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[LOGO OF PROVIDENT MUTUAL APPEARS HERE] PROSPECTUS
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PROSPECTUS FOR
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE POLICY
ISSUED BY
PROVIDENT MUTUAL LIFE INSURANCE COMPANY
1600 MARKET STREET, PHILADELPHIA, PENNSYLVANIA 19103
TELEPHONE: (215) 636-5000
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This Prospectus describes a flexible premium adjustable variable life
insurance policy (the "Policy") offered by Provident Mutual Life Insurance
Company ("PMLIC"). The Policy has an insurance component and an investment
component. The primary intended purpose of the Policy is to provide insurance
coverage until the Insured's Attained Age 95. It is designed to provide
considerable flexibility in connection with premium payments, investment
options, and death benefits. It does so by giving the Policyowner (the
"Owner") the right to vary the frequency and amount of premium payments (after
the initial premium), to allocate Net Premiums among investment alternatives
with different investment objectives and to increase or decrease the Death
Benefit payable under the Policy.
After certain deductions are made, Net Premiums are allocated to one or more
of the Separate Accounts, or the Guaranteed Account (which is part of PMLIC's
General Account and pays interest at declared rates guaranteed to equal or
exceed 4%) or both. The eight Separate Accounts presently available are: the
Provident Mutual Variable Growth Separate Account; the Provident Mutual
Variable Money Market Separate Account; the Provident Mutual Variable Bond
Separate Account; the Provident Mutual Variable Managed Separate Account; the
Provident Mutual Variable Zero Coupon Bond Separate Account; the Provident
Mutual Variable Aggressive Growth Separate Account; the Provident Mutual
Variable International Separate Account and the Provident Mutual Variable
Separate Account (collectively, the Separate Accounts). The Growth, Money
Market, Bond, Managed, Aggressive Growth and International Separate Accounts
invest in shares of a designated corresponding mutual fund portfolio. Each
portfolio is a part of The Market Street Fund, Inc. (the MS Fund). The Zero
Coupon Bond Separate Account has two Sub-Accounts, the assets of which are
used to purchase units of a corresponding series of The Stripped ("Zero") U.S.
Treasury Securities Fund, Provident Mutual Series A (Zero Coupon Trust or
Trust). The Provident Mutual Variable Separate Account has thirteen
Subaccounts, the assets of which are used to purchase shares of a designated
corresponding mutual fund portfolio (each, along with the portfolios of the MS
Fund, a "Portfolio") that is part of one of the following funds: Neuberger &
Berman Advisers Management Trust, TCI Portfolios, Inc., Variable Insurance
Products Fund, Variable Insurance Products Fund II and Van Eck Investment
Trust (together with the MS Fund, the "Funds").
The portion of the Policy Account Value in the Separate Accounts will vary
with the investment experience of the corresponding Portfolios or series of
the Trust. The Owner bears the entire investment risk for all amounts
allocated to the Separate Accounts; there is no guaranteed minimum account
value for the Separate Accounts.
The accompanying Prospectuses for the Funds and for the Zero Coupon Trust
describe the investment objectives and the attendant risks of the Portfolios
and the two series of the Trust.
The Policy Account Value will reflect the Monthly Deductions and certain
other fees and charges such as the Mortality and Expense Risk Charge and, for
the Zero Coupon Bond Separate Account, the transaction charge. Also, a
surrender charge may be imposed if, during the first 10 Policy Years or within
10 years after a Face Amount increase, the Policy lapses or if the Owner
effects a decrease in Face Amount. Generally, the Policy will remain in force
as long as the Net Cash Surrender Value is sufficient to pay certain monthly
charges imposed in connection with the Policy.
It may not be advantageous to purchase a Policy as a replacement for another
type of life insurance or as a means to obtain additional protection if the
purchaser already owns an adjustable variable life insurance policy.
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THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY CURRENT PROSPECTUSES FOR
THE FUNDS LISTED ABOVE.
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PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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Prospectus dated May 1, 1995
Form 15938 5.95
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TABLE OF CONTENTS
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Definitions............................................................. 1
Summary Description of the Policy....................................... 4
The Policy Offered.................................................... 4
Availability of Policy................................................ 5
The Death Benefit..................................................... 5
Flexibility to Adjust Amount of Death Benefit......................... 5
Policy Account Value.................................................. 5
Allocation of Net Premiums............................................ 6
Transfers............................................................. 6
Free-Look Privilege................................................... 6
Charges Assessed in Connection with the Policy........................ 7
Premium Tax Charge.................................................. 7
Monthly Deductions.................................................. 7
Surrender Charge and Additional Surrender Charge.................... 7
Face Amount Increase Charge......................................... 7
Transfer Charge..................................................... 7
Partial Withdrawal Charge........................................... 7
Daily Charges Against the Separate Accounts......................... 8
Policy Lapse and Reinstatement........................................ 8
Loan Privilege........................................................ 8
Partial Withdrawal of Net Cash Surrender Value........................ 8
Surrender of the Policy............................................... 9
Accelerated Death Benefit............................................. 9
Tax Treatment......................................................... 9
Illustrations of Death Benefits, Policy Account Value and Net Cash
Surrender Value...................................................... 9
Provident Mutual Life Insurance Company, The Separate Accounts, The
Funds and The Stripped ("Zero") U.S. Treasury Securities Fund, Provi-
dent Mutual Series A................................................... 10
Provident Mutual Life Insurance Company............................... 10
The Separate Accounts................................................. 10
The Market Street Fund, Inc........................................... 10
The Stripped ("Zero") U.S. Treasury Securities Fund, Provident Mutual
Series A............................................................. 12
1996 Series......................................................... 12
2006 Series......................................................... 12
The Variable Insurance Products Fund and Variable Insurance Products
Fund II.............................................................. 13
VIP Fund............................................................ 14
VIP Fund II......................................................... 14
Neuberger & Berman Advisers Management Trust.......................... 16
TCI Portfolios, Inc. ................................................. 17
Van Eck Investment Trust.............................................. 18
The Guaranteed Account................................................ 20
Detailed Description of Policy Provisions............................... 20
Death Benefit......................................................... 20
General............................................................. 20
Death Benefit Options............................................... 20
Option A.......................................................... 20
Option B.......................................................... 21
Which Death Benefit Option to Choose.............................. 21
Change in Death Benefit Option.................................... 21
How the Death Benefit May Vary...................................... 22
Ability to Adjust Face Amount......................................... 22
Increase............................................................ 22
Decrease............................................................ 23
Changes Affecting the Death Benefit................................... 23
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How the Duration of the Policy May Vary................................. 24
Policy Account Value.................................................... 24
Calculation of Policy Account Value................................... 24
Determination of Number of Units for the Separate Accounts............ 25
Determination of Unit Value........................................... 25
Net Investment Factor................................................. 25
Payment and Allocation of Premiums...................................... 25
Issuance of a Policy.................................................. 25
Amount and Timing of Premiums......................................... 26
Premium Limitations................................................... 26
Allocation of Net Premiums............................................ 26
Transfers............................................................. 27
Policy Lapse.......................................................... 27
Reinstatement......................................................... 27
Charges and Deductions.................................................... 28
Premium Tax Charge...................................................... 28
Surrender Charges....................................................... 28
Surrender Charge...................................................... 28
Additional Surrender Charge........................................... 28
Surrender Charge Upon Decrease in Face Amount......................... 29
Allocation of Surrender Charges....................................... 29
Monthly Deductions...................................................... 29
Cost of Insurance..................................................... 29
Cost of Insurance Rate.............................................. 30
Premium Class....................................................... 30
Administrative Charges................................................ 30
Initial Administrative Charge....................................... 30
Monthly Administrative Charge....................................... 30
Additional Benefit Charges............................................ 31
Face Amount Increase Charge............................................. 31
Partial Withdrawal Charge............................................... 31
Transfer Charge......................................................... 31
Charges Against the Separate Accounts................................... 31
Mortality and Expense Risk Charge..................................... 31
Asset Charge Against Zero Coupon Bond Separate Account................ 31
Charges for Income Taxes................................................ 32
Guarantee of Certain Charges............................................ 32
Other Charges........................................................... 32
Contract Rights........................................................... 32
Loan Privileges......................................................... 32
General............................................................... 32
Interest Rate Charged................................................. 32
Allocation of Loans and Collateral.................................... 32
Interest Credited to Loan Account..................................... 32
Effect of Policy Loan................................................. 33
Loan Repayments....................................................... 33
Lapse With Loans Outstanding.......................................... 33
Tax Considerations.................................................... 33
Surrender Privilege..................................................... 33
Partial Withdrawal of Net Cash Surrender Value.......................... 33
Accelerated Death Benefit............................................... 35
Tax Consequence of the Rider.......................................... 35
Amount of the Accelerated Death Benefit............................... 35
Conditions for Receipt of the Accelerated Death Benefit............... 36
Operation of the Rider................................................ 36
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Effect on Existing Policy............................................ 36
Free-Look Privileges................................................... 37
Free-Look for Policy................................................. 37
Free-Look for Increase in Face Amount................................ 37
Special Transfer and Conversion Rights................................. 37
Transfer Right for Policy............................................ 37
Conversion Privilege for Increase in Face Amount..................... 37
Transfer Right for Change in Investment Policy of Separate Account or
Subaccount.......................................................... 37
The Guaranteed Account................................................... 38
Minimum Guaranteed and Current Interest Rates.......................... 38
Calculation of Guaranteed Account Value.............................. 38
Transfers from Guaranteed Account...................................... 39
Other Policy Provisions.................................................. 39
Amount Payable on Final Policy Date.................................... 39
Payment of Policy Benefits............................................. 39
The Contract........................................................... 39
Ownership.............................................................. 40
Beneficiary............................................................ 40
Change of Owner and Beneficiary........................................ 40
Split Dollar Arrangements.............................................. 40
Assignments............................................................ 40
Misstatement of Age.................................................... 40
Suicide................................................................ 40
Incontestability....................................................... 41
Dividends.............................................................. 41
Settlement Options..................................................... 41
Supplementary Benefits................................................. 41
Disability Waiver of Monthly Deductions.............................. 41
Disability Waiver of Premium Benefit................................. 41
Change of Insured.................................................... 42
Federal Income Tax Considerations........................................ 42
Introduction........................................................... 42
Tax Status of the Policy............................................... 42
Tax Treatment of Policy Benefits....................................... 43
In General........................................................... 43
Modified Endowment Contracts......................................... 44
Distributions from Policies Classified as Modified Endowment Con-
tracts.............................................................. 44
Distributions from Policies Not Classified as Modified Endowment Con-
tracts.............................................................. 44
Policy Loan Interest................................................. 45
Investment in the Policy............................................. 45
Multiple Policies.................................................... 45
Other Tax Consequences............................................... 45
Special Rules for Pension and Profit-Sharing Plans..................... 45
Possible Charge for PMLIC's Taxes...................................... 46
Voting Rights............................................................ 46
Changes in Applicable Law, Funding, and Otherwise........................ 47
Officers and Directors of PMLIC.......................................... 48
Distribution of Policies................................................. 50
Policy Reports........................................................... 51
State Regulation......................................................... 51
Experts.................................................................. 51
Legal Matters ........................................................... 52
Appendix A--Illustration of Death Benefits, Policy Account Values and Net
Cash Surrender Values................................................... A-1
Appendix B--Long Term Market Trends...................................... B-1
Financial Statements..................................................... F-1
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THE POLICY MAY NOT BE AVAILABLE IN ALL JURISDICTIONS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS. IF GIVEN, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE
RELIED ON.
THE PRIMARY PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE
INSURANCE PROTECTION. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
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DEFINITIONS
ADDITIONAL SURRENDER
CHARGE.................... The separately determined amount deducted from
the Policy Account Value upon surrender or lapse
of the Policy within 10 years of the effective
date of an increase in Face Amount. A pro-rata
Additional Surrender Charge will be deducted for
a reduction in Face Amount within 10 years of the
effective date of a Face Amount increase. The
Maximum Additional Surrender Charge will be shown
in the Policy Schedule Pages reflecting the Face
Amount increase.
ATTAINED AGE............... The Issue Age of the Insured plus the number of
full Policy Years since the Policy Date.
BENEFICIARY................ The person(s) or entity(ies) designated to
receive all or some of the Insurance Proceeds
when the Insured dies. The Beneficiary is
designated in the application or if subsequently
changed, as shown in the latest change filed with
PMLIC. If no Beneficiary survives and unless
otherwise provided, the Insured's estate will be
the Beneficiary.
CASH SURRENDER VALUE....... The Policy Account Value minus any applicable
contingent Surrender Charge or Additional
Surrender Charge.
DEATH BENEFIT.............. Under Option A, the greater of the Face Amount or
a percentage of the Policy Account Value on the
date of death; under Option B, the greater of the
Face Amount plus the Policy Account Value on the
date of death, or a percentage of the Policy
Account Value on the date of death. The Death
Benefit Option is selected at time of application
but may be later changed.
FACE AMOUNT................ The Initial Face Amount plus any increases in
Face Amount and minus any decreases in Face
Amount.
FINAL POLICY DATE.......... The Policy Anniversary nearest Insured's Attained
Age 95 at which time the Policy Account Value, if
any, (less any outstanding Policy loan and
accrued interest) will be paid to the Owner if
the Insured is living. The Policy will end on the
Final Policy Date.
GRACE PERIOD............... The 61-day period allowed for payment of a
premium following the date PMLIC mails notice of
the amount required to keep the Policy in force.
HOME OFFICE................ PMLIC's Home Office at 1600 Market Street,
Philadelphia, PA 19103.
INITIAL FACE AMOUNT........ The Face Amount of the Policy on the Issue Date.
The Face Amount may be increased or decreased
after issue.
INSURANCE PROCEEDS......... The net amount to be paid to the Beneficiary when
the Insured dies.
INSURED.................... The person upon whose life the Policy is issued.
ISSUE AGE.................. The age of the Insured at his or her birthday
nearest the Policy Date. The Issue Age is stated
in the Policy.
LOAN ACCOUNT............... The account to which the collateral for the
amount of any Policy loan is transferred from the
Separate Accounts and/or the Guaranteed Account.
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MINIMUM FACE AMOUNT........ For the first 10 Policy Years, for Issue Ages 21-
75, the Minimum Face Amount is $500,000; for
Issue Ages 1-21, $250,000. After the tenth Policy
Year, the Minimum Face Amount is $200,000.
MINIMUM INITIAL PREMIUM.... Equal to $300 (the Initial Administrative Charge)
plus the sum of three monthly deductions,
increased by any premium tax and applicable
surrender charges.
MONTHLY DEDUCTIONS......... The amount deducted from the Policy Account Value
on each Policy Processing Day. It includes the
Monthly Administrative Charge, the Monthly Cost
of Insurance Charge, and the monthly cost of any
benefits provided by riders. The first Monthly
Deduction also includes the Initial
Administrative Charge.
NET AMOUNT AT RISK......... The amount by which the Death Benefit exceeds the
Policy Account Value.
NET CASH SURRENDER VALUE... The Policy Account Value minus any applicable
contingent surrender charges, minus any
outstanding Policy loans and accrued interest.
NET PREMIUM................ The remainder of a premium after the deduction of
the Premium Tax Charge.
OWNER...................... The person(s) or entity(ies) entitled to exercise
the rights granted in the Policy.
PLANNED PERIODIC PREMIUM... The premium amount which the Owner plans to pay
at the frequency selected. The Owner is entitled
to receive a reminder notice and change the
amount of the Planned Periodic Premium. The Owner
is not required to pay the designated amount.
POLICY ACCOUNT VALUE....... The sum of the Policy's values in the Separate
Accounts, the Guaranteed Account, and the Loan
Account.
POLICY ANNIVERSARY......... The same day and month as the Policy Date in each
later year.
POLICY DATE................ The date set forth in the Policy that is used to
determine Policy Years and Policy Processing
Days. The Policy Date is generally the same as
the Issue Date but may be another date mutually
agreed upon by PMLIC and the proposed Insured.
POLICY ISSUE DATE.......... The date on which the Policy is issued. It is
used to measure suicide and contestable periods.
POLICY PROCESSING DAY...... The day in each calendar month which is the same
day of the month as the Policy Date. The first
Policy Processing Day is the Policy Date.
POLICY YEAR................ A year that starts on the Policy Date or on a
Policy Anniversary.
PREMIUM CLASS.............. The classification of the Insured for cost of
insurance purposes. The classes are: standard;
nonsmoker; with extra rating; and nonsmoker with
extra rating.
SURRENDER CHARGE........... The amount deducted from the Policy Account Value
upon lapse or surrender of the Policy during the
first 10 Policy Years. A pro-rata Surrender
Charge will be deducted upon a decrease in the
Initial Face Amount during the first 10 Policy
Years. The Maximum
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Surrender Charge is shown in the Policy. The
Surrender Charge is determined separately from
the Additional Surrender Charge.
VALUATION DAY.............. Each day that the New York Stock Exchange is open
for business and any other day on which there is
a sufficient degree of trading with respect to a
Separate Account's portfolio of securities to
materially affect the value of that Separate
Account.
VALUATION PERIOD........... The time between two successive Valuation Days.
Each Valuation Period includes a Valuation Day
and any non-Valuation Day or consecutive non-
Valuation Days immediately preceding it.
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SUMMARY DESCRIPTION OF THE POLICY
The following summary of the Policy provisions should be read in conjunction
with the detailed information appearing elsewhere in this Prospectus.
THE POLICY OFFERED
The Flexible Premium Adjustable Variable Life Insurance Policy (the "Policy")
offered by this Prospectus is issued by Provident Mutual Life Insurance Company
("PMLIC"). The Policy allows the Owner, subject to certain limitations, to make
premium payments in any amount and at any frequency. As long as the Policy
remains in force, it will provide for:
(1)Life insurance coverage on the named Insured up to the Insured's
Attained Age 95;
(2)A Cash Surrender Value;
(3)Surrender and withdrawal rights and Policy loan privileges; and
(4)A variety of additional insurance benefits.
The Policy described in this Prospectus is designed to provide insurance
coverage to help lessen the economic loss resulting from the death of the
Insured. It is not primarily offered as an investment. Life insurance is not a
short-term investment. Prospective Owners should consider their need for
insurance coverage and the Policy's long-term investment potential.
The Policy is called "flexible premium" because there is no fixed schedule
for premium payments, even though the Owner may establish a schedule of Planned
Periodic Premiums. The Policy is described as "adjustable" because the Owner
may, within limits, increase or decrease the Face Amount and may change the
Death Benefit Option. The Policy is called "variable" because, unlike a fixed
benefit whole life insurance policy, the Death Benefit under the Policy may,
and its Account Value will, vary to reflect the investment performance of the
chosen Separate Accounts, and the crediting of interest to the Guaranteed
Account, as well as other factors.
The failure to pay Planned Periodic Premiums will not itself cause the Policy
to lapse. Conversely, the payment of premiums in any amount or frequency will
not necessarily guarantee that the Policy will remain in force. In general, the
Policy will lapse if the Net Cash Surrender Value is insufficient to pay the
Monthly Deduction for cost of insurance and administrative charges.
After deduction of the Premium Tax Charge, Net Premiums are allocated to one
or more of the Separate Accounts and/or the Guaranteed Account as selected by
the Owner. The Guaranteed Account is part of PMLIC's General Account.
The assets of the Growth, Money Market, Bond, Managed, Aggressive Growth and
International Separate Accounts are invested in a corresponding portfolio of
The Market Street Fund, Inc. (the MS Fund), a series mutual fund with six
separate investment portfolios, each intended to meet different investment
objectives. Provident Mutual Variable Separate Account consists of thirteen
Subaccounts, the assets of which are used to purchase shares of a designated
corresponding mutual fund portfolio (each, along with the portfolios of the MS
Fund, a "Portfolio") that is part of one of the following funds: Neuberger &
Berman Advisers Management Trust, TCI Portfolios, Inc., Variable Insurance
Products Fund, Variable Insurance Products Fund II and Van Eck Investment Trust
(together with the MS Fund, the "Funds", each, a "Fund"). The Subaccounts of
the Zero Coupon Bond Separate Account invest in units of a corresponding series
of The Stripped ("Zero") U.S. Treasury Securities Fund, Provident Mutual Series
A (Zero Coupon Trust or Trust). There is no assurance that the investment
objectives of a particular Portfolio or series of the Trust will be met. The
Owner bears the entire investment risk of amounts allocated to the Separate
Accounts.
A prospective Owner who already has life insurance coverage should consider
whether or not changing or adding to existing coverage would be advantageous.
Generally, it is not advisable to purchase another policy as a replacement for
an existing policy.
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AVAILABILITY OF POLICY
This Policy can be issued for Insureds from Issue Ages 1 to 75. For Issue
Ages 21 and over, the minimum Initial Face Amount is $500,000; for Issue Ages
under 21, $250,000. (For Policies issued to residents of New York State, the
minimum Initial Face Amount is $1,000,001.) Before issuing a Policy, PMLIC will
require that the proposed Insured meet certain underwriting standards
satisfactory to PMLIC. The premium classes available are Standard, Nonsmoker,
with Extra Rating and Nonsmoker with Extra Rating. (See "Issuance of a Policy,"
Page 25.)
THE DEATH BENEFIT
As long as the Policy remains in force, PMLIC will pay the Insurance Proceeds
to the Beneficiary upon receipt of due proof of the death of the Insured. The
Insurance Proceeds will consist of the Policy's Death Benefit, plus any
dividends payable, plus any relevant additional benefits provided by a
supplementary benefit rider, less any outstanding Policy loan and accrued
interest, less any unpaid Monthly Deductions.
There are two Death Benefit Options available. Death Benefit Option A
provides for the greater of (a) the Face Amount and (b) the applicable
percentage of the Policy Account Value. Death Benefit Option B provides for the
greater of (a) the Face Amount plus the Policy Account Value and (b) the
applicable percentage of the Policy Account Value. (See "Death Benefit
Options," Page 20.)
FLEXIBILITY TO ADJUST AMOUNT OF DEATH BENEFIT
After the first Policy Year, the Owner has significant flexibility to adjust
the Death Benefit by changing the Death Benefit Option or by increasing or
decreasing the Face Amount of the Policy. (See "Change in Death Benefit
Option," Page 21, and "Ability to Adjust Face Amount," Page 22.) The minimum
amount of a requested increase in Face Amount is $100,000 (or such lesser
amount required in a particular state) and any requested increase may require
evidence of insurability. Any decrease in Face Amount must be for at least
$100,000 (or such lesser amount required in a particular state) and during
Policy Years 2 through 10 cannot result in a Face Amount less than the minimum
Initial Face Amount available; after the tenth Policy Year, the Minimum Face
Amount cannot be less than $200,000. PMLIC reserves the right to establish
different Minimum Face Amounts for Policies issued in the future.
Any change in Death Benefit Options or in the Face Amount may affect the
charges under the Policy. Any increase in the Face Amount will result in an
increase in the Monthly Deductions and any increase in Face Amount will also
increase the surrender charges which are imposed upon lapse or surrender of the
Policy or the pro-rata surrender charges imposed upon a decrease in Face Amount
within the relevant ten-year period. For any decrease in Face Amount, that part
of the surrender charges attributable to the decrease will reduce the Policy
Account Value, and the surrender charges will be reduced by this amount. A
decrease in Face Amount may also affect cost of insurance charges. (See "Cost
of Insurance," Page 29.)
To the extent that a requested decrease in Face Amount would result in
cumulative premiums exceeding the maximum premium limitations applicable under
the Internal Revenue Code for life insurance, PMLIC will not effect the
decrease.
POLICY ACCOUNT VALUE
The Policy Account Value is the total amount of value held under the Policy
at any time. It equals the sum of the amounts held in the Separate Accounts,
the Guaranteed Account and the Loan Account. (See "Calculation of Policy
Account Value," Page 24.)
The Policy Account Value in the Separate Accounts will reflect the investment
performance of the chosen Separate Accounts, any Net Premiums paid, any
transfers, any partial withdrawals, any loans, any loan repayments, any loan
interest paid or credited and any charges assessed in connection with the
Policy. The Owner bears the entire investment risk for amounts allocated to the
Separate Accounts. There is no guaranteed minimum for the portion of the Policy
Account Value in the Separate Accounts.
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The Guaranteed Account earns interest at rates PMLIC declares in advance for
specific periods. The rates are guaranteed to equal or exceed 4%. The
principal, after deductions, is also guaranteed. The value of the Guaranteed
Account will reflect any amounts allocated or transferred to it plus interest
credited to it, less amounts deducted, transferred or withdrawn from it. (See
"The Guaranteed Account," Page 38.)
The Loan Account will reflect any amounts transferred from the Separate
Accounts and/or Guaranteed Account as collateral for Policy loans plus interest
of at least 4% credited to such amount. (See "Loan Privileges," Page 32.)
The Policy Account Value is relevant to the computation of the Death Benefit
and cost of insurance charges.
ALLOCATION OF NET PREMIUMS
Except as described below, Net Premiums will generally be allocated to the
Separate Accounts and the Guaranteed Account in accordance with the allocation
percentages which are in effect for such premium when received at PMLIC's Home
Office. These percentages will be those specified in the application or as
subsequently changed by the Owner or as specified for a particular premium
payment.
Where state law requires a return of gross premiums paid when a Policy is
returned under the Free-Look provision (see "Free-Look for Policy," Page 37)
any portion of the Initial Net Premium and any Net Premiums received before the
expiration of a 15-day period beginning on the later of the Policy Issue Date
or the date PMLIC receives the Minimum Initial Premium, which are to be
allocated to the Separate Accounts will be allocated to the Money Market
Separate Account. At the end of the 15-day period, the amount in the Money
Market Separate Account (including investment experience) will be allocated to
each of the chosen Separate Accounts based on the proportion that the
allocation percentage for such Separate Account bears to the sum of the
Separate Account premium allocation percentages. (See "Allocation of Net
Premiums," Page 26.)
TRANSFERS
The Owner may make transfers of the amounts in the Separate Accounts and
Guaranteed Account between and among such accounts and between and among
Subaccounts of a Separate Account. Transfers between and among the Separate
Accounts (and/or Subaccounts) or into the Guaranteed Account will be made on
the date we receive the request. PMLIC requires a minimum amount for each such
transfer, usually $1,000. Transfers out of the Guaranteed Account may only be
made within 30 days of a Policy Anniversary and are limited in amount. If the
Owner makes more than four transfers in a Policy Year, a Transfer Charge of $25
will be deducted from the amount being transferred. (See "Transfers," Page
27.)
FREE-LOOK PRIVILEGE
The Policy provides for an initial Free-Look period. The Owner may cancel the
Policy before the latest of: (a) 45 days after Part I of the Application for
the Policy is signed; (b) 10 days after the Owner receives the Policy; and (c)
10 days after PMLIC mails or personally delivers a Notice of Withdrawal Right
to the Owner. Upon returning the Policy to PMLIC or to an agent of PMLIC within
such time with a written request for cancellation, the Policy will be
cancelled. PMLIC will promptly pay to the Owner will receive a refund equal to
the sum of: (i) the Policy Account Value as of the date PMLIC receives the
returned Policy; plus (ii) the amount deducted for premium taxes; plus (iii)
any Monthly Deductions charged against the Policy Account Value; plus (iv) an
amount reflecting other charges directly or indirectly deducted under the
Policy. Where state law requires a minimum refund equal to gross premiums paid,
the refund will instead equal the gross premium paid on the Policy and will not
reflect the investment experience of the Separate Accounts. (See "Free-Look
Privileges," Page 37.)
A Free-Look privilege also applies after a requested increase in Face Amount.
(See "Free-Look For Increase in Face Amount," Page 37.)
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CHARGES ASSESSED IN CONNECTION WITH THE POLICY
Premium Tax Charge. A Premium Tax Charge will be deducted from each premium
payment for state and local premium taxes. This charge is based on the rate for
the Insured's residence at the time the premium is paid. PMLIC reserves the
right to change the amount of the charge deducted from future premiums if the
Insured's residence changes or applicable law is changed. (See "Premium Tax
Charge," Page 28.)
Monthly Deductions. On the Policy Date and on each Policy Processing Day
thereafter, the Policy Account Value will be reduced by a Monthly Deduction
equal to the sum of the monthly Cost of Insurance Charge, Monthly
Administrative Charge, a charge for additional benefits added by rider and, on
the Policy Date only, the Initial Administrative Charge. The monthly Cost of
Insurance Charge will be determined by multiplying the Net Amount at Risk (that
is the Death Benefit less Policy Account Value) by the applicable cost of
insurance rate(s), which will depend upon the Attained Age and Premium Class of
the Insured and PMLIC's expectations as to future mortality and expense
experience, but which will not exceed the guaranteed maximum cost of insurance
rates set forth in the Policy based on the Insured's Attained Age, Premium
Class, and the "1980 Commissioners Standard Ordinary Mortality Table B." The
Policy, when sold in Massachusetts and New York State in non-employer sponsored
arrangements, utilizes sex-distinct mortality tables. For the "sex-distinct"
version, cost of insurance rates also vary based on the sex of the Insured.
(See "Cost of Insurance," Page 29.) The monthly Administrative Charge is
currently $8; the maximum permissible monthly Administrative Charge is $16.
(See "Monthly Administrative Charge," Page 30.) The Initial Administrative
Charge is $300, payable on the Policy Date. (See "Initial Administrative
Charge," Page 30.)
Surrender Charge and Additional Surrender Charge. A Surrender Charge, which
is a contingent deferred sales charge, is imposed if the Policy is surrendered
or lapses at any time before the tenth Policy Year. A portion of this Surrender
Charge will be deducted if the Owner decreases the Initial Face Amount before
the end of the tenth Policy Year. (See "Surrender Charge," Page 28.) An
Additional Surrender Charge will be imposed if the Policy is surrendered or
lapses at any time within ten years after the effective date of an increase in
Face Amount. (See "Additional Surrender Charge," Page 28.) A portion of an
Additional Surrender Charge will be deducted if the related increment of Face
Amount is decreased within ten years after such increase took effect. (See
"Surrender Charge Upon Decrease in Face Amount," Page 29.)
The Surrender Charge is equal to 30% of the premiums received during the
first Policy Year (or, for the Additional Surrender Charge, the first twelve
policy months after an increase) up to one target premium (which is an amount,
based on the age of the Insured, used solely for the purpose of calculating the
Surrender Charge) plus 9% of all other premiums received to the date of
surrender, lapse or decrease. The Surrender Charge and any Additional Surrender
Charges, however, will not exceed the Maximum Surrender Charge and Maximum
Additional Surrender Charges, respectively. During Policy Years one through six
(or for six years following the effective date of an increase in Face Amount),
this maximum equals 50% of the target premium for the Initial Face Amount (or
50% of the target premium for the increase, as the case may be). The maximum
declines to 40% of the relevant target premiums during the seventh year, 30%
during the eighth year, 20% during the ninth year and 10% during the tenth
year.
Face Amount Increase Charge. A charge equal to $300 will be deducted from the
Policy Account Value on the effective date of an increase in Face Amount to
compensate PMLIC for administrative expenses in connection with the increase.
(See "Face Amount Increase Charge," Page 31.)
Transfer Charge. After the fourth transfer between accounts in a Policy Year,
a $25 charge for each additional transfer will be deducted from the amount
transferred to compensate PMLIC for administrative costs in handling such
transfers. (See "Transfer Charge," Page 31.)
Partial Withdrawal Charge. A charge equal to $25 will be deducted by PMLIC
from the Policy Account Value to compensate it for its costs. (See "Partial
Withdrawal Charge," Page 31.)
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Daily Charges Against the Separate Accounts. A daily charge for PMLIC's
assumption of certain mortality and expense risks incurred in connection with
the Policy will be imposed at an effective annual rate of 0.75% of the average
daily net assets of the Separate Accounts. (See "Charges Against the Separate
Accounts," Page 31.)
With regard to the Zero Coupon Bond Separate Account, a deduction equivalent
to an effective annual rate of 0.25% of the average daily net assets of each
Sub-Account will be made for transaction charges associated with the purchase
of units of the Zero Coupon Trust. This charge may be increased in the future
but in no event will it exceed an effective annual rate of 0.50%. (See "Asset
Charge Against Zero Coupon Bond Separate Account," Page 31.)
Shares of the Portfolios are purchased by the Separate Accounts at net asset
value which reflects management fees and expenses deducted from the assets of
the Portfolios.
POLICY LAPSE AND REINSTATEMENT
The Policy will lapse if and only if the Net Cash Surrender Value is
insufficient to cover the Monthly Deductions and a 61-day Grace Period expires
without a sufficient premium payment. The failure to pay a Planned Periodic
Premium will not itself cause a Policy to lapse. (See "Policy Lapse," Page
27.)
Subject to certain conditions, including evidence of insurability
satisfactory to PMLIC and the payment of a sufficient premium, a Policy may be
reinstated at any time within three years (or such longer period as may be
required in a particular state) after the expiration of the Grace Period and
before the Final Policy Date. (See "Reinstatement," Page 27.)
LOAN PRIVILEGE
The Owner may obtain Policy loans in a minimum amount of $1,500 (or such
lesser minimum as may be required in a particular state) but not exceeding, in
the aggregate, the Net Cash Surrender Value.
Policy loans will bear interest at a fixed rate of 8% per year (6% per year
for Policies issued in New York State), payable at the end of each Policy Year.
If interest is not paid when due, it will be added to the outstanding loan
balance. Policy loans may be repaid at any time and in any amount prior to the
Final Policy Date.
Policy loans are allocated to the Separate Accounts and the Guaranteed
Account based on the proportion that each account's value bears to the total
unloaned Policy Account Value. Based on this allocation, the collateral for the
loan is deducted from each account and transferred to the Loan Account. This
amount in the Loan Account will earn interest at an effective annual rate PMLIC
will determine prior to each calendar year. This rate will not be less than 4%.
(See "Loan Privileges," Page 32.)
Depending upon the investment performance of Net Cash Surrender Value and the
amount of any Policy loan, such loans may cause a Policy to lapse. If a Policy
is not a Modified Endowment Contract, lapse of the Policy with Policy loans
outstanding may result in adverse tax consequences. (See "Tax Treatment of
Policy Benefits," Page 43.)
PARTIAL WITHDRAWAL OF NET CASH SURRENDER VALUE
After the first Policy Year, the Owner may, subject to certain restrictions,
request a partial withdrawal of Net Cash Surrender Value. The minimum amount
for such withdrawal is $1,500. An expense charge of $25 will be deducted from
the Policy Account Value for each withdrawal. The withdrawal amount and expense
charge will be allocated to the Separate Accounts and the Guaranteed Account
based on the proportion that the value in each account bears to the total
unloaned Policy Account Value. If Death Benefit Option A is in effect, PMLIC
will reduce the Face Amount by the amount of the withdrawal. (See "Partial
Withdrawal of Net Cash Surrender Value," Page 33.)
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SURRENDER OF THE POLICY
The Owner may at any time fully surrender the Policy and receive the Net Cash
Surrender Value, if any. The Net Cash Surrender Value will equal the Policy
Account Value less any Policy loan and any applicable surrender charges. (See
"Surrender Privilege," Page 33.)
ACCELERATED DEATH BENEFIT
The Owner of a Policy with the Accelerated Death Benefit Rider may receive,
at his or her request and upon approval by PMLIC, accelerated payment of part
of the Policy's Death Benefit if the Insured develops a Terminal Illness or is
permanently confined to a Nursing Care Facility. (See "Accelerated Death
Benefit," Page 35.)
TAX TREATMENT
PMLIC believes (based on IRS Notice 88-128 and the proposed Regulations under
Section 7702, issued on July 3, 1991), that a Policy issued on the basis of a
Standard Premium Class generally should meet the Section 7702 definition of a
life insurance contract. With respect to a Policy issued with Extra Rating or
Nonsmoker with Extra Rating (i.e., substandard) basis, there is insufficient
guidance to determine if such a Policy would satisfy the Section 7702
definition of a life insurance contract, particularly if the Owner pays the
full amount of premiums permitted under such a Policy. An Owner of a Policy
issued with extra rating basis may, however, adopt certain self-imposed
limitations on the amount of premiums paid for such a Policy which should cause
the Policy to meet the Section 7702 definition of a life insurance contract.
Any Owner contemplating the adoption of such limitations should do so only
after consulting a tax adviser.
Assuming that a Policy qualifies as a life insurance contract for federal
income tax purposes, a Policyowner should not be deemed to be in constructive
receipt of Policy Account Value under a Policy until there is a distribution
from the Policy. Moreover, death benefits payable under a Policy should be
completely excludable from the gross income of the Beneficiary. As a result,
the Beneficiary generally should not be taxed on these proceeds. (See "Tax
Status of the Policy," Page 42.)
Under certain circumstances, a Policy may be treated as a "Modified Endowment
Contract." If the Policy is a Modified Endowment Contract, then all pre-death
distributions, including Policy loans, will be treated first as a distribution
of taxable income and then as a return of basis or investment in the contract.
In addition, prior to age 59 1/2 any such distributions generally will be
subject to a 10% penalty tax. (For further discussion on the circumstances
under which a Policy will be treated as a Modified Endowment Contract, See "Tax
Treatment of Policy Benefits," Page 43.)
If the Policy is not a Modified Endowment Contract, distributions generally
will be treated first as a return of basis or investment in the contract and
then as disbursing taxable income. Moreover, loans will not be treated as
distributions. Finally, neither distributions nor loans from a Policy that is
not a Modified Endowment Contract are subject to the 10% penalty tax. (See
"Distributions from Policies Not Classified as Modified Endowment Contracts,"
Page 44.)
For a discussion of the tax considerations relating to the Neuberger & Berman
Advisers Management Trust ("AMT") reorganization, see the AMT prospectus which
accompanies this Prospectus.
ILLUSTRATIONS OF DEATH BENEFITS, POLICY ACCOUNT VALUE AND NET CASH SURRENDER
VALUE
Illustrations of how investment performance of the Separate Accounts may
cause Death Benefits, the Policy Account Value and the Net Cash Surrender Value
to vary are included in Appendix A commencing on page A-1. These projections of
hypothetical values may be helpful in understanding the long-term effects of
different levels of investment performance, of charges and deductions, of
electing one or the other death benefit option, and generally comparing and
contrasting this Policy to other life insurance policies. Nonetheless, the
illustrations are based on hypothetical investment rates of return and are not
guaranteed. Illustrations are illustrative only and are not a representation of
past or future performance. Actual rates of return may be more or less than
those reflected in the illustrations and, therefore, actual values will be
different from those illustrated.
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PROVIDENT MUTUAL LIFE INSURANCE COMPANY, THE SEPARATE ACCOUNTS,
THE FUNDS AND THE STRIPPED ("ZERO")
U.S. TREASURY SECURITIES FUND, PROVIDENT MUTUAL SERIES A
PROVIDENT MUTUAL LIFE INSURANCE COMPANY
PMLIC, a mutual life insurance company chartered in 1865 under Pennsylvania
law, is authorized to transact life insurance and annuity business in
Pennsylvania and in 50 other jurisdictions. PMLIC assumes all insurance risks
under the Policy and its assets support the Policy's benefits. On December 31,
1994, PMLIC's assets were over $4.6 billion. (See "Financial Statements", Page
F-1.)
THE SEPARATE ACCOUNTS
The Growth, Money Market, Bond, Managed, and Zero Coupon Bond Separate
Accounts were established by PMLIC on October 21, 1985 under the provisions of
the Pennsylvania Insurance Law; the Aggressive Growth Separate Account was
established on February 21, 1989, the International Separate Account on July
15, 1991 and the Variable Separate Account on June 3, 1993. Each is a separate
investment account to which assets are allocated to support the benefits
payable under the Policies as well as other variable life insurance policies
PMLIC may issue.
Each Separate Account's assets are the property of PMLIC. Each Policy
provides that the portion of the Separate Account's assets equal to the
reserves and other liabilities under the Policies (and other policies)
supported by the Separate Account will not be chargeable with liabilities
arising out of any other business that PMLIC may conduct. In addition to the
net assets and other liabilities for the Policies, the Separate Account's net
assets include amounts held to support other variable life insurance policies
issued by PMLIC and amounts derived from expenses charged to the accounts by
PMLIC which it currently holds in the Separate Accounts. From time to time
these additional amounts will be transferred in cash by PMLIC to its General
Account. Before making any such transfer, PMLIC will consider any possible
adverse impact the transfer might have on an account.
The Separate Accounts are collectively registered with the Securities and
Exchange Commission (SEC) under the Investment Company Act of 1940 (1940 Act)
as a unit investment trust type of investment company. Such registration does
not involve any supervision of the management or investment practices or
policies of the Separate Accounts by the SEC. Each Separate Account meets the
definition of a "Separate Account" under Federal securities laws.
THE MARKET STREET FUND, INC.
The Growth, Money Market, Bond, Managed, Aggressive Growth and International
Separate Accounts invest in shares of The Market Street Fund, Inc., a "series"
type of mutual fund which is registered with the SEC under the 1940 Act as a
diversified open-end management investment company. The MS Fund currently
issues six "series" or classes of shares, each of which represents an interest
in a separate portfolio within the MS Fund: the Growth Portfolio, the Money
Market Portfolio, the Bond Portfolio, the Managed Portfolio, the Aggressive
Growth Portfolio and the International Portfolio. Shares of each portfolio
currently are purchased and redeemed by the corresponding Separate Account. The
Fund sells and redeems its shares at net asset value without a sales charge.
The MS Fund presently serves as an investment medium for other variable life
policies issued by PMLIC and for variable annuity contracts issued by
Providentmutual Life and Annuity Company of America, a wholly-owned subsidiary
of PMLIC. At some later date the MS Fund may serve as an investment medium for
other variable life policies and variable annuity contracts issued by PMLIC and
may be made available as an investment medium for variable contracts issued by
other insurance companies, including affiliated and unaffiliated companies of
PMLIC. PMLIC currently does not foresee any disadvantages to Owners arising out
of the fact that the MS Fund will offer its shares to fund products other than
PMLIC's policies. However,
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the MS Fund's Board of Directors intends to monitor events in order to identify
any material irreconcilable conflicts that possibly may arise and to determine
what action, if any, should be taken in response to those events or conflicts.
The investment objectives of the MS Fund's portfolios are set forth below.
The investment experience of each of the Separate Accounts depends on the
investment performance of the corresponding portfolio. There is no assurance
that any portfolio will achieve its stated objective.
The Growth Portfolio. This portfolio seeks intermediate and long-term growth
of capital by investing in common stocks of companies believed to offer above-
average growth potential over both the intermediate and the long-term. Current
income is a secondary consideration.
The Money Market Portfolio. The Money Market Portfolio seeks to provide
maximum current income consistent with capital preservation and liquidity by
investing in high-quality money market instruments.
The Bond Portfolio. The Bond Portfolio seeks to generate a high level of
current income consistent with prudent investment risk by investing in a
diversified portfolio of marketable debt securities.
The Managed Portfolio. The Managed Portfolio seeks to realize as high a level
of long-term total rate of return as is consistent with prudent investment risk
by investing in stocks, bonds, money market instruments or a combination
thereof.
The Aggressive Growth Portfolio. The Aggressive Growth Portfolio seeks to
achieve a high level of long-term capital appreciation by investing in
securities of a diverse group of smaller emerging companies.
The International Portfolio. The International Portfolio seeks long-term
growth of capital principally through investments in a diversified portfolio of
marketable equity securities of established non-United States companies.
With respect to the Growth Portfolio, the MS Fund is advised by Newbold's
Asset Management, Inc. (NAM) which is registered with the SEC as an investment
adviser under the Investment Advisers Act of 1940. As compensation for its
services, NAM receives monthly compensation at an effective annual rate of
0.50% of the first $20 million of the average daily net assets of the Growth
Portfolio, 0.40% of the next $20 million of the average daily net assets of the
portfolio, and 0.30% of the average daily net assets in excess of $40 million.
With respect to the Money Market Portfolio, the MS Fund is advised by
Providentmutual Investment Management Company (PIMC), which is registered with
the SEC as an investment adviser under the Investment Advisers Act of 1940. As
compensation for its services, PIMC receives monthly compensation at an
effective annual rate of 0.25% of the average daily net assets of the
portfolio.
With respect to the Bond, Managed and Aggressive Growth Portfolios, the MS
Fund is advised by Sentinel Advisors Company (SAC), which is registered with
the SEC as an investment adviser under the Investment Advisers Act of 1940. As
compensation for its services, PMMC receives monthly compensation as follows:
Bond Portfolio -- 0.35% of the first $100 million of the average daily
net assets of the portfolio and 0.30% of the average daily net assets in
excess of $100 million.
Managed Portfolio -- 0.40% of the first $100 million of the average daily
net assets of the portfolio and 0.35% of the average daily net assets in
excess of $100 million.
Aggressive Growth Portfolio -- 0.50% of the first $20 million of the
average daily net assets of the portfolio, 0.40% of the next $20 million of
the average daily net assets of the portfolio and 0.30% of the average
daily net assets in excess of $40 million.
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With respect to the International Portfolio, the MS Fund is advised by PIMC
which receives monthly compensation at an effective annual rate of 0.75% of the
first $500 million of the average daily net assets of the portfolio and 0.60%
of the average daily net assets in excess of $500 million. PIMC has employed
The Boston Company Asset Management, Inc. (TBC) to provide investment advisory
services in connection with the portfolio. As compensation for the investment
advisory services rendered, PIMC pays TBC a monthly fee at an effective annual
rate of 0.375% of the first $500 million of the average daily net assets of the
portfolio and 0.30% of the average daily net assets in excess of $500
million.
In addition to the fee for the investment advisory services, the MS Fund pays
its own expenses generally, including brokerage costs, administrative costs,
custodian costs, and legal, accounting and printing costs. However, PMLIC has
entered into an agreement with the MS Fund whereby it will reimburse the MS
Fund for all ordinary operating expenses, excluding advisory fees, in excess of
an annual rate of 0.40% of the average daily net assets of each portfolio
except the International Portfolio and 0.75% for the International Portfolio.
It is anticipated that this agreement will continue; if it is terminated, MS
Fund expenses will increase.
A more extensive description of the MS Fund, its investment objectives and
policies, its risks, expenses, and all other aspects of its operation is
contained in the Prospectus for the MS Fund, which accompanies this
Prospectus.
THE STRIPPED ("ZERO") U.S. TREASURY SECURITIES FUND, PROVIDENT MUTUAL SERIES A
The Zero Coupon Bond Separate Account invests in units of The Stripped
("Zero") U.S. Treasury Securities Fund, Provident Mutual Series A, a unit
investment trust registered with the SEC as such under the 1940 Act. The Zero
Coupon Trust consists of two series, each with a different maturity date. The
objective of the Trust is to provide safety of capital and a high yield to
maturity through investment in any of the fixed series consisting primarily of
debt obligations issued by the United States of America that have been stripped
of their unmatured interest coupons, coupons stripped from debt obligations of
the United States, and receipts and certificates for such stripped debt
obligations and coupons. A brief summary of the securities purchased by the
Trust is set forth below.
More detailed information may be found in the current Prospectus for The
Stripped ("Zero") U.S. Treasury Securities Fund, Provident Mutual Series A
which accompanies this Prospectus.
Since the U.S. Treasury securities have been stripped of their unmatured
interest coupons, they are purchased at a deep discount. If held to maturity,
the amounts invested by the Zero Coupon Trust would grow to the face value of
the U.S. Treasury securities and therefore, a compound rate of growth to
maturity could be determined for the Trust units at the time of purchase. The
units, however, are held in Sub-Accounts of the Zero Coupon Bond Separate
Account, and certain charges described under "Charges Against the Separate
Accounts" on Page 31, specifically the charge for mortality and expense risks
and the transaction charge against the Zero Coupon Bond Separate Account, must
be reflected in the determination of a net return. The net rate of return to
maturity calculated below thus depends on the compound rate of growth in the
units and these underlying charges, and on the units being held to maturity. It
does not, however, reflect the applicable Monthly Deductions from Policy
Account Value (see "Monthly Deductions," Page 29) or the Premium Tax Charge
(see "Premium Tax Charge," Page 28) or any Surrender Charges (see "Surrender
Charges," Page 28), which would affect the actual yield to an Owner. Since the
value of the Trust's units will vary daily to reflect the market value of the
underlying securities, the compound rate of growth to maturity and, hence, the
net rate of return to maturity will correspondingly vary on a daily basis. The
rate of return to maturity may differ for each Net Premium allocated to the
Zero Coupon Bond Separate Account, depending upon the rate in effect when the
premium is received.
1996 Series. This portfolio contains stripped U.S. Treasury securities
maturing on May 15, 1996. As of April 28, 1993 the net rate of return to
maturity was 4.45%.
2006 Series. This portfolio contains stripped U.S. Treasury securities
maturing on February 15, 2006. As of April 28, 1993 the net rate of return to
maturity was 6.92%.
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Because the value of the Trust's units vary on a daily basis to reflect
market values, no net rate of return can be calculated prospectively for units
not held until maturity. The fluctuation in the value of units of the Zero
Coupon Trust prior to maturity is more volatile than that of units of a unit
investment trust containing unstripped U.S. Treasury securities of comparable
maturities, and because the value of units of the Zero Coupon Trust will affect
the Death Benefit and Policy Account Value, the Policy Account Value and Death
Benefit will fluctuate accordingly.
Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPFS) serves as Sponsor
for the Zero Coupon Trust. Because each series invests in a fixed portfolio,
there is no investment manager. As Sponsor, MLPFS sells units of the Zero
Coupon Trust to the Zero Coupon Bond Separate Account. The price of these units
includes a transaction charge which is not paid by the Zero Coupon Bond
Separate Account upon acquisition. Rather, the transaction charge is paid
directly by PMLIC to MLPFS out of PMLIC's General Account assets. The amount of
the transaction charge paid is limited by agreement between PMLIC and MLPFS and
will not be greater than that ordinarily paid by a dealer for similar
securities. PMLIC is reimbursed for the transaction charge paid through a daily
asset charge which is made against the assets of the Sub-Accounts. (See "Asset
Charge Against Zero Coupon Bond Separate Account", Page 31.)
Units of the Zero Coupon Trust are disposed of to the extent necessary for
PMLIC to provide benefits and make reallocations under the Policies. MLPFS
intends, but is not contractually obligated, to maintain a secondary market in
Trust units. As long as a secondary market exists, PMLIC will sell such units
to MLPFS at the Sponsor's repurchase price. Otherwise, units will be redeemed
at the Trust's redemption price, which is typically a lower amount.
Thirty days prior to the maturity date of the securities contained in a
series of the Trust, an Owner who has allocated Net Premiums to the Sub-Account
of the Zero Coupon Bond Separate Account investing in that series will be
notified and given the opportunity to select the account or Sub-Account into
which the Policy Account Value attributable thereto should be reallocated. If
no instructions are received from the Owner by PMLIC within the 30-day period,
the amount in the Sub-Account will be transferred to the Money Market Separate
Account.
THE VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II
Provident Mutual Variable Separate Account (the "Variable Account") has
thirteen Subaccounts, seven of which invest exclusively in shares of Portfolios
of the Variable Insurance Products Fund (the "VIP Fund") or of the Variable
Insurance Products Fund II (the "VIP Fund II"). Like the MS Fund, the VIP Fund
and the VIP Fund II are each "series" type mutual funds registered with the SEC
as diversified open-end management investment companies issuing a number of
series or classes of shares, each of which represents an interest in a
Portfolio of the Fund.
The Fidelity Equity-Income Subaccount, Fidelity Growth Subaccount, Fidelity
High Income Subaccount and Fidelity Overseas Subaccount of the Variable Account
invest in shares of the Equity-Income Portfolio, Growth Portfolio, High Income
Portfolio and Overseas Portfolio, respectively, of the VIP Fund. The Fidelity
Asset Manager Subaccount, Fidelity Index 500 Subaccount and Fidelity Investment
Grade Bond Subaccount of the Variable Account invest in shares of the Asset
Manager Portfolio, Index 500 Portfolio and Investment Grade Bond Portfolio,
respectively, of the VIP Fund II. (The VIP Fund and VIP Fund II have other
investment Portfolios that are not offered to the Variable Account or under the
Policies.) Shares of these Portfolios are purchased and redeemed by the
Variable Account at net asset value without a sales charge. The Variable
Account purchases shares of the Portfolios from the VIP Fund and the VIP Fund
II in accordance with a participation agreement between each Fund and PMLIC.
The termination provisions of these participation agreements are described
below.
The investment objectives of the Portfolios of the VIP Fund and the VIP Fund
II in which the Subaccounts invest are set forth below. The investment
experience of each Subaccount depends upon the
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investment performance of the corresponding Portfolio. There is no assurance
that any Portfolio will achieve its stated objective.
VIP Fund
Equity-Income Portfolio. This Portfolio seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Equity-Income Portfolio considers the potential for capital appreciation.
The Portfolio's goal is to achieve a yield which exceeds the composite yield of
the securities comprising the Standard and Poor's 500 Composite Stock Price
Index.
Growth Portfolio. This Portfolio seeks to achieve capital appreciation. The
Growth Portfolio normally purchases common stocks, although its investments are
not restricted to any one type of security. Capital appreciation may also be
found in other types of securities, including bonds and preferred stocks.
High Income Portfolio. This Portfolio seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated, fixed-income
securities, while also considering growth of capital.
Overseas Portfolio. This Portfolio seeks long term growth of capital
primarily through investments in foreign securities. The Overseas Portfolio
provides a means for diversification by participating in companies and
economies outside of the United States.
VIP Fund II
Asset Manager Portfolio. This Portfolio seeks to obtain high total return
with reduced risk over the long-term by allocating its assets among stocks,
bonds and short-term fixed-income instruments.
Index 500 Portfolio. This Portfolio seeks to provide investment results that
correspond to the total return (i.e., the combination of capital changes and
income) of common stocks publicly traded in the United States. In seeking this
objective, the Index 500 Portfolio attempts to duplicate the composition and
total return of the Standard and Poor's 500 Composite Stock Price Index while
keeping transaction costs and other expenses low. The Portfolio is designed as
a long-term investment option.
Investment Grade Bond Portfolio. This Portfolio seeks as high a level of
current income as is consistent with the preservation of capital by investing
in a broad range of investment-grade fixed-income securities. The Portfolio
will maintain a dollar-weighted average portfolio maturity of ten years or
less.
The Equity-Income, Growth, High Income, and Overseas Portfolios of the VIP
Fund and the Asset Manager, Index 500 and Investment Grade Bond Portfolios of
the VIP Fund II are managed by Fidelity Management & Research Company ("FMR").
For managing its investments and business affairs, each Portfolio pays FMR a
monthly fee.
For the Equity-Income, Growth, Overseas and Asset Manager Portfolios, the
annual fee rate is the sum of two components:
1. A group fee rate based on the monthly average net assets of all the
mutual funds advised by FMR. This rate cannot rise above 0.52% and it
drops (to as low as a marginal rate of 0.30% when average group assets
exceed $174 billion) as total assets in all these funds rise.
2. An individual fund fee rate of 0.20% for the Equity-Income Portfolio,
0.30% for the Growth Portfolio, 0.40% for the Asset Manager Portfolio
and 0.45% for the Overseas Portfolio.
One-twelfth of the combined annual fee rate is applied to each Portfolio's
net assets averaged over the most recent month, giving a dollar amount which is
the fee for that month.
The Index 500 Portfolio pays FMR a monthly management fee at the annual rate
of 0.28% of the Portfolio's average net assets. One-twelfth of this annual fee
rate is applied to the net assets averaged over the most recent month, giving a
dollar amount which is the fee for that month.
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For the High Income and Investment Grade Bond Portfolios, the annual fee rate
is the sum of two components:
1. A group fee rate based on the monthly average net assets of all the
mutual funds advised by FMR. This rate cannot rise above 0.37%, and it
drops (to as low as a marginal rate of 0.14%) as total assets in all
these funds rise.
2. An individual fund fee rate of 0.35% for the High Income Portfolio and
0.30% for the Investment Grade Bond Portfolio.
One-twelfth of the combined annual fee rate is applied to the Portfolio's
net assets averaged over the most recent month, giving a dollar amount
which is the fee for that month.
On behalf of the Asset Manager Portfolio, FMR has entered into sub-
advisory agreements with Fidelity Management & Research (U.K.) Inc. ("FMR
(U.K.)") and Fidelity Management & Research (Far East) Inc. ("FMR Far
East"), pursuant to which these entities provide research and investment
recommendations with respect to companies based outside the United States.
FMR (U.K.) primarily focuses on companies based in Europe while FMR Far
East focuses primarily on companies based in Asia and the Pacific Basin.
Under the sub-advisory agreements, FMR and not the Portfolio pays FMR
(U.K.) and FMR Far East fees equal to 110% and 105%, respectively, of each
sub-advisor's costs incurred in connection with its sub-advisory
agreement.
On behalf of the Overseas Portfolio, FMR has entered into sub-advisory
agreements with FMR U.K., FMR Far East, and Fidelity International
Investment Advisors (FIIA). Under the sub-advisory agreements, FMR may
receive investment advice and research services with respect to companies
based outside the U.S. and may grant them investment management authority
as well as the authority to buy and sell securities if FMR believes it
would be beneficial to the Portfolio. FIIA, in turn, has entered into a
sub-advisory agreement with its wholly owned subsidiary Fidelity
International Investment Advisors (U.K.) Limited (FIIAL U.K.).
Currently, FMR U.K., FMR Far East, FIIA and FIIAL U.K. each focus on
investment opportunities in countries other than the U.S., including
countries in Europe, Asia and the Pacific Basin.
Under the sub-advisory agreements FMR pays the fees of FMR U.K., FMR Far
East, and FIIA. FIIA, in turn, pays the fees of FIIAL U.K.
For providing investment advice and research services the sub-advisors
are compensated as follows:
. FMR pays FMR U.K. and FMR Far East fees equal to 110% and 105%,
respectively, of FMR U.K.'s and FMR Far East's costs incurred in
connection with providing investment advice and research services.
. FMR pays FIIA 30% of its monthly management fee with respect to the
average market value of investments held by the Portfolio for which
FIIA has provided FMR with investment advice.
. FIIA pays FIIAL U.K. a fee equal to 110% of FIIAL U.K.'s costs
incurred in connection with providing investment advice and research
services.
For providing investment management services, the sub-advisors are
compensated according to the following formulas:
. FMR pays FMR U.K., FMR Far East, and FIIA 50% of its monthly
management fee with respect to the Portfolio's average net assets
managed by the sub-advisor on a discretionary basis.
. FIIA pays FIIAL U.K. 110% of FIIAL U.K.'s costs incurred in
connection with providing investment management.
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<PAGE>
Each Portfolio utilizes Fidelity Investments Institutional Operations Company
("FIIOC"), an affiliate of FMR, to maintain the master accounts of the
participating insurance companies. Under the transfer agent agreement with
FIIOC, each Portfolio pays fees based on the type, size, and number of accounts
in each Portfolio and the number of transactions made by shareholders of each
Portfolio.
Each Portfolio also has an agreement with Fidelity Service Co. ("Service"),
an affiliate of FMR under which each Portfolio pays Service to calculate its
daily share prices and to maintain the portfolio and general accounting records
of each Portfolio and to administer each Portfolio's securities lending
program. The fees for pricing and bookkeeping services are based on each
Portfolio's average net assets but must fall within a range of $45,000 to
$750,000. The fees for securities lending services are based on the number and
duration of individual securities loans.
FMR may, from time to time, agree to reimburse a Portfolio for management
fees and other expenses above a specified percentage of average net assets.
Reimbursement arrangements, which may be terminated at any time without notice,
will increase a Portfolio's yield. If FMR discontinues a reimbursement
arrangement, each Portfolio's expenses will go up and its yield will be
reduced. FMR retains the right to be repaid by a Portfolio for expense
reimbursements if expenses fall below the limit prior to the end of a fiscal
year. Repayment by a Portfolio will lower its yield. FMR has voluntarily agreed
to reimburse the management fees and all other expenses (excluding taxes,
interest and extraordinary expenses) in excess of 1.50% of the average net
assets of the Equity-Income and Growth Portfolios, 1.25% of the average net
assets of the Asset Manager Portfolio and 0.28% of the average net assets of
the Index 500 Portfolio.
A full description of the VIP Fund and the VIP Fund II, the investment
objectives and policies of the Portfolios, the risks, expenses and all other
aspects of their operation is contained in the prospectuses for the VIP Fund
and VIP Fund II which accompany this Prospectus. You should note that the VIP
Fund and VIP Fund II have other investment portfolios that are not available
with the variable life insurance policies issued by PMLIC.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
The Variable Account has thirteen Subaccounts, three of which invest
exclusively in shares of Portfolios of the Neuberger & Berman Advisers
Management Trust ("AMT"). Like the MS fund, the AMT is a "series" type mutual
fund registered with the SEC as a diversified open-end management investment
company issuing a number of series or classes of shares, each of which
represents an interest in a Portfolio of AMT.
The Neuberger & Berman Balanced Subaccount, Neuberger & Berman Growth
Subaccount and Neuberger & Berman Limited Maturity Bond Subaccount of the
Variable Account invest in shares of the Balanced Portfolio, Growth Portfolio
and Limited Maturity Bond Portfolio, respectively, of AMT. (AMT has other
investment portfolios that are not offered to the Variable Account or under the
Policies.) Shares of these Portfolios are purchased and redeemed by the
Variable Account at net asset value without a sales charge. The Variable
Account purchases shares of the Portfolios from AMT in accordance with a
participation agreement between AMT and PMLIC. The termination provisions of
these participation agreements are described below.
Each Portfolio of AMT invests all of its net investable assets in its
corresponding Series (each, a "Series") of Advisers Managers Trust ("Managers
Trust"), an open-end management investment company. Each Series invests in
securities in accordance with an investment objective, policies and limitations
identical to those of its corresponding Portfolio. This "master/feeder fund"
structure is different from that of many other investment companies which
directly acquire and manage their own portfolios of securities. For more
information regarding this structure, see the prospectus for AMT.
In that the investment objective of each Portfolio matches that of its
corresponding Series, the following describes the investment objective of each
Series underlying the Portfolio of AMT in which the Subaccounts
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<PAGE>
will invest. The investment experience of each Subaccount depends upon the
investment performance of its corresponding Portfolio. There is no assurance
that any Portfolio will achieve its stated objective.
Balanced Portfolio. The Series corresponding to this Portfolio seeks long-
term capital growth and reasonable current income without undue risk to
principal through investment of a portion of its assets in common stocks and a
portion of its assets in debt securities.
Growth Portfolio. The Series corresponding to this Portfolio seeks capital
appreciation without regard to income through investments in common stocks of
companies that the investment adviser believes will have the maximum potential
for long-term capital appreciation.
Limited Maturity Bond Portfolio. The Series corresponding to this Portfolio
seeks the highest current income consistent with low risk to principal and
liquidity through investment in a diversified portfolio of fixed and variable
debt securities with a short to intermediate term.
The Investment Adviser for the Series of Managers Trust corresponding to the
Balanced, Growth and Limited Maturity Bond Portfolios of AMT is Neuberger &
Berman Management, Incorporated. The Investment Adviser retains Neuberger &
Berman, without cost to AMT, as sub-adviser to furnish it with investment
recommendations and research information.
As compensation for its services under the Investment Advisory Agreement AMT
pays a fee to the Investment Adviser at the end of each month. For the Balanced
Portfolio this fee is paid at the annual rate of 0.80% of the average daily net
assets of the Portfolio, for the Growth Portfolio, at the annual rate of 0.70%
of the first $250 million of the average of the total net asset value
determined on each calendar day throughout the month (hereinafter called
"average asset value"), 0.675% of the next $250 million of average asset value,
0.650% of the next $250 million of average asset value, 0.625% of the next $250
million of average asset value and 0.60% of the average asset value in excess
of $1 billion and for the Limited Maturity Bond Portfolio, at the annual rate
of 0.60% of the average daily net assets of the Portfolio.
In addition to the investment advisory fee, AMT incurs other expenses,
including certain costs of distributing its shares in accordance with a plan
adopted pursuant to Rule 12b-1 under the 1940 Act. The distributor, Neuberger &
Berman Management, Incorporated, has agreed to reimburse each of the Portfolios
for certain expenses.
A more extensive description of AMT, the investment objectives of the
available Portfolios, the risks, expenses and all other aspects of their
operation is contained in the prospectuses for the Balanced, Growth and Limited
Maturity Bond Portfolios of AMT which accompany this Prospectus.
TCI PORTFOLIOS, INC.
The Variable Account has thirteen Subaccounts, one of which invests
exclusively in shares of a Portfolio of the TCI Portfolios, Inc. ("TCI"). Like
the MS Fund, the TCI is a "series" type mutual fund registered with the SEC as
a diversified open-end management investment company issuing a number of series
or classes of shares, each of which represents an interest in a Portfolio of
TCI.
The TCI Growth Subaccount of the Variable Account invests in shares of the
TCI Growth Portfolio of TCI. (TCI has other investment portfolios that are not
offered to the Variable Account or under the Policies.) Shares of the TCI
Growth Portfolio are purchased and redeemed by the Variable Account at net
asset value without a sales charge. The Variable Account purchases shares of
TCI Growth Portfolio from TCI in accordance with a participation agreement
between TCI and PMLIC. The termination provisions of these participation
agreements are described below.
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<PAGE>
TCI Growth Portfolio seeks capital growth by investing primarily in common
stocks that are considered by management to have better-than-average prospects
for appreciation. There is no assurance that TCI Growth Portfolio will achieve
its stated objective.
The investment adviser for the TCI Growth Portfolio is Investors Research
Corporation ("Investors Research"). As compensation for its services, Investors
Research receives a fee at the end of each month at an annual rate of 1% of the
average net assets of the TCI Growth Portfolio.
A more extensive description of TCI and the TCI Growth Portfolio, including
the Portfolio's investment objectives and policies, risks, expenses and other
aspects of its operations are contained in the Prospectus for TCI which
accompanies this Prospectus.
VAN ECK INVESTMENT TRUST
The Variable Account has thirteen Subaccounts, two of which invest
exclusively in shares of Portfolios of Van Eck Investment Trust (the "Van Eck
Trust"). Like the MS Fund, the Van Eck Trust is a "series" type mutual fund
registered with the SEC as a diversified open-end management investment company
issuing a number of series or classes of shares, each of which represents an
interest in a Portfolio of Van Eck Trust.
The Van Eck Global Bond Subaccount and the Van Eck Gold and Natural Resources
Subaccount of the Variable Account invest in shares of the Van Eck Global Bond
Portfolio and the Van Eck Gold and Natural Resources Portfolio, respectively,
of Van Eck Trust. Shares of the Van Eck Global Bond Portfolio and the Gold and
Natural Resources Portfolio are purchased and redeemed by the Variable Account
at net asset value without a sales charge. The Variable Account purchases
shares of the Portfolio from Van Eck Trust in accordance with a participation
agreement between the Trust and PMLIC. The termination provisions of this
participation agreement are described below.
The investment objectives of the Portfolios of Van Eck Trust are set forth
below. The investment experience of each Subaccount depends upon the investment
performance of its corresponding Portfolio. There is no assurance that these
Portfolios will achieve their stated objectives.
Van Eck Global Bond Portfolio seeks high total return through a flexible
policy of investing globally, primarily in debt securities.
Van Eck Gold and Natural Resources Portfolio seeks long-term capital
appreciation by investing in equity and debt securities of companies engaged in
the exploration, development, production and distribution of gold and other
natural resources such as strategic and other metals, minerals, forest
products, oil, natural gas and coal. Current income is not an investment
objective.
The investment adviser for the Van Eck Global Bond Portfolio and the Gold and
Natural Resources Portfolio is Van Eck Associates Corporation ("Van Eck
Associates"). As compensation for its services, Van Eck Associates receives a
monthly fee at an annual rate of 0.75% of the first $500 million of the average
daily net assets of the Portfolios, 0.65% of the next $250 million of the daily
net assets of the Portfolios, and 0.50% of the average daily net assets of the
Portfolios in excess of $750 million.
A more extensive description of Van Eck Trust, Van Eck Global Bond Portfolio,
and Van Eck Gold and Natural Resources Portfolio, including each Portfolio's
investment objectives and policies, risks, expenses and other aspects of its
operations are contained in the Prospectus for the Trust which accompanies this
Prospectus.
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<PAGE>
TERMINATION OF PARTICIPATION AGREEMENTS
The participation agreements pursuant to which the Funds sell their shares to
Subaccounts of the Variable Account contain varying provisions regarding
termination. The following summarizes those provisions:
Fidelity Variable Insurance products Fund and Variable Insurance Products
Fund II. The Agreements provide for termination 1) upon six months' advance
notice by either party, 2) at PMLIC's option if shares of the Fund are not
reasonably available to meet requirements of the policies, 3) at PMLIC's
option if shares of the Fund are not registered, issued, or sold in
accordance with applicable laws, if the Fund ceases to qualify as a
regulated investment company under the Code or for a Portfolio of the Fund
in the event such Portfolio fails to meet diversification requirements
under the Code, 4) at the option of the Fund or its principal underwriter
if it determines that PMLIC has suffered material adverse changes in its
business or financial condition or is subject to material adverse
publicity, 5) at the option of PMLIC if the Fund has suffered material
adverse changes in its business or financial condition or is a subject of
material adverse publicity, or 6) at the option of the Fund or its
principal underwriter if PMLIC decides to make another mutual fund
available as a funding vehicle for its policies.
Neuberger & Berman Advisers Management Trust. This Agreement may be
terminated by either party on six months' written notice to the other.
TCI Portfolios, Inc. The agreement with TCI provides for termination 1)
by PMLIC or TCI upon six months prior written notice or in the event that
formal proceedings are initiated against the other party by the SEC or
another regulator, 2) by PMLIC or TCI in the event that shares of TCI
subject to the agreement are not registered, offered or sold in conformity
with applicable law, 3) by PMLIC upon reasonable notice if shares of one of
the then available Portfolios of TCI are no longer available or upon sixty
days notice if PMLIC should substitute shares of another fund or Fund for
those of TCI, 4) upon assignment of the agreement unless both parties agree
to the assignment in writing or upon termination of TCI's investment
management agreement with Investor's Research (unless a new management
agreement is entered into by TCI with Investor's Research), and 5) by TCI
if PMLIC breaches the agreement.
Van Eck Investment Trust. The agreement with Van Eck Trust provides for
termination 1) by PMLIC or Van Eck Trust upon six months prior written
notice or in the event that formal proceedings are initiated against the
other party by the SEC or another regulator, 2) by PMLIC or Van Eck Trust
in the event that shares of Van Eck Trust subject to the agreement are not
registered, offered or sold in conformity with applicable law, 3) by PMLIC
upon reasonable notice if shares of one of the then available Portfolios of
Van Eck Trust are no longer available or upon sixty days notice if PMLIC
should substitute shares of another fund or Fund for those of Van Eck
Trust, 4) upon assignment of the agreement unless both parties agree to the
assignment in writing.
Should an agreement between PMLIC and a Fund terminate, the Subaccounts which
invest in that Fund will not be able to purchase additional shares of such
Fund. In that event, Owners will no longer be able to allocate cash values or
net premiums to Subaccounts investing in Portfolios of such Fund.
Additionally, in certain circumstances, it is possible that a Fund or a
portfolio of a Fund may refuse to sell its shares to a Subaccount despite the
fact that the participation agreement between the Fund and PMLIC has not been
terminated. Should a Fund or portfolio of such Fund decide not to sell its
shares to PMLIC, PMLIC will not be able to honor requests by Owners to allocate
cash values or net premiums to Subaccounts investing in shares of that Fund or
portfolio.
RESOLVING MATERIAL CONFLICTS
The VIP Fund and VIP Fund II are used as investment vehicles for variable
life insurance policies and variable annuity contracts issued by PMLIC and
variable annuity contracts issued by Providentmutual Life and Annuity Company
of America, a subsidiary of PMLIC. AMT is used as an investment vehicle for
19
<PAGE>
variable life insurance policies issued by PMLIC. In addition, the Funds, other
than MS Fund, are also available to registered separate accounts of insurance
companies, other than PMLIC or its affiliates, offering variable annuity and
variable life insurance policies. As a result, there is a possibility that a
material conflict may arise between the interests of Owners whose policy values
are allocated to the Variable Account and the owners of life insurance policies
and variable annuities issued by such other companies whose values are
allocated to one or more other separate accounts investing in any one of the
Funds.
In addition, AMT may sell shares to certain retirement plans qualifying under
Section 401 of the Code (including cash or deferred arrangements under Section
401(k) of the Code). As a result, there is a possibility that a material
conflict may arise between the interests of Owners of policies generally, or
certain classes of Owners, and such retirement plans or participants in such
retirement plans.
In the event of a material conflict, PMLIC will take any necessary steps,
including removing the Variable Account from that Fund, to resolve the matter.
The Board of Directors or Trustees of the Funds intend to monitor events in
order to identify any material conflicts that possibly may arise and to
determine what action, if any, should be taken in response to those events or
conflicts. See the Individual Fund Prospectuses for more information.
THE GUARANTEED ACCOUNT
For information on the Guaranteed Account, see page 38.
DETAILED DESCRIPTION OF POLICY PROVISIONS
DEATH BENEFIT
General. As long as the Policy remains in force, the Insurance Proceeds of
the Policy will, upon due proof of the Insured's death (and fulfillment of
certain other requirements), be paid to the named Beneficiary in accordance
with the designated Death Benefit Option. The proceeds may be paid in cash or
under one of the Settlement Options set forth in the Policy. The amount payable
under the designated Death Benefit Option will be increased by any additional
benefits, and any dividend payable and will be decreased by any outstanding
Policy loan and accrued interest and by any unpaid Monthly Deductions.
Death Benefit Options. The Policy provides two Death Benefit Options: Option
A and Option B. The Owner designates the Death Benefit Option in the
application and may change it as described in "Change in Death Benefit Option,"
Page 21.
Option A. The Death Benefit is equal to the greater of: (a) the Face Amount
of the Policy and (b) the Policy Account Value on the Valuation Date on or next
following the Insured's date of death multiplied by the specified percentage
shown in the table below:
<TABLE>
<CAPTION>
ATTAINED AGE PERCENTAGE
- ------------ ----------
<S> <C>
Under 40 250%
45 215%
50 185%
55 150%
</TABLE>
<TABLE>
<CAPTION>
ATTAINED AGE PERCENTAGE
------------ ----------
<S> <C>
60 130%
65 120%
70 115%
75 through 90 105%
95 100%
</TABLE>
For Attained Ages not shown, the percentages will decrease by a ratable portion
for each full year.
Illustration of Option A -- For purposes of this illustration, assume that
the Insured is under Attained Age 40 and there is no Policy loan outstanding.
20
<PAGE>
Under Option A, a Policy with a Face Amount of $500,000 will generally pay a
Death Benefit of $500,000. The specified percentage for an Insured under
Attained Age 40 on the Policy Anniversary prior to the date of death is 250%.
Because the Death Benefit must be equal to or be greater than 2.50 times the
Policy Account Value, any time the Policy Account Value exceeds $200,000 the
Death Benefit will exceed the Face Amount. Each additional dollar added to the
Policy Account Value will increase the Death Benefit by $2.50. Thus, a 35 year
old Insured with a Policy Account Value of $250,000 will have a Death Benefit
of $625,000 (2.50 X $250,000); a Policy Account Value of $300,000 will yield a
Death Benefit of $750,000 (2.50 X $300,000); a Policy Account Value of $400,000
will yield a Death Benefit of $1,000,000 (2.50 X $400,000).
Similarly, any time the Policy Account Value exceeds $200,000, each dollar
taken out of the Policy Account Value will reduce the Death Benefit by $2.50.
If at any time, however, the Policy Account Value multiplied by the specified
percentage is less than the Face Amount, the Death Benefit will be the Face
Amount of the Policy.
Option B. The Death Benefit is equal to the greater of: (a) the Face Amount
of the Policy plus the Policy Account Value and (b) the Policy Account Value
multiplied by the specified percentage shown in the table above. (The Policy
Account Value in each case is determined on the Valuation Day on or next
following the Insured's date of death.)
Illustration of Option B. For purposes of this illustration, assume that the
Insured is under Attained Age 40 and there is no outstanding Policy loan.
Under Option B, a Policy with a Face Amount of $500,000 will generally pay a
Death Benefit of $500,000 plus the Policy Account Value. Thus, for example, a
Policy with a $50,000 Policy Account Value will have a Death Benefit of
$550,000 ($500,000 plus $50,000); a Policy Account Value of $100,000 will yield
a Death Benefit of $600,000; and a Policy Account Value of $250,000 will yield
a Death Benefit of $750,000. Since the specified percentage is 250%, the Death
Benefit will be at least 2.50 times the Policy Account Value. As a result, if
the Policy Account Value exceeds $333,333, the Death Benefit will be greater
than the Face Amount plus the Policy Account Value. Each additional dollar
added to the Policy Account Value above $333,333 will increase the Death
Benefit by $2.50. An Insured with a Policy Account Value of $350,000 will
therefore have a Death Benefit of $875,000 (2.50 X $350,000); a Policy Account
Value of $400,000 will yield a Death Benefit of $1,000,000 (2.50 X $400,000);
and a Policy Account Value of $500,000 will yield a Death Benefit of $1,250,000
(2.50 X $500,000). Similarly, any time the Policy Account Value exceeds
$333,333, each dollar taken out of the Policy Account Value will reduce the
Death Benefit by $2.50. If at any time, however, the Policy Account Value
multiplied by the applicable percentage is less than the Face Amount plus the
Policy Account Value, the Death Benefit will be the Face Amount plus the Policy
Account Value.
Which Death Benefit Option to Choose. If an Owner prefers to have premium
payments and favorable investment performance reflected partly in the form of
an increasing Death Benefit, the Owner should choose Option B. If an Owner is
satisfied with the amount of the Insured's existing insurance coverage and
prefers to have premium payments and favorable investment performance reflected
to the maximum extent in the Policy Account Value, the Owner should choose
Option A.
Change in Death Benefit Option. After the first Policy Year, at any time when
the Death Benefit would be the Face Amount (if Option A is in effect) or the
Face Amount plus the Policy Account Value (if Option B is in effect), the Death
Benefit Option in effect may be changed by sending PMLIC a written request. No
charges will be imposed to make a change in the Death Benefit Option. The
effective date of any such change will be the Policy Processing Day on or next
following the date PMLIC receives the written request.
If the Death Benefit Option is changed from Option A to Option B, on the
effective date of the change, the Death Benefit will not change and the Face
Amount will be decreased by the Policy Account Value on that date. However,
this change may not be made if it would reduce the Face Amount to less than the
Minimum Face Amount.
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<PAGE>
If the Death Benefit Option is changed from Option B to Option A, on the
effective date of the change, the Death Benefit will not change and the Face
Amount will be increased by the Policy Account Value on that date.
A change in the Death Benefit Option may affect the Net Amount at Risk over
time which, in turn, would affect the monthly Cost of Insurance Charge.
Changing from Option A to Option B will generally result in a net amount at
risk that remains level. Such a change will result in a relative increase in
the cost of insurance charges over time because the Net Amount at Risk will,
unless the Death Benefit is based on the applicable percentage of Policy
Account Value, remain level rather than decreasing as the Policy Account Value
increases. Unless the Death Benefit is based on the applicable percentage of
Policy Account Value, changing from Option B to Option A will, if the Policy
Account Value increases, decrease the Net Amount at Risk over time, thereby
reducing the cost of insurance charge.
The effects of these Death Benefit Option changes on the Face Amount, Death
Benefit and Net Amount at Risk can be illustrated as follows. Assume that a
contract under Option A has a Face Amount of $1,000,000 and a Policy Account
Value of $100,000 and, therefore, a Death Benefit of $1,000,000 and a Net
Amount at Risk of $900,000 ($1,000,000 - $100,000). If the Death Benefit Option
is changed from Option A to Option B, the Face Amount will decrease from
$1,000,000 to $900,000 but the Death Benefit and Net Amount at Risk would
remain the same. Assume that a contract under Option B has a Face Amount of
$500,000 and a Policy Account Value of $50,000 and, therefore, the Death
Benefit is $550,000 ($500,000 + $50,000) and a Net Amount at Risk of $500,000
($550,000 - $50,000). If the Death Benefit Option is changed from Option B to
Option A, the Face Amount will increase to $550,000, but the Death Benefit and
Net Amount at Risk would remain the same.
If a change in the Death Benefit Option would result in cumulative premiums
exceeding the maximum premium limitations under the Internal Revenue Code for
life insurance, PMLIC will not effect the change.
A change in the Death Benefit Option may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page 43).
How the Death Benefit May Vary. The amount of the Death Benefit may vary with
the Policy Account Value. The Death Benefit under Option A will vary with the
Policy Account Value whenever the specified percentage of Policy Account Value
exceeds the Face Amount of the Policy. The Death Benefit under Option B will
always vary with the Policy Account Value because the Death Benefit equals the
greater of (a) the Face Amount plus the Policy Account Value and (b) the Policy
Account Value multiplied by the specified percentage.
ABILITY TO ADJUST FACE AMOUNT
Subject to certain limitations, an Owner may generally, at any time after the
first Policy Year, increase or decrease the Policy's Face Amount by submitting
a written application to PMLIC. The effective date of the increase or decrease
will be the Policy Processing Day on or next following PMLIC's approval of the
request. An increase in Face Amount may have tax consequences. (See "Tax
Treatment Of Policy Benefits," Page 43). The effect of changes in Face Amount
on Policy charges, as well as other considerations, are described below.
Increases and decreases in Face Amount may not be made within 12 months of a
previous increase or decrease, as the case may be.
Increase. A request for an increase in Face Amount may not be for less than
$100,000 (or such lesser amount required in a particular state). The Owner may
not increase the Face Amount after the Insured's Attained Age 75. To obtain the
increase, the Owner must submit an application for the increase and provide
evidence satisfactory to PMLIC of the Insured's insurability.
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<PAGE>
On the effective date of an increase, and taking the increase into account,
the Net Cash Surrender Value must be equal to the Monthly Deductions then due
and the expense charge (currently $300) for the increase. If the Net Cash
Surrender Value is not sufficient, the increase will not take effect until the
Owner makes a sufficient additional premium payment to increase the Net Cash
Surrender Value.
An increase in the Face Amount will generally affect the total Net Amount at
Risk which will increase the monthly Cost of Insurance Charges. An increase in
Face Amount will increase the amount of any Additional Surrender Charge. A Face
Amount increase expense charge will also be deducted. (See "Face Amount
Increase Charge," Page 31). In addition, different cost of insurance rates may
apply to the increase in insurance coverage. (See "Cost of Insurance," Page
29).
After increasing the Face Amount, the Owner will have the right: (i) during
the free-look period following the effective date of the increase, to have the
increase cancelled and receive a credit or refund; and (ii) during the first 24
months following the increase, to exchange the increase in Face Amount for a
fixed benefit permanent life insurance policy issued by PMLIC. (See "Conversion
Privilege for Increase in Face Amount," Page 37).
Decrease. The amount of a Face Amount decrease must be for at least $100,000
(or such lesser amount required in a particular state). During Policy Years 2
through 10, the Face Amount after any decrease may not be less than the minimum
Initial Face Amount for a newly issued policy. After the 10th Policy Year, the
Minimum Face Amount is $200,000. To the extent a decrease in the Face Amount
could result in cumulative premiums exceeding the maximum premium limitations
applicable for life insurance under the Internal Revenue Code, PMLIC will not
effect the decrease.
A decrease in the Face Amount generally will decrease the total Net Amount at
Risk which will decrease an Owner's monthly insurance charges. A decrease in
the Face Amount may result in the imposition of a surrender charge as of the
Policy Processing Day on which the decrease becomes effective. (See "Surrender
Charge Upon Decrease in Face Amount," Page 29).
Any surrender charge applicable to a decrease will be deducted from the
Policy Account Value and the remaining surrender charge will be reduced by the
amount deducted. The surrender charge will be deducted from the Separate
Accounts and the Guaranteed Account based on the proportion that the value in
such account bears to the total unloaned Policy Account Value.
For purposes of determining the cost of insurance charge and surrender
charges, any decrease in the Face Amount will reduce the Face Amount in the
following order: (a) the Face Amount provided by the most recent increase; (b)
the next most recent increases, successively; and (c) the Initial Face Amount.
CHANGES AFFECTING THE DEATH BENEFIT
Owner may increase or decrease the Face Amount. In addition, changing the
level of premium payments, and, to a lesser extent, making a partial withdrawal
of Net Cash Surrender Value may have consequences for the Death Benefit or
charges associated therewith. The consequences of each are summarized
below.
A decrease in Face Amount will, subject to applicable percentage limitations,
decrease the insurance protection. It will not reduce the Policy Account Value,
except for the deduction of any Surrender Charge applicable to the decrease.
The Monthly Deductions will generally be correspondingly lower following the
decrease.
An increase in Face Amount will generally increase the amount of insurance
protection, depending on the Policy Account Value and applicable percentage. If
the insurance protection is increased, Monthly Deductions will increase as
well.
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Under Death Benefit Option A, until the applicable percentage of Policy
Account Value exceeds the Face Amount, then (i) if the Owner increases the
premium payments from the current level, the amount of insurance protection
will generally be reduced, and (ii) if the Owner reduces the premium payments
from the current level, the amount of insurance protection will generally be
increased.
Under Death Benefit Option B, until the applicable percentage of Policy
Account Value exceeds the Face Amount plus the Policy Account Value, the level
of premium payments will not affect the amount of insurance protection.
(However, both the Policy Account Value and Death Benefit will be increased if
premium payments are increased and reduced if premium payments are reduced.)
Under either Death Benefit Option, if the Death Benefit is the applicable
percentage of Policy Account Value, then (i) if the Owner increases premium
payments from the current level, the amount of insurance protection will
increase and (ii) if the Owner reduces the premium payments from the current
level, the amount of insurance protection will be lower.
A partial withdrawal of Net Cash Surrender Value will reduce the Death
Benefit. It will not reduce the amount of insurance protection unless the Death
Benefit is based on the applicable percentage of Policy Account Value. This is
because if the Death Benefit is based on the applicable percentage, the
decrease in the Death Benefit will be greater than the amount of a withdrawal.
Since the primary use of a partial withdrawal is to withdraw cash which reduces
the Policy Account Value, the Net Cash Surrender Value is reduced, thereby
increasing the likelihood that the Policy will lapse. (See "Policy Lapse," Page
27).
HOW THE DURATION OF THE POLICY MAY VARY
The Policy will remain in force as long as the Net Cash Surrender Value of
the Policy is sufficient to pay the Monthly Deductions and the charges under
the Policy. When the Net Cash Surrender Value is insufficient to pay the
charges and the Grace Period expires without an adequate premium payment by the
Owner, the Policy will lapse and terminate without value. The Owner has certain
rights to reinstate the Policy. (See "Reinstatement," Page 27).
POLICY ACCOUNT VALUE
The Policy Account Value is the total amount of value held under the Policy
at any time. It is equal to the sum of the Policy's values in the Separate
Accounts, the Guaranteed Account and the Loan Account. The Policy Account Value
minus any applicable Contingent Surrender Charge or Additional Surrender Charge
is equal to the Cash Surrender Value. There is no guaranteed minimum for the
portion of the Policy Account Value in any of the Separate Accounts and,
because the Policy Account Value on any future date depends upon a number of
variables, it cannot be predetermined.
The Policy Account Value and Cash Surrender Value will reflect the investment
performance of the chosen Separate Accounts, the crediting of interest in
excess of 4% (the guaranteed minimum) for the Guaranteed Account and the Loan
Account, any Net Premiums paid, any transfers, any partial withdrawals, any
loans, any loan repayments, any loan interest paid, and any charges assessed in
connection with the Policy.
Calculation of Policy Account Value. The Policy Account Value is determined
first on the Policy Date and thereafter on each Valuation Day. On the Policy
Date, the Policy Account Value will be the Net Premiums received less any
Monthly Deductions due on the Policy Date. On each Valuation Day after the
Policy Date, the Policy Account Value will be:
(1) The aggregate of the values attributable to the Policy in each
Separate Account, determined by multiplying the number of units the Policy
has in the Separate Account by the Separate Account's Unit Value on that
date;
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(2) The value attributable to the Policy in the Guaranteed Account (See
"The Guaranteed Account," Page 38); plus
(3) The value attributable to the Policy in the Loan Account. (See "Loan
Privileges," Page 32).
Determination of Number of Units for the Separate Accounts. Amounts
allocated, transferred or added to a Separate Account under a Policy are used
to purchase units of that Separate Account; units are redeemed when amounts are
deducted, transferred or withdrawn. The number of units a Policy has in a
Separate Account equals the number of units purchased minus the number of units
redeemed up to such time. For each Separate Account, the number of units
purchased or redeemed in connection with a particular transaction is determined
by dividing the dollar amount by the unit value.
Determination of Unit Value. The unit value of a Separate Account is equal to
the unit value on the immediately preceding Valuation Day multiplied by the Net
Investment Factor for that Separate Account on that Valuation Day.
Net Investment Factor. Each Separate Account or Sub-Account of a Separate
Account has its own Net Investment Factor. The Net Investment Factor measures
the daily investment performance of a Separate Account or Sub-Account. The
factor will increase to reflect investment income and capital gains, realized
and unrealized, for the securities of the underlying portfolio or series. The
factor will decrease to reflect any capital losses, realized or unrealized, for
the securities of the underlying portfolio or series.
The asset charge for mortality and expense risks and the transaction charge
for the Zero Coupon Bond Separate Account will be deducted in determining the
applicable Net Investment Factor.
PAYMENT AND ALLOCATION OF PREMIUMS
Issuance of a Policy. In order to purchase a Policy, an individual must make
application to PMLIC through a licensed PMLIC agent who is also a registered
representative of PML Securities Company ("PML") or a broker/dealer having a
Selling Agreement with PML or a broker/dealer having a Selling Agreement with
such a broker/dealer. The minimum Initial Face Amount of a Policy under PMLIC's
rules is currently $500,000 for Issue Ages 21 and over and $250,000 for Issue
Ages under 21. (For Policies issued to residents of New York State, the minimum
Face Amount at issue is $1,000,001). PMLIC reserves the right to revise its
rules from time to time to specify a different minimum Initial Face Amount for
subsequently issued policies. A Policy will be issued only to Insureds who have
an Issue Age of 75 or less and who provide PMLIC with satisfactory evidence of
insurability. Acceptance is subject to PMLIC's underwriting rules. PMLIC
reserves the right to reject an application for any reason permitted by law.
(See "Distribution of Policies," Page 50.)
At the time the application for a Policy is signed, an applicant can, subject
to PMLIC's underwriting rules, obtain temporary insurance protection, pending
issuance of the Policy, by answering "no" to the Health Questions of the
Temporary Agreement and submitting payment of the Minimum Initial Premium with
the Application. The Minimum Initial Premium will equal the Initial
Administrative Charge of $300 plus an amount sufficient for the first three
Monthly Deductions, increased for any Premium Tax and Surrender Charge. Where
Minimum Initial Premium is not submitted with the application, it must be
submitted when the Policy is delivered.
The amount of coverage under the Temporary Agreement is the lesser of the
Face Amount applied for or $500,000. Coverage under the agreement will end on
the earliest of: (a) the 90th day from the date of the agreement; (b) the date
that insurance takes effect under the Policy; (c) the date a policy, other than
as applied for, is offered to the Applicant; or (d) five days from the date
PMLIC mails a notice of termination of coverage.
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Amount and Timing of Premiums. Each premium payment must be for at least
$100. Subject to certain limitations described below, an Owner has considerable
flexibility in determining the amount and frequency of premium payments.
At the time of application, each Owner will select a Planned Periodic Premium
schedule, based on a periodic billing mode of annual, semi-annual, or quarterly
payment. The Owner is entitled to receive a premium reminder notice from PMLIC
at the specified interval. The Owner may change the Planned Periodic Premium
frequency and amount. Also, under the Automatic Payment Plan, the Owner can
select a monthly payment schedule pursuant to which premium payments will be
automatically deducted from a bank account or other source, rather than being
"billed".
Unless prohibited by a particular state (i.e., New York), any payments made
while there is an outstanding Policy loan will be applied as loan repayments
unless PMLIC is notified in writing, that the amount is to be applied as a
premium payment. (Payments made under New York Policies will be treated as
premium payments and will only be applied as loan repayments if the Owner
specifically requests). The Owner is not required to pay the Planned Periodic
Premiums in accordance with the specified schedule. The Owner has the
flexibility to alter the amount, frequency and time period over which premiums
are paid. Payment of the Planned Periodic Premiums will not, however, guarantee
that the Policy will remain in force. Instead, the duration of the Policy
depends upon the Policy's Net Cash Surrender Value. Thus, even if Planned
Periodic Premiums are paid, the Policy will lapse whenever the Net Cash
Surrender Value is insufficient to pay the Monthly Deductions and any other
charges under the Policy and if a Grace Period expires without an adequate
payment by the Owner.
Premium Limitations. With regard to a Policy's inside build-up, the Internal
Revenue Code of 1986 (the "Code") provides for exclusion of the Death Benefit
from gross income if total premium payments do not exceed certain stated
limits. In no event can the total of all premiums paid under a Policy exceed
such limits. If at any time a premium is paid which would result in total
premiums exceeding such limits, PMLIC will only accept that portion of the
premium which would make total premiums equal the maximum amount which may be
paid under the Policy. The excess will be refunded. Even if total premiums were
to exceed the maximum premium limitations established by the Code, the excess
of a Policy's Death Benefit over the Policy's Cash Surrender Value would still
be excludable from gross income under the Code.
The maximum premium limitations set forth in the Code depend in part upon the
amount of the Death Benefit at any time. As a result, any Policy changes which
affect the amount of the Death Benefit may affect whether cumulative premiums
paid under the Policy exceed the maximum premium limitations. To the extent
that any such change would result in cumulative premiums exceeding the maximum
premium limitations, PMLIC will not effect such change. (See "Federal Income
Tax Considerations," Page 42).
Allocation of Net Premiums. The Net Premium equals the premium paid less the
Premium Tax Charge. The application for the Policy will indicate how Net
Premiums should be allocated among the Separate Accounts and/or the Guaranteed
Account. The percentages of each Net Premium that may be allocated to any
account must be in whole numbers and the sum of the allocation percentages must
be 100%. PMLIC will allocate the Net Premiums on the date it receives such
premium at its Home Office.
Where state law requires a refund of premiums paid when a policy is returned
under the Free-Look provision (See "Free-Look for Policy," Page 37) any portion
of the Initial Premium and any subsequent premiums received by PMLIC before the
expiration of a 15-day period beginning on the later of the Policy Issue Date
or the date PMLIC receives the Minimum Initial Premium, which are to be
allocated to the Separate Accounts will be allocated to the Money Market
Separate Account. At the end of the 15-day period, PMLIC will allocate the
amount in the Money Market Separate Account to each of the chosen Separate
Accounts based on the proportion that the allocation percentage for such
Separate Account bears to the sum of the Separate Account premium allocation
percentages.
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For example, assume a Policy was issued with Net Premiums allocated 25% to
the Growth Separate Account, 25% to the Bond Separate Account and 50% to the
Guaranteed Account. During the 15-day period stated above, 50% (25% + 25%) of
the premiums will be allocated to the Money Market Separate Account. At the
end of the 15-day period, 50% (25% / 50%) of the amount in the Money Market
Separate Account will be transferred to the Growth Separate Account and 50% to
the Bond Separate Account.
For premium payments received after the 15-day period, Net Premiums will be
allocated based on the allocation percentages then in effect. The allocation
schedules may be changed at any time by providing PMLIC with written notice.
The values of the Separate Accounts will vary with their investment
experience and the Owner bears the entire investment risk. Owners should
periodically review their allocation schedule in light of market conditions
and the Owner's overall financial objectives.
Transfers. The Owner may transfer the Policy Account Value between and among
the Separate Accounts the Subaccounts of the Variable Account and the
Guaranteed Account by making a written transfer request to PMLIC. The amount
transferred each time must be at least $1,000, unless the total value in an
account is less than $1,000, in which case the entire amount will be
transferred. Transfers between and among the Separate Accounts (and/or
Subaccounts) are made as of the Valuation Day that the request for transfer is
received at the Home Office.
The Owner may, at any time, transfer all or part of the amount in one of the
Separate Accounts (or Subaccount) to another Separate Account (or Subaccount)
and/or to the Guaranteed Account. (For transfers from the Guaranteed Account
to the Separate Accounts, see "Transfers from Guaranteed Account," Page
39).
After four transfers have been made in any Policy Year, a $25 transfer
charge will be deducted from each transfer during the remainder of such Policy
Year. All transfers included in a request are treated as one transfer
transaction. Transfers resulting from Policy loans, the exercise of exchange
privileges, and the reallocation from the Money Market Separate Account
following the 15-day period after the Issue Date, will not be subject to a
transfer charge and will not count against the four free transfers in any
Policy Year. Under present law, transfers are not taxable transactions.
Policy Lapse. The failure to make a premium payment will not itself cause a
Policy to lapse. Lapse will only occur when the Net Cash Surrender Value is
insufficient to cover the Monthly Deductions and other charges under the
Policy and the Grace Period expires without a sufficient payment.
The Policy provides for a 61-day Grace Period that is measured from the date
on which notice is sent by PMLIC. Thus, the Policy does not lapse, and the
insurance coverage continues, until the expiration of this Grace Period. In
order to prevent lapse, the Owner must during the Grace Period make a premium
payment sufficient to increase the Net Cash Surrender Value to an amount
sufficient to cover any unpaid Monthly Deductions. The notice sent by PMLIC
will specify the payment required to keep the Policy in force. Failure to make
a sufficient payment within the Grace Period will result in lapse of the
Policy without value.
Reinstatement. A Policy that lapses without value may be reinstated at any
time within three years (or longer period required in a particular state)
after the expiration of the Grace Period and before the Final Policy Date by
submitting evidence of the Insured's insurability satisfactory to PMLIC and
payment of an amount sufficient to keep the Policy in force for at least three
months following the effective date of reinstatement, which is the date the
reinstatement application is approved. Upon reinstatement, the Policy Account
Value will be based upon the premium paid to reinstate the Policy and the
Policy will be reinstated with the same Policy Date as it had prior to the
lapse.
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CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate PMLIC
for (a) providing the insurance benefits set forth in the Policy; (b)
administering the Policy; (c) assuming certain risks in connection with the
Policy; and (d) incurring expenses in distributing the Policy.
PREMIUM TAX CHARGE
Prior to allocation of Net Premiums, premiums paid are reduced by a Premium
Tax Charge. Various states and some of their subdivisions impose a tax on
premiums received by insurance companies. Premium taxes vary from state to
state, and range from 0.75% to 3.5%. A deduction of a percentage of the premium
will be made from each premium payment. The applicable percentage will be based
on the rate for the Insured's residence.
SURRENDER CHARGES
A Surrender Charge, which is a contingent deferred sales charge, is imposed
if the Policy is surrendered or lapses at any time before the end of the tenth
Policy Year. A portion of this Surrender Charge will be deducted if the Owner
decreases the Initial Face Amount before the end of the tenth Policy Year.
Additional Surrender Charges, which also are contingent deferred sales charges,
will be imposed if the Policy is surrendered or lapses at any time within ten
years after the effective date of an increase in Face Amount.
A portion of an Additional Surrender Charge also will be deducted if the
related increment of Face Amount is decreased within ten years after such
increase took effect. These surrender charges are designed partially to
compensate PMLIC for the cost of selling the Policy, including agent sales
commissions, the cost of printing the prospectuses and sales literature, and
any advertising and underwriting costs. PMLIC does not expect the surrender
charges to cover all of these costs. To the extent that they do not, PMLIC will
cover the short-fall from its general account assets, which may include profits
from the mortality and expense risk charge.
Surrender Charge. The Surrender Charge will not exceed the Maximum Surrender
Charge specified in the Policy. During Policy Years 1 through 6, this maximum
equals 50% of the target premium (which is an amount, based on the Initial Face
Amount and the Issue Age of the Insured, used solely for the purpose of
calculating the Surrender Charge) for the Initial Face Amount. It equals 40% of
that target premium during Policy Year 7, 30% during Policy Year 8, 20% during
Policy Year 9, 10% during Policy Year 10, and 0% during Policy Years 11 and
later. The Surrender Charge actually imposed will equal the lesser of the
Maximum Surrender Charge and an amount equal to 30% of the premiums actually
received during the first Policy Year up to one target premium plus 9% of all
other premiums paid to the date of surrender or lapse, less any Surrender
Charge previously paid at the time of a decrease in Face Amount.
Additional Surrender Charge. An Additional Charge is associated with each
increase in Face Amount. Each Additional Surrender Charge is calculated in a
manner similar to the Surrender Charge associated with the Initial Face Amount.
The Maximum Additional Surrender Charge for an increase in Face Amount is 50%
of the target premium for that increase (which is an amount based upon the
amount of the increase and the Attained Age of the Insured at the time of such
increase). This maximum remains level for six years following the effective
date of an increase. It equals 40% of that target premium during the seventh
year, and declines to 0% by the beginning of the eleventh year after the
effective date of the increase. The Additional Surrender Charge actually
deducted will equal the lesser of this maximum and 30% of premiums received, up
to the first target premium for that increase, during the first twelve policy
months after an increase and 9% of all premiums thereafter. As explained below,
only a portion of premiums received after the effective date of an increase
will be counted for this purpose. However, as described in the following
paragraph, a portion of the Policy Account Value on the effective date of an
increase also will be considered a "premium" for purposes of calculating the
amount of each Additional Surrender Charge.
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Additional premium payments may not be required to fund a requested increase
in Face Amount. Instead, a special method, based on a guideline annual premium
calculated according to SEC rules, is used to allocate a portion of the
existing Policy Account Value to the increase and to allocate subsequent
premium payments between the Initial Face Amount and the increase. The Policy
Account Value is allocated according to the ratio between the SEC guideline
annual premium for the Initial Face Amount and the SEC guideline annual premium
for the total Face Amount on the effective date of the increase before any
deductions are made. For example, if the guideline annual premium is equal to
$15,000 before an increase and is equal to $20,000 after an increase, the
Policy Account Value on the effective date of the increase would be allocated
75% ($15,000/$20,000) to the Initial Face Amount and 25% to the increase.
Premium payments made on or after the effective date of the increase are
allocated between the Initial Face Amount and the increase using the same ratio
as is used to allocate the Policy Account Value. In the event there is more
than one increase in Face Amount, SEC guideline annual premiums for each
increment of Face Amount are used to allocate Policy Account Values and premium
payments among the various increments of Face Amounts.
Surrender Charge Upon Decrease in Face Amount. A surrender charge may be
deducted on a decrease in Face Amount. In the event of a decrease, the
surrender charge deducted is a fraction of the charge that would apply to a
full surrender of the Policy. If there have been no increases in Face Amount,
the fraction will be determined by dividing the amount of the decrease by the
current Face Amount and multiplying the result by the Surrender Charge. If more
than one Surrender Charge is in effect (i.e., pursuant to one or more increases
in Face Amount), the surrender charge will be applied in the following order:
(1) the most recent increase followed by (2) the next most recent increases,
successively, and (3) the Initial Face Amount. Where a decrease causes a
partial reduction in an increase or in the Initial Face Amount, a proportionate
share of the Surrender Charge for that increase or for the Initial Face Amount
will be deducted.
Allocation of Surrender Charges. The Surrender Charge will be deducted from
the Policy Account Value. For surrender charges resulting from Face Amount
decreases, that part of any such surrender charge will reduce the Policy
Account Value and will be allocated among the accounts based on the proportion
that the value in each of the Separate Accounts and the Guaranteed Account
Value bear to the total unloaned Policy Account Value.
MONTHLY DEDUCTIONS
Charges will be deducted from the Policy Account Value on the Policy Date and
on each Policy Processing Day to compensate PMLIC for administrative expenses
and for the insurance coverage provided by the Policy. The Monthly Deduction
consists of four components -- (a) the cost of insurance, (b) insurance
underwriting and expenses in connection with issuing the Policy, (c)
administrative expenses, and (d) the cost of any additional benefits provided
by rider. Because portions of the Monthly Deduction, such as the cost of
insurance, can vary from month to month, the Monthly Deduction may vary in
amount from month to month. The Monthly Deduction will be deducted from the
Separate Accounts and the Guaranteed Account in accordance with the allocation
percentages for Monthly Deductions chosen by the Owner at the time of
application, or as later changed by PMLIC pursuant to the Owner's written
request. If a monthly deduction cannot be made on the basis of the allocation
schedule then in effect, the deduction will be made based on the allocation of
Policy Account Value among the Owner's Guaranteed Account Value and the value
in any Separate Account and/or Subaccount.
Cost of Insurance. Because the cost of insurance depends upon several
variables, the cost for each Policy Month can vary. PMLIC will determine the
monthly Cost of Insurance Charge by multiplying the applicable cost of
insurance rate or rates by the Net Amount at Risk for each Policy Month.
The Net Amount at Risk on any Policy Processing Day is the amount by which
the Death Benefit exceeds the Policy Account Value. The Net Amount at Risk is
determined separately for the Initial Face Amount and any increases in Face
Amount. In determining the Net Amount at Risk for each increment of Face
Amount, the Policy Account Value is first considered part of the Initial Face
Amount. If the Policy
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Account Value exceeds the Initial Face Amount, it is considered as part of any
increases in Face Amount in the order such increases took effect.
A cost of insurance rate is also determined separately for the Initial Face
Amount and any increases in Face Amount. In calculating the cost of insurance
charge, the rate for the Premium Class on the Policy Date is applied to the Net
Amount at Risk for the Initial Face Amount. For each increase in Face Amount,
the rate for the Premium Class applicable to the increase is used. If, however,
the Death Benefit is calculated as the Policy Account Value times the specified
percentage, the rate for the Premium Class for the Initial Face Amount will be
used for the amount of the Death Benefit in excess of the total Face Amount.
Any change in the Net Amount at Risk will affect the total cost of insurance
charges paid by the Owner.
Cost of Insurance Rate. The cost of insurance rate will be based on the
Attained Age and Premium Class of the Insured. The actual monthly cost of
insurance rates will be based on PMLIC's expectations as to future mortality
and expense experience. They will not, however, be greater than the guaranteed
maximum cost of insurance rates set forth in the Policy. These guaranteed
maximum rates are based on the Insured's Attained Age, Premium Class, and the
1980 Commissioners Standard Ordinary Mortality Table B. Any change in the cost
of insurance rates will apply to all persons of the same Attained Age and
Premium Class. For Policies sold in Massachusetts, New Jersey and New York
State in non-employer sponsored arrangements, cost of insurance rates, both
current and guaranteed, also vary based on the sex of the Insured.
Premium Class. The Premium Class of the Insured will affect the cost of
insurance rates. PMLIC currently places Insureds into standard classes and
classes with extra ratings, which reflect higher mortality risks. In an
otherwise identical Policy, an Insured in the standard class will have a lower
cost of insurance than an Insured in a premium class with extra ratings. The
Premium Classes are divided into two categories: smokers and nonsmokers.
Nonsmoking insureds will generally incur lower cost of insurance rates than
Insureds who are classified as smokers in the same Premium Class.
Since the nonsmoker designation is not available for Insureds under Attained
Age 21, shortly before an Insured attains age 21, PMLIC will notify the Insured
about possible classification as a nonsmoker and will send the Insured an
Application for Change in Premium Class. If the Insured does not qualify as a
nonsmoker or does not return the application, cost of insurance rates will
remain as shown in the Policy. However, if the Insured returns the application
and qualifies as a nonsmoker, the cost of insurance rates will be changed to
reflect the nonsmoker classification.
Administrative Charges. PMLIC administers the Policy and the Separate
Accounts and, therefore, will incur certain ordinary administrative expenses
and certain issuance expenses. There are two administrative charges, the
Initial Administrative Charge and the Monthly Administrative Charge. PMLIC does
not expect to make a profit on either of these charges.
Initial Administrative Charge. The Initial Administrative Charge of $300 will
be deducted from the Policy Account Value on the Policy Date as part of the
first Monthly Deduction. The Initial Admininstrative Charge is intended to
reimburse PMLIC for administrative expenses in connection with the issuance of
the Policy, including medical exams, review of applications for insurance,
underwriting decisions and processing of the applications, establishing Policy
records, and Policy issue.
Monthly Administrative Charge. A Monthly Administrative Charge (presently $8)
will be deducted from the Policy Account Value on the Policy Date and each
Policy Processing Day as part of the Monthly Deduction. This charge may be
increased, but in no event will it be greater than $16 per month. This charge
is intended to reimburse PMLIC for ordinary administrative expenses expected to
be incurred, including record keeping, processing claims and certain Policy
changes, preparing and mailing reports, and overhead costs.
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Additional Benefit Charges. The Monthly Deduction will include charges for
any additional benefits added to the Policy. The monthly charges will be
specified in the applicable Rider.
FACE AMOUNT INCREASE CHARGE
If the Face Amount is increased, a $300 increase charge will be deducted from
the Policy Account Value on the effective date of such increase. This charge
will be deducted from the accounts based on the allocation schedule for Monthly
Deductions in effect at such time. This charge is intended to reimburse PMLIC
for administrative expenses in connection with the Face Amount increase,
including medical exams, review of the application for the increase,
underwriting decisions and processing of the application, and changing Policy
records and the Policy. PMLIC does not expect to make a profit on this charge.
PARTIAL WITHDRAWAL CHARGE
A charge of $25 will be deducted from the Policy Account Value for each
partial withdrawal of Net Cash Surrender Value. This charge is intended to
compensate PMLIC for the administrative costs in effecting the requested
payment and in making all calculations which may be required by reason of the
partial withdrawal.
TRANSFER CHARGE
After four transfers have been made in any Policy Year, a transfer charge of
$25 will be deducted for each transfer during the remainder of such Policy Year
to compensate PMLIC for the costs of processing such transfers. PMLIC expects
to realize no profit from this charge.
The transfer charge will be deducted from the amount being transferred. The
transfer charge will not apply to transfers resulting from Policy loans, the
exercise of special transfer rights and the initial reallocation of account
values from the Money Market Separate Account to other Separate Accounts. These
transfers will not count against the four free transfers in any Policy Year.
CHARGES AGAINST THE SEPARATE ACCOUNTS
Mortality and Expense Risk Charge. A daily charge will be deducted from the
value of the net assets of the Separate Accounts to compensate PMLIC for
mortality and expense risks assumed in connection with the Policy. This charge
will be deducted at an annual rate of 0.75% (or a daily rate of .002055%) of
the average daily net assets of each Separate Account. The mortality risk
assumed by PMLIC is that Insureds may live for a shorter time than projected
and, therefore, greater death benefits than expected will be paid in relation
to the amount of premiums received. The expense risk assumed is that expenses
incurred in issuing and administering the Policies will exceed the
administrative charges provided in the Policy.
If the Mortality and Expense Risk Charge proves insufficient, PMLIC will
provide for all death benefits and expenses and any loss will be borne by
PMLIC. Conversely, PMLIC will realize a gain from this charge to the extent all
money collected from this charge is not needed to provide for benefits and
expenses under the Policies.
Asset Charge Against Zero Coupon Bond Separate Account. PMLIC makes a daily
asset charge against the assets of the Zero Coupon Bond Separate Account. This
charge is to reimburse PMLIC for transaction charges paid directly by PMLIC to
Merrill Lynch, Pierce, Fenner & Smith on the sale of Zero Coupon Trust units to
the Zero Coupon Bond Separate Account. PMLIC pays these amounts from General
Account assets. The amount of the asset charge currently is equivalent to an
effective annual rate of 0.25% (.000685% per day) of the average daily net
assets of each Sub-Account. This amount may be increased in the future, but in
no event will it exceed an effective annual rate of 0.50% (.001370% per day).
The charge will be cost-based (taking into account a loss of interest) with no
anticipated element of profit for PMLIC.
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CHARGES FOR INCOME TAXES
PMLIC currently does not charge any Separate Account for its corporate
Federal income taxes. However, PMLIC may make such a charge in the future if
there are any taxes that are attributable to that account. Charges for other
applicable taxes attributable to the account also may be made.
GUARANTEE OF CERTAIN CHARGES
PMLIC guarantees that it will not increase the charge to the Separate
Accounts for mortality and expense risks.
OTHER CHARGES
The Separate Accounts purchase shares of the Funds at net asset value. The
net asset value of those shares reflect management fees and expenses already
deducted from the assets of the Funds' Portfolios. The fees and expenses for
the Funds and their Portfolios are described briefly in connection with a
general description of each Fund.
More detailed information is contained in the Funds and the Zero Coupon Trust
Prospectuses which are attached to or accompany this Prospectus.
CONTRACT RIGHTS
LOAN PRIVILEGES
General. The Owner may at any time after the Issue Date borrow money from
PMLIC using the Policy as the only security for the loan. The Owner may obtain
Policy loans in a minimum amount of $1,500 (or such lesser minimum required in
a particular state i.e., New York--$500 minimum) but not exceeding the Policy's
Net Cash Surrender Value on the date of the loan. While the Insured is living,
the Owner may repay all or a portion of a loan and accrued interest.
Interest Rate Charged. The interest rate charged on Policy loans will be at
the fixed rate of 8% per year (6% per year for Policies issued in New York
State). Interest is due at the end of each Policy Year. If interest is not paid
when due, it will be added to the loan balance and bear interest at the same
rate.
Allocation of Loans and Collateral. PMLIC will allocate the amount of a
Policy loan among the Separate Accounts (and Subaccounts) and/or the Guaranteed
Account based upon the proportion that the value of the Separate Accounts (and
Subaccounts) and/or the Guaranteed Account Value bear to the total unloaned
Policy Account Value at the time the loan is made.
The collateral for a Policy loan will be the loan amount plus accrued
interest to the next Policy Anniversary, less interest at 4% per annum which
will be earned to such Policy Anniversary. PMLIC will deduct the collateral for
the loan from each account based on the loan allocation and transfer this
amount to the Loan Account. The collateral for any existing loan will be
recalculated: (a) when loan interest is repaid or treated as part of the loaned
amount; (b) when a new loan is made; and (c) when a loan repayment is made. A
transfer to or from the Loan Account will be made to reflect any recalculation
of collateral. At any time, the amount of the outstanding loan under a Policy
equals the sum of all loans (including due and unpaid interest added to the
loan balance) minus any loan repayments.
Interest Credited to Loan Account. As long as the Policy is in force, PMLIC
will credit the amount in the Loan Account with interest at effective annual
rates it determines, but not less than 4% or such higher minimum rate required
under state law. The rate will apply to the calendar year which follows the
date of determination. Loan interest credited will be transferred to the
accounts: (1) when loan interest is paid or treated as part of the loaned
amount; (2) when a loan repayment is made; and (3) when a new loan is made.
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Effect of Policy Loan. Policy loans, whether or not repaid, will have a
permanent effect on the Policy Account Value, the Cash Surrender Value, and Net
Cash Surrender Value and may permanently affect the Death Benefit under the
Policy. The effect on the Policy Account Value and Death Benefit could be
favorable or unfavorable, depending on whether the investment performance of
the Separate Accounts (or Sub-accounts) and the interest credited to the
Guaranteed Account is less than or greater than the interest being credited on
the assets in the Loan Account while the loan is outstanding. Compared to a
Policy under which no loan is made, values under a Policy will be lower when
the credited interest rate is less than the investment experience of assets
held in the Separate Accounts and interest credited to the Guaranteed Account.
The longer a loan is outstanding, the greater the effect a Policy loan is
likely to have. The Death Proceeds will be reduced by the amount of any
outstanding Policy loan.
Loan Repayments. PMLIC will assume that any payments made while there is an
outstanding loan on the Policy is a loan repayment unless it receives written
instructions that it is a premium payment. Repayments up to the amount of the
outstanding loan will be allocated to the accounts based on the amount of the
outstanding loan allocated to each account as of the date of repayment; any
repayment in excess of the amount of the outstanding loan will be allocated to
the accounts based on the amount of interest due on the portion of the
outstanding loan allocated to each account. For this purpose, the amount of the
interest due is determined as of the next Policy Anniversary.
Lapse With Loans Outstanding. The amount of an outstanding loan under a
Policy plus any accrued interest on outstanding loans is not part of Net Cash
Surrender Value. Therefore, the larger the amount of an outstanding loan, the
more likely it is that the Policy could lapse. (See "How the Duration of the
Policy May Vary," Page 24 and "Policy Lapse," Page 27.) In addition, if the
Policy is not a Modified Endowment Policy, lapse of the Policy with outstanding
loans may result in adverse tax consequences. (See "Tax Treatment of Policy
Benefits," Page 43.)
Tax Considerations. Any loans taken from a "Modified Endowment Contract" will
be treated as a taxable distribution. In addition, with certain exceptions, a
10% additional income tax penalty will be imposed on the portion of any loan
that is included in income. (See "Distributions from Policies Classified as
Modified Endowment Contracts," Page 44).
SURRENDER PRIVILEGE
At any time before the earlier of the death of the Insured and the Final
Policy Date, the Owner may surrender the Policy for its Net Cash Surrender
Value. The Net Cash Surrender Value is the Policy Account Value minus any
Policy loan and accrued interest and less any surrender charges. The Net Cash
Surrender Value will be determined by PMLIC on the date it receives, at its
Home Office, a surrender request signed by the Owner. Coverage under the Policy
will end on the day the Owner mails or otherwise sends the written surrender
request to PMLIC.
A surrender may have Federal income tax consequences. (See "Tax Treatment of
Policy Benefits," Page 43).
PARTIAL WITHDRAWAL OF NET CASH SURRENDER VALUE
At any time before the earlier of the death of the Insured and the Final
Policy Date, the Owner may withdraw a portion of the Policy's Net Cash
Surrender Value. The minimum amount which may be withdrawn is $1,500. A
withdrawal charge will be deducted from the Policy Account Value. A partial
withdrawal will not result in the imposition of pro-rata surrender charges.
The withdrawn amount and expense charge will be allocated based on the
proportion that the value in the Separate Accounts (or any Subaccount) and the
Guaranteed Account Value bear to the total unloaned Policy Account Value.
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The effect of a partial withdrawal on the Death Benefit and Face Amount will
vary depending upon the Death Benefit Option in effect and whether the Death
Benefit is based on the applicable percentage of Policy Account Value. (See
"Death Benefit Options," Page 20.)
Option A. The effect of a partial withdrawal on the Face Amount and Death
Benefit under Option A can be described as follows:
If the Death Benefit equals the Face Amount, a partial withdrawal will
reduce the Face Amount and the Death Benefit by the amount of the partial
withdrawal.
For the purposes of this illustration (and the following illustrations of
partial withdrawals), assume that the Attained Age of the Insured is under
40 and there is no indebtedness. The applicable percentage is 250% for an
Insured with an Attained Age under 40.
Under Option A, a contract with a Face Amount of $600,000 and a Policy
Account Value of $30,000 will have a Death Benefit of $600,000. Assume that
the policyowner takes a partial withdrawal of $10,000. The partial
withdrawal will reduce the Policy Account Value to $19,975 ($20,000 -
$10,000 - $25) and the Death Benefit and Face Amount to $590,000
($600,000 - $10,000).
If the Death Benefit immediately prior to the partial withdrawal is based
on the applicable percentage of Policy Account Value, the Face Amount will
be reduced by an amount equal to the amount of the partial withdrawal. The
Death Benefit will be reduced to equal the greater of (a) the Face Amount
after the partial withdrawal, and (b) the applicable percentage of the
Policy Account Value after deducting the amount of the partial withdrawal
and the expense charge.
Under Option A, a policy with a Face Amount of $600,000 and a Policy
Account Value of $300,000 will have a Death Benefit of $750,000. Assume
that the policyowner takes a partial withdrawal of $49,975. The partial
withdrawal will reduce the Policy Account Value to $250,000 ($300,000 -
$49,975 - 25) and the Face Amount to $550,025 ($600,000 - $49,975). The
Death Benefit is the greater of (a) the Face Amount of $550,025 and (b) the
applicable percentage of the Policy Account Value $625,000 ($250,000 X
2.5). Therefore, the Death Benefit will be $625,000.
Option B. The Face Amount will never be decreased by a partial withdrawal. A
partial withdrawal will, however, always decrease the Death Benefit.
If the Death Benefit equals the Face Amount plus the Policy Account
Value, a partial withdrawal will reduce the Policy Account Value by the
amount of the partial withdrawal and expense charge and thus the Death
Benefit will also be reduced by the amount of the partial withdrawal and
the expense charge.
Under Option B, a policy with a Face Amount of $500,000 and a Policy
Account Value of $90,000 will have a Death Benefit of $590,000 ($500,000 +
$90,000). Assume the policyowner takes a partial withdrawal of $20,000. The
partial withdrawal will reduce the Policy Account Value to $69,975 ($90,000
- $20,000 - $25) and the Death Benefit to $569,975 ($500,000 + $69,975).
The Face Amount is unchanged.
If the Death Benefit immediately prior to the partial withdrawal is based
on the applicable percentage of Policy Account Value, the Death Benefit
will be reduced to equal the greater of (a) the Face Amount plus the Policy
Account Value after deducting the partial withdrawal and expense charge and
(b) the applicable percentage of Policy Account Value after deducting the
amount of the partial withdrawal and the expense charge.
Under Option B, a policy with a Face Amount of $500,000 and a Policy
Account Value of $300,000 will have a Death Benefit of $750,000 ($300,000 X
2.5). Assume the policyowner takes a partial withdrawal of $149,975. The
partial withdrawal will reduce the Policy Account Value to $150,000
($300,000 - $149,975 - $25) and the Death Benefit to the greater of (a) the
Face Amount plus the Policy Account Value - $650,000 ($500,000 + $150,000)
and (b) the Death Benefit based on the applicable percentage of
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the Policy Account Value- $375,000 ($150,000 X 2.5). Therefore, the Death
Benefit will be $650,000. The Face Amount is unchanged.
Any decrease in Face Amount due to a partial withdrawal will first reduce the
most recent increase in Face Amount, then the most recent increases,
successively, and lastly, the Initial Face Amount.
Because a partial withdrawal can affect the Face Amount and the Death Benefit
as described above, a partial withdrawal may also affect the Net Amount at Risk
which is used to calculate the cost of insurance charge under the Policy. (See
"Cost of Insurance," Page 22). A request for partial withdrawal may not be
allowed if or to the extent such withdrawal would reduce the Face Amount below
the Minimum Face Amount for the Policy. Also, if a partial withdrawal would
result in cumulative premiums exceeding the maximum premium limitations
applicable under the Code for life insurance, PMLIC will not allow such partial
withdrawal.
A partial withdrawal of Net Cash Surrender Value may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits", Page 43).
ACCELERATED DEATH BENEFIT
Applicants residing in states that have approved the Accelerated Death
Benefit Rider (the "ADBR") may elect to add it to their Policy at issue,
subject to PMLIC receiving satisfactory additional evidence of insurability.
The ADBR is not yet available in all states and the terms under which it is
available may vary from state-to-state. There is no assurance that the ADBR
will be approved in all states or that it will be approved under the terms
described herein.
The ADBR permits the Owner to receive, at his or her request and upon
approval by PMLIC, an accelerated payment of part of the Policy's Death Benefit
when one of the following two events occurs.
1. Terminal Illness. The Insured develops a non-correctable medical
condition which is expected to result in his or her death within 12
months; or
2. Permanent Confinement to a Nursing Care Facility. The Insured has been
confined to a Nursing Care Facility for 180 days and is expected to
remain in such a facility for the remainder of his or her life.
There is no charge for adding the ADBR to a Policy. However, an
administrative charge, currently $100 and not to exceed $250, will be deducted
from the accelerated death benefit at the time it is paid.
Tax Consequence of The Rider. The Federal income tax consequences associated
with adding the ADBR or receiving the accelerated death benefit are uncertain.
Accordingly, we urge you to consult a tax adviser before adding the ADBR to
your Policy or requesting an accelerated death benefit.
Amount of the Accelerated Death Benefit. The ADBR provides for a minimum
accelerated death benefit payment of $10,000 and a maximum benefit payment
equal to 75% of the Eligible Death Benefit less 25% of any outstanding policy
loans and accrued interest. The ADBR also restricts the total of the
accelerated death benefits paid from all life insurance policies issued to an
Owner by PMLIC and its subsidiaries to $250,000. This $250,000 maximum may be
increased, as provided in the ADBR, to reflect inflation. The term Eligible
Death Benefit under the ADBR means:
The insurance Proceeds payable under a Policy if the insured died at the time
a claim for an accelerated death benefit is approved by PMLIC, minus:
1. any dividend accumulations;
2. any dividends due and not paid;
3. any dividend payable at death if the Insured died at such time;
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4. any Premium Refund payable at death if the Insured died at such
time; and
5. any insurance payable under the terms of any other rider attached to
a Policy.
An Owner may request only one accelerated death benefit payment (except to
pay premiums and policy loan interest) and there are no restrictions on the
Owner's use of the benefit. An Owner may elect to receive the accelerated death
benefit payment in a lump sum or in 12 or 24 equal monthly installments. If
installments are elected and the Insured dies before all of the payments have
been made, the present value (at the time of the Insured's death) of the
remaining payments and the remaining insurance Proceeds at Death under the
Policy will be paid to the Beneficiary in a lump sum.
Conditions for Receipt of the Accelerated Death Benefit. In order to receive
an accelerated death benefit payment, a Policy must be in force other than as
Extended Term Insurance and an Owner must submit Due Proof of Eligibility and a
completed claim form to PMLIC at its Home Office. Due Proof of Eligibility
means a written certification (described more fully in the ADBR), in a form
acceptable to PMLIC, from a treating physician stating that the Insured has a
Terminal Illness or is expected to be permanently continued in a Nursing Care
Facility.
PMLIC may request additional medical information from an Owner's physician
and/or may require an independent physical examination (at its expense) before
approving the claim for payment of the accelerated death benefit. PMLIC will
not approve a claim for an accelerated death benefit payment if a Policy is
assigned in whole or in part, if the Terminal Illness or Permanent Confinement
is the result of intentionally self-inflicted injury or if the Owner is
required to elect it in order to meet the claims of creditors or to obtain a
government benefit.
Operation of the Rider. The ADBR provides that the accelerated death benefit
be made in the form of a policy loan up to the amount of the maximum loan
available under a Policy at the time the claim is approved. Therefore, a
request for an accelerated death benefit payment in an amount less than or
equal to the maximum loan available at that time will result in a policy loan
being made in the amount of the requested benefit. This policy loan operates as
would any loan under the Policy.
To the extent that the amount of a requested accelerated death benefit
payment exceeds the maximum available loan amount, the benefit will be advanced
to the Owner and a lien will be placed on the Death Benefit payable under the
Policy (the "death benefit lien") in the amount of this advance. Under the
ADBR, interest will accrue daily, at a rate determined as described in the
ADBR, on the amount of this advance and upon the death of the Insured the
amount of the advance and accrued interest thereon will be subtracted from the
amount of Insurance Proceeds at Death.
Effect on Existing Policy. The Insurance Proceeds at Death otherwise payable
under a Policy at the time of an Insured's death will be reduced by the amount
of any death benefit lien and accrued interest thereon. If the Owner makes a
request for a surrender, a policy loan or a withdrawal, the Policy's Net Cash
Surrender Value and Loan will be reduced by the amount of any outstanding death
benefit lien plus accrued interest. Therefore, depending upon the size of the
death benefit lien, this may result in the Net Cash Surrender Value and the
Loan Value being reduced to zero.
Premiums and policy loan interest must be paid when due. However, if
requested with the accelerated death benefit claim, future premiums and policy
loan interest may be paid through additional accelerated death benefits. If
future premiums and policy loan interest are to be paid through additional
accelerated death benefits, Periodic Premiums and policy loan interest will be
paid in this manner automatically.
In addition to lapse under the applicable provisions of the Policy, a Policy
will also terminate on any Policy Anniversary when the death benefit lien
exceeds the Insurance Proceeds at Death.
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FREE-LOOK PRIVILEGES
Free-Look for Policy. The Policy provides for an initial Free-Look Period.
The Owner may cancel the Policy until the latest of: (a) 45 days after Part I
of the application for the Policy is signed; (b) 10 days after the Owner
receives the Policy; and (c) 10 days after PMLIC mails the Notice of Withdrawal
Right to the Owner. Upon giving notice of cancellation and returning the
Policy, the Owner will receive a refund equal to the sum of: (i) the Policy
Account Value as of the date the returned Policy is received by PMLIC at its
Home Office or the PMLIC representative through whom the Policy was purchased;
plus (ii) any Premium Tax Charges deducted from premiums paid; plus (iii) any
Monthly Deductions charged against the accounts; plus (iv) any Mortality and
Expense Risk charges deducted from the value of the net assets of the Separate
Accounts attributable to the Policy; plus (v) any advisory fees charged by the
Fund against the net asset value in the Fund Portfolios attributable to the
Policy's value in the corresponding Separate Accounts.
When state law requires a refund equal to gross premiums paid, the refund
will instead equal the gross premiums paid on the Policy and will not reflect
the investment experience of the Separate Accounts or interest earnings for the
Guaranteed Account.
Free-Look for Increase in Face Amount. Any requested increase in Face Amount
is also subject to a Free-Look privilege. The Owner may cancel a requested
increase in Face Amount until the latest of: (a) 45 days after the application
for the increase is signed; (b) 10 days after the Owner receives the new Policy
Schedule pages reflecting the increase; and (c) 10 days after PMLIC mails a
Notice of Withdrawal Right to the Owner.
Upon requesting cancellation of the increase, all cost of insurance charges
attributable to the increase plus the increase expense charge will be
reallocated to the accounts in the same proportion as they were deducted,
unless the Owner requests a refund of such amount.
SPECIAL TRANSFER AND CONVERSION RIGHTS
Transfer Right for Policy. During the first two years following Policy issue,
the Owner may, on one occasion, transfer the entire Policy Account Value in the
Separate Accounts (or a Subaccount) to the Guaranteed Account without such
transfer counting toward the four transfers permitted without charge during a
Policy Year. If such transfer is made after four transfers have been made
during a Policy Year, no transfer charge will be deducted.
Conversion Privilege for Increase in Face Amount. During the first two years
following an increase in Face Amount, the Owner may, on one occasion, without
evidence of insurability, exchange the amount of the increase in Face Amount
for a fixed-benefit permanent life insurance policy. (Such an exchange may,
however, have Federal income tax consequences. See "Tax Treatment of Policy
Benefits," Page 35). Premiums under this new policy will be based on the
Attained Age and Premium Class of the Insured on the effective date of the
increase in the Face Amount of the Policy. The new policy will have the same
Face Amount as the amount of the increase. PMLIC will make a partial withdrawal
of Net Cash Surrender Value from the Policy equal to the cash value of the new
policy as of the date of conversion and apply such amount to the new policy. No
charge will apply to this partial withdrawal.
Transfer Right for Change in Investment Policy of Separate Account or
Subaccount. If the investment policy of a Separate Account or Subaccount is
materially changed, the Owner may transfer the portion of the Policy Account
Value in such Separate Account (or Subaccount) to another Separate Account (or
Subaccount) or to the Guaranteed Account without having such transfer count
toward the four transfers permitted without charge during a Policy Year. If
such transfer is made after four transfers have been made during a Policy Year,
no transfer charge will be deducted.
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THE GUARANTEED ACCOUNT
An Owner may allocate some or all of the Net Premiums and transfer some or
all of the Policy Account Value to the Guaranteed Account, which is part of
PMLIC's General Account and pays interest at declared rates guaranteed for each
calendar year (subject to a minimum guaranteed interest rate of 4%). The
principal, after deductions, is also guaranteed. PMLIC's General Account
supports its insurance and annuity obligations. The Guaranteed Account has not,
and is not required to be, registered with the SEC under the Securities Act of
1933, and neither the Guaranteed Account nor PMLIC's General Account has been
registered as an investment company under the Investment Company Act of 1940.
Therefore, neither PMLIC's General Account, the Guaranteed Account, nor any
interests therein are generally subject to regulation under the 1933 Act or the
1940 Act. The disclosures relating to these accounts which are included in this
Prospectus are for your information and have not been reviewed by the SEC.
However, such disclosures may be subject to certain generally applicable
provisions of the Federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
The portion of the Policy Account Value allocated to the Guaranteed Account
will be credited with rates of interest, as described below. Since the
Guaranteed Account is part of PMLIC's General Account, PMLIC assumes the risk
of investment gain or loss on this amount. All assets in the General Account
are subject to PMLIC's general liabilities from business operations.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES.
The Guaranteed Account Value is guaranteed to accumulate at a minimum
effective annual interest rate of 4%. PMLIC will credit the Guaranteed Account
Value with current rates in excess of the minimum guarantee but is not
obligated to do so. These current interest rates are influenced by, but do not
necessarily correspond to, prevailing general market interest rates. Since
PMLIC, in its sole discretion, anticipates changing the current interest rate
from time to time, different allocations to and from the Guaranteed Account
Value will be credited with different current interest rates. The interest rate
to be credited to each amount allocated or transferred to the Guaranteed
Account will apply to the end of the calendar year in which such amount is
received or transferred. At the end of the calendar year, PMLIC reserves the
right to declare a new current interest rate on such amount and accrued
interest thereon (which may be a different current interest rate than the
current interest rate on new allocations to the Guaranteed Account on that
date). The rate declared on such amount and accrued interest thereon at the end
of each calendar year will be guaranteed for the following calendar year. Any
interest credited on the amounts in the Guaranteed Account in excess of the
minimum guaranteed rate of 4% per year will be determined in the sole
discretion of PMLIC. The Owner assumes the risk that interest credited may not
exceed the guaranteed minimum rate.
Amounts deducted from the Guaranteed Account for partial withdrawals, Policy
loans, transfers to the Separate Accounts, Monthly Deductions or other charges
are currently, for the purpose of crediting interest, accounted for on a last
in, first out ("LIFO") method. For example, a withdrawal is satisfied by taking
out Guaranteed Account Value attributable to the amount most recently
transferred or allocated to the Guaranteed Account.
PMLIC reserves the right to change the method of crediting interest from time
to time, provided that such changes do not have the effect of reducing the
guaranteed rate of interest below 4% per annum or shorten the period for which
the interest rate applies to less than a calendar year (except for the year in
which such amount is received or transferred).
Calculation of Guaranteed Account Value. The Guaranteed Account Value at any
time is equal to amounts allocated and transferred to it plus interest credited
to it, minus amounts deducted, transferred or withdrawn from it.
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Interest will be credited to the Guaranteed Account on each Policy Processing
Day as follows: for amounts in the account for the entire Policy Month, from
the beginning to the end of the month; for amounts allocated to the account
during the prior Policy Month, from the date the Net Premium or loan repayment
is allocated to the end of the month; for amounts transferred to the account
during the Policy Month, from the date of transfer to the end of the month; and
for amounts deducted or withdrawn from the account during the prior Policy
Month, from the beginning of the month to the date of deduction or withdrawal.
TRANSFERS FROM GUARANTEED ACCOUNT.
Within 30 days prior to or following any Policy Anniversary, one transfer is
allowed from the Guaranteed Account to any or all of the Separate Accounts (or
Subaccounts). The amount transferred from the Guaranteed Account may not exceed
25% of the value of such account. If the written request for such transfer is
received prior to the Policy Anniversary, the transfer will be made as of the
Policy Anniversary; if the written request is received after the Policy
Anniversary, the transfer will be made as of the date PMLIC receives the
written request at its Home Office.
OTHER POLICY PROVISIONS
Amount Payable on Final Policy Date. If the Insured is living on the Final
Policy Date (at Insured's Attained Age 95), PMLIC will pay the Owner the Policy
Account Value less any outstanding Policy loan and accrued interest and any
unpaid Monthly Deductions. Insurance coverage under the Policy will then end.
Payment will generally be made within seven days of the Final Policy Date.
Payment of Policy Benefits. Insurance Proceeds under a Policy will ordinarily
be paid to the Beneficiary within seven days after PMLIC receives proof of the
Insured's death at its Home Office and all other requirements are satisfied.
Interest at the annual rate of 3% or any higher rate declared by PMLIC or
required by law is paid on the Insurance Proceeds from the date of death until
payment is made.
Any amounts payable as a result of the exercise of the free-look right,
surrender, partial withdrawal, or Policy loan will ordinarily be paid within
seven days of receipt of written request at PMLIC's Home Office in a form
satisfactory to PMLIC.
Generally, the amount of a payment will be determined as of the date of
receipt by PMLIC of all required documents. However, PMLIC may defer the
determination or payment of such amounts if the date for determining such
amounts falls within any period during which: (1) the disposal or valuation of
a Separate Account's assets is not reasonably practicable because the New York
Stock Exchange is closed or conditions are such that, under the SEC's rules and
regulations, trading is restricted or an emergency is deemed to exist; or (2)
the SEC by order permits postponement of such actions for the protection of
PMLIC policyholders. PMLIC also may defer the determination or payment of
amounts from the Guaranteed Account for up to six months.
The Owner may decide the form in which proceeds will be paid. During the
Insured's lifetime, the Owner may arrange for the Insurance Proceeds to be paid
in a lump sum or under a Settlement Option. These choices are also available
upon surrender of the Policy for its Net Cash Surrender Value and for payment
of the Policy Account Value on the Final Policy Date. If no election is made,
payment will be made in a lump sum. The Beneficiary may also arrange for
payment of the Insurance Proceeds in a lump sum or under a Settlement Option.
The Contract. The Policy and a copy of the applications attached thereto are
the entire contract. Only statements made in the applications can be used to
void the Policy or deny a claim. The statements are considered representations
and not warranties. Only the President or a Vice President of PMLIC can agree
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to change or waive any provisions of the Policy and only in writing. As a
result of differences in applicable state laws, certain provisions of the
Policy may vary from state to state.
Ownership. The Owner is the Insured unless a different Owner is named in the
application or thereafter changed. While the Insured is living, the Owner is
entitled to exercise any of the rights stated in the Policy or otherwise
granted by PMLIC. If the Insured and Owner are not the same, and the Owner dies
before the Insured, these rights will vest in the estate of the Owner, unless
otherwise provided.
Beneficiary. The Beneficiary is designated in the application for the Policy,
unless thereafter changed by the Owner during the Insured's lifetime by written
notice to PMLIC. Any Insurance Proceeds for which there is not a designated
Beneficiary surviving at the Insured's death are payable in a single sum to the
Insured's executors or administrators.
Change of Owner and Beneficiary. As long as the Policy is in force, the Owner
or Beneficiary may be changed by written request in a form acceptable to PMLIC.
The change will take effect as of the date it is signed, whether or not the
Insured is living when the request is received by PMLIC. PMLIC will not be
responsible for any payment made or action taken before it receives the written
request.
Split Dollar Arrangements. The Owner or Owners may enter into a Split Dollar
Arrangement between each other or another person or persons whereby the payment
of premiums and the right to receive the benefits under the Policy (i.e., Net
Cash Surrender Value or Death Proceeds) are split between the parties. There
are different ways of allocating such rights.
For example, an employer and employee might agree that under a Policy on the
life of the employee, the employer will pay the premiums and will have the
right to receive the Net Cash Surrender Value. The employee may designate the
Beneficiary to receive any Death Proceeds in excess of the Net Cash Surrender
Value. If the employee dies while such an arrangement is in effect, the
employer would receive from the Death Proceeds the amount which he would have
been entitled to receive upon surrender of the policy and the employee's
Beneficiary would receive the balance of the proceeds.
No transfer of Policy rights pursuant to a Split Dollar Arrangement will be
binding on PMLIC unless in writing and received by PMLIC.
The parties who elect to enter into a Split Dollar Arrangement should consult
their own tax advisers regarding the tax consequences of such an arrangement.
Assignments. The Owner may assign any and all rights under the Policy. No
assignment binds PMLIC unless in writing and received by PMLIC. PMLIC assumes
no responsibility for determining whether an assignment is valid and the extent
of the assignee's interest. All assignments will be subject to any Policy loan.
The interest of any Beneficiary or other person will be subordinate to any
assignment. A payee who is not also the Owner may not assign or encumber Policy
benefits, and to the extent permitted by applicable law, such benefits are not
subject to any legal process for the payment of any claim against the payee.
Misstatement of Age. If the Insured's age has been misstated in the
application, the Death Benefit and any benefits provided by riders will be such
as the most recent Monthly Deductions would have provided at the correct age.
Suicide. In the event of the Insured's suicide within two years from the
Issue Date of the Policy (except where state law requires a shorter period)
PMLIC's liability is limited to the payment to the Beneficiary of a sum equal
to the premiums paid less any Policy loan and accrued interest and any partial
withdrawals.
If the Insured commits suicide within two years (or shorter period required
by state law) from the effective date of any Policy change which increases the
Death Benefit, the amount which PMLIC will pay with respect to the increase
will be the deductions previously made for such increase.
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<PAGE>
Incontestability. The Policy will be incontestable after it has been in force
during the Insured's lifetime for two years from the Issue Date (or such other
date as required by state law). Similar incontestability will apply to an
increase in Face Amount or reinstatement after it has been in force during the
Insured's lifetime for two years from its effective date. Before such times,
however, PMLIC may contest the validity of the Policy (or changes) based on
material misstatements in the initial or any subsequent application.
Dividends. The Policy is participating; however, no dividends are expected to
be paid on the Policy.
If dividends are ever declared, they will be paid under one of the following
options:
(a) Paid in cash; or
(b) Applied as a Net Premium.
The Owner must choose an option at the time the application for the Policy is
signed. If no option is chosen, any dividend will be applied as a Net Premium
payment. The Owner may change the option by giving written notice to PMLIC.
Settlement Options. In lieu of a single sum payment on death or surrender, an
election may be made to apply the proceeds under any one of the fixed-benefit
Settlement Options provided in the Policy. The options are described below.
Proceeds at Interest Option. Left on deposit to accumulate with PMLIC with
interest payable at a rate of at least 3% per year.
Instalments of a Specified Amount Option. Payable in equal instalments until
proceeds applied under the Option and interest on the unpaid balance at 3% per
year and any additional interest are exhausted.
Instalments for a Specified Period Option. Payable in the number of equal
monthly instalments set forth in the election. Payments may be increased by
additional interest which would increase the instalments certain. The
guaranteed interest rate is 3% per year.
Life Income Option. Payable in equal monthly instalments during the payee's
life. Payments will be made either with or without a guaranteed minimum number.
If there is to be a minimum number of payments, they will be for either 120 or
240 months or until the proceeds applied under the Option are exhausted, as
elected.
Joint and Survivor Life Income. Payable in equal monthly instalments during
the joint lives of the payee and one other person and during the life of the
survivor. The minimum number of payments will be for either 120 or 240 months,
as elected.
Supplementary Benefits. The following supplementary benefits, which are
subject to the restrictions and limitations set forth therein, may be included
in a Policy:
Disability Waiver of Monthly Deductions. Subject to certain age and
underwriting restrictions, the Policy may include a Disability Waiver of
Monthly Deductions Rider providing that in the event of the Insured's total
disability before Attained Age 60 and continuing for at least six months, PMLIC
will waive all monthly deductions after the commencement of and during the
continuance of such total disability. If this rider is added, the Monthly
Deduction will be increased to include the cost of this rider.
Disability Waiver of Premium Benefit. Subject to certain age and underwriting
restrictions, a Policy may include the Disability Waiver of Premium Benefit
providing that, in the event of the Insured's total disability before Attained
Age 60 and continuing for at least 180 days, PMLIC will apply a premium payment
to the Policy on each Policy Processing Day prior to Insured's Attained Age 65
and while the Insured remains totally disabled.
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At the time of application, a Monthly Benefit Amount is selected by the
applicant. This amount is generally intended to reflect the amount of the
premiums expected to be paid monthly. In the event of Insured's total
disability the amount of the premium payment applied on each Policy Processing
Day will be the lesser of: (a) the Monthly Benefit Amount; or (b) the monthly
average of the premium payments less partial withdrawals for the Policy since
its Policy Date.
If the Policy is issued with the Disability Waiver of Premium Benefit Rider,
each Monthly Deduction will be increased to include the cost of the rider which
is a specified percentage of the Monthly Benefit Amount.
This supplementary benefit must be selected at the time of application and
cannot be added after issue. However, for Policies issued prior to the date the
Disability Waiver of Premium Benefit Rider is approved in a particular state,
the Rider can be added as a supplementary benefit to the Policy within 6 months
after state approval. PMLIC reserves the right to require evidence of
insurability to add this rider to an existing Policy.
An Owner cannot elect to have both this rider and another disability waiver
benefit rider attached as supplementary benefits with the same Policy.
Change of Insured. Upon request, the Policy may include a Change of Insured
Rider by which the Insured under a Policy may be changed to a New Insured,
subject to certain conditions and evidence of insurability. The Monthly
Deduction for cost of insurance will be changed to that for the New Insured as
of the effective date of the change. A change of insured is treated as a
taxable event.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon PMLIC's understanding of
the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service (the "Service"). No representation is made as to the
likelihood of continuation of the present Federal income tax laws or of the
current interpretations by the Internal Revenue Service.
TAX STATUS OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code")
sets forth a definition of a life insurance contract for Federal tax purposes.
This definition can be satisfied by complying with one of two tests set forth
in Section 7702. Although the Secretary of the Treasury (the "Treasury") is
authorized to prescribe regulations implementing Section 7702, while proposed
regulations and other interim guidance has been issued, final regulations have
not been adopted. Guidance as to how Section 7702 is to be applied is limited.
If a Policy were determined not to be a life insurance contract for purposes of
Section 7702, such Policy would not provide the tax advantages normally
provided by a life insurance policy.
PMLIC believes (largely in reliance on IRS Notice 88-128 and the proposed
regulations under Section 7702 issued on July 3, 1991) that a Policy issued on
the basis of a Standard Premium Class should meet the Section 7702 definition
of a life insurance contract, as long as the Owner does not pay the full amount
of premiums permitted under such a Policy. With respect to a Policy issued on a
Special or Nonsmoker Special basis (i.e., a Premium Class involving higher than
standard mortality risk), there is insufficient guidance to determine if such a
Policy would satisfy the Section 7702 definition of a life insurance contract,
particularly if the Owner pays the full amount of premiums permitted under the
Policy. An Owner of a Policy issued on
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<PAGE>
a Special basis may, however, adopt certain self-imposed limitations on the
amount of premiums paid for such a Policy which should cause the Policy to meet
the Section 7702 definition of a life insurance contract. An Owner
contemplating the adoption of such limitations should do so only after
consulting a tax adviser. If it is subsequently determined that a Policy does
not satisfy Section 7702, PMLIC may take whatever steps are appropriate and
necessary to attempt to cause such a Policy to comply with Section 7702. For
these reasons, PMLIC reserves the right to restrict Policy transactions as
necessary to attempt to qualify it as a life insurance contract under Section
7702.
Section 817(h) of the Code requires that the investments of each of the
Separate Accounts must be "adequately diversified" in accordance with Treasury
regulations in order for the Policy to qualify as a life insurance contract
under Section 7702 of the Code (discussed above). The Separate Accounts,
through the Fund and the Zero Coupon Trust, intend to comply with the
diversification requirements prescribed in Treas. Reg. (S)1.817-5, which affect
how the Fund's and Trust's assets are to be invested. PMLIC believes that the
Separate Accounts will, thus, meet the diversification requirement, and PMLIC
will monitor continued compliance with this requirement. In certain
circumstances, owners of variable life insurance contracts may be considered
the owners, for federal income tax purposes, of the assets of the separate
accounts used to support their contracts. In those circumstances, income and
gains from the separate account assets would be includible in the variable
contract owner's gross income. The IRS has stated in published rulings that a
variable contract owner will be considered the owner of separate account assets
if the contract owner possesses incidents of ownership in those assets, such as
the ability to exercise investment control over the assets. The Treasury
Department has also announced, in connection with the issuance of regulations
concerning diversification, that those regulations "do not provide guidance
concerning the circumstances in which investor control of the investments of a
segregated asset account may cause the investor (i.e., the Policyowner), rather
than the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular subaccounts without being treated as owners of the
underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating premium payments
and Policy Values and the investment objective of certain Portfolios (i.e. the
Gold and Natural Resources Portfolio) may be narrower. These differences could
result in an Owner being treated as the owner of a pro rata portion of the
assets of the Separate Accounts. In addition, PMLIC does not know what
standards will be set forth, if any, in the regulations or rulings which the
Treasury Department has stated it expects to issue. PMLIC therefore reserves
the right to modify the Policy as necessary to attempt to prevent an Owner from
being considered the owner of a pro rata share of the assets of the Separate
Accounts.
For a discussion of the tax considerations relating to the Neuberger & Berman
Advisers Management Trust ("AMT") reorganization, see the AMT prospectus which
accompanies this Prospectus.
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. PMLIC believes that the proceeds and cash value increases of a
Policy should be treated in a manner consistent with a fixed-benefit life
insurance policy for Federal income tax purposes. Thus, the Death Benefit under
the Policy should be excludable from the gross income of the Beneficiary under
Section 101(a)(1) of the Code.
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's Death Benefit Option (i.e., a change from Death Benefit Option A to
Death Benefit Option B or vice versa), a Policy loan, a partial withdrawal, a
surrender, the addition of an Accelerated Death Benefit Rider, the receipt of
an Accelerated Death Benefit, a change in ownership, or an assignment of the
Policy may have Federal income tax
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<PAGE>
consequences. In addition, Federal, state and local transfer, and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each Owner or Beneficiary.
Generally, the Owner will not be deemed to be in constructive receipt of the
Policy Account Value, including increments thereof, until there is a
distribution. The tax consequences of distributions from, and loans taken from
or secured by, a Policy depend on whether the Policy is classified as a
"Modified Endowment Contract". Whether a Policy is or is not a Modified
Endowment Contract, upon a complete surrender or lapse of a Policy, or when
benefits are paid at a Policy's maturity date, if the amount received plus the
amount of indebtedness exceeds the total investment in the Policy, the excess
will generally be treated as ordinary income subject to tax.
Modified Endowment Contracts. Section 7702A establishes a class of life
insurance contracts designated as "Modified Endowment Contracts," which applies
to Policies entered into or materially changed after June 20, 1988.
Due to the Policy's flexibility, classification as a Modified Endowment
Contract will depend on the individual circumstances of each Policy. In
general, a Policy will be a Modified Endowment Contract if the accumulated
premiums paid at any time during the first seven Policy Years exceeds the sum
of the net level premiums which would have been paid on or before such time if
the Policy provided for paid-up future benefits after the payment of seven
level annual premiums. The determination of whether a Policy will be a Modified
Endowment Contract after a material change generally depends upon the
relationship of the Death Benefit and Policy Account Value at the time of such
change and the additional premiums paid in the seven years following the
material change. At the time a premium is credited which would cause the Policy
to become a Modified Endowment Contract, PMLIC will notify the Owner that
unless a refund of the excess premium is requested by the Owner, the Policy
will become a Modified Endowment Contract. The Owner will have 30 days after
receiving such notification to request the refund. The excess premium paid
(with either the 4% required interest or positive Separate Account earnings, if
any) will be returned to the Owner upon receipt by PMLIC of the refund request.
The amount to be refunded will be deducted from the Policy Account Value in the
Separate Accounts and in the Guaranteed Account in the same proportion as the
premium payment was allocated to such accounts. In the event that earnings on
such excess premium is not at least 4%, the premium plus an amount equal to
interest at an annual rate of 4% will be returned.
The rules relating to whether a Policy will be treated as a Modified
Endowment Contract are extremely complex and cannot be adequately described in
the limited confines of this summary. Therefore, a current or prospective Owner
should consult with a competent advisor to determine whether a policy
transaction will cause the Policy to be treated as a Modified Endowment
Contract.
Distributions from Policies Classified as Modified Endowment
Contracts. Policies classified as Modified Endowment Contract will be subject
to the following tax rules: First, all distributions, including distributions
upon surrender and partial withdrawals from such a Policy are treated as
ordinary income subject to tax up to the amount equal to the excess (if any) of
the Policy Account Value immediately before the distribution over the
investment in the Policy (described below) at such time. Second, loans taken
from or secured by, such a Policy are treated as distributions from such a
Policy and taxed accordingly. Past due loan interest that is added to the loan
amount will be treated as a loan. Third, a 10 percent additional income tax is
imposed on the portion of any distribution from, or loan taken from or secured
by, such a Policy that is included in income except where the distribution or
loan is made on or after the Owner attains age 59 1/2, is attributable to the
Owner's becoming disabled, or is part of a series of substantially equal
periodic payments for the life (or life expectancy) of the Owner or the joint
lives (or joint life expectancies) of the Owner and the Owner's Beneficiary.
Distributions From Policies Not Classified as Modified Endowment
Contracts. Distributions from a Policy that is not a Modified Endowment
Contract, are generally treated as first recovering the investment in the
Policy (described below) and then, only after the return of all such investment
in the Policy, as distributing
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<PAGE>
taxable income. An exception to this general rule occurs in the case of a
decrease in the Policy's Death Benefit or any other change that reduces
benefits under the Policy in the first 15-years after the Policy is issued and
that results in a cash distribution to the Owner in order for the Policy to
continue complying with the Section 7702 definitional limits. Such a cash
distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a Modified Endowment Contract
are not treated as distributions. Instead, such loans are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon surrender) nor
loans from, or secured by, a Policy that is not a Modified Endowment Contract
are subject to the 10 percent additional tax.
Policy Loan Interest. Generally, consumer interest paid on any loan under a
Policy which is owned by an individual is not deductible. In addition, interest
on any loan under a Policy owned by a taxpayer and covering the life of any
individual who is an officer or employee of or is financially interested in the
business carried on by that taxpayer will not be tax deductible to the extent
the aggregate amount of such loans with respect to contracts covering such
individual exceeds $50,000. The deduction of interest on Policy loans may also
be subject to the restrictions of Section 264 of the Code.
Investment in the Policy. Investment in the Policy means: (i) the aggregate
amount of any premiums or other consideration paid for a Policy, minus (ii) the
aggregate amount received under the Policy which is excluded from gross income
of the Owner (except that the amount of any loan from, or secured by, a Policy
that is a Modified Endowment Contract, to the extent such amount is excluded
from gross income, will be disregarded), plus (iii) the amount of any loan
from, or secured by, a Policy that is a Modified Endowment Contract to the
extent that such amount is included in the gross income of the Owner.
Multiple Policies. All Modified Endowment Contracts that are issued by PMLIC
(or its affiliates) to the same Owner during any calendar year are treated as
one Modified Endowment Contract for purposes of determining the amount
includible in the gross income under Section 72(e) of the Code.
Other Tax Consequences. 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 may vary depending on the
particular facts and circumstances of each individual arrangement. Therefore,
if you are contemplating the use of a Policy in any arrangement the value of
which depends in part on its tax consequences, you should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement.
SPECIAL RULES FOR PENSION AND PROFIT-SHARING PLANS
If Policies are purchased by a trust forming part of a pension or profit-
sharing plan meeting the qualification requirements of Section 401(a) of the
Code, various special tax rules will apply. Because these rules are extensive
and complicated, it is not possible to describe all of them here. Accordingly,
counsel or other competent tax advisors familiar with qualified plan matters
should be consulted in connection with any such purchase.
Generally, a plan participant on whose behalf a Policy is purchased will be
treated as having annual imputed income based on a cost of insurance factor
multiplied by the Net Amount at Risk under the Policy. This imputed income is
to be reported by the employer to the employee and the Service annually and
included in the employee's gross income. In the event of the death of a plan
participant while covered by the plan, Insurance Proceeds paid to the
participant's Beneficiary generally will not be completely excludable from the
Beneficiary's gross income under Section 101(a) of the Code. Any Death Benefit
in excess of the Policy Account Value will be excludable. The portion of the
Death Benefit equal to the Policy Account Value, however, generally will be
subject to Federal income tax to the extent it exceeds the sum of $5,000 plus
the
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participant's "investment in the contract" as defined in the Code, which will
include the imputed income noted above. Special rules may apply in certain
circumstances (e.g., to Owner-employees or participants who have borrowed from
the plan).
The Service has interpreted the plan qualification provisions of the Code to
require that non-retirement benefits, including death benefits, payable under a
qualified plan be "incidental to" retirement benefits provided by the plan.
These interpretations, which are primarily set forth in a series of Revenue
Rulings issued by the Service, should be considered in connection with any
purchase of life insurance policies to provide benefits under a qualified plan.
POSSIBLE CHARGE FOR PMLIC'S TAXES
At the present time, PMLIC makes no charge for any Federal, state or local
taxes (other than state premium taxes) that the Company incurs that may be
attributable to the Separate Accounts or to the Policies. PMLIC, however,
reserves the right in the future to make a charge for any such tax or other
economic burden resulting from the application of the tax laws that it
determines to be properly attributable to the Accounts or to the Policies. If
any tax charges are made in the future, they will be accumulated daily and
transferred from the applicable Separate Account to PMLIC's General Account.
Any investment earnings on tax charges accumulated in a Separate Account will
be retained by PMLIC.
VOTING RIGHTS
All of the assets held in the Growth, Money Market, Bond, Managed, Aggressive
Growth and International Separate Accounts and the Subaccounts of the Variable
Account will be invested in shares of corresponding portfolios of the Funds.
(The organizational documents governing the Trust do not contemplate meetings
of holders of Trust units nor any action taken by vote of such holders.) The
Funds do not hold routine annual shareholders' meetings. Shareholders' meetings
will be called whenever each Fund believes that it is necessary to vote to
elect the Board of Directors of the Fund and to vote upon certain other matters
that are required by the 1940 Act to be approved or ratified by the
shareholders of a mutual fund. PMLIC is the legal owner of Fund shares and as
such has the right to vote upon any matter that may be voted upon at a
shareholders' meeting. However, in accordance with its view of present
applicable law, PMLIC will vote the shares of the Funds at meetings of the
shareholders of the appropriate Fund or Portfolio in accordance with
instructions received from policyowners. Fund shares held in each Separate
Account for which no timely instructions from policyowners are received will be
voted by PMLIC in the same proportion as those shares in that Separate Account
for which instructions are received.
Each policyowner having a voting interest will be sent proxy material and a
form for giving voting instructions. Policyowners may vote, by proxy or in
person, only as to the Portfolios that correspond to the Separate Accounts or
Subaccounts in which their Policy values are allocated. The number of shares
held in each Separate Account or Subaccounts attributable to a Policy for which
the policyowner may provide voting instructions will be determined by dividing
the Policy's value in that account by the net asset value of one share of the
corresponding Portfolio as of the record date for the shareholder meeting.
Fractional shares will be counted. For each share of a Portfolio for which
policyowners have no interest, PMLIC will cast votes, for or against any
matter, in the same proportion as policyowners vote.
If required by state insurance officials, PMLIC may disregard voting
instructions if such instructions would require shares to be voted so as to
cause a change in the investment objectives or policies of one or more of the
Portfolios, or to approve or disapprove an investment policy or investment
adviser of one or more of the Portfolios. In addition, PMLIC may disregard
voting instructions in favor of changes initiated by a policyowner or the
Fund's Board of Directors provided that PMLIC's disapproval of the change is
reasonable and is based on a good faith determination that the change would be
contrary to state law or otherwise inappropriate, considering the portfolio's
objectives and purposes, and the effect the change would
46
<PAGE>
have on PMLIC. If PMLIC does disregard voting instructions, it will advise
policyowners of that action and its reasons for such action in the next semi-
annual report to policyowners.
At some later time, MS Fund shares may be held by separate accounts of
insurance companies not affiliated with PMLIC. PMLIC expects that those shares
will be voted in accordance with instructions of the owners of insurance
policies and contracts issued by those other insurance companies. This will
dilute the effect of voting instructions of policyowners.
Shares of the Funds other than the MS Fund are currently being offered to
variable life insurance and variable annuity separate accounts of life
insurance companies other than PMLIC that are not affiliated with PMLIC. PMLIC
understands that shares of these Funds also will be voted by such other life
insurance companies in accordance with instructions from their policyowners
invested in such separate accounts. This will dilute the effect of voting
instructions of policyowners of the Policies.
CHANGES IN APPLICABLE LAW, FUNDING AND OTHERWISE
The voting rights described in this Prospectus are created under applicable
Federal securities laws. To the extent that such laws or regulations
promulgated thereunder eliminate the necessity to solicit voting instructions
from Owners or restrict such voting rights, PMLIC reserves the right to proceed
in accordance with any such laws or regulations.
PMLIC also reserves the right, subject to compliance with applicable law,
including approval of Owners, if so required: (1) to transfer assets determined
by PMLIC to be associated with the class of policies to which the Policies
belong from one Separate Account to another Separate Account by withdrawing the
same percentage of each investment in the account with appropriate adjustments
to avoid odd lots and fractions (such transfers will not count against the four
free transfers during a Policy Year); (2) to create additional separate
investment accounts, to create divisions (or Subaccounts) from, or combine or
remove divisions (or Subaccounts) from, Separate Accounts, or to combine any
two or more accounts including the Separate Accounts (or Subaccounts); (3) to
operate one or more of the Separate Accounts (or Subaccounts) as a management
investment company under the 1940 Act, or in any other form permitted by law;
(4) to deregister the unit investment trust under the 1940 Act; and (5) to
modify the provisions of the Policies to comply with applicable laws. PMLIC has
reserved all rights in respect of its corporate name and any part thereof,
including without limitation the right to withdraw its use and to grant its use
to one or more other separate accounts and other entities.
Although PMLIC believes it to be highly unlikely, it is possible that in the
judgment of its management, one or more of the Portfolios or series of the Zero
Coupon Trust may become unsuitable for investment by the corresponding Separate
Account or Subaccount because of a change in investment policy, or a change in
the tax laws, or because the shares or units are no longer available for
investment or for any other reasonable cause. In that event, PMLIC may seek to
substitute the shares of another Portfolio or series or of an entirely
different mutual fund or trust. Before this would be done, the approval of the
SEC and possibly one or more state insurance departments would be obtained, to
the extent legally required.
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OFFICERS AND DIRECTORS OF PMLIC
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION* DURING THE PAST FIVE YEARS
------------------ --------------------------
<C> <S>
L. J. Rowell, Jr. ............. 1994 to present -- Chairman and Chief
Chairman of the Board Executive Officer of PMLIC; 1992 to 1994 --
and Chief Executive Officer Chairman, President and Chief Executive
Officer of PMLIC; 1991 to 1992 -- President
and Chief Executive Officer of PMLIC; 1987
to 1991 -- President and Chief Operating
Officer of PMLIC; 1984 to 1987 -- President
of PMLIC.
Dr. Dorothy M. Brown........... 1992 to present -- Acting President of the
Director Pennsylvania Academy of the Fine Arts; 1979
16 Meredith Road to 1991 -- President of Rosemont College.
Wynnewood, PA 19096
Robert J. Casale............... 1988 to present -- Group President/Brokerage
Director Information Services Group of Automatic Data
2 Journal Square Processing Inc.; 1986 to
Jersey City, NJ 07306 1988 -- Managing Director of Kidder Peabody;
1975 to
1986 -- President, Special Markets Group of
AT&T.
Nicholas DeBenedictus.......... 1993 to present -- Chairman, President and
Philadelphia Suburban Corp. Chief Executive Officer of Philadelphia
762 Lancaster Avenue Suburban Corporation; 1989 to 1992 -- Senior
Bryn Mawr, PA 19010 Vice President of Philadelphia Electric
Company.
Dr. Claire M. Fagin............ 1994 to present -- Leadership Professor and
Director Dean Emeritus of the School of Nursing,
Nursing Education Bldg. S-2 University of Pennsylvania; 1993 to 1994 --
Philadelphia, PA 19104 Interim President of University of
Pennsylvania; 1992 to 1993 --Leadership
Professor and Dean Emeritus of the School of
Nursing, University of Pennsylvania; 1977 to
1992 --
Professor and Margaret Bond Simon Dean of
Nursing, School of Nursing, University of
Pennsylvania.
Philip C. Herr, II............. 1961 to present -- Partner -- Herr, Potts &
Director Herr.
Herr, Potts & Herr
100 Matsonford Road
Suite 446
Radnor, PA 19087
J. Richard Jones............... 1981 to present -- President and Chief
Director Executive Officer of Jackson-Cross Company.
100 North 20th Street
Philadelphia, PA 19103
Robert W. Kloss................ 1994 to present -- President and Chief
President and Chief Operating Operating Officer of PMLIC; 1986 to 1994 --
Officer President and Chief Executive Officer of
Director Covenant Life Insurance Company.
John A. Miller................. 1992 to present -- Chairman of the Executive
Director Committee of PMLIC; 1991 to 1992 -- Chairman
of the Board of Directors of PMLIC; 1984 to
1991 -- Chairman and Chief Executive Officer
of PMLIC.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION* DURING THE PAST FIVE YEARS
------------------ --------------------------
<C> <S>
John P. Neafsey................ 1993 to present -- President of JN Associates;
Director 1990 to 1993 -- President of Greenwich Capital
765 Hollow Tree Ridge Road Markets, Inc.; 1987 to 1990 -- Executive Vice
Darien, CT 06820 President, Director and Chief Financial
Officer of Sun Company, Inc.; 1978 to 1987 --
Senior Vice President of Finance and
Information Systems and Chief Financial
Officer of Sun Company, Inc.
Charles L. Orr................. 1993 to present -- President and Chief
Director Executive Office of Shaklee Corporation; 1990
Shaklee Corporation to 1993 -- President of Shaklee U.S., Inc.
Shaklee Terraces
444 Market Street
San Francisco, CA 94111
William A. Pollard............. 1989 to present -- Retired; 1961 to 1988 --
Director Chairman of Reliance Insurance Company.
26 Main Street
Essex, CT 06426
Donald A. Scott................ 1964 to present -- Senior Partner -- Morgan,
Director Lewis and Bockius.
2000 One Logan Square
Philadelphia, PA 19103
John J. F. Sherrerd............ 1969 to present -- Partner -- Miller, Anderson
Director & Sherrerd.
One Tower Bridge
West Conshohocken, PA 19428
Harold A. Sorgenti............. 1991 to present--Partner -- The Freedom
Director Chemical Company; 1979 to 1991 -- President
Mellon Center, Suite 3905 and Chief Executive Officer of Arco Chemical
1735 Market Street Company.
Philadelphia, PA 19103
William R. Wilson.............. 1993 to present -- Retired; 1981 to 1992 --
Director Chairman and Chief Executive Officer of
Oaklands Business Parks, Inc. Lukens, Inc.
600 West Lincoln Highway
Exton, PA 19341
Gerald B. Beam................. 1995 to present -- Executive Vice President --
Executive Vice President -- Individual Insurance Operations of PMLIC;
Individual Insurance Opera- 1988 to 1995 -- Executive Vice President--
tions Corporate of PMLIC; 1987 to 1988 -- Senior
Vice President-- Corporate of PMLIC; 1983 to
1987 -- Senior Vice President-- Administration
of PMLIC.
John R. McClelland............. 1988 to present -- Executive Vice President and
Executive Vice President Chief Financial Officer of PMLIC; 1968 to 1988
and Chief Financial Officer Senior Vice President and Chief Financial
Officer of Continental American Life Insurance
Company.
Charlene Parsons............... 1995 to present -- Executive Vice President --
Executive Vice President -- Corporate of PMLIC; 1991 to 1994 -- Vice
Corporate President -- Human Resources of PMLIC; 1989 to
1991 -- Assistant Vice President -- Human
Resources of PMLIC.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION* DURING THE PAST FIVE YEARS
------------------ --------------------------
<C> <S>
Stanley R. Reber............... 1988 to present -- Executive Vice President
Executive Vice President and Chief Investment Officer of PMLIC; 1985
and Chief Investment Officer to 1988 -- Senior Vice President --
Investments of PMLIC.
Mary Lynn Finelli.............. 1986 to present -- Vice President and
Vice President and Controller of PMLIC; 1976 to 1986 --
Controller Principal of Arthur Young Company.
Craig L. Snyder................ Vice President -- Mortgage Loans and Real
Vice President -- Estate of PMLIC.
Mortgage Loans and
Real Estate
Guy H. Edwards................. Vice President -- Information Services of
Vice President -- PMLIC.
Information Services
William P. Loesche............. 1994 to present -- Counsel and Secretary of
Counsel PMLIC; 1988 to 1994-- Counsel and Assistant
and Secretary Secretary of PMLIC.
Rosanne Gatta.................. 1994 to present -- Vice President and
Assistant Vice President Treasurer of PMLIC; 1985 to 1994 -- Assistant
and Treasurer Vice President and Treasurer of PMLIC.
</TABLE>
- --------
* Unless otherwise indicated, the address is 1600 Market Street, Philadelphia,
Pennsylvania 19103.
A Fidelity Bond in the amount of $5 million covering PMLIC's officers and
employees has been issued by National Union Insurance Company, a subsidiary of
American International Group.
DISTRIBUTION OF POLICIES
Applications for the Policies are solicited by agents who are licensed by
state insurance authorities to sell PMLIC's variable life insurance policies,
and who are also registered representatives of PML Securities Company ("PML")
or registered representatives of broker/dealers who have Selling Agreements
with PML or registered representatives of broker/dealers who have Selling
Agreements with such broker/dealers. PML, whose address is Christiana Executive
Campus, P.O. Box 15626, Wilmington, Delaware 19850, is a registered
broker/dealer under the Securities Exchange Act of 1934 (the "1934 Act") and a
member of the National Association of Securities Dealers, Inc. (the "NASD").
PML is an indirect wholly-owned subsidiary of PMLIC. PML acts as the principal
underwriter, as defined in the 1940 Act, of the Policies (as well as other
variable life policies) for the Separate Accounts pursuant to an Underwriting
Agreement to which the Accounts, PML and PMLIC are parties. PML is also the
principal underwriter of variable annuity contracts issued by PMLIC and
variable life insurance policies and variable annuity contracts issued by
Providentmutual Life and Annuity Company of America, a wholly-owned subsidiary
of PMLIC. PML has entered into a Selling Agreement with The Wolper Ross
Corporation ("TWRC"), a registered broker/dealer under the 1934 Act and a
member of the NASD, whereby registered representatives of TWRC will solicit
applications for the Policy. Under the terms of the Selling Agreement, TWRC may
also enter into selling agreements with other broker/dealers with respect to
distribution of the Policy. The Policies are offered and sold only in those
states where their sale is lawful.
The insurance underwriting and the determination of a proposed Insured's
Premium Class and whether to accept or reject an application for a Policy is
done by PMLIC. In determining whether to accept an
50
<PAGE>
application, PMLIC may also consider the total number of Policies and total
Face Amount of Policies issued in the aggregate as well as issued with respect
to applications taken by individual registered representatives of a particular
broker/dealer. PMLIC will refund any premiums paid if a Policy ultimately is
not issued or will refund the applicable amount if the Policy is returned under
the Free-Look provision.
Agents are compensated for sales of the Policies on a commission and service
fee basis and with other forms of compensation. During the first Policy Year,
agent commissions will not be more than 40% of the premiums paid up to a target
amount (used only to determine commission payments) and 5% of the premiums paid
in excess of that amount. For Policy Years 2 through 10, the agent commissions
will not be more than 5% of the premiums paid; and for years 11 and later, the
agent commissions will not be more than 2% of the premiums paid. However, for
each premium received within 10 years following an increase in Face Amount,
agent commissions on the premium paid up to the target amount for the increase
in each year will be calculated using the commission rates for the
corresponding Policy Year. Agents may also receive expense allowances. The
agent may be required to return the first year commission less the surrender
charge imposed if a Policy is not continued through the second Policy Year.
POLICY REPORTS
At least once each Policy Year a statement will be sent to the Owner
describing the status of the Policy, including setting forth the Face Amount,
the current Death Benefit, any Policy loans and accrued interest, the current
Policy Account Value, the Guaranteed Account Value, the Loan Account Value, the
value in each Separate Account, premiums paid since the last report, charges
deducted since the last report, any partial withdrawals since the last report,
and the current Net Cash Surrender Value. At the present time, PMLIC plans to
send these Policy Statements on a monthly basis. In addition, a statement will
be sent to an Owner showing the status of the Policy following the transfer of
amounts from one Separate Account or Sub-Account of a Separate Account to
another, the taking out of a loan, a repayment of a loan, a partial withdrawal
and the payment of any premiums (excluding those paid by bank draft or
otherwise under the Automatic Payment Plan).
An Owner will be sent a semi-annual report containing the financial
statements of the Separate Accounts and the Funds and Trust as required by the
1940 Act.
STATE REGULATION
PMLIC is subject to regulation and supervision by the Insurance Department of
the Commonwealth of Pennsylvania which periodically examines its affairs. It is
also subject to the insurance laws and regulations of all jurisdictions where
it is authorized to do business. A copy of the Policy form has been filed with,
and where required approved by, insurance officials in each jurisdiction where
the Policies are sold. PMLIC is required to submit annual statements of its
operations, including financial statements, to the insurance departments of the
various jurisdictions in which it does business for the purposes of determining
solvency and compliance with local insurance laws and regulations.
EXPERTS
The Financial Statements listed on Page F-1 have been included in this
Prospectus, in reliance on the reports of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
Actuarial matters included in the Prospectus have been examined by Scott V.
Carney, F.S.A., MAAA, Assistant Actuary of PMLIC.
51
<PAGE>
LEGAL MATTERS
Sutherland, Asbill & Brennan of Washington, D.C. has provided advice on legal
matters relating to certain aspects of Federal securities law applicable to the
issue and sale of the Policies. Matters of the Commonwealth of Pennsylvania law
pertaining to the Policies, including PMLIC's right to issue the Policies and
its qualification to do so under applicable laws and regulations issued
thereunder, have been passed upon by Linda E. Senker, Associate General Counsel
of PMLIC.
52
<PAGE>
APPENDIX A
ILLUSTRATION OF DEATH BENEFITS, POLICY ACCOUNT VALUES
AND NET CASH SURRENDER VALUES
The following tables illustrate how the Death Benefits, Policy Account Values
and Net Cash Surrender Values of a Policy may change with the investment
experience of the Separate Accounts. The tables show how the Death Benefits,
Policy Account Values and Net Cash Surrender Values of a Policy issued to an
Insured of a given age would vary over time if the investment return on the
assets held in each Portfolio of the Fund and Trust were a uniform, gross,
annual rate of 0%, 6% and 12%.
The tables on pages A-3 to A-8 illustrate a Policy issued to an Insured, Age
40 in the Nonsmoker Premium Class with a Face Amount of $1,000,000 and a
Planned Periodic Premium of $12,000 paid at the beginning of each Policy Year.
The Death Benefits, Policy Account Values and Net Cash Surrender Values would
be lower if the Insured was a smoker or in a special class since the cost of
insurance charges would increase. Also, the values would be different from
those shown if the gross annual investment returns averaged 0%, 6% and 12% over
a period of years, but fluctuated above and below those averages for individual
Policy Years.
The second column of the tables show the amount to which the premiums would
accumulate if an amount equal to those premiums were invested to earn interest,
after taxes, at 5% compounded annually. The columns shown under the heading
"Guaranteed" assume that throughout the life of the policy, the monthly charge
for cost of insurance is based on the maximum level permitted under the Policy
(based on the 1980 CSO Table B) and maximum monthly administrative fee of $16;
the columns under the heading "Current" assume that throughout the life of the
Policy, the monthly charge for cost of insurance is based on the current cost
of insurance rate and current monthly administrative fee of $8.
The amounts shown in all tables reflect daily charges for mortality and
expense risks equivalent to an effective annual charge of 0.75%, and in
addition, reflect an averaging of certain other asset charges described below
that may be assessed under the Policy, depending upon how premiums are
allocated. The total of the asset charges reflected in the Current and
Guaranteed illustrations, including the 0.75% mortality and expense risk charge
listed above, is 1.48% and 1.51%, respectively. This total charge is based on
an assumption that an Owner allocates the Policy values equally among the
Growth, Managed, Aggressive Growth, International, Money Market and Bond
Separate Accounts and to each Sub-Account of the Variable Separate Account and
the Zero Coupon Bond Separate Account.
These asset charges reflect an investment advisory fee of 0.52% which
represents an average of the fees incurred by the Portfolios during 1994 and
expenses of 0.21% which is based on an average of the actual expenses incurred
by the Portfolios during 1994. For all of the Portfolios, the annual expenses
used in the illustrations are net of certain reimbursements that may or may not
continue.
Currently there is an expense reimbursement agreement between PMLIC and the
MS Fund pursuant to which PMLIC reimburses MS Fund expenses, excluding
investment advisory fees, in excess of 0.40% for all Portfolios except the
International Portfolio and 0.75% for the International Portfolio. There was no
reimbursement in 1994. The MS Fund expenses, excluding advisory fees, during
1994 were 0.28% for the Growth Portfolio, 0.30% for the Money Market Portfolio,
0.33% for the Bond Portfolio, 0.27% for the Managed Portfolio, 0.36% for the
Aggressive Growth Portfolio and 0.57% for the International Portfolio. It is
anticipated that this agreement will continue past the current year. If it does
not continue, Fund expenses may increase.
The investment advisory fees and other expenses during 1994 for the
Portfolios were:
VIP Fund Equity-Income Portfolio 0.80%, VIP Fund Growth Portfolio 0.69%,
VIP Fund High Income Portfolio 0.71%, VIP Fund Overseas Portfolio 0.92%,
VIP Fund II Asset Manager Portfolio
A-1
<PAGE>
0.80%, VIP Fund II Index 500 Portfolio 0.28%, VIP Fund II Investment Grade
Bond Portfolio 0.67%, AMT Growth Portfolio 0.91%, AMT Balanced Portfolio
0.97%, AMT Limited Maturity Bond Portfolio 0.73%, TCI Growth Portfolio
1.00%, Van Eck Global Bond Portfolio 0.93% and Van Eck Gold and Natural
Resources Portfolio 0.96%.
The tables also reflect the fact that no charges for Federal or state income
taxes are currently made against the Separate Accounts. If such a charge is
made in the future, it would take a higher gross annual rate of return to
produce the same Policy values.
The tables illustrate the Policy values that would result based upon the
hypothetical investment rates of return if premiums are paid and allocated as
indicated, no amounts are allocated to the Guaranteed Account, and no Policy
loans are made. The tables are also based on the assumption that the Owner has
not requested an increase or decrease in the Face Amount, that no partial
withdrawals have been made and no transfers have been made in any Policy Year.
Upon request, PMLIC will provide a comparable illustration based upon the
proposed Insured's Age and Premium Class, the Death Benefit Option, Face
Amount, Planned Periodic Premiums and riders requested.
The following illustrations are based on cost of insurance rates that, in
turn, are based on non sex-distinct mortality tables and a Face Amount of
$1,000,000. For Policies sold in New York State, the minimum Face Amount is
$1,000,001. Also, for Policies sold in Massachusetts, New Jersey and New York
State for non employer-sponsored arrangements, sex-distinct mortality tables
are utilized and cost of insurance rates, both guaranteed and current, vary
based on the sex of the Insured. An illustration for a "sex-distinct" Policy
with a Face Amount of $1,000,001 will be substantially, but not exactly the
same as that for a $1,000,000 Face Amount Policy based on cost of insurance
rates that are not sex-distinct.
A-2
<PAGE>
PROVIDENT MUTUAL -- FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT INSURED ISSUE AGE 40 NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $12,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
<TABLE>
<CAPTION>
GUARANTEED* CURRENT**
PREMIUMS --------------------------- ---------------------------
END OF ACCUMULATED POLICY NET CASH POLICY NET CASH
POLICY AT 5% INT. ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 12,600 8,249 5,153 1,000,000 10,096 7,000 1,000,000
2 25,830 16,440 12,264 1,000,000 20,243 16,067 1,000,000
3 39,722 24,281 19,481 1,000,000 30,156 25,356 1,000,000
4 54,308 31,743 26,943 1,000,000 39,831 35,031 1,000,000
5 69,623 38,842 34,042 1,000,000 49,281 44,481 1,000,000
6 85,704 45,542 40,742 1,000,000 58,504 53,704 1,000,000
7 102,589 51,840 48,000 1,000,000 67,392 63,552 1,000,000
8 120,319 57,727 54,847 1,000,000 75,964 73,084 1,000,000
9 138,935 63,202 61,282 1,000,000 84,228 82,308 1,000,000
10 158,481 68,217 67,257 1,000,000 92,217 91,257 1,000,000
11 179,006 72,755 72,755 1,000,000 99,965 99,965 1,000,000
12 200,556 76,759 76,759 1,000,000 107,450 107,450 1,000,000
13 223,184 80,183 80,183 1,000,000 114,653 114,653 1,000,000
14 246,943 82,954 82,954 1,000,000 121,554 121,554 1,000,000
15 271,890 85,009 85,009 1,000,000 128,133 128,133 1,000,000
16 298,084 86,309 86,309 1,000,000 134,348 134,348 1,000,000
17 325,589 86,798 86,798 1,000,000 140,205 140,205 1,000,000
18 354,468 86,462 86,462 1,000,000 145,678 145,678 1,000,000
19 384,791 85,259 85,259 1,000,000 150,752 150,752 1,000,000
20 416,631 83,124 83,124 1,000,000 155,424 155,424 1,000,000
25 601,361 53,539 53,539 1,000,000 173,051 173,051 1,000,000
30 837,129 0 0 0 173,379 173,379 1,000,000
</TABLE>
* These values reflect investment results using guaranteed cost of insurance
rates and administrative charges and the maximum transaction charge for the
zero coupon bond account.
** These values reflect investment results using current cost of insurance
rates and administrative charges and the current transaction charge for the
zero coupon bond account.
The death benefit may, and the policy account values and net cash surrender
values will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY
WOULD BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN
APPLICABLE TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT
ALSO FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE
DEATH BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY
WOULD ALSO BE DIFFERENT FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT
ALLOCATIONS MADE TO THE SEPARATE ACCOUNTS AND THE DIFFERENT RATES OF RETURN OF
THE SEPARATE ACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR
PARTICULAR SEPARATE ACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
A-3
<PAGE>
PROVIDENT MUTUAL -- FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT INSURED ISSUE AGE 40 NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $12,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
<TABLE>
<CAPTION>
GUARANTEED* CURRENT**
PREMIUMS --------------------------- ---------------------------
END OF ACCUMULATED POLICY NET CASH POLICY NET CASH
POLICY AT 5% INT. ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 12,600 8,829 5,733 1,000,000 10,736 7,640 1,000,000
2 25,830 18,127 13,951 1,000,000 22,163 17,987 1,000,000
3 39,722 27,605 22,805 1,000,000 34,012 29,212 1,000,000
4 54,308 37,239 32,439 1,000,000 46,296 41,496 1,000,000
5 69,623 47,050 42,250 1,000,000 59,046 54,246 1,000,000
6 85,704 57,006 52,206 1,000,000 72,276 67,476 1,000,000
7 102,589 67,111 63,271 1,000,000 85,900 82,060 1,000,000
8 120,319 77,360 74,480 1,000,000 99,952 97,072 1,000,000
9 138,935 87,759 85,839 1,000,000 114,457 112,537 1,000,000
10 158,481 98,267 97,307 1,000,000 129,469 128,509 1,000,000
11 179,006 108,874 108,874 1,000,000 145,046 145,046 1,000,000
12 200,556 119,529 119,529 1,000,000 161,193 161,193 1,000,000
13 223,184 130,195 130,195 1,000,000 177,918 177,918 1,000,000
14 246,943 140,806 140,806 1,000,000 195,230 195,230 1,000,000
15 271,890 151,303 151,303 1,000,000 213,144 213,144 1,000,000
16 298,084 161,655 161,655 1,000,000 231,649 231,649 1,000,000
17 325,589 171,811 171,811 1,000,000 250,788 250,788 1,000,000
18 354,468 181,762 181,762 1,000,000 270,575 270,575 1,000,000
19 384,791 191,475 191,475 1,000,000 291,035 291,035 1,000,000
20 416,631 200,897 200,897 1,000,000 312,212 312,212 1,000,000
25 601,361 239,458 239,458 1,000,000 430,878 430,878 1,000,000
30 837,129 248,069 248,069 1,000,000 572,431 572,431 1,000,000
</TABLE>
* These values reflect investment results using guaranteed cost of insurance
rates and administrative charges and the maximum transaction charge for the
zero coupon bond account.
** These values reflect investment results using current cost of insurance
rates and administrative charges and the current transaction charge for the
zero coupon bond account.
The death benefit may, and the policy account values and net cash surrender
values will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY
WOULD BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN
APPLICABLE TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT
ALSO FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE
DEATH BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY
WOULD ALSO BE DIFFERENT FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT
ALLOCATIONS MADE TO THE SEPARATE ACCOUNTS AND THE DIFFERENT RATES OF RETURN OF
THE SEPARATE ACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR
PARTICULAR SEPARATE ACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
A-4
<PAGE>
PROVIDENT MUTUAL -- FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT INSURED ISSUE AGE 40 NONSMOKER
DEATH BENEFIT OPTION A ANNUAL PREMIUM $12,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
<TABLE>
<CAPTION>
GUARANTEED* CURRENT**
PREMIUMS ----------------------------- -----------------------------
END OF ACCUMULATED POLICY NET CASH POLICY NET CASH
POLICY AT 5% INT. ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- --------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 12,600 9,412 6,316 1,000,000 11,376 8,280 1,000,000
2 25,830 19,886 15,710 1,000,000 24,160 19,984 1,000,000
3 39,722 31,211 26,411 1,000,000 38,182 33,382 1,000,000
4 54,308 43,444 38,644 1,000,000 53,565 48,765 1,000,000
5 69,623 56,697 51,897 1,000,000 70,465 65,665 1,000,000
6 85,704 71,042 66,242 1,000,000 89,035 84,235 1,000,000
7 102,589 86,596 82,756 1,000,000 109,341 105,501 1,000,000
8 120,319 103,482 100,602 1,000,000 131,588 128,708 1,000,000
9 138,935 121,849 119,929 1,000,000 155,989 154,069 1,000,000
10 158,481 141,818 140,858 1,000,000 182,810 181,850 1,000,000
11 179,006 163,558 163,558 1,000,000 212,345 212,345 1,000,000
12 200,556 187,224 187,224 1,000,000 244,867 244,867 1,000,000
13 223,184 213,005 213,005 1,000,000 280,686 280,686 1,000,000
14 246,943 241,096 241,096 1,000,000 320,148 320,148 1,000,000
15 271,890 271,736 271,736 1,000,000 363,642 363,642 1,000,000
16 298,084 305,225 305,225 1,000,000 411,590 411,590 1,000,000
17 325,589 341,894 341,894 1,000,000 464,505 464,505 1,000,000
18 354,468 382,166 382,166 1,000,000 522,941 522,941 1,000,000
19 384,791 426,505 426,505 1,000,000 587,532 587,532 1,000,000
20 416,631 475,434 475,434 1,000,000 658,999 658,999 1,000,000
25 601,361 813,447 813,447 1,000,000 1,146,387 1,146,387 1,398,592
30 837,129 1,373,253 1,373,253 1,592,973 1,935,855 1,935,855 2,245,592
</TABLE>
* These values reflect investment results using guaranteed cost of insurance
rates and administrative charges and the maximum transaction charge for the
zero coupon bond account.
** These values reflect investment results using current cost of insurance
rates and administrative charges and the current transaction charge for the
zero coupon bond account.
The death benefit may, and the policy account values and net cash surrender
values will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY
WOULD BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN
APPLICABLE TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT
ALSO FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE
DEATH BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY
WOULD ALSO BE DIFFERENT FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT
ALLOCATIONS MADE TO THE SEPARATE ACCOUNTS AND THE DIFFERENT RATES OF RETURN OF
THE SEPARATE ACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR
PARTICULAR SEPARATE ACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
A-5
<PAGE>
PROVIDENT MUTUAL -- FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT INSURED ISSUE AGE 40 NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $12,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
<TABLE>
<CAPTION>
GUARANTEED* CURRENT**
PREMIUMS --------------------------- ---------------------------
END OF ACCUMULATED POLICY NET CASH POLICY NET CASH
POLICY AT 5% INT. ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 12,600 8,220 5,124 1,008,220 10,084 6,988 1,010,084
2 25,830 16,354 12,178 1,016,354 20,206 16,030 1,020,206
3 39,722 24,107 19,307 1,024,107 30,078 25,278 1,030,078
4 54,308 31,446 26,646 1,031,446 39,695 34,895 1,039,695
5 69,623 38,386 33,586 1,038,386 49,071 44,271 1,049,071
6 85,704 44,884 40,084 1,044,884 58,198 53,398 1,058,198
7 102,589 50,936 47,096 1,050,936 66,963 63,123 1,066,963
8 120,319 56,531 53,651 1,056,531 75,379 72,499 1,075,379
9 138,935 61,664 59,744 1,061,664 83,453 81,533 1,083,453
10 158,481 66,283 65,323 1,066,283 91,219 90,259 1,091,219
11 179,006 70,366 70,366 1,070,366 98,711 98,711 1,098,711
12 200,556 73,852 73,852 1,073,852 105,904 105,904 1,105,904
13 223,184 76,691 76,691 1,076,691 112,772 112,772 1,112,772
14 246,943 78,802 78,802 1,078,802 119,290 119,290 1,119,290
15 271,890 80,117 80,117 1,080,117 125,435 125,435 1,125,435
16 298,084 80,600 80,600 1,080,600 131,151 131,151 1,131,151
17 325,589 80,192 80,192 1,080,192 136,445 136,445 1,136,445
18 354,468 78,888 78,888 1,078,888 141,284 141,284 1,141,284
19 384,791 76,652 76,652 1,076,652 145,644 145,644 1,145,644
20 416,631 73,428 73,428 1,073,428 149,524 149,524 1,149,524
25 601,361 38,015 38,015 1,038,015 161,983 161,983 1,161,983
30 837,129 0 0 0 153,512 153,512 1,153,512
</TABLE>
* These values reflect investment results using guaranteed cost of insurance
rates and administrative charges and the maximum transaction charge for the
zero coupon bond account.
** These values reflect investment results using current cost of insurance
rates and administrative charges and the current transaction charge for the
zero coupon bond account.
The death benefit may, and the policy account values and net cash surrender
values will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY
WOULD BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN
APPLICABLE TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT
ALSO FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE
DEATH BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY
WOULD ALSO BE DIFFERENT FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT
ALLOCATIONS MADE TO THE SEPARATE ACCOUNTS AND THE DIFFERENT RATES OF RETURN OF
THE SEPARATE ACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR
PARTICULAR SEPARATE ACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
A-6
<PAGE>
PROVIDENT MUTUAL -- FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT INSURED ISSUE AGE 40 NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $12,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
<TABLE>
<CAPTION>
GUARANTEED* CURRENT**
PREMIUMS --------------------------- ---------------------------
END OF ACCUMULATED POLICY NET CASH POLICY NET CASH
POLICY AT 5% INT. ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 12,600 8,799 5,703 1,008,799 10,723 7,627 1,010,723
2 25,830 18,032 13,856 1,018,032 22,122 17,946 1,022,122
3 39,722 27,405 22,605 1,027,405 33,923 29,123 1,033,923
4 54,308 36,884 32,084 1,036,884 46,135 41,335 1,046,135
5 69,623 46,482 41,682 1,046,482 58,785 53,985 1,058,785
6 85,704 56,155 51,355 1,056,155 71,883 67,083 1,071,883
7 102,589 65,895 62,055 1,065,895 85,327 81,487 1,085,327
8 120,319 75,685 72,805 1,075,685 99,140 96,260 1,099,140
9 138,935 85,516 83,596 1,085,516 113,341 111,421 1,113,341
10 158,481 95,330 94,370 1,095,330 127,976 127,016 1,127,976
11 179,006 105,094 105,094 1,105,094 143,096 143,096 1,143,096
12 200,556 114,735 114,735 1,114,735 158,692 158,692 1,158,692
13 223,184 124,186 124,186 1,124,186 174,753 174,753 1,174,753
14 246,943 133,346 133,346 1,133,346 191,270 191,270 1,191,270
15 271,890 142,121 142,121 1,142,121 208,233 208,233 1,208,233
16 298,084 150,443 150,443 1,150,443 225,599 225,599 1,225,599
17 325,589 158,220 158,220 1,158,220 243,386 243,386 1,243,386
18 354,468 165,407 165,407 1,165,407 261,572 261,572 1,261,572
19 384,791 171,928 171,928 1,171,928 280,145 280,145 1,280,145
20 416,631 177,682 177,682 1,177,682 299,110 299,110 1,299,110
25 601,361 188,264 188,264 1,188,264 400,485 400,485 1,400,485
30 837,129 145,550 145,550 1,145,550 503,973 503,973 1,503,973
</TABLE>
* These values reflect investment results using guaranteed cost of insurance
rates and administrative charges and the maximum transaction charge for the
zero coupon bond account.
** These values reflect investment results using current cost of insurance
rates and administrative charges and the current transaction charge for the
zero coupon bond account.
The death benefit may, and the policy account values and net cash surrender
values will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY
WOULD BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN
APPLICABLE TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT
ALSO FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE
DEATH BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY
WOULD ALSO BE DIFFERENT FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT
ALLOCATIONS MADE TO THE SEPARATE ACCOUNTS AND THE DIFFERENT RATES OF RETURN OF
THE SEPARATE ACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR
PARTICULAR SEPARATE ACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
A-7
<PAGE>
PROVIDENT MUTUAL -- FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT INSURED ISSUE AGE 40 NONSMOKER
DEATH BENEFIT OPTION B ANNUAL PREMIUM $12,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
<TABLE>
<CAPTION>
GUARANTEED* CURRENT**
PREMIUMS --------------------------- -----------------------------
END OF ACCUMULATED POLICY NET CASH POLICY NET CASH
POLICY AT 5% INT. ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 12,600 9,379 6,283 1,009,379 11,362 8,266 1,011,362
2 25,830 19,782 15,606 1,019,782 24,114 19,938 1,024,114
3 39,722 30,983 26,183 1,030,983 38,080 33,280 1,038,080
4 54,308 43,022 38,222 1,043,022 53,374 48,574 1,053,374
5 69,623 55,996 51,196 1,055,996 70,144 65,344 1,070,144
6 85,704 69,950 65,150 1,069,950 88,533 83,733 1,088,533
7 102,589 84,972 81,132 1,084,972 108,580 104,740 1,108,580
8 120,319 101,152 98,272 1,101,152 130,469 127,589 1,130,469
9 138,935 118,600 116,680 1,118,600 154,390 152,470 1,154,390
10 158,481 137,382 136,422 1,137,382 180,584 179,624 1,180,584
11 179,006 157,604 157,604 1,157,604 209,318 209,318 1,209,318
12 200,556 179,341 179,341 1,179,341 240,824 240,824 1,240,824
13 223,184 202,687 202,687 1,202,687 275,356 275,356 1,275,356
14 246,943 227,710 227,710 1,227,710 313,195 313,195 1,313,195
15 271,890 254,501 254,501 1,254,501 354,653 354,653 1,354,653
16 298,084 283,189 283,189 1,283,189 400,040 400,040 1,400,040
17 325,589 313,896 313,896 1,313,896 449,762 449,762 1,449,762
18 354,468 346,807 346,807 1,346,807 504,225 504,225 1,504,225
19 384,791 382,099 382,099 1,382,099 563,889 563,889 1,563,889
20 416,631 419,942 419,942 1,419,942 629,280 629,280 1,629,280
25 601,361 651,726 651,726 1,651,726 1,065,156 1,065,156 2,065,156
30 837,129 966,110 966,110 1,966,110 1,753,030 1,753,030 2,753,030
</TABLE>
* These values reflect investment results using guaranteed cost of insurance
rates and administrative charges and the maximum transaction charge for the
zero coupon bond account.
** These values reflect investment results using current cost of insurance
rates and administrative charges and the current transaction charge for the
zero coupon bond account.
The death benefit may, and the policy account values and net cash surrender
values will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT
RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE
DEATH BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY
WOULD BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN
APPLICABLE TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT
ALSO FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE
DEATH BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY
WOULD ALSO BE DIFFERENT FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT
ALLOCATIONS MADE TO THE SEPARATE ACCOUNTS AND THE DIFFERENT RATES OF RETURN OF
THE SEPARATE ACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR
PARTICULAR SEPARATE ACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
A-8
<PAGE>
APPENDIX B
LONG TERM MARKET TRENDS
The information below is a record of the compound annual returns of common
stocks, high-grade corporate bonds and 30-day U.S. Treasury bills over 20 year
holding periods.* The compound annual returns assume the reinvestment of
dividends, capital gains and interest. This is an historical record and is not
intended as a projection of future performance. Charges associated with a
variable life policy are not reflected.
The data indicates that, historically, the investment performance of common
stocks over long periods of time has been positive and has generally been
superior to that of long-term, high-grade debt securities. Common stocks have,
however, been subject to more dramatic market adjustments over short periods of
time. To the extent that cash value is allocated to separate accounts which
invest in common stocks, these trends indicate the potential advantages of
holding a variable life insurance policy for a long period of time.
The following chart illustrates the compound annual returns of the S&P 500
Composite Stock Price Index for each of the 20-year periods shown. These
returns are compared to the compound annual returns of high-grade corporate
bonds and U.S. Treasury bills for the same periods. (The 20-year periods
selected for the chart begin in 1935 and have ending periods at five year
intervals.)
[A. ANNUAL
GRAPH]
- --------
* Sources: Common stock returns--Standard & Poor's 500 Composite Stock Price
Index. Corporate bond returns--Salomon Brothers Long-Term High Grade
Corporate Bond Index, Long-Term Government Bond returns and U.S. Treasury
Bill returns--C.R.S.P. U.S. Government Bond File through 1976 and The Wall
Street Journal thereafter. All data from: (C) Ibbotson, Roger G., and Rex A
Sinquefield, Stocks, Bonds, Bills and Inflation (SBBI), 1982, updated in
Stocks, Bonds, Bills and Inflation 1995 Yearbook (TM), Ibbotson Associates,
Inc., Chicago. All rights reserved.
B-1
<PAGE>
Over the 50 20-year time periods beginning in 1926 and ending in 1994 (i.e.
1926-1945, 1927-1946, and so on through 1975-1994):
--The compound annual return of common stocks was superior to that of high-
grade, long-term corporate bonds in 47 of the 50 periods.
--The compound annual return of common stocks surpassed that of U.S.
Treasury bills in each of the 50 periods.
--Common stock compound annual returns exceeded the average annual rate of
inflation in each of the 50 periods.
Over the 40 30-year time periods beginning in 1926 and ending in 1994, the
compound annual return of common stocks was superior to that of high-grade,
long-term corporate bonds, U.S. Treasury bills and inflation in all 40
periods.
From 1926 through 1994 the compound annual return for common stocks was
10.2%, compared to 5.4% for high-grade, long-term corporate bonds, 4.8% for
Long-Term Government Bonds, 3.7% for U.S. Treasury bills and 3.1% for the
Consumer Price Index.
----------------
SUMMARY TABLE: HISTORIC S&P 500 COMPOSITE STOCK INDEX RESULTS FOR
SPECIFIC HOLDING PERIODS
The following chart categorizes the historical results of the Standard &
Poor's 500 Composite Stock Index, with dividends reinvested, over one-year,
five-year, ten-year and twenty-year periods beginning in 1926 and ending in
1994.
The chart shows that historically, the longer that a portfolio matching the
S&P 500 Composite Stock Index was held, the less likely was the chance of a
loss. Conversely, the shorter the holding period of such a portfolio, the more
likely was the chance of a loss. The chart also shows that shorter term results
tend to be more extreme than longer term results.
THE CHART IS NOT A PROJECTION OR REPRESENTATION OF FUTURE STOCK MARKET
RESULTS. IT CANNOT BE TAKEN AS REPRESENTATIVE OF THE PERFORMANCE OF ANY ONE
SEPARATE ACCOUNT. Rather it shows the historic performance of a broad index of
stocks over arbitrarily selected time periods.
PERCENT OF HOLDING PERIODS WITH THE FOLLOWING RETURNS:
<TABLE>
<CAPTION>
GREATER
THAN
HOLDING NEGATIVE 0-5.00% 5.01-10.00% 10.01-15.00% 15.01-20.00% 20.00%
PERIOD RETURN RETURN RETURN RETURN RETURN RETURN
------- -------- ------- ----------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
1 year 29.0% 4.3% 11.6% 7.3% 11.6% 36.2%
5 years 10.8% 15.4% 15.4% 33.8% 15.4% 9.2%
10 years 3.3% 11.7% 36.7% 21.0% 25.0% 1.7%
20 years 0.0% 6.0% 34.0% 54.0% 6.0% 0.0%
</TABLE>
----------------
- --------
Source: All basic data from: (C) Ibbotson, Roger G., and Rex A. Sinquefield,
Stocks, Bonds, Bills and Inflation (SBBI), 1982, updated in Stocks, Bonds,
Bills and Inflation 1995 Yearbook (TM), Ibbotson Associates, Inc., Chicago. All
rights reserved.
B-2
<PAGE>
TREASURY BILLS ADJUSTED FOR INFLATION
The data below show the annual rate of return over 20-year holding periods of
U.S. Treasury Bills after adjusting for inflation as measured by the Urban
Consumer Price Index. This annual rate, as adjusted, is also called the real
interest rate and is represented as the real interest rate in the chart below.
U.S. Treasury Bills are considered to be one of the safest kinds of
investments, as they are backed by the U.S. government. However, the highest
inflation-adjusted return of U.S. Treasury Bills over the historic 20-year
periods presented below has been modest.
(GRAPH)
THE "DOLLAR COST AVERAGING" INVESTMENT METHOD
As the Compound Annual Returns graph indicates, the investment performance of
many common stocks has generally been positive over certain relatively long
periods. Common stocks have, however, also been subject to market declines,
often dramatic ones, and general volatility of prices over shorter time
periods. The price fluctuations of common stocks has historically been greater
than that of high-grade debt securities.
B-3
<PAGE>
The relative volatility of common stock prices as compared with prices of
high-grade debt instruments offers both advantages and disadvantages to
investors. Unfortunately, many investors who otherwise might be interested in
common stocks see only the disadvantages and not the advantages of stock price
fluctuation. The primary disadvantage, of course, is that price declines can be
prolonged and substantial, and when this occurs, investors cannot liquidate
their investments without realizing losses. Price declines, however, also offer
investors important opportunities.
Opportunity arises from the fact that investors can purchase more common
stock for the same amount of money than they would before prices declined.
Investors may take advantage of this if they remain willing to continue
investing in both rising and falling markets. The dollar cost averaging method
of investing demonstrates this.
In this method of investing:
. Relatively constant dollar amounts are invested at regular intervals
(monthly, quarterly, or annually).
. Stock market fluctuations, especially the savings on purchases from price
declines, are exploited for the investor's benefit.
HOW DOLLAR COST AVERAGING WORKS
<TABLE>
<CAPTION>
INVESTMENTS AT COMMON STOCK SHARES
REGULAR INTERVALS MARKET PRICE PURCHASED
----------------- ------------ ---------
<S> <C> <C>
$150 $20 7.5
150 15 10.0
150 10 15.0
150 5 30.0
150 10 15.0
150 15 10.0
---- ---------
$900 87.5
Total Value of 87.5 shares @ $15/share $1,312.50
Less Investment made (900.00)
---------
Gain/Profit $ 412.50
</TABLE>
Though the market price has not returned to the initial high of $20 per
share, dollar cost averaging has permitted the investor to purchase more shares
at a savings and thus realize a significant gain. Obviously, the dollar cost
averaging method only works if the investor continues to invest relatively
constant amounts over a long period of time.
This plan of investing does not assure a profit or protect against a loss in
declining markets; it does allow investors to take advantage of market
fluctuations. Since the success of this strategy is dependent on systematic
investing, purchasers should consider their ability to sustain their payments
through all periods of marketing fluctuations.
How does the dollar cost averaging method relate to a variable life insurance
policy? A policyowner may invest his or her net premiums in a separate account,
and, although a Policy's value in the separate accounts is affected by several
factors other than investment experience (e.g., cash value charges and charges
against the separate account), the dollar cost averaging method can be
generally applied to the Policy to the extent that the policyowner pays
premiums on a regular basis and he or she allocates net premiums to separate
accounts which invest in common stocks in relatively constant amounts.
B-4
<PAGE>
SUPPLEMENT DATED FEBRUARY 1, 1996
TO PROSPECTUS DATED MAY 1, 1995
Effective February 1, 1996, for Policies issued to residents of New York State,
the minimum Initial Face Amount is $2,500,001.
----------
