<PAGE> 1
PROSPECTUS MAY 1, 2000 (REVISED AS OF OCTOBER 17, 2000)
============================================================================
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
FARMERS NEW WORLD LIFE INSURANCE COMPANY
THROUGH
FARMERS VARIABLE LIFE SEPARATE ACCOUNT A
HOME OFFICE: SERVICE CENTER:
3003 - 77TH AVENUE, S.E. P.O. BOX 724208
MERCER ISLAND, WASHINGTON 98040 ATLANTA, GEORGIA 31139
(206) 232-8400 1-877-376-8008 (TOLL FREE)
============================================================================
This prospectus describes the Farmers flexible premium variable life insurance
policy (the "Policy") issued by Farmers New World Life Insurance Company. The
Policy provides life insurance and accumulates variable Contract Value. The
amount of life insurance may, and the Contract Value will, depend on the
investment experience of the subaccounts of the Farmers Variable Life Separate
Account A ("variable account") in which you invest.
You choose one of two death benefit options. The death benefit will be at least
the principal sum shown in the Policy's specifications page, adjusted for any
increases or decreases in principal sum, and reduced by any outstanding loan
amount.
This prospectus provides information that a prospective owner should know before
investing and you should keep this prospectus for future reference. You should
consider whether this Policy is suitable for you in light of your life insurance
needs. If you already own a life insurance policy, it may not be to your
advantage to buy additional insurance or replace your existing life insurance
policy with the Policy described in this Prospectus.
You can allocate Contract Value to:
- the subaccounts of the variable account, which invest in the portfolios
listed on this page; or
- a fixed account, which credits a specified rate of interest.
AN INVESTMENT IN THIS POLICY IS NOT A BANK DEPOSIT, AND THE POLICY IS NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. PLEASE READ THE "RISK SUMMARY" SECTION OF THIS PROSPECTUS. IT
DESCRIBES CERTAIN RISKS ASSOCIATED WITH INVESTING IN THE POLICY.
The following portfolios are currently available under the Policy:
[ ] JANUS ASPEN SERIES
Capital Appreciation Portfolio
(Institutional Shares)
[ ] KEMPER VARIABLE SERIES
Kemper Government Securities Portfolio
Kemper High Yield Portfolio
Kemper Small Cap Growth Portfolio
KVS Dreman High Return Equity Portfolio (Formerly Kemper-Dreman High
Return Equity Portfolio)
[ ] PIMCO VARIABLE INSURANCE TRUST
PIMCO Low Duration Bond Portfolio
PIMCO Foreign Bond Portfolio
[ ] SCUDDER VARIABLE LIFE INVESTMENT FUND
Money Market Portfolio
Growth and Income Portfolio (Class A Shares)
International Portfolio (Class A Shares)
Bond Portfolio (Class A Shares)
[ ] FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Templeton Developing Markets Securities Fund (Class 2 Shares) (Formerly
Templeton Developing Markets Fund)
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.
--------------------------------------------------------------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THIS
POLICY OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A FEDERAL CRIME.
--------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
================================================================================
<TABLE>
<S> <C>
GLOSSARY...........................................................................1
POLICY SUMMARY.....................................................................4
The Policy in General...........................................................4
Premiums........................................................................4
Investment Options..............................................................5
Contract Value..................................................................5
Charges and Deductions..........................................................6
Portfolio Expense Table.........................................................7
Surrenders and Withdrawals......................................................8
Death Benefits..................................................................9
Transfers.......................................................................9
Loans..........................................................................10
RISK SUMMARY......................................................................10
Investment Risk................................................................10
Risk of Lapse..................................................................11
Tax Risks......................................................................11
Limits on Cash Withdrawals.....................................................12
Loan Risks.....................................................................12
Effects of Surrender Charges...................................................12
Comparison with Other Insurance Policies.......................................13
Illustrations..................................................................13
FARMERS NEW WORLD LIFE INSURANCE COMPANY AND THE FIXED ACCOUNT....................13
Farmers New World Life Insurance Company.......................................13
The Fixed Account..............................................................14
THE VARIABLE ACCOUNT AND THE PORTFOLIOS...........................................15
The Variable Account...........................................................15
The Portfolios.................................................................15
Investment Objectives of the Portfolios......................................16
Your Right to Vote Portfolio Shares............................................18
THE POLICY........................................................................18
Purchasing a Policy............................................................18
When Insurance Coverage Takes Effect...........................................19
Ownership Rights...............................................................19
Changing the Owner...........................................................19
Selecting and Changing the Beneficiary.......................................20
Assigning the Policy.........................................................20
Canceling a Policy.............................................................20
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
PREMIUMS..........................................................................21
Premium Flexibility............................................................21
Minimum Premiums...............................................................22
Planned Premiums...............................................................23
Allocating Premiums............................................................23
CONTRACT VALUES...................................................................24
Contract Value.................................................................24
Surrender Value................................................................24
Subaccount Value...............................................................24
Subaccount Unit Value..........................................................25
Fixed Account Value............................................................26
CHARGES AND DEDUCTIONS............................................................26
Premium Deductions.............................................................27
Monthly Deduction..............................................................27
Cost of Insurance............................................................27
Charges for Riders...........................................................28
Monthly Administration Charge................................................28
Monthly Special Premium Class Charge.........................................28
Monthly Flat Extra Charge....................................................29
Mortality and Expense Risk Charge..............................................29
Surrender Charge...............................................................29
Decrease in Principal Sum....................................................30
Transfer Charge................................................................31
Portfolio Expenses.............................................................31
Other Charges..................................................................31
DEATH BENEFIT.....................................................................32
Death Benefit Proceeds.........................................................32
Death Benefit Options..........................................................32
Changing Death Benefit Options.................................................34
Effects of Withdrawals on the Death Benefit....................................35
Changing the Principal Sum.....................................................35
Payment Options................................................................37
SURRENDERS AND WITHDRAWALS........................................................39
Surrenders.....................................................................39
Partial Withdrawals............................................................39
TRANSFERS.........................................................................40
Automatic Asset Rebalancing Program............................................41
Third Party Transfers..........................................................41
Excessive Trading Limits.......................................................41
Dollar Cost Averaging Program..................................................42
Telephone Transfers............................................................42
LOANS.............................................................................43
Loan Conditions................................................................43
Effect of Policy Loans.........................................................44
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
POLICY LAPSE......................................................................44
Lapse..........................................................................44
Reinstatement..................................................................45
FEDERAL TAX CONSIDERATIONS........................................................46
Tax Status of the Policy.......................................................46
Tax Treatment of Policy Benefits...............................................46
OTHER POLICY INFORMATION..........................................................49
Our Right to Contest the Policy................................................49
Suicide Exclusion..............................................................49
Misstatement of Age or Sex.....................................................49
Modifying the Policy...........................................................49
When We Will Make Payments.....................................................50
Reports to Owners..............................................................50
Policy Termination.............................................................51
Supplemental Benefits (Riders).................................................51
PERFORMANCE DATA..................................................................51
Hypothetical Illustrations Based on Adjusted Historic Portfolio Performance....51
ADDITIONAL INFORMATION............................................................52
Sale of the Policies...........................................................52
Legal Matters..................................................................52
Legal Proceedings..............................................................52
Year 2000 Matters..............................................................52
Experts........................................................................53
Financial Statements...........................................................53
Farmers' Executive Officers and Directors......................................53
Senior Officers................................................................55
ILLUSTRATIONS.....................................................................57
APPENDIX A - GUARANTEED MAXIMUM COST OF INSURANCE RATES..........................A-1
APPENDIX B - TABLE OF SURRENDER CHARGE FACTORS...................................B-1
APPENDIX C - FINANCIAL STATEMENTS................................................C-1
</TABLE>
iii
<PAGE> 5
GLOSSARY
================================================================================
For your convenience, we are providing a glossary of the special terms we
use in this prospectus.
ACCUMULATION UNIT
An accounting unit we use to calculate subaccount values. It measures the net
investment results of each of the subaccounts.
ATTAINED AGE
The insured's age on the issue date plus the number of years completed since the
issue date.
BENEFICIARY
The person(s) you select to receive the death benefit from this Policy.
CASH VALUE
The Contract Value minus any applicable surrender charge.
COMPANY (WE, US, OUR, FARMERS, FNWL)
Farmers New World Life Insurance Company
CONTRACT VALUE
The sum of the values you have in the variable account and the fixed account. If
you have a loan outstanding, the Contract Value includes any amounts we hold in
the loan account to secure the loan.
CUMULATIVE MINIMUM PREMIUMS
The sum of all monthly-mode minimum premiums due since the issue date. The
initial minimum premium is specified on the Policy specifications page. The
minimum premium will change if you increase or decrease the principal sum or if
certain other changes in the Policy occur.
DEATH BENEFIT PROCEEDS
The amount we will pay to the beneficiary when we receive proof of the insured's
death. We will increase the proceeds by any additional insurance benefits you
add by rider, and we will reduce the proceeds by the amount of any outstanding
loans (including any interest you owe), and any due and unpaid monthly
deductions.
FIXED ACCOUNT
An option to which you can direct your Contract Value under the Policy. It
provides a guarantee of principal and interest. The assets supporting the fixed
account are held in our general account and are not part of, or dependent on,
the investment performance of the variable account.
FIXED ACCOUNT VALUE
The portion of your Contract Value allocated to the fixed account.
FUNDS
Investment companies that are registered with the SEC. This Policy allows you to
invest in the portfolios of the funds that are listed on the front page of this
prospectus.
GENERAL ACCOUNT
The account containing all of Farmers' assets, other than those held in its
separate accounts.
HOME OFFICE
The address of our Home Office is 3003 - 77th Avenue, S.E., Mercer Island,
Washington 98040.
INITIAL PREMIUM
The amount you must pay before insurance coverage begins under this Policy. The
initial premium is shown on your Policy's specification page.
INSURED
The person whose life is insured by this Policy.
ISSUE AGE
The insured's age as of the last birthday before the issue date.
ISSUE DATE
The date when life insurance coverage begins. We measure Policy months, Policy
years, and Policy anniversaries from the issue date. On the issue date, we place
your initial premium (times the percent of premium factor) in the fixed account.
The first monthly deduction occurs on the issue
1
<PAGE> 6
date. The entire Contract Value remains allocated to the fixed account until the
reallocation date.
LAPSE
When life insurance coverage ends because you do not have enough cash value to
pay the monthly deduction and any outstanding loan amount (including any
interest you owe on the loan(s)), and you have not made a sufficient payment by
the end of a 61-day grace period. If you have paid total premiums (minus
withdrawals) that exceed cumulative minimum premiums, then the Policy will enter
a 61-day grace period only if the Contract Value (minus any outstanding loan
amount, including any interest you owe) is too low to pay the entire monthly
deduction due.
LOAN AMOUNT
The total amount of all outstanding Policy loans, including both principal and
interest due. We deduct an amount equal to the loan amount from the subaccounts
and the fixed account and place it in the loan account as collateral for the
loans. The loan account is part of our general account.
MATURITY DATE
The Policy anniversary when the insured reaches age 110 and life insurance
coverage under this Policy ends. The maturity date is shown on the Policy
specifications page.
MONTHLY DEDUCTION
The amount we deduct from the Contract Value each month to pay for the insurance
coverage. The monthly deduction includes the cost of insurance charge, the
monthly administration charge, the cost of any riders, and any flat extra charge
for a special premium class.
MONTHLY DUE DATE
The day of each month when we determine Policy charges and deduct them from
Contract Value. It is the same date each month as the issue date. If there is no
Valuation Day that coincides with the issue date in the calendar month, the
monthly due date is the next Valuation Day.
PERCENT OF PREMIUM FACTOR
The factor (currently .965) by which we multiply each premium to determine the
amount of premium credited to the Contract Value. We retain the balance of each
premium to compensate us for certain expenses such as premium taxes and
distribution expenses. The percent of premium factor is shown on your Policy's
specifications page.
PORTFOLIO
A separate investment portfolio of a fund. Each subaccount invests exclusively
in one portfolio of a fund.
PREMIUM CLASS
A classification that affects the cost of insurance rate and the premium
required to insure an individual.
PREMIUMS
All payments you make under the Policy other than loan repayments. When we use
the term "premium" in this prospectus, it generally has the same meaning as "net
premium" in the Policy, and means a premium multiplied by the percent of premium
factor.
PRINCIPAL SUM
The dollar amount of insurance selected by the owner. The principal sum on the
issue date is set forth on the Policy's specifications page. You may increase or
decrease the principal sum under certain conditions. Certain actions you take,
such as changing the death benefit option or taking a partial withdrawal, may
affect the amount of the principal sum. The actual death benefit proceeds we pay
under the Policy may be more or less than the principal sum.
REALLOCATION DATE
The date 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 is the record date, plus the number of days in your state's
right to examine period, plus 10 days.
RECORD DATE
The date we record your Policy in our books as an in force policy.
RIGHT TO EXAMINE PERIOD
The period when you may return the Policy and receive a refund. The length of
the right to
2
<PAGE> 7
examine period varies by state. It will be at least 10 days from the date you
receive the Policy. The first page of your Policy shows your right to examine
period.
SERVICE CENTER
The address of the Service Center is P.O. Box 724208, Atlanta, GA 31139.
McCamish Systems, L.L.C. is the administrator of the Policy. You can call the
Service Center office toll-free at 1-877-376-8008.
SUBACCOUNT
A division of the variable account that invests exclusively in shares of one
portfolio of a fund. The investment performance of each subaccount is linked
directly to the investment performance of the portfolio in which it invests.
SURRENDER
The termination of the Policy at the option of the owner.
SURRENDER VALUE
The amount we will pay you if you surrender the Policy while it is in force. The
Surrender Value on the date you surrender is equal to: the Contract Value, minus
any surrender charge, and minus any outstanding loan amount (including any
interest you owe on the loan(s)).
TAX CODE
The Internal Revenue Code of 1986, as amended.
VALUATION DAY
Each day that the New York Stock Exchange ("NYSE") is open for trading. Farmers
New World Life Insurance Company is open to administer the Policy on each day
the NYSE is open.
VALUATION PERIOD
The period of time over which we determine the change in the value of the
subaccounts in order to price accumulation units. Each valuation period begins
at the close of normal trading on the NYSE (currently 4:00 p.m. Eastern time,
1:00 p.m. Pacific Time) on each Valuation Day and ends at the close of normal
trading on the NYSE on the next Valuation Day.
VARIABLE ACCOUNT
Farmers Variable Life Separate Account A. It is a separate investment account
that is divided into subaccounts, each of which invests in a corresponding
portfolio of a designated fund.
VARIABLE ACCOUNT VALUE
The portion of your Contract Value that is allocated to the subaccounts of the
variable account.
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 is necessary,
and (3) be received at our Service Center.
YOU (YOUR, OWNER)
The person entitled to exercise all rights as owner under the Policy.
3
<PAGE> 8
POLICY SUMMARY
================================================================================
This summary provides only a brief overview of the more important
features of the Policy. More detailed information about the Policy appears
later in this prospectus. Please read the remainder of this prospectus
carefully.
THE POLICY IN GENERAL
- This Policy is an individual flexible premium variable life insurance policy.
- The Policy is designed to be long-term in nature in order to provide
significant life insurance benefits for you. However, purchasing this Policy
involves certain risks. (See "Risk Summary.") You should consider the Policy
in conjunction with other insurance you own. The Policy is not suitable as a
short-term savings vehicle.
- A few of the Policy features listed below are not available in all states, may
vary depending upon when your Policy was issued and may not be suitable for
your particular situation. Please consult your agent and refer to your Policy
for details.
- This Policy cannot be offered in any state where it is not lawful to make such
offer.
PREMIUMS
- You can select a premium plan. Within certain limits specified in your Policy,
you can vary the frequency and amount of premiums. You may be able to skip
premium payments under certain circumstances. However, you greatly increase
your risk of lapse if you do not regularly pay premiums at least as large as
the current minimum premium.
- We will not accept any premiums after the insured reaches attained age 100.
- After you pay an initial premium, you can pay subsequent premiums (minimum
$25) at any time.
- If you authorize electronic payments from your checking account, or ask us to
bill you, the premiums you pay each year must be $300 or more.
- We multiply each premium by the percent of premium factor (currently 0.965)
and credit the resulting amount to the Contract Value.
- The initial minimum premium and payment mode (monthly or annual) are shown on
your Policy's specification page. The minimum premium will change if you
increase or decrease the principal sum, if you change death benefit options,
if you change or add a rider, if you take a partial withdrawal and you have
chosen a level death benefit (Option B), or if the insured's premium class
changes.
- This Policy does not provide a no-lapse period. PAYING THE CURRENT MINIMUM
MONTHLY PREMIUM FOR THE POLICY WILL NOT NECESSARILY KEEP YOUR POLICY IN FORCE.
Additional premiums may be necessary to keep the Policy in force.
- If you have paid large enough premiums so that total premiums paid (less
withdrawals) exceed the cumulative minimum premiums, your Policy will enter a
61-day pre-lapse grace period only if the Contract Value, less the loan amount
(including any interest you owe) is not enough to cover the monthly deduction
when due. We would not take the surrender charge into account.
- If you have not paid enough premiums so that total premiums paid (less
withdrawals) are less than the cumulative minimum premiums, then your Policy
will enter the grace period if the Surrender Value is not
4
<PAGE> 9
sufficient to cover the monthly deduction when due. This means that if you do
not pay large enough premiums, we will take surrender charges into account in
determining whether your Policy will enter a 61-day pre-lapse grace period.
- There will be a 61-day grace period before your Policy lapses. We will
mail you a notice at least 61 days before the end of the grace period. If you
fail to make a sufficient payment during the 61-day grace period, your Policy
will lapse and terminate without value. See "Risk of Lapse," and "Policy
Lapse."
- New premium(s) will be allocated to the subaccounts and the fixed account in
accordance with your instructions in the application, unless you provide
different instructions with your premiums. Any future premiums will be
allocated in accordance with the new instructions, unless we receive contrary
instructions.
INVESTMENT OPTIONS
VARIABLE ACCOUNT:
- You may direct the money in your Policy to any of the 12 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 investment portfolio of a fund. The
following portfolios are currently available:
[ ] JANUS ASPEN SERIES
Capital Appreciation Portfolio
(Institutional Shares)
[ ] KEMPER VARIABLE SERIES FUND
Kemper Government Securities Portfolio
Kemper High Yield Portfolio
Kemper Small Cap Growth Portfolio
KVS Dreman High Return Equity Portfolio (Formerly Kemper-Dreman
High Return Equity Portfolio)
[ ] PIMCO VARIABLE INSURANCE TRUST
PIMCO Low Duration Bond Portfolio
PIMCO Foreign Bond Portfolio
[ ] SCUDDER VARIABLE LIFE INVESTMENT FUND
Money Market Portfolio
Growth and Income Portfolio (Class A Shares)
International Portfolio (Class A Shares)
Bond Portfolio (Class A Shares)
[ ] FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Templeton Developing Markets Securities Fund (Class 2 Shares)
(Formerly Templeton Developing Markets Fund)
FIXED ACCOUNT:
- You may place money in the fixed account where it earns interest at an annual
rate of at least 3.0%. We may declare higher rates of interest, but are not
obligated to do so.
CONTRACT VALUE
- Contract Value is the sum of your amounts in the subaccounts and the fixed
account. Contract Value also includes amounts we hold in the loan account to
secure any outstanding loans.
- Contract 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
5
<PAGE> 10
deduct, and any other transactions (such as transfers, withdrawals, and
loans).
- Contract Value is the starting point for calculating important values
under the Policy, such as the cash value, Surrender Value and the death
benefit.
- We do not guarantee a minimum Contract Value. Your Policy may lapse if you do
not pay sufficient premiums and do not have sufficient Surrender Value to pay
the monthly deduction when due. See "Minimum Premiums" and "Policy Lapse."
- Once you receive your Policy, the RIGHT TO EXAMINE PERIOD begins. You may
return the Policy during this period and receive a refund. See "Canceling a
Policy."
- From the issue date until the reallocation date (the record date, plus the
number of days in your state's right to examine period, plus 10 days), we hold
your premium(s) in the fixed account. On the reallocation date, we transfer
the Contract Value in the fixed account to other subaccounts and the fixed
account in accordance with the allocation percentages you provided in the
application.
CHARGES AND DEDUCTIONS
$ Premium Charge: We currently deduct 3.5% from each premium and credit the
remaining 96.5% to your Contract Value. This occurs when we apply the percent
of premium factor to each premium received. We may change the charge for new
owners in the future. This charge compensates us for distribution expenses and
state premium taxes.
$ Monthly Deduction. Each month we deduct:
- a cost of insurance charge for the Policy (varies by issue age, sex,
premium class and Policy duration);
- charges for any riders;
- a flat extra charge, if any, for a special premium class;
- a special premium class rate, applied to both current and guaranteed cost
of insurance charges, for insured in a special premium class; and
- a current monthly administration charge of $5, guaranteed never to be
higher than $8.
$ Surrender and Withdrawal Charges:
- surrender: We deduct a surrender charge when a full surrender occurs
during the first 14 Policy years. It consists of:
- a deferred sales charge component: calculated by multiplying the sum of
all premiums by a factor that declines over the first 15 Policy years and
is less for issue ages 66 and older; and
- an administrative component: calculated by multiplying the number of
thousands of principal sum on the issue date (minus any reductions in
principal sum for which a surrender charge has already been paid) by a
factor that varies by insured's issue age, sex and premium class, and the
number of years you held the Policy.
THE SURRENDER CHARGE MAY BE SIGNIFICANT. YOU MAY HAVE NO SURRENDER VALUE IF
YOU SURRENDER YOUR POLICY DURING THE FIRST 14 POLICY YEARS.
- The maximum surrender charge is the entire Contract Value. It is more
likely that you may have no Surrender Value if you pay premiums below or
not much higher than the current minimum premium, and/or your investment
performance is too low.
6
<PAGE> 11
- withdrawal (partial surrender): We deduct a processing fee equal to the
lesser of $25 or 2% of the amount withdrawn, PLUS a surrender charge if
you elect a level death benefit (Option B).
- decrease in principal sum: If you decrease the principal sum, we will
deduct a portion of the surrender charge.
$ Mortality and Expense Risk Charge: Deducted daily at an annual rate equal to
0.90% of your average daily net assets in the variable subaccounts.
$ Transfer Charge: $25 fee for the 13th and each additional transfer in a Policy
year.
$ Portfolio Expenses: You indirectly bear the annual operating expenses of the
portfolios in which the subaccounts invest. These may include investment
management fees, 12b-1 fees, and other expenses. These charges vary by
portfolio and, during 1999, ranged from 0.43% to 1.81% per year. See
"Portfolio Expense Table."
$ Other charges:
- A $5 fee for each additional annual report you request.
- A charge of $1.50 per $1,000 for each increase in principal sum (maximum
charge is $300).
- Any riders attached to the Policy will have their own charges.
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 by
investing in the subaccounts. The table reflects the actual charges and
expenses for each portfolio for the fiscal year ended December 31, 1999,
except as stated in the footnotes. Expenses of the portfolios may be higher or
lower in the future. For more information on the fees and expenses described
in this table, see the prospectuses for the portfolios which accompany this
prospectus.
ANNUAL PORTFOLIO OPERATING EXPENSES (as a percentage of average portfolio
assets after fee waivers and expense reimbursements)
<TABLE>
<CAPTION>
TOTAL ANNUAL
EXPENSES (AFTER
MANAGEMENT OTHER EXPENSES WAIVERS
FEES 12B-1 (AFTER AND
NAME OF PORTFOLIO (AFTER WAIVERS) FEES REIMBURSEMENT) REIMBURSEMENT)
----------------- --------------- ------ -------------- ---------------
<S> <C> <C> <C> <C>
Janus Aspen Series
Capital Appreciation Portfolio .65% --% .04% .69%
(Institutional Shares)(1)
Kemper Variable Series
Kemper Government Securities Portfolio .55% --% .08% .63%
Kemper High Yield Portfolio .60% --% .07% .67%
Kemper Small Cap Growth Portfolio .65% --% .06% .71%
KVS Dreman High Return Equity
Portfolio(2) .75% --% .11% .86%
PIMCO Variable Insurance Trust(3)
Low Duration Bond Portfolio .25% --% .40% .65%
Foreign Bond Portfolio .25% --% .85% 1.10%
</TABLE>
7
<PAGE> 12
<TABLE>
<S> <C> <C> <C> <C>
Scudder Variable Life Investment Fund
Money Market Portfolio .37% --% .06% .43%
Growth and Income Portfolio (Class A Shares) .47% --% .08% .55%
International Portfolio (Class A Shares) .85% --% .18% 1.03%
Bond Portfolio (Class A Shares) .48% --% .09% .57%
Franklin Templeton Variable Insurance Products Trust
Templeton Developing Markets Securities Fund
(Class 2 Shares)(4)(5) 1.25% .25% .31% 1.81%
</TABLE>
1/ The expense figures shown for the Janus Aspen Capital Appreciation Portfolio
are based upon expenses for the fiscal year ended December 31, 1999, restated to
reflect a reduction in the management fee.
2/ Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year period
commencing on May 1, 2000, to limit their respective fees and to reimburse other
operating expenses to the extent necessary to limit total annual expenses of the
KVS Dreman High Return Equity Portfolio to 0.87%.
3/ For the PIMCO Low Duration Bond Portfolio, "Other Expenses" reflects a 0.25%
administrative fee and a 0.15% service fee. For the PIMCO Foreign Bond
Portfolio, "Other Expenses" reflects a 0.50% administrative fee, a 0.15% service
fee, and 0.20% of interest expense. PIMCO has contractually agreed to reduce
total annual portfolio operating expenses to the extent they would exceed, due
to the payment of organizational expenses and Trustees' fees, 0.65% and 0.90% of
average daily net assets of the PIMCO Low Duration Bond Portfolio and the PIMCO
Foreign Bond Portfolio, respectively. This expense reimbursement does not
include the 0.20% interest expense for the PIMCO Foreign Bond Portfolio. Without
such reductions, total annual expenses for the fiscal year ended December 31,
1999 would have been 0.78% and 1.25% for the PIMCO Low Duration Bond Portfolio
and the PIMCO Foreign Bond Portfolio, respectively. Under the Expense Limitation
Agreement, PIMCO may recoup these waivers and reimbursements in future periods,
not exceeding three years, provided total annual expenses, including such
recoupment, do not exceed the annual expense limit. For the PIMCO Foreign Bond
Portfolio, the ratio of net expenses to average net assets excluding interest
expense is 0.90%. Fees expressed are restated as of April 1, 2000.
4/ On February 8, 2000, shareholders approved a merger and reorganization that
combined the portfolio with the Templeton Developing Markets Equity Fund,
effective May 1, 2000. The shareholders of that portfolio had approved new
management fees, which apply to the combined portfolio effective May 1, 2000.
The table shows restated total expenses based on the new fees and the assets of
the portfolio as of December 31, 1999, and not the assets of the combined
portfolio. However, if the table reflected both the new fees and the combined
assets, the portfolio's expenses after May 1, 2000 would be estimated as:
management fees, 1.25%; 12b-1 fees, 0.25%; other expenses, 0.29%; and total
annual expenses, 1.79%.
5/ Class 2 of the Templeton Developing Markets Securities Fund has a
distribution plan or "Rule 12b-1 Plan" which is described in the portfolio's
prospectus. While the maximum amount payable under the portfolio's class 2 rule
12b-1 plan is 0.35% per year of the portfolio's average daily net assets, the
Board of Trustees of Franklin Templeton Variable Insurance Products Trust has
set the current rate at 0.25% per year. Because these fees are paid out of Class
2's assets on an ongoing basis, over time these fees will increase the cost of
an investment, and may cost more than paying other types of sales charges.
SURRENDERS AND WITHDRAWALS
- FULL SURRENDER: At any time while the Policy is in force, you may submit a
written request to surrender your Policy and receive the Surrender Value
(that is, the Contract Value minus any surrender charge, and minus any
outstanding loan amount including any interest you owe). A surrender may
have tax consequences. See "Federal Tax Considerations."
- PARTIAL WITHDRAWALS: After the first Policy year, you may submit a written
request to withdraw part of the Surrender Value, subject to the following
rules. Withdrawals may have tax consequences. See "Federal Tax
Considerations."
- You may make only 1 withdrawal each calendar quarter.
- You must request at least $500.
- You may not request more than 75% of the Surrender Value.
- Surrender charges apply to the withdrawal if you have selected a level
death benefit (Option B).
8
<PAGE> 13
- For each withdrawal, we deduct a processing fee equal to the lesser of
$25 or 2% of the withdrawal.
- If you select a level death benefit (Option B), the principal sum will
be reduced by the amount of the partial withdrawal (but not by any
surrender charges or the processing fee).
DEATH BENEFITS
- As long as it remains in force, the Policy provides for a death benefit
payment upon the death of the insured.
- You must choose one of two death benefit options under the Policy.
- OPTION A is a variable death benefit through attained age 99 that is
the greater of :
- the principal sum plus the Contract Value on the date of death;
or
- the Contract Value multiplied by the applicable death benefit
percentage.
- OPTION B is a level death benefit through attained age 99 that is the
greater of:
- the principal sum on the date of death; or
- the Contract Value multiplied by the applicable death benefit
percentage.
Any death benefit proceeds paid will be increased by any additional insurance
benefits you add by rider and will be reduced by the amount of any outstanding
loan amount (including any interest you owe) and any due and unpaid monthly
deductions.
- After the first Policy year, you may change the death benefit option or
increase or decrease the principal sum once each Policy year (but you may
not change both the death benefit and principal sum during the same Policy
year unless done simultaneously). A change in death benefit may have tax
consequences. See "Death Benefit."
- You may not decrease the principal sum below the minimum principal sum
amount shown on your Policy's specifications page.
TRANSFERS
- Each Policy year, you may make:
- an unlimited number of transfers from and among the subaccounts; and
- one transfer from the fixed account.
- Transfers from subaccounts must be a minimum of $250, or the total value in
the subaccount if less.
- Transfers from the fixed account may not be for more than 25% of the
unloaned value in the fixed account. If the balance in the fixed account
after the transfer is less than $250, then the entire balance will be
transferred.
- We charge $25 for the 13th and each additional transfer during a Policy
year.
- AUTOMATIC ASSET REBALANCING PROGRAM:
Under the automatic asset rebalancing program, we will automatically transfer
amounts among the subaccounts on a quarterly basis so that the allocation of
your Contract Value matches the percentages you specify.
9
<PAGE> 14
- DOLLAR COST AVERAGING PROGRAM:
The dollar cost averaging program permits you to systematically transfer (on
each monthly anniversary of the issue date) a set dollar amount from the fixed
account to up to 8 subaccounts. The minimum transfer amount is $100.
LOANS
- You may take a loan against the Policy for amounts up to the Surrender
Value, minus the loan interest you would have to pay by the next Policy
anniversary.
- To secure the loan, we transfer an amount equal to the loan from the
subaccounts and fixed account to the loan account (part of our general
account). Unless you specify otherwise, the amount is withdrawn from the
subaccounts and the fixed account on a pro-rata basis.
- Amounts in the loan account earn interest at the guaranteed minimum rate of
3% per year.
- During the first fourteen Policy years, we currently charge you interest at
4.5% annually, with a maximum loan interest rate of 8% per year on your
loan. After the fourteenth Policy year, the maximum loan interest rate is
3%, compounded annually. Interest is charged daily, and is due and payable
at the end of each Policy year, or on the date of any policy loan increase
or repayment, if earlier. Unpaid interest becomes part of the outstanding
loan and accrues interest.
- You may repay all or part of your outstanding loans at any time. Loan
repayments must be at least $25, and must be clearly marked as "loan
repayments" or they will be credited as premiums.
- We deduct any unpaid loans from the proceeds payable on the insured's
death.
- A loan may have tax consequences. See "Federal Tax Consequences."
RISK SUMMARY
================================================================================
INVESTMENT RISK
If you invest your Contract Value in one or more subaccounts, you will
be subject to the risk that investment performance will be unfavorable and that
your Contract Value will decrease. You COULD lose everything you invest and your
Policy could lapse. If you allocate premiums and Contract Value to the fixed
account, we will credit your Contract Value in the fixed account 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 3.0%.
10
<PAGE> 15
RISK OF LAPSE
This Policy does not provide a no-lapse period. You greatly increase
your risk of lapse if you do not regularly pay premiums at least as large as the
current minimum premium. Your Policy may lapse if loans, withdrawals, the
monthly deduction of insurance charges, and insufficient investment returns
reduce the Surrender Value to zero.
Your Policy will enter a 61-day pre-lapse grace period if:
- you have not paid large enough premiums so that total premiums paid
(minus withdrawals, but not including surrender charges or the
processing fee) are less than the cumulative minimum premiums, AND
the Surrender Value is not large enough to cover the monthly
deduction when due; or
- you have paid enough premiums so that total premiums paid (minus
withdrawals, but not including surrender charges or the processing
fee) are greater than the cumulative minimum premiums, BUT the
Contract Value, minus any outstanding loan amount (including any
interest you owe) is not large enough to cover the monthly deduction
when due.
Whenever your Policy enters the 61-day grace period, you must make a
sufficient payment before the grace period ends. If you do not make a sufficient
payment during the grace period, your Policy will terminate without value,
insurance coverage will no longer be in effect, and you will receive no
benefits. The payment you make during the grace period must be large enough to
cause either one of the following conditions:
1. the Surrender Value must exceed zero, after deducting all due and
unpaid monthly deductions; OR
2. total premiums you paid (minus withdrawals, but not including
surrender charges or the processing fee) must exceed the cumulative
minimum premiums, AND the Contract Value, minus any outstanding loan
(including any interest you owe) must exceed zero, after deducting
all due and unpaid monthly deductions.
A Policy lapse will have adverse tax consequences. See "Federal Tax
Considerations," and "Policy Loans."
You may reinstate a lapsed Policy within three years after the Policy
enters the grace period, if the insured meets our insurability requirements and
you pay the amount we require. We will not reinstate a Policy that has been
surrendered for the Surrender Value.
TAX RISKS
Although there is limited guidance and some uncertainty, we believe that
the Policy should be deemed a life insurance contract under Federal tax law, so
that the death benefit paid to the beneficiary will not be subject to Federal
income tax.
11
<PAGE> 16
Depending on the total amount of premiums you pay, the Policy may be
treated as a modified endowment contract ("MEC") under Federal tax laws. If a
Policy is treated as a MEC, then withdrawals, 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 withdrawals,
surrenders and loans taken before you reach age 59-1/2.
You should consult a qualified tax adviser for assistance in all tax
matters involving your Policy.
LIMITS ON CASH WITHDRAWALS
The Policy permits you to take only one partial withdrawal in any
calendar quarter, after the first Policy year has been completed. The amount you
may withdraw is limited to 75% of the Surrender Value.
A withdrawal reduces the Surrender Value and Contract Value and will
increase the risk that the Policy will lapse. A withdrawal also may have tax
consequences.
A withdrawal will reduce the death benefit. If you select a level death
benefit (Option B), a partial withdrawal will permanently reduce the principal
sum by the amount of the withdrawal (not including the surrender charge or the
processing fee). If a variable death benefit (Option A) is in effect when you
make a withdrawal, the death benefit also will be reduced by the amount that the
Contract Value is reduced.
LOAN RISKS
A Policy loan, whether or not repaid, will affect Contract 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 loan
collateral. 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 by the amount of the outstanding loan, plus any interest you
owe on Policy loans.
A Policy loan will increase the risk that the Policy will lapse. There
is a risk that if the loan amount reduces your Surrender Value (or Contract
Value, if applicable) to an amount that is not large enough to pay the monthly
deduction when due, then the Policy will enter the 61-day grace period, and
possibly lapse. Adverse tax consequences would result.
EFFECTS OF SURRENDER CHARGES
The surrender charges under this Policy are significant during the first
14 Policy years. It is likely that you will receive no Surrender Value if you
surrender your Policy in the early Policy years. You should purchase this Policy
only if you have the financial ability to keep it in force at the initial
principal sum for a substantial period of time.
12
<PAGE> 17
Even if you do not ask to surrender your Policy, surrender charges may
play a role in determining whether your Policy will lapse. If you have not paid
sufficient minimum premiums, the Surrender Value is the measure we use to
determine whether your Policy will enter a grace period, and possibly lapse.
COMPARISON WITH OTHER INSURANCE POLICIES
Like fixed benefit life insurance, the Policy offers a minimum death
benefit and provides a Contract Value, loan privileges and a Surrender Value.
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 Contract Value and the Surrender
Value will always vary with the investment performance 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.
ILLUSTRATIONS
The illustrations provided at the end of this prospectus illustrate
Contract Values, Surrender Values and Death Benefits. These illustrations are
based on hypothetical rates of return that are not guaranteed. The illustrations
also assume costs of insurance for a hypothetical person. Your rates of return
and insurance charges may be higher or lower than those shown in these
illustrations.
Your Policy can lapse before maturity, depending on the premiums you pay
and the investment results of the subaccounts in which you invest your Contract
Value. Your agent can provide you with an illustration that can show how many
years your Policy would stay in force under various premium and hypothetical
investment scenarios. For certain issue ages, classes and policy sizes, this
illustration may show that regular payments of the minimum premium will keep
your Policy in force several years even if investment results are very low and
even if we impose the maximum charges allowed by the Policy. This is not true
for all ages, classes, and investment results, however, so we encourage you to
request an illustration from your agent to help you decide what level of premium
payments to pay in your particular circumstances.
FARMERS NEW WORLD LIFE INSURANCE COMPANY AND THE FIXED ACCOUNT
================================================================================
FARMERS NEW WORLD LIFE INSURANCE COMPANY
Farmers New World Life Insurance Company ("Farmers"), is the stock life
insurance company issuing the Policy. Farmers is located at 3003 -- 77th Avenue,
S.E., Mercer Island, Washington 98040, and was incorporated under Washington law
on February 21, 1910. Farmers established the variable account to support the
investment options under this Policy and under other variable life insurance
policies Farmers may issue. Farmers' general account supports the fixed account
under the Policy.
13
<PAGE> 18
Farmers is a direct wholly-owned subsidiary of Farmers Group, Inc.
("FGI"). FGI is a stock holding and management company. The ultimate controlling
parents of FGI are Allied Zurich p.l.c., a United Kingdom company and Zurich
Allied AG, a Swiss Company. Allied Zurich p.l.c. and Zurich Allied AG are traded
in certain European markets, but are not publicly traded in the U.S.
Farmers markets a broad line of individual life insurance products,
including universal life, term life and whole life insurance and annuity
products (predominately flexible premium deferred annuities). Farmers currently
is licensed to sell insurance in 41 states and the District of Columbia. The
states where Farmers is not licensed are Alaska, Florida, Hawaii, Louisiana,
Maine, New Hampshire, New York, North Carolina, and Vermont.
THE FIXED ACCOUNT
The fixed account is part of Farmers' general account. We use our
general assets to support our insurance and annuity obligations other than those
funded by our separate investment accounts. Subject to applicable law, Farmers
has sole discretion over investment of the fixed account's assets. Farmers bears
the full investment risk for all amounts contributed to the fixed account.
Farmers 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.
Money you place in the fixed account will earn interest that is
compounded daily at the current interest rate in effect at the time of your
allocation. We intend to credit the fixed account with interest at current rates
in excess of the minimum guaranteed rate of 3%, but we are not obligated to do
so. We have no specific formula for determining current interest rates.
The fixed account value will not share in the investment performance of
our general account. Because we, in our sole discretion, anticipate changing the
current interest rate from time to time, different allocations you make to the
fixed account will be credited with different current interest rates. You assume
the risk that interest credited to amounts in the fixed account may not exceed
the minimum 3% guaranteed rate.
We reserve the right to change the method of crediting interest from
time to time, provided that such changes do not reduce the guaranteed rate of
interest below 3% per year or shorten the period for which the interest rate
applies to less than one year (except for the year in which such amount is
received or transferred).
We allocate amounts from the fixed account for partial withdrawals,
transfers to the subaccounts, or charges for the monthly deduction on a last in,
first out basis ("LIFO") for the purpose of crediting interest.
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.
14
<PAGE> 19
THE VARIABLE ACCOUNT AND THE PORTFOLIOS
================================================================================
THE VARIABLE ACCOUNT
Farmers established the variable account as a separate investment
account under Washington law on April 6, 1999. Farmers owns the assets in the
variable account and is obligated to pay all benefits under the Policies.
Farmers may use the variable account to support other variable life insurance
policies Farmers issues. The variable account is registered with the U.S.
Securities and Exchange Commission ("SEC") as a 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 12 subaccounts, each of which
invests in shares of one portfolio of a fund.
Under Washington law, the assets in the variable account are the
property of Farmers. However, assets in the variable account that are
attributable to the Policy are not chargeable with liabilities arising out of
any other business we may conduct. Income, gains, and losses (realized and
unrealized), resulting from assets in the variable account, are credited to or
charged against the variable account without regard to other income, gains or
losses of Farmers. Promises we make in the Policy are general corporate
obligations of Farmers and are not dependent on assets in the variable 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, Farmers reserves the right to:
1. Create new variable 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;
5. Substitute new portfolios for any existing portfolios if shares of
the portfolio are no longer available for investment or if Farmers
determines that investment in a portfolio is no longer appropriate in
light of the purposes of the variable account;
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.
No such changes will be made without any necessary approval of the SEC and
applicable state insurance departments. We will notify you of any changes.
THE PORTFOLIOS
Each subaccount of the variable account invests exclusively in shares of
a designated portfolio of a fund. Shares of each portfolio are purchased and
redeemed at net asset value, without a sales charge. Any dividends and
distributions from a portfolio are reinvested at net asset value in shares of
that portfolio. Each fund available under the Contract is registered with the
SEC under the 1940 Act 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 SEC.
15
<PAGE> 20
The assets of each portfolio are separate from the assets of any other
portfolio, and each portfolio has separate investment objectives and policies.
As a result, each portfolio operates as a separate investment portfolio and the
income or losses of one portfolio has no effect on the investment performance of
any other portfolio.
Each of the portfolios is managed by an investment adviser registered
with the SEC under the Investment Advisers Act of 1940, as amended. Each
investment adviser is responsible for the selection of the investments of the
portfolio. These investments must be consistent with the investment objective,
policies and restrictions of that portfolio.
Some of the portfolios have been established by investment advisers that
manage retail mutual funds sold directly to the public having similar names and
investment objectives to the portfolios available under the Contract. While some
of the portfolios may be similar to, and may in fact be modeled after, publicly
traded mutual funds, you should understand that the portfolios are not otherwise
directly related to any publicly traded mutual fund. Consequently, the
investment performance of publicly traded mutual funds and any similarly named
portfolio may differ substantially from the portfolios available through this
Contract.
An investment in a subaccount, or in any portfolio, including the Money
Market Portfolio, is not insured or guaranteed by the U.S. Government and there
can be no assurance that the Money Market Portfolio will be able to maintain a
stable net asset value per share.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS
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.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE AND INVESTMENT ADVISER
<S> <C>
JANUS ASPEN SERIES -- CAPITAL Seeks long-term growth of capital. It is non-diversified.
APPRECIATION PORTFOLIO Investment adviser is Janus Capital Corporation.
(INSTITUTIONAL SHARES)
KEMPER GOVERNMENT Seeks high current return consistent with preservation of
SECURITIES PORTFOLIO capital. Investment adviser is Scudder Kemper Investments,
Inc.
KEMPER HIGH YIELD PORTFOLIO Seeks to provide a high level of current income. Investment
adviser is Scudder Kemper Investments, Inc.
KEMPER SMALL CAP GROWTH Seeks maximum appreciation of investors' capital. Investment
PORTFOLIO adviser is Scudder Kemper Investments, Inc.
</TABLE>
16
<PAGE> 21
<TABLE>
<S> <C>
KVS DREMAN HIGH RETURN Seeks to achieve a high rate of total return. Investment
EQUITY PORTFOLIO adviser is Scudder Kemper Investments, Inc.; investment
sub-adviser is Dreman Value Management L.L.C.
PIMCO LOW DURATION BOND Seeks to maximize total return, consistent with preservation
PORTFOLIO of capital and prudent investment management. Investment
adviser is Pacific Investment Management Company.
PIMCO FOREIGN BOND Seeks to maximize total return, consistent with preservation
PORTFOLIO of capital and prudent investment management. Investment
adviser is Pacific Investment Management Company.
MONEY MARKET PORTFOLIO Seeks to maintain stability of capital and,
consistent therewith, to maximize the liquidity
of capital and to provide current income.
Investment adviser is Scudder Kemper Investments,
Inc.
GROWTH AND INCOME PORTFOLIO Seeks long-term growth of capital, current income and growth
(CLASS A SHARES) of income. Investment adviser is Scudder Kemper Investments,
Inc.
INTERNATIONAL PORTFOLIO Seeks long-term growth of capital primarily through
(CLASS A SHARES) diversified holdings of marketable foreign equity
investments. Investment adviser is Scudder Kemper
Investments, Inc.
BOND PORTFOLIO Seeks a high level of income consistent with a high quality
(CLASS A SHARES) portfolio of debt securities. Investment adviser is Scudder
Kemper Investments, Inc.
TEMPLETON DEVELOPING MARKETS Seeks long-term capital appreciation. The Fund invests
SECURITIES FUND (CLASS 2 primarily in emerging markets equity securities. Investment
SHARES) adviser is Templeton Asset Management Ltd.
</TABLE>
In addition to the variable account, the funds may sell shares to other
separate investment accounts established by other insurance companies to support
variable annuity contracts and variable life insurance policies as well as to
qualified 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 funds simultaneously. Although
neither Farmers nor the mutual funds currently foresee any such disadvantages,
either to variable life insurance policy owners or to variable annuity contract
owners, each fund's Board of Directors (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 (or Trustees) were to conclude that
separate funds should be established for variable life insurance and variable
annuity separate accounts, Farmers will bear the attendant expenses, but
variable life insurance policy owners and variable annuity contract owners would
no longer have the economies of scale resulting from a larger combined fund.
17
<PAGE> 22
PLEASE READ THE ATTACHED PROSPECTUSES FOR THE PORTFOLIOS TO OBTAIN MORE COMPLETE
INFORMATION REGARDING THE PORTFOLIOS.
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 from us. We will ask you to instruct us on how to vote and to
return your proxy to us in a timely manner. You will have the right to instruct
us on the number of portfolio shares that corresponds to the amount of Contract
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 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 send the application and initial premium
to us through any licensed Farmers insurance agent who is also a registered
representative of a broker-dealer having a selling agreement with the principal
underwriter for the Policy, Farmers Financial Solutions, LLC. Acceptance of an
application is subject to our insurance underwriting, and we reserve the right
to decline an application for any reasons subject to the requirements imposed by
law in the jurisdiction where the requested insurance Policy was to be issued
and delivered. If the application is declined or canceled, the full amount paid
with the application will be refunded.
We determine the minimum principal sum (death benefit) for a Policy
based on the attained age of the insured when we issue the Policy. The minimum
principal sum for the preferred premium class is $150,000, and $50,000 for all
others. The maximum issue age for insureds in the preferred underwriting class
is age 75, and for all other premium classes is age 80. We base the minimum
initial premium for your Policy on a number of factors including the age, sex
and premium class of the insured and the amount of the principal sum. We
currently require a minimum initial premium as shown on the Policy's
specifications page.
We use different underwriting standards 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 to
reject an application for any reason permitted by law.
18
<PAGE> 23
WHEN INSURANCE COVERAGE TAKES EFFECT
TEMPORARY INSURANCE COVERAGE. If the insured meets our eligibility
requirements for temporary insurance coverage, then we will provide the insured
with temporary insurance coverage in the amount applied for, or $50,000,
whichever is less. The conditions and eligibility requirements for temporary
insurance coverage are detailed in the Temporary Insurance Agreement included
with the Policy application.
Temporary insurance coverage terminates automatically, and without
notice, on the earliest of:
- The date full insurance coverage becomes effective; or
- The date the proposed insured receives notice that their
application has been declined, and in no event later than 12:01
a.m. Pacific Standard Time of the fifth day after Farmers has
mailed a letter giving such notice; or
- The date the proposed insured or the owner signs a request to
cancel the application or rejects the policy if issued other than
as applied for.
FULL INSURANCE COVERAGE. If we issue the Policy as applied for, full
insurance coverage under the Policy will take effect on the issue date, provided
sufficient payment has been received. If we issue a Policy other than as applied
for, full insurance coverage will take effect either upon the completion of all
underwriting and owner payment for and acceptance of the Policy, or on the issue
date, whichever is later. The issue date will be printed in the Policy and may
be several days later than when the Policy is delivered to you. Full insurance
coverage will not begin before the issue date printed in the Policy.
Generally, we will issue the Policy if we determine that the insured
meets our underwriting requirements and we accept the original application. On
the issue date, we will begin to deduct monthly deductions from your net premium
and we will allocate your premium (multiplied by the percent of premium factor,
and minus the monthly deduction(s)) to the fixed account until the reallocation
date. See "Allocating Premiums."
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 successor owner is named, then
ownership of the Policy will pass to the insured's estate. The owner may
exercise certain rights described below.
CHANGING THE - You may change the owner by providing a written request
OWNER 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 may have taken
before we received the written request.
- Changing the owner does not automatically change the
beneficiary.
- Changing the owner may have tax consequences. You should
consult a tax adviser before changing the owner.
19
<PAGE> 24
SELECTING AND - You designate the beneficiary (the person to receive the
CHANGING THE death benefit when the insured dies) in the application.
BENEFICIARY
- 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 request a delay clause which provides that if
the beneficiary dies within a specified number of days
(maximum 180 days) following the insured's death, then
the death benefit proceeds will be paid as if the
beneficiary had died first.
- 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 may have taken
before we received the written request.
ASSIGNING THE - You may assign Policy rights while the insured is alive.
POLICY
- 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.
- We are not:
-- bound by any assignment unless we receive a
written notice of the assignment.
-- responsible for the validity of any assignment.
-- liable for any payment we made before we received
written notice of the assignment.
- Assigning the Policy may have tax consequences. See
"Federal Tax Considerations."
CANCELING A POLICY
You may cancel a Policy during the "right-to-examine period" by
returning it to our Home Office. In most states, the right-to-examine period
expires 10 days after you receive the Policy. This period will be longer if
required by state law. If you decide to cancel the Policy during the
right-to-examine 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
an amount equal to the greater of Contract Value at the end of the Valuation
Date on which we receive the returned Policy at our Home Office or the sum of
all premiums paid for the Policy.
20
<PAGE> 25
PREMIUMS
================================================================================
PREMIUM FLEXIBILITY
You have flexibility to determine the frequency and the amount of the
premiums you pay. You do not have to pay premiums according to any schedule.
However, you greatly increase your risk of lapse if you do not regularly pay
premiums at least as large as the current minimum premium.
Before the issue date of the Policy (or if premium is paid on delivery
of the Policy, before the record date), we will require you to pay the premium
indicated on your Policy's specification page. Thereafter, you may pay premiums
($25 minimum) at any time. You must send all premiums to our Service Center. We
reserve the right to limit the number and amount of any unscheduled premiums.
You may not pay any premiums after the insured reaches attained age 100.
We multiply each premium by the percent of premium factor (currently
0.965) and credit the resulting value to the Contract Value. We retain the
balance of each premium to compensate us for certain expenses such as premium
taxes and selling expenses.
WE WILL TREAT ANY PAYMENT YOU MAKE AS A PREMIUM UNLESS YOU CLEARLY MARK
IT AS A LOAN REPAYMENT. 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, or if the payment would increase the death benefit by
more than the amount of the premium. Your Policy's specifications page will show
the maximum premium amount. If we return a portion of your premium based on the
maximum premium amount, we will not allow you to make additional premiums until
they are allowed by the maximum premium limitations.
ELECTRONIC PAYMENTS OR BILLING. If you authorize electronic payment of
your premiums from your bank account, or if you ask to be billed for your
planned premiums, the total amount of premiums being debited, or billed, must be
at least $300 per year. You can be billed, or make electronic payments, on an
annual, semi-annual, quarterly or monthly basis for the applicable fraction of
$300, but the total for the year must add up to at least $300.
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
attained age 110), or the date when either (1) the insured dies, or (2) the
grace period ends after the Surrender Value has been exhausted, or (3) we
receive your signed request to surrender the Policy.
BACKDATING. We may sometimes backdate a Policy, if you request, by
assigning an issue date earlier than the record date so that you can obtain
lower cost of insurance rates, based on a younger insurance age. We will not
backdate a Policy earlier than the date the application is signed. Backdating in
some cases causes higher surrender charges if it results in the Deferred Sales
Charge or Administrative Components being based on a lower age bracket. (See
"Surrender Charge.") For a backdated Policy, monthly deductions will begin on
the backdated issue date. You will therefore incur charges for the period
between the issue date and the record date as though full insurance coverage is
in effect during this period, even though full coverage does not in fact begin
until the record date (or a few days prior to the record date in some cases).
(See "When Insurance Coverage Takes Effect.")
21
<PAGE> 26
MINIMUM PREMIUMS
The full initial premium is the only premium required to be paid under
the Policy. However, you greatly increase your risk of lapse if you do not
regularly pay premiums at least as large as the current minimum premium. PAYING
THE CURRENT MONTHLY MINIMUM PREMIUM WILL NOT NECESSARILY KEEP YOUR POLICY IN
FORCE. Additional premiums may be necessary to keep the Policy in force.
The initial minimum premium and payment mode (annual and monthly) are
shown on your Policy's specifications page, and depends on a number of factors
including the age, sex, and premium class of the proposed insured, and the
principal sum requested.
The minimum premium will change if:
- you increase or decrease the principal sum;
- you change the death benefit option;
- you change or add a rider;
- you take a partial withdrawal when you have elected the level death
benefit option (Option B); or
- the insured's premium class changes (for example, from smoker to
non-smoker, or from standard to substandard).
If your Surrender Value (that is, the Contract Value, minus the
surrender charge, and minus any outstanding loan amount, including any interest
you owe) becomes zero or less, so that you cannot pay the monthly deduction when
due, AND if the total premiums you have paid, less withdrawals (not including
surrender charges and processing fees), are less than the cumulative minimum
premiums under your Policy, then your Policy will enter a 61-day grace period.
During the grace period, you must make a payment large enough to keep the Policy
in force. The cumulative minimum premiums is the sum of all past monthly-mode
minimum premiums due since the issue date.
But if the total premiums you have paid, less withdrawals (not including
surrender charges and processing fees), are greater than the cumulative minimum
premiums required under your Policy, then your Policy will enter a grace period
only if your Contract Value, minus any outstanding loan amount (including any
interest you owe), is not large enough to pay the entire monthly deduction when
due. See "Risk Summary," and "Policy Lapse."
Your Policy can lapse before maturity, depending on the premiums you pay
and the investment results of the subaccounts in which you invest your Contract
Value. Your agent can provide you with an illustration that can show how many
years your Policy would stay in force under various premium and hypothetical
investment scenarios. For certain issue ages, classes and policy sizes, this
illustration may show that regular payments of the minimum premium will keep
your Policy in force several years even if investment results are very low and
even if we impose the maximum charges allowed by the Policy. This is not true
for all ages, classes, and investment results, however, so we encourage you to
request an illustration from your agent to help you decide what level of premium
payments to pay in your particular circumstances.
22
<PAGE> 27
PLANNED PREMIUMS
You may determine a planned premium schedule which allows you to pay
level premiums at fixed intervals over a specified period of time. You are not
required to pay premiums according to this schedule. You may change the amount,
frequency, and the time period over which you make your planned premiums by
sending us a written request. We have the right to limit the amount of any
increase in planned premiums. Even if you make your planned premiums on
schedule, your Policy may lapse if your Surrender Value (or Contract Value, if
applicable) is insufficient to pay the monthly deduction. See "Risk Summary,"
"Policy Lapse."
ALLOCATING PREMIUMS
When you apply for a Policy, you must instruct us to allocate your
initial premium(s) 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 premium in any subaccount or the
fixed account you select;
- 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. Any future premiums will be allocated in
accordance with the new allocation, unless we receive contrary written
instructions. We reserve the right to limit the number of premium allocation
changes. We also reserve the right to limit the number of subaccount allocations
in effect at any one time.
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 issue date, we will allocate your premium(s), times the percent
of premium factor, minus the monthly deduction(s) to the fixed account. We also
allocate any premiums we receive from the issue date to the reallocation date
(the record date, plus the number of days in your state's right to examine
period, plus 10 days) to the fixed account. While held in the fixed account,
premium(s) will be credited with interest at the current fixed account rate. On
the reallocation date, we will reallocate the Contract Value in the fixed
account to the other subaccounts (at the unit value next determined) and the
fixed account in accordance with the allocation percentages provided in the
application.
Unless additional underwriting is required, we invest all premiums paid
after the reallocation date on the Valuation Day they are received in our
Service Center. We credit these premiums to the subaccounts at the unit value
next determined after we receive your payment.
23
<PAGE> 28
CONTRACT VALUES
================================================================================
CONTRACT VALUE
CONTRACT VALUE - serves as the starting point for calculating values under a
Policy
- equals the sum of all values in each subaccount and the
fixed account
- is determined on the issue date and on each Valuation Day
- on the issue date, equals the initial premium times the
percent of premium factor, less the monthly deduction
- has no guaranteed minimum amount and may be more or less
than premiums paid
SURRENDER VALUE
The Surrender Value is the amount we pay when you surrender your Policy.
We determine the Surrender Value at the end of the Valuation Period when we
receive your written surrender request.
SURRENDER VALUE - the Contract Value as of such date; MINUS
ON ANY VALUATION
DAY EQUALS: - any surrender charge as of such date; MINUS
- any outstanding Policy loans; MINUS
- any interest you owe on the Policy loans.
SUBACCOUNT VALUE
Each subaccount's value is the Contract 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
THE NUMBER OF - the initial units purchased at the unit value on the issue
UNITS IN ANY date; PLUS
SUBACCOUNT ON
ANY VALUATION - units purchased with additional premiums net of the percent
DAY EQUALS: of premium factor; PLUS
- units purchased via transfers from another subaccount or the
fixed account; MINUS
- units redeemed to pay a pro-rata share of the monthly
deductions; MINUS
- units redeemed to pay for withdrawals, and any applicable
surrender charges; 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 of the
allocation, transfer, or withdrawal, by the unit value for that subaccount at
the end of the Valuation Period.
24
<PAGE> 29
SUBACCOUNT UNIT VALUE
The value (or price) of each subaccount will reflect the investment
performance of the portfolio in which the subaccount invests. 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.
The unit value of any subaccount at the end of a Valuation Period is
calculated as:
A x B, where:
"A" is the subaccount's unit value for the end of the immediately
preceding Valuation Day; and
"B" is the net investment factor for the most current Valuation Day.
The net investment factor is an index we use to measure the investment
performance of a subaccount from one Valuation Period to the next. Each
subaccount has a net investment factor for each Valuation Period that may be
greater or less than one. Therefore, the value of a unit (and the value of a
subaccount) may increase or decrease. We determine the net investment factor for
any subaccount for any Valuation Period by the following formula:
X Z
--- -
Y
"X" equals:
1. the net asset value per portfolio share held in the subaccount at the
end of the current Valuation Day; PLUS
2. the per share amount of any dividend or capital gain distribution on
shares held in the subaccount during the current Valuation Day; MINUS
3. the per share amount of any capital loss distribution on shares held
in the subaccount during the current Valuation Day; MINUS
4. the per share amount of any taxes or any amount set aside during the
Valuation Day as a reserve for taxes.
"Y" equals the net asset value per portfolio share held in the subaccount as of
the end of the immediately preceding Valuation Day.
"Z" equals the mortality and expense risk charge.
25
<PAGE> 30
FIXED ACCOUNT VALUE
On the issue date, the fixed account value is equal to the premiums
allocated to the fixed account, less the portion of the first monthly deduction
taken from the fixed account.
THE FIXED ACCOUNT - "A" is the fixed account value on the preceding
VALUE AT THE END OF Valuation Day plus interest from the preceding
ANY VALUATION Valuation Day to the date of calculation; PLUS
PERIOD IS EQUAL TO
A+B+C-D-E-F: - "B" is the portion of the premium(s), multiplied by the
percent of premium factor, allocated to the fixed
account since the preceding Valuation Day, plus
interest from the date such premiums were received to
the date of calculation; PLUS
- "C" any amounts transferred to the fixed account since
the preceding Valuation Day, plus interest from the
effective date of such transfers to the date of
calculation; MINUS
- "D" is the amount of any transfer from the fixed
account to the subaccounts since the preceding
Valuation Day, plus interest from the effective date of
such transfers to the date of calculation; MINUS
- "E" is the amount of any withdrawals (partial
surrenders) and any applicable surrender charges
deducted from the fixed account since the preceding
Valuation Day, plus interest on those surrendered
amounts from the effective date of each withdrawal to
the date of calculation; MINUS
- "F" is zero, except on the monthly due date, when it is
a pro-rata share of the monthly deduction for the month
beginning on that monthly due date.
Your Policy's guaranteed minimum fixed account value will not be less
than the minimum values required by the state where we deliver your Policy.
CHARGES AND DEDUCTIONS
================================================================================
This section describes the charges and deductions that we make under the
Policy to compensate for: (1) the services and benefits we provide; (2) the
costs and expenses we incur; and (3) the risks we assume.
SERVICES AND BENEFITS - the death benefit (principal sum), surrender and loan
WE PROVIDE: benefits under the Policy
- investment options, including premium allocations
- administration of elective options
- the distribution of reports to owners
26
<PAGE> 31
COSTS AND EXPENSES - costs associated with processing and underwriting
WE INCUR: applications, issuing and administering the Policy
(including any riders)
- overhead and other expenses for providing services and
benefits
- sales and marketing expenses
- other costs of doing business, such as collecting
premiums, maintaining records, processing claims,
effecting transactions, and paying Federal, state and
local premium and other taxes and fees
RISKS WE ASSUME: - that the cost of insurance charges we may deduct are
insufficient to meet our actual claims because insureds
die sooner than we estimate
- that the costs of providing the services and benefits
under the Policies exceed the charges we deduct
PREMIUM DEDUCTIONS
When you make a premium payment, we apply a percent of premium factor
currently equal to 0.965 to the premium to determine the amount that we will
allocate to the subaccounts and the fixed account according to your
instructions. The 3.5% of each premium we retain compensates us for distribution
expenses and state premium taxes. We may change the percent of premium factor
for new Policies in the future.
MONTHLY DEDUCTION
We take a monthly deduction from the Contract Value on the issue date
and on each monthly due date (the same day of each succeeding month as the issue
date, or, if there is no comparable Valuation Day, the next Valuation Day). We
will make deductions from each subaccount and the fixed account in accordance
with the current premium allocation instructions. 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 (i.e., in the same proportion that the value in
each subaccount and the fixed account bears to the total Contract Value on the
monthly due date). Because portions of the monthly deduction can vary from
month-to-month, the monthly deduction will also vary.
The monthly deduction is equal to:
-- The cost of insurance charge for the Policy; PLUS
-- The charges for any riders; PLUS
-- The monthly administration charge; PLUS
-- The special premium factor applied to the cost of insurance for a
special premium class, if any; PLUS
-- The flat extra charge for a special premium class, if any.
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 a death benefit that exceeds your Contract Value). The charge depends on
a number of variables (Contract Value and the insured's issue age, sex, and
premium class, and the number of months since the issue date) that would cause
it to vary from Policy to Policy and from monthly due date to monthly due date.
27
<PAGE> 32
The cost of insurance charge is equal to the cost of insurance rate at
the insured's attained age, times the number of thousands of Risk Insurance
Amount.
The Risk Insurance Amount is:
1. The current death benefit; MINUS
2. The Contract Value at the end of the Valuation Day preceding the
monthly due date; PLUS
3. The monthly administrative charge for the month that begins on the
monthly due date; PLUS
4. Any charges for riders for the month that begins on the monthly due
date.
The Risk Insurance Amount may increase, or decrease, depending on
investment experience, the payment of additional premiums, Policy riders, and
the application of the death benefit percentage formula. Therefore, the cost of
insurance charges can increase or decrease over time.
Cost of insurance rates are based on the sex, attained age, and premium
class of the insured. The cost of insurance rates are generally higher for male
insureds than for female insureds of the same age and premium class, and
ordinarily increase with age. Cost of insurance rates may never exceed the
guaranteed maximum cost of insurance rates shown in Appendix A.
The premium class of the insured will affect the cost of insurance
rates. We currently place insureds into standard premium classes and into
special premium classes involving higher mortality risks. The cost of insurance
rates for special premium classes involving higher mortality risks are multiples
of the standard rates. If the insured is in a special premium class, the
guaranteed maximum monthly cost of insurance rate will be the rate shown in the
table in Appendix A times the special premium class rating factor shown on your
Policy's specification page. The charge for any attached rider is a separate
calculation.
We calculate the cost of insurance separately for the initial principal
sum and for any increase in principal sum. If you request and we approve an
increase in your Policy's principal sum, then a different premium class (and a
different cost of insurance) may apply to the increase, based on the insured's
circumstances at the time of the increase.
The Policies are based on mortality tables that distinguish between men
and women. As a result, the Policy may pay different benefits to men and women
of the same age and premium class. We also offer Policies based on unisex
mortality tables if required by state law.
CHARGES FOR RIDERS. The monthly deduction includes charges for any
optional insurance benefits you add to your Policy by rider.
MONTHLY ADMINISTRATION CHARGE. We deduct this charge to compensate us
for administrative expenses such as recordkeeping, processing death benefit
claims and Policy changes, and overhead costs. The monthly administration charge
currently equals $5, guaranteed never to be higher than $8.
MONTHLY SPECIAL PREMIUM CLASS CHARGE. If the insured is in a special
premium class, the guaranteed maximum monthly cost of insurance rate will be the
rate shown in the Policy times the special premium rate factor shown on the
Policy's specifications page. This factor is applied to both current and
guaranteed cost of insurance rate. This charge compensates us for additional
costs associated with claims from the insureds in the special premium class. If
applicable to you, your Policy's specifications page will show the amount of
this charge.
28
<PAGE> 33
MONTHLY FLAT EXTRA CHARGE. We deduct a flat extra charge if the insured
is in a special premium class. This compensates us for the additional costs
associated with the special premium class. The charge, if any, will be shown on
your Policy's specifications page.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from your Contract Value in 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. This charge is equal to:
- your Contract Value in each subaccount MULTIPLIED BY
- the daily pro rata portion of the annual mortality and expense
risk charge rate of 0.90%.
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
We deduct a surrender charge if, during the first 14 Policy years, you:
- fully surrender the Policy, or
- take a partial withdrawal from your Policy, if you have elected a
level death benefit (Option B) , or
- you decrease the principal sum that was in effect at the time of
issue.
In the case of a full surrender, we pay the remaining Contract Value
(less any surrender charge and any outstanding loan amount, including any
interest you owe) to you. The payment you receive is called the Surrender Value.
If you take a partial withdrawal, we will reduce the Contract Value on a
pro-rata basis from the subaccounts and the fixed account (unless you instruct
us otherwise) by the amount of the partial withdrawal, the processing fee, and
any surrender charge.
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 Contract Value available if you
surrender your Policy during the period when surrender charges apply. This will
depend on a number of factors, but is more likely if:
1. you pay premiums equal to or not much higher than the minimum
premium shown in your Policy, or
2. investment performance is too low.
The surrender charge is equal to the sum of the Deferred Sales Charge
Component and the Administrative Component.
29
<PAGE> 34
The Deferred Sales Charge Component is calculated by:
1. find the sum of all premiums that have been paid to the Policy
(do not deduct amounts withdrawn or the percent of premium
factor);
2. multiply this sum by 0.075 if the insured's issue age was 65 or
younger, or by 0.050 if the insured's issue age was 66 or older;
3. multiply the result by the appropriate number on this table:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Policy Year: 1-3 4 5 6 7 8 9 10 11 12 13 14 15 or more
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issue ages 0-65 1.00 1.00 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00
------------------------------------------------------------------------------------------------------------------------
Issue ages 66 and older 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.15 0.10 0.05 0.00
------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Administrative Component is calculated by:
1. the appropriate surrender charge factor from the tables in
Appendix B for the insured's age on the issue date and the number
of full Policy years since the issue date (regardless of whether
the Policy has lapsed and been reinstated) (the tables vary by
sex and premium class); MULTIPLIED BY
2. the number of thousands of principal sum on the issue date, MINUS
any reductions in principal sum for which a surrender charge has
already been imposed.
DECREASE IN PRINCIPAL SUM. If you decrease the principal sum that was in
effect on the issue date, we will assess the administrative component of the
surrender charge. To determine the surrender charge for a decrease in principal
sum: multiply the appropriate surrender charge factor from the tables in
Appendix B by the number of thousands of principal sum at the time of issue that
are now being decreased. Only a reduction in the original principal sum amount
(as of the issue date) incurs a surrender charge.
AN EXAMPLE OF CALCULATING THE SURRENDER CHARGE FOLLOWS:
This example is for a Policy issued to a male nonsmoker that is in its
seventh Policy year. The principal sum is $200,000 and the issue age is 35. A
premium of $1,000 has been paid at the beginning of each year and the total
cumulative premium payments are $7,000.
The total surrender charge is the sum of a Deferred Sales Charge
Component and an Administrative Component.
The Deferred Sales Charge Component is calculated by multiplying the
cumulative premium by 0.075, then multiplying the result by the appropriate
number from the table. For this example the appropriate number is 0.80. The
result is ($7,000)(0.075)(0.80) = $420.
The Administrative Component is calculated by multiplying the number of
thousands of principal sum by the appropriate factor from the surrender charge
table. In this example the factor is 4.94. The result is ($200)(4.94) = $988.
The total surrender charge is the sum of the Deferred Sales Charge
Component and the Administrative Component. The total surrender charge is
therefore $420 + $988 = $1,408.
PARTIAL WITHDRAWAL PROCESSING FEE. We deduct a processing fee equal to
the lesser of $25 or 2% of the amount withdrawn.
30
<PAGE> 35
TRANSFER CHARGE
- We currently allow you to make 12 transfers each Policy year free
from charge. Any unused free transfers do not carry over to the next
Policy year.
- We charge $25 for each additional transfer. 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, or
from the remaining Contract Value, according to your instructions.
- Transfers we effect on the reallocation date, and transfers due to
loans, automatic asset rebalancing, and dollar cost averaging, do NOT
count as transfers for the purpose of assessing this charge.
PORTFOLIO EXPENSES
The value of the net assets of each subaccount reflects the investment
management fees, 12b-1 fees in some cases, and other expenses incurred by the
corresponding portfolio in which the subaccount invests. See the Portfolio
Expense Table in this prospectus, and the portfolios' prospectuses for further
information on these fees and expenses.
We receive compensation from certain investment advisers and/or
administrators (and/or an affiliate thereof) of the portfolios in connection
with administrative or other services we provide and cost savings experienced by
the investment advisers, administrators or distributors. Such compensation may
range from 0.15% to 0.25% and is based on a percentage of assets of the
particular portfolios attributable to the Policy, and in some cases, other
policies issued by Farmers (or its affiliates). We also receive a portion of the
12b-1 fees deducted from portfolio assets as reimbursement for providing certain
services permitted under the fund's 12b-1 plan. Some advisers, administrators or
portfolios may pay us more than others.
OTHER CHARGES
- We charge $5 for each additional annual report you request.
- We charge $1.50 per $1,000 for each increase in principal sum (this
charge cannot exceed $300).
- Any riders attached to the Policy will have their own charges.
31
<PAGE> 36
DEATH BENEFIT
================================================================================
DEATH BENEFIT PROCEEDS
As long as the Policy is in force, we will pay the death benefit
proceeds once we receive satisfactory proof of the insured's death at our Home
Office. 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 into an interest paying checking account or under
a payment option. See "Payment Options."
DEATH BENEFIT - the death benefit (described below); 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); PLUS
- any additional insurance provided by rider.
If all or part of the death benefit proceeds are paid in one sum, we
will pay interest on this sum as required by applicable state law from the date
we receive due proof of the insured's death to the date we make payment. We will
place the death benefit proceeds into an interest-bearing draft account opened
in the beneficiary's name. The beneficiary can withdraw all or a portion of the
proceeds at any time. We fully guarantee all amounts held in the draft account.
We may further adjust the amount of the death benefit proceeds under
certain circumstances. See "Our Right to Contest the Policy," "Misstatement of
Age or Sex," and "Suicide Exclusion."
DEATH BENEFIT OPTIONS
In your application, you tell us how much life insurance coverage you
want on the life of the insured. We call this the "principal sum" of insurance.
You also choose whether the death benefit we will pay is Option A (variable
death benefit through attained age 99), or Option B (level death benefit through
attained age 99). For attained ages after age 99, the death benefit equals the
Contract Value. You may change the death benefit option after the first Policy
year.
THE VARIABLE DEATH - the principal sum PLUS the Contract Value (determined
BENEFIT UNDER as of the end of the Valuation Period during which the
OPTION A IS THE insured dies); OR
GREATER OF:
- the death benefit required by the Tax Code (Contract
Value on the date of death multiplied by the applicable
death benefit percentage).
Under Option A, the death benefit varies with the Contract Value.
THE LEVEL DEATH - the principal sum on the date of death; OR
BENEFIT UNDER
OPTION B IS THE - the death benefit required by the Tax Code (Contract
GREATER OF: Value on the date of death multiplied by the applicable
death benefit percentage).
32
<PAGE> 37
Under Option B, your death benefit generally equals the principal amount
and will remain level, unless the death benefit is determined as required by the
Tax Code (Contract Value times the applicable death benefit percentage).
Under Option A, your death benefit will tend to be higher than under
Option B. However, the monthly insurance charges we deduct will also be higher
to compensate us for our additional risk. Because of this, your Contract Value
will tend to be higher under Option B than under Option A.
In order for the Policy to qualify as life insurance, Federal tax law
requires that your death benefit be at least as much as your Contract Value
multiplied by the applicable death benefit percentage. The death benefit
percentage is based on the insured person's attained age. For example, the death
benefit percentage is 250% for an insured at age 40 or under, and it declines
for older insureds. The following table indicates the applicable death benefit
percentages for different attained ages:
<TABLE>
<CAPTION>
ATTAINED AGE DEATH BENEFIT PERCENTAGE
<S> <C>
40 and under 250%
41 to 45 250% minus 7% for each age over age 40
46 to 50 209% minus 6% for each age over age 46
51 to 55 178% minus 7% for each age over age 51
56 to 60 146% minus 4% for each age over age 56
61 to 65 128% minus 2% for each age over age 61
66 to 70 119% minus 1% for each age over age 66
71 to 74 113% minus 2% for each age over age 71
75 to 90 105%
91 to 94 104% minus 1% for each age over age 91
95 and above 100%
</TABLE>
If the Tax Code requires us to increase the death benefit by reference
to the death benefit percentages, that increase in the death benefit will
increase our risk, and will result in a higher monthly cost of insurance.
OPTION A EXAMPLE. Assume that the insured's attained age is under 40,
that there have been no decreases in the principal sum, and that there are no
outstanding loans. Under Option A, a Policy with a principal sum of $50,000 will
pay a death benefit equal to the greater of $50,000 plus Contract Value or 250%
of the Contract Value. Thus, a Policy with a Contract Value of $10,000 will have
a death benefit of $60,000 (that is, the greater of $60,000 ($50,000 + $10,000)
or $25,000 (250% of $10,000)).
33
<PAGE> 38
However, once the Contract Value exceeds $33,334, the death benefit
determined by reference to the death benefit percentage ($33,333 X 250% =
$83,335) will be greater than the principal sum plus Contract Value ($50,000 +
$33,334 = $83,334). Each additional dollar of Contract Value above $33,334 will
increase the death benefit by $2.50.
Similarly, under this scenario, any time Contract Value exceeds $33,334,
each dollar taken out of Contract Value will reduce the death benefit by $2.50.
OPTION B EXAMPLE. Assume that the insured's attained age is under 40,
there have been no withdrawals or decreases in principal sum, and that there are
no outstanding loans. Under Option B, a Policy with a $50,000 principal sum will
generally pay $50,000 in death benefits. However, because the death benefit must
be equal to or be greater than 250% of Contract Value, any time the Contract
Value exceeds $20,000, the death benefit will be determined as required by the
Tax Code (Contract Value X 250%) and will exceed the principal sum of $50,000.
Each additional dollar added to the Contract Value above $20,000 will increase
the death benefit by $2.50.
Similarly, so long as the Contract Value exceeds $20,000, each dollar
taken out of the Contract Value will reduce the death benefit by $2.50.
CHANGING DEATH BENEFIT OPTIONS
- After the first Policy year, you may change death benefit options or
change the principal sum (but not both, unless done simultaneously)
once each Policy year.
- You must make your request in writing.
- We may require evidence of insurability.
- The effective date of the change will be the monthly due date on or
following the date when we approve your request for a change.
- We will send you a Policy endorsement with the change to attach to
your Policy.
- Changing the death benefit option may have tax consequences. You
should consult a tax adviser before changing the death benefit
option.
FROM OPTION A (VARIABLE DEATH BENEFIT) TO OPTION B (LEVEL DEATH BENEFIT)
- We do not require evidence of insurability.
- The principal sum will change. The new Option B principal sum
will equal the Option A principal sum plus the Contract Value on
the effective date of the change.
- The minimum premium will increase.
- The change in option affects the determination of the death
benefit since Contract Value is no longer added to the principal
sum. The death benefit will equal the new principal sum (or, if
higher, the Contract Value times the applicable death benefit
percentage).
34
<PAGE> 39
FROM OPTION B (LEVEL DEATH BENEFIT) TO OPTION A (VARIABLE DEATH BENEFIT)
- You must provide satisfactory evidence of insurability.
- The principal sum will change. The new Option A principal sum
will equal the Option B principal sum less the Contract Value
immediately before the change, but the new principal sum will not
be less than the minimum principal sum shown on your Policy's
specifications page. WE WILL NOT IMPOSE ANY SURRENDER CHARGE
SOLELY AS A RESULT OF THIS CHANGE IN PRINCIPAL SUM.
- The minimum premium will decrease.
- The change in death benefit option affects the determination of
the death benefit since Contract Value will be added to the new
principal sum, and the death benefit will then vary with the
Contract Value.
A change in death benefit option may affect the future monthly cost of
insurance charge, which varies with the Risk Insurance Amount. Generally, the
Risk Insurance Amount is the amount by which the death benefit exceeds the
Contract Value. (See " Charges and Deductions -- Monthly Deduction -- Cost of
Insurance.") If the death benefit does not equal Contract Value times the death
benefit percentage under either Options A or B, changing from Option A (variable
death benefit) to Option B (level death benefit) will generally decrease the
future Risk Insurance Amount. This would decrease the future cost of insurance
charges. Changing from Option B (level death benefit) to Option A (variable
death benefit) generally results in a Risk Insurance Amount that remains level.
Such a change, however, results in an increase in cost of insurance charges over
time, since the cost of insurance rates increase with the insured's age.
After any change in death benefit option, the total surrender charge for
the Policy will continue to be based on the principal sum on the issue date on
which surrender charges have not already been imposed.
EFFECTS OF WITHDRAWALS ON THE DEATH BENEFIT
If you have selected the variable death benefit (Option A), a withdrawal
will not affect the principal sum. But if you have selected the level death
benefit (Option B), a withdrawal (partial surrender) will reduce the principal
sum by the amount of the withdrawal (not including surrender charges or the
processing fee). The reduction in principal sum will be subject to the terms of
the Changing the Principal Sum section below.
CHANGING THE PRINCIPAL SUM
When you apply for the Policy, you tell us how much life insurance
coverage you want on the life of the insured. We call this the principal sum.
After the first Policy year, you may change the principal sum subject to the
conditions described below. YOU MAY EITHER CHANGE THE PRINCIPAL SUM OR CHANGE
THE DEATH BENEFIT OPTION (BUT NOT BOTH, UNLESS DONE SIMULTANEOUSLY) NO MORE THAN
ONCE PER POLICY YEAR. We will send you a Policy endorsement with the change to
attach to your Policy.
35
<PAGE> 40
Increasing the principal sum could increase the death benefit.
Decreasing the principal sum could decrease the death benefit. The amount of
change in the death benefit will depend, among other things, upon the selected
death benefit option and the degree to which the death benefit exceeds the
principal sum prior to the change. Changing the principal sum could affect the
subsequent level of death benefit and Policy values. An increase in the
principal sum may increase the Risk Insurance Amount, thereby increasing your
cost of insurance charge. Conversely, a decrease in the principal sum may
decrease the Risk Insurance Amount, thereby decreasing your cost of insurance
charge.
We will not permit any change that would result in your Policy being
disqualified as a life insurance contract under Section 7702 of the Internal
Revenue Code. However, changing the principal sum may have other tax
consequences. You should consult a tax adviser before changing the principal
sum.
INCREASES
- You may increase the principal sum by submitting a written
request and providing evidence of insurability satisfactory to
us. The increase will be effective on the monthly due date
following our approval of your request.
- You can only increase the principal sum before the insured's
attained age 80.
- The minimum increase is $10,000.
- We deduct a processing fee from the Contract Value equal to $1.50
per $1,000 of increase. The fee cannot exceed $300. The
processing fee will be deducted from the subaccounts and the
fixed account on a pro-rata basis, unless you give us different
instructions.
- If the amount of the Contract Value is insufficient to cover the
processing fee, you must add sufficient additional premiums
before the increase in principal sum will become effective.
- Increasing the principal sum will increase your Policy's minimum
premium.
DECREASES
- You may decrease the principal sum, but not below the minimum
principal sum amount shown on your Policy's specifications page.
- You must submit a written request to decrease the principal sum.
Evidence of insurability is not required.
- Any decrease will be effective on the monthly due date following
our approval of your request.
- Any decrease will first be used to:
1. reduce the most recent increase; then
2. the next most recent increases in succession; and then
3. the principal sum on the issue date (subject to a
surrender charge).
36
<PAGE> 41
- If you decrease the principal sum that was in effect on the issue
date, we will assess the Administrative Component of the
surrender charge. To determine the surrender charge for a
decrease in principal sum, multiply the appropriate surrender
charge factor from the tables in Appendix B by the number of
thousands of principal sum at the time of issue that are now
being decreased. Only a reduction in the original principal sum
amount (as of the issue date) incurs a surrender charge.
Surrender charges will be deducted from the subaccounts and the
fixed account on a pro-rata basis, unless you give us different
instructions.
- A decrease in principal sum may require that a portion of a
Policy's Surrender Value be distributed as a partial surrender in
order to maintain federal tax compliance.
- Decreasing the principal sum will reduce your Policy's minimum
premium.
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. Below is
information concerning settlement options described in your Policy. None of
these options vary with the investment performance of the variable account.
SETTLEMENT OPTIONS. If you surrender the Policy, or if the Policy matures, you
may elect to receive the net surrender value in either a lump sum or as a series
of regular income payments under one of five fixed settlement options described
below. In either event, life insurance coverage ends. Also, when the insured
dies, the beneficiary may apply the lump sum death benefit proceeds to one of
the same settlement options. The proceeds under any settlement option must be at
least $2,500, and each payment must be at least $25, or we will instead pay the
proceeds in one lump sum. We may make other settlement options available in the
future.
Once we begin making payments under a settlement option, you or the
beneficiary will no longer have any value in the subaccounts or the fixed
account. Instead, the only entitlement will be the amount of the regular payment
for the period selected under the terms of the settlement option chosen.
Depending upon the circumstances, the effective date of a settlement option is
the surrender date, the maturity date or the insured's date of death.
Under any settlement option, the dollar amount of each payment will
depend on three things:
- the amount of the surrender or death benefit proceeds on the
surrender date, maturity date or insured's date of death;
- the interest rate we credit on those amounts (we guarantee a
minimum interest rate); and
- the specific option(s) you choose. The amount you would receive
may depend on your adjusted age and sex.
OPTION 1 -- - Your proceeds will earn interest at a rate of 2.5%
INTEREST per year compounded annually.
ACCUMULATION:
- We may not keep the funds under this option for
longer than five years, unless the beneficiary is
a minor, in which case we may hold the funds until
the beneficiary attains the age of majority.
37
<PAGE> 42
OPTION 2 -- - You will receive income of at least $25 annually,
INTEREST INCOME: $12.42 semi-annually, $6.19 quarterly, or $2.05
monthly for each $1,000 of proceeds.
- Unless you direct otherwise, the payee may
withdraw the proceeds at any time.
- After the first year, we may defer such withdrawal
for up to six months.
OPTION 3 -- - We will pay installments for a specified period.
INCOME - PERIOD
CERTAIN: - The amount of each installment will not be less
than the amounts shown in the table in your
Policy.
- If the payee dies before the end of the specified
period, we will pay the installments to the
contingent payee for the remainder of the
specified period.
OPTION 4 -- - We will pay installments of a specified amount
INCOME - AMOUNT until the proceeds together with interest are paid
CERTAIN: in full.
- We will credit interest at a rate of 2.5%
compounded annually.
OPTION 5 -- - We will pay installments for the payee's lifetime.
INCOME - LIFE:
- We will make payments for at least a specified
guaranteed period.
- If the payee dies before the end of the guaranteed
period, we will continue to pay proceeds to a
contingent payee for the remainder of the
guaranteed period.
- The amount of each installment will depend on the
adjusted age and sex of the payee at the time the
first payment is due.
- We determine the adjusted age by calculating the
age at the payee's nearest birthday on the date of
the first payment and subtracting a number that
depends on the year in which the first payment
begins:
<TABLE>
<CAPTION>
First Payment Date Adjusted Age is Age Minus
------------------ -------------------------
<S> <C>
Before 2001 0 Years
2001 to 2010 1 Year
2011 to 2020 2 Years
2021 to 2030 3 Years
2031 to 2040 4 Years
After 2040 5 Years
</TABLE>
38
<PAGE> 43
SURRENDERS AND WITHDRAWALS
================================================================================
SURRENDERS
- You may make a written request to surrender your Policy for its
Surrender Value as calculated at the end of the Valuation Day when we
receive your request. You should send your written request to the
Service Center. A surrender may have tax consequences.
- The insured must be alive and the Policy must be in force when you make
your written request. A surrender is effective as of the date when we
receive your written request.
- You will incur a surrender charge if you surrender the Policy during the
first 14 Policy years. See "Charges and Deductions."
- Once you surrender your Policy, all coverage and other benefits under it
cease and cannot be reinstated.
- We will pay you the Surrender Value in a lump sum within seven calendar
days unless you request other arrangements.
- Surrendering the Policy may have tax consequences. See "Federal Tax
Consequences."
PARTIAL WITHDRAWALS
After the first Policy Year, you may request a withdrawal of a portion
of your Contract Value subject to certain conditions. Partial withdrawals may
have tax consequences. See "Federal Tax Consequences."
WITHDRAWAL -- You must make your partial withdrawal request to us in
CONDITIONS: writing.
-- You should send your written request to the Service
Center.
-- You may make only one partial withdrawal each calendar
quarter.
-- You must request at least $500.
-- You cannot withdraw more than 75% of the Surrender Value
without surrendering the Policy.
-- You can specify the subaccount(s) and fixed account from
which to make the withdrawal, otherwise we will deduct the
amount from the subaccounts and the fixed account on a
pro-rata basis (that is, according to the percentage of
Contract Value contained in each subaccount and the fixed
account).
-- We will process the withdrawal at the unit values next
determined after we receive your request.
-- We generally will pay a withdrawal request within seven
calendar days after the Valuation Day when we receive the
request.
Whenever you take a withdrawal, we deduct a processing fee (on a pro
rata basis) from the Contract Value equal to the lesser of $25 or 2% of the
amount withdrawn.
39
<PAGE> 44
In addition, if you make a partial withdrawal during the first 14 years
from the issue date and you have elected the level death benefit (Option B), we
will deduct a surrender charge from your Contract Value. The surrender charge on
a withdrawal is equal to the appropriate surrender charge factor from the table
in Appendix B, multiplied by the number of thousands in principal sum on the
issue date, minus any reductions in principal sum for which we have already
imposed a surrender charge. We will cancel units equal to the amount of the
withdrawal, processing fee, and any surrender charge from the subaccounts and
the fixed account according to your instructions, or on a pro-rata basis if you
provide no instructions.
If the level death benefit (Option B) is in effect at the time of a
withdrawal, we will reduce the principal sum by the amount of the withdrawal
(but not by any surrender charges or the processing fee). See "Changing the
Principal Sum - Decreases." We will not allow any withdrawal to reduce the
principal sum below the minimum principal sum set forth in the Policy.
TRANSFERS
================================================================================
You may make transfers from 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:
- You may make an unlimited number of transfers in a Policy year from the
subaccounts.
- You may only make one transfer a Policy year from the fixed account
(unless you choose dollar cost averaging).
- You may request transfers in writing (in a form we accept), or by
telephone. You should send written requests to the Service Center.
- For SUBACCOUNT TRANSFERS, you must transfer the lesser of $250, or the
total value in the subaccount.
- For FIXED ACCOUNT TRANSFERS, you may not transfer more than 25% of the
unloaned value in the fixed account, unless the balance after the
transfer is less than $250, in which case the entire amount will be
transferred.
- We deduct a $25 charge from the amount transferred or from the remaining
Contract Value (your choice) for the 13th and each additional transfer
in a Policy year. Any unused free transfers do not carry over to the
next Policy year. Transfers we effect on the reallocation date and
transfers resulting from loans 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 unit values determined at the end of the
Valuation Day when we receive your transfer request.
40
<PAGE> 45
AUTOMATIC ASSET REBALANCING PROGRAM
The automatic asset rebalancing program permits you to maintain the
percentage of the Contract Value allocated to each subaccount at a pre-set
level. Under the program, automatic transfers are made among the subaccounts on
a quarterly basis so that your Contract Value is reallocated to match the
percentages you specify. Asset rebalancing is consistent with maintaining your
allocation of investments among market segments, although it is accomplished by
reducing your Contract Value allocated to the better performing segments.
Transfers under this program are not subject to the $250 minimum
transfer limitation. We will not charge a transfer fee for asset rebalancing.
You may not include the fixed account in the asset rebalancing program. We may
change, terminate, limit or suspend automatic asset rebalancing at any time.
You may elect automatic asset rebalancing on your application or you may
enroll in automatic asset rebalancing at any time by completing a form and
returning it to the Service Center. You may cancel your participation in the
program at any time.
We may modify or revoke the automatic asset rebalancing program at any
time.
THIRD PARTY TRANSFERS
If you authorize a third party to transact transfers on your behalf, we
will honor their transfer instructions, so long as they comply with our
administrative systems, rules and procedures, which we may modify or rescind at
any time. We take no responsibility for any third party asset allocation
program. PLEASE NOTE that any fees and charges assessed for third party asset
allocation services are separate and distinct from the Policy fees and charges
set forth in this prospectus. We neither recommend nor discourage the use of
asset allocation services.
EXCESSIVE TRADING LIMITS
We reserve the right to limit transfers in any Policy year, or to refuse
any transfer request for an owner if:
- we believe, in our sole discretion, that excessive trading by the
owner, or a specific transfer request, or a group of transfer
requests, may have a detrimental effect on the accumulation unit
values of any subaccount or the share prices of any portfolio or
would be detrimental to other owners; or
- we are informed by one or more portfolios that they intend to
restrict the purchase of portfolio shares because of excessive
trading or because they believe that a specific transfer or group of
transfers would have a detrimental effect on the price of portfolio
shares.
We may apply the restrictions in any manner reasonably designed to prevent
transfers that we consider disadvantageous to other owners.
41
<PAGE> 46
DOLLAR COST AVERAGING PROGRAM
Under the dollar cost averaging program, you may authorize us to
transfer a fixed dollar amount at monthly intervals from the fixed account to
one or more subaccounts. You may designate up to eight subaccounts to receive
the transfers. The fixed dollar amount will purchase more accumulation units of
a subaccount when their value is lower and fewer units when their value is
higher. Over time, the cost per unit averages out to be less than if all
purchases of units had been made at the highest value and greater than if all
purchases had been made at the lowest value. The dollar cost averaging method of
investment reduces the risk of making purchases only when the price of
accumulation units is high. It does not assure a profit or protect against a
loss in declining markets.
You may cancel your participation in the program at any time.
You may enroll in the dollar cost averaging program at any time by
completing our dollar cost averaging form and sending it to the Service Center.
We make transfers on the same day of every month as your issue date. We must
receive the form at least 5 valuation days before the transfer date, for your
transfers to begin on that date. When you enroll in the dollar cost averaging
program, your total Contract Value in an account must be at least equal to the
amount you designate to be transferred on each transfer date. Transfers from the
fixed account must be at least $100.
We may modify or revoke the dollar cost averaging program at any time.
TELEPHONE TRANSFERS
Your Policy, as applied for and issued, will automatically receive
telephone transfer privileges unless you provide other instructions. The
telephone transfer privileges allow you to give authority to the registered
representative or agent of record for your Policy to make telephone transfers
and to change the allocation of future payments among the subaccounts and the
fixed account on your behalf according to your instructions. To make a telephone
transfer, you may call the Service Center toll-free at 1-877-376-8008.
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, 1:00
p.m. Pacific 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
42
<PAGE> 47
of the NYSE, on any day the NYSE is open, 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.
We reserve the right to modify, restrict, suspend or eliminate the
transfer privileges (including the telephone transfer facility) at any time, for
any class of Policies, for any reason.
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. See "Federal Tax Consequences."
LOAN CONDITIONS: - You may take a loan against the Policy for amounts up
to the Surrender Value minus loan interest you would
have to pay by the next Policy anniversary date.
- 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 our general 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 Contract
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 from the fixed account.
- We normally pay the amount of the loan within seven
calendar days after we receive a proper loan request at
the Service Center. We may postpone payment of loans
under certain conditions. See "When We Make Payments."
- We charge you interest on your loan. During the first
fourteen policy years, the current loan interest rate
is 4.5%, with a maximum loan interest rate of 8% per
year, compounded annually, on your loan. After the
fourteenth Policy year, the maximum loan interest rate
is 3%, compounded annually. We may change the interest
rate, but we will notify you of any increase in loan
interest at least 30 days before the new rate becomes
effective. Interest is due and payable at the end of
each Policy year, or, if earlier, on the date of any
loan increase or repayment. Unpaid interest becomes
part of the outstanding loan and accrues interest
accordingly.
- You may repay all or part of your outstanding loans at
any time by sending the repayment to the Service
Center. LOAN REPAYMENTS MUST BE AT LEAST $25, AND MUST
BE CLEARLY MARKED AS "LOAN REPAYMENTS" OR THEY WILL BE
CREDITED AS PREMIUMS.
43
<PAGE> 48
- 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 instructions.
- We deduct any unpaid loan amount, including any
interest you owe, from the Surrender Value and death
benefit proceeds payable on the insured's death.
- If any unpaid loan amount, including any interest you
owe, equals or exceeds the Contract Value, causing the
Surrender Value to become zero, then your Policy will
enter a 61-day grace period. See "Policy Lapse."
EFFECTS OF POLICY LOANS
A Policy loan affects the Policy, because we reduce the death benefit
proceeds and Surrender Value under the Policy by any outstanding loan amount,
including any interest you owe. Repaying the loan causes the death benefit
proceeds and 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 amount in the loan
account. This amount is not affected by the variable account's investment
performance and may not be credited with the same interest rates currently
accruing on the fixed account. Amounts transferred from the variable account to
the loan account will affect the value in the variable account 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, a few of which include
an increased potential for the Policy to lapse if projected earnings, taking
into account outstanding loans, are not achieved. A Policy loan may also have
possible adverse tax consequences. See "Federal Income Tax Considerations." In
addition, the tax consequences of a Policy loan after the fourteenth Policy year
are uncertain. You should consult a tax adviser before taking out a Policy loan.
We will notify you (and any assignee of record) if the sum of your loans
plus any interest you owe on the loans is more than the 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
================================================================================
LAPSE
The following circumstances will cause your Policy to enter a 61-day
grace period during which you must make a large enough payment to keep your
Policy in force:
- If your Policy's Surrender Value becomes zero, and total premiums you
have paid, minus withdrawals (not including surrender charges and
processing fees), are less than the cumulative minimum premiums
required under the Policy; or
44
<PAGE> 49
- If you have paid large enough premiums so that total premiums you
have paid, less withdrawals (not including surrender charges and
processing fees), are greater than the cumulative minimum premiums,
and the Contract Value (minus outstanding loan amount and interest
you owe) is too low to pay the entire monthly deduction when due.
Whenever your Policy enters the grace period, you must make a sufficient
payment before the grace period ends. If you do not make a sufficient payment by
the end of the grace period, then your Policy will terminate without value,
insurance coverage will no longer be in effect, and you will receive no
benefits. The payment must be large enough to cause either one of the following
conditions:
1. the Surrender Value must exceed zero, after deducting all due and
unpaid monthly deductions; OR
2. total premiums paid less withdrawals (not including surrender
charges and processing fees) must exceed cumulative minimum
premiums, AND the Contract Value less any outstanding loan amount
(including any interest you owe) must exceed zero, after
deducting all due and unpaid monthly deductions.
If your Policy meets the circumstances where it would enter into a grace
period, we will mail a notice to your last known address and any assignee of
record. We will mail the notice at least 61 days before the end of the grace
period. 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.
REINSTATEMENT
We will reinstate a lapsed Policy within three years after the Policy
enters a grace period that ends with a lapse (and prior to the maturity date).
To reinstate the Policy you must:
- provide evidence of insurability satisfactory to us;
- make a payment of the unpaid monthly deductions due during the last
expired grace period;
- make a payment of a minimum premium sufficient to keep the Policy in
force for three months; and
- repay the entire Policy loan amount (including any interest you owed)
that existed at the date of termination of coverage.
We will not reinstate any indebtedness. Your Contract Value on the reinstatement
date will equal the premiums you pay at reinstatement, minus all unpaid monthly
deductions due during the last expired grace period, minus an additional monthly
deduction due at the time of reinstatement. The surrender charges will still
apply and will be calculated as of the original issue date of the Policy. The
reinstatement date for your Policy will be the monthly due date on or following
the date we approve your application for reinstatement. We will apply the
suicide and incontestability provisions from the reinstatement date. We may
decline a request for reinstatement. We will not reinstate a Policy that has
been surrendered for the Surrender Value.
45
<PAGE> 50
FEDERAL TAX CONSIDERATIONS
================================================================================
The following summary provides a general description of the Federal
income tax considerations associated with a Policy and does not purport to be
complete or to cover all situations. THIS DISCUSSION IS NOT INTENDED AS TAX
ADVICE. Please consult counsel or other qualified tax advisers 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 Tax 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
under Federal tax law. There is limited guidance as to how these requirements
are to be applied. Nevertheless, we believe that a Policy should satisfy the
applicable Tax Code requirements. Because of the absence of pertinent
interpretations of the Tax Code requirements, there is, however, some
uncertainty about the application of such requirements to the Policy,
particularly if the Policy is issued on a special premium class basis. 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 variable 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 your flexibility to allocate premiums and
Contract Values, have not been explicitly addressed in published rulings. While
we believe that the Policy does not give you investment 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 Tax 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 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 adviser on these consequences.
46
<PAGE> 51
Generally, you will not be deemed to be in constructive receipt of the
Contract Value until there is a distribution. When distributions from a Policy
occur, or when loans are taken out from or secured by (e.g., by assignment), a
Policy, the tax consequences depend on whether the Policy is classified as a
"Modified Endowment Contract."
MODIFIED ENDOWMENT CONTRACTS. Under the Tax Code, certain life insurance
policies are classified as "Modified Endowment Contracts" ("MECs") and receive
less favorable tax treatment than other life insurance contracts. Due to the
Policy's flexibility, each Policy's circumstances will determine whether the
Policy is classified as a MEC. The rules are too complex to be summarized here,
but generally depend on the amount of premiums paid during the first seven
Policy years. Certain changes in a Policy after it is issued (including a
reduction in benefits at any time after issuance) could also cause it to be
classified as a MEC. If you do not want your Policy to be classified as a MEC,
you should consult a tax adviser to determine the circumstances, if any, under
which your Policy would not be classified as a MEC.
Upon issue of your Policy, we will notify you if your Policy is
classified as a MEC based on the initial premium we receive. If any future
payment we receive would cause your Policy to become a MEC, you will be
notified. We will not invest that premium in the Policy until you notify us that
you want to continue your Policy as a MEC.
DISTRIBUTIONS (OTHER THAN DEATH BENEFITS) 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 withdrawals, will be treated first
as distributions of gain taxable as ordinary income and as tax-free
recovery of the Policy owner's investment in the Policy only after
all gain has been distributed.
- Loans taken from or secured by (e.g., by assignment) such a Policy
are treated as distributions and taxed accordingly.
- A 10% additional income tax is imposed on the amount included in
income except where the distribution or loan is made when you have
attained age 59_ 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.
- If a Policy becomes a MEC, distributions that occur during the Policy
year will be taxed as distributions from a MEC. In addition,
distributions from a Policy within two years before it becomes a MEC
will be taxed in this manner. This means that a distribution from a
Policy that is not a MEC at the time when the distribution is made
could later become taxable as a distribution from a MEC.
DISTRIBUTIONS (OTHER THAN DEATH BENEFITS) 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.
47
<PAGE> 52
Loans from or secured by a Policy that is not a MEC are generally not
treated as distributions. However, the tax consequences associated with Policy
loans that are outstanding after the first Policy year is less clear; you should
consult a tax adviser about such loans.
Finally, neither distributions from nor loans from or secured by a
Policy that is not a MEC are subject to the 10% additional tax.
INVESTMENT IN THE POLICY. Your investment in the Policy is generally
your aggregate premiums. When a distribution is taken from the Policy, your
investment in the Policy is reduced by the amount of the distribution that is
tax-free.
POLICY LOANS. If a loan from a Policy is outstanding when the Policy is
cancelled or lapses, the amount of the outstanding indebtedness will be added to
the amount distributed and will be taxed accordingly. 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 adviser 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.
OTHER POLICY OWNER TAX MATTERS. The tax consequences of continuing the
Policy beyond the insured's 100th year are unclear. You should consult a tax
adviser if you intend to keep the Policy in-force beyond the insured's 100th
year.
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 adviser 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 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 adviser with respect to legislative developments and
their effect on the Policy.
POSSIBLE CHARGES FOR OUR TAXES. At the present time, we make no charge
for any Federal, state or local taxes (other than the charge for state premium
taxes) that may be attributable to the subaccounts or to the Policy. We reserve
the right to impose charges for any future taxes or economic burden we may
incur.
48
<PAGE> 53
OTHER POLICY INFORMATION
================================================================================
OUR RIGHT TO CONTEST THE POLICY
In issuing this Policy, we rely on all statements made by or for 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 issue date, or if reinstated, for two years from
the date of reinstatement. We will not contest any increase in principal sum
after the increase has been in force for two years during the insured's
lifetime. This provision also applies to any riders.
SUICIDE EXCLUSION
If the insured commits suicide, while sane or insane, within two years
of the issue date, the Policy will terminate and our liability is limited to an
amount equal to the premiums paid, LESS any loans (including any interest you
owe), and LESS any withdrawals (not including surrender charges and processing
fees) previously paid. A new two-year period will apply from the effective date
of any reinstatement and to each increase in principal sum starting on the
effective date of each increase. During this two-year period, the death benefit
proceeds paid that are associated with an increase in principal sum will be
limited to the monthly cost of insurance charges for the increase.
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 the Policy or waive any of our
rights or requirements under the 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;
49
<PAGE> 54
-- assure continued qualification of the Policy as a life
insurance contract under the Federal tax laws; or
-- reflect a change in the variable account's operations.
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 will amend the provision to conform with such laws.
WHEN WE WILL MAKE PAYMENTS
We usually pay the amounts of any surrender, withdrawal, death benefit
proceeds, loans, or settlement options within seven calendar 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 SEC; OR
- the SEC permits, by an order, the postponement 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.
If you have submitted a recent check or draft, we have the right to
defer payment of surrenders, withdrawals, death benefit proceeds, or payments
under a settlement option until such check or draft has been honored.
We have the right to defer payment of any surrender, withdrawal, death
benefit proceeds, loans or settlement options from the fixed account for up to
six months from the date we receive your written request.
REPORTS TO OWNERS
At least once each year, or more often as required by law, we will mail
to owners at their last known address a report showing at least the following
information as of the end of the report period:
the current principal sum any loans since the last report
the current death benefit premiums paid since the last report
the Contract Value all deductions since the last report
the Surrender Value the amount of any outstanding loans
You may request additional copies of reports for a $5 fee. We will
maintain all records relating to the variable account and the fixed account.
50
<PAGE> 55
POLICY TERMINATION
Your Policy will terminate on the earliest of:
-- the maturity date (insured's -- the end of the grace period
attained age 110) without a sufficient payment
-- the date the insured dies -- the date you surrender the
Policy
SUPPLEMENTAL BENEFITS (RIDERS)
The following supplemental benefits (riders) are available and may be
added to a Policy. The cost of these benefits is added to the monthly deduction.
The riders available with the Policies provide fixed benefits that do not vary
with the investment experience of the variable account.
- waiver of monthly deductions due to the insured's total
disability
- term insurance on the insured's dependent children
- payment of an accidental death benefit if the insured's death was
caused by accidental bodily injury
- term insurance on additional insureds
- automatic increases in principal sum
- accelerated payment of a portion of the death benefit in the
event the insured develops a terminal illness
- payment of a monthly disability benefit to the fixed account if
the insured is totally disabled. This rider is designed to
provide a monthly benefit that defrays a portion of the monthly
deductions during periods when the policyowner is disabled and
cannot pay any premiums. Surrender charges would be assessed and
normal withdrawal limits would apply if you withdrew the monthly
disability benefit. See "Surrender Charge."
The benefits and restrictions are described in each rider. We will
provide samples of these provisions upon request.
Each rider may not be available in all states, and a rider may vary by
state.
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, Contract Value and 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.
The values we may illustrate for death benefit, Contract Value and
Surrender Value would take into account all charges and deductions from the
Policy, the variable account and the portfolios. We would not deduct premium
taxes or charges for any riders.
51
<PAGE> 56
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 Farmers Financial Solutions,
LLC ("FFS"), the principal underwriter of the Policy. FFS is located at 2423
Galena Avenue, Simi Valley, California 93065, and is affiliated with Farmers
through Farmers' parent which provides management-related services to the parent
companies of FFS. FFS is registered with the Securities and Exchange Commission
under the Securities Exchange Act of 1934 as a broker-dealer, and is a member of
the National Association of Securities Dealers, Inc. The maximum sales
commission payable to Farmers' agents who are registered representatives is 50%
of premiums paid up to a target premium set by Farmers and 2.6% of premium in
excess of the target premium in the first year. The commission is 4.0% of
premiums up to the target premium and 2.6% of excess premium in renewal years
two through ten. After year 10 the commission is 0.15% of the Policy's Contract
Value each year. In addition, certain production, persistency and managerial
bonuses may be paid.
LEGAL MATTERS
Sutherland Asbill & Brennan LLP of Washington, D.C. has provided advice
on certain legal matters relating to the Policy under the Federal securities
laws. All matters of Washington law pertaining to the Policy have been passed
upon by M. Douglas Close, Vice President and General Counsel, Farmers New World
Life Insurance Company.
LEGAL PROCEEDINGS
Like other life insurance companies, we are involved in lawsuits. These
actions are in various stages of discovery and development, and some seek
punitive as well as compensatory damages. While it is not possible to predict
the outcome of such matters with absolute certainty, we believe that the
ultimate disposition of these proceedings should not have a material adverse
effect on the financial position of Farmers New World Life. In addition, we are,
from time to time, involved as a party to various governmental and
administrative proceedings. There are no pending or threatened lawsuits that
will materially impact the variable account.
YEAR 2000 MATTERS
YEAR 2000 ISSUE
In 1995, Farmers Group, Inc. ("FGI") initiated a Year 2000 project (the
"Year 2000 Project") in order to prepare for the information processing problems
presented by the approach of the new millennium. FGI expended significant
efforts to gain a complete understanding of Year 2000 implications and to
develop a strategy to make FGI's systems Year 2000 compliant. The costs
associated with the Year 2000 Project were expensed as incurred and, through
December 31, 1999, totaled $23.2 million. The costs related to the Year 2000
Project were consistent with management's expectations of the total costs that
would be incurred in connection with the Year 2000 issue. No further costs
related to the Year 2000 Project are expected.
52
<PAGE> 57
The Year 2000 issue has not presented any significant disruptions to the
operations of FGI. However, FGI will continue to monitor its systems throughout
the year to ensure that all systems are operating properly.
EXPERTS
The financial statements included in the Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, 700 Fifth Avenue, Suite 4500,
Seattle, Washington 98104-5044, as stated in their report appearing in the
Prospectus in the registration statement, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
Actuarial matters included in this prospectus have been examined by Joel
D. Kuni as stated in the opinion filed as an exhibit to this registration
statement.
FINANCIAL STATEMENTS
Our audited balance sheets as of December 31, 1999 and 1998, and the
related statements of income, comprehensive income, stockholder's equity, and
cash flows for each of the three years in the period ended December 31, 1999, as
well as the Independent Auditors' Report, are contained herein. Our financial
statements should be considered only as bearing upon our ability to meet our
obligations under the Policies.
There are no financial statements available for the variable account,
because the variable account had not commenced operations as of December 31,
1999.
FARMERS' EXECUTIVE OFFICERS AND DIRECTORS
Farmers is governed by a board of directors. The following table sets
forth the name, address and principal occupation during the past five years of
each of Farmers' executive officers and directors.
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
POSITION WITH
NAME AND ADDRESS FARMERS PRINCIPAL OCCUPATION DURING PAST 5 YEARS
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Richard E. Bangert Board Director Director since 1973.
2615 42nd West
Seattle, WA
-----------------------------------------------------------------------------------------------
Donald J. Covey Board Director Director since 1976; Chairman, UNICO
6300 Sand Point Way, N.E., #307 Properties, Inc., 1990-1994; Retired,
Seattle, WA 1995.
-----------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 58
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
POSITION WITH
NAME AND ADDRESS FARMERS PRINCIPAL OCCUPATION DURING PAST 5 YEARS
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Martin D. Feinstein Board Director Chairman of the Board of Farmers
4680 Wilshire Blvd. Group, Inc. ("FGI") since 11/97, Chief
Los Angeles, CA Executive Officer of FGI since 1/95
and director of FGI since 2/95;
director of Allied Zurich
p.l.c. since 3/98 and
member of Group Executive
Board of Zurich Financial
Services; director of
B.A.T. from 1/97 to 9/98;
Senior Vice
President-Property and
Casualty Staff of FGI
from 10/93 to 1/95; Chief
Operating Officer of FGI
from 1/95 to 1/97.
-----------------------------------------------------------------------------------------------
Paul Hopkins Board Director Senior Vice President & Chief
4680 Wilshire Blvd. Marketing Officer, FGI since 1998;
Los Angeles, CA Senior Vice President Agencies, FGI
from 1997 to 1998; Vice
President Agencies, FGI
from 1994-1997; Assistant
Vice President Regional
Operations, FGI from
1992-1994.
-----------------------------------------------------------------------------------------------
Dennis I. Okamoto Board Director Regional Vice President of US West
1600 - 7th Ave., Suite 1802 Communications from 1968 to 1998;
Seattle, WA Retired, 1998.
-----------------------------------------------------------------------------------------------
C. Paul Patsis Board Director President, FNWL since 5/98; President,
3003 - 77th Ave., S.E. Marketing One from 1989 to 5/98.
Mercer Island, WA
-----------------------------------------------------------------------------------------------
Keitha Schofield Board Director Executive Vice President-Support
4680 Wilshire Blvd. Services of FGI since 1/98 and
Los Angeles, CA director of FGI since 5/97; Senior
Vice President and Chief
Information Officer of
FGI from 5/95 to 1/97;
Executive Vice President
- Support Services and
Chief Information Officer
from 1/97 to 1/98; Vice
President-Technology
Division of Continental
Airlines, Inc. from 1988
to 5/95.
-----------------------------------------------------------------------------------------------
Gary R. Severson Board Director Vice Chairman, Laird Norton Trust
6131 - 128th Ave., N.E. Company since 1997; Chairman of the
Kirkland, WA Board, First Interstate Bank from 7/83
to 8/96.
-----------------------------------------------------------------------------------------------
John F. Sullivan Jr. Board Director President, G.J. Sullivan Company from
1201 - 3rd Ave., Suite 3390 1985 to 1994; Retired since 1995.
Seattle, WA (Continues as non-executive Vice
President of G.J. Sullivan Company).
-----------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE> 59
The following table gives the name, address and principal occupation
during the past five years of the senior officers of Farmers (other than
officers listed above as directors).
SENIOR OFFICERS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
POSITION WITH
NAME AND ADDRESS FARMERS PRINCIPAL OCCUPATION DURING PAST 5 YEARS
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Sharylee Barnes, M.D. Medical Director Assistant Medical Director of Swiss
3003 - 77th Ave., S.E. Reinsurance and Private Practice.
Mercer Island, WA
-----------------------------------------------------------------------------------------------
Kathryn M. Callahan Vice President & Vice President and Actuary, FNWL since
3003 - 77th Ave., S.E. Actuary 1987.
Mercer Island, WA
-----------------------------------------------------------------------------------------------
M. Douglas Close Vice President & Associate General Counsel, FGI since
4680 Wilshire Blvd. General Counsel 1990.
Los Angeles, CA
-----------------------------------------------------------------------------------------------
Sharon D. Courlas, M.D. Vice President & Medical Director, FNWL since 1991;
3003 - 77th Ave., S.E. Medical Director Medical Director at Safeco from 1/99
Mercer Island, WA to 5/99; Consulting Contract Medical
Director, PEMCO since 1997.
-----------------------------------------------------------------------------------------------
David A. Demmon Assistant Vice Assistant Vice President and
3003 - 77th Ave., S.E. President & Treasurer, FNWL since 1992.
Mercer Island, WA Treasurer
-----------------------------------------------------------------------------------------------
Gerald A. Dulek Assistant Vice Vice President Real Estate & Support
4680 Wilshire Blvd. President Services, FGI since 3/76.
Los Angeles, CA
-----------------------------------------------------------------------------------------------
Gerald E. Faulwell Vice President & Senior Vice President & Chief
4680 Wilshire Blvd. Assistant Treasurer Financial Officer, FGI since 1988.
Los Angeles, CA
-----------------------------------------------------------------------------------------------
Laszlo G. Heredy Vice President Vice President, FGI since 12/80.
4680 Wilshire Blvd.
Los Angeles, CA
-----------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE> 60
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
POSITION WITH
NAME AND ADDRESS FARMERS PRINCIPAL OCCUPATION DURING PAST 5 YEARS
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Doren Hohl Assistant Secretary Secretary & Senior Corporate Counsel,
4680 Wilshire Blvd. FGI since 3/92.
Los Angeles, CA
-----------------------------------------------------------------------------------------------
Paul F. Hott Assistant Vice Assistant Vice President MIS, FNWL
3003 - 77th Ave., S.E. President since 3/95; Computer Operations
Mercer Island, WA Manager from 4/93 to 3/95.
-----------------------------------------------------------------------------------------------
Kathleen D. Katovich Assistant Secretary Senior Corporate Counsel, FGI since
4680 Wilshire Blvd. 2/96; Assistant General Counsel,
Los Angeles, CA California Institute of Technology
from 1992 to 1996.
-----------------------------------------------------------------------------------------------
Hubert L. Mountz Assistant Treasurer Vice President, Taxes and Assistant
4680 Wilshire Blvd. Treasurer, FGI since 3/90.
Los Angeles, CA
-----------------------------------------------------------------------------------------------
Link R. Murphy, M.D. Assistant Medical Assistant Medical Director, FNWL since
2500 Farmers Way Director 1983; private practice from 1983 to
Columbus, OH 1999.
-----------------------------------------------------------------------------------------------
C. Paul Patsis President President, FNWL since 5/98; President,
3003 - 77th Ave., S.E. Marketing One from 1989 to 5/98.
Mercer Island, WA
-----------------------------------------------------------------------------------------------
John R. Patton Assistant Vice Assistant Vice President & Secretary,
3003 - 77th Ave., S.E. President & FNWL since 11/98; Life Claims Manager,
Mercer Island, WA Secretary FNWL from 3/85 to 11/98.
-----------------------------------------------------------------------------------------------
Christopher R. Pflug Assistant Secretary Corporate Counsel & Assistant
4680 Wilshire Blvd. Secretary, FGI since 12/95.
Los Angeles, CA
-----------------------------------------------------------------------------------------------
James I. Randolph Vice President & Vice President Insurance Operations
3003 - 77th Ave., S.E. Assistant Secretary and Assistant Secretary, FNWL since
Mercer Island, WA 9/91.
-----------------------------------------------------------------------------------------------
Maryann M. Seltzer Assistant Secretary Senior Corporate Counsel, FGI since
4680 Wilshire Blvd. 1973.
Los Angeles, CA
-----------------------------------------------------------------------------------------------
</TABLE>
We hold the assets of the variable account physically segregated and
apart from our general account and any other separate investment accounts. We
maintain records of all purchases and sales of portfolio shares by each of the
subaccounts. Additional protection for the assets of the variable account is
provided by a blanket fidelity bond issued by Federal Insurance Company to
Farmers Group, Inc. providing aggregate coverage of $30,000,000 (subject to a
$500,000 deductible) for all officers and employees of Farmers Group, Inc.
56
<PAGE> 61
ILLUSTRATIONS
================================================================================
The following illustrations have been prepared to help show how certain
values under a sample Policy would change with different hypothetical rates of
investment performance over an extended period of time. The illustrations show
Contract Value and Surrender Value as well as death benefits. The tables
illustrate how Contract Values and Surrender Values, which reflect all
applicable charges and deductions, and death benefits of the Policy at the
illustrated age, would vary over time if the return on the assets of the
portfolios was a uniform, gross, after-tax, annual rate of 0%, 6% or 12%. The
tables assume that an annual premium of $1,000 was paid on the first day of each
Policy year. The tables also show how the Policy would operate if premiums
accumulated at 5% interest.
The Contract Values, Surrender Values and Death Benefits shown in the
tables reflect the fact that the hypothetical net rate of return for each
subaccount is lower than the gross rate of return on the portfolios as a result
of expenses and fees incurred by the portfolios and the variable account. The
illustrations assume that the assets in the portfolios are subject to an annual
expense ratio of 0.8092% of the average daily net assets. This annual expense
ratio assumes an equal allocation of values between all subaccounts and is based
on the arithmetic average of the expense ratios of each of the portfolios for
the last fiscal year and takes into account current expense reimbursement
arrangements. The illustrations reflect the fee waivers and expense
reimbursements in effect during fiscal year 1999 for the PIMCO Low Duration Bond
Portfolio and the PIMCO Foreign Bond Portfolio. Without these waivers and
reimbursements, total annual expenses for these portfolios would have been 0.78%
and 1.25%, respectively, and the illustrations would have assumed that the
assets in the portfolios were subject to an annual expense ratio of 0.8325%. For
information on portfolio expenses, see the Portfolio Expense Table above.
The illustrations also take into account the daily charge for assuming
mortality and expense risks against each subaccounts. This charge is equivalent
to an annual charge of 0.90% of the average daily net assets in the subaccounts.
The illustrations also take into account the percent of premium factor, the
monthly cost of insurance charge, the monthly administration charge, and the
surrender charges where applicable.
Taking into consideration the assumed annual average portfolio expenses
of 0.8092% and the 0.90% annual charge for mortality and expense risks, the
gross annual rates of return of 0%, 6% and 12% correspond to approximate net
annual rates of return of -1.71%, 4.29% and 10.29%.
The tables illustrating Policy values are based on the assumptions that
the owner pays the premiums indicated, does not increase your principal sum, and
does not make any withdrawals or take any Policy loans. The values under the
Policy will be different from those shown even if the portfolio returns average
0%, 6% or 12%, but fluctuate over and under those averages throughout the years
shown.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN 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 Contract 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 withdrawal
history.
57
<PAGE> 62
Separate illustrations on each of the following pages reflect our
current cost of insurance and administration charges and the higher guaranteed
maximum cost of insurance and administration charges that we have the
contractual right to charge. The illustrations assume no charges for Federal or
state taxes or charges for supplemental benefits.
These illustrations assume the level death benefit option (Option B) is
chosen. The illustrated death benefits increase in certain years, reflecting
current Internal Revenue Code requirements.
Zero values in the illustration indicate the Policy lapses unless
premiums higher than those illustrated are paid.
These illustrations are based on Farmers' 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.
58
<PAGE> 63
Flexible Premium Variable Life Insurance Policy
Male Standard Non-Nicotine, Annual Premium, Issue Age 35
$100,000 Initial Death Benefit
(Level Death Benefit (Option B) Selected)
Hypothetical Values Based on Current Cost of Insurance and
Current Administration Charge
<TABLE>
<CAPTION>
Premiums 0% Hypothetical Gross 6% Hypothetical Gross 12% Hypothetical Gross
Paid Plus Investment Return Investment Return Investment Return
Policy Interest Contract Surrender Death Contract Surrender Death Contract Surrender Death
Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,050 725 32 100,000 775 82 100,000 825 132 100,000
2 2,153 1,432 664 100,000 1,578 810 100,000 1,729 961 100,000
3 3,310 2,118 1,275 100,000 2,404 1,561 100,000 2,716 1,873 100,000
4 4,526 2,781 1,863 100,000 3,256 2,338 100,000 3,792 2,874 100,000
5 5,802 3,423 2,430 100,000 4,134 3,141 100,000 4,969 3,976 100,000
6 7,142 4,038 3,077 100,000 5,034 4,073 100,000 6,251 5,290 100,000
7 8,549 4,628 3,714 100,000 5,957 5,043 100,000 7,649 6,735 100,000
8 10,027 5,192 4,339 100,000 6,903 6,050 100,000 9,176 8,323 100,000
9 11,578 5,731 4,955 100,000 7,877 7,101 100,000 10,847 10,071 100,000
10 13,207 6,262 5,578 100,000 8,893 8,209 100,000 12,692 12,008 100,000
11 14,917 6,784 6,207 100,000 9,955 9,378 100,000 14,730 14,153 100,000
12 16,713 7,300 6,845 100,000 11,066 10,611 100,000 16,984 16,529 100,000
13 18,599 7,808 7,489 100,000 12,228 11,909 100,000 19,474 19,155 100,000
14 20,579 8,309 8,142 100,000 13,442 13,275 100,000 22,225 22,058 100,000
15 22,657 8,803 8,803 100,000 14,711 14,711 100,000 25,266 25,266 100,000
16 24,840 9,290 9,290 100,000 16,038 16,038 100,000 28,626 28,626 100,000
17 27,132 9,770 9,770 100,000 17,426 17,426 100,000 32,340 32,340 100,000
18 29,539 10,243 10,243 100,000 18,876 18,876 100,000 36,444 36,444 100,000
19 32,066 10,710 10,710 100,000 20,393 20,393 100,000 40,980 40,980 100,000
20 34,719 11,170 11,170 100,000 21,978 21,978 100,000 45,992 45,992 100,000
25 50,113 11,139 11,139 100,000 28,916 28,916 100,000 78,878 78,878 105,697
30 69,761 8,881 8,881 100,000 35,895 35,895 100,000 132,113 132,113 161,178
35 94,836 2,611 2,611 100,000 42,056 42,056 100,000 216,609 216,609 251,267
40 126,840 0 0 0 45,868 45,868 100,000 351,370 351,370 375,966
45 167,685 0 0 0 43,686 43,686 100,000 568,572 568,572 597,001
</TABLE>
59
<PAGE> 64
Flexible Premium Variable Life Insurance Policy
Male Standard Non-Nicotine, Annual Premium, Issue Age 35
$100,000 Initial Death Benefit
(Level Death Benefit (Option B) Selected)
Hypothetical Values Based on Maximum Cost of Insurance and
Maximum Administration Charge
<TABLE>
<CAPTION>
Premiums 0% Hypothetical Gross 6% Hypothetical Gross 12% Hypothetical Gross
Paid Plus Investment Return Investment Return Investment Return
Policy Interest Contract Surrender Death Contract Surrender Death Contract Surrender Death
Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,050 684 0 100,000 733 40 100,000 782 89 100,000
2 2,153 1,349 581 100,000 1,489 721 100,000 1,636 868 100,000
3 3,310 1,992 1,149 100,000 2,267 1,424 100,000 2,566 1,723 100,000
4 4,526 2,613 1,695 100,000 3,067 2,149 100,000 3,580 2,662 100,000
5 5,802 3,212 2,219 100,000 3,889 2,896 100,000 4,686 3,693 100,000
6 7,142 3,785 2,824 100,000 4,731 3,770 100,000 5,890 4,929 100,000
7 8,549 4,333 3,419 100,000 5,594 4,680 100,000 7,203 6,289 100,000
8 10,027 4,856 4,003 100,000 6,478 5,625 100,000 8,635 7,782 100,000
9 11,578 5,351 4,575 100,000 7,382 6,606 100,000 10,198 9,422 100,000
10 13,207 5,818 5,134 100,000 8,305 7,621 100,000 11,903 11,219 100,000
11 14,917 6,255 5,678 100,000 9,247 8,670 100,000 13,765 13,188 100,000
12 16,713 6,659 6,204 100,000 10,207 9,752 100,000 15,799 15,344 100,000
13 18,599 7,031 6,712 100,000 11,183 10,864 100,000 18,022 17,703 100,000
14 20,579 7,368 7,201 100,000 12,176 12,009 100,000 20,454 20,287 100,000
15 22,657 7,668 7,668 100,000 13,184 13,184 100,000 23,116 23,116 100,000
16 24,840 7,927 7,927 100,000 14,204 14,204 100,000 26,031 26,031 100,000
17 27,132 8,141 8,141 100,000 15,231 15,231 100,000 29,224 29,224 100,000
18 29,539 8,303 8,303 100,000 16,262 16,262 100,000 32,724 32,724 100,000
19 32,066 8,407 8,407 100,000 17,291 17,291 100,000 36,561 36,561 100,000
20 34,719 8,449 8,449 100,000 18,314 18,314 100,000 40,774 40,774 100,000
25 50,113 7,487 7,487 100,000 23,146 23,146 100,000 69,243 69,243 100,000
30 69,761 3,602 3,602 100,000 26,711 26,711 100,000 115,907 115,907 141,407
35 94,836 0 0 0 26,946 26,946 100,000 189,647 189,647 219,990
40 126,840 0 0 0 19,210 19,210 100,000 306,702 306,702 328,172
45 167,685 0 0 0 0 0 0 494,988 494,988 519,738
</TABLE>
60
<PAGE> 65
APPENDIX A - GUARANTEED MAXIMUM COST OF INSURANCE RATES
--------------------------------------------------------------------------------
GUARANTEED MAXIMUM MONTHLY
COST OF INSURANCE RATES FOR A MALE NON-SMOKER (ISSUE AGES 21-80)*
Per $1000 of Risk Insurance Amount
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
Cost of Cost of Cost of Cost of Cost of Cost of
Attained Insurance Attained Insurance Attained Insurance Attained Insurance Attained Insurance Attained Insurance
Age Rate Age Rate Age Rate Age Rate Age Rate Age Rate
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
21 0.13788 35 0.14370 49 0.39205 62 1.35058 75 5.13652 88 16.39051
22 0.13539 36 0.15117 50 0.42611 63 1.50009 76 5.66811 89 17.59988
23 0.13207 37 0.16114 51 0.46514 64 1.66621 77 6.22379 90 18.85909
24 0.12875 38 0.17194 52 0.51000 65 1.84812 78 6.80688 91 20.19721
25 0.12459 39 0.18357 53 0.56150 66 2.04497 79 7.43566 92 21.66408
26 0.12210 40 0.19769 54 0.61881 67 2.25096 80 8.13005 93 23.40255
27 0.12044 41 0.21264 55 0.68276 68 2.48520 81 8.90834 94 25.73492
28 0.11961 42 0.22842 56 0.75254 69 2.73937 82 9.78630 95 29.22599
29 0.11961 43 0.24586 57 0.82646 70 3.02676 83 10.75978 96 34.96802
30 0.12044 44 0.26497 58 0.90869 71 3.35485 84 11.80967 97 44.93622
31 0.12293 45 0.28656 59 1.00089 72 3.73361 85 12.91190 98 61.89321
32 0.12625 46 0.30982 60 1.10389 73 4.16221 86 14.05233 99 83.06141
33 0.13124 47 0.33474 61 1.21851 74 4.63317 87 15.21353 100-109 0.00000
34 0.13705 48 0.36215
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Different rates apply for male smokers, all females, and all juveniles
(issue ages 0-20).
If the insured is in a special premium class, the guaranteed maximum
monthly cost of insurance rate will be the rate shown in the table times the
special premium class rating factor shown on the Policy Specifications page.
A-1
<PAGE> 66
APPENDIX B - TABLE OF SURRENDER CHARGE FACTORS
MALE NONSMOKERS (PREFERRED & STANDARD)
Number of Full Policy Years Completed Since the Issue Date
<TABLE>
<CAPTION>
Issue 15 or
Age 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 more
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
21 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
22 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
23 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
24 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
25 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
26 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
27 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
28 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
29 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
30 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
31 5.91 5.91 5.91 5.91 5.91 5.32 4.73 4.14 3.55 2.96 2.36 1.77 1.18 0.59 0.00 0.00
32 5.98 5.98 5.98 5.98 5.98 5.38 4.78 4.19 3.59 2.99 2.39 1.79 1.20 0.60 0.00 0.00
33 6.01 6.01 6.01 6.01 6.01 5.41 4.81 4.21 3.61 3.01 2.41 1.80 1.20 0.60 0.00 0.00
34 6.11 6.11 6.11 6.11 6.11 5.50 4.89 4.28 3.67 3.06 2.45 1.83 1.22 0.61 0.00 0.00
35 6.18 6.18 6.18 6.18 6.18 5.56 4.94 4.33 3.71 3.09 2.47 1.85 1.24 0.62 0.00 0.00
36 6.28 6.28 6.28 6.28 6.28 5.66 5.03 4.40 3.77 3.14 2.51 1.89 1.26 0.63 0.00 0.00
37 6.32 6.32 6.32 6.32 6.32 5.68 5.05 4.42 3.79 3.16 2.53 1.89 1.26 0.63 0.00 0.00
38 6.42 6.42 6.42 6.42 6.42 5.78 5.13 4.49 3.85 3.21 2.57 1.93 1.28 0.64 0.00 0.00
39 6.52 6.52 6.52 6.52 6.52 5.87 5.22 4.56 3.91 3.26 2.61 1.96 1.30 0.65 0.00 0.00
40 6.62 6.62 6.62 6.62 6.62 5.96 5.30 4.63 3.97 3.31 2.65 1.99 1.32 0.66 0.00 0.00
41 6.76 6.76 6.76 6.76 6.76 6.08 5.40 4.73 4.05 3.38 2.70 2.03 1.35 0.68 0.00 0.00
42 6.82 6.82 6.82 6.82 6.82 6.14 5.46 4.78 4.09 3.41 2.73 2.05 1.36 0.68 0.00 0.00
43 6.99 6.99 6.99 6.99 6.99 6.29 5.59 4.89 4.19 3.50 2.80 2.10 1.40 0.70 0.00 0.00
44 7.13 7.13 7.13 7.13 7.13 6.41 5.70 4.99 4.28 3.56 2.85 2.14 1.43 0.71 0.00 0.00
45 7.30 7.30 7.30 7.30 7.30 6.57 5.84 5.11 4.38 3.65 2.92 2.19 1.46 0.73 0.00 0.00
46 7.46 7.46 7.46 7.46 7.46 6.72 5.97 5.23 4.48 3.73 2.99 2.24 1.49 0.75 0.00 0.00
47 7.67 7.67 7.67 7.67 7.67 6.90 6.13 5.37 4.60 3.83 3.07 2.30 1.53 0.77 0.00 0.00
48 7.87 7.87 7.87 7.87 7.87 7.08 6.30 5.51 4.72 3.93 3.15 2.36 1.57 0.79 0.00 0.00
49 8.14 8.14 8.14 8.14 8.14 7.33 6.51 5.70 4.88 4.07 3.26 2.44 1.63 0.81 0.00 0.00
50 8.38 8.38 8.38 8.38 8.38 7.54 6.70 5.86 5.03 4.19 3.35 2.51 1.68 0.84 0.00 0.00
51 8.65 8.65 8.65 8.65 8.65 7.78 6.92 6.05 5.19 4.32 3.46 2.59 1.73 0.86 0.00 0.00
52 8.95 8.95 8.95 8.95 8.95 8.05 7.16 6.26 5.37 4.47 3.58 2.68 1.79 0.89 0.00 0.00
53 9.29 9.29 9.29 9.29 9.29 8.36 7.43 6.50 5.57 4.64 3.71 2.79 1.86 0.93 0.00 0.00
54 9.62 9.62 9.62 9.62 9.62 8.66 7.70 6.74 5.77 4.81 3.85 2.89 1.92 0.96 0.00 0.00
55 10.06 10.06 10.06 10.06 10.06 9.06 8.05 7.04 6.04 5.03 4.03 3.02 2.01 1.01 0.00 0.00
56 10.47 10.47 10.47 10.47 10.47 9.42 8.37 7.33 6.28 5.23 4.19 3.14 2.09 1.05 0.00 0.00
57 10.91 10.91 10.91 10.91 10.91 9.82 8.72 7.63 6.54 5.45 4.36 3.27 2.18 1.09 0.00 0.00
58 11.41 11.41 11.41 11.41 11.41 10.27 9.13 7.99 6.85 5.71 4.57 3.42 2.28 1.14 0.00 0.00
59 11.99 11.99 11.99 11.99 11.99 10.79 9.59 8.39 7.19 5.99 4.79 3.60 2.40 1.20 0.00 0.00
60 12.56 12.56 12.56 12.56 12.56 11.30 10.05 8.79 7.54 6.28 5.02 3.77 2.51 1.26 0.00 0.00
61 13.17 13.17 13.17 13.17 13.17 11.85 10.53 9.22 7.90 6.58 5.27 3.95 2.63 1.32 0.00 0.00
62 13.88 13.88 13.88 13.88 13.88 12.49 11.10 9.71 8.33 6.94 5.55 4.16 2.78 1.39 0.00 0.00
63 14.62 14.62 14.62 14.62 14.62 13.16 11.70 10.23 8.77 7.31 5.85 4.39 2.92 1.46 0.00 0.00
64 15.43 15.43 15.43 15.43 15.43 13.89 12.34 10.80 9.26 7.71 6.17 4.63 3.09 1.54 0.00 0.00
65 16.25 16.25 16.25 16.25 16.25 14.63 13.00 11.38 9.75 8.13 6.50 4.88 3.25 1.63 0.00 0.00
66 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
67 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
68 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
69 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
70 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
71 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
72 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
</TABLE>
<PAGE> 67
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
73 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
74 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
75 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
76 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
77 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
78 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
79 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
80 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
</TABLE>
FEMALE NONSMOKERS (PREFERRED & STANDARD)
Number of Full Policy Years Completed Since the Issue Date
<TABLE>
<CAPTION>
Issue 15 or
Age 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 more
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
21 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
22 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
23 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
24 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
25 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
26 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
27 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
28 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
29 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
30 5.74 5.74 5.74 5.74 5.74 5.17 4.59 4.02 3.45 2.87 2.30 1.72 1.15 0.57 0.00 0.00
31 5.78 5.78 5.78 5.78 5.78 5.20 4.62 4.04 3.47 2.89 2.31 1.73 1.16 0.58 0.00 0.00
32 5.81 5.81 5.81 5.81 5.81 5.23 4.65 4.07 3.49 2.91 2.32 1.74 1.16 0.58 0.00 0.00
33 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
34 5.91 5.91 5.91 5.91 5.91 5.32 4.73 4.14 3.55 2.96 2.36 1.77 1.18 0.59 0.00 0.00
35 5.95 5.95 5.95 5.95 5.95 5.35 4.76 4.16 3.57 2.97 2.38 1.78 1.19 0.59 0.00 0.00
36 5.98 5.98 5.98 5.98 5.98 5.38 4.78 4.19 3.59 2.99 2.39 1.79 1.20 0.60 0.00 0.00
37 6.08 6.08 6.08 6.08 6.08 5.47 4.86 4.26 3.65 3.04 2.43 1.82 1.22 0.61 0.00 0.00
38 6.11 6.11 6.11 6.11 6.11 5.50 4.89 4.28 3.67 3.06 2.45 1.83 1.22 0.61 0.00 0.00
39 6.18 6.18 6.18 6.18 6.18 5.56 4.94 4.33 3.71 3.09 2.47 1.85 1.24 0.62 0.00 0.00
40 6.28 6.28 6.28 6.28 6.28 5.66 5.03 4.40 3.77 3.14 2.51 1.89 1.26 0.63 0.00 0.00
41 6.35 6.35 6.35 6.35 6.35 5.72 5.08 4.45 3.81 3.18 2.54 1.91 1.27 0.64 0.00 0.00
42 6.42 6.42 6.42 6.42 6.42 5.78 5.13 4.49 3.85 3.21 2.57 1.93 1.28 0.64 0.00 0.00
43 6.49 6.49 6.49 6.49 6.49 5.84 5.19 4.54 3.89 3.24 2.59 1.95 1.30 0.65 0.00 0.00
44 6.62 6.62 6.62 6.62 6.62 5.96 5.30 4.63 3.97 3.31 2.65 1.99 1.32 0.66 0.00 0.00
45 6.69 6.69 6.69 6.69 6.69 6.02 5.35 4.68 4.01 3.34 2.68 2.01 1.34 0.67 0.00 0.00
46 6.82 6.82 6.82 6.82 6.82 6.14 5.46 4.78 4.09 3.41 2.73 2.05 1.36 0.68 0.00 0.00
47 6.92 6.92 6.92 6.92 6.92 6.23 5.54 4.85 4.15 3.46 2.77 2.08 1.38 0.69 0.00 0.00
48 7.09 7.09 7.09 7.09 7.09 6.38 5.67 4.97 4.26 3.55 2.84 2.13 1.42 0.71 0.00 0.00
49 7.19 7.19 7.19 7.19 7.19 6.47 5.76 5.04 4.32 3.60 2.88 2.16 1.44 0.72 0.00 0.00
50 7.36 7.36 7.36 7.36 7.36 6.63 5.89 5.15 4.42 3.68 2.95 2.21 1.47 0.74 0.00 0.00
51 7.53 7.53 7.53 7.53 7.53 6.78 6.02 5.27 4.52 3.77 3.01 2.26 1.51 0.75 0.00 0.00
52 7.70 7.70 7.70 7.70 7.70 6.93 6.16 5.39 4.62 3.85 3.08 2.31 1.54 0.77 0.00 0.00
53 7.90 7.90 7.90 7.90 7.90 7.11 6.32 5.53 4.74 3.95 3.16 2.37 1.58 0.79 0.00 0.00
54 8.14 8.14 8.14 8.14 8.14 7.33 6.51 5.70 4.88 4.07 3.26 2.44 1.63 0.81 0.00 0.00
55 8.38 8.38 8.38 8.38 8.38 7.54 6.70 5.86 5.03 4.19 3.35 2.51 1.68 0.84 0.00 0.00
56 8.58 8.58 8.58 8.58 8.58 7.72 6.86 6.01 5.15 4.29 3.43 2.57 1.72 0.86 0.00 0.00
57 8.88 8.88 8.88 8.88 8.88 7.99 7.10 6.22 5.33 4.44 3.55 2.66 1.78 0.89 0.00 0.00
58 9.12 9.12 9.12 9.12 9.12 8.21 7.29 6.38 5.47 4.56 3.65 2.74 1.82 0.91 0.00 0.00
59 9.46 9.46 9.46 9.46 9.46 8.51 7.56 6.62 5.67 4.73 3.78 2.84 1.89 0.95 0.00 0.00
60 9.79 9.79 9.79 9.79 9.79 8.81 7.83 6.86 5.88 4.90 3.92 2.94 1.96 0.98 0.00 0.00
61 10.10 10.10 10.10 10.10 10.10 9.09 8.08 7.07 6.06 5.05 4.04 3.03 2.02 1.01 0.00 0.00
62 10.40 10.40 10.40 10.40 10.40 9.36 8.32 7.28 6.24 5.20 4.16 3.12 2.08 1.04 0.00 0.00
63 10.77 10.77 10.77 10.77 10.77 9.69 8.62 7.54 6.46 5.39 4.31 3.23 2.15 1.08 0.00 0.00
64 11.14 11.14 11.14 11.14 11.14 10.03 8.91 7.80 6.69 5.57 4.46 3.34 2.23 1.11 0.00 0.00
65 11.58 11.58 11.58 11.58 11.58 10.42 9.26 8.11 6.95 5.79 4.63 3.47 2.32 1.16 0.00 0.00
66 12.91 12.91 12.91 11.62 10.33 9.04 7.75 6.46 5.16 3.87 2.58 1.94 1.29 0.65 0.00 0.00
67 13.66 13.66 13.66 12.30 10.93 9.56 8.20 6.83 5.46 4.10 2.73 2.05 1.37 0.68 0.00 0.00
68 14.41 14.41 14.41 12.97 11.53 10.09 8.65 7.21 5.76 4.32 2.88 2.16 1.44 0.72 0.00 0.00
69 15.28 15.28 15.28 13.75 12.22 10.69 9.17 7.64 6.11 4.58 3.06 2.29 1.53 0.76 0.00 0.00
</TABLE>
<PAGE> 68
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
70 16.21 16.21 16.21 14.59 12.97 11.35 9.73 8.11 6.48 4.86 3.24 2.43 1.62 0.81 0.00 0.00
71 17.41 17.41 17.41 15.67 13.93 12.19 10.45 8.71 6.96 5.22 3.48 2.61 1.74 0.87 0.00 0.00
72 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
73 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
74 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
75 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
76 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
77 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
78 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
79 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
80 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
</TABLE>
MALE SMOKERS
Number of Full Policy Years Completed Since the Issue Date
<TABLE>
<CAPTION>
Issue 15 or
Age 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 more
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
1 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
2 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
3 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
4 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
5 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
6 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
7 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
8 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
9 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
10 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
11 5.38 5.38 5.38 5.38 5.38 4.85 4.31 3.77 3.23 2.69 2.15 1.62 1.08 0.54 0.00 0.00
12 5.43 5.43 5.43 5.43 5.43 4.89 4.34 3.80 3.26 2.71 2.17 1.63 1.09 0.54 0.00 0.00
13 5.50 5.50 5.50 5.50 5.50 4.95 4.40 3.85 3.30 2.75 2.20 1.65 1.10 0.55 0.00 0.00
14 5.56 5.56 5.56 5.56 5.56 5.01 4.45 3.89 3.34 2.78 2.23 1.67 1.11 0.56 0.00 0.00
15 5.84 5.84 5.84 5.84 5.84 5.26 4.68 4.09 3.51 2.92 2.34 1.75 1.17 0.58 0.00 0.00
16 5.88 5.88 5.88 5.88 5.88 5.29 4.70 4.12 3.53 2.94 2.35 1.76 1.18 0.59 0.00 0.00
17 5.90 5.90 5.90 5.90 5.90 5.31 4.72 4.13 3.54 2.95 2.36 1.77 1.18 0.59 0.00 0.00
18 5.93 5.93 5.93 5.93 5.93 5.34 4.75 4.15 3.56 2.97 2.37 1.78 1.19 0.59 0.00 0.00
19 5.96 5.96 5.96 5.96 5.96 5.36 4.76 4.17 3.57 2.98 2.38 1.79 1.19 0.60 0.00 0.00
20 5.99 5.99 5.99 5.99 5.99 5.39 4.79 4.19 3.59 3.00 2.40 1.80 1.20 0.60 0.00 0.00
21 6.01 6.01 6.01 6.01 6.01 5.41 4.81 4.21 3.61 3.01 2.41 1.80 1.20 0.60 0.00 0.00
22 6.05 6.05 6.05 6.05 6.05 5.44 4.84 4.23 3.63 3.02 2.42 1.81 1.21 0.60 0.00 0.00
23 6.07 6.07 6.07 6.07 6.07 5.46 4.86 4.25 3.64 3.03 2.43 1.82 1.21 0.61 0.00 0.00
24 6.10 6.10 6.10 6.10 6.10 5.49 4.88 4.27 3.66 3.05 2.44 1.83 1.22 0.61 0.00 0.00
25 6.13 6.13 6.13 6.13 6.13 5.51 4.90 4.29 3.68 3.06 2.45 1.84 1.23 0.61 0.00 0.00
26 6.15 6.15 6.15 6.15 6.15 5.53 4.92 4.30 3.69 3.07 2.46 1.84 1.23 0.61 0.00 0.00
27 6.18 6.18 6.18 6.18 6.18 5.56 4.94 4.33 3.71 3.09 2.47 1.85 1.24 0.62 0.00 0.00
28 6.20 6.20 6.20 6.20 6.20 5.58 4.96 4.34 3.72 3.10 2.48 1.86 1.24 0.62 0.00 0.00
29 6.24 6.24 6.24 6.24 6.24 5.61 4.99 4.37 3.74 3.12 2.50 1.87 1.25 0.62 0.00 0.00
30 6.26 6.26 6.26 6.26 6.26 5.63 5.01 4.38 3.76 3.13 2.50 1.88 1.25 0.63 0.00 0.00
31 6.40 6.40 6.40 6.40 6.40 5.76 5.12 4.48 3.84 3.20 2.56 1.92 1.28 0.64 0.00 0.00
32 6.53 6.53 6.53 6.53 6.53 5.88 5.22 4.57 3.92 3.27 2.61 1.96 1.31 0.65 0.00 0.00
33 6.62 6.62 6.62 6.62 6.62 5.96 5.30 4.63 3.97 3.31 2.65 1.99 1.32 0.66 0.00 0.00
34 6.82 6.82 6.82 6.82 6.82 6.14 5.46 4.78 4.09 3.41 2.73 2.05 1.36 0.68 0.00 0.00
35 6.97 6.97 6.97 6.97 6.97 6.27 5.58 4.88 4.18 3.48 2.79 2.09 1.39 0.70 0.00 0.00
36 7.18 7.18 7.18 7.18 7.18 6.47 5.75 5.03 4.31 3.59 2.87 2.16 1.44 0.72 0.00 0.00
37 7.28 7.28 7.28 7.28 7.28 6.56 5.83 5.10 4.37 3.64 2.91 2.19 1.46 0.73 0.00 0.00
38 7.51 7.51 7.51 7.51 7.51 6.76 6.01 5.26 4.51 3.75 3.00 2.25 1.50 0.75 0.00 0.00
39 7.73 7.73 7.73 7.73 7.73 6.96 6.19 5.41 4.64 3.87 3.09 2.32 1.55 0.77 0.00 0.00
40 7.97 7.97 7.97 7.97 7.97 7.17 6.38 5.58 4.78 3.99 3.19 2.39 1.59 0.80 0.00 0.00
41 8.27 8.27 8.27 8.27 8.27 7.45 6.62 5.79 4.96 4.14 3.31 2.48 1.65 0.83 0.00 0.00
42 8.47 8.47 8.47 8.47 8.47 7.62 6.77 5.93 5.08 4.23 3.39 2.54 1.69 0.85 0.00 0.00
43 8.85 8.85 8.85 8.85 8.85 7.96 7.08 6.19 5.31 4.42 3.54 2.65 1.77 0.88 0.00 0.00
44 9.19 9.19 9.19 9.19 9.19 8.27 7.35 6.43 5.51 4.59 3.67 2.76 1.84 0.92 0.00 0.00
</TABLE>
<PAGE> 69
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
45 9.59 9.59 9.59 9.59 9.59 8.63 7.67 6.71 5.75 4.80 3.84 2.88 1.92 0.96 0.00 0.00
46 9.85 9.85 9.85 9.85 9.85 8.86 7.88 6.89 5.91 4.92 3.94 2.95 1.97 0.98 0.00 0.00
47 10.15 10.15 10.15 10.15 10.15 9.14 8.12 7.11 6.09 5.08 4.06 3.05 2.03 1.02 0.00 0.00
48 10.46 10.46 10.46 10.46 10.46 9.41 8.36 7.32 6.27 5.23 4.18 3.14 2.09 1.05 0.00 0.00
49 10.86 10.86 10.86 10.86 10.86 9.77 8.69 7.60 6.52 5.43 4.34 3.26 2.17 1.09 0.00 0.00
50 11.19 11.19 11.19 11.19 11.19 10.07 8.95 7.83 6.71 5.59 4.48 3.36 2.24 1.12 0.00 0.00
51 11.56 11.56 11.56 11.56 11.56 10.40 9.25 8.09 6.94 5.78 4.62 3.47 2.31 1.16 0.00 0.00
52 11.98 11.98 11.98 11.98 11.98 10.78 9.58 8.38 7.19 5.99 4.79 3.59 2.40 1.20 0.00 0.00
53 12.43 12.43 12.43 12.43 12.43 11.18 9.94 8.70 7.46 6.21 4.97 3.73 2.49 1.24 0.00 0.00
54 12.86 12.86 12.86 12.86 12.86 11.58 10.29 9.01 7.72 6.43 5.15 3.86 2.57 1.29 0.00 0.00
55 13.44 13.44 13.44 13.44 13.44 12.09 10.75 9.41 8.06 6.72 5.38 4.03 2.69 1.34 0.00 0.00
56 13.93 13.93 13.93 13.93 13.93 12.54 11.15 9.75 8.36 6.97 5.57 4.18 2.79 1.39 0.00 0.00
57 14.45 14.45 14.45 14.45 14.45 13.01 11.56 10.12 8.67 7.23 5.78 4.34 2.89 1.45 0.00 0.00
58 15.04 15.04 15.04 15.04 15.04 13.54 12.03 10.53 9.03 7.52 6.02 4.51 3.01 1.50 0.00 0.00
59 15.71 15.71 15.71 15.71 15.71 14.14 12.57 11.00 9.43 7.86 6.28 4.71 3.14 1.57 0.00 0.00
60 16.25 16.25 16.25 16.25 16.25 14.63 13.00 11.38 9.75 8.13 6.50 4.88 3.25 1.63 0.00 0.00
61 16.25 16.25 16.25 16.25 16.25 14.63 13.00 11.38 9.75 8.13 6.50 4.88 3.25 1.63 0.00 0.00
62 16.25 16.25 16.25 16.25 16.25 14.63 13.00 11.38 9.75 8.13 6.50 4.88 3.25 1.63 0.00 0.00
63 16.25 16.25 16.25 16.25 16.25 14.63 13.00 11.38 9.75 8.13 6.50 4.88 3.25 1.63 0.00 0.00
64 16.25 16.25 16.25 16.25 16.25 14.63 13.00 11.38 9.75 8.13 6.50 4.88 3.25 1.63 0.00 0.00
65 16.25 16.25 16.25 16.25 16.25 14.63 13.00 11.38 9.75 8.13 6.50 4.88 3.25 1.63 0.00 0.00
66 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
67 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
68 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
69 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
70 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
71 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
72 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
73 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
74 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
75 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
76 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
77 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
78 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
79 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
80 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
</TABLE>
FEMALE SMOKERS
Number of Full Policy Years Completed Since the Issue Date
<TABLE>
<CAPTION>
Issue 15 or
Age 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 more
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
1 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
2 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
3 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
4 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
5 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
6 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
7 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
8 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
9 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
10 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
11 5.32 5.32 5.32 5.32 5.32 4.78 4.25 3.72 3.19 2.66 2.13 1.59 1.06 0.53 0.00 0.00
12 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
13 5.36 5.36 5.36 5.36 5.36 4.82 4.29 3.75 3.22 2.68 2.14 1.61 1.07 0.54 0.00 0.00
14 5.38 5.38 5.38 5.38 5.38 4.85 4.31 3.77 3.23 2.69 2.15 1.62 1.08 0.54 0.00 0.00
15 5.61 5.61 5.61 5.61 5.61 5.05 4.49 3.93 3.37 2.80 2.24 1.68 1.12 0.56 0.00 0.00
16 5.63 5.63 5.63 5.63 5.63 5.07 4.50 3.94 3.38 2.82 2.25 1.69 1.13 0.56 0.00 0.00
17 5.69 5.69 5.69 5.69 5.69 5.12 4.55 3.98 3.41 2.84 2.27 1.71 1.14 0.57 0.00 0.00
18 5.71 5.71 5.71 5.71 5.71 5.14 4.57 4.00 3.43 2.85 2.28 1.71 1.14 0.57 0.00 0.00
19 5.77 5.77 5.77 5.77 5.77 5.19 4.61 4.04 3.46 2.88 2.31 1.73 1.15 0.58 0.00 0.00
</TABLE>
<PAGE> 70
<TABLE>
<CAPTION>
Issue 15 or
Age 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 more
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
20 5.79 5.79 5.79 5.79 5.79 5.21 4.63 4.05 3.47 2.89 2.32 1.74 1.16 0.58 0.00 0.00
21 5.89 5.89 5.89 5.89 5.89 5.30 4.71 4.12 3.53 2.94 2.36 1.77 1.18 0.59 0.00 0.00
22 5.91 5.91 5.91 5.91 5.91 5.32 4.73 4.14 3.55 2.96 2.36 1.77 1.18 0.59 0.00 0.00
23 5.95 5.95 5.95 5.95 5.95 5.35 4.76 4.16 3.57 2.97 2.38 1.78 1.19 0.59 0.00 0.00
24 5.97 5.97 5.97 5.97 5.97 5.37 4.77 4.18 3.58 2.98 2.39 1.79 1.19 0.60 0.00 0.00
25 5.99 5.99 5.99 5.99 5.99 5.39 4.79 4.19 3.59 3.00 2.40 1.80 1.20 0.60 0.00 0.00
26 6.01 6.01 6.01 6.01 6.01 5.41 4.81 4.21 3.61 3.01 2.41 1.80 1.20 0.60 0.00 0.00
27 6.04 6.04 6.04 6.04 6.04 5.43 4.83 4.22 3.62 3.02 2.41 1.81 1.21 0.60 0.00 0.00
28 6.07 6.07 6.07 6.07 6.07 5.46 4.86 4.25 3.64 3.03 2.43 1.82 1.21 0.61 0.00 0.00
29 6.09 6.09 6.09 6.09 6.09 5.48 4.87 4.26 3.65 3.05 2.44 1.83 1.22 0.61 0.00 0.00
30 6.11 6.11 6.11 6.11 6.11 5.50 4.89 4.28 3.67 3.06 2.45 1.83 1.22 0.61 0.00 0.00
31 6.19 6.19 6.19 6.19 6.19 5.57 4.95 4.34 3.72 3.10 2.48 1.86 1.24 0.62 0.00 0.00
32 6.27 6.27 6.27 6.27 6.27 5.64 5.02 4.39 3.76 3.14 2.51 1.88 1.25 0.63 0.00 0.00
33 6.35 6.35 6.35 6.35 6.35 5.72 5.08 4.45 3.81 3.18 2.54 1.91 1.27 0.64 0.00 0.00
34 6.49 6.49 6.49 6.49 6.49 5.84 5.19 4.54 3.89 3.24 2.59 1.95 1.30 0.65 0.00 0.00
35 6.58 6.58 6.58 6.58 6.58 5.92 5.26 4.60 3.95 3.29 2.63 1.97 1.32 0.66 0.00 0.00
36 6.67 6.67 6.67 6.67 6.67 6.00 5.33 4.67 4.00 3.33 2.67 2.00 1.33 0.67 0.00 0.00
37 6.87 6.87 6.87 6.87 6.87 6.18 5.49 4.81 4.12 3.43 2.75 2.06 1.37 0.69 0.00 0.00
38 6.97 6.97 6.97 6.97 6.97 6.27 5.58 4.88 4.18 3.48 2.79 2.09 1.39 0.70 0.00 0.00
39 7.13 7.13 7.13 7.13 7.13 6.41 5.70 4.99 4.28 3.56 2.85 2.14 1.43 0.71 0.00 0.00
40 7.35 7.35 7.35 7.35 7.35 6.62 5.88 5.15 4.41 3.68 2.94 2.21 1.47 0.74 0.00 0.00
41 7.52 7.52 7.52 7.52 7.52 6.77 6.02 5.26 4.51 3.76 3.01 2.26 1.50 0.75 0.00 0.00
42 7.69 7.69 7.69 7.69 7.69 6.92 6.15 5.38 4.61 3.84 3.08 2.31 1.54 0.77 0.00 0.00
43 7.87 7.87 7.87 7.87 7.87 7.08 6.30 5.51 4.72 3.93 3.15 2.36 1.57 0.79 0.00 0.00
44 8.18 8.18 8.18 8.18 8.18 7.37 6.55 5.73 4.91 4.09 3.27 2.46 1.64 0.82 0.00 0.00
45 8.38 8.38 8.38 8.38 8.38 7.54 6.70 5.86 5.03 4.19 3.35 2.51 1.68 0.84 0.00 0.00
46 8.59 8.59 8.59 8.59 8.59 7.73 6.87 6.01 5.15 4.29 3.44 2.58 1.72 0.86 0.00 0.00
47 8.72 8.72 8.72 8.72 8.72 7.85 6.98 6.11 5.23 4.36 3.49 2.62 1.74 0.87 0.00 0.00
48 8.97 8.97 8.97 8.97 8.97 8.07 7.18 6.28 5.38 4.49 3.59 2.69 1.79 0.90 0.00 0.00
49 9.10 9.10 9.10 9.10 9.10 8.19 7.28 6.37 5.46 4.55 3.64 2.73 1.82 0.91 0.00 0.00
50 9.33 9.33 9.33 9.33 9.33 8.40 7.46 6.53 5.60 4.67 3.73 2.80 1.87 0.93 0.00 0.00
51 9.56 9.56 9.56 9.56 9.56 8.60 7.64 6.69 5.73 4.78 3.82 2.87 1.91 0.96 0.00 0.00
52 9.77 9.77 9.77 9.77 9.77 8.79 7.82 6.84 5.86 4.89 3.91 2.93 1.95 0.98 0.00 0.00
53 10.03 10.03 10.03 10.03 10.03 9.03 8.02 7.02 6.02 5.01 4.01 3.01 2.01 1.00 0.00 0.00
54 10.33 10.33 10.33 10.33 10.33 9.30 8.27 7.23 6.20 5.17 4.13 3.10 2.07 1.03 0.00 0.00
55 10.63 10.63 10.63 10.63 10.63 9.56 8.50 7.44 6.38 5.31 4.25 3.19 2.13 1.06 0.00 0.00
56 10.84 10.84 10.84 10.84 10.84 9.76 8.67 7.59 6.50 5.42 4.34 3.25 2.17 1.08 0.00 0.00
57 11.21 11.21 11.21 11.21 11.21 10.09 8.97 7.85 6.73 5.61 4.48 3.36 2.24 1.12 0.00 0.00
58 11.45 11.45 11.45 11.45 11.45 10.30 9.16 8.01 6.87 5.72 4.58 3.43 2.29 1.14 0.00 0.00
59 11.83 11.83 11.83 11.83 11.83 10.65 9.46 8.28 7.10 5.91 4.73 3.55 2.37 1.18 0.00 0.00
60 12.19 12.19 12.19 12.19 12.19 10.97 9.75 8.53 7.31 6.09 4.87 3.66 2.44 1.22 0.00 0.00
61 12.47 12.47 12.47 12.47 12.47 11.22 9.98 8.73 7.48 6.24 4.99 3.74 2.49 1.25 0.00 0.00
62 12.74 12.74 12.74 12.74 12.74 11.47 10.19 8.92 7.64 6.37 5.10 3.82 2.55 1.27 0.00 0.00
63 13.08 13.08 13.08 13.08 13.08 11.77 10.46 9.16 7.85 6.54 5.23 3.92 2.62 1.31 0.00 0.00
64 13.39 13.39 13.39 13.39 13.39 12.05 10.71 9.38 8.04 6.70 5.36 4.02 2.68 1.34 0.00 0.00
65 13.78 13.78 13.78 13.78 13.78 12.40 11.02 9.64 8.27 6.89 5.51 4.13 2.76 1.38 0.00 0.00
66 15.29 15.29 15.29 13.76 12.23 10.70 9.17 7.64 6.12 4.59 3.06 2.29 1.53 0.76 0.00 0.00
67 15.98 15.98 15.98 14.38 12.78 11.18 9.59 7.99 6.39 4.79 3.20 2.40 1.60 0.80 0.00 0.00
68 16.61 16.61 16.61 14.95 13.29 11.63 9.97 8.31 6.64 4.98 3.32 2.49 1.66 0.83 0.00 0.00
69 17.33 17.33 17.33 15.59 13.86 12.13 10.40 8.66 6.93 5.20 3.47 2.60 1.73 0.87 0.00 0.00
70 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
71 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
72 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
73 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
74 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
75 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
76 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
77 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
78 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
79 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
80 17.50 17.50 17.50 15.75 14.00 12.25 10.50 8.75 7.00 5.25 3.50 2.63 1.75 0.88 0.00 0.00
</TABLE>
<PAGE> 71
APPENDIX C - FINANCIAL STATEMENTS
================================================================================
FARMERS NEW WORLD LIFE INSURANCE COMPANY
C-1
<PAGE> 72
FARMERS NEW WORLD LIFE
INSURANCE COMPANY
(a wholly owned subsidiary of Farmers Group, Inc.)
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997, AND
INDEPENDENT AUDITORS' REPORT
DELOITTE & TOUCHE LLP
<PAGE> 73
INDEPENDENT AUDITORS' REPORT
Board of Directors
Farmers New World Life Insurance Company
Mercer Island, Washington
We have audited the accompanying balance sheets of Farmers New World Life
Insurance Company (a wholly owned subsidiary of Farmers Group, Inc.) (the
Company) as of December 31, 1999 and 1998, and the related statements of income,
comprehensive income, stockholder's equity, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of Farmers New World Life Insurance Company at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States of America.
February 4, 2000
<PAGE> 74
FARMERS NEW WORLD LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Farmers Group, Inc.)
BALANCE SHEETS (in thousands)
DECEMBER 31, 1999 AND 1998
================================================================================
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ ---------- ----------
<S> <C> <C>
INVESTMENTS (Notes 2 and 3):
Fixed maturities available-for-sale:
Bonds, at fair value (cost: $3,791,785 and $3,510,846) $3,684,255 $3,674,223
Redeemable preferred stocks, at fair value
(cost: $64,176 and $82,090) 64,855 86,662
Equity securities available-for-sale:
Nonredeemable preferred stocks, at fair value
(cost: $1,153 and $1,153) 1,158 1,270
Common stocks, at fair value (cost: $123,567 and $41) 127,556 3
Mortgage loans on real estate, net of allowance for losses 35,834 52,879
Investment real estate, net of accumulated depreciation
and allowance for losses 66,672 59,047
Surplus note of the Exchanges (Note 4) 119,000 119,000
Policy loans 201,687 185,211
Joint ventures 6,662 8,456
S&P 500 call options, at fair value (cost: $19,521 and $11,305) 32,718 14,817
---------- ----------
Total investments 4,340,397 4,201,568
CASH AND CASH EQUIVALENTS 93,035 63,784
ACCRUED INVESTMENT INCOME 53,975 53,263
OTHER RECEIVABLES 18,608 17,558
DEFERRED POLICY ACQUISITION COSTS 550,908 467,248
VALUE OF BUSINESS ACQUIRED (Note 5) 328,718 334,442
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $8,842 and $7,411 14,351 14,379
OTHER ASSETS:
Securities lending collateral (Note 6) 262,425 461,801
Other assets 3,740 2,298
---------- ----------
Total other assets 266,165 464,099
---------- ----------
TOTAL $5,666,157 $5,616,341
========== ==========
</TABLE>
See notes to financial statements.
<PAGE> 75
================================================================================
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1999 1998
------------------------------------ ----------- -----------
<S> <C> <C>
POLICY LIABILITIES AND ACCRUALS:
Future policy benefits $ 3,412,452 $ 3,184,248
Policy claims (Note 7) 28,396 26,177
----------- -----------
Total policy liabilities and accruals 3,440,848 3,210,425
OTHER POLICYHOLDER FUNDS AND DIVIDENDS 83,479 57,358
ACCRUED EXPENSES AND OTHER LIABILITIES:
Securities lending liability (Note 6) 262,425 461,801
Death benefit liability 45,423 37,024
Other liabilities 74,636 63,736
----------- -----------
Total accrued expenses and other liabilities 382,484 562,561
INCOME TAXES (Note 8):
Current 10,006 4,180
Deferred 93,970 161,184
----------- -----------
Total income taxes 103,976 165,364
----------- -----------
Total liabilities 4,010,787 3,995,708
CONTINGENCIES (Note 9)
STOCKHOLDER'S EQUITY:
Common stock, $1 par value - Authorized, 25,000,000 shares;
issued and outstanding, 6,600,000 shares 6,600 6,600
Additional paid-in capital 994,246 994,246
Accumulated other comprehensive income (loss), net of deferred
tax provision (benefit) of $(24,965) and $41,518 (46,363) 77,105
Retained earnings (Note 10) 700,887 542,682
----------- -----------
Total stockholder's equity 1,655,370 1,620,633
----------- -----------
TOTAL $ 5,666,157 $ 5,616,341
=========== ===========
</TABLE>
2
<PAGE> 76
FARMERS NEW WORLD LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF INCOME (in thousands)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
================================================================================
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
REVENUES:
<S> <C> <C> <C>
Net premiums earned (Note 11) $ 209,683 $ 173,229 $ 151,134
Universal life and annuity policy charges 210,639 206,393 200,857
Net investment income (Note 2) 307,674 293,770 275,760
Net realized investment gains (losses) (Note 2) 24,159 (13,473) 10,063
Other income 36 707 784
--------- --------- ---------
Total revenues 752,191 660,626 638,598
BENEFITS AND EXPENSES:
Death and other benefits (Note 7) 137,798 133,984 112,370
Future policy benefits 52,200 23,711 15,713
Interest credited to policyholders 157,831 150,618 146,376
Underwriting, acquisition, and insurance expenses:
Amortization of deferred policy acquisition costs 83,187 68,997 70,855
Amortization of value of business acquired 19,394 23,897 21,305
Commissions 13,520 18,972 17,344
General insurance expenses and taxes 44,077 38,659 42,986
--------- --------- ---------
Total benefits and expenses 508,007 458,838 426,949
--------- --------- ---------
Income before provision for income taxes 244,184 201,788 211,649
PROVISION (BENEFIT) FOR INCOME TAXES (Note 8):
Current 85,426 70,690 80,889
Deferred 553 496 (7,027)
--------- --------- ---------
Total provision for income taxes 85,979 71,186 73,862
--------- --------- ---------
NET INCOME $ 158,205 $ 130,602 $ 137,787
========= ========= =========
</TABLE>
See notes to financial statements.
3
<PAGE> 77
FARMERS NEW WORLD LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
================================================================================
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET INCOME $ 158,205 $ 130,602 $ 137,787
OTHER COMPREHENSIVE INCOME, net of tax:
Unrealized holding gains (losses) on securities:
Unrealized holding gains (losses) on securities, net
of tax provision (benefit) of $96,564 and $(7,921) (179,334) 14,711
Less: reclassification adjustment for losses (gains)
included in net income, net of tax of
$1,749 and $(357) 3,249 (662)
--------- ---------
Net unrealized holding gains (losses) on
securities, net of tax provision (benefit) of
$(94,815), $7,565, and $28,968 (176,085) 14,049 53,797
Change in effect of unrealized gains (losses) on other
insurance accounts, net of tax provision (benefit) of
$28,332, $(1,949), and $(7,387) 52,617 (3,619) (13,718)
--------- --------- ---------
COMPREHENSIVE INCOME $ 34,737 $ 141,032 $ 177,866
========= ========= =========
</TABLE>
See notes to financial statements.
4
<PAGE> 78
FARMERS NEW WORLD LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY (in thousands)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
================================================================================
<TABLE>
<CAPTION>
Accumulated
Additional other Total stock-
Common paid-in comprehensive Retained holder's
stock capital income earnings equity
---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 $ 6,600 $ 994,246 $ 26,596 $ 274,293 $1,301,735
Net income 137,787 137,787
Change in other comprehensive income, net of tax of $21,581 40,079 40,079
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1997 6,600 994,246 66,675 412,080 1,479,601
Net income 130,602 130,602
Unrealized gains on available-for-sale investments arising
during the period, net of tax of $7,921 14,711 14,711
Reclassification adjustment for gains included in
net income, net of tax of $(357) (662) (662)
Change in effect of unrealized losses on other insurance
accounts, net of tax of $(1,949) (3,619) (3,619)
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1998 6,600 994,246 77,105 542,682 1,620,633
Net income 158,205 158,205
Unrealized losses on available-for-sale investments arising
during the period, net of tax of $(96,564) (179,334) (179,334)
Reclassification adjustment for losses included in
net income, net of tax of $1,749 3,249 3,249
Change in effect of unrealized gains on other insurance
accounts, net of tax of $28,332 52,617 52,617
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1999 $ 6,600 $ 994,246 $ (46,363) $ 700,887 $1,655,370
========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
5
<PAGE> 79
FARMERS NEW WORLD LIFE INSURANCE COMPANY
----------------------------------------
(a wholly owned subsidiary of Farmers Group, Inc.)
STATEMENTS OF CASH FLOWS (in thousands)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
================================================================================
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 158,205 $ 130,602 $ 137,787
Adjustments to reconcile net income to
net cash provided by operating activities:
Universal life type contracts:
Deposits received 302,424 299,007 295,747
Withdrawals (253,228) (241,765) (232,728)
Interest credited 71,386 67,585 62,247
Realized investment losses (gains) (24,159) 13,473 (10,063)
Amortization of deferred policy acquisition costs and VOBA 102,581 92,894 92,160
Deferred income tax expense (benefit) 553 496 (7,027)
Depreciation 2,606 2,544 2,462
Cash provided (used) by changes in operating assets and liabilities:
Federal income taxes payable 5,826 4,180 (22,822)
Deferred policy acquisition costs (99,568) (93,047) (70,913)
Life insurance policy liabilities 55,478 27,802 14,588
Other policyholder funds 26,121 (2,714) (2,894)
Other 12,768 31,758 (37,212)
----------- --------- ---------
Net cash provided by operating activities 360,993 332,815 221,332
INVESTING ACTIVITIES:
Purchase of bonds and stocks available-for-sale (1,322,589) (660,918) (735,325)
Proceeds from sales or maturities of bonds and stocks available-for-sale 953,106 458,364 450,760
Purchase of mortgage loans (32,623)
Mortgage loan collections 18,421 36,839 30,448
Purchase of investment real estate (20,640) (908) (23,568)
Proceeds from sale of investment real estate 10,565 8,557 2,327
Increase in policy loans (16,475) (19,317) (17,836)
Purchase of capital assets (2,508) (572) (1,685)
Purchase of surplus note of the Exchanges (119,000)
Purchase of options (8,216) (7,855) (3,450)
Other 1,891 320 (7,332)
----------- --------- ---------
Net cash used by investing activities (386,445) (304,490) (338,284)
FINANCING ACTIVITIES:
Annuity contracts:
Deposits received 157,468 144,793 131,651
Withdrawals (194,187) (202,244) (161,150)
Interest credited 91,422 82,930 80,280
----------- --------- ---------
Net cash provided by financing activities 54,703 25,479 50,781
----------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29,251 53,804 (66,171)
CASH AND CASH EQUIVALENTS:
Beginning of year 63,784 9,980 76,151
----------- --------- ---------
End of year $ 93,035 $ 63,784 $ 9,980
=========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during year for:
Income taxes $ 82,047 $ 41,250 $ 122,787
Interest 125 945
</TABLE>
See notes to financial statements.
6
<PAGE> 80
FARMERS NEW WORLD LIFE INSURANCE COMPANY (a wholly owned subsidiary of Farmers
Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
================================================================================
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY: The accompanying financial statements include the accounts of
Farmers New World Life Insurance Company (the Company), a wholly owned
subsidiary of Farmers Group, Inc. (FGI), whose ultimate parent is Zurich
Financial Services Group. FGI, a management services insurance holding
company, is attorney-in-fact for three interinsurance exchanges and their
subsidiaries (the Exchanges) and owns a reinsurance company, Farmers Re.
In December 1988, BATUS Inc. (BATUS), a subsidiary of B.A.T Industries
p.l.c. (B.A.T), acquired 100% ownership of FGI and its subsidiaries for
$5,212,619,000 in cash, including related expenses, through its wholly owned
subsidiary, BATUS Financial Services. Immediately thereafter, BATUS
Financial Services was merged into FGI. The acquisition was accounted for as
a purchase and, accordingly, the acquired assets and liabilities were
recorded in the Company's balance sheet based on their estimated fair values
at December 31, 1988.
At the time of purchase, a portion of the purchase price, $530,076,000, was
assigned to the Company's value of business acquired (VOBA), which
represented an actuarial determination of the expected profits from the
business in-force at the date of B.A.T's acquisition of FGI. The amount so
assigned is being amortized over its actuarially determined useful life with
the unamortized amount included in value of business acquired in the
accompanying balance sheets.
In September 1998, B.A.T's Financial Services Businesses, including FGI and
subsidiaries, were merged with Zurich Insurance Company (Zurich). The
businesses of Zurich and B.A.T's Financial Services Businesses were
transferred to Zurich Financial Services (ZFS), a new Swiss company with
headquarters in Zurich. This merger was accounted for by ZFS as a pooling of
interests and, therefore, no purchase accounting adjustments were made to
FGI's assets and liabilities.
NATURE OF OPERATIONS: The Company concentrates its activities in the
individual life insurance and annuity markets. Principal lines of business
include traditional and universal whole life products as well as term life
insurance. Additionally, the Company issues flexible and single premium
deferred annuities, single premium immediate annuities, and equity indexed
annuities. Beginning in 2000, the Company has added variable universal life
and variable annuity products to its product line. Securities and Exchange
Commission registration and filings were completed in December 1999, in
anticipation of product marketing in 2000.
The Company and the Exchanges operate using common trade names and logos,
including Farmers Insurance Group of Companies, Farmers Insurance Group, and
Farmers. In addition, the Company and the Exchanges distribute their
respective insurance products through a common network of direct writing
agents and district managers. As of December 31, 1999, this network
consisted of 14,722 writing agents and 494 district managers, each of whom
is an independent contractor. The size, efficiency, and scope of this agency
force have made it a major factor in the Exchange's and the Company's
growth. Each agent is required to first submit business to the insurers in
the Farmers Insurance Group of Companies within the classes and lines of
business written by such insurers. To the extent that such insurers decline
such business or do not underwrite it, the agents may offer business to
other insurers.
7
<PAGE> 81
The Company is currently licensed in 39 states, primarily in the western,
midwestern, and southwestern regions of the United States.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION: Premiums for traditional life, structured settlement
contracts involving life contingencies (SSILC), and accident and health
insurance products are recognized as revenues when due from policyholders.
Policy withdrawal, maintenance, and other charges are recognized as income
when earned.
Revenues associated with universal life products consist of policy charges
for the cost of insurance, policy administration fees, surrender charges,
and investment income on assets allocated to support policyholder account
balances on deposit. Revenues for deferred annuity products and structured
settlement contracts not involving life contingencies (SSNILC) consist of
surrender charges, investment income on assets allocated to support
policyholder account balances on deposit, and administrative charges for
equity-indexed annuities. Consideration received for interest-sensitive
insurance, SSNILC, and annuity products is recorded as a liability when
received.
INVESTMENTS: The Company has classified all investments in fixed maturities
and equity securities as available-for-sale and reports them on the balance
sheet at fair value with unrealized gains and losses, net of tax, excluded
from earnings and reported as accumulated other comprehensive income, a
component of stockholder's equity. As of December 31, 1999 and 1998, there
were no securities designated as held-to-maturity or trading.
Realized gains (losses) on sales, redemptions, and write-downs of
investments are determined based on the net book value of individual
investments.
Investment real estate consists of properties purchased for investment and
properties acquired through foreclosure, and is carried at the lower of cost
less accumulated depreciation of $27,292,000 in 1999 and $28,366,000 in
1998, or market. Depreciation is provided on a straight-line basis over 45
years, the estimated life of the properties.
The Company follows the provisions of SFAS No. 118 (amending SFAS No. 114),
Accounting by Creditors for Impairment of a Loan, which requires that
impaired loans be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value
of the collateral, if the loan is collateral dependent. No material amounts
were recognized in the periods presented.
DEFERRED POLICY ACQUISITION COSTS: The costs of acquiring new traditional
life business, principally first-year commissions and other expenses for
policy underwriting and issuance (which are primarily related to and vary
with the production of new business), are deferred and amortized
proportionately over the estimated period during which the related premiums
will be recognized as income, based on the same assumptions that are used
for computing the liabilities for future policy benefits.
Policy acquisition costs for universal life and deferred annuity products
are deferred and amortized in relation to the present value of expected
gross profits on the policies. Deferred Policy Acquisition Costs (DAC)
include amounts associated with the unrealized gains and losses recorded as
other comprehensive income, a component of stockholder's equity.
Accordingly, DAC is increased or
8
<PAGE> 82
decreased for the impact of estimated future gross profits as if net
unrealized gains or losses on securities had been realized at the balance
sheet date. Net unrealized gains or losses on securities within other
comprehensive income also reflect this impact.
VALUE OF BUSINESS ACQUIRED: The present value of the business acquired in
the 1988 merger with B.A.T is being amortized as the life insurance business
in-force at the time of the merger declines.
PROPERTY AND EQUIPMENT: Depreciation of property and equipment has been
provided using the straight-line method with estimated useful lives of 10 to
45 years for buildings and improvements and five years for furniture and
equipment.
LONG-LIVED ASSETS: In accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
long-lived assets and certain identifiable intangibles to be held and used
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. No
such impairments have occurred.
POLICY LIABILITIES AND ACCRUALS: Liabilities for future policy benefits for
traditional life policies are computed principally on a net level premium
method reflecting estimated future investment yields, mortality, morbidity,
and withdrawals. Interest rate assumptions range from 2.25% to 9.00%
depending upon the year of issue. Mortality is calculated principally on
select and ultimate tables in common usage in the industry, modified for
Company experience, and withdrawals are estimated based primarily on
experience.
Liabilities for future policy benefits on universal life and deferred
annuity products are determined under the retrospective deposit method and
consist principally of policy values before any surrender charges.
Liabilities for future policy benefits on SSNILC are recorded when the
payments are received.
Unpaid policy claims include claims in the course of settlement and a
provision for claims incurred but not reported, based on past experience.
LIFE SALES MANAGEMENT SERVICES: Fees charged to the Company by FGI for sales
and marketing services were $21,750,000, $21,187,000, and $20,862,000 in
1999, 1998, and 1997, respectively, and are accounted for as deferred policy
acquisition costs except for advertising expenses, which are expensed as
incurred, of $1,814,000, $1,336,000, and $1,590,000 in 1999, 1998, and 1997,
respectively.
STATEMENTS OF CASH FLOWS: For purposes of reporting cash flows, the Company
considers short-term investments purchased with an initial maturity of three
months or less to be cash equivalents.
ACCOUNTING PRONOUNCEMENTS: In March 1998, the American Institute of
Certified Public Accountants (AICPA) issued Statement of Position (SOP) No.
98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. This SOP, effective for financial statements issued for
periods beginning after December 15, 1998, applies to all nongovernmental
entities and establishes the rules for capitalizing or expensing software
costs developed or obtained for internal use. During 1999, the Company
capitalized $6,724,000 in accordance with this SOP.
In 1998, the Financial Accounting Standards Board (FASB) released SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement, effective for financial statements of public and nonpublic
entities issued for fiscal years beginning after June 15, 1999, and deferred
until June 15, 2000, by SFAS No. 137, Deferral of Effective Date of FASB
Statement No. 133, establishes accounting and reporting standards for
derivative instruments (including certain derivative
9
<PAGE> 83
instruments embedded in other contracts) and for hedging activities. SFAS
No. 133 requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at market value. The Company does not expect the adoption of
this statement to have a material impact on its financial statements.
NOTE 2: INVESTMENTS
INVESTMENT INCOME: The sources of investment income for the years ended
December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Bonds $270,191 $257,422 $236,405
Common and preferred stocks 5,737 8,123 11,747
Other 43,883 41,883 40,370
-------- -------- --------
Gross investment income 319,811 307,428 288,522
Less investment expenses 12,137 13,658 12,762
-------- -------- --------
Net investment income $307,674 $293,770 $275,760
======== ======== ========
</TABLE>
The Company's investment expenses included approximately $737,000,
$1,143,000, and $2,063,000 in 1999, 1998, and 1997, respectively, that were
paid to its parent company, FGI.
In June 1998, the Company's investment management was transferred to Scudder
Kemper Investments, Inc. (SKI), an indirect subsidiary of Zurich Financial
Services. In 1999 and 1998, approximately $1,469,000 and $704,000 of the
Company's investment expenses were paid to SKI.
REALIZED GAINS (LOSSES): Realized investment gains (losses) for the years
ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Bonds $ 17,558 $(15,126) $ 8,613
Redeemable preferred stocks 450 25 1,304
Nonredeemable preferred stocks 71
Common stocks 4,589 117 61
Investment real estate 1,562 1,393 3
Other 118 11
-------- --------
$ 24,159 $(13,473) $ 10,063
======== ======== ========
</TABLE>
Properties acquired through foreclosure were $18,805,000 and $25,677,000 at
December 31, 1999 and 1998. During 1999 and 1998, the Company recorded
$386,000 and $768,000 in realized gains and $1,114,000 and $587,000 in
realized losses on the sale of real estate acquired through foreclosure,
respectively. The Company maintained an allowance for losses of $3,263,000
for the years ended December 31, 1999 and 1998.
10
<PAGE> 84
UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES: Gross unrealized gains
(losses) pertaining to nonredeemable preferred stocks and common stocks
stated at fair value as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
Gains Losses Net
-------- -------- --------
1999:
<S> <C> <C> <C>
Nonredeemable preferred stocks $ 97 $ (92) $ 5
Common stocks 11,350 (7,361) 3,989
-------- -------- --------
$ 11,447 $ (7,453) 3,994
======== ========
Less deferred federal income taxes (1,398)
--------
$ 2,596
========
1998:
Nonredeemable preferred stocks $ 165 $ (48) $ 117
Common stocks (38) (38)
-------- -------- --------
$ 165 $ (86) 79
======== ======== ========
Less deferred federal income taxes (28)
--------
$ 51
========
</TABLE>
11
<PAGE> 85
UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES: Amortized cost, gross
unrealized gains, gross unrealized losses, and estimated fair value of fixed
maturities as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1999:
Fixed maturities available-for-sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 350,845 $ 553 $ (20,033) $ 331,365
Obligations of states and
political subdivisions 314,988 3,105 (5,420) 312,673
Debt securities issued by
foreign governments 62,214 5,336 (1,045) 66,505
Corporate securities 1,223,504 6,957 (47,222) 1,183,239
Mortgage-backed securities 1,840,234 8,758 (58,519) 1,790,473
----------- ----------- ----------- -----------
3,791,785 24,709 (132,239) 3,684,255
Redeemable preferred stock 64,176 1,347 (668) 64,855
----------- ----------- ----------- -----------
$ 3,855,961 $ 26,056 $ (132,907) $ 3,749,110
=========== =========== =========== ===========
1998:
Fixed maturities available-for-sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 408,742 $ 42,515 $ (124) $ 451,133
Obligations of states and
political subdivisions 334,242 25,784 (5) 360,021
Debt securities issued by
foreign governments 88,672 2,410 (15,032) 76,050
Corporate securities 914,465 58,161 (5,938) 966,688
Mortgage-backed securities 1,764,725 65,546 (9,940) 1,820,331
----------- ----------- ----------- -----------
3,510,846 194,416 (31,039) 3,674,223
Redeemable preferred stock 82,090 4,747 (175) 86,662
----------- ----------- ----------- -----------
$ 3,592,936 $ 199,163 $ (31,214) $ 3,760,885
=========== =========== =========== ===========
</TABLE>
12
<PAGE> 86
MATURITIES OF FIXED MATURITIES: The amortized cost and estimated fair value
of fixed maturities classified as available-for-sale by contractual maturity
at December 31, 1999, are shown below (in thousands). 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>
Estimated
Amortized fair
cost value
---------- ----------
<S> <C> <C>
Fixed maturities available-for-sale:
Due in one year or less $ 29,287 $ 29,183
Due after one year through five years 600,267 593,984
Due after five years through 10 years 665,258 647,032
Due after 10 years 656,739 623,583
---------- ----------
1,951,551 1,893,782
Mortgage-backed securities 1,840,234 1,790,473
Preferred stock with characteristics of debt securities 64,176 64,855
---------- ----------
$3,855,961 $3,749,110
========== ==========
</TABLE>
In determining estimated fair value, management obtains quotations from
independent sources who make markets in similar securities, generally
broker/dealers. Unless representative trades of securities actually occurred
at December 31, 1999, these quotes are generally estimates of market value
based on an evaluation of appropriate factors, such as trading in similar
securities, yields, credit quality, coupon rate, maturity, type of issue,
and other market data.
SALE AND IMPAIRMENT OF DEBT SECURITIES: The gross gains, gross losses,
proceeds from sales, and write-downs of debt securities for the years ended
December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Write-
gains losses Proceeds downs
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1999 $ 35,321 $(17,313) $910,601 $ --
1998 11,742 (468) 458,247 (26,356)
1997 12,111 (2,194) 446,202
</TABLE>
13
<PAGE> 87
NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments disclosed have been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented may not be indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies could have a significant effect on the estimated fair
value amounts. The carrying value and estimated fair value of assets and
liabilities as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
Estimated
Carrying fair
value value
---------- ----------
<S> <C> <C>
1999:
Assets:
Cash and cash equivalents $ 93,035 $ 93,035
Fixed maturities available-for-sale 3,749,110 3,749,110
Nonredeemable preferred stock available-for-sale 1,158 1,158
Common stock available-for-sale 127,556 127,556
Mortgage loans 35,834 43,818
Surplus note of the Exchanges 119,000 119,000
Policy loans 201,687 199,166
Joint ventures 6,662 5,137
S&P call options 32,718 32,718
Liabilities:
Future policy benefits - Deferred annuities 1,531,412 1,481,098
1998:
Assets:
Cash and cash equivalents $ 63,784 $ 63,784
Fixed maturities available-for-sale 3,760,885 3,760,885
Nonredeemable preferred stock available-for-sale 1,270 1,270
Common stock available-for-sale 3 3
Mortgage loans 52,879 67,615
Surplus note of the Exchanges 119,000 119,000
Policy loans 185,211 192,620
Joint ventures 8,456 6,668
S&P call options 14,817 14,817
Liabilities:
Future policy benefits - Deferred annuities 1,492,032 1,433,494
</TABLE>
The following methods and assumptions were used to estimate the fair value of
financial instruments as of December 31, 1999 and 1998:
CASH AND CASH EQUIVALENTS: The carrying amounts of these items are a
reasonable estimate of their fair value.
FIXED MATURITIES, REDEEMABLE AND NONREDEEMABLE PREFERRED STOCK, AND COMMON
STOCK: The estimated fair values of bonds, redeemable and nonredeemable
preferred stock, and common stock are based upon quoted market prices,
dealer quotes, and prices obtained from independent pricing services.
14
<PAGE> 88
MORTGAGE LOANS: The estimated fair value of the mortgage loan portfolio is
determined by discounting the estimated future cash flows, using a year-end
market rate which is applicable to the yield, credit quality, and average
maturity of the composite portfolio.
POLICY LOANS: The estimated fair value of policy loans is determined by
discounting future cash flows using the current rates at which similar loans
would be made.
SURPLUS NOTE OF THE EXCHANGES: The carrying amount of this item is a
reasonable estimate of its fair market value.
JOINT VENTURES: The estimated fair value of the joint ventures is based on
quoted market prices, current appraisals, and independent pricing services.
S&P 500 CALL OPTIONS: S&P 500 call options are purchased as hedges against
the interest liabilities generated on the equity-indexed annuity products.
These call options are carried at an estimated fair value based on stock
price, strike price, time to expiration, interest rates, dividends, and
volatility using the methodology of the Black-Scholes option pricing
formula.
FUTURE POLICY BENEFITS - DEFERRED ANNUITIES: The estimated fair values are
based on the currently available cash surrender value, similar to the demand
deposit liabilities of depository institutions.
NOTE 4: SURPLUS NOTE
In September 1998, the Company purchased a $119,000,000 surplus note of the
Exchanges which bears interest at 6.10% annually and is payable in full no later
than October 2001. Conditions governing repayment of the amount are outlined in
the surplus note. Generally, repayment may be made only when the surplus balance
of the issuer reaches a specified level, and then only after approval is granted
by the issuer's governing Board and the appropriate department of insurance.
The Company recognized interest income of $7,259,000 and $2,279,000 on this note
during 1999 and 1998, respectively.
NOTE 5: VALUE OF BUSINESS ACQUIRED
The changes in the VOBA were as follows (in thousands) as of December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 334,442 $ 359,146 $ 383,951
Amortization related to operations (50,392) (53,598) (56,371)
Interest accrued 30,998 29,701 35,066
Amortization related to net unrealized gains (losses) 13,670 (807) (3,500)
--------- --------- ---------
Balance, end of year $ 328,718 $ 334,442 $ 359,146
========= ========= =========
</TABLE>
Based on current conditions and assumptions as to future events, the Company
expects to amortize the December 31, 1999, balance as follows: approximately
7.0% in 2000, 2001, and 2002, and 8.0% in 2003 and 2004. The discount rate used
to determine the amortization rate of the VOBA ranged from 12.5% to 7.5%.
15
<PAGE> 89
NOTE 6: SECURITY LENDING ARRANGEMENT
The Company has entered into a security lending agreement with a lending agent,
an affiliate company. The agreement authorizes the agent to lend securities held
in the Company's portfolio to a list of authorized borrowers. Concurrent with
delivery of the securities, the borrower provides the Company with cash
collateral equal to at least 102% of the market value of domestic securities and
105% of the market value of other securities subject to the loan.
The securities are marked-to-market on a daily basis and the collateral is
adjusted on the next business day. The collateral is invested in highly liquid,
fixed income assets with a maturity of less than one year. Income earned from
the security lending arrangement is shared 25% and 75% between the agent and the
Company, respectively. Income earned by the Company was $798,000, $899,000, and
$816,000 in 1999, 1998, and 1997, respectively. As of December 31, 1999 and
1998, the Company recorded $262,425,000 and $461,801,000, respectively, of
collateral in other assets and in accrued expenses and other liabilities.
NOTE 7: LIABILITY FOR POLICY CLAIMS
Activity in the liability for policy claims is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance, January 1 $ 26,177 $ 22,156
Less reinsurance recoverables 16 270
-------- --------
Net balance, January 1 26,161 21,886
Incurred related to:
Current year 123,329 121,016
Prior years 14,469 12,968
-------- --------
Total incurred 137,798 133,984
Paid related to:
Current year 105,055 105,252
Prior years 31,963 24,457
-------- --------
Total paid 137,018 129,709
-------- --------
Net balance, December 31 26,941 26,161
Plus reinsurance recoverables 1,455 16
-------- --------
Balance, December 31 $ 28,396 $ 26,177
======== ========
</TABLE>
The liability for policy claims at December 31, 1999 and 1998, was increased for
claims reported in prior years by $14,469,000 and $12,968,000, respectively. The
liability for policy claims is primarily comprised of pending claims known to
the Company at the end of the year as well as estimates for incurred claims not
yet reported to the Company. Because estimates are utilized in the statement
process, actual expenses incurred in the current year related to prior year
claims may differ from those estimates. The Company monitors these fluctuations
to ensure that current liabilities adequately reflect reasonable expense levels
for both current and prior periods.
16
<PAGE> 90
NOTE 8: INCOME TAXES
The Company files a consolidated federal income tax return with Farmers Group,
Inc. and its subsidiaries.
The Company uses the asset and liability method of accounting for income taxes
under SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years the differences are expected to be recovered or
settled.
The components of the provision for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 83,823 $ 69,601 $ 79,185
State 1,603 1,089 1,704
-------- -------- --------
Total current 85,426 70,690 80,889
Deferred:
Federal 1,127 496 (7,027)
State (574)
--------
Total deferred 553 496 (7,027)
-------- -------- --------
Total $ 85,979 $ 71,186 $ 73,862
======== ======== ========
</TABLE>
The table below reconciles the provision for income taxes computed at the U.S.
statutory income tax rate of 35% to the Company's provision for income taxes (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected tax expense $ 85,464 $ 70,626 $ 73,938
Tax-exempt investment income (1,410) (1,705) (2,233)
State taxes 1,029 1,089 1,704
Other, net 896 1,176 453
-------- -------- --------
Reported income tax expense $ 85,979 $ 71,186 $ 73,862
======== ======== ========
</TABLE>
17
<PAGE> 91
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liabilities as of December 31 are presented in the
following table (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred policy acquisition costs $ 245,850 $ 251,626
Future policy benefits (115,336) (135,215)
Investments (15,447) (10,842)
Valuation of investments in securities (24,965) 41,518
Depreciable assets 4,620 5,520
Other (752) 8,577
--------- ---------
Net deferred tax liabilities $ 93,970 $ 161,184
========= =========
</TABLE>
There was no valuation allowance recognized for deferred tax assets in 1999 or
1998.
NOTE 9: CONTINGENCIES
The Company is a party to lawsuits arising from its normal business activities.
These actions are in various stages of discovery and development, and some seek
punitive as well as compensatory damages. In the opinion of management, the
Company has not engaged in any conduct which should warrant the award of any
material punitive or compensatory damages. Acting on the advice of counsel, the
Company intends to defend vigorously its position in each case, and management
believes that, while it is not possible to predict the outcome of such matters
with absolute certainty, ultimate disposition of these proceedings should not
have a material adverse effect on the Company's financial position or results of
operations.
NOTE 10: REGULATORY MATTERS
The Company, domiciled in Washington State, prepares its statutory financial
statements in accordance with accounting practices prescribed by the State of
Washington Department of Insurance. Prescribed statutory accounting practices
include a variety of publications of the National Association of Insurance
Commissioners (NAIC), as well as state laws, regulations, and general
administrative rules.
Statutory stockholder's equity was $989,615,000 and $888,644,000 as of December
31, 1999 and 1998, respectively. Statutory net income for the years ended
December 31, 1999, 1998, and 1997, was $114,909,000, $98,796,000, and
$122,863,000, respectively.
Statutory unassigned surplus of $979,816,000 and $878,845,000 included in
retained earnings at December 31, 1999 and 1998, respectively, is the amount
held for the benefit of the stockholder. The entire amount in 1999 and 1998 is
designated as stockholder's surplus for tax purposes and would not subject the
Company to taxation if paid as a cash dividend.
The maximum amount of dividends that can be paid to stockholders by state of
Washington insurance companies without prior approval of the Insurance
Commissioner is subject to restrictions relating to statutory surplus. The
maximum dividend payout which could be made without prior approval is
$112,941,000 in 2000.
Dividends are determined by the Board of Directors.
18
<PAGE> 92
As of December 31, 1999 and 1998, the Company's statutory surplus exceeded the
NAIC risk-based capital requirements.
NOTE 11: REINSURANCE
The Company has ceded business under both yearly renewable-term contracts and
coinsurance contracts. The policy benefit liabilities and unpaid claim amounts
attributable to such business are stated as other receivables on the balance
sheets. The carrying value of reinsurance receivables included in other
receivables totalled approximately $10,846,000 and $8,500,000 at December 31,
1999 and 1998, respectively. The Company utilizes several reinsurers to minimize
concentration of credit risk.
The Company has established retention limits for automatic reinsurance ceded.
The maximum retention on new issues is $2,000,000 per life for the Farmers
Flexible Universal Life policy and $1,500,000 per life for all traditional
policies except Farmers Yearly Renewable Term. The maximum retention on new
issues is $800,000 per life for Farmers Yearly Renewable Term. The excess risk
is reinsured with an outside reinsurer. Increases in policy benefit liabilities
and claims expense are stated net of increases in future policy benefit
liabilities and claims expenses applicable to reinsurance ceded. Death and other
benefits expense is reduced by $3,052,000, $4,074,000, and $2,047,000 in 1999,
1998, and 1997, respectively, of reinsurance recoveries. The Company is
contingently liable with respect to reinsurance ceded in the event that a
reinsurer is unable to meet its obligations under existing reinsurance
agreements. Effective July 1, 1999, the Company entered into a new co-insurance
agreement with a reinsurer. The Company agrees to cede a significant portion of
the risk of the Farmers Premier 10 and Farmers Premier 20 policies.
The effect of reinsurance on premiums and amounts earned for the years ended
December 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Direct premiums $ 214,557 $ 168,159 $ 145,073
Reinsurance assumed 9,065 8,798 10,297
Reinsurance ceded (13,939) (3,728) (4,236)
--------- --------- ---------
Net premiums earned $ 209,683 $ 173,229 $ 151,134
========= ========= =========
</TABLE>
Premiums assumed from unaffiliated companies approximated $9,065,000,
$8,798,000, and $10,297,000 in 1999, 1998, and 1997, respectively, which
represent 4.3%, 5.1%, and 6.8% of the net premiums earned in 1999, 1998, and
1997, respectively. Claims paid to unaffiliated companies on assumed reinsurance
were approximately $8,134,000, $7,998,000, and $8,240,000 in 1999, 1998, and
1997, respectively.
NOTE 12: EMPLOYEES' RETIREMENT PLANS
The Company participates in FGI's two noncontributory defined benefit pension
plans (the Regular Plan and the Restoration Plan). The Regular Plan covers
substantially all employees of FGI, its subsidiaries, and the Exchanges who have
reached age 21 and have rendered one year of service. Benefits are based on
years of service and the employee's compensation during the last five years of
employment. The Restoration Plan provides supplemental retirement benefits for
certain key employees of FGI, its subsidiaries, and the Exchanges.
FGI's policy is to fund the amount determined under the aggregate cost method,
provided it does not exceed funding limitations. There has been no change in
funding policy from prior years.
19
<PAGE> 93
Assets of the Regular Plan are held by an independent trustee. Assets held are
primarily in fixed maturity and equity investments. The principal liability is
for annuity benefit payments of current and future retirees. Assets of the
Restoration Plan are considered corporate assets of FGI and are held in a
grantor trust.
Information regarding the Regular Plan's and the Restoration Plan's funded
status is not developed separately for FGI, its subsidiaries, including the
Company, and the Exchanges. The funded status of both plans as of December 1,
1999 and 1998 (the latest date for which information is available) is as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Change in benefit obligation:
Net benefit obligation at beginning of the year $ 853,174 $ 747,069
Service cost 29,395 26,423
Interest cost 58,469 54,998
Plan amendments 7,903
Actuarial losses (gains) (111,100) 54,218
Benefits paid (33,948) (29,534)
----------- -----------
$ 803,893 $ 853,174
=========== ===========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 924,301 $ 817,552
Actual return on plan assets 124,380 135,313
Benefits paid (32,753) (28,564)
----------- -----------
Fair value of plan assets at end of the year $ 1,015,928 $ 924,301
=========== ===========
Funded status at end of the year $ 212,034 $ 71,127
Unrecognized net actuarial gain (287,586) (140,910)
Unrecognized prior service cost 35,859 31,255
Unrecognized net transition asset (21,510) (26,186)
----------- -----------
Net amount recognized at end of the year $ (61,203) $ (64,714)
=========== ===========
</TABLE>
Upon B.A.T's purchase of FGI and its subsidiaries in 1988, FGI allocated part of
the purchase price to its portion of the Regular Plan assets in excess of the
projected benefit obligation at the date of acquisition. The asset is being
amortized for the difference between FGI's net pension cost and amounts
contributed to the plan. The unamortized balance as of December 31, 1999 and
1998, was $16,940,000 and $20,622,000, respectively.
20
<PAGE> 94
Components of net periodic pension expense for FGI and its subsidiaries are as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Service costs $ 15,126 $ 13,240 $ 14,238
Interest costs 34,525 27,810 28,362
Return on plan assets (49,000) (35,817) (35,116)
Amortization of:
Transition obligation 955 1,365 1,229
Prior service cost 2,207 1,986 2,298
Actuarial gain (2,445) (2,447) (1,248)
-------- -------- --------
Net periodic pension expense $ 1,368 $ 6,137 $ 9,763
======== ======== ========
</TABLE>
The Company's share of pension expense was $192,000, $452,000, and $510,000 in
1999, 1998, and 1997, respectively.
FGI uses the projected unit credit cost actuarial method for attribution of
expense for financial reporting purposes. The interest cost and the actuarial
present value of benefit obligations were computed using a weighted average
interest rate of 8.00%, 6.75%, and 7.25% in 1999, 1998, and 1997, respectively,
while the expected return on plan assets was computed using a weighted average
interest rate of 9.25%, 9.25%, and 9.00% in 1999, 1998, and 1997, respectively.
The weighted average rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation was
5.00%, 4.50%, and 5.00% in 1999, 1998, and 1997, respectively.
FGI and its subsidiaries' postretirement benefits plan is a contributory defined
benefit plan for employees who were retired or who were eligible for early
retirement on January 1, 1995, and is a contributory defined dollar plan for all
other employees retiring after January 1, 1995. Health benefits are provided for
all employees who participated in the Company's group medical benefits plan for
15 years prior to retirement at age 55 or later. A life insurance benefit of
$5,000 is provided at no cost to retirees who maintained group life insurance
coverage for 15 years prior to retirement at age 55 or later.
There are no assets separated and allocated to this plan.
21
<PAGE> 95
The funded status of the entire plan, which includes FGI, its subsidiaries, and
the Exchanges, at December 1, 1999 and 1998 (the latest date for which
information is available) was as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Change in benefit obligation:
Net benefit obligation at beginning of the year $ 80,367 $ 70,758
Service cost 1,537 1,280
Interest cost 5,374 5,080
Plan participations' contributions 1,575 1,297
Actuarial loss (gain) (5,892) 6,936
Benefits paid (3,460) (4,984)
-------- --------
$ 79,501 $ 80,367
======== ========
Fair value of plan assets at end of the year $ -- $ --
======== ========
Funded status at end of the year $(79,501) $(80,367)
Unrecognized net actuarial gain (14,070) (8,193)
Unrecognized net transition obligation 17,044 18,354
-------- --------
Accrued postretirement benefit cost $(76,527) $(70,206)
======== ========
</TABLE>
FGI and its subsidiaries' share of the accrued postretirement benefit cost was
approximately $55,578,000 and $53,206,000 in 1999 and 1998, respectively. The
unrecognized net transition obligation of $17,044,000 and $18,354,000 in 1999
and 1998, respectively, represents the remaining transition obligation of the
Exchanges.
Components of postretirement benefits expense for FGI and its subsidiaries are
as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Service costs $ 696 $ 636 $ 753
Interest costs 3,263 2,527 2,918
Amortization of actuarial gain (9) (435) (13)
------- ------- -------
Net periodic expense $ 3,950 $ 2,728 $ 3,658
======= ======= =======
</TABLE>
The Company's share of this amount was approximately $229,000, $205,000, and
$253,000 in 1999, 1998, and 1997, respectively.
The weighted average interest rate used in the above benefit computations was
8.00%, 6.75%, and 7.25% in 1999, 1998, and 1997, respectively. Beginning in
1997, the initial medical inflation rate was 7.00% to be graded over a
three-year period to 6.00% and level thereafter, and contribution levels from
retirees were the same as applicable medical cost increases where defined
benefits exist. The weighted average rate of increase in future compensation
levels used in determining the actuarial present value of the accumulated
benefit obligation was 5.00%, 4.50%, and 5.00% in 1999, 1998, and 1997,
respectively.
22
<PAGE> 96
A 1% increase or decrease in the medical inflation rate assumption would have
resulted in the following (in thousands):
<TABLE>
<CAPTION>
1% 1%
increase decrease
--------- ---------
<S> <C> <C>
Effect on 1999 service and interest components of net periodic cost $ 116 $ (106)
Effect on accumulated postretirement benefit obligation
at December 31, 1999 2,028 (1,849)
</TABLE>
NOTE 13: EMPLOYEES' PROFIT SHARING PLANS
FGI and its subsidiaries have two profit sharing plans providing for cash
payments to all eligible employees. The two plans, Cash Profit Sharing Plan
(consisting of Cash and Quest for Gold Program in 1999 and 1998) and Deferred
Profit Sharing Plan, provide for a maximum aggregate expense of 16.25% of FGI
and its subsidiaries' consolidated annual pretax earnings, as adjusted. The
Deferred Profit Sharing Plan, limited to 10% of pretax earnings, as adjusted, or
15% of the salary or wage paid or accrued to the eligible employee, provides for
an annual contribution by FGI and its subsidiaries to a trust for eventual
payment to employees as provided in the plan. The Cash Profit Sharing Plan and
Quest for Gold Program provide for annual cash distributions to eligible
employees. The Cash Profit Sharing Plan is limited to 5% of pretax earnings, as
adjusted, or 5% of eligible employees' salaries or wages paid or accrued. The
Quest for Gold Program is limited to 1.25% of pretax earnings, as adjusted, or
6% of eligible employees' salaries or wages paid or accrued.
The Company's share of expense under these plans was $4,120,000, $4,069,000, and
$3,850,000 in 1999, 1998, and 1997, respectively.
NOTE 14: EQUITY-INDEXED ANNUITIES
During 1997, the Company began selling an equity-indexed annuity product. At the
end of its seven-year term, this product credits interest to the annuity
participant at a rate based on a specified portion of the change in the value of
the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), subject
to a guaranteed annual minimum return. In order to hedge the interest liability
generated on the annuities as the index rises, the Company purchases call
options on the S&P 500 Index. The Company considers such call options to be held
as a hedge. As of December 31, 1999 and 1998, the Company had call options with
contract values of $65,229,000 and $40,229,000, respectively, and carrying
values of $32,718,000 and $14,817,000, respectively.
Hedge accounting is used to account for the call options as the Company believes
that the options reduce the risk associated with increases in the account value
of the annuities that result from increases in the S&P 500 Index. The call
options effectively hedge the annuity contracts since they are both purchased
and sold with identical parameters. Periodically, the value of the assets (S&P
500 call options) are matched to the potential liability (annuity contracts) to
ensure the hedge has remained effective. The annuities were written based on a
seven-year investment term, absent early termination by participants. Therefore,
the anticipated hedge transaction (i.e., payment of interest to the policyholder
at the end of the investment term and maturity of the call option) for each
annuity is generally expected to occur in seven years or less. For the years
ended December 31, 1999 and 1998, the amount of unrealized hedging gains was
$13,197,000 and $3,511,000, respectively.
The call options are carried at estimated fair value. Unrealized gains and
losses resulting from changes in the estimated fair value of the call options
are recorded as an adjustment to the interest liability credited to
policyholders. In addition, realized gains and losses from maturity or
termination of the call options are
23
<PAGE> 97
offset against the interest credited to policyholders during the period
incurred. Premiums paid on call options are amortized to net investment income
over the term of the contracts. There were no early terminations by annuity
participants that led to maturities or sales of the S&P 500 call options during
1999 or 1998.
The cash requirement of the call options consists of the initial premium paid to
purchase the call options. Should a liability exist to the annuity participant
at maturity of the annuity policy, the termination or maturity of the option
contracts will generate positive cash flow to the Company. The appropriate
amount of cash will then be remitted to the annuity participant based on the
respective participation rate. The call options are generally expected to be
held for a seven-year term, but can be terminated at any time.
There are certain risks associated with the call options, primarily with respect
to significant movements in the United States stock market and counterparty
nonperformance. The Company believes that the counterparties to its call option
agreements are financially responsible and that the counterparty risk associated
with these transactions is minimal.
NOTE 15: PARTICIPATING POLICIES
Participating business, which consists of group business, comprised
approximately 8.6% of total insurance in-force for both years ended December 31,
1999 and 1998. In addition, participating business represented 2.0%, 2.1%, and
2.2% of premium income for the years ended December 31, 1999, 1998, and 1997.
The amount of dividends paid on participating business is determined by the
Farmers Life Board of Directors and is paid annually on the policyholder's
anniversary date. Amounts allocable to participating policyholders are based on
published dividend projections or expected dividend scales.
NOTE 16: OPERATING SEGMENTS
The Company concentrates its activities in the individual life insurance and
annuity markets. These activities are managed separately as each offers a unique
set of product services. As a result, the Company is comprised of the following
two reportable operating segments as defined in SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information: the life insurance segment
and the annuity segment.
The life insurance segment provides individual life insurance products,
including universal life, term life, and whole life. The annuity segment
provides flexible and single premium deferred annuities, single premium
immediate annuities, and equity-indexed annuity products.
The basis of accounting used by the Company's management in evaluating segment
performance and determining how resources should be allocated is referred to as
the Company's GAAP historical basis, which excludes the effects of the purchase
accounting (PGAAP) adjustments related to the acquisition of FGI and the Company
by B.A.T in December 1988 (Note 1).
The Company accounts for intersegment transactions as if they were to third
parties and, as such, records the transactions at current market prices. There
were no intersegment revenues among the Company's two reportable operating
segments for the years 1999, 1998, and 1997.
The Company operates in 39 states and does not earn revenues or hold assets in
any foreign countries.
24
<PAGE> 98
Information regarding the Company's reportable operating segments follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31, 1999
----------------------------
GAAP historical basis PGAAP adjustments Total
--------------------- ----------------- PGAAP
Life Annuities Total Life Annuities Total basis
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 635,419 $ 118,044 $ 753,463(a) $ (921) $ (351) $ (1,272) $ 752,191
Investment income 202,258 118,502 320,760 (598) (351) (949) 319,811
Investment expenses (7,653) (4,484) (12,137) (12,137)
Net realized gains 24,482 24,482 (323) (323) 24,159
Income before provision
for taxes 246,963 26,326 273,289 (26,301) (2,804) (29,105) 244,184
Provision for income taxes 87,421 9,319 96,740 (9,724) (1,037) (10,761) 85,979
Assets 3,646,654 1,870,221 5,516,875 98,675 50,607 149,282(b) 5,666,157
Capital expenditures 2,508 2,508 2,508
Depreciation and
amortization 69,727 7,924 77,651(c) 24,727 2,809 27,536(d) 105,187
</TABLE>
(a) Revenues for the operating segments include net investment income and
net realized gains (losses).
(b) Amount includes PGAAP adjustments related to the DAC ($190,100,000
decrease) and VOBA ($328,700,000 increase) assets.
(c) Amount includes the historical basis amortization associated with the
DAC asset.
(d) Amount includes PGAAP adjustments totalling $21,300,000 related to the
amortization of the DAC and VOBA assets.
<TABLE>
<CAPTION>
Year ended December 31, 1998
----------------------------
GAAP historical basis PGAAP adjustments Total
--------------------- ----------------- PGAAP
Life Annuities Total Life Annuities Total basis
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 544,390 $ 116,029 $ 660,419(a) $ 171 $ 36 $ 207 $ 660,626
Investment income 190,197 117,024 307,221 128 79 207 307,428
Investment expenses (8,457) (5,201) (13,658) (13,658)
Net realized losses (13,473) (13,473) (13,473)
Income before provision
for taxes 173,576 26,033 199,609 1,895 284 2,179 201,788
Provision for income taxes 61,803 9,269 71,072 99 15 114 71,186
Assets 3,593,311 1,844,266 5,437,577 118,310 60,454 178,764(b) 5,616,341
Capital expenditures 572 572 572
Depreciation and
amortization 88,146 8,572 96,718(c) (1,129) (151) (1,280)(d) 95,438
</TABLE>
(a) Revenues for the insurance operating segments include net investment
income and net realized gains (losses).
(b) Amount includes PGAAP adjustments related to the DAC ($168,300,000
decrease) and VOBA ($334,400,000 increase) assets.
(c) Amount includes the historical basis amortization associated with the
DAC asset.
(d) Amount includes PGAAP adjustments related to the amortization of the DAC
($26,200,000 decrease) and VOBA ($23,900,000 increase) assets.
25
<PAGE> 99
<TABLE>
<CAPTION>
Year ended December 31, 1997
----------------------------
GAAP historical basis PGAAP adjustments Total
--------------------- ----------------- PGAAP
Life Annuities Total Life Annuities Total basis
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 522,983 $ 114,899 $ 637,882(a) $ 588 $ 128 $ 716 $ 638,598
Investment income 171,979 115,827 287,806 428 288 716 288,522
Investment expenses (7,626) (5,136) (12,762) (12,762)
Net realized gains 10,063 10,063 10,063
Income before provision
for taxes 190,418 24,677 215,095 (3,050) (396) (3,446) 211,649
Provision for income taxes 67,022 8,685 75,707 (1,633) (212) (1,845) 73,862
Assets 3,311,007 1,870,445 5,181,452 116,805 60,454 177,259(b) 5,358,711
Capital expenditures 1,696 1,696 1,696
Depreciation and
amortization 82,849 7,210 90,059(c) 4,025 538 4,563(d) 94,622
</TABLE>
(a) Revenues for the insurance operating segments include net investment
income and net realized gains (losses).
(b) Amount includes PGAAP adjustments related to the DAC ($195,200,000
decrease) and VOBA ($359,100,000 increase) assets.
(c) Amount includes the historical basis amortization associated with the
DAC asset.
(d) Amount includes PGAAP adjustments related to the amortization of the DAC
($18,500,000 decrease) and VOBA ($21,300,000 increase) assets.
26
