed DCA") account option. Money you place in the standard
fixed account option will earn interest at current interest rates declared from
time to time. The interest rate will equal at least 3.0%.
At the time you purchase the Policy, you may place the entire initial
premium into the fixed DCA account. Money you place in the fixed DCA account
will earn interest at an annual rate of at least 3.0%. Money will be transferred
out of the fixed DCA account in six equal monthly installments and placed in the
standard fixed account and the subaccounts of your choice.
5
<PAGE>
CASH VALUE
o Cash value equals the sum of your Policy's value in the subaccounts and the
fixed account options. If there is a loan outstanding, the cash value
includes any amounts held in our general account to secure the Policy loan.
o Cash value varies from day to day, depending on the investment experience
of the subaccounts you choose, the interest credited to the fixed account
options, the charges deducted and any other Policy transactions (such as
transfers, withdrawals, and Policy loans).
o Cash value is the starting point for calculating important values under the
Policy, such as net surrender value and the death benefit.
o There is no guaranteed minimum cash value. The Policy may lapse if you do
not have sufficient cash value in the Policy to pay the monthly Policy
charge(s), the surrender charge and/or any outstanding loan amount
(including interest you owe on any Policy loan(s)). The Policy will not
lapse if you have purchased the Guaranteed Minimum Death Benefit rider and
the rider is in effect.
TRANSFERS
o You can transfer cash value among the subaccounts and the standard fixed
account. We charge a $10 transfer processing fee for each transfer after
the first 12 transfers in a Policy year.
o You may make transfers by telephone or by fax.
o Policy loans reduce the amount of cash value available for transfers.
o Dollar cost averaging and asset rebalancing programs are available.
o You may make one transfer per Policy year from the standard fixed account
and we must receive your request within 30 days after a Policy anniversary,
unless you select dollar cost averaging from the standard fixed account.
The amount of your transfer cannot be more than the greater of:
-> 25% of the value in the standard fixed account; or
-> the amount transferred from the standard fixed account in the prior
Policy year.
CHARGES AND DEDUCTIONS
o Monthly Policy charge: Deducted from your cash value (reduced by the loan
amount) on the Policy date and on each Monthiversary. The monthly Policy
charge pays for Policy administrative expenses and the cost of providing
death benefits under the Policy. The monthly Policy charge will vary with
the gender of the insured(s), the number of insureds, and the number of
Policy years you have owned the Policy.
o Daily charge: Deducted from the unit value of each subaccount, at an annual
rate equal to 0.50%, on each valuation date.
o Cost of insurance charge: We reserve the right to charge a maximum monthly
cost of insurance charge. See Cost of Insurance Charge p. 38. We do not
currently assess a cost of insurance charge. If, in the future, we assess a
cost of insurance charge, then we will waive the surrender charge.
o Surrender charge: Deducted when a full surrender occurs during the first
nine Policy years. We deduct a declining surrender charge of up to 9.75% of
your initial premium if you surrender your Policy or if your Policy lapses
during the first nine Policy years.
6
<PAGE>
o Transfer fee: We deduct $10 for each transfer in excess of 12 per Policy
year.
o Portfolio expenses: The portfolios deduct management fees and expenses from
the amounts you have invested in the portfolios. These charges range from
0.26% to 1.01% annually, depending on the portfolio. See Portfolio Annual
Expense Table p. 13. See also the fund prospectuses.
o Rider charges: If you select the Guaranteed Minimum Death Benefit rider at
application, we will deduct a charge from your cash value (less any
outstanding Policy loan) each month equal to:
-> .02% MULTIPLIED BY the total subaccount values; PLUS
-> .02% MULTIPLIED BY the fixed account value.
LOANS
o You may take a loan against the Policy for amounts up to 90% of the cash
value, less any surrender charge and any outstanding loan amount.
o The minimum loan amount is generally $500.
o You may request a loan by calling us or by writing or faxing us written
instructions.
o We currently charge 6.0% interest annually, payable in arrears, on any
outstanding loan amount; a lower rate applies to any preferred loans.
o We currently permit preferred loans to be taken anytime. You may borrow an
amount equal to the cash value less total premiums paid, less any
outstanding loan amount. We currently charge a 3.0% preferred loan rate.
THIS RATE IS NOT GUARANTEED.
o To secure the loan, we transfer a portion of your cash value to a loan
reserve account, which is part of our general account. You will earn at
least 3.0% interest on amounts in the loan reserve account.
o Federal income taxes and a penalty tax may apply to loans you make against
the Policy.
o If you take a loan, we will terminate any Guaranteed Minimum Death Benefit
rider.
o There are risks involved in taking a Policy loan. See Risk Summary, p. 9.
DEATH BENEFIT
o So long as the Policy does not lapse, the death benefit is the greater of:
-> the current specified amount; or
-> the product of: the Policy's cash value on the date of the insured's
(or surviving insured's) death MULTIPLIED BY the specified percentage
shown on page 41 of this prospectus.
o We will reduce the death benefit proceeds by the amount of any outstanding
Policy loans (including any interest you owe on Policy loan(s)), and any
due and unpaid charges.
o We determine your Policy's specified amount based on:
-> the initial premium you pay; and
-> the insured's (or joint insureds') age, gender and rate class.
o You may not increase or decrease the specified amount.
o The death benefit should be income tax free to the beneficiary.
7
<PAGE>
o The death benefit is available in a lump sum or a variety of payout
options.
o If you purchase the GUARANTEED MINIMUM DEATH BENEFIT RIDER and the rider is
in effect, and if the net surrender value on any Monthiversary is not
sufficient to cover the monthly Policy charge, then insurance coverage will
be provided under this rider and no grace period will begin, so long as no
Policy loans have been taken under the Policy. If a death benefit is
payable under the provisions of this rider, then PFL guarantees to provide
a death benefit as follows:
(1) During the first 15 Policy years, or before the Policy
anniversary following the insured's (or younger joint insured's)
75th birthday, if sooner, the minimum death benefit payable will
be the greater of:
o the current specified amount; or
o the product of: the Policy's cash value on the date of the
insured's (or surviving insured's) death MULTIPLIED BY the
specified percentage shown on page 41.
(2) After the first 15 Policy years, or on or after the Policy
anniversary following the insured's (or younger joint insured's)
75th birthday, if sooner, the minimum death benefit payable will
be the initial premium, reduced, on a dollar-for-dollar basis, by
any partial withdrawals.
(3) The minimum death benefit will never be less than $1,000.
If you take a Policy loan, the Guaranteed Minimum Death Benefit rider will
terminate and your Policy could lapse.
o A partial withdrawal will reduce the specified amount by the amount of the
withdrawal multiplied by the ratio of the initial specified amount to the
initial premium.
PARTIAL WITHDRAWALS AND SURRENDERS
o You can take one withdrawal of cash value every 12 months after the first
Policy year.
o We do not assess any charges for partial withdrawals.
o The amount of the withdrawal is limited to your Policy's earnings which we
compute as:
the cash value, MINUS any outstanding Policy loans, MINUS any interest
you owe on Policy loans, and MINUS total premiums paid.
o A partial withdrawal reduces the current specified amount (the minimum
death benefit) by:
Amount of withdrawal X initial specified amount
------------------------
initial premium
o A partial withdrawal does not void a Guaranteed Minimum Death Benefit
rider, but it reduces the death benefit we would pay, as described above.
o You cannot take a partial withdrawal if it will reduce the specified amount
below $1,000.
o Federal income taxes and a penalty tax may apply to partial withdrawals and
surrenders.
o You may fully surrender the Policy at any time before the insured's (or
surviving insured's) death or the maturity date. You will receive the net
surrender value (cash value, minus any surrender charge, minus any Policy
loans outstanding, and minus any interest you owe on Policy loans). The
surrender charge will apply during the first nine Policy years.
8
<PAGE>
RISK SUMMARY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVESTMENT If you direct us to invest your cash value in one or more
RISK subaccounts, you will be subject to the risk that investment
performance will be unfavorable and that the cash value of
your Policy will decrease. If you select the fixed account
options, you are credited with a declared rate of interest,
but you assume a risk that the rate may decrease, although
it will never be lower than a guaranteed minimum annual
effective rate of 3.0%. Because charges continue to be
deducted from cash value, if withdrawals, loans and monthly
deductions have reduced your net surrender value to too low
an amount, and/or if investment experience of your selected
subaccounts is not sufficiently favorable, and/or interest
rates credited to the fixed account are too low, then the
net surrender value of your Policy may fall to zero. In that
case, if the Guaranteed Minimum Death Benefit rider is not
in effect, the Policy will lapse without value and insurance
coverage will no longer be in effect after 61 days, unless
you make an additional payment sufficient to prevent a
lapse. On the other hand, if investment experience is
sufficiently favorable and you have kept the Policy in force
for a substantial period of time, you may be able to draw
upon cash value, through partial withdrawals and Policy
loans.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RISK OF LAPSE Certain circumstances will cause your Policy to enter a
61-day grace period, during which you must make a sufficient
payment to keep your Policy in force. If the net surrender
value of your Policy (that is, the cash value, minus the
surrender charge and minus outstanding loan amounts) is too
low to pay a monthly Policy charge, loan charges and any
rider fees when due, and if the Guaranteed Minimum Death
Benefit rider is not in effect, then the Policy will be in
default and a grace period will begin. There is the risk
that if withdrawals, loans and monthly deductions reduce
your net surrender value to too low an amount and/or if the
investment experience of your selected subaccounts is not
sufficiently favorable and/or if interest rates credited to
the fixed account are too low, then the net surrender value
of your Policy may fall to zero and the Policy could lapse.
In that case, you will have a 61-day grace period to make a
sufficient payment. If we do not receive a sufficient
payment before the grace period ends, your Policy will end
without value, insurance coverage will no longer be in
effect, and you will receive no benefits. Adverse tax
consequences may result.
You may not reinstate your Policy after it has lapsed unless
you completed the Policy application and had your Policy
delivered to you in a state which permits reinstatement.
If so, then you may reinstate this Policy within five years
after it has lapsed if the insured (or joint insureds) meets
the insurability requirements and you pay the amount we
require.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9
<PAGE>
TAX RISKS It is reasonable to conclude that the Policy will be deemed
(INCOME TAX a life insurance Policy under federal tax law, so that the
AND MEC) death benefit paid to the beneficiary will not be subject to
federal income tax. However, the Policy has certain in-
novative features that are not addressed in existing legal
interpretations and there is, therefore, some risk that the
Policy might not be deemed a life insurance policy under
federal tax law. If the Policy is not so treated, annual
increases in the Policy's cash value will be subject to
federal income tax each year. Even if the Policy is treated
as a life insurance policy under the federal tax laws, the
Policy will, in most situations, be treated as a modified
endowment contract ("MEC") under those laws. If a Policy is
treated as a MEC, partial withdrawals, surrenders and loans
will be taxable as ordinary income to the extent of its
earnings in the Policy. In addition, a 10% penalty tax may
be imposed on partial withdrawals, surrenders and loans
taken before you reach age 59 1/2. If a Policy is treated as
a life insurance policy and is not treated as a MEC, partial
surrenders and withdrawals will not be subject to tax to the
extent of your investment in the Policy, and amounts in
excess of your investment in the Policy, while subject to
tax as ordinary income, will not be subject to a 10% penalty
tax. You should consult a qualified tax advisor for
assistance in all tax matters involving your Policy.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIMITS ON The Policy permits you to take only one partial withdrawal
PARTIAL in any 12-month period, after the first Policy year has been
WITHDRAWALS completed. The amount you may withdraw is limited to
earnings. We calculate earnings as cash value, reduced by
any outstanding loan amount (including any interest due on
Policy loans) and any premiums paid.
A partial withdrawal will reduce the specified amount (and
the minimum death benefit under the Guaranteed Minimum Death
Benefit rider) by:
Amount of withdrawal X initial specified amount
------------------------
initial premium
This reduction may be significant. However, in no event will
any withdrawal reduce the minimum death benefit under the
Guaranteed Minimum Death Benefit rider below $1,000.
Federal income taxes and a tax penalty may apply to partial
withdrawals and surrenders.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOAN RISKS A Policy loan, whether or not repaid, will affect cash
value over time because we subtract the amount of the loan
from the subaccounts and fixed account options and place
that amount in the loan reserve as collateral. We then
credit a fixed interest rate of 3.0% to the loan collateral.
As a result, the loan collateral does not participate in the
investment results of the subaccounts nor does it receive
the current interest rates credited to the fixed account
options.
10
<PAGE>
The longer the loan is outstanding, the greater the effect
is likely to be. Depending on the investment results of the
subaccounts and the interest rates credited to the fixed
account, the effect could be favorable or unfavorable.
We also charge interest on Policy loans at a rate of 6.0%
payable in arrears. Interest is added to the amount of the
loan to be repaid.
A Policy loan affects the death benefit because a loan
reduces the death benefit proceeds by the amount of the
outstanding loan, plus any interest you owe on Policy loans.
A Policy loan will terminate the Guaranteed Minimum Death
Benefit rider.
A Policy loan could make it more likely that a Policy would
lapse. There is a risk if the loan reduces your net
surrender value to too low an amount and investment
experience is unfavorable, that the Policy will lapse,
resulting in adverse tax consequences. You will have a
61-day grace period to submit a sufficient payment to avoid
the Policy's termination without value and the end of
insurance coverage. As mentioned in "Risk of Lapse" on p. 9,
you may only reinstate your Policy if your Policy was
delivered to you in a state which permits reinstatement.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EFFECTS OF THE The surrender charge under this Policy will reduce your cash
SURRENDER value if you surrender your Policy in the first nine Policy
CHARGE years. You should purchase this Policy only if you have the
financial ability to keep it in force at the initial
specified amount for a substantial period of time.
Even if you do not ask to surrender your Policy, the
surrender charge plays a role in determining whether your
Policy will lapse. Net surrender value (that is, cash value
minus the surrender charge and outstanding loans) is the
measure we use each month to determine whether your Policy
will remain in force or will lapse.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMPARISON Like fixed benefit life insurance, the Policy offers a death
WITH OTHER benefit and provides a cash value, loan privileges and a
INSURANCE value on surrender. However, the Policy differs from a fixed
POLICIES benefit policy because it allows you to place your premium
in investment subaccounts. The amount and duration of life
insurance protection and of the Policy's cash value will
vary with the investment performance of the amounts you
place in the subaccounts. In addition, the cash value and
net surrender value will always vary with the investment
experience of your selected subaccounts.
As you consider purchasing this Policy, keep in mind that it
may not be to your advantage to replace existing insurance
with the Policy.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11
<PAGE>
ILLUSTRATIONS The hypothetical illustrations in this prospectus are used
in connection with the purchase of a Policy and are based on
hypothetical rates of return. These rates are not
guaranteed, and are provided only to illustrate how the
specified amount, Policy charges and hypothetical rates of
return affect death benefit levels, cash value and net
surrender value of the Policy. We may also illustrate Policy
values based on the adjusted historical performance of the
portfolios since the portfolios' inception, reduced by
Policy and subaccount charges. The hypothetical and adjusted
historic portfolio rates illustrated should not be
considered to represent past or future performance. It is
almost certain that actual rates of return may be higher or
lower than those illustrated, so that the values under
your Policy will be different from those in the
illustrations.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
12
<PAGE>
PORTFOLIO ANNUAL EXPENSE TABLE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This table shows the fees and expenses charged by each portfolio. More detail
concerning each portfolio's fees and expenses is contained in the fund
prospectuses.
ANNUAL PORTFOLIO OPERATING EXPENSES
(As a percentage of average portfolio assets AFTER fee waivers and expense
reimbursements)
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER EXPENSES ANNUAL
PORTFOLIO FEES (AFTER REIMBURSEMENT) EXPENSES
--------- ---------- --------------------- --------
<S> <C> <C> <C>
AIM V.I. Capital Appreciation Fund 0.62% 0.05% 0.67%
AIM V.I. Government Securities Fund 0.50% 0.26% 0.76%
AIM V.I. Growth and Income Fund 0.61% 0.04% 0.65%
AIM V.I. Value Fund 0.61% 0.05% 0.66%
Dreyfus Stock Index Fund 0.25% 0.01% 0.26%
Dreyfus -- Money Market Portfolio 0.50% 0.06% 0.56%
Dreyfus -- Small Company Stock
Portfolio 0.75% 0.23% 0.98%
MFS Emerging Growth Series(1) 0.75% 0.10% 0.85%
MFS Research Series(1) 0.75% 0.11% 0.86%
MFS Total Return Series(1) 0.75% 0.16% 0.91%
MFS Utilities Series(1) 0.75% 0.26% 1.01%
Oppenheimer Capital Appreciation Fund 0.72% 0.03% 0.75%
Oppenheimer Global Securities Fund 0.68% 0.06% 0.74%
Oppenheimer High Income Fund 0.74% 0.04% 0.78%
Oppenheimer Main Street Growth
& Income Fund 0.74% 0.05% 0.79%
Oppenheimer Strategic Bond Fund 0.74% 0.06% 0.80%
WRL VKAM Emerging Growth(2) 0.80% 0.09% 0.89%
WRL Janus Global(2)(3) 0.80% 0.15% 0.95%
WRL Janus Growth(2)(4) 0.78% 0.05% 0.83%
</TABLE>
(1) Each series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series
with its custodian and dividend disbursing agent. Each series may enter
into other such arrangements and directed brokerage arrangements, which
would also have the effect of reducing the series' expenses. Expenses do
not take into account these expense reductions, and are therefore higher
than the actual expenses of the series.
(2) Effective January 1, 1997, the Board of the WRL Series Fund, Inc.
authorized the fund to charge each portfolio of the fund, including WRL
VKAM Emerging Growth, WRL Janus Growth, and WRL Janus Global, an annual
Rule 12b-1 fee of up to 0.15% of each portfolio's average daily net
assets. However, the fund will not deduct the fee from any portfolio
before April 30, 2000. You will receive advance written notice if a Rule
12b-1 fee is deducted. See the WRL Series Fund, Inc.'s prospectus for
more details.
(3) WRL Janus Growth's advisory fee reflects 0.80% of the average daily net
assets for the period prior to May 1, 1998, and 0.775% of the first $3
billion of average daily net assets and 0.75% of the average daily net
assets in excess of $3 billion for the period May 1, 1998 to December
31, 1998. WRL Investment Management, Inc. ("WRL Management") currently
waives 0.025% of its advisory fee for the first $3 billion of the
portfolio's average daily net assets (net fee -- 0.775%); and 0.05% for
the portfolio's average daily net assets above $3 billion (net fee --
0.75%). This waiver is voluntary and may be terminated at any time upon
90 days' written notice to the fund.
13
<PAGE>
(4) For WRL Janus Global, WRL Management will waive 0.025% of its advisory
fee once portfolio average daily net assets reach $2 billion (net fee --
0.775%). This waiver is voluntary and may be terminated at any time upon
90 days' written notice to the fund.
The purpose of the preceding table is to assist you in understanding the
various costs and expenses that you will bear directly and indirectly. The table
reflects charges and expenses of the portfolios of the funds for the fiscal year
ended December 31, 1998. Expenses of the funds may be higher or lower in the
future. For more information on the charges described in this table, see the
fund prospectuses which accompany this prospectus.
PFL AND THE FIXED ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PFL LIFE INSURANCE COMPANY
PFL Life Insurance Company is the insurance company issuing the Policy. PFL
was incorporated under Iowa law on April 19, 1961. PFL established the separate
account to support the investment options under this Policy and under other
variable life insurance policies PFL may issue. PFL's general account supports
the fixed account options under the Policy. PFL intends to sell this Policy in
all states in which it is licensed.
THE FIXED ACCOUNT OPTIONS
The fixed account is part of PFL's general account. We use general account
assets to support our insurance and annuity obligations other than those funded
by separate accounts. Subject to applicable law, PFL has sole discretion over
the investment of the fixed account's assets. PFL bears the full investment risk
for all amounts contributed to the fixed account. PFL guarantees that the
amounts allocated to the fixed account options will be credited interest daily
at a net effective interest rate of at least 3.0%. We will determine any
interest rate credited in excess of the guaranteed rate at our sole discretion.
We have no specific formula for determining interest rates. If you allocate your
initial premium to the fixed account options, then we will credit interest from
the date we receive the premium.
THE STANDARD FIXED ACCOUNT. Money you place into the standard fixed account
option will earn interest compounded daily at a current interest rate in effect
at the time of your allocation. The interest rate is guaranteed never to be less
than 3.0% per year. We may declare current interest rates from time to time. We
may declare more than one interest rate for different money based upon the date
of allocation or transfer to the standard fixed account.
We allocate amounts from the standard fixed account for partial
withdrawals, transfers to the subaccounts, or monthly deduction charges on a
last-in, first-out basis ("LIFO") for the purpose of crediting interest.
THE FIXED DCA ACCOUNT. At the time you purchase the Policy, you may place
your entire initial premium into the fixed DCA account. Money you place into the
fixed DCA account will earn interest at an annual rate of at least 3.0%. We may
declare current interest rates from time to time. Money will be transferred out
of the fixed DCA account in six equal monthly installments and placed in the
standard fixed account and the subaccounts of your choice. See Fixed DCA
Account, p. 33.
14
<PAGE>
THE FIXED ACCOUNT OPTIONS HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION AND THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HAS
NOT REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE FIXED ACCOUNT
OPTIONS.
THE SEPARATE ACCOUNT AND THE PORTFOLIOS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT
The separate account is divided into subaccounts, each of which invests in
shares of a specific portfolio of a fund. The subaccounts buy and sell portfolio
shares at net asset value without any sales charge. Any dividends and
distributions from a portfolio are reinvested at net asset value in shares of
that portfolio.
Income, gains, and losses credited to, or charged against, a subaccount of
the separate account reflect the subaccount's own investment experience and not
the investment experience of our other assets. The separate account's assets may
not be used to pay any of our liabilities other than those arising from the
Policies. If the separate account's assets exceed the required reserves and
other liabilities, we may transfer the excess to our general account.
The separate account may include other subaccounts that are not available
under the Policies and are not discussed in this prospectus. We may substitute
another subaccount, portfolio or insurance company separate account under the
Policies if, in our judgment, investment in a subaccount or portfolio would no
longer be possible or becomes inappropriate to the purposes of the Policies, or
if investment in another subaccount or insurance company separate account is in
the best interest of owners. No substitution shall take place without notice to
owners and prior approval of the Securities and Exchange Commission ("SEC") and
insurance company regulators, to the extent required by the Investment Company
Act of 1940, as amended (the "1940 Act") and applicable law.
THE PORTFOLIOS
The separate account invests in shares of the portfolios. Each portfolio is
an investment division of a fund, which is an open-end investment company
registered with the SEC. Such registration does not involve supervision of the
management or investment practices or policies of the portfolios by the SEC.
Each portfolio's assets are held separate from the assets of the other
portfolios, and each portfolio has investment objectives and policies that are
different from those of the other portfolios. Thus, each portfolio operates as a
separate investment fund, and the income or losses of one portfolio have no
effect on the investment performance of any other portfolio. Pending any prior
approval by a state insurance regulatory authority, certain subaccounts and
corresponding portfolios may not be available to residents of some states.
Each portfolio's investment objective(s) and policies are summarized
below. THERE IS NO ASSURANCE THAT ANY OF THE PORTFOLIOS WILL ACHIEVE ITS STATED
OBJECTIVE(S). Certain
15
<PAGE>
portfolios may have investment objectives and policies similar to other
portfolios that are managed by the same investment adviser or manager. The
investment results of the portfolios, however, may be higher or lower than those
of such other portfolios. We do not guarantee or make any representation that
the investment results of a portfolio will be comparable to any other portfolio,
even those with the same investment adviser or manager. You can find more
detailed information about the portfolios, including a description of risks, in
the fund prospectuses. You should read the fund prospectuses carefully.
<TABLE>
<CAPTION>
INVESTMENT MANAGER/
PORTFOLIO SUB-ADVISER INVESTMENT OBJECTIVE
- --------- ----------- --------------------
<S> <C> <C> <C> <C>
AIM V.I. -> A I M Advisors, Inc. -> Seeks capital appreciation through
CAPITAL investments in common stocks, with
APPRECIATION emphasis on medium-sized and
FUND smaller emerging growth companies.
AIM V.I. -> A I M Advisors, Inc. -> Seeks to achieve a high level of
GOVERNMENT current income consistent with
SECURITIES reasonable concern for safety of
FUND principal by investing in debt
securities issued, guaranteed or
otherwise backed by the United States
Government.
AIM V.I. -> A I M Advisors, Inc. -> Seeks growth of capital, with current
GROWTH AND income as a secondary objective.
INCOME FUND
AIM V.I. -> A I M Advisors, Inc. -> Seeks to achieve long-term growth of
VALUE FUND capital by investing primarily in equity
securities judged by AIM to be undervalued
relative to the current or projected earnings
of the companies issuing the securities, or
relative to current market values of assets
owned by the companies issuing the securities
or relative to the equity markets generally.
Income is a secondary objective.
DREYFUS STOCK -> The Dreyfus Corporation -> Seeks to provide investment results that
INDEX FUND and Mellon Equity correspond to the price and yield
Associates performance of publicly traded common
stocks in the aggregate, as represented
by the Standard & Poor's 500 Composite
Stock Price Index.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT MANAGER/
PORTFOLIO SUB-ADVISER INVESTMENT OBJECTIVE
- --------- ----------- --------------------
<S> <C> <C> <C> <C>
DREYFUS -- -> The Dreyfus -> Seeks to provide as high a level of
MONEY MARKET Corporation current income as is consistent with
PORTFOLIO the preservation of capital and the
maintenance of liquidity.
DREYFUS -- -> The Dreyfus -> Seeks to provide investment results
SMALL Corporation that are greater than the total return
COMPANY performance of publicly-traded
STOCK PORTFOLIO common stocks in the aggregate, as
represented by the Russell 2500/registered trademark/
Index.
MFS -> Massachusetts Financial -> Seeks to provide long-term growth of
EMERGING Services Company capital.
GROWTH SERIES
MFS RESEARCH -> Massachusetts Financial -> Seeks to provide long-term growth of
SERIES Services Company capital and future income.
MFS TOTAL -> Massachusetts Financial -> Seeks to provide above-average
RETURN SERIES Services Company income (compared to a portfolio
invested entirely in equity
securities) consistent with the
prudent employment of capital, and
secondarily to provide a reasonable
opportunity for growth of capital and
income.
MFS UTILITIES -> Massachusetts Financial -> Seeks capital growth and current
SERIES Services Company income (income above that available
from a portfolio invested entirely in
equity securities).
OPPENHEIMER -> OppenheimerFunds, Inc. -> Seeks to achieve capital appreciation
CAPITAL by investing in securities of well-
APPRECIATION known established companies.
FUND
OPPENHEIMER -> OppenheimerFunds, Inc. -> Portfolio seeks long-term capital
GLOBAL appreciation by investing a substantial
SECURITIES portion of its assets in securities of
FUND foreign issuers, "growth-type"
companies, cyclical industries and
special situations which are considered
to have appreciation possibilities,
but which may be considered to be
speculative.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT MANAGER/
PORTFOLIO SUB-ADVISER INVESTMENT OBJECTIVE
- --------- ----------- --------------------
<S> <C> <C> <C> <C>
OPPENHEIMER -> OppenheimerFunds, Inc. -> Seeks a high level of current income
HIGH INCOME from investment in high yield
FUND fixed-income securities. The
portfolio's investments include
unrated securities or high risk
securities in the lower rating
categories, commonly known as
"junk bonds," which are subject
to a greater risk of loss of
principal and nonpayment of
interest than higher- rated
securities.
OPPENHEIMER -> OppenheimerFunds, Inc. -> Seeks a high total return (which
MAIN STREET includes growth in the value of its
GROWTH & shares as well as current income)
INCOME FUND from equity and debt securities.
OPPENHEIMER -> OppenheimerFunds, Inc. -> Seeks a high level of current income
STRATEGIC BOND principally derived from interest on
FUND debt securities and seeks to enhance
such income by writing covered call
options on debt securities.
WRL VKAM -> Van Kampen Asset -> Seeks capital appreciation by
EMERGING Management Inc. investing primarily in common stocks
GROWTH of small and medium-sized
companies.
WRL JANUS -> Janus Capital -> Seeks long-term growth of capital in a
GLOBAL Corporation manner consistent with the preserva-
tion of capital.
WRL JANUS -> Janus Capital -> Seeks growth of capital.
GROWTH Corporation
</TABLE>
In addition to the separate account, shares of the portfolios are also sold
to other separate accounts that insurance companies, including PFL or its
affiliates, establish to support variable annuity contracts and variable life
insurance policies. It is possible that, in the future, it may become
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the portfolios simultaneously. Neither we
nor the portfolios currently foresee any such disadvantages, either to variable
life insurance policyowners or to variable annuity contract owners. However,
each fund's Board of Directors will monitor events in order to identify any
material conflicts between the interests of such variable life insurance
policyowners and variable annuity contract owners, and will determine what
action, if any, it should take. Such action could include the sale of portfolio
shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes
18
<PAGE>
in state insurance laws, (2) changes in federal income tax laws, or (3)
differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contract owners.
If a fund's Board of Directors were to conclude that separate funds should
be established for variable life insurance and variable annuity separate
accounts, PFL will bear the attendant expenses, but variable life insurance
policyowners and variable annuity contract owners would no longer have the
economies of scale resulting from a larger combined fund.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
We reserve the right to transfer separate account assets to another
separate account that we determine to be associated with the class of contracts
to which the Policy belongs. We also reserve the right, subject to compliance
with applicable law, to add to, delete from, or substitute the investments that
are held by any subaccount or that any subaccount may purchase. We will only
add, delete or substitute shares of another portfolio of a fund (or of another
open-end, registered investment company), if the shares of a portfolio are no
longer available for investment, or if in our judgement further investment in
any portfolio would become inappropriate in view of the purposes of the separate
account. We will not add, delete or substitute any shares attributable to your
interest in a subaccount without notice to and prior approval of the SEC, to the
extent required by the 1940 Act or other applicable law. We may also decide to
purchase for the separate account securities from other portfolios.
We also reserve the right to establish additional subaccounts of the
separate account, each of which would invest in a new portfolio of a fund, or in
shares of another investment company, with specified investment objectives. We
may establish new subaccounts when, in our sole discretion, marketing, tax or
investment conditions warrant. We will make any new subaccounts available to
existing owners on a basis we determine. We may also eliminate one or more
subaccounts for the same reasons as stated above.
In the event of any such substitution or change, we may make such changes
in this and other policies as may be necessary or appropriate to reflect such
substitution or change. If we deem it to be in the best interests of persons
having voting rights under the Policies, and when permitted by law, the separate
account may be (1) operated as a management company under the 1940 Act, (2)
deregistered under the 1940 Act in the event such registration is no longer
required, (3) managed under the direction of a committee, or (4) combined with
one or more other separate accounts, or subaccounts.
PLEASE READ THE ATTACHED FUND PROSPECTUSES TO OBTAIN MORE COMPLETE INFORMATION
REGARDING THE PORTFOLIOS.
OUR RIGHT TO VOTE PORTFOLIO SHARES
Even though we are the legal owner of the portfolio shares held in the
subaccounts, and have the right to vote on all matters submitted to shareholders
of the portfolios, we will vote our shares only as policyowners instruct, so
long as such action is required by law.
19
<PAGE>
Before a vote of a portfolio's shareholders occurs, you will receive voting
materials from us. We will ask you to instruct us on how to vote and to return
your proxy to us in a timely manner. You will have the right to instruct us on
the number of portfolio shares that corresponds to the amount of cash value you
have in that portfolio (as of a date set by the portfolio).
If we do not receive voting instructions on time from some policyowners, we
will vote those shares in the same proportion as the timely voting instructions
we receive. Should federal securities laws, regulations and interpretations
change, we may elect to vote portfolio shares in our own right. If required by
state insurance officials, or if permitted under federal regulation, we may
disregard certain policyowner voting instructions. If we ever disregard voting
instructions, we will send you a summary in the next annual report to
policyowners advising you of the action and the reasons we took such action.
THE POLICY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PURCHASING A POLICY
To purchase a Policy, a prospective owner must submit a completed
application and an initial premium to us. You may also send the application and
initial premium to us through any licensed life insurance agent who is also a
registered representative of a broker-dealer having a selling agreement with
AFSG Securities Corporation, the principal underwriter for the Policy.
Please submit your applications to: PFL Life Insurance Company
P.O. Box 3183
Cedar Rapids, Iowa 52406-3183
You may also fax your application to us at 319-297-8320 and send us your
initial premium by wire transfer. See Initial Premium p. 26 for details.
We determine the specified amount for a Policy based on the initial premium
paid and other characteristics of the proposed insured (or joint insureds), such
as age, gender and rate class. We base the minimum initial premium for your
Policy on the guideline single premium established under federal tax laws given
the age, gender and rate class of the insured (or joint insured). We currently
require a minimum initial premium of $20,000.
We use different underwriting standards (simplified, expanded) in relation
to the Policy. We can provide you with details as to these underwriting
standards when you apply for a Policy. We must receive evidence of insurability
that satisfies our underwriting standards before we will issue a Policy.
Generally, for simplified underwriting for a single life Policy we will issue a
Policy only for an insured between the ages of 35 to 80; for a Joint Policy, the
minimum age for both insureds is 45 and the difference between the joint
insureds' ages cannot be greater than 20 years. The joint insureds must be
spouses or expanded underwriting will be required. To issue a Policy for an
insured (or joint insureds) between the ages of 18 to 34 and 81 to 90, we will
use expanded underwriting. We reserve the right to reject an application for any
reason permitted by law.
20
<PAGE>
UNDERWRITING STANDARDS
This Policy uses mortality tables that distinguish between men and women.
As a result, the Policy pays different benefits to men and women of the same
age. Montana prohibits our use of actuarial tables that distinguish between men
and women to determine premiums and policy benefits for policies issued on the
lives of its residents. Therefore, we will base the premiums and benefits in
Policies that we issue in Montana, to insure residents of that state, on
actuarial tables that do not differentiate on the basis of gender.
Your cost of insurance charge will depend on the insured's (or each joint
insured's) rate class. We currently place insureds (or each joint insured) into
one of the following rate classes:
o select, non-tobacco use; and
o standard, tobacco use.
We generally charge higher rates for insureds who use tobacco.
WHEN INSURANCE COVERAGE TAKES EFFECT
Full insurance coverage under the Policy will take effect only if the
insured (or joint insureds) is alive and in the same condition of health as
described in the application when the Policy is delivered to the owner, and if
the initial premium is paid.
CONDITIONAL INSURANCE COVERAGE. If you pay the initial premium listed in
the conditional receipt attached to the application, and we deliver the
conditional receipt to you, you will have conditional insurance coverage under
the terms of the conditional receipt. Conditional insurance coverage is void if
the check or draft sent to pay the initial premium is not honored when we first
present it for payment.
THE AMOUNT OF o the specified amount applied for; or
CONDITIONAL INSURANCE o $300,000
COVERAGE IS THE LESSER OF: reduced by all amounts payable under all other
life insurance applications that the insured (or
joint insureds) has in force or pending with us.
CONDITIONAL LIFE o as soon as you complete an application and
INSURANCE COVERAGE pay an initial premium of at least $20,000,
BEGINS: if the insured (or joint insureds)
qualifies for simplified underwriting; or
o on the later of:
-> the date of your application; or
-> the date the insured (or joint
insureds) completes all of the medical
tests and examinations that we
require,
if the insured (or joint insureds) does not
qualify for simplified underwriting.
21
<PAGE>
CONDITIONAL LIFE INSURANCE o the date we determine the insured (or joint
COVERAGE TERMINATES insureds) has satisfied our underwriting
AUTOMATICALLY ON THE requirements (the Policy date);
EARLIEST OF: o 60 days from the date the application was
completed;
o the date we determine that any person
proposed for insurance in the application
is not insurable according to our rules,
limits and standards for the plan, amount
and rate class shown in the application;
o the date we modify the plan, amount, riders
and/or the premium rate class shown in the
application, or any supplemental
agreements; or
o the date we mail notice of the ending of
coverage and we refund the initial premium
to the applicant at the address shown on
the application.
SPECIAL LIMITATIONS OF THE o the conditional receipt will be void:
CONDITIONAL RECEIPT: -> if not signed by an authorized agent
of PFL;
-> in the event the application contains
any fraud or material
misrepresentation; or
-> if, on the date of the conditional
receipt, the proposed insured (or
joint insureds) is under 15 days of
age or over 80 years of age.
o the conditional receipt does not provide
benefits for disability and accidental
death benefits.
o the conditional receipt does not provide
benefits if any proposed insured (or joint
insured) commits suicide. In this case,
PFL's liability will be limited to return
of the initial premium paid with the
application.
FULL INSURANCE COVERAGE AND ALLOCATION OF INITIAL PREMIUM. Once we
determine that the insured (or joint insureds) meets our underwriting
requirements, full insurance coverage begins, we issue the Policy, and we begin
to deduct monthly and daily insurance charges from your initial premium. This
date is the Policy date. On the Policy date, we will allocate your premium to
the subaccounts and fixed account options you elected on your application,
provided you live in a state that does not require a refund of full premium
during the free look period. If your state requires us to return the full
premium in the event you exercise your free look right, we will place your
premium in the reallocation account until the reallocation date. See
Reallocation Account, p. 28.
On any day we credit premiums or transfer cash value to a subaccount, we
will convert the dollar amount of the premium (or transfer) into subaccount
units at the unit value for that subaccount, determined at the end of the day.
We will credit amounts to the subaccounts only on a valuation date, that is, on
a date the New York Stock Exchange ("NYSE") is open for trading. See Policy
Values, p. 28.
22
<PAGE>
OWNERSHIP RIGHTS
The Policy belongs to the owner named in the application. The owner may
exercise all of the rights and options described in the Policy. If two owners
are named, the Policy will be owned jointly, and each owner's consent will be
required to exercise ownership rights. The owner is the insured unless the
application specifies a different person as the insured. If the owner dies
before the insured (or surviving insured) and no contingent owner is named, then
ownership of the Policy will pass to the owner's estate. The owner may exercise
certain rights described below.
CHANGING THE o Change the owner by providing written
OWNER notice to us at any time while the insured
(or surviving insured) is alive and the
Policy is in force.
o Change is effective as of the date that the
written notice is signed.
o Changing the owner does not automatically
change the beneficiary.
o Changing the owner may have tax
consequences. You should consult a tax
advisor before changing the owner.
o We are not liable for payments we made
before we received the written notice.
CHOOSING THE o The owner designates the beneficiary (the
BENEFICIARY person to receive the death benefit when
the insured or surviving insured dies) in
the application.
o If you designate more than one beneficiary,
then each beneficiary shares equally in any
death benefit proceeds unless the
beneficiary designation states otherwise.
o If the beneficiary dies before the insured
or surviving insured, then any contingent
beneficiary becomes the beneficiary.
o If both the beneficiary and contingent
beneficiary die before the insured or
surviving insured, then the death benefit
will be paid to the owner or the owner's
estate upon the insured's or surviving
insured's death.
CHANGING THE o Change the beneficiary by providing us with
BENEFICIARY a written notice.
o Change is effective as of the date the
owner signs the written notice.
o We are not liable for any payments we made
before we received the written notice.
23
<PAGE>
ASSIGNING THE o The owner may assign Policy rights while
POLICY the insured (or either or both joint
insureds) is alive.
o The owner retains any ownership rights that
are not assigned.
o Assignee may not change the owner or the
beneficiary, and may not elect or change an
optional method of payment. Any amount
payable to the assignee will be paid in a
lump sum.
o Claim under any assignment are subject to
proof of interest and the extent of the
assignment.
o We are not:
-> bound by any assignment unless we
receive a written notice of the
assignment;
-> responsible for the validity of any
assignment;
-> liable for any payment we made before
we received written notice of the
assignment; or
-> any assignment which results in
adverse tax consequences to the
owner, insured(s) or
beneficiary(ies).
o Assigning the Policy may have tax
consequences. You should consult a tax
advisor before assigning the Policy.
POLICY SPLIT OPTION
For a Joint Policy, as long as you provide us with sufficient evidence that
the joint insureds meet our insurability standards, you may request that the
Policy, not including any riders, be split (the "Split Option") into two new
individual fixed account life insurance policies, one on the life of each joint
insured, if one of the three events listed below occurs. You may request this
Split Option by giving us written notice within 90 days after:
o the enactment or effective date (whichever is later) of a change in
the federal estate tax laws that would reduce or eliminate the
unlimited marital deduction;
o the date of entry of a final decree of divorce of the joint insureds;
or
o written confirmation of a dissolution of a business partnership of
which the joint insureds were partners.
24
<PAGE>
CONDITIONS FOR EXERCISING o If more than one person owns the Policy,
SPLIT OPTION: each owner must agree to the split.
o The initial specified amount for each new
policy cannot be more than 50% of the
Policy's specified amount, excluding the
face amount of any riders.
o The new policies will be subject to our
minimum and maximum specified amounts and
issue ages for the plan of insurance you
select.
o You must obtain our approval before you can
exercise the Split Option if one of the
joint insureds is older than the new
policy's maximum issue age when you request
the Split Option.
Cash value and indebtedness under the Policy will be allocated equally to
each of the new policies. If one joint insured does not meet our insurability
requirements, we will pay you half of the Policy's net surrender value and issue
only one new policy covering the joint insured that meets our insurability
requirements; or you may cancel the Split Option and keep the Policy in force on
both joint insureds.
We will base the premiums for the new policies on each joint insured's
attained age and premium rate class which we determine based on the current
evidence of insurability submitted for each joint insured. Premiums will be
payable as of the Policy date for each new policy. The Policy date for each new
policy will be the monthly anniversary after we receive your written request to
exercise the Split Option. The owner and beneficiary for the new policies will
be those named in the Policy, unless you specify otherwise. Any new premium you
pay to the new policies will be subject to the normal charges, if any, of the
new policies at the time you pay the premium.
Exercising the Split Option may result in a taxable event. Moreover, the
new life insurance policies received if you exercise the Split Option may not
be treated as life insurance policies for federal income tax purposes, or, if
so treated, may be treated as MECs, even if the original Policy was not. (See
Federal Income Tax Considerations, p. 47.) You should consult a tax advisor
before exercising the Split Option.
CANCELING A POLICY
You may cancel a Policy during the "free-look period" by returning it to
our office, to one of our branch offices or to the agent who sold you the
Policy. The free-look period expires 10 days after you receive the Policy. In
some states you may have more than 10 days. If you decide to cancel the Policy
during the free-look period, we will treat the Policy as if it had never been
issued. We will pay the refund, without interest, within seven days after we
receive the returned Policy. The amount of the refund will be:
o any monthly deductions or other charges we deducted from amounts
allocated to the subaccounts and the fixed account options; PLUS
25
<PAGE>
o your cash value in the subaccounts and the fixed account options on
the date we (or our agent) receive the returned Policy, except that
the amount allocated to the fixed DCA account will be treated as if it
had been allocated to the standard fixed account, except that the
amount allocated to the fixed DCA account will be treated as if it had
been allocated to the standard fixed account.
If any state law prohibits the calculation above, we will refund, without
interest, the total of all premiums paid for the Policy. See Allocating
Premiums, p. 27.
PREMIUMS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INITIAL PREMIUM
The initial premium for a given specified amount depends on a number of
factors including the age, gender, and rate class of the proposed insured(s).
FOR A GIVEN INITIAL PREMIUM, WE WILL SPECIFY THE EXACT SPECIFIED AMOUNT THAT YOU
MUST PURCHASE. For a Joint Policy, we will provide the specified amount at the
time of application based upon the specific ages, gender, and rate classes of
the proposed joint insureds.
We will accept initial premium payments by wire transfer and Policy
applications by fax under the following conditions.
o If you wish to make payments by wire transfer, you should instruct
your bank to wire federal funds to us. Please contact us at
1-800-525-6205 for complete wire instructions.
o If you send your initial premium by wire transfer, you must, at the
same time, send us your completed application by telephone facsimile
transmission ("faxed application") to 319-297-8320, and send the
original signed application to our administrative office.
o If we accept your initial premium payment by wire transfer accompanied
by your faxed application, we will allocate your premium on the Policy
date (or reallocation date if you reside in a state that requires full
refund of premium during the free look period) according to your
instructions once we have received your application. See Reallocation
Account, p. 28.
o If you send your initial premium by wire transfer but do not send us
your faxed application simultaneously, or if the application is
incomplete, we will keep the initial premium for up to five business
days. If we cannot obtain the faxed application or necessary
information within five business days, we will return your initial
premium to you, unless you allow us to keep it until we receive your
faxed application or necessary information.
o When we receive your original signed application and if the allocation
instructions are different from those in the faxed application, then
we will reallocate your cash value in accordance with the instructions
on your original signed application on the first valuation date after
we receive the original signed application.
26
<PAGE>
We currently require a minimum initial premium of $20,000. If you want to
qualify for simplified underwriting, the maximum premium you can pay at the time
of your application is $50,000 (for ages 35-49) and $100,000 (for ages 50-80).
Other limits apply for Joint Policies and Policies with full underwriting. We
reserve the right to modify these requirements and premium amounts at any time.
TAX-FREE EXCHANGES ("1035 EXCHANGES"). We will accept as part of your
initial premium money from one contract that qualified for a tax-free exchange
under Section 1035 of the Internal Revenue Code. If you contemplate such an
exchange, you should consult a competent tax advisor to learn the potential tax
effects of such a transaction.
Subject to our underwriting requirements, we will permit you to make one
additional cash payment within three business days of our receipt of the
proceeds from the 1035 Exchange before we determine your Policy's specified
amount.
ADDITIONAL PREMIUMS
You will have LIMITED FLEXIBILITY TO ADD ADDITIONAL PREMIUMS to the Policy
since we require that the initial premium equal the maximum amount that can be
applied to the Policy at issue. In general, you may not pay any additional
premiums on the Policy for several years in order for the Policy to continue to
qualify as a life insurance Policy as defined in federal tax laws and
regulations. At the time the Policy allows for the payment of additional
premiums, we reserve the right to limit or refund any premium if:
o the amount is below our current minimum additional premium
requirement;
o the premium would increase the death benefit by more than the amount
of the premium; or
o accepting the premium would disqualify the Policy as a life insurance
Policy as defined in federal tax laws and regulations.
You may pay premiums by any method we deem acceptable. We will treat any
payment you make as a loan repayment unless you clearly mark it as a premium
payment.
ALLOCATING PREMIUMS
When you apply for a Policy, you must instruct us to allocate your premium
to one or more subaccounts of the separate account and to the fixed account
options according to the following rules:
o allocation percentages must be in whole numbers;
o if you select the fixed DCA account, you must put your entire initial
premium into the fixed DCA account at the time of your application;
and
o if you select standard dollar cost averaging, you must put at least
$5,000 into the Dreyfus -- Money Market subaccount.
Generally, we will not allow you to pay additional premiums except in
certain limited circumstances. If we do allow you to pay additional premiums,
you may change the allocation instructions for such additional premium payments
without charge by writing us or
27
<PAGE>
calling us at 1-800-525-6205. Upon instructions from you, the registered
representative/agent of record for your Policy may also change your allocation
instructions for you. In the future, we may decide that the minimum amount you
can allocate to a particular subaccount is 1.0% of each premium payment
(currently not required).
Whenever you direct money into a subaccount, we will credit your Policy
with the number of units for that subaccount that can be bought for the dollar
payment. We price each subaccount unit using the unit value determined at the
end of the day after the closing of the NYSE (usually at 4:00 p.m. Eastern
time). We will credit amounts to the subaccounts only on a valuation date, that
is, on a date the NYSE is open for trading. See Policy Values, p. 28. below.
Your cash value will vary with the investment experience of the subaccounts in
which you invest. YOU BEAR THE INVESTMENT RISK FOR AMOUNTS YOU ALLOCATE TO THE
SUBACCOUNTS.
You should review periodically how your cash value is allocated among the
subaccounts and the fixed account options because market conditions and your
overall financial objectives may change.
REALLOCATION ACCOUNT. If your state requires us to return your initial
premium in the event you exercise your free-look right, we will allocate the
initial premium on the Policy date to the reallocation account. While held in
the reallocation account, your premium will earn interest at the current rates
for the standard fixed account. The premium will remain in the reallocation
account for the number of days in your state's free look period plus five days.
This is the reallocation date. Please contact your agent for details concerning
the free look period for your state.
On the first valuation date on or after the reallocation date, we will
reallocate all cash value from the reallocation account to the subaccounts and
fixed account options you selected on the application. If you requested either
fixed DCA or standard dollar cost averaging, we will reallocate the cash value
to either the fixed DCA account or the Dreyfus -- Money Market subaccount
respectively, on the reallocation date.
For states which do not require full refund of the initial premium, the
reallocation date is the same as the Policy date and we will allocate your
initial premium on the Policy date to the subaccounts and the fixed account
options in accordance with the instructions you gave us on your application.
28
<PAGE>
POLICY VALUES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CASH VALUE o serves as the starting point for
calculating values under a Policy.
o equals the sum of all values in each
subaccount and the fixed account options.
o is determined on the Policy date and on
each valuation date.
o has no guaranteed minimum amount and may be
more or less than premiums paid.
NET SURRENDER VALUE
The net surrender value is the amount we pay when you surrender your
Policy. We determine the net surrender value at the end of the valuation period
when we receive your written surrender request.
NET SURRENDER o the cash value as of such date; MINUS
VALUE ON ANY o any surrender charge as of such date; MINUS
VALUATION DATE o any outstanding Policy loan(s); MINUS
EQUALS: o any interest you owe on any Policy loan(s).
SUBACCOUNT VALUE
Each subaccount's value is the cash value in that subaccount. At the end of
any valuation period, the subaccount's value is equal to the number of units
that the Policy has in the subaccount, multiplied by the unit value of that
subaccount.
THE NUMBER OF o the initial units purchased at unit value
UNITS IN ANY on the Policy date; PLUS
SUBACCOUNT ON o units purchased with additional premium(s);
ANY VALUATION PLUS
DATE EQUALS: o units purchased via transfers from another
subaccount or the fixed account; MINUS
o units redeemed to pay for monthly
deductions; MINUS
o units redeemed to pay for partial
withdrawals; MINUS
o units redeemed as part of a transfer to
another subaccount or the fixed account.
Every time you allocate, transfer or withdraw money to or from a
subaccount, we convert that dollar amount into units. We determine the number of
units we credit to, or subtract from, your Policy by dividing the dollar amount
of the allocation, transfer or partial withdrawal by the unit value for that
subaccount at the end of the valuation period.
SUBACCOUNT UNIT VALUE
The value (or price) of each subaccount unit will reflect the investment
performance of the portfolio in which the subaccount invests. Unit values will
vary among subaccounts. The
29
<PAGE>
unit value of each subaccount was originally established at $10 per unit. The
unit value may increase or decrease from one valuation period to the next.
THE UNIT VALUE o the total value of the portfolio shares
OF ANY held in the subaccount, determined by
SUBACCOUNT AT multiplying the number of portfolio shares
THE END OF A owned by the subaccount by the portfolio's
PERIOD VALUATION net asset value per share determined at the
IS CALCULATED end of the valuation period; MINUS
AS: o a charge equal to the daily net assets of
the subaccount multiplied by the daily
equivalent of the daily charge; MINUS
o the accrued amount of reserve for any taxes
or other economic burden resulting from
applying tax laws that we determine to be
properly attributable to the subaccount;
AND THE RESULT DIVIDED BY
o the number of outstanding units in the
subaccount.
The portfolio in which any subaccount invests will determine its net asset
value per share once daily, as of the close of the regular business session of
the NYSE (usually 4:00 p.m. Eastern time), which coincides with the end of each
valuation period.
FIXED ACCOUNT VALUE
On the Policy date, the fixed account value is equal to the premiums
allocated to the fixed account, minus the portion of the first monthly deduction
taken from the fixed account.
THE FIXED ACCOUNT o the premium(s) allocated to the fixed
VALUE AT THE END OF account; PLUS
ANY VALUATION o any amounts transferred from a subaccount
PERIOD IS EQUAL TO: to the fixed account; PLUS
o total interest credited to the fixed
account; MINUS
o amounts charged to pay for monthly
deductions; MINUS
o amounts withdrawn from the fixed account to
pay for partial withdrawals; MINUS
o amounts transferred from the fixed account
to a subaccount.
TRANSFERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GENERAL
You or your agent/registered representative of record may make transfers
among the subaccounts or from the subaccounts to the fixed account. We determine
the amount you have available for transfers at the end of the valuation period
when we receive your transfer request. WE MAY MODIFY OR REVOKE THE TRANSFER
PRIVILEGE AT ANY TIME. The following features apply to transfers under the
Policy:
30
<PAGE>
/checkmark/ You may make an unlimited number of transfers in a Policy
year.
/checkmark/ You may make one transfer from the fixed account per Policy
year.
/checkmark/ You may request transfers in writing (in a form we accept), by
fax or by telephone.
/checkmark/ There is no minimum amount that must be transferred.
/checkmark/ There is no minimum amount that must remain in a subaccount
after a transfer.
/checkmark/ We deduct a $10 charge from the amount transferred for the
13th and each additional transfer in a Policy year.
/checkmark/ We consider all transfers made in any one day to be a single
transfer.
/checkmark/ Transfers resulting from loans, conversion rights, standard
and fixed dollar cost averaging, asset rebalancing, and
transfers from the fixed account are NOT treated as transfers
for the purpose of the transfer charge.
The Policy's transfer privilege is not intended to afford policyowners a
way to speculate on short-term movements in the market. Excessive use of the
transfer privilege can disrupt the management of the portfolios and increase
transaction costs. Accordingly, we have established a policy of limiting
excessive transfer activity. We will limit transfer activity to two substantive
transfers (at least 30 days apart) from each portfolio, except from the Dreyfus
- -- Money Market portfolio, during any 12-month period. We interpret
"substantive" to mean either a dollar amount large enough to have a negative
impact on a portfolio's operations or a series of movements between portfolios.
We will not limit non-substantive transfers.
Your Policy as applied for and issued, will automatically receive telephone
transfer privileges unless you provide other instructions. The telephone
transfer privileges allow you to give authority to the registered representative
or agent of record for your Policy to make telephone transfers and to change the
allocation of future payments among the subaccounts and the fixed account on
your behalf according to your instructions. To make a telephone transfer, you
may call 1-800-525-6205 or fax your instructions to 319-297-8320.
Please note the following regarding telephone or fax transfers:
-> We are not liable for any loss, damage, cost or expense from complying
with telephone instructions we reasonably believe to be authentic. You
bear the risk of any such loss.
-> We will employ reasonable procedures to confirm that telephone
instructions are genuine.
-> If we do not employ reasonable confirmation procedures, we may be
liable for losses due to unauthorized or fraudulent instructions.
-> Such procedures may include requiring forms of personal identification
prior to acting upon telephone instructions, providing written
confirmation of transactions to owners, and/or tape recording
telephone instructions received from owners.
-> We may also require written confirmation of your request.
-> If you do not want the ability to make telephone transfers, you should
notify us in writing.
-> Telephone or fax requests must be received before 4:00 p.m. Eastern
time to assure same-day pricing of the transaction.
31
<PAGE>
-> We will not be responsible for any transmittal problems when you fax
us your request unless you report it to us within five business days
and send us proof of your fax transmittal.
-> We may discontinue this option at any time.
We will process any transfer request we receive before the NYSE closes
(usually 4:00 p.m. Easterm time) using the subaccount unit value determined at
the end of that session of the NYSE. If we receive the transfer request after
the NYSE closes, we will process the request using the subaccount unit value
determined at the close of the next regular business session of the NYSE.
STANDARD FIXED ACCOUNT TRANSFERS
You may make one transfer per Policy year from the standard fixed account
unless you select standard dollar cost averaging from the standard fixed
account. We reserve the right to require that you make the transfer request in
writing. We must receive the transfer request no later than 30 days after a
Policy anniversary. We will make the transfer on the date we receive the written
request. The maximum amount you may transfer is the greater of:
-> 25% of the amount in the standard fixed account; or
-> the amount you transferred from the standard fixed account in the
immediately prior Policy year (excluding transfers from the fixed DCA
account).
CONVERSION RIGHTS
If within two years of your Policy date, you transfer all of your
subaccount values to the standard fixed account, then we will not charge you a
transfer fee, even if applicable. You must make your request in writing.
STANDARD DOLLAR COST AVERAGING
Standard dollar cost averaging is an investment strategy designed to reduce
the investment risks associated with market fluctuations. The strategy spreads
the allocation of your premium into the subaccounts over a period of time. This
potentially allows you to reduce the risk of investing most of your premium into
the subaccounts at a time when prices are high. The success of this strategy is
not assured and depends on market trends. You should consider carefully your
financial ability to continue the program over a long enough period of time to
purchase units when their value is low as well as when they are high. We make no
guarantee that dollar cost averaging will result in a profit or protect you
against a loss.
Under standard dollar cost averaging, we automatically transfer a set
dollar amount from the Dreyfus -- Money Market subaccount to one or more
subaccounts that you choose. At the beginning of dollar cost averaging, you must
choose the time period (12, 24 or 36 months) over which the entire amount will
be transferred in equal monthly installments. We will make the transfers monthly
as of the end of the valuation date starting on the first
32
<PAGE>
Monthiversary after the Policy date or reallocation date. We will make the first
transfer in the month after we receive your request, provided that we receive
the form by the 25th day of the month.
TO START STANDARD DOLLAR -> you must submit a completed form to us
COST AVERAGING: requesting standard dollar cost averaging;
-> you must have at least $5,000 in the
Dreyfus - Money Market subaccount;
-> the monthly amount transferred will be
determined by dividing the total amount to
be transferred by the number of months in
the period chosen (12, 24 or 36 months);
and
-> interest accrued on the cash value in the
Dreyfus Money Market subaccount during the
term of dollar cost averaging will be
tranferred in the last month of the
standard dollar cost averaging term.
You may request standard dollar cost averaging to begin at any time. There is no
charge for standard dollar cost averaging, except that you cannot begin standard
dollar cost averaging if you have an active fixed DCA account. Transfers under
standard dollar cost averaging do NOT count as transfers for purposes of the
transfer charge.
STANDARD DOLLAR COST -> we receive your request to cancel your
AVERAGING WILL participation;
TERMINATE IF: -> the value in the Dreyfus - Money Market
subaccount is depleted;
-> you elect to participate in the asset
rebalancing program; OR
-> you elect to participate in any asset
allocation services provided by a third
party.
We may modify, suspend, or discontinue standard dollar cost averaging at
any time.
FIXED DCA ACCOUNT
To be eligible for fixed dollar cost averaging, you must elect the fixed
DCA account on your application and put your entire initial premium into the
fixed DCA account. Money you place in the fixed DCA account will earn interest
at rates we declare from time to time. Money will be transferred out of the
fixed DCA account in six equal monthly installments with the first transfer
starting on the first Monthiversary after the Policy date or reallocation date.
Interest accrued on the initial premium will be transferred in the last month of
the fixed DCA account term. Money in the fixed DCA account may be transferred
entirely to other subaccounts or the standard fixed account after one month.
There is no charge for participating in the fixed DCA account. Transfers
from the fixed DCA account do NOT count as transfers for purposes of the
transfer charge.
33
<PAGE>
We reserve the right to stop offering the fixed DCA account at any time for
any reason. We may offer a higher 30-day interest rate guaranteed for one month.
If you exercise your free look right and you reside in a state which requires us
to return your premium, then we will return your initial full premium, but
without any interest. But if you reside in a state which requires us to return
cash value, then we will treat your initial premium as if it had been allocated
to the standard fixed account.
FIXED DOLLAR COST o we receive written notice from you
AVERAGING WILL END IF: instructing us to cancel the program;
o you elect to participate in the asset
rebalancing program; or
o you elect to participate in any asset
allocation services provided by a third
party.
ASSET REBALANCING PROGRAM
We also offer an asset rebalancing program under which you may transfer
amounts periodically to maintain a particular percentage allocation among the
subaccounts. Cash value allocated to each subaccount will grow or decline in
value at different rates. The asset rebalancing program automatically
reallocates the cash value in the subaccounts at the end of each period to match
your Policy's currently effective premium allocation schedule. Cash value in the
standard fixed account, the standard dollar cost averaging program and the fixed
DCA account are not available for this program. This program does not guarantee
gains. A subaccount may still have losses.
You may elect asset rebalancing to occur on each quarterly, semi-annual or
annual anniversary of the Policy date. You may modify your allocations
quarterly. Once we receive the asset rebalancing request form, we will effect
the initial rebalancing of cash value on the next such anniversary, in
accordance with the Policy's current premium allocation schedule. We will credit
the amounts transferred at the unit value next determined on the dates the
transfers are made. If a day on which rebalancing would ordinarily occur falls
on a day on which the NYSE is closed, rebalancing will occur on the next day the
NYSE is open.
To start asset rebalancing, you must submit a completed asset rebalancing
request form to us before the maturity date. There is no charge for the asset
rebalancing program. Reallocations under the asset rebalancing program do NOT
count as transfers for purposes of the transfer charge.
34
<PAGE>
ASSET REBALANCING -> you elect to participate in the fixed DCA
WILL CEASE IF: account;
-> you elect to participate in the standard
dollar cost averaging program;
-> we receive your request to discontinue
participation;
-> you make ANY transfer to or from any
subaccount other than under a scheduled
rebalancing; or
-> you elect to participate in any asset
allocation services provided by a third
party.
You may start and stop participating in the asset rebalancing program at
any time; but we may restrict your right to re-enter the program to once each
Policy year. If you wish to resume the asset rebalancing program, you must
complete a new request form. We may modify, suspend, or discontinue the asset
rebalancing program at any time.
THIRD PARTY ASSET ALLOCATION SERVICES
We may provide administrative or other support services to independent
third parties you authorize to conduct transfers on your behalf, or who provide
recommendations as to how your subaccount values should be allocated. This
includes, but is not limited to, transferring subaccount values among
subaccounts in accordance with various investment allocation strategies that
these third parties employ. These independent third parties may or may not be
appointed PFL agents for the sale of Policies. PFL DOES NOT ENGAGE ANY THIRD
PARTIES TO OFFER INVESTMENT ALLOCATION SERVICES OF ANY TYPE, SO THAT PERSONS OR
FIRMS OFFERING SUCH SERVICES DO SO INDEPENDENT FROM ANY AGENCY RELATIONSHIP THEY
MAY HAVE WITH PFL FOR THE SALE OF POLICIES. PFL THEREFORE TAKES NO
RESPONSIBILITY FOR THE INVESTMENT ALLOCATIONS AND TRANSFERS TRANSACTED ON YOUR
BEHALF BY SUCH THIRD PARTIES OR ANY INVESTMENT ALLOCATION RECOMMENDATIONS MADE
BY SUCH PARTIES. PFL does not currently charge you any additional fees for
providing these support services. PFL reserves the right to discontinue
providing administrative and support services to owners utilizing independent
third parties who provide investment allocation and transfer recommendations.
CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This section describes the charges and deductions that we make under the
Policy to compensate for: (1) the services and benefits we provide; (2) the
costs and expenses we incur; and (3) the risks we assume.
SERVICES AND o the death benefit, cash and loan benefits;
BENEFITS WE o investment options, including premium
PROVIDE: allocations;
o administration of elective options;
o the distribution of reports to owners.
35
<PAGE>
COSTS AND o costs associated with processing and
EXPENSES WE INCUR: underwriting applications;
o expenses of issuing and administering the
Policy (including any Policy riders);
o overhead and other expenses for providing
services and benefits, sales and marketing
expenses; and
o other costs of doing business, such as
collecting premiums, maintaining records,
processing claims, effecting transactions,
and paying federal, state and local premium
and other taxes and fees.
RISKS WE ASSUME: o that the charges we deduct may be
insufficient to meet our actual claims
because insureds die sooner than we
estimate; and
o that the costs of providing the services
and benefits under the Policies may exceed
the charges we are allowed to deduct.
PREMIUM DEDUCTIONS
We deduct no charges from premiums before allocating the premiums to the
separate account and the fixed account options according to your instructions.
MONTHLY DEDUCTION
We take a monthly deduction from the cash value on the Policy date and on
each Monthiversary. We subtract any outstanding loan amount from the cash value
before calculating the charge. We deduct this charge from your Policy's value in
each subaccount and the fixed account in accordance with the current premium
allocation instructions. If the value of any account is insufficient to pay that
account's portion of the monthly deduction, we will take the monthly deduction
on a pro rata basis from all accounts (I.E., in the same proportion that the
value in each subaccount and the fixed account bears to the total cash value on
the Monthiversary). Because portions of the monthly deduction can vary monthly,
the monthly deduction will also vary.
36
<PAGE>
THE MONTHLY DEDUCTION IS o the monthly Policy charge based on your
EQUAL TO: Policy's separate account assets; PLUS
o the monthly Policy charge based on your
Policy's fixed account assets; PLUS
o the monthly cost of insurance charge for
the Policy, if any; PLUS
o the monthly charge for any benefits
provided by riders attached to the Policy
(currently, only the Guaranteed Minimum
Death Benefit rider).
Monthly Policy Charge:
o Based on your Policy's separate
account assets, this charge is equal
to:
-> the separate account monthly
deduction charge (see table
below) divided by 12; MULTIPLIED
BY
-> the sum of the Policy's
subaccount values on the
Monthiversary.
o Based on your Policy's fixed account
assets, this charge is equal to:
-> the fixed account monthly
deduction charge (see table
below) divided by 12;
MULTIPLIED BY
-> the fixed account value on the
Monthiversary, minus any
outstanding Policy loan(s).
o This charge compensates us for
administrative expenses such as
recordkeeping, processing death
benefit claims and Policy changes,
mortality expenses and overhead costs.
o This charge varies for each Policy
based on the Policy year, gender, and
whether the Policy is issued on a
single life or a joint and last
survivor basis.
DAILY CHARGE o On each valuation date, we deduct a
daily charge at the annual rate of
0.50% from your Policy's assets in the
subaccounts as part of the calculation
of the unit value for each subaccount.
o This charge compensates us for certain
mortality and expense risks we assume.
37
<PAGE>
The monthly Policy charge and the daily charge for single life and Joint
Policies are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
MALE/UNISEX FEMALE
SINGLE LIFE POLICY ---------------------------------------------------------
POLICY YEARS POLICY YEARS POLICY YEARS POLICY YEARS
1-10 11+ 1-10 11+
- ---------------------------------------------------------------------------------------------------
SEPARATE ACCOUNT DAILY CHARGE
CHARGES (from unit value) .50% .50% .50% .50%
(annual rate) -------------------------------------------------------------------------------
MONTHLY
POLICY CHARGE
(as a % of separate
account assets) 2.00% 1.00% 1.85% .85%
-------------------------------------------------------------------------------
TOTAL 2.50% 1.50% 2.35% 1.35%
- ---------------------------------------------------------------------------------------------------
FIXED ACCOUNT MONTHLY
CHARGES POLICY CHARGE
(annual rate) (as a % of fixed
account assets) 2.00% 1.00% 1.85% .85%
-------------------------------------------------------------------------------
TOTAL 2.00% 1.00% 1.85% .85%
- ---------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------
JOINT POLICY POLICY YEARS POLICY YEARS
1-10 11+
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SEPARATE ACCOUNT CHARGES DAILY CHARGE (from unit value) .50% .50%
(annual rate) ---------------------------------------------------------------------
MONTHLY POLICY CHARGE (as 1.50% .50%
a % of separate account assets)
---------------------------------------------------------------------
TOTAL 2.00% 1.00%
- ---------------------------------------------------------------------------------------------------
FIXED ACCOUNT CHARGES MONTHLY POLICY CHARGE (as 1.50% .50%
(annual rate) a % of fixed account assets)
---------------------------------------------------------------------
TOTAL 1.50% .50%
- ---------------------------------------------------------------------------------------------------
</TABLE>
COST OF INSURANCE CHARGE. We reserve the right to assess a monthly cost of
insurance charge based on the amount of risk for this Policy. The charge would
depend on a number of variables (age, gender, rate class, specified amount, cash
value) that would cause it to vary from Policy to Policy and from Monthiversary
to Monthiversary. Currently, we do not assess this charge and we do not intend
to assess this charge in the future, although we reserve the right to do so.
Should we begin to assess this charge in the future, we will waive any surrender
charge upon the surrender of this Policy. See Surrender Charge, p. 39.
The GUARANTEED maximum monthly cost of insurance rates are based on the
gender, age, plan of insurance, and risk class of the insured(s). These rates
will not exceed those shown in your Policy's Table of Guaranteed Maximum Life
Insurance Rates.
We currently place insureds into standard (tobacco use) and select
(non-tobacco use) rate classes. The GUARANTEED rates are based on the 1980
Commissioners' Standard Ordinary
38
<PAGE>
Mortality Tables, Male or Female, Tobacco or Non-Tobacco Mortality Rates ("1980
CSO Tables"). Cost of insurance rates for an insured in a non-tobacco use class
are less than or equal to rates for an insured of the same age and gender in a
tobacco use class.
The Policies are based on mortality tables that distinguish between men and
women. As a result, the Policy may pay different benefits to men and women of
the same age and rate class. We also offer Policies based on unisex mortality
tables if required by state law.
SURRENDER CHARGE
If you surrender your Policy during the first nine years, we deduct a
surrender charge from your cash value and pay the remaining cash value (less any
outstanding loan amounts) to you. The payment you receive is called the net
surrender value. The surrender charge is 9.75% of the initial premium if you
surrender your Policy before the end of the first Policy year and then declines
gradually to 0% after the ninth Policy year. The rate at which the surrender
charge declines depends on the insured's (or joint insureds') age, gender and
whether you have purchased a single life or a Joint Policy. See Appendix C,
Surrender Charge Table, for a schedule of the surrender charges by age, year,
gender and Policy type.
If we begin to assess a cost of insurance charge on Policies as noted
above, we will waive all future surrender charges.
TRANSFER CHARGE o We currently allow you to make 12 transfers
each year free from charge.
o We charge $10 for each additional transfer.
o For purposes of assessing the transfer
charge, all transfers made in one day,
regardless of the number of subaccounts
affected by the transfer, is considered a
single transfer.
o We deduct the transfer charge from the
amount being transferred.
o Transfers due to loans, exercise of
conversion rights, dollar cost averaging,
asset rebalancing and transfers from the
fixed account do NOT count as transfers for
purposes of assessing this charge.
o We will not increase this charge.
PORTFOLIO EXPENSES
The portfolios deduct management fees and expenses from the amounts you
have invested in the portfolios. These charges currently range from 0.26% to
1.01%. See the Portfolio Annual Expense Table in this prospectus, and the fund
prospectuses.
39
<PAGE>
GUARANTEED MINIMUM If you select the Guaranteed Minimum Death
DEATH BENEFIT RIDER Benefit rider at application, then we will
CHARGE deduct from your Policy's cash value (less any
outstanding loan) a monthly charge on the Policy
date and each Monthiversary thereafter. The
monthly charge will be equal to:
o 0.02% MULTIPLIED BY the sum of your
Policy's subaccount values, if any, on the
valuation date of each Monthiversary; PLUS
o 0.02% MULTIPLIED BY your Policy's fixed
account value on the valuation date of each
monthly deduction.
DEATH BENEFIT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DEATH BENEFIT PROCEEDS
As long as the Policy is in force, we will pay the death benefit proceeds
on a Policy once we receive satisfactory proof of the insured's (or surviving
insured's) death. We may require return of the Policy. We will pay the death
benefit proceeds to the primary beneficiary(ies), if living, or to a contingent
beneficiary. If each beneficiary dies before the insured (or surviving insured)
and there is no contingent beneficiary, we will pay the death benefit proceeds
to the owner or the owner's estate. We will pay the death benefit proceeds in a
lump sum or under a payment option. See Payment Options, p. 42.
DEATH BENEFIT o the death benefit (described below); MINUS
PROCEEDS EQUAL: o any past due monthly deductions if the
insured (or surviving insured) dies during
the grace period (see Policy Lapse and
Reinstatement, p. 46); MINUS
o any outstanding Policy loan on the date of
death; MINUS
o any interest you owe on Policy loan(s).
If all or part of the death benefit proceeds are paid in one sum, we will
pay interest on this sum as required by applicable state law from the date we
receive due proof of the insured's (or surviving insured's) death to the date we
make payment.
We may further adjust the amount of the death benefit proceeds if we
contest the Policy or if you misstate the insured's (or joint insured's) age or
gender. See Our Right to Contest the Policy; and Misstatement of Age or Gender.
DEATH BENEFIT
The Policy provides a death benefit. The death benefit is determined at the
end of the valuation period in which the insured (or surviving insured) dies.
The death benefit is determined as of the date of the insured's (or the
surviving insured's) death.
40
<PAGE>
THE DEATH BENEFIT o the current specified amount; or
IS THE GREATER OF: o the product of: the Policy's cash value on
the date of the insured's (or surviving
insured's) death MULTIPLIED BY the
specified percentage, called the
"limitation percentage," shown below.
The limitation percentage is the minimum percentage of cash value we must
pay as the death benefit under federal tax requirements. It is based on the age
of the insured (or younger joint insured) at the beginning of each Policy year.
The following table indicates the limitation percentages for different ages:
AGE
(YOUNGER INSURED,
IF JOINT POLICY) LIMITATION PERCENTAGE
---------------- ---------------------
40 and under 250%
41 to 45 250% minus 7% for each age over age 40
46 to 50 215% minus 6% for each age over age 45
51 to 55 185% minus 7% for each age over age 50
56 to 60 150% minus 4% for each age over age 55
61 to 65 130% minus 2% for each age over age 60
66 to 70 120% minus 1% for each age over age 65
71 to 75 115% minus 2% for each age over age 70
76 to 90 105%
91 to 94 105% minus 1% for each age over age 90
95 and above 100%
EFFECTS OF PARTIAL WITHDRAWALS ON THE DEATH BENEFIT
A partial withdrawal will reduce the specified amount by an amount equal to
the amount of the partial withdrawal multiplied by the ratio of the initial
specified amount to the initial premium. For an example, see Partial
Withdrawals, p. 42.
GUARANTEED MINIMUM DEATH BENEFIT RIDER
If you purchase the Guaranteed Minimum Death Benefit rider at the time you
apply for the Policy and the rider is in effect upon the insured's (or surviving
insured's) date of death, we guarantee to provide a death benefit as follows:
-> If the net surrender value on any Monthiversary is not sufficient to
cover the monthly Policy charge on such day, then coverage will be
provided as indicated below, and no grace period will begin, so long
as no Policy loans have been taken under the Policy;
-> If a death benefit is payable under the provisions of this rider, then
PFL guarantees to provide a death benefit as follows:
O During the first 15 Policy years, or before the Policy
anniversary following the insured's (or younger joint insured's)
75th birthday, if sooner, the minimum death benefit we will pay
is the amount described under Death Benefit above;
41
<PAGE>
O After the first 15 Policy years, or on or after the Policy
anniversary following the insured's (or younger joint insured's)
75th birthday, if sooner, the minimum death benefit we will pay
is the initial premium, reduced, on a dollar-for-dollar basis, by
any partial withdrawals.
o However, in no event will the minimum death benefit ever be less
than $1,000.
THE GUARANTEED o the date the Policy terminates;
MINIMUM DEATH BENEFIT o the date any Policy loan is taken; or
RIDER WILL TERMINATE ON o the Monthiversary on which this rider is
THE EARLIEST OF: terminated by written request from the
owner.
This rider may only be purchased at the time you purchase the Policy.
There is also a charge for this rider. See Guaranteed Minimum Death Benefit
Rider Charge, p. 40.
CHANGING THE SPECIFIED AMOUNT
You may not increase or decrease the specified amount on your Policy.
However, a partial withdrawal will reduce the specified amount. If you need a
higher specified amount, you must apply for a second policy.
PAYMENT OPTIONS
There are several ways of receiving proceeds under the death benefit and
surrender provisions of the Policy, other than in a lump sum. Information
concerning these settlement options is available on request. None of these
options vary with the investment performance of a separate account.
SURRENDERS AND PARTIAL WITHDRAWALS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SURRENDERS
You may make a written request to surrender your Policy for its net
surrender value as calculated at the end of the valuation date on which we
receive your request. The insured (or surviving insured) must be alive and the
Policy must be in force when you make your written request. A surrender is
effective as of the date when we receive your written request. You will incur a
surrender charge if you surrender the Policy during the first nine Policy years.
See Surrender Charge, p. 39. Once you surrender your Policy, all coverage and
other benefits under it cease and cannot be reinstated. We will normally pay you
the net surrender value in a lump sum within seven days unless you request other
arrangements. A surrender may have tax consequences. See Federal Income Tax
Considerations, p. 47.
PARTIAL WITHDRAWALS
After the first Policy year, you may request a partial withdrawal of a
portion of your cash value subject to certain conditions.
42
<PAGE>
PARTIAL -> You must make your partial withdrawal
WITHDRAWAL request to us in writing.
CONDITIONS: -> We will only allow one partial withdrawal
during a 12-month period.
-> The most you can request is the Policy's
earnings. We calculate earnings as the cash
value MINUS total outstanding loans, MINUS
any interest you owe on the Policy loans,
and MINUS total premiums paid.
-> You may not take a partial withdrawal if it
will reduce the specified amount below
$1,000.
-> You can specify the subaccount(s) and the
standard fixed account from which to make
the withdrawal. Otherwise we will deduct
the amount from the Policy's value in the
subaccounts and the standard fixed account
in accordance with the current allocation
instructions.
-> We generally will pay a partial withdrawal
request within seven days following the
valuation date we receive the request.
-> There is no charge for taking a partial
withdrawal.
-> A partial withdrawal may have tax
consequences. See Federal Income Tax
Considerations, p. 47.
A partial withdrawal will reduce the cash value (and the initial premium
payable under the Guaranteed Minimum Death Benefit rider) by the amount of the
partial withdrawal and will reduce the specified amount by an amount equal to
the amount of the partial withdrawal multiplied by the ratio of the initial
specified amount to the initial premium. A partial withdrawal will also reduce
the specified amount payable under the Guaranteed Minimum Death Benefit rider by
an amount equal to the amount of the partial withdrawal multiplied by the ratio
of the initial specified amount to the initial premium.
An example of a partial withdrawal's effect on the specified amount is
shown below.
EXAMPLE: A Policy with a specified amount of $200,000 on a male standard
(age 35) has a guideline single premium of $48,920. The ratio of the initial
specified amount to the initial premium is 4.09 (I.E., 200,000 divided by
48,920). If a $19,000 partial withdrawal is taken after the first Policy year,
the specified amount will be reduced by $77,710 (I.E., 4.09 multiplied by
$19,000).
LOANS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GENERAL
After the Policy date (as long as the Policy is in force) you may borrow
money from us using the Policy as the only security for the loan. Taking a loan
will terminate the
43
<PAGE>
Guaranteed Minimum Death Benefit rider, if any. See Guaranteed Minimum Death
Benefit Rider, p. 41. A loan that is taken from, or secured by, a Policy may
have tax consequences. See Federal Income Tax Considerations, p. 47.
POLICY LOANS ARE o you must borrow at least $500; and
SUBJECT TO CERTAIN o the maximum amount you may borrow is 90% of
CONDITIONS: the cash value, less any surrender charge
and any outstanding loan amount.
When you take a loan, we will withdraw an amount equal to the requested
loan from each of the subaccounts and the fixed account based on your current
premium allocation instructions (unless you specify otherwise). We will transfer
that amount to the loan reserve. The loan reserve is the portion of the fixed
account used as collateral for a Policy loan.
We normally pay the amount of the loan within seven days after we receive
a proper loan request. We may postpone payment of loans under certain
conditions. See Payments We Make, p. 51.
You may request a loan by telephone by calling us at 1-800-525-6205. If the
loan amount you request exceeds $50,000 or if the address of record has been
changed within the past 10 days, we may reject your request. If you do not want
the ability to request a loan by telephone, you should notify us in writing. You
will be required to provide certain information for identification purposes when
you request a loan by telephone. We may ask you to provide us with written
confirmation of your request. We will not be liable for processing a loan
request if we believe the request is genuine.
You may also fax your loan request to us at 319-297-8320. We will not be
responsible for any transmittal problems when you fax your request unless you
report it to us within five business days and send us proof of your fax
transmittal.
You can repay a loan at any time while the Policy is in force. WE WILL
CONSIDER ANY PAYMENTS YOU MAKE ON THE POLICY AS LOAN REPAYMENTS UNLESS THE
PAYMENTS ARE CLEARLY SPECIFIED AS PREMIUM PAYMENTS.
At each Policy anniversary, we will compare the amount of the outstanding
loan to the amount in the loan reserve. We will also make this comparison any
time you repay all or part of the loan, or make a request to borrow an
additional amount. At each such time, if the amount of the outstanding loan
exceeds the amount in the loan reserve, we will withdraw the difference from the
subaccounts and the standard fixed account and transfer it to the loan reserve,
in the same manner as when a loan is made. If the amount in the loan reserve
exceeds the amount of the outstanding loan, we will withdraw the difference from
the loan reserve and transfer it to the subaccounts and the standard fixed
account in the same manner as current premiums are allocated. No charge will be
imposed for these transfers, and these transfers are NOT treated as transfers in
calculating the transfer charge. We reserve the right to require the transfer to
the fixed account if the loans were originally transferred from the fixed
account.
44
<PAGE>
INTEREST RATE CHARGED
The annual interest rate you may pay on a Policy loan is 6.0% and is
payable in arrears on each Policy anniversary. Loan interest that is unpaid when
due will be added to the amount of the loan on each Policy anniversary and will
bear interest at the same rate.
LOAN RESERVE INTEREST RATE CREDITED
We will credit the amount in the loan reserve with interest at an
effective annual rate of 3.0%. We may credit a higher rate, but we are not
obligated to do so.
PREFERRED LOANS
At any time after the Policy date, you may borrow against the Policy up to
an amount that is equal to the cash value MINUS total premiums paid, LESS any
outstanding loan amounts (including any interest owed in the Policy loan(s)).
Such a loan is called a preferred loan. We will charge interest on a preferred
loan at an annual rate of 3.0%, payable in arrears. THIS RATE IS NOT GUARANTEED.
Any existing loan, other than a preferred loan, is not eligible for a preferred
loan rate. Amounts in the loan reserve securing preferred loans accrue interest
at the same 3.0% annual rate as other loans. Consult a tax advisor before taking
a preferred loan because such a loan may have adverse tax consequences. We
reserve the right to modify or discontinue the preferred loan feature.
EFFECT OF POLICY LOANS
A Policy loan affects the Policy because we reduce the death benefit
proceeds and net surrender value under the Policy by the amount of any
outstanding loan plus interest you owe on the loans. Repaying the loan causes
the death benefit proceeds and net surrender value to increase by the amount of
the repayment. As long as a loan is outstanding, we hold an amount equal to the
loan in the loan reserve. This amount is not affected by the separate account's
investment performance and may not be credited with the interest rates accruing
on the fixed account options. Amounts transferred from the separate account to
the loan reserve will affect the value in the separate account because we credit
such amounts with an interest rate declared by us rather than a rate of return
reflecting the investment results of the separate account. Taking a Policy loan
will cause a Guaranteed Minimum Death Benefit rider to terminate.
There are risks involved in taking a Policy loan, a few of which include
the potential for a Policy to lapse if projected earnings, taking into account
outstanding loans, are not achieved. A Policy loan may also have possible
adverse tax consequences that could occur if a Policy lapses with loans
outstanding (see Federal Income Tax Considerations, p. 47). You should consult a
tax advisor before taking out a Policy loan.
We will notify you (and any assignee of record) if the sum of your loans
plus any interest you owe on the loans is more than the net surrender value. If
you do not submit a sufficient payment within 61 days from the date of the
notice, your Policy may lapse.
We will accept 1035 Exchanges where the policy from another company has an
outstanding policy loan of no more than 40% of the policy's cash value
transferred to our Policy. We intend to treat these as preferred loan amounts.
45
<PAGE>
POLICY LAPSE AND REINSTATEMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LAPSE
Your Policy may lapse (terminate without value) if the net surrender value
on any Monthiversary is less than the monthly deductions due on that day. A
lapse might also occur if poor investment results cause a decrease in the net
surrender value.
The monthly deductions may exceed the net surrender value if:
o we begin to impose monthly cost of insurance charges; or
o the sum of all outstanding Policy loans plus accrued loan interest
exceeds the net surrender value.
If the net surrender value is not enough to pay the monthly deductions, we
will mail a notice to your last known address and to any assignee of record. The
notice will specify the minimum payment you must pay and the final date by which
we must receive the payment to prevent a lapse. We generally require that you
make the payment within 61 days after the date of the notice. This 61-day period
is called the GRACE PERIOD. If we do not receive the specified minimum payment
by the end of the grace period, all coverage under the Policy will terminate
without value.
Generally, you may not reinstate this Policy after it has lapsed. See
Reinstatement below.
If you purchase the Guaranteed Minimum Death Benefit rider, then no grace
period will begin (and the Policy will not lapse) provided that there have been
no Policy loans. See Guaranteed Minimum Death Benefit Rider, p. 41.
REINSTATEMENT
You may not reinstate your Policy if it lapses unless you completed the
Policy application and had your Policy delivered to you in a state which permits
reinstatement. If so, then we will reinstate a lapsed Policy within five years
from the date of lapse (and prior to the maturity date). To reinstate the Policy
you must:
o submit a written application for reinstatement;
o provide evidence of insurability satisfactory to us;
o make a payment that is large enough to cover:
-> any monthly deductions due at the time of termination and upon
reinstatement; plus
-> one monthly deduction in advance; plus
-> repayment of outstanding loans plus unpaid interest.
We will not reinstate any indebtedness. The cash value of the loan reserve on
the reinstatement date will be zero. The reinstatement date for your Policy will
be the monthly
46
<PAGE>
anniversary on or following the day we approve your application for
reinstatement. We may decline a request for reinstatement.
FEDERAL INCOME TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following summary provides a general description of the federal income
tax considerations associated with a Policy and does not purport to be complete
or to cover all situations. THIS DISCUSSION IS NOT INTENDED AS TAX ADVICE.
Please consult counsel or other qualified tax advisors for more complete
information. We base this discussion on our understanding of the present federal
income tax laws as they are currently interpreted by the Internal Revenue
Service (the "IRS"). Federal income tax laws and the current interpretations by
the IRS may change.
TAX STATUS OF THE POLICY
A Policy must satisfy certain requirements set forth in the Internal
Revenue Code (the "Code") in order to qualify as a life insurance policy for
federal income tax purposes and to receive the tax treatment normally accorded
life insurance policies under federal tax law. Guidance as to how these
requirements are to be applied is limited. Nevertheless, it is reasonable to
conclude that the Policy should satisfy the applicable Code requirements.
Because of certain innovative features of the Policies and the absence of
pertinent interpretations of the Code requirements, there is, however, some
uncertainty about the application of such requirements to the Policy. If it is
subsequently determined that a Policy does not satisfy the applicable
requirements, we may take appropriate steps to bring the Policy into compliance
with such requirements and we reserve the right to restrict Policy transactions
in order to do so.
In certain circumstances, owners of variable life insurance policies have
been considered for federal income tax purposes to be the owners of the assets
of the separate account supporting their policies due to their ability to
exercise investment control over those assets. Where this is the case, the
policyowners have been currently taxed on income and gains attributable to the
separate account assets. There is little guidance in this area, and some
features of the Policies, such as flexibility to allocate premiums and cash
values, have not been explicitly addressed in published rulings. While we
believe that the Policy does not give you investment control over separate
account assets, we reserve the right to modify the Policy as necessary to
prevent you from being treated as the owner of the separate account assets
supporting the Policy.
In addition, the Code requires that the investments of the separate account
be "adequately diversified" in order to treat the Policy as a life insurance
policy for federal income tax purposes. We intend that the separate account,
through the portfolios, will satisfy these diversification requirements.
The following discussion assumes that the Policy will qualify as a life
insurance Policy for federal income tax purposes.
47
<PAGE>
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. We believe that the death benefit under a Policy should be
excludable from the beneficiary's gross income. Federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy proceeds
depend on your circumstances and the beneficiary's circumstances. A tax advisor
should be consulted on these consequences.
Generally, you will not be deemed to be in constructive receipt of the cash
value until there is a distribution. When distributions from a Policy occur, or
when loans are taken out from or secured by (E.G., by assignment), a Policy, the
tax consequences depend on whether the Policy is classified as a "Modified
Endowment Contract."
MODIFIED ENDOWMENT CONTRACTS. Under the Code, certain life insurance
policies are classified as "Modified Endowment Contracts" ("MECs") and receive
less favorable tax treatment than other life insurance policies. IN MOST
SITUATIONS, THE POLICIES WILL BE CLASSIFIED AS MECS. There are, however, certain
limited situations where a Policy may not be classified as a MEC. If you do not
want your Policy to be classified as a MEC, you should consult a tax advisor to
determine the circumstances, if any, under which your Policy would not be
classified as a MEC.
Upon issue of your Policy, we will notify you as to whether or not your
Policy is classified as a MEC based on the initial premium we receive. If your
Policy is not a MEC at issue, you will also be notified of the maximum amount of
additional premiums you can pay annually without causing your Policy to be
classified as a MEC. If a payment would cause your Policy to become a MEC, you
and your agent will be notified. At that time, you will need to notify us if you
want to continue your Policy as a MEC.
DISTRIBUTIONS FROM MODIFIED ENDOWMENT CONTRACTS. Policies classified as
MECs are subject to the following tax rules:
o All distributions other than death benefits from a MEC, including
distributions upon surrender and partial withdrawals, will be treated
first as distributions of gain taxable as ordinary income. They will
be treated as tax-free recovery of the owner's investment in the
Policy only after all gain has been distributed. Your investment in
the Policy is generally your total premium payments. When a
distribution is taken from the Policy, your investment in the Policy
is reduced by the amount of the distribution that is tax-free.
o Loans taken from or secured by (E.G., by assignment) such a Policy are
treated as distributions and taxed accordingly.
o A 10% additional federal income tax is imposed on the amount included
in income except where the distribution or loan is made when you have
attained age 59 1/2 or are disabled, or where the distribution is part
of a series of substantially equal periodic payments for your life (or
life expectancy) or the joint lives (or joint life expectancies) of
you and the beneficiary.
DISTRIBUTIONS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT
CONTRACTS. Distributions from a Policy that is not a MEC are generally treated
first as a recovery of your investment
48
<PAGE>
in the Policy, and as taxable income after the recovery of all investment in the
Policy. However, certain distributions which must be made in order to enable the
Policy to continue to qualify as a life insurance policy for federal income tax
purposes if Policy benefits are reduced during the first 15 Policy years may be
treated in whole or in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not a MEC are generally not
treated as distributions. Instead, such loans are treated as indebtedness.
However, the tax consequences associated with preferred loans are less clear and
a tax advisor should be consulted about such loans.
Finally, neither distributions from nor loans from or secured by a Policy
that is not a MEC are subject to the 10% additional tax.
MULTIPLE POLICIES. All MECs that we issue (or that our affiliates issue) to
the same owner during any calendar year are treated as one MEC for purposes of
determining the amount includable in the owner's income when a taxable
distribution occurs.
DEDUCTIBILITY OF POLICY LOAN INTEREST. In general, interest you pay on a
loan from a Policy will not be deductible. Before taking out a Policy loan, you
should consult a tax advisor as to the tax consequences.
INVESTMENT IN THE POLICY. Your investment in the Policy is generally the
sum of the premium payments you made. When a distribution from the Policy
occurs, your investment in the Policy is reduced by the amount of the
distribution that is tax-free.
BUSINESS USES OF THE POLICY. The Policy may be used in various
arrangements, including nonqualified deferred compensation or salary continuance
plans, split dollar insurance plans, executive bonus plans, retiree medical
benefit plans and others. The tax consequences of such plans and business uses
of the Policy may vary depending on the particular facts and circumstances of
each individual arrangement and business uses of the Policy. Therefore, if you
are contemplating using the Policy in any arrangement the value of which depends
in part on its tax consequences, you should be sure to consult a tax advisor as
to tax attributes of the arrangement. In recent years, moreover, Congress has
adopted new rules relating to life insurance owned by businesses. Any business
contemplating the purchase of a new Policy or a change in an existing Policy
should consult a tax advisor.
TAX TREATMENT OF POLICY SPLIT. If you purchase a Joint Policy, the Policy
Split Option permits you to split the Policy into two new individual life
insurance policies upon the occurrence of a divorce of the joint insureds,
certain changes in federal estate tax law, or a dissolution of a business
partnership of which the joint insureds were partners. (See Policy Split Option,
p. 24.) A Policy split could have adverse tax consequences. For example, it is
not clear whether a Policy split will be treated as a nontaxable exchange under
Sections 1031 through 1043 of the Code. If a Policy split is not treated as a
nontaxable exchange, a split could result in the recognition of taxable income
in an amount up to any gain in the Policy at the time of the split. It is also
not clear whether the individual policies that result from a Policy split would
in all circumstances be treated as life insurance policies
49
<PAGE>
for federal income tax purposes and, if so treated, whether the individual
policies would be classified as MECs. Before you exercise your rights under the
Policy Split Option, you should consult a competent tax advisor regarding the
possible consequences of a Policy split.
POSSIBLE TAX LAW CHANGES. Although the likelihood of legislative changes
is uncertain, there is always a possibility that the tax treatment of the
Policies could change by legislation or otherwise. You should consult a tax
advisor with respect to legislative developments and their effect on the
Policy.
OTHER POLICY INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OUR RIGHT TO CONTEST THE POLICY
In issuing this Policy, we rely on all statements made by or for the
insured (or joint insureds) in the application or in a supplemental application.
Therefore, if you make any material misrepresentation of a fact in the
application (or any supplemental application), then we may contest the Policy's
validity or may resist a claim under the Policy.
In the absence of fraud, we cannot bring any legal action to contest the
validity of the Policy after the Policy has been in force during the insured's
lifetime (or while both joint insureds are still alive) for two years from the
Policy date, or if reinstated (if permitted by state law), for two years from
the date of reinstatement. If you purchased a Joint Policy, at the end of the
second Policy year, we will send you a notice asking you whether either joint
insured has died. We can still contest the Policy's validity even if you do not
notify us that a joint insured has died and even if the Policy is still in
force.
SUICIDE EXCLUSION
If the insured (or either joint insured) commits suicide, while sane or
insane, within two years of the Policy date, then the Policy will terminate and
our total liability, including the Guaranteed Minimum Death Benefit rider, is
limited to an amount equal to the total premiums paid, less any loans and less
any partial withdrawals. We will pay this amount to the beneficiary in one sum.
If the Policy lapsed, we will measure the suicide period from the reinstatement
date (if permitted by state law).
MISSTATEMENT OF AGE OR GENDER
If the age or gender of the insured (or either joint insured) was stated
incorrectly in the application or any supplemental application, then the death
benefit will be adjusted based on what the initial premium would have purchased
based on the insured(s) correct age and gender.
MODIFYING THE POLICY
Only our President or Secretary may modify this Policy or waive any of our
rights or requirements under this Policy. Any modification or waiver must be in
writing. No agent may bind us by making any promise not contained in this
Policy.
50
<PAGE>
If we modify the Policy, we will provide you with notice and we will make
appropriate endorsements to the Policy.
BENEFITS AT MATURITY
If the insured (or either joint insured) is living and the Policy is in
force, the Policy will mature on the Policy anniversary nearest the insured's
(or a joint insured's) 100th birthday. This is the maturity date. On the
maturity date we will pay you the net surrender value of your Policy.
We will extend the maturity date if your Policy is still in force on the
maturity date. Any riders in force on the scheduled maturity date will terminate
on that date and will not be extended. Interest on any outstanding Policy loans
will continue to accrue during the period for which the maturity date is
extended. You must submit a written request for the extension between 90 and 180
days prior to the maturity date. We will automatically extend the maturity date
until the next Policy anniversary. You must submit a written request, between 90
and 180 days before each subsequent Policy anniversary, stating that you wish to
extend the maturity date for another Policy year.
If you extend the maturity date on each valuation date, we will adjust the
specified amount to equal the cash value, and the limitation percentage will be
100%. We will not permit you to make additional premium payments unless it is
required to prevent the Policy from lapsing. We will waive all future monthly
deductions.
The tax consequences of extending the maturity date beyond the 100th
birthday of the insured (or a joint insured) are uncertain. You should consult a
tax advisor as to those consequences.
PAYMENTS WE MAKE
We usually pay the amounts of any surrender, partial withdrawal, death
benefit proceeds, or settlement options within seven business days after we
receive all applicable written notices and/or due proofs of death. However, we
can postpone such payments if:
o the NYSE is closed, other than customary weekend and holiday closing,
or trading on the NYSE is restricted as determined by the SEC; OR
o the SEC permits, by an order, the postponement for the protection of
policyowners; OR
o the SEC determines that an emergency exists that would make the
disposal of securities held in the separate account or the
determination of their value not reasonably practicable.
If you have submitted a recent check or draft, we have the right to defer
payment of surrenders, partial withdrawals, death benefit proceeds, or payments
under a settlement option until such check or draft has been honored. We also
reserve the right to defer payment of transfers, partial withdrawals, or
surrenders from the fixed account for up to six months.
51
<PAGE>
REPORTS TO OWNERS
At least once each year, or more often as required by law, we will mail to
policyowners at their last known address a report showing the following
information as of the end of the report period:
<TABLE>
<S> <C> <C> <C>
/checkmark/ the current cash value /checkmark/ any activity since the last report
/checkmark/ the current net surrender value /checkmark/ investment experience of each subaccount
/checkmark/ the current death benefit /checkmark/ any other information required by law
/checkmark/ any outstanding loans
</TABLE>
You may request additional copies of reports, but we may charge a fee for
such additional copies. In addition, we will send written confirmations of any
premium payments and other financial transactions you request. We also will send
copies of the annual and semi-annual report to shareholders for each portfolio
in which you are indirectly invested.
RECORDS
We will maintain all records relating to the separate account and the fixed
account.
POLICY TERMINATION
Your Policy will terminate on the earliest of:
<TABLE>
<S> <C> <C> <C>
o the maturity date; o the end of the grace period; or
o the date the insured (or surviving o the date the Policy is
insured) dies; surrendered.
</TABLE>
IMSA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We are a charter member of the Insurance Marketplace Standards Association
("IMSA"). IMSA is an independent, voluntary organization of life insurance
companies. It promotes high ethical standards in the sales, advertising and
servicing of individual life insurance and annuity products. Companies must
undergo a rigorous self and independent assessment of their practices to become
a member of IMSA. The IMSA logo in our sales literature shows our ongoing
commitment to these standards.
PERFORMANCE DATA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RATES OF RETURN
This section shows the historical investment experience of the portfolios
based on the portfolios' historical investment experience. This information does
not represent or project future investment performance.
We base the rates of return that we show below on each portfolio's actual
investment performance. We deduct investment management fees and direct fund
expenses. The rates are average annual compounded rates of return for the
periods ended on December 31, 1998.
52
<PAGE>
These rates of return do not reflect any charges that are deducted under
the Policy or from the separate account (such as the daily charge, the monthly
deduction or the surrender charge). IF THESE CHARGES WERE DEDUCTED, PERFORMANCE
WOULD BE LOWER. These rates are not estimates, projections or guarantees of
future performance.
AVERAGE ANNUAL COMPOUNDED RATES OF RETURN
FOR THE PERIODS ENDED ON DECEMBER 31, 1998
<TABLE>
<CAPTION>
INCEPTION
FUND PORTFOLIO INCEPTION 10 YEARS 5 YEARS 1 YEAR DATE
- -------------- --------- -------- ------- ------ ---------
<S> <C> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund ............ 18.77% N/A 17.23% 19.30% 5/5/93
AIM V.I. Government Securities Fund ........... 5.76% N/A 5.80% 7.73% 5/5/93
AIM V.I. Growth and Income Fund ............... 22.49% N/A 24.41% 27.68% 5/2/94
AIM V.I. Value Fund ........................... 21.90% N/A 21.70% 32.41% 5/5/93
Dreyfus Stock Index Fund ...................... 17.12% N/A 23.58% 28.21% 9/29/89
Dreyfus -- Small Company
Stock Portfolio ............................. 8.55% N/A N/A (5.97)% 5/1/96
MFS Emerging Growth Series .................... 26.55% N/A N/A 34.16% 7/24/95
MFS Research Series ........................... 22.52% N/A N/A 23.39% 7/26/95
MFS Total Return Series ....................... 18.73% N/A N/A 12.33% 1/3/95
MFS Utilities Series .......................... 25.40% N/A N/A 18.06% 1/3/95
Oppenheimer Capital Appreciation Fund ......... 16.03% 16.85% 22.10% 24.00% 4/3/85
Oppenheimer Global Securities Fund ............ 12.49% N/A 9.66% 14.10% 11/12/90
Oppenheimer High Income Fund .................. 12.96% 12.71% 8.62% 0.30% 12/31/87
Oppenheimer Main Street Growth & Income
Fund ........................................ 27.00% N/A N/A 4.70% 7/5/95
Oppenheimer Strategic Bond Fund ............... 6.79% N/A 6.83% 2.90% 5/5/93
WRL VKAM Emerging Growth ...................... 23.09% N/A 21.95% 37.33% 3/1/93
WRL Janus Global .............................. 21.94% N/A 19.46% 30.01% 12/3/92
WRL Janus Growth .............................. 20.91% 22.61% 25.20% 64.47% 10/2/86
</TABLE>
The annualized yield for the Dreyfus -- Money Market for the seven days
ending December 31, 1998 was 4.62%.
Additional information regarding the investment performance of the
portfolios appears in the attached fund prospectuses.
HYPOTHETICAL ILLUSTRATIONS BASED ON ADJUSTED PORTFOLIO PERFORMANCE
This section contains hypothetical illustrations of Policy values based on
the adjusted historical experience of the portfolios. We started selling the
Policies in 1999. The separate account was established on November 20, 1998 and
will commence operations in August 1999. The portfolios commenced operations
before the separate account. The rates of return below show the adjusted actual
investment experience of each portfolio for the periods shown, including periods
before the separate account commenced operations. The illustrations of cash
values and net surrender values below depict these Policy values as if you had
purchased the Policy without the Guaranteed Minimum Death Benefit rider on the
last valuation date prior to January 1 of the year after the portfolio began
operations. WE
53
<PAGE>
ASSUMED THE RATE OF RETURN FOR EACH PORTFOLIO IN EACH CALENDAR YEAR TO BE
UNIFORMLY EARNED THROUGHOUT THE YEAR; HOWEVER, THE PORTFOLIO'S ACTUAL
PERFORMANCE DID AND WILL VARY THROUGHOUT THE YEAR.
In order to demonstrate how the actual investment experience of the
portfolios could have affected the cash value and net surrender value of the
Policy, we provide hypothetical illustrations for a hypothetical insured. THESE
HYPOTHETICAL ILLUSTRATIONS ARE DESIGNED TO SHOW THE PERFORMANCE THAT COULD HAVE
RESULTED IF THE HYPOTHETICAL INSURED COULD HAVE HELD THE POLICY DURING THE
PERIOD ILLUSTRATED. These illustrations do not represent what may happen in the
future.
The amounts we show for cash values and net surrender values take into
account all charges and deductions from the Policy, the separate account, and
the portfolios. For each portfolio, we base one illustration on the guaranteed
cost of insurance rates and one on the current cost of insurance rates for a
single life Policy for a hypothetical male insured age 35. The insured's age,
gender and rate class, amount and timing of premium payments, withdrawals, and
loans would affect individual Policy benefits.
For each portfolio, the illustrations below assume the Policy was purchased
without the Guaranteed Minimum Death Benefit rider based on an initial premium
of $30,000 and a specified amount of $147,487 for a male age 35, select,
non-tobacco use, rate class.
The following example shows how the hypothetical net return of the AIM V.I.
Capital Appreciation Fund would have affected benefits for a Policy dated on the
last valuation date prior to January 1, 1994. This example assumes that the
premium and cash values were invested in the portfolio for the entire period and
that the values were determined on each Policy anniversary thereafter.
AIM V.I. CAPITAL APPRECIATION FUND
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1995 $29,991 $29,792 $27,066 $26,867
1996* 39,688 39,190 36,838 36,340
1997* 45,511 44,726 42,736 41,951
1998* 50,381 49,300 47,681 46,600
1999* 58,617 57,139 56,217 54,739
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
54
<PAGE>
The following example shows how the hypothetical net return of the AIM V.I.
Government Securities Fund would have affected benefits for a Policy dated on
the last valuation date prior to January 1, 1994. This example assumes that the
premium and cash values were invested in the portfolio for the entire period and
that the values were determined on each Policy anniversary thereafter.
AIM V.I. GOVERNMENT SECURITIES FUND
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1995 $28,168 $27,974 $25,243 $25,049
1996* 31,745 31,304 28,895 28,454
1997* 31,670 31,012 28,895 28,237
1998* 33,408 32,476 30,708 29,776
1999* 35,100 33,870 32,700 31,470
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
The following example shows how the hypothetical net return of the AIM V.I.
Growth and Income Fund would have affected benefits for a Policy dated on the
last valuation date prior to January 1, 1995. This example assumes that the
premium and cash values were invested in the portfolio for the entire period and
that the values were determined on each Policy anniversary thereafter.
AIM V.I. GROWTH AND INCOME FUND
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 $39,165 $39,943 $36,240 $36,018
1997* 45,817 45,353 42,967 42,503
1998* 56,177 55,402 53,402 52,627
1999* 69,953 68,778 67,253 66,078
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
55
<PAGE>
The following example shows how the hypothetical net return of the AIM V.I.
Value Fund would have affected benefits for a Policy dated on the last valuation
date prior to January 1, 1994. This example assumes that the premium and cash
values were invested in the portfolio for the entire period and that the values
were determined on each Policy anniversary thereafter.
AIM V.I. VALUE FUND
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1995 $30,441 $30,241 $27,516 $27,316
1996* 40,450 39,951 37,600 37,101
1997* 45,374 44,602 42,599 41,827
1998* 54,735 53,585 52,035 50,885
1999* 70,685 68,969 68,285 66,569
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
The following example shows how the hypothetical net return of the Dreyfus
Stock Index Fund would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1990. This example assumes that the premium
and cash values were invested in the portfolio for the entire period and that
the values were determined on each Policy anniversary thereafter.
DREYFUS STOCK INDEX FUND
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------- ------------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
1991 $ 28,238 $28,045 $ 25,313 $25,120
1992* 35,761 35,281 32,911 32,431
1993* 37,355 36,639 34,580 33,864
1994* 39,829 38,839 37,129 36,139
1995* 39,188 37,983 36,788 35,583
1996* 52,278 50,390 50,178 48,290
1997* 62,480 59,970 60,680 58,170
1998* 81,023 77,486 79,823 76,286
1999* 101,312 96,533 100,712 95,933
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
56
<PAGE>
The following example shows how the hypothetical net return of the Dreyfus
- -- Money Market Portfolio would have affected benefits for a Policy dated on the
last valuation date prior to January 1, 1991. This example assumes that the
premium and cash values were invested in the portfolio for the entire period and
that the values were determined on each Policy anniversary thereafter.
DREYFUS -- MONEY MARKET PORTFOLIO
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1992 $31,011 $30,810 $28,086 $27,885
1993* 31,500 31,088 28,650 28,238
1994* 31,731 31,096 28,956 28,321
1995* 32,299 31,419 29,599 28,719
1996* 33,283 32,124 30,883 29,724
1997* 34,115 32,660 32,015 30,560
1998* 34,997 33,218 33,197 31,418
1999* 35,878 33,748 34,678 32,548
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
The following example shows how the hypothetical net return of the Dreyfus
- -- Small Company Stock Portfolio would have affected benefits for a Policy dated
on the last valuation date prior to January 1, 1997. This example assumes that
the premium and cash values were invested in the portfolio for the entire period
and that the values were determined on each Policy anniversary thereafter.
DREYFUS -- SMALL COMPANY STOCK PORTFOLIO
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1998 $35,628 $35,414 $32,703 $32,489
1999* 32,673 32,285 29,823 29,435
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
57
<PAGE>
The following example shows how the hypothetical net return of the MFS
Emerging Growth Series would have affected benefits for a Policy dated on the
last valuation date prior to January 1, 1996. This example assumes that the
premium and cash values were invested in the portfolio for the entire period and
that the values were determined on each Policy anniversary thereafter.
MFS EMERGING GROWTH SERIES
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1997 $34,237 $34,027 $31,312 $31,102
1998* 40,703 40,238 37,853 37,388
1999* 53,257 52,426 50,482 49,651
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
The following example shows how the hypothetical net return of the MFS
Research Series would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1996. This example assumes that the premium
and cash values were invested in the portfolio for the entire period and that
the values were determined on each Policy anniversary thereafter.
MFS RESEARCH SERIES
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1997 $35,792 $35,578 $32,867 $32,653
1998* 41,980 41,518 39,130 38,668
1999* 50,518 49,749 47,743 46,974
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
58
<PAGE>
The following example shows how the hypothetical net return of the MFS
Total Return Series would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1995. This example assumes that the premium
and cash values were invested in the portfolio for the entire period and that
the values were determined on each Policy anniversary thereafter.
MFS TOTAL RETURN SERIES
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 $33,881 $33,672 $30,956 $30,747
1997* 37,792 37,349 34,942 34,499
1998* 44,708 43,962 41,933 41,187
1999* 48,980 47,949 46,280 45,249
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
The following example shows how the hypothetical net return of the MFS
Utilities Series would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1995. This example assumes that the premium
and cash values were invested in the portfolio for the entire period and that
the values were determined on each Policy anniversary thereafter.
MFS UTILITIES SERIES
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 $35,828 $35,613 $32,903 $32,688
1997* 41,411 40,953 38,561 38,103
1998* 53,189 52,382 50,414 49,607
1999* 61,243 60,116 58,543 57,416
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
59
<PAGE>
The following example shows how the hypothetical net return of the
Oppenheimer Capital Appreciation Fund would have affected benefits for a Policy
dated on the last valuation date prior to January 1, 1986. This example assumes
that the premium and cash values were invested in the portfolio for the entire
period and that the values were determined on each Policy anniversary
thereafter.
OPPENHEIMER CAPITAL APPRECIATION FUND
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------- ------------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
1987 $ 33,952 $ 33,742 $ 31,027 $ 30,817
1988* 38,830 38,378 35,980 35,528
1989* 44,237 43,507 41,462 40,732
1990* 53,320 52,218 50,620 49,518
1991* 47,733 46,548 45,333 44,148
1992* 58,441 56,744 56,341 54,644
1993* 65,280 63,152 63,480 61,352
1994* 68,279 65,816 67,079 64,616
1995* 67,241 64,576 66,641 63,976
1996* 89,622 85,748 89,622 85,748
1997* 110,531 105,350 110,531 105,350
1998* 137,948 130,969 137,948 130,969
1999* 168,506 159,343 168,506 159,343
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
The following example shows how the hypothetical net return of the
Oppenheimer Global Securities Fund would have affected benefits for a Policy
dated on the last valuation date prior to January 1, 1991. This example assumes
that the premium and cash values were invested in the portfolio for the entire
period and that the values were determined on each Policy anniversary
thereafter.
OPPENHEIMER GLOBAL SECURITIES FUND
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1992 $30,249 $30,050 $27,324 $27,125
1993* 27,405 27,026 24,555 24,176
1994* 45,524 44,608 42,749 41,833
1995* 41,859 40,818 39,159 38,118
1996* 41,740 40,473 39,340 38,073
1997* 47,953 46,240 45,853 44,140
1998* 57,255 54,944 55,455 53,144
1999* 63,719 60,895 62,519 59,695
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
60
<PAGE>
The following example shows how the hypothetical net return of the
Oppenheimer High Income Fund would have affected benefits for a Policy dated on
the last valuation date prior to January 1, 1988. This example assumes that the
premium and cash values were invested in the portfolio for the entire period and
that the values were determined on each Policy anniversary thereafter.
OPPENHEIMER HIGH INCOME FUND
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1989 $32,966 $32,760 $30,041 $29,835
1990* 33,709 33,293 30,859 30,443
1991* 34,406 33,764 31,631 30,989
1992* 44,934 43,843 42,234 41,143
1993* 51,676 50,188 49,276 47,788
1994* 63,674 61,603 61,574 59,503
1995* 60,128 57,962 58,328 56,162
1996* 70,588 67,791 69,388 66,591
1997* 79,339 75,915 78,739 75,315
1998* 86,835 82,776 86,835 82,776
1999* 85,807 81,485 85,807 81,485
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
The following example shows how the hypothetical net return of the
Oppenheimer Main Street Growth & Income Fund would have affected benefits for a
Policy dated on the last valuation date prior to January 1, 1996. This example
assumes that the premium and cash values were invested in the portfolio for the
entire period and that the values were determined on each Policy anniversary
thereafter.
OPPENHEIMER MAIN STREET GROWTH & INCOME FUND
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1997 $38,771 $38,550 $35,846 $35,624
1998* 50,095 49,596 47,245 46,746
1999* 51,155 50,460 48,380 47,685
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
61
<PAGE>
The following example shows how the hypothetical net return of the
Oppenheimer Strategic Bond Fund would have affected benefits for a Policy dated
on the last valuation date prior to January 1, 1994. This example assumes that
the premium and cash values were invested in the portfolio for the entire period
and that the values were determined on each Policy anniversary thereafter.
OPPENHEIMER STRATEGIC BOND FUND
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1995 $28,153 $27,960 $25,228 $25,035
1996* 31,665 31,225 28,815 28,375
1997* 34,610 33,902 31,835 31,127
1998* 36,696 35,713 33,996 33,013
1999* 36,828 35,602 34,428 33,202
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
The following example shows how the hypothetical net return of the WRL VKAM
Emerging Growth portfolio would have affected benefits for a Policy dated on the
last valuation date prior to January 1, 1994. This example assumes that the
premium and cash values were invested in the portfolio for the entire period and
that the values were determined on each Policy anniversary thereafter.
WRL VKAM EMERGING GROWTH PORTFOLIO
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1995 $27,106 $26,916 $24,181 $23,991
1996* 38,806 38,284 35,956 35,434
1997* 44,994 44,171 42,219 41,396
1998* 53,294 52,099 50,594 49,399
1999* 71,377 69,542 68,977 67,142
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
62
<PAGE>
The following example shows how the hypothetical net return of the WRL
Janus Global portfolio would have affected benefits for a Policy dated on the
last valuation date prior to January 1, 1993. This example assumes that the
premium and cash values were invested in the portfolio for the entire period and
that the values were determined on each Policy anniversary thereafter.
WRL JANUS GLOBAL
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------ -----------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1994 $39,512 $39,289 $36,587 $36,364
1995* 38,632 38,224 35,782 35,374
1996* 46,364 45,654 43,589 42,879
1997* 57,761 56,657 55,061 53,957
1998* 66,898 65,406 64,498 63,006
1999* 84,824 82,648 82,724 80,548
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
The following example shows how the hypothetical net return of the WRL
Janus Growth portfolio would have affected benefits for a Policy dated on the
last valuation date prior to January 1, 1987. This example assumes that the
premium and cash values were invested in the portfolio for the entire period and
that the values were determined on each Policy anniversary thereafter.
WRL JANUS GROWTH
MALE ISSUE AGE 35, $30,000 SINGLE PREMIUM
($147,487 SPECIFIED AMOUNT, SELECT, NON-TOBACCO USE CLASS)
BOTH CURRENT AND GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
CASH VALUE NET SURRENDER VALUE
------------------------- ------------------------
CURRENT GUARANTEED CURRENT GUARANTEED
Last valuation date prior to January 1: ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
1988 $ 32,449 $ 32,244 $ 29,524 $ 29,319
1989* 37,540 37,086 34,690 34,236
1990* 53,833 52,943 51,058 50,168
1991* 52,386 51,333 49,686 48,633
1992* 81,639 79,728 79,239 77,328
1993* 81,493 79,313 79,393 77,213
1994* 82,634 80,140 80,834 78,340
1995* 73,893 71,405 72,693 70,205
1996* 106,021 102,074 105,421 101,474
1997* 121,971 116,991 121,971 116,991
1998* 141,225 134,943 141,225 134,943
</TABLE>
* For each year shown, benefits and values reflect only single premium paid.
63
<PAGE>
OTHER PERFORMANCE DATA IN ADVERTISING SALES LITERATURE
We may compare each subaccount's performance to the performance of:
o other variable life issuers in general;
o variable life insurance policies which invest in mutual funds with
similar investment objectives and policies, as reported by Lipper
Analytical Services, Inc. ("Lipper") and Morningstar, Inc.
("Morningstar"); and other services, companies, individuals, or
industry or financial publications (E.G. FORBES, MONEY, THE WALL
STREET JOURNAL, BUSINESS WEEK, BARRON'S, KIPLINGER'S PERSONAL FINANCE,
and FORTUNE);
-> Lipper and Morningstar rank variable annuity contracts and
variable life policies. Their performance analysis ranks such
policies and contracts on the basis of total return, and assumes
reinvestment of distributions; but it does not show sales
charges, redemption fees or certain expense deductions at the
separate account level.
o the Standard & Poor's Index of 500 Common Stocks, or other widely
recognized indices;
-> unmanaged indices may assume the reinvestment of dividends, but
usually do not reflect deductions for the expenses of operating
or managing an investment portfolio; or
o other types of investments, such as:
-> certificates of deposit;
-> savings accounts and U.S. Treasuries;
-> certain interest rate and inflation indices (E.G. the Consumer
Price Index); or
-> indices measuring the performance of a defined group of
securities recognized by investors as representing a particular
segment of the securities markets (E.G. Donoghue Money Market
Institutional Average, Lehman Brothers Corporate Bond Index, or
Lehman Brothers Government Bond Index).
PFL'S PUBLISHED RATINGS
We may publish in advertisements, sales literature, or reports we send to
you the ratings and other information that an independent ratings organization
assigns to us. These organizations include: A.M. Best Company, Moody's Investors
Service, Inc., Standard & Poor's Insurance Rating Services, and Duff & Phelps
Credit Rating Co. These ratings are opinions regarding an operating insurance
company's financial capacity to meet the obligations of its insurance policies
in accordance with their terms. These ratings do not apply to the separate
account, the subaccounts, the funds or their portfolios, or to their
performance.
64
<PAGE>
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SALE OF THE POLICIES
The Policy will be sold by individuals who are licensed as our life
insurance agents and who are also registered representatives of broker-dealers
having written sales agreements for the Policy with AFSG Securities Corporation
("AFSG"), the principal underwriter of the Policy. AFSG is located at 4333
Edgewood Road NE, Cedar Rapids, Iowa 52499. AFSG is registered with the SEC
under the Securities Exchange Act of 1934 as a broker-dealer, and is a member of
the National Association of Securities Dealers, Inc. The maximum sales
commission payable to PFL agents or other registered representatives will be
approximately 7.65% of the initial premium. In addition, certain production,
persistency and managerial bonuses may be paid.
LEGAL MATTERS
Sutherland Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain legal matters relating to the Policy under the federal securities laws.
All matters of Iowa law pertaining to the Policy have been passed upon by Frank
A. Camp, Vice President and Division General Counsel of PFL.
LEGAL PROCEEDINGS
Like other life insurance companies, we are involved in lawsuits. We are
not aware of any class action lawsuits naming us as a defendant or involving the
separate account. In some lawsuits involving other insurers, substantial damages
have been sought and/or material settlement payments have been made. Although
the outcome of any litigation cannot be predicted with certainty, we believe
that at the present time there are no pending or threatened lawsuits that are
reasonably likely to have a material adverse impact on us, or AFSG, or the
separate account.
VARIATIONS IN POLICY PROVISIONS
Certain provisions of the Policy may vary from the descriptions in this
prospectus in order to comply with different state laws. These variations may
include restrictions on Policy reinstatement, use of the fixed account and
different interest rates charged and credited on Policy loans. Please refer to
your Policy, since any variations will be included in your Policy or in riders
or endorsements attached to your Policy.
YEAR 2000 READINESS DISCLOSURE
We have in place a Year 2000 Project Plan (the "Plan") to review and
analyze existing hardware and software systems, as well as voice and data
communications systems, to determine if they are Year 2000 compliant. As of the
date of this prospectus, all of our mission-critical systems are Year 2000
compliant and ready. The Plan is continuing as scheduled, as we continue with
the validation of our mission-critical and non-mission-critical systems,
including revalidation testing in 1999. In addition, PFL has undertaken
aggressive
65
<PAGE>
initiatives to test all systems that interface with any third parties and other
business partners. All of these steps are aimed at allowing current operations
to remain unaffected by the Year 2000 date change.
As of the date of this prospectus, we have identified and made available
what we believe are the appropriate resources of hardware, people, and dollars,
including the engagement of outside third parties, to ensure that the Plan will
be completed.
Our actions under the Plan are intended to reduce significantly PFL's risk
of a material business interruption based on the Year 2000 issues. Resolving the
Year 2000 computer problem is complex and multifaceted. We cannot know
conclusively whether a response plan is successful until the Year 2000 arrives
(or an earlier date if the systems or equipment address Year 2000 data prior to
the Year 2000). In spite of its efforts or results, PFL's ability to function
unaffected to and through the Year 2000 may be adversely affected by actions, or
failure to act, of third parties beyond our knowledge or control. See the fund
prospectuses for information on their preparation for Year 2000.
This statement is a Year 2000 Readiness Disclosure pursuant to Section 3(9)
of the YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT, 15 U.S.C.
Section 1 (1998).
EXPERTS
There are no financial statements of the Legacy Builder Variable Life
Separate Account since the separate account has not commenced operations as of
the date of this prospectus.
The statutory-basis financial statements and schedules of PFL at December
31, 1998 and 1997 and for each of the three years in the period ended December
31, 1998, appearing in this prospectus and registration statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein. The financial statements and schedules
referred to above are included in reliance upon such report given upon the
authority of such firm as an expert in accounting and auditing.
Actuarial matters included in this prospectus and registration statement
have been examined by Richard Greer as stated in the opinion filed as an exhibit
to the registration statement.
FINANCIAL STATEMENTS
Our financial statements appear on the following pages. You should consider
our financial statements only as bearing upon our ability to meet our
obligations under the Policies. You should not consider our financial statements
as bearing upon the investment performance of the assets held in the separate
account.
Our financial statements as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998 have been prepared on the
basis of statutory accounting principles rather than generally accepted
accounting principles.
ADDITIONAL INFORMATION ABOUT PFL
PFL is a stock life insurance company that is wholly owned by AEGON USA,
Inc., which, in turn, is wholly owned by AEGON N.V., a Netherlands corporation
that is a
66
<PAGE>
publicly traded international insurance group. PFL's office is located at 4333
Edgewood Road NE, Cedar Rapids, Iowa 52499 and the mailing address is P.O. Box
3183, Cedar Rapids, Iowa 52406-3183.
PFL was incorporated in 1961 under Iowa law and is subject to regulation by
the Iowa Commissioner of Insurance as well as by the insurance departments of
all other states and jurisdictions in which it does business. PFL is licensed to
sell insurance in 38 states and Guam. PFL submits annual statements on its
operations and finances to insurance officials in all states and jurisdictions
in which it does business. The Policy described in this prospectus has been
filed with, and where required, approved by, insurance officials in those
jurisdictions in which it is sold.
PFL'S EXECUTIVE OFFICERS AND DIRECTORS
We are governed by a board of directors. The following table gives the
name, address and principal occupation during the past five years of each of our
directors.
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
NAME AND ADDRESS PRINCIPAL OCCUPATION
AND POSITION WITH PFL DURING PAST 5 YEARS
- ----------------------------------------------------------------------------------------
<S> <C>
William L. Busler* Director, Chairman of the Board, and President
Director, Chairman of the
Board, and President
- ----------------------------------------------------------------------------------------
Larry N. Norman* Director, Executive Vice President
Director, Executive Vice President
- ----------------------------------------------------------------------------------------
Patrick S. Baird* Executive Vice President (1995-present), Chief
Director, Senior Vice Operating Officer (1996-present), Chief Financial
President, and Chief Officer (1992-1995), Vice President and Chief Tax
Operating Officer Officer (1984-1995) of AEGON USA.
- ----------------------------------------------------------------------------------------
Douglas C. Kolsrud* Director, Senior Vice President, Chief Investment
Director, Senior Vice Officer and Corporate Actuary
President, Chief Investment
Officer and Corporate Actuary
- ----------------------------------------------------------------------------------------
Craig D. Vermie* Director, Vice President, Secretary and General
Director, Vice President, Counsel
Secretary and General Counsel
- ----------------------------------------------------------------------------------------
</TABLE>
* Located at 4333 Edgewood Road, NE, Cedar Rapids, Iowa 52449.
67
<PAGE>
The following table gives the name, address and principal occupation during the
past five years of the principal officers of PFL (other than officers listed
above as directors).
PRINCIPAL OFFICERS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
NAME AND ADDRESS PRINCIPAL OCCUPATION
AND POSITION WITH PFL DURING PAST 5 YEARS
- ----------------------------------------------------------------------------------------
<S> <C>
Robert J. Kontz* Vice President and Corporate Controller
Vice President and Corporate
Controller
- ----------------------------------------------------------------------------------------
Brenda K. Clancy* Vice President, Treasurer and Chief Financial Officer
Vice President, Treasurer and
Chief Financial Officer
- ----------------------------------------------------------------------------------------
</TABLE>
* Located at 4333 Edgewood Road, NE, Cedar Rapids, Iowa 52449.
PFL holds the assets of the separate account physically segregated and
apart from the general account. PFL maintains records of all purchases and
sales of portfolio shares by each of the subaccounts. A blanket bond issued to
AEGON U.S. Holding Corporation ("AEGON U.S.") in the amount of $10 million,
covering all of the employees of AEGON U.S. and its affiliates, including PFL.
A Stockbrokers Blanket Bond, issued to AEGON U.S.A. Securities, Inc. providing
fidelity coverage, covers the activities of registered representatives of AFSG
to a limit of $10 million.
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT
PFL established the separate account as a separate investment account under
Iowa law in 1998. We own the assets in the separate account and are obligated to
pay all benefits under the Policies. The separate account may be used to support
other variable life insurance policies of PFL, as well as for other purposes
permitted by law. The separate account is registered with the SEC as a unit
investment trust under the 1940 Act and qualifies as a "separate account" within
the meaning of the federal securities laws.
68
<PAGE>
APPENDIX A
ILLUSTRATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following illustrations show how certain values under a sample Policy
would change with different rates of fictional investment performance over an
extended period of time. In particular, the illustrations show how the death
benefit, cash value, and net surrender value under a Policy issued to an insured
of a given age, would change over time if the single premium was paid and the
return on the assets in the subaccounts was a uniform gross annual rate (before
any expenses) of 0%, 6% or 12%. The tables illustrate Policy values that would
result based on assumptions that you pay the initial premium indicated and you
do not take any partial withdrawals or Policy loans. The values under the Policy
will be different from those shown even if the returns averaged 0%, 6% or 12%,
but fluctuated over and under those averages throughout the years shown.
We based the illustration on page 71 on a Policy for an insured who is a 35
year old male in the select, non-tobacco use rate class, initial premium of
$30,000 and a $147,487 initial specified amount and the Policy's death benefit
without the Guaranteed Minimum Death Benefit rider. The illustration on that
page also assumes cost of insurance charges based on our CURRENT cost of
insurance rates. The illustration on page 72 is based on the same factors as
those on page 71, except that cost of insurance rates are based on the
GUARANTEED cost of insurance rates.
We based the illustration on page 73 on a Policy for joint insureds who are
a 55 year old male and a 55 year old female in the select, non-tobacco use rate
class, initial premium of $30,000, a $109,579 initial specified amount and the
Policy's death benefit without the Guaranteed Minimum Death Benefit rider. The
illustration on that page also assumes cost of insurance charges based on our
CURRENT cost of insurance rates. The illustration on page 74 is based on the
same factors as those on page 73, except that cost of insurance rates are based
on the GUARANTEED cost of insurance rates.
For the CURRENT cost of insurance illustrations, we do not currently assess
any additional cost of insurance charge and we do not intend to assess this
charge in the future, although we reserve the right to do so. For the GUARANTEED
cost of insurance illustrations, this cost of insurance charge deduction is
based on the 1980 Commissioners Standard Ordinary Mortality Table of rates.
The amounts we show for the death benefits, cash values and net surrender
values take into account (1) the daily charge for assuming mortality and expense
risks assessed against each subaccount. This charge is equivalent to an annual
charge of 0.50% of the average net assets of the subaccounts; (2) estimated
daily expenses equivalent to an effective average annual expense level of 0.77%
of the portfolios' average daily net assets; and (3) all applicable cash value
charges using the current monthly Policy charge. The 0.77% average portfolio
expense level assumes an equal allocation of amounts among the 19 subaccounts.
It is based on an average 0.67% investment advisory fee and estimated 1999
average normal
69
<PAGE>
operating expenses of 0.10% for each of the portfolios. We used annual actual
audited expenses incurred during 1998 for the following portfolios to calculate
the average annual expense level: AIM V.I. Capital Appreciation Fund (0.67%),
AIM V.I. Government Securities Fund (0.76%), AIM V.I. Growth and Income Fund
(0.65%), AIM V.I. Value Fund (0.66%), Dreyfus Stock Index Fund (0.26%), Dreyfus
- -- Money Market Portfolio (0.56%), Dreyfus -- Small Company Stock Portfolio
(0.98%), MFS Emerging Growth Series (0.85%), MFS Research Series (0.86%), MFS
Total Return Series (0.91%), MFS Utilities Series (1.01%), Oppenheimer Capital
Appreciation Fund (0.75%), Oppenheimer Global Securities Fund (0.74%),
Oppenheimer High Income Fund (0.78%), Oppenheimer Main Street Growth & Income
Fund (0.79%), Oppenheimer Strategic Bond Fund (0.80%), WRL VKAM Emerging Growth
(0.89%), WRL Janus Global (0.95%) and WRL Janus Growth (0.83%).
Taking into account the monthly Policy charge, the daily charge and the
assumed average portfolio expense levels, the gross annual investment return
rates of 0%, 6% and 12% are equivalent to net annual investment return rates as
described in the chart below for a Policy assuming CURRENT cost of insurance
charges. For a Policy assuming GUARANTEED cost of insurance charges, the net
annual investment return rates will be further reduced.
<TABLE>
<CAPTION>
GROSS RATES OF RETURN 0% 6% 12%
- --------------------- ---------------------- ----------------- --------------------
EQUIVALENT NET ANNUAL INVESTMENT RETURN RATES
-----------------------------------------------------------------
FOR YEARS: 1-10 11+ 1-10 11+ 1-10 11+
- ------------------------- -------- ----------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
SINGLE LIFE:
- Male/Unisex ........ -3.23% -2.25% 2.65% 3.69% 8.54% 9.63%
- Female ............. -3.08% -2.11% 2.81% 3.84% 8.70% 9.79%
----- ----- ---- ---- ---- -----
JOINT LIFE .............. -2.74% -1.76% 3.17% 4.21% 9.08% 10.08%
----- ----- ---- ---- ---- -----
</TABLE>
The hypothetical returns shown in the tables are without any tax charges
that may be attributable to the separate account, because we are not currently
making such charges. In order to produce after tax returns of 0%, 6% or 12% if
such charges are made in the future, the separate account would have to earn a
sufficient amount in excess of 0%, 6% or 12% to cover any tax charges.
The "Premium Accumulated at 5%" column of each table shows the amount which
would accumulate if you invested an amount equal to the premium to earn interest
at 5% per year, compounded annually.
We will furnish, upon request, a comparable illustration reflecting the
proposed insured's age, gender, risk classification and desired plan features.
70
<PAGE>
PFL LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
<TABLE>
<S> <C>
Initial Specified Amount $147,487 Select, Non-Tobacco Use Class
Initial Premium $30,000 Death Benefit Without Rider
Using Current Cost of Insurance Rates
<CAPTION>
DEATH BENEFIT
END OF PREMIUMS ASSUMING HYPOTHETICAL GROSS*
POLICY ACCUMULATED ANNUAL INVESTMENT RETURN OF
YEAR AT 5% 0% 6% 12%
<S> <C> <C> <C> <C>
1 31,500 147,487 147,487 147,487
2 33,075 147,487 147,487 147,487
3 34,729 147,487 147,487 147,487
4 36,465 147,487 147,487 147,487
5 38,288 147,487 147,487 147,487
6 40,203 147,487 147,487 147,487
7 42,213 147,487 147,487 147,487
8 44,324 147,487 147,487 147,487
9 46,540 147,487 147,487 147,487
10 48,867 147,487 147,487 151,076
15 62,368 147,487 147,487 205,816
20 79,599 147,487 147,487 267,885
25 101,591 147,487 147,487 362,039
30 129,658 147,487 147,487 521,932
35 165,480 147,487 147,487 785,804
40 211,200 147,487 147,487 1,147,738
45 269,550 147,487 147,487 1,783,410
50 344,022 147,487 174,239 2,823,929
55 439,069 147,487 208,823 4,471,534
60 560,376 147,487 240,736 6,810,694
65 715,197 147,487 285,661 10,677,577
</TABLE>
<TABLE>
<CAPTION>
END OF CASH VALUE NET SURRENDER VALUE
POLICY ASSUMING HYPOTHETICAL GROSS* ASSUMING HYPOTHETICAL GROSS*
YEAR ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
0% 6% 12% 0% 6% 12%
<S> <C> <C> <C> <C> <C> <C>
1 29,032 30,796 32,561 26,107 27,871 29,636
2 28,095 31,614 35,340 25,245 28,764 32,490
3 27,189 32,453 38,356 24,414 29,678 35,581
4 26,312 33,315 41,630 23,612 30,615 38,930
5 25,463 34,199 45,184 23,063 31,799 42,784
6 24,641 35,107 49,040 22,541 33,007 46,940
7 23,846 36,039 53,226 22,046 34,239 51,426
8 23,077 36,995 57,769 21,877 35,795 56,569
9 22,332 37,977 62,700 21,732 37,377 62,100
10 21,611 38,985 68,052 21,611 38,985 68,052
15 19,284 46,723 107,757 19,284 46,723 107,757
20 17,208 55,997 170,627 17,208 55,997 170,627
25 15,355 67,112 270,179 15,355 67,112 270,179
30 13,702 80,432 427,813 13,702 80,432 427,813
35 12,226 96,396 677,418 12,226 96,396 677,418
40 10,910 115,529 1,072,653 10,910 115,529 1,072,653
45 9,735 138,460 1,698,485 9,735 138,460 1,698,485
50 8,687 165,942 2,689,457 8,687 165,942 2,689,457
55 7,751 198,879 4,258,604 7,751 198,879 4,258,604
60 6,917 238,353 6,743,261 6,917 238,353 6,743,261
65 6,172 285,661 10,677,577 6,172 285,661 10,677,577
</TABLE>
*For the equivalent net annual investment return rates, see p. 70.
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 rates of return. Actual investment rates of return may be more or
less than those shown and will depend on a number of factors, including the
investment allocations by an owner and the different investment rates of return
for the funds. The death benefit, cash value and net surrender value for a
Policy would be different from those shown if the actual investment rates of
return averaged 0%, 6% and 12% over a period of years, but fluctuated above or
below that average for individual Policy years. No representation can be made by
PFL or the funds that these hypothetical investment rates of return can be
achieved for any one year or sustained over any period of time. This
illustration must be preceded or accompanied by current fund prospectuses.
71
<PAGE>
PFL LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
<TABLE>
<S> <C>
Initial Specified Amount $147,487 Select, Non-Tobacco Use Class
Initial Premium $30,000 Death Benefit Without Rider
Using Guaranteed Cost of Insurance Rates
<CAPTION>
DEATH BENEFIT
END OF PREMIUMS ASSUMING HYPOTHETICAL GROSS**
POLICY ACCUMULATED ANNUAL INVESTMENT RETURN OF
YEAR AT 5% 0% 6% 12%
<S> <C> <C> <C> <C>
1 31,500 147,487 147,487 147,487
2 33,075 147,487 147,487 147,487
3 34,729 147,487 147,487 147,487
4 36,465 147,487 147,487 147,487
5 38,288 147,487 147,487 147,487
6 40,203 147,487 147,487 147,487
7 42,213 147,487 147,487 147,487
8 44,324 147,487 147,487 147,487
9 46,540 147,487 147,487 147,487
10 48,867 147,487 147,487 147,487
15 62,368 147,487 147,487 190,886
20 79,599 147,487 147,487 243,132
25 101,591 147,487 147,487 321,858
30 129,658 * 147,487 454,345
35 165,480 * 147,487 667,614
40 211,200 * 147,487 952,004
45 269,550 * * 1,451,861
50 344,022 * * 2,232,270
55 439,069 * * 3,378,683
60 560,376 * * 4,959,983
65 715,197 * * 7,776,095
</TABLE>
<TABLE>
<CAPTION>
END OF CASH VALUE NET SURRENDER VALUE
POLICY ASSUMING HYPOTHETICAL GROSS** ASSUMING HYPOTHETICAL GROSS**
YEAR ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
0% 6% 12% 0% 6% 12%
<S> <C> <C> <C> <C> <C> <C>
1 28,832 30,591 32,350 25,907/dagger/ 27,666/dagger/ 29,425/dagger/
2 27,688 31,188 34,895 24,838/dagger/ 28,338/dagger/ 32,045/dagger/
3 26,566 31,788 37,648 23,791/dagger/ 29,013/dagger/ 34,873/dagger/
4 25,462 32,389 40,626 22,762/dagger/ 29,689/dagger/ 37,926/dagger/
5 24,375 32,992 43,851 21,975/dagger/ 30,592/dagger/ 41,451/dagger/
6 23,300 33,592 47,340 21,200/dagger/ 31,492/dagger/ 45,240/dagger/
7 22,235 34,189 51,117 20,435/dagger/ 32,389/dagger/ 49,317/dagger/
8 21,178 34,782 55,209 19,978/dagger/ 33,582/dagger/ 54,009/dagger/
9 20,126 35,368 59,642 19,526/dagger/ 34,768/dagger/ 59,042/dagger/
10 19,076 35,945 64,448 19,076 35,945 64,448
15 14,512 40,667 99,940 14,512 40,667 99,940
20 8,953 45,207 154,861 8,953 45,207 154,861
25 1,215 48,698 240,193 1,215 48,698 240,193
30 * 49,590 372,414 * 49,590 372,414
35 * 44,568 575,529 * 44,568 575,529
40 * 25,975 889,723 * 25,975 889,723
45 * * 1,382,724 * * 1,382,724
50 * * 2,125,971 * * 2,125,971
55 * * 3,217,793 * * 3,217,793
60 * * 4,910,874 * * 4,910,874
65 * * 7,776,095 * * 7,776,095
</TABLE>
/dagger/ The net surrender value shown would in fact be equal to the cash value
since, under the terms of the Policy, the surrender charge will be
waived if a cost of insurance charge were to be deducted.
* In the absence of an additional payment, the Policy would lapse.
** For the equivalent net annual investment return rates, see p. 70.
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 rates of return. Actual investment rates of return may be more or
less than those shown and will depend on a number of factors, including the
investment allocations by an owner and the different investment rates of return
for the funds. The death benefit, cash value and net surrender value for a
Policy would be different from those shown if the actual investment rates of
return averaged 0%, 6% and 12% over a period of years, but fluctuated above or
below that average for individual Policy years. No representation can be made by
PFL or the funds that these hypothetical investment rates of return can be
achieved for any one year or sustained over any period of time. This
illustration must be preceded or accompanied by current fund prospectuses.
72
<PAGE>
PFL LIFE INSURANCE COMPANY
JOINT SURVIVORSHIP MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
HYPOTHETICAL ILLUSTRATIONS
MALE AND FEMALE ISSUE AGES 55
<TABLE>
<S> <C>
Initial Specified Amount $109,579 Select, Non-Tobacco Use Class
Initial Premium $30,000 Death Benefit Without Rider
Using Current Cost of Insurance Rates
<CAPTION>
END OF DEATH BENEFIT
POLICY PREMIUMS ASSUMING HYPOTHETICAL GROSS*
YEAR ACCUMULATED ANNUAL INVESTMENT RETURN OF
AT 5% 0% 6% 12%
<S> <C> <C> <C> <C>
1 31,500 109,579 109,579 109,579
2 33,075 109,579 109,579 109,579
3 34,729 109,579 109,579 109,579
4 36,465 109,579 109,579 109,579
5 38,288 109,579 109,579 109,579
6 40,203 109,579 109,579 109,579
7 42,213 109,579 109,579 109,579
8 44,324 109,579 109,579 109,579
9 46,540 109,579 109,579 109,579
10 48,867 109,579 109,579 109,579
15 62,368 109,579 109,579 134,745
20 79,599 109,579 109,579 201,793
25 101,591 109,579 109,579 321,499
30 129,658 109,579 109,579 521,971
35 165,480 109,579 120,591 847,448
40 211,200 109,579 142,542 1,323,463
45 269,550 109,579 173,428 2,127,449
</TABLE>
<TABLE>
<CAPTION>
END OF CASH VALUE NET SURRENDER VALUE
POLICY ASSUMING HYPOTHETICAL GROSS* ASSUMING HYPOTHETICAL GROSS*
YEAR ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
0% 6% 12% 0% 6% 12%
<S> <C> <C> <C> <C> <C> <C>
1 29,178 30,951 32,724 26,253 28,026 29,799
2 28,378 31,932 35,696 25,528 29,082 32,846
3 27,600 32,944 38,937 24,825 30,169 36,162
4 26,844 33,988 42,473 24,144 31,288 39,773
5 26,108 35,066 46,329 23,708 32,666 43,929
6 25,393 36,177 50,536 23,293 34,077 48,436
7 24,697 37,324 55,125 22,897 35,524 53,325
8 24,020 38,507 60,131 22,820 37,307 58,931
9 23,361 39,728 65,591 22,761 39,128 64,991
10 22,721 40,987 71,547 22,721 40,987 71,547
15 20,788 50,367 116,160 20,788 50,367 116,160
20 19,019 61,893 188,592 19,019 61,893 188,592
25 17,401 76,056 306,189 17,401 76,056 306,189
30 15,921 93,461 497,115 15,921 93,461 497,115
35 14,567 114,849 807,093 14,567 114,849 807,093
40 13,327 141,131 1,310,359 13,327 141,131 1,310,359
45 12,194 173,428 2,127,440 12,194 173,428 2,127,440
</TABLE>
* For the equivalent net annual investment return rates, see p. 70.
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 rates of return. Actual investment rates of return may be more or
less than those shown and will depend on a number of factors, including the
investment allocations by an owner and the different investment rates of return
for the funds. The death benefit, cash value and net surrender value for a
Policy would be different from those shown if the actual investment rates of
return averaged 0%, 6% and 12% over a period of years, but fluctuated above or
below that average for individual Policy years. No representation can be made by
PFL or the funds that these hypothetical investment rates of return can be
achieved for any one year or sustained over any period of time. This
illustration must be preceded or accompanied by current fund prospectuses.
73
<PAGE>
PFL LIFE INSURANCE COMPANY
JOINT SURVIVORSHIP MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
HYPOTHETICAL ILLUSTRATIONS
MALE AND FEMALE ISSUE AGES 55
<TABLE>
<S> <C>
Initial Specified Amount $109,579 Select, Non-Tobacco Use Class
Initial Premium $30,000 Death Benefit Without Rider
Using Guaranteed Cost of Insurance Rates
<CAPTION>
END OF PREMIUMS DEATH BENEFIT
POLICY PREMIUMS ASSUMING HYPOTHETICAL GROSS**
YEAR ACCUMULATED ANNUAL INVESTMENT RETURN OF
AT 5% 0% 6% 12%
<S> <C> <C> <C> <C>
1 31,500 109,579 109,579 109,579
2 33,075 109,579 109,579 109,579
3 34,729 109,579 109,579 109,579
4 36,465 109,579 109,579 109,579
5 38,288 109,579 109,579 109,579
6 40,203 109,579 109,579 109,579
7 42,213 109,579 109,579 109,579
8 44,324 109,579 109,579 109,579
9 46,540 109,579 109,579 109,579
10 48,867 109,579 109,579 109,579
15 62,368 109,579 109,579 132,375
20 79,599 109,579 109,579 196,730
25 101,591 * 109,579 310,596
30 129,658 * 109,579 494,662
35 165,480 * * 774,498
40 211,200 * * 1,169,778
45 269,550 * * 1,880,394
</TABLE>
<TABLE>
<CAPTION>
END OF CASH VALUE NET SURRENDER VALUE
POLICY ASSUMING HYPOTHETICAL GROSS** ASSUMING HYPOTHETICAL GROSS**
YEAR ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
0% 6% 12% 0% 6% 12%
<S> <C> <C> <C> <C> <C> <C>
1 29,174 30,947 32,720 26,249/dagger/ 28,022/dagger/ 29,795/dagger/
2 28,360 31,914 35,677 25,510/dagger/ 29,064/dagger/ 32,827/dagger/
3 27,557 32,900 38,892 24,782/dagger/ 30,125/dagger/ 36,117/dagger/
4 26,761 33,904 42,388 24,061/dagger/ 31,204/dagger/ 39,688/dagger/
5 25,969 34,924 46,187 23,569/dagger/ 32,524/dagger/ 43,787/dagger/
6 25,176 35,957 50,318 23,076/dagger/ 33,857/dagger/ 48,218/dagger/
7 24,377 37,000 54,809 22,577/dagger/ 35,200/dagger/ 53,009/dagger/
8 23,565 38,048 59,692 22,365/dagger/ 36,848/dagger/ 58,492/dagger/
9 22,730 39,094 65,002 22,130/dagger/ 38,494/dagger/ 64,402/dagger/
10 21,863 40,130 70,779 21,863 40,130 70,779
15 17,537 47,278 114,116 17,537 47,278 114,116
20 9,115 53,292 183,860 9,115 53,292 183,860
25 * 54,520 295,806 * 54,520 295,806
30 * 41,546 471,107 * 41,546 471,107
35 * * 737,617 * * 737,617
40 * * 1,158,196 * * 1,158,196
45 * * 1,880,394 * * 1,880,394
</TABLE>
/dagger/ The net surrender value shown would in fact be equal to the cash value
since, under the terms of the Policy, the surrender charge will be
waived if a cost of insurance charge were to be deducted.
* In the absence of an additional payment, the Policy would lapse.
** For the equivalent net annual investment return rates, see p. 70.
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 rates of return. Actual investment rates of return may be more or
less than those shown and will depend on a number of factors, including the
investment allocations by an owner and the different investment rates of return
for the funds. The death benefit, cash value and net surrender value for a
Policy would be different from those shown if the actual investment rates of
return averaged 0%, 6% and 12% over a period of years, but fluctuated above or
below that average for individual Policy years. No representation can be made by
PFL or the funds that these hypothetical investment rates of return can be
achieved for any one year or sustained over any period of time. This
illustration must be preceded or accompanied by current fund prospectuses.
74
<PAGE>
APPENDIX B
WEALTH INDICES OF INVESTMENTS IN THE U.S. CAPITAL MARKET
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The information below graphically depicts the growth of $1.00 invested in
large company stocks, small company stocks, long-term government bonds, Treasury
bills, and hypothetical asset returning the inflation rate over the period from
the end of 1925 to the end of 1998. All results assume reinvestment of dividends
on stocks or coupons on bonds and no taxes. Transaction costs are not included,
except in the small stock index starting in 1982.
Each of the cumulative index values is initialized at $1.00 at year-end
1925. The graph illustrates that large company stocks and small company stocks
have the best performance over the entire 73-year period: investments of $1.00
in these assets would have grown to $2,350.89 and $5,116.65, respectively, by
year-end 1998. This higher growth was earned by investments involving
substantial risk. In contrast, long-term government bonds (with an approximate
20-year maturity), which exposed the holder to much less risk, grew to only
$44.18.
The lowest-risk strategy over the past 73 years (for those with short-term
time horizons) was to buy U.S. Treasury bills. Since U.S. Treasury bills tended
to track inflation, the resulting real (inflation-adjusted) returns were near
zero for the entire 1926 - 1998 period.
75
<PAGE>
[GRAPH OMITTED]
COMPOUND ANNUAL RATES OF RETURN BY DECADE
<TABLE>
<CAPTION>
1920s* 1930s 1940s 1950s 1960s 1970s 1980s 1990s** 1989-98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Large Company ............ 19.2% -0.1% 9.2% 19.4% 7.8% 5.9% 17.5% 17.9% 19.2%
Small Company ............ -4.5 1.4 20.7 16.9 15.5 11.5 15.8 13.6 13.2
Long-Term Corp. .......... 5.2 6.9 2.7 1.0 1.7 6.2 13.0 10.3 10.9
Long-Term Govt. .......... 5.0 4.9 3.2 -0.1 1.4 5.5 12.6 11.0 11.7
Inter-Term Govt. ......... 4.2 4.6 1.8 1.3 3.5 7.0 11.9 8.3 8.7
Treasury Bills ........... 3.7 0.6 0.4 1.9 3.9 6.3 8.9 5.0 5.3
Inflation ................ -1.1 -2.0 5.4 2.2 2.5 7.4 5.1 3.0 3.1
</TABLE>
- ----------------
* Based on the period 1926-1929.
** Based on the period 1990-1998.
Used with permission. /copyright/1999 Ibbotson Associates, Inc. All rights
reserved. [Certain portions of this work were derived from copyrighted works of
Roger G. Ibbotson and Rex Sinquefield.]
76
<PAGE>
APPENDIX C
SURRENDER CHARGE TABLE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MALE (SINGLE LIFE)
<TABLE>
<CAPTION>
POLICY YEAR
------------------------------------------------------------------------------------------------
AGE 1 2 3 4 5 6 7 8 9 10+
- ------ ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-74 9.75% 9.50% 9.25% 9.00% 8.00% 7.00% 6.00% 4.00% 2.00% 0.00%
75 9.75% 9.50% 9.25% 9.00% 8.00% 7.00% 5.84% 4.00% 2.00% 0.00%
76 9.75% 9.50% 9.25% 9.00% 8.00% 6.69% 5.49% 4.00% 2.00% 0.00%
77 9.75% 9.50% 9.25% 9.00% 7.89% 6.30% 5.18% 4.00% 2.00% 0.00%
78 9.75% 9.50% 9.25% 9.00% 7.44% 5.95% 4.89% 4.00% 2.00% 0.00%
79 9.75% 9.50% 9.25% 9.00% 7.03% 5.61% 4.62% 3.87% 2.00% 0.00%
80 9.75% 9.50% 9.25% 8.65% 6.64% 5.31% 4.36% 3.66% 2.00% 0.00%
81 9.75% 9.50% 9.25% 8.18% 6.28% 5.02% 4.12% 3.46% 2.00% 0.00%
82 9.75% 9.50% 9.25% 7.74% 6.94% 4.75% 3.90% 3.26% 2.00% 0.00%
83 9.75% 9.50% 9.25% 7.33% 5.62% 4.49% 3.68% 3.07% 2.00% 0.00%
84 9.75% 9.50% 9.25% 6.94% 5.32% 4.24% 3.47% 2.88% 2.00% 0.00%
85 9.75% 9.50% 9.15% 6.58% 5.03% 4.00% 3.25% 2.67% 2.00% 0.00%
86 9.75% 9.50% 8.68% 6.22% 4.75% 3.75% 3.02% 2.46% 1.99% 0.00%
87 9.75% 9.50% 8.21% 5.87% 4.46% 3.49% 2.78% 2.22% 1.76% 0.00%
88 9.75% 9.50% 7.75% 5.52% 4.15% 3.21% 2.51% 1.96% 1.51% 0.00%
89 9.75% 9.50% 7.28% 5.14% 3.82% 2.90% 2.22% 1.68% 1.25% 0.00%
90 9.75% 9.50% 6.78% 4.72% 3.45% 2.56% 1.90% 1.39% 0.99% 0.00%
</TABLE>
FEMALE (SINGLE LIFE)
<TABLE>
<CAPTION>
POLICY YEAR
------------------------------------------------------------------------------------------------
AGE 1 2 3 4 5 6 7 8 9 10+
- ------ ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-78 9.75% 9.50% 9.25% 9.00% 8.00% 7.00% 6.00% 4.00% 2.00% 0.00%
79 9.75% 9.50% 9.25% 9.00% 8.00% 7.00% 5.75% 4.00% 2.00% 0.00%
80 9.75% 9.50% 9.25% 9.00% 8.00% 6.56% 5.32% 4.00% 2.00% 0.00%
81 9.75% 9.50% 9.25% 9.00% 7.70% 6.08% 4.93% 4.00% 2.00% 0.00%
82 9.75% 9.50% 9.25% 9.00% 7.14% 5.63% 4.56% 3.77% 2.00% 0.00%
83 9.75% 9.50% 9.25% 8.75% 6.62% 5.22% 4.22% 3.47% 2.00% 0.00%
84 9.75% 9.50% 9.25% 8.13% 6.15% 4.83% 3.89% 3.18% 2.00% 0.00%
85 9.75% 9.50% 9.25% 7.55% 5.69% 4.46% 3.57% 2.90% 2.00% 0.00%
86 9.75% 9.50% 9.25% 7.00% 5.26% 4.10% 3.26% 2.62% 2.00% 0.00%
87 9.75% 9.50% 9.19% 6.48% 4.84% 3.75% 2.95% 2.33% 1.84% 0.00%
88 9.75% 9.50% 8.51% 5.97% 4.43% 3.39% 2.63% 2.03% 1.55% 0.00%
89 9.75% 9.50% 7.84% 5.46% 4.01% 3.02% 2.29% 1.72% 1.27% 0.00%
90 9.75% 9.50% 7.18% 4.95% 3.58% 2.64% 1.94% 1.41% 1.01% 0.00%
</TABLE>
77
<PAGE>
JOINT AND LAST SURVIVOR PLAN: AGE IS BASED ON THE OLDER OF THE INSUREDS
<TABLE>
<CAPTION>
POLICY YEAR
------------------------------------------------------------------------------------------------
AGE 1 2 3 4 5 6 7 8 9 10+
- ------ ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-74 9.75% 9.50% 9.25% 9.00% 8.00% 7.00% 6.00% 4.00% 2.00% 0.00%
75 9.75% 9.50% 9.25% 9.00% 7.25% 5.00% 3.50% 2.50% 1.75% 0.00%
76 9.75% 9.50% 9.25% 9.00% 7.25% 5.00% 3.50% 2.50% 1.75% 0.00%
77 9.75% 9.50% 9.25% 9.00% 7.25% 5.00% 3.50% 2.50% 1.75% 0.00%
78 9.75% 9.50% 9.25% 9.00% 7.25% 5.00% 3.50% 2.50% 1.75% 0.00%
79 9.75% 9.50% 9.25% 9.00% 7.25% 5.00% 3.50% 2.50% 1.75% 0.00%
80 9.75% 9.50% 9.25% 6.75% 4.25% 2.75% 1.75% 1.00% 0.75% 0.00%
81 9.75% 9.50% 9.25% 6.75% 4.25% 2.75% 1.75% 1.00% 0.75% 0.00%
82 9.75% 9.50% 9.25% 6.75% 4.25% 2.75% 1.75% 1.00% 0.75% 0.00%
83 9.75% 9.50% 9.25% 6.75% 4.25% 2.75% 1.75% 1.00% 0.75% 0.00%
84 9.75% 9.50% 9.25% 6.75% 4.25% 2.75% 1.75% 1.00% 0.75% 0.00%
85 9.75% 9.50% 6.50% 3.50% 1.75% 1.00% 0.50% 0.00% 0.00% 0.00%
86 9.75% 9.50% 6.50% 3.50% 1.75% 1.00% 0.50% 0.00% 0.00% 0.00%
87 9.75% 9.50% 6.50% 3.50% 1.75% 1.00% 0.50% 0.00% 0.00% 0.00%
88 9.75% 9.50% 6.50% 3.50% 1.75% 1.00% 0.50% 0.00% 0.00% 0.00%
89 9.75% 9.50% 6.50% 3.50% 1.75% 1.00% 0.50% 0.00% 0.00% 0.00%
90 9.75% 9.50% 6.50% 3.50% 1.75% 1.00% 0.50% 0.00% 0.00% 0.00%
</TABLE>
We will apply the full amount of the surrender charge percentage listed in the
Surrender Charge Table to surrenders that occur during the Policy year.
78
<PAGE>
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LEGACY BUILDER VARIABLE LIFE SEPARATE ACCOUNT
There are no financial statements for the separate account as of the date of
this prospectus.
PFL LIFE INSURANCE COMPANY
Statutory-Basis Balance Sheet as of March 31, 1999 (unaudited).
Statutory-Basis Statement of Operations for the three months ended March 31,
1999 (unaudited).
Statutory-Basis Statement of Changes in Capital and Surplus for the three months
ended March 31, 1999 (unaudited).
Statutory-Basis Statement of Cash Flow for the three months ended March 31, 1999
(unaudited).
Notes to Statutory-Basis Financial Statements for the three months ended March
31, 1999 (unaudited).
Report of Independent Auditors dated February 19, 1999. Statutory-Basis Balance
Sheets at December 31, 1998 and 1997.
Statutory-Basis Statements of Operations for the years ended December 31, 1998,
1997 and 1996.
Statutory-Basis Statements of Changes in Capital and Surplus for the years ended
December 31, 1998, 1997, and 1996.
Statutory-Basis Statements of Cash Flows for the years ended December 31, 1998,
1997, and 1996.
Notes to Statutory-Basis Financial Statements.
Statutory-Basis Financial Statement Schedules.
79
<PAGE>
PFL LIFE INSURANCE COMPANY
BALANCE SHEET -- STATUTORY BASIS
AS OF MARCH 31, 1999
(IN THOUSANDS) (UNAUDITED)
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments ................ $ 122,431
Bonds .......................................... 4,945,296
Preferred stock ................................ 14,469
Common stock, at market ........................ 80,234
Mortgage loans on real estate .................. 1,042,066
Home office properties, at cost less accumulated
depreciation .................................. 7,999
Real estate acquired in satisfaction of debt,
at cost less accumulated depreciation ......... 11,709
Investment real estate ......................... 32,474
Policy loans ................................... 59,981
Other invested assets .......................... 83,693
-----------
Total cash and invested assets .................. 6,400,352
Premiums deferred and uncollected ............... 14,978
Accrued investment income ....................... 69,996
Transfers from separate accounts ................ 74,658
Other assets .................................... 33,910
Separate account assets ......................... 3,548,936
-----------
Total admitted assets ........................... $10,142,830
===========
80
<PAGE>
PFL LIFE INSURANCE COMPANY
BALANCE SHEET -- STATUTORY BASIS--(CONTINUED)
AS OF MARCH 31, 1999
(IN THOUSANDS) (UNAUDITED)
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life ............................................ $ 1,376,707
Annuity ......................................... 3,887,425
Accident and health ............................. 220,476
Policy and contract claim reserves
Life ............................................. 9,737
Accident and health .............................. 44,768
Other policyholders' funds ....................... 167,381
Remittances and items not allocated .............. 70,066
Federal income taxes payable ..................... 13,081
Asset valuation reserve .......................... 93,919
Interest maintenance reserve ..................... 53,317
Short-term notes payable to affiliate ............ 97,421
Payable to affiliate ............................. 55,555
Payable for securities ........................... 61,993
Other liabilities ................................ 68,643
Separate account liabilities ..................... 3,543,038
-----------
Total liabilities ................................. 9,763,527
Capital and surplus:
Common stock, $10.00 par value, 500 shares
Authorized, 266 issued and outstanding ......... 2,660
Paid-in surplus .................................. 154,282
Unassigned surplus ............................... 222,361
-----------
Total capital and surplus ......................... 379,303
-----------
Total liabilities and capital and surplus ......... $10,142,830
===========
81
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS -- STATUTORY BASIS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<S> <C>
Revenues:
Premiums and other considerations, net of reinsurance
Life ....................................................................... $ 27,295
Annuity .................................................................... 180,537
Accident and health ........................................................ 41,981
Net investment income ........................................................ 108,567
Amortization of interest maintenance reserve ................................. 2,775
Commissions and expense allowances on reinsurance ceded ...................... 5,377
Other income ................................................................. 25,112
---------
391,644
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits ...................................... 12,311
Surrender benefits ......................................................... 189,929
Other benefits ............................................................. 64,071
Increase (decrease) in aggregate reserves for policies and contracts:
Life ..................................................................... 19,532
Annuity .................................................................. (37,961)
Accident and health ...................................................... 14,741
Other .................................................................... 4,460
---------
267,083
Insurance expenses:
Commissions .................................................................. 34,797
General insurance expenses ................................................... 11,082
Taxes, licenses and fees ..................................................... 2,884
Transfer to separate accounts ................................................ 52,375
Other ........................................................................ (798)
---------
100,340
---------
367,423
---------
Gain from operations before federal income tax expense and net
realized capital gains on investments ........................................ 24,221
Federal income tax expense ..................................................... 7,974
---------
Gain from operations before net realized
capital gains on investments ................................................. 16,247
Net realized capital gains on investments (net of related federal income tax
expense and amounts transferred to interest maintenance reserve) ............. 1,470
---------
Net income ..................................................................... $ 17,717
=========
</TABLE>
82
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
CAPITAL
COMMON PAID-IN UNASSIGNED AND
STOCK SURPLUS SURPLUS SURPLUS
-------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 ................. $2,660 $154,282 $205,586 $362,528
Net income ................................ 0 0 17,717 17,717
Net unrealized gains ...................... 0 0 1,259 1,259
Change in non-admitted assets ............. 0 0 (30) (30)
Change in asset valuation reserve ......... 0 0 (2,331) (2,331)
Other adjustments ......................... 0 0 160 160
------ -------- -------- --------
Balance at March 31, 1999 .................. $2,660 $154,282 $222,361 $379,303
====== ======== ======== ========
</TABLE>
83
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOW -- STATUTORY BASIS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS) (UNAUDITED)
OPERATING ACTIVITIES
Premiums and other considerations, net of reinsurance ......... $ 281,101
Net investment income ......................................... 109,690
Life and accident and health claims ........................... (35,645)
Surrender benefits to policyholders ........................... (189,929)
Other benefits to policyholders ............................... (44,508)
Commissions, other expenses and other taxes ................... (55,103)
Federal income taxes, excluding tax on capital gains .......... 684
Other, net .................................................... 101,846
Net transfers to separate accounts ............................ (56,167)
---------
Net cash provided by operating activities .................... 111,969
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid: ............
Bonds and preferred stocks ................................... 831,473
Common stocks ................................................ 11,595
Mortgage loans on real estate ................................ 51,096
Other ........................................................ 13,993
---------
908,157
Cost of investments acquired:
Bonds and preferred stocks ................................... 948,790
Common stock ................................................. 35,131
Mortgage loans ............................................... 79,253
Other ........................................................ 5,810
---------
1,068,984
---------
Net cash used in investing activities ......................... (160,827)
---------
FINANCING ACTIVITIES
Borrowed money ................................................ 88,000
---------
Net cash provided by financing activities ..................... 88,000
Increase in cash and short-term investments ................... 39,142
Cash and short-term investments at beginning of year .......... 83,289
---------
Cash and short-term investments at end of year ................ $ 122,431
=========
84
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS) (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited statutory basis financial statements have been
prepared in accordance with statutory accounting principles for interim
financial information and the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the accompanying statutory
basis financial statements and notes thereto for the year ended December 31,
1998.
85
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
PFL Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of PFL Life
Insurance Company as of December 31, 1998 and 1997, and the related
statutory-basis statements of operations, changes in capital and surplus, and
cash flows for each of the three years in the period ended December 31, 1998.
Our audits also included the accompanying statutory-basis financial statement
schedules required by Article 7 of Regulation S-X. These financial statements
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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.
As described in Note 1 to the financial statements, the Company presents
its financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, of the State of
Iowa, which practices differ from generally accepted accounting principles. The
variances between such practices and generally accepted accounting principles
also are described in Note 1. The effects on the financial statements of these
variances are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of PFL Life Insurance Company at December 31, 1998 and 1997,
or the results of its operations or its cash flows for each of the three years
in the period ended December 31, 1998.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of PFL Life Insurance
Company at December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with accounting practices prescribed or permitted by the Insurance
Division, Department of Commerce, of the State of Iowa. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic statutory-basis financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Des Moines, Iowa
February 19, 1999
86
<PAGE>
PFL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments .................................... $ 83,289 $ 23,939
Bonds .............................................................. 4,822,442 4,913,144
Stocks:
Preferred ......................................................... 14,754 2,750
Common (cost: 1998 - $34,731; 1997 - $33,058) ..................... 49,448 42,345
Affiliated entities (cost: 1998 - $8,060; 1997 - $10,798) ......... 5,613 8,031
Mortgage loans on real estate ...................................... 1,012,433 935,207
Real estate, at cost less accumulated depreciation
($9,500 in 1998; $8,655 in 1997):
Home office properties ............................................ 8,056 8,283
Properties acquired in satisfaction of debt ....................... 11,778 11,814
Investment properties ............................................. 44,325 36,416
Policy loans ....................................................... 60,058 57,136
Other invested assets .............................................. 76,482 29,864
---------- ----------
Total cash and invested assets ...................................... 6,188,678 6,068,929
Premiums deferred and uncollected ................................... 15,318 16,101
Accrued investment income ........................................... 65,308 69,662
Receivable from affiliate ........................................... 643 --
Federal income taxes recoverable .................................... 639 --
Transfers from separate accounts .................................... 70,866 60,193
Other assets ........................................................ 29,511 37,624
Separate account assets ............................................. 3,348,611 2,517,365
---------- ----------
Total admitted assets ............................................... $9,719,574 $8,769,874
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
87
<PAGE>
PFL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life ........................................................ $1,357,175 $ 884,018
Annuity ..................................................... 3,925,293 4,204,125
Accident and health ......................................... 205,736 169,328
Policy and contract claim reserves:
Life ........................................................ 9,101 8,635
Accident and health ......................................... 48,906 57,713
Other policyholders' funds ................................... 162,266 143,831
Remittances and items not allocated .......................... 19,690 153,745
Asset valuation reserve ...................................... 91,588 69,825
Interest maintenance reserve ................................. 50,575 30,287
Federal income taxes payable ................................. -- 1,889
Short-term notes payable to affiliates ....................... 9,421 16,400
Other liabilities ............................................ 76,766 75,070
Payable for securities ....................................... 57,645 --
Payable to affiliates ........................................ -- 13,240
Separate account liabilities ................................. 3,342,884 2,512,406
---------- ----------
Total liabilities ............................................. 9,357,046 8,340,512
Commitments and contingencies
Capital and surplus:
Common stock, $10 par value, 500 shares authorized, 266 issued
and outstanding ............................................ 2,660 2,660
Paid-in surplus .............................................. 154,282 154,282
Unassigned surplus ........................................... 205,586 272,420
---------- ----------
Total capital and surplus ..................................... 362,528 429,362
---------- ----------
Total liabilities and capital and surplus ..................... $9,719,574 $8,769,874
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
88
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of reinsurance:
Life ......................................................... $ 516,111 $ 202,435 $ 204,872
Annuity ...................................................... 667,920 657,695 725,966
Accident and health .......................................... 178,593 207,982 227,862
Net investment income .......................................... 446,984 446,424 428,337
Amortization of interest maintenance reserve ................... 8,656 3,645 2,434
Commissions and expense allowances on reinsurance
ceded ........................................................ 32,781 49,859 73,931
---------- ---------- ----------
1,851,045 1,568,040 1,663,402
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits ........................ 135,184 146,583 147,024
Surrender benefits ........................................... 732,796 658,071 512,810
Other benefits ............................................... 152,209 126,495 101,288
Increase (decrease) in aggregate reserves for policies
and contracts:
Life ....................................................... 473,158 149,575 140,126
Annuity .................................................... (278,665) (203,139) 188,002
Accident and health ........................................ 36,407 30,059 26,790
Other ...................................................... 17,550 16,998 19,969
---------- ---------- ----------
1,268,639 924,642 1,136,009
Insurance expenses:
Commissions ................................................... 136,569 157,300 177,466
General insurance expenses .................................... 48,018 57,571 57,282
Taxes, licenses and fees ...................................... 19,166 8,715 13,889
Net transfers to separate accounts ............................ 265,702 297,480 171,785
Other expenses ................................................ 1,016 119 526
---------- ---------- ----------
470,471 521,185 420,948
---------- ---------- ----------
1,739,110 1,445,827 1,556,957
---------- ---------- ----------
Gain from operations before federal income tax expense
and net realized capital gains (losses) on investments ......... 111,935 122,213 106,445
Federal income tax expense ....................................... 49,835 43,381 41,177
---------- ---------- ----------
Gain from operations before net realized capital gains
(losses) on investments ........................................ 62,100 78,832 65,268
Net realized capital gains (losses) on investments (net of
related federal income taxes and amounts transferred to
interest maintenance reserve) .................................. 3,398 7,159 (3,503)
---------- ---------- ----------
Net income ....................................................... $ 65,498 $ 85,991 $ 61,765
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
89
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN UNASSIGNED CAPITAL AND
STOCK SURPLUS SURPLUS SURPLUS
-------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 ........................ $2,660 $154,129 $ 220,739 $ 377,528
Net income ...................................... -- -- 61,765 61,765
Change in net unrealized capital gains .......... -- -- 2,351 2,351
Change in non-admitted assets ................... -- -- (148) (148)
Change in asset valuation reserve ............... -- -- (10,930) (10,930)
Dividend to stockholder ......................... -- -- (20,000) (20,000)
Prior period adjustment ......................... -- -- 5,025 5,025
Surplus effect of sales of divisions ............ -- -- (384) (384)
Surplus effect of ceding commissions
associated with the sale of a division ........ -- -- 29 29
Amendment of reinsurance agreement .............. -- -- 421 421
Change in liability for reinsurance in
unauthorized companies ........................ -- -- 2,690 2,690
------ -------- ---------- ----------
Balance at December 31, 1996 ...................... 2,660 154,129 261,558 418,347
Capital contribution ............................ -- 153 -- 153
Net income ...................................... -- -- 85,991 85,991
Change in net unrealized capital gains .......... -- -- 3,592 3,592
Change in non-admitted assets ................... -- -- (481) (481)
Change in asset valuation reserve ............... -- -- (14,974) (14,974)
Dividend to stockholder ......................... -- -- (62,000) (62,000)
Surplus effect of sale of a division ............ -- -- (161) (161)
Surplus effect of ceding commissions
associated with the sale of a division ........ -- -- 5 5
Amendment of reinsurance agreement .............. -- -- 389 389
Surplus effect of reinsurance agreement ......... -- -- 402 402
Change in liability for reinsurance in
unauthorized companies ........................ -- -- (1,901) (1,901)
------ -------- ---------- ----------
Balance at December 31, 1997 ...................... 2,660 154,282 272,420 429,362
Net income ...................................... -- -- 65,498 65,498
Change in net unrealized capital gains .......... -- -- 4,504 4,504
Change in non-admitted assets ................... -- -- (260) (260)
Change in asset valuation reserve ............... -- -- (21,763) (21,763)
Dividend to stockholder ......................... -- -- (120,000) (120,000)
Increase in liability for reinsurance in
unauthorized companies ........................ -- -- 2,036 2,036
Tax benefit on stock options exercised .......... -- -- 2,476 2,476
Change in surplus in separate accounts .......... -- -- 675 675
------ -------- ---------- ----------
Balance at December 31, 1998 ...................... $2,660 $154,282 $ 205,586 $ 362,528
====== ======== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
90
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums and other considerations,
net of reinsurance .................................. $ 1,396,428 $ 1,119,936 $ 1,240,748
Net investment income ................................. 469,246 452,091 431,456
Life and accident and health claims ................... (138,249) (154,383) (147,556)
Surrender benefits and other fund withdrawals ......... (732,796) (658,071) (512,810)
Other benefits to policyholders ....................... (152,167) (126,462) (101,254)
Commissions, other expenses and other taxes ........... (197,135) (225,042) (248,321)
Net transfers to separate accounts .................... (276,375) (319,146) (210,312)
Federal income taxes .................................. (72,176) (47,909) (35,551)
Cash paid in conjunction with an amendment of
a reinsurance agreement ............................. -- (4,826) (5,812)
Cash received in connection with a reinsurance
agreement ........................................... -- 1,477 --
Other, net ............................................ (93,095) 89,693 (41,677)
------------ ------------ ------------
Net cash provided by operating activities ............. 203,681 127,358 368,911
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks .......................... 3,347,174 3,284,095 2,112,831
Common stocks ....................................... 34,564 34,004 27,214
Mortgage loans on real estate ....................... 192,210 138,162 74,351
Real estate ......................................... 5,624 6,897 18,077
Cash received from ceding commissions
associated with the sale of a division ............ -- 8 45
Other ............................................... 7,210 57,683 22,568
------------ ------------ ------------
3,586,782 3,520,849 2,255,086
Cost of investments acquired:
Bonds and preferred stocks .......................... (3,251,822) (3,411,442) (2,270,105)
Common stocks ....................................... (36,379) (37,339) (29,799)
Mortgage loans on real estate ....................... (257,039) (159,577) (324,381)
Real estate ......................................... (11,458) (2,013) (222)
Policy loans ........................................ (2,922) (2,922) (1,539)
Cash paid in association with the
sale of a division ................................. -- (591) (662)
Other ................................................. (44,514) (15,674) (6,404)
------------ ------------ ------------
(3,604,134) (3,629,558) (2,633,112)
------------ ------------ ------------
Net cash used in investing activities ................. (17,352) (108,709) (378,026)
</TABLE>
SEE ACCOMPANYING NOTES.
91
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Issuance (repayment) of short-term intercompany
notes payable ................................................ $ (6,979) $ 16,400 $ --
Capital contribution ........................................... -- 153 --
Dividends to stockholder ....................................... (120,000) (62,000) (20,000)
-------- --------- ---------
Net cash used in financing activities .......................... (126,979) (45,447) (20,000)
-------- --------- ---------
Increase (decrease) in cash and short-term investments ......... 59,350 (26,798) (29,115)
Cash and short-term investments at beginning of year ........... 23,939 50,737 79,852
-------- --------- ---------
Cash and short-term investments at end of year ................. $ 83,289 $ 23,939 $ 50,737
======== ========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
92
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PFL Life Insurance Company ("the Company") is a stock life insurance
company and is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA"), which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is an indirect wholly-owned subsidiary of AEGON N.V., a holding
company organized under the laws of The Netherlands.
In connection with the sale of certain affiliated business units, the
Company has assumed various blocks of business from these former affiliates
through mergers. In addition, the Company has canceled or entered into several
coinsurance and reinsurance agreements with affiliates and non-affiliates. The
following is a description of those transactions:
o During 1996, the Company sold its North Richland Hills, Texas
health administrative operations known as The Insurance Center.
The transaction resulted in the transfer of substantially all
employees and office facilities to United Insurance Companies,
Inc. ("UICI"). All inforce business will continue to be shared by
UICI and the Company and its affiliates through the existing
coinsurance agreements. After a short transition period, all new
business produced by United Group Association, an independent
insurance agency, will be written by the insurance subsidiaries
of UICI and will not be shared with the Company and its
affiliates through coinsurance arrangements. As a result of the
sale, during 1996 the Company transferred $123 in assets,
substantially all of which was cash, and $70 of liabilities. The
difference between the assets and liabilities of $(53) plus a tax
credit of $19 was charged directly to unassigned surplus. During
1997, the Company transferred $591 in assets, substantially all
of which was cash and $343 of liabilities. The difference between
the assets and liabilities of $(248) net of a tax credit of $87
was charged directly to unassigned surplus.
o On January 1, 1994, the Company entered into an agreement with a
non-affiliate reinsurer to annually increase reinsurance ceded
(primarily group health business) by 2-1/2% through 1997. As a
result, during 1996, the Company transferred $5,991 in assets,
including $5,812 of cash and short-term investments and
liabilities of $6,146. The difference between the assets and
liabilities of $155, plus a tax credit of $266 was credited
directly to unassigned surplus. During 1997, the Company
transferred $5,045 in assets, including $4,826 of cash and
short-term investments, and liabilities of$5,164. The difference
between the assets and liabilities of $119 plus a tax credit of
$270 was credited directly to unassigned surplus.
93
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
o During 1993, the Company sold the Oakbrook Division (primarily
group health business). The initial transfer of risk occurred
through an indemnity reinsurance agreement. The policies will
then be assumed by the reinsurer by novation as state regulatory
and policyholder approvals are received. During 1996, the Company
paid $539 in association with this sale; the payment, net of a
tax credit of $189, was charged directly to unassigned surplus.
In addition, the Company received from the third party
administrator a ceding commission of one percent of the premiums
collected between January 1, 1994 and December 31, 1996. As a
result of the sale, in 1996, the Company received $45 for ceding
commissions; the commissions net of the related tax effect of
$(16) were charged directly to unassigned surplus. Also, during
1996, the Company paid $539 in association with this sale; this
payment, net of a tax credit of $189, was charged directly to
unassigned surplus. In 1997, the Company received $8 for ceding
commissions; the commissions net of the related tax effect of $3
were credited directly to unassigned surplus.
o During 1997, the Company entered into a reinsurance agreement
with a non-affiliate. As a result of the agreement, the Company
received $1,480 of assets, including $1,477 of cash and
short-term securities, and $861 of liabilities. The difference
between the assets and liabilities of $619, net of a tax effect
of $217 was credited directly to unassigned surplus.
NATURE OF BUSINESS
The Company sells individual non-participating whole life, endowment and
term contracts, as well as a broad line of single fixed and flexible premium
annuity products. In addition, the Company offers group life, universal life,
and individual and specialty health coverages. The Company is licensed in 49
states and the District of Columbia. Sales of the Company's products are
primarily through the Company's agents and financial institutions.
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract claim reserves, guaranty fund
assessment accruals
94
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) and
valuation allowances on investments. It is reasonably possible that actual
experience could differ from the estimates and assumptions utilized which could
have a material impact on the financial statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Division,
Department of Commerce, of the State of Iowa ("Insurance Department"), which
practices differ in some respects from generally accepted accounting principles.
The more significant of these differences are as follows: (a) bonds are
generally reported at amortized cost rather than segregating the portfolio into
held-to-maturity (reported at amortized cost), available-for-sale (reported at
fair value), and trading (reported at fair value) classifications; (b)
acquisition costs of acquiring new business are charged to current operations as
incurred rather than deferred and amortized over the life of the policies; (c)
policy reserves on traditional life products are based on statutory mortality
rates and interest which may differ from reserves based on reasonable
assumptions of expected mortality, interest, and withdrawals which include a
provision for possible unfavorable deviation from such assumptions; (d) policy
reserves on certain investment products use discounting methodologies based on
statutory interest rates rather than full account values; (e) reinsurance
amounts are netted against the corresponding asset or liability rather than
shown as gross amounts on the balance sheet; (f) deferred income taxes are not
provided for the difference between the financial statement and income tax bases
of assets and liabilities; (g) net realized gains or losses attributed to
changes in the level of interest rates in the market are deferred and amortized
over the remaining life of the bond or mortgage loan, rather than recognized as
gains or losses in the statement of operations when the sale is completed; (h)
potential declines in the estimated realizable value of investments are provided
for through the establishment of a formula-determined statutory investment
reserve (reported as a liability), changes to which are charged directly to
surplus, rather than through recognition in the statement of operations for
declines in value, when such declines are judged to be other than temporary; (i)
certain assets designated as "non-admitted assets" have been charged to surplus
rather than being reported as assets; (j) revenues for universal life and
investment products consist of premiums received rather than policy charges for
the cost of insurance, policy administration charges, amortization of policy
initiation fees and surrender charges assessed; (k) pension expense is recorded
as amounts are paid; (l) adjustments to federal income taxes of prior years are
charged or credited directly to unassigned surplus, rather than reported as a
component of expense in the statement of operations; (m) gains or losses on
dispositions of business are charged or credited directly to unassigned surplus
rather than being reported in the statement of operations; and (n) a liability
is established for "unauthorized reinsurers" and changes in this liability are
charged or
95
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
credited directly to unassigned surplus. The effects of these variances have not
been determined by the Company but are presumed to be material.
In 1998, the National Association of Insurance Commissioners ("NAIC")
adopted codified statutory accounting principles ("Codification"). Codification
will likely change, to some extent, prescribed statutory accounting practices
and may result in changes to the accounting practices that the Company uses to
prepare its statutory-basis financial statements. Codification will require
adoption by the various states before it becomes the prescribed statutory basis
of accounting for insurance companies domesticated within those states.
Accordingly, before Codification becomes effective for the Company, the State of
Iowa must adopt Codification as the prescribed basis of accounting on which
domestic insurers must report their statutory-basis results to the Insurance
Department. At this time, it is unclear whether the State of Iowa will adopt
Codification. However, based on current guidance, management believes that the
impact of Codification will not be material to the Company's statutory-basis
financial statements.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with remaining maturity of one year or less when
purchased to be cash equivalents.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office
of the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortization is computed using methods which result in a
level yield over the expected life of the investment. The Company reviews its
prepayment assumptions on mortgage and other asset-backed securities at regular
intervals and adjusts amortization rates retrospectively when such assumptions
are changed due to experience and/or expected future patterns. Investments in
preferred stocks in good standing are reported at cost. Investments in preferred
stocks not in good standing are reported at the lower of cost or market. Common
stocks of unaffiliated and affiliated companies, which includes shares of mutual
funds and real estate investment trusts, are carried at market value. Real
estate is reported at cost less allowances for depreciation. Depreciation is
computed principally by the straight-line method. Policy loans are reported at
unpaid principal. Other invested assets consist principally of investments in
various joint ventures and are recorded at equity in underlying net assets.
Other "admitted assets" are valued, principally at cost, as required or
permitted by Iowa Insurance Laws.
Net realized capital gains and losses are determined on the basis of
specific identification and are recorded net of related federal income taxes.
The Asset Valuation
96
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Reserve ("AVR") is established by the Company to provide for potential losses in
the event of default by issuers of certain invested assets. These amounts are
determined using a formula prescribed by the NAIC and are reported as a
liability. The formula for the AVR provides for a corresponding adjustment for
realized gains and losses. Under a formula prescribed by the NAIC, the Company
defers, in the Interest Maintenance Reserve ("IMR"), the portion of realized
gains and losses on sales of fixed income investments, principally bonds and
mortgage loans, attributable to changes in the general level of interest rates
and amortizes those deferrals over the remaining period to maturity of the
security.
Interest income is recognized on an accrual basis. The Company does not
accrue income on bonds in default, mortgage loans on real estate in default
and/or foreclosure or which are delinquent more than twelve months, or on real
estate where rent is in arrears for more than three months. Further, income is
not accrued when collection is uncertain. At December 31, 1998, 1997 and 1996,
the Company excluded investment income due and accrued of $102, $177 and $1,541,
respectively, with respect to such practices.
The Company uses interest rate swaps and caps as part of its overall
interest rate risk management strategy for certain life insurance and annuity
products. The Company entered into several interest rate swap contracts to
modify the interest rate characteristics of the underlying liabilities. The net
interest effect of such swap transactions is reported as an adjustment of
interest income from the hedged items as incurred.
The Company has entered into an interest rate cap agreement to hedge the
exposure of changing interest rates. The cash flows from the interest rate cap
will help offset losses that might occur from changes in interest rates. The
cost of such agreement is included in interest expense ratably during the life
of the agreement. Income received as a result of the cap agreement will be
recognized in investment income as earned. Unamortized cost of the agreements is
included in other invested assets.
AGGREGATE POLICY RESERVES
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables based on
statutorily specified interest rates and valuation methods that will provide, in
the aggregate, reserves that are greater than or equal to the minimum required
by law.
The aggregate policy reserves for life insurance policies are based
principally upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary
Mortality and American Experience Mortality Tables. The reserves are calculated
using interest rates
97
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
ranging from 2.00 to 6.00 percent and are computed principally on the Net Level
Premium Valuation and the Commissioners' Reserve Valuation Methods. Reserves for
universal life policies are based on account balances adjusted for the
Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 2.50 to 11.25 percent and mortality rates, where appropriate, from a
variety of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims
reported to the Company and claims incurred but not yet reported through the
statement date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of variable annuity contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. The assets in the separate accounts are valued at market.
Income and gains and losses with respect to the assets in the separate accounts
accrue to the benefit of the policyholders and, accordingly, the operations of
the separate accounts are not included in the accompanying financial statements.
The separate accounts do not have any minimum guarantees and the investment
risks associated with market value changes are borne entirely by the
policyholders. The Company received variable contract premiums of $345,319,
$281,095 and $227,864 in 1998, 1997 and 1996, respectively. All variable account
contracts are subject to discretionary withdrawal by the policyholder at the
market value of the underlying assets less the current surrender charge.
STOCK OPTION PLAN
AEGON N.V. sponsors a stock option plan for eligible employees of the
Company. Under this plan, certain employees have indicated a preference to
immediately
98
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) sell
shares received as a result of their exercise of the stock options; in these
situations, AEGON N.V. has settled such options in cash rather than issuing
stock to these employees. These cash settlements are paid by the Company, and
AEGON N.V. subsequently reimburses the Company for such payments. Under
statutory accounting principles, the Company does not record any expense related
to this plan, as the expense is recognized by AEGON N.V. However, the Company is
allowed to record a deduction in the consolidated tax return filed by the
Company and certain affiliates. The tax benefit of this deduction has been
credited directly to surplus.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard ("SFAS") No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statutory-basis balance sheet, for which it is practicable to estimate that
value. SFAS No. 119, DISCLOSURES ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires additional disclosure about
derivatives. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparisons to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS No. 107 and No. 119 exclude certain financial instruments and
all nonfinancial instruments from their disclosure requirements and allow
companies to forego the disclosures when those estimates can only be made at
excessive cost. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
INVESTMENT SECURITIES: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available.
99
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS--(CONTINUED)
For fixed maturity securities not actively traded, fair values are
estimated using values obtained from independent pricing services or, in
the case of private placements, are estimated by discounting expected
future cash flows using a current market rate applicable to the yield,
credit quality, and maturity of the investments. The fair values for equity
securities, including affiliated mutual funds and real estate investment
trusts, are based on quoted market prices.
MORTGAGE LOANS AND POLICY LOANS: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans is assumed to equal their carrying
value.
INVESTMENT CONTRACTS: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
INTEREST RATE CAP AND INTEREST RATE SWAPS: Estimated fair value of the
interest rate cap is based upon the latest quoted market price. Estimated
fair value of interest rate swaps are based upon the pricing differential
for similar swap agreements.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
100
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS--(CONTINUED)
The following sets forth a comparison of the fair values and carrying
values of the Company's financial instruments subject to the provisions of SFAS
No. 107 and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------
1998 1997
------------------------- -------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Cash and short-term
investments ....................... $ 83,289 $ 83,289 $ 23,939 $ 23,939
Bonds ............................... 4,822,442 4,900,516 4,913,144 5,046,527
Preferred stocks .................... 14,754 14,738 2,750 8,029
Common stocks ....................... 49,448 49,448 42,345 42,345
Affiliated common stock ............. 5,613 5,613 8,031 8,031
Mortgage loans on real estate ....... 1,012,433 1,089,315 935,207 983,720
Policy loans ........................ 60,058 60,058 57,136 57,136
Interest rate cap ................... 4,445 725 5,618 1,513
Interest rate swaps ................. 1,916 6,667 -- 2,546
Separate account assets ............. 3,348,611 3,348,611 2,517,365 2,517,365
LIABILITIES
Investment contract liabilities ..... 4,084,683 4,017,509 4,345,181 4,283,461
Separate account liabilities ........ 3,271,005 3,213,251 2,452,205 2,452,205
</TABLE>
101
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt
securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Bonds:
United States Government
and agencies ...................... $ 150,085 $ 2,841 $ 321 $ 152,605
State, municipal and other
government ........................ 62,948 918 1,651 62,215
Public utilities .................... 139,732 5,053 2,555 142,230
Industrial and miscellaneous ........ 2,068,086 78,141 34,493 2,111,734
Mortgage and other asset-
backed securities ................. 2,401,591 45,185 15,044 2,431,732
---------- -------- ------- ----------
4,822,442 132,138 54,064 4,900,516
Preferred stocks ...................... 14,754 75 91 14,738
---------- -------- ------- ----------
$4,837,196 $132,213 $54,155 $4,915,254
========== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
United States Government
and agencies ...................... $ 188,241 $ 2,562 $ 21 $ 190,782
State, municipal and other
government ........................ 61,532 2,584 1,774 62,342
Public utilities .................... 121,582 5,384 2,952 124,014
Industrial and miscellaneous ........ 1,955,587 85,233 7,752 2,033,068
Mortgage and other asset-
backed securities ................. 2,586,202 55,382 5,263 2,636,321
---------- -------- ------- ----------
4,913,144 151,145 17,762 5,046,527
Preferred stocks ..................... 2,750 5,279 -- 8,029
---------- -------- ------- ----------
$4,915,894 $156,424 $17,762 $5,054,556
========== ======== ======= ==========
</TABLE>
102
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS--(CONTINUED)
The carrying value and estimated fair value of bonds at December 31, 1998,
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
------------ -------------
<S> <C> <C>
Due in one year or less ............................ $ 151,747 $ 148,410
Due after one year through five years .............. 1,211,064 1,232,329
Due after five years through ten years ............. 753,543 761,787
Due after ten years ................................ 304,497 326,258
---------- ----------
2,420,851 2,468,784
Mortgage and other asset-backed securities ......... 2,401,591 2,431,732
---------- ----------
$4,822,442 $4,900,516
========== ==========
</TABLE>
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest on bonds and notes ............. $374,478 $373,496 $364,356
Dividends on equity investments ......... 1,357 1,460 1,436
Interest on mortgage loans .............. 77,960 80,266 69,418
Rental income on real estate ............ 6,553 7,501 9,526
Interest on policy loans ................ 4,080 3,400 3,273
Other investment income ................. 2,576 613 1,799
-------- -------- --------
Gross investment income ................. 467,004 466,736 449,808
Investment expenses ..................... 20,020 20,312 21,471
-------- -------- --------
Net investment income ................... $446,984 $446,424 $428,337
======== ======== ========
</TABLE>
103
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS--(CONTINUED)
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1998 1997 1996
------------- ------------- ----------
<S> <C> <C> <C>
Proceeds ...................... $3,347,174 $3,284,095 $2,112,831
========== ========== ==========
Gross realized gains .......... $ 48,760 $ 30,094 $ 19,876
Gross realized losses ......... (8,072) (17,265) (19,634)
---------- ---------- ----------
Net realized gains ............ $ 40,688 $ 12,829 $ 242
========== ========== ==========
</TABLE>
At December 31, 1998, investments with an aggregate carrying value of
$5,935,160 were on deposit with regulatory authorities or were restrictively
held in bank custodial accounts for the benefit of such regulatory authorities
as required by statute.
Realized investment gains (losses) and changes in unrealized gains (losses)
for investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
-----------------------------------------
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Debt securities .................................. $ 40,688 $ 12,829 $ 242
Short-term investments ........................... 1,533 (19) (197)
Equity securities ................................ (879) 6,972 1,798
Mortgage loans on real estate .................... 12,637 2,252 (5,530)
Real estate ...................................... 3,176 4,252 1,210
Other invested assets ............................ (2,523) 1,632 12
--------- --------- --------
54,632 27,918 (2,465)
Tax effect ....................................... (22,290) (10,572) (1,235)
Transfer to interest maintenance reserve ......... (28,944) (10,187) 197
--------- --------- --------
Net realized gains (losses) ...................... $ 3,398 $ 7,159 $ (3,503)
========= ========= ========
</TABLE>
104
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED
-------------------------------------------
YEAR ENDED DECEMBER 31
-------------------------------------------
1998 1997 1996
------------- ---------- --------------
<S> <C> <C> <C>
Debt securities ................. $ (60,604) $40,289 $ (115,867)
Equity securities ............... 5,750 5,653 2,929
--------- ------- ----------
Change in unrealized appreciation
(depreciation) ................ $ (54,854) $45,942 $ (112,938)
========= ======= ==========
</TABLE>
Gross unrealized gains and gross unrealized losses on equity securities
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1998 1997 1996
------------- ---------- --------------
<S> <C> <C> <C>
Unrealized gains ................ $ 15,980 $ 10,356 $ 9,590
Unrealized losses ............... (3,710) (3,836) (8,723)
--------- -------- ----------
Net unrealized gains ............ $ 12,270 $ 6,520 $ 867
========= ======== ==========
</TABLE>
During 1998, the Company issued mortgage loans with interest rates ranging
from 5.88% to 7.86%. The maximum percentage of any one mortgage loan to the
value of the underlying real estate at origination was 90% for commercial loans
and 95% for residential loans. Mortgage loans with a carrying value of $245 were
non-income producing for the previous twelve months. Accrued interest of $89
related to these mortgage loans was excluded from investment income. The Company
requires all mortgaged properties to carry fire insurance equal to the value of
the underlying property.
105
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS--(CONTINUED)
At December 31, 1998 and 1997, the Company held a mortgage loan loss
reserve in the asset valuation reserve of $16,104 and $11,985, respectively. The
mortgage loan portfolio is diversified by geographic region and specific
collateral property type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION PROPERTY TYPE DISTRIBUTION
- ----------------------------------------- -----------------------------
DECEMBER 31 DECEMBER 31
--------------- --------------
1998 1997 1998 1997
------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
South Atlantic 32% 29% Retail 35% 35%
E. North Central 16 12 Office 30 31
Pacific 15 15 Industrial 21 6
Mountain 10 10 Apartment 12 14
Middle Atlantic 10 7 Other 2 14
W. South Central 6 9
W. North Central 5 6
E. South Central 3 8
New England 3 4
</TABLE>
At December 31, 1998, the Company had no investments (excluding U. S.
Government guaranteed or insured issues) which individually represented more
than ten percent of capital and surplus and the asset valuation reserve.
The Company utilizes a variety of off-balance sheet financial instruments
as part of its efforts to hedge and manage fluctuations in the market value of
its investment portfolio attributable to changes in general interest rate levels
and to manage duration mismatch of assets and liabilities. These instruments
include interest rate exchange agreements (swaps and caps), options, and
commitments to extend credit and all involve elements of credit and market risks
in excess of the amounts recognized in the accompanying financial statements at
a given point in time. The contract or notional amounts of those instruments
reflect the extent of involvement in the various types of financial instruments.
The Company's exposure to credit risk is the risk of loss from a
counterparty failing to perform according to the terms of the contract. That
exposure includes settlement risk (i.e., the risk that the counterparty defaults
after the Company has delivered funds or securities under terms of the contract)
that would result in an accounting loss and replacement cost risk (i.e., the
cost to replace the contract at current market rates should the counterparty
default prior to settlement date). Credit loss exposure resulting from
nonperformance by a counterparty for commitments to extend credit is represented
by the contractual amounts of the instruments.
106
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS--(CONTINUED)
At December 31, 1998 and 1997, the Company's outstanding financial
instruments with on and off-balance sheet risks, shown in notional amounts, are
summarized as follows:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Derivative securities:
Interest rate swaps:
Receive fixed - pay floating .............................. $100,000 $100,000
Receive floating (uncapped) - pay floating (capped) ....... 53,011 67,229
Receive floating (LIBOR) - pay floating (S&P) ............. 60,000 --
Interest rate cap agreements .................................. 500,000 500,000
</TABLE>
4. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to meet
its obligation under the reinsurance treaty.
Reinsurance assumption and cession treaties are transacted primarily with
affiliates. Premiums earned reflect the following reinsurance assumed and ceded
amounts:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Direct premiums ............. $1,533,822 $1,312,446 $1,457,450
Reinsurance assumed ......... 2,366 2,038 1,796
Reinsurance ceded ........... (173,564) (246,372) (300,546)
---------- ---------- ----------
Net premiums earned ......... $1,362,624 $1,068,112 $1,158,700
========== ========== ==========
</TABLE>
The Company received reinsurance recoveries in the amount of $173,297,
$183,638 and $168,155 during 1998, 1997 and 1996, respectively. At December 31,
1998 and 1997, estimated amounts recoverable from reinsurers that have been
deducted from policy and contract claim reserves totaled $47,956 and $60,437,
respectively. The aggregate reserves for policies and contracts were reduced for
reserve credits for reinsurance ceded at December 31, 1998 and 1997 of
$2,163,905 and $2,434,130, respectively.
107
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
4. REINSURANCE--(CONTINUED)
At December 31, 1998, amounts recoverable from unauthorized reinsurers of
$55,379 (1997 - $73,080) and reserve credits for reinsurance ceded of $49,835
(1997 - $78,838) were associated with a single reinsurer and its affiliates. The
Company holds collateral under these reinsurance agreements in the form of trust
agreements totaling $106,226 at December 31, 1998 that can be drawn on for
amounts that remain unpaid for more than 120 days.
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax
return filing with certain affiliated companies. Under the terms of a
tax-sharing agreement between the Company and its affiliates, the Company
computes federal income tax expense as if it were filing a separate income tax
return, except that tax credits and net operating loss carryforwards are
determined on the basis of the consolidated group. Additionally, the alternative
minimum tax is computed for the consolidated group and the resulting tax, if
any, is allocated back to the separate companies on the basis of the separate
companies' alternative minimum taxable income.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before federal income
tax expense and net realized capital gains (losses) on investments for the
following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Computed tax at federal statutory
rate (35%) ................................... $ 39,177 $ 42,775 $ 37,256
Tax reserve adjustment ......................... 607 2,004 2,211
Excess tax depreciation ........................ (223) (392) (384)
Deferred acquisition costs - tax basis ......... 11,827 4,308 5,583
Prior year under (over) accrual ................ 1,750 (1,016) (499)
Dividend received deduction .................... (1,053) (941) (454)
Charitable contribution ........................ -- (848) --
Other items - net .............................. (2,250) (2,509) (2,536)
-------- -------- --------
Federal income tax expense ..................... $ 49,835 $ 43,381 $ 41,177
======== ======== ========
</TABLE>
108
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. INCOME TAXES--(CONTINUED)
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($20,387 at December 31, 1998). To the extent dividends are paid from
the amount accumulated in the policyholders' surplus account, net earnings would
be reduced by the amount of tax required to be paid. Should the entire amount in
the policyholders' surplus account become taxable, the tax thereon computed at
current rates would amount to approximately $7,135.
The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1987.
During 1996, there was a $5,025 prior period adjustment to the tax accrual. This
included a $2,100 writeoff of an intangible asset for tax purposes, and a
federal income tax refund of $1,829 for tax years 1984 through 1986 and related
interest of $1,686, net of a tax effect of $590. An examination is underway for
years 1993 through 1995.
109
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES
A portion of the Company's policy reserves and other policyholders' funds
(including separate account liabilities) relates to liabilities established on a
variety of the Company's products that are not subject to significant mortality
or morbidity risk; however, there may be certain restrictions placed upon the
amount of funds that can be withdrawn without penalty. The amount of reserves on
these products, by withdrawal characteristics, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
1998 1997
------------------------- ------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------ ---------- ------------ ---------
<S> <C> <C> <C> <C>
Subject to discretionary
withdrawal with market
value adjustment ............. $ 82,048 1% $ 8,912 0%
Subject to discretionary
withdrawal at book value
less surrender charge ........ 515,778 5 755,300 8
Subject to discretionary
withdrawal at market value ... 3,211,896 34 2,454,845 27
Subject to discretionary
withdrawal at book value
(minimal or no charges or
adjustments) ................. 5,519,265 58 5,821,049 63
Not subject to discretionary
withdrawal provision ......... 228,030 2 203,522 2
---------- --- ---------- ---
9,557,017 100% 9,243,628 100%
Less reinsurance ceded ......... 2,124,769 2,372,495
---------- ----------
Total policy reserves on
annuities and deposit fund
liabilities .................. $7,432,248 $6,871,134
========== ==========
</TABLE>
110
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES--(CONTINUED)
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Transfers as reported in the summary of
operations of the separate accounts
statement:
Transfers to separate accounts .......... $345,319 $281,095 $227,864
Transfers from separate accounts ........ 79,808 9,819 75,172
-------- -------- --------
Net transfers to separate accounts ...... 265,511 271,276 152,692
Reconciling adjustments - charges for
investment manage-ment, administration
fees and contract guarantees ............ 191 26,204 19,093
-------- -------- --------
Transfers as reported in the summary of
operations of the life, accident and
health annual statement ................. $265,702 $297,480 $171,785
======== ======== ========
</TABLE>
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next anniversary
date. At December 31, 1998 and 1997, these assets (which are reported as
premiums deferred and uncollected) and the amounts of the related gross premiums
and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
----------- --------- -----------
<S> <C> <C> <C>
DECEMBER 31, 1998
Life and annuity:
Ordinary direct first year business ........ $ 3,346 $2,500 $ 846
Ordinary direct renewal business ........... 21,435 6,365 15,070
Group life direct business ................... 1,171 536 635
Reinsurance ceded .......................... (1,367) (44) (1,323)
-------- ------ --------
24,585 9,357 15,228
Accident and health:
Direct ..................................... 108 -- 108
Reinsurance ceded .......................... (18) -- (18)
-------- ------ --------
Total accident and health .................... 90 -- 90
-------- ------ --------
$ 24,675 $9,357 $ 15,318
======== ====== ========
</TABLE>
111
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES--(CONTINUED)
<TABLE>
<CAPTION>
GROSS LOADING NET
----------- --------- -----------
<S> <C> <C> <C>
DECEMBER 31, 1997
Life and annuity:
Ordinary direct first year business ........ $ 2,316 $1,698 $ 618
Ordinary direct renewal business ........... 22,724 6,834 15,890
Group life direct business ................. 1,523 646 877
Reinsurance ceded .......................... (1,464) (81) (1,383)
-------- ------ --------
25,099 9,097 16,002
Accident and health:
Direct ..................................... 148 -- 148
Reinsurance ceded .......................... (49) -- (49)
-------- ------ --------
Total accident and health .................... 99 -- 99
-------- ------ --------
$ 25,198 $9,097 $ 16,101
======== ====== ========
</TABLE>
At December 31, 1998 and 1997, the Company had insurance in force
aggregating $44,233 and $69,271, respectively, in which the gross premiums are
less than the net premiums required by the standard valuation standards
established by the Insurance Division, Department of Commerce, of the State of
Iowa. The Company established policy reserves of $998 and $1,128 to cover these
deficiencies at December 31, 1998 and 1997, respectively.
7. DIVIDEND RESTRICTIONS
The Company is subject to limitations, imposed by the State of Iowa, on the
payment of dividends to its parent company. Generally, dividends during any
twelve-month period may not be paid, without prior regulatory approval, in
excess of the greater of (a) 10 percent of statutory capital and surplus as of
the preceding December 31, or (b) statutory gain from operations for the
preceding year. Subject to the availability of unassigned surplus at the time of
such dividend, the maximum payment which may be made in 1999, without the prior
approval of insurance regulatory authorities, is $62,100.
The Company paid dividends to its parent of $120,000, $62,000 and $20,000
in 1998, 1997 and 1996, respectively.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the FASB
No. 87
112
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. RETIREMENT AND COMPENSATION PLANS--(CONTINUED)
expense as a percent of salaries. The benefits are based on years of service and
the employee's compensation during the highest five consecutive years of
employment. Pension expense aggregated $380, $422 and $1,056 for the years ended
December 31, 1998, 1997 and 1996, respectively. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement and Income
Security Act of 1974.
The Company's employees also participate in a contributory defined
contribution plan sponsored by AEGON which is qualified under Section 401(k) of
the Internal Revenue Service Code. Employees of the Company who customarily work
at least 1,000 hours during each calendar year and meet the other eligibility
requirements, are participants of the plan. Participants may elect to contribute
up to fifteen percent of their salary to the plan. The Company will match an
amount up to three percent of the participant's salary. Participants may direct
all of their contributions and plan balances to be invested in a variety of
investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement and Income Security Act of 1974. Expense
related to this plan was $233, $226 and $297 for the years ended December 31,
1998, 1997 and 1996, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's
senior management with benefits in excess of normal pension benefits. The plans
are noncontributory, and benefits are based on years of service and the
employee's compensation level. The plans are unfunded and nonqualified under the
Internal Revenue Service Code. In addition, AEGON has established incentive
deferred compensation plans for certain key employees of the Company. AEGON also
sponsors an employee stock option plan for individuals employed at least three
years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been accrued
or funded as deemed appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans
sponsored by AEGON that provide postretirement medical, dental and life
insurance benefits to employees meeting certain eligibility requirements.
Portions of the medical and dental plans are contributory. The expenses of the
postretirement plans calculated on the pay-as-you-go basis are charged to
affiliates in accordance with an intercompany cost sharing arrangement. The
Company expensed $62, $62 and $184 for the years ended December 31, 1998, 1997
and 1996, respectively.
113
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
9. RELATED PARTY TRANSACTIONS
The Company shares certain offices, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1998, 1997
and 1996, the Company paid $18,706, $18,705 and $17,028, respectively, for these
services, which approximates their costs to the affiliates.
Payables to affiliates bear interest at the thirty-day commercial paper
rate of 4.95% at December 31, 1998. During 1998, 1997 and 1996, the Company paid
net interest of $1,491, $1,188 and $174, respectively, to affiliates.
During 1997, the Company received a capital contribution of $153 in cash
from its parent.
At December 31, 1998 and 1997, the Company has short-term notes payable to
an affiliate of $9,421 and $16,400, respectively. Interest on these notes
accrues at rates ranging from 5.13% to 5.52% at December 31, 1998 and at 5.60%
at December 31, 1997.
During 1998, the Company issued life insurance policies to certain
affiliated companies, covering the lives of certain employees of those
affiliates. Premiums of $174,000 related to these policies were recognized
during the year, and aggregate reserves for policies and contracts are $181,720
at December 31, 1998.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for compensatory
and punitive damages, in addition to contract liability, it is management's
opinion, after consultation with counsel and a review of available facts, that
damages arising from such demands will not be material to the Company's
financial position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. Assessments are charged to operations when received
by the Company except where right of offset against other taxes paid is allowed
by law; amounts available for future offsets are recorded as an asset on the
Company's balance sheet. Potential future obligations for unknown insolvencies
are not determinable by the Company. The future obligation has been based on the
most recent information available from the National Organization of Life and
Health Insurance Guaranty Associations. The Company has established a reserve of
$17,901 and $17,700 and an offsetting premium
114
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
10. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
tax benefit of $7,631 and $7,984 at December 31, 1998 and 1997, respectively,
for its estimated share of future guaranty fund assessments related to several
major insurer insolvencies. The guaranty fund expense (benefit) was $1,985,
$(975) and $2,617 for December 31, 1998, 1997 and 1996, respectively.
11. YEAR 2000 (UNAUDITED)
The term Year 2000 issue generally refers to the improper processing of
dates and incorrect date calculations that might occur in computer software and
hardware and embedded systems as the Year 2000 is approached. The use of
computer programs that rely on two-digit date fields to perform computations and
decision-making functions may cause systems to malfunction when processing
information involving dates after 1999. For example, any computer software that
has date-sensitive coding might recognize a code of 00 as the year 1900 rather
than the year 2000.
The Company has developed a Year 2000 Project Plan (the Plan) to address
the Year 2000 issue as it affects the Company's internal IT ("Information
Technology") and non-IT systems, and to assess Year 2000 issues relating to
third parties with whom the Company has critical relationships.
The Plan for addressing internal systems generally includes an assessment
of internal IT and non-IT systems and equipment affected by the Year 2000 issue;
definition of strategies to address affected systems and equipment; remediation
of identified systems and equipment; internal testing and certification that
each internal system is Year 2000 compliant; and a review of existing and
revised business resumption and contingency plans to address potential Year 2000
issues. The Company has remediated and tested substantially all of its
mission-critical internal IT systems as of December 31, 1998. The Company
continues to remediate and test certain non-critical internal IT systems,
internal non-IT systems and will continue with a revalidation testing program
throughout 1999.
The Company's Year 2000 issues are more complex because a number of its
systems interface with other systems not under the Company's control. The
Company's most significant interfaces and uses of third-party vendor systems are
in the bank, financial services and trust areas. The Company utilizes various
banks to handle numerous types of financial and sales transactions. Several of
these banks also provide trustee and custodial services for the Company's
investment holdings and transactions. These services are critical to a financial
services company such as the Company as its business centers around cash
receipts and disbursements to policyholders and the investment of policyholder
funds. The Company has received written confirmation from its vendor banks
regarding their status on Year 2000. The banks indicate their dedication
115
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
11. YEAR 2000 (UNAUDITED)--(CONTINUED)
to resolving any Year 2000 issues related to their systems and services prior to
December 31, 1999. The Company anticipates that a considerable effort will be
necessary to ensure that its corrected or new systems can properly interface
with those business partners with whom it transmits and receives data and other
information (external systems). The Company has undertaken specific testing
regimes with these third-party business partners and expects to continue working
with its business partners on any interfacing of systems. However, the timing of
external system compliance cannot currently be predicted with accuracy because
the implementation of Year 2000 readiness will vary from one company to another.
The Company does have some exposure to date-sensitive embedded technology
such as micro-controllers, but the Company views this exposure as minimal.
Unlike other industries that may be equipment intensive, like manufacturing, the
Company is a life insurance, and financial services organization providing
insurance annuities and pension products to its customers. As such, the primary
equipment and electronic devices in use are computers and telephone-related
equipment. This type of hardware can have date-sensitive embedded technology
which could have Year 2000 problems. Because of this exposure, the Company has
reviewed its computer hardware and telephone systems, with assistance from the
applicable vendors, and has upgraded, or replaced, or is in the process of
replacing any equipment that will not properly process date-sensitive data in
the Year 2000 or beyond.
For the Company, a reasonably likely worst case scenario might include one
or more of the Company's significant policyholder systems being non-compliant.
Such an event could result in a material disruption of the Company's operations.
Specifically, a number of the Company's operations could experience an
interruption in the ability to collect and process premiums or deposits, process
claim payments, accurately maintain policyholder information, accurately
maintain accounting records, and/or perform adequate customer service. Should
the worst case scenario occur, it could, dependent upon its duration, have a
material impact on the Company's business and financial condition. Simple
failures can be repaired and returned to production within a matter of hours
with no material impact. Unanticipated failures with a longer service disruption
period could have a more serious impact. For this reason, the Company is placing
significant emphasis on risk management and Year 2000 business resumption
contingency planning in 1999 by modifying its existing business resumption and
disaster recovery plans to address potential Year 2000 issues.
The actions taken by management under the Year 2000 Project Plans are
intended to significantly reduce the Company's risk of a material business
interruption based on the Year 2000 issues. It should be noted that the Year
2000 computer problem, and its resolution, is complex and multifaceted, and any
company's success cannot be
116
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
11. YEAR 2000 (UNAUDITED)--(CONTINUED)
conclusively known until the Year 2000 is reached. In spite of its efforts or
results, the Company's ability to function unaffected to and through the Year
2000 may be adversely affected by actions (or failure to act) of third parties
beyond our knowledge or control. It is anticipated that there may be problems
that will have to be resolved in the ordinary course of business on and after
the Year 2000. However, the Company does not believe that the problems will have
a material adverse affect on the Company's operations or financial condition.
117
<PAGE>
PFL LIFE INSURANCE COMPANY
SUMMARY OF INVESTMENTS -- OTHER THAN
INVESTMENTS IN RELATED PARTIES
(DOLLARS IN THOUSANDS)
December 31, 1998
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
- ------------------ ------------ ------------ ----------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and government
agencies and authorities ........................... $ 926,370 $ 943,313 $ 926,370
States, municipalities and political subdivisions .... 107,975 114,146 107,975
Foreign governments .................................. 54,670 53,950 54,670
Public utilities ..................................... 139,732 142,230 139,732
All other corporate bonds ............................ 3,593,695 3,646,877 3,593,695
Redeemable preferred stock ............................. 14,754 14,738 14,754
---------- --------- ----------
Total fixed maturities ................................. 4,837,196 4,915,254 4,837,196
EQUITY SECURITIES
Common stocks:
Affiliated entities .................................. 8,060 5,613 5,613
Banks, trust and insurance ........................... 5,935 7,193 7,193
Industrial, miscellaneous and all other .............. 28,796 42,255 42,255
---------- --------- ----------
Total equity securities ................................ 42,791 55,061 55,061
Mortgage loans on real estate .......................... 1,012,433 1,012,433
Real estate ............................................ 52,381 52,381
Real estate acquired in satisfaction of debt ........... 11,778 11,778
Policy loans ........................................... 60,058 60,058
Other long-term investments ............................ 76,482 76,482
Cash and short-term investments ........................ 83,289 83,289
---------- ----------
Total investments ...................................... $6,176,408 $6,188,678
========== ==========
</TABLE>
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
118
<PAGE>
PFL LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
SCHEDULE III
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
--------------- ---------- -------------
<S> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1998
Individual life ........... $1,355,283 $ -- $ 8,976
Individual health ......... 94,294 9,631 12,123
Group life and health 93,405 10,298 36,908
Annuity ................... 3,925,293 -- --
---------- ------- -------
$5,468,275 $19,929 $58,007
========== ======= =======
YEAR ENDED
DECEMBER 31, 1997
Individual life ........... $ 882,003 $ -- $ 8,550
Individual health ......... 62,033 9,207 12,821
Group life and health 88,211 11,892 44,977
Annuity ................... 4,204,125 -- --
---------- ------- -------
$5,236,372 $21,099 $66,348
========== ======= =======
YEAR ENDED
DECEMBER 31, 1996
Individual life ........... $ 734,350 $ -- $ 7,240
Individual health ......... 39,219 8,680 13,631
Group life and health 78,418 14,702 53,486
Annuity ................... 4,408,419 -- --
---------- ------- -------
$5,260,406 $23,382 $74,357
========== ======= =======
<CAPTION>
BENEFITS,
CLAIMS
NET LOSSES AND OTHER
PREMIUM INVESTMENT SETTLEMENT OPERATING PREMIUMS
REVENUE INCOME* EXPENSES EXPENSES* WRITTEN
------------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1998
Individual life ........... $ 514,194 $ 85,258 $ 545,720 $ 87,455 --
Individual health ......... 68,963 8,004 48,144 30,442 $68,745
Group life and health 111,547 11,426 82,690 54,352 108,769
Annuity ................... 667,920 342,296 592,085 298,222 --
---------- -------- ---------- --------
$1,362,624 $446,984 $1,268,639 $470,471
========== ======== ========== ========
YEAR ENDED
DECEMBER 31, 1997
Individual life ........... $ 200,175 $ 75,914 $ 211,921 $ 36,185 --
Individual health ......... 63,548 5,934 37,706 29,216 $63,383
Group life and health 146,694 11,888 103,581 91,568 143,580
Annuity ................... 657,695 352,688 571,434 364,216 --
---------- -------- ---------- --------
$1,068,112 $446,424 $ 924,642 $521,185
========== ======== ========== ========
YEAR ENDED
DECEMBER 31, 1996
Individual life ........... $ 202,082 $ 66,538 $ 197,526 $ 38,067 --
Individual health ......... 55,871 5,263 32,903 29,511 $55,678
Group life and health 174,781 12,877 105,459 122,953 171,320
Annuity ................... 725,966 343,659 800,121 230,417 --
---------- -------- ---------- --------
$1,158,700 $428,337 $1,136,009 $420,948
========== ======== ========== ========
</TABLE>
* Allocations of net investment income and other operating expenses are based on
a number of assumptions and estimates, and the results would change if
different methods were applied.
119
<PAGE>
PFL LIFE INSURANCE COMPANY
REINSURANCE
(DOLLARS IN THOUSANDS)
SCHEDULE IV
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Life insurance in force ......... $6,384,095 $438,590 $39,116 $5,984,621 .6%
========== ======== ======= ========== ===
Premiums:
Individual life ............... $ 515,164 $ 3,692 $ 2,366 $ 513,838 .5%
Individual health ............. 76,438 7,475 -- 68,963 --
Group life and health ......... 255,848 144,301 -- 111,547 --
Annuity ....................... 686,372 18,096 -- 668,276 --
---------- -------- ------- ---------- --
$1,533,822 $173,564 $ 2,366 $1,362,624 .2%
========== ======== ======= ========== ===
YEAR ENDED DECEMBER 31, 1997
Life insurance in force ......... $5,025,027 $420,519 $35,486 $4,639,994 .8%
========== ======== ======= ========== ===
Premiums:
Individual life ............... $ 201,691 $ 3,554 $ 2,038 $ 200,175 1.0%
Individual health ............. 73,593 10,045 -- 63,548 --
Group life and health ......... 339,269 192,575 -- 146,694 --
Annuity ....................... 697,893 40,198 -- 657,695 --
---------- -------- ------- ---------- ---
$1,312,446 $246,372 $ 2,038 $1,068,112 .2%
========== ======== ======= ========== ===
YEAR ENDED DECEMBER 31, 1996
Life insurance in force ......... $4,863,416 $477,112 $30,685 $4,416,989 .7%
========== ======== ======= ========== ===
Premiums:
Individual life ............... $ 204,144 $ 3,858 $ 1,796 $ 202,082 .9%
Individual health ............. 68,699 12,828 -- 55,871 --
Group life and health ......... 390,296 215,515 -- 174,781 --
Annuity ....................... 794,311 68,345 -- 725,966 --
---------- -------- ------- ---------- ---
$1,457,450 $300,546 $ 1,796 $1,158,700 .2%
========== ======== ======= ========== ===
</TABLE>
120
