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April 30, 1999
NORTHWESTERN
MUTUAL LIFE-Registered Trademark-
The Quiet Company-Registered Trademark-
Northwestern Mutual Variable Executive Life
Flexible Premium Variable Life Insurance Policy
This prospectus describes seven new investment divisions which we expect to
be available on June 30, 1999. We have filed an amendment to the Policy form
with the insurance commissioner of your state to include these new divisions.
If you own a Policy issued before the date when the new divisions become
available in your state, we will send you an amendment to your Policy soon
after that date. Please read the prospectus for more information.
Northwestern Mutual
Series Fund, Inc. and
Russell Insurance Funds
The Northwestern Mutual
Life Insurance Company
720 East Wisconsin Avenue
Milwaukee, WI 53202
(414) 271-1444
EARNINGS
GROWTH
QUALITY
RELIABILITY
COMMITMENT
CAPITAL
INVESTMENT STRATEGY
QUALITY
INVESTED
PROSPECTUSES
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CONTENTS FOR THIS PROSPECTUS
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Page
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Prospectus........................ 1
Summary........................... 2
Variable Life Insurance......... 2
The Account and its Divisions... 2
The Policy...................... 2
Availability Limitations...... 2
Premiums...................... 2
Death Benefit................. 2
Cash Value.................... 2
Deductions and Charges........ 2
From Premiums............... 2
From Policy Value........... 2
From the Mutual Funds....... 3
The Northwestern Mutual Life
Insurance Company,
Northwestern Mutual Variable Life
Account,
Northwestern Mutual Series
Fund, Inc. and
Russell Insurance Funds..... 4
Northwestern Mutual Life........ 4
The Account..................... 4
The Funds....................... 4
Northwestern Mutual Series
Fund, Inc...................... 4
Small Cap Growth Stock
Portfolio.................... 4
Aggressive Growth Stock
Portfolio.................... 5
International Equity
Portfolio.................... 5
Index 400 Stock Portfolio..... 5
Growth Stock Portfolio........ 5
Growth and Income Stock
Portfolio.................... 5
Index 500 Stock Portfolio..... 5
Balanced Portfolio............ 5
High Yield Bond Portfolio..... 5
Select Bond Portfolio......... 5
Money Market Portfolio........ 5
Russell Insurance Funds........ 5
Multi-Style Equity Fund....... 6
Aggressive Equity Fund........ 6
Non-U.S. Fund................. 6
Real Estate Securities Fund... 6
Core Bond Fund................ 6
Detailed Information About the
Policy........................... 6
Premiums........................ 6
Death Benefit................... 7
Death Benefit Options......... 7
Choice of Tests for Tax
Purposes..................... 7
Death Benefit Changes......... 7
Allocations to the Account...... 8
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Deductions and Charges.......... 8
Deductions from Premiums...... 8
Charges Against the Policy
Value........................ 8
Expenses of the Funds......... 9
Cash Value........................ 9
Policy Loans...................... 9
Withdrawals of Policy Value....... 10
Termination and Reinstatement..... 10
Right to Return Policy........ 10
Other Policy Provisions....... 10
Owner..................... 10
Beneficiary............... 10
Incontestability.......... 11
Suicide................... 11
Misstatement of Age or
Sex...................... 11
Collateral Assignment..... 11
Deferral of Determination
and Payment.............. 11
Dividends................. 11
Voting Rights................. 11
Substitution of Fund Shares
and Other Changes............ 12
Reports........................... 12
Distribution of the Policies...... 12
Tax Considerations................ 12
General....................... 12
Life Insurance
Qualification................ 12
Tax Treatment of Life
Insurance.................... 13
Modified Endowment
Contracts.................... 13
Other Tax Considerations...... 14
Other Information................. 15
Management.................... 15
Regulation.................... 17
Year 2000 Issues.............. 17
Legal Proceedings............. 18
Registration Statement........ 18
Experts....................... 18
Financial Statements.............. 19
Report of Independent
Accountants (for the two years
ended December 31, 1998)....... 19
Financial Statements of the
Account (for the two years
ended December 31, 1998)....... 20
Financial Statements of
Northwestern Mutual Life (for
the three years ended December
31, 1998)...................... 26
Report of Independent
Accountants (for the three
years ended December 31,
1998).......................... 39
Appendix.......................... 40
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PROSPECTUS
NORTHWESTERN MUTUAL VARIABLE EXECUTIVE LIFE
- FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
This prospectus describes the Variable Executive Life Policy (the "Policy")
offered by The Northwestern Mutual Life Insurance Company. The Policy is an
individual flexible premium variable life insurance policy designed to be used
for a variety of business purposes.
The Policy offers flexible premium payments, sixteen investment funding options
and a choice of three death benefit options.
The investment options correspond to the eleven Portfolios of Northwestern
Mutual Series Fund, Inc. and the five Funds which comprise the Russell Insurance
Funds. The prospectuses for these mutual funds, attached to this prospectus,
describe the investment objectives for all of the Portfolios and Funds.
The values provided by the Policy vary daily depending on investment results.
These values are not guaranteed. The Portfolios and Funds present varying
degrees of investment risk.
You may return a Policy for a limited period of time. See "Right to Return
Policy", p. 10.
IT MAY NOT BE ADVANTAGEOUS TO REPLACE EXISTING INSURANCE WITH A VARIABLE LIFE
INSURANCE POLICY. SEE DEDUCTIONS AND CHARGES AND CASH VALUE.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES FOR
NORTHWESTERN MUTUAL SERIES FUND, INC. AND THE RUSSELL INSURANCE FUNDS WHICH ARE
ATTACHED HERETO, AND SHOULD BE RETAINED FOR FUTURE REFERENCE.
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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SUMMARY
THE FOLLOWING SUMMARY PROVIDES A BRIEF OVERVIEW OF THE POLICY. IT OMITS DETAILS
WHICH ARE INCLUDED ELSEWHERE IN THIS PROSPECTUS AND THE ATTACHED MUTUAL FUND
PROSPECTUSES AND IN THE TERMS OF THE POLICY.
VARIABLE LIFE INSURANCE
Variable life insurance is cash value life insurance and is similar in many ways
to traditional fixed benefit life insurance. Both kinds of life insurance
provide an income tax-free death benefit and a cash value that grows
tax-deferred. Variable life insurance allows the policyowner to direct the
premiums, after certain deductions, among a range of investment options. The
variable life insurance death benefit and cash value vary to reflect the
performance of the selected investments.
THE ACCOUNT AND ITS DIVISIONS
Northwestern Mutual Variable Life Account is the investment vehicle for the
Policies. The Account has sixteen divisions. You determine how net premiums are
to be apportioned. We invest the assets of each division in a corresponding
Portfolio of Northwestern Mutual Series Fund, Inc. or one of the Russell
Insurance Funds. The eleven Portfolios of Northwestern Mutual Series Fund, Inc.
are the Small Cap Growth Stock Portfolio, Aggressive Growth Stock Portfolio,
International Equity Portfolio, Index 400 Stock Portfolio, Growth Stock
Portfolio, Growth and Income Stock Portfolio, Index 500 Stock Portfolio,
Balanced Portfolio, High Yield Bond Portfolio, Select Bond Portfolio and Money
Market Portfolio. The five Russell Insurance Funds are the Multi-Style Equity
Fund, Aggressive Equity Fund, Non-U.S. Fund, Real Estate Securities Fund, and
Core Bond Fund. For additional information about the funds see the attached
prospectuses.
THE POLICY
AVAILABILITY LIMITATIONS We have designed the Variable Executive Life Policy
for use with non-tax qualified executive benefit plans. We offer the Policy for
use with corporate-sponsored plans where at least five Policies will be issued,
each on the life of a different eligible insured person, and the first year
premium for the group will be at least $250,000. We will permit exceptions in
some cases and additional requirements may apply. Each case must be approved at
our Home Office.
PREMIUMS You may pay premiums at any time and in any amounts, within limits,
but additional premiums will be required to keep the Policy in force if values
become insufficient to pay current charges.
DEATH BENEFIT The Policy offers a choice of three death benefit options:
- SPECIFIED AMOUNT (OPTION A)
- SPECIFIED AMOUNT PLUS POLICY VALUE (OPTION B)
- SPECIFIED AMOUNT PLUS PREMIUMS PAID (OPTION C)
In each case, the death benefit will be at least the amount needed to meet
federal income tax requirements for life insurance. You select the Specified
Amount when you purchase the Policy. You may increase or decrease the Specified
Amount, within limits and subject to conditions, after a Policy is issued. The
minimum amount is $50,000.00. No minimum death benefit is guaranteed.
CASH VALUE The cash value of a Policy is not guaranteed and varies daily to
reflect investment experience. You may surrender a Policy for its cash value.
The Policy also includes loan and withdrawal provisions.
DEDUCTIONS AND CHARGES
FROM PREMIUMS
- Deduction of 3.6% for local, state and federal taxes attributable to
premiums
- Sales load of 15% up to the Target Premium for first Policy year, and 3%
of all other premiums. The Target Premium is based on the modified
endowment contract seven-pay limit for the Specified Amount and the age
and sex of the insured. See "Modified Endowment Contracts", p. 13. A
Policy receiving the 3% deduction in the first Policy year on any portion
of the premium will be classified as a modified endowment contract.
FROM POLICY VALUE
- Cost of insurance charge deducted monthly, is based on the net amount at
risk, the age, sex and risk classification of the insured, and the Policy
duration. Current charges are based on our experience. Maximum charges are
based on the 1980 CSO Mortality Tables.
- Monthly mortality and expense risk charge. The current charge is at the
annual rate of .75%
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(0.06250% monthly rate) of the amount invested in the Account for the
Policy for the first 10 Policy years, and .30% (0.02500% monthly rate)
thereafter. The maximum annual rate is .90% (0.07500% monthly rate).
- Monthly administrative charge. The current charge is $15.00 in the first
Policy year and $5.00 thereafter. The maximum charge is $15 in the first
Policy year and $10 thereafter.
- Charge for expenses and taxes associated with the Policy loan, if any. The
aggregate charge is at the current annual rate of .75% (0.06250% monthly
rate) of the Policy debt for the first ten Policy years and .20%
(0.01667%) thereafter.
- Any transaction charges that may result from a withdrawal, a transfer, a
change in the Specified Amount or a change in the death benefit option. We
are currently waiving these charges. The maximum charge is $250 for death
benefit option changes and $25 for each of the other transactions.
FROM THE MUTUAL FUNDS
- A daily charge for investment advisory and other services provided to the
mutual funds. The total expenses vary by Portfolio or Fund and currently
fall in an approximate range of .21% to 2.37% of assets on an annual
basis.
The following table shows the annual expenses for each of the Portfolios and
Funds, as a percentage of the average net assets, based on 1998 operations.
Expenses for the Portfolios and Funds which were not in operation during 1998
are estimated.
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NORTHWESTERN MUTUAL SERIES FUND, INC.
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INVESTMENT
PORTFOLIO ADVISORY FEE OTHER EXPENSES TOTAL EXPENSES
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Small Cap Growth
Stock*................. .80% .46% 1.26%
Aggressive Growth
Stock.................. .52% .00% .52%
International Equity.... .67% .09% .76%
Index 400 Stock*........ .25% .23% .48%
Growth Stock............ .45% .01% .46%
Growth and Income
Stock.................. .57% .01% .58%
Index 500 Stock......... .20% .01% .21%
Balanced................ .30% .00% .30%
High Yield Bond......... .49% .01% .50%
Select Bond............. .30% .00% .30%
Money Market............ .30% .00% .30%
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*SMALL CAP GROWTH STOCK AND INDEX 400 STOCK PORTFOLIOS Northwestern Mutual
Investment Services, LLC (NMIS), investment adviser to Northwestern Mutual
Series Fund, Inc., has voluntarily agreed to waive a portion of its advisory
fee, up to the full amount of that fee, equal to the amount by which total
operating expenses exceed (1) 0.92% of the Small Cap Growth Stock Portfolio's
average daily net assets on an annual basis, and (2) 0.35% of the Index 400
Stock Portfolio's average daily net assets. In addition, NMIS has voluntarily
agreed to reimburse each of these portfolios for all remaining expenses after
fee waivers which exceed (1) 0.92% in the case of the Small Cap Growth Stock
Portfolio, and (2) 0.35% in the case of the Index 400 Stock Portfolio, of the
average daily net assets on an annual basis. This waiver and reimbursement, in
each case, may be revised or eliminated at any time without notice to
shareholders. Operating expenses are based on average net assets expected to be
invested during the period ending on December 31, 1999. During the course of
this period, expenses may be more or less than the amounts shown.
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RUSSELL INSURANCE FUNDS
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INVESTMENT OTHER EX- TOTAL EX-
FUND ADVISORY FEE* PENSES* PENSES
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Multi-Style Equity
Fund................... 0.78% 0.43% 1.21%
Aggressive Equity Fund.. 0.95% 0.72% 1.67%
Non-U.S. Fund........... 0.95% 1.42% 2.37%
Real Estate Securities
Fund................... 0.85% 0.30% 1.15%
Core Bond Fund.......... 0.60% 0.68% 1.28%
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*MULTI-STYLE EQUITY FUND Frank Russell Investment Company's (FRIC's) advisor,
Frank Russell Investment Management Company (FRIMCo) has voluntarily agreed to
waive a portion of its 0.78% management fee, up to the full amount of that fee,
equal to the amount by which the Fund's total operating expenses exceed 0.92% of
the Fund's average daily net assets on an annual basis. FRIMCo has voluntarily
agreed to reimburse the Fund for all remaining expenses after fee waivers which
exceed 0.92% of the average daily net assets on an annual basis. This waiver may
be revised or eliminated at any time without notice to shareholders. Taking the
fee waivers into account, the actual annual total operating expenses were 0.92%
of the average net assets of the Multi-Style Fund.
AGGRESSIVE EQUITY FUND FRIMCo has voluntarily agreed to waive a portion of its
0.95% management fee, up to the full amount of that fee, equal to the amount by
which the Fund's total operating expenses exceed 1.25% of the Fund's average
daily net assets on an annual basis. FRIMCo has voluntarily agreed to reimburse
the Fund for all remaining expenses after fee waivers which exceed 1.25% of the
average daily net assets on an annual basis. This waiver may be revised or
eliminated at any time without notice to shareholders. Taking the fee waivers
into account, the actual annual total operating expenses were 1.25% of the
average net assets of the Aggressive Equity Fund.
NON-U.S. FUND FRIMCo has voluntarily agreed to waive a portion of its 0.95%
management fee, up to the full amount of that fee, equal to the amount by which
the Fund's total operating expenses exceed 1.30% of the Fund's average daily net
assets on an annual basis. FRIMCo has voluntarily agreed to reimburse the Fund
for all remaining expenses after fee waivers which exceed 1.30% of the average
daily net assets on an annual basis. This waiver may be revised or eliminated at
any time without notice to shareholders. Taking the fee waivers into account,
the actual annual total operating expenses were 1.30% of the average net assets
of the Non-U.S. Fund.
REAL ESTATE SECURITIES Fund FRIMCo has voluntarily agreed to waive a portion of
its .85% management fee, up to the full amount of that fee, equal to the amount
by which the Fund's total operating expenses exceed 1.15% of the Fund's average
daily net assets on an annual basis. FRIMCo has voluntarily agreed to reimburse
the Fund for all remaining expenses after fee waivers which exceed 1.15% of the
average daily net assets on an annual basis. This waiver may be revised or
eliminated at any time without notice to shareholders. Operating expenses are
based on average net assets expected to be invested during the year ending
December 31, 1999. During the course of this period, expenses may be more or
less than the amount shown.
CORE BOND FUND FRIMCo has voluntarily agreed to waive a portion of its 0.60%
management fee, up to the full amount of that fee, equal to the amount by which
the Fund's total operating expenses exceed .80% of the Fund's average daily net
assets on an annual basis. FRIMCo has voluntarily agreed to reimburse the Fund
for all remaining expenses after fee waivers which exceed .80% of the average
daily net assets on an annual basis. This waiver may be revised or eliminated at
any time without notice to shareholders. Taking the fee waivers into account,
the actual annual total operating expenses were .80% of the average net assets
of the Core Bond Fund.
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THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY,
NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT,
NORTHWESTERN MUTUAL SERIES FUND, INC. AND
RUSSELL INSURANCE FUNDS
NORTHWESTERN MUTUAL LIFE
The Northwestern Mutual Life Insurance Company is a mutual life insurance
company organized by a special act of the Wisconsin Legislature in 1857. It is
the nation's fourth largest life insurance company, based on total assets in
excess of $77 billion on December 31, 1998, and is licensed to conduct a
conventional life insurance business in the District of Columbia and in all
states of the United States. Northwestern Mutual Life sells life and disability
insurance policies and annuity contracts through its own field force of
approximately 6,000 full time producing agents. The Internal Revenue Service
Employer Identification Number of Northwestern Mutual Life is 39-0509570.
"We" in this prospectus means Northwestern Mutual Life.
THE ACCOUNT
We established Northwestern Mutual Variable Life Account by action of our
Trustees on November 23, 1983, in accordance with the provisions of Wisconsin
insurance law. Under Wisconsin law the income, gains and losses, realized or
unrealized, of the Account are credited to or charged against the assets of the
Account without regard to our other income, gains or losses. We use the Account
only for variable life insurance policies, including other variable life
insurance policies which are described in other prospectuses.
The Account is registered with the Securities and Exchange Commission as a unit
investment trust under the Investment Company Act of 1940. This registration
does not involve supervision of management or investment practices or policies.
The Account has sixteen divisions. All of the assets of each division are
invested in shares of the corresponding Portfolio or Fund described below.
THE FUNDS
NORTHWESTERN MUTUAL SERIES FUND, INC.
Northwestern Mutual Series Fund, Inc. is a mutual fund of the series type
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. The Account buys shares of each Portfolio at
their net asset value without any sales charge.
The investment adviser for the Fund is Northwestern Mutual Investment Services,
LLC ("NMIS"), our wholly-owned subsidiary. The investment advisory agreements
for the respective Portfolios provide that NMIS will provide services and bear
certain expenses of the Fund. For providing investment advisory and other
services and bearing Fund expenses, the Fund pays NMIS a fee at an annual rate
which ranges from .20% of the aggregate average daily net assets of the Index
500 Stock Portfolio to a maximum of .67% for the International Equity Portfolio,
based on 1998 asset size. Other expenses borne by the Portfolios range from 0%
for the Select Bond, Money Market and Balanced Portfolios to .09% for the
International Equity Portfolio. We provide the people and facilities NMIS uses
in performing its investment advisory functions and we are a party to the
investment advisory agreement. NMIS has retained J.P. Morgan Investment
Management, Inc. and Templeton Investment Counsel, Inc. under investment
sub-advisory agreements to provide investment advice to the Growth and Income
Stock Portfolio and the International Equity Portfolio.
The investment objectives and types of investments for each of the eleven
Portfolios of the Fund are set forth below. There can be no assurance that the
Portfolios will realize their objectives. For more information about the
investment objectives and policies, the attendant risk factors and expenses see
the attached prospectus for Northwestern Mutual Series Fund, Inc.
SMALL CAP GROWTH STOCK PORTFOLIO. The investment objective of the Small Cap
Growth Stock Portfolio is long-term growth of capital. The Portfolio will seek
to achieve this objective primarily by investing in the
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common stocks of companies which can reasonably be expected to increase sales
and earnings at a pace which will exceed the growth rate of the U.S. economy
over an extended period. WE EXPECT THE SMALL CAP GROWTH STOCK PORTFOLIO TO BE
AVAILABLE FOR USE WITH THE POLICIES BEGINNING ON JUNE 30, 1999.
AGGRESSIVE GROWTH STOCK PORTFOLIO. The investment objective of the Aggressive
Growth Stock Portfolio is to achieve long-term appreciation of capital primarily
by investing in the common stocks of companies which can reasonably be expected
to increase their sales and earnings at a pace which will exceed the growth rate
of the nation's economy over an extended period.
INTERNATIONAL EQUITY PORTFOLIO. The investment objective of the International
Equity Portfolio is long-term capital growth. It pursues its objective through a
flexible policy of investing in stocks and debt securities of companies and
governments outside the United States.
INDEX 400 STOCK PORTFOLIO. The investment objective of the Index 400 Stock
Portfolio is to achieve investment results that approximate the performance of
the Standard & Poor's MidCap 400 Index ("S&P 400 Index"). The Portfolio will
attempt to meet this objective by investing in stocks included in the S&P 400
Index. WE EXPECT THE INDEX 400 STOCK PORTFOLIO TO BE AVAILABLE FOR USE WITH THE
POLICIES BEGINNING ON JUNE 30, 1999.
GROWTH STOCK PORTFOLIO. The investment objective of the Growth Stock Portfolio
is long-term growth of capital; current income is secondary. The Portfolio will
seek to achieve this objective by selecting investments in companies which have
above average earnings growth potential.
GROWTH AND INCOME STOCK PORTFOLIO. The investment objective of the Growth and
Income Stock Portfolio is long-term growth of capital and income. Ordinarily the
Portfolio pursues its investment objectives by investing primarily in
dividend-paying common stock.
INDEX 500 STOCK PORTFOLIO. The investment objective of the Index 500 Stock
Portfolio is to achieve investment results that approximate the performance of
the Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index"). The
Portfolio will attempt to meet this objective by investing in stocks included in
the S&P 500 Index. Stocks are generally more volatile than debt securities and
involve greater investment risks.
BALANCED PORTFOLIO. The investment objective of the Balanced Portfolio is to
realize as high a level of long-term total rate of return as is consistent with
prudent investment risk. The Balanced Portfolio will invest in common stocks and
other equity securities, bonds and money market instruments. Investment in the
Balanced Portfolio necessarily involves the risks inherent in stocks and debt
securities of varying maturities, including the risk that the Portfolio may
invest too much or too little of its assets in each type of security at any
particular time.
HIGH YIELD BOND PORTFOLIO. The investment objective of the High Yield Bond
Portfolio is to achieve high current income and capital appreciation by
investing primarily in fixed income securities that are rated below investment
grade by the major rating agencies.
SELECT BOND PORTFOLIO. The primary investment objective of the Select Bond
Portfolio is to provide as high a level of long-term total rate of return as is
consistent with prudent investment risk. A secondary objective is to seek
preservation of shareholders' capital. The Select Bond Portfolio will invest
primarily in debt securities. The value of debt securities will tend to rise and
fall inversely with the rise and fall of interest rates.
MONEY MARKET PORTFOLIO. The investment objective of the Money Market Portfolio
is to realize maximum current income consistent with liquidity and stability of
capital. The Money Market Portfolio will invest in money market instruments and
other debt securities with maturities generally not exceeding one year. The
return produced by these securities will reflect fluctuations in short-term
interest rates.
RUSSELL INSURANCE FUNDS
The Russell Insurance Funds also comprise a mutual fund of the series type
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. The Account buys shares of each of the Russell
Insurance Funds at their net asset value without any sales charge.
The assets of each of the Russell Insurance Funds are invested by one or more
investment management organizations researched and recommended by Frank Russell
Company ("Russell"), and an affiliate of
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5
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Russell, Frank Russell Investment Management Company ("FRIMCo"). FRIMCo also
advises, operates and administers the Russell Insurance Funds. Russell is our
majority-owned subsidiary.
The investment objectives and types of investments for each of the five Russell
Insurance Funds are set forth below. There can be no assurance that the Funds
will realize their objectives. A table showing the expense ratios for each of
the Russell Insurance Funds is included in the Summary above, at page 3. For
more information about the investment objectives and policies, the attendant
risk factors and expenses see the attached prospectus for the Russell Insurance
Funds. WE EXPECT THE RUSSELL INSURANCE FUNDS TO BE AVAILABLE FOR USE WITH THE
POLICIES BEGINNING ON JUNE 30, 1999.
MULTI-STYLE EQUITY FUND. The investment objective of the Multi-Style Equity
Fund is to provide income and capital growth by investing principally in equity
securities. The Multi-Style Equity Fund invests primarily in common stocks of
medium and large capitalization companies. These companies are predominately
US-based, although the Fund may invest a limited portion of its assets in non-US
firms from time to time.
AGGRESSIVE EQUITY FUND. The investment objective of the Aggressive Equity Fund
is to provide capital appreciation by assuming a higher level of volatility than
is ordinarily expected from Multi-Style Equity Fund by investing in equity
securities. The Aggressive Equity Fund invests primarily in common stocks of
small and medium capitalization companies. These companies are predominately
US-based, although the Fund may invest in non-US firms from time to time.
NON-U.S. FUND. The investment objective of the Non-U.S. Fund is to provide
favorable total return and additional diversification for US investors by
investing primarily in equity and fixed-income securities of non-US companies,
and securities issued by non-US governments. The Non-U.S. Fund invests primarily
in equity securities issued by companies domiciled outside the United States and
in depository receipts, which represent ownership of securities of non-US
companies.
REAL ESTATE SECURITIES FUND. The investment objective of the Real Estate
Securities Fund is to generate a high level of total return through above
average current income, while maintaining the potential for capital
appreciation. The Fund seeks to achieve its objective by concentrating its
investments in equity securities of issuers whose value is derived primarily
from development, management and market pricing of underlying real estate
properties.
CORE BOND FUND. The investment objective of the Core Bond Fund is to maximize
total return, through capital appreciation and income, by assuming a level of
volatility consistent with the broad fixed-income market, by investing in
fixed-income securities. The Core Bond Fund invests primarily in fixed-income
securities. In particular, the Fund holds debt securities issued or guaranteed
by the US government, or to a lesser extent by non-US governments, or by their
respective agencies and instrumentalities. It also holds mortgage-backed
securities, including collateralized mortgage obligations. The Fund also invests
in corporate debt securities and dollar-denominated obligations issued in the US
by non-US banks and corporations (Yankee Bonds). A majority of the Fund's
holdings are US dollar-denominated. From time to time the Fund may invest in
municipal debt obligations.
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DETAILED INFORMATION ABOUT THE POLICY
PREMIUMS
The Policy permits you to pay premiums at any time before the Policy anniversary
that is nearest the insured's 95th birthday and in any amounts within the limits
described in this section.
We use the Specified Amount you select when you purchase the Policy to determine
the minimum initial premium. The minimum initial premium is approximately equal
to three times the initial monthly Cost of Insurance Charge and other
deductions.
We calculate a Target Premium when the Policy is issued and we use the Target
Premium to determine the sales load for the first Policy year. The Target
Premium is based on the Specified Amount and the age and sex of the insured.
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After a Policy is issued, there are no minimum premiums, except that we will not
accept a premium of less than $25. The Policy will remain in force during the
insured's lifetime so long as the Policy Value, less the amount of any Policy
debt, is sufficient to pay the monthly cost of insurance charge and other
current charges.
The Policy sets no maximum on premiums, but we will accept a premium that would
increase the net amount at risk only if the insurance, as increased, will be
within our issue limits, the insured meets our insurability requirements and we
receive the premium prior to the anniversary nearest the insured's 75th
birthday. We will not accept a premium if it would disqualify the Policy as life
insurance for federal income tax purposes. We will accept a premium, however,
even if it would cause the Policy to be classified as a modified endowment
contract. See "Tax Considerations", p. 12.
DEATH BENEFIT
DEATH BENEFIT OPTIONS The Policy provides for three death benefit options:
SPECIFIED AMOUNT (OPTION A) You select the Specified Amount when you purchase
the Policy.
SPECIFIED AMOUNT PLUS POLICY VALUE (OPTION B) The Policy Value is the cumulative
amount invested, adjusted for investment results, reduced by the charges for
insurance and other expenses.
SPECIFIED AMOUNT PLUS PREMIUMS PAID (OPTION C)
In addition, under any of the Options, we will increase the Death Benefit if
necessary to meet the definitional requirements for life insurance for federal
income tax purposes as discussed below.
Under any of the death benefit options the death benefit will be equal to the
Policy Value at all times on and after the Policy anniversary nearest the 100th
birthday of the insured.
CHOICE OF TESTS FOR TAX PURPOSES A Policy must satisfy one of two testing
methods to qualify as life insurance for federal income tax purposes. You may
choose either the Guideline Premium/Cash Value Corridor Test or the Cash Value
Accumulation Test. Both tests require the Policy to meet minimum ratios, or
multiples, of death benefit to the Policy Value. The minimum multiple decreases
as the age of the insured advances. You make the choice of testing methods when
you purchase a Policy and it may not be changed.
For the Guideline Premium/Cash Value Corridor Test the minimum multiples of
death benefit to the Policy Value are shown below.
GUIDELINE PREMIUM/CASH VALUE
CORRIDOR TEST MULTIPLES
<TABLE>
<CAPTION>
ATTAINED POLICY ATTAINED POLICY
AGE VALUE % AGE VALUE %
- -------------- ------------- -------------- -------------
<S> <C> <C> <C>
40 or under... 250 61............ 128
41............ 243 62............ 126
42............ 236 63............ 124
43............ 229 64............ 122
44............ 222 65............ 120
45............ 215 66............ 119
46............ 209 67............ 118
47............ 203 68............ 117
48............ 197 69............ 116
49............ 191 70............ 115
50............ 185 71............ 113
51............ 178 72............ 111
52............ 171 73............ 109
53............ 164 74............ 107
54............ 157 75-90......... 105
55............ 150 91............ 104
56............ 146 92............ 103
57............ 142 93............ 102
58............ 138 94............ 101
59............ 134 95 or over.... 100
60............ 130
</TABLE>
For the Cash Value Accumulation Test the minimum multiples of death benefit to
the Policy Value are calculated using net single premiums based on the attained
age of the insured and the Policy's underwriting classification, using a 4%
interest rate.
The Guideline Premium/Cash Value Corridor Test has lower minimum multiples than
the Cash Value Accumulation Test, usually resulting in better cash value
accumulation for a given amount of premium. But the Guideline Premium/Cash Value
Corridor Test limits the amount of premium that may be paid in each Policy year.
The Cash Value Accumulation Test has no such annual limitation, and allows more
premium to be paid during the early Policy years.
DEATH BENEFIT CHANGES After we issue a Policy you may change the death benefit
option, or increase or decrease the Specified Amount, subject to our approval.
Changes are subject to insurability requirements and issue limits. We will not
permit a change if
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it results in a Specified Amount less than the minimum for a new Policy that we
would issue on that date.
A change in the death benefit option, or an increase or decrease in the
Specified Amount, will be effective on the monthly processing date next
following receipt of a written request at our Home Office.
Administrative charges of up to $250 for a change in the death benefit option,
and up to $25 for each of more than one change in the Specified Amount in a
Policy year, may apply. We will deduct any such charges from the Policy Value.
We are currently waiving these charges.
A change in the death benefit option, or an increase or decrease in the
Specified Amount, may have important tax effects. See "Tax Considerations", p.
12. The cost of insurance charge will increase if a change results in a larger
net amount at risk. See "Charges Against the Policy Value," below.
ALLOCATIONS TO THE ACCOUNT
We place the initial net premium in the Account on the Policy date. Net premiums
you pay thereafter are placed in the Account on the date we receive them at our
Home Office. Net premiums are premiums less the deductions from premiums. See
"Deductions from Premiums", below.
We invest premiums we place in the Account prior to the initial allocation date
in the Money Market Division of the Account. The initial allocation date will be
one day after the end of the period during which the policyowner has the right
to return the Policy, based on the applicable state laws. See "Right to Return
Policy," p. 10. On the initial allocation date we invest the amount in the Money
Market Division in the Account divisions as you have directed in the application
for the Policy. You may change the allocation for future net premiums at any
time by written request and the change will be effective for premiums we place
in the Account thereafter. Allocation must be in whole percentages.
You may transfer accumulated amounts from one division of the Account to
another. Transfers are effective on the date we receive a written request at our
Home Office. We reserve the right to charge a fee of up to $25, to cover
administrative costs of transfers, if there are more than twelve transfers in a
Policy year. We are currently waiving these charges.
DEDUCTIONS AND CHARGES
DEDUCTIONS FROM PREMIUMS We deduct a charge for taxes attributable to premiums
from each premium. The total amount of this deduction is 3.6% of the premium. Of
this amount 2.35% is for state premium taxes. Premium taxes vary from state to
state and currently range from .5% to 3.5% of life insurance premiums. The 2.35%
rate is an average. The tax rate for a particular state may be lower, higher, or
equal to the 2.35% deduction. We do not expect to profit from this charge. The
remainder of the deduction, 1.25% of each premium, is for federal income taxes
measured by premiums. We believe that this charge does not exceed a reasonable
estimate of our federal income taxes attributable to the treatment of deferred
acquisition costs.
We deduct a charge for sales costs from each premium. The charge is 15% of
premiums paid during each of the first ten Policy years up to the Target Premium
and 3% of all other premiums. The Target Premium is based on the Specified
Amount and the age and sex of the insured. To the extent that sales expenses
exceed the amounts deducted, we will pay the expenses from our other assets.
These assets may include, among other things, any gain realized from the monthly
charge against the Policy Value for the mortality and expense risks we have
assumed, as described below.
CHARGES AGAINST THE POLICY VALUE We deduct a cost of insurance charge from the
Policy Value on each monthly processing date. We determine the amount by
multiplying the net amount at risk by the cost of insurance rate. The net amount
at risk is equal to the death benefit currently in effect less the Policy Value.
The cost of insurance rate reflects the issue age, policy duration and risk
classification of the insured. The maximum cost of insurance rates are included
in the Policy.
We also deduct a charge for the mortality and expense risks we have assumed. The
maximum amount of the charge is equal to an annual rate of .90% (0.07500%
monthly rate) of the Policy Value. Currently the charge is equal to an annual
rate of .75% (0.06250% monthly rate) of Policy Value for the first ten Policy
years and .30% (0.0250% monthly rate) thereafter. The mortality risk is that
insureds may not live as long as we estimated. The expense risk is that expenses
of issuing and administering the Policies may exceed the estimated costs. We
will realize a gain from this charge
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to the extent it is not needed to provide benefits and pay expenses under the
Policies.
There is a monthly administrative charge of not more than $15 for the first
Policy year and $10 thereafter. Currently this charge will be $5 after the first
Policy year. This charge is for administrative expenses, including costs of
premium collection, processing claims, keeping records and communicating with
Policyowners. We do not expect to profit from this charge.
We make a charge for the expenses and taxes associated with the Policy debt, if
any. The aggregate charge is at the current annual rate of 0.75% (0.06250%
monthly rate) of the Policy debt for the first ten Policy years and 0.20%
(0.01667% monthly rate) thereafter.
The Policy provides for transaction fees to be deducted from the Policy Value on
the dates on which transactions take place. These charges are $25 for changes in
the Specified Amount, withdrawals or transfers of assets among the divisions of
the Account if more than twelve transfers take place in a Policy year. The fee
for a change in the death benefit option is $250. Currently we are waiving all
of these fees.
We will apportion deductions from the Policy Value among the divisions of the
Account in proportion to the amounts invested in the divisions.
EXPENSES OF THE FUNDS The investment performance of each division of the
Account reflects all expenses borne by the corresponding Portfolio or Fund. The
expenses are summarized above on page 4. See the attached mutual fund
prospectuses for more information about those expenses.
CASH VALUE
You may surrender a Policy for the cash value at any time during the lifetime of
the insured. The cash value for the Policy will change daily in response to
investment results. No minimum cash value is guaranteed. The cash value is equal
to the Policy Value reduced by any Policy debt outstanding. During the first
Policy year the cash value is increased by the amount of sales load previously
deducted from premiums, and during the second Policy year the cash value is
increased by 50% of previous sales load deductions. This increase in cash value
during the first two Policy years does not apply if the Policy is in a grace
period on the date on which you surrender the Policy.
We determine the cash value for a Policy at the end of each valuation period.
Each business day, together with any non-business days before it, is a valuation
period. A business day is any day on which the New York Stock Exchange is open
for trading. In accordance with the requirements of the Investment Company Act
of l940, we may also determine the cash value for a Policy on any other day on
which there is sufficient trading in securities to materially affect the value
of the securities held by the Portfolios or Funds.
POLICY LOANS
You may borrow up to 90% of the Policy Value using the Policy as security. If a
Policy loan is already outstanding, the maximum amount for any new loan is 90%
of the Policy Value, less the amount already borrowed.
Interest on a Policy loan accrues and is payable on a daily basis at an annual
effective rate of 5%. We add unpaid interest to the amount of the loan. If the
amount of the loan equals or exceeds the Policy Value on a monthly processing
date, the Policy will enter the grace period. See "Termination and
Reinstatement", p. 10. We will send you a notice at least 61 days before the
termination date. The notice will show how much you must pay to keep the Policy
in force.
We will take the amount of a Policy loan from the Account divisions in
proportion to the amounts in the divisions. We will transfer the amounts
withdrawn to our general account and will credit them on a daily basis with an
annual earnings rate equal to the 5% Policy loan interest rate. A Policy loan,
even if you repay it, will have a permanent effect on the Policy Value because
the amounts borrowed will not participate in the Account's investment results
while the loan is outstanding. The effect may be either favorable or unfavorable
depending on whether the earnings rate credited to the loan amount is higher or
lower than the rate credited to the unborrowed amount left in the Account.
You may repay a Policy loan, and any accrued interest outstanding, in whole or
in part, at any time. We will credit payments as of the date we receive them and
will transfer those amounts from our general account to the Account divisions,
in proportion to the premium allocation in effect, as of the same date.
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A Policy loan may have important tax consequences. See "Tax Considerations", p.
12.
WITHDRAWALS OF POLICY VALUE
You may make a withdrawal of Policy Value. A withdrawal may not reduce the loan
value to less than any Policy debt outstanding. The loan value is 90% of the
Policy Value, less any Policy debt already outstanding. Following a withdrawal
the remaining Policy Value, less any Policy debt outstanding, must be at least
three times the current monthly charges for the cost of insurance and other
expenses. The minimum amount for withdrawals is $250. We permit up to four
withdrawals in a Policy year. An administrative charge of up to $25 may apply,
but we are currently waiving this charge.
A withdrawal of Policy Value decreases the death benefit by the same amount. If
the death benefit for a Policy has been increased to meet the federal tax
requirements for life insurance, the decrease in the death benefit caused by a
subsequent withdrawal will be larger than the amount of the withdrawal. If
Option A or Option C is in effect a withdrawal of Policy Value will reduce the
Specified Amount by the amount of the withdrawal. Following a withdrawal the
remaining death benefit must be at least the minimum amount that we would
currently issue.
We will take the amount withdrawn from Policy Value from the Account divisions
in proportion to the amounts in the divisions. The Policy makes no provision for
repayment of amounts withdrawn. A withdrawal of Policy Value may have important
tax consequences. See "Tax Considerations", p. 12.
TERMINATION AND REINSTATEMENT
If the Policy Value, less any Policy debt outstanding, is less than the monthly
charges for the cost of insurance and other expenses on any monthly processing
date, we allow a grace period of 61 days for the payment of sufficient premium
to keep the Policy in force. The grace period begins on the date that we send
you a notice. The notice will state the minimum amount of premium required to
keep the Policy in force and the date by which you must pay the premium. The
Policy will terminate unless you pay the required amount before the grace period
expires.
After a Policy has terminated, it may be reinstated within one year. The insured
must provide satisfactory evidence of insurability. The minimum amount of
premium required for reinstatement will be the monthly charges that were due
when the Policy terminated plus the charges for three more months.
Reinstatement of a Policy will be effective on the first monthly processing date
after an application for reinstatement is received at our Home Office, subject
to our approval. Any Policy debt that was outstanding when the Policy terminated
will also be reinstated.
The Policy Value when a Policy is reinstated is equal to the premium paid, after
the deduction for taxes and sales load, less the sum of all monthly charges for
the cost of insurance and other expenses for the grace period and for the
current month. We will allocate the Policy Value among the Account divisions
based on the allocation for premiums currently in effect.
A Policy may not be reinstated after the Policy has been surrendered for its
cash value.
See "Tax Considerations", p. 12, for a discussion of the tax effects associated
with termination and reinstatement of a Policy.
RIGHT TO RETURN POLICY
You may return a Policy within 45 days after you signed the application for
insurance or within 10 days (or later where required by state law) after you
receive the Policy, whichever is later. You may mail or deliver the Policy to
the agent who sold it or to our Home Office. If you return it, we will consider
the Policy void from the beginning. We will refund the sum of the amounts
deducted from the premium paid plus the value of the Policy in the Account on
the date we receive the returned Policy. In some states, the amount we refund
will not be less than the premium you paid.
OTHER POLICY PROVISIONS
OWNER. The owner is identified in the Policy. The owner may exercise all rights
under the Policy while the insured is living. Ownership may be transferred to
another. We must receive written proof of the transfer at our Home Office. "You"
in this prospectus means the owner or prospective purchaser of a Policy.
BENEFICIARY. The beneficiary is the person to whom the death benefit is
payable. The beneficiary is named in the application. After we issue the Policy
you may
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change the beneficiary in accordance with the Policy provisions.
INCONTESTABILITY. We will not contest a Policy after it has been in force
during the lifetime of the insured for two years from the date of issue. We will
not contest an increase in the amount of insurance that was subject to
insurability requirements after the increased amount has been in force during
the lifetime of the insured for two years from the date of issuance of the
increase.
SUICIDE. If the insured dies by suicide within one year from the date of issue,
the amount payable under the Policy will be limited to the premiums paid, less
the amount of any Policy debt and withdrawals. If the insured dies by suicide
within one year of the date of issuance of an increase in the amount of
insurance, which was subject to insurability requirements, the amount payable
with respect to the increase will be limited to the amounts charged for the cost
of insurance and other expenses attributable to the increase.
MISSTATEMENT OF AGE OR SEX. If the age or sex of the insured has been
misstated, we will adjust the charges for cost of insurance and other expenses
under a Policy to reflect the correct age and sex.
COLLATERAL ASSIGNMENT. You may assign a Policy as collateral security. We are
not responsible for the validity or effect of a collateral assignment and will
not be deemed to know of an assignment before receipt of the assignment in
writing at our Home Office.
DEFERRAL OF DETERMINATION AND PAYMENT. We will ordinarily pay Policy benefits
within seven days after we receive all required documents at our Home Office.
However, we may defer determination and payment of benefits during any period
when it is not reasonably practicable to value securities because the New York
Stock Exchange is closed or an emergency exists or the Securities and Exchange
Commission, by order, permits deferral for the protection of Policyowners.
DIVIDENDS. The Policies will share in divisible surplus to the extent we
determine annually. Since we do not expect the Policies to contribute to
divisible surplus, we do not expect to pay any dividends.
VOTING RIGHTS
We are the owner of the shares of both mutual funds in which all assets of the
Account are invested. As the owner of the shares we will exercise our right to
vote the shares to elect directors of the mutual funds, to vote on matters
required to be approved or ratified by mutual fund shareholders under the
Investment Company Act of 1940 and to vote on any other matters that may be
presented to any mutual fund shareholders' meeting. However, we will vote the
mutual fund shares held in the Account in accordance with instructions from
owners of the Policies. We will vote any shares of the mutual funds held in our
general account in the same proportions as the shares for which we have received
voting instructions. If the applicable laws or regulations change so as to
permit us to vote the shares in our own discretion, we may elect to do so.
The number of mutual fund shares for each division of the Account for which the
owner of a Policy may give instructions is determined by dividing the amount of
the Policy Value apportioned to that division, if any, by the per share value
for the corresponding Portfolio or Fund. The number will be determined as of a
date we choose, but not more than 90 days before the shareholders' meeting.
Fractional votes are counted. We will solicit voting instructions with written
materials at least 14 days before the meeting. We will vote shares as to which
we receive no instructions in the same proportion as the shares as to which we
receive instructions.
We may, if required by state insurance officials, disregard voting instructions
which would require mutual fund shares to be voted for a change in the sub-
classification or investment objectives of a Portfolio or Fund, or to approve or
disapprove an investment advisory agreement for either of the mutual funds. We
may also disregard voting instructions that would require changes in the
investment policy or investment adviser for either a Portfolio or a Fund,
provided that we reasonably determine to take this action in accordance with
applicable federal law. If we disregard voting instructions, we will include a
summary of the action and reasons therefor in the next semiannual report to the
owners of the Policies.
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SUBSTITUTION OF FUND SHARES AND OTHER CHANGES
If, in our judgment, a Portfolio or Fund becomes unsuitable for continued use
with the Policies because of a change in investment objectives or restrictions,
shares of another Portfolio or Fund or another mutual fund may be substituted.
Any substitution of shares will be subject to any required approval of the
Securities and Exchange Commission, the Wisconsin Commissioner of Insurance or
other regulatory authority. We have also reserved the right, subject to
applicable federal and state law, to operate the Account or any of its divisions
as a management company under the Investment Company Act of 1940, or in any
other form permitted, or to terminate registration of the Account if
registration is no longer required, and to change the provisions of the Policies
to comply with any applicable laws.
REPORTS
At least once each Policy year you will receive a statement showing the death
benefit, cash value, Policy Value and any Policy loan, including loan interest.
This report will show the apportionment of invested assets among the Account
divisions. You will also receive annual and semiannual reports for the Account
and both of the mutual funds, including financial statements.
DISTRIBUTION OF THE POLICIES
We sell the Policies through individuals who, in addition to being licensed life
insurance agents of Northwestern Mutual Life, are registered representatives of
Northwestern Mutual Investment Services LLC ("NMIS"), our wholly-owned
subsidiary. NMIS is a registered broker-dealer under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities Dealers. NMIS
was organized in 1968 as a Wisconsin corporation. Its address is 720 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202. The Internal Revenue Service
Employer Identification Number of NMIS is 39-0509570.
Commissions paid to the agents will not exceed 15% of the premium for the first
year and 2 3/4% of the premium thereafter. During the sixth Policy year and
thereafter agents will receive compensation at the annual rate of .20% of the
cash value of a Policy.
General agents and district agents who are registered representatives of NMIS
and have supervisory responsibility for sales of the Policies receive commission
overrides and other compensation.
TAX CONSIDERATIONS
GENERAL The following discussion provides a general description of federal
income tax considerations relating to the Policy. The discussion is based on
current provisions of the Internal Revenue Code ("Code") as currently
interpreted by the Internal Revenue Service. We do not intend this as tax
advice. The discussion is not exhaustive, it does not address the likelihood of
future changes in federal income tax law or interpretations thereof, and it does
not address state or local tax considerations which may be significant in the
purchase and ownership of a Policy.
LIFE INSURANCE QUALIFICATION Section 7702 of the Code defines life insurance
for federal income tax purposes. The Code provides two alternative tests for
determining whether the death benefit is a sufficient multiple of the Policy
Value. See "Choice of Tests for Tax Purposes", p. 7. We have designed the Policy
to comply with these rules. We will return premiums that would cause a Policy to
be disqualified as life insurance.
Section 817(h) of the Code authorizes the Secretary of the Treasury to set
standards for diversification of the investments underlying variable life
insurance policies. Final regulations have been issued pursuant to this
authority. Failure to meet the diversification requirements would disqualify the
Policies as life insurance for purposes of Section 7702 of the Code. We intend
to comply with these requirements.
The Treasury Department, in connection with the diversification requirements,
stated that it expected to issue guidance about circumstances where a
policyowner's control of separate account assets would cause the policyowner,
and not the life insurance company, to be treated as the owner of those assets.
These guidelines have not been issued. If the owner of a Policy were treated as
the owner of the Fund shares held in the Account, the income and gains related
to those shares would be included in the owner's gross income for federal income
tax purposes. We believe that we own the assets of the Account under current
federal income tax law.
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TAX TREATMENT OF LIFE INSURANCE While a Policy is in force, increases in the
Policy Value as a result of investment experience are not subject to federal
income tax until there is a distribution as defined by the Code. The death
benefit received by a beneficiary will not be subject to federal income tax.
Unless the Policy is a modified endowment contract, as described below, we
believe that a loan received under a Policy will be construed as indebtedness of
the owner and no part of the loan will be treated as a distribution subject to
current federal income tax. Interest paid by individual owners of the Policies
will ordinarily not be deductible. You should consult a qualified tax adviser as
to the deductibility of interest paid, or accrued, by other purchasers of the
Policies. See "Other Tax Considerations", p. 14.
As a general rule, the proceeds from a withdrawal of Policy Value will be
taxable only to the extent that the withdrawal exceeds the basis of the Policy.
The basis of the Policy is generally equal to the premiums paid less any amounts
previously received as tax-free distributions. In certain circumstances, a
withdrawal of Policy Value during the first 15 Policy years may be taxable to
the extent that the Policy Value exceeds the basis of the Policy. This means
that the amount withdrawn may be taxable even if that amount is less than the
basis of the Policy. In addition, if a Policy terminates while a Policy loan is
outstanding, the cancellation of the loan and accrued interest will be treated
as a distribution from the Policy and may be taxable under these rules.
Special tax rules may apply when ownership of a Policy is transferred. You
should seek qualified tax advice if you plan a transfer of ownership.
MODIFIED ENDOWMENT CONTRACTS A Policy will be classified as a modified
endowment contract if the cumulative premium paid during the first seven Policy
years exceeds a defined "seven-pay" limit. The seven-pay limit is based on a
hypothetical life insurance policy issued on the same insured person and for the
same initial death benefit which, under specified conditions (which include the
absence of expense and administrative charges) will be fully paid for after
seven level annual payments. A Policy will be treated as a modified endowment
contract unless cumulative premiums paid under the Policy, at all times during
the first seven Policy years, are less than or equal to the cumulative seven-pay
premiums which would have been paid under the hypothetical policy on or before
such times.
Whenever there is a "material change" under a Policy, it will generally be
treated as a new contract for purposes of determining whether the Policy is a
modified endowment contract, and subjected to a new seven-pay period and a new
seven-pay limit. The new seven-pay limit would be determined taking into account
the Policy Value of the Policy at the time of such change. A materially changed
Policy would be considered a modified endowment contract if it failed to satisfy
the new seven-pay limit. A material change could occur as a result of a change
in the death benefit option, a change in the Specified Amount, and certain other
changes.
If the benefits are reduced during the first seven Policy years after entering
into the Policy (or within seven years after a material change), for example, by
requesting a decrease in the Specified Amount or, in some cases, by making a
withdrawal of Policy Value, the seven-pay premium limit will be redetermined
based on the reduced level of benefits and applied retroactively for purposes of
the seven-pay test. If the premiums previously paid are greater than the
calculated seven-pay premium level limit, the Policy will become a modified
endowment contract. A life insurance policy which is received in exchange for a
modified endowment contract will also be considered a modified endowment
contract.
If a Policy is a modified endowment contract, any distribution from the Policy
will be taxed on a gain-first basis. Distributions for this purpose include a
loan (including any increase in the loan amount to pay interest on an existing
loan or an assignment or a pledge to secure a loan) or a withdrawal of Policy
Value. Any such distributions will be considered taxable income to the extent
the Policy Value exceeds the basis in the Policy. For modified endowment
contracts, the basis would be increased by the amount of any prior loan under
the Policy that was considered taxable income. For purposes of determining the
taxable portion of any distribution, all modified endowment contracts issued by
Northwestern Mutual Life to the same policyowner (excluding certain qualified
plans) during any calendar year are to be aggregated. The Secretary of the
Treasury has authority to prescribe additional rules to prevent avoidance of
gain-first taxation on distributions from modified endowment contracts.
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A 10% penalty tax will apply to the taxable portion of a distribution from a
modified endowment contract. The penalty tax will not, however, apply to
distributions (i) to taxpayers 59 1/2 years of age or older, (ii) in the case of
a disability (as defined in the Code) or (iii) received as part of a series of
substantially equal periodic annuity payments for the life (or life expectancy)
of the taxpayers or the joint lives (or joint life expectancies) of the taxpayer
and his beneficiaries. If a Policy is surrendered, the excess, if any, of the
Policy Value over the basis of the Policy will be subject to federal income tax
and, unless one of the above exceptions applies, the 10% penalty tax. The
exceptions generally do not apply to life insurance policies owned by
corporations or other entities. If a Policy terminates while there is a Policy
loan, the cancellation of the loan and accrued loan interest will be treated as
a distribution to the extent not previously treated as such and could be subject
to tax, including the penalty tax, as described under the above rules.
If a Policy becomes a modified endowment contract, distributions that occur
during the Policy year it becomes a modified endowment contract and any
subsequent Policy year will be taxed as described in the two preceding
paragraphs. In addition, distributions from a Policy within two years before it
becomes a modified endowment contract will be subject to tax in this manner.
This means that a distribution made from a Policy that is not a modified
endowment contract could later become taxable as a distribution from a modified
endowment contract. The Secretary of the Treasury has been authorized to
prescribe rules which would treat similarly other distributions made in
anticipation of a policy becoming a modified endowment contract.
OTHER TAX CONSIDERATIONS Business-owned life insurance may be subject to
certain additional rules. Section 264(a)(1) of the Code generally disallows a
deduction for premiums paid on Policies by anyone who is directly or indirectly
a beneficiary under the Policy. Increases in Policy Value may also be subject to
tax under the corporation alternative minimum tax provisions.
Section 264(a)(4) of the Code limits the Policyowner's deduction for interest on
loans taken against life insurance policies to interest on an aggregate total of
$50,000 of loans per covered life only with respect to life insurance policies
covering key persons. Generally, a key person means an officer or a 20% owner.
However, the number of key persons will be limited to the greater of (a) five
individuals, or (b) the lesser of 5% of the total officers and employees of the
taxpayer or 20 individuals. Deductible interest for these Policies will be
subject to limits based on current market rates.
In addition, Section 264(f) disallows a proportionate amount of a business'
interest deduction based on the amount of unborrowed cash value of non-exempt
life insurance policies held in relation to other business assets. Exempt
policies include policies held by natural persons unless the business is a
direct or indirect beneficiary under the policy and policies owned by a business
and insuring employees, directors, officers and 20% owners (as well as joint
policies insuring 20% owners and their spouses).
Finally, life insurance subject to a split dollar arrangement is taxable to the
employee in the amount of the annual value of the economic benefit to the
employee measured by the issuer's lowest one-year term rates as defined by
various Internal Revenue Service rulings or the government's P.S. 58 table
rates. There is also a risk that the accrued earnings in equity split dollar
policies may be taxable in the year earned. Although the Internal Revenue
Service has not issued a formal ruling on this issue, it issued a technical
advise memorandum in 1996 to this effect (which is applicable only to the
taxpayer under audit) and is currently reviewing the taxation of split dollar
arrangements generally.
Depending on the circumstances, the exchange of a Policy, a change in the death
benefit option, a Policy loan, a withdrawal of Policy Value, a change in
ownership or an assignment of the Policy may have federal income tax
consequences. In addition, federal, state and local transfer, estate,
inheritance, and other tax consequences of Policy ownership, premium payments
and receipt of Policy proceeds depend on the circumstances of each Policyowner
or beneficiary. If you contemplate any such transaction you should consult a
qualified tax adviser.
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OTHER INFORMATION
MANAGEMENT
Northwestern Mutual Life is managed by a Board of Trustees. The Trustees and
senior officers of Northwestern Mutual Life and their positions including Board
committee memberships, and their principal occupations, as of the date of this
prospectus, are listed below. Unless otherwise indicated, the business address
of each Trustee and senior officer is c/o The Northwestern Mutual Life Insurance
Company, 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202.
TRUSTEES
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------------------------------- ------------------------------------------------------------------------------
<S> <C>
R. Quintus Anderson (A)...................... Chairman, Aarque Capital Corporation since 1997; prior thereto, Chairman, The
Aarque Companies, 111 West Second Street, P.O. Box 310, Jamestown, NY
14702-0310 (diversified metal products manufacturing)
Edward E. Barr (HR).......................... Chairman, Sun Chemical Corporation, 222 Bridge Plaza South, Fort Lee, New
Jersey 07024 (graphic arts) since 1998; prior thereto, President and Chief
Executive Officer. President and Chief Executive Officer, DIC Americas, Inc.,
Fort Lee, NJ
Gordon T. Beaham, III (OT)................... Chairman of the Board and President, Faultless Starch/Bon Ami Company, 1025
West Eighth Street, Kansas City, MO 64101 (consumer products manufacturer)
Robert C. Buchanan (A, E, F)................. President and Chief Executive Officer, Fox Valley Corporation, 100 West
Lawrence Street, P.O. Box 727, Appleton, WI 54911 (manufacturer of gift wrap
and writing paper)
Robert E. Carlson (E)........................ Executive Vice President of Northwestern Mutual Life
George A. Dickerman (AM)..................... Chairman Emeritus, Spalding Sports Worldwide, 425 Meadow Street, P.O. Box 901,
Chicopee, MA 01021-0901 (manufacturer of sporting equipment) since 1999;
Chairman of the Board from 1998 to 1999; prior thereto, President
Pierre S. du Pont (AM)....................... Attorney, Richards, Layton and Finger, P.O. Box 551, 1 Rodney Square,
Wilmington, DE 19899
James D. Ericson (AM, E, F. HR, OT).......... President and Chief Executive Officer of Northwestern Mutual Life
J. E. Gallegos (A)........................... Attorney at Law; President, Gallegos Law Firm, 460 St. Michaels Drive,
Building 300, Santa Fe, NM 87505
Stephen N. Graff (E, F, OT).................. Retired Partner, Arthur Andersen LLP (public accountants). Address: 805 Lone
Tree Road, Elm Grove, WI 53122-2014
Patricia Albjerg Graham (HR)................. Professor, Graduate School of Education, Harvard University, 420 Gutman,
Cambridge, MA 02138. President, The Spencer Foundation (social and behavioral
sciences)
Stephen F. Keller (HR)....................... Attorney. Former Chairman, Santa Anita Realty Enterprises since 1997; prior
thereto, Chairman. Address: 101 South Las Palmas Avenue, Los Angeles, CA 90004
Barbara A. King (AM)......................... President, Landscape Structures, Inc., Rt 3, 601 - 7th Street South, Delano,
MN 55328 (manufacturer of playground equipment)
J. Thomas Lewis (HR)......................... Attorney (retired), 228 St. Charles Avenue, Suite 1024, New Orleans, LA 70130,
since 1998; prior thereto, Attorney, Monroe & Lemann, New Orleans, LA
</TABLE>
--
15
<PAGE>
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- --------------------------------------------- ------------------------------------------------------------------------------
<S> <C>
Daniel F. McKeithan, Jr. (E, F, HR).......... President, Tamarack Petroleum Company, Inc., 777 East Wisconsin Avenue,
Milwaukee, WI 53202 (operator of oil and gas wells); President, Active
Investor Management, Inc., Milwaukee, WI
Guy A. Osborn (E, F, OT)..................... Retired Chairman of Universal Foods Corporation, 433 East Michigan Street,
Milwaukee, WI 53202 since 1997; prior thereto, Chairman and Chief Executive
Officer
Timothy D. Proctor (A)....................... Director, Worldwide Human Resources of Glaxo Wellcome plc, Glaxo Wellcome
House, Berkeley Avenue, Greenford, Middlesex UB60NN, United Kingdom, since
1998; prior thereto, Senior Vice President Human Resources, General Counsel &
Secretary (pharmaceuticals)
Donald J. Schuenke (AM, E, F)................ Retired Chairman of Northwestern Mutual Life
H. Mason Sizemore, Jr. (AM).................. President and Chief Operating Officer, The Seattle Times, Fairview Avenue
North and John Street, P.O. Box 70, Seattle, WA 98109 (publishing)
Harold B. Smith (OT)......................... Chairman, Executive Committee, Illinois Tool Works, Inc., 3600 West Lake
Avenue, Glenview, IL 60025-5811 (engineered components and industrial systems
and consumables)
Sherwood H. Smith, Jr. (AM).................. Chairman of the Board of Carolina Power & Light, 411 Fayetteville Street Mall,
P.O. Box 1551, Raleigh, NC 27602, since 1997; prior thereto, Chairman of the
Board and Chief Executive Officer.
John E. Steuri (OT).......................... Chairman, Advanced Thermal Technologies, 2102 Riverfront Drive, Suite 120,
Little Rock, AR 72202-1747 since 1997 (heating, air-conditioning and humidity
control). Retired since 1996 as Chairman and Chief Executive Officer of ALLTEL
Information Services, Inc., Little Rock, AR (application software).
John J. Stollenwerk (AM, E, F)............... President and Owner, Allen-Edmonds Shoe Corporation, 201 East Seven Hills
Road, P.O. Box 998, Port Washington, WI 53074-0998
Barry L. Williams (HR)....................... President and Chief Executive Officer of Williams Pacific Ventures, Inc., 100
First Street, Suite 2350, San Francisco, CA 94105-2634 (venture capital)
Kathryn D. Wriston (A)....................... Director of various corporations. Address: c/o Shearman & Sterling, 599
Lexington Avenue, Room 1126, New York, NY 10022
A -- Member, Audit Committee F -- Member, Finance Committee
AM -- Member, Agency and Marketing Committee HR -- Member, Human Resources and Public Policy Committee
OT -- Member, Operations and Technology Committee
E -- Member, Executive Committee
</TABLE>
--
16
<PAGE>
SENIOR OFFICERS (OTHER THAN TRUSTEES)
<TABLE>
<CAPTION>
POSITION WITH
NAME NORTHWESTERN MUTUAL LIFE
- ----------------------- -----------------------------------
<S> <C>
John M. Bremer Executive Vice President, General
Counsel and Secretary
Peter W. Bruce Executive Vice President
Edward J. Zore Executive Vice President
Deborah A. Beck Senior Vice President
William H. Beckley Senior Vice President
Mark G. Doll Senior Vice President
Richard L. Hall Senior Vice President
William C. Koenig Senior Vice President and Chief
Actuary
Donald L. Mellish Senior Vice President
Mason G. Ross Senior Vice President
John E. Schlifske Senior Vice President
Leonard F. Stecklein Senior Vice President
Frederic H. Sweet Senior Vice President
Dennis Tamcsin Senior Vice President
Walter J. Wojcik Senior Vice President
Gary E. Long Vice President and Controller
</TABLE>
REGULATION
We are subject to the laws of Wisconsin governing insurance companies and to
regulation by the Wisconsin Commissioner of Insurance. We file an annual
statement in a prescribed form with the Department of Insurance on or before
March 1 in each year covering operations for the preceding year and including
financial statements. Regulation by the Wisconsin Insurance Department includes
periodic examination to determine solvency and compliance with insurance laws.
We are also subject to the insurance laws and regulations of the other
jurisdictions in which we are licensed to operate.
YEAR 2000 ISSUES
Since early 1996 we have been preparing for the computer requirements associated
with the approaching turn of the century. We completed assessment of internal
systems in 1996. As of the date of this prospectus the necessary system changes
are substantially complete. System testing is in process and we expect testing
of all critical systems to be completed during the first six months of 1999.
The work on these computer systems extends to software packages we purchase from
vendors. In addition, we have been communicating formally with our business
partners to identify and assess potential exposure that could result from their
failure to address these computer issues on a timely basis. Each of our
departments has prepared a contingency plan.
We and our business partners bear all of the costs of identifying and resolving
the computer systems issues associated with the year 2000. These costs will have
no effect on the performance of the Account. The Policies permit charges for
administrative expenses to be increased up to the guaranteed maximum rates.
However, we do not expect our costs for year 2000 compliance to have any
significant effect on the benefits or values provided by the Policies.
We believe that our computer systems will be ready for the year 2000 well in
advance of the deadline. By their nature, however, the issues in this area carry
the risk of unforeseen problems, both at Northwestern Mutual Life and at all the
other sites where supporting functions and interaction take place. There can be
no assurance that these problems will not have a material
--
17
<PAGE>
adverse impact on the operations of Northwestern Mutual Life and the Account.
LEGAL PROCEEDINGS
We are engaged in litigation of various kinds which in our judgment is not of
material importance in relation to its total assets. There are no legal
proceedings pending to which the Account is a party.
REGISTRATION STATEMENT
We have filed a registration statement with the Securities and Exchange
Commission, Washington, D.C. under the Securities Act of 1933, as amended, with
respect to the Policies. This prospectus does not contain all the information
set forth in the registration statement. A copy of the omitted material is
available from the main office of the SEC in Washington, D.C. upon payment of
the prescribed fee. Further information about the Policies is also available
from the Home Office of Northwestern Mutual Life. The address and telephone
number are on the cover of this prospectus.
EXPERTS
The financial statements of Northwestern Mutual Life as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998 and
of the Account as of December 31, 1998 and for each of the two years in the
period ended December 31, 1998 included in this prospectus have been so included
in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting. Actuarial matters included in this prospectus have been examined by
William C. Koenig, F.S.A., Senior Vice President and Chief Actuary of
Northwestern Mutual Life. His opinion is filed as an exhibit to the registration
statement.
--
18
<PAGE>
[LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
To The Northwestern Mutual Life Insurance Company and
Policyowners of Northwestern Mutual Variable Life Account
In our opinion, the accompanying combined statement of assets and liabilities
and the related combined and separate statements of operations and changes in
equity present fairly, in all material respects, the financial position of
Northwestern Mutual Variable Life Account and Aggressive Growth Stock Division,
International Equity Division, Growth Stock Division, Growth and Income Stock
Division, Index 500 Stock Division, Balanced Division, High Yield Bond Division,
Select Bond Division, and the Money Market Division thereof at December 31,
1998, the results of each of their operations and the changes in each of their
equity for each of the two years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of The Northwestern Mutual Life Insurance
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
direct confirmation of the number of shares owned at December 31, 1998 with
Northwestern Mutual Series Fund, Inc., provide a reasonable basis for the
opinion expressed above.
[SIG]
Milwaukee, Wisconsin
January 25, 1999
--
19
<PAGE>
NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT
FINANCIAL STATEMENTS
DECEMBER 31, 1998
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
<TABLE>
<S> <C> <C>
ASSETS
Investments at Market Value:
Northwestern Mutual Series Fund, Inc.
Aggressive Growth Stock
34,420 shares (cost $102,404).............. $ 119,230
International Equity
46,760 shares (cost $73,163)............... 78,416
Growth Stock
29,383 shares (cost $49,267)............... 66,025
Growth and Income Stock
43,428 shares (cost $60,081)............... 70,528
Index 500 Stock
58,115 shares (cost $126,062).............. 191,141
Balanced
71,092 shares (cost $108,217).............. 158,110
High Yield Bond
15,509 shares (cost $16,804)............... 14,516
Select Bond
10,143 shares (cost $12,181)............... 12,669
Money Market
39,300 shares (cost $39,300)............... 39,300 $ 749,935
---------
Due from Sale of Fund Shares.................................. 95
Due from Northwestern Mutual Life Insurance Company........... 328
---------
Total Assets............................................ $ 750,358
---------
---------
LIABILITIES
Due to Northwestern Mutual Life Insurance Company........... $ 95
Due on Purchase of Fund Shares.............................. 328
---------
Total Liabilities....................................... 423
---------
EQUITY (NOTE 8)
Variable Life Policies Issued Before October 11, 1995....... 392,772
Variable Complife Policies Issued On or After October 11,
1995....................................................... 356,862
Variable Executive Life Policies Issued On or After March 2,
1998....................................................... 301
---------
Total Equity............................................ 749,935
---------
Total Liabilities and Equity............................ $ 750,358
---------
---------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
--
20
<PAGE>
NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH INTERNATIONAL EQUITY
COMBINED STOCK DIVISION DIVISION
----------------------------- ----------------------------- -----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend Income............... $ 24,922 $ 24,262 $ 3,287 $3,345 $ 3,591 $ 1,286
Mortality and Expense Risks... 2,755 1,788 424 271 308 197
Taxes......................... 1,178 767 181 116 132 85
------------- ------------- ------------- ------------- ------------- -------------
Net Investment Income......... 20,989 21,707 2,682 2,958 3,151 1,004
------------- ------------- ------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Realized Gain on
Investments............... 4,332 4,871 523 231 284 203
Unrealized Appreciation
(Depreciation) of
Investments During the
Period.................... 68,780 42,532 4,928 5,109 (1,424) 2,358
------------- ------------- ------------- ------------- ------------- -------------
Net Gain (Loss) on
Investments............... 73,112 47,403 5,451 5,340 (1,140) 2,561
------------- ------------- ------------- ------------- ------------- -------------
Increase in Equity Derived
from Investment
Activity.................. 94,101 69,110 8,133 8,298 2,011 3,565
------------- ------------- ------------- ------------- ------------- -------------
EQUITY TRANSACTIONS
Policyowners' Net
Deposits.................. 258,672 170,672 30,145 21,502 20,672 12,656
Policy Loans, Surrenders,
and Death Benefits........ (37,427) (23,728) (6,454) (4,003) (4,327) (2,787)
Mortality and Other (net)... (39,611) (28,427) (5,193) (3,791) (3,785) (2,368)
Transfers from Other
Divisions................. 133,775 86,366 20,371 19,008 15,743 14,866
Transfers to Other
Divisions................. (133,773) (86,366) (6,419) (4,091) (5,013) (2,149)
------------- ------------- ------------- ------------- ------------- -------------
Increase in Equity Derived
from Equity Transactions.... 181,636 118,517 32,450 28,625 23,290 20,218
------------- ------------- ------------- ------------- ------------- -------------
Net Increase in Equity........ 275,737 187,627 40,583 36,923 25,301 23,783
EQUITY
Beginning of Year........... 474,198 286,571 78,647 41,724 53,116 29,333
------------- ------------- ------------- ------------- ------------- -------------
End of Year................. $749,935 $474,198 $119,230 $78,647 $78,417 $53,116
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
---
21
<PAGE>
NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROWTH & INCOME INDEX 500
GROWTH STOCK DIVISION STOCK DIVISION STOCK DIVISION
----------------------------- ----------------------------- -----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend Income............... $ 956 $ 1,413 $ 537 $ 7,776 $ 4,530 $ 2,579
Mortality and Expense Risks... 211 105 234 120 671 395
Taxes......................... 91 45 100 52 287 169
------------- ------------- ------------- ------------- ------------- -------------
Net Investment Income......... 654 1,263 203 7,604 3,572 2,015
------------- ------------- ------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Realized Gain on
Investments............... 143 172 220 173 1,125 2,375
Unrealized Appreciation
(Depreciation) of
Investments During the
Period.................... 10,533 4,151 10,574 (1,823) 31,738 17,772
------------- ------------- ------------- ------------- ------------- -------------
Net Gain (Loss) on
Investments............... 10,676 4,323 10,794 (1,650) 32,863 20,147
------------- ------------- ------------- ------------- ------------- -------------
Increase in Equity Derived
from Investment
Activity.................. 11,330 5,586 10,997 5,954 36,435 22,162
------------- ------------- ------------- ------------- ------------- -------------
EQUITY TRANSACTIONS
Policyowners' Net
Deposits.................. 12,991 7,334 14,771 7,537 29,665 19,733
Policy Loans, Surrenders,
and Death Benefits........ (2,859) (1,314) (2,902) (1,842) (8,924) (5,039)
Mortality and Other (net)... (2,494) (1,329) (2,847) (1,457) (5,367) (4,127)
Transfers from Other
Divisions................. 16,839 8,851 17,225 10,673 37,076 20,024
Transfers to Other
Divisions................. (2,015) (1,341) (3,106) (1,104) (5,443) (3,783)
------------- ------------- ------------- ------------- ------------- -------------
Increase in Equity Derived
from Equity Transactions.... 22,462 12,201 23,141 13,807 47,007 26,808
------------- ------------- ------------- ------------- ------------- -------------
Net Increase in Equity........ 33,792 17,787 34,138 19,761 83,442 48,970
EQUITY
Beginning of Year........... 32,233 14,446 36,389 16,628 107,699 58,729
------------- ------------- ------------- ------------- ------------- -------------
End of Year................. $66,025 $32,233 $70,527 $36,389 $191,141 $107,699
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
---
22
<PAGE>
NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCED DIVISION HIGH YIELD BOND DIVISION SELECT BOND DIVISION
----------------------------- ----------------------------- -----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend Income............... $ 8,344 $ 5,105 $ 1,489 $1,370 $ 743 $ 436
Mortality and Expense Risks... 681 558 53 29 51 35
Taxes......................... 292 239 22 12 22 15
------------- ------------- ------------- ------------- ------------- -------------
Net Investment Income......... 7,371 4,308 1,414 1,329 670 386
------------- ------------- ------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Realized Gain on
Investments............... 1,893 1,655 47 26 97 36
Unrealized Appreciation
(Depreciation) of
Investments During the
Period.................... 14,317 15,262 (1,828) (531) (58) 234
------------- ------------- ------------- ------------- ------------- -------------
Net Gain (Loss) on
Investments............... 16,210 16,917 (1,781) (505) 39 270
------------- ------------- ------------- ------------- ------------- -------------
Increase in Equity Derived
from Investment
Activity.................. 23,581 21,225 (367) 824 709 656
------------- ------------- ------------- ------------- ------------- -------------
EQUITY TRANSACTIONS
Policyowners' Net
Deposits.................. 17,811 15,394 3,490 1,922 2,004 1,820
Policy Loans, Surrenders,
and Death Benefits........ (8,879) (7,260) (690) (349) (620) (311)
Mortality and Other (net)... (3,232) (3,395) (641) (339) (250) (560)
Transfers from Other
Divisions................. 7,905 4,266 5,399 3,276 3,951 2,000
Transfers to Other
Divisions................. (5,398) (4,734) (1,476) (425) (2,217) (756)
------------- ------------- ------------- ------------- ------------- -------------
Increase in Equity Derived
from Equity Transactions.... 8,207 4,271 6,082 4,085 2,868 2,193
------------- ------------- ------------- ------------- ------------- -------------
Net Increase in Equity........ 31,788 25,496 5,715 4,909 3,577 2,849
EQUITY
Beginning of Year........... 126,322 100,826 8,801 3,892 9,092 6,243
------------- ------------- ------------- ------------- ------------- -------------
End of Year................. $158,110 $126,322 $14,516 $8,801 $12,669 $9,092
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
<CAPTION>
MONEY MARKET DIVISION
-----------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
INVESTMENT INCOME
Dividend Income............... $ 1,445 $ 952
Mortality and Expense Risks... 122 78
Taxes......................... 51 34
------------- -------------
Net Investment Income......... 1,272 840
------------- -------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Realized Gain on
Investments............... -- --
Unrealized Appreciation
(Depreciation) of
Investments During the
Period.................... -- --
------------- -------------
Net Gain (Loss) on
Investments............... -- --
------------- -------------
Increase in Equity Derived
from Investment
Activity.................. 1,272 840
------------- -------------
EQUITY TRANSACTIONS
Policyowners' Net
Deposits.................. 127,123 82,774
Policy Loans, Surrenders,
and Death Benefits........ (1,772) (823)
Mortality and Other (net)... (15,802) (11,061)
Transfers from Other
Divisions................. 9,266 3,402
Transfers to Other
Divisions................. (102,686) (67,983)
------------- -------------
Increase in Equity Derived
from Equity Transactions.... 16,129 6,309
------------- -------------
Net Increase in Equity........ 17,401 7,149
EQUITY
Beginning of Year........... 21,899 14,750
------------- -------------
End of Year................. $39,300 $21,899
------------- -------------
------------- -------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
---
23
<PAGE>
NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 -- Northwestern Mutual Variable Life Account (the "Account") is
registered as a unit investment trust under the Investment Company Act of 1940
and is a segregated asset account of The Northwestern Mutual Life Insurance
Company ("Northwestern Mutual") used to fund variable life insurance policies.
NOTE 2 -- The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Principal
accounting policies are summarized below.
NOTE 3 -- All assets of each Division of the Account are invested in shares of
the corresponding Portfolio of Northwestern Mutual Series Fund, Inc. (the
"Fund"). The shares are valued at the Fund's offering and redemption price per
share. The Fund is a diversified open-end investment company registered under
the Investment Company Act of 1940.
NOTE 4 -- Dividend income from the Fund is recorded on the record date of the
dividends. Transactions in Fund shares are accounted for on the trade date. The
basis for determining cost on sale of Fund shares is identified cost. Purchases
and sales of Fund shares for the year ended December 31, 1998 by each Division
are shown below:
<TABLE>
<CAPTION>
PURCHASES SALES
--------------- ---------------
<S> <C> <C>
Aggressive Growth Division...... $ 36,381,397 $ 1,248,015
International Equity Division... 27,429,118 990,001
Growth Stock Division........... 23,393,892 279,458
Growth & Income Stock
Division........................ 24,059,882 715,896
Index 500 Stock Division........ 52,625,759 2,046,627
Balanced Division............... 20,647,579 5,068,597
High Yield Bond Division........ 8,131,249 635,946
Select Bond Division............ 5,351,461 1,813,834
Money Market Division........... 47,332,350 29,930,945
</TABLE>
NOTE 5 -- A deduction for mortality and expense risks is determined daily and
paid to Northwestern Mutual. Generally, for Variable Life policies issued before
October 11, 1995, and Variable Complife policies issued on or after October 11,
1995 the deduction is at an annual rate of .50% and .60%, respectively, of the
net assets of the Account. A deduction for the mortality and expense risks for
the Variable Executive Life policies issued on or after March 3, 1998 is
determined monthly at an annual rate of .75% of the amount invested in the
Account for the Policy for the first ten Policy years, and .30% thereafter. The
mortality risk is that insureds may not live as long as estimated. The expense
risk is that expenses of issuing and administering the policies may exceed the
estimated costs.
Certain deductions are also made from the annual, single or other premiums
before amounts are allocated to the Account. These deductions are for (1) sales
load, (2) administrative expenses, (3) taxes and (4) a risk charge for the
guaranteed minimum death benefit.
Additional mortality costs are deducted from the policy annually and are paid to
Northwestern Mutual to cover the cost of providing insurance protection. This
cost is actuarially calculated based upon the insured's age, the 1980
Commissioners Standard Ordinary Mortality Table and the amount of insurance
provided under the policy.
NOTE 6 -- Northwestern Mutual is taxed as a "life insurance company" under the
Internal Revenue Code. The variable life insurance policies which are funded in
the Account are taxed as part of the operations of Northwestern Mutual. Policies
provide that a charge for taxes may be made against the assets of the Account.
Generally, for Variable Life policies issued before October 11, 1995,
Northwestern Mutual charges the Account at an annual rate of .20% of the
Account's net assets and reserves the right to increase, decrease or eliminate
the charge for taxes in the future. Generally, for Variable Complife policies
issued on or after October 11, 1995, and for Variable Executive Life policies
issued on or after March 3, 1998, there is no charge being made against the
assets of the Account for federal income taxes, but Northwestern Mutual reserves
the right to charge for taxes in the future.
NOTE 7 -- The Account is credited for the policyowners' net annual premiums at
the respective policy anniversary dates regardless of when policyowners actually
paid their premiums. Northwestern Mutual's equity represents any unpaid portion
of net annual premiums. This applies to Variable Life and Variable Complife
policies only.
--
24
<PAGE>
NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(IN THOUSANDS)
NOTE 8 -- Equity Values by Division are shown below:
<TABLE>
<CAPTION>
VARIABLE LIFE
POLICIES ISSUED BEFORE
OCTOBER 11, 1995
EQUITY OF:
------------------------ TOTAL
POLICYOWNERS NML EQUITY
------------- --------- ----------
<S> <C> <C> <C>
Aggressive Growth Stock Division....................................................... $ 42,391 $ 3,793 $ 46,184
International Equity Division.......................................................... 32,539 3,074 35,613
Growth Stock Division.................................................................. 22,888 1,510 24,398
Growth and Income Stock Division....................................................... 26,309 1,808 28,117
Index 500 Stock Division............................................................... 95,615 4,943 100,558
Balanced Division...................................................................... 134,029 5,006 139,035
High Yield Bond Division............................................................... 4,916 428 5,344
Select Bond Division................................................................... 6,911 417 7,328
Money Market Division.................................................................. 5,918 277 6,195
------------- --------- ----------
$ 371,516 $ 21,256 $ 392,772
------------- --------- ----------
------------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
VARIABLE COMPLIFE
POLICIES ISSUED ON OR
AFTER OCTOBER 11, 1995
EQUITY OF:
------------------------- TOTAL
POLICYOWNERS NML EQUITY
------------- ---------- ----------
<S> <C> <C> <C>
Aggressive Growth Stock Division...................................................... $ 54,132 $ 18,846 $ 72,978
International Equity Division......................................................... 31,302 11,492 42,794
Growth Stock Division................................................................. 30,575 11,026 41,601
Growth and Income Stock Division...................................................... 30,515 11,841 42,356
Index 500 Stock Division.............................................................. 65,609 24,890 90,499
Balanced Division..................................................................... 14,142 4,909 19,051
High Yield Bond Division.............................................................. 6,565 2,594 9,159
Select Bond Division.................................................................. 4,161 1,171 5,332
Money Market Division................................................................. 13,154 19,938 33,092
------------- ---------- ----------
$ 250,155 $ 106,707 $ 356,862
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
VARIABLE EXECUTIVE LIFE
POLICIES ISSUED ON OR
AFTER MARCH 2, 1998
-------------------------
TOTAL
EQUITY
-------------------------
<S> <C>
Aggressive Growth Stock Division...................................................................... $ 67
International Equity Division......................................................................... 10
Growth Stock Division................................................................................. 25
Growth and Income Stock Division...................................................................... 55
Index 500 Stock Division.............................................................................. 84
Balanced Division..................................................................................... 24
High Yield Bond Division.............................................................................. 13
Select Bond Division.................................................................................. 9
Money Market Division................................................................................. 14
-----
$ 301
-----
-----
</TABLE>
--
25
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN MILLIONS)
The following financial statements of Northwestern Mutual should be considered
only as bearing upon the ability of Northwestern Mutual Life to meet its
obligations under the Policies.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Bonds......................................... $ 34,888 $ 32,359
Common and preferred stocks................... 6,576 6,524
Mortgage loans................................ 12,250 10,835
Real estate................................... 1,481 1,372
Policy loans.................................. 7,580 7,163
Other investments............................. 1,839 2,026
Cash and temporary investments................ 1,275 572
Due and accrued investment income............. 827 795
Other assets.................................. 1,313 1,275
Separate account assets....................... 9,966 8,160
--------- ---------
Total assets.............................. $ 77,995 $ 71,081
--------- ---------
--------- ---------
LIABILITIES AND SURPLUS
Reserves for policy benefits.................. $ 51,815 $ 47,343
Policy benefit and premium deposits........... 1,709 1,624
Policyowner dividends payable................. 2,870 2,640
Interest maintenance reserve.................. 606 461
Asset valuation reserve....................... 1,994 1,974
Income taxes payable.......................... 1,161 1,043
Other liabilities............................. 3,133 3,735
Separate account liabilities.................. 9,966 8,160
--------- ---------
Total liabilities......................... 73,254 66,980
Surplus....................................... 4,741 4,101
--------- ---------
Total liabilities and surplus............. $ 77,995 $ 71,081
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
--
26
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUE
Premium income................................ $ 8,021 $ 7,294 $ 6,667
Net investment income......................... 4,536 4,171 3,836
Other income.................................. 922 861 759
--------- --------- ---------
Total revenue............................. 13,479 12,326 11,262
--------- --------- ---------
BENEFITS AND EXPENSES
Benefit payments to policyowners and
beneficiaries................................ 3,602 3,329 2,921
Net additions to policy benefit reserves...... 4,521 4,026 3,701
Net transfers to separate accounts............ 564 566 579
--------- --------- ---------
Total benefits............................ 8,687 7,921 7,201
Operating expenses............................ 1,297 1,138 1,043
--------- --------- ---------
Total benefits and expenses............... 9,984 9,059 8,244
--------- --------- ---------
Gain from operations before dividends and taxes... 3,495 3,267 3,018
Policyowner dividends............................. 2,869 2,636 2,341
--------- --------- ---------
Gain from operations before taxes................. 626 631 677
Income tax expense................................ 301 356 452
--------- --------- ---------
Net gain from operations.......................... 325 275 225
Net realized capital gains........................ 484 414 395
--------- --------- ---------
Net income................................ $ 809 $ 689 $ 620
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
--
27
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN SURPLUS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
BEGINNING OF YEAR BALANCE......................... $4,101 $3,515 $2,786
Net income...................................... 809 689 620
Increase (decrease) in net unrealized gains..... (147) 576 295
Increase in investment reserves................. (20) (526) (176)
Other, net...................................... (2) (153) (10)
------- ------- -------
Net increase in surplus......................... 640 586 729
------- ------- -------
END OF YEAR BALANCE............................... $4,741 $4,101 $3,515
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
--
28
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Insurance and annuity premiums.................. $ 8,876 $ 8,093 $ 7,361
Investment income received...................... 4,216 3,928 3,634
Disbursement of policy loans, net of
repayments..................................... (416) (360) (326)
Benefits paid to policyowners and
beneficiaries.................................. (3,572) (3,316) (2,912)
Net transfers to separate accounts.............. (564) (565) (579)
Policyowner dividends paid...................... (2,639) (2,347) (2,105)
Operating expenses and taxes.................... (1,749) (1,722) (1,663)
Other, net...................................... (83) 124 (59)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES..... 4,069 3,835 3,351
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
PROCEEDS FROM INVESTMENTS SOLD OR MATURED
Bonds......................................... 28,720 38,284 31,942
Common and preferred stocks................... 10,359 9,057 4,570
Mortgage loans................................ 1,737 1,012 1,253
Real estate................................... 159 302 178
Other investments............................. 768 398 316
-------- -------- --------
41,743 49,053 38,259
-------- -------- --------
COST OF INVESTMENTS ACQUIRED
Bonds......................................... 30,873 41,169 35,342
Common and preferred stocks................... 9,642 9,848 4,463
Mortgage loans................................ 3,135 2,309 2,455
Real estate................................... 268 202 125
Other investments............................. 567 359 255
-------- -------- --------
44,485 53,887 42,640
-------- -------- --------
NET INCREASE (DECREASE) IN SECURITIES LENDING
AND OTHER...................................... (624) 440 1,617
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES......... (3,366) (4,394) (2,764)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
INVESTMENTS...................................... 703 (559) 587
CASH AND TEMPORARY INVESTMENTS, BEGINNING OF
YEAR............................................. 572 1,131 544
-------- -------- --------
CASH AND TEMPORARY INVESTMENTS, END OF YEAR....... $ 1,275 $ 572 $ 1,131
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
--
29
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. PRINCIPAL ACCOUNTING POLICIES
The accompanying consolidated statutory financial statements include the
accounts of The Northwestern Mutual Life Insurance Company ("Company") and its
wholly-owned life insurance subsidiary, Northwestern Long Term Care Insurance
Company ("Subsidiary"). The Company and its Subsidiary offer life, annuity,
disability income and long term care products to the personal, business, estate
and tax-qualified markets.
The consolidated financial statements have been prepared using accounting
policies prescribed or permitted by the Office of the Commissioner of Insurance
of the State of Wisconsin ("statutory basis of accounting").
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles, which will replace the
current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. The NAIC is now considering amendments to the
codification guidance that would also be effective upon its planned
implementation effective January 1, 2001. It is expected that the Office of the
Commissioner of Insurance of the State of Wisconsin ("OCI") will adopt the
codification, but it is not known whether the OCI will make any changes to that
guidance. The potential effect of the codification on the Company will depend
upon the guidance adopted by the OCI.
Financial statements prepared on the statutory basis of accounting vary from
financial statements prepared on the basis of Generally Accepted Accounting
Principles ("GAAP") primarily because on a GAAP basis (1) policy acquisition
costs are deferred and amortized, (2) investment valuations and insurance
reserves are based on different assumptions, (3) funds received under
deposit-type contracts are not reported as premium revenue, and (4) deferred
taxes are provided for temporary differences between book and tax basis of
certain assets and liabilities. The effects on the financial statements of the
differences between the statutory basis of accounting and GAAP are material to
the Company.
The preparation of financial statements in conformity with the statutory basis
of accounting requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual future results could differ from these estimates.
INVESTMENTS
The Company's investments are valued on the following bases:
<TABLE>
<S> <C> <C>
Bonds -- Amortized cost using the interest method; loan-backed and
structured securities are amortized using estimated
prepayment rates and, generally, the prospective adjustment
method
Common and preferred stocks -- Common stocks are carried at fair value, preferred stocks
are generally carried at cost, and unconsolidated
subsidiaries are recorded using the equity method
Mortgage loans -- Amortized cost
Real estate -- Lower of cost, less depreciation and encumbrances, or
estimated net realizable value
Policy loans -- Unpaid principal balance, which approximates fair value
Other investments -- Consists primarily of joint venture investments which are
valued at equity in ventures' net assets
Cash and temporary investments -- Amortized cost, which approximates fair value
</TABLE>
--
30
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
TEMPORARY INVESTMENTS
Temporary investments consist of debt securities that have maturities of one
year or less at acquisition.
NET INVESTMENT INCOME
Net investment income includes interest and dividends received or due and
accrued on debt securities and stocks, equity in unconsolidated subsidiaries'
earnings and the Company's share of joint venture income. Net investment income
is reduced by investment management expenses, real estate depreciation,
depletion related to energy assets and costs associated with securities lending.
INTEREST MAINTENANCE RESERVE
The Company is required to maintain an interest maintenance reserve ("IMR"). The
IMR is used to defer realized gains and losses, net of tax, on fixed income
investments resulting from changes in interest rates. Net realized gains and
losses deferred to the IMR are amortized into investment income over the
approximate remaining term to maturity of the investment sold.
INVESTMENT RESERVES
The Company is required to maintain an asset valuation reserve ("AVR"). The AVR
establishes a general reserve for invested asset valuation using a formula
prescribed by state regulations. The AVR is designed to stabilize surplus
against potential declines in the value of investments. In addition, the Company
maintained a $200 million voluntary investment reserve at December 31, 1998 and
1997 to absorb potential investment losses exceeding those considered by the AVR
formula. Increases or decreases in these investment reserves are recorded
directly to surplus.
SEPARATE ACCOUNTS
Separate account assets and related policy liabilities represent the segregation
of funds deposited by "variable" life insurance and annuity policyowners.
Policyowners bear the investment performance risk associated with variable
products. Separate account assets are invested at the direction of the
policyowner in a variety of Company-managed mutual funds. Variable product
policyowners also have the option to invest in a fixed interest rate annuity in
the general account of the Company. Separate account assets are reported at fair
value.
PREMIUM REVENUE AND OPERATING EXPENSES
Life insurance premiums are recognized as revenue at the beginning of each
policy year. Annuity and disability income premiums are recognized when received
by the Company. Operating expenses, including costs of acquiring new policies,
are charged to operations as incurred.
OTHER INCOME
Other income includes considerations on supplementary contracts, ceded
reinsurance expense allowances and miscellaneous policy charges.
--
31
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
BENEFIT PAYMENTS TO POLICYOWNERS AND BENEFICIARIES
Benefit payments to policyowners and beneficiaries include death, surrender and
disability benefits, matured endowments and supplementary contract payments.
RESERVES FOR POLICY BENEFITS
Reserves for policy benefits are determined using actuarial estimates based on
mortality and morbidity experience tables and valuation interest rates
prescribed by the Office of the Commissioner of Insurance of the State of
Wisconsin. See Note 3.
POLICYOWNER DIVIDENDS
Almost all life insurance policies, and certain annuity and disability income
policies, issued by the Company are participating. Annually, the Company's Board
of Trustees approves dividends payable on participating policies in the
following fiscal year, which are accrued and charged to operations when
approved.
RECLASSIFICATION
Certain financial statement balances for 1997 and 1996 have been reclassified to
conform to the current year presentation.
2. INVESTMENTS
DEBT SECURITIES
Debt securities consist of all bonds and fixed-maturity preferred stocks. The
estimated fair values of debt securities are based upon quoted market prices, if
available. For securities not actively traded, fair values are estimated using
independent pricing services or internally developed pricing models. The Company
records unrealized losses for debt securities considered impaired.
--
32
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
Statement value, which principally represents amortized cost, and estimated fair
value of the Company's debt securities at December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
RECONCILIATION TO ESTIMATED FAIR VALUE
---------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1998 VALUE APPRECIATION DEPRECIATION VALUE
- -------------------------------------------------- --------- ------------ ------------ ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
US Government and political obligations........... $ 3,904 $ 461 $ (11) $ 4,354
Mortgage-backed securities........................ 7,357 280 (15) 7,622
Corporate and other debt securities............... 23,627 1,240 (382) 24,485
--------- ------------ ------ ---------
34,888 1,981 (408) 36,461
Preferred stocks.................................. 189 4 (1) 192
--------- ------------ ------ ---------
Total............................................. $35,077 $1,985 $(409) $36,653
--------- ------------ ------ ---------
--------- ------------ ------ ---------
<CAPTION>
RECONCILIATION TO ESTIMATED FAIR VALUE
---------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 VALUE APPRECIATION DEPRECIATION VALUE
- -------------------------------------------------- --------- ------------ ------------ ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
US Government and political obligations........... $ 3,695 $ 336 $ (3) $ 4,028
Mortgage-backed securities........................ 7,015 264 (4) 7,275
Corporate and other debt securities............... 21,649 1,098 (208) 22,539
--------- ------------ ------ ---------
32,359 1,698 (215) 33,842
Preferred stocks.................................. 167 4 (2) 169
--------- ------------ ------ ---------
Total............................................. $32,526 $1,702 $(217) $34,011
--------- ------------ ------ ---------
--------- ------------ ------ ---------
</TABLE>
The statement value of debt securities by contractual maturity at December 31,
1998 and 1997 is shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(IN MILLIONS)
<S> <C> <C>
Due in one year or less........................... $ 655 $ 605
Due after one year through five years............. 5,031 4,878
Due after five years through ten years............ 10,286 9,760
Due after ten years............................... 11,748 10,268
------------ ------------
27,720 25,511
Mortgage-backed securities........................ 7,357 7,015
------------ ------------
$35,077 $32,526
------------ ------------
------------ ------------
</TABLE>
STOCKS
The estimated fair values of common and perpetual preferred stocks are based
upon quoted market prices, if available. For securities not actively traded,
fair values are estimated using independent pricing services or internally
developed pricing models.
--
33
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
The adjusted cost of common and preferred stock held by the Company at December
31, 1998 and 1997 was $4.8 billion and $5.0 billion, respectively.
MORTGAGE LOANS AND REAL ESTATE
Mortgage loans are collateralized by properties located throughout the United
States and Canada. The Company attempts to minimize mortgage loan investment
risk by diversification of geographic locations and types of collateral
properties.
The fair value of mortgage loans as of December 31, 1998 and 1997 was
approximately $12.9 billion and $11.5 billion, respectively. The fair value of
the mortgage loan portfolio is estimated by discounting the future estimated
cash flows using current interest rates of debt securities with similar credit
risk and maturities, or utilizing net realizable values.
At December 31, 1998 and 1997, real estate includes $61 million acquired through
foreclosure at each date and $120 million and $124 million, respectively, of
home office real estate. In 1998, 1997 and 1996, the Company recorded unrealized
losses of $5 million, $2 million and $43 million, respectively, for the excess
of statement value over fair value of certain real estate investments and
mortgage loans.
REALIZED GAINS AND LOSSES
Realized investment gains and losses for the years ended December 31, 1998, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------ ------------------------------
NET NET NET
REALIZED REALIZED REALIZED
REALIZED REALIZED GAINS REALIZED REALIZED GAINS REALIZED REALIZED GAINS
GAINS LOSSES (LOSSES) GAINS LOSSES (LOSSES) GAINS LOSSES (LOSSES)
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds......................... $ 514 $ (231) $ 283 $ 518 $ (269) $ 249 $ 396 $ (383) $ 13
Common and preferred stocks... 885 (240) 645 533 (150) 383 580 (115) 465
Mortgage loans................ 18 (11) 7 14 (14) - 2 (15) (13)
Real estate................... 41 - 41 100 (2) 98 36 - 36
Other investments............. 330 (267) 63 338 (105) 233 204 (51) 153
-------- -------- -------- -------- -------- -------- -------- -------- --------
1,788 (749) 1,039 1,503 (540) 963 1,218 (564) 654
-------- -------- -------- -------- -------- -------- -------- -------- --------
Less: Capital gains taxes..... 358 340 224
Less: IMR deferrals........... 197 209 35
-------- -------- --------
Net realized capital gains.... $ 484 $ 414 $ 395
-------- -------- --------
-------- -------- --------
</TABLE>
SECURITIES LENDING
The Company has entered into a securities lending agreement whereby certain
securities are loaned to third parties, primarily major brokerage firms. The
Company's policy requires a minimum of 102 percent of the fair value of the
loaned securities as collateral, calculated on a daily basis in the form of
either cash or securities. Collateral assets received and related liability due
to counterparties of $1.5 billion are included in the consolidated
--
34
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
statements of financial position for each of the periods ended at December 31,
1998 and 1997, and approximate the statement value of securities loaned at those
dates.
INVESTMENT IN MGIC
The Company owns 11.0% (11.9 million shares) of the outstanding common stock of
MGIC Investment Corporation ("MGIC"). This investment is accounted for using the
equity method. At December 31, 1998 and 1997, the fair value of the Company's
investment in MGIC exceeded the statement value of $180 million and $273
million, respectively, by $296 million and $768 million, respectively.
In July 1995, the Company entered into a forward contract with a brokerage firm
to deliver 8.9 million to 10.7 million shares of MGIC (or cash in an amount
equal to the market value of the MGIC shares at contract maturity) in August,
1998, in exchange for a fixed cash payment of $247 million ($24 per share). The
Company's objective in entering into the forward contract was to hedge against
depreciation in the value of its MGIC holdings during the contract period below
the initial spot price of $24, while partially participating in appreciation, if
any, during the forward contract's duration. In August 1998, the Company
delivered 8.9 million shares to settle the forward contract. In conjunction with
the settlement, the Company recorded a $114 million realized gain.
DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions to reduce
its exposure to fluctuations in interest rates, foreign currency exchange rates
and market volatility. These hedging strategies include the use of forwards,
futures, options and swaps.
The Company held the following positions for hedging purposes at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
DERIVATIVE FINANCIAL INSTRUMENT NOTIONAL AMOUNTS RISKS REDUCED
- --------------------------------------------- --------------------------- ---------------------------------------------
(IN MILLIONS)
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C> <C>
Foreign Currency Forward Currency exposure on foreign-denominated
Contracts................................... $601 $564 investments.
Common Stock Futures......................... 657 327 Stock market price fluctuation.
Bond Futures................................. 379 95 Bond market price fluctuation.
Options to acquire Interest Rate Swaps....... 419 530 Interest rates payable on certain annuity and
insurance contracts.
Foreign Currency and Interest Rate Swaps..... 94 209 Interest rates on variable rate notes and
currency exposure on foreign-denominated
bonds.
</TABLE>
The notional or contractual amounts of derivative financial instruments are used
to denominate these types of transactions and do not represent the amounts
exchanged between the parties.
In addition to the use of derivatives for hedging purposes, equity swaps were
held for investment purposes during 1997 and 1998. The notional amount of equity
swaps outstanding at December 31, 1998 and 1997 was $188 million and $143
million, respectively.
Foreign currency forwards, foreign currency swaps, stock futures and equity
swaps are reported at fair value. Resulting gains and losses on these contracts
are unrealized until expiration of the contract. There is no statement
--
35
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
value reported for interest rate swaps, bond futures and options to acquire
interest rate swaps prior to the settlement of the contract, at which time
realized gains and losses are deferred to IMR. Changes in the value of
derivative instruments are expected to offset gains and losses on the hedged
investments. During 1998, net realized and unrealized gains on investments were
partially offset by net realized losses of $104 million and net unrealized
losses of $58 million on derivative instruments. The effect of derivative
instruments in 1997 and 1996 was not material to the Company's results of
operations.
3. RESERVES FOR POLICY BENEFITS
Life insurance reserves on substantially all policies issued since 1978 are
based on the Commissioner's Reserve Valuation Method with interest rates ranging
from 3 1/2% to 5 1/2%. Other life policy reserves are primarily based on the net
level premium method employing various mortality tables at interest rates
ranging from 2% to 4 1/2%.
Deferred annuity reserves on contracts issued since 1985 are valued primarily
using the Commissioner's Annuity Reserve Valuation Method with interest rates
ranging from 3 1/2% to 6 1/4%. Other deferred annuity reserves are based on
contract value. Immediate annuity reserves are based on present values of
expected benefit payments at interest rates ranging from 3 1/2% to 7 1/2%.
Active life reserves for disability income ("DI") policies issued since 1987 are
primarily based on the two-year preliminary term method using a 4% interest rate
and the 1985 Commissioner's Individual Disability Table A ("CIDA") for
morbidity. Active life reserves for prior DI policies are based on the net level
premium method, a 3% to 4% interest rate and the 1964 Commissioner's Disability
Table for morbidity. Disabled life reserves for DI policies are based on the
present values of expected benefit payments primarily using the 1985 CIDA
(modified for Company experience in the first two years of disability) with
interest rates ranging from 3% to 5 1/2%.
Use of these actuarial tables and methods involves estimation of future
mortality and morbidity based on past experience. Actual future experience could
differ from these estimates.
4. EMPLOYEE AND AGENT BENEFIT PLANS
The Company sponsors noncontributory defined benefit retirement plans for all
eligible employees and agents. The expense associated with these plans is
generally recorded by the Company in the period contributions to the plans are
funded. As of January 1, 1998, the most recent actuarial valuation date
available, the qualified defined benefit plans were fully funded. The Company
recorded a liability of $98 million and $87 million for nonqualified defined
benefit plans at December 31, 1998 and 1997, respectively. In addition, the
Company has a contributory 401(k) plan for eligible employees and a
noncontributory defined contribution plan for all full-time agents. The
Company's contributions are expensed in the period contributions are made to the
plans. The Company recorded $29 million, $27 million and $25 million of total
expense related to its defined benefit and defined contribution plans for the
years ended December 31, 1998, 1997 and 1996, respectively. The defined benefit
and defined contribution plans' assets of $1.9 billion and $1.7 billion at
December 31, 1998 and 1997, respectively, were primarily invested in the
separate accounts of the Company.
In addition to pension and retirement benefits, the Company provides certain
health care and life insurance benefits ("postretirement benefits") for retired
employees. Substantially all employees may become eligible for these benefits if
they reach retirement age while working for the Company. Postretirement benefit
costs for the years ended December 31, 1998, 1997 and 1996 were a net expense
(benefit) of $1.8 million, ($1.3) million and
--
36
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
($12.0) million, respectively. Net benefits were primarily a result of favorable
differences between actuarial assumptions and actual experience.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
-------------------- --------------------
<S> <C> <C>
Unfunded postretirement
benefit obligation for
retirees and other fully
eligible employees (Accrued
in statement of financial
position).................... $35 million $34 million
Estimated postretirement
benefit obligation for active
non-vested employees (Not
accrued until employee
vests)....................... $56 million $50 million
Discount rate................. 7% 7%
Health care cost trend rate... 10% to an ultimate 10% to an ultimate
5%, declining 1% for 5%, declining 1% for
5 years 5 years
</TABLE>
If the health care cost trend rate assumptions were increased by 1%, the accrued
postretirement benefit obligation as of December 31, 1998 and 1997 would have
been increased by $5 million and $4 million, respectively.
At December 31, 1998 and 1997, the recorded postretirement benefit obligation
was reduced by $23 million and $20 million, respectively, for assets funded for
postretirement health care benefits.
5. REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
to reinsurers under excess coverage and coinsurance contracts. The Company
retains a maximum of $25 million of coverage per individual life and $35 million
maximum of coverage per joint life. The Company has an excess reinsurance
contract for disability income policies with retention limits varying based upon
on coverage type.
The amounts shown in the accompanying consolidated financial statements are net
of reinsurance. Policy benefit reserves at December 31, 1998 and 1997 were
reported net of ceded reserves of $518 million and $435 million, respectively.
The effect of reinsurance on premiums and benefits for the years ended December
31, 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Direct premiums................................... $8,426 $7,647 $7,064
Premiums ceded.................................... (405) (353) (397)
------- ------- -------
Net premium revenue............................... $8,021 $7,294 $6,667
------- ------- -------
------- ------- -------
Benefits to policyowners and beneficiaries........ $8,869 $8,057 $7,348
Benefits ceded.................................... (182) (136) (147)
------- ------- -------
Net benefits to policyowners and beneficiaries.... $8,687 $7,921 $7,201
------- ------- -------
------- ------- -------
</TABLE>
--
37
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
In addition, the Company received $121 million, $115 million and $93 million for
the years ended December 31, 1998, 1997 and 1996, respectively, from reinsurers
representing allowances for reimbursement of commissions and other expenses.
These amounts are included in other income in the consolidated statement of
operations.
Reinsurance contracts do not relieve the Company from its obligations to
policyowners. Failure of reinsurers to honor their obligations could result in
losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.
6. INCOME TAXES
Provisions for income taxes are based on current income tax payable without
recognition of deferred taxes. The Company files a consolidated life-nonlife
federal income tax return. Federal income tax returns for years through 1988 are
closed as to further assessment of tax. Adequate provision has been made in the
financial statements for any additional taxes which may become due with respect
to the open years.
The Company's effective tax rate on gains from operations before taxes for the
years ended December 31, 1998, 1997 and 1996 was 48%, 56%, and 67% respectively.
The Company's effective tax rate exceeds the federal corporate rate of 35%
primarily because, (1) the Company pays a tax that is assessed only on the
surplus of mutual life insurance companies ("equity tax"), and (2) the Company
must capitalize and amortize (as opposed to immediately deducting) an amount
deemed to represent the cost of acquiring new business ("DAC tax").
7. ACQUISITION OF FRANK RUSSELL COMPANY
Pursuant to an Agreement and Plan of Merger, dated as of August 10, 1998, the
Company acquired Frank Russell Company effective January 1, 1999 for a purchase
price of approximately $950 million. Frank Russell is a leading investment
management and consulting firm, providing investment advice, analytical tools
and investment vehicles to institutional and individual investors in more than
30 countries.
In connection with its acquisition of Frank Russell Company, the Company will be
required in 1999 to charge-off directly from surplus approximately $341 million,
which represents the amount of acquisition goodwill less 10% of the Company's
surplus at December 31, 1998. In addition, the Company will request permission
from the OCI to charge-off the remaining $474 million of acquisition goodwill in
1999 and currently intends to do so.
In connection with the acquisition, the Company has unconditionally guaranteed
certain debt obligations of Frank Russell Company, including $350 million of
senior notes and up to $150 million of other credit facilities.
8. CONTINGENCIES
The Company has guaranteed certain obligations of its affiliates. These
guarantees totaled approximately $133 million at December 31, 1998 and are
generally supported by the underlying net asset values of the affiliates.
In addition, the Company routinely makes commitments to fund mortgage loans or
other investments in the normal course of business. These commitments aggregated
to $2.1 billion at December 31, 1998 and were extended at market interest rates
and terms.
The Company is engaged in various legal actions in the normal course of its
investment and insurance operations. In the opinion of management, any losses
resulting from such actions would not have a material effect on the Company's
financial position.
--
38
<PAGE>
[LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Policyowners of
The Northwestern Mutual Life Insurance Company
We have audited the accompanying consolidated statement of financial position of
The Northwestern Mutual Life Insurance Company and its subsidiary as of December
31, 1998 and 1997, and the related consolidated statements of operations, of
changes in surplus and of cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, these consolidated financial statements were prepared in
conformity with accounting practices prescribed or permitted by the Office of
the Commissioner of Insurance of the State of Wisconsin (statutory basis of
accounting), which practices differ from generally accepted accounting
principles. Accordingly, the consolidated financial statements are not intended
to represent a presentation in accordance with generally accepted accounting
principles. The effects on the consolidated financial statements of the
variances between the statutory basis of accounting and generally accepted
accounting principles, although not reasonably determinable, are presumed to be
material.
In our opinion, the consolidated financial statements audited by us (1) do not
present fairly in conformity with generally accepted accounting principles, the
financial position of The Northwestern Mutual Life Insurance Company and its
subsidiary at December 31, 1998 and 1997, or the results of their operations or
their cash flows for each of the three years in the period ended December 31,
1998 because of the effects of the variances between the statutory basis of
accounting and generally accepted accounting principles referred to in the
preceding paragraph and (2) do present fairly, in all material respects, the
financial position of The Northwestern Mutual Life Insurance Company and its
subsidiary at December 31, 1998 and 1997 and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, on the basis of accounting described in Note 1.
[/S/ PRICEWATERHOUSECOOPERS LLP]
January 25, 1999
--
39
<PAGE>
APPENDIX
ILLUSTRATIONS OF DEATH BENEFITS, CASH VALUES AND ACCUMULATED PREMIUMS. The
tables on the following pages illustrate how the death benefit and cash value
for a Policy would vary over time based on hypothetical investment results. The
tables assume gross investment return rates of 0%, 6% and 12% on assets of the
Account. The Policies illustrated are on a sex-neutral basis, age 45, $500,000
Specified Amount and death benefit Option A with a $10,000 annual planned
premium. The first four illustrations, on pages 41-44, are for a Policy issued
to a guaranteed issue, non-Tobacco risk using 1) the guideline premium/cash
value corridor test, and 2) the cash value accumulation test for the definition
of life insurance, based on both current charges and on maximum charges. The
next four illustrations are for a Policy issued to a select risk using the two
different definition of life insurance tests and based on both current charges
and on maximum charges.
The death benefits and cash values would be different from those shown if the
gross investment return rate averaged 0%, 6% or 12%, but fluctuated over and
under the average rate at various points in time. The values would also be
different, depending on the Account divisions selected by the owner of the
Policy, if the Portfolio or Funds return rate averaged 0%, 6% or 12%, but the
rates for each individual Portfolio or Fund varied over and under the average.
The amounts shown as the death benefits and cash values reflect the deductions
from premiums and deductions from Policy Value. The amounts shown as the cash
values reflect the fact that the Company will refund a portion of the sales load
for a policy surrendered during the first two years. The amounts shown also
reflect the average of the investment advisory fees and other expenses
applicable to each of the Portfolios and Funds at the annual rate of .66% of
their net assets. In calculating this average rate we used the actual expenses
for 1998 for the nine Portfolios which were in operation, and estimated expense
ratios which we expect the two new Portfolios and five Funds to incur in 1999 on
an annualized basis. See "The Funds", p. 4. Thus the 0%, 6% and 12% gross
hypothetical return rates on the Fund's assets are equivalent to the net rates
of -.66%, 5.34% and 11.34% on the assets of the Account.
The second column of each table shows the amount which would accumulate if an
amount equal to the annual premium were invested to earn interest, after taxes,
at a 5% interest rate compounded annually.
The death benefits and corresponding cash values shown on pages 41, 43, 45 and
47 illustrate benefits which would be paid if investment returns of 0%, 6% and
12% are realized, if mortality and expense experience in the future is as
currently experienced. HOWEVER, CURRENT MONTHLY COST OF INSURANCE AND EXPENSE
CHARGES MAY CHANGE SUBJECT TO THE STATED MAXIMUM CHARGES.
A comparable illustration based on a proposed insured's age, sex and risk
classification and proposed face amount or premium is available upon request.
--
40
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
SEX-NEUTRAL ISSUE AGE 45 -- GUARANTEED ISSUE NON-TOBACCO
$500,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION A
$10,000 ANNUAL PREMIUM
GUIDELINE PREMIUM / CASH VALUE CORRIDOR TEST
CURRENT CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT CASH VALUE
-------------------------------- --------------------------------
PREMIUM ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ACCUMULATED AT ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF 5% INTEREST -------------------------------- --------------------------------
POLICY YEAR PER YEAR 0% 6% 12% 0% 6% 12%
- ----------------------------- -------------- -------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1............................ 10,500 500,000 500,000 500,000 8,650 9,107 9,565
2............................ 21,525 500,000 500,000 500,000 16,358 17,794 19,284
3............................ 33,101 500,000 500,000 500,000 23,605 26,560 29,747
4............................ 45,256 500,000 500,000 500,000 31,541 36,569 42,208
5............................ 58,019 500,000 500,000 500,000 39,326 46,998 55,948
6............................ 71,420 500,000 500,000 500,000 46,909 57,816 71,055
7............................ 85,491 500,000 500,000 500,000 54,298 69,046 87,681
8............................ 100,266 500,000 500,000 500,000 61,497 80,714 105,999
9............................ 115,779 500,000 500,000 500,000 68,462 92,796 126,155
10........................... 132,068 500,000 500,000 500,000 75,249 105,371 148,407
15........................... 226,575 500,000 500,000 500,000 107,789 179,430 306,159
20 (age 65).................. 347,193 500,000 500,000 700,369 134,107 271,755 574,073
25........................... 501,135 500,000 500,000 1,184,378 151,814 389,773 1,021,016
30........................... 697,608 500,000 583,497 1,889,588 154,116 545,325 1,765,970
35........................... 948,363 500,000 781,441 3,164,856 126,629 744,229 3,014,149
40........................... 1,268,398 500,000 1,039,078 5,318,749 31,803 989,598 5,065,476
45........................... 1,676,852 0 1,347,562 8,789,959 0 1,283,392 8,371,389
</TABLE>
ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE.
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 AND WILL DEPEND
UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER
TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF
THE VARIABLE ACCOUNT.
THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A
PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL
POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT
AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
A PERIOD OF TIME.
--
41
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
SEX-NEUTRAL ISSUE AGE 45 -- GUARANTEED ISSUE NON-TOBACCO
$500,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION A
$10,000 ANNUAL PREMIUM
GUIDELINE PREMIUM / CASH VALUE CORRIDOR TEST
GUARANTEED CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT CASH VALUE
------------------------------ -----------------------------
PREMIUM ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ACCUMULATED AT ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF 5% INTEREST ------------------------------ -----------------------------
POLICY YEAR PER YEAR 0% 6% 12% 0% 6% 12%
- ---------------------------------- -------------- -------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1................................. 10,500 500,000 500,000 500,000 7,235 7,646 8,059
2................................. 21,525 500,000 500,000 500,000 13,379 14,632 15,938
3................................. 33,101 500,000 500,000 500,000 18,978 21,513 24,257
4................................. 45,256 500,000 500,000 500,000 25,241 29,504 34,304
5................................. 58,019 500,000 500,000 500,000 31,217 37,665 45,219
6................................. 71,420 500,000 500,000 500,000 36,916 46,012 57,110
7................................. 85,491 500,000 500,000 500,000 42,291 54,507 70,040
8................................. 100,266 500,000 500,000 500,000 47,352 63,170 84,142
9................................. 115,779 500,000 500,000 500,000 52,107 72,020 99,564
10................................ 132,068 500,000 500,000 500,000 56,459 80,974 116,378
15................................ 226,575 500,000 500,000 500,000 72,185 127,807 228,593
20 (age 65)....................... 347,193 500,000 500,000 507,493 75,097 177,668 415,978
25................................ 501,135 500,000 500,000 841,911 56,470 228,214 725,785
30................................ 697,608 0 500,000 1,308,408 0 277,899 1,222,812
35................................ 948,363 0 500,000 2,131,270 0 322,455 2,029,781
40................................ 1,268,398 0 500,000 3,463,907 0 362,079 3,298,959
45................................ 1,676,852 0 500,000 5,512,562 0 394,699 5,250,059
</TABLE>
ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE.
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 AND WILL DEPEND
UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER
TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF
THE VARIABLE ACCOUNT.
THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A
PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL
POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT
AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
A PERIOD OF TIME.
--
42
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
SEX-NEUTRAL ISSUE AGE 45 -- GUARANTEED ISSUE NON-TOBACCO
$500,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION A
$10,000 ANNUAL PREMIUM
CASH VALUE ACCUMULATION TEST
CURRENT CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT CASH VALUE
-------------------------------- --------------------------------
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
PREMIUM ANNUAL ANNUAL
ACCUMULATED AT INVESTMENT RETURN OF INVESTMENT RETURN OF
END OF 5% INTEREST -------------------------------- --------------------------------
POLICY YEAR PER YEAR 0% 6% 12% 0% 6% 12%
- ----------------------------- -------------- -------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1............................ 10,500 500,000 500,000 500,000 8,650 9,107 9,565
2............................ 21,525 500,000 500,000 500,000 16,358 17,794 19,284
3............................ 33,101 500,000 500,000 500,000 23,605 26,560 29,747
4............................ 45,256 500,000 500,000 500,000 31,541 36,569 42,208
5............................ 58,019 500,000 500,000 500,000 39,326 46,998 55,948
6............................ 71,420 500,000 500,000 500,000 46,909 57,816 71,055
7............................ 85,491 500,000 500,000 500,000 54,298 69,046 87,681
8............................ 100,266 500,000 500,000 500,000 61,497 80,714 105,999
9............................ 115,779 500,000 500,000 500,000 68,462 92,796 126,155
10........................... 132,068 500,000 500,000 500,000 75,249 105,371 148,407
15........................... 226,575 500,000 500,000 610,291 107,789 179,430 305,585
20 (age 65).................. 347,193 500,000 500,000 989,179 134,107 271,755 561,933
25........................... 501,135 500,000 607,479 1,530,330 151,814 386,442 973,504
30........................... 697,608 500,000 741,887 2,307,023 154,116 521,732 1,622,414
35........................... 948,363 500,000 885,515 3,435,244 126,629 676,241 2,623,393
40........................... 1,268,398 500,000 1,035,317 5,052,457 31,803 846,424 4,130,637
45........................... 1,676,852 0 1,189,346 7,349,067 0 1,025,216 6,334,896
</TABLE>
ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE.
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 AND WILL DEPEND
UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER
TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF
THE VARIABLE ACCOUNT.
THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A
PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL
POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT
AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
A PERIOD OF TIME.
--
43
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
SEX-NEUTRAL ISSUE AGE 45 -- GUARANTEED ISSUE NON-TOBACCO
$500,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION A
$10,000 ANNUAL PREMIUM
CASH VALUE ACCUMULATION TEST
GUARANTEED CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT CASH VALUE
------------------------------ ------------------------------
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
PREMIUM ANNUAL ANNUAL
ACCUMULATED AT INVESTMENT RETURN OF INVESTMENT RETURN OF
END OF 5% INTEREST ------------------------------ ------------------------------
POLICY YEAR PER YEAR 0% 6% 12% 0% 6% 12%
- --------------------------------- -------------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1................................ 10,500 500,000 500,000 500,000 7,235 7,646 8,059
2................................ 21,525 500,000 500,000 500,000 13,379 14,632 15,938
3................................ 33,101 500,000 500,000 500,000 18,978 21,513 24,257
4................................ 45,256 500,000 500,000 500,000 25,241 29,504 34,304
5................................ 58,019 500,000 500,000 500,000 31,217 37,665 45,219
6................................ 71,420 500,000 500,000 500,000 36,916 46,012 57,110
7................................ 85,491 500,000 500,000 500,000 42,291 54,507 70,040
8................................ 100,266 500,000 500,000 500,000 47,352 63,170 84,142
9................................ 115,779 500,000 500,000 500,000 52,107 72,020 99,564
10............................... 132,068 500,000 500,000 500,000 56,459 80,974 116,378
15............................... 226,575 500,000 500,000 500,000 72,185 127,807 228,593
20 (age 65)...................... 347,193 500,000 500,000 715,520 75,097 177,668 406,472
25............................... 501,135 500,000 500,000 1,050,331 56,470 228,214 668,157
30............................... 697,608 0 500,000 1,487,001 0 277,899 1,045,734
35............................... 948,363 0 500,000 2,061,929 0 322,455 1,574,634
40............................... 1,268,398 0 500,000 2,823,235 0 362,079 2,308,136
45............................... 1,676,852 0 500,000 3,836,833 0 394,699 3,307,350
</TABLE>
ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE.
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 AND WILL DEPEND
UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER
TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF
THE VARIABLE ACCOUNT.
THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A
PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL
POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT
AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
A PERIOD OF TIME.
--
44
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
SEX-NEUTRAL ISSUE AGE 45 -- SELECT UNDERWRITING RISK
$500,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION A
$10,000 ANNUAL PREMIUM
GUIDELINE PREMIUM / CASH VALUE CORRIDOR TEST
CURRENT CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT CASH VALUE
------------------------------------- -------------------------------------
PREMIUM ASSUMING HYPOTHETICAL GROSS ANNUAL ASSUMING HYPOTHETICAL GROSS ANNUAL
ACCUMULATED AT INVESTMENT RETURN OF INVESTMENT RETURN OF
END OF 5% INTEREST ------------------------------------- -------------------------------------
POLICY YEAR PER YEAR 0% 6% 12% 0% 6% 12%
- ----------------------------------- -------------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1.................................. 10,500 500,000 500,000 500,000 9,001 9,470 9,938
2.................................. 21,525 500,000 500,000 500,000 16,992 18,469 20,002
3.................................. 33,101 500,000 500,000 500,000 24,514 27,557 30,839
4.................................. 45,256 500,000 500,000 500,000 32,771 37,954 43,764
5.................................. 58,019 500,000 500,000 500,000 40,813 48,727 57,953
6.................................. 71,420 500,000 500,000 500,000 48,701 59,952 73,601
7.................................. 85,491 500,000 500,000 500,000 56,332 71,549 90,764
8.................................. 100,266 500,000 500,000 500,000 63,819 83,646 109,716
9.................................. 115,779 500,000 500,000 500,000 71,165 96,269 130,655
10................................. 132,068 500,000 500,000 500,000 78,373 109,447 153,799
15................................. 226,575 500,000 500,000 500,000 113,567 187,550 317,999
20 (age 65)........................ 347,193 500,000 500,000 725,983 141,840 284,262 595,068
25................................. 501,135 500,000 500,000 1,225,043 159,737 406,829 1,056,072
30................................. 697,608 500,000 607,203 1,952,123 162,524 567,479 1,824,414
35................................. 948,363 500,000 810,902 3,267,379 136,320 772,288 3,111,789
40................................. 1,268,398 500,000 1,076,141 5,488,885 44,695 1,024,896 5,227,509
45................................. 1,676,852 0 1,393,645 9,069,014 0 1,327,281 8,637,156
</TABLE>
ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE.
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 AND WILL DEPEND
UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER
TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF
THE VARIABLE ACCOUNT.
THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A
PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL
POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT
AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
A PERIOD OF TIME.
--
45
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
SEX-NEUTRAL ISSUE AGE 45 -- SELECT UNDERWRITING RISK
$500,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION A
$10,000 ANNUAL PREMIUM
GUIDELINE PREMIUM / CASH VALUE CORRIDOR TEST
GUARANTEED CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT CASH VALUE
------------------------------ -----------------------------
PREMIUM ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ACCUMULATED AT ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF 5% INTEREST ------------------------------ -----------------------------
POLICY YEAR PER YEAR 0% 6% 12% 0% 6% 12%
- ---------------------------------- -------------- -------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1................................. 10,500 500,000 500,000 500,000 7,235 7,646 8,059
2................................. 21,525 500,000 500,000 500,000 13,379 14,632 15,938
3................................. 33,101 500,000 500,000 500,000 18,978 21,513 24,257
4................................. 45,256 500,000 500,000 500,000 25,241 29,504 34,304
5................................. 58,019 500,000 500,000 500,000 31,217 37,665 45,219
6................................. 71,420 500,000 500,000 500,000 36,916 46,012 57,110
7................................. 85,491 500,000 500,000 500,000 42,291 54,507 70,040
8................................. 100,266 500,000 500,000 500,000 47,352 63,170 84,142
9................................. 115,779 500,000 500,000 500,000 52,107 72,020 99,564
10................................ 132,068 500,000 500,000 500,000 56,459 80,974 116,378
15................................ 226,575 500,000 500,000 500,000 72,185 127,807 228,593
20 (age 65)....................... 347,193 500,000 500,000 507,493 75,097 177,668 415,978
25................................ 501,135 500,000 500,000 841,911 56,470 228,214 725,785
30................................ 697,608 0 500,000 1,308,408 0 277,899 1,222,812
35................................ 948,363 0 500,000 2,131,270 0 322,455 2,029,781
40................................ 1,268,398 0 500,000 3,463,907 0 362,079 3,298,959
45................................ 1,676,852 0 500,000 5,512,562 0 394,699 5,250,059
</TABLE>
ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE.
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 AND WILL DEPEND
UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER
TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF
THE VARIABLE ACCOUNT.
THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A
PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL
POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT
AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
A PERIOD OF TIME.
--
46
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
SEX-NEUTRAL ISSUE AGE 45 -- SELECT UNDERWRITING RISK
$500,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION A
$10,000 ANNUAL PREMIUM
CASH VALUE ACCUMULATION TEST
CURRENT CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT CASH VALUE
-------------------------------- --------------------------------
PREMIUM ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ACCUMULATED AT ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF 5% INTEREST -------------------------------- --------------------------------
POLICY YEAR PER YEAR 0% 6% 12% 0% 6% 12%
- ----------------------------- -------------- -------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1............................ 10,500 500,000 500,000 500,000 9,001 9,470 9,938
2............................ 21,525 500,000 500,000 500,000 16,992 18,469 20,002
3............................ 33,101 500,000 500,000 500,000 24,514 27,557 30,839
4............................ 45,256 500,000 500,000 500,000 32,771 37,954 43,764
5............................ 58,019 500,000 500,000 500,000 40,813 48,727 57,953
6............................ 71,420 500,000 500,000 500,000 48,701 59,952 73,601
7............................ 85,491 500,000 500,000 500,000 56,332 71,549 90,764
8............................ 100,266 500,000 500,000 500,000 63,819 83,646 109,716
9............................ 115,779 500,000 500,000 500,000 71,165 96,269 130,655
10........................... 132,068 500,000 500,000 500,000 78,373 109,447 153,799
15........................... 226,575 500,000 500,000 633,861 113,567 187,550 317,387
20 (age 65).................. 347,193 500,000 500,390 1,027,731 141,840 284,262 583,833
25........................... 501,135 500,000 631,884 1,586,392 159,737 401,966 1,009,168
30........................... 697,608 500,000 768,709 2,388,304 162,524 540,594 1,679,575
35........................... 948,363 500,000 915,082 3,553,438 136,320 698,820 2,713,654
40........................... 1,268,398 500,000 1,067,798 5,223,735 44,695 872,978 4,270,664
45........................... 1,676,852 0 1,224,822 7,595,840 0 1,055,796 6,547,614
</TABLE>
ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE.
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 AND WILL DEPEND
UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER
TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF
THE VARIABLE ACCOUNT.
THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A
PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL
POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT
AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
A PERIOD OF TIME.
--
47
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
SEX-NEUTRAL ISSUE AGE 45 -- SELECT UNDERWRITING RISK
$500,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION A
$10,000 ANNUAL PREMIUM
CASH VALUE ACCUMULATION TEST
GUARANTEED CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT CASH VALUE
------------------------------ -----------------------------
PREMIUM ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ACCUMULATED AT ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
5% INTEREST ------------------------------ -----------------------------
END OF POLICY YEAR PER YEAR 0% 6% 12% 0% 6% 12%
- ---------------------------------- -------------- -------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1................................. 10,500 500,000 500,000 500,000 7,235 7,646 8,059
2................................. 21,525 500,000 500,000 500,000 13,379 14,632 15,938
3................................. 33,101 500,000 500,000 500,000 18,978 21,513 24,257
4................................. 45,256 500,000 500,000 500,000 25,241 29,504 34,304
5................................. 58,019 500,000 500,000 500,000 31,217 37,665 45,219
6................................. 71,420 500,000 500,000 500,000 36,916 46,012 57,110
7................................. 85,491 500,000 500,000 500,000 42,291 54,507 70,040
8................................. 100,266 500,000 500,000 500,000 47,352 63,170 84,142
9................................. 115,779 500,000 500,000 500,000 52,107 72,020 99,564
10................................ 132,068 500,000 500,000 500,000 56,459 80,974 116,378
15................................ 226,575 500,000 500,000 500,000 72,185 127,807 228,593
20 (age 65)....................... 347,193 500,000 500,000 715,520 75,097 177,668 406,472
25................................ 501,135 500,000 500,000 1,050,331 56,470 228,214 668,157
30................................ 697,608 0 500,000 1,487,001 0 277,899 1,045,734
35................................ 948,363 0 500,000 2,061,929 0 322,455 1,574,634
40................................ 1,268,398 0 500,000 2,823,235 0 362,079 2,308,136
45................................ 1,676,852 0 500,000 3,836,833 0 394,699 3,307,350
</TABLE>
ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE.
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 AND WILL DEPEND
UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER
TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF
THE VARIABLE ACCOUNT.
THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A
PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL
POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT
AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
A PERIOD OF TIME.
--
48
<PAGE>
(This page has been left blank intentionally.)
--
49
<PAGE>
More information about Northwestern Mutual Series Fund, Inc. is included in
the Fund's Statement of Additional Information (SAI), incorporated by
reference in this prospectus, which is available free of charge.
More information about the Fund's investments is included in the Fund's
annual and semi-annual reports, which discuss the market conditions and
investment strategies that significantly affected each Portfolio's
performance during the previous fiscal period.
To request a free copy of the Fund's SAI, or current annual or semi-annual
report, call us at 1-800-519-4665. Information about the Fund (including the
SAI) can be reviewed and copied at the Public Reference Room of the
Securities and Exchange Commission (SEC) in Washington, DC. Information on
the operation of the Public Reference Room may be obtained by calling the SEC
at 1-800-SEC-0330. Reports and other information about the Fund are
available on the SEC's Internet site at http://www.sec.gov. Copies of the
information may be obtained, upon payment of a duplicating fee by writing the
Public Reference Section of the SEC, Washington, DC 20549-6009.
NORTHWESTERN MUTUAL LIFE
Northwestern Mutual Variable Executive Life
Northwestern Mutual Variable Life Account
Northwestern Mutual Series Fund, Inc.
Russell Insurance Funds
34-1011 (4-99)
PROSPECTUSES
Investment Company Act File Nos. 811-3990 and 811-5371
NORTHWESTERN
MUTUAL LIFE-Registered Trademark-
PO Box 3095
Milwaukee WI 53201-3095
Change Service Requested
