<PAGE>
As filed with the Securities and Exchange Commission on January 20, 1999
Registration File Nos. 333-86231/811-9115
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
LEGACY BUILDER VARIABLE LIFE SEPARATE ACCOUNT
(Exact Name of Trust)
PFL LIFE INSURANCE COMPANY
(Name of Depositor)
4333 Edgewood Road, NE
Cedar Rapids, Iowa 52499
(Complete Address of Depositor's Principal Executive Offices)
Frank A. Camp, Esq.
Vice President and Division General Counsel
PFL Life Insurance Company
4333 Edgewood Road, NE
Cedar Rapids, Iowa 52499
(Name and Complete Address of Agent for Service)
Copies to:
Frederick R. Bellamy, Esq.
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of the Registration Statement.
Title of securities being registered: Legacy Builder Plus flexible premium
variable life insurance policy.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
_________, 1999
PFL Life Insurance Company is offering Legacy Builder Plus (the "Policy"), the
flexible premium variable life insurance policy described in this prospectus.
This prospectus provides information that a prospective owner should know before
investing in the Policy. You should consider the Policy in conjunction with
other insurance you own.
You can allocate your Cash Value to:
. the Legacy Builder Variable Life Separate Account (the "variable
account"), which invests in the portfolios listed on this page; or
. a fixed account, which credits a specified rate of interest.
A prospectus for each of the portfolios available through the variable account
must accompany this prospectus. Please read these documents before investing
and save them for future reference.
Please note that the Policies and the portfolios:
. are not bank deposits
. are not federally insured
. are not endorsed by any bank or government agency
. are not guaranteed to achieve their goals
. are subject to risks, including loss of the amount invested.
The Policy generally will be a "modified endowment contract" for Federal income
tax purposes. This means all loans, surrenders and partial surrenders are
treated first as distributions of taxable income, and then as a return of basis.
Prior to your age 59 1/2, all these distributions generally are subject to a 10%
penalty tax.
- --------------------------------------------------------------------------------
The Securities and Exchange Commission has not
approved or disapproved this Policy or determined
that this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
================================================================================
Legacy Builder Plus
Flexible Premium Variable Life
Insurance Policy
issued by
Legacy Builder Variable Life Separate
Account
and
PFL Life Insurance Company
4333 Edgewood Road NE
Cedar Rapids, Iowa 52499
(800) 732-7754
================================================================================
The available portfolios are:
. AIM Variable Insurance Funds, Inc.
AIM V.I. Capital Appreciation Fund
AIM V.I. Government Securities Fund
AIM V.I. Growth & Income Fund
AIM V.I. Value Fund
. Dreyfus Stock Index Fund
. Dreyfus Variable Investment Fund
Dreyfus Money Market Portfolio
Dreyfus Small Company Stock Portfolio
. MFS Variable Insurance Trust
MFS Emerging Growth Series
MFS Research Series
MFS Total Return Series
MFS Utilities Series
. Oppenheimer Variable Account Funds
Oppenheimer Global Securities Fund/VA
Oppenheimer Growth Fund/VA
Oppenheimer Main Street Growth & Income Fund/VA
Oppenheimer High Income Fund/VA
Oppenheimer Strategic Bond Fund/VA
. WRL Series Fund, Inc.
WRL VKAM Emerging Growth Portfolio
WRL Janus Global Portfolio
WRL Janus Growth Portfolio
<PAGE>
Table of Contents
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<TABLE>
<S> <C>
Glossary.................................................................. 1
Policy Summary............................................................ 3
Risk Summary.............................................................. 3
Portfolio Expense Table................................................... 6
The Company and the Fixed Account......................................... 11
PFL Life Insurance Company.............................................. 11
The Fixed Account....................................................... 11
The Variable Account and the Portfolios................................... 12
The Variable Account.................................................... 12
The Portfolios.......................................................... 13
Your Right to Vote Portfolio Shares..................................... 15
The Policy................................................................ 16
Purchasing a Policy..................................................... 16
When Insurance Coverage Takes Effect.................................... 16
Extending the Maturity Date............................................. 16
Ownership Rights........................................................ 17
Changing the Owner................................................... 17
Selecting and Changing the
Beneficiary........................................................ 17
Assigning the Policy................................................. 17
Canceling a Policy...................................................... 18
Premiums.................................................................. 18
Premium Payments........................................................ 18
Allocating Premiums..................................................... 20
Policy Values............................................................. 20
Cash Value.............................................................. 20
Growth Accelerator...................................................... 21
Cash Surrender Value.................................................... 21
Subaccount Value........................................................ 21
Unit Value.............................................................. 21
Fixed Account Value..................................................... 22
Charges and Deductions.................................................... 22
Premium Expense Charge.................................................. 23
Monthly Deduction....................................................... 23
Cost of Insurance.................................................... 23
Monthly Policy Charge................................................ 24
Daily Charge............................................................ 24
Surrender Charge........................................................ 24
Partial Surrender Charge................................................ 24
Transfer Charge......................................................... 25
Portfolio Expenses...................................................... 25
Death Benefit............................................................. 25
Death Benefit........................................................... 25
Payment Options......................................................... 26
Full and Partial Surrenders............................................... 26
Full Surrenders......................................................... 26
Partial Surrenders...................................................... 27
Transfers................................................................. 27
Dollar Cost Averaging................................................... 28
Asset Rebalancing Program............................................... 29
Loans..................................................................... 30
Loan conditions......................................................... 30
Effect of Policy Loans.................................................. 31
Policy Lapse and Reinstatement............................................ 31
Lapse................................................................... 31
Reinstatement........................................................... 32
Federal Tax Consideration................................................. 32
Other Policy Information.................................................. 34
Our Right to Contest the Policy......................................... 34
Suicide Exclusion....................................................... 35
Misstatement of Age or Sex.............................................. 35
Modifying the Policy.................................................... 35
Payments We Make........................................................ 35
Reports to Owners....................................................... 36
Records................................................................. 36
Policy Termination...................................................... 36
Performance Data.......................................................... 36
Additional Information.................................................... 46
Sale of Policies........................................................ 46
Legal Matters........................................................... 46
Legal Proceedings....................................................... 46
Year 2000 Matters....................................................... 46
Experts................................................................. 47
Financial Statements.................................................... 47
Additional Information about PFL Life
Insurance Company.................................................... 47
PFL's Executive Officers and Directors.................................. 47
Illustrations............................................................. 48
</TABLE>
<PAGE>
Glossary
================================================================================
Cash Value
The sum of your Policy's value in the subaccounts and the fixed account
(including amounts held in the fixed account to secure any loans).
Cash Surrender Value
The amount we pay when you surrender your Policy. It is equal to: (1) the Cash
Value as of the date of surrender; minus (2) any surrender charge; minus (3) any
outstanding Policy loan; minus (4) any loan interest you owe.
Death benefit proceeds
The amount we will pay to the beneficiary when we receive proof of the insured's
death. We will reduce the proceeds by the amount of any outstanding loans
(including any interest you owe), and any due and unpaid monthly deductions.
Initial premium
The amount you must pay before insurance coverage begins under this Policy.
Your Policy's schedule page shows the initial premium. It must be at least
$10,000.
Insured
The person whose life is insured by this Policy.
Lapse
If the Policy has an outstanding loan and you do not have enough Cash Value to
pay the monthly deduction, the surrender charge and any outstanding loan amount
(including any interest you owe on the loan(s)), the Policy will enter a 61-day
grace period. The Policy will lapse (terminate without value) if you do not
make a sufficient payment by the end of a grace period.
Maturity Date
The Policy anniversary when the insured reaches age 100 and life insurance
coverage under this Policy ends. You may elect to continue the Policy beyond
insured's age 100 under the extended maturity provision. However, the extended
maturity provision may not be available in all states.
Monthly Date
This is the same day of each month as the Policy Date. If there is no Valuation
Date in a calendar month that coincides with the Policy Date, the Monthly Date
is the next Valuation Date. On each Monthly Date, we determine Policy charges
and deduct them from the Cash Value.
Monthly Deduction
The amount we deduct from the Cash Value each month. The monthly deduction
includes the cost of insurance charge, and any monthly administration charge.
Net Premium
The amount we receive as premium, less the premium expense charge.
Office
Our administrative and service office is Financial Markets Division, P.O. Box
3183, Cedar Rapids, Iowa 52406-3183; or 4333 Edgewood Road NE, Cedar Rapids,
Iowa 52499-0001. The telephone number is 1-800-732-7754.
1
<PAGE>
Owner (you, your)
The person entitled to exercise all rights as owner under the Policy.
Policy Date
The date when we complete our underwriting process, full life insurance coverage
goes into effect, we issue the Policy, and we begin to deduct the Monthly
Deductions. Your Policy's schedule page shows the Policy Date. The free look
period begins on the Policy Date. We measure Policy months, years, and
anniversaries from the Policy Date.
Premiums
All payments you make under the Policy other than loan repayments.
Reallocation Date
The date shown on the Policy schedule page when we reallocate any premium (plus
interest) held in the fixed account to the subaccounts and fixed account as you
directed in your application. The Reallocation Date varies by state according
to a state's free look requirement. In states that require a full refund of
premium upon exercise of the free look right, the Reallocation Date is 5 days
after the end of the free look period. In other states, the Reallocation Date
is the Policy Date.
Subaccount
A subdivision of the Legacy Builder Variable Life Separate Account. We invest
each subaccount's assets exclusively in shares of one investment portfolio.
Surrender
To cancel the Policy by signed request from the owner.
Valuation Date
Each day that both the New York Stock Exchange and PFL Life Insurance Company
are open for business, except for any days when a subaccount's corresponding
investment portfolio does not value its shares. As of the date of this
prospectus, there are no days when both the New York Stock Exchange and PFL are
open for business and an investment portfolio does not value its shares.
Valuation Period
The period beginning at the close of business of the New York Stock Exchange on
one Valuation Date and continuing to the close of business on the next Valuation
Date.
Variable account
Legacy Builder Variable Life Separate Account. It is a separate investment
account that is divided into subaccounts, each of which invests in a
corresponding portfolio of a designated mutual fund.
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 in our sole
discretion is necessary for us to take the action you request or for you to
exercise the right specified, and (3) be received at our Office.
2
<PAGE>
Policy Summary
================================================================================
This summary describes important features of the Policy and corresponds to
sections in this prospectus which discuss the topics in more detail. All
capitalized words and phrases, and a number of others, are defined or explained
in the Glossary.
Premiums
. You can select a premium payment plan but you are not required to pay
premiums according to the plan. You can vary the frequency and amount, and
can skip premium payments. We will not accept any premiums after the insured
reaches age 100.
. In general, the minimum initial premium is $10,000, and the minimum
additional premium is $5,000.
. If the insured qualifies for simplified underwriting:
- Conditional life insurance coverage begins as soon as you complete an
application and pay an initial premium.
- The maximum initial premium you may pay is $1,500 multiplied by the
insured's age at issue. (For example, if the insured is age 50 at issue,
the maximum initial premium for simplified underwriting is $75,000.)
- You may pay the maximum initial premium at issue or at any time during the
first 2 Policy years; however, premiums paid in the second Policy year may
not exceed premiums paid in the first Policy year.
- In the second and subsequent Policy years, you have different premium
payment options depending on what premiums you paid in the previous Policy
year. See "Premiums" for further information.
. If the insured undergoes full underwriting:
- You designate the total premium for which we will underwrite the insured
(the "underwriting premium").
- At issue, you must pay an amount equal to the greater of: (1) 50% of the
underwriting premium; or (2) the underwriting premium minus $100,000.
- In the second and subsequent Policy years, you have different premium
payment options depending on what premiums you paid in the previous Policy
year. See "Premiums" for further information.
. If you have no outstanding loans (or if you fully repay a loan), then we
guarantee that your Policy will never lapse.
. If you have an outstanding loan, your Policy will enter a 61-day grace period
whenever the loan amount exceeds the Cash Value minus any surrender charge.
The loan amount is the total amount of all outstanding Policy loans,
including both principal and interest due. If that occurs, then your Policy
will terminate without value unless you make a sufficient payment during the
grace period. See "Risk of Lapse," and "Policy Lapse and Reinstatement."
. Once we issue your Policy, the free look period begins. The free look period
is the period when you may return the Policy and receive a refund. The length
of the free look period varies by state. See "Canceling a Policy." The front
cover of your Policy shows the applicable free look period.
. We put all premiums (minus any premium expense charge) in the fixed account
until the Reallocation Date.
3
<PAGE>
Investment options
You may allocate your money among the variable account investment options, and
the fixed account options.
Variable Account:
. You may allocate the money in your Policy to any of the subaccounts of the
variable account. We do not guarantee any money you place in the subaccounts.
The value of each subaccount will increase or decrease, depending on the
investment performance of the corresponding portfolio. You could lose some or
all of your money.
. Each subaccount invests exclusively in one of the following investment
portfolios:
[_] AIM Variable Insurance Funds, Inc.
AIM V.I. Capital Appreciation Fund
AIM V.I. Government Securities Fund
AIM V.I. Growth & Income Fund
AIM V.I. Value Fund
[_] Dreyfus Stock Index Fund
[_] Dreyfus Variable Investment Fund
Dreyfus Money Market Portfolio
Dreyfus Small Company Stock Portfolio
[_] MFS Variable Insurance Trust
MFS Emerging Growth Series
MFS Research Series
MFS Total Return Series
MFS Utilities Series
[_] Oppenheimer Variable Account Funds
Oppenheimer Global Securities Fund/VA
Oppenheimer Growth Fund/VA
Oppenheimer Main Street Growth & Income Fund/VA
Oppenheimer High Income Fund/VA
Oppenheimer Strategic Bond Fund/VA
[_] WRL Series Fund, Inc.
WRL VKAM Emerging Growth Portfolio
WRL Janus Global Portfolio
WRL Janus Growth Portfolio
Fixed Account:
. You may also place money in the basic fixed account where it earns interest
at an annual rate of at least 3%. We may declare a higher rate of interest,
but we are not obligated to do so.
. At the time of purchase, you may place some or all of your initial net
premium in the Dollar Cost Averaging Fixed Account ("DCA Fixed Account").
Money you place in the DCA Fixed Account will earn interest at an annual rate
of at least 3.0%. We will transfer money out of the DCA Fixed Account in
equal installments over a period of 6 months (or other periods available at
the time of issue) and place it in the variable subaccounts according to your
instructions.
4
<PAGE>
Cash Value
. Cash Value is the sum of your amounts in the subaccounts and the fixed
account. If you have any loans outstanding, Cash Value also includes amounts
we hold in our fixed account to secure any loans.
. Cash Value varies from day to day, depending on the investment experience of
the subaccounts you choose, the interest we credit to the fixed account, the
charges we deduct, and any other transactions (transfers, partial surrenders,
and loans.)
. Cash Value is the starting point for calculating important values under the
Policy, such as the Cash Surrender Value and the death benefit.
. Your Policy may lapse if you do not have sufficient Cash Surrender Value to
pay the monthly deductions.
. Growth Accelerator: At the end of each month in any Policy year, we will
credit your Cash Value with additional interest at an annual rate of 0.50% if
your Policy satisfies the following requirements at the beginning of the
Policy year:
X Cash Value is greater than 200% of the total premiums paid; and
X Cash Value exceeds $50,000.
. We do not guarantee a minimum Cash Value. Cash Value can go down -- all the
way to zero.
Charges and Deductions
$ Premium expense charge: We deduct a premium expense charge equal to the
----------------------
actual premium tax imposed by the state where we issue your Policy. Premium
taxes currently range from 0.50% to 3.50% of each premium payment. We credit
the remaining net premium to your Cash Value.
$ Monthly Deduction. On the Policy Date and on each Monthly Date, we deduct the
-----------------
following charges on a pro-rata basis from each subaccount and the fixed
account:
- a cost of insurance charge for the Policy
- a monthly Policy charge including two components:
(1) a monthly administrative charge of $2.50 if the Cash Value at the
beginning of a Policy year is less than $50,000; and
(2) a monthly asset based charge equal to 0.55% annually of the assets in
the variable account. We deduct this charge from the assets in the
variable account during the first 10 Policy years.
$ Surrender charge: During the first 6 years after a premium payment, we deduct
----------------
a 7% surrender charge on any surrender attributable to the premium. A
separate surrender charge applies to each premium payment.
We deduct a 7% surrender charge on the entire amount of any full or partial
surrender during the first Policy year. After the first Policy year, you may
partially surrender amounts up to your Policy's gain (Cash Value minus
premiums) free of charge; however, the 7% surrender charge will apply to the
portion of any partial surrender that exceeds the gain and is attributable to
a premium paid within the 6 years prior to the partial surrender.
$ Daily Charge: We deduct a daily charge equal (on an annual basis) to 0.75% of
------------
the average daily net assets of the variable account.
$ Transfer charge: We currently assess no charge for transfers. We reserve the
---------------
right to charge $10 for the 13th and each additional transfer in a Policy
year.
$ Portfolio Expenses: The portfolios deduct investment advisory (management)
------------------
fees and other expenses from their assets. These charges vary by portfolio
and in 1998 the total annual amount of these charges ranged from 0.26% to
1.01% of average portfolio assets.
5
<PAGE>
Portfolio Expense Table
================================================================================
The following table shows the fees and expenses charged by the portfolios. The
purpose of the 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 for the fiscal year ended December 31, 1998.
Expenses of the portfolios may be higher or lower in the future. For more
information on the management fees described in this table, see the portfolios'
prospectuses.
Annual Portfolio Operating Expenses (as a percentage of average net assets and
after fee waivers and expense reimbursements)
<TABLE>
<CAPTION>
Management Other Rule Total Annual
Portfolio Fees Expenses 12b-1 Fees Expenses
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation 0.62% 0.05% -- 0.67%
AIM V.I. Government Securities 0.50% 0.26% -- 0.76%
AIM V.I. Growth & Income 0.61% 0.04% -- 0.65%
AIM V.I. Value 0.61% 0.05% -- 0.66%
Dreyfus Money Market 0.50% 0.06% -- 0.56%
Dreyfus Small Company Stock 0.75% 0.23% -- 0.98%
Dreyfus Stock Index 0.25% 0.01% -- 0.26%
MFS Emerging Growth (1) 0.75% 0.10% -- 0.85%
MFS Research (1) 0.75% 0.11% -- 0.86%
MFS Total Return (1) 0.75% 0.16% -- 0.91%
MFS Utilities (1) 0.75% 0.26% -- 1.01%
Oppenheimer Global Securities 0.68% 0.06% -- 0.74%
Oppenheimer Growth 0.73% 0.02% -- 0.75%
Oppenheimer Main Street Growth & Income 0.74% 0.05% -- 0.79%
Oppenheimer High Income 0.74% 0.04% -- 0.78%
Oppenheimer Strategic Bond 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) These portfolios have an expense offset arrangement which reduces their
custodian fee based upon the amount of cash maintained by the portfolio with
its custodian and dividend disbursing agent. Each portfolio may enter into
other such arrangements and directed brokerage arrangements, which would
also have the effect of reducing the portfolio's expenses. Expenses stated
in this table do not take into account these expense reductions, and are
therefore higher than the actual expenses of the portfolios.
(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 Global, and WRL Janus Growth, 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. The fund
will provide advance written notice if a Rule 12b-1 fee is deducted. See
the WRL Series Fund, Inc.'s prospectus for more details.
(3) WRL Investment Management, Inc. ("WRL Management") currently waives 0.025%
of its advisory fee for this portfolio's average daily net assets above $2
billion (net fee -- 0.775%). This waiver is voluntary and may be terminated
at any time upon 90 days' notice to the fund.
(4) WRL Management currently waives 0.025% of its advisory fee for the first $3
billion of this portfolio's average daily net assets (net fee -- 0.775%);
and 0.05% for the portfolio's assets above $3 billion (net fee -- 0.75%).
This waiver is voluntary and may be terminated at any time upon 90 days'
notice to the fund.
6
<PAGE>
Surrenders
. Full surrender: At any time while the Policy is in force, you may make a
written request to surrender your Policy and receive the Cash Surrender Value
(that is, the Cash Value minus any surrender charge, and minus any
outstanding loan amount including any accrued interest).
. Partial surrenders: You may make a written request to withdraw part of the
Cash Value, subject to the following rules:
- You must request at least $500;
- At least $5,000 of Cash Surrender Value must remain in the Policy after
the partial surrender;
- During the first Policy year, any amount you surrender is subject to a
surrender charge; and
- After the first Policy year, you may surrender amounts up to your Policy's
gain (Cash Value minus premiums paid) free of charge.
. A partial surrender automatically causes a pro-rata reduction in the death
benefit.
. Full and partial surrenders may be taxable and, prior to your age 59 1/2, may
be subject to a 10% tax penalty.
. When assessing the 7% surrender charge, we deem premiums to be withdrawn on a
"first-in-first-out" (FIFO) basis.
Death Benefit
. While the Policy is in force, the death benefit is the greater of: (1) the
Basic Death Benefit; or (2) the Guaranteed Minimum Death Benefit ("GMDB").
. Basic Death Benefit: The Basic Death Benefit is equal to the Cash Value
divided by the net single premium. The net single premium is calculated using
guaranteed cost of insurance charges with a 4.5% interest rate. The Basic
Death Benefit will change monthly due to changes in the Cash Value. The net
single premium will change annually.
. Guaranteed Minimum Death Benefit: The GMDB is the greater of premiums paid or
highest Cash Value on a Policy anniversary prior to the insured's age 75
(both adjusted for partial surrenders). At the insured's age 75, the GMDB
remains fixed for the remainder of the Policy. For Policies issued after age
74, the GMDB will be the premiums paid less partial surrenders.
. We deduct any unpaid loans from the proceeds payable on the insured's death.
7
<PAGE>
Transfers
. Each year, you may make an unlimited number of transfers of Cash Value from
the subaccounts and the fixed account.
. Transfers from subaccounts must be at least $500, or, if less, the total
value in the subaccount.
. Transfers from the fixed account each Policy year may not exceed the greater
of:
- 25% of the amount in the fixed account; or
- $1,000.
If the balance after the transfer is less than $1,000, we will transfer the
entire amount in the fixed account.
. We may charge $10 for the 13th and each additional transfer during a Policy
year.
. We do not impose transfer charges for Dollar Cost Averaging or Asset
Rebalancing.
Loans
. You may take a loan against the Policy for any amount from $500 up to 90% of
the Cash Value net of surrender charge, minus any outstanding loans and
interest you owe.
. To secure the loan, we transfer an amount equal to the loan from the variable
account and fixed account to the loan account (part of our general account).
. Amounts in the loan account earn interest at the guaranteed minimum rate of
3% per year.
. We currently charge you an interest rate of 4.5% per year on your loan. We
guarantee that this interest rate will not exceed 6% per year. Interest is
due and payable at the end of each calendar quarter. Unpaid interest becomes
part of the outstanding loan.
. Loan interest generally is not tax deductible (consult your tax advisor for
possible exceptions).
. You may repay all or part of your outstanding loans at any time. Loan
repayments must be at least $500, and must be clearly marked as "loan
repayments" or they will be credited as premiums if they equal or exceed
minimum premium amounts.
. We deduct any unpaid loans from the proceeds payable on the insured's death.
. Loans taken from, or secured by, this Policy generally will be taxed as
distributions and, prior to age 59 1/2, a tax penalty may apply.
. The "no-lapse guarantee" does not apply if there is an outstanding loan.
8
<PAGE>
Risk Summary
===============================================================================
Investment Risk If you invest your Cash Value in one or more subaccounts, then
you will be subject to the risk that investment performance
will be unfavorable and that the Cash Value will decrease. You
could lose everything you invest. If you select the fixed
account, then we credit your Cash Value with a declared rate
of interest, but you assume the risk that the rate may
decrease, although it will never be lower than a guaranteed
minimum annual effective rate of 3%.
Because we deduct charges from Cash Value every month, if
investment results are negative or not sufficiently favorable,
then your Cash Surrender Value may fall to zero. If your Cash
Surrender Value is zero and you have an outstanding loan, then
your Policy will enter a 61-day grace period. Unless you make
a sufficient payment during the grace period, the Policy will
lapse without value and insurance coverage will no longer be
in effect. However, if investment experience is sufficiently
favorable and you have kept the Policy in force for a
substantial time, then you may be able to draw upon Cash
Value, through partial surrenders and loans.
- -------------------------------------------------------------------------------
Risk of Lapse If you do not have an outstanding loan, we guarantee that your
Policy will never lapse (terminate without value), regardless
of investment performance.
If you have an outstanding loan and your Cash Surrender Value
becomes zero, then the Policy will enter a 61-day grace
period.
Whenever your Policy enters the grace period, if you do not
make a sufficient payment before the grace period ends, your
Policy will lapse, insurance coverage will no longer be in
effect, and you will receive no benefits. The payment must be
sufficient enough to cause the Cash Surrender Value to exceed
zero, after deducting all due and unpaid monthly deductions
and outstanding loans. You might not be able to reinstate a
policy that has lapsed (depending on applicable state law).
- -------------------------------------------------------------------------------
Tax Risks We anticipate that the Policy should be deemed a life
insurance contract under Federal tax law. However, there is
some uncertainty in this regard. The Policy generally will be
treated as a modified endowment contract ("MEC") under Federal
tax laws (except, in some cases for a Policy issued in
exchange for another life issuance policy that was not a MEC).
---
If a Policy is treated as a MEC, then surrenders, partial
surrenders, and loans under a Policy will be taxable as
ordinary income to the extent there are earnings in the
Policy. In addition, a 10% penalty tax may be imposed on
surrenders, partial surrenders, and loans taken before you
reach age 59 1/2. You should consult a qualified tax advisor
for assistance in all tax matters involving your Policy.
- -------------------------------------------------------------------------------
Surrender Charge The 7% surrender charge under this Policy applies for 6 years
after each premium payment. You should purchase this Policy
only if you have the financial ability to keep it in force for
a substantial period of time.
Even if you do not ask to surrender your Policy, surrender
charges may play a role in determining whether your Policy
---
will lapse. Cash Surrender Value (that is, Cash Value minus
any surrender charges and outstanding loans) is one measure we
use to determine whether your Policy will enter a grace
period, and possibly lapse.
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9
<PAGE>
Partial You may request partial surrenders of a portion of the Cash
Surrender Surrender Value. After the first Policy year, you may request
Limits partial surrenders of amounts up to your Policy's gain free
of charge. The amount partially surrendered must be at least
$500 and must not cause the Cash Surrender Value after the
partial surrender to be less than $5,000. We impose a 7%
surrender charge on the portion of any surrender that exceeds
the gain in the Policy and is attributable to a premium paid
within the 6 years prior to the surrender.
A partial surrender reduces the Cash Surrender Value, so it
will increase the risk that the Policy will lapse. A partial
surrender will reduce the death benefit and also may have tax
consequences.
- -------------------------------------------------------------------------------
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 as collateral. We then credit a
fixed interest rate of 3.0% to the collateral in the loan
account. As a result, the loan collateral does not participate
in the investment results of the subaccounts nor does it
receive any higher current interest rate credited to the fixed
account. 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 rate credited to the fixed
account, the effect could be favorable or unfavorable.
A Policy loan affects the death benefit because a loan reduces
the death benefit proceeds and Cash Surrender Value by the
amount of the outstanding loan, plus any interest you owe on
Policy loans.
While a loan is outstanding, the "no-lapse guarantee" does not
--------
apply. See Policy Lapse and Reinstatement.
-----
A Policy loan could make it more likely that a Policy would
terminate. There is a risk that if the loan reduces your Cash
Surrender Value to too low an amount and investment results
are unfavorable, then the Policy will lapse, resulting in loss
of insurance and possibly adverse tax consequences. A loan
will likely be taxed as a partial surrender and a 10% penalty
tax may apply.
- -------------------------------------------------------------------------------
Comparison with Like fixed benefit life insurance, the Policy offers a death
Other Insurance benefit and provides a Cash Value, loan privileges and a
Policies value on surrender. However, the Policy differs from a fixed
benefit policy because it allows you to place your premiums
in investment subaccounts. The amount and duration of life
insurance protection will vary with the investment
performance of the amounts you place in the subaccounts. In
addition, the Cash Surrender Value will always vary with the
investment results 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.
- -------------------------------------------------------------------------------
10
<PAGE>
Illustrations The hypothetical illustrations in this prospectus or used in
connection with the purchase of a Policy are based on
hypothetical rates of return. These rates are not guaranteed,
and are provided only to illustrate how the Policy charges
and hypothetical rates of return affect death benefit levels,
Cash Value and Cash 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. Actual rates of return undoubtedly
will be higher or lower than those illustrated, so the values
under your Policy will be different from those illustrated.
- -------------------------------------------------------------------------------
11
<PAGE>
The Company and the Fixed Account
===============================================================================
PFL Life Insurance Company
PFL Life Insurance Company ("PFL," "Company," "we," "us" or "our") 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 we
may issue. Our general account supports the fixed account options under the
Policy.
IMSA. PFL is a member of the Insurance Marketplace Standards Association
("IMSA"). IMSA members subscribe to a set of ethical standards involving the
sales and service of individually sold life insurance and annuities. As a
member of IMSA, PFL may use the IMSA logo and language in advertisements.
The Fixed Account
The basic 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 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 will be credited interest daily at a net
effective interest rate of at least 3%. We will determine any interest rate
credited in excess of the guaranteed rate at our sole discretion.
The Dollar Cost Averaging Fixed Account. At the time you purchase a Policy, you
may place your entire initial premium in the Dollar Cost Averaging Fixed Account
("DCA Fixed Account"). Money you place in the DCA Fixed Account will earn
interest at an annual rate of at least 3%. We may declare a higher rate of
interest at our sole discretion. We will transfer money out of the DCA Fixed
Account in equal installments over a period of 6 months and place it in the
subaccounts and basic fixed account according to your instructions. The first
such transfer occurs on the Monthly Date after the Reallocation Date. In the
last month of the DCA Fixed Account term, we will transfer interest accrued on
the premium.
There is no charge for participating in the DCA Fixed Account, and transfers
under this program do not count in determining any transfer charge.
We reserve the right to stop offering the DCA Fixed Account at any time for any
reason.
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<PAGE>
The fixed account is not 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.
The Variable Account and the Portfolios
===============================================================================
The Variable Account
PFL established the variable account as a separate investment account under Iowa
law on November 20, 1998. PFL owns the assets in the variable account and is
obligated to pay all benefits under the Policies. PFL may use the variable
account to support other variable life insurance policies PFL issues. The
variable account is registered with the Securities and Exchange Commission as an
unit investment trust under the Investment Company Act of 1940 and qualifies as
a "separate account" within the meaning of the Federal securities laws.
The variable account is divided into subaccounts, each of which invests in
shares of a specific portfolio of one of the following mutual funds:
. AIM Variable Insurance Funds, Inc.
(managed by AIM Advisors, Inc.)
. Dreyfus Variable Investment Fund
(managed by The Dreyfus Corporation)
. Dreyfus Stock Index Fund (managed by The
Dreyfus Corporation)
. MFS Variable Insurance Trust (managed by
Massachusetts Financial Services Company)
. Oppenheimer Variable Account Funds (managed
by OppenheimerFunds, Inc.)
. WRL Series Fund, Inc. (managed by WRL
Investment Management, Inc.)
The subaccounts buy and sell portfolio shares at net asset value. 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
variable account reflect the subaccount's own investment experience and not the
investment experience of our other assets. The variable account's assets may
not be used to pay any of PFL's liabilities other than those arising from the
Policies. If the variable account's assets exceed the required reserves and
other liabilities, we may transfer the excess to our general account.
The variable account may include other subaccounts that are not available under
the Policies and are not discussed in this prospectus. Where permitted by
applicable law, PFL reserves the right to:
1. Create new separate accounts;
2. Combine separate accounts, including the variable account;
3. Remove, combine or add subaccounts and make the new subaccounts
available to you at our discretion;
4. Make new portfolios available under the variable account or remove
existing portfolios;
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<PAGE>
5. Substitute new portfolios for any existing portfolios if shares of the
portfolio are no longer available for investment or if we determine that
investment in a portfolio is no longer appropriate in light of the
variable account's purposes;
6. Deregister the variable account under the Investment Company Act of 1940
if such registration is no longer required;
7. Operate the variable account as a management investment company under
the Investment Company Act of 1940 or as any other form permitted by
law; and
8. Make any changes required by the Investment Company Act of 1940 or any
other law.
We will not make any such changes without receiving any necessary approval of
the Securities and Exchange Commission and applicable state insurance
departments. We will notify you of any changes.
The Portfolios
The variable account invests in shares of certain portfolios of the Funds. Each
of the Funds is registered with the Securities and Exchange Commission as an
open-end management investment company. Such registration does not involve
supervision of the management or investment practices or policies of the Funds
by the Securities and Exchange Commission.
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 generally
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.
The following table summarizes each portfolio's investment objective(s) and
policies. There is no assurance that any of the portfolios will achieve its
stated objective(s). You can find more detailed information about the
portfolios, including a description of risks, in the prospectuses for the Funds.
You should read the Funds' prospectuses carefully.
Portfolio Investment Objective
--------- --------------------
AIM V.I. Capital . Seeks capital appreciation through investments in
Appreciation common stocks, with emphasis on medium-sized and
smaller emerging growth companies.
Aim V.I. . Seeks to achieve a high level of current income
Government consistent with reasonable concern for safety of
Securities principal by investing in debt securities issued,
guaranteed or otherwise backed by the United States
Government.
AIM V.I. Growth . Seeks growth of capital, with current income as a
& Income secondary objective.
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<PAGE>
AIM V.I. Value . Seeks to achieve long-term growth of capital by
investing primarily in equity securities judged by the
investment adviser 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 Money . Seeks to provide as high a level of current income as
Market is consistent with the preservation of capital and the
maintenance of liquidity.
Dreyfus Small . Seeks to provide investment results that are greater
Company Stock than the total return performance of publicly-traded
common stocks in the aggregate, as represented by the
Russell 2500(R) Index.
Dreyfus Stock . Seeks to provide investment results that correspond to
Index the price and yield performance of publicly traded
common stocks in the aggregate, as represented by the
Standard & Poor's 500(R) Composite Stock Price Index.
MFS Emerging . Seeks to provide long-term growth of capital.
Growth
MFS Research . Seeks to provide long-term growth of capital and
future income.
MFS Total Return . Seeks to provide above-average 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 . Seeks capital growth and current income (income above
that available from a portfolio invested entirely in
equity securities).
Oppenheimer . Seeks long-term capital appreciation by investing a
Global substantial portion of its assets in securities of
Securities 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.
Oppenheimer . Seeks to achieve capital appreciation by investing in
Growth securities of well-known established companies.
Oppenheimer Main . Seeks a high total return (which includes growth in
Street Growth the value of its shares as well as current income)
& Income from equity and debt securities.
Oppenheimer High . Seeks a high level of current income from investment
Income in high yield fixed-income securities. High Income'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 . Seeks a high level of current income principally
Strategic Bond derived from interest on debt securities and seeks to
enhance such income by writing covered call options on
debt securities.
RL VKAM . Seeks capital appreciation by investing primarily in
Emerging Growth common stocks of small and medium sized companies.
WRL Janus Global . Seeks long-term growth of capital in a manner
consistent with preservation of capital, primarily
through investments in common stocks of foreign and
domestic issuers.
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<PAGE>
WRL Janus Growth . Seeks growth of capital by investing primarily in
common stocks listed on a national securities exchange
or traded on NASDAQ.
In addition to the variable account, the portfolios may sell shares to other
separate investment accounts established by other insurance companies to support
variable annuity contracts and variable life insurance policies or qualified
retirement plans. 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. Although
neither PFL nor the portfolios currently foresee any such disadvantages, either
to variable life insurance policy owners or to variable annuity contract owners,
each fund's Board of Directors (or Trustees) will monitor events in order to
identify any material conflicts between the interests of such variable life
insurance policy owners and variable annuity contract owners, and will determine
what action, if any, it should take. Such action could include the sale of fund
shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in Federal income tax laws, or (3) differences
in voting instructions between those given by variable life insurance policy
owners and those given by variable annuity contract owners.
If a fund's Board of Directors (Trustees) were to conclude that separate funds
should be established for variable life insurance and variable annuity separate
accounts, then variable life insurance policy owners and variable annuity
contract owners would no longer have the economies of scale resulting from a
larger combined fund.
These portfolios are not available for purchase directly by the general public,
and are not the same as other portfolios with very similar or nearly identical
names that are sold directly to the public. However, the investment objectives
and policies of certain portfolios available under the Policy are very similar
to the investment objectives and policies of other portfolios that are or may be
managed by the same investment adviser or manager. Nevertheless, the investment
performance and results of the portfolios available under the Policy may be
lower or higher than the investment results of such other (publicly available)
portfolios. There can be no assurance, and we make no representation, that the
investment results of any of the portfolios available under the Policy will be
comparable to the investment results of any other portfolio, even if the other
portfolio has the same investment adviser or manager, the same investment
objectives and policies, and a very similar name.
Please read the attached portfolio prospectuses to obtain more complete
information regarding the portfolios. Keep these prospectuses for future
reference.
Your 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 Policy owners instruct, so
long as such action is required by law.
Before a vote of a portfolio's shareholders occurs, you will receive voting
materials. 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 owners, 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 owner voting instructions. If we
16
<PAGE>
ever disregard voting instructions, we will send you a summary in the next
annual report to Policy owners advising you of the action and the reasons we
took such action.
The Policy
===============================================================================
Purchasing a Policy
To purchase a Policy, you must submit a completed application and an initial
premium to us at our Office. 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.
We determine the basic death benefit for a Policy based on the age of the
insured when we issue the Policy, the initial premium paid, and other
characteristics of the proposed insured(s) such as age, gender and risk class.
Generally, the Policy is available for insureds between issue ages 30-80 for
standard risk classes, and between issue ages 30-70 for non-standard risk
classes. We use different underwriting standards (simplified underwriting, or
full underwriting) 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. We reserve the right: (1) to modify our underwriting
requirements at any time; or (2) to reject an application for any reason
permitted by law. There is no insurance coverage until we complete our
underwriting process and accept the application.
When Insurance Coverage Takes Effect
Once we determine that the insured meets our underwriting requirements,
insurance coverage begins, we issue the Policy, and we begin to deduct monthly
charges from your premium. This date is the Policy Date. On the Policy Date,
we will allocate your premium (less charges) to the fixed account. On the
Reallocation Date, we will transfer your Cash Value from the fixed account to
the subaccounts or maintain your Cash Value in the fixed account as you directed
on your application. The Reallocation Date varies by state according to a
state's free look requirement. In states that require a full refund of premium
upon exercise of the free look right, the Reallocation Date is 5 days after the
end of the free look period. In other states, the Reallocation Date is the
Policy Date.
Full insurance coverage under the Policy will take effect only if the proposed
insured is alive and in the same condition of health as described in the
application when we deliver the Policy to you, and if the initial premium is
paid.
Extending the Maturity Date
You may request to extend the Maturity Date for your Policy. You must make your
request in writing and we must receive it at least 90 days, but no more than 180
days, prior to the scheduled Maturity Date. After you extend the Maturity Date,
we will automatically extend your Maturity Date every year unless you direct us
in writing to do otherwise. Interest on any outstanding Policy loan will
continue to accrue during the period for which the Maturity Date is extended.
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<PAGE>
The Cash Value at the Maturity Date will be equal to the death benefit, less any
indebtedness. If you choose to extend the Maturity Date, the Cash Value will
continue to earn interest and no monthly deductions will be deducted from the
Cash Value.
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. The owner is
the insured unless the application specifies a different person as the insured.
If the owner dies before the 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 Owner
. You may change the owner by providing a written request to us at any
time while the insured is alive.
. The change takes effect on the date that the written request is
signed.
. We are not liable for any actions we take before we receive the
written request.
. Changing the owner does not automatically change the beneficiary or
the insured.
. Changing the owner may have tax consequences.
Selecting and Changing the Beneficiary
. You designate the beneficiary (the person to receive the death
benefit when the insured dies) in the application.
. If you designate more than one beneficiary, then each beneficiary
shares equally in any death benefit proceeds unless the beneficiary
designation states otherwise.
. If the beneficiary dies before the insured, then any contingent
beneficiary becomes the beneficiary.
. If both the beneficiary and contingent beneficiary die before the
insured, then we will pay the death benefit to the owner or the
owner's estate once the insured dies.
. You can change the beneficiary by providing us with a written
request while the insured is living.
. The change in beneficiary is effective as of the date you sign the
written request.
. We are not liable for any actions we take before we receive the
written request.
Assigning the Policy
. You may assign Policy rights while the insured is alive.
. The owner retains any ownership rights that are not assigned.
. Assignee may not change the owner or the beneficiary, and may not
elect or change an optional method of payment. We will pay any
amount payable to the assignee in a lump sum.
. Claims under any assignment are subject to proof of interest and the
extent of the assignment.
. If you assign your Policy as collateral for a loan, you should
consider that loans secured by this Policy are treated as
distributions and could be subject to income tax and a 10% penalty if
you are under age 59 1/2.
. We are not:
- bound by any assignment unless we receive a written notice of the
assignment;
- responsible for the validity of any assignment; or
- liable for any actions we take before we receive written notice
of the assignment.
. Assigning the Policy may have tax consequences.
Canceling a Policy
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<PAGE>
You may cancel a Policy during the free-look period by returning it to PFL at
4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499, or to the agent who sold it.
The free-look period generally expires 10 days after you receive the Policy, but
this period will be longer if required by state law. If you decide to cancel
the Policy during the free-look period, we will treat the Policy as if we never
issued it. Within seven calendar days after we receive the returned Policy, we
will refund either (a) an amount equal to the Cash Value plus any charges we
deducted, or (b) where required by state law, we will refund all premiums paid
for the Policy.
Premiums
===============================================================================
Premium Payments
Before we issue a Policy, you must pay an initial premium equal to at least
$10,000. Thereafter, you may pay premiums at any time and in any amount of
$5,000 or more. However, because most additional premium payments will increase
the death benefit, we will require additional underwriting for most additional
premium payments.
We have the right to limit or refund any premium, if the premium would
disqualify the Policy as a life insurance contract under the Internal Revenue
Code. Your Policy's schedule page will show the maximum additional premium you
can pay during the first two Policy Years without additional underwriting. As
indicated below, it is the Company's policy to use simplified issue underwriting
for these Policies. However, the Company reserves the right to impose full
underwriting on future premium payments. If we return a portion of your premium
based on the maximum premium amount, we will not allow you to make additional
premium payments until they are allowed by the maximum premium limitations. We
reserve the right to modify our premium limitations at any time. You make all
premium payments to our Office or to one of our authorized agents.
You can stop paying premiums at any time and your Policy will continue in force
until the earlier of the maturity date (when the insured reaches age 100), or
the date when either (1) the insured dies, or (2) the grace period ends without
a sufficient payment, or (3) we receive your signed request to surrender the
Policy.
The type of underwriting you qualify for depends upon the amount of premium paid
at issue. Listed below are the two types of underwriting you may qualify for.
See "Policy Summary- Premiums" for more information.
Simplified Issue Guidelines.
In the second and subsequent Policy years, you will have different options
depending on your actions in the previous Policy year. In the second Policy
year, you may have up to three options as follows:
1. Pay an amount up to the difference between the simplified issue limit
and the amount paid in the first Policy year, but not more than the
amount paid in the first Policy year, with no additional underwriting.
This option is only available if no partial withdrawals have been
taken.
2. Pay an amount that exceeds the limit in option (1) up to your attained
Age times 1,500 subject to simplified issue underwriting. "Age" is
defined as the insured's age on the Policy Date, plus the number of
completed Policy years since the Policy Date.
3. Pay an amount that exceeds the limit in option (2) on a fully
underwritten basis.
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<PAGE>
In the third and subsequent Policy years you would have one or two options
depending on the premium paid in the previous Policy year.
1. IF you paid a premium in the previous Policy year, you may pay
additional premium on a simplified issue basis up to the simplified
issue limit (attained Age times 1,500). You may pay more than
simplified issue limit on a fully underwritten basis. (Note that the
minimum additional premium that we will accept is $5,000.)
2. IF you did not pay premium in the previous Policy year, additional
premium payments can be made subject to underwriting at our discretion,
including full underwriting.
Fully Underwritten Guidelines.
In the second and subsequent Policy years, you will have different options
available to you depending on your actions in the previous Policy year. In the
second Policy year, you may have up to three options as follows:
1. Pay an amount up to the difference between the underwriting premium and
the amount paid in the first Policy year. The underwriting premium is
the total premium that you designate yourself to be underwritten for.
This option is only available if no partial withdrawals have been taken
and if the underwriting premium actually exceeds total premium paid in
the first Policy year.
2. Pay an amount that exceeds the limit in option (1) up to the attained
Age times 1,500 subject to simplified issue underwriting. Note that
this option may not exist if the limit in (1) exceeds the attained Age
times 1,500.
3. Pay an amount that exceeds the greater of the limit in options (1) and
(2) on a fully underwritten basis.
With respect to both options 2 and 3, the premium will not be accepted if
you do not qualify for the underwriting class under which the Policy was
issued.
In the third and subsequent Policy years you would have one or two options
depending on the premium paid in the previous Policy year.
1. IF you paid a premium in the previous Policy year, you may pay
additional premium on a simplified issue basis up to the simplified
issue limit (attained Age time 1,500). You may pay more than the
simplified issue limit on a fully underwritten basis. (Note that the
minimum additional premium that we will accept is $5,000.)
2. IF you did not pay premium in the previous Policy year, additional
premium payments can be made subject to underwriting at our discretion,
including full underwriting.
Tax-Free Exchanges (1035 Exchanges). We may 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, contingent upon receipt of the cash
from that contract. We will accept a Section 1035 exchange of a contract with
an outstanding loan; however, we will not preserve the loan (i.e., you will pay
off the loan and transfer the net policy value). If you contemplate a tax-free
exchange, you should consult a competent tax advisor to discuss the potential
tax effects of such a transaction.
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<PAGE>
Allocating Premiums
When you apply for a Policy, you must instruct us to allocate your net premium
to one or more subaccounts of the variable account and to the fixed account
according to the following rules:
. You must put at least 1% of each net premium in any subaccount or the
fixed account you select (you can, of course, put nothing in some
subaccounts or the fixed account).
. Allocation percentages must be in whole numbers and the sum of the
percentages must equal 100.
. You can change the allocation instructions for additional premiums
without charge at any time by providing us with written notification
(or any other notification we deem satisfactory).
. Any allocation change will be effective on the date we record the
change. We record the allocation change on the same day that we
receive the request for the change.
. We reserve the right to limit the number of premium allocation changes;
and to limit the number of subaccount allocations in effect at any one
time.
We will credit interest on your initial net premium from the date we receive
payment and the necessary documents to the Reallocation Date. Interest will be
credited at the current fixed account rate. Interest is guaranteed to equal at
least 3% annually.
Investment returns from amounts allocated to the subaccounts will vary with the
investment experience of these subaccounts and will be reduced by Policy
charges. You bear the entire investment risk for amounts you allocate to the
subaccounts.
On the Policy Date, we will allocate your Cash Value to the fixed account. We
also allocate any net premiums we receive from the Policy Date to the
Reallocation Date to the fixed account. On the Reallocation Date, we will
reallocate the Cash Value in the fixed account to the subaccounts or retain it
in the fixed account in accordance with the allocation percentages provided in
the application. We invest all net premiums paid after the Reallocation Date on
the Valuation Date we receive them. We credit these net premiums to the
subaccounts (as appropriate) at the unit value next determined after we receive
your payment. (Please refer to the Glossary for an explanation of the
Reallocation Date.)
Policy Values
================================================================================
Cash Value . serves as the starting point for calculating values under a
Policy;
. equals the sum of all values in the fixed account and in
each subaccount of the variable account;
. is determined on the Policy Date and on each Valuation
Date; and has no guaranteed minimum amount and may be more
or less than premiums paid (except for amounts allocated to
the fixed account).
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<PAGE>
Growth Accelerator
At the end of each month in any Policy year, we will credit your Cash Value with
additional interest at an annual rate of 0.50% if your Policy satisfies the
following requirements at the beginning of the Policy year:
. Cash Value is greater than 200% of the total premiums paid; and
. Cash Value exceeds $50,000.
We will allocate the additional interest to the variable account and the fixed
account on a pro-rata basis. We guarantee to credit the monthly interest
(0.04167% multiplied by the Cash Value at the end of each month); however, the
Policy needs to be requalified to meet the specified requirements on a year-to-
year basis. There is no charge for this benefit.
Cash Surrender Value
The Cash Surrender Value is the amount we pay to you when you surrender your
Policy. We determine the Cash Surrender Value at the end of the Valuation
Period when we receive your written surrender request.
Cash Surrender . the Cash Value as of such date; minus
Value on any . any surrender charge as of such date; minus
Valuation Date . any outstanding Policy loans; minus
equals: . any interest you owe on the Policy loans.
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 . the initial units purchased at the unit value on the
units in any Policy Date; plus
subaccount on . units purchased with additional net premiums; plus
any Valuation . units purchased via transfers from another subaccount
Date equals: or the fixed account; plus
. units purchased via growth accelerator, if any; minus
. units redeemed to pay for monthly deductions; minus
. units redeemed to pay for partial surrenders; minus
. units redeemed as part of a transfer to another
subaccount or the fixed account.
Every time you allocate or transfer 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 by the unit value
for that subaccount at the end of the Valuation Period.
Unit Value
We determine a unit value for each subaccount to reflect how investment results
affect the Policy values. Unit values will vary among subaccounts. The 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.
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<PAGE>
<TABLE>
<S> <C>
The unit value of . the total value of the assets held in the subaccount, determined by multiplying the
any subaccount number of shares of the designated portfolio owned by the subaccount times the
at the end of a portfolio's net asset value per share; minus
Valuation Period . a deduction for the mortality and expense risk charge; minus
is calculated as: . 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; the subaccount;
and the result divided by
. the number of outstanding units in the subaccount.
</TABLE>
Fixed Account Value
On the Policy Date, the fixed account value is equal to the net premiums
allocated to the fixed account, less the portion of the first monthly deduction
taken from the fixed account.
<TABLE>
<S> <C>
The fixed account . the net premium(s) allocated to the fixed account; plus
value at the end of . any amounts transferred to the fixed account; plus
any Valuation . interest credited to the fixed account; plus
Period is equal to: . amount credited via growth accelerator, if any; minus
. amounts charged to pay for monthly deductions; minus
. amounts withdrawn from the fixed account; minus
. amounts transferred from the fixed account to a subaccount.
</TABLE>
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.
<TABLE>
<S> <C>
Services and . the death benefit, cash and loan benefits under the Policy
benefits we . investment options, including premium allocations
provide: . administration of elective options and the distribution of reports to owners
- -----------------------------------------------------------------------------------------------------------------------------
Costs and . costs associated with processing and underwriting applications, issuing and
expenses we . administering the Policy
incur: . overhead and other expenses for providing services and benefits
. sales and marketing expenses
. other costs of doing business, such as collecting premiums, maintaining records,
processing claims, effecting transactions, and paying Federal, state and local
premium and other taxes and fees
- ------------------------------------------------------------------------------------------------------------------------------
Risks we assume: . that the cost of insurance charges we may deduct are insufficient to meet our
actual claims because insureds die sooner than we estimate
. that the costs of providing the services and benefits under the Policies exceed
the charges we deduct
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Premium Expense Charge
When you make a premium payment, we deduct a premium expense charge equal to the
premium tax imposed by the state where we issue your Policy. State premium
taxes currently range from 0.50% to 3.50% of each premium payment. After we
deduct any premium expense charge, we apply the remaining amount (the net
premium) to the subaccounts and the fixed account according to your allocation
instructions. The premium expense charge compensates us for state premium
taxes.
Monthly Deduction
We deduct a monthly deduction from the Cash Value on the Policy Date and on each
Monthly Date. We will make deductions from each subaccount and the fixed
account on a pro rata basis (i.e., in the same proportion that the value in each
subaccount and the fixed account bears to the total Cash Value on the Monthly
Date). If the value of any subaccount or the fixed account is insufficient to
pay that subaccount or fixed account's portion of the monthly deduction, we will
take the monthly deduction on a pro-rata basis from all accounts. Because
portions of the monthly deduction (such as the cost of insurance) can vary from
month-to-month, the monthly deduction will also vary.
The monthly deduction has two components:
1. The cost of insurance charge for the Policy; plus
2. The monthly Policy charge, if applicable.
Cost of Insurance. We assess a monthly cost of insurance charge to compensate
us for underwriting the death benefit (i.e., the anticipated cost of paying the
amount of the death benefit that exceeds your Cash Surrender Value upon the
insured's death). The charge depends on a number of variables (age, gender,
risk class) that would cause it to vary from Policy to Policy and from Monthly
Date to Monthly Date.
<TABLE>
<S> <C>
Cost of The cost of insurance charge is equal to:
Insurance
Charge . the cost of insurance rates; multiplied by
. the net amount at risk for your Policy on the Monthly Date.
The net amount at risk is equal to:
. the death benefit at the beginning of the month; divided by
. a "risk rate divisor" (a factor that reduces the net amount at risk, for purposes
of computing the cost of insurance, by taking into account assumed monthly
earnings at an annual rate of 3%); minus
. the Cash Value at the beginning of the month.
</TABLE>
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<PAGE>
We base the cost of insurance rates on the insured's age, gender, and risk
class. The actual monthly cost of insurance rates are based on our expectations
as to future mortality experience. The rates will never be greater than the
guaranteed amount stated in your Policy. These guaranteed rates are based on
the 1980 Commissioner's Standard Ordinary (C.S.O.) Mortality Tables (smoker/non-
smoker) and the insured's age and rate class. For standard rate classes, these
guaranteed rates will never be greater than the rates in the C.S.O. tables.
When required, we use a unisex table.
Monthly Policy Charge. We assess a monthly Policy charge to compensate us for
administrative expenses such as record keeping, processing death benefit claims
and Policy changes, and overhead costs. The monthly Policy charge includes two
components:
(1) a monthly administrative charge of $2.50 if the Cash Value at the
beginning of a Policy year is less than $50,000; and
(2) a monthly asset based charge equal to an annual rate of 0.55% of the
assets in the variable account. We deduct this charge from the assets
in the variable account during the first 10 Policy years.
Daily Charge
We deduct a daily charge from each subaccount to compensate us for certain
mortality and expense risks we assume. The mortality risk is that an insured
will live for a shorter time than we project. The expense risk is that the
expenses that we incur will exceed the administrative charge limits we set in
the Policy. The daily charge is equal to:
. the assets in each subaccount, multiplied by
. the daily pro rata portion of the annual charge rate of 0.75%.
If this charge does not cover our actual costs, we absorb the loss. Conversely,
if the charge more than covers actual costs, the excess is added to our surplus.
We expect to profit from this charge. We may use any profits for any lawful
purpose including covering distribution costs.
Surrender Charge
If you fully surrender your Policy during the first 6 years following any
premium payment, we deduct a surrender charge from your Cash Value and pay the
remaining amount (less any outstanding loan amount) to you. The payment you
receive is called the Cash Surrender Value. The surrender charge is equal to 7%
of the premium(s) that was paid within 6 years of the surrender.
The surrender charge may be significant. You should carefully calculate this
charge before you request a surrender. Under some circumstances the level of
surrender charges might result in no Cash Surrender Value available if you
surrender your Policy in the first few years after paying a premium.
Partial Surrender Charge
You may request partial surrenders of a portion of the Cash Surrender Value;
however, the entire amount surrendered in the first Policy year is subject to a
surrender charge. After the first Policy year, you may partially surrender
amounts up to your Policy's gain (Cash Value minus premium) free of charge. We
deduct a 7% surrender charge on the portion of any partial surrender that
exceeds the gain and is attributable to a premium paid within 6 years prior to
the partial surrender. For this purpose, we deem any gain to be withdrawn
first, and then the oldest premiums in the order they were paid (i.e., first-in-
first-out, or "FIFO").
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<PAGE>
Transfer Charge
<TABLE>
<S> <C>
. We guarantee that you can make 12 transfers each year free from charge. We currently allow an
unlimited number of free transfers.
. We reserve the right to charge $10 for each transfer in excess of 12 during a Policy Year. We
will not increase this charge.
. For purposes of assessing the transfer charge, each written or telephone request is considered to be one transfer,
regardless of the number of subaccounts (or fixed account) affected by the transfer.
. We deduct the transfer charge from the amount being transferred.
. Transfers we effect on the Reallocation Date, and transfers due to dollar cost averaging, asset
rebalancing, and loans, do not count as transfers for the purpose of assessing this charge.
</TABLE>
Portfolio Expenses
The value of the net assets of each subaccount reflects the investment advisory
fees and other expenses incurred by the corresponding portfolio in which the
subaccount invests. See the Portfolio Annual Expenses Table in this prospectus,
and the portfolios' prospectuses for further information on these fees and
expenses.
Death Benefit
================================================================================
Death Benefit
While the Policy is in force, the death benefit is the greater of:
(1) the Basic Death Benefit; or
(2) the Guaranteed Minimum Death Benefit ("GMDB").
. Basic Death Benefit: The Basic Death Benefit is the minimum amount that
must be payable at the insured's death, before reduction for any
outstanding loans, for the Policy to be treated as life insurance under the
Internal Revenue Code. We determine the Basic Death Benefit by dividing the
Cash Value by the net single premium. The net single premium is the amount
of premium needed to provide a paid up death benefit of $1.00, assuming the
guaranteed cost of insurance charges, a 4.5% interest rate, and mortality
as set forth in the "Commissioners 1980 Standard Ordinary Mortality Table."
The Basic Death Benefit will change monthly, or as of the date of death,
due to changes in the Cash Value. The net single premium will change
annually.
. Guaranteed Minimum Death Benefit: Until the insured's age 75, the GMDB is
the greater of premiums paid (less partial surrenders) or the highest Cash
Value on a Policy anniversary (adjusted for subsequent partial surrenders).
At age 75, the GMDB remains fixed for the remainder of the Policy. For
Policies issued after age 74, the GMDB will be the premiums paid less
partial surrenders. If you take a partial surrender, the GMDB is reduced on
a "dollar for dollar" basis .
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<PAGE>
As long as the Policy is in force, we will pay the death benefit proceeds on an
individual Policy once we receive satisfactory proof of the insured's death. We
may require return of the Policy. We will pay the death benefit proceeds to the
primary beneficiary or a contingent beneficiary. If the beneficiary dies before
the 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.
Death benefit . the death benefit (described above); minus
proceeds equal: . any past due monthly deductions; minus
. any outstanding Policy loan on the date of death; minus
. any interest you owe on the Policy loan(s)
If all or part of the death benefit proceeds are paid in one sum, we will pay
interest on this sum only if required by applicable state law, from the date we
receive due proof of the insured's death to the date we make payment.
We may further adjust the amount of the death benefit proceeds under certain
circumstances.
See Our Right to Contest the Policy; and Misstatement of Age or Sex.
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.
Full and Partial Surrenders
================================================================================
Full Surrenders
You may make a written request to surrender your Policy for its Cash Surrender
Value as calculated at the end of the Valuation Date when we receive your
request.
<TABLE>
<S> <C>
Full surrender . The insured must be alive and the Policy must be in force when you
conditions: make your written request. A surrender is effective as of the date when we receive
your written request. We may require that you return the Policy.
. You will incur a surrender charge of 7% of any premium payments made
within 6 years before the surrender. See Charges and Deductions --
Surrender Charge.
. Once you surrender your Policy, all coverage and other benefits under it cease.
. We will pay you the Cash Surrender Value in a lump sum within seven days unless
you request other arrangements.
</TABLE>
Surrendering the Policy may have adverse tax consequences. See Federal Tax
Considerations - Tax Treatment of Policy Benefits.
27
<PAGE>
Partial Surrenders
You may request a partial surrender of a portion of your Cash Value subject to
certain conditions.
<TABLE>
<S> <C>
. You must make your partial surrender request to us in writing.
. You must request at least $500.
. You may withdraw up to the Policy's gain (Cash Value minus premiums) free of charge after the
first Policy year.
. At least $5,000 of Cash Surrender Value must remain in the Policy after the partial surrender.
. We assess a surrender charge equal to 7% of the whole amount surrendered in the first Policy
year.
. We assess a surrender charge equal to 7% of the portion of any partial surrender after the first
Policy year that exceeds the gain and is attributable to a premium payment made within 6 years
before the partial surrender. See Charges and Deductions -- Partial Surrenders.
. We deduct the surrender charge from the remaining Cash Value.
. You can specify the subaccount(s) and fixed account from which to make the partial surrender;
otherwise we will deduct the amount (including any partial surrender charge) from the
subaccounts and the fixed account on a pro-rata basis (that is, according to the percentage of
Cash Value contained in each subaccount and the fixed account).
. We will process the partial surrender at the unit values next determined after we receive your
request.
. We generally will pay a partial surrender request within seven days after the Valuation Date
when we receive the request.
</TABLE>
Partial surrenders may have adverse tax consequences. See Federal Tax
Considerations - Tax Treatment of Policy Benefits.
Transfers
You may make transfers from (i.e., out of) the subaccounts or from 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:
<TABLE>
<S> <C>
. You may make an unlimited number of transfers in a Policy Year.
. You may request transfers in writing (in a form we accept), or by telephone.
. For transfers out of the variable subaccounts, you must transfer at least $500, or, if less, the
total value in the subaccount.
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
. For transfers out of the fixed account, you may not transfer more than 25% of the value in the
fixed account (not including amounts securing Policy loans), or $1,000 (whichever is greater). If
the balance after the transfer is less than $1,000, we will transfer the entire amount in the fixed
account. We allow one out of the fixed account every 12 months.
. We may deduct a $10 charge from the amount transferred for the 13th and each additional
transfer in a Policy Year. Transfers we effect on the Reallocation Date, and transfers resulting
from loans, dollar cost averaging and asset rebalancing are not treated as transfers for the
purpose of the transfer charge.
. We consider each written or telephone request to be a single transfer, regardless of the number of
subaccounts (or fixed account) involved.
. We process transfers based on the unit values next determined after we receive your request
(which is at the end of the Valuation Date during which we receive your request).
</TABLE>
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 1-800-732-7754.
Please note the following regarding telephone 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.
. Such procedures may include requiring forms of personal identification
prior to acting upon telephone instructions, providing written
confirmation of transactions to you, and/or tape recording telephone
instructions received from you.
. If we do not employ reasonable confirmation procedures, we may be liable
for losses due to unauthorized or fraudulent instructions.
The corresponding portfolio of any subaccount determines its net asset value per
each share once daily, as of the close of the regular business session of the
New York Stock Exchange ("NYSE") (usually 4:00 p.m. Eastern time), which
coincides with the end of each Valuation Period. Therefore, we will process any
transfer request we receive after the close of the regular business session of
the NYSE, using the net asset value for each share of the applicable portfolio
determined as of the close of the next regular business session of the NYSE.
Dollar Cost Averaging
When purchasing a Policy, you may place some or all of your initial net premium
in the Dollar Cost Averaging Fixed Account ("DCA Fixed Account"). 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 allows you to
potentially reduce the risk of investing most of your premium into the
subaccounts at a time when prices are high. The success of this
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<PAGE>
strategy is not assured and depends on market trends. You should carefully
consider 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 it is
high.
Money you place in the DCA Fixed Account will earn interest at an annual rate of
at least 3%. We will transfer money out of the DCA Fixed Account in equal
installments over a specified period of 6 months (or other periods available at
issue) and place it in the subaccounts and fixed account according to your
instructions.
We may credit different interest rates for dollar cost averaging programs of
varying time periods. If you discontinue the dollar cost averaging program
before its completion, then the interest credited on amounts in the DCA Fixed
Account may be adjusted downward, but not below the minimum guaranteed effective
annual interest rate of 3%.
There is no charge for dollar cost averaging. A transfer under this program is
not considered a transfer for purposes of assessing the transfer fee.
<TABLE>
<S> <C>
Dollar cost -- we receive your request to cancel your participation;
averaging will -- the value in the DCA Fixed Account is depleted;
terminate if: -- you elect to participate in the asset rebalancing program; or
-- you elect to participate in any asset allocation services provided by a
third party.
</TABLE>
We may modify, suspend, or discontinue the dollar cost averaging program at any
time.
Asset Rebalancing Program
We also offer an asset rebalancing program under which we will automatically
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. The asset
rebalancing program will transfer Cash Value from those subaccounts that have
increased in value to those subaccounts that have declined in value (or not
increased as much). Over time, this method of investing may help you buy low and
sell high. The asset rebalancing program does not guarantee gains, nor does it
assure that any subaccount will not have losses. Cash Value in the fixed account
and the DCA Fixed Account are not available for this program.
<TABLE>
<S> <C>
To participate in the -- you must complete an asset rebalancing request form and submit it to
asset rebalancing us before the maturity date
program: -- you must have a minimum Cash Value of $10,000.
</TABLE>
You may elect for 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 New York Stock Exchange ("NYSE") is closed, rebalancing
will occur on the next day the NYSE is open. There is no charge for the asset
rebalancing program. Any reallocation which occurs under the asset rebalancing
program will not be counted towards the 12 free transfers allowed during each
Policy Year. You can begin or end this program only once each Policy year. We
may modify, suspend, or discontinue the asset rebalancing program at any time.
30
<PAGE>
<TABLE>
<S> <C>
Asset rebalancing -- you elect to participate in the DCA Fixed Account;
will cease if: -- we receive your request to discontinue participation;
-- you make a 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
</TABLE>
Loans
================================================================================
While the Policy is in force, you may borrow money from us using the Policy as
the only security for the loan. A loan that is taken from, or secured by, a
Policy may have tax consequences.
Loan conditions:
You may take a loan against the Policy for amounts from $500 up to 90% of the
Cash Value net of any surrender charge, minus outstanding loans and any interest
you owe.
. To secure the loan, we transfer an amount equal to the loan from the
variable account and fixed account to the loan account, which is a part
of the fixed account. If your loan application does not specify any
allocation instructions, we will transfer the loan from the subaccounts
and the fixed account on a pro-rata basis (that is, according to the
percentage of Cash Value contained in each subaccount and the fixed
account).
. Amounts in the loan account earn interest at the guaranteed minimum
rate of 3% per year, compounded annually. We may credit the loan
account with an interest rate different than the fixed account.
. 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.
. We currently charge you an interest rate of 4.50% (the guaranteed
maximum is 6%) per year on your loan. Interest is due and payable at
the end of each calendar quarter, or, if earlier, on the date of any
loan increase or repayment. Unpaid interest becomes part of the
outstanding loan and accrues interest accordingly. We reserve the right
to change the interest rate on any new and existing loans. However, the
interest rate will never be raised above the guaranteed rate of
6%.
. You may repay all or part of your outstanding loans at any time. Loan
repayments must be at least $500, and must be clearly marked as "loan
repayments" or they will be credited as premiums if they meet minimum
premium requirements.
. Upon each loan repayment, we will transfer an amount equal to the loan
repayment from the loan account to the fixed and/or variable account
according to your current premium allocation schedule.
. We deduct any unpaid loans from the Cash Surrender Value and death
benefit proceeds payable on the insured's death.
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<PAGE>
. If any unpaid loan, including interest you owe, equals or exceeds the
Cash Value, causing the Cash Surrender Value to become zero, then your
Policy will enter a 61-day grace period. See Policy Lapse and
Reinstatement, below.
Effect of Policy Loans
A Policy loan affects the Policy, because we reduce the death benefit proceeds
and Cash 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 Cash 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
account. This amount is not affected by the variable account's investment
performance and may not be credited with the interest rates accruing on the
fixed account. Amounts transferred from the variable account to the loan account
will affect the Cash Value, even if the loan is repaid, because we credit such
amounts with an interest rate we declare rather than a rate of return reflecting
the investment results of the variable account.
There are risks involved in taking a Policy loan, including the potential for a
Policy to lapse if projected earnings, taking into account outstanding loans,
are not achieved. If the Policy is a "modified endowment contract" (see Federal
Tax Considerations, below), then a loan will be treated as a partial surrender
for Federal income tax purposes. A Policy loan may also have possible adverse
tax consequences that could occur if a Policy lapses with loans outstanding. See
Loan Risks.
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 Cash Surrender Value. If you
do not submit a sufficient payment within 61 days from the date of the notice,
your Policy may lapse.
Policy Lapse and Reinstatement
================================================================================
Lapse
If you have no outstanding Policy loans, then we guarantee that your Policy will
not lapse, regardless of investment performance. If you do have an outstanding
loan, then certain circumstances will cause your Policy to enter a grace period
during which you must make a sufficient payment to keep your Policy in force:
. If you have an outstanding Policy loan and your Policy's Cash Surrender
Value becomes zero (or negative), then the Policy will enter a 61-day
grace period.
If your Policy enters into a grace period, we will mail a notice to your last
known address and to any assignee of record. The 61-day grace period begins on
the date of the notice. The notice will specify the minimum payment required and
the final date by which we must receive the payment to keep the Policy from
lapsing. If we do not receive the specified minimum payment by the end of the
grace period, all coverage under the Policy will terminate and you will receive
no benefits. The payment must be sufficient enough to cause the Cash Surrender
Value to exceed zero, after deducting all due and unpaid monthly deductions and
outstanding loans.
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<PAGE>
Reinstatement
You may not reinstate your Policy if it lapses unless we issued your Policy in a
state which requires that the Policy include a reinstatement provision. If your
Policy was issued in a state which requires that the Policy include a
reinstatement provision, then you may request a reinstatement of a lapsed Policy
within five years of the date of lapse (and prior to the Maturity Date). To
reinstate a Policy, you must:
. submit a written application for reinstatement;
. provide evidence of insurability satisfactory to us; and
. make a premium payment that is large enough to cover the sum of:
-- the monthly deductions not previously paid during the grace period,
plus
-- $10,000.
We will not reinstate any outstanding loans (including interest you owe). The
amount in the loan account on the reinstatement date will be zero. Your Cash
Surrender Value on the reinstatement date will equal the premium you pay at
reinstatement minus the sum of:
(1) monthly deductions to cover the grace period;
(2) one additional monthly deduction; and
(3) any surrender charge.
The reinstatement date for your Policy will be the monthly date on or following
the day we approve your application for reinstatement. We may decline a request
for reinstatement.
Federal Tax Considerations
================================================================================
The following summarizes some of the basic 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 ("Code") in order to qualify as a life insurance
contract for Federal income tax purposes and to receive the tax treatment
normally accorded life insurance contracts. The guidance as to how these
requirements are to be generally applied is limited and the manner in which such
requirements should be applied to certain features of the Policy is not directly
addressed by the available legal authorities. Nevertheless, we believe that a
Policy should satisfy the applicable Code requirements. Because of 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 contracts have been
considered for Federal income tax purposes to be the owners of the assets of the
separate account supporting their contracts due to their ability to exercise
investment control over those assets. Where this is the case, the contract
owners 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 the 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
33
<PAGE>
control over variable account assets, we reserve the right to modify the Policy
as necessary to prevent you from being treated as the owner of the variable
account assets supporting the Policy.
In addition, the Code requires that the investments of the variable account be
"adequately diversified" in order to treat the Policy as a life insurance
contract for Federal income tax purposes. We intend that the variable account,
through the portfolios, will satisfy these diversification requirements.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
Tax Treatment of Policy Benefits
In General. We believe that the death benefit under a Policy generally should
be excludible 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. You should
consult a tax advisor 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 a Policy (e.g., by assignment), then
the tax consequences depend on whether the Policy is classified as a "Modified
Endowment Contract."
Modified Endowment Contracts. Under the Code, certain life insurance contracts
are classified as "Modified Endowment Contracts" ("MECs") and receive less
favorable tax treatment than other life insurance contracts. The Policy will
generally be classified as a MEC, although some policies issued in exchange for
life insurance contracts that are not classified as MECs may not 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.
Distributions from Modified Endowment Contracts. Policies classified as MECs
are subject to the following tax rules:
. All distributions other than death benefits from a MEC, including
distributions upon surrender and partial surrenders, will be treated
first as distributions of gain taxable as ordinary income and as tax-
free recovery of the owner's investment in the Policy only after all
gain has been distributed.
. Loans taken from such a Policy (or secured by such a Policy, e.g., by
assignment) are treated as distributions and taxed accordingly.
. A 10% additional income tax penalty 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
the beneficiary.
Distributions from Policies that are not Modified Endowment Contracts.
Distributions (other than death benefits) from a Policy that is not a MEC are
generally treated first as a recovery of your investment 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 contract for Federal income tax purposes
if Policy benefits are reduced during the first 15 Policy Years may be treated
in whole or in part as ordinary income subject to tax.
34
<PAGE>
Loans from or secured by a Policy that is not a MEC are generally not treated as
distributions. However, if the difference between the interest rate credited on
an amount in the loan account and the interest rate changed on the Policy loan
is negligible, the tax consequences are uncertain. In these circumstances, you
should consult a tax adviser as to such consequences. In addition, if a Policy
that is not a MEC lapses when a Policy loan is outstanding, the loan balance
will be treated as a distribution and taxed accordingly.
Finally, neither distributions from nor loans from (or secured by) a Policy that
is not a MEC are subject to the 10% additional tax.
Investment in the Policy. Your investment in the Policy is generally your
aggregate 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.
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.
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 includible in the owner's income when a taxable
distribution occurs.
Continuing the Policy Beyond Age 100. The tax consequences of continuing the
Policy beyond the 100th birthday of the insured are uncertain. You should
consult a tax advisor as to these consequences.
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, Congress has adopted new rules
relating to life insurance owned by businesses. Any business contemplating the
purchase of a new Policy or a change in an existing Policy should consult a tax
adviser.
Possible Tax Law Changes. While the likelihood of legislative or other changes
is uncertain, there is always a possibility that the tax treatment of the Policy
could change by legislation or otherwise. It is even possible that any
legislative change could be retroactive (effective prior to the date of the
change). 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 you and/or the
insured 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 for two years from the Policy Date, or if reinstated, for two years
from the date of reinstatement.
35
<PAGE>
Suicide Exclusion
If the insured commits suicide, while sane or insane, within two years of the
Policy Date, the Policy will terminate and our liability is limited to an amount
equal to the premiums paid, less any loans, and less any partial surrenders
previously paid.
Misstatement of Age or Sex
If the insured's age or sex was stated incorrectly in the application or any
supplemental application, we will adjust the death benefit to the amount that
would have been payable at the correct age and sex based on the most recent
deduction for cost of insurance. If the insured's age has been overstated or
understated, we will calculate future monthly deductions using the cost of
insurance based on the insured's correct age and sex.
Modifying the Policy
Only one of our officers 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.
Upon notice to you, we may modify the Policy:
-- to conform the Policy, our operations, or the variable account's
operations to the requirements of any law (or regulation issued by a
government agency) to which the Policy, our company or the variable
account is subject; or
-- to assure continued qualification of the Policy as a life insurance
contract under the Federal tax laws; or
-- to reflect a change in the variable account's operation.
If we modify the Policy, we will make appropriate endorsements to the Policy.
If any provision of the Policy conflicts with the laws of a jurisdiction that
govern the Policy, we reserve the right to amend the provision to conform with
such laws.
Payments We Make
We usually pay the amounts of any surrender, partial surrender, 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:
. the NYSE is closed, other than customary weekend and holiday closing,
or trading on the NYSE is restricted as determined by the Securities
and Exchange Commission (SEC); or
. the SEC permits, by an order or less formal interpretation (e.g., no-
action letter), the postponement of any payment for the protection of
Owners; or
. the SEC determines that an emergency exists that would make the
disposal of securities held in the variable account or the
determination of their value not reasonably practicable.
36
<PAGE>
If you have submitted a recent check or draft, we have the right to defer
payment of surrenders, partial surrenders, death benefit proceeds, or payments
under a payment option until such check or draft has been honored.
Reports to Owners
Once each calendar quarter, we plan to mail to Owners at their last known
address a report showing the following information as of the end of the report
period:
. the current Cash Value
. the current Cash Surrender Value
. the current death benefit
. any activity (e.g., premiums paid, partial surrenders, deductions,
loans or loan repayments, other transactions) since the last report
. any other information required by law
We may amend these reporting procedures at any time, and/or provide less
frequent reports.
Records
We will maintain all records relating to the variable account and the fixed
account.
Policy Termination
Your Policy will terminate on the earliest of:
<TABLE>
<S> <C>
-- the maturity date (insured's age 100) -- the end of the grace period
without a sufficient payment
-- the date the insured dies -- the date you surrender the Policy
</TABLE>
Performance Data
================================================================================
Hypothetical illustrations based on adjusted historic portfolio performance
In order to demonstrate how the actual investment experience of the portfolios
could have affected the death benefit, Cash Value and Cash Surrender Value of
the Policy, we may provide hypothetical illustrations using the actual
investment experience of each portfolio since its inception. These hypothetical
illustrations are designed to show the performance that could have resulted if
the Policy had been in existence during the period illustrated. Hypothetical
illustrations are not indicative of future performance.
The values we illustrate for death benefit, Cash Value and Cash Surrender Value
take into account any charges and deductions from the Policy, the variable
account and the portfolios. We have not deducted any charges for premium taxes.
These charges could be substantial and would lower the performance figures
significantly if reflected.
37
<PAGE>
The charges and deductions that are used to determine the case value are as
follows:
. monthly cost of insurance charges;
. monthly administrative charges; and
. monthly asset based charges.
If the Cash Value is greater than 200% of the total premiums paid, and the Cash
Value exceeds $2,000, then we will credit your Cash Value with additional
interest at an annual rate of 0.50%.
Each of the following hypothetical illustrations is based on the historical
investment performance of the portfolios. Each illustration assumes that the
entire premium of $50,000 is allocated to the particular subaccount, and that
there are no transfers, no loans, and no partial surrenders. The values would be
different for an insured of a different sex, age, or risk class. The adjusted
historical annual total return figures are the total returns of the portfolio
for each year, less the 0.75% daily charge deducted from the variable account.
AIM V.I. CAPITAL APPRECIATION FUND
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- --------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------ ----------- ---------- ---------- ------------- ---------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
5/31/1993 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1993 125,555 125,391 55,966 55,882 52,466 52,382 N/A
12/31/1994 122,359 121,905 56,159 55,939 52,659 52,439 1.73%
12/31/1995 157,966 156,948 74,618 74,120 71,118 70,620 34.70%
12/31/1996 176,759 175,081 85,897 85,059 82,397 81,559 16.71%
12/31/1997 190,994 188,531 95,442 94,183 91,942 90,683 12.66%
12/31/1998 217,298 213,675 111,658 109,760 108,158 106,260 18.26%
</TABLE>
* Assuming the policy was purchased on 5/31/1993
AIM V.I. GOVERNMENT SECURITIES FUNDc
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- --------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
5/31/1993 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1993 112,393 112,246 50,099 50,024 46,599 46,524 N/A
12/31/1994 102,829 102,447 47,193 47,008 43,693 43,508 -4.46%
12/31/1995 113,025 112,297 53,390 53,033 49,890 49,533 14.71%
12/31/1996 110,016 108,972 53,463 52,941 49,963 49,441 1.53%
12/31/1997 113,272 111,811 56,603 55,856 53,103 52,356 7.35%
12/31/1998 116,063 114,128 59,612 58,598 56,112 55,098 6.80%
</TABLE>
* Assuming the policy was purchased on 5/31/1993
38
<PAGE>
AIM V.I. GROWTH & INCOME
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- --------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
5/31/1994 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1994 110,404 110,260 49,212 49,139 45,712 45,639 N/A
12/31/1995 140,537 140,015 64,503 64,249 61,003 60,749 32.88%
12/31/1996 160,371 159,338 75,754 75,248 72,254 71,748 19.06%
12/31/1997 191,882 190,060 93,246 92,336 89,746 88,836 24.80%
12/31/1998 233,574 229,929 116,773 114,863 113,273 111,363 26.57%
</TABLE>
* Assuming the policy was purchased on 5/31/1994
AIM V.I. VALUE FUND
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- --------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
5/31/1993 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1993 122,602 122,442 54,649 54,568 51,149 51,068 N/A
12/31/1994 121,579 121,127 55,801 55,582 52,301 52,082 3.52%
12/31/1995 157,994 156,976 74,631 74,133 71,131 70,633 35.58%
12/31/1996 173,373 171,727 84,251 83,429 80,751 79,929 14.45%
12/31/1997 204,673 202,034 102,277 100,928 98,777 97,428 23.09%
12/31/1998 258,910 254,593 133,041 130,779 129,541 127,279 31.49%
</TABLE>
* Assuming the policy was purchased on 5/31/1993
39
<PAGE>
DREYFUS STOCK INDEX FUND
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------- ---------- -------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------- ---------- ------- ---------- ------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
9/30/1989 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1989 111,568 111,505 49,731 49,694 46,231 46,194 N/A
12/31/1990 102,340 102,046 46,968 46,824 43,468 43,324 -4.21%
12/31/1991 126,382 125,688 59,699 59,357 56,199 55,857 28.90%
12/31/1992 128,820 127,734 62,601 62,056 59,101 58,556 6.31%
12/31/1993 131,436 129,896 65,680 64,891 62,180 61,391 6.38%
12/31/1994 128,806 126,827 66,157 65,119 62,657 61,619 2.14%
12/31/1995 167,988 164,789 88,556 86,838 88,556 86,838 35.78%
12/31/1996 197,903 194,135 106,527 104,460 106,527 104,460 21.63%
12/31/1997 253,495 248,668 139,243 136,540 139,243 136,540 31.99%
12/31/1998 314,203 308,221 176,003 172,587 176,003 172,587 27.10%
</TABLE>
* Assuming the policy was purchased on 9/30/1989
DREYFUS MONEY MARKET PORTFOLIO
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------- ---------- -------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------- ---------- ------- ---------- ------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
8/31/1990 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1990 111,685 111,601 49,783 49,737 46,283 46,237 N/A
12/31/1991 112,530 112,183 51,648 51,478 48,148 47,978 5.19%
12/31/1992 111,488 110,850 52,663 52,349 49,163 48,849 3.37%
12/31/1993 109,585 108,632 53,253 52,776 49,753 49,276 2.52%
12/31/1994 108,883 107,576 54,410 53,741 50,910 50,241 3.60%
12/31/1995 109,558 107,839 56,271 55,369 52,771 51,869 4.87%
12/31/1996 109,693 107,525 57,674 56,451 57,674 56,451 4.32%
12/31/1997 109,973 107,305 58,524 56,749 58,524 56,749 4.41%
12/31/1998 110,067 106,851 59,230 56,831 59,230 56,831 4.18%
</TABLE>
* Assuming the policy was purchased on 8/31/1990
40
<PAGE>
DREYFUS SMALL COMPANY STOCK PORTFOLIO
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------- ---------- -------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------- ---------- ------- ---------- ------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
5/31/1996 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1996 113,442 113,295 50,566 50,491 47,066 46,991 N/A
12/31/1997 131,350 130,862 60,286 60,049 56,786 56,549 20.87%
12/31/1998 117,329 116,573 55,422 55,052 51,922 51,552 -6.80%
</TABLE>
* Assuming the policy was purchased on 5/31/1996
MFS EMERGING GROWTH SERIES
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------- ---------- -------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------- ---------- ------- ---------- ------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
7/31/1995 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1995 126,885 126,767 56,559 56,496 53,059 52,996 N/A
12/31/1996 141,184 140,719 64,800 64,573 61,300 61,073 16.16%
12/31/1997 163,747 162,770 77,349 76,869 73,849 73,369 21.01%
12/31/1998 208,795 206,924 101,465 100,529 97,965 97,029 32.99%
</TABLE>
* Assuming the policy was purchased on 7/31/1995
MFS FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
10/31/1997 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1997 116,256 116,212 51,821 51,792 48,321 48,292 N/A
12/31/1998 73,502 73,307 33,733 33,636 30,233 30,136 -33.97%
</TABLE>
* Assuming the policy was purchased on 10/31/1997
41
<PAGE>
MFS RESEARCH SERIES
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($ 109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
7/31/1995 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1995 120,385 120,272 53,661 53,601 50,161 50,101 N/A
12/31/1996 140,029 139,568 64,269 64,044 60,769 60,544 21.43%
12/31/1997 160,215 159,259 75,680 75,211 72,180 71,711 19.37%
12/31/1998 187,878 186,194 91,300 90,458 87,800 86,958 22.31%
</TABLE>
* Assuming the policy was purchased on 7/31/1995
MFS TOTAL RETURN
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1/31/1995 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1995 136,430 136,150 60,814 60,678 57,314 57,178 N/A
12/31/1996 148,389 147,712 68,106 67,781 64,606 64,281 13.52%
12/31/1997 171,240 169,974 80,888 80,271 77,388 76,771 20.41%
12/31/1998 182,819 180,889 88,842 87,880 85,342 84,380 11.36%
</TABLE>
* Assuming the policy was purchased on 1/31/1995
MFS UTILITIES SERIES
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- ------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1/31/1995 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1995 140,841 140,552 62,780 62,639 59,280 59,139 N/A
12/31/1996 158,735 158,010 72,855 72,507 69,355 69,007 17.64%
12/31/1997 198,895 197,424 93,952 93,235 90,452 89,735 30.74%
12/31/1998 223,173 220,817 108,452 107,278 104,952 103,778 17.04%
</TABLE>
* Assuming the policy was purchased on 1/31/1995
42
<PAGE>
OPPENHEIMER CAPITAL APPRECIATION FUND/VA
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
4/30/1985 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1985 119,475 119,297 53,256 53,166 49,756 49,666 N/A
12/31/1986 133,785 133,259 61,403 61,149 57,903 57,649 16.89%
12/31/1987 131,483 130,604 62,108 61,679 58,608 58,179 2.54%
12/31/1988 152,775 151,284 74,241 73,497 70,741 69,997 21.19%
12/31/1989 179,747 177,376 89,822 88,610 86,322 85,110 22.68%
12/31/1990 157,095 154,424 80,686 79,288 77,186 75,788 -8.90%
12/31/1991 187,894 183,909 99,258 97,153 99,258 97,153 24.62%
12/31/1992 205,094 199,791 111,245 108,369 111,245 108,369 13.68%
12/31/1993 210,505 203,984 117,168 113,538 117,168 113,538 6.45%
12/31/1994 203,866 196,405 116,368 112,109 116,368 112,109 0.21%
12/31/1995 268,439 256,964 157,035 150,323 157,035 150,323 35.66%
12/31/1996 324,585 308,541 194,476 184,863 194,476 184,863 24.28%
12/31/1997 397,355 374,843 243,688 229,882 243,688 229,882 25.75%
12/31/1998 434,535 406,542 272,611 255,049 272,611 255,049 12.27%
</TABLE>
* Assuming the policy was purchased on 4/30/1985
OPPENHEIMER GLOBAL SECURITIES FUND/VA
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
11/30/1990 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1990 110,261 110,240 49,148 49,130 45,648 45,630 N/A
12/31/1991 108,352 108,087 49,728 49,596 46,228 46,096 2.62%
12/31/1992 95,689 95,209 45,198 44,960 41,698 41,460 -7.81%
12/31/1993 155,068 153,843 75,356 74,741 71,856 71,241 69.11%
12/31/1994 139,165 137,617 69,542 68,748 66,042 65,248 -6.43%
12/31/1995 135,496 133,503 69,593 68,546 66,093 65,046 1.48%
12/31/1996 152,071 149,230 80,239 78,711 80,239 78,711 16.93%
12/31/1997 170,917 167,662 87,503 85,803 87,503 85,803 21.52%
12/31/1998 178,292 174,897 88,213 86,497 88,213 86,497 13.11%
</TABLE>
* Assuming the policy was purchased on 11/30/1990
43
<PAGE>
OPPENHEIMER HIGH INCOME FUND/VA
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1/31/1988 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1988 122,164 121,913 54,454 54,332 50,954 50,832 N/A
12/31/1989 121,798 121,242 55,902 55,635 52,402 52,135 4.06%
12/31/1990 121,251 120,354 57,275 56,838 53,775 53,338 3.87%
12/31/1991 154,532 152,901 75,096 74,283 71,596 70,783 32.94%
12/31/1992 173,468 171,026 86,684 85,438 83,184 81,938 17.05%
12/31/1993 208,710 204,956 107,196 105,234 103,696 101,734 25.41%
12/31/1994 193,372 189,060 102,743 100,415 102,743 100,415 -3.90%
12/31/1995 223,076 217,041 123,792 120,394 123,792 120,394 19.48%
12/31/1996 246,511 238,550 138,622 134,084 138,622 134,084 14.40%
12/31/1997 265,352 255,256 153,620 147,702 153,620 147,702 11.38%
12/31/1998 256,395 245,031 152,653 145,806 152,653 145,806 -0.57%
</TABLE>
* Assuming the policy was purchased on 1/31/1988
OPPENHEIMER MAIN STREET GROWTH & INCOME FUND/VA
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
7/31/1995 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1995 131,703 131,580 58,706 58,641 55,206 55,141 N/A
12/31/1996 165,952 165,406 76,167 75,900 72,667 72,400 31.54%
12/31/1997 209,181 207,934 98,811 98,198 95,311 94,698 31.51%
12/31/1998 208,517 206,649 101,376 100,441 97,876 96,941 3.78%
</TABLE>
* Assuming the policy was purchased on 7/31/1995
44
<PAGE>
OPPENHEIMER STRATEGIC BOND FUND/VA
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
5/31/1993 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1993 113,723 113,575 50,692 50,616 47,192 47,116 N/A
12/31/1994 104,000 103,614 47,731 47,543 44,231 44,043 -4.50%
12/31/1995 114,081 113,346 53,888 53,528 50,388 50,028 14.48%
12/31/1996 121,671 120,515 59,126 58,549 55,626 55,049 11.24%
12/31/1997 125,908 124,284 62,918 62,087 59,418 58,587 7.90%
12/31/1998 123,216 121,161 63,285 62,209 59,785 58,709 2.00%
</TABLE>
* Assuming the policy was purchased on 5/31/1993
WRL VKAM EMERGING GROWTH PORTFOLIO
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
bCAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
3/31/1993 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1993 127,872 127,658 56,999 56,893 53,499 53,393 N/A
12/31/1994 112,638 112,172 51,698 51,473 48,198 47,973 -8.05%
12/31/1995 157,326 156,238 74,316 73,784 70,816 70,284 45.73%
12/31/1996 177,988 176,204 86,494 85,604 82,994 82,104 18.00%
12/31/1997 205,796 203,021 102,839 101,421 99,339 97,921 20.56%
12/31/1998 269,780 265,105 138,627 136,179 135,127 132,679 36.14%
</TABLE>
* Assuming the policy was purchased on 3/31/1993
45
<PAGE>
WRL JANUS GLOBAL
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/1992 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1993 140,980 140,665 64,706 64,548 61,206 61,048 34.07%
12/31/1994 134,463 133,821 63,516 63,198 60,016 59,698 -0.49%
12/31/1995 157,491 156,289 76,533 75,929 73,033 72,429 22.16%
12/31/1996 191,535 189,462 95,712 94,648 92,212 91,148 26.80%
12/31/1997 216,624 213,511 111,262 109,626 107,762 106,126 17.88%
12/31/1998 269,342 264,410 142,182 139,527 142,182 139,527 28.89%
</TABLE>
* Assuming the policy was purchased on 12/31/1992
WRL JANUS GROWTH PORTFOLIO
Male, Issue Age 55, Non-Tobacco Use, Approved Preferred Class
($109,800 Specified Amount, Initial Premium $50,000)
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Death Benefit Cash Value Cash Surrender Value Adjusted Historical
------------------------- ---------------------- ------------------------- -------------------
Current Guaranteed Current Guaranteed Current Guaranteed Annual Total Return
------------- ---------- ---------- ---------- ------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
10/31/1986 109,800 109,800 48,943 48,934 45,443 45,434 N/A
12/31/1987 114,233 113,929 52,430 52,279 48,930 48,779 N/A
12/31/1988 128,922 128,245 60,899 60,564 57,399 57,064 17.75%
12/31/1989 180,435 178,962 87,683 86,944 84,183 83,444 45.97%
12/31/1990 171,386 169,430 85,644 84,640 82,144 81,140 -0.97%
12/31/1991 260,992 257,069 134,111 132,051 130,611 128,551 58.64%
12/31/1992 255,862 250,990 135,004 132,385 135,004 132,385 1.58%
12/31/1993 257,190 252,294 138,568 135,880 138,568 135,880 3.21%
12/31/1994 228,065 223,723 125,391 122,958 125,391 122,958 -9.00%
12/31/1995 324,862 318,677 182,144 178,609 182,144 178,609 46.05%
12/31/1996 371,515 364,442 212,580 208,454 212,580 208,454 17.09%
12/31/1997 425,596 417,493 249,418 244,577 249,418 244,577 16.68%
12/31/1998 681,912 668,929 409,050 401,111 409,050 401,111 63.06%
</TABLE>
* Assuming the policy was purchased on 10/31/1986
46
<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 4425 North River
Blvd. NE, Cedar Rapids, Iowa 52402, 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% 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.
Frank A. Camp, Vice President and Division General Counsel, PFL Life Insurance
Company, has passed upon all matters of Iowa law pertaining to the Policy.
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
variable account. In some lawsuits involving other insurers, substantial
damages have been sought and/or material settlement payments have been made. We
believe that there are no pending or threatened lawsuits that will adversely
impact us or the variable account.
Year 2000 Matters
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 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 significantly reduce 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
portfolios' 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).
47
<PAGE>
Experts
The statutory-basis financial statements and schedules of PFL as of 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, 801 Grand Avenue, Suite 3400, Des
Moines, Iowa 50309, as set forth in their report thereon appearing elsewhere
herein. The statutory-basis financial statements referred to above are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
Actuarial matters included in this prospectus have been examined by Richard R.
Greer as stated in the opinion filed as an exhibit to the registration
statement.
Financial Statements
This prospectus does not include financial statements of the variable account
because, as of the date of this prospectus, the variable account had not yet
commenced operations, had no assets, and had incurred no liabilities. PFL's
statutory-basis financial statements appear in Appendix A. PFL's statutory-
basis financial statements should be distinguished from the variable account's
financial statements and you should consider our financial statements only as
bearing upon our ability to meet our obligations under the Policies.
Additional Information about PFL Life Insurance Company
PFL is a stock life insurance company that is a wholly owned indirect subsidiary
of AEGON USA, Inc. AEGON USA, Inc. is a wholly owned indirect subsidiary of
AEGON N.V., a Netherlands corporation that is a publicly traded international
insurance group. PFL's home office is located at 4333 Edgewood Road NE, Cedar
Rapids, Iowa 52499.
PFL was incorporated in 1961 under Iowa law and is subject to regulation by the
Iowa Commissioner of Insurance. PFL is engaged in the business of issuing life
insurance policies and annuity contracts, and is licensed to do business in the
District of Columbia, Guam and all states except New York. PFL submits annual
statements on its operations and finances to insurance officials in all states
and jurisdictions in which it does business. PFL has filed the Policy described
in this prospectus with insurance officials in those jurisdictions in which the
Policy is sold.
PFL intends to reinsure a portion of the risks assumed under the Policies.
PFL's Executive Officers and Directors'
PFL is governed by a board of directors. The following table sets forth the
name and principal occupation during the past five years of each of PFL's
directors and senior officers. Each person is located at PFL Life Insurance
Company, 4333 Edgewood Road, NE, Cedar Rapids, IA 52449.
Board of Directors and Senior Officers
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Name Position with PFL Principal Occupation During Past 5 years
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
William L. Busler Director, Chairman of the Director, Chairman of the Board, and President
Board, and President
- ------------------------------------------------------------------------------------------------
Larry N. Norman Director, Executive Vice Director, Executive Vice President
President
- ------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Name Position with PFL Principal Occupation During Past 5 years
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Patrick S. Baird Director, Senior Vice Executive Vice President (1995-present), Chief
President, and Chief Operating Officer (1996-present), Chief
Operating Officer Financial Officer (1992-1995), Vice President
and Chief Tax Officer (1984-1995) of AEGON USA.
- ------------------------------------------------------------------------------------------------
Douglas C. Kolsrud Director, Senior Vice Director, Senior Vice President, Chief
President, Chief Investment Officer and Corporate Actuary
Investment Officer and
Corporate Actuary
- ------------------------------------------------------------------------------------------------
Craig D. Vermie Director, Vice Director, Vice President, Secretary and General
President, Secretary and Counsel
General Counsel
- ------------------------------------------------------------------------------------------------
Robert J. Kontz Vice President and Vice President and Corporate Controller
Corporate Controller
- ------------------------------------------------------------------------------------------------
Brenda K. Clancy Vice President, Vice President, Treasurer and Chief Financial
Treasurer and Chief Officer
Financial Officer
- ------------------------------------------------------------------------------------------------
</TABLE>
PFL holds the assets of the variable account physically segregated and apart
from the general account. PFL maintains records of all purchases and sale of
portfolio shares by each of the subaccounts. A blanket bond in the amount of
$10 million (subject to a $1 million deductible), covering directors, officers
and all employees of AEGON USA, Inc. and its affiliates has been issued to PFL
and its affiliates. A Stockbrokers Blanket Bond, issued to AEGON USA providing
fidelity coverage, covers the activities of registered representatives of AFSG
to a limit of $10 million (subject to a $50,000 deductible).
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 Cash Surrender Value under a Policy covering a male insured of
age 55 on the Policy Date, would change over time if the planned premiums were
paid and the return on the assets in the subaccounts were a uniform gross annual
rate (before any expenses) of 0%, 6% or 12%. The tables also show how the
Policy would operate if premiums accumulated at 5% interest. The tables
illustrate Policy values that would result based on assumptions that you pay the
premiums indicated, you do not increase your principal sum, and you do not make
any partial surrenders 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.
The hypothetical investment returns are provided only to illustrate the
mechanics of a hypothetical Policy and do not represent past or future
investment rates of return. Actual rates of return for a particular Policy may
be more or less than the hypothetical investment rates of return. The actual
return on your Cash Value will depend on factors such as the amounts you
allocate to particular portfolios, the amounts deducted for the Policy's monthly
charges, the portfolios' expense ratios, your Policy loan and partial surrender
history, and rates of inflation.
The illustrations assume that the assets in the portfolios are subject to an
annual expense ratio of 0.81% of the average daily net assets. This annual
expense ratio is based on the average of the expense ratios of each
49
<PAGE>
of the portfolios for the last fiscal year and takes into account current
expense reimbursement arrangements. For more information on portfolio expenses,
see the Portfolio Expense Table in this prospectus. For more specific
information on management fees, see the portfolios' prospectuses.
Separate illustrations on each of the following pages reflect our current cost
of insurance charges and the higher guaranteed maximum cost of insurance that we
have has the contractual right to charge. The illustrations assume no charges
for Federal or state taxes or charges for supplemental benefits. However, these
illustrations assume a premium tax charge of 2%; actual premium tax charges
could be higher or lower, depending on the state of issue.
After deducting portfolio expenses, the illustrated gross annual investment
rates of return of 0%, 6% and 12% would correspond to approximate net annual
rates for the variable account of -1.56%, 4.44%, and 10.44%, respectively.
The illustrations are based on PFL's sex distinct rates for non-tobacco users.
Upon request, we will furnish a comparable illustration based upon the proposed
insured's individual circumstances. Such illustrations may assume different
hypothetical rates of return than those illustrated in the following
illustrations.
50
<PAGE>
PFL FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 55
<TABLE>
<CAPTION>
SPECIFIED AMOUNT: $109,800 INITIAL PREMIUM: $ 50,000
USING CURRENT PRACTICE CHARGES FOR NON-TOBACCO USERS, APPROVED PREFERRED CLASS
End of Premiums
Policy Accumulated DEATH BENEFIT CASH VALUE CASH SURRENDER VALUE
Year at 5% - - - - - - - - -
------------------------------------------------------------------------------------------------
Assuming Hypothetical Gross and Net Annual Investment Return of
Gross 0% 6% 12% 0% 6% 12% 0% 6% 12%
Net -1.56% 4.44% 10.44% -1.56% 4.44% 10.44% -1.56% 4.44% 10.44%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 52,500 106,842 112,798 118,727 47,562 50,461 53,362 44,062 46,961 49,862
2 55,125 100,706 112,868 125,625 46,158 51,991 58,137 42,658 48,491 54,637
3 57,881 94,950 112,978 132,972 44,790 53,561 63,333 41,290 50,061 59,833
4 60,775 89,550 113,123 140,791 43,458 55,172 68,987 39,958 51,672 65,487
5 63,814 84,483 113,307 149,120 42,159 56,826 75,136 38,659 53,326 71,636
6 67,005 79,729 113,531 158,000 40,894 58,523 81,825 37,394 55,023 78,325
7 70,355 75,270 113,801 167,473 39,661 60,264 89,100 39,661 60,264 89,100
8 73,873 71,088 114,117 177,585 38,460 62,049 97,009 38,460 62,049 97,009
9 77,566 67,168 114,486 188,395 37,290 63,877 105,606 37,290 63,877 105,606
10 81,445 63,494 114,913 199,961 36,149 65,751 114,996 36,149 65,751 114,996
11 85,517 60,357 115,990 213,433 35,233 68,048 125,852 35,233 68,048 125,852
12 89,793 57,433 117,198 228,047 34,337 70,420 137,722 34,337 70,420 137,722
13 94,282 54,681 118,490 243,804 33,462 72,874 150,709 33,462 72,874 150,709
14 98,997 52,092 119,866 260,805 32,610 75,414 164,922 32,610 75,414 164,922
15 103,946 50,000 121,332 279,162 31,777 78,044 180,479 31,777 78,044 180,479
16 109,144 50,000 122,809 298,792 30,905 80,706 197,357 30,905 80,706 197,357
17 114,601 50,000 124,287 319,762 29,973 83,392 215,639 29,973 83,392 215,639
18 120,331 50,000 125,767 342,157 28,968 86,089 235,402 28,968 86,089 235,402
19 126,348 50,000 127,246 366,069 27,869 88,785 256,722 27,869 88,785 256,722
20 132,665 50,000 128,724 391,597 26,656 91,471 279,683 26,656 91,471 279,683
21 139,298 50,000 130,197 418,831 25,304 94,139 304,377 25,304 94,139 304,377
22 146,263 50,000 131,657 447,859 23,785 96,784 330,905 23,785 96,784 330,905
23 153,576 50,000 133,094 478,761 22,067 99,400 359,378 22,067 99,400 359,378
24 161,255 50,000 134,501 511,616 20,107 101,987 389,913 20,107 101,987 389,913
25 169,318 50,000 135,865 546,492 17,850 104,579 422,616 17,850 104,579 422,616
26 177,784 50,000 137,209 583,610 15,253 107,108 457,704 15,253 107,108 457,704
27 186,673 50,000 138,534 623,099 12,229 109,607 495,289 12,229 109,607 495,289
28 196,006 50,000 139,835 665,083 8,660 112,059 535,460 8,660 112,059 535,460
29 205,807 50,000 141,111 709,708 4,394 114,451 578,313 4,394 114,451 578,313
30 216,097 50,000 142,360 757,128 * 116,775 623,957 * 116,775 623,957
</TABLE>
Note:
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return.
51
<PAGE>
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 portfolio(s). The death
benefit, Cash Values and Cash 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 years, but fluctuated above or below that average for
individual Policy years. No presentation can be made by PFL that these
hypothetical investment rates of return can be achieved for any one year or
sustained over any period of time.
*The Policy has no Cash Value, however, the Policy will stay in force with a
death benefit if the Policy does not have a Policy loan outstanding.
52
<PAGE>
PFL FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 55
<TABLE>
<CAPTION>
SPECIFIED AMOUNT: $109,800 INITIAL PREMIUM: $ 50,000
USING GUARANTEED CHARGES FOR NON-TOBACCO USERS, APPROVED PREFERRED CLASS
End of Premiums
Policy Accumulated DEATH BENEFIT CASH VALUE CASH SURRENDER VALUE
Year at 5%
Assuming Hypothetical Gross and Net Annual Investment Return of
Gross 0% 6% 12% 0% 6% 12% 0% 6% 12%
Net -1.56% 4.44% 10.44% -1.56% 4.44% 10.44% -1.56% 4.44% 10.44%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 52,500 106,623 112,567 118,484 47,455 50,349 53,243 43,955 46,849 49,743
2 55,125 100,246 112,353 125,051 45,938 51,743 57,860 42,438 48,243 54,360
3 57,881 94,248 112,142 131,988 44,448 53,152 62,850 40,948 49,652 59,350
4 60,775 88,603 111,929 139,305 42,987 54,575 68,240 39,487 51,075 64,740
5 63,814 83,291 111,711 147,021 41,552 56,009 74,056 38,052 52,509 70,556
6 67,005 78,293 111,490 155,159 40,144 57,451 80,327 36,644 53,951 76,827
7 70,355 73,588 111,263 163,739 38,761 58,899 87,081 38,761 58,899 87,081
8 73,873 69,160 111,029 172,781 37,402 60,345 94,346 37,402 60,345 94,346
9 77,566 64,993 110,788 182,311 36,066 61,786 102,149 36,066 61,786 102,149
10 81,445 61,071 110,541 192,353 34,752 63,218 110,566 34,752 63,218 110,566
11 85,517 57,673 110,849 203,973 33,647 64,996 120,207 33,647 64,996 120,207
12 89,793 54,485 111,204 216,384 32,554 66,779 130,600 32,554 66,779 130,600
13 94,282 51,470 111,558 229,541 31,476 68,566 141,800 31,476 68,566 141,800
14 98,997 50,000 111,906 243,487 30,395 70,357 153,861 30,395 70,357 153,861
15 103,946 50,000 112,248 258,261 29,236 72,146 166,839 29,236 72,146 166,839
16 109,144 50,000 112,580 273,905 27,984 73,928 180,781 27,984 73,928 180,781
17 114,601 50,000 112,899 290,464 26,616 75,693 195,732 26,616 75,693 195,732
18 120,331 50,000 113,205 307,981 25,103 77,431 211,728 25,103 77,431 211,728
19 126,348 50,000 113,495 326,509 23,413 79,130 228,804 23,413 79,130 228,804
20 132,665 50,000 113,772 346,113 21,506 80,785 247,010 21,506 80,785 247,010
21 139,298 50,000 114,041 366,860 19,341 82,396 266,408 19,341 82,396 266,408
22 146,263 50,000 114,301 388,820 16,867 83,963 287,072 16,867 83,963 287,072
23 153,576 50,000 114,553 412,064 14,025 85,491 309,090 14,025 85,491 309,090
24 161,255 50,000 114,796 436,664 10,743 86,985 332,559 10,743 86,985 332,559
25 169,318 50,000 115,028 462,680 6,918 88,444 357,561 6,918 88,444 357,561
26 177,784 50,000 115,241 490,170 2,413 89,862 384,166 2,413 89,862 384,166
27 186,673 50,000 115,434 519,197 * 91,231 412,426 * 91,231 412,426
28 196,006 50,000 115,601 549,821 * 92,539 442,371 * 92,539 442,371
29 205,807 50,000 115,743 582,122 * 93,775 474,038 * 93,775 474,038
30 216,097 50,000 115,861 616,196 * 94,937 507,484 * 94,937 507,484
</TABLE>
Note:
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return.
53
<PAGE>
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 portfolio(s). The death
benefit, Cash Values and Cash 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 years, but fluctuated above or below that average for
individual Policy years. No presentation can be made by PFL that these
hypothetical investment rates of return can be achieved for any one year or
sustained over any period of time.
* The Policy has no Cash Value, however, the Policy will stay in force with a
death benefit if the Policy does not have a Policy loan outstanding.
54
<PAGE>
APPENDIX A
PFL Life Insurance Company
Balance Sheet - Statutory Basis
as of September 30, 1999
(unaudited)
and
Financial Statements - Statutory Basis
PFL Life Insurance Company
Years ended December 31, 1998, 1997 and 1996
with Report of Independent Auditors
<PAGE>
PFL Life Insurance Company
Balance Sheet - Statutory Basis
As of September 30, 1999
(In Thousands) (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Admitted Assets
Cash and invested assets:
Cash and short-term investments $ 54,945
Bonds 4,815,223
Preferred stock 19,377
Common stock, at market 67,202
Mortgage loans on real estate 1,283,005
Home office properties, at cost less accumulated
depreciation 7,885
Real estate acquired in satisfaction of debt,
at cost less accumulated depreciation 16,194
Investment real estate 32,813
Policy loans 58,539
Other invested assets 107,813
-----------
Total cash and invested assets 6,462,996
Premiums deferred and uncollected 15,407
Accrued investment income 67,334
Transfers from separate accounts 85,260
Receivable from affiliate 52,323
Federal income tax recoverable 4,951
Other assets 24,713
Separate account assets 3,823,394
-----------
Total admitted assets $10,536,378
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Liabilities and capital and surplus Liabilities:
Aggregate reserves for policies and contracts:
Life $ 1,470,127
Annuity 3,919,084
Accident and health 247,373
Policy and contract claim reserves:
Life 9,382
Accident and health 38,110
Other policyholders' funds 171,112
Remittances and items not allocated 109,745
Asset valuation reserve 102,369
Interest maintenance reserve 46,354
Short-term notes payable to affiliate 65,100
Payable for securities 91,918
Other liabilities 69,988
Separate account liabilities 3,817,519
-----------
Total liabilities 10,158,181
Capital and surplus:
Common stock, $2.48 par value, 1,164 shares
authorized, 1,008 issued and outstanding 2,660
Paid-in surplus 154,282
Unassigned surplus 221,255
-----------
Total capital and surplus 378,197
-----------
Total liabilities and capital and surplus $10,536,378
===========
</TABLE>
<PAGE>
PFL Life Insurance Company
Statement of Operations - Statutory Basis
For the Nine Months Ended September 30, 1999
(In Thousands) (Unaudited)
<TABLE>
<S> <C>
Revenues:
Premiums and other considerations, net of reinsurance:
Life $ 139,481
Annuity 887,357
Accident and health 121,758
Net investment income 322,055
Amortization of interest maintenance reserve 5,798
Commissions and expense allowances on
reinsurance ceded 14,798
Other income 71,318
---------
1,562,565
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits 34,877
Surrender benefits 718,275
Other benefits 181,278
Increase (decrease) in aggregate reserves for
policies and contracts:
Life 112,952
Annuity (6,278)
Accident and health 41,637
Other 8,896
---------
1,091,637
Insurance expenses:
Commissions 120,464
General insurance expenses 38,903
Taxes, licenses and fees 8,850
Transfer to separate accounts 246,200
Other (479)
--------
413,938
---------
1,505,575
---------
Gain from operations before federal income
tax expense and net realized capital gains on
investments 56,990
Federal income tax expense 15,046
---------
Gain from operations before net realized
capital gains on investments 41,944
Net realized capital gains on investments
(net of related federal income tax
expense and amounts transferred to interest maintenance
reserve) 4,483
---------
Net income $ 46,427
=========
</TABLE>
<PAGE>
PFL Life Insurance Company
Statement of Changes in Capital and Surplus - Statutory Basis
(In Thousands) (Unaudited)
<TABLE>
<CAPTION>
Total
Capital
Common Paid-in Unassigned and
Stock Surplus Surplus Surplus
----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 $ 2,660 $154,282 $ 205,586 $362,528
Net income 0 0 46,427 46,427
Change in net unrealized gains 0 0 (6,248) (6,248)
Change in non-admitted assets 0 0 (400) (400)
Change in asset valuation reserve 0 0 (10,781) (10,781)
Dividend to stockholder 0 0 (15,000) (15,000)
Other adjustments 0 0 1,671 1,671
----------------------------------------------------
Balance at September 30, 1999 $ 2,660 $154,282 $ 221,255 $378,197
====================================================
</TABLE>
<PAGE>
PFL Life Insurance Company
Statement of Cash Flow - Statutory Basis
For the Nine Months Ended September 30, 1999
(In Thousands) (Unaudited)
<TABLE>
<S> <C>
Operating Activities
Premiums and other considerations, net of reinsurance $1,236,423
Net investment income 324,126
Life and accident and health claims (94,787)
Surrender benefits to policyholders and other fund withdrawals (718,275)
Other benefits to policyholders (128,912)
Commissions, other expenses and other taxes (169,455)
Dividends to stockholder (15,000)
Federal income taxes, excluding tax on capital gains (19,153)
Other, net 73,170
Net transfers to separate accounts (260,593)
-----------
Net cash provided by operating activities 227,544
Investing Activities
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks 2,657,068
Common stocks 66,432
Mortgage loans on real estate 132,507
Other 6,014
-----------
2,862,021
Cost of investments acquired:
Bonds and preferred stocks 2,667,692
Common stocks 75,853
Mortgage loans 398,401
Other 31,642
-----------
3,173,588
-----------
Net cash used in investing activities (311,567)
-----------
Financing Activities
Borrowed money 55,679
-----------
Net cash provided by financing activities 55,679
Decrease in cash and short-term investments (28,344)
Cash and short-term investments at beginning of year 83,289
-----------
Cash and short-term investments at end of year $ 54,945
===========
</TABLE>
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis
For the Nine Months Ended September 30, 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 nine month period ended September 30, 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.
<PAGE>
PFL Life Insurance Company
Financial Statements - Statutory Basis
Years ended December 31, 1998, 1997 and 1996
Contents
--------
<TABLE>
<S> <C>
Report of Independent Auditors.................................. 1
Audited Financial Statements
Balance Sheets - Statutory Basis................................ 3
Statements of Operations - Statutory Basis...................... 5
Statements of Changes in Capital and Surplus - Statutory Basis.. 6
Statements of Cash Flows - Statutory Basis...................... 7
Notes to Financial Statements - Statutory Basis................. 9
Statutory-Basis Financial Statement Schedules
Summary of Investments - Other Than Investments in
Related Parties................................................ 32
Supplementary Insurance Information............................. 33
Reinsurance.................................................... 35
</TABLE>
56
<PAGE>
Report of Independent Auditors
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.
1
<PAGE>
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.
ERNST & YOUNG LLP
Des Moines, Iowa
February 19, 1999
2
<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.
3
<PAGE>
<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.
4
<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.
5
<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.
6
<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>
7
<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.
8
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis
(Dollars in thousands)
December 31, 1998
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:
. 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.
. 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.
9
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. Organization and Summary of Significant Accounting Policies (continued)
. 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.
. 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 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.
10
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. Organization and Summary of Significant Accounting Policies (continued)
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 credited directly to unassigned surplus. The effects of these
variances have not been determined by the Company but are presumed to be
material.
11
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. Organization and Summary of Significant Accounting Policies (continued)
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.
12
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. Organization and Summary of Significant Accounting Policies (continued)
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 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.
13
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. Organization and Summary of Significant Accounting Policies (continued)
The aggregate policy reserves for life insurance policies are based principally
upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality and
American Experience Mortality Tables. The reserves are calculated using interest
rates ranging from 2.00 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.
14
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. Organization and Summary of Significant Accounting Policies (continued)
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
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.
15
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. Fair Values of Financial Instruments (continued)
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. 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.
16
<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>
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>
17
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. Investments (continued)
<TABLE>
<CAPTION>
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 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>
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>
18
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. Investments (continued)
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>
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.
19
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. Investments (continued)
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>
<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>
20
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. Investments (continued)
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.
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.
21
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. Investments (continued)
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.
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.
22
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
4. Reinsurance (continued)
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.
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.
23
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
5. Income Taxes (continued)
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>
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.
24
<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>
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 191 26,204 19,093
guarantees
----------------------------------------------
Transfers as reported in the summary of operations
of the life, accident and health annual statement $265,702 $297,480 $171,785
==============================================
</TABLE>
25
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. Policy and Contract Attributes (continued)
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next anniversary
date. At December 31, 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
==================================================
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.
26
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
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 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.
27
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
8. Retirement and Compensation Plans (continued)
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.
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.
28
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
9. Related Party Transactions (continued)
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 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.
29
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
11. Year 2000 (Unaudited) (continued)
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 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.
30
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
11. Year 2000 (Unaudited) (continued)
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 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.
31
<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.
32
<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
====================================================
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Net Benefits, Claims Losses
Premium Investment and Settlement Other Operating Premiums
Revenue Income* Expenses Expenses* Written
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 514,194 $ 85,258 $ 545,720 $ 87,455 -
68,963 8,004 48,144 30,442 $ 68,745
111,547 11,426 82,690 54,352 108,769
667,920 342,296 592,085 298,222 -
- ------------------------------------------------------------------------------
$1,362,624 $446,984 $1,268,639 $ 470,471
==============================================================================
$ 200,175 $ 75,914 $ 211,921 $ 36,185 -
63,548 5,934 37,706 29,216 $ 63,383
146,694 11,888 103,581 91,568 143,580
657,695 352,688 571,434 364,216 -
- ------------------------------------------------------------------------------
$1,068,112 $446,424 $ 924,642 $ 521,185
==============================================================================
$ 202,082 $ 66,538 $ 197,526 $ 38,067 -
55,871 5,263 32,903 29,511 $ 55,678
174,781 12,877 105,459 122,953 171,320
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.
34
<PAGE>
PFL Life Insurance Company
Reinsurance
(Dollars in thousands)
SCHEDULE IV
<TABLE>
<CAPTION>
Ceded to Assumed From Percentage of
Gross Other Other Amount Assumed
Amount Companies Companies Net 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>
35
<PAGE>
PART II.
OTHER INFORMATION
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that Section.
REPRESENTATION PURSUANT TO SECTION 26(e) (2) (A)
PFL Life Insurance Company ("PFL Life") hereby represents that the fees and
charges deducted under the Contracts, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by PFL Life.
RULE 484 UNDERTAKING
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel, the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
CONTENTS OF REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
The facing sheet
The Prospectus, consisting of 51 pages
The undertaking to file reports
Representation Pursuant to Section 26(e) (2) (A)
The statement with respect to indemnification
The Rule 484 undertaking
The signatures
Written consent of the following persons:
(a) Richard R. Greer, Actuary
(b) Frank A. Camp, Esq.
(c) Sutherland Asbill & Brennan LLP
(d) Ernst & Young LLP
<PAGE>
The following exhibits:
1. The following exhibits correspond to those required by paragraph A to the
instructions as to exhibits in Form N-8B-2:
A. (1) Resolutions of the Board of Directors of PFL Life establishing the
Separate Account (6)
(2) Not Applicable
(3) Distribution of Policies:
(a) Form of Principal Underwriting Agreement (10)
(b) Form of Broker-Dealer Supervision and Sales Agreement by and
between AFSG Securities Corporation and the Broker-Dealer (4)
(4) Not Applicable
(5) Specimen Flexible Premium Variable Life Insurance Policy (9)
(6) (a) Certificate of Incorporation of PFL Life (2)
(b) By-Laws of PFL Life (2)
(7) Not Applicable
(8) Participation Agreements:
(a) Among MFS Variable Insurance Trust and PFL Life and
Massachusetts Financial Services Company (6)
(b) Among AIM Variable Insurance Funds, Inc., PFL Life and AFSG
Securities Corporation (4)
(c) Among PFL Life and Dreyfus Variable Investment Fund (7)
(d) Amendment to Participation Agreement Among PFL Life and
Dreyfus Variable Investment Fund (6)
(e) Amendment to Participation Agreement Among Oppenheimer
Variable Account Funds, OppenheimerFunds, Inc. and PFL
Life (6)
(f) Among Oppenheimer Variable Account Funds, OppenheimerFunds,
Inc. and PFL Life (4)
(g) Among WRL Series Fund, Inc. and PFL Life and AUSA Life
Insurance Company, Inc. and amendments thereto (3)
(h) Amendments dated November 27, 1998 to Participation
Agreements:
(i) Among MFS Variable Insurance Trust, Massachusetts
Financial Services Company and PFL Life (8)
(ii) Among PFL Life and Dreyfus Variable Investment Fund (8)
(iii) Among Oppenheimer Variable Account Funds,
OppenheimerFunds, Inc. and PFL Life (8)
(iv) Among AIM Variable Insurance Funds, Inc., AIM
Distributors, Inc., PFL Life and AFSG Securities
Corporation (8)
(v) Among WRL Series Fund, Inc., PFL Life and AUSA Life
Insurance Company, Inc. (8)
(i) Amendments dated August 1, 1999 to Participation Agreements:
(i) Among AIM Variable Insurance Funds, Inc., AIM
Distributors, Inc., PFL Life and AFSG Securities
Corporation (10)
(ii) MFS Variable Insurance Trust, Massachusetts Financial
Services Company and PFL Life (10)
(iii) WRL Series Fund, Inc. PFL Life and AUSA Life Insurance
Company, Inc. (10)
<PAGE>
(9) Not Applicable
(10) Application for Flexible Premium Variable Life Insurance Policy (9)
(11) Memorandum describing issuance, transfer and redemption procedures
(10)
2. See Exhibit 1.A.
3. Opinion of Counsel as to the legality of the securities being registered
(11)
4. No financial statement will be omitted from the Prospectus pursuant to
Instruction 1(b) or (c) of Part I
5. Not Applicable
6. Opinion and consent of Richard R. Greer as to actuarial matters pertaining
to the securities being registered (10)
7. Consent of Frank A. Camp, Esq. (10)
8. Consent of Sutherland Asbill & Brennan LLP (10)
9. Consent of Ernst & Young LLP (10)
10. Powers of Attorney (9)
__________________
(1) This exhibit was previously filed on Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-6 (File No. 33-92226) filed on
July 10, 1998 and hereby is incorporated by reference.
(2) This exhibit was previously filed on Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-3 (File No. 333-36297) filed on
February 27, 1998 and is hereby incorporated by reference.
(3) This exhibit was previously filed on Post-Effective Amendment No. 1 to the
Registration Statement on Form N-4 (File No. 333-26209) filed on
April 29, 1998 and is hereby incorporated by reference.
(4) This exhibit was previously filed on Post-Effective Amendment No. 4 to the
Registration Statement on Form N-4 (File 333-07509) filed on April 30,
1998 and is hereby incorporated by reference.
(5) This exhibit was previously filed on Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4 (File 333-07509) filed on December 6,
1996 and is hereby incorporated by reference.
(6) This exhibit was previously filed on the Initial Registration Statement on
Form S-6 (File 333-68087) filed on November 30, 1998 and is hereby
incorporated by reference.
(7) This exhibit was previously filed on the Initial Registration Statement on
Form N-4 (File 333-26209) filed on April 30, 1997 and is hereby
incorporated by reference.
(8) This exhibit was previously filed on Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-6 (File 333-68087) filed June 8, 1999
and is incorporated by reference.
(9) This exhibit was previously filed on the Initial Registration Statement on
Form S-6 (File 333-86231) filed August 31, 1999 and is incorporated by
reference.
(10) This exhibit was previously filed on Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-6 (File 333-86231) filed on December 29,
1999 and is incorporated by reference.
(11) Filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant,
Legacy Builder Variable Life Separate Account, has duly caused this Pre-
Effective Amendment No. 2 to Registration Statement on Form S-6 to be signed on
its behalf by the undersigned thereunto duly authorized, and its seal to be
hereunto affixed and attested, all in Cedar Rapids, Iowa on the 19th day of
January, 2000.
(Seal) LEGACY BUILDER VARIABLE LIFE
SEPARATE ACCOUNT
PFL LIFE INSURANCE COMPANY
Depositor
WILLIAM L. BUSLER*
-----------------------------
William L. Busler, President
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
TITLE DATE
----- ----
<S> <C> <C>
PATRICK S. BAIRD* Director January 19, 2000
- ---------------------
Patrick S. Baird
CRAIG D. VERMIE* Director January 19, 2000
- ---------------------
Craig D. Vermie
WILLIAM L. BUSLER* Director January 19, 2000
- --------------------- (Principal Executive
William L. Busler Officer)
LARRY N. NORMAN* Director January 19, 2000
- ---------------------
Larry N. Norman
DOUGLAS C. KOLSRUD* Director January 19, 2000
- ---------------------
Douglas C. Kolsrud
ROBERT J. KONTZ* Corporate Controller January 19, 2000
- ---------------------
Robert J. Kontz*
BRENDA K. CLANCY* Treasurer January 19, 2000
- ---------------------
Brenda K. Clancy**
</TABLE>
** Principal Accounting Officer
* /s/ Frank A. Camp
---------------------
Frank A. Camp
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3 Opinion of Counsel as to the Legality of the
Securities being Registered
<PAGE>
EXHIBIT 3.
OPINION OF COUNSEL AS TO THE LEGALITY OF THE SECURITIES BEING REGISTERED
<PAGE>
PFL LIFE INSURANCE COMPANY LETTERHEAD
January 14, 2000
Board of Directors
PFL Life Insurance Company
Legacy Builder Variable Life Separate Account
4333 Edgewood Road, NE
Cedar Rapids, Iowa 52499
Gentlemen:
In my capacity as Vice President and Division General Counsel of PFL Life
Insurance Company ("PFL"), I have participated in the preparation and review of
the Registration Statement on Form S-6 (File No. 811-333-86231) filed with the
Securities and Exchange Commission under the Securities Act of 1933 for the
registration of a flexible premium variable life insurance policies (the
"Policy") to be issued with respect to the Legacy Builder Variable Life Separate
Account (the "Account"). The Account was established on November 20, 1998 by the
Board of Directors of PFL as a separate account for assets applicable to the
Policies, pursuant to the provisions of Section 490.821 of the Iowa Business
Corporation Act.
I am of the following opinion:
1. PFL has been duly organized under the laws of Iowa and is a validly
existing corporation.
2. The Account has been duly created and is validly existing as a separate
account pursuant to the aforesaid provision of Iowa law.
3. Section 490.821 of the Iowa Business Corporation Act provides that the
portion of the assets of the Account equal to the reserves and other
liabilities for variable benefits under the Policies is not chargeable with
liabilities arising out of any other business PFL may conduct. Assets
allocated to the fixed account under the Policies, however, are part of
PFL's general account and are subject to PFL's general liabilities from
business operations.
4. The Policies, when issued as contemplated by the Registration Statement,
will be legal and binding obligations of PFL in accordance with their terms.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as I judged to be necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ Frank A. Camp
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Frank A. Camp
Vice President and Division
General Counsel
