P R O S P E C T U S
MAY 1, 1999
AS SUPPLEMENTED JUNE 30, 1999
WRL FINANCIAL FREEDOM BUILDER(R)
issued through
WRL Series Life Account
by
Western Reserve Life Assurance Co.
of Ohio
570 Carillon Parkway
St. Petersburg, Florida 33716
1-800-851-9777
(727) 299-1800
AN INDIVIDUAL FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
CONSIDER CAREFULLY THE RISK
FACTORS BEGINNING ON PAGE 8
OF THIS PROSPECTUS.
An investment in this Policy is
not a bank deposit. The Policy
is not insured or guaranteed by
the Federal Deposit Insurance
Corporation or any other
THE SECURITIES AND EXCHANGE government agency.
COMMISSION HAS NOT APPROVED
OR DISAPPROVED THESE SECURITIES
OR PASSED UPON THE ADEQUACY The prospectus for the WRL
OF THIS PROSPECTUS. ANY Series Fund, Inc. must
REPRESENTATION TO THE CONTRARY accompany this prospectus.
IS A CRIMINAL OFFENSE. Certain portfolios may not be
available in all states. Please
read this document before
investing and save it for
future reference.
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TABLE OF CONTENTS
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Glossary ....................................................... 1
Policy Summary ................................................. 4
Risk Summary ................................................... 8
Portfolio Annual Expense Table ................................. 12
Western Reserve and the Fixed Account .......................... 13
Western Reserve ............................................ 13
The Fixed Account .......................................... 13
The Separate Account and the Portfolios ........................ 14
The Separate Account ....................................... 14
The Fund ................................................... 15
Addition, Deletion, or Substitution of Investments ......... 19
Your Right to Vote Portfolio Shares ........................ 19
The Policy ..................................................... 20
Purchasing a Policy ........................................ 20
Underwriting Standards ..................................... 21
When Insurance Coverage Takes Effect ....................... 21
Ownership Rights ........................................... 23
Canceling a Policy ......................................... 24
Premiums ....................................................... 24
Premium Flexibility ........................................ 24
Planned Periodic Payments .................................. 25
No Lapse Period ............................................ 25
Premium Limitations ........................................ 25
Making Premium Payments .................................... 25
Allocating Premiums ........................................ 26
Policy Values .................................................. 27
Cash Value ................................................. 27
Net Surrender Value ........................................ 27
Subaccount Value ........................................... 27
Subaccount Unit Value ...................................... 28
Fixed Account Value ........................................ 29
Transfers ...................................................... 29
General .................................................... 29
Fixed Account Transfers .................................... 31
Conversion Rights .......................................... 31
Dollar Cost Averaging ...................................... 31
Asset Rebalancing Program .................................. 32
Third Party Asset Allocation Services ...................... 33
Charges and Deductions ......................................... 33
Premium Charges ............................................ 34
Monthly Deduction .......................................... 34
Mortality and Expense Risk Charge .......................... 36
Surrender Charge ........................................... 36
Pro Rata Decrease Charge ................................... 38
This Policy is not available in the State of New York.
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Transfer Charge .......................................... 38
Change in Net Premium Allocation Charge .................. 39
Cash Withdrawal Charge ................................... 39
Taxes .................................................... 39
Portfolio Expenses ....................................... 39
Group or Sponsored Policies .............................. 39
Associate Policies ....................................... 40
Builder Plus ProgramSM ................................... 40
Death Benefit ................................................ 41
Death Benefit Proceeds ................................... 41
Death Benefit ............................................ 41
Effects of Cash Withdrawals on the Death Benefit ......... 43
Choosing Death Benefit Options ........................... 44
Changing the Death Benefit Option ........................ 44
Decreasing the Specified Amount .......................... 44
Payment Options .......................................... 45
Surrenders and Cash Withdrawals .............................. 45
Surrenders ............................................... 45
Cash Withdrawals ......................................... 45
Loans ........................................................ 46
General .................................................. 46
Interest Rate Charged .................................... 47
Loan Reserve Interest Rate Credited ...................... 48
Effect of Policy Loans ................................... 48
Policy Lapse and Reinstatement ............................... 48
Lapse .................................................... 48
No Lapse Period .......................................... 49
Reinstatement ............................................ 50
Federal Income Tax Considerations ............................ 50
Tax Status of the Policy ................................. 50
Tax Treatment of Policy Benefits ......................... 51
Other Policy Information ..................................... 53
Our Right to Contest the Policy .......................... 53
Suicide Exclusion ........................................ 53
Misstatement of Age or Gender ............................ 53
Modifying the Policy ..................................... 53
Benefits at Maturity ..................................... 54
Payments We Make ......................................... 54
Settlement Options ....................................... 55
Reports to Owners ........................................ 56
Records .................................................. 56
Policy Termination ....................................... 57
Supplemental Benefits (Riders) ............................... 57
Children's Insurance Rider ............................... 57
Accidental Death Benefit Rider ........................... 57
Other Insured Rider ...................................... 57
Disability Waiver Rider .................................. 58
Disability Waiver and Monthly Income Rider ............... 58
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Primary Insured Rider ("PIR") and Primary Insured
Rider Plus ("PIR Plus") ........................................ 58
Terminal Illness Accelerated Death Benefit Rider .................. 59
IMSA .................................................................. 60
Performance Data ...................................................... 60
Rates of Return ................................................... 60
Hypothetical Illustrations Based on Adjusted
Historic Portfolio Performance ................................. 61
Other Performance Data in Advertising Sales Literature ............ 70
Western Reserve's Published Ratings ............................... 70
Additional Information ................................................ 71
Sale of the Policies .............................................. 71
Legal Matters ..................................................... 71
Legal Proceedings ................................................. 71
Variations in Policy Provisions ................................... 71
Year 2000 Readiness Disclosure .................................... 72
Experts ........................................................... 72
Financial Statements .............................................. 73
Additional Information about Western Reserve ...................... 73
Western Reserve's Directors and Officers .......................... 74
Additional Information about the Separate Account ................. 76
Appendix A -- Illustrations ........................................... 77
Appendix B -- Wealth Indices of Investments in the U.S. Capital Market 81
Appendix C -- Surrender Charge Per Thousand (Based on the gender and
rate class of the insured) .................................. 83
Index to Financial Statements ......................................... 85
WRL Series Life Account ........................................... 86
Western Reserve Life Assurance Co. of Ohio ........................ 105
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GLOSSARY
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accounts The options to which you can allocate your money. The
accounts include the fixed account and the subaccounts in the
separate account.
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attained age The issue age of the person insured, plus the number of
completed years since the Policy date.
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beneficiary(ies) The person or persons you select to receive the death benefit
from this Policy. You can name the primary beneficiary and
contingent beneficiaries.
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cash value The sum of your Policy's value in the subaccounts and the
fixed account. If there is a Policy loan outstanding, the
cash value includes any amounts held in our general account
to secure the Policy loan.
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death benefit The amount we will pay to the beneficiary on the insured's
proceeds death. We will reduce the death benefit proceeds by the
amount of any outstanding loan amount and any due and unpaid
monthly deduction. We will increase the death benefit
proceeds by any interest you paid in advance on the loan for
the period between the date of death and the next Policy
anniversary.
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fixed account An option to which you may allocate premiums and cash value.
We guarantee that any amounts you allocate to the fixed
account will earn interest at a declared rate. New Jersey
residents: The fixed account option is NOT available to you.
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free look period The period during which you may return the Policy and receive
a refund as described in this prospectus. The length of the
free look period varies by state. The free look period is
listed in the Policy.
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fund(s) The WRL Series Fund, Inc., an investment company which is
registered with the U.S. Securities and Exchange Commission,
and other registered investment companies that may be added
to the Policy.
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in force While coverage under the Policy is active and the insured's
life remains insured.
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initial premium The amount you must pay before insurance coverage begins
under this Policy. The initial premium is shown on the
schedule page of your Policy.
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insured The person whose life is insured by this Policy.
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issue age The insured's age on his or her birthday nearest to the
Policy date.
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lapse When life insurance coverage ends because you do not have
enough cash value in the Policy to pay the monthly deduction,
the surrender charges and any outstanding loan amount, and
you have not made a sufficient payment by the end of a grace
period.
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loan amount The total amount of all outstanding Policy loans, including
both principal and interest due.
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loan reserve A part of the fixed account to which amounts are transferred
as collateral for Policy loans.
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maturity date The Policy anniversary nearest the insured's 95th birthday.
It is the date when life insurance coverage under this
Policy ends.
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minimum The amount shown on your Policy schedule page that we use
monthly during the no lapse period to determine whether a grace
guarantee period will begin. We make this determination whenever your
premium net surrender value is not enough to meet monthly deductions.
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monthly This is the day of each month when we determine Policy
anniversary or charges and deduct them from cash value. It is the same date
Monthiversary each month as the Policy date. If there is no valuation date
in the calendar month that coincides with the Policy date,
the Monthiversary is the next valuation date.
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net premium The part of your premium that we allocate to the fixed
account or the subaccounts. The net premium is equal to the
premium you paid minus the premium expense charges.
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net surrender The amount we will pay you if you surrender the Policy while
value it is in force. The net surrender value on the date you
surrender is equal to: the cash value, minus any surrender
charge, minus any outstanding loan amount, plus any interest
you paid in advance on the loan for the period between the
date of surrender and the next Policy anniversary.
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no lapse date For a Policy issued to any insured ages 0-60, the no lapse
date is either the number of years to attained age 65 or the
twentieth Policy anniversary, whichever is less. For a Policy
issued to an insured ages 61-80, the no lapse date is the
fifth Policy anniversary. The no lapse date is specified in
your Policy.
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no lapse period The period of time between the Policy date and the no lapse
date during which the Policy will not lapse if certain
conditions are met.
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office Our administrative office and mailing address is P.O. Box
5068, Clearwater, Florida 33758-5068. Our street address is
570 Carillon Parkway, St. Petersburg, Florida 33716. Our
phone number is 1-800-851-9777.
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planned periodic A premium payment you make in a level amount at a fixed
premium interval over a specified period of time.
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Policy date The date when our underwriting process is complete, full life
insurance coverage goes into effect, we begin to make the
monthly deductions, and your initial premium is allocated to
the WRL J.P. Morgan Money Market subaccount. The Policy date
is shown on the schedule page of your Policy. We measure
Policy months, years, and anniversaries from the Policy date.
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portfolio One of the separate investment portfolios of the fund.
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premiums All payments you make under the Policy other than loan
repayments.
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record date The date we record your Policy on our books as an in force
Policy, and we allocate your cash value from the WRL J.P.
Morgan Money Market subaccount to the accounts that you
elected on your application.
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separate account The WRL Series Life Account. It is a separate investment
account that is divided into subaccounts. We established the
separate account to receive and invest net premiums under the
Policy and other variable life insurance policies we issue.
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specified amount The minimum death benefit we will pay under the Policy
provided the Policy is in force. It is the amount shown on
the Policy's schedule page, unless you decrease the specified
amount. In addition, we will reduce the specified amount by
the dollar amount of any cash withdrawal if you choose the
Option A death benefit.
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subaccount A subdivision of the separate account that invests
exclusively in shares of one investment portfolio of the
fund.
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surrender charge If, during the first 15 Policy years, you fully surrender the
Policy, we will deduct a surrender charge from the cash
value.
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termination When the insured's life is no longer insured under the
Policy.
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valuation date Each day the New York Stock Exchange is open for trading.
Western Reserve is open whenever the New York Stock Exchange
is open.
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valuation period The period beginning at the close of business of the New York
Stock Exchange on one valuation date and continuing to the
close of business of the New York Stock Exchange on the next
valuation date.
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we, us, our Western Reserve Life Assurance Co. of Ohio
(Western
Reserve)
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written notice The written notice you must sign and send us to request or
exercise your rights as owner under the Policy. To be
complete, it must: (1) be in a form we accept, (2) contain
the information and documentation that we determine we need
to take the action you request, and (3) be received at our
office.
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you, your The person entitled to exercise all rights as owner under the
(owner or Policy.
policyowner)
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POLICY SUMMARY WRL FINANCIAL FREEDOM BUILDER(R)
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The sections in this summary correspond to sections in this prospectus,
which discuss the topics in more detail.
THE POLICY IN GENERAL
The WRL Financial Freedom Builder(R) is an individual flexible premium
variable life insurance policy.
The Policy is designed to be long-term in nature in order to provide
significant life insurance benefits for you. However, purchasing this Policy
involves certain risks. (See Risk Summary.) You should consider the Policy in
conjunction with other insurance you own. The Policy is not suitable as a
short-term savings vehicle.
A few of the Policy features listed below are not available in all states,
may vary depending upon when your Policy was issued and may not be suitable for
your particular situation. Certain states place restrictions on access to the
fixed account and on other Policy features. Please consult your agent and refer
to your Policy for details.
PREMIUMS
o You select a payment plan but are not required to pay premiums according to
the plan. You can vary the frequency and amount, within limits, and can
skip premium payments.
o Unplanned premiums may be made, within limits.
o Premium payments must be at least $50.
o Under certain circumstances, extra premiums may be required to prevent
lapse.
o Once we issue your Policy, the FREE LOOK PERIOD begins. You may return the
Policy during this period and receive a refund.
DEDUCTIONS FROM PREMIUM BEFORE WE PLACE IT IN A SUBACCOUNT AND/OR FIXED ACCOUNT
o For the first ten Policy years: 6.0% premium expense charge.
o After the tenth Policy year: 2.5% premium expense charge.
o A premium collection charge of $3.00 from each premium payment.
INVESTMENT OPTIONS
SUBACCOUNTS.You may direct the money in your Policy to any of the
subaccounts of the WRL Series Life Account, a separate account. Each subaccount
invests exclusively in one investment portfolio of the WRL Series Fund, Inc.
(the "fund"). THE MONEY YOU PLACE IN THE SUBACCOUNTS IS NOT GUARANTEED. THE
VALUE OF EACH SUBACCOUNT WILL INCREASE OR DECREASE, DEPENDING ON INVESTMENT
PERFORMANCE OF THE CORRESPONDING PORTFOLIO. YOU COULD LOSE SOME OR ALL OF YOUR
MONEY.
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The portfolios available to you are:
<TABLE>
<S> <C>
- WRL Alger Aggressive Growth - WRL AEGON Balanced
- WRL VKAM Emerging Growth - WRL NWQ Value Equity
- WRL Janus Growth - WRL C.A.S.E. Growth
- WRL Janus Global - WRL GE/Scottish Equitable International Equity
- WRL AEGON Bond - WRL Goldman Sachs Growth*
- WRL LKCM Strategic Total Return - WRL Goldman Sachs Small Cap*
- WRL Federated Growth & Income - WRL T. Rowe Price Dividend Growth*
- WRL J.P. Morgan Real Estate Securities - WRL T. Rowe Price Small Cap*
- WRL Dean Asset Allocation - WRL Salomon All Cap*
- WRL GE U.S. Equity - WRL Pilgrim Baxter Mid Cap Growth*
- WRL Third Avenue Value - WRL Dreyfus Mid Cap*
- WRL J.P. Morgan Money Market
</TABLE>
* SUBJECT TO STATE APPROVALS, THESE PORTFOLIOS WILL BE AVAILABLE FOR
ALLOCATIONS OF NET PREMIUMS AND CASH VALUE ON OR ABOUT JULY 1, 1999. PLEASE
CONTACT YOUR AGENT FOR INFORMATION REGARDING AVAILABILITY.
FIXED ACCOUNT. You may also direct the money in your Policy to the fixed
account. Money you place in the fixed account is guaranteed, and will earn
interest at a current interest rate declared from time to time. The annual
interest rate will equal at least 4.0%.
CASH VALUE
o Cash value equals the sum of your Policy's value in the subaccounts and the
fixed account. If there is a loan outstanding, the cash value includes any
amounts held in our general account to secure the Policy loan.
o Cash value varies from day to day, depending on the investment experience
of the subaccounts you choose, the interest credited to the fixed account,
the charges deducted and any other Policy transactions (such as additional
premium payments, transfers, withdrawals, and Policy loans).
o Cash value is the starting point for calculating important values under the
Policy, such as net surrender value and the death benefit.
o There is no guaranteed minimum cash value. The Policy may lapse if you do
not have sufficient cash value in the Policy to pay the monthly deductions,
the surrender charge and/or any outstanding loan amount (including interest
you owe on any Policy loan(s)).
o The Policy will not lapse during the no lapse period so long as you have
paid sufficient premiums.
TRANSFERS
o You can transfer cash value among the subaccounts and the fixed account. We
charge a $25 transfer processing fee for each transfer after the first 12
transfers in a Policy year.
o You may make transfers by telephone or by fax.
o Policy loans reduce the amount of cash value available for transfers.
o Dollar cost averaging and asset rebalancing programs are available.
o We must receive your request to transfer from the fixed account within 30
days after a Policy anniversary unless you select dollar cost averaging
from the fixed account. The amount of your transfer cannot be more than:
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-> 25% of your value in the fixed account OR
-> the amount you transferred from the fixed account in the prior Policy
year.
CHARGES AND DEDUCTIONS
o Premium expense charge: We deduct 6.0% from each premium payment during the
first ten Policy years. After the tenth year we reduce the charge to 2.5%.
o Premium collection charge: We deduct $3.00 from each premium payment to
compensate us for billing and collection costs.
o Monthly policy charge: We deduct $5.00 from your cash value each month.
o Cost of insurance charges: Deducted monthly from your cash value. Your
charges vary each month with the insured's age, the specified amount, the
death benefit option you choose, and the investment experience of the
portfolios in which you invest.
o Mortality and expense risk charge: Deducted daily from each subaccount at
an annual rate of 0.90% of your average daily net assets of each
subaccount. We intend to reduce this amount to 0.75% after 15 Policy years,
but we do not guarantee that we will do so.
o Surrender charge: Deducted when a full surrender occurs during the first 15
Policy years. It is calculated by multiplying the specified amount as of
the Policy date by the surrender charge per thousand of specified amount
for the Policy year in which a surrender occurs. We reduce total surrender
charges at the rate of 20% per year, beginning in Policy year 11, until
they reach zero at the end of the 15th Policy year. This charge may be
significant. You may have no net surrender value if you surrender your
Policy in the first few Policy years.
o Pro rata decrease charge: If you decrease the specified amount during the
first 15 Policy years, we will deduct a decrease charge equal to a pro rata
portion of the surrender charge.
o Transfer fee: We deduct $25 for each transfer in excess of 12 per Policy
year.
o Rider charges: We deduct charges each month for optional insurance benefits
(riders).
o Cash withdrawal fee: We deduct a processing fee for cash withdrawals equal
to the lesser of $25 or 2% of the withdrawal.
o Portfolio expenses: The portfolios deduct investment charges from the
amounts you have invested in the portfolios. These charges range from 0.40%
to 1.50% annually, depending on the portfolio. See Portfolio Annual Expense
Table. See also the fund prospectus.
LOANS
o After the first Policy year (as long as your Policy is in force), you may
take a loan against the Policy up to 90% of the cash value, less any
surrender charges and any already outstanding loan amount.
o The minimum loan amount is generally $500.
o You may request a loan by calling us or by writing or faxing us written
instructions.
o We currently charge 5.2% interest annually. You will be charged the
interest in advance each year on any outstanding loan amount.
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o To secure the loan, we transfer a portion of your cash value to a loan
reserve account. The amount we transfer is equal to the loan plus interest
in advance until the next Policy anniversary. The loan reserve account is
part of the fixed account. You will earn at least 4.0% interest on amounts
in the loan reserve account.
o Federal income taxes and a penalty tax may apply to loans you take against
the Policy.
o There are risks involved in taking a Policy loan. See Risk Summary p. 8.
DEATH BENEFIT
o You must choose one of three death benefit options. We offer the following:
o Option A is the greater of:
-> the current specified amount, or
-> a specified percentage, multiplied by the Policy's cash value on
the date of the insured's death.
o Option B is the greater of:
-> the current specified amount, plus the Policy's cash value on the
date of the insured's death, or
-> a specified percentage, multiplied by the Policy's cash value on
the date of the insured's death.
o Option C is the greater of:
-> the amount payable under Option A, or
-> the current specified amount, multiplied by an age-based
"factor," plus the Policy's cash value on the date of the
insured's death.
o So long as the Policy does not lapse, the minimum death benefit we pay
under any option will be the current specified amount.
o The minimum specified amount for a Policy for issue ages 0-45 is $50,000.
It declines to $25,000 for issue ages 46-80. We will state the minimum
specified amount in your Policy. You cannot decrease the specified amount
below this minimum.
o We will reduce the death benefit proceeds by the amount of any
outstanding Policy loan, and any due and unpaid charges.
o We will increase the death benefit proceeds by any additional
insurance benefits you add by rider, and any interest you paid in
advance on any loan for the period between the date of death and the
next Policy anniversary.
o After the third Policy year, you may change the death benefit option
or decrease the specified amount (but not both) once each Policy
year.
o The death benefit should be income tax free to the beneficiary.
o The death benefit is available in a lump sum or a variety of payout
options.
CASH WITHDRAWALS AND SURRENDERS
o You can take one withdrawal of cash value every 12 months after the first
Policy year.
o The amount of the withdrawal must be:
o At least $500; and
o No more than 10% of the net surrender value.
o We will deduct a processing fee equal to $25 or 2% of the amount you
withdraw (whichever is less) from the withdrawal, and we will pay you the
balance.
o There is no surrender charge assessed when you take a cash withdrawal.
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o A cash withdrawal will reduce the death benefit by at least the amount of
the withdrawal. We will not impose a pro rata decrease charge when the
specified amount is decreased as a result of taking a cash withdrawal.
o If you choose death benefit Option A, we will reduce the current specified
amount by the dollar amount of the withdrawal. We will not impose a pro
rata decrease charge when the specified amount is decreased as a result of
taking a cash withdrawal.
o Federal income taxes and a penalty tax may apply to cash withdrawals and
surrenders.
o You may fully surrender the Policy at any time before the insured's death
or the maturity date. You will receive the net surrender value. The
surrender charge will apply during the first 15 Policy years.
RISK SUMMARY
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INVESTMENT If you direct us to invest your cash value in one or more
RISK subaccounts, you will be subject to the risk that investment
performance will be unfavorable and that the cash value of your
Policy will decrease. If you select the fixed account, you are
credited with a declared rate of interest, but you assume a risk
that the rate may decrease, although it will never be lower than
a guaranteed minimum annual effective rate of 4.0%. Because
charges continue to be deducted from cash value, if withdrawals,
loans and monthly deduc- tions have reduced your net surrender
value to too low an amount, and/or if investment experience of
your selected subaccounts is not sufficiently favorable, and/or
interest rates credited to the fixed account are too low, and/or
you stop making premium payments or you make payments near or
below the minimum requirements, the net surrender value of your
Policy may fall to zero. In that case, if the no lapse period has
expired or is no longer in effect, the Policy will lapse without
value and insurance coverage will no longer be in effect after 61
days, unless you make an additional payment sufficient to prevent
a lapse. On the other hand, if investment experience is
sufficiently favorable and you have kept the Policy in force for
a substantial time, you may be able to draw upon cash value,
through withdrawals and Policy loans.
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RISK Certain circumstances will cause your Policy to enter a 60-day
OF LAPSE grace period, during which you must make a sufficient payment to
keep your Policy in force. If the net surrender value of your
Policy (that is, the cash value, minus surrender charges and
minus outstanding loan amounts) is too low to pay the monthly
deductions, any loan charges and any rider fees when due, and if
the no lapse period has expired or is no longer in effect, the
Policy will be in default and a grace period will begin. There is
a risk that if withdrawals, loans and monthly deductions reduce
your net surrender value to too low an amount, and/or if the
investment experience of your selected subaccounts is not
sufficiently favorable, and/or if interest rates credited to the
fixed account are too low, and/or you stop making premium
payments or you
8
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make payments near or below the minimum requirements, the net
surrender value of your Policy may fall to zero and the Policy
could lapse. In that case, you will have a 61-day grace period to
make a sufficient payment. If we do not receive a sufficient
payment before the grace period ends, your Policy will end
without value, insurance coverage will no longer be in effect,
and you will receive no benefits. Adverse tax consequences may
result.
Your Policy contains a no lapse period. Your Policy will not
lapse before the no lapse date stated in your Policy, as long as
you pay enough premiums. If you do not pay enough premiums, you
will automatically lose the no lapse guarantee and you will
increase the risk that your Policy will lapse. In addition, if
you take a withdrawal, or take a Policy loan, or if you decrease
your specified amount, you will increase the risk of losing the
no lapse guarantee. We deduct the total amount of your
withdrawals, any loans and any pro rata decrease charge from your
premiums paid when we determine whether your premiums are high
enough to keep the no lapse period in effect.
You will lessen the risk of Policy lapse if you keep the no lapse
period in effect. Before you take a cash withdrawal, loan,
decrease the specified amount or add a rider, you should consider
carefully the effect it will have on the no lapse guarantee.
You may reinstate this Policy within five years after it has
lapsed if the insured meets the insurability requirements and you
pay the amount we require.
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TAX RISKS We expect that the Policy will be deemed a life insurance
(INCOME TAX contract under federal tax law, so that the death benefit paid to
AND MEC) the beneficiary will not be subject to federal income tax.
However, due to lack of guidance, there is uncertainty in this
regard with respect to Policies issued on a substandard basis.
Depending on the total amount of premiums you pay, the Policy may
be treated as a modified endowment contract ("MEC") under federal
tax laws. A Builder Plus Program SM Policy (discussed on page 40)
will in most instances be treated as a MEC. If a Policy is
treated as a MEC, partial withdrawals, surrenders and loans will
be taxable as ordinary income to the extent there are earnings in
the Policy. In addition, a 10% penalty tax may be imposed on
partial withdrawals, surrenders and loans taken before you reach
age 59 1/2. If a Policy is not treated as a MEC, partial
surrenders and withdrawals will not be subject to tax to the
extent of your investment in the Policy, and amounts in excess of
your investment in the Policy, while subject to tax as ordinary
income, will not be subject to a 10% penalty tax. You should
consult a qualified tax advisor for assistance in all tax matters
involving your Policy.
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LIMITS The Policy permits you to take only one partial withdrawal in any
ON CASH 12-month period, after the first Policy year has been completed.
WITHDRAWALS The amount you may withdraw is limited to 10% of the net
surrender value.
A cash withdrawal will reduce cash value, so it will increase the
risk that the Policy will lapse. A cash withdrawal may also
increase the risk that the no lapse period will end.
A cash withdrawal will reduce the death benefit. If you select
death benefit Option A, a cash withdrawal will permanently reduce
the specified amount of the Policy. A cash withdrawal also
reduces the death benefit under Options B and C because the cash
value is reduced. In some circumstances, a withdrawal may reduce
the death benefit by more than the dollar amount of the
withdrawal.
Federal income taxes and a penalty tax may apply to partial
withdrawals and surrenders.
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LOAN RISKS A Policy loan, whether or not repaid, will affect cash value over
time because we subtract the amount of the loan from the
subaccounts and the fixed account and place that amount in the
loan reserve as collateral. We then credit a fixed interest rate
of not less than 4.0% to the loan collateral. We currently credit
interest at 4.75% annually, but we are not obligated to do so in
the future. As a result, the loan collateral does not participate
in the investment results of the subaccounts and may not continue
to receive the current interest rates credited. The longer the
loan is outstanding, the greater the effect is likely to be.
Depending on the investment results of the subaccounts and the
interest rates credited to the fixed account, the effect could be
favorable or unfavorable.
We also charge interest on Policy loans at a rate of 5.2% to be
paid in advance. Interest is added to the amount of the loan to
be repaid.
A Policy loan affects the death benefit because a loan reduces
the death benefit proceeds and net surrender value by the amount
of the outstanding loan.
A Policy loan could make it more likely that a Policy would
lapse. A Policy loan will increase the risk that the no lapse
period will end. There is also a risk if the loan reduces your
net surrender value to too low an amount and investment
experience is unfavorable, and the no lapse period is no longer
in effect, and insufficient premiums are paid, that the Policy
will lapse.
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<PAGE>
EFFECTS The surrender charge under this Policy is significant, especially
OF THE in the early Policy years. It is likely that you will receive no
SURRENDER net surrender value if you surrender your Policy in the first few
CHARGE Policy years. You should purchase this Policy only if you have
the financial ability to keep it in force at the initial
specified amount for a substantial period of time.
Even if you do not ask to surrender your Policy, the surrender
charge plays a role in determining whether your Policy will
lapse. Net surrender value (that is, cash value minus the
surrender charge and outstanding loans) is the measure we use
each month when the no lapse period ends to determine whether
your Policy will remain in force or will lapse.
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COMPARISON Like fixed benefit life insurance, the Policy offers a death
WITH OTHER benefit and provides a cash value, loan privileges and a value on
INSUARANCE surrender. However, the Policy differs from a fixed benefit
POLICIES policy because it allows you to place your premiums in investment
subaccounts. The amount and duration of life insurance protection
and of the Policy's cash value will vary with the investment
performance of the amounts you place in the subaccounts. In
addition, the cash value and net surrender values will always
vary with the investment results of your selected subaccounts.
As you consider purchasing this Policy, keep in mind that it may
not be to your advantage to replace existing insurance with the
Policy.
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ILLUSTRATIONS The hypothetical illustrations in this prospectus or used in
connection with the purchase of a Policy are based on
hypothetical rates of return. These rates are not guaranteed, and
are provided only to illustrate how the specified amount, Policy
charges and hypothetical rates of return affect death benefit
levels, cash value and net surrender value of the Policy. We may
also illustrate Policy values based on the adjusted historical
performance of the portfolios since the portfolios' inception,
reduced by Policy and subaccount charges. The hypothetical and
adjusted historic portfolio rates illustrated should not be
considered to represent past or future performance. There is the
risk that actual rates of return may be higher or lower than
those illustrated, so that the values under your Policy will be
different from those in the illustrations.
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11
<PAGE>
PORTFOLIO ANNUAL EXPENSE TABLE
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This table shows the fees and expenses charged by each portfolio. More detail
concerning each portfolio's fees and expenses is contained in the fund
prospectus.
ANNUAL PORTFOLIO OPERATING EXPENSES(1)
(As a percentage of average portfolio assets after fee waivers and expense
reimbursements)
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER EXPENSES ANNUAL
PORTFOLIOS FEES (AFTER REIMBURSEMENT) EXPENSES
---------- ---------- --------------------- --------
<S> <C> <C> <C>
WRL Alger Aggressive Growth 0.80% 0.11% 0.91%
WRL VKAM Emerging Growth 0.80% 0.09% 0.89%
WRL Janus Growth(2) 0.78% 0.05% 0.83%
WRL Janus Global(3) 0.80% 0.15% 0.95%
WRL AEGON Bond 0.45% 0.09% 0.54%
WRL LKCM Strategic Total Return 0.80% 0.06% 0.86%
WRL Federated Growth & Income 0.75% 0.15% 0.90%
WRL J.P. Morgan Money Market 0.40% 0.06% 0.46%
WRL Dean Asset Allocation 0.80% 0.06% 0.86%
WRL GE U.S. Equity 0.80% 0.25% 1.05%
WRL Third Avenue Value 0.80% 0.20% 1.00%
WRL J.P. Morgan Real Estate Securities(4) 0.80% 0.20% 1.00%
WRL AEGON Balanced 0.80% 0.11% 0.91%
WRL NWQ Value Equity 0.80% 0.09% 0.89%
WRL C.A.S.E. Growth 0.80% 0.20% 1.00%
WRL GE/Scottish Equitable International Equity 1.00% 0.50% 1.50%
WRL Goldman Sachs Growth(3)(5) 0.90% 0.10% 1.00%
WRL Goldman Sachs Small Cap(5) 0.90% 0.10% 1.00%
WRL T. Rowe Price Dividend Growth(3)(5) 0.90% 0.10% 1.00%
WRL T. Rowe Price Small Cap(5) 0.75% 0.25% 1.00%
WRL Salomon All Cap(3)(5) 0.90% 0.10% 1.00%
WRL Pilgrim Baxter Mid Cap Growth(3)(5) 0.90% 0.10% 1.00%
WRL Dreyfus Mid Cap(3)(5) 0.85% 0.15% 1.00%
</TABLE>
(1) Effective January 1, 1997, the fund's Board authorized the fund to charge
each portfolio of the fund an annual 12b-1 fee of up to 0.15% of each
portfolio's average daily net assets. However, the fund will not deduct
the fee from any portfolio before April 30, 2000. You will receive advance
written notice if a Rule 12b-1 fee is deducted. See the fund prospectus
for more detail.
(2) WRL Janus Growth's sub-advisory fee was 0.80% of the average daily net
assets for the period prior to May 1, 1998, 0.775% of the first $3 billion
of average daily net assets and 0.75% of the average daily net assets in
excess of $3 billion for the period May 1, 1998 to December 31, 1998.
(3) As compensation for its services to the portfolios, the investment adviser
receives monthly compensation at an annual rate of a percentage of the
average daily net assets of each portfolio. The management fees for each
portfolio are: WRL Janus Global - 0.80% up to $2 billion and 0.775% over
$2 billion; WRL Goldman Sachs Growth - 0.90% up to $100 million and 0.80%
over $100 million; WRL T. Rowe Price Dividend Growth - 0.90% up to $100
million and 0.80% over $100 million; WRL Salomon All Cap - 0.90% up to
$100 million and 0.80% over $100 million; WRL Pilgrim Baxter Mid Cap
Growth - 0.90% up to $100 million and 0.80% over $100 million; and WRL
Dreyfus Mid Cap - 0.85% up to $100 million and 0.80% over $100 million.
(4) Because the WRL J.P. Morgan Real Estate Securities portfolio commenced
operations on May 1, 1998, the percentages set forth as "Other Expenses"
and "Total Annual Expenses" are annualized.
(5) Because these portfolios did not commence operations until May 1, 1999,
the percentages set forth as "Other Expenses" and "Total Annual Expenses"
reflect estimates of "Other Expenses" for the first year of operations.
SUBJECT TO STATE APPROVALS, THESE PORTFOLIOS WILL BE AVAILABLE FOR
ALLOCATIONS OF NET PREMIUMS AND CASH VALUE ON OR ABOUT JULY 1, 1999.
PLEASE CONTACT YOUR AGENT FOR INFORMATION REGARDING AVAILABILITY.
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<PAGE>
The purpose of the preceding table is to help you understand the various
costs and expenses that you will bear directly and indirectly. The table
reflects charges and expenses of the portfolios of the fund for the fiscal year
ended December 31, 1998. Expenses of the fund may be higher or lower in the
future. For more information on the charges described in this Table, see the
fund prospectus which accompanies this prospectus.
WRL Investment Management, Inc. ("WRL Management"), the investment adviser
of the fund, has undertaken, until at least April 30, 2000, to pay expenses on
behalf of the portfolios of the fund to the extent normal operating expenses of
a portfolio exceed a stated percentage of each portfolio's average daily net
assets. The expense limitation for WRL Alger Aggressive Growth, WRL VKAM
Emerging Growth, WRL Janus Growth, WRL Janus Global, WRL LKCM Strategic Total
Return, WRL Federated Growth & Income, WRL Dean Asset Allocation, WRL Third
Avenue Value, WRL J.P. Morgan Real Estate Securities, WRL AEGON Balanced, WRL
NWQ Value Equity, WRL C.A.S.E. Growth, WRL Goldman Sachs Growth, WRL Goldman
Sachs Small Cap, WRL T. Rowe Price Dividend Growth, WRL T. Rowe Price Small
Cap, WRL Salomon All Cap, WRL Pilgrim Baxter Mid Cap Growth and WRL Dreyfus Mid
Cap is 1.00% of the average daily net assets; 0.70% of the average daily net
assets for the WRL AEGON Bond and WRL J.P. Morgan Money Market; 1.50% of the
average daily net assets for WRL GE/Scottish Equitable International Equity;
and 1.30% of the average daily net assets of WRL GE U.S. Equity. In 1998, WRL
Management reimbursed WRL GE/Scottish Equitable International Equity in the
amount of $127,763, WRL Third Avenue Value in the amount of $14,229, and WRL
J.P. Morgan Real Estate Securities in the amount of $28,275. Without such
reimbursement, the total fund expenses during 1998 for WRL GE/Scottish
Equitable International Equity, WRL Third Avenue Value, and WRL J.P. Morgan
Real Estate Securities would have been 1.96%, 1.13%, and 3.34%, respectively.
See the fund prospectus for a description of the expense limitation applicable
to each portfolio.
WESTERN RESERVE AND THE FIXED ACCOUNT
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WESTERN RESERVE
Western Reserve Life Assurance Co. of Ohio is the insurance company
issuing the Policy. Western Reserve was incorporated under Ohio law on October
1, 1957. We have established the separate account to support the investment
options under this Policy and under other variable life insurance policies we
issue. Our general account supports the fixed account under the Policy. Western
Reserve intends to sell this Policy in all states (except New York), Puerto
Rico, Guam and the District of Columbia.
THE FIXED ACCOUNT
The fixed account is part of Western Reserve's general account. We use
general account assets to support our insurance and annuity obligations other
than those funded by separate accounts. Subject to applicable law, Western
Reserve has sole discretion over the investment of the fixed account's assets.
Western Reserve bears the full investment risk for
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<PAGE>
all amounts contributed to the fixed account. Western Reserve guarantees that
the amounts allocated to the fixed account will be credited interest daily at a
net effective interest rate of at least 4.0%. We will determine any interest
rate credited in excess of the guaranteed rate at our sole discretion. We have
no specific formula for determining interest rates.
Money you place in the fixed account will earn interest compounded daily
at a current interest rate in effect at the time of your allocation. We may
declare current interest rates from time to time. We may declare more than one
interest rate for different money based upon the date of allocation or transfer
to the standard fixed account. When we declare a higher current interest rate
on amounts allocated to the fixed account, we guarantee the higher rate on
those amounts for at least one year (the "guarantee period") unless those
amounts are transferred to the loan reserve. At the end of the guarantee period
we may declare a new current interest rate on those amounts and any accrued
interest thereon. We will guarantee this new current interest rate for another
guarantee period. We credit interest greater than 4.0% during any guarantee
period at our sole discretion. You bear the risk that interest we credit will
not exceed 4.0%.
We allocate amounts from the fixed account for cash withdrawals, transfers
to the subaccounts, or monthly deduction charges on a last in, first out basis
("LIFO") for the purpose of crediting interest.
New Jersey residents: The fixed account is NOT available to you. You may
not direct or transfer any premium payments or cash value to the fixed account.
The fixed account is used solely for Policy loans.
THE FIXED ACCOUNT HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION AND THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE FIXED ACCOUNT.
THE SEPARATE ACCOUNT AND THE PORTFOLIOS
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THE SEPARATE ACCOUNT
The separate account is divided into subaccounts, each of which invests in
shares of a specific portfolio of the fund. These subaccounts buy and sell
portfolio shares at net asset value without any sales charge. Any dividends and
distributions from a portfolio are reinvested at net asset value in shares of
that portfolio.
Income, gains, and losses credited to, or charged against, a subaccount of
the separate account reflect the subaccount's own investment experience and not
the investment experience of our other assets. The separate account's assets
may not be used to pay any of our liabilities other than those arising from the
Policies. If the separate account's assets exceed the required reserves and
other liabilities, we may transfer the excess to our general account.
The separate account may include other subaccounts that are not available
under the Policies and are not discussed in this prospectus. We may substitute
another subaccount,
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<PAGE>
portfolio or insurance company separate account under the Policies if, in our
judgment, investment in a subaccount or portfolio would no longer be possible
or becomes inappropriate to the purposes of the Policies, or if investment in
another subaccount or insurance company separate account is in the best
interest of owners. No substitution shall take place without notice to owners
and prior approval of the Securities and Exchange Commission (SEC) and
insurance company regulators, to the extent required by the Investment Company
Act of 1940, as amended (the "1940 Act") and applicable law.
THE FUND
The separate account invests in shares of the fund, a series mutual fund
that is registered with the SEC as an open-ended management investment company.
Such registration does not involve supervision of the management or investment
practices or policies of the fund by the SEC.
Currently, the portfolios of the fund corresponding to the subaccounts of
the separate account are: WRL Alger Aggressive Growth, WRL VKAM Emerging Growth,
WRL Janus Growth, WRL Janus Global, WRL AEGON Bond, WRL LKCM Strategic Total
Return, WRL Federated Growth & Income, WRL J.P. Morgan Money Market, WRL Dean
Asset Allocation, WRL GE U.S. Equity, WRL Third Avenue Value, WRL J.P. Morgan
Real Estate Securities, WRL AEGON Balanced, WRL NWQ Value Equity, WRL C.A.S.E.
Growth, WRL GE/Scottish Equitable International Equity, WRL Goldman Sachs
Growth, WRL Goldman Sachs Small Cap, WRL T. Rowe Price Dividend Growth, WRL T.
Rowe Price Small Cap, WRL Salomon All Cap, WRL Pilgrim Baxter Mid Cap Growth and
WRL Dreyfus Mid Cap. Each portfolio's assets are held separate from the assets
of the other portfolios, and each portfolio has investment objectives and
policies that are different from those of the other portfolios. Thus, each
portfolio operates as a separate investment fund, and the income or losses of
one portfolio has no effect on the investment performance of any other
portfolio. Pending any prior approval by a state insurance regulatory authority,
certain subaccounts and corresponding portfolios may not be available to
residents of some states.
Each portfolio's investment objective(s) and policies are summarized
below. THERE IS NO ASSURANCE THAT ANY OF THE PORTFOLIOS WILL ACHIEVE ITS STATED
OBJECTIVE(S). Certain portfolios may have investment objectives and policies
similar to other portfolios that are managed by the same investment adviser or
manager. The investment results of the portfolios, however, may be higher or
lower than those of such other portfolios. We do not guarantee or make any
representation that the investment results of the portfolios will be comparable
to any other portfolio, even those with the same investment adviser or manager.
15
<PAGE>
You can find more detailed information about the portfolios, including a
description of risks, in the fund prospectus. You should read the fund
prospectus carefully.
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISER INVESTMENT OBJECTIVE
- --------- ----------- --------------------
<S> <C> <C> <C> <C>
WRL ALGER -> Fred Alger -> Seeks long-term capital
AGGRESSIVE Management, Inc. appreciation.
GROWTH (FORMERLY
AGGRESSIVE
GROWTH)
WRL VKAM -> Van Kampen -> Seeks capital appreciation by
EMERGING Asset Management Inc. investing primarily in common
GROWTH (FORMERLY stocks of small and medium-sized
EMERGING GROWTH companies.
WRL JANUS -> Janus Capital -> Seeks growth of capital.
GROWTH (FORMERLY Corporation
GROWTH)
WRL JANUS -> Janus Capital -> Seeks long-term growth of capital
GLOBAL (FORMERLY Corporation in a manner consistent with the
GLOBAL) preservation of capital.
WRL AEGON -> AEGON USA -> Seeks the highest possible current
BOND (FORMERLY Investment income within the confines of the
BOND) Management, Inc. primary goal of insuring the
protection of capital.
WRL LKCM -> Luther King Capital -> Seeks to provide current income,
STRATEGIC Management long-term growth of income and
TOTAL RETURN Corporation capital appreciation.
(FORMERLY
STRATEGIC TOTAL
RETURN)
WRL FEDERATED -> Federated Investment -> Seeks total return by investing in
GROWTH & INCOME Counseling securities that have defensive
(FORMERLY GROWTH characteristics.
& INCOME)
WRL J.P. MORGAN -> J.P. Morgan Investment -> Seeks to obtain maximum current
MONEY MARKET Management Inc. income consistent with the
(FORMERLY MONEY preservation of principal and
MARKET) maintenance of liquidity.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISER INVESTMENT OBJECTIVE
- --------- ----------- --------------------
<S> <C> <C> <C> <C>
WRL DEAN ASSET -> Dean Investment -> Seeks preservation of capital and
ALLOCATION Associates competitive investment returns.
(FORMERLY TACTICAL
ASSET ALLOCATION)
WRL GE U.S. -> GE Investment -> Seeks long-term growth of capital.
EQUITY Management
(FORMERLY Incorporated
U.S. EQUITY)
WRL THIRD -> EQSF Advisers, Inc. -> Seeks long-term capital
AVENUE VALUE appreciation.
(FORMERLY THIRD
AVENUE VALUE)
WRL J.P. MORGAN -> J.P. Morgan Investment -> Seeks long-term total return from
REAL ESTATE Management Inc. investments primarily in equity
SECURITIES securities of real estate companies.
(FORMERLY REAL Total return will consist of
ESTATE SECURITIES) realized and unrealized capital
gains and losses plus income.
WRL AEGON -> AEGON USA -> Seeks preservation of capital,
BALANCED Investment reduced volatility, and superior
(FORMERLY Management, Inc. long-term risk-adjusted returns.
BALANCED)
WRL NWQ VALUE -> NWQ Investment -> Seeks to achieve maximum,
EQUITY (FORMERLY Management consistent total return with
VALUE EQUITY) Company, Inc. minimum risk to principal.
WRL C.A.S.E. -> C.A.S.E. -> Seeks annual growth of capital
GROWTH (FORMERLY Management, Inc. through investment in companies
C.A.S.E. GROWTH) whose management, financial
resources and fundamentals appear
attractive on a scale measured
against each company's present
value.
WRL GE/SCOTTISH -> Scottish Equitable -> Seeks long-term growth of capital.
EQUITABLE Investment Management
INTERNATIONAL Limited and GE
EQUITY (FORMERLY Investment Management
INTERNATIONAL Incorporated
EQUITY)
WRL GOLDMAN -> Goldman Sachs Asset -> Seeks long-term growth of capital.
SACHS GROWTH* Management, Inc.
WRL GOLDMAN -> Goldman Sachs Asset -> Seeks long-term growth of capital.
SACHS SMALL CAP* Management, Inc.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISER INVESTMENT OBJECTIVE
- --------- ----------- --------------------
<S> <C> <C> <C> <C>
WRL T. ROWE -> T. Rowe Price -> Seeks to provide an increasing
PRICE DIVIDEND Associates, Inc. level of dividend income,
GROWTH* long-term capital appreciation and
reasonable current income through
investments primarily in dividend
paying stocks.
WRL T. ROWE -> T. Rowe Price -> Seeks long-term growth of capital
PRICE SMALL CAP* Associates, Inc. by investing primarily in common
stocks of small growth companies.
WRL SALOMON -> Salomon Brothers Asset -> Seeks capital appreciation.
ALL CAP* Management, Inc.
WRL PILGRIM -> Pilgrim Baxter & -> Seeks capital appreciation.
BAXTER MID CAP Associates, Ltd.
GROWTH*
WRL DREYFUS -> The Dreyfus -> Seeks total investment returns
MID CAP* Corporation (including capital appreciation and
income), which consistently
outperform the S&P 400 Mid Cap
Index.
</TABLE>
* SUBJECT TO STATE APPROVALS, THESE PORTFOLIOS WILL BE AVAILABLE FOR
ALLOCATIONS OF NET PREMIUMS AND CASH VALUE ON OR ABOUT JULY 1, 1999. PLEASE
CONTACT YOUR AGENT FOR INFORMATION REGARDING AVAILABILITY.
WRL Management, located at 570 Carillon Parkway, St. Petersburg, Florida
33716, a wholly-owned subsidiary of Western Reserve, serves as investment
adviser to the fund and manages the fund in accordance with policies and
guidelines established by the fund's Board of Directors. For certain
portfolios, WRL Management has engaged investment sub-advisers to provide
portfolio management services. WRL Management and each investment sub-adviser
are registered investment advisers under the Investment Advisers Act of 1940,
as amended. See the fund prospectus for more information regarding WRL
Management and the investment sub-advisers.
In addition to the separate account, shares of the fund are also sold to
other separate accounts that we (or our affiliates) establish to support
variable annuity contracts and variable life insurance policies. It is possible
that, in the future, it may become disadvantageous for variable life insurance
separate accounts and variable annuity separate accounts to invest in the fund
simultaneously. Neither we nor the fund currently foresee any such
disadvantages, either to variable life insurance policyowners or to variable
annuity contract owners. However, the fund's Board of Directors will monitor
events in order to identify any material conflicts between the interests of
such variable life insurance policyowners and variable annuity contract owners,
and will determine what action, if any, it should take. Such action could
include the sale of the fund's shares by one or more of the separate accounts,
which could have adverse consequences. Material conflicts could result from,
for example,
18
<PAGE>
(1) changes in state insurance laws, (2) changes in federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contract owners.
If the fund's Board of Directors were to conclude that separate funds
should be established for variable life insurance and variable annuity separate
accounts, Western Reserve will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contract owners would no longer
have the economies of scale resulting from a larger combined fund.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
We reserve the right to transfer separate account assets to another
separate account that we determine to be associated with the class of contracts
to which the Policy belongs. We also reserve the right, subject to compliance
with applicable law, to add to, delete from, or substitute the investments that
are held by any subaccount, or that any subaccount may purchase. We will only
add, delete or substitute shares of another portfolio of the fund (or of
another open-end, registered investment company) if the shares of a portfolio
are no longer available for investment, or if in our judgement further
investment in any portfolio would become inappropriate in view of the purposes
of the separate account. We will not add, delete or substitute any shares
attributable to your interest in a subaccount without notice to and prior
approval of the SEC, to the extent required by the 1940 Act or other applicable
law. We may also decide to purchase for the separate account securities from
other portfolios.
We also reserve the right to establish additional subaccounts of the
separate account, each of which would invest in a new portfolio of the fund, or
in shares of another investment company, with a specified investment
objectives. We may establish new subaccounts when, in our sole discretion,
marketing, tax or investment conditions warrant. We will make any new
subaccounts available to existing owners on a basis we determine. We may also
eliminate one or more subaccounts for the same reasons as stated above.
In the event of any such substitution or change, we may make such changes
in this and other policies as may be necessary or appropriate to reflect such
substitution or change. If we deem it to be in the best interests of persons
having voting rights under the Policies, and when permitted by law, the
separate account may be (1) operated as a management company under the 1940
Act, (2) deregistered under the 1940 Act in the event such registration is no
longer required, (3) managed under the direction of a committee, or (4)
combined with one or more other separate accounts, or subaccounts.
PLEASE READ THE ATTACHED FUND PROSPECTUS TO OBTAIN MORE COMPLETE INFORMATION
REGARDING THE PORTFOLIOS.
YOUR RIGHT TO VOTE PORTFOLIO SHARES
Even though we are the legal owner of the portfolio shares held in the
subaccounts, and have the right to vote on all matters submitted to
shareholders of the portfolios, we will vote our shares only as policyowners
instruct, so long as such action is required by law.
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<PAGE>
Before a vote of a portfolio's shareholders occurs, you will receive
voting materials from us. We will ask you to instruct us on how to vote and to
return your proxy to us in a timely manner. You will have the right to instruct
us on the number of portfolio shares that corresponds to the amount of cash
value you have in that portfolio (as of a date set by the portfolio).
If we do not receive voting instructions on time from some policyowners,
we will vote those shares in the same proportion as the timely voting
instructions we receive. Should federal securities laws, regulations and
interpretations change, we may elect to vote portfolio shares in our own right.
If required by state insurance officials, or if permitted under federal
regulation, we may disregard certain owner voting instructions. If we ever
disregard voting instructions, we will send you a summary in the next annual
report to policyowners advising you of the action and the reasons we took such
action.
THE POLICY
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PURCHASING A POLICY
To purchase a Policy, you must submit a completed application and an
initial premium to us. You may also send the application and initial premium to
us through any licensed life insurance agent who is also a registered
representative of a broker-dealer having a selling agreement with AFSG
Securities Corporation, the principal underwriter for the Policy.
Our address for applications submitted by World Marketing Alliance
distribution systems is:
Western Reserve
P.O. Box 628069
Orlando, Florida 32862-8069
Everyone else should submit applications to:
Western Reserve
P.O. Box 628078
Orlando, Florida 32862-8078
We determine the specified amount for a Policy based on the initial
premium paid and other characteristics of the proposed insured(s), such as age,
gender and rate class. Our current minimum specified amount for a Policy for
issue ages 0-45 is generally $50,000. It declines to $25,000 for issue ages
46-80. We will generally only issue a Policy to you if you provide sufficient
evidence that the insured meets our insurability standards. Your application is
subject to our underwriting rules, and we may reject any application for any
reason permitted by law. We will not issue a Policy to you if the insured is
over age 80. The insured must be insurable and acceptable to us under our
underwriting rules on the
later of:
o the date of your application; or
o the date the insured completes all of the medical tests and
examinations that we require.
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UNDERWRITING STANDARDS
This Policy uses mortality tables that distinguish between men and women.
As a result, the Policy pays different benefits to men and women of the same
age. Montana prohibits our use of actuarial tables that distinguish between men
and women to determine premiums and policy benefits for policies issued on the
lives of its residents. Therefore, we will base the premiums and benefits in
Policies that we issue in Montana, to insure residents of that state, on
actuarial tables that do not differentiate on the basis of gender.
Your cost of insurance charge will depend on the insured's rate class. We
currently place insureds into the following standard rate classes:
o ultimate select, non-tobacco use;
o select, non-tobacco use;
o ultimate standard, tobacco use; and
o standard, tobacco use.
We also place insureds in various sub-standard rate classes, which involve
a higher mortality risk and higher charges. We generally charge higher rates
for insureds who use tobacco. We charge lower cost of insurance rates for
insureds who are in an "ultimate class." An ultimate class is only available if
our underwriting guidelines require you to take a blood test at your proposed
age.
WHEN INSURANCE COVERAGE TAKES EFFECT
Insurance coverage under the Policy will take effect only if the insured(s)
is alive and in the same condition of health as described in the application
when the Policy is delivered to the owner, and if the initial premium is paid.
CONDITIONAL INSURANCE COVERAGE. If you pay the full initial premium listed
in the conditional receipt attached to the application, and we deliver the
conditional receipt to you, you will have conditional insurance coverage under
the terms of the conditional receipt. Conditional insurance coverage is void if
the check or draft you gave us to pay the initial premium is not honored when
we first present it for payment.
THE AMOUNT OF o the specified amount applied for; or
CONDITIONAL INSURANCE o $300,000
COVERAGE IS THE LESSER OF: reduced by all amounts payable under all
life insurance applications that the insured
has pending with us.
CONDITIONAL LIFE INSURANCE o the date of your application; or
COVERAGE BEGINS ON THE o the date the insured completes all of the
LATER OF: medical tests and examinations that we
require; or
o the date of issue, if any, requested in
the application.
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CONDITIONAL LIFE INSURANCE o the date we determine the insured has
COVERAGE TERMINATES satisfied our underwriting requirements
AUTOMATICALLY ON THE and the insurance applied for takes effect
EARLIEST OF: (the Policy date); or
o 60 days from the date the application was
completed; or
o the date we determine that any person
proposed for insurance in the application
is not insurable according to our rules,
limits and standards for the plan, amount
and rate class shown in the application;
or
o the date we modify the plan, amount,
riders and/or the premium rate class shown
in the application, or any supplemental
agreements; or
o the date we mail notice of the ending of
coverage and we refund the first premium
to the applicant at the address shown on
the application.
SPECIAL LIMITATIONS OF THE o the conditional receipt will be VOID:
CONDITIONAL RECEIPT: -> if not signed by an authorized agent of
Western Reserve; or
-> in the event the application contains
any fraud or material
misrepresentation; or
-> if, on the date of the conditional
receipt, the proposed insured is under
15 days of age or over 80 years of age.
o the conditional receipt does not provide
benefits for disability and accidental
death benefits.
o the conditional receipt does not provide
benefits if any proposed insured commits
suicide. In this case, Western Reserve's
liability will be limited to return of the
first premium paid with the application.
FULL INSURANCE COVERAGE AND ALLOCATION OF NET PREMIUMS. Once we determine
that the insured meets our underwriting requirements, full insurance coverage
will begin and we will begin to make the monthly deductions from your net
premium. This date is the Policy date. On the Policy date, we will allocate
your initial net premium, less the monthly deductions, to the WRL J.P. Morgan
Money Market subaccount. On the record date, which is the date we record your
Policy on our books as an in force Policy, we will allocate your cash value
from the WRL J.P. Morgan Money Market subaccount to the accounts you elect on
your application.
On any day we credit net premiums or transfer cash value to a subaccount,
we will convert the dollar amount of the net premium (or transfer) into
subaccount units at the unit value for that subaccount, determined at the end
of the day. We will credit amounts to the subaccounts only on a valuation date,
that is, on a date the New York Stock Exchange ("NYSE") is open for trading.
See Policy Values p. 27.
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OWNERSHIP RIGHTS
The Policy belongs to the owner named in the application. The owner may
exercise all of the rights and options described in the Policy. The owner is
the insured unless the application specifies a different person as the insured.
If the owner dies before the insured and no contingent owner is named, then
ownership of the Policy will pass to the owner's estate. The owner may exercise
certain rights described below.
CHANGING THE o Change the owner by providing written notice to us at
OWNER any time while the insured is alive and the Policy is in
force.
o Change is effective as of the date that the written
notice is signed.
o Changing the owner does not automatically change the
beneficiary.
o Changing the owner may have tax consequences. You should
consult a tax advisor before changing the owner.
o We are not liable for payments we made before we
received the written notice.
CHOOSING THE o The owner designates the beneficiary (the person to
BENEFICIARY receive the death benefit when the insured dies) in the
application.
o If the owner designates more than one beneficiary, then
each beneficiary shares equally in any death benefit
proceeds unless the beneficiary designation states
otherwise.
o If the beneficiary dies before the insured, then any
contingent beneficiary becomes the beneficiary.
o If both the beneficiary and contingent beneficiary die
before the insured, then the death benefit will be paid
to the owner or the owner's estate upon the insured's
death.
CHANGING THE o The owner changes the beneficiary by providing us with a
BENEFICIARY written notice.
o Change is effective as of the date the owner signs the
written notice.
o We are not liable for any payments we made before we
received the written notice.
ASSIGNING THE o The owner may assign Policy rights while the insured is
POLICY alive.
o The owner retains any ownership rights that are not
assigned.
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o Assignee may not change the owner or the beneficiary,
and may not elect or change an optional method of
payment. Any amount payable to the assignee will be paid
in a lump sum.
o Claims under any assignment are subject to proof of
interest and the extent of the assignment.
o We are not:
-> bound by any assignment unless we receive a
written notice of the assignment
-> responsible for the validity of any assignment
-> liable for any payment we made before we received
written notice of the assignment
-> bound by any assignment which results in adverse
tax consequences to the owner, insured(s) or
beneficiary(ies)
o Assigning the Policy may have tax consequences. You
should consult a tax advisor before assigning the
Policy.
CANCELING A POLICY
You may cancel a Policy for a refund during the "free-look period" by
returning it to our office, to one of our branch offices or to the agent who
sold you the Policy. The free-look period expires 10 days after you receive the
Policy. In some states you may have more than 10 days. If you decide to cancel
the Policy during the free-look period, we will treat the Policy as if it had
never been issued. We will pay the refund within seven days after we receive
the returned Policy. The amount of the refund will be:
o any charges and taxes we deduct from your premiums; PLUS
o any monthly deductions or other charges we deducted from amounts you
allocated to the subaccounts and the fixed account; PLUS
o your cash value in the subaccounts and the fixed account on the date
we (or our agent) receive the returned Policy.
Some states may require us to refund the premiums you paid.
PREMIUMS
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PREMIUM FLEXIBILITY
You generally have flexibility to determine the frequency and the amount of
the premiums you pay. Unlike conventional insurance policies, you do not have to
pay your premiums according to a rigid and inflexible premium schedule. Before
we issue the Policy to you, we may require you to pay a premium at least equal
to a minimum monthly guarantee premium set forth in your Policy. Thereafter
(subject to the limitations described below), you may make unscheduled premium
payments at any time and in any amount. Under some circumstances, you may be
required to pay extra premiums to prevent a lapse. Your minimum monthly
guarantee premium may change if you request a change in your Policy. If this
happens, we will notify you of the new minimum monthly guarantee premium.
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PLANNED PERIODIC PAYMENTS
You will determine a planned periodic payment schedule which allows you to
pay level premiums at fixed intervals over a specified period of time. You are
not required to pay premiums according to this schedule. You may change the
amount, frequency, and the time period over which you make your planned
periodic payments.
Even if you make your planned periodic payments on schedule, your Policy
may still lapse. The duration of your Policy depends on the Policy's net
surrender value. If the net surrender value is not high enough to pay the
monthly deduction (and your no lapse period expired) then your Policy will
lapse (unless you make the payment we specify during the 61-day grace period).
See Policy Lapse and Reinstatement p. 48.
NO LAPSE PERIOD
Until the no lapse date that is provided in your Policy, your Policy will
remain in force and no grace period will begin, even if your net surrender
value is too low to pay the monthly deduction, so long as:
o the total amount of the premiums you paid (minus any withdrawals,
outstanding loans, and any pro rata decrease charge) is equal to or
exceeds:
-> the minimum monthly guarantee premium stated in your Policy,
MULTIPLIED BY
-> the number of months since the Policy date, including the current
month.
PREMIUM LIMITATIONS
Premium payments must be at least $50 ($1,000 if by wire). We may return
premiums less than $50. We will not allow you to make any premium payments that
would cause the total amount of the premiums you pay to exceed the current
maximum premium limitations which qualify the Policy as life insurance
according to federal tax laws. This maximum is set forth in your Policy. If you
make a payment that would cause your total premiums to be greater than the
maximum premium limitations, we will return the excess portion of the premium
payment. We will not allow you to make additional premium payments until they
are allowed by the maximum premium limitations.
MAKING PREMIUM PAYMENTS
We will consider any payments you make to be premium payments, unless you
clearly mark them as loan repayments. We will deduct certain charges from your
premium payments (see Premium Expense Charge p. 34). We will accept premium
payments by wire transfer. If you wish to make payments by wire transfer, you
should instruct your bank to wire federal funds to us. Please contact us at
1-800-851-9777 for complete wire instructions.
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TAX-FREE EXCHANGES ("1035 Exchanges"). We will accept as part of your
initial premium money from one contract that qualifies for a tax-free exchange
under Section 1035 of the Internal Revenue Code. If you contemplate such an
exchange, you should consult a competent tax advisor to learn the potential tax
effects of such a transaction.
Subject to our underwriting requirements, we will permit you to make one
additional cash payment within three business days of our receipt of the
proceeds from the 1035 Exchange before we determine your Policy's specified
amount.
ALLOCATING PREMIUMS
You must instruct us on how to allocate your net premium among the
subaccounts and the fixed account. (New Jersey residents: The fixed account is
NOT available to you. You may not direct or transfer any money to the fixed
account.) You must follow these guidelines:
o Allocation percentages must be in whole numbers;
o If you select dollar cost averaging, you must have at least $5,000 in
each subaccount from which we will make transfers and you must
transfer at least a total of $100 monthly; and
o If you select asset rebalancing, the cash value of your Policy, if an
existing Policy, or your minimum initial premium, if a new Policy,
must be at least $5,000.
You may change the allocation instructions for additional premium payments
without charge at any time by writing us or calling us at 1-800-851-9777. Upon
instructions from you, the registered representative/agent of record for your
Policy may also change your allocation instructions for you. In the future, we
may decide that the minimum amount you can allocate to a particular subaccount
is 10% of a net premium payment (currently not required). We reserve the right
to limit the number of premium allocation changes or to charge $25 for each
change in excess of one per calendar quarter.
Whenever you direct money into a subaccount, we will credit your Policy
with the number of units for that subaccount that can be bought for the dollar
payment. We price each subaccount unit using the unit value determined at the
end of the day after the closing of the NYSE (usually at 4:00 p.m. Eastern
time). We will credit amounts to the subaccounts only on a valuation date, that
is, on a date the NYSE is open for trading. See Policy Values below. Your cash
value will vary with the investment experience of the subaccounts in which you
invest. YOU BEAR THE INVESTMENT RISK FOR AMOUNTS YOU ALLOCATE TO THE
SUBACCOUNTS.
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You should periodically review how your cash value is allocated among the
subaccounts and the fixed account because market conditions and your overall
financial objectives may change.
POLICY VALUES
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CASH VALUE o serves as the starting point for calculating values under
a Policy.
o equals the sum of all values in each subaccount and the
fixed account.
o is determined on the Policy date and on each valuation
date.
o has no guaranteed minimum amount and may be more or less
than premiums paid.
NET SURRENDER VALUE
The net surrender value is the amount we pay when you surrender your
Policy. We determine the net surrender value at the end of the valuation period
when we receive your written surrender request.
NET SURRENDER o the cash value as of such date; MINUS
VALUE ON ANY o any surrender charge as of such date; MINUS
VALUATION DATE o any outstanding Policy loan(s); PLUS
EQUALS: o any interest you paid in advance on the loan(s) for
the period between the date of the surrender and the
next Policy anniversary.
SUBACCOUNT VALUE
Each subaccount's value is the cash value in that subaccount. At the end
of any valuation period, the subaccount's value is equal to the number of units
that the Policy has in the subaccount, multiplied by the unit value of that
subaccount.
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THE NUMBER OF o the initial units purchased at unit value on the Policy
UNITS IN ANY date; PLUS
SUBACCOUNT ON o units purchased with additional net premium(s); PLUS
ANY VALUATION o units purchased via transfers from another subaccount
DATE EQUALS: or the fixed account; MINUS
o units redeemed to pay for monthly deductions; MINUS
o units redeemed to pay for partial withdrawals; MINUS
o units redeemed as part of a transfer to another
subaccount or the fixed account; MINUS
o units redeemed to pay any pro rata decrease charge.
Every time you allocate, transfer or withdraw money to or from a
subaccount, we convert that dollar amount into units. We determine the number
of units we credit to, or subtract from, your Policy by dividing the dollar
amount of the allocation, transfer or cash withdrawal by the unit value for
that subaccount at the end of the valuation period.
SUBACCOUNT UNIT VALUE
The value (or price) of each subaccount unit will reflect the investment
performance of the portfolio in which the subaccount invests. Unit values will
vary among subaccounts. The unit value of each subaccount was originally
established at $10 per unit. The unit value will increase or decrease from one
valuation period to the next.
THE UNIT VALUE o the total value of the portfolio shares held in the
OF ANY subaccount, determined by multiplying the number of
SUBACCOUNT AT portfolio shares owned by the subaccount times the
THE END OF A portfolio's net asset value per share determined at
VALUATION the end of the valuation period; MINUS
PERIOD o a deduction for the mortality and expense risk
IS CALCULATED AS: charge; MINUS
o the accrued amount of reserve for any taxes or
other economic burden resulting from applying tax
laws that we determine to be properly attributable
to the subaccount; AND THE RESULT DIVIDED BY
o the number of outstanding units in the subaccount.
The portfolio in which any subaccount invests will determine its net asset
value per share once daily, as of the close of the regular business session of
the NYSE (usually 4:00 p.m. Eastern time), which coincides with the end of each
valuation period.
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FIXED ACCOUNT VALUE
On the record date, the fixed account value is equal to the cash value
allocated to the fixed account from the WRL J.P. Morgan Money Market
subaccount.
THE FIXED ACCOUNT o the sum of net premium(s) allocated to the fixed
VALUE AT THE END OF PLUS account;
ANY VALUATION o any amounts transferred to the fixed account;
PERIOD IS EQUAL TO: PLUS
o total interest credited to the fixed account;
MINUS
o amounts charged to pay for monthly deductions;
MINUS
o amounts withdrawn or surrendered from the fixed
account; MINUS
o amounts transferred from the fixed account to a
subaccount; MINUS
o amounts withdrawn from the fixed account to pay
any pro rata decrease charge incurred due to a
decrease in specified amount.
New Jersey residents: The fixed account value at the end of any valuation
period is equal to:
o any amounts transferred from a subaccount to the fixed account to
establish a loan reserve; PLUS
o total interest credited to the loan reserve.
TRANSFERS
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GENERAL
You or your agent/registered representative of record may make transfers
among the subaccounts or from the subaccounts to the fixed account. We
determine the amount you have available for transfers at the end of the
valuation period when we receive your transfer request. WE MAY MODIFY OR REVOKE
THE TRANSFER PRIVILEGE AT ANY TIME. The following features apply to transfers
under the Policy:
/checkmark/ You may make an unlimited number of transfers in a Policy year
among the subaccounts.
/checkmark/ You may make one transfer from the fixed account in a Policy
year.
/checkmark/ You may request transfers in writing (in a form we accept), by
fax or by telephone.
/checkmark/ There is no minimum amount that must be transferred.
/checkmark/ There is no minimum amount that must remain in a subaccount
after a transfer.
/checkmark/ We deduct a $25 charge from the amount transferred for each
transfer in excess of 12 transfers in a Policy year.
/checkmark/ We consider all transfers made in any one day to be a single
transfer.
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/checkmark/ Transfers resulting from loans, conversion rights, reallocation
of cash value immediately after the record date, and transfers
from the fixed account are NOT treated as transfers for the
purpose of the transfer charge.
/checkmark/ Transfers under dollar cost averaging and asset rebalancing are
treated as transfers for purposes of the transfer charge.
The Policy's transfer privilege is not intended to afford policyowners a
way to speculate on short-term movements in the market. Excessive use of the
transfer privilege can disrupt the management of the portfolios and increase
transaction costs. Accordingly, we have established a policy of limiting
excessive transfer activity. We will limit transfer activity to two substantive
transfers (at least 30 days apart) from each portfolio, except from WRL J.P.
Morgan Money Market. We interpret "substantive" to mean either a dollar amount
large enough to have a negative impact on a portfolio's operations or a series
of movements between portfolios. We will not limit non-substantive transfers.
Your Policy, as applied for and issued, will automatically receive
telephone transfer privileges unless you provide other instructions. The
telephone transfer privileges allow you to give authority to the registered
representative or agent of record for your Policy to make telephone transfers
and to change the allocation of future payments among the subaccounts and the
fixed account on your behalf according to your instructions. To make a
telephone transfer, you may call 1-800-851-9777 or fax your instructions to
727-299-1667.
Please note the following regarding telephone or fax transfers:
-> We are not liable for any loss, damage, cost or expense from complying
with telephone instructions we reasonably believe to be authentic. You
bear the risk of any such loss.
-> We will employ reasonable procedures to confirm that telephone
instructions are genuine.
-> Such procedures may include requiring forms of personal identification
prior to acting upon telephone instructions, providing written
confirmation of transactions to owners, and/or tape recording
telephone instructions received from owners.
-> We may also require written confirmation of your request.
-> If we do not employ reasonable confirmation procedures, we may be
liable for losses due to unauthorized or fraudulent instructions.
-> If you do not want the ability to make telephone transfers, you should
notify us in writing.
-> Telephone or fax requests must be received before 4:00 p.m. Eastern
time to assure same-day pricing of the transaction.
-> We will not be responsible for any transmittal problems when you fax
us your request unless you report it to us within five business days
and send us proof of your fax transmittal.
-> We may discontinue this option at any time.
We will process any transfer request we receive before the NYSE closes
(usually 4:00 p.m Eastern time) using the subaccount unit value determined at
the end of that session of
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the NYSE. If we receive the transfer request after the NYSE closes, we will
process the request using the subaccount unit value determined at the close of
the next regular business session of the NYSE.
FIXED ACCOUNT TRANSFERS
You may make one transfer per Policy year from the fixed account unless you
select dollar cost averaging from the fixed account. We reserve the right to
require that you make the transfer request in writing. We must receive the
transfer request no later than 30 days after a Policy anniversary. We will make
the transfer on the date we receive the written request. The maximum amount you
may transfer is the greater of:
-> 25% of the amount in the fixed account, or
-> the amount you transferred from the fixed account in the immediately
prior Policy year.
New Jersey residents: The fixed account is NOT available to you. You may
not direct or transfer any money to the fixed account.
CONVERSION RIGHTS
If within 24 months of your Policy date, you transfer all of your
subaccount values to the fixed account, then we will not charge you a transfer
fee, even if applicable. You must make your request in writing.
DOLLAR COST AVERAGING
Dollar cost averaging is an investment strategy designed to reduce the
investment risks associated with market fluctuations. The strategy spreads the
allocation of your premium into the subaccounts over a period of time. This
potentially allows you to reduce the risk of investing most of your premium
into the subaccounts at a time when prices are high. The success of this
strategy is not assured and depends on market trends. You should carefully
consider your financial ability to continue the program over a long enough
period of time to purchase units when their value is low as well as when it is
high. We make no guarantee that dollar cost averaging will result in a profit
or protect you against loss.
Under dollar cost averaging, we automatically transfer a set dollar amount
from the WRL J.P. Morgan Money Market subaccount, the WRL AEGON Bond
subaccount, the fixed account, or any combination of these to a subaccount that
you choose. We will make the transfers monthly as of the end of the valuation
date. We will make the first transfer in the month after we receive your
request, provided that we receive the form by the 25th day of the month.
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TO START DOLLAR COST -> you must submit a completed form to us
AVERAGING: requesting dollar cost averaging;
-> you must have at least $5,000 in each account
from which we will make transfers;
-> your total transfers each month under dollar
cost averaging must be at least $100; and
-> each month, you may not transfer more than
one-tenth of the amount that was in your fixed
account at the beginning of dollar cost
averaging.
There is no charge for dollar cost averaging. However, each transfer under
dollar cost averaging counts towards your 12 free transfers each year.
DOLLAR -> we receive your request to cancel your
COST AVERAGING participation;
WILL TERMINATE IF: -> the value in the accounts from which we make the
transfers is depleted;
-> you elect to participate in the asset rebalancing
program; OR
-> you elect to participate in any asset allocation
services provided by a third party.
We may modify, suspend, or discontinue dollar cost averaging at any time.
ASSET REBALANCING PROGRAM
We also offer an asset rebalancing program under which you may transfer
amounts periodically to maintain a particular percentage allocation among the
subaccounts. Cash value allocated to each subaccount will grow or decline in
value at different rates. The asset rebalancing program automatically
reallocates the cash value in the subaccounts at the end of each period to
match your Policy's currently effective premium allocation schedule. Cash value
in the fixed account and the dollar cost averaging program is not available for
this program. This program does not guarantee gains. A subaccount may still
have losses.
You may elect asset rebalancing to occur on each quarterly, semi-annual or
annual anniversary of the Policy date. Once we receive the asset rebalancing
request form, we will effect the initial rebalancing of cash value on the next
such anniversary, in accordance with the Policy's current premium allocation
schedule. We will credit the amounts transferred at the unit value next
determined on the dates the transfers are made. If a day on which rebalancing
would ordinarily occur falls on a day on which the NYSE is closed, rebalancing
will occur on the next day the NYSE is open.
TO START -> you must submit a completed asset rebalancing
ASSET REBALANCING: request form to us before the maturity date; and
-> you must have a minimum cash value of $5,000 or
make a $5,000 initial premium payment.
There is no charge for the asset rebalancing program. However, each
reallocation we make under the program counts towards your 12 free transfers
each year.
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ASSET REBALANCING -> you elect to participate in the dollar cost
WILL CEASE IF: averaging program;
-> we receive your request to discontinue
participation;
-> you make ANY transfer to or from any subaccount
other than under a scheduled rebalancing; OR
-> you elect to participate in any asset allocation
services provided by a third party.
You may start and stop participating in the asset rebalancing program at
any time; but we may restrict your right to re-enter the program to once each
Policy year. If you wish to resume the asset rebalancing program, you must
complete a new request form. We may modify, suspend, or discontinue the asset
rebalancing program at any time.
THIRD PARTY ASSET ALLOCATION SERVICES
We may provide administrative or other support services to independent
third parties you authorize to conduct transfers on your behalf, or who provide
recommendations as to how your subaccount values should be allocated. This
includes, but is not limited to, transferring subaccount values among
subaccounts in accordance with various investment allocation strategies that
these third parties employ. These independent third parties may or may not be
appointed Western Reserve agents for the sale of Policies. WESTERN RESERVE DOES
NOT ENGAGE ANY THIRD PARTIES TO OFFER INVESTMENT ALLOCATION SERVICES OF ANY
TYPE, SO THAT PERSONS OR FIRMS OFFERING SUCH SERVICES DO SO INDEPENDENT FROM
ANY AGENCY RELATIONSHIP THEY MAY HAVE WITH WESTERN RESERVE FOR THE SALE OF
POLICIES. WESTERN RESERVE THEREFORE TAKES NO RESPONSIBILITY FOR THE INVESTMENT
ALLOCATIONS AND TRANSFERS TRANSACTED ON YOUR BEHALF BY SUCH THIRD PARTIES OR
ANY INVESTMENT ALLOCATION RECOMMENDATIONS MADE BY SUCH PARTIES. Western Reserve
does not currently charge you any additional fees for providing these support
services. Western Reserve reserves the right to discontinue providing
administrative and support services to owners utilizing independent third
parties who provide investment allocation and transfer recommendations.
CHARGES AND DEDUCTIONS
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This section describes the charges and deductions that we make under the
Policy to compensate for: (1) the services and benefits we provide; (2) the
costs and expenses we incur; and (3) the risks we assume.
SERVICES AND BENEFITS WE o the death benefit, cash and loan benefits;
PROVIDE UNDER THE POLICY: o investment options, including premium
allocations;
o administration of elective options; and
o the distribution of reports to owners.
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COSTS AND EXPENSES o costs associated with processing and underwriting
WE INCUR: applications;
o expenses of issuing and administering the Policy
(including any Policy riders);
o overhead and other expenses for providing services
and benefits, sales commissions and marketing
expenses; and
o other costs of doing business, such as collecting
premiums, maintaining records, processing claims,
effecting transactions, and paying federal, state
and local premium and other taxes and fees.
RISKS WE ASSUME: o that the charges we may deduct may be insufficient
to meet our actual claims because insureds die
sooner than we estimate; and
o that the costs of providing the services and
benefits under the Policies may exceed the charges
we are allowed to deduct.
PREMIUM CHARGES
Before we allocate the net premiums you make, we will deduct the following
charges.
PREMIUM EXPENSE o This charge equals:
CHARGE -> 6.0% of premiums during the first ten
Policy years; and
-> 2.5% of premiums thereafter.
o This charge compensates us for distribution
expenses and state premium taxes.
PREMIUM COLLECTION o This charge equals $3.00 per premium payment.
CHARGE o This charge compensates us for premium billing and
collection costs.
o We will not increase this charge.
MONTHLY DEDUCTION
We take a monthly deduction from the cash value on the Policy date and on
each monthly anniversary. We deduct this charge from each subaccount and the
fixed account in accordance with the current premium allocation instructions.
If the value of any account is insufficient to pay that account's portion of
the monthly deduction, we will take the monthly deduction on a pro rata basis
from all accounts (i.e., in the same proportion that the value in each
subaccount and the fixed account bears to the total cash value on the
Monthiversary). Because portions of the monthly deduction (such as cost of
insurance) can vary monthly, the monthly deduction will also vary.
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MONTHLY DEDUCTION The total we deduct each month is equal to:
o the monthly policy charge; PLUS
o the monthly cost of insurance charge; PLUS
o the monthly charge for any riders attached to
the Policy.
MONTHLY POLICY o This charge equals $5.00 each Policy month.
CHARGE o We guarantee this charge will never be more than
$7.50 per month.
o We may waive this charge if you purchase additional
policies.
o This charge compensates us for administrative
expenses such as recordkeeping, processing death
benefit claims and Policy changes, and overhead
costs.
COST OF INSURANCE We deduct this charge each month. It varies each month
CHARGE and is equal to:
o the cost of insurance rates; MULTIPLIED BY
o the net amount at risk for your Policy on the
Monthiversary.
The net amount at risk is equal to:
o the death benefit at the beginning of the
month; DIVIDED BY
o 1.0032737 (this factor reduces the net amount
at risk, for purposes of computing the cost
of insurance, by taking into account assumed
monthly earnings at an annual rate of 4%);
MINUS
o the cash value at the beginning of the month.
We base the cost of insurance rates on the insured's attained age, gender,
and rate class, and the length of time that the Policy has been in force. The
actual monthly cost of insurance rates are based on our expectations as to
future mortality experience. The rates will never be greater than the
guaranteed amount stated in your Policy. These guaranteed rates are based on
the 1980 Commissioners Standard Ordinary (C.S.O.) Mortality Tables and the
insured's attained age and rate class. For standard rate classes, these
guaranteed rates will never be greater than the rates in the C.S.O. tables. We
may also guarantee a rate for a specific period of time (E.G. one year). For a
listing of rate classes, see Underwriting Standards p. 21.
We may issue certain Policies on a simplified or expedited basis. The cost
of insurance rates for Policies we issue on this basis will be no higher than
the guaranteed rates for select, non-tobacco use or standard, tobacco use
categories. However, these rates
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may be higher or lower than current rates charged under otherwise identical
Policies that are using standard underwriting criteria.
OPTIONAL INSURANCE RIDERS The monthly deduction will include charges for
any optional insurance benefits you add to your
Policy by rider (see Supplemental Benefits,
p. 57).
MORTALITY AND EXPENSE We deduct a daily charge from your cash value in
RISK CHARGE each subaccount to compensate us for certain
mortality and expense risks we assume. This
charge is equal to:
o your Policy's cash value in each
subaccount MULTIPLIED BY
o the daily pro rata portion of the
annual mortality and expense risk
charge rate of 0.90%.
The annual rate is equal to 0.90% of the average daily net assets of each
subaccount. We intend to reduce this amount to 0.75% after the fifteenth Policy
year, but we do not guarantee that we will do so.
The mortality risk is that an insured will live for a shorter time than we
project. The expense risk is that the expenses that we incur will exceed the
administrative charge limits we set in the Policy.
If this charge does not cover our actual costs, we absorb the loss.
Conversely, if the charge more than covers actual costs, the excess is added to
our surplus. We expect to profit from this charge. We may use any profits to
cover distribution costs.
If you totally surrender your Policy during the first 15 years, we deduct
a surrender charge from your cash value and pay the remaining cash value (less
any outstanding loan amounts) to you. The payment you receive is called the net
surrender value. We reduce the surrender charge at older ages in compliance
with state laws.
THE SURRENDER CHARGE MAY BE SIGNIFICANT. YOU SHOULD CALCULATE THIS CHARGE
CAREFULLY BEFORE YOU CONSIDER A SURRENDER. Under some circumstances the level
of surrender charges might result in no net surrender value available if you
surrender your Policy in the first few Policy years. This will depend on a
number of factors, but is more likely if:
o you pay premiums equal to or not much higher than the minimum monthly
guarantee premium shown in your Policy, and/or
o investment performance is too low.
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SURRENDER CHARGE The surrender charge is equal to:
o the SURRENDER CHARGE PER THOUSAND; multiplied
by
o the number of thousands in the Policy's
specified amount as it is stated in the Policy;
multiplied by
o the SURRENDER CHARGE FACTOR.
The SURRENDER CHARGE PER THOUSAND is calculated for each $1,000 of
specified amount stated in your Policy. It varies with the insured's issue age,
gender and rate classifications. See the surrender charge table, found at
Appendix C.
The SURRENDER CHARGE FACTOR varies with the insured's age and the number of
years the Policy has been in force. For insureds ages 0-39, the surrender charge
factor is equal to 1.00 during Policy years 1-5. It decreases by 0.10 each year
until the fifteenth Policy year when it is zero. If you are older than 39 when
we issue your Policy, the factor is less than 1.00 at the end of the first
Policy year and decreases to zero at the fifteenth Policy year. Factors for the
Builder Plus Program are different than those shown here (see Builder Plus
Program, p. 40). We always determine the surrender charge factor from the Policy
date to the surrender date, regardless of whether there were any prior lapses
and reinstatements.
SURRENDER CHARGE FACTORS
ISSUE AGES 0 - 39
END OF POLICY YEAR* FACTOR
---------------------- -------
At Issue ........... 1.00
1-5 ................ 1.00
6 .................. .90
7 .................. .80
8 .................. .70
9 .................. .60
10 ................. .50
11 ................. .40
12 ................. .30
13 ................. .20
14 ................. .10
15 ................. 0
16+ ................ 0
* The factor on any date other than an anniversary will be interpolated
between the two end of year factors.
o SURRENDER CHARGE EXAMPLE: Assume a male tobacco user purchases the
Policy at Issue Age 35 with a specified amount of $100,000. The Policy
is surrendered in Policy year 5. The surrender charge per thousand is
$16.48. This is multiplied by the surrender charge factor of 1.00
The surrender charge = the surrender charge per thousand ($16.48) X the
number of thousands of initial specified amount
(100) X the surrender charge factor (1.0)
= $1,648.
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PRO RATA DECREASE CHARGE
If you decrease the specified amount during the first 15 Policy years, we
will deduct a pro rata decrease charge from the cash value.
PRO RATA DECREASE CHARGE This charge is equal to:
o the amount of the decrease in specified
amount that you request; MULTIPLIED BY
o the surrender charge per thousand of
specified amount calculated as of the
date of the decrease using your
Policy's specified amount on the Policy
date. (See Appendix C.)
We will not deduct the pro rata decrease charge from the cash value when a
specified amount decrease results from:
o a change in the death benefit option, or
o a withdrawal (when you select death benefit Option A).
We will determine the pro rata decrease charge from the Policy date to the
date of the decrease using the above formula, regardless of whether your Policy
has lapsed and been reinstated, or you have previously decreased your specified
amount.
If we deduct a pro rata decrease charge due to a decrease in specified
amount, we will reduce proportionately any future surrender charges incurred
during the first 15 Policy years. This means that when we calculate the
surrender charge, we will reduce it by an amount equal to the surrender charge
multiplied by the ratio of any prior decreases in the specified amount to the
initial full specified amount. A decrease in specified amount will generally
decrease the insurance protection of the Policy.
TRANSFER CHARGE o We currently allow you to make 12 transfers each year
free from charge.
o We charge $25 for each additional transfer.
o For purposes of assessing the transfer charge, all
transfers made in one day, regardless of the number
of subaccounts affected by the transfer, is
considered a single transfer.
o We deduct the transfer charge from the amount being
transferred.
o Transfers due to loans, exercise of conversion
rights, or from the fixed account do not count as
transfers for the purpose of assessing this charge.
o Transfers under dollar cost averaging and asset
rebalancing are transfers for purposes of this
charge.
o We will not increase this charge.
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CHANGE IN NET o We currently do not charge you if you change your net
PREMIUM ALLOCATION premium allocation. However, in the future we may
CHARGE decide to charge you $25 if you make more than one
change every three months in your allocation
schedule. We will notify you if we decide to impose
this charge.
CASH WITHDRAWAL o When you make a cash withdrawal, we charge a
CHARGE processing fee of $25 or 2% of the amount you
withdraw, whichever is less.
o We deduct this amount from the withdrawal, and we pay
you the balance.
o We will not increase this fee.
TAXES
We currently do not make any deductions for taxes from the separate
account. We may do so in the future if such taxes are imposed by federal or
state agencies.
PORTFOLIO EXPENSES
The portfolios deduct investment charges from the amounts you have
invested in the portfolios. These charges range from 0.40% to 1.50%. See the
Portfolio Annual Expense Table in this prospectus, and the fund prospectus.
GROUP OR SPONSORED POLICIES
We issue a different Policy for group or sponsored arrangements
("Group/Sponsored Policies"). Under Group/Sponsored Policies, a trustee or
employer purchases individual policies covering a group of individuals on a
group basis (E.G. Section 401 employer-sponsored benefit plans and deferred
compensation plans). A sponsored arrangement is where an employer permits a
group solicitation of Policies to its employees or an association permits a
group solicitation of Policies to its members.
We have certain criteria to issue Group/Sponsored Policies. Generally, a
group or sponsored arrangement must be a specific size and must have been in
operation for a number of years. We may reduce certain charges, such as premium
expense charges, the surrender charge, limits on minimum premium and minimum
specified amount, or monthly policy charge, for these Policies. In some cases,
we currently waive the monthly policy charge and reduce the surrender charge.
The amount of the reduction and the criteria for Group/Sponsored Policies will
reflect the reduced sales effort resulting from these sales. Groups or
sponsored arrangements which have been set up solely to purchase Group/
Sponsored Policies or which have been in existence for less than six months
will not qualify. Group/Sponsored Policies may not be available in all states.
Group/Sponsored Policies may be subject to special tax rules and consequences
and other legal restrictions (see Federal Income Tax Considerations, p. 50).
Insurance policies where the benefits vary based on gender may not be used
to fund certain employer-sponsored benefit plans and fringe benefit programs.
Employers should consult tax attorneys before proposing to offer
Group/Sponsored Policies.
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ASSOCIATE POLICIES
We offer an Associate Policy to certain employees, field associates,
directors and their relatives. An Associate Policy may have reduced or waived
premium expense charges, surrender charges, limits on minimum premium and
minimum specified amount, or monthly policy charge. The Associate Policy is
available to:
o our current and retired directors, officers, full-time employees and
registered representatives, and those of our affiliates; current and
retired directors, officers, full-time employees and registered
representatives of AFSG and any broker-dealer with which they have a
sales agreement;
o any trust, pension, profit-sharing or other employee benefit plan of
the foregoing persons or entities;
o current and retired directors, officers, and full-time employees of
the WRL Series Fund, Inc., the IDEX Mutual Funds, and any investment
adviser or sub-adviser thereto; and
o any family member of the above.
We may modify or terminate this arrangement. Associate Policies may not be
available in all states.
BUILDER PLUS PROGRAM(SM)
A Builder Plus Program Policy differs from a standard Policy in the
following ways:
o the initial premium must be at least $10,000, and at least 90% of the
maximum allowable premium;
o our administrative and distribution expenses are lower, so we do not
assess any premium expense charges;
o the underwriting process is shorter and simpler;
o the cost of insurance charges may be different;
o most Builder Plus Program Policies will be modified endowment
contracts (see Federal Income Tax Considerations p. 50); and
o the surrender charge factor applies for a shorter time.
SURRENDER CHARGE FACTORS
ISSUE AGES 0 - 39
END OF POLICY YEAR* FACTOR
---------------------- -------
At Issue ........... 1.00
1-5 ................ 1.00
6 .................. .80
7 .................. .60
8 .................. .40
9 .................. 0
10+ ................ 0
* The surrender charge on any date other than an anniversary will be
interpolated between the two end of year surrender charges.
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For insureds older than 39, this factor is less than 1.00 at the end of
the first Policy year and declines to zero at the end of the ninth Policy year.
The minimum possible specified amount at issue is the amount that a $10,000
premium will purchase based on the insured's age, gender and rate class, and
certain federal tax law guidelines. For a larger premium there will be a larger
minimum specified amount. The maximum specified amount depends on the size of
the initial premium payment, and is approximately 111% of the lowest possible
specified amount for that premium. Due to federal tax laws, the amount of
additional premium payments you make may be limited. There are no planned
periodic premiums.
DEATH BENEFIT
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DEATH BENEFIT PROCEEDS
As long as the Policy is in force, we will pay the death benefit proceeds
on an individual Policy once we receive satisfactory proof of the insured's
death. We may require return of the Policy. We will pay the death benefit
proceeds to the primary beneficiary(ies), if living, or to a contingent
beneficiary. If each beneficiary dies before the insured and there is no
contingent beneficiary, we will pay the death benefit proceeds to the owner or
the owner's estate. We will pay the death benefit proceeds in a lump sum or
under a payment option. See Payment Options, p. 45.
DEATH BENEFIT o the death benefit (described below); MINUS
PROCEEDS EQUAL: o any past due charges; MINUS
o any outstanding Policy loan amount; PLUS
o any additional insurance in force provided by rider;
PLUS
o any interest you paid in advance on the loan(s) for
the period between the date of death and the next
Policy anniversary.
We may further adjust the amount of the death benefit proceeds if we
contest the Policy or if you misstate the insured's age or gender. See Our
Right to Contest the Policy; and Misstatement of Age or Gender.
DEATH BENEFIT
The Policy provides a death benefit. The death benefit is determined at
the end of the valuation period in which the insured dies. You must select one
of the three death benefit options we offer in your application. No matter
which death benefit option you choose, we guarantee that, so long as the Policy
does not lapse, the death benefit will never be less than the specified amount
on the date of the insured's death.
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DEATH BENEFIT o the current specified amount; OR
OPTION A EQUALS THE o a specified percentage called the "limitation
GREATER OF: percentage," MULTIPLIED BY
-> the cash value on the insured's date of
death.
Under Option A, your death benefit remains level unless the limitation
percentage multiplied by the cash value is greater than the specified amount;
then the death benefit will vary as the cash value varies.
The limitation percentage is the minimum percentage of cash value we must
pay as the death benefit under federal tax requirements. It is based on the age
of the insured at the beginning of each Policy year. The following table
indicates the limitation percentages for different ages:
AGE LIMITATION PERCENTAGE
--- ---------------------
40 and under 250%
41 to 45 250% of cash value minus 7% for each age over age 40
46 to 50 215% of cash value minus 6% for each age over age 45
51 to 55 185% of cash value minus 7% for each age over age 50
56 to 60 150% of cash value minus 4% for each age over age 55
61 to 65 130% of cash value minus 2% for each age over age 60
66 to 70 120% of cash value minus 1% for each age over age 65
71 to 75 115% of cash value minus 2% for each age over age 70
76 to 90 105%
91 to 95 105% of cash value minus 1% for each age over age 90
If the federal tax code requires us to determine the death benefit by
reference to these limitation percentages, the Policy is described as "in the
corridor." An increase in the cash value will increase our risk, and we will
increase the cost of insurance we deduct from the cash value.
OPTION A ILLUSTRATION. Assume that the insured's attained age is under 40,
there have been no withdrawals or decreases in specified amount, and that there
is no outstanding indebtedness. Under Option A, a Policy with a $50,000
specified amount will generally pay $50,000 in death benefits. However, because
the death benefit must be equal to or be greater than 250% of cash value, any
time the cash value of the Policy exceeds $20,000, the death benefit will
exceed the $50,000 specified amount. Each additional dollar added to the cash
value above $20,000 will increase the death benefit by $2.50.
Similarly, so long as the cash value exceeds $20,000, each dollar taken
out of the cash value will reduce the death benefit by $2.50. If at any time
the cash value multiplied by the limitation percentage is less than the
specified amount, the death benefit will equal the specified amount of the
Policy reduced by the dollar value of any cash withdrawals.
DEATH BENEFIT o the current specified amount; PLUS
OPTION B EQUALS THE -> the cash value on the insured's date of
GREATER OF: death; OR
o the limitation percentage, MULTIPLIED BY
-> the cash value on the insured's date of
death.
Under Option B, the death benefit always varies as the cash value varies.
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OPTION B ILLUSTRATION. Assume that the insured's attained age is under 40
and that there is no outstanding indebtedness. Under Option B, a Policy with a
specified amount of $50,000 will generally pay a death benefit of $50,000 plus
cash value. Thus, a Policy with a cash value of $10,000 will have a death
benefit of $60,000 ($50,000 + $10,000). The death benefit, however, must be at
least 250% of cash value. As a result, if the cash value of the Policy exceeds
$33,333, the death benefit will be greater than the specified amount plus cash
value. Each additional dollar of cash value above $33,333 will increase the
death benefit by $2.50.
Similarly, any time cash value exceeds $33,333, each dollar taken out of
cash value will reduce the death benefit by $2.50. If at any time, cash value
multiplied by the limitation percentage is less than the specified amount plus
the cash value, then the death benefit will be the specified amount plus the
cash value of the Policy.
DEATH BENEFIT o death benefit Option A; OR
OPTION C EQUALS THE o the current specified amount, MULTIPLIED BY
GREATER OF: -> a "factor" equal to the lesser of:
o 1.0 or
o 0.04 TIMES (95 - insured's age at
death); PLUS
-> the cash value on the insured's date of
death.
Under Option C, the death benefit varies as the cash value and the
insured's attained age varies.
OPTION C -- THREE ILLUSTRATIONS.
1. Assume that the insured is under age 40 and that there is no
outstanding indebtedness. Under Option C, a Policy with a specified amount of
$50,000 and with a cash value of $10,000 will have a death benefit of $60,000
($50,000 x the minimum of (1.0 and (0.04 x (95 - 40))) + $10,000). So long as
the insured is under age 71, this benefit is the same as the Option B benefit.
2. Assume that the insured is attained age 75 and that there is no
outstanding indebtedness. Under Option C, a Policy with a specified amount of
$50,000 and with a cash value of $12,000 will have a death benefit of $52,000
($50,000 x the minimum of (1.0 and (0.04 x (95 - 75))) + $12,000). The death
benefit, however, must be at least 105% of cash value as shown in the
limitation percentage table above.
3. Assume that the insured is attained age 75 and that there is no
outstanding indebtedness. Under Option C, a Policy with a specified amount of
$50,000 and with a cash value of $9,000 will have a death benefit equal to the
specified amount of $50,000, since the calculation of $50,000 times the minimum
of (1.0 and (0.04 x (95 - 75))) plus $9,000 is less than the specified amount.
EFFECTS OF CASH WITHDRAWALS ON THE DEATH BENEFIT
If you choose Option A, a cash withdrawal will reduce the specified amount
by an amount equal to the amount of the cash withdrawal. We will not impose a
decrease charge
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when the specified amount is decreased as a result of taking a cash withdrawal.
Regardless of the death benefit option you choose, a cash withdrawal will reduce
the death benefit by at least the amount of the withdrawal.
CHOOSING DEATH BENEFIT OPTIONS
You must choose one death benefit option on your application. This is an
important decision. The death benefit option you choose will have an impact on
the dollar value of the death benefit, on your cash value, and on the amount of
cost of insurance charges you pay.
You may find Option A more suitable for you if your goal is to increase
your cash value through positive investment experience. You may find Option B
more suitable if your goal is to increase your total death benefit. You may
find Option C more suitable if your goal is to increase your total death
benefit before you reach attained age 70, and to increase your cash value
through positive investment experience thereafter.
CHANGING THE DEATH BENEFIT OPTION
After the third Policy year, you may change your death benefit option once
each Policy year if you have not decreased the specified amount that year. We
will notify you of the new specified amount.
o You must make your request in writing.
o The effective date of the change will be the monthly anniversary on or
following the date when we receive your request for a change.
o You may not make a change that would decrease the specified amount
below the minimum specified amount stated in your Policy.
o There may be adverse federal tax consequences. You should consult a
tax advisor before changing your Policy's death benefit option.
DECREASING THE SPECIFIED AMOUNT
After the Policy has been in force for three years, you may decrease the
specified amount once each Policy year if you have not changed the death
benefit option that year. A decrease in the specified amount may affect your
cost of insurance charge and may have adverse federal tax consequences. You
should consult a tax advisor before decreasing your Policy's specified amount.
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CONDITIONS FOR o you may not change your death benefit option
DECREASING THE SPECIFIED in the same Policy year that you decrease
AMOUNT: your specified amount;
o you may not decrease your specified amount
lower than the minimum specified amount
stated in your Policy;
o you may not decrease your specified amount
if it would disqualify your Policy as life
insurance under the Internal Revenue Code;
o we may limit the amount of the decrease to
no more than 20% of the specified amount;
o a decrease in specified amount will take
effect on the monthly anniversary on or
after we receive your written request; and
o we will assess a pro rata decrease charge
against the cash value if you decrease your
specified amount within the first 15 Policy
years.
PAYMENT OPTIONS
There are several ways of receiving proceeds under the death benefit and
surrender provisions of the Policy, other than in a lump sum. See Settlement
Options p. 55 for information concerning these settlement options.
SURRENDERS AND CASH WITHDRAWALS
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SURRENDERS
You may make a written request to surrender your Policy for its net
surrender value as calculated at the end of the valuation date on which we
receive your request. The insured must be alive and the Policy must be in force
when you make your written request. A surrender is effective as of the date
when we receive your written request. You will incur a surrender charge if you
surrender the Policy during the first 15 Policy years (see Charges and
Deductions p. 33). Once you surrender your Policy, all coverage and other
benefits under it cease and cannot be reinstated. We will normally pay you the
net surrender value in a lump sum within seven days or under a settlement
option. A surrender may have tax consequences. See Federal Income Tax
Considerations p. 50.
CASH WITHDRAWALS
After the first Policy year, you may request a cash withdrawal of a
portion of your cash value subject to certain conditions.
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CASH o You must make your cash withdrawal request to us in
WITHDRAWAL writing.
CONDITIONS: o We only allow one cash withdrawal during a 12-month
period.
o We may limit the amount you can withdraw to at least
$500, and to no more than 10% of the net surrender value.
o You can specify the subaccount(s) and the fixed account
from which to make the withdrawal. Otherwise we will
deduct the amount from the subaccounts and the fixed
account in accordance with the current allocation
instructions. We generally will pay a cash withdrawal
request within seven days following the valuation date we
receive the request.
o We will deduct a processing fee equal to $25 or 2% of the
amount you withdraw, whichever is less. We deduct this
amount from the withdrawal, and we pay you the balance.
o You may not take a cash withdrawal that would disqualify
your Policy as life insurance under the Internal Revenue
Code.
A cash withdrawal will reduce the cash value by the amount of the cash
withdrawal, and reduce the death benefit by at least the amount of the cash
withdrawal. When death benefit Option A is in effect, a cash withdrawal will
reduce the specified amount by an amount equal to the amount of the cash
withdrawal. We will not impose a pro rata decrease charge when the specified
amount is decreased as a result of taking a cash withdrawal.
In no event will we permit any withdrawal to reduce the specified amount
below the minimum specified amount set forth in the Policy.
A cash withdrawal may have tax consequences (see Federal Income Tax
Considerations p. 50).
LOANS
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GENERAL
After the first Policy year (as long as the Policy is in force) you may
borrow money from us using the Policy as the only security for the loan. We may
permit a loan prior to the first anniversary for Policies issued pursuant to
1035 Exchanges. A loan that is taken from, or secured by, a Policy may have tax
consequences. See Federal Income Tax Considerations p. 50.
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POLICY LOANS ARE o we may require you to borrow at least $500; and
SUBJECT TO CERTAIN o the maximum amount you may borrow is 90% of the
CONDITIONS: cash value, less any surrender charge and any
outstanding loan amount.
When you take a loan, we will withdraw an amount equal to the requested
loan plus interest in advance until the next Policy anniversary from each of
the subaccounts and the fixed account based on your current premium allocation
instructions (unless you specify otherwise). We will transfer that amount to
the loan reserve. The loan reserve is the portion of the fixed account used as
collateral for a Policy loan.
We normally pay the amount of the loan within seven days after we receive
a proper loan request. We may postpone payment of loans under certain
conditions. See Payments We Make p. 54.
You may request a loan by telephone by calling us at 1-800-851-9777. If
the loan amount you request exceeds $50,000 or if the address of record has
been changed within the past 10 days, we may reject your request. If you do not
want the ability to request a loan by telephone, you should notify us in
writing. You will be required to provide certain information for identification
purposes when you request a loan by telephone. We ask you to provide us with
written confirmation of your request. We will not be liable for processing a
loan request if we believe the request is genuine.
You may also fax your loan request to us at 727-299-1667. We will not be
responsible for any transmittal problems when you fax your request unless you
report it to us within five business days and send us proof of your fax
transmittal.
You can repay a loan at any time while the Policy is in force. WE WILL
CONSIDER ANY PAYMENTS YOU MAKE ON THE POLICY TO BE PREMIUM PAYMENTS UNLESS THE
PAYMENTS ARE CLEARLY SPECIFIED AS LOAN REPAYMENTS.
At each Policy anniversary, we will compare the amount of the outstanding
loan to the amount in the loan reserve. We will also make this comparison any
time you repay all or part of the loan, or make a request to borrow an
additional amount. At each such time, if the amount of the outstanding loan
exceeds the amount in the loan reserve, we will withdraw the difference from the
subaccounts and the fixed account and transfer it to the loan reserve, in the
same manner as when a loan is made. If the amount in the loan reserve exceeds
the amount of the outstanding loan, we will withdraw the difference from the
loan reserve and transfer it to the subaccounts and the fixed account in the
same manner as current premiums are allocated. No charge will be imposed for
these transfers, and these transfers are not treated as transfers in calculating
the transfer charge. We reserve the right to require a transfer to the fixed
account if the loans were originally transferred from the fixed account.
INTEREST RATE CHARGED
We will charge you an annual interest rate on a Policy loan that is equal
to 5.2% and is payable annually in advance (equivalent to an effective annual
rate of 5.5%). Loan interest
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that is unpaid when due will be added to the amount of the loan on each Policy
anniversary and will bear interest at the same rate.
LOAN RESERVE INTEREST RATE CREDITED
We will credit the amount in the loan reserve with interest at an
effective annual rate of at least 4.0%. We may credit a higher rate, but we are
not obligated to do so.
o We currently credit interest at an effective annual rate of 4.75% on
amounts you borrow during the first ten Policy years.
o After the tenth Policy year, on all amounts that you have borrowed, we
currently credit interest to part of the cash value in excess of the
premiums paid less withdrawals at an interest rate equal to the
interest rate we charge on the total loan. The remaining portion,
equal to the cost basis, is currently credited 4.75%.
EFFECT OF POLICY LOANS
A Policy loan affects the Policy because we reduce the death benefit
proceeds and net surrender value under the Policy by the amount of any
outstanding loan. Repaying the loan causes the death benefit proceeds and net
surrender value to increase by the amount of the repayment. As long as a loan
is outstanding, we hold an amount equal to the loan plus interest in advance
until the next Policy anniversary in the loan reserve. This amount is not
affected by the separate account's investment performance and may not be
credited with the interest rates accruing on the fixed account. Amounts
transferred from the separate account to the loan reserve will affect the value
in the separate account because we credit such amounts with an interest rate
declared by us rather than a rate of return reflecting the investment results
of the separate account.
There are risks involved in taking a Policy loan, a few of which include
the potential for a Policy to lapse if projected earnings, taking into account
outstanding loans, are not achieved. A Policy loan may also have possible
adverse tax consequences (see Federal Income Tax Considerations p. 50). You
should consult a tax advisor before taking out a Policy loan.
We will notify you (and any assignee of record) if the sum of your loans
plus any interest you owe on the loans is more than the net surrender value. If
you do not submit a sufficient payment within 61 days from the date of the
notice, your Policy may lapse.
POLICY LAPSE AND REINSTATEMENT
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LAPSE
Your Policy may not necessarily lapse if you fail to make a planned
periodic payment. However, even if you make all your planned periodic payments,
there is no guarantee that your Policy will not lapse. This Policy provides a no
lapse period. See below. Once your no lapse period ends, your Policy may lapse
(terminate without value) if the net surrender value
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on any Monthiversary is less than the monthly deductions due on that day. Such
lapse might occur if poor investment experience causes a decrease in the net
surrender value, or you have not paid enough premiums to offset the monthly
charges.
If the net surrender value is not enough to pay the monthly deductions, we
will mail a notice to your last known address and any assignee of record. The
notice will specify the minimum payment you must pay and the final date by
which we must receive the payment to prevent a lapse. We generally require that
you make the payment within 61 days after the date of the notice. This 61-day
period is called the GRACE PERIOD. If we do not receive the specified minimum
payment by the end of the grace period, all coverage under the Policy will
terminate without value.
NO LAPSE PERIOD
This Policy provides a no lapse period. As long as the no lapse period is
in effect, your Policy will not lapse and no grace period will begin. Even if
your net surrender value is not enough to pay your monthly deduction, the
Policy will not lapse so long as the no lapse period is in effect. The no lapse
period will not extend beyond the no lapse date stated in your Policy. Each
month we determine whether the no lapse period is still in effect.
NO LAPSE DATE o For a Policy issued to any insured ages 0-60, the no
lapse date is either the number of years to attained
age 65 or the twentieth Policy anniversary, whichever
is less.
o For a Policy issued to an insured ages 61-80, the no
lapse date is the fifth Policy anniversary.
o The no lapse date is specified in your Policy.
EARLY TERMINATION o The no lapse period will end immediately if you do not
OF THE NO LAPSE pay sufficient premiums.
PERIOD o You must pay total premiums (minus withdrawals, loans,
and any pro rata decrease charge) that equal at least:
-> your minimum monthly guarantee premium (shown
in your Policy), MULTIPLIED BY
-> the number of months since the Policy date
(including the current month).
You will lessen the risk of Policy lapse if you keep the no lapse period
in effect. Before you take a cash withdrawal or a loan or decrease the
specified amount you should consider carefully the effect it will have on the
no lapse period guarantee.
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REINSTATEMENT
We will reinstate a lapsed Policy for five years after the lapse (and
prior to the maturity date). To reinstate the Policy you must:
o submit a written application for reinstatement;
o provide evidence of insurability satisfactory to us;
o make a premium payment that is large enough to cover:
-> one monthly deduction at the time of termination;
-> the next two monthly deductions which become due after
reinstatement; and
-> any surrender charge calculated from the Policy date to the date
of reinstatement.
We will not reinstate any indebtedness. The cash value of the loan reserve on
the reinstatement date will be zero. Your net surrender value on the
reinstatement date will equal the net premiums you pay at reinstatement, MINUS
one monthly deduction and any surrender charge. The reinstatement date for your
Policy will be the monthly anniversary on or following the day we approve your
application for reinstatement. We may decline a request for reinstatement.
FEDERAL INCOME TAX CONSIDERATIONS
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The following summary provides a general description of the federal income
tax considerations associated with a Policy and does not purport to be complete
or to cover all situations. THIS DISCUSSION IS NOT INTENDED AS TAX ADVICE.
Please consult counsel or other qualified tax advisors for more complete
information. We base this discussion on our understanding of the present
federal income tax laws as they are currently interpreted by the Internal
Revenue Service (the "IRS"). Federal income tax laws and the current
interpretations by the IRS may change.
TAX STATUS OF THE POLICY
A Policy must satisfy certain requirements set forth in the Internal
Revenue Code (the "Code") in order to qualify as a life insurance policy for
federal income tax purposes and to receive the tax treatment normally accorded
life insurance policies under federal tax law. Guidance as to how these
requirements are to be applied is limited. Nevertheless, we believe that a
Policy issued on the basis of a standard rate class should satisfy the
applicable Code requirements. Because of the absence of pertinent
interpretations of the Code requirements, there is, however, more uncertainty
about the application of such requirements to a Policy issued on a substandard
basis. If it is subsequently determined that a Policy does not satisfy the
applicable requirements, we may take appropriate steps to bring the Policy into
compliance with such requirements and we reserve the right to restrict Policy
transactions in order to do so.
In certain circumstances, owners of variable life insurance policies have
been considered for federal income tax purposes to be the owners of the assets
of the separate
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account supporting their policies due to their ability to exercise investment
control over those assets. Where this is the case, the policyowners have been
currently taxed on income and gains attributable to the separate account assets.
There is little guidance in this area, and some features of the Policies, such
as your flexibility to allocate premiums and cash values, have not been
explicitly addressed in published rulings. While we believe that the Policy does
not give you investment control over separate account assets, we reserve the
right to modify the Policy as necessary to prevent you from being treated as the
owner of the separate account assets supporting the Policy.
In addition, the Code requires that the investments of the separate
account be "adequately diversified" in order to treat the Policy as a life
insurance policy for federal income tax purposes. We intend that the separate
account, through the portfolios, will satisfy these diversification
requirements.
The following discussion assumes that the Policy will qualify as a life
insurance policy for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. We believe that the death benefit under a Policy should be
excludible from the beneficiary's gross income. Federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy proceeds
depend on your circumstances and the beneficiary's circumstances. A tax advisor
should be consulted on these consequences.
Generally, you will not be deemed to be in constructive receipt of the
cash value until there is a distribution. When distributions from a Policy
occur, or when loans are taken out from or secured by (E.G., by assignment), a
Policy, the tax consequences depend on whether the Policy is classified as a
"Modified Endowment Contract."
MODIFIED ENDOWMENT CONTRACTS. Under the Code, certain life insurance
policies are classified as "Modified Endowment Contracts" ("MECs") and receive
less favorable tax treatment than other life insurance policies. Due to the
Policy's flexibility, each Policy's circumstances will determine whether the
Policy is classified as a MEC. Among other things, a reduction in benefits at
any time could cause a Policy to become a MEC. A Builder Plus Program(SM) Policy
(discussed on page 40) will in most instances be treated as a MEC, however. If
you do not want your Policy to be classified as a MEC, you should consult a tax
advisor to determine the circumstances, if any, under which your Policy would
not be classified as a MEC.
Upon issue of your Policy, we will notify you as to whether or not your
Policy is classified as a MEC based on the initial premium we receive. You will
also be notified of the amount of the maximum annual premium you can pay
without causing your Policy to be classified as a MEC. If a payment would cause
your Policy to become a MEC, you and your agent will be notified. At that time,
you will need to notify us if you want to continue your Policy as a MEC.
Distributions from Modified Endowment Contracts. Policies classified as
MECs are subject to the following tax rules:
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o All distributions other than death benefits from a MEC, including
distributions upon surrender and withdrawals, will be treated first as
distributions of gain taxable as ordinary income. They will be treated
as tax-free recovery of the owner's investment in the Policy only
after all gain has been distributed. Your investment in the Policy is
generally your total premium payments. When a distribution is taken
from the Policy, your investment in the Policy is reduced by the
amount of the distribution that is tax-free.
o Loans taken from or secured by (e.g., by assignment) such a
Policy are treated as distributions and taxed accordingly.
o A 10% additional federal income tax is imposed on the amount included
in income except where the distribution or loan is made when you have
attained age 59 1/2 or are disabled, or where the distribution is part
of a series of substantially equal periodic payments for your life (or
life expectancy) or the joint lives (or joint life expectancies) of
you and your beneficiary.
Distributions from Policies that are not Modified Endowment
Contracts. Distributions from a Policy that is not a MEC are generally treated
first as a recovery of your investment in the Policy, and as taxable income
after the recovery of all investment in the Policy. However, certain
distributions which must be made in order to enable the Policy to continue to
qualify as a life insurance policy for federal income tax purposes if Policy
benefits are reduced during the first 15 Policy years may be treated in whole
or in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not a MEC are generally not
treated as distributions. Instead, such loans are treated as indebteness.
However, the tax consequences associated with Policy loans that are outstanding
after the first 10 Policy years are less clear and a tax advisor should be
consulted about such loans.
Finally, neither distributions from nor loans from or secured by a Policy
that is not a MEC are subject to the 10% additional tax.
INVESTMENT IN THE POLICY. Your investment in the Policy is generally the
sum of the premium payments you made. When a distribution from the Policy
occurs, your investment in the Policy is reduced by the amount of the
distribution that is tax-free.
Multiple Policies. All MECs that we issue (or that our affiliates issue)
to the same owner during any calendar year are treated as one MEC for purposes
of determining the amount includible in the owner's income when a taxable
distribution occurs.
DEDUCTIBILITY OF POLICY LOAN INTEREST. In general, interest you pay on a
loan from a Policy will not be deductible. Before taking out a Policy loan, you
should consult a tax advisor as to the tax consequences.
BUSINESS USES OF THE POLICY. The Policy may be used in various
arrangements, including nonqualified deferred compensation or salary continuance
plans, split dollar
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insurance plans, executive bonus plans, retiree medical benefit plans and
others. The tax consequences of such plans and business uses of the Policy may
vary depending on the particular facts and circumstances of each individual
arrangement and business uses of the Policy. Therefore, if you are contemplating
using the Policy in any arrangement the value of which depends in part on its
tax consequences, you should be sure to consult a tax advisor as to tax
attributes of the arrangement. In recent years, moreover, Congress has adopted
new rules relating to life insurance owned by businesses. Any business
contemplating the purchase of a new Policy or a change in an existing Policy
should consult a tax advisor.
TERMINAL ILLNESS ACCELERATED DEATH BENEFIT RIDER. We believe that the
single-sum payment we make under this rider should be fully excludable from the
gross income of the beneficiary, as long as the beneficiary is an insured under
the Policy. You should consult a tax advisor about the consequences of adding
this rider to your Policy, or requesting a single-sum payment.
POSSIBLE TAX LAW CHANGES. Although the likelihood of legislative changes
is uncertain, there is always a possibility that the tax treatment of the
Policies could change by legislation or otherwise. You should consult a tax
advisor with respect to legislative developments and their effect on the
Policy.
OTHER POLICY INFORMATION
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OUR RIGHT TO CONTEST THE POLICY
In issuing this Policy, we rely on all statements made by or for the
insured in the application or in a supplemental application. Therefore, if you
make any material misrepresentation of a fact in the application (or any
supplemental application), then we may contest the Policy's validity or may
resist a claim under the Policy.
In the absence of fraud, we cannot bring any legal action to contest the
validity of the Policy after the Policy has been in force during the insured's
lifetime for two years from the Policy date, or if reinstated, for two years
from the date of reinstatement.
SUICIDE EXCLUSION
If the insured commits suicide, while sane or insane, within two years of
the Policy date, the Policy will terminate and our liability is limited to an
amount equal to the premiums paid, less any outstanding indebtedness, and less
any cash withdrawals paid. We will pay this amount to the beneficiary in one
sum. If the Policy lapsed, we will measure the suicide period from the
reinstatement date. If the insured commits suicide within two years of the
reinstatement date or the date of any increase in insurance, our total
liability with respect to such reinstatement or increase will be the cost of
insurance charges we deducted.
MISSTATEMENT OF AGE OR GENDER
If the age or gender of the insured was stated incorrectly in the
application or any supplemental application, the death benefit will be adjusted
based on what the initial premium would have purchased based on the insured's
correct age and gender.
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MODIFYING THE POLICY
Only our President or Secretary may modify this Policy or waive any of our
rights or requirements under this Policy. Any modification or waiver must be in
writing. No agent may bind us by making any promise not contained in this
Policy.
If we modify the Policy, we will provide you notice and we will make
appropriate endorsements to the Policy.
BENEFITS AT MATURITY
If the insured is living and the Policy is in force, the Policy will
mature on the Policy anniversary nearest the insured's 95th birthday. This is
the maturity date. On the maturity date we will pay you the net surrender value
of your Policy.
If your Policy was issued before May 1, 1999, we may extend the maturity
date if your Policy is still in force on the maturity date and there are no
adverse tax consequences in doing so. You must submit a written request for the
extension between 90 and 180 days prior to the maturity date. We must agree to
the extension.
If your Policy was issued after May 1, 1999, we will extend the maturity
date if your Policy is still in force on the maturity date. Any riders in force
on the scheduled maturity date will terminate on that date and will not be
extended. Interest on any outstanding Policy loans will continue to accrue
during the period for which the maturity date is extended. You must submit a
written request for the extension between 90 and 180 days prior to the maturity
date and elect one if the following:
1. If you had previously selected death benefit Option B or C, we will
change the death benefit to Option A. On each valuation date, we will
adjust the specified amount to equal the cash value, and the
limitation percentage will be 100%. We will not permit you to make
additional premium payments unless it is required to prevent the
Policy from lapsing. We will waive all future monthly deductions; or
2. We will automatically extend the maturity date until the next Policy
anniversary. You must submit a written request, between 90 and 180
days before each subsequent Policy anniversary, stating that you wish
to extend the maturity date for another Policy year. All benefits and
charges will continue as set forth in your Policy. We will adjust the
annual cost of insurance rates using the then current cost of
insurance rates.
If you choose 2 above, you may change your election to 1 above at any
time. However, if you choose 1 above, then you may not change your election to
2 above.
The tax consequences of extending the maturity date beyond the 100th
birthday of the insured are uncertain. You should consult a tax advisor as to
those consequences.
PAYMENTS WE MAKE
We usually pay the amounts of any surrender, cash withdrawal, death
benefit proceeds, or settlement options within seven business days after we
receive all applicable written notices and/or due proofs of death. However, we
can postpone such payments if:
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o the NYSE is closed, other than customary weekend and holiday closing,
or trading on the NYSE is restricted as determined by the SEC; OR
o the SEC permits, by an order, the postponement for the protection of
policyowners; OR
o the SEC determines that an emergency exists that would make the
disposal of securities held in the separate account or the
determination of their value not reasonably practicable.
If you have submitted a recent check or draft, we have the right to defer
payment of surrenders, cash withdrawals, death benefit proceeds, or payments
under a settlement option until such check or draft has been honored. We also
reserve the right to defer payment of transfers, cash withdrawals, or
surrenders from the fixed account for up to six months.
SETTLEMENT OPTIONS
If you surrender the Policy, or if the Policy matures, you may elect to
receive the net surrender value in either a lump sum or as a series of regular
income payments under one of the three settlement options described below. In
either event, life insurance coverage ends. Also, when the insured dies, the
beneficiary may apply the lump sum death benefit proceeds to one of the same
settlement options. If the regular payment under a settlement option would be
less than $100, we will instead pay the proceeds in one lump sum. We may make
other settlement options available in the future.
Once we begin making payments under a settlement option, you or the
beneficiary will no longer have any value in the subaccounts or the fixed
account. Instead, the only entitlement will be the amount of the regular payment
for the period selected under the terms of the settlement option chosen.
Depending upon the circumstances, the effective date of a settlement option is
the surrender date, the maturity date or the insured's date of death.
Under any settlement option, the dollar amount of each payment will depend
on three things:
o the amount of the surrender or death benefit proceeds on the surrender
date, maturity date or insured's date of death;
o the interest rate we credit on those amounts (we guarantee a minimum
annual interest rate of 3%); and
o the specific payment option(s) you choose.
OPTION 1 - EQUAL o We will pay the proceeds, plus interest, in
MONTHLY INSTALLMENTS equal monthly installments for a fixed period of
FOR A FIXED PERIOD your choice, but not longer than 240 months.
o We will stop making payments once we have made
all the payments for the period selected.
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OPTION 2 - EQUAL At your or the beneficiary's direction, we will make
MONTHLY INSTALLMENTS equal monthly installments:
FOR LIFE (LIFE INCOME) o only for the life of the payee, at the
end of which payments will end; or
o for the longer of the payee's life, or
for 10 years if the payee dies before
the end of the first 10 years of
payments; or
o until the total amount of all payments
we have made equals the proceeds that
were applied to the settlement option.
OPTION 3 - EQUAL o We will make equal monthly payments during the
MONTHLY INSTALLMENTS FOR joint lifetimes of two persons, first to a
THE LIFE OF THE PAYEE AND chosen payee, and then to a co-payee, if
THEN TO A DESIGNATED living, upon the death of the payee.
SURVIVOR (JOINT AND o Payments to the co-payee, if living, upon the
SURVIVOR) payee's death will equal either:
-> the full amount made to the payee
before the payee's death; or
-> one-third of the amount paid to the
payee before the payee's death. All
payments will cease upon the death of
the co-payee.
REPORTS TO OWNERS
At least once each year, or more often as required by law, we will mail to
policyowners at their last known address a report showing the following
information as of the end of the report period:
<TABLE>
<S> <C> <C> <C>
/checkmark/ the current cash value /checkmark/ any activity since the last report
/checkmark/ the current net surrender value /checkmark/ projected values
/checkmark/ the current death benefit /checkmark/ investment experience of each subaccount
/checkmark/ any outstanding loans /checkmark/ any other information required by law
</TABLE>
You may request additional copies of reports, but we may charge a fee for
such additional copies. In addition, we will send written confirmations of any
premium payments and other financial transactions you request. We also will
send copies of the annual and semi-annual report to shareholders for each
portfolio in which you are indirectly invested.
RECORDS
We will maintain all records relating to the separate account and the
fixed account.
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POLICY TERMINATION
Your Policy will terminate on the earliest of:
o the maturity date; o the end of the grace period; or
o the date the insured dies; o the date the Policy is surrendered.
SUPPLEMENTAL BENEFITS (RIDERS)
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The following supplemental benefits (riders) are available and may be
added to a Policy. Monthly charges for these riders are deducted from cash
value as part of the monthly deduction. The riders available with the Policies
provide fixed benefits that do not vary with the investment experience of the
separate account. For purposes of the riders, the primary insured is the person
insured under the Policy, and the face amount is the level term insurance
amount we pay at death.
CHILDREN'S INSURANCE RIDER
This rider provides a face amount on the primary insured's children. We
will pay a death benefit once we receive proof that the insured child died
while both the rider and coverage were in force for that child. If the primary
insured dies while the rider is in force, we will terminate the rider 31 days
after the death, and we will offer a separate life insurance policy to each
insured child.
ACCIDENTAL DEATH BENEFIT RIDER
Subject to certain limitations, we will pay a face amount if the primary
insured's death results solely from accidental bodily injury where:
o the death is caused by external, violent, and accidental means;
o the death occurs within 90 days of the accident; and
o the death occurs while the rider is in force.
The rider will terminate on the earliest of:
o the Policy anniversary nearest the primary insured's 70th birthday;
o the date the Policy terminates; or
o the monthly anniversary when the rider terminates at the primary
insured's request.
OTHER INSURED RIDER
We will pay the rider's face amount when we receive proof of the other
insured's death. On any monthly anniversary while the rider is in force, you
may replace it with a new Policy on the other insured's life (without evidence
of insurability).
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CONDITIONS TO o your request must be in writing;
REPLACE THE o the rider has not reached the anniversary nearest to
RIDER: the other insured's 70th birthday;
o the new policy is any permanent insurance plan that we
currently offer;
o subject to the minimum specified amount required for
the new Policy, the amount of the insurance under the
new Policy will equal the face amount in force under
the rider; and
o we will base your premium on the other insured's rate
class under the rider.
DISABILITY WAIVER RIDER
Subject to certain conditions, we will waive the Policy's monthly
deductions while you are disabled. We must receive proof that:
o you are totally disabled;
o the rider was in force when you became disabled;
o you became disabled before the anniversary nearest your 60th birthday;
and
o you are continuously disabled for at least six months.
We will not waive any deduction which becomes due more than one year before we
receive written notice of your claim.
DISABILITY WAIVER AND MONTHLY INCOME RIDER
This rider has the same benefits as the Disability Waiver Rider, but adds
an income benefit for up to 120 months.
PRIMARY INSURED RIDER ("PIR") AND PRIMARY INSURED RIDER PLUS ("PIR PLUS")
Under the PIR and the PIR Plus, we provide term insurance coverage on a
different basis from the coverage in your Policy. You may purchase the PIR and
PIR Plus anytime.
FEATURES OF o the rider increases the Policy's death benefit by the
PIR AND PIR rider's face amount;
PLUS: o the PIR terminates when you turn 90, and the PIR Plus
terminates when you turn 85;
o we do not assess any additional surrender charge for PIR
and PIR Plus;
o generally PIR and PIR Plus coverage costs less than the
insurance coverage under the Policy, but has no cash
value;
o you may cancel or reduce your rider coverage without
decreasing your Policy's specified amount; and
o you may generally decrease your specified amount without
reducing your rider coverage.
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It may cost you less to reduce your PIR or PIR Plus coverage than to
decrease your specified amount, because we do not deduct a surrender charge in
connection with your PIR or PIR Plus rider. However, it may cost you more to
keep a higher specified amount, because the specified amount may have a cost of
insurance that is higher than the cost of the same amount of coverage under
your PIR or PIR Plus.
You should consult your registered representative to determine if you
would benefit from PIR or PIR Plus. We may discontinue offering PIR or PIR Plus
at any time. We may also modify the terms of these riders for new Policies.
TERMINAL ILLNESS ACCELERATED DEATH BENEFIT RIDER
This rider allows us to pay all or a portion of the death benefit once we
receive satisfactory proof that the insured is ill and has a life expectancy of
one year or less. A doctor must certify the insured's life expectancy.
We will pay a "single-sum benefit" equal to:
o the death benefit on the date we pay the single-sum benefit;
MULTIPLIED BY
o the election percentage of the death benefit you elect to receive;
DIVIDED BY
o 1 + i ("i" equals the interest rate determined by the Code or the
Policy loan interest rate, whichever is greater); MINUS
o any indebtedness at the time we pay the single-sum benefit, multiplied
by the election percentage.
The maximum terminal illness death benefit we will pay is equal to:
o the death benefit available under the Policy at the insured's death;
PLUS
o the benefit available under any PIR or PIR Plus rider in force.
o a single-sum benefit may not be greater than $500,000.
The election percentage is a percentage that you select. It may not be
greater than 100% of your Policy's death benefit under the rider.
We will not pay a benefit under the rider if the insured's terminal
condition results from self-inflicted injuries which occur during the period
specified in your Policy's suicide provision.
The rider terminates at the earliest of:
o the date the Policy terminates;
o the date a settlement option takes effect;
o the date we pay a single-sum benefit; or
o the date you terminate the rider.
We do not charge for this rider. This rider may not be available in all
states, or its terms may vary depending on a state's insurance law
requirements.
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IMSA
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We are a charter member of the Insurance Marketplace Standards Association
("IMSA"). IMSA is an independent, voluntary organization of life insurance
companies. It promotes high ethical standards in the sales, advertising and
servicing of individual life insurance and annuity products. Companies must
undergo a rigorous self and independent assessment of their practices to become
a member of IMSA. The IMSA logo in our sales literature shows our ongoing
commitment to these standards.
PERFORMANCE DATA
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RATES OF RETURN
This section shows the historical investment experience of the portfolios
based on the portfolios' historical investment experience. This information
does not represent or project future investment performance.
We base the rates of return that we show below on each portfolio's actual
investment performance. We deduct investment management fees and direct fund
expenses. The rates are actual average annual compounded rates of return for
the periods ended on December 31, 1998.
These rates of return do not reflect the annual mortality and expense risk
charge, charges deducted from premiums, monthly deductions from cash value, or
surrender charges. These rates are not an estimate, projection or guarantee of
future performance.
We also show below comparable figures for the unmanaged Standard & Poor's
Index of 500 Common Stocks ("S&P 500"), a widely used measure of stock market
performance. The S&P 500 does not reflect any deduction for the expenses of
operating and managing an investment portfolio.
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AVERAGE ANNUAL COMPOUNDED RATES OF RETURN
FOR THE PERIODS ENDED ON DECEMBER 31, 1998
<TABLE>
<CAPTION>
INCEPTION
FUND PORTFOLIO INCEPTION 10 YEARS 5 YEARS 3 YEARS 1 YEAR DATE
- -------------- --------- -------- ------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
WRL Alger Aggressive Growth .................... 23.54% N/A N/A 26.83% 48.69% 3/1/94
WRL VKAM Emerging Growth ....................... 23.09% N/A 21.95% 25.63% 37.33% 3/1/93
WRL Janus Growth ............................... 20.91% 22.61% 25.20% 31.63% 64.47% 10/2/86
WRL Janus Global ............................... 21.94% N/A 19.46% 25.40% 30.01% 12/3/92
WRL AEGON Bond ................................. 7.89% 9.14% 6.46% 6.12% 9.32% 10/2/86
WRL LKCM Strategic Total Return ................ 14.12% N/A 13.76% 15.39% 9.64% 3/1/93
WRL Federated Growth & Income .................. 11.78% N/A N/A 12.77% 3.05% 3/1/94
WRL J.P. Morgan Money Market ................... 5.03% 5.01% 4.87% 5.18% 5.26% 10/2/86
WRL Dean Asset Allocation ...................... 14.80% N/A N/A 13.06% 8.33% 1/3/95
WRL GE U.S. Equity ............................. 25.00% N/A N/A N/A 22.87% 1/2/97
WRL Third Avenue Value ......................... -6.84% N/A N/A N/A -6.84% 1/2/98
WRL J.P. Morgan Real Estate Securities ......... -14.93% N/A N/A N/A N/A 5/1/98
WRL AEGON Balanced ............................. 9.71% N/A N/A 11.51% 6.93% 3/1/94
WRL NWQ Value Equity ........................... 11.83% N/A N/A N/A -4.78% 5/1/96
WRL C.A.S.E. Growth ............................ 15.01% N/A N/A 11.47% 2.47% 5/1/95
WRL GE/Scottish Equitable International
Equity ....................................... 10.17% N/A N/A N/A 12.85% 1/2/97
S&P 500 ........................................ 17.86% 19.21% 24.06% 28.23% 28.58% 10/2/86
</TABLE>
Because WRL Goldman Sachs Growth, WRL Goldman Sachs Small Cap, WRL T. Rowe
Price Dividend Growth, WRL T. Rowe Price Small Cap, WRL Salomon All Cap, WRL
Pilgrim Baxter Mid Cap Growth and WRL Dreyfus Mid Cap had not commenced
operations as of December 31, 1998, the above chart does not reflect rates of
return for these portfolios.
Additional information regarding the investment performance of the
portfolios appears in the attached fund prospectus.
HYPOTHETICAL ILLUSTRATIONS BASED ON SUBACCOUNT PERFORMANCE
This section contains hypothetical illustrations of Policy values based on
the historical experience of the subaccounts. We started selling the Policies
in 1997. The separate account and the fund commenced operations on October 2,
1986. The rates of return below show the actual investment experience of each
subaccount for the periods shown. The illustrations of cash values and net
surrender values below depict these Policy features as if you had purchased it
on the last valuation date prior to January 1, 1987 and had elected death
benefit Option A. The illustrations are based on the historical investment
experience of the subaccount indicated as of the last valuation date prior to
January 1 of the year after the subaccount began investing in the portfolio. We
assumed the rate of return for each subaccount in each calendar year to be
uniformly earned throughout the year; however, the subaccount's actual
performance did and will vary throughout the year.
In order to demonstrate how the actual investment experience of the
subaccounts and the underlying portfolios could have affected the Option A
death benefit, cash value and net
61
<PAGE>
surrender value of the Policy, we provide hypothetical illustrations using the
actual investment experience of each subaccount since it began investing in the
underlying portfolios. THESE HYPOTHETICAL ILLUSTRATIONS ARE DESIGNED TO SHOW
THE PERFORMANCE THAT COULD HAVE RESULTED IF THE HYPOTHETICAL OWNER HAD HELD THE
POLICY DURING THE PERIOD ILLUSTRATED. We assumed that the actual rate of return
was uniformly earned throughout the year; however, the portfolio's (and the
subaccount's) actual performance did and will vary throughout the year
resulting in variable deductions from cash value that could affect performance.
These illustrations do not represent what may happen in the future.
The amounts we show for death benefits, cash values, and net surrender
values take into account all charges and deductions from the Policy, the
separate account, and the fund. For each subaccount, we base one illustration
on the guaranteed cost of insurance rates and one on the current cost of
insurance rates for a hypothetical male insured age 35. The insured's age,
gender and rate class, amount and timing of premium payments, withdrawals, and
loans would affect individual Policy benefits.
For each subaccount, the illustrations below show death benefit Option A
based on an annual premium of $2,000 and a specified amount of $165,000 for a
male age 35, non-tobacco use, ultimate select rate class.
The following example shows how the hypothetical net return of the WRL Alger
Aggressive Growth subaccount would have affected benefits for a Policy dated on
the last valuation date prior to January 1, 1995. This example assumes that net
premiums and cash values were in the subaccount for the entire period and that
the values were determined on each Policy anniversary thereafter.
WRL ALGER AGGRESSIVE GROWTH
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 .................................... $ 2,196 $ 2,196 $ 0 $ 0
1997* ................................... 4,128 4,097 1,567 1,537
1998* ................................... 7,034 6,956 4,473 4,395
1999* ................................... 12,731 12,558 10,170 9,997
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
62
<PAGE>
The following example shows how the hypothetical net return of the WRL VKAM
Emerging Growth subaccount would have affected benefits for a Policy dated on
the last valuation date prior to January 1, 1994. This example assumes that net
premiums and cash values were in the subaccount for the entire period and that
the values were determined on each Policy anniversary thereafter.
WRL VKAM EMERGING GROWTH
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1995 .................................... $ 1,425 $ 1,425 $ 0 $ 0
1996* ................................... 4,415 4,379 1,854 1,818
1997* ................................... 7,061 6,980 4,501 4,419
1998* ................................... 10,400 10,250 7,840 7,689
1999* ................................... 16,312 16,050 13,751 13,489
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the WRL Janus
Growth subaccount would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1987. This example assumes that net premiums
and cash values were in the subaccount for the entire period and that the
values were determined on each Policy anniversary thereafter.
WRL JANUS GROWTH
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1988 .................................... $ 1,734 $ 1,734 $ 0 $ 0
1989* ................................... 3,900 3,869 1,339 1,308
1990* ................................... 8,023 7,932 5,462 5,372
1991* ................................... 9,468 9,332 6,907 6,771
1992* ................................... 17,533 17,254 14,972 14,693
1993* ................................... 19,342 19,008 17,037 16,704
1994* ................................... 21,495 21,097 19,446 19,048
1995* ................................... 20,875 20,458 19,082 18,666
1996* ................................... 32,665 32,003 31,128 30,466
1997* ................................... 39,926 39,111 38,646 37,830
1998* ................................... 48,299 47,323 47,275 46,299
1999* ................................... 81,362 79,737 80,594 78,969
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
63
<PAGE>
The following example shows how the hypothetical net return of the WRL Janus
Global subaccount would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1993. This example assumes that net premiums
and cash values were in the subaccount for the entire period and that the
values were determined on each Policy anniversary thereafter.
WRL JANUS GLOBAL
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1994 .................................... $ 2,146 $ 2,146 $ 0 $ 0
1995* ................................... 3,682 3,653 1,121 1,093
1996* ................................... 6,421 6,345 3,860 3,784
1997* ................................... 10,135 9,985 7,574 7,425
1998* ................................... 13,768 13,539 11,207 10,978
1999* ................................... 19,758 19,404 17,454 17,100
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the WRL AEGON
Bond subaccount would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1987. This example assumes that net premiums
and cash values were in the subaccount for the entire period and that the
values were determined on each Policy anniversary thereafter.
WRL AEGON BOND
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1988 .................................... $ 1,454 $ 1,454 $ 0 $ 0
1989* ................................... 3,228 3,198 667 637
1990* ................................... 5,454 5,381 2,893 2,820
1991* ................................... 7,380 7,254 4,819 4,693
1992* ................................... 10,529 10,326 7,968 7,765
1993* ................................... 12,762 12,494 10,457 10,189
1994* ................................... 16,051 15,689 14,002 13,641
1995* ................................... 16,158 15,767 14,365 13,975
1996* ................................... 21,502 20,974 19,965 19,438
1997* ................................... 22,749 22,184 21,468 20,904
1998* ................................... 26,197 25,558 25,173 24,534
1999* ................................... 29,950 29,226 29,182 28,457
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
64
<PAGE>
The following example shows how the hypothetical net return of the WRL LKCM
Strategic Total Return subaccount would have affected benefits for a Policy
dated on the last valuation date prior to January 1, 1994. This example assumes
that net premiums and cash values were in the subaccount for the entire period
and that the values were determined on each Policy anniversary thereafter.
WRL LKCM STRATEGIC TOTAL RETURN
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1995 .................................... $ 1,540 $ 1,540 $ 0 $ 0
1996* ................................... 3,867 3,834 1,306 1,274
1997* ................................... 6,201 6,125 3,640 3,564
1998* ................................... 9,394 9,250 6,833 6,689
1999* ................................... 11,892 11,683 9,331 9,123
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the WRL
Federated Growth & Income subaccount would have affected benefits for a Policy
dated on the last valuation date prior to January 1, 1995. This example assumes
that net premiums and cash values were in the subaccount for the entire period
and that the values were determined on each Policy anniversary thereafter.
WRL FEDERATED GROWTH & INCOME
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 .................................... $1,978 $1,978 $ 0 $ 0
1997* ................................... 3,932 3,902 1,372 1,341
1998* ................................... 6,816 6,737 4,255 4,176
1999* ................................... 8,548 8,420 5,987 5,859
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
65
<PAGE>
The following example shows how the hypothetical net return of the WRL J.P.
Morgan Money Market subaccount would have affected benefits for a Policy dated
on the last valuation date prior to January 1, 1987. This example assumes that
net premiums and cash values were in the subaccount for the entire period and
that the values were determined on each Policy anniversary thereafter.
WRL J.P. MORGAN MONEY MARKET
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1988 .................................... $ 1,627 $ 1,627 $ 0 $ 0
1989* ................................... 3,348 3,319 788 758
1990* ................................... 5,262 5,192 2,702 2,632
1991* ................................... 7,239 7,116 4,678 4,555
1992* ................................... 9,157 8,977 6,596 6,417
1993* ................................... 10,902 10,666 8,598 8,361
1994* ................................... 12,593 12,296 10,544 10,247
1995* ................................... 14,430 14,064 12,638 12,271
1996* ................................... 16,585 16,154 15,049 14,617
1997* ................................... 18,738 18,246 17,458 16,966
1998* ................................... 21,050 20,508 20,025 19,484
1999* ................................... 23,438 22,841 22,670 22,073
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the WRL Dean
Asset Allocation portfolio subaccount would have affected benefits for a Policy
dated on the last valuation date prior to January 1, 1995. This example assumes
that net premiums and cash values were in the subaccount for the entire period
and that the values were determined on each Policy anniversary thereafter.
WRL DEAN ASSET ALLOCATION
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 .................................... $1,891 $1,891 $ 0 $ 0
1997* ................................... 3,934 3,903 1,373 1,342
1998* ................................... 6,366 6,291 3,806 3,730
1999* ................................... 8,512 8,382 5,951 5,821
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
66
<PAGE>
The following example shows how the hypothetical net return of the WRL GE
U.S. Equity subaccount would have affected benefits for a Policy dated on the
last valuation date prior to January 1, 1997. This example assumes that net
premiums and cash values were in the subaccount for the entire period and that
the values were determined on each Policy anniversary thereafter.
WRL GE U.S. EQUITY
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1998 .................................... $2,008 $2,008 $ 0 $ 0
1999* ................................... 4,380 4,348 1,819 1,787
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the WRL Third
Avenue Value subaccount would have affected benefits for a Policy dated on the
last valuation date prior to January 1, 1998. This example assumes that net
premiums and cash values were in the subaccount for the entire period and that
the values were determined on each Policy anniversary thereafter.
WRL THIRD AVENUE VALUE
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1999 .................................... $1,434 $1,434 $0 $0
</TABLE>
67
<PAGE>
The following example shows how the hypothetical net return of the WRL AEGON
Balanced subaccount would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1995. This example assumes that net premiums
and cash values were in the subaccount for the entire period and that the
values were determined on each Policy anniversary thereafter.
WRL AEGON BALANCED
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1996 .................................... $1,886 $1,886 $ 0 $ 0
1997* ................................... 3,796 3,766 1,236 1,205
1998* ................................... 6,235 6,160 3,674 3,599
1999* ................................... 8,260 8,132 5,699 5,571
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the WRL NWQ
Value Equity subaccount would have affected benefits for a Policy dated on the
last valuation date prior to January 1, 1997. This example assumes that net
premiums and cash values were in the subaccount for the entire period and that
the values were determined on each Policy anniversary thereafter.
WRL NWQ VALUE EQUITY
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1998 .................................... $1,975 $1,975 $ 0 $ 0
1999* ................................... 3,328 3,300 768 740
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
68
<PAGE>
The following example shows how the hypothetical net return of the WRL C.A.S.E.
Growth subaccount would have affected benefits for a Policy dated on the last
valuation date prior to January 1, 1996. This example assumes that net premiums
and cash values were in the subaccount for the entire period and that the
values were determined on each Policy anniversary thereafter.
WRL C.A.S.E. GROWTH
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1997 .................................... $1,846 $1,846 $ 0 $ 0
1998* ................................... 3,905 3,874 1,345 1,314
1999* ................................... 5,547 5,479 2,987 2,918
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the WRL
GE/Scottish Equitable International Equity subaccount would have affected
benefits for a Policy dated on the last valuation date prior to January 1,
1997. This example assumes that net premiums and cash values were in the
subaccount for the entire period and that the values were determined on each
Policy anniversary thereafter.
WRL GE/SCOTTISH EQUITABLE INTERNATIONAL EQUITY
Male Issue Age 35, $2,000 Annual Premium
($165,000 Specified Amount, Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Last valuation date prior to January 1: Current Guaranteed Current Guaranteed
- ----------------------------------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1998 .................................... $1,676 $1,676 $ 0 $ 0
1999* ................................... 3,638 3,607 1,077 1,047
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
Because the WRL J.P. Morgan Real Estate Securities subaccount did not
commence operations until May 1, 1998 and the WRL Goldman Sachs Growth, WRL
Goldman Sachs Small Cap, WRL T. Rowe Price Dividend Growth, WRL T. Rowe Price
Small Cap, WRL Salomon All Cap, WRL Pilgrim Baxter Mid Cap Growth and WRL
Dreyfus Mid Cap subaccounts did not commence operations until May 1, 1999,
there are no hypothetical illustrations for these subaccounts.
69
<PAGE>
OTHER PERFORMANCE DATA IN ADVERTISING SALES LITERATURE
We may compare each subaccount's performance to the performance of:
o other variable life issuers in general;
o variable life insurance policies which invest in mutual funds with
similar investment objectives and policies, as reported by Lipper
Analytical Services, Inc. ("Lipper") and Morningstar, Inc.
("Morningstar"); and other services, companies, individuals, or
industry or financial publications (E.G. FORBES, MONEY, THE WALL
STREET JOURNAL, BUSINESS WEEK, BARRON'S, KIPLINGER'S PERSONAL FINANCE,
and FORTUNE);
-> Lipper and Morningstar rank variable annuity contracts and
variable life policies. Their performance analysis ranks such
policies and contracts on the basis of total return, and assumes
reinvestment of distributions; but it does not show sales
charges, redemption fees or certain expense deductions at the
separate account level.
o the Standard & Poor's Index of 500 Common Stocks, or other widely
recognized indices;
-> unmanaged indices may assume the reinvestment of dividends, but
usually do not reflect deductions for the expenses of operating
or managing an investment portfolio; or
o other types of investments, such as:
-> certificates of deposit;
-> savings accounts and U.S. Treasuries;
-> certain interest rate and inflation indices (E.G. the Consumer
Price Index); or
-> indices measuring the performance of a defined group of
securities recognized by investors as representing a particular
segment of the securities markets (E.G. Donoghue Money Market
Institutional Average, Lehman Brothers Corporate Bond Index, or
Lehman Brothers Government Bond Index).
WESTERN RESERVE'S PUBLISHED RATINGS
We may publish in advertisements, sales literature, or reports we send to
you the ratings and other information that an independent ratings organization
assigns to us. These organizations include: A.M. Best Company, Moody's
Investors Service, Inc., Standard & Poor's Insurance Rating Services, and Duff
& Phelps Credit Rating Co. These ratings are opinions regarding an operating
insurance company's financial capacity to meet the obligations of its insurance
policies in accordance with their terms. These ratings do not apply to the
separate account, the subaccounts, the fund or its portfolios, or to their
performance.
70
<PAGE>
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SALE OF THE POLICIES
The Policy will be sold by individuals who are licensed as our life
insurance agents and who are also registered representatives of broker-dealers
having written sales agreements for the Policy with AFSG Securities Corporation
("AFSG"), the principal underwriter of the Policy. AFSG is located at 4333
Edgewood Road, N.E., Cedar Rapids, Iowa 52499. AFSG is registered with the SEC
under the Securities Exchange Act of 1934 as a broker-dealer, and is a member
of the National Association of Securities Dealers, Inc. The sales commission
payable to Western Reserve agents or other registered representatives may vary
with the sales agreement, but it is not expected to be greater than:
o 65% of all premiums you make during the first Policy year, PLUS
o 2.50% of all premiums you make during Policy years 2 through 10.
We will pay an additional sales commission of up to 0.15% of the Policy's cash
value on the fifth Policy anniversary and each anniversary thereafter where the
cash value (minus amounts attributable to loans) equals at least $5,000. In
addition, certain production, persistency and managerial bonuses may be paid.
LEGAL MATTERS
Sutherland Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain matters relating to the federal securities laws. All matters of Ohio
law pertaining to the Policy have been passed upon by Thomas E. Pierpan, Vice
President, Assistant Secretary and Associate General Counsel of Western
Reserve.
LEGAL PROCEEDINGS
Like other life insurance companies, we are involved in lawsuits. We are
not aware of any class action lawsuits naming us as a defendant or involving
the separate account. In some lawsuits involving other insurers, substantial
damages have been sought and/or material settlement payments have been made.
Although the outcome of any litigation cannot be predicted with certainty, we
believe that at the present time there are no pending or threatened lawsuits
that are reasonably likely to have a material adverse impact on us, or AFSG, or
the separate account.
VARIATIONS IN POLICY PROVISIONS
Certain provisions of the Policy may vary from the descriptions in this
prospectus, depending on when and where the Policy was issued, in order to
comply with different state laws. These variations may include restrictions on
use of the fixed account and different interest rates charged and credited on
Policy loans. Please refer to your Policy, since any variations will be
included in your Policy or in riders or endorsements attached to your Policy.
71
<PAGE>
YEAR 2000 READINESS DISCLOSURE
In May 1996, Western Reserve adopted and presently has in place a Year
2000 Project Plan (the "Plan") to review and analyze existing hardware and
software systems, as well as voice and data communications systems, to
determine if they are Year 2000 compliant. As of March 1, 1999, substantially
all of Western Reserve's mission-critical systems are Year 2000 compliant. The
Plan remains on track as we continue with the validation of our mission-critical
and non-mission-critical systems, including revalidation testing in 1999. In
addition, we have undertaken aggressive initiatives to test all systems that
interface with any third parties and other business partners. All of these
steps are aimed at allowing current operations to remain unaffected by the Year
2000 date change.
As of the date of this prospectus, Western Reserve has identified and made
available what it believes are the appropriate resources of hardware, people,
and dollars, including the engagement of outside third parties, to ensure that
the Plan will be completed.
The actions taken by management under the Plan are intended to reduce
significantly Western Reserve's risk of a material business interruption based
on the Year 2000 issues. It should be noted that the Year 2000 computer
problem, and its resolution, is complex and multifaceted, and any company's
success cannot be conclusively known until the Year 2000 is reached. In spite
of its efforts or results, our ability to function unaffected to and through
the Year 2000 may be adversely affected by actions, or failure to act, of third
parties beyond our knowledge or control.
This statement is a Year 2000 Readiness Disclosure pursuant to Section
3(9) of the YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT, 15 U.S.C.
Section 1 (1998).
EXPERTS
The financial statements of WRL Series Life Account as of December 31,
1998 and for the year then ended have been included herein in reliance upon the
report of PricewaterhouseCoopers LLP, independent accountants, and upon the
authority of that firm as experts in accounting and auditing.
The statutory-basis financial statements and schedules of Western Reserve
at December 31, 1998 and 1997 and for each of the three years in the period
ended December 31, 1998, appearing in this prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein which is based in part
on the report of PricewaterhouseCoopers LLP, independent accountants. The
financial statements referred to above are included in reliance upon such
reports given upon the authority of such firms as experts in accounting and
auditing.
Actuarial matters included in this prospectus have been examined by Alan
Yaeger as stated in the opinion filed as an exhibit to the registration
statement.
72
<PAGE>
FINANCIAL STATEMENTS
Our financial statements appear on the following pages. Our financial
statements should be distinguished from the separate account's financial
statements and you should consider our financial statements only as bearing
upon our ability to meet our obligations under the Policies.
Our financial statements for the years ended December 31, 1998 and 1997
and for each of the three years in the period ended December 31, 1998, have
been prepared on the basis of statutory accounting principles rather than
generally accepted accounting principles.
ADDITIONAL INFORMATION ABOUT WESTERN RESERVE
Western Reserve is a stock life insurance company that is wholly-owned by
First AUSA Life Insurance Company, which, in turn, is wholly-owned by AEGON
USA, Inc. Western Reserve's office is located at 570 Carillon Parkway, St.
Petersburg, Florida 33716-1202 and the mailing address is P.O. Box 5068,
Clearwater, Florida 33758-5068.
Western Reserve was incorporated in 1957 under the laws of Ohio and is
subject to regulation by the Insurance Department of the State of Ohio, as well
as by the insurance departments of all other states and jurisdictions in which
it does business. Western Reserve is licensed to sell insurance in all states
(except New York), Puerto Rico, Guam, and in the District of Columbia. Western
Reserve submits annual statements on its operations and finances to insurance
officials in all states and jurisdictions in which it does business. The Policy
described in this prospectus has been filed with, and where required, approved
by, insurance officials in those jurisdictions in which it is sold.
WESTERN RESERVE'S DIRECTORS AND OFFICERS
We are governed by a board of directors. The following table sets forth
the name, address and principal occupation during the past five years of each
of our directors.
73
<PAGE>
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH WESTERN RESERVE DURING PAST 5 YEARS
---------------- ----------------------------- -------------------
<S> <C> <C>
John R. Kenney Chairman of the Board, Chairman of the Board, and
570 Carillon Parkway Chief Executive Officer President of WRL Series Fund,
St. Petersburg, Florida 33716 and President Inc. (1993 - present); Chairman
of the Board of IDEX Mutual
Funds (1990 - present); Chair-
man of the Board of WRL
Investment Management, Inc.
(1996 - present); and Chairman
of the Board of WRL Investment
Services, Inc. (1996 - present).
Patrick S. Baird Director Executive Vice President (1995 -
4333 Edgewood Road, NE present), Chief Operating Officer
Cedar Rapids, Iowa 52499 (1996 - present), Chief Financial
Officer (1992 - 1995), Vice
President and Chief Tax Officer
(1984 - 1995) of AEGON USA,
Inc.
Jack E. Zimmerman Director Trustee, IDEX Mutual Funds
507 St. Michel Circle (1987 - present); retired from
Kettering, Ohio 45429 Martin Marietta (1993).
Lyman H. Treadway Director Retired Consultant.
30195 Chagrin Blvd., Ste. 210N
Cleveland, Ohio 44124
James R. Walker Director Self-employed, Public
3320 Office Park Dr. Accountant (1996 - present);
Dayton, Ohio 45439 Partner, Walker-Davis C.P.A.'s,
Dayton, Ohio (1990 - 1995).
</TABLE>
74
<PAGE>
The following table gives the name, address and principal occupation during the
past five years of the principal officers of Western Reserve (other than
officers listed above as directors).
PRINCIPAL OFFICERS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH WESTERN RESERVE DURING PAST 5 YEARS
---------------- ----------------------------- -------------------
<S> <C> <C>
Alan M. Yaeger* Executive Vice President, Executive Vice President, WRL
Actuary and Chief Series Fund, Inc. (1993 -
Financial Officer present); Director of WRL
Investment Management, Inc.
(1996 - present); Director of
WRL Investment Services, Inc.
(1996 - present).
William H. Geiger* Senior Vice President, Secretary Senior Vice President, Secretary,
and Corporate Counsel Corporate Counsel, and Group
Vice President-Compliance (1998
- present); Senior Vice President,
Secretary, General Counsel and
Group Vice President-
Compliance (1996 - 1998),
Senior Vice President, Secretary,
and General Counsel (1990 -
1996) of Western Reserve;
Group Vice President-
Compliance and Corporate
Counsel (1996 - present) of
AUSA Life Insurance Company,
Bankers United Life Assurance
Company, Life Investors
Insurance Company of America,
Monumental Life Insurance
Company and PFL Life Insur-
ance Company, subsidiaries of
AEGON USA, Inc.; Assistant
Secretary (1990 - present), Vice
President and Assistant Secretary
(1990 - 1997) of IDEX Mutual
Funds; and Assistant Secretary
(1994 - present) and Vice
President and Assistant Secretary
(1994 - 1997) of WRL Series
Fund, Inc.
Allan J. Hamilton* Vice President, Treasurer Vice President and Controller
and Controller (1987 - present), Treasurer (1997
- present) of Western Reserve;
Treasurer and Chief Financial
Officer of WRL Series Fund, Inc.
(1997 - present).
</TABLE>
* Located at 570 Carillon Parkway, St. Petersburg, Florida 33716-1202.
Western Reserve holds the assets of the separate account physically
segregated and apart from the general account. Western Reserve maintains
records of all purchases and sales of portfolio shares by each of the
subaccounts. A blanket bond was issued to AEGON U.S. Holding Corporation
("AEGON U.S.") in the amount of $5 million (subject to a $1 million
deductible),
75
<PAGE>
covering all of the employees of AEGON U.S. and its affiliates, including
Western Reserve. A Stockbrokers Blanket Bond, issued to AEGON U.S.A.
Securities, Inc. providing fidelity coverage, covers the activities of
registered representative of AFSG Securities Corporation to a limit of $12
million.
ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT
Western Reserve established the separate account as a separate investment
account under Ohio law in 1985. We own the assets in the separate account and
are obligated to pay all benefits under the Policies. The separate account is
used to support other life insurance policies of Western Reserve and its
affiliates, AUSA Life Insurance Company, Inc. and PFL Life Insurance Company,
as well as for other purposes permitted by law. The separate account is
registered with the SEC as an unit investment trust under the 1940 Act and
qualifies as a "separate account" within the meaning of the federal securities
laws.
76
<PAGE>
APPENDIX A
ILLUSTRATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following illustrations show how certain values under a sample Policy
would change with different rates of fictional investment performance over an
extended period of time. In particular, the illustrations show how the death
benefit, cash value, and net surrender value under a Policy issued to an
insured of a given age, would change over time if the premiums indicated were
paid and the return on the assets in the subaccounts were a uniform gross
annual rate (before any expenses) of 0%, 6% or 12%. The tables illustrate
Policy values that would result based on assumptions that you pay the premiums
indicated, you do not change your specified amount, and you do not take any
cash withdrawals or Policy loans. The values under the Policy will be different
from those shown even if the returns averaged 0%, 6% or 12%, but fluctuated
over and under those averages throughout the years shown.
We based the illustration on page 79 on a Policy for an insured who is a
35 year old male in the Ultimate Select, non-tobacco use, rate class, annual
premiums of $2,000, a $165,000 specified amount and death benefit Option A. The
illustration on that page also assumes cost of insurance charges based on our
GUARANTEED cost of insurance rates.
The illustration on page 80 is based on the same factors as those on page
79, except that cost of insurance rates are based on the CURRENT cost of
insurance rates (based on the 1980 Commissioners Standard Ordinary Mortality
Table).
The amounts we show for the death benefits, cash values and net surrender
values take into account (1) the daily charge for assuming mortality and
expense risks assessed against each subaccount. This charge is equivalent to an
annual charge of 0.90% of the average net assets of the subaccounts during the
first 15 Policy years (we intend to reduce this charge to 0.60% after the first
15 Policy years. However, we do not guarantee that we will do so); (2)
estimated daily expenses equivalent to an effective average annual expense
level of 0.94% of the portfolios' average daily net assets; and (3) all
applicable premium expense charges and cash value charges using the current
monthly Policy charge. The 0.94% average portfolio expense level assumes an
equal allocation of amounts among the 23 subaccounts. It is based on an average
0.80% investment advisory fee and estimated 1998 average normal operating
expenses of 0.14% for each of the portfolios in operation during 1998. We used
annualized actual audited expenses incurred during 1998 for the following
portfolios to calculate the average annual expense level: WRL J.P. Morgan Money
Market (0.46%), WRL AEGON Bond (0.54%), WRL Janus Growth (0.83%), WRL LKCM
Strategic Total Return (0.86%), WRL VKAM Emerging Growth (0.89%), WRL Janus
Global (0.95%), WRL Alger Aggressive Growth (0.91%), WRL AEGON Balanced
(0.91%), WRL Federated Growth & Income (0.90%), WRL C.A.S.E. Growth (1.00%),
WRL Dean Asset Allocation (0.86%), WRL NWQ Value Equity (0.89%), WRL
GE/Scottish Equitable International Equity (1.50%), WRL GE U.S. Equity (1.05%),
WRL Third Avenue Value (1.00%), and WRL J.P. Morgan Real Estate Securities
(1.00%). Because the portfolios of WRL Goldman Sachs Growth, WRL Goldman Sachs
Small Cap, WRL T. Rowe Price Dividend Growth, WRL T.
77
<PAGE>
Rowe Price Small Cap, WRL Salomon All Cap, WRL Pilgrim Baxter Mid Cap Growth
and WRL Dreyfus Mid Cap had not commenced operations as of December 31, 1998,
the estimated average annual portfolio expense level reflects estimated
expenses for each of these portfolios at 1.00% for 1999.
During 1998, WRL Management undertook to pay normal operating expenses of
certain portfolios that exceeded a certain stated percentage of those
portfolios' average daily net assets. WRL Management has undertaken until at
least April 30, 2000 to pay expenses to the extent normal operating expenses of
certain portfolios of the fund exceed a stated percentage of the portfolio's
average daily net assets. See the Portfolio Annual Expense Table p. 12. Taking
into account the assumed charges of 1.84%, the gross annual investment return
rates of 0%, 6% and 12% are equivalent to net annual investment return rates of
- -1.84%, 4.16%, and 10.16%.
The hypothetical returns shown in the tables are without any tax charges
that may be attributable to the separate account, because we are not currently
making such charges. In order to produce after tax returns of 0%, 6% or 12% if
such charges are made in the future, the separate account would have to earn a
sufficient amount in excess of 0%, 6% or 12% to cover any tax charges.
The "Premium Accumulated at 5%" column of each table shows the amount
which would accumulate if you invested an amount equal to the premium to earn
interest at 5% per year, compounded annually.
We will furnish, upon request, a comparable illustration reflecting the
proposed insured's age, gender, risk classification and desired plan features.
78
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
<TABLE>
<S> <C>
Specified Amount $165,000 Ultimate Select Class
Annual Premium $2,000 Option Type A
Using Guaranteed Cost of Insurance Rates
</TABLE>
<TABLE>
<CAPTION>
END OF PREMIUMS DEATH BENEFIT
POLICY ACCUMULATED ASSUMING HYPOTHETICAL GROSS AND NET
YEAR AT 5% ANNUAL INVESTMENT RETURN OF
0% (GROSS) 6% (GROSS) 12% (GROSS)
-1.84% (NET) YEARS 1-15 4.16% (NET) YEARS 1-15 10.16% (NET) YEARS 1-15
-1.69 (NET) YEARS 16+ 4.31% (NET) YEARS 16+ 10.31% (NET) YEARS 16+
<S> <C> <C> <C> <C>
1 2,100 165,000 165,000 165,000
2 4,305 165,000 165,000 165,000
3 6,620 165,000 165,000 165,000
4 9,051 165,000 165,000 165,000
5 11,604 165,000 165,000 165,000
6 14,284 165,000 165,000 165,000
7 17,098 165,000 165,000 165,000
8 20,053 165,000 165,000 165,000
9 23,156 165,000 165,000 165,000
10 26,414 165,000 165,000 165,000
15 45,315 165,000 165,000 165,000
20 69,439 165,000 165,000 165,000
30 (AGE 65) 139,522 165,000 165,000 339,271
40 (AGE 75) 253,680 * 165,000 793,211
50 (AGE 85) 439,631 * 170,894 2,017,430
60 (AGE 95) 742,526 * 254,782 4,815,026
</TABLE>
<TABLE>
<CAPTION>
END OF CASH VALUE NET SURRENDER VALUE
POLICY ASSUMING HYPOTHETICAL GROSS AND NET ASSUMING HYPOTHETICAL GROSS AND NET
YEAR ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
0% (GROSS) 6% (GROSS) 12% (GROSS) 0% (GROSS) 6% (GROSS) 12% (GROSS)
-1.84% (NET) 4.16% (NET) 10.16% (NET) -1.84% (NET) 4.16% (NET) 10.16% (NET)
YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15
-1.69% (NET) 4.31% (NET) 10.31% (NET) -1.69% (NET) 4.31% (NET) 10.31% (NET)
YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+
<S> <C> <C> <C> <C> <C> <C>
1 1,533 1,636 1,739 0 0 0
2 3,006 3,306 3,620 445 745 1,059
3 4,436 5,031 5,677 1,875 2,470 3,116
4 5,824 6,812 7,928 3,263 4,251 5,367
5 7,167 8,648 10,389 4,606 6,088 7,828
6 8,465 10,541 13,083 6,161 8,237 10,778
7 9,715 12,490 16,028 7,666 10,441 13,980
8 10,917 14,497 19,253 9,125 12,704 17,461
9 12,069 16,561 22,784 10,533 15,024 21,248
10 13,172 18,685 26,654 11,891 17,405 25,373
15 18,173 30,603 52,882 18,173 30,603 52,882
20 21,574 44,397 95,731 21,574 44,397 95,731
30 (AGE 65) 18,722 76,185 287,091 18,722 76,185 287,091
40 (AGE 75) * 111,721 741,318 * 111,721 741,381
50 (AGE 85) * 162,756 1,921,361 * 162,756 1,921,361
60 (AGE 95) * 252,260 4,767,353 * 252,260 4,767,353
</TABLE>
* In the absence of an additional payment, the Policy would lapse.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future rates of return. Actual investment rates of return may be more
or less than those shown and will depend on a number of factors, including the
investment allocations by an owner and the different investment rates of return
for the fund. The death benefit, cash value and net surrender value for a
Policy would be different from those shown if the actual investment rates of
return averaged 0%, 6% and 12% over a period of years, but fluctuated above or
below that average for individual Policy years. No representation can be made
by Western Reserve or the fund that these hypothetical investment rates of
return can be achieved for any one year or sustained over any period of time.
This illustration must be preceded or accompanied by a current fund prospectus.
79
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
<TABLE>
<S> <C>
Specified Amount $165,000 Ultimate Select Class
Annual Premium $2,000 Option Type A
Using Current Cost of Insurance Rates
</TABLE>
<TABLE>
<CAPTION>
END OF PREMIUMS DEATH BENEFIT
POLICY ACCUMULATED ASSUMING HYPOTHETICAL GROSS AND NET
YEAR AT 5% ANNUAL INVESTMENT RETURN OF
0% (GROSS) 6% (GROSS) 12% (GROSS)
-1.84% (NET) YEARS 1-15 4.16% (NET) YEARS 1-15 10.16% (NET) YEARS 1-15
-1.69% (NET) YEARS 16+ 4.31% (NET) YEARS 16+ 10.31% (NET) YEARS 16+
<S> <C> <C> <C> <C>
1 2,100 165,000 165,000 165,000
2 4,305 165,000 165,000 165,000
3 6,620 165,000 165,000 165,000
4 9,051 165,000 165,000 165,000
5 11,604 165,000 165,000 165,000
6 14,284 165,000 165,000 165,000
7 17,098 165,000 165,000 165,000
8 20,053 165,000 165,000 165,000
9 23,156 165,000 165,000 165,000
10 26,414 165,000 165,000 165,000
15 45,315 165,000 165,000 165,000
20 69,439 165,000 165,000 165,000
30 (AGE 65) 139,522 165,000 165,000 353,523
40 (AGE 75) 253,680 165,000 165,000 848,172
50 (AGE 85) 439,631 * 258,164 2,225,344
60 (AGE 95) 742,526 * 394,553 5,622,222
</TABLE>
<TABLE>
<CAPTION>
END OF CASH VALUE NET SURRENDER VALUE
POLICY ASSUMING HYPOTHETICAL GROSS AND NET ASSUMING HYPOTHETICAL GROSS AND NET
YEAR ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
0% (GROSS) 6% (GROSS) 12% (GROSS) 0% (GROSS) 6% (GROSS) 12% (GROSS)
-1.84% (NET) 4.16% (NET) 10.16% (NET) -1.84% (NET) 4.16% (NET) 10.16% (NET)
YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15
-1.69% (NET) 4.31% (NET) 10.31% (NET) -1.69% (NET) 4.31% (NET) 10.31% (NET)
YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+
<S> <C> <C> <C> <C> <C> <C>
1 1,533 1,636 1,739 0 0 0
2 3,034 3,336 3,650 474 775 1,089
3 4,501 5,100 5,749 1,940 2,539 3,188
4 5,935 6,932 8,057 3,374 4,371 5,496
5 7,326 8,824 10,584 4,765 6,263 8,023
6 8,674 10,779 13,352 6,369 8,474 11,048
7 9,977 12,795 16,384 7,928 10,746 14,335
8 11,236 14,877 19,708 9,443 13,084 17,915
9 12,429 17,004 23,333 10,893 15,468 21,796
10 13,568 19,191 27,301 12,287 17,910 26,020
15 18,723 31,431 54,152 18,723 31,431 54,152
20 22,588 45,932 98,247 22,588 45,932 98,247
30 (AGE 65) 27,819 86,160 289,773 27,819 86,160 289,773
40 (AGE 75) 24,104 147,727 792,685 24,104 147,727 792,685
50 (AGE 85) * 245,870 2,119,375 * 245,870 2,119,375
60 (AGE 95) * 390,647 5,566,556 * 390,647 5,566,556
</TABLE>
* In the absence of an additional payment, the Policy would lapse.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual investment rates of return
may be more or less than those shown and will depend on a number of factors,
including the investment allocations by an owner and the different investment
rates for the fund. The death benefit, cash value and net surrender value for a
Policy would be different from those shown if the actual investment rates of
return averaged 0%, 6% and 12% over a period of years, but fluctuated above or
below that average for individual Policy years. No representation can be made
by Western Reserve or the fund that these hypothetical investment rates of
return can be achieved for any one year or sustained over any period of time.
This illustration must be preceded or accompanied by a current fund prospectus.
80
<PAGE>
APPENDIX B
WEALTH INDICES OF INVESTMENTS IN THE U.S. CAPITAL MARKET
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The information below graphically depicts the growth of $1.00 invested in
large company stocks, small company stocks, long-term government bonds,
Treasury bills, and hypothetical asset returning the inflation rate over the
period from the end of 1925 to the end of 1998. All results assume reinvestment
of dividends on stocks or coupons on bonds and no taxes. Transaction costs are
not included, except in the small stock index starting in 1982.
Each of the cumulative index values is initialized at $1.00 at year-end
1925. The graph illustrates that large company stocks and small company stocks
have the best performance over the entire 73-year period: investments of $1.00
in these assets would have grown to $2,350.89 and $5,116.65, respectively, by
year-end 1998. This higher growth was earned by investments involving
substantial risk. In contrast, long-term government bonds (with an approximate
20-year maturity), which exposed the holder to much less risk, grew to only
$44.18.
The lowest-risk strategy over the past 73 years (for those with short-term
time horizons) was to buy U.S. Treasury bills. Since U.S. Treasury bills tended
to track inflation, the resulting real (inflation-adjusted) returns were near
zero for the entire 1926 - 1998 period.
81
<PAGE>
[GRAPH OMITTED]
COMPOUND ANNUAL RATES OF RETURN BY DECADE
<TABLE>
<CAPTION>
1920s* 1930s 1940s 1950s 1960s 1970s 1980s 1990s** 1989-98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Large Company ............ 19.2% -0.1% 9.2% 19.4% 7.8% 5.9% 17.5% 17.9% 19.2%
Small Company ............ -4.5 1.4 20.7 16.9 15.5 11.5 15.8 13.6 13.2
Long-Term Corp. .......... 5.2 6.9 2.7 1.0 1.7 6.2 13.0 10.3 10.9
Long-Term Govt. .......... 5.0 4.9 3.2 -0.1 1.4 5.5 12.6 11.0 11.7
Inter-Term Govt. ......... 4.2 4.6 1.8 1.3 3.5 7.0 11.9 8.3 8.7
Treasury Bills ........... 3.7 0.6 0.4 1.9 3.9 6.3 8.9 5.0 5.3
Inflation ................ -1.1 -2.0 5.4 2.2 2.5 7.4 5.1 3.0 3.1
</TABLE>
- ----------------
* Based on the period 1926-1929.
** Based on the period 1990-1998.
Used with permission. (C)1999 Ibbotson Associates, Inc. All rights reserved.
[Certain portions of this work were derived from copyrighted works of Roger G.
Ibbotson and Rex Sinquefield.]
82
<PAGE>
APPENDIX C
SURRENDER CHARGE PER THOUSAND
(BASED ON THE GENDER AND RATE CLASS OF THE INSURED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MALE MALE FEMALE FEMALE
ISSUE ULTIMATE SELECT/ ULTIMATE STANDARD/ ULTIMATE SELECT/ ULTIMATE STANDARD/
AGE SELECT STANDARD SELECT STANDARD
- ----- ---------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
0 N/A 11.76 N/A 11.76
1 N/A 8.16 N/A 8.16
2 N/A 8.16 N/A 8.16
3 N/A 7.92 N/A 7.92
4 N/A 7.68 N/A 7.68
5 N/A 7.68 N/A 7.68
6 N/A 7.68 N/A 7.68
7 N/A 7.68 N/A 7.68
8 N/A 7.68 N/A 7.68
9 N/A 7.68 N/A 7.68
10 N/A 7.68 N/A 7.68
11 N/A 7.68 N/A 7.68
12 N/A 7.68 N/A 7.68
13 N/A 7.92 N/A 7.92
14 N/A 8.16 N/A 8.16
15 N/A 8.40 N/A 8.40
16 N/A 8.52 N/A 8.52
17 N/A 8.88 N/A 8.88
18 8.72 9.20 8.72 9.20
19 8.84 9.32 8.84 9.32
20 8.96 9.44 8.96 9.44
21 9.16 9.88 9.16 9.64
22 9.32 10.04 9.32 9.80
23 9.52 10.24 9.52 10.00
24 9.68 10.40 9.68 10.40
25 9.88 10.84 9.88 10.60
26 10.56 11.28 10.32 11.04
27 11.00 11.72 10.76 11.48
28 11.40 12.12 11.16 12.12
29 12.08 12.80 11.84 12.56
30 12.52 13.24 12.28 13.00
31 13.04 14.00 12.80 13.52
32 13.76 14.48 13.52 14.24
33 14.28 15.24 14.04 14.76
34 14.76 15.96 14.52 15.48
35 15.52 16.48 15.28 16.00
</TABLE>
83
<PAGE>
APPENDIX C -- (CONTINUED)
SURRENDER CHARGE PER THOUSAND
(BASED ON THE GENDER AND RATE CLASS OF THE INSURED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MALE MALE FEMALE FEMALE
ISSUE ULTIMATE SELECT/ ULTIMATE STANDARD/ ULTIMATE SELECT/ ULTIMATE STANDARD/
AGE SELECT STANDARD SELECT STANDARD
- ----- ---------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
36 16.20 17.40 15.96 16.92
37 17.20 18.40 16.72 17.92
38 18.12 19.56 17.64 18.60
39 19.08 20.76 18.36 19.56
40 20.28 21.96 19.32 20.52
41 21.64 23.56 20.68 22.12
42 23.08 25.24 22.12 23.80
43 24.44 27.08 23.15 25.40
44 26.04 29.16 23.86 26.96
45 27.44 31.04 24.59 27.83
46 28.72 32.80 25.38 28.76
47 29.84 34.56 26.22 29.73
48 31.00 36.32 27.11 30.75
49 32.24 38.32 28.04 31.84
50 33.56 40.56 29.05 32.99
51 34.98 42.56 30.11 34.20
52 36.49 45.24 31.24 35.48
53 38.10 47.68 32.45 36.84
54 39.83 50.84 33.72 38.28
55 41.68 53.28 35.09 39.79
56 43.63 55.79 36.54 41.39
57 45.74 57.00 38.08 43.06
58 47.98 57.00 39.74 44.88
59 50.38 57.00 41.54 46.85
60 52.97 57.00 43.47 48.97
61 55.74 57.00 45.57 51.26
62 57.00 57.00 47.82 53.73
63 57.00 57.00 50.26 56.41
64 57.00 57.00 52.88 57.00
65 57.00 57.00 55.68 57.00
66 and over 57.00 57.00 57.00 57.00
</TABLE>
WRL00159-05/99
84
<PAGE>
Index to Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WRL SERIES LIFE ACCOUNT:
Report of Independent Accountants dated January 29, 1999
Statements of assets and liabilities for the year ended December 31, 1998
Statements of changes in net assets for the years ended December 31, 1998 and
1997
Financial highlights for the years ended December 31, 1998, 1997, 1996, 1995
and 1994
Notes to the Financial Statements
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Report of Independent Auditors dated February 19, 1999
Statutory-Basis Balance Sheets at December 31, 1998 and 1997
Statutory-Basis Statements of Operations for the years ended December 31, 1998,
1997 and 1996
Statutory-Basis Statements of Changes in Capital and Surplus for the years
ended December 31, 1998, 1997 and 1996
Statutory-Basis Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996
Notes to Statutory-Basis Financial Statements
Statutory-Basis Financial Statement Schedules
85
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Western Reserve Life
Assurance Co. of Ohio and Policy Owners of the
WRL Series Life Account.
In our opinion, the accompanying statement of assets and liabilities and
the related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the financial
position of each of the Sub-Accounts constituting the WRL Series Life Account
(a separate account of Western Reserve Life Assurance Co. of Ohio, hereafter
referred to as the "Life Account") at December 31, 1998, the results of each of
their operations, the changes in each of their net assets and the financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Life Account'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 provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 29, 1999
86
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1998
ALL AMOUNTS (EXCEPT UNIT VALUES) IN THOUSANDS
<TABLE>
<CAPTION>
MONEY
MARKET BOND GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares ............................................. 24,472 2,150 13,310
======= ======= ========
Cost ............................................... $24,472 $24,523 $423,759
======= ======= ========
Investment, at net asset value ...................... $24,472 $24,925 $797,795
Transfers receivable from depositor ................. 104 9 232
------- ------- --------
Total assets ....................................... 24,576 24,934 798,027
------- ------- --------
LIABILITIES:
Accrued expenses .................................... 0 0 0
Transfers payable to depositor ...................... 0 0 0
------- ------- --------
Total liabilities .................................. 0 0 0
------- ------- --------
Net assets ......................................... $24,576 $24,934 $798,027
======= ======= ========
NET ASSETS CONSISTS OF:
Policy Owners' equity ............................... $24,576 $24,934 $798,027
Depositor's equity .................................. 0 0 0
------- ------- --------
Net assets applicable to units outstanding ......... $24,576 $24,934 $798,027
======= ======= ========
Policy Owners' units ................................ 1,460 1,090 8,668
Depositor's units ................................... 0 0 0
------- ------- --------
Units outstanding .................................. 1,460 1,090 8,668
======= ======= ========
Accumulation unit value ............................ $ 16.83 $ 22.89 $ 92.07
======= ======= ========
<CAPTION>
STRATEGIC EMERGING
GLOBAL TOTAL RETURN GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares ............................................. 9,833 6,028 9,752
======== ======= ========
Cost ............................................... $189,249 $81,865 $176,852
======== ======= ========
Investment, at net asset value ...................... $233,131 $98,885 $262,548
Transfers receivable from depositor ................. 125 41 117
-------- ------- --------
Total assets ....................................... 233,256 98,926 262,665
-------- ------- --------
LIABILITIES:
Accrued expenses .................................... 0 0 0
Transfers payable to depositor ...................... 0 0 0
-------- ------- --------
Total liabilities .................................. 0 0 0
-------- ------- --------
Net assets ......................................... $233,256 $98,926 $262,665
======= ========
NET ASSETS CONSISTS OF:
Policy Owners' equity ............................... $233,256 $98,926 $262,665
Depositor's equity .................................. 0 0 0
-------- ------- --------
Net assets applicable to units outstanding ......... $233,256 $98,926 $262,665
======== ======= ========
Policy Owners' units ................................ 10,167 4,814 8,218
Depositor's units ................................... 0 0 0
-------- ------- --------
Units outstanding .................................. 10,167 4,814 8,218
======== ======= ========
Accumulation unit value ............................ $ 22.94 $ 20.55 $ 31.96
======== ======= ========
</TABLE>
The notes to the financial statements are an integral part of this report.
87
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1998
ALL AMOUNTS (EXCEPT UNIT VALUES) IN THOUSANDS
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH &
GROWTH BALANCED INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares ............................................. 7,923 1,185 1,306
======== ======= =======
Cost ............................................... $126,802 $13,872 $16,213
======== ======= =======
Investment, at net asset value ...................... $177,787 $14,863 $16,036
Transfers receivable from depositor ................. 70 1 11
-------- ------- -------
Total assets ....................................... 177,857 14,864 16,047
-------- ------- -------
LIABILITIES:
Accrued expenses .................................... 0 0 0
Transfers payable to depositor ...................... 0 0 0
-------- ------- -------
Total liabilities .................................. 0 0 0
-------- ------- -------
Net assets ......................................... $177,857 $14,864 $16,047
======== ======= =======
NET ASSETS CONSISTS OF:
Policy Owners' equity ............................... $177,857 $14,864 $16,047
Depositor's equity .................................. 0 0 0
-------- ------- -------
Net assets applicable to units outstanding ......... $177,857 $14,864 $16,047
======== ======= =======
Policy Owners' units ................................ 6,669 990 976
Depositor's units ................................... 0 0 0
-------- ------- -------
Units outstanding .................................. 6,669 990 976
======== ======= =======
Accumulation unit value ............................ $ 26.67 $ 15.02 $ 16.44
======== ======= =======
<CAPTION>
TACTICAL ASSET C.A.S.E.
ALLOCATION GROWTH VALUE EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares ............................................. 2,988 1,364 2,152
======= ======= =======
Cost ............................................... $38,916 $19,242 $28,825
======= ======= =======
Investment, at net asset value ...................... $39,889 $17,718 $26,066
Transfers receivable from depositor ................. 15 12 17
------- ------- -------
Total assets ....................................... 39,904 17,730 26,083
------- ------- -------
LIABILITIES:
Accrued expenses .................................... 0 0 0
Transfers payable to depositor ...................... 0 0 0
------- ------- -------
Total liabilities .................................. 0 0 0
------- ------- -------
Net assets ......................................... $39,904 $17,730 $26,083
======= ======= =======
NET ASSETS CONSISTS OF:
Policy Owners' equity ............................... $39,904 $17,730 $26,083
Depositor's equity .................................. 0 0 0
------- ------- -------
Net assets applicable to units outstanding ......... $39,904 $17,730 $26,083
======= ======= =======
Policy Owners' units ................................ 2,383 1,417 1,982
Depositor's units ................................... 0 0 0
------- ------- -------
Units outstanding .................................. 2,383 1,417 1,982
======= ======= =======
Accumulation unit value ............................ $ 16.74 $ 12.51 $ 13.16
======= ======= =======
</TABLE>
The notes to the financial statements are an integral part of this report.
88
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1998
ALL AMOUNTS (EXCEPT UNIT VALUES) IN THOUSANDS
<TABLE>
<CAPTION>
INTERNATIONAL U.S. THIRD AVENUE
EQUITY EQUITY VALUE
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares ............................................. 483 976 302
====== ======= ======
Cost ............................................... $5,705 $13,010 $2,904
====== ======= ======
Investment, at net asset value ...................... $5,824 $14,078 $2,801
Transfers receivable from depositor ................. 3 6 6
------ ------- ------
Total assets ....................................... 5,827 14,084 2,807
------ ------- ------
LIABILITIES:
Accrued expenses .................................... 0 0 0
Transfers payable to depositor ...................... 0 0 0
------ ------- ------
Total liabilities .................................. 0 0 0
------ ------- ------
Net assets ......................................... $5,827 $14,084 $2,807
====== ======= ======
NET ASSETS CONSISTS OF:
Policy Owners' equity ............................... $5,827 $14,084 $2,622
Depositor's equity .................................. 0 0 185
------ ------- ------
Net assets applicable to units outstanding ......... $5,827 $14,084 $2,807
====== ======= ======
Policy Owners' units ................................ 489 919 284
Depositor's units ................................... 0 0 20
------ ------- ------
Units outstanding .................................. 489 919 304
====== ======= ======
Accumulation unit value ............................ $11.92 $ 15.33 $ 923
====== ======= ======
</TABLE>
REAL ESTATE
SECURITIES
SUB-ACCOUNT
-----------
ASSETS:
Investment in WRL Series Fund, Inc.:
Shares ............................................. 83
=====
Cost ............................................... $ 784
=====
Investment, at net asset value ...................... $ 708
Transfers receivable from depositor ................. 1
-----
Total assets ....................................... 709
-----
LIABILITIES:
Accrued expenses .................................... 0
Transfers payable to depositor ...................... 0
-----
Total liabilities .................................. 0
-----
Net assets ......................................... $ 709
=====
NET ASSETS CONSISTS OF:
Policy Owners' equity ............................... $ 371
Depositor's equity .................................. 338
-----
Net assets applicable to units outstanding ......... $ 709
=====
Policy Owners' units ................................ 44
Depositor's units ................................... 40
-----
Units outstanding .................................. 84
=====
Accumulation unit value ............................ $8.46
=====
The notes to the financial statements are an integral part of this report.
89
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
MONEY
MARKET BOND GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- -----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ......................................................... $1,113 $1,196 $ 1,180
Capital gain distributions .............................................. 0 0 5,200
------ ------ --------
Total investment income ................................................ 1,113 1,196 6,380
EXPENSES:
Mortality and expense risk .............................................. 194 194 5,277
------ ------ --------
Net investment income (loss) ........................................... 919 1,002 1,103
------ ------ --------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions .................. 0 642 12,232
Change in unrealized appreciation (depreciation) ....................... 0 71 283,227
------ ------ --------
Net gain (loss) on investment securities ............................... 0 713 295,459
------ ------ --------
Net increase (decrease) in net assets resulting from operations ....... $ 919 $1,715 $296,562
====== ====== ========
<CAPTION>
STRATEGIC EMERGING
GLOBAL TOTAL RETURN GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- -----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ......................................................... $ 1,092 $2,240 $ 0
Capital gain distributions .............................................. 8,026 1,844 8,683
------- ------ -------
Total investment income ................................................ 9,118 4,084 8,683
EXPENSES:
Mortality and expense risk .............................................. 1,693 800 1,789
------- ------ -------
Net investment income (loss) ........................................... 7,425 3,284 6,894
------- ------ -------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions .................. 3,529 1,097 4,995
Change in unrealized appreciation (depreciation) ....................... 34,898 3,250 54,519
------- ------ -------
Net gain (loss) on investment securities ............................... 38,427 4,347 59,514
------- ------ -------
Net increase (decrease) in net assets resulting from operations ....... $45,852 $7,631 $66,408
======= ====== =======
</TABLE>
The notes to the financial statements are an integral part of this report.
90
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
AGGRESSIVE
GROWTH BALANCED GROWTH & INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- -----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ......................................................... $ 356 $329 $ 651
Capital gain distributions .............................................. 8,627 13 112
------- ---- ------
Total investment income ................................................ 8,983 342 763
EXPENSES:
Mortality and expense risk .............................................. 1,132 115 119
------- ---- ------
Net investment income (loss) ........................................... 7,851 227 644
------- ---- ------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions .................. 2,395 262 390
Change in unrealized appreciation (depreciation) ....................... 41,953 314 (659)
------- ---- ------
Net gain (loss) on investment securities ............................... 44,348 576 (269)
------- ---- ------
Net increase (decrease) in net assets resulting from operations ....... $52,199 $803 $ 375
======= ==== ======
<CAPTION>
TACTICAL ASSET C.A.S.E.
ALLOCATION GROWTH VALUE EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- -----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income .................................................. $ 1,115 $ 1,514 $ 530
Capital gain distributions ....................................... 2,619 90 1,755
-------- -------- --------
Total investment income ......................................... 3,734 1,604 2,285
EXPENSES:
Mortality and expense risk ....................................... 315 129 264
-------- -------- --------
Net investment income (loss) .................................... 3,419 1,475 2,021
-------- -------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions ........... 429 175 1,254
Change in unrealized appreciation (depreciation) ................ (1,516) (1,289) (5,937)
-------- -------- --------
Net gain (loss) on investment securities ........................ (1,087) (1,114) (4,683)
-------- -------- --------
Net increase (decrease) in net assets resulting from operations $ 2,332 $ 361 $ (2,662)
======== ======== ========
</TABLE>
The notes to the financial statements are an integral part of this report.
91
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
INTERNATIONAL U.S. THIRD AVENUE
EQUITY EQUITY BOND VALUE
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT(a)
----------- ----------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ......................................................... $ 3 $ 413 $ 8
Capital gain distributions .............................................. 0 94 0
----- ------ ------
Total investment income ................................................ 3 507 8
EXPENSES:
Mortality and expense risk .............................................. 35 73 19
----- ------ ------
Net investment income (loss) ........................................... (32) 434 (11)
----- ------ ------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions .................. 147 358 (39)
Change in unrealized appreciation (depreciation) ....................... 222 1,053 (103)
----- ------ ------
Net gain (loss) on investment securities ............................... 369 1,411 (142)
----- ------ ------
Net increase (decrease) in net assets resulting from operations ....... $ 337 $1,845 $ (153)
===== ====== ======
<CAPTION>
REAL ESTATE
SECURITIES
SUB-ACCOUNT(b)
--------------
<S> <C>
INVESTMENT INCOME:
Dividend income .................................................. $ 0
Capital gain distributions ....................................... 0
------
Total investment income ......................................... 0
EXPENSES:
Mortality and expense risk ....................................... 4
------
Net investment income (loss) .................................... (4)
-------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) from securities transactions ........... (36)
Change in unrealized appreciation (depreciation) ................ (76)
------
Net gain (loss) on investment securities ........................ (112)
------
Net increase (decrease) in net assets resulting from operations $ (116)
======
</TABLE>
(a) The inception date of this Sub-Account was January 2, 1998.
(b) The inception date of this Sub-Account was May 1, 1998.
The notes to the financial statements are an integral part of this report.
92
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
MONEY MARKET
SUB-ACCOUNT
DECEMBER 31,
-----------------------
1998 1997
------------ ----------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) .......................................... $ 919 $ 639
Net gain (loss) on investment securities .............................. 0 0
---------- --------
Net increase (decrease) in net assets resulting from operations ....... 919 639
---------- --------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ................................ 12,763 7,719
---------- --------
Less cost of units redeemed:
Administrative charges ............................................... 3,123 3,108
Policy loans ......................................................... 1,163 687
Surrender benefits ................................................... 1,250 854
Death benefits ....................................................... 10 9
---------- --------
5,546 4,658
---------- --------
Increase (decrease) in net assets from capital unit transactions ..... 7,217 3,061
---------- --------
Net increase (decrease) in net assets ................................ 8,136 3,700
Depositor's equity contribution (redemption) .......................... 0 0
NET ASSETS:
Beginning of year ..................................................... 16,440 12,740
---------- --------
End of year ........................................................... $ 24,576 $ 16,440
========== ========
UNIT ACTIVITY:
Units outstanding - beginning of year ................................. 1,020 825
Units issued .......................................................... 11,339 9,509
Units redeemed ........................................................ (10,899) (9,314)
---------- --------
Units outstanding - end of year ....................................... 1,460 1,020
========== ========
<CAPTION>
BOND GROWTH
SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31, DECEMBER 31,
---------------------- ------------------------
1998 1997 1998 1997
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) .......................................... $ 1,002 $ 661 $ 1,103 $ 44,206
Net gain (loss) on investment securities .............................. 713 418 295,459 15,238
------- ------- -------- --------
Net increase (decrease) in net assets resulting from operations ....... 1,715 1,079 296,562 59,444
------- ------- -------- --------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ................................ 9,472 7,506 140,684 106,236
------- ------- -------- --------
Less cost of units redeemed:
Administrative charges ............................................... 2,292 1,633 44,910 37,231
Policy loans ......................................................... 594 428 18,083 11,212
Surrender benefits ................................................... 865 437 22,312 15,746
Death benefits ....................................................... 159 15 4,185 711
------- ------- -------- --------
3,910 2,513 89,490 64,900
------- ------- -------- --------
Increase (decrease) in net assets from capital unit transactions ..... 5,562 4,993 51,194 41,336
------- ------- -------- --------
Net increase (decrease) in net assets ................................ 7,277 6,072 347,756 100,780
Depositor's equity contribution (redemption) .......................... 0 0 0 0
NET ASSETS:
Beginning of year ..................................................... 17,657 11,585 450,271 349,491
------- ------- -------- --------
End of year ........................................................... $24,934 $17,657 $798,027 $450,271
======= ======= ======== ========
UNIT ACTIVITY:
Units outstanding - beginning of year ................................. 836 593 7,972 7,208
Units issued .......................................................... 1,030 568 2,967 2,877
Units redeemed ........................................................ (776) (325) (2,271) (2,113)
------- ------- -------- --------
Units outstanding - end of year ....................................... 1,090 836 8,668 7,972
======= ======= ======== ========
<CAPTION>
GLOBAL
SUB-ACCOUNT
DECEMBER 31,
------------------------
1998 1997
----------- ------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) .......................................... $ 7,425 $ 15,859
Net gain (loss) on investment securities .............................. 38,427 805
-------- --------
Net increase (decrease) in net assets resulting from operations ....... 45,852 16,664
-------- --------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ................................ 72,962 64,272
-------- --------
Less cost of units redeemed:
Administrative charges ............................................... 19,369 12,590
Policy loans ......................................................... 4,953 2,948
Surrender benefits ................................................... 5,662 3,391
Death benefits ....................................................... 591 149
-------- --------
30,575 19,078
-------- --------
Increase (decrease) in net assets from capital unit transactions ..... 42,387 45,194
-------- --------
Net increase (decrease) in net assets ................................ 88,239 61,858
Depositor's equity contribution (redemption) .......................... 0 0
NET ASSETS:
Beginning of year ..................................................... 145,017 83,159
-------- --------
End of year ........................................................... $233,256 $145,017
======== ========
UNIT ACTIVITY:
Units outstanding - beginning of year ................................. 8,145 5,497
Units issued .......................................................... 5,610 5,205
Units redeemed ........................................................ (3,588) (2,557)
-------- --------
Units outstanding - end of year ....................................... 10,167 8,145
======== ========
<CAPTION>
STRATEGIC
TOTAL RETURN EMERGING GROWTH
SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31, DECEMBER 31,
----------------------- ------------------------
1998 1997 1998 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) .......................................... $ 3,284 $ 6,101 $ 6,894 $ 13,841
Net gain (loss) on investment securities .............................. 4,347 6,521 59,514 10,932
-------- -------- -------- --------
Net increase (decrease) in net assets resulting from operations ....... 7,631 12,622 66,408 24,773
-------- -------- -------- --------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ................................ 24,191 22,072 64,824 54,392
-------- -------- -------- --------
Less cost of units redeemed:
Administrative charges ............................................... 7,696 6,025 19,612 14,518
Policy loans ......................................................... 2,319 1,624 5,601 3,692
Surrender benefits ................................................... 2,587 2,044 7,688 3,986
Death benefits ....................................................... 1,047 148 368 192
-------- -------- -------- --------
13,649 9,841 33,269 22,388
-------- -------- -------- --------
Increase (decrease) in net assets from capital unit transactions ..... 10,542 12,231 31,555 32,004
-------- -------- -------- --------
Net increase (decrease) in net assets ................................ 18,173 24,853 97,963 56,777
Depositor's equity contribution (redemption) .......................... 0 0 0 0
NET ASSETS:
Beginning of year ..................................................... 80,753 55,900 164,702 107,925
-------- -------- -------- --------
End of year ........................................................... $ 98,926 $ 80,753 $262,665 $164,702
======== ======== ======== ========
UNIT ACTIVITY:
Units outstanding - beginning of year ................................. 4,270 3,570 7,013 5,532
Units issued .......................................................... 1,946 1,809 4,099 4,085
Units redeemed ........................................................ (1,402) (1,109) (2,894) (2,604)
-------- -------- -------- --------
Units outstanding - end of year ....................................... 4,814 4,270 8,218 7,013
======== ======== ======== ========
</TABLE>
The notes to the financial statements are an integral part of this report.
93
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH
SUB-ACCOUNT
DECEMBER 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) .......................................... $ 7,851 $ 7,795
Net gain (loss) on investment securities .............................. 44,348 6,524
-------- --------
Net increase (decrease) in net assets resulting from operations ....... 52,199 14,319
-------- --------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ................................ 53,159 40,282
-------- --------
Less cost of units redeemed:
Administrative charges ............................................... 13,960 9,888
Policy loans ......................................................... 3,522 1,926
Surrender benefits ................................................... 4,423 2,485
Death benefits ....................................................... 248 58
-------- --------
22,153 14,357
-------- --------
Increase (decrease) in net assets from capital unit transactions ..... 31,006 25,925
-------- --------
Net increase (decrease) in net assets ................................ 83,205 40,244
Depositor's equity contribution (redemption) .......................... 0 0
NET ASSETS:
Beginning of year ..................................................... 94,652 54,408
-------- --------
End of year ........................................................... $177,857 $ 94,652
======== ========
UNIT ACTIVITY:
Units outstanding - beginning of year ................................. 5,230 3,702
Units issued .......................................................... 3,797 3,540
Units redeemed ........................................................ (2,358) (2,012)
-------- --------
Units outstanding - end of year ....................................... 6,669 5,230
======== ========
<CAPTION>
BALANCED GROWTH & INCOME
SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) .......................................... $ 227 $ 992 $ 644 $1,214
Net gain (loss) on investment securities .............................. 576 226 (269) 283
------- ------- ------- ------
Net increase (decrease) in net assets resulting from operations ....... 803 1,218 375 1,497
------- ------- ------- ------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ................................ 5,658 4,373 8,963 3,232
------- ------- ------- ------
Less cost of units redeemed:
Administrative charges ............................................... 1,423 958 1,633 733
Policy loans ......................................................... 279 179 218 163
Surrender benefits ................................................... 596 153 431 260
Death benefits ....................................................... 15 3 72 11
------- ------- ------- ------
2,313 1,293 2,354 1,167
------- ------- ------- ------
Increase (decrease) in net assets from capital unit transactions ..... 3,345 3,080 6,609 2,065
------- ------- ------- ------
Net increase (decrease) in net assets ................................ 4,148 4,298 6,984 3,562
Depositor's equity contribution (redemption) .......................... 0 0 0 0
NET ASSETS:
Beginning of year ..................................................... 10,716 6,418 9,063 5,501
------- ------- ------- ------
End of year ........................................................... $14,864 $10,716 $16,047 $9,063
======= ======= ======= ======
UNIT ACTIVITY:
Units outstanding - beginning of year ................................. 756 526 563 422
Units issued .......................................................... 578 472 966 352
Units redeemed ........................................................ (344) (242) (553) (211)
------- ------- ------- ------
Units outstanding - end of year ....................................... 990 756 976 563
======= ======= ======= ======
<CAPTION>
TACTICAL ASSET
ALLOCATION
SUB-ACCOUNT
DECEMBER 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) .......................................... $ 3,419 $ 1,913
Net gain (loss) on investment securities .............................. (1,087) 1,362
-------- -------
Net increase (decrease) in net assets resulting from operations ....... 2,332 3,275
-------- -------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ................................ 13,703 11,386
-------- -------
Less cost of units redeemed:
Administrative charges ............................................... 3,421 2,219
Policy loans ......................................................... 748 463
Surrender benefits ................................................... 925 742
Death benefits ....................................................... 160 60
-------- -------
5,254 3,484
-------- -------
Increase (decrease) in net assets from capital unit transactions ..... 8,449 7,902
-------- -------
Net increase (decrease) in net assets ................................ 10,781 11,177
Depositor's equity contribution (redemption) .......................... 0 0
NET ASSETS:
Beginning of year ..................................................... 29,123 17,946
-------- -------
End of year ........................................................... $ 39,904 $29,123
======== =======
UNIT ACTIVITY:
Units outstanding - beginning of year ................................. 1,867 1,330
Units issued .......................................................... 1,377 1,163
Units redeemed ........................................................ (861) (626)
-------- -------
Units outstanding - end of year ....................................... 2,383 1,867
======== =======
<CAPTION>
C.A.S.E. GROWTH VALUE EQUITY
SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) .......................................... $ 1,475 $ 994 $ 2,021 $ 183
Net gain (loss) on investment securities .............................. (1,114) (252) (4,683) 3,038
-------- ------- -------- -------
Net increase (decrease) in net assets resulting from operations ....... 361 742 (2,662) 3,221
-------- ------- -------- -------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ................................ 8,731 8,029 6,086 17,023
-------- ------- -------- -------
Less cost of units redeemed:
Administrative charges ............................................... 2,433 970 2,846 1,257
Policy loans ......................................................... 520 146 643 542
Surrender benefits ................................................... 295 144 401 388
Death benefits ....................................................... 60 6 165 0
-------- ------- -------- -------
3,308 1,266 4,055 2,187
-------- ------- -------- -------
Increase (decrease) in net assets from capital unit transactions ..... 5,423 6,763 2,031 14,836
-------- ------- -------- -------
Net increase (decrease) in net assets ................................ 5,784 7,505 (631) 18,057
Depositor's equity contribution (redemption) .......................... 0 (25) 0 (230)
NET ASSETS:
Beginning of year ..................................................... 11,946 4,466 26,714 8,887
-------- ------- -------- -------
End of year ........................................................... $ 17,730 $11,946 $ 26,083 $26,714
======== ======= ======== =======
UNIT ACTIVITY:
Units outstanding - beginning of year ................................. 969 413 1,916 790
Units issued .......................................................... 1,317 931 1,748 1,772
Units redeemed ........................................................ (869) (375) (1,682) (646)
-------- ------- -------- -------
Units outstanding - end of year ....................................... 1,417 969 1,982 1,916
======== ======= ======== =======
</TABLE>
The notes to the financial statements are an integral part of this report.
94
<PAGE>
WRL SERIES LIFE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
ALL AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY U.S. EQUITY THIRD AVENUE REAL ESTATE
SUB-ACCOUNT SUB-ACCOUNT VALUE SECURITIES
DECEMBER 31, DECEMBER 31, SUB-ACCOUNT SUB-ACCOUNT
--------------------- -------------------- DECEMBER 31, DECEMBER 31,
1998 1997(a) 1998 1997(a) 1998(b) 1998(c)
---------- ---------- ---------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ........................... $ (32) $ (4) $ 434 $ 107 $ (11) $ (4)
Net gain (loss) on investment
securities ............................................ 369 31 1,411 96 (142) (112)
------ ------ ------- ------ ------ ------
Net increase (decrease) in net assets resulting from
operations ............................................ 337 27 1,845 203 (153) (116)
------ ------ ------- ------ ------ ------
CAPITAL UNIT TRANSACTIONS:
Proceeds from units sold (transferred) ................. 3,972 2,458 10,178 3,208 2,932 472
------ ------ ------- ------ ------ ------
Less cost of units redeemed:
Administrative charges ................................ 433 117 862 91 138 4
Policy loans .......................................... 196 59 159 56 8 43
Surrender benefits .................................... 35 14 113 9 26 0
Death benefits ........................................ 107 0 63 0 0 0
------ ------ ------- ------ ------ ------
771 190 1,197 156 172 47
------ ------ ------- ------ ------ ------
Increase (decrease) in net assets from capital
unit transactions ................................... 3,201 2,268 8,981 3,052 2,760 425
------ ------ ------- ------ ------ ------
Net increase (decrease) in net assets ................. 3,538 2,295 10,826 3,255 2,607 309
Depositor's equity contribution (redemption) ........... 0 (6) 0 3 200 400
NET ASSETS:
Beginning of year ...................................... 2,289 0 3,258 0 0 0
------ ------ ------- ------ ------ ------
End of year ............................................ $5,827 $2,289 $14,084 $3,258 $2,807 $ 709
====== ====== ======= ====== ====== ======
UNIT ACTIVITY:
Units outstanding - beginning of year .................. 215 0 259 0 0 0
Units issued ........................................... 767 484 1,266 393 495 113
Units redeemed ......................................... (493) (269) (606) (134) (191) (29)
------ ------ ------- ------ ------ ------
Units outstanding - end of year ........................ 489 215 919 259 304 84
====== ====== ======= ====== ====== ======
</TABLE>
(a) The inception date of this Sub-Account was January 2, 1997.
(b) The inception date of this Sub-Account was January 2, 1998.
(c) The inception date of this Sub-Account was May 1, 1998.
The notes to the financial statements are an integral part of this report.
95
<PAGE>
WRL SERIES LIFE ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
MONEY MARKET SUB-ACCOUNT
DECEMBER 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Accumulation unit value, beginning of year ............................... $ 16.13 $ 15.45
Income from operations:
Net investment income (loss) ........................................... 0.70 0.68
Net realized and unrealized gain (loss) on investment .................. 0.00 0.00
------- -------
Net income (loss) from operations ..................................... 0.70 0.68
------- -------
Accumulation unit value, end of year ..................................... $ 16.83 $ 16.13
======= =======
Total return (a) ......................................................... 4.36% 4.37%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $24,576 $16,440
Ratios of net investment income (loss) to average net assets (b) ........ 4.24% 4.28%
<CAPTION>
MONEY MARKET SUB-ACCOUNT
DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of year ............................... $ 14.83 $ 14.19 $ 13.84
Income from operations:
Net investment income (loss) ........................................... 0.62 0.64 0.35
Net realized and unrealized gain (loss) on investment .................. 0.00 0.00 0.00
------- ------- -------
Net income (loss) from operations ..................................... 0.62 0.64 0.35
------- ------- -------
Accumulation unit value, end of year ..................................... $ 15.45 $ 14.83 $ 14.19
======= ======= =======
Total return (a) ......................................................... 4.17% 4.49% 2.58%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $12,740 $10,759 $ 9,706
Ratios of net investment income (loss) to average net assets (b) ........ 4.07% 4.37% 2.66%
<CAPTION>
BOND SUB-ACCOUNT
DECEMBER 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Accumulation unit value, beginning of year ............................... $ 21.12 $ 19.53
Income from operations:
Net investment income (loss) ........................................... 1.01 1.01
Net realized and unrealized gain (loss) on investment .................. 0.76 0.58
------- -------
Net income (loss) from operations ..................................... 1.77 1.59
------- -------
Accumulation unit value, end of year ..................................... $ 22.89 $ 21.12
======= =======
Total return (a) ......................................................... 8.34% 8.18%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $24,934 $17,657
Ratios of net investment income (loss) to average net assets (b) ........ 4.58% 5.06%
<CAPTION>
BOND SUB-ACCOUNT
DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of year ............................... $ 19.67 $ 16.14 $ 17.50
Income from operations:
Net investment income (loss) ........................................... 0.99 1.05 0.89
Net realized and unrealized gain (loss) on investment .................. (1.13) 2.48 (2.25)
-------- ------- ---------
Net income (loss) from operations ..................................... (0.14) 3.53 (1.36)
-------- ------- ---------
Accumulation unit value, end of year ..................................... $ 19.53 $ 19.67 $ 16.14
======== ======= =========
Total return (a) ......................................................... (0.75)% 21.89% (7.77)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $ 11,585 $10,066 $ 6,259
Ratios of net investment income (loss) to average net assets (b) ........ 5.34% 5.80% 5.57%
<CAPTION>
GROWTH SUB-ACCOUNT
DECEMBER 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Accumulation unit value, beginning of year ....................... $ 56.48 $ 48.48
Income from operations:
Net investment income (loss) ................................... 0.13 5.83
Net realized and unrealized gain (loss) on investment .......... 35.46 2.17
-------- --------
Net income (loss) from operations ............................. 35.59 8.00
-------- --------
Accumulation unit value, end of year ............................. $ 92.07 $ 56.48
======== ========
Total return (a) ................................................. 63.01% 16.50%
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................ $798,027 $450,271
Ratios of net investment income (loss) to average net assets (b) 0.19% 10.84%
<CAPTION>
GROWTH SUB-ACCOUNT
DECEMBER 31,
--------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Accumulation unit value, beginning of year ....................... $ 41.47 $ 28.44 $ 31.30
Income from operations:
Net investment income (loss) ................................... 2.88 3.89 0.04
Net realized and unrealized gain (loss) on investment .......... 4.13 9.14 (2.90)
-------- -------- --------
Net income (loss) from operations ............................. 7.01 13.03 (2.86)
-------- -------- --------
Accumulation unit value, end of year ............................. $ 48.48 $ 41.47 $ 28.44
======== ======== ========
Total return (a) ................................................. 16.91% 45.81% (9.13)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ........................ $349,491 $262,467 $161,490
Ratios of net investment income (loss) to average net assets (b) 6.41% 11.05% 0.16%
</TABLE>
The notes to the financial statements are an integral part of this report.
96
<PAGE>
WRL SERIES LIFE ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
GLOBAL SUB-ACCOUNT
DECEMBER 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Accumulation unit value, beginning of year ............................ $ 17.80 $ 15.13
Income from operations:
Net investment income (loss) ........................................ 0.82 2.30
Net realized and unrealized gain (loss) on investment ............... 4.32 0.37
-------- --------
Net income (loss) from operations .................................. 5.14 2.67
-------- --------
Accumulation unit value, end of year .................................. $ 22.94 $ 17.80
======== ========
Total return (a) ...................................................... 28.86% 17.69%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................. $233,256 $145,017
Ratios of net investment income (loss) to average net assets (b) ..... 3.92% 13.39%
<CAPTION>
GLOBAL SUB-ACCOUNT
DECEMBER 31,
----------------------------------
1996 1995 1994(c)
----------- ----------- ----------
<S> <C> <C> <C>
Accumulation unit value, beginning of year ............................ $ 11.95 $ 9.80 $ 10.00
Income from operations:
Net investment income (loss) ........................................ 1.50 0.45 0.71
Net realized and unrealized gain (loss) on investment ............... 1.68 1.70 (0.91)
------- ------- --------
Net income (loss) from operations .................................. 3.18 2.15 (0.20)
------- ------- --------
Accumulation unit value, end of year .................................. $ 15.13 $ 11.95 $ 9.80
======= ======= ========
Total return (a) ...................................................... 26.60% 21.96% (2.02)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................. $83,159 $37,049 $ 21,672
Ratios of net investment income (loss) to average net assets (b) ..... 11.09% 4.25% 8.86%
<CAPTION>
STRATEGIC TOTAL RETURN
SUB-ACCOUNT
DECEMBER 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Accumulation unit value, beginning of year ............................ $ 18.91 $ 15.66
Income from operations:
Net investment income (loss) ........................................ 0.71 1.56
Net realized and unrealized gain (loss) on investment ............... 0.93 1.69
------- -------
Net income (loss) from operations .................................. 1.64 3.25
------- -------
Accumulation unit value, end of year .................................. $ 20.55 $ 18.91
======= =======
Total return (a) ...................................................... 8.66% 20.77%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................. $98,926 $80,753
Ratios of net investment income (loss) to average net assets (b) ..... 3.67% 8.89%
<CAPTION>
STRATEGIC TOTAL RETURN SUB-ACCOUNT
DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of year ............................ $ 13.74 $ 11.12 $ 11.28
Income from operations:
Net investment income (loss) ........................................ 0.82 0.68 0.18
Net realized and unrealized gain (loss) on investment ............... 1.10 1.94 (0.34)
------- ------- --------
Net income (loss) from operations .................................. 1.92 2.62 (0.16)
------- ------- --------
Accumulation unit value, end of year .................................. $ 15.66 $ 13.74 $ 11.12
======= ======= ========
Total return (a) ...................................................... 13.97% 23.55% (1.42)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................. $55,900 $39,648 $ 23,649
Ratios of net investment income (loss) to average net assets (b) ..... 5.76% 5.47% 1.93%
<CAPTION>
EMERGING GROWTH
SUB-ACCOUNT
DECEMBER 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Accumulation unit value, beginning of year ............................ $ 23.48 $ 19.51
Income from operations:
Net investment income (loss) ........................................ 0.91 2.20
Net realized and unrealized gain (loss) on investment ............... 7.57 1.77
-------- --------
Net income (loss) from operations .................................. 8.48 3.97
-------- --------
Accumulation unit value, end of year .................................. $ 31.96 $ 23.48
======== ========
Total return (a) ...................................................... 36.11% 20.37%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................. $262,665 $164,702
Ratios of net investment income (loss) to average net assets (b) ..... 3.44% 10.18%
<CAPTION>
EMERGING GROWTH SUB-ACCOUNT
DECEMBER 31,
------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of year ............................ $ 16.56 $ 11.38 $ 12.40
Income from operations:
Net investment income (loss) ........................................ 0.82 0.65 (0.09)
Net realized and unrealized gain (loss) on investment ............... 2.13 4.53 (0.93)
-------- ------- -------
Net income (loss) from operations .................................. 2.95 5.18 (1.02)
-------- ------- -------
Accumulation unit value, end of year .................................. $ 19.51 $ 16.56 $ 11.38
======== ======= =======
Total return (a) ...................................................... 17.82% 45.49% (8.18)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................. $107,925 $67,905 $36,687
Ratios of net investment income (loss) to average net assets (b) ..... 4.51% 4.66% (0.86)%
</TABLE>
The notes to the financial statements are an integral part of this report.
97
<PAGE>
WRL SERIES LIFE ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH
SUB-ACCOUNT
DECEMBER 31,
------------------------
1998 1997
------------ -----------
<S> <C> <C>
Accumulation unit value, beginning of year ............................ $ 18.10 $ 14.70
Income from operations:
Net investment income (loss) ........................................ 1.33 1.75
Net realized and unrealized gain (loss) on investment ............... 7.24 1.65
-------- -------
Net income (loss) from operations .................................. 8.57 3.40
-------- -------
Accumulation unit value, end of year .................................. $ 26.67 $ 18.10
======== =======
Total return (a) ...................................................... 47.36% 23.14%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................. $177,857 $94,652
Ratios of net investment income (loss) to average net assets (b) ..... 6.20% 10.26%
<CAPTION>
AGGRESSIVE GROWTH SUB-ACCOUNT
DECEMBER 31,
-----------------------------------
1996 1995 1994(c)
----------- ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of year ............................ $ 13.43 $ 9.82 $10.00
Income from operations:
Net investment income (loss) ........................................ 0.36 0.37 (0.06)
Net realized and unrealized gain (loss) on investment ............... 0.91 3.24 (0.12)
------- ------- ------
Net income (loss) from operations .................................. 1.27 3.61 (0.18)
------- ------- ------
Accumulation unit value, end of year .................................. $ 14.70 $ 13.43 $ 9.82
======= ======= ======
Total return (a) ...................................................... 9.46% 36.79% (1.85)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................. $54,408 $32,904 $8,909
Ratios of net investment income (loss) to average net assets (b) ..... 2.65% 2.93% (0.72)%
<CAPTION>
BALANCED SUB-ACCOUNT
DECEMBER 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Accumulation unit value, beginning of year ............................... $ 14.17 $ 12.21
Income from operations:
Net investment income (loss) ........................................... 0.25 1.55
Net realized and unrealized gain (loss) on investment .................. 0.60 0.41
------- -------
Net income (loss) from operations ..................................... 0.85 1.96
------- -------
Accumulation unit value, end of year ..................................... $ 15.02 $ 14.17
======= =======
Total return (a) ......................................................... 5.98% 16.06%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $14,864 $10,716
Ratios of net investment income (loss) to average net assets (b) ........ 1.76% 11.62%
<CAPTION>
BALANCED SUB-ACCOUNT
DECEMBER 31,
-----------------------------------
1996 1995 1994(c)
----------- ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of year ............................... $ 11.13 $ 9.37 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 0.36 0.37 0.22
Net realized and unrealized gain (loss) on investment .................. 0.72 1.39 (0.85)
------- -------- ---------
Net income (loss) from operations ..................................... 1.08 1.76 (0.63)
------- -------- ---------
Accumulation unit value, end of year ..................................... $ 12.21 $ 11.13 $ 9.37
======= ======== =========
Total return (a) ......................................................... 9.73% 18.73% (6.29)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $ 6,418 $ 3,795 $ 2,145
Ratios of net investment income (loss) to average net assets (b) ........ 3.18% 3.59% 3.06%
<CAPTION>
GROWTH & INCOME
SUB-ACCOUNT
DECEMBER 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Accumulation unit value, beginning of year ............................ $ 16.09 $ 13.03
Income from operations:
Net investment income (loss) ........................................ 0.77 2.61
Net realized and unrealized gain (loss) on investment ............... (0.42) 0.45
------- --------
Net income (loss) from operations .................................. 0.35 3.06
------- --------
Accumulation unit value, end of year .................................. $ 16.44 $ 16.09
======= ========
Total return (a) ...................................................... 2.13% 23.54%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................. $16,047 $ 9,063
Ratios of net investment income (loss) to average net assets (b) ..... 4.83% 18.50%
<CAPTION>
GROWTH & INCOME SUB-ACCOUNT
DECEMBER 31,
-----------------------------------
1996 1995 1994(c)
----------- ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of year ............................ $ 11.77 $ 9.49 $ 10.00
Income from operations:
Net investment income (loss) ........................................ 0.76 0.49 0.29
Net realized and unrealized gain (loss) on investment ............... 0.50 1.79 (0.80)
-------- -------- ---------
Net income (loss) from operations .................................. 1.26 2.28 (0.51)
-------- -------- ---------
Accumulation unit value, end of year .................................. $ 13.03 $ 11.77 $ 9.49
======== ======== =========
Total return (a) ...................................................... 10.64% 24.14% (5.15)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................. $ 5,501 $ 2,631 $ 1,215
Ratios of net investment income (loss) to average net assets (b) ..... 6.38% 4.57% 3.71%
</TABLE>
The notes to the financial statements are an integral part of this report.
98
<PAGE>
WRL SERIES LIFE ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
TACTICAL ASSET ALLOCATION SUB-ACCOUNT
DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995(d)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning of year ............................... $ 15.60 $ 13.50 $ 11.90 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 1.58 1.20 0.53 0.61
Net realized and unrealized gain (loss) on investment .................. (0.44) 0.90 1.07 1.29
------- ------- ------- --------
Net income (loss) from operations ..................................... 1.14 2.10 1.60 1.90
------- ------- ------- --------
Accumulation unit value, end of year ..................................... $ 16.74 $ 15.60 $ 13.50 $ 11.90
======= ======= ======= ========
Total return (a) ......................................................... 7.36% 15.55% 13.40% 19.03%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $39,904 $29,123 $17,946 $ 9,446
Ratios of net investment income (loss) to average net assets (b) ........ 9.69% 8.14% 4.35% 5.47%
<CAPTION>
C.A.S.E. GROWTH SUB-ACCOUNT
DECEMBER 31,
---------------------------------------
1998 1997 1996(e)
----------- ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of year ............................... $ 12.32 $ 10.81 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 1.24 1.51 0.37
Net realized and unrealized gain (loss) on investment .................. (1.05) 0.00 0.44
------- ------- -------
Net income (loss) from operations ..................................... 0.19 1.51 0.81
------- ------- -------
Accumulation unit value, end of year ..................................... $ 12.51 $ 12.32 $ 10.81
======= ======= =======
Total return (a) ......................................................... 1.56% 14.00% 8.09%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $17,730 $11,946 $ 4,466
Ratios of net investment income (loss) to average net assets (b) ........ 10.21% 12.65% 6.11%
<CAPTION>
VALUE EQUITY SUB-ACCOUNT
DECEMBER 31,
---------------------------------------
1998 1997 1996(e)
----------- ----------- -----------
<S> <C> <C> <C>
Accumulation unit value, beginning of year ............................... $ 13.94 $ 11.25 $ 10.00
Income from operations:
Net investment income (loss) ........................................... 0.95 0.14 0.05
Net realized and unrealized gain (loss) on investment .................. (1.73) 2.55 1.20
-------- ------- --------
Net income (loss) from operations ..................................... (0.78) 2.69 1.25
-------- ------- --------
Accumulation unit value, end of year ..................................... $ 13.16 $ 13.94 $ 11.25
======== ======= ========
Total return (a) ......................................................... (5.63)% 23.93% 12.51%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $ 26,083 $26,714 $ 8,887
Ratios of net investment income (loss) to average net assets (b) ........ 6.84% 1.05% 0.77%
</TABLE>
The notes to the financial statements are an integral part of this report.
99
<PAGE>
WRL SERIES LIFE ACCOUNT
FINANCIAL HIGHLIGHTS*
FOR THE YEAR ENDED
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY U.S. EQUITY
SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31, DECEMBER 31,
----------------------- -------------------------
1998 1997(f) 1998 1997(f)
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Accumulation unit value, beginning of year ............................... $10.65 $10.00 $ 12.59 $ 10.00
Income from operations:
Net investment income (loss) ........................................... (0.09) (0.03) 0.73 0.99
Net realized and unrealized gain (loss) on investment .................. 1.36 0.68 2.01 1.60
------- ------- ------- --------
Net income (loss) from operations ..................................... 1.27 0.65 2.74 2.59
------- ------- ------- --------
Accumulation unit value, end of year ..................................... $11.92 $10.65 $ 15.33 $ 12.59
======= ======= ======= ========
Total return (a) ......................................................... 11.84% 6.54% 21.78% 25.89%
Ratios and supplemental data:
Net assets at end of year (in thousands) ................................ $5,827 $2,289 $14,084 $ 3,258
Ratios of net investment income (loss) to average net assets (b) ........ (0.81)% (0.28)% 5.30% 8.28%
</TABLE>
<TABLE>
<CAPTION>
THIRD AVENUE REAL ESTATE
VALUE SECURITIES
SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31, DECEMBER 31,
1998(g) 1998(h)
-------------- -------------
<S> <C> <C>
Accumulation unit value, beginning of year ........................... $ 10.00 $ 10.00
Income from operations:
Net investment income (loss) ....................................... (0.05) (0.05)
Net realized and unrealized gain (loss) on investment .............. (0.72) (1.49)
------- --------
Net income (loss) from operations ................................. (0.77) (1.54)
------- --------
Accumulation unit value, end of year ................................. $ 9.23 $ 8.46
======= ========
Total return (a) ..................................................... (7.67)% (15.44)%
Ratios and supplemental data:
Net assets at end of year (in thousands) ............................ $ 2,807 $ 709
Ratios of net investment income (loss) to average net assets (b) .... (0.52)% (0.90)%
</TABLE>
NOTES TO FINANCIAL HIGHLIGHTS:
* Per unit information has been computed using average units outstanding
throughout each period.
(a) Not annualized for periods less than one year.
(b) Annualized for periods less than one year.
(c) The inception date of this Sub-Account was March 1, 1994.
(d) The inception date of this Sub-Account was January 3, 1995.
(e) The inception date of this Sub-Account was May 1, 1996.
(f) The inception date of this Sub-Account was January 2, 1997.
(g) The inception date of this Sub-Account was January 2, 1998.
(h) The inception date of this Sub-Account was May 1, 1998.
The notes to the financial statements are an integral part of this report.
100
<PAGE>
WRL SERIES LIFE ACCOUNT
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The WRL Series Life Account (the "Life Account"), was established as a
variable life insurance separate account of Western Reserve Life Assurance Co.
of Ohio ("WRL") and is registered as a unit investment trust ("Trust") under
the Investment Company Act of 1940, as amended. The Life Account contains
sixteen investment options referred to as sub-accounts. Each sub-account
invests in the corresponding Portfolio of the WRL Series Fund, Inc.
(collectively referred to as the "Fund" and individually as a "Portfolio"), a
registered management investment company under the Investment Company Act of
1940, as amended.
The Fund has entered into annually renewable investment advisory
agreements for each Portfolio with WRL Investment Management, Inc. ("WRL
Management") as investment adviser. Costs incurred in connection with the
advisory services rendered by WRL Management are paid by each Portfolio. WRL
Management has entered into sub-advisory agreements with various management
companies, some of which are affiliates of WRL. Each sub-adviser is compensated
directly by WRL Management.
On January 2, 1998 and May 1, 1998, WRL made initial contributions
totaling $600,000 to the Life Account. The respective amounts of the
contributions and units received are as follows:
SUB-ACCOUNT CONTRIBUTION UNITS
-------------------------------- -------------- -------
Third Avenue Value ............. $200,000 20,000
Real Estate Securities ......... $400,000 40,000
The Life Account holds assets to support the benefits under certain
flexible premium variable universal life insurance policies (the "Policies")
issued by WRL. The Life Account's equity transactions are accounted for using
the appropriate effective date at the corresponding accumulation unit value.
The following significant accounting policies, which are in conformity
with generally accepted accounting principles, have been consistently applied
in the preparation of the Trust's financial statements. The preparation of
financial statements required management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
A. VALUATION OF INVESTMENTS AND SECURITIES TRANSACTIONS
Investments in the Fund's shares are stated at the closing net asset value
("NAV") per share as determined by the Fund. Investment transactions are
accounted for on the trade date at the Fund NAV next determined after receipt
of sale or redemption orders without sales charges. Dividend income and capital
gains distributions are recorded on the ex-dividend date. The cost of
investments sold is determined on a first-in, first-out basis.
101
<PAGE>
WRL SERIES LIFE ACCOUNT
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
B. FEDERAL INCOME TAXES
The operations of the Life Account are a part of and are taxed with the
total operations of WRL, which is taxed as a life insurance company under the
Internal Revenue Code. Under the Internal Revenue Code law, the investment
income of the Life Account, including realized and unrealized capital gains, is
not taxable to WRL. Accordingly, no provision for Federal income taxes has been
made.
NOTE 2. CHARGES AND DEDUCTIONS
Charges are assessed by WRL in connection with the issuance and
administration of the Policies.
A. POLICY CHARGES
Under some forms of the Policies, a sales charge and premium taxes are
deducted by WRL prior to allocation of policy owner payments to the
sub-accounts. Thereafter, monthly administrative and cost of insurance charges
are deducted from the policies. Contingent surrender charges also apply.
Under the other forms of the Policies, such "front-end" and other
administrative charges are deducted prior to allocation of the initial premium
payment but may be subject to contingent surrender charges.
Under all forms of the Policy, monthly charges against policy cash values
are made to compensate WRL for costs of insurance provided.
B. LIFE ACCOUNT CHARGES
A daily charge equal to an annual rate of .90% of average daily net assets
is assessed to compensate WRL for assumption of mortality and expense risks and
administrative services in connection with issuance and administration of the
Policies. This charge (not assessed at the individual contract level)
effectively reduces the value of a unit outstanding during the year.
NOTE 3. DIVIDENDS AND DISTRIBUTIONS
Dividends are not declared by the Life Account, since the increase in the
value of the underlying investment in the Fund is reflected daily in the
accumulation unit value used to calculate the equity value within the Life
Account. Consequently, a dividend distribution by the underlying Fund does not
change either the accumulation unit value or equity values within the Life
Account.
102
<PAGE>
WRL SERIES LIFE ACCOUNT
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 4. SECURITIES TRANSACTIONS
Securities transactions for the year ended December 31, 1998 are as
follows (in thousands):
PURCHASE PROCEEDS
SUB-ACCOUNT OF SECURITIES OF SECURITIES
----------- ------------- -------------
Money Market ....................... $54,231 $46,140
Bond ............................... 14,451 7,857
Growth ............................. 72,758 20,484
Global ............................. 59,238 9,357
Strategic Total Return ............. 17,619 3,754
Emerging Growth .................... 49,088 10,679
Aggressive Growth .................. 44,611 5,689
Balanced ........................... 4,604 1,017
Growth & Income .................... 10,694 3,411
Tactical Asset Allocation .......... 14,060 2,009
C.A.S.E. Growth .................... 9,433 2,525
Value Equity ....................... 13,179 9,081
International Equity ............... 6,220 3,048
U.S. Equity ........................ 12,496 3,076
Third Avenue Value (a) ............. 3,849 906
Real Estate Securities (b) ......... 1,047 226
(a) The inception date of this Sub-Account was January 2, 1998.
(b) The inception date of this Sub-Account was May 1, 1998.
103
<PAGE>
WRL SERIES LIFE ACCOUNT
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 5. OTHER MATTERS
At December 31, 1998 net unrealized appreciation (depreciation) on
investments was as follows (in thousands):
SUB-ACCOUNT
-----------------------------------
Money Market ...................... $ 0
Bond .............................. 402
Growth ............................ 374,036
Global ............................ 43,882
Strategic Total Return ............ 17,020
Emerging Growth ................... 85,696
Aggressive Growth ................. 50,985
Balanced .......................... 991
Growth & Income ................... (177)
Tactical Asset Allocation ......... 973
C.A.S.E. Growth ................... (1,524)
Value Equity ...................... (2,759)
International Equity .............. 119
U.S. Equity ....................... 1,068
Third Avenue Value ................ (103)
Real Estate Securities ............ (76)
104
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Western Reserve Life Assurance Co. of Ohio
We have audited the accompanying statutory-basis balance sheets of Western
Reserve Life Assurance Co. of Ohio as of December 31, 1998 and 1997, and the
related statutory-basis statements of operations, changes in capital and
surplus, and cash flows for each of the three years in the period ended
December 31, 1998. Our audits also included the statutory-basis financial
statement schedules required by Regulation S-X, Article 7. These financial
statements and schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the "Separate Account Assets" and "Separate
Account Liabilities" in the balance sheets of the Company. The Separate Account
financial statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the data included
for the Separate Account, is based solely upon the reports of the other
auditors.
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 and the reports of other
auditors provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents
its financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Department of the State of Ohio, which practices
differ from generally accepted accounting principles. The variances between
such practices and generally accepted accounting principles are also described
in Note 1. The effects on the financial statements of these variances are not
reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of Western Reserve Life Assurance Co. of Ohio at December
31, 1998 and 1997, or the results of its operations or its cash flows for each
of the three years in the period ended December 31, 1998.
However, in our opinion, based on our audits and the reports of other
auditors, the financial statements referred to above present fairly, in all
material respects, the financial position of Western Reserve Life Assurance Co.
of Ohio at December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998 in conformity with accounting practices prescribed or permitted by the
Insurance Department of the State of Ohio. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
statutory-basis financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Des Moines, Iowa
February 19, 1999
105
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
BALANCE SHEETS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments .............................. $ 73,808 $ 13,896
Bonds ........................................................ 184,697 255,919
Common stocks:
Affiliated entities (cost: 1998 - $243; 1997 - $150)......... 704 319
Other (cost: 1998 and 1997 - $302)........................... 384 428
Mortgage loans on real estate ................................ 9,916 4,824
Home office properties ...................................... 34,583 19,964
Investment properties ....................................... 11,594 --
Policy loans ................................................ 112,982 76,741
Other invested assets ....................................... 396 --
---------- ----------
Total cash and invested assets ................................ 429,064 372,091
Premiums deferred and uncollected ............................. 900 1,928
Accrued investment income ..................................... 2,867 4,088
Transfers from separate accounts .............................. 350,633 279,958
Cash surrender value of life insurance policies ............... 45,445 --
Other assets .................................................. 9,239 5,221
Separate account assets ....................................... 6,999,290 4,814,594
---------- ----------
Total admitted assets ......................................... $7,837,438 $5,477,880
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
106
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
BALANCE SHEETS -- STATUTORY BASIS
(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life ............................................ $ 231,596 $ 186,523
Annuity ......................................... 265,418 296,290
Policy and contract claim reserves ............... 9,233 10,929
Other policyholders' funds ....................... 38,080 3,877
Remittances and items not allocated .............. 20,569 9,184
Federal income taxes payable ..................... 5,716 2,283
Asset valuation reserve .......................... 2,848 2,436
Interest maintenance reserve ..................... 9,684 9,134
Short-term note payable to affiliate ............. 44,200 8,200
Payable to affiliate ............................. 37,907 1,925
Other liabilities ................................ 31,151 19,257
Separate account liabilities ..................... 6,997,456 4,812,979
---------- ----------
Total liabilities ................................. 7,693,858 5,363,017
Commitments and contingencies
Capital and surplus:
Common stock, $1.00 par value, 1,500 shares
authorized, issued and outstanding ............. 1,500 1,500
Paid-in surplus .................................. 120,107 88,015
Unassigned surplus ............................... 21,973 25,348
---------- ----------
Total capital and surplus ......................... 143,580 114,863
---------- ----------
Total liabilities and capital and surplus ......... $7,837,438 $5,477,880
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
107
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of reinsurance:
Life ........................................................... $ 476,053 $ 394,370 $ 293,590
Annuity ........................................................ 794,841 822,149 740,125
Net investment income ........................................... 36,315 40,013 36,067
Amortization of interest maintenance reserve .................... 744 1,576 1,335
Commissions and expense allowances on reinsurance ceded ......... 15,333 11 11
Other income .................................................... 67,751 3,016 13,398
---------- ---------- ----------
1,391,037 1,261,135 1,084,526
Benefits and expenses:
Benefits paid or provided for:
Life ........................................................... 42,982 28,060 21,256
Surrender benefits ............................................. 551,528 431,939 286,406
Other benefits ................................................. 31,280 28,112 23,270
Increase (decrease) in aggregate reserves for policies
and contracts:
Life .......................................................... 42,940 29,485 80,139
Annuity ....................................................... (30,872) (35,940) 12,877
Other ......................................................... 32,178 794 422
---------- ---------- ----------
670,036 482,450 424,370
Insurance expenses:
Commissions .................................................... 205,939 179,106 140,261
General insurance expenses ..................................... 102,611 70,546 47,406
Taxes, licenses and fees ....................................... 15,545 13,101 10,848
Net transfer to separate accounts .............................. 402,618 519,214 452,471
Other expenses ................................................. 59 21 60
---------- ---------- ----------
726,772 781,988 651,046
---------- ---------- ----------
1,396,808 1,264,438 1,075,416
---------- ---------- ----------
Gain (loss) from operations before federal income taxes (benefit)
and realized capital gains (losses) on investments ............. (5,771) (3,303) 9,110
Federal income tax expense (benefit) ............................. (347) 469 9,297
---------- ---------- ----------
Loss from operations before realized capital gains
(losses) on investments ........................................ (5,424) (3,772) (187)
Net realized capital gains (losses) on investments (net of
related federal income taxes and amounts transferred to interest
maintenance reserve) ........................................... 1,494 747 (811)
---------- ---------- ----------
Net loss ......................................................... $ (3,930) $ (3,025) $ (998)
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
108
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
CAPITAL
COMMON PAID-IN UNASSIGNED AND
STOCK SURPLUS SURPLUS SURPLUS
-------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 ....................... $1,500 $ 68,015 $ 28,424 $ 97,939
Net loss for 1996 ............................... -- -- (998) (998)
Net unrealized capital gains .................... -- -- 1,294 1,294
Change in non-admitted assets ................... -- -- 199 199
Change in asset valuation reserve ............... -- -- (120) (120)
Change in surplus in separate accounts .......... -- -- 237 237
Change in reserve valuation ..................... -- -- (2,995) (2,995)
------ -------- -------- --------
Balance at December 31, 1996 ..................... 1,500 68,015 26,041 95,556
Net loss for 1997 ............................... -- -- (3,025) (3,025)
Change in non-admitted assets ................... -- -- (702) (702)
Change in asset valuation reserve ............... -- -- 3,274 3,274
Change in surplus in separate accounts .......... -- -- (2,115) (2,115)
Change in reserve valuation ..................... -- -- (1,872) (1,872)
Capital contribution ............................ -- 20,000 -- 20,000
Tax effect of capital loss carry-forward utilized
by affiliates ................................. -- -- 3,747 3,747
------ -------- -------- --------
Balance at December 31, 1997 ..................... 1,500 88,015 25,348 114,863
Net loss for 1998 ............................... -- -- (3,930) (3,930)
Net unrealized capital gains .................... -- -- 248 248
Change in non-admitted assets ................... -- -- (1,815) (1,815)
Change in asset valuation reserve ............... -- -- (412) (412)
Change in surplus in separate accounts .......... -- -- (341) (341)
Change in reserve valuation ..................... -- -- (2,132) (2,132)
Capital contribution ............................ -- 32,092 -- 32,092
Settlement of prior period tax returns .......... -- -- 353 353
Tax benefits on stock options exercised ......... -- -- 4,654 4,654
------ -------- -------- --------
Balance at December 31, 1998 ..................... $1,500 $120,107 $ 21,973 $143,580
====== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
109
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums and other considerations, net of reinsurance .......... $1,356,732 $1,223,898 $1,046,548
Net investment income .......................................... 38,294 43,802 38,666
Life and accident and health claims ............................ (44,426) (26,005) (20,655)
Surrender benefits and other fund withdrawals .................. (551,528) (431,939) (286,406)
Other benefits to policyholders ................................ (31,231) (28,147) (22,129)
Commissions, other expenses and other taxes .................... (326,080) (262,901) (196,373)
Net transfers to separate accounts ............................. (461,982) (596,347) (658,326)
Federal income taxes received (paid) ........................... 11,956 5,006 (9,449)
Interest paid .................................................. -- (731) --
Other, net ..................................................... (7,109) (14,901) 28,325
---------- ---------- ----------
Net cash used in operating activities .......................... (15,374) (88,265) (79,799)
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks .................................... 143,449 146,963 122,820
Mortgage loans on real estate ................................. 221 2,116 132
Real estate ................................................... -- -- 4,304
Other ......................................................... -- -- 175
---------- ---------- ----------
143,670 149,079 127,431
Cost of investments acquired ...................................
Bonds and preferred stocks .................................... (68,202) (40,418) (26,826)
Common stocks ................................................. (93) (150) (4)
Mortgage loans on real estate ................................. (5,313) (891) --
Real estate ................................................... (26,213) (12,002) (7,837)
Policy loans .................................................. (36,241) (24,137) (15,479)
Other ......................................................... (414) -- (5)
---------- ---------- -----------
(136,476) (77,598) (50,151)
---------- ---------- ----------
Net cash provided by investing activities ...................... 7,194 71,481 77,280
FINANCING ACTIVITIES
Issuance of short-term note payable to affiliate ............... 36,000 8,200 --
Capital contribution ........................................... 32,092 20,000 --
---------- ---------- ----------
Net cash provided by financing activities ...................... 68,092 28,200 --
---------- ---------- ----------
Increase (decrease) in cash and short-term investments ......... 59,912 11,416 (2,519)
Cash and short-term investments at beginning of year ........... 13,896 2,480 4,999
---------- ---------- ----------
Cash and short-term investments at end of year ................. $ 73,808 $ 13,896 $ 2,480
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
110
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Western Reserve Life Assurance Co. of Ohio ("the Company") is a stock life
insurance company and is a wholly-owned subsidiary of First AUSA Life Insurance
Company which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON N.V., a holding company
organized under the laws of The Netherlands.
NATURE OF BUSINESS
The Company operates predominantly in the variable universal life and
variable annuity areas of the life insurance business. The Company is licensed
in 49 states, District of Columbia, Puerto Rico and Guam. Sales of the
Company's products are through financial planners, independent representatives,
financial institutions and stockbrokers. The majority of the Company's new life
insurance written and a substantial portion of new annuities written is done
through one marketing organization; the Company expects to maintain this
relationship for the foreseeable future.
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could
impact the amounts reported and disclosed herein.
The accompanying financial statements have been prepared in conformity
with accounting practices prescribed or permitted by the Insurance Department
of the State of Ohio ("Insurance Department"), which practices differ from
generally accepted accounting principles. The more significant of these
differences are as follows: (a) bonds are generally reported at amortized cost
rather than segregating the portfolio into held-to-maturity (reported at
amortized cost), available-for-sale (reported at fair value), and trading
(reported at fair value) classifications; (b) acquisition costs of acquiring
new business are expensed as incurred rather than deferred and amortized over
the life of the policies; (c) policy reserves on traditional life products are
based on statutory mortality rates and interest which may differ from reserves
based on reasonable assumptions of expected mortality, interest, and
withdrawals which include a provision for possible unfavorable deviation from
such assumptions; (d) policy reserves on certain investment products use
discounting methodologies utilizing statutory interest rates rather than full
111
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
account values; (e) reinsurance amounts are netted against the corresponding
asset or liability rather than shown as gross amounts on the balance sheet; (f)
deferred income taxes are not provided for the difference between the financial
statement amounts and income tax bases of assets and liabilities; (g) net
realized gains or losses attributed to changes in the level of interest rates
in the market are deferred and amortized over the remaining life of the bond or
mortgage loan, rather than recognized as gains or losses in the statement of
operations when the sale is completed; (h) declines in the estimated realizable
value of investments are provided for through the establishment of a formula-
determined statutory investment reserve (reported as a liability) changes to
which are charged directly to surplus, rather than through recognition in the
statement of operations for declines in value, when such declines are judged to
be other than temporary; (i) certain assets designated as "non-admitted assets"
have been charged to surplus rather than being reported as assets; (j) revenues
for universal life and investment products consist of the entire premiums
received rather than policy charges for the cost of insurance, policy
administration charges, amortization of policy initiation fees and surrender
charges assessed; (k) pension expense is recorded as amounts are paid rather
than accrued and expensed during the periods in which the employers provide
service; and (l) the financial statements of wholly-owned affiliates are not
consolidated with those of the Company. The effects of these variances have not
been determined by the Company, but are presumed to be material.
In 1998, the National Association of Insurance Commissioners (NAIC)
adopted codified statutory accounting principles ("Codification"). Codification
will likely change, to some extent, prescribed statutory accounting practices
and may result in changes to the accounting practices that the Company uses to
prepare its statutory-basis financial statements. Codification will require
adoption by the various states before it becomes the prescribed statutory basis
of accounting for insurance companies domesticated within those states.
Accordingly, before Codification becomes effective for the Company, the State
of Ohio must adopt Codification as the prescribed basis of accounting on which
domestic insurers must report their statutory-basis results to the Insurance
Department. At this time it is unclear whether the State of Ohio will adopt
Codification. However, based on current guidance, management believes that the
impact of Codification will not be material to the Company's statutory-basis
financial statements.
112
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Other significant statutory accounting practices are as follows:
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with remaining maturities of one year or less when
purchased to be cash equivalents.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation
office of the NAIC has ascribed a value), mortgage loans on real estate and
short-term investments are reported at cost adjusted for amortization of
premiums and accrual of discounts. Amortization is computed using methods which
result in a level yield over the expected life of the investment. The Company
reviews its prepayment assumptions on mortgage and other asset backed
securities at regular intervals and adjusts amortization rates retrospectively
when such assumptions are changed due to experience and/or expected future
patterns. Common stocks of unaffiliated companies are carried at market and
include shares of mutual funds (money market and other), and the related
unrealized capital gains/(losses) are reported in unassigned surplus without
any adjustment for federal income taxes. Common stocks of the Company's
wholly-owned affiliates are recorded at the equity in net assets. Home office
and investment properties are reported at cost less allowances for
depreciation. Depreciation is computed principally by the straight-line method.
Policy loans are reported at unpaid principal. Other "admitted assets" are
valued, principally at cost, as required or permitted by Ohio Insurance Laws.
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for
anticipated losses in the event of default by issuers of certain invested
assets. These amounts are determined using a formula prescribed by the NAIC and
are reported as a liability. The formula for the AVR provides for a
corresponding adjustment for realized gains and losses. Under a formula
prescribed by the NAIC, the Company defers, in the Interest Maintenance Reserve
(IMR), the portion of realized gains and losses on sales of fixed income
investments, principally bonds and mortgage loans, attributable to changes in
the general level of interest rates and amortizes those deferrals over the
remaining period to maturity of the security.
During 1998, 1997 and 1996, net realized capital gains of $1,294, $3,259
and $2,394, respectively, were credited to the IMR rather than being
immediately recognized in the statements of operations. Amortization of these
net gains aggregated $744, $1,576 and $1,335 for the years ended December 31,
1998, 1997 and 1996, respectively.
113
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Interest income is recognized on an accrual basis. The Company does not
accrue income on bonds in default, mortgage loans on real estate in default
and/or foreclosure or which are delinquent more than twelve months, or real
estate where rent is in arrears for more than three months. Further, income is
not accrued when collection is uncertain. No investment income due and accrued
has been excluded for the years ended December 31, 1998, 1997 and 1996, with
respect to such practices.
AGGREGATE RESERVES FOR POLICIES
Life and annuity reserves are developed by actuarial methods and are
determined based on published tables using statutorily specified interest rates
and valuation methods that will provide, in the aggregate, reserves that are
greater than or equal to the minimum required by law.
The aggregate policy reserves for life insurance policies are based
principally upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary
Mortality Tables. The reserves are calculated using interest rates ranging from
2.25 to 5.50 percent and are computed principally on the Net Level Premium
Valuation and the Commissioners' Reserve Valuation Methods. Reserves for
universal life policies are based on account balances adjusted for the
Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 5.75 to 8.75 percent and mortality rates, where appropriate, from a
variety of tables.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims
reported to the Company and claims incurred but not yet reported through the
statement date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of variable universal life and variable
annuity contracts and the Company's corresponding obligation to the contract
owners are shown
114
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
separately in the balance sheets. The assets in the separate accounts are
valued at market. Income and gains and losses with respect to the assets in the
separate accounts accrue to the benefit of the policyholders and, accordingly,
the operations of the separate accounts are not included in the accompanying
financial statements. The separate accounts do not have any minimum guarantees
and the investment risks associated with market value changes are borne
entirely by the policyholders. The Company received variable contract premiums
of $1,240,858, $1,164,013 and $997,513 in 1998, 1997 and 1996, respectively.
All variable account contracts are subject to discretionary withdrawal by the
policyholder at the market value of the underlying assets less the current
surrender charge. Separate account contractholders have no claim against the
assets of the general account.
STOCK OPTION PLAN
AEGON N.V. sponsors a stock option plan for eligible employees of the
Company. Under this plan, certain employees have indicated a preference to
immediately sell shares received as a result of their exercise of the stock
options; in these situations, AEGON N.V. has settled such options in cash
rather than issuing stock to these employees. These cash settlements are paid
by the Company and AEGON N.V. subsequently reimburses the Company for such
payments. Under statutory accounting principles, the Company does not record
any expense related to this plan, as the expense is recognized by AEGON N.V.
However, the Company is allowed to record a deduction in the consolidated tax
return filed by the Company and certain affiliates. The tax benefit of this
deduction has been credited directly to surplus.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statutory-basis balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparisons to independent
markets and, in many cases, could not be realized in immediate settlement of
the instrument. Statement of Financial Accounting Standards No. 107 excludes
certain
115
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS--(CONTINUED)
financial instruments and all nonfinancial instruments from its disclosure
requirements and allows companies to forego the disclosures when those
estimates can only be made at excessive cost. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
statutory-basis balance sheet for these instruments approximate their fair
values.
INVESTMENT SECURITIES: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing
services or (in the case of private placements) are estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
The fair values for equity securities are based on quoted market prices.
MORTGAGE LOANS AND POLICY LOANS: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of
the loans. The fair value of policy loans are assumed to equal their
carrying value.
INVESTMENT CONTRACTS: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
116
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS--(CONTINUED)
The following sets forth a comparison of the fair values and carrying
values of the Company's financial instruments subject to the provisions of
Statement of Financial Accounting Standards No. 107:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1998 1997
------------------------- -------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Cash and short-term investments .......... $ 73,808 $ 73,808 $ 13,896 $ 13,896
Bonds .................................... 184,697 192,556 255,919 267,763
Common stocks, other than affiliates ..... 384 384 428 428
Mortgage loans on real estate ............ 9,916 10,390 4,824 5,143
Policy loans ............................. 112,982 112,982 76,741 76,741
Separate account assets .................. 6,999,290 6,999,290 4,814,594 4,814,594
LIABILITIES
Investment contract liabilities .......... 297,349 294,105 280,121 276,113
Separate account annuities ............... 5,096,680 5,038,296 3,615,255 3,565,557
</TABLE>
117
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt
securities are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Bonds:
United States Government and agencies ..... $ 4,749 $ 83 $ -- $ 4,832
State, municipal and other government ..... 3,234 117 -- 3,351
Public utilities .......................... 18,792 818 251 19,359
Industrial and miscellaneous .............. 96,332 6,685 577 102,440
Mortgage-backed securities ................ 61,590 1,235 251 62,574
-------- ------- ------ --------
Total bonds ................................ $184,697 $ 8,938 1,079 $192,556
======== ======= ====== ========
DECEMBER 31, 1997
Bonds:
United States Government and agencies ..... $ 3,675 $ 9 $ 30 $ 3,654
State, municipal and other government ..... 3,855 360 -- 4,215
Public utilities .......................... 15,794 904 403 16,295
Industrial and miscellaneous .............. 121,513 7,700 710 128,503
Mortgage-backed securities ................ 111,082 4,198 184 115,096
-------- ------- ------ --------
Total bonds ................................ $255,919 $13,171 $1,327 $267,763
======== ======= ====== ========
</TABLE>
The carrying value and fair value of bonds at December 31, 1998 by
contractual maturity are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without penalties.
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
VALUE VALUE
---------- ----------
<S> <C> <C>
Due in one year or less ............................ $ 2,706 $ 2,743
Due one through five years ......................... 61,340 64,696
Due five through ten years ......................... 43,233 45,352
Due after ten years ................................ 15,828 17,191
-------- --------
123,107 129,982
Mortgage and other asset backed securities ......... 61,590 62,574
-------- --------
$184,697 $192,556
======== ========
</TABLE>
118
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS--(CONTINUED)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest on bonds ....................................... $ 17,150 $ 25,723 $ 33,969
Dividends on equity investments from subsidiary ......... 13,233 10,855 --
Interest on mortgage loans .............................. 499 478 559
Rental income on real estate ............................ 2,839 1,371 919
Interest on policy loans ................................ 6,241 4,656 3,339
Other investment income ................................. 540 26 9
-------- -------- --------
Gross investment income ................................. 40,502 43,109 38,795
Investment expenses ..................................... (4,187) (3,096) (2,728)
-------- -------- --------
Net investment income ................................... $ 36,315 $ 40,013 $ 36,067
======== ======== ========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Proceeds ...................... $143,449 $146,963 $122,820
======== ======== ========
Gross realized gains .......... $ 4,641 $ 3,921 $ 2,984
Gross realized losses ......... 899 626 791
-------- -------- --------
Net realized gains ............ $ 3,742 $ 3,295 $ 2,193
======== ======== ========
</TABLE>
At December 31, 1998, bonds with an aggregate carrying value of $4,297
were on deposit with certain state regulatory authorities or were restrictively
held in bank custodial accounts for benefit of such state regulatory
authorities, as required by statute.
119
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS--(CONTINUED)
Realized investment gains (losses) and changes in unrealized gains
(losses) for investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
---------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Debt securities .................................. $ 3,742 $ 3,295 $ 2,193
Real estate ...................................... -- -- (606)
Other invested assets ............................ (18) -- (4)
-------- -------- ---------
3,724 3,295 1,583
Tax expense ...................................... (936) (711) --
Transfer to interest maintenance reserve ......... (1,294) (3,259) (2,394)
-------- -------- --------
Net realized gains (losses) ...................... $ 1,494 $ 747 $ (811)
======== ======== ========
<CAPTION>
CHANGE IN UNREALIZED
-----------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------ ---------- -------------
<S> <C> <C> <C>
Debt securities .......................................... $ (3,985) $ (896) $ (14,442)
Common stock ............................................. 248 -- (66)
-------- ------ ---------
Change in unrealized appreciation (depreciation) ......... $ (3,737) $ (896) $ (14,508)
======== ====== =========
</TABLE>
Gross unrealized gains (losses) on common stocks were as follows:
REALIZED
---------------------------
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
-------- ------ -------
Unrealized gains ............. $ 579 $295 $295
Unrealized losses ............ (36) -- --
----- ---- ----
Net unrealized gains ......... $ 543 $295 $295
===== ==== ====
During 1998, the Company issued one mortgage loan with an interest rate of
6.71%. The maximum percentage of any one mortgage loan to the value of the
underlying real estate at origination was 75%. The Company requires all
mortgagees to carry fire insurance equal to the value of the underlying
property.
During 1998, 1997 and 1996, no mortgage loans were foreclosed and
transferred to real estate. During 1998 and 1997, the Company held a mortgage
loan loss reserve in the asset valuation reserve of $112 and $54, respectively.
At December 31, 1998, the Company had no investments (excluding U. S.
Government guaranteed or insured issues) which individually represented more
than ten percent of capital and surplus and the asset valuation reserve.
120
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
4. REINSURANCE
The Company reinsures portions of certain insurance policies which exceed
its established limits, thereby providing a greater diversification of risk and
minimizing exposure on larger risks. The Company remains contingently liable
with respect to any insurance ceded, and this would become an actual liability
in the event that the assuming insurance company became unable to meet its
obligations under the reinsurance treaty.
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Direct premiums .............. $1,345,752 $1,219,271 $1,034,757
Reinsurance assumed .......... 461 2,389 2,063
Reinsurance ceded ............ (75,319) (5,141) (3,105)
---------- ---------- ----------
Net premiums earned .......... $1,270,894 $1,216,519 $1,033,715
---------- ---------- ----------
</TABLE>
The Company received reinsurance recoveries in the amount of $5,260,
$2,288 and $2,156 during 1998, 1997 and 1996, respectively. At December 31,
1998 and 1997, estimated amounts recoverable from reinsurers that have been
deducted from policy and contract claim reserves totaled $1,003 and $2,721,
respectively. The aggregate reserves for policies and contracts were reduced
for reserve credits for reinsurance ceded at December 31, 1998 and 1997 of
$2,849 and $1,369, respectively.
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax
return filing with certain affiliated companies. Under the terms of a
tax-sharing agreement between the Company and its affiliates, the Company
computes federal income tax expense as if it were filing a separate income tax
return, except that tax credits and net operating loss carryforwards are
determined on the basis of the consolidated group. Additionally, the
alternative minimum tax is computed for the consolidated group and the
resulting tax, if any, is allocated back to the separate companies on the basis
of the separate companies' alternative minimum taxable income.
121
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. INCOME TAXES--(CONTINUED)
Federal income tax expense (benefit) differs from the amount computed by
applying the statutory federal income tax rate to gain (loss) from operations
before income taxes (benefit) and realized capital gains (losses) on
investments for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ---------
<S> <C> <C> <C>
Computed tax (benefit) at federal statutory rate (35%) .......... $ (2,019) $ (1,156) $3,189
Deferred acquisition costs -- tax basis ......................... 9,672 9,164 7,172
Tax reserve valuation ........................................... 1,513 (194) (696)
Excess tax depreciation ......................................... (442) (127) (65)
Amortization of IMR ............................................. (260) (552) (467)
Dividend received deduction ..................................... (6,657) (5,326) --
Prior year over-accrual ......................................... (2,322) (1,541) (9)
Other, net ...................................................... 168 201 173
-------- -------- ------
Federal income tax expense (benefit) ............................ $ (347) $ 469 $9,297
-------- -------- ------
</TABLE>
Federal income tax expense differs from the amount computed by applying
the statutory federal income tax rate to realized gains (losses) due to the
differences in book and tax asset bases at the time certain investments are
sold.
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation, but
was accumulated for income tax purposes in a memorandum account referred to as
the policyholders' surplus account. No federal income taxes have been provided
for in the financial statements on income deferred in the policyholders'
surplus account ($293 at December 31, 1998). To the extent dividends are paid
from the amount accumulated in the policyholders' surplus account, net earnings
would be reduced by the amount of tax required to be paid. Should the entire
amount in the policyholders' surplus account become taxable, the tax thereon
computed at current rates would amount to approximately $103.
At December 31, 1996, the Company had capital loss carryforwards of
approximately $10,705, which were utilized by the Company's affiliates in the
consolidated tax return filing in 1997. This transaction resulted in a receipt
from the Company's affiliate of $3,747, which was credited directly to
unassigned surplus.
In 1998, the Company reached a final settlement with the Internal Revenue
Service for 1994 and 1995 resulting in a tax refund of $300 and interest
received of $53.
122
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES
A portion of the Company's policy reserves and other policyholders' funds
relate to liabilities established on a variety of the Company's products,
primarily separate accounts, that are not subject to significant mortality or
morbidity risk; however, there may be certain restrictions placed upon the
amount of funds that can be withdrawn without penalty. The amount of reserves
on these products, by withdrawal characteristics are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1998 1997
----------------------- ----------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------ ---------- ------------ ---------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with market
value adjustment ................................. $ 12,810 $ 13,812 1%
Subject to discretionary withdrawal at book value
less surrender charge ............................ 76,289 1% 68,376 2
Subject to discretionary withdrawal at market value 5,096,680 94 3,615,255 91
Subject to discretionary withdrawal at book value
(minimal or no charges or adjustments) ........... 210,270 4 201,457 5
Not subject to discretionary withdrawal provision . 15,681 1 16,572 1
---------- -- ---------- --
5,411,730 100% 3,915,472 100%
=== ===
Less reinsurance ceded ............................ 1,131 --
---------- ----------
Total policy reserves on annuities and deposit fund
liabilities ...................................... $5,410,599 $3,915,472
========== ==========
</TABLE>
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Transfers as reported in the summary of operations
of the separate accounts statement:
Transfers to separate accounts ........................ $1,240,858 $1,164,013 $ 997,513
Transfers from separate accounts ...................... 847,507 646,477 339,523
---------- ---------- ----------
Net transfers to separate accounts ..................... 393,351 517,536 657,990
Reconciling adjustments -- change in accruals for
investment management, administration fees and
contract guarantees, and separate account surplus ..... 9,267 1,678 (205,519)
---------- ---------- ----------
Transfers as reported in the summary of operations
of the life, accident and health annual statement ..... $ 402,618 $ 519,214 $ 452,471
========== ========== ==========
</TABLE>
123
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES--(CONTINUED)
Reserves on the Company's traditional life products are computed using
mean reserving methodologies. These methodologies result in the establishment
of assets for the amount of the net valuation premiums that are anticipated to
be received between the policy's paid-through date to the policy's next
anniversary date. At December 31, 1998 and 1997, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
--------- --------- ---------
<S> <C> <C> <C>
DECEMBER 31, 1998
Ordinary direct renewal business ............ $1,101 $201 $ 900
------ ---- ------
$1,101 $201 $ 900
====== ==== ======
DECEMBER 31, 1997
Ordinary direct first year business ......... $ 2 $ 1 $ 1
Ordinary direct renewal business ............ 1,350 140 1,210
Group life direct business .................. 717 -- 717
------ ---- ------
$2,069 $141 $1,928
====== ==== ======
</TABLE>
In 1994, the NAIC enacted a guideline to clarify reserving methodologies
for contracts that require immediate payment of claims upon proof of death of
the insured. Companies were allowed to grade the effects of the change in
reserving methodologies over five years. A direct charge to surplus of $2,132,
$1,872 and $2,995 was made for the years ended December 31, 1998, 1997 and
1996, respectively, related to the change in reserve methodology.
7. DIVIDEND RESTRICTIONS
The Company is subject to limitations, imposed by the State of Ohio, on
the payment of dividends to its parent company. Generally, dividends during any
twelve month period may not be paid; without prior regulatory approval, in
excess of the lesser of (a) 10 percent of statutory capital and surplus as of
the preceding December 31, or (b) statutory gain from operations for the
preceding year. Subject to the availability of unassigned surplus at the time
of such dividend, the maximum payment which may be made in 1999, without the
prior approval of insurance regulatory authorities, is $14,657.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit plan sponsored
by AEGON. The Company has no legal obligation for the plan. The Company
recognizes pension expense equal to its allocation from AEGON. The pension
expense is allocated among the participating companies based on the FASB
Statement No. 87 expense as a percent of salaries. The benefits are based on
years of service and the employee's compensation during the highest five
consecutive years of employment. Pension expense
124
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. RETIREMENT AND COMPENSATION PLANS--(CONTINUED)
aggregated $917, $659 and $581 for the years ended December 31, 1998, 1997 and
1996, respectively. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement and Income Security Act of 1974.
The Company's employees also participate in a contributory defined
contribution plan sponsored by AEGON which is qualified under Section 401(k) of
the Internal Revenue Service Code. Employees of the Company who customarily
work at least 1,000 hours during each calendar year and meet the other
eligibility requirements are participants of the plan. Participants may elect
to contribute up to fifteen percent of their salary to the plan. The Company
will match an amount up to three percent of the participant's salary.
Participants may direct all of their contributions and plan balances to be
invested in a variety of investment options. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement and Income
Security Act of 1974. Pension expense related to this plan was $632, $448 and
$184 for the years ended December 31, 1998, 1997 and 1996, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's
senior management with benefits in excess of normal pension benefits. The plans
are noncontributory and benefits are based on years of service and the
employee's compensation level. The plans are unfunded and nonqualified under
the Internal Revenue Code. In addition, AEGON has established incentive
deferred compensation plans for certain key employees of the Company. AEGON
also sponsors an employee stock option plan for individuals employed at least
three years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been accrued
for or funded as deemed appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans
sponsored by AEGON that provide postretirement medical, dental and life
insurance benefits to employees meeting certain eligibility requirements.
Portions of the medical and dental plans are contributory. The expenses of the
postretirement plans calculated on the pay-as-you-go basis are charged to
affiliates in accordance with an intercompany cost sharing arrangement. The
Company expensed $157, $99 and $98 for the years ended December 31, 1998, 1997
and 1996, respectively.
9. RELATED PARTY TRANSACTIONS
The Company shares certain officers, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1998,
1997 and
125
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
9. RELATED PARTY TRANSACTIONS--(CONTINUED)
1996, the Company paid $12,763, $10,040 and $10,038, respectively, for such
services, which approximates their costs to the affiliates. The Company
provides office space, marketing and administrative services to certain
affiliates. During 1998, 1997 and 1996, the Company received $5,125, $4,395 and
$3,271, respectively, for such services, which approximates their cost. The
Company had a net payable with affiliates of $33,449 and $1,925 at December 31,
1998 and 1997, respectively.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 4.74% at December 31, 1998. During 1998,
1997 and 1996, the Company paid net interest of $1,090, $364 and $138,
respectively, to affiliates.
The Company received capital contributions of $32,092 and $20,000 from its
parent in 1998 and 1997, respectively.
At December 31, 1998 and 1997, the Company had short-term note payables to
an affiliate of $44,200 and $8,200, respectively. Interest on these notes
ranged from 5.13% to 5.54% at December 31, 1998 and was 5.60% at December 31.
1997.
During 1998, the Company purchased life insurance policies covering the
lives of certain employees of the Company. Premiums of $43,500 were paid to an
affiliate for these policies. At December 31, 1998, the cash surrender value of
these policies is $45,445.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive damages in addition to contract liability, it is
management's opinion, after consultation with counsel and a review of available
facts, that damages arising from such demands will not be material to the
Company's financial position.
The Company is subject to insurance guaranty laws in the states in which
it writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. Assessments are charged to operations
when received by the Company except where right of offset against other taxes
paid is allowed by law; amounts available for future offsets are recorded as an
asset on the Company's balance sheet. The future obligation has been based on
the most recent information available from the National Organization of Life
and Health Insurance Guaranty Association. Potential future obligations for
unknown insolvencies are not determinable by the Company. The Company has
established a reserve of $3,489 and $4,007 and an offsetting premium tax
benefit of $828 and $1,070 at December 31, 1998 and 1997, respectively, for its
126
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
10. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
estimated share of future guaranty fund assessments related to several major
insurer insolvencies. The guaranty fund expense (credit) was $(74), $0 and $212
at December 31, 1998, 1997 and 1996, respectively.
11. YEAR 2000 (UNAUDITED)
The term Year 2000 Issue generally refers to the improper processing of
dates and incorrect date calculations that might occur in computer software and
hardware and embedded systems as the Year 2000 is approached. The use of
computer programs that rely on two-digit date fields to perform computations
and decision-making functions may cause systems to malfunction when processing
information involving dates after 1999. For example, any computer software that
has date-sensitive coding might recognize a code of 00 as the year 1900 rather
than the year 2000.
The Company has developed a Year 2000 Project Plan (the Plan) to address
the Year 2000 issue as it affects the Company's internal IT and non-IT systems,
and to assess Year 2000 issues relating to third parties with whom the Company
has critical relationships.
The Plan for addressing internal systems generally includes an assessment
of internal IT and non-IT systems and equipment affected by the Year 2000
issue; definition of strategies to address affected systems and equipment;
remediation of identified systems and equipment; internal testing and
certification that each internal system is Year 2000 compliant; and a review of
existing and revised business resumption and contingency plans to address
potential Year 2000 issues. The Company has remediated and tested substantially
all of its mission-critical internal IT systems as of December 31, 1998. The
Company continues to remediate and test certain non-critical internal IT
systems, internal non-IT systems and will continue with a revalidation testing
program throughout 1999.
The Company's Year 2000 issues are more complex because a number of its
systems interface with other systems not under the Company's control. The
Company's most significant interfaces and uses of third-party vendor systems
are in the bank, financial services and trust areas. The Company utilizes
various banks to handle numerous types of financial and sales transactions.
Several of these banks also provide trustee and custodial services for the
Company's investment holdings and transactions. These services are critical to
a financial services company such as the Company as its business centers around
cash receipts and disbursements to policyholders and the investment of
policyholder funds. The Company has received written confirmation from its
vendor banks regarding their status on Year 2000. The banks indicate their
dedication to resolving any Year 2000 issues related to their systems and
services prior to
127
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
11. YEAR 2000 (UNAUDITED)--(CONTINUED)
December 31, 1999. The Company anticipates that a considerable effort will be
necessary to ensure that its corrected or new systems can properly interface
with those business partners with whom it transmits and receives data and other
information (external systems). The Company has undertaken specific testing
regimes with these third-party business partners and expects to continue
working with its business partners on any interfacing of systems. However, the
timing of external system compliance cannot currently be predicted with
accuracy because the implementation of Year 2000 readiness will vary from one
company to another.
The Company does have some exposure to date sensitive embedded technology
such as micro-controllers, but the Company views this exposure as minimal.
Unlike other industries that may be equipment intensive, like manufacturing,
the Company is a life insurance and financial services organization providing
insurance, annuities and pension products to its customers. As such, the
primary equipment and electronic devices in use are computers and telephone
related equipment. This type of hardware can have date sensitive embedded
technology which could have Year 2000 problems. Because of this exposure, the
Company has reviewed its computer hardware and telephone systems, with
assistance from the applicable vendors, and has upgraded, or replaced, or is in
the process of replacing any equipment that will not properly process date
sensitive data in the Year 2000 or beyond.
For the Company, a reasonably likely worst case scenario might include one
or more of the Company's significant policyholder systems being non-compliant.
Such an event could result in a material disruption of the Company's
operations. Specifically, a number of the Company's operations could experience
an interruption in the ability to collect and process premiums or deposits,
process claim payments, accurately maintain policyholder information,
accurately maintain accounting records, and or perform adequate customer
service. Should the worst case scenario occur, it could, dependent upon its
duration, have a material impact on the Company's business and financial
condition. Simple failures can be repaired and returned to production within a
matter of hours with no material impact. Unanticipated failures with a longer
service disruption period could have a more serious impact. For this reason,
the Company is placing significant emphasis on risk management and Year 2000
business resumption contingency planning in 1999 by modifying its existing
business resumption and disaster recovery plans to address potential Year 2000
issues.
The actions taken by management under the Year 2000 Project Plans are
intended to significantly reduce the Company's risk of a material business
interruption based on the Year 2000 issues. It should be noted that the Year
2000 computer problem, and its resolution, is complex and multifaceted, and any
company's success cannot be conclusively known until the Year 2000 is reached.
In spite of its efforts or results, the
128
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
11. YEAR 2000 (UNAUDITED)--(CONTINUED)
Company's ability to function unaffected to and through the Year 2000 may be
adversely affected by actions (or failure to act) of third parties beyond our
knowledge or control. It is anticipated that there may be problems that will
have to be resolved in the ordinary course of business on and after the Year
2000. However, the Company does not believe that the problems will have a
material adverse affect on the Company's operations or financial condition.
12. RECONCILIATION OF CAPITAL AND SURPLUS AND NET INCOME
The following table reconciles capital and surplus and net income as
reported in the Annual Statement filed with the Insurance Department of the
State of Ohio, to the amounts reported in the accompanying financial
statements:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1998
-------------- ------------------
TOTAL CAPITAL
AND SURPLUS NET INCOME/(LOSS)
-------------- ------------------
<S> <C> <C>
Amounts reported in Annual Statement ............. $148,038 $ 528
Adjustment to federal income tax benefit ......... (4,458) (4,458)
-------- --------
Amounts reported herein .......................... $143,580 $ (3,930)
======== ========
</TABLE>
129
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1998
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
- ------------------ -------- ----- -------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and government
agencies and authorities ................................ $ 19,899 $ 20,673 $ 19,899
States, municipalities and political subdivisions ......... 6,676 6,930 6,676
Public utilities .......................................... 18,792 19,359 18,792
All other corporate bonds ................................. 139,330 145,594 139,330
--------- -------- ---------
Total fixed maturities ..................................... 184,697 192,556 184,697
EQUITY SECURITIES
Common stocks:
Affiliated entities ....................................... 243 704
Industrial, miscellaneous and all other ................... 302 384
--------- ---------
Total equity securities .................................... 545 1,088
Mortgage loans on real estate .............................. 9,916 9,916
Real estate ................................................ 34,583 34,583
Policy loans ............................................... 112,982 112,982
Other invested assets ...................................... 396 396
Cash and short-term investments ............................ 73,808 73,808
Investment properties ...................................... 11,594 11,594
--------- ---------
Total investments .......................................... $ 429,655 $ 429,064
========= =========
</TABLE>
- ----------------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accruals of discounts.
130
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
SCHEDULE III
<TABLE>
<CAPTION>
BENEFITS,
CLAIMS,
FUTURE POLICY POLICY AND NET LOSSES AND OTHER
BENEFITS AND CONTRACT PREMIUM INVESTMENT SETTLEMENT OPERATING
EXPENSES LIABILITIES REVENUE INCOME* EXPENSES EXPENSES*
------------ -------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Individual life ................ $ 221,050 $ 8,624 $ 474,120 $ 9,884 $ 122,542 $ 230,368
Group life ..................... 10,546 100 1,933 723 1,962 2,281
Annuity ........................ 265,418 509 794,841 25,708 545,532 91,505
--------- -------- ----------- -------- --------- ---------
$ 497,014 $ 9,233 $ 1,270,894 $ 36,315 $ 670,036 $ 324,154
========= ======== =========== ======== ========= =========
YEAR ENDED DECEMBER 31, 1997
Individual life ................ $ 177,088 $ 9,533 $ 390,452 $ 13,742 $ 88,738 $ 176,303
Group life ..................... 9,435 805 3,918 810 3,986 3,292
Annuity ........................ 296,290 591 822,149 25,461 389,726 83,179
--------- -------- ----------- -------- --------- ---------
$ 482,813 $ 10,929 $ 1,216,519 $ 40,013 $ 482,450 $ 262,774
========= ======== =========== ======== ========= =========
YEAR ENDED DECEMBER 31, 1996
Individual life ................ $ 145,964 $ 7,017 $ 289,375 $ 8,228 $ 125,861 $ 124,181
Group life and health .......... 9,202 713 4,215 3,940 3,828 2,818
Annuity ........................ 332,230 854 740,125 23,899 294,681 71,576
--------- -------- ----------- -------- --------- ---------
$ 487,396 $ 8,584 $ 1,033,715 $ 36,067 $ 424,370 $ 198,575
========= ======== =========== ======== ========= =========
</TABLE>
- ----------------
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
131
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
REINSURANCE
(DOLLARS IN THOUSANDS)
SCHEDULE IV
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------ --------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Life insurance in force ........ $ 51,064,173 $ 9,862,460 $ -- $ 41,201,713 0.0%
============ =========== =========== ============ ===
Premiums:
Individual life ............... $ 493,633 $ 19,512 $ -- $ 474,121 0.0%
Group life and health ......... 1,691 220 461 1,932 23.8
Annuity ....................... 850,428 55,587 -- 794,841 0.0
------------ ----------- ----------- ------------ ----
$ 1,345,752 $ 75,319 $ 461 $ 1,270,894 .03%
============ =========== =========== ============ ====
YEAR ENDED DECEMBER 31, 1997
Life insurance in force ........ $ 40,221,361 $ 6,776,447 $ 2,692,822 $ 36,137,736 7.5%
============ =========== =========== ============ ====
Premiums:
Individual life ............... $ 395,361 $ 4,910 $ -- $ 390,452 0.0%
Group life and health ......... 1,761 231 2389 3,918 61.0
Annuity ....................... 822,149 -- -- 822,149 0.0
------------ ----------- ----------- ------------ ----
$ 1,219,271 $ 5,141 $ 2,389 $ 1,216,519 0.2%
============ =========== =========== ============ ====
YEAR ENDED DECEMBER 31, 1996
Life insurance in force ........ $ 28,168,880 $ 4,463,986 $ 2,210,601 $ 25,915,495 8.5%
============ =========== =========== ============ ====
Premiums:
Individual life ............... $ 292,239 $ 2,863 $ -- $ 289,376 0.0%
Group life and health ......... 2,393 242 2,063 4,214 49.0
Annuity ....................... 740,125 -- -- 740,125 0.0
------------ ----------- ----------- ------------ ----
$ 1,034,757 $ 3,105 $ 2,063 $ 1,033,715 0.2%
============ =========== =========== ============ ====
</TABLE>
132
