<PAGE>
Prospectus
Variable Adjustable Life
Insurance Policy
[LOGO APPEARS HERE]
This prospectus describes a Variable Adjustable Life Insurance Policy issued
by Minnesota Life Insurance Company ("Minnesota Life"). It provides life
insurance protection for the life of the insured so long as scheduled premiums
are paid. Under some plans of insurance, the face amount of insurance may
decrease or terminate during the life of the insured.
The Policy may be adjusted, within described limits, as to face amount,
premium amount and the plan of insurance.
Variable Adjustable Life policy values may be invested in our separate account
called the Variable Life Account. Policy values may also be invested in a
general account option. The actual cash value of all Policies will vary with
the investment experience of these options.
The Variable Life Account invests its assets in shares of Advantus Series
Fund, Inc. and Class 2 of the Templeton Developing Markets Fund, a series of
Templeton Variable Products Series Fund (the "Funds"). The Funds have
seventeen Portfolios which are available to the Variable Life Account. They
are:
. Growth Portfolio . Value Stock Portfolio
. Bond Portfolio . Small Company Value Portfolio
. Money Market Portfolio. Global Bond Portfolio
. Asset Allocation Portfolio
. Index 400 Mid-Cap Portfolio
. Mortgage Securities Portfolio
. Macro-Cap Value Portfolio
. Index 500 Portfolio . Micro-Cap Growth Portfolio
. Capital Appreciation Portfolio
. Real Estate Securities Portfolio
. International Stock Portfolio
. Templeton Developing Markets Fund
. Small Company Growth Portfolio
This prospectus must be accompanied by the current prospectuses of the Funds.
This prospectus should be read carefully and retained for future reference.
The policies have not been approved or disapproved by the SEC. Neither the SEC
nor any state has determined whether this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
Minnesota Life Insurance Company
400 Robert Street North
St. Paul, MN 55101-2098
651.665.3500 Tel
www.minnesotamutual.com
Dated: May 3, 1999
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Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Summary................................................................... 1
Condensed Financial Information........................................... 8
General Descriptions
Minnesota Life Insurance Company........................................ 10
Variable Life Account................................................... 10
Advantus Series Fund, Inc............................................... 10
Templeton Variable Products Series Fund................................. 11
Additions, Deletions or Substitutions................................... 11
Selection of Sub-Accounts............................................... 12
The Guaranteed Principal Account........................................ 12
Detailed Information about the Variable Adjustable Life Insurance Policy
Adjustable Life Insurance............................................... 13
Policy Adjustments...................................................... 16
Applications and Policy Issue........................................... 20
Policy Premiums......................................................... 21
Policy Values........................................................... 24
Death Benefit Options................................................... 27
Policy Loans............................................................ 28
Surrender............................................................... 30
Free Look............................................................... 31
Conversion.............................................................. 31
Policy Charges.......................................................... 31
Other Policy Provisions................................................. 34
Additional Benefits..................................................... 36
Other Matters
Federal Tax Status...................................................... 38
Directors and Principal Officers of Minnesota Life...................... 41
Voting Rights........................................................... 42
Distribution of Policies................................................ 42
Legal Matters........................................................... 43
Legal Proceedings....................................................... 43
Year 2000 Computer Problems............................................. 43
Experts................................................................. 43
Registration Statement.................................................. 43
Special Terms............................................................. 44
Financial Statements of Minnesota Life Variable Life Account.............. 45
Financial Statements of Minnesota Life Insurance Company.................. 66
Appendix I-Illustrations of Policy Values, Death Benefits and Premiums.... 93
Appendix II-Summary of Policy Charges..................................... 102
Appendix III-Illustration of Death Benefit Calculation.................... 107
Appendix IV-Policy Loan Example........................................... 108
Appendix V-Example of Sales Load Computation.............................. 109
Appendix VI-Average Annual Returns........................................ 110
Appendix VII-S&P 500 Performance History.................................. 111
Appendix VIII-Range of Returns............................................ 112
</TABLE>
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Summary
The following summary is designed to answer certain general questions
concerning the Policy and to give you a brief overview of the more significant
Policy features. This summary is not comprehensive.You should review the
information contained elsewhere in this prospectus. You should also refer to
the heading "Special Terms" for the definition of unfamiliar terms.
What is a Variable Adjustable Life Insurance Policy?
The Variable Adjustable Life Insurance Policy (the "Policy") described in
this prospectus combines traditional insurance provisions, flexible
administrative procedures and significant and useful market sensitive
investment features. First and foremost, the Policy provides a guaranteed death
benefit for the insured's lifetime so long as scheduled premiums are paid. In
this respect, the Policy is similar to conventional whole life insurance. In
addition, the Policy contains adjustment features which give you the
flexibility to tailor the Policy to your individual requirements at issue and
to adjust the Policy thereafter as your insurance needs change.
Throughout the life of the insured, policy values are invested at your
direction in the several portfolios of Advantus Series Fund, Inc., in Class 2
of the Templeton Developing Markets Fund (the "Funds") or in a Minnesota Life
general account option. Such investment enables you to obtain market rates of
return on your investment in the Policy in combination with guaranteed
insurance protection.
This prospectus describes two versions of the Variable Adjustable Life
Insurance Policy, "VAL '87" and "VAL '95".
What is the guaranteed death benefit?
We guarantee that the face amount of insurance shown on the policy
specification page will be paid on the death of the insured so long as you do
not have policy indebtedness and all scheduled premiums have been paid. Some
Policies will have a scheduled decrease in such guaranteed face amount at the
end of the initial policy protection period. In this case, the time
and amount of the decrease are also shown on the policy specification page. The
importance of the guarantee is that adverse investment performance may never
reduce your life insurance protection below the guaranteed amount. We impose a
charge of 1.5 percent of premiums for providing this guarantee.
What makes the Policy "Adjustable"?
The Policy is termed "Adjustable" because it allows you the flexibility to
custom-design your Policy at issue and thereafter to change or "adjust" your
Policy as your insurance needs change. The three components in designing your
Policy are the level of premiums you wish to pay, the level of death benefit
protection you need and the appropriate "plan" of insurance for you. You may
choose any two of the three components--premium, face amount and plan--and we
will calculate the third component.
Within very broad limits, including those designed to assure that the Policy
qualifies as life insurance for tax purposes, you may choose any level of
premium or death benefit that you wish. Based on the premium and initial face
amount you choose, we will calculate the tabular cash value which results from
using the guaranteed mortality and assumed rate of return in the Policy. The
pattern of tabular cash values and the resulting schedule of face amount and
premiums define the guaranteed plan of insurance.
The maximum plan of insurance available is one where the Policy becomes paid-
up after the payment of ten annual premiums. A paid-up Policy is one for which
no additional premiums are required to guarantee the face amount of insurance
for the entire life of the insured, provided there is no policy indebtedness.
Whole life plans may be suitable for individuals who wish to ensure lifetime
coverage, without any scheduled reduction in face amount as described below, by
the payment of relatively higher premiums and, in certain cases, for a lesser
period of time, or who wish to accumulate substantial cash values by utilizing
the investment features of the Policy.
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The minimum plan that we offer at original issue is a ten year protection
Policy. If the insured's age at original issue is over 55, the minimum plan of
protection will be less than ten years, as described in the table below:
<TABLE>
<CAPTION>
Minimum Plan
Issue Age (in years)
--------- ------------
<S> <C>
56 9
57 8
58 7
59 6
60 or greater 5
</TABLE>
A protection Policy provides only a term plan of insurance. There is a
stated face amount and a scheduled premium level, providing the stated face
amount for a specified number of years, always less than for whole life. At
the end of the initial protection period, there will be a scheduled reduction
in the guaranteed face amount; that reduced face amount will have a whole life
plan of insurance, based on continued payment of your scheduled premiums. A
protection plan requires the lowest initial level of premiums and offers the
most insurance protection with the lowest investment element. The protection
plan may be a suitable starting point for young policy owners who have not
reached their peak earning years but who have substantial life insurance
needs.
For any given face amount of insurance, you may select a plan that falls
anywhere between the minimum protection plan and the maximum whole life plan.
The higher the premium you pay, the greater will be your cash value
accumulation at any given time and therefore, for whole life plans, the
shorter the period during which you need to pay premiums before your Policy
becomes paid-up. For example, the table below shows the premium required for
various plans for a standard non-smoker risk, male, age 40 at issue, insured
with a $100,000 VAL '95 Policy.
<TABLE>
<CAPTION>
Annual
Plan of Insurance Premium
- ----------------- -------
<S> <C>
Minimum--10 year protection plan $ 428
30 year protection plan $ 939
Whole life plan $1,723
Life paid-up at age 70 $1,923
Maximum--10 year, limited payment, whole life plan $3,833
</TABLE>
The flexibility described above with respect to designing your Policy to
suit your needs at issue continues throughout the time the Policy remains in
force by virtue of its adjustability features. As your insurance needs and
personal circumstances change over the years, you may change, subject to the
limitations described herein, the premium and face amount and thus the plan.
Some limitations do apply to policy adjustments, and these limitations are
more fully described in this prospectus. See the heading "Policy Adjustments"
in this prospectus on page 16. Any policy adjustment for a change in premium
must result in a change of the annual premium of at least $100 and any
adjustment to a Policy's face amount generally must result in a change of the
face amount of at least $5,000. An adjusted Policy must provide a level face
amount of insurance to the next policy anniversary after the later of: (a)
five years from the date of adjustment; or (b) ten years from the date of
policy issue. If the insured's age at original issue is over 55, the adjusted
Policy must provide a level face amount of insurance to the next policy
anniversary after the later of: (a) five years from the date of adjustment; or
(b) a certain number of years from the date of policy issue, based on the
table below:
<TABLE>
<CAPTION>
Issue Age Number of Years
--------- ---------------
<S> <C>
56 9
57 8
58 7
59 6
60 or greater 5
</TABLE>
These face amount requirements do not apply in the following situations:
(1) when there is an automatic adjustment when the face amount is scheduled to
decrease;
(2) when there is an automatic adjustment at the insured's age 70;
(3) when the base premium is reduced to zero.
What makes the Policy "Variable"?
The Policy is termed "Variable" because unlike traditional whole life and
universal life contracts which provide for accumulations of contract values at
fixed rates determined by the insurance company, Variable Adjustable Life
policy values may be invested in a separate account of ours called the
Minnesota Life Variable Life Account ("Variable Life Account"), the sub-
accounts of which invest in corresponding Portfolios of the Funds. Thus,
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your policy values invested in these sub-accounts will reflect market rates of
return.
The actual cash value of the Policies, to the extent invested in sub-accounts
of the Variable Life Account, will vary with the investment experience of the
sub-accounts of the Variable Life Account. These have no guaranteed minimum
actual cash value. Therefore, you bear the risk that adverse investment
performance may depreciate your investment in the Policy. At the same time, the
Policy offers you the opportunity to have your actual cash value appreciate
more rapidly than it would under comparable fixed benefit contracts by virtue
of favorable investment performance. In addition, under some Policies, the
death benefit will also increase and decrease (but not below the guaranteed
amount) with investment experience.
Those seeking the traditional insurance protections of a guaranteed cash
value may allocate premiums to the guaranteed principal account. The guaranteed
principal account is a general account option with a guaranteed accumulation at
a fixed rate of interest. While it is more fully described in the Policy,
additional information on this option may be found under the heading "The
Guaranteed Principal Account" in this prospectus on page 12.
What variable investment options are available?
The Variable Life Account invests in seventeen Portfolios of the Funds. These
offer policy owners the opportunity to invest in stocks, bonds, mortgage
securities and money market instruments. Policy owners who wish to actively
manage the investment of their actual cash values may direct their funds to
the:
. Growth
. Bond
. Money Market
. Mortgage Securities
. Index 500
. Capital Appreciation
. International Stock
. Small Company Growth
. Value Stock
. Small Company Value
. Global Bond
. Index 400 Mid-Cap
. Macro-Cap Value
. Micro-Cap Growth
. Real Estate Securities Portfolios
. Templeton Developing Markets Fund Class 2
We also offer an Asset Allocation Portfolio, which is designed to offer
policy owners who do not wish to direct their investment the opportunity to
have the Funds' investment advisers make the decisions concerning what
percentages of the assets should be invested in stocks, bonds and money market
instruments at any given time.
The investment objectives and certain policies of these Portfolios of the
Advantus Series Fund are as follows:
The Growth Portfolio seeks the long-term accumulation of capital. Current
income, while a factor in portfolio selection, is a secondary objective. The
Growth Portfolio will invest primarily in common stocks and other equity
securities. Common stocks are more volatile than debt securities and involve
greater investment risk.
The Bond Portfolio seeks as high a level of long-term total rate of return
as is consistent with prudent investment risk. A secondary objective is to
seek preservation of capital. The Bond Portfolio will invest primarily in
long-term, fixed-income, high-quality debt instruments. The value of debt
securities will tend to rise and fall inversely with the rise and fall of
interest rates.
The Money Market Portfolio seeks maximum current income to the extent
consistent with liquidity and the preservation of capital. The Money Market
Portfolio will invest in money market instruments and other debt securities
with maturities not exceeding one year. The return produced by these
securities will reflect fluctuations in short-term interest rates.
An investment in the Money Market Portfolio is neither insured nor
guaranteed by the U.S. Government and there can be no assurance that the
Portfolio will be able to maintain a stable net asset value of $1.00 per
share.
The Asset Allocation Portfolio seeks as high a level of long-term total
rate of return as is consistent with prudent investment risk. The Asset
Allocation Portfolio will invest in common stocks and other equity
securities, bonds and money market instruments. The Asset Allocation
Portfolio involves the risks inherent in stocks and debt securities of
varying maturities and the risk that the Portfolio may invest too much or too
little of its assets in each type of security at any particular time.
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The Mortgage Securities Portfolio seeks a high level of current income
consistent with prudent investment risk. In pursuit of this objective the
Mortgage Securities Portfolio will follow a policy of investment primarily in
mortgage-related securities. Prices of mortgage-related securities will tend
to rise and fall inversely with the rise and fall of the general level of
interest rates.
The Index 500 Portfolio seeks investment results that correspond generally
to the price and yield performance of the common stocks included in the
Standard & Poor's Corporation 500 Composite Stock Price Index (the "Index").
It is designed to provide an economical and convenient means of maintaining a
broad position in the equity market as part of an overall investment
strategy. All common stocks, including those in the Index, involve greater
investment risk than debt securities. The fact that a stock has been included
in the Index affords no assurance against declines in the price or yield
performance of that stock.
The Capital Appreciation Portfolio seeks growth of capital. Investments
will be made based upon their potential for capital appreciation. Therefore,
current income will be incidental to the objective of capital growth. Because
of the market risks inherent in any equity investment, the selection of
securities on the basis of their appreciation possibilities cannot ensure
against possible loss in value.
The International Stock Portfolio seeks long-term capital growth. In
pursuit of this objective the International Stock Portfolio will follow a
policy of investing in stocks issued by companies, large and small, and debt
obligations of companies and governments outside the United States. Current
income will be incidental to the objective of capital growth. The Portfolio
is designed for persons seeking international diversification. Investors
should consider carefully the substantial risks involved in investing in
securities issued by companies and governments of foreign nations, which are
in addition to the usual risks inherent in domestic investments.
The Small Company Growth Portfolio seeks long-term accumulation of capital.
In pursuit of this objective, the Small Company Growth Portfolio will follow
a policy of investing primarily in common and preferred stocks issued by
small companies, defined in the terms of either market capitalization or
gross revenues. Investments in small companies usually involve greater
investment risks than fixed income securities or corporate equity securities
generally. Small companies will typically have a market capitalization of
less than $1.5 billion or annual gross revenues of less than $1.5 billion.
The Value Stock Portfolio seeks long-term accumulation of capital. The
production of income through the holding of dividend paying stocks will be a
secondary objective of the Portfolio. The Value Stock Portfolio will invest
primarily in equity securities of companies which, in the opinion of the
Portfolio's investment adviser, have market values which appear low relative
to their underlying value or future earnings and growth potential.
The Small Company Value Portfolio seeks the long-term accumulation of
capital. The Portfolio will follow a policy of investing primarily in the
equity securities of small companies, defined in terms of market
capitalization and which appear to have market values which are low relative
to their underlying value or future earnings and growth potential. Dividend
income will be incidental to the investment objective for this Portfolio.
The Global Bond Portfolio seeks to maximize current income consistent with
protection of principal. The Portfolio pursues its objective by investing
primarily in issuers located anywhere in the world.
Prior to May 1, 1998, the Global Bond Portfolio was known as the
International Bond Portfolio and pursued its objective by investing primarily
in a managed portfolio of non-U.S. dollar debt securities issued by foreign
governments, companies and supranational entities. Effective May 1, 1998,
pursuant to a change in the investment practices of the Portfolio approved by
the Board of Directors, the Portfolio will seek to achieve its investment
objective by investing primarily in debt securities issued anywhere in the
world. The investment objective of the Portfolio remains unchanged.
The Index 400 Mid-Cap Portfolio seeks to provide investment results
generally corresponding to the aggregate
4
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price and dividend performance of publicly traded common stocks that comprise
the Standard & Poor's 400 MidCap Index. The Portfolio pursues its investment
objective by investing primarily in the 400 common stocks that comprise the
Index, issued by medium sized domestic companies with market capitalizations
that generally range from $200 million to $5 billion. It is designed to
provide an economical and convenient means of maintaining a diversified
portfolio in this equity security area as part of an over-all investment
strategy. The inclusion of a stock in the Index in no way implies an opinion
by Standard & Poor's as to its attractiveness as an investment, nor is it a
sponsor or in any way affiliated with the Portfolio.
The Macro-Cap Value Portfolio seeks to provide high total return. It
pursues this objective by investing in equity securities that the sub-adviser
believes, through the use of dividend discount models, to be undervalued
relative to their long-term earnings power, creating a diversified portfolio
of equity securities which typically will have a price/earnings ratio and a
price to book ratio that reflects a value orientation. The Portfolio seeks to
enhance its total return relative to that of a universe of large-sized U.S.
companies.
The Micro-Cap Growth Portfolio seeks long-term capital appreciation. It
pursues its objective by investing primarily in equity securities of smaller
companies which the sub-adviser believes are in an early stage or
transitional point in their development and have demonstrated or have the
potential for above average revenue growth. It will invest primarily in
common stocks and stock equivalents of micro-cap companies, that is,
companies with a market capitalization of less than $300 million.
The Real Estate Securities Portfolio seeks above-average income and long-
term growth of capital. It will pursue its objective by investing primarily
in equity securities of companies in the real estate industry. The Portfolio
seeks to provide a yield in excess of the yield of the Standard & Poor's 500
Composite Index.
In addition to the investment in the Advantus Series Fund, the Variable Life
Account invests in the Templeton Developing Markets Fund, Class 2, a
diversified portfolio with two classes of shares of the Templeton Variable
Products Series Fund, a mutual fund of the series type.
The investment objectives and certain policies of the Templeton Developing
Markets Fund available under the Policy are as follows:
The Templeton Developing Markets Fund seeks long-term capital appreciation.
It pursues this objective by investing primarily in emerging market equity
securities. Countries generally considered to have emerging markets are all
countries that are considered to be emerging countries by the International
Bank for Reconstruction and Development (more commonly referred to as the
World Bank) or the International Finance Corporation, as well as countries
that are classified by the United Nations or otherwise regarded by their
authorities as emerging.
There is no assurance that any Portfolio will meet its objectives. Additional
information concerning the investment objectives, policies and risks of the
Portfolios can be found in the current prospectuses for the Funds, which are
attached to this prospectus.
How do you allocate your net premiums?
In your initial policy application, you indicate how you want your net
premiums allocated among the guaranteed principal account and the sub-accounts
of the Variable Life Account. All future net premiums will be allocated in the
same proportion until you send us a written request to change the allocation.
Similarly, you may transfer amounts from one sub-account to another by sending
us a written request or by calling us.
What death benefit options are offered under the Policy?
The Policy provides two death benefit options: the Cash Option and the
Protection Option. Your choice will depend on whether you want favorable
investment experience of amounts invested in sub-accounts of the Variable Life
Account to be reflected in accelerated accumulations of actual cash value or in
enhanced life insurance coverage. If investment performance is less than that
assumed in the design of the Policy, the death benefit will still equal the
current face amount.
The Cash Option provides a fixed death benefit equal to the guaranteed face
amount. Favorable investment returns, if any, will be reflected in increased
actual cash values which will, on whole life plans, shorten the premium paying
period. Only if and when the policy value exceeds the net single premium, as
defined on page 44, for the then current face amount will the death benefit
vary.
The Protection Option provides a variable death benefit from the issue date
as well as variable actual cash values. Favorable
5
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<TABLE>
<CAPTION>
Fund Expense
Advisory (after expense
Portfolio Fee reimbursement) Total
--------- -------- -------------- -----
<S> <C> <C> <C>
Growth .50% .03% .53%
Bond .50 .05 .55
Money Market .50 .08 .58
Asset Allocation .50 .03 .53
Mortgage Securities .50 .07 .57
Index 500 .40 .04 .44
Capital Appreciation .75 .03 .78
International Stock .70 .24 .94
Small Company Growth .75 .04 .79
Value Stock .75 .04 .79
Small Company Value(1) .75 .15 .90
Global Bond .60 .53 1.13
Index 400 Mid-Cap(1) .40 .15 .55
Macro-Cap Value(1) .70 .15 .85
Micro-Cap Growth(1) 1.10 .15 1.25
Real Estate Securities(1) .75 .15 .90
</TABLE>
(1) Minnesota Life voluntarily absorbed certain expenses of the Small Company
Value, Index 400 Mid-Cap, Macro-Cap Value, Micro-Cap Growth, and Real
Estate Securities Portfolios for the period ended December 31, 1998. If
these Portfolios had been charged for expenses, the ratio of expenses to
average daily net assets would have been 1.83%, 1.36%, 2.53%, 2.10%, and
1.90%, respectively. For these Portfolios, it is Minnesota Life's
intention to waive fund expenses during the current fiscal year which
exceed, as a percentage of average daily net assets, .15%. Minnesota Life
also reserves the option to reduce the level of other expenses which it
will voluntarily absorb.
investment returns will be reflected both in increased life insurance coverage
and increased cash value accumulations, although any increases in actual cash
values under the Protection Option will not be as great as under the Cash
Option.
Do you have access to your policy values?
Yes. Your actual cash value is available to you during the insured's
lifetime. You may use the actual cash value to provide retirement income, as
collateral for a loan, to continue some insurance protection if you do not
wish to continue paying premiums or to obtain cash by surrendering your Policy
in full or in part.
You may also borrow up to 90 percent of your policy value as a policy loan.
Each alternative may be subject to conditions described in the Policy or in
this prospectus under the heading "Policy Values" on page 24 and certain
transactions may have tax consequences as described under the heading "Federal
Tax Status" on page 38.
What charges are associated with the Policy?
We assess certain charges from each premium payment, from policy values and
from the amounts held in the Variable Life Account. All of these charges,
which are largely designed to cover our expenses in providing insurance
protection and in distributing and administering the Policies, are fully
described under the heading "Policy Charges" in this prospectus on page 31.
Because of the significance of these charges in early policy years,
prospective purchasers should purchase a Policy only if they intend to and
have the financial capacity to keep it in force for a substantial period.
Against base premiums we deduct a basic sales load of 7 percent and we may
also deduct a first year sales load not to exceed 23 percent. We also deduct
from premiums an underwriting charge, a premium tax charge of 2.5 percent and
a face amount guarantee charge of 1.5 percent. Nonrepeating premiums are
currently subject only to the premium tax charge.
Against the actual cash value of a Policy we deduct an administration charge
of $60 per year, a transaction charge for each Policy adjustment and a monthly
cost of insurance charge.
With VAL '87, a charge for sub-standard risks is deducted from the actual
cash value of a Policy. With VAL '95, a charge for sub-standard risks is
deducted from the premium. Sub-standard risk charges compensate us for
providing the death benefit for Policies whose mortality risks exceed the
standard.
Against the assets held in the Variable Life Account we assess a mortality
and expense risk charge which is deducted from the Variable Life Account
assets on each date on which a Fund Portfolio is valued at an annual rate of
.50 percent of the Variable Life Account average daily net assets.
Advantus Capital Management, Inc. one of our subsidiaries, acts as the
investment adviser to Advantus Series Fund and also deducts from the Fund the
advisory fee of the fund manager and the fund expense for the portfolio
expense for each of VAL's portfolios. The respective advisory fee and fund
expense as a percent of average daily net assets for each portfolio were as
follows:
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For more information about the Fund, see the prospectus of Advantus Series
Fund, Inc. which is attached to this prospectus.
The Templeton Developing Markets Fund pays the following annual fees and
expenses:
. investment adviser management fees -- 1.25 percent
. other fund expenses -- .66 percent
In addition, Class 2 of the Templeton Developing Markets Fund has a Rule
12b-1 plan and may pay up to 0.25 percent annually of the average daily net
assets for distribution. For more information, see the Templeton Fund's
prospectus.
Are the benefits under a Policy subject to Federal income tax?
With respect to a Policy issued on the basis of a standard premium class, we
believe that such a Policy should qualify as a life insurance contract for
Federal income tax purposes. With respect to a Policy issued on a sub-standard
basis, it is not clear whether or not such a Policy would qualify as a life
insurance contract for Federal tax purposes. Assuming that a Policy qualifies
as a life insurance contract for Federal income tax purposes, the benefits
under Policies described in this prospectus should receive the same tax
treatment under the Internal Revenue Code of 1986 as benefits under
traditional fixed benefit life insurance policies. Thus, death proceeds
payable under variable life insurance policies should be excludable from the
beneficiary's gross income for Federal income tax purposes. It is also
believed that you should not be in constructive receipt of the cash values of
your Policy until actual distribution. See the heading "Federal Tax Status" in
this prospectus on page 38.
It should be noted, however, that under recent legislation the tax treatment
described above relating to distributions is available only for policies not
described as "modified endowment contracts." Policies described as modified
endowment contracts are treated as life insurance with respect to the tax
treatment of death proceeds and the tax-free inside build-up of yearly cash
value increases. However, any amounts received by the owner, such as
dividends, cash withdrawals, loans and amounts received from partial or total
surrender of the contract will be subject to the same tax treatment as amounts
received under an annuity. Annuity tax treatment includes the ten percent
additional income tax imposed on the portion of any distribution that is
included in income, except where the distribution or loan is made on or after
the policy owner attains age 59 1/2, is attributable to the policy owner
becoming disabled, or is part of a series of substantially equal periodic
payments for the life of the policy owner or the joint lives of the policy
owner and beneficiary.
A determination as to whether a policy is a modified endowment contract and
subject to this special tax treatment will require an examination of the
premium paid in relation to the death benefit of the policy. A modified
endowment contract results if the cumulative premiums during the first seven
contract years exceed the sum of the net level premiums which would be paid
under a seven-pay life policy. In addition, a policy which is subject to a
material change will be treated as a new policy on the date that such a
material change takes effect. A determination must be made at that time to
test whether such a policy meets the seven-pay standard by taking into account
the previously existing cash surrender value. We will monitor your Policy to
determine whether it may become a modified endowment contract.
How do you purchase a Policy?
To be eligible to purchase a Policy the insured must be no more than age 85,
satisfy our underwriting standards and the Policy must have a face amount of
at least $50,000. The procedure to purchase a Policy is to complete an
application, provide us with evidence of insurability satisfactory to us and
pay your first scheduled premium. See the heading "Applications and Policy
Issue" in this prospectus on page 20.
For a limited time after your application for the Policy and delivery of it,
you may return the Policy for a refund of all premium payments within the
terms of its "free look" provision. See the heading "Free Look" in this
prospectus on page 31.
Moreover, while the Policy is in force and the premiums fully paid and prior
to the death of the insured, you may convert it to any adjustable life policy
with a fixed death benefit and fixed cash values which we may then offer. On
conversion, the issue age and risk class of the insured shall be as stated in
this Policy. For VAL '95, this conversion privilege is only available during
the first 24 months from the original policy date, but comparable fixed
insurance coverage can be obtained after 24 months from the original policy
date by transferring all of the policy value to the guaranteed principal
account and thereafter allocating all premiums to that account.
7
<PAGE>
Condensed Financial Information
The financial statements of Minnesota Life Insurance Company and of
Minnesota Life Variable Life Account may be found elsewhere in this
prospectus.
The table below gives per unit information about the financial history of
each sub-account from the inception of each to December 31, 1998. This
information should be read in conjunction with the financial statements and
related notes of Minnesota Life Variable Life Account included in this
prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Sub-Ac-
count:
Unit value at
beginning of
year $3.43 $2.59 $2.22 $1.79 $1.79 $1.72 $1.65 $1.23 $1.24 $0.99
Unit value at
end of year $4.60 $3.43 $2.59 $2.22 $1.79 $1.79 $1.72 $1.65 $1.23 $1.24
Number of units
outstanding at
end of year 22,653,190 19,284,419 16,176,371 12,822,494 9,964,217 6,671,352 3,703,167 1,251,845 511,276 257,995
Bond Sub-Ac-
count:
Unit value at
beginning of
year $2.17 $1.99 $1.95 $1.63 $1.72 $1.57 $1.48 $1.26 $1.18 $1.06
Unit value at
end of year $2.29 $2.17 $1.99 $1.95 $1.63 $1.72 $1.57 $1.48 $1.26 $1.18
Number of units
outstanding at
end of year 13,380,650 9,679,443 7,366,222 5,340,539 3,659,230 2,240,344 1,281,711 654,954 484,684 247,525
Money Market
Sub-Account:
Unit value at
beginning of
year $1.66 $1.58 $1.52 $1.45 $1.40 $1.37 $1.34 $1.27 $1.19 $1.10
Unit value at
end of year $1.73 $1.66 $1.58 $1.52 $1.45 $1.40 $1.37 $1.34 $1.27 $1.19
Number of units
outstanding at
end of year 5,915,721 4,323,601 4,082,791 3,509,791 2,920,337 1,849,721 1,167,590 536,680 341,717 141,494
Asset Allocation
Sub-
Account:
Unit value at
beginning of
year $2.96 $2.50 $2.23 $1.79 $1.83 $1.73 $1.62 $1.26 $1.22 $1.02
Unit value at
end of year $3.64 $2.96 $2.50 $2.23 $1.79 $1.83 $1.73 $1.62 $1.26 $1.22
Number of units
outstanding at
end of year 38,273,621 34,942,517 32,104,595 27,633,273 23,769,797 18,341,417 8,943,507 2,587,520 1,202,183 408,152
Mortgage Securi-
ties
Sub-Account:
Unit value at
beginning of
year $2.31 $2.13 $2.03 $1.73 $1.80 $1.66 $1.56 $1.35 $1.24 $1.10
Unit value at
end of year $2.45 $2.31 $2.13 $2.03 $1.73 $1.80 $1.66 $1.56 $1.35 $1.24
Number of units
outstanding at
end of year 5,351,168 4,464,617 4,175,648 3,616,256 3,250,971 2,419,453 1,471,984 555,964 241,631 95,633
Index 500 Sub-
Account:
Unit value at
beginning of
year $3.86 $2.93 $2.42 $1.78 $1.77 $1.62 $1.51 $1.17 $1.23 $0.95
Unit value at
end of year $4.92 $3.86 $2.93 $2.42 $1.78 $1.77 $1.62 $1.51 $1.17 $1.23
Number of units
outstanding at
end of year 28,132,934 22,433,487 17,250,529 11,917,281 8,997,722 6,074,831 4,026,796 1,307,951 658,612 237,854
Capital Appreci-
ation
Sub-Account:
Unit value at
beginning of
year $3.82 $3.00 $2.56 $2.10 $2.06 $1.87 $1.79 $1.27 $1.30 $0.95
Unit value at
end of year $4.98 $3.82 $3.00 $2.56 $2.10 $2.06 $1.87 $1.79 $1.27 $1.30
Number of units
outstanding at
end of year 24,802,737 22,986,605 19,778,274 16,587,673 12,929,134 9,082,661 5,053,453 1,689,614 802,456 181,898
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- --------- --------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International Stock Sub-
Account:
Unit value at beginning
of
year $1.99 $1.79 $1.50 $1.32 $1.33 $0.93 $1.00(a)
Unit value at end of
year $2.11 $1.99 $1.79 $1.50 $1.32 $1.33 $0.93
Number of units out-
standing at end of year 42,958,209 35,764,833 28,056,128 20,883,317 15,062,750 6,244,750 1,615,754
Small Company Growth
Sub-
Account:
Unit value at beginning
of
year $1.81 $1.69 $1.59 $1.21 $1.15 $1.00(b)
Unit value at end of
year $1.82 $1.81 $1.69 $1.59 $1.21 $1.15
Number of units out-
standing at end of year 33,912,334 27,207,371 19,918,050 13,089,758 7,074,933 1,261,521
Value Stock Sub-Account:
Unit value at beginning
of
year $2.15 $1.78 $1.37 $1.04 $1.00(c)
Unit value at end of
year $2.18 $2.15 $1.78 $1.37 $1.04
Number of units out-
standing at end of year 23,718,362 17,273,210 9,648,331 3,864,294 971,938
Small Company Value Sub-
Account:
Unit value at beginning
of
year $1.00(d)
Unit value at end of
year $0.86
Number of units out-
standing at end of year 894,678
Global Bond Sub-Account:
Unit value at beginning
of
year $1.00(d)
Unit value at end of
year $1.12
Number of units out-
standing at end of year 293,075
Index 400 Mid-Cap Sub-
Account:
Unit value at beginning
of
year $1.00(d)
Unit value at end of
year $1.05
Number of units out-
standing at end of year 1,020,446
Macro-Cap Value Sub-Ac-
count:
Unit value at beginning
of
year $1.00(d)
Unit value at end of
year $1.06
Number of units out-
standing at end of year 823,503
Micro-Cap Growth Sub-Ac-
count:
Unit value at beginning
of
year $1.00(d)
Unit value at end of
year $1.03
Number of units out-
standing at end of year 733,049
Real Estate Securities
Sub-Account:
Unit value at beginning
of
year $1.00(d)
Unit value at end of
year $0.87
Number of units out-
standing at end of year 284,627
Templeton Development
Markets Sub-Account:
Unit value at beginning
of
year $1.00(d)
Unit value at end of
year $0.86
Number of units out-
standing at end of year 778,238
</TABLE>
(a) The information for the sub-account is shown for the period May 1, 1992 to
December 31, 1992. May 1, 1992 was the effective date of the 1933 Act
Registration.
(b) The information for the sub-account is shown for the period May 3, 1993 to
December 31, 1993. May 3, 1993 was the effective date of the 1933 Act
Registration.
(c) The information for the sub-account is shown for the period May 2, 1994 to
December 31, 1994. May 2, 1994 was the effective date of the 1933 Act
Registration.
(d) The information for the sub-account is shown for the period May 19, 1998,
commencement of operations, to December 31, 1998.
9
<PAGE>
General Descriptions
Minnesota Life Insurance Company
We are Minnesota Life Insurance Company ("Minnesota Life"), a life insurance
company organized under the laws of Minnesota. Minnesota Life was formerly
known as The Minnesota Mutual Life Insurance Company ("Minnesota Mutual"), a
mutual life insurance company organized in 1880 under the laws of Minnesota.
On October 1, 1998, a plan of reorganization created a mutual insurance
holding company named Minnesota Mutual Companies, Inc. Minnesota Mutual
reorganized as a stock insurance company subsidiary of the new holding company
and took the new name Minnesota Life.
Our home office is at 400 Robert Street North, St. Paul, Minnesota 55101-
2098, telephone: (651) 665-3500. We are licensed to conduct life insurance
business in all states of the United States (except New York where we are an
authorized reinsurer), the District of Columbia, Canada, Puerto Rico and Guam.
Variable Life Account
A separate account, called the Minnesota Life Variable Life Account, was
established on October 21, 1985, by our Board of Trustees in accordance with
certain provisions of the Minnesota insurance law. The separate account is
registered as a "unit investment trust" with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940. Registration
under the Act does not signify that the SEC supervises the management, or the
investment practices or policies, of the Variable Life Account. The separate
account meets the definition of a "separate account" under the federal
securities laws.
We are the legal owner of the assets in the Variable Life Account. The
obligations to policy owners and beneficiaries arising under the Policies are
general corporate obligations of Minnesota Life and thus our general assets
back the Policies. The Minnesota law under which the Variable Life Account was
established provides that the assets of the Variable Life Account shall not be
chargeable with liabilities arising out of any other business which we may
conduct, but shall be held and applied exclusively to the benefit of the
holders of those variable life insurance policies for which the separate
account was established. The investment performance of the Variable Life
Account is entirely independent of both the investment performance of our
General Account and of any other separate account which we may have
established or may later establish.
The Variable Life Account currently has seventeen sub-accounts to which you
may allocate premiums. Each sub-account invests in shares of a corresponding
Portfolio of the Funds.
Advantus Series Fund, Inc.
The Variable Life Account currently invests in Advantus Series Fund, Inc., a
mutual fund of the series type. Prior to May 1, 1997, the name of the Fund was
"MIMLIC Series Fund, Inc." Advantus Series Fund is registered with the SEC as
a diversified, open-end management investment company. Such registration does
not signify that the SEC supervises the management, or the investment
practices or policies, of the Fund. The Fund issues its shares, continually
and without sales charge, only to us and certain of our separate accounts
including the Variable Life Account. Shares are sold and redeemed at net asset
value.
Advantus Series Fund's investment adviser is Advantus Capital Management,
Inc. ("Advantus Capital"). Advantus Capital is a wholly-owned subsidiary of
Minnesota Life.
While Advantus Capital acts as investment adviser to the Fund and its
Portfolios, it has obtained an order from the SEC permitting it to act as a
"manager of managers". Pursuant to the order, Advantus Capital may, for any
portfolio, select one or more sub-advisers and adopt or amend an investment
sub-advisory agreement without approval of the shareholders of the affected
portfolio. In accordance with the order, Advantus Capital has retained the
following sub-advisers:
. Winslow Capital Management, Inc. for the Capital Appreciation Portfolio,
. Templeton Investment Counsel, Inc. for the International Stock Portfolio,
. J.P. Morgan Investment Management Inc. for the Macro-Cap Value Portfolio,
. Wall Street Associates for the Micro-Cap Growth Portfolio, and
. Julius Baer Investment Management Inc. for the Global Bond Portfolio
10
<PAGE>
The Fund currently has nineteen investment Portfolios, sixteen of which are
available to the Variable Life Account. A series of the Fund's common stock is
issued for each Portfolio. The assets of each Portfolio are separate from the
others and each has different investment objectives and policies. Therefore,
each Portfolio operates as a separate investment fund and the investment
performance of one has no effect on the investment performance of any other
Portfolio.
All dividends and capital gains distributions from the Portfolios are
automatically reinvested in shares of that Portfolio at net asset value.
For more information on the Fund and its Portfolios, see "Summary--What
investment options are available?" in this prospectus and the prospectus of
the Advantus Series Fund, Inc. which is attached to this prospectus.
Templeton Variable Products Series Fund
In addition to the investments in Advantus Series Fund, the Variable Life
Account invests in the Templeton Developing Markets Fund, Class 2, a
diversified portfolio of the Templeton Variable Products Series Fund, a mutual
fund of the series type.
Class 2 of the Templeton Developing Markets Fund pays 0.25 percent of the
average daily net assets annually under a distribution plan adopted under Rule
12b-1 of the Investment Company Act of 1940. Amounts paid under the 12b-1 plan
to us may be used for certain contract owner services or distribution
activities.
The investment adviser of Templeton Developing Markets Fund is Templeton
Asset Management Ltd., a Singapore corporation. It is an indirect wholly-owned
subsidiary of Franklin Resources, Inc. ("Franklin"). Through its subsidiaries,
Franklin is engaged in the financial services industry. The Templeton
organization has been investing globally since 1940 and, with its affiliates,
provides investment management and advisory services to a worldwide client
base. The investment adviser and its affiliates have offices worldwide.
Additions, Deletions or Substitutions
We reserve the right to add, combine or remove any sub-accounts of the
Variable Life Account when permitted by law. Each additional sub-account will
purchase shares in a new portfolio or mutual fund. Such sub-accounts may be
established when, in our sole discretion, marketing, tax, investment or other
conditions warrant such action. We will use similar considerations should
there be a determination to eliminate one or more of the sub-accounts of the
Variable Life Account. The addition of any investment option will be made
available to existing policy owners on such basis as may be determined by us.
We retain the right, subject to any applicable law, to make substitutions
with respect to the investments of the sub-accounts of the Variable Life
Account. If investment in a Fund Portfolio should no longer be possible or if
we determine it becomes inappropriate for Policies of this class, we may
substitute another mutual fund or portfolio for a sub-account. Substitution
may be made with respect to existing policy values and future premium
payments. A substitution may be made only with any necessary approval of the
SEC.
We reserve the right to transfer assets of the Variable Life Account as
determined by us to be associated with the Policies to another separate
account. A transfer of this kind may require the approvals of state regulatory
authorities and of the SEC.
We also reserve the right, when permitted by law, to de-register the
Variable Life Account under the Investment Company Act of 1940, to restrict or
eliminate any voting rights of the policy owners, and to combine the Variable
Life Account with one or more of our other separate accounts.
Shares of the Portfolios of the Funds are also sold to other of our separate
accounts, which are used to receive and invest premiums paid under our
variable annuity contracts and variable life insurance policies. It is
conceivable that in the future it may be disadvantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest
in the Funds simultaneously. Although neither we nor the Funds currently
foresee any such disadvantages either to variable life insurance policy owners
or to variable annuity contract owners, the Funds' Boards of Directors intend
to monitor events in order to identify any material conflicts between such
policy owners and contract owners and to determine what action, if any, should
be taken in response thereto.
11
<PAGE>
Such action could include the sale of Fund shares by one or more of the
separate accounts, which could have adverse consequences. Material conflicts
could result from, for example:
. changes in state insurance laws
. changes in Federal income tax laws
. changes in the investment management of any of the Portfolios of the Funds,
or
. differences in voting instructions between those given by policy owners and
those given by contract owners.
Selection of Sub-Accounts
You must make a choice as to how your net premiums are allocated among the
various sub-accounts. In choosing, you should consider how willing you might
be to accept investment risks and the manner in which your other assets are
invested. The sub-accounts represent a broad range of investments available in
the marketplace.
The common stock sub-accounts differ depending on the types of stocks that
make up the account. The focus of each account varies by the size of company,
growth or value style, and U.S. versus international markets. Historically,
for investments held over relatively long periods, the investment performance
of common stocks has generally been superior to that of long-term or short-
term debt securities, even though common stocks have been subject to more
dramatic changes in value over short periods of time. Accordingly, the common
stock sub-accounts may be more desirable options for policy owners who are
willing to accept such short-term risks. These risks tend to be magnified in
the sub-accounts investing in more aggressive stocks, smaller company stocks
and international stocks. As an alternative to the actively managed sub-
accounts, index sub-accounts are available which tend to sub- match the risks
and performance of those common stocks included in the underlying index.
On the other hand, the experience of the recent past has been sharply
divergent from the long-term historical record. Since 1980, short-term
interest rates were, for a time, at a historically high level and for some
period the prices of a diversified portfolio of equity securities were
declining during a period when the cost of living was rising. The value of
long-term bonds and mortgage securities has fallen and risen to a greater
extent than in the past. Some policy owners, who desire the greatest safety of
principal may prefer the money market sub-account, recognizing that the level
of short-term rates may change rather rapidly. Some policy owners may wish to
rely on Advantus Capital's judgment for an appropriate asset mix by choosing
the asset allocation sub-account.
The Guaranteed Principal Account
The guaranteed principal account is a general account option. You may
allocate net premiums and may transfer your actual cash value subject to
Policy limitations to the guaranteed principal account which is part of our
general account.
Because of exemptive and exclusionary provisions, interests in our general
account have not been registered under the Securities Act of 1933, and the
general account has not been registered as an investment company under the
Investment Company Act of 1940. Therefore, neither the guaranteed principal
account nor any interest therein are subject to the provisions of these Acts,
and we have been advised that the staff of the SEC does not review disclosures
relating to the guaranteed principal account. Disclosures regarding the
guaranteed principal account may, however, be subject to certain generally
applicable provisions of the Federal Securities Laws relating to the accuracy
and completeness of statements made in prospectuses.
This prospectus describes a Variable Adjustable Life insurance policy and is
generally intended to serve as a disclosure document only for the aspects of
the Policy relating to the sub-accounts of the Variable Life Account. For
complete details regarding the guaranteed principal account, please see the
Variable Adjustable Life Policy.
General Account Description Our general account consists of all assets owned
by us other than those in the Variable Life Account and any other separate
accounts which we may establish. The guaranteed principal account is that
portion of our general assets which is attributable to this Policy and
policies of this class, exclusive of policy loans. The description is for
accounting purposes only and does not represent a division of the general
account assets for the specific benefit of contracts of this class.
Allocations to the guaranteed principal account become part of our general
assets and are used to support insurance and annuity obligations. Subject to
applicable law, we have sole discretion over
12
<PAGE>
Detailed Information about the
Variable Adjustable Life Insurance Policy
the investment of assets of the general account. Policy owners do not share in
the actual investment experience of the assets in the general account.
You may allocate or transfer a portion or all of the net premiums to
accumulate at a fixed rate of interest in the guaranteed principal account. We
guarantee such amounts as to principal and a minimum rate of interest.
Transfers from the guaranteed principal account to the sub-accounts of the
Variable Life Account are subject to certain limitations with respect to timing
and amount.
General Account Value We bear the full investment risk for amounts allocated to
the guaranteed principal account and guarantees that interest credited to each
policy owner's actual cash value in the guaranteed principal account will not
be less than an annual rate of 4 percent without regard to the actual
investment experience of the general account. Consequently, if a policy owner
allocates all net premiums only to the guaranteed principal account, and if all
scheduled premiums are paid when due, there is no policy adjustment, and we
deduct the maximum cost of insurance charges and all other charges as set forth
in this Policy, then the actual cash value will be at least equal to the
tabular cash value of the Policy.
We may, at our sole discretion, credit a higher rate of interest, "excess
interest," although we are not obligated to credit interest in excess of 4
percent per year, and may not do so. Any interest credited on the Policy's
actual cash value in the guaranteed principal account in excess of the
guaranteed minimum rate per year will be determined at our sole discretion. You
assume the risk that interest credited may not exceed the guaranteed minimum
rate.
Even if excess interest is credited to your actual cash value in the
guaranteed principal account, we will not credit excess interest to that
portion of the policy value which is in the
loan account in the general account. However,
such loan account will be credited interest at a rate which is not less than
the policy loan interest rate minus 2 percent per annum.
Adjustable Life Insurance
This Policy is similar to our conventional life insurance product known as
"adjustable life". This Policy, like conventional adjustable life insurance,
permits you to determine the amount of life insurance protection you need and
the amount of money you can afford to pay. Based on your selection of any two
of the three components of a Policy--face amount, premium and plan--we will
then calculate the third. Thus, adjustable life allows you the flexibility to
custom-design a Policy to meet your needs. Theoretically, each Policy can be
unique because of the different combinations of age, amount of life insurance
protection and premium. In addition, adjustable life is designed to adapt to
your changing needs and objectives by allowing you to change your Policy after
issue. The face amount and premium level, and thus the plan of insurance, may
be adjusted by you, subject to the limitations described herein, so long as the
Policy remains in force.
Flexibility at Issue The Policy offered by this prospectus provides the same
type of flexibility found in conventional adjustable life. Subject to certain
minimums, maximums and our underwriting standards, you may choose any level of
premium or face amount that you wish. This flexibility results in a broad range
of plans of insurance. Generally speaking, a plan of insurance, when used with
respect to the Policy, refers to the level of cash value accumulation assumed
in the design of the Policy and, for whole life plans, the period of coverage
during which you will have to pay premiums.
Whole life insurance plans provide life insurance in an amount at least equal
to the initial face amount at the death of the insured whenever that occurs.
Premiums may be payable for a specified number of years or for the life of the
insured. Whole life insurance plans assume an eventual tabular cash value
accumulation, at or before the insured's age 100, equal to the net single
premium required for that face amount of
13
<PAGE>
insurance. The tabular cash value is described on page 16 and is shown in your
Policy. The net single premium for a whole life insurance plan is the amount
of money that is necessary, at the insured's attained age, to pay for all
future guaranteed cost of insurance charges for the entire lifetime of the
insured without the payment of additional premium. This determination assumes
that the current face amount of the Policy will be constant and that the
Policy will perform at its assumed rate of return.
Protection insurance plans provide life insurance in an amount at least
equal to the initial face amount for a specified period. After the initial
protection period, there is insurance coverage in a reduced amount on the life
of the insured. Protection plans of insurance assume the exhaustion of the
tabular cash value at the end of the initial protection period, except for the
cash value associated with the reduced amount of insurance coverage at the end
of the initial protection period.
The "greater" your plan of insurance, the larger the policy values you may
expect to be available for investment in the Fund Portfolios, and, for whole
life plans of insurance, the shorter the period of time during which you will
have to pay premiums. Under the Policy, the highest premium amount permitted
at the time of issue, or the maximum plan of insurance, for a specific face
amount is one which will provide a fully paid-up Policy after the payment of
ten annual premium payments. A Policy becomes paid-up when its policy value is
such that no further premiums are required to provide the face amount of
insurance until the death of the insured, provided there is no policy
indebtedness.
Examples of whole life plans include Policies which become paid-up upon the
payment of a designated number of annual premiums, such as ten pay life or
twenty pay life, or Policies which become paid-up at a designated age of the
insured, such as paid-up at 65. If you select a premium level for a specific
face amount which would cause the Policy to become paid-up at other than a
policy anniversary, you will be required to pay scheduled premiums until the
policy anniversary immediately following the date the Policy is scheduled to
become paid-up. The Policy will be issued with a scheduled increase in face
amount to reflect the fact that the scheduled premiums were in excess of the
premiums required to have a paid-up Policy for the initial face amount of
coverage.
If you select a premium amount which is less than the premium required for a
whole life plan of insurance or, in other words, if you select a protection
plan of insurance, premiums will be payable for the life of the insured or to
age 100, but the guaranteed face amount of insurance provided by the Policy
will not be level during the life of the insured. The initial face amount will
be in effect until the Policy's tabular cash value, i.e., the cash value which
is assumed in designing the Policy and which would be guaranteed in a
conventional fixed-benefit policy, is exhausted. At that time a lower amount
of insurance will become effective. This is called the scheduled reduction in
face amount. The reduced face amount is calculated on the basis of the
continued payment of the scheduled premiums and a whole life plan of
insurance. The result is that the Policy, on issue, will have an initial
guaranteed death benefit extending to a stated date; after that date, a lower
death benefit is guaranteed for the life of the insured.
At the time of the scheduled reduction in face amount, we will adjust your
Policy as described in the policy adjustment section of this prospectus. If
the policy value (the actual cash value plus the amount of any loan) is
greater than the tabular cash value, the adjustment will result in either a
smaller reduction in the face amount or a scheduled reduction in face amount
occurring at a later date.
For example, if a standard risk VAL '95 Policy were issued with a face
amount of $100,000 and an annual premium of $926, the plan of insurance for a
male non-smoker insured age 45 at issue would be full coverage until age 65,
at which time the face amount would be reduced to $14,701 guaranteed for the
whole of life. If we assume a hypothetical gross annual investment return of 8
percent, the Cash Option death benefit, current mortality charges, no loans,
and no policy adjustments, the policy value of the Policy at age 65 would be
$15,841. Based on
14
<PAGE>
this policy value, a whole life plan, and the continued payment of the $926
premium, the face amount would be reduced to $42,115 guaranteed thereafter for
the whole of life.
The table below shows the policy values and death benefits for the Policy
described in the above example, if the scheduled reduction is allowed to
occur, which is twenty years after issue.
Scheduled Reduction
<TABLE>
<CAPTION>
Guaranteed
Policy Death Minimum
Value Benefit Death
Policy Attained Annual End of Beginning Benefit at
Year Age Premium Year of Year Issue
- ------ -------- ------- ------ --------- ----------
<S> <C> <C> <C> <C> <C>
5 50 $926 $ 2,080 $100,000 $100,000
10 55 926 5,879 100,000 100,000
15 60 926 10,683 100,000 100,000
20 65 926 15,841 100,000 100,000
21 66 926 17,501 42,115 14,701
22 67 926 19,272 42,115 14,701
23 68 926 21,167 42,115 14,701
24 69 926 23,202 42,115 14,701
25 70 926 25,394 42,115 14,701
</TABLE>
Alternately, for the VAL '95 Policy above we will make a policy adjustment
effective the same date as the scheduled reduction to maintain the $100,000
face amount and the $926 premium. The new guaranteed plan of insurance would
be full coverage until age 74, at which time the face amount would be reduced
to not less than $8,982, again with the face amount guaranteed for the whole
of life.
The following table shows the policy values and death benefits when a policy
adjustment to maintain the initial face amount is automatically done after
twenty years.
Policy Adjustment
<TABLE>
<CAPTION>
Guaranteed
Policy Death Minimum
Value Benefit Death
Policy Attained Annual End of Beginning Benefit
Year Age Premium Year of Year Adjustment
- ------ -------- ------- ------ --------- ----------
<S> <C> <C> <C> <C> <C>
5 50 $926 $ 2,080 $100,000 $100,000
10 55 926 5,879 100,000 100,000
15 60 926 10,683 100,000 100,000
20 65 926 15,841 100,000 100,000
21 66 926 16,842 100,000 100,000
22 67 926 17,831 100,000 100,000
23 68 926 18,810 100,000 100,000
24 69 926 19,775 100,000 100,000
25 70 926 20,730 100,000 100,000
</TABLE>
The lowest annual base premium allowed for any plan of insurance is $300.
Subject to this limitation, the lowest premium you may choose for any specific
amount of life insurance protection is a premium which will provide a level
death benefit for a period which shall be the longer of ten years from the
policy issue date or five years from the date of a policy adjustment. If the
insured's age at original issue is over age 55, the minimum plan of protection
will be less than ten years, as described in the table below:
<TABLE>
<CAPTION>
Minimum Plan
Issue Age (in years)
- ------------- ------------
<S> <C>
56 9
57 8
58 7
59 6
60 or greater 5
</TABLE>
15
<PAGE>
This is the minimum plan of insurance for any given face amount. The minimum
initial face amount on a Policy is $50,000.
Policy Adjustments
Adjustable life insurance policies allow an owner to change the premium,
face amount or the plan of insurance of the Policy after it is issued. Subject
to the limitations described more fully below, you can at any time change the
face amount of your Policy or your scheduled premium. A change in scheduled
premium or face amount will usually result in a change in the plan of
insurance. Depending upon the change you request, the premium paying period
may be lengthened or shortened for whole life plans or the plan may be
converted from a whole life plan to a protection type plan which provides for
a scheduled reduction in face amount at a future date. For Policies having a
protection type plan, a change in face amount or premium may convert the
Policy to a whole life plan by eliminating the scheduled decrease in face
amount or it may change the time at which the decrease is scheduled to occur.
Changes in premium, face amount or the plan of insurance are referred to as
policy adjustments. They may be made singly or in combination with one
another. There are also four other types of policy adjustments:
(1) a partial surrender of a Policy's cash value;
(2) an adjustment so that there are no further scheduled base premiums;
(3) an automatic adjustment at the point when the face amount is scheduled to
decrease; and
(4) an automatic adjustment made under VAL '95 at the policy anniversary
nearest the insured's age 70.
When a Policy is adjusted, we compute a new plan of insurance, face amount
or premium amount, if any. If a partial surrender of actual cash value is
made, the Policy will be automatically adjusted to a new face amount which
will be equal to the old face amount less the amount of the partial surrender,
unless a different face amount is requested or required to satisfy the
restrictions on adjustability described below. An adjustment providing for no
further scheduled base premium payments, regardless of whether the Policy is
paid-up, is also referred to as a "stop premium" mode and is described under
the caption "Avoiding Lapse" on page 23 of this prospectus. At the point when
the face amount is scheduled to decrease, an adjustment may be made to
maintain the current face amount and premium of the Policy, as described on
page 18. Certain adjustments may cause a Policy to become a modified endowment
contract. See "Federal Tax Status" for a description of the federal tax
treatment of modified endowment contracts.
In computing either a new face amount or new plan of insurance as a result
of an adjustment, we will make the calculation on the basis of the higher of
the Policy's "policy value" or its "tabular cash value" at the time of the
change. The "policy value" is the actual cash value of the Policy plus the
amount of any policy loan, while the "tabular cash value" is what the actual
cash value of the Policy would have been if all scheduled premiums were paid
annually on the premium due date, there were no policy adjustments or policy
loans, any percentage increase in the actual cash value matched the Policy's
assumed rate of return, the net investment experience of the sub-accounts
selected by the owner or the interest credited to the guaranteed principal
account matched the policy's assumed rate of return, the maximum cost of
insurance charges were deducted once at the end of the policy year and other
charges provided for in the Policy were deducted. See, for a further
description of these values, the section "Policy Values" in this prospectus on
page 24. If the policy value is higher than the tabular cash value, a policy
adjustment will translate the excess value into enhanced insurance coverage,
as either a higher face amount or an improved plan of insurance. If the policy
value is less than the tabular cash value, use of the tabular cash value
ensures that the Policy's guarantee of a minimum death benefit is not impaired
by the adjustment.
Any adjustment will result in a redetermination of a Policy's tabular cash
value. After adjustment, the tabular cash value shall be equal to the greater
of the policy value or the tabular cash value prior to that adjustment, plus
any nonrepeating premium paid at the time of the adjustment and minus the
amount of any partial surrender made at the time of the adjustment.
16
<PAGE>
On adjustment, you may request a new Policy face amount. In the absence of
instructions to the contrary, we will calculate the face amount after
adjustment depending on the Policy's death benefit option, the type of
adjustment, and whether the Policy is a VAL '95 or a VAL '87. With both VAL
'87 and VAL '95, if the Policy has the Cash Option death benefit the new face
amount will be equal to the face amount of the Policy less the amount of any
partial surrender made as part of the adjustment. With a VAL '87 Policy with
the Protection Option death benefit and with the Amended VAL '95 Protection
Option after age 70, the face amount after adjustment shall be equal to the
death benefit provided by the Policy immediately prior to the adjustment less
the amount of any partial surrender made as part of the adjustment. With a VAL
'95 Policy with the Protection Option death benefit before age 70, the face
amount after adjustment will be equal to the face amount of the Policy
immediately prior to the adjustment.
To illustrate the operation of an adjustment, consider a standard risk VAL
'95 Policy issued with a face amount of $100,000 and an annual premium of $926
to a male non-smoker insured age 45. If we assume a hypothetical gross annual
investment return of 8 percent, the Protection Option death benefit, current
mortality charges, no loans, and no policy adjustments, the policy value of
the Policy at age 50 would be $2,065 and the Policy's tabular cash value would
be $1,680. Assume the owner requests a policy adjustment to increase the
scheduled premium to $1,500, but does not specify the face amount. As
described above, we compare the policy value less the charge on adjustment to
the tabular cash value to determine the policy value to be used in the plan of
insurance calculation. In this example, the policy value (less the charge on
adjustment) is greater than the tabular cash value, so the policy value is
used. The tabular cash value is then set equal to the policy value. The policy
adjustment would therefore result in a face amount of $100,000, a scheduled
premium of $1,500, and a plan of insurance of full coverage until age 74, at
which time the face amount would be scheduled to reduce to $14,952.
The table below shows the tabular cash values, policy values and death
benefits for the first ten years of the example described.
<TABLE>
<CAPTION>
End of Year
Policy Attained Annual Tabular End of Year Beginning of Year
Year Age Premium Cash Value Policy Value Death Benefit
- ------ -------- ------- ----------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
1 46 $ 926 $ 0 $ 13 $100,000
2 47 926 437 474 100,013
3 48 926 865 943 100,474
4 49 926 1,280 1,473 100,943
5 50 926 1,680 2,065 101,473
6 51 1,500 2,842 2,914 102,065
7 52 1,500 3,766 4,026 102,914
8 53 1,500 4,684 5,255 104,026
9 54 1,500 5,591 6,592 105,255
10 55 1,500 6,477 8,032 106,592
</TABLE>
All of these changes may be accomplished under a single Policy. There is no
need to surrender the Policy or purchase a new one simply because of a change
in your insurance needs. Whenever adjustments are made, new policy information
pages will be provided. These pages state the new face amount, scheduled
premium, plan of insurance, attained age and tabular cash value.
Nonrepeating Premiums The Policy also allows a policy owner to pay a premium
called a nonrepeating premium. This payment of premium is in addition to the
scheduled premium payments called for by the terms of the Policy. While the
payment of a nonrepeating premium does not cause an adjustment to the Policy,
any such payment will be reflected in the tabular cash value of the Policy at
issue or upon any later adjustment. The payment of a nonrepeating premium will
increase the policy values you have available for investment in the Fund. With
VAL '95, we may impose additional restrictions or refuse to permit
nonrepeating premiums in our discretion.
Restrictions on Adjustments Adjustments can be made on any monthly anniversary
of
17
<PAGE>
the policy date. You may request a policy adjustment by completing an
application for adjustment. Adjustments will not apply to any
additional benefit agreements which are attached to your Policy. Any
adjustment will be effective on the date that it is approved by us and
recorded at our home office.
An adjustment must satisfy certain limitations on premiums, face amount and
plan. Other limitations on adjustments and combinations of adjustments may
also apply. The current limits on adjustments are those described here. We
reserve the right to change these limitations from time to time.
(1) An adjustment may not result in more than a paid-up whole life plan for
the then current face amount.
(2) After age 85, increases in face amount requiring evidence of insurability
will not be allowed.
(3) Any adjustment for a change of premium must result in a change of the
annual premium of at least $100. Currently, we will waive this limitation
for changes in premium which are the result of a face amount change under
the Cost of Living Agreement.
(4) Any adjustment involving an increase in premium may not result in a whole
life plan of insurance requiring the payment of premiums for less than ten
years or to age 100, if less.
(5) Any Policy adjustment, other than a change to a stop premium, must result
in a Policy with an annual base premium of at least $300.
(6) Any adjustment for a change of the face amount must result in a change of
the face amount of at least $5,000, except for face amount changes which
are the result of a Cost of Living Agreement change, a partial surrender
under the Policy or face amount changes which are required to satisfy
limitations pertaining to plans of insurance.
(7) After adjustment, other than an automatic adjustment at the point when the
face amount is scheduled to decrease, an automatic adjustment made under
VAL '95 at the insured's age 70, or adjustment to stop premium, the Policy
must provide a level face amount of insurance to the next policy
anniversary after the later of: (a) five years from the date of
adjustment; or (b) ten years from the date of issue. If the insured's age
at original issue is over age 55, the minimum plan of protection will be
less than ten years from the policy issue date, as described on page 15.
(8) An automatic adjustment at the point when the face amount is scheduled to
decrease or an adjustment to stop premium requires that a Policy have an
actual cash value at the time of the adjustment as would be sufficient to
keep the Policy in force until the next policy anniversary.
Example As an example of the operation of the plan limitation on policy
adjustment, assume a minimum plan VAL '95 Policy issued to a standard non-
smoker risk male at age 40 with a level face amount of $100,000 for a period
of ten years (until age 50) on a protection type plan for an annual premium of
$428. Assume also that the Policy has a policy value equal at all times to its
tabular cash value. If at the end of five years (at age 45) the policy owner
wished to decrease the premium so as to reduce the period before a scheduled
reduction in face amount took place from age 50 to age 49, the adjustment
would not be allowed because a face amount decrease at age 49 would be only
four years from the date of the policy adjustment, and nine years from the
date of issue (see limitation 7). On the other hand, if the owner wished to
postpone a scheduled reduction in face amount until age 65 by increasing the
premium of the Policy to $835 for the same initial face amount, the adjustment
would be permitted because the face amount decrease would occur 25 years from
the original issue date and 20 years from the date of adjustment, both periods
of time which are within the policy adjustment limitations on plans of
insurance.
The plan limitations apply for each type of adjustment. Consider a situation
similar to the one above except that the Policy has an initial face amount of
$200,000. In that case the annual premium for a minimum plan of ten years
(before the scheduled reduction in face amount) would be $800. If the policy
owner wished to make a partial surrender of $500 at the end of five years, the
surrender would not be permitted without either an increase in premium or a
further reduction in face amount, since the annual premium of $800 would
support the adjusted face amount of $199,500 for only two more years from the
point of adjustment. This resulting plan would be less
18
<PAGE>
than the minimum plan of five years. If the owner elected to increase the
premium in order to maintain the new face amount of $199,500, the new premium
would have to be sufficient to continue the new face amount for an additional
five years from the policy adjustment date.
Similarly, if the owner requested a reduction in face amount below $199,500
in order to satisfy the limitations pertaining to plans of insurance, the new
face amount would have to continue for an additional five years, which is ten
years from the date the Policy was issued. As indicated, a face amount change
made for the purpose of bringing an adjustment into compliance with the plan
limitation will not be subject to the usual minimum face amount change
requirement of $5,000. A partial surrender may often require a reduction in
face amount by more than the amount of the surrender in order to satisfy plan
limitations.
Proof of Insurability We require proof of insurability for all adjustments
resulting in an increase in face amount, except for increases made pursuant to
an additional benefit agreement. In addition, except for partial surrenders to
pay substandard risk premiums, we require proof of insurability for partial
surrenders where, at the request of the policy owner, no reduction is made in
the Policy's death benefit. Decreases in face amount or premium and increases
in premium not resulting in any increase in death benefit do not require
evidence of insurability. With VAL '87, the payment of a nonrepeating premium
will require evidence of insurability when the Protection Option death benefit
option is in effect or if the Policy is paid-up at the time of payment. With
VAL '95, we may require evidence of insurability when a nonrepeating premium
is paid if the death benefit of your Policy increases as a result of the
payment of a nonrepeating premium.
Charges in Connection with Policy Adjustments In connection with a policy
adjustment, we will make a special $25 charge to cover the administrative
costs associated with processing the adjustment. If, however, the only policy
adjustment is a partial surrender, the transaction charge shall be the lesser
of $25 or 2 percent of the amount surrendered. In addition, because of the
underwriting and selling expenses anticipated for any change resulting in an
increase in premium, we will assess a new first year sales load on any
increase in premium on adjustment. We will also assess an underwriting charge
on any increase in face amount requiring evidence of insurability. See, for a
further description of these charges, the section "Policy Charges" in this
prospectus on page 31. Limiting the first year sales load and underwriting
charge to the
increased premium or face amount is in substance the equivalent of issuing a
new Policy for the increase. A policy adjustment will always be more favorable
than the purchase of a second Policy for the increased amount since there is
no duplication of administrative charges.
19
<PAGE>
The chart below illustrates the kinds of changes that may be made as a
policy adjustment and the effect of each.
IF YOU MAKE THIS IT WILL DO THIS:
KIND OF
ADJUSTMENT,
If
you . . .
<TABLE>
<S> <C> <C>
Decrease the current then: a scheduled decrease
face amount.......... while the premium remains in the current face amount,
or the same................... if any, will take place at
Retain the current an increased age of the
face amount.......... while the premium increases insured; a scheduled
decrease in the face amount
will be eliminated; or the
premium paying period will
be shortened.
- -------------------------------------------------------------------------------
If
you . . .
Increase the current then: a scheduled decrease
face amount.......... with no increase in premium in the current face amount,
or if any, will take place at
Retain the current a decreased age of the
face amount.......... while the premium insured; a scheduled
or decreases.................. decrease in the face amount
Make a partial will occur; or the premium
surrender............ while the premium and face paying period will be
amount remain the same..... lengthened.
- -------------------------------------------------------------------------------
If you . . .
Stop base premium.... while the face amount then: a scheduled decrease
remains the same........... in the current face amount, if
any, will take place at a
decreased age of the insured
and no insurance will be
provided after the decrease;
or, a scheduled decrease in the
face amount will occur.
However, for VAL '95, you must
continue to pay the charge for
a sub-standard risk, or your
Policy will lapse.
</TABLE>
You may request a description of the effect of other types or combinations
of adjustments from us.
Applications and Policy Issue
Persons wishing to purchase a Policy must send a completed application to us
at our home office. The minimum face amount we will issue on a Policy is
$50,000 and we require an annual base premium on each Policy of at least $300.
The minimum plan of insurance at policy issue is a protection plan which has a
level death benefit for a period of ten years. If the insured's age at
original issue is over age 55, the minimum plan of protection will be less
than ten years from the Policy issue date, as described on page 15. The Policy
must be issued on an insured
20
<PAGE>
no more than age 85. Before issuing any Policy, we require evidence of
insurability satisfactory to us, which in some cases will require a medical
examination. Persons who satisfy the underwriting requirements are offered the
most favorable premium rates, while a higher premium is charged to persons
with a greater mortality risk. Acceptance of an application is subject to our
underwriting rules and we reserve the right to reject an application for any
reason.
If we accept an application, accompanied by a check for all or at least one-
twelfth of the annual premium, the policy date will be the issue date, which
is the date the decision to accept the application and issue the Policy is
made. The policy date will be used to determine subsequent policy
anniversaries and premium due dates.
If we accept an application not accompanied by a check for the initial
premium, a Policy will be issued with a policy date which is 15 days after the
issue date. The 15 day period has been determined to be the normal time during
which delivery of the Policy to the policy owner is expected to occur. We or
our agent must receive the initial premium within 60 days after the issue
date. No life insurance coverage is provided until the initial premium is
paid. If the initial premium is paid after the policy date (and the policy
date is not changed as described below), you will have paid for insurance
coverage during a period when no coverage was in force. Therefore, in such
circumstance you should consider requesting a current policy date, i.e., the
date on which our home office receives the premium. You will be sent updated
policy pages to reflect the change in policy date. This request should be made
at or prior to the time you pay the initial premium.
In certain circumstances it may be to your advantage to have the policy date
be the same as the issue date in order to preserve an issue age on which
premium rates are based. In that case, all premiums due between the issue date
and the date of delivery of the Policy must be paid on delivery.
When the Policy is issued, the face amount, premium, tabular cash values and
a listing of any supplemental agreements are stated on the policy information
pages of the policy form, page 1.
Policy Premiums
The Policies have a level premium throughout the life of the insured or
until the Policy becomes paid-up. We guarantee that we will not increase the
amount of premiums for a Policy in force. Subject to the limitations discussed
under the heading "Restrictions on Adjustments" in this prospectus on page 17,
you may choose to adjust the Policy at any time and alter the amount of future
premiums.
The amount of premium required for a Policy will depend on the Policy's
initial face amount, the plan of insurance, the insured's age at issue, sex,
risk classification, smoking status and the additional benefits associated
with the Policy.
The first premium is due as of the policy date and must be paid on or before
the date your Policy is delivered. Between the date we receive an initial
premium for the Policy, either a full first premium or a partial premium, and
the date insurance coverage commences under the Policy, the life of the
insured may be covered under the terms of a conditional insurance agreement.
All scheduled premiums after the first premium are payable on or before the
date they are due and must be mailed to us at our home office. In some cases,
you may elect to have premiums paid under our automatic payment plan through
pre-authorized transfers from a bank checking account or such other account as
may be approved by your bank.
Scheduled premiums on the Policy are payable during the insured's lifetime
on an annual, semi-annual or quarterly basis on the due dates set forth in the
Policy. You may also pay scheduled premiums monthly if you make arrangements
for payments through an automatic payment plan established through your bank
or if you meet the requirements to establish a payroll deduction plan through
your employer. A scheduled premium may be paid no earlier than twenty days
prior to the date that it is due. For premiums paid after the due date, see
the paragraph following the heading "Lapse" in this section of the prospectus.
In addition to scheduled premiums, you may pay a nonrepeating premium. The
maximum nonrepeating premium we will accept is the amount sufficient to change
your Policy to a paid-up whole life policy for the then current face amount.
The minimum nonrepeating premium is $500.
21
<PAGE>
We will bill annually, semi-annually or quarterly for nonrepeating premiums
if a Policy has a base annual premium of at least $2,400 and if the total
amount billed for nonrepeating premiums is at least $600. You may also arrange
for monthly payments through an automatic payment plan established through
your bank; in this situation, your base annual premium must be at least $2,400
and each nonrepeating premium must be at least $50.
With VAL '95 we may impose additional restrictions or refuse to permit
nonrepeating premiums in our discretion.
The payment of a nonrepeating premium may have Federal income tax
consequences. See the heading "Federal Tax Status" in this prospectus on page
38.
With VAL '87, charges for additional benefits are deducted from premiums to
calculate base premiums. From base premiums we deduct charges assessed against
premiums and nonrepeating premiums, to calculate net premiums. With VAL '95,
charges for additional benefits and for sub-standard risks are deducted from
premiums to calculate base premiums. From base premiums we deduct charges
assessed against premiums and nonrepeating premiums to calculate net premiums.
Net premiums, namely premiums after the deduction of the charges assessed
against premiums and nonrepeating premiums, are allocated to the guaranteed
principal account or sub-accounts of the Variable Life Account which, in turn,
invest in Fund shares.
You make your selection on your application for the Policy. You may change
your allocation instructions for future premiums by giving us a written
request. The allocation to the guaranteed principal account or to any sub-
account of the Variable Life Account must be at least 10 percent of the net
premium. We reserve the right to delay the allocation of net premiums to named
sub-accounts for a period of up to 30 days after Policy issue or an
adjustment. In no event will any delay extend beyond the free look period
applied to the Policy in the state in which it is issued. If we exercise this
right, net premiums will be allocated to the Money Market sub-account until
the end of that period. This right, which has not been implemented to date,
will be exercised by us only when we believe economic conditions make such an
allocation necessary to reduce market risk during the free look period.
We reserve the right to restrict the all ocation of premiums to the
guaranteed principal account. If we do so, no more than 50 percent of the net
premium may be allocated to the guaranteed principal account. Currently, we do
not exercise such a restriction, and this restriction is not applicable when
you are allocating all of your premiums to the guaranteed principal account as
a conversion privilege.
Paid-Up Policies A Policy is paid-up when no additional premiums are required
to provide the face amount of insurance for the life of the insured. We may or
may not accept additional premiums. When a Policy becomes paid-up, the policy
value will then equal or exceed the net single premium needed to purchase an
amount of insurance equal to the face amount of the Policy at the insured's
then attained age. However, its actual cash value will continue to vary daily
to reflect the investment experience of the Variable Life Account and any
interest credited as a result of a policy loan. Once a Policy becomes paid-up,
it will always retain its paid-up status regardless of any subsequent decrease
in its policy value. However, on a paid-up Policy with indebtedness, where the
actual cash value decreases to zero, a loan repayment may be required to keep
the Policy in force. See the discussion in this prospectus under the heading
"Policy Loans," below.
We will make a determination on each policy anniversary as to whether a
Policy is paid-up. When a Policy becomes paid-up, we will send you a notice.
Lapse Your Policy may lapse in one of two ways: (1) if a scheduled premium is
not paid; or (2) if there is no actual cash value when there is a policy loan.
As a scheduled premium policy, your Policy will lapse if a premium is not
paid on or before the date it is due or within the 31-day grace period
provided by the Policy. You may pay that premium during the 31-day period
immediately following the premium due date. Your premium payment, however,
must be received in our home office within the 31-day grace period. The
insured's life will continue to be insured during this 31-day period.
With VAL '95, if a Policy covers an insured in a sub-standard risk class,
the portion of the scheduled premium equal to the charge for such risk will
continue to be payable notwithstanding the adjustment to a stop premium mode.
As with any scheduled premium, failure to pay the premium for the sub-standard
risk within the grace period provided will cause the Policy to lapse.
22
<PAGE>
If scheduled premiums are paid on or before the dates they are due or within
the grace period, absent any policy loans, the Policy will remain in force
even if the investment results of the sub-accounts have been so unfavorable
that the actual cash value has decreased to zero. However, should the actual
cash value decrease to zero while there is an outstanding policy loan the
Policy will lapse, even if the Policy was paid-up and all scheduled premiums
had been paid.
If the Policy lapses because not all scheduled premiums have been paid or if
a Policy with a policy loan has no actual cash value, we will send you a
notice of default that will indicate the payment required to keep the Policy
in force on a premium paying basis. If the payment is not received within 31
days after the date of mailing the notice of default, the Policy will
terminate or the nonforfeiture benefits will apply. For more information on
lapse, see "Avoiding Lapse" below.
If at the time of any lapse a Policy has a surrender value, that is, an
amount remaining after subtracting from the actual cash value all unpaid
policy charges, we will use it to purchase extended term insurance. The
extended term benefit is a fixed life insurance benefit calculated on the 1980
Commissioners Standard Ordinary Mortality Tables with 4 percent interest. As
an alternative to the extended term insurance, you may have the surrender
value paid to you in a single sum payment, thereby terminating the Policy.
Unless you request a single sum payment of your surrender value within 62 days
of the date of the first unpaid premium, we will apply it to purchase extended
term insurance on the insured's life.
We determine the duration of the extended term benefit by applying the
surrender value of your Policy as of the end of the grace period as a net
single premium to buy fixed benefit term insurance. The extended term benefit
is not provided through the Variable Life Account and the death benefit will
not vary during the extended term insurance period. The amount of this
insurance will be equal to the face amount of your Policy, less the amount of
any policy loans at the date of lapse. During the extended term period a
Policy has a surrender value equal to the reserve for the insurance coverage
for the remaining extended term period. At the end of the extended term period
all insurance provided by your Policy will terminate and the Policy will have
no further value.
You may arrange for automatic premium loans to keep the Policy in force in
the event that a scheduled premium payment is not made. For more information
on this option, please see the heading "Policy Loans" in this prospectus on
page 28.
Reinstatement At any time within three years from the date of lapse you may
ask us to restore your Policy to a premium paying status unless the Policy
terminated because the surrender value has been paid or the period of extended
insurance has expired. We will require:
(1) your written request to reinstate the Policy;
(2) that you submit to us at our home office during the insured's lifetime
evidence satisfactory to us of the insured's insurability so that we may
have time to act on the evidence during the insured's lifetime; and
(3) at our option a premium payment which is equal to all overdue premiums
with interest at a rate not to exceed 6 percent per annum compounded
annually and any policy loan in effect at the end of the grace period
following the date of default with interest at a rate not exceeding 8
percent per annum compounded annually. At the present time we do not
require the payment of all overdue premiums, or the payment of interest on
reinstated loans.
After a lapse and reinstatement, the reinstated Policy may be adjusted. The
standard minimum requirements for adjustments will continue to apply, as
described under the section "Restrictions on Adjustments" in this prospectus
on page 17.
Avoiding Lapse If your Policy has sufficient loan value, you can avoid a lapse
due to the failure to pay a scheduled premium by arranging for an automatic
premium loan. The effect of a policy loan on policy values and the
restrictions applicable thereto are described under the caption "Policy Loans"
on page 28 of this prospectus. An automatic premium loan is particularly
advantageous for a policy owner who contemplates early repayment of the amount
loaned, since it permits the policy owner to restore policy values without
additional sales and
23
<PAGE>
underwriting charges. Automatic premium loans for the long term are generally
not advantageous.
You may also avoid a lapse by adjusting your Policy to a zero base premium.
We call this the stop premium mode. We will use the greater of your policy
value or tabular cash value to determine a new plan of insurance based on the
greater of the then current face amount or death benefit of the Policy and the
assumption that no further premiums will be paid. The new plan may be a term
or protection plan, but unlike other term plans there will be no reduced face
amount of coverage at the end of the protection period, because no further
premiums will be payable. If at that time the Policy has a surrender value, we
will use it to purchase extended term coverage or we will pay it to you in a
single sum thereby terminating the Policy.
The insurance coverage resulting from an adjustment to a stop premium mode
is similar to the coverage available under the extended term option. Under
both, the coverage is available only for a limited period of time. There are,
however, fundamental differences between the two. Extended term coverage is a
fixed benefit with fixed cash values providing a longer guaranteed period of
coverage than the same amount applied as a stop premium. The stop premium mode
provides variable insurance with an actual cash value and, under the
Protection Option, a death benefit that will vary to reflect any investment
experience of selected sub-accounts and the deduction of smaller cost of
insurance charges than the maximum charges derived from the 1980 CSO mortality
tables. Because the actual cash value continues to exist, we will continue to
assess policy charges against the actual cash value while the Policy is on
stop premium. Moreover with VAL '95, if a Policy covers an insured in a sub-
standard risk class, the portion of the scheduled premium equal to the charge
for such risk will continue to be payable.
There are also other differences which should be considered. In general, if
you contemplate resuming premium payments at a future date, the stop premium
mode may be more desirable in that you may resume premium payments at any time
without evidence of insurability, while the reinstatement option available
during the extended term period requires proof of insurability and must be
exercised within three years following the date of lapse.
If you do not contemplate resuming premium payments, your choice between
permitting your Policy to lapse and adjusting it to a stop premium mode should
depend on, first, whether the surrender value of your Policy at that time
exceeds its tabular cash value and, second, whether you expect your Policy's
policy value to exceed its tabular cash value in the future. If at the time of
possible lapse your Policy's surrender value is less than its tabular cash
value, you should consider adjusting to a stop premium mode because the period
of insurance coverage will be based on the higher tabular cash value while the
period of extended term coverage upon lapse would be computed on the basis of
the lower surrender value. If the two values are the same, the period of
guaranteed coverage under the extended term option will be longer than under
the stop premium mode. Thus, you should be sure that the benefit of using the
higher tabular cash value is not offset by the shorter period of guaranteed
insurance coverage usually resulting from the stop premium mode.
On the other hand, if the surrender value of your Policy exceeds its tabular
cash value, you should evaluate the benefit of a guaranteed longer period of
insurance coverage under the extended term option against the possibility of
longer coverage under the stop premium mode. With the stop premium mode there
may be an available policy value at the end of the plan which could be used to
continue the face amount of the Policy to a later time than provided under the
extended term option. In considering this possibility, you should keep in mind
that a Policy with the Cash Option death benefit is more likely to have a
higher policy value than a comparable Policy with the Protection Option death
benefit.
Policy Values
The Policy has an actual cash value which varies with the investment
experience of the guaranteed principal account and the sub-accounts of the
Variable Life Account. Depending upon the death benefit selected, the death
benefit may also vary although it will never be less than the then current
face amount. Net premiums, namely premiums after the deduction of all charges,
will be allocated to the guaranteed principal account
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or sub-accounts of the Variable Life Account selected by you on your
application for the Policy.
The value of the Policy's interest in the guaranteed principal account and
the sub-accounts of the Variable Life Account is known as its actual cash
value. It is determined separately for your guaranteed principal account
actual cash value and for your separate account actual cash value. The
separate account actual cash value will include all sub-accounts of the
Variable Life Account. Unlike a traditional fixed benefit life insurance
policy, a Policy's actual cash value cannot be determined in advance, even if
scheduled premiums are made when required, because the separate account actual
cash value varies daily with the investment performance of the sub-accounts of
the Variable Life Account in which the Policy participates. Even if you
continue to pay scheduled premiums when due, the separate account actual cash
value of a Policy could decline to zero because of unfavorable investment
experience and the assessment of charges. Upon request, we will tell you the
actual cash value of your Policy. We will also send you a report each year on
the policy anniversary advising you of your Policy's actual and tabular cash
values, the face amount and the death benefit as of the date of the report. It
will also summarize Policy transactions during the year. It will be as of a
date within two months of its mailing.
The guaranteed principal account actual cash value is the sum of all net
premium payments allocated to the guaranteed principal account. This amount
will be increased by any interest, dividends, loan repayments, policy loan
interest credits and transfers into the guaranteed principal account. This
amount will be reduced by any policy loans, unpaid policy loan interest,
partial surrenders, transfers into the sub-accounts of the Variable Life
Account and charges assessed against your guaranteed principal account actual
cash value. Interest is credited on the guaranteed principal account actual
cash value of your Policy. Interest is credited daily at a rate of not less
than 4 percent per year, compounded annually. We guarantee this minimum rate
for the life of the Policy without regard to the actual experience of the
general account. As conditions permit, we will credit additional amounts of
interest to the guaranteed principal account actual cash value. Your
guaranteed principal account actual cash value is guaranteed by us. It cannot
be reduced by any investment experience of the general account.
We determine each portion of a Policy's separate account actual cash value
separately. The separate account actual cash value is not guaranteed. We
determine the separate account actual cash value by multiplying the current
number of sub-account units credited to a Policy by the current sub-account
unit value. A unit is a measure of your Policy's interest in a sub-account.
The number of units credited with respect to each net premium payment is
determined by dividing the portion of the net premium payment allocated to
each sub-account by the then current unit value for that sub-account. The
number of units so credited is determined as of the end of the valuation
period during which we receive your premium at our home office.
Once determined, the number of units credited to your Policy will not be
affected by changes in the unit value. However, the number will be increased
by the allocation of subsequent net premiums, nonrepeating premiums,
dividends, loan repayments, loan interest credits and transfers to that sub-
account. The number of units of each sub-account credited to your Policy will
be decreased by policy charges to the sub-account, policy loans and loan
interest, transfers from that sub-account and partial surrenders from that
sub-account. Such number of sub-account units will decrease to zero on a
policy surrender, the purchase of extended term insurance or termination.
The unit value of a sub-account will be determined on each valuation date.
The amount of any increase or decrease will depend on the net investment
experience of that sub-account. The value of a unit for each sub-account was
originally set at $1.00 on the first valuation date. For any subsequent
valuation date, its value is equal to its value on the preceding valuation
date multiplied by the net investment factor for that sub-account for the
valuation period ending on the subsequent valuation date.
The net investment factor for a valuation period is: the gross investment
rate for such valuation period, less a deduction for the mortality and expense
risk charge under this
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Policy which is assessed at an annual rate of .50 percent against the average
daily net assets of each sub-account of the Variable Life Account. The gross
investment rate is equal to:
(1) the net asset value per share of a Fund share held in the sub-account of
the Variable Life Account determined at the end of the current valuation
period; plus
(2) the per share amount of any dividend or capital gain distributions by the
Funds if the "ex-dividend" date occurs during the current valuation period;
with the sum divided by
(3) the net asset value per share of that Fund share held in the sub-account
determined at the end of the preceding valuation period.
We determine the value of the units in each sub-account on each day on which
the Portfolios of the Funds are valued. The net asset value of the Funds'
shares is computed once daily, and, in the case of the Money Market Portfolio,
after the declaration of the daily dividend, as of the primary closing time for
business on the New York Stock Exchange (as of the date hereof the primary
close of trading is 3:00 p.m. (Central time), but this time may be changed) on
each day, Monday through Friday, except
(1) days on which changes in the value of the Funds' portfolio securities will
not materially affect the current net asset value of the Funds' shares,
(2) days during which no Funds' shares are tendered for redemption and no order
to purchase or sell the Funds' shares is received by the Funds and
(3) customary national business holidays on which the New York Stock Exchange
is closed for trading.
Although the actual cash value for each Policy is determinable on a daily
basis, we update our records to reflect that value on each monthly anniversary.
We also make policy value determinations on the date of the insured's death and
on a policy adjustment, surrender, and lapse. When the policy value is
determined, we will assess and update to the date of the transaction those
charges made against your actual cash value, namely the administration charge
of $60 per year and the cost of insurance charge (and, for VAL '87 any charge
for sub-standard risks). Increases or decreases in policy values will not be
uniform for all Policies but will be affected by policy transaction activity,
cost of insurance charges, (charges for sub-standard risks for VAL '87) and the
existence of policy loans.
To illustrate the operation of the Policy under various assumptions, we have
prepared several tables, along with additional explanatory text, that may be of
assistance. For these tables, please see Appendix I, "Illustrations of Policy
Values, Death Benefits and Premiums," found on page 93 of this prospectus. For
additional materials and tables, including values after policy charges, please
see Appendix II, Summary of Policy Charges, found on page 102 of this
prospectus.
Transfers The Policy allows for transfers of the actual cash value between the
guaranteed principal account and the Variable Life Account or among the sub-
accounts of the Variable Life Account. You may request a transfer at any time
while the Policy remains in force or you may arrange in advance for systematic
transfers; systematic transfers are transfers of specified dollar or unit value
amounts to be made periodically among the sub-accounts and the guaranteed
principal account. The amount to be transferred to or from a sub-account or the
guaranteed principal account must be at least $250. If the balance is less than
$250, the entire actual cash value attributable to that sub-account or the
guaranteed principal account must be transferred. If a transfer would reduce
the actual cash value in the sub-account from which the transfer is to be made
to less than $250, we reserve the right to include that remaining sub-account
actual cash value in the amount transferred. We will make the transfer on the
basis of sub-account unit values as of the end of the valuation period during
which your written or telephone request is received at our home office. A
transfer is subject to a transaction charge, not to exceed $10, for each
transfer of actual cash value among the sub-accounts and the guaranteed
principal account. Currently, there is a charge only for non-systematic
transfers in excess of four per year. None of these requirements will apply
when you are transferring all of the policy value to the guaranteed principal
account as a conversion privilege.
Your instructions for transfer may be made in writing or you, or a person
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authorized by you, may make such changes by telephone. To do so, you may call
us at 1-800-277-9244 between the hours of 8:00 a.m. and 4:30 p.m., Central
time, our regular business hours. Policy owners may also submit their requests
for transfer, surrender or other transactions to us by facsimile (FAX)
transmission. Our FAX number is (651) 665-4194.
Transfers made pursuant to a telephone call are subject to the same
conditions and procedures as would apply to written transfer requests. During
periods of marked economic or market changes, policy owners may experience
difficulty in implementing a telephone transfer due to a heavy volume of
telephone calls. In such a circumstance, policy owners should consider
submitting a written transfer request while continuing to attempt a telephone
redemption. We reserve the right to restrict the frequency of, or otherwise
modify, condition, terminate or impose charges upon, telephone transfer
privileges. For more information on telephone transfers, contact us.
While for some policy owners we have used a form to pre-authorize telephone
transactions, we now make this service automatically available to all policy
owners. We will employ reasonable procedures to satisfy ourselves that
instructions received from policy owners are genuine and, to the extent that
we do not, we may be liable for any losses due to unauthorized or fraudulent
instructions. We require policy owners to identify themselves in those
telephone conversations through policy numbers, social security numbers and
such other information as we may deem to be reasonable. We record telephone
transfer instruction conversations and we provide the policy owners with a
written confirmation of the telephone transfer.
The maximum amount of actual cash value to be transferred out of the
guaranteed principal account to the sub-accounts of the Variable Life Account
may be limited to 20 percent of the guaranteed principal account balance.
Transfers to or from the guaranteed principal account may be limited to one
such transfer per policy year. Neither of these restrictions will apply when
you are
transferring all of the policy value to the guaranteed principal account as a
conversion privilege.
Transfers from the guaranteed principal account must be made by a written or
telephone request. It must be received by us or postmarked in the 30-day
period before or after the last day of the policy year. Written requests for
transfers which meet these conditions will be effective after we approve and
record them at our home office. Currently, we do not impose such restrictions.
In the case of a transfer, the charge is assessed against the amount
transferred.
Death Benefit Options
The death benefit provided by the Policy depends upon the death benefit
option you choose. You may choose one of two available death benefit options--
the Cash Option or the Protection Option. If you fail to make an election, the
Cash Option will be in effect. The scheduled premium for a Policy is the same
no matter which death benefit option you choose. At no time will the death
benefit be less than the larger of the then current face amount or the amount
of insurance that could be purchased using the policy value as a net single
premium.
Cash Option Under the Cash Option, the death benefit will be the current face
amount at the time of the insured's death. The death benefit will not vary
unless the policy value exceeds the net single premium for the then current
face amount. At that time, the death benefit will be the greater of the face
amount of the Policy or the amount of insurance which could be purchased at
the date of the insured's death by using the policy value as a net single
premium.
Protection Option The death benefit provided by the Protection Option will
vary depending on the investment experience of the allocation options you
select, whether there is interest credited as a result of a policy loan and
the extent to which we assess lower insurance charges than those maximums
derived from the 1980 Commissioners Standard Ordinary Mortality Tables.
With VAL '87, the amount of the death benefit is equal to the current face
amount or, if the policy value is greater than the tabular cash value at the
date of the insured's death, the current face amount plus an additional amount
of insurance which could be purchased by using that difference between values
as a net single premium.
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Before the policy anniversary nearest the insured's age 70, and with both
VAL '95 and the Amended VAL '95 Protection Option, if you have chosen that
Option, the amount of the death benefit is equal to the policy value, plus the
larger of:
(a) the then current face amount; and
(b) the amount of insurance which could be purchased using the policy value as
a net single premium.
At the policy anniversary nearest the insured's age 70, we will
automatically adjust the face amount of your Policy to equal the death benefit
immediately preceding the adjustment. The Protection Option of VAL '95 is only
available until the policy anniversary nearest the insured's age 70; at that
time we will convert the death benefit option to the Cash Option. With the
Amended VAL '95 Protection Option, after the policy anniversary nearest the
insured's age 70, the amount of the death benefit is equal to the current face
amount or, if the policy value is greater than the tabular cash value at the
date of the insured's death, the current face amount plus an additional amount
of insurance which could be purchased by using that difference between values
as a net single premium.
Choosing the Death Benefit Option The different death benefit options meet
different needs and objectives. If you are satisfied with the amount of your
insurance coverage and wish to have any favorable investment results reflected
to the maximum extent in increasing actual cash values, you should choose the
Cash Option. The Protection Option results primarily in an increased death
benefit. In addition, there are other distinctions between the two options
which may influence your selection. In the event of a superior investment
performance, the Cash Option will result in a Policy becoming paid-up more
rapidly than the Protection Option. This is because of larger cost of
insurance charges under the Protection Option resulting from the additional
amount of death benefit provided under that option. But under the Cash Option,
favorable investment experience does not increase the death benefit unless the
policy value exceeds the net single premium for the then current face amount,
and the beneficiary will not benefit from any larger actual cash value which
exists at the time of the insured's death because of the favorable investment
experience.
You may elect to have the death benefit option changed while the Policy is
in force by filing a written request with us at our home office. We may
require that you provide us with satisfactory evidence of the insured's
insurability before we make a change to the Protection Option. The change will
take effect when we approve and record it in our home office. A change in
death benefit option may have Federal income tax consequences. See the heading
"Federal Tax Status" in this prospectus on page 38.
For an illustration of the calculation of the death benefit under the Policy
options, please see Appendix III, "Illustration of Death Benefit Calculation,"
on page 107 of this prospectus.
Policy Loans
You may borrow from us using only your Policy as the security for the loan.
The total amount of your loan may not exceed 90 percent of your policy value.
A loan taken from, or secured by a Policy, may have Federal income tax
consequences. See the heading "Federal Tax Status" in this prospectus on page
38.
The policy value is the actual cash value of your Policy plus any policy
loan. Any policy loan paid to you in cash must be in an amount of at least
$100. Policy loans in smaller amounts are allowed under the automatic premium
loan provision. We will deduct interest on the loan in arrears. At your
request, we will send you a loan request form for your signature. You may also
obtain a policy loan by calling us at 1-800-277-9244 between the hours of 8:00
a.m. and 4:30 p.m., Central time, our regular business hours. Should you make
a telephone call to us you will be asked, for security purposes, for your
personal identification and policy number. The Policy will be the only
security required for your loan. We will determine your policy value as of the
date we receive your written request at our home office.
When you take a loan, we will reduce the actual cash value. It will be
reduced by the amount you borrow and any unpaid interest. Unless you direct us
otherwise, we will take the policy loan from your guaranteed principal account
actual cash value and separate account actual cash value in the same
proportion that those values bear to each other and, as to the actual cash
value in the separate account, from each sub-account in the proportion that
the actual cash value in such sub-account bears to your actual cash
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value in all of the sub-accounts. The number of units to be cancelled will be
based upon the value of the units as of the end of the valuation period during
which we receive your loan request at our home office. This amount shall be
transferred to the loan account. The loan account continues to be part of the
Policy in the general account. A policy loan has no immediate effect on policy
value since at the time of the loan the policy value is the sum of your actual
cash value and any policy loan.
The actual cash value of your Policy may decrease between premium due dates.
Unfavorable investment experience and the assessment of charges could cause
your separate account actual cash value to decline to zero. If your Policy has
indebtedness and no actual cash value, the Policy will lapse and there may be
adverse tax consequences; see the Federal Tax Status section on page 38. In
this event, to keep your Policy in force, you will have to make a loan
repayment. We will give you notice of our intent to terminate the Policy and
the loan repayment required to keep it in force. The time for repayment will
be within 31 days after our mailing of the notice.
Policy Loan Interest The interest rate on a policy loan will not be more than
the rate shown on page 1 of your Policy. The interest rate charged on a policy
loan will not be more than that permitted in the state in which the Policy is
delivered.
Policy loan interest is due:
. on the date of the death of the insured
. on a policy adjustment, surrender, lapse, a policy loan transaction
. on each policy anniversary.
If you do not pay the interest on your loan in cash, your policy loan will
be increased and your actual cash value will be reduced by the amount of the
unpaid interest. The new loan will be subject to the same rate of interest as
the loan in effect.
We will also credit interest to your Policy when there is a policy loan.
Interest credits on a policy loan shall be at a rate which is not less than
your policy loan interest rate minus 2 percent per annum. We allocate policy
loan interest credits to your actual cash value as of the date of the death of
the insured, on a policy adjustment, surrender, lapse, a policy loan
transaction and on each policy anniversary. We allocate interest credits to
the guaranteed principal account and separate account following your
instructions to us. We will use your instructions for the allocation of net
premiums. In the absence of such instructions, we will allocate interest
credits to the guaranteed principal account actual cash value and separate
account actual cash value in the same proportion that those values bear to
each other and, as to the actual cash value in the separate account, to each
sub-account in the proportion that the actual cash value in such sub-account
bears to your actual cash value in all of the sub-accounts.
Currently, the loan account credits interest, as described above, at a rate
which is not less than your policy loan interest rate minus 2 percent per
annum. However, depending on the insured's age and the period of time that the
Policy has been in force, we may credit the Policy with interest at a more
favorable rate. Under our current procedures, if all the conditions are met we
will credit your loan at a rate which is equal to the policy loan rate minus
.75 percent per annum. The conditions which must be met have to do with your
age and the duration of the Policy. The insured's age must be greater than or
equal to age 55 as of the last policy anniversary. The duration of the Policy,
which is the number of years during which the Policy has been in force, must
be greater than or equal to 10. The duration includes any period a previous
policy was in effect if that previous policy was exchanged for this Policy.
Policy loans may also be used as automatic premium loans to keep your Policy
in force. If you asked for this service in your application, or if you write
us and ask for this service after your Policy has been issued, we will make
automatic premium loans. You can also write to us at any time and tell us you
do not want this service. If you have this service and you have not paid the
premium that is due before the end of the grace period, we will make a policy
loan to pay the premium. Interest on such a policy loan is charged from the
date the premium was due. However, in order for an automatic premium loan to
occur, the amount available for a loan must be enough to pay at least a
quarterly premium. If the loan value is not enough to pay at least a quarterly
premium, your Policy will lapse.
Policy Loan Repayments If your Policy is in force, your loan can be repaid in
part or in full at any time before the insured's death.
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Your loan may also be repaid within 60 days after the date of the insured's
death, if we have not paid any of the benefits under the Policy. Any loan
repayment must be at least $100 unless the balance due is less than $100. When
implemented, we will waive this minimum loan repayment provision for loan
repayments made under our automatic payment plan where loan repayments are in
an amount of at least $25.
We allocate loan repayments to the guaranteed principal account until all
loans from the guaranteed principal account have been repaid. Thereafter we
allocate loan repayments to the guaranteed principal account or the sub-
accounts of the Variable Life Account as you direct. In the absence of your
instructions, we will allocate loan repayments to the guaranteed principal
account actual cash value and separate account actual cash value in the same
proportion that those values bear to each other and, as to the actual cash
value in the separate account, to each sub-account in the proportion that the
actual cash value in such sub-account bears to your actual cash value in all
of the sub-accounts.
Loan repayments reduce your loan account by the amount of the loan
repayment.
A policy loan, whether or not it is repaid, will have a permanent effect on
the policy value because the investment results of the sub-accounts will apply
only to the amount remaining in the sub-accounts. The effect could be either
positive or negative. If net investment results of the sub-accounts are
greater than the amount being credited on the loan, the policy value will not
increase as rapidly as it would have if no loan had been made. If investment
results of the sub-accounts are less than the amount being credited on the
loan, the policy value will be greater than if no loan had been made. For an
example of the effect of a policy loan on a Policy and its death benefit,
please see Appendix IV, "Policy Loan Example," in this prospectus on page 108.
Surrender
You may request a surrender or partial surrender of your Policy at any time
while the insured is living. On surrender, the surrender value of the Policy
is the actual cash value minus unpaid policy charges which are assessed
against actual cash value. We determine the surrender value as of the end of
the valuation period during which we receive your surrender request at our
home office. You may surrender the Policy by sending us the Policy and a
written request for its surrender. You may request that the surrender value be
paid to you in cash or, as an alternative, you may request that the surrender
value be applied on a settlement option or to provide extended protection
insurance on the life of the insured.
We also permit a partial surrender of the actual cash value of the Policy in
any amount of $500 or more. However, we will not permit a partial surrender,
if immediately thereafter the partial surrender would reduce the actual cash
value to an amount which is less than 10 percent of the policy value
immediately after the partial surrender. If a Policy is not paid-up, the death
benefit of the Policy will be reduced by the amount of the partial surrender.
If the Policy is paid-up, the death benefit will be reduced so as to retain
the same ratio between the policy value and the death benefit of the Policy as
existed prior to the partial surrender. With any partial surrender, we will
adjust the Policy to reflect the new face amount and actual cash value and,
unless otherwise instructed, the existing level of premium payments.
We are currently waiving these restrictions requiring a minimum amount for a
partial surrender where a partial withdrawal from a Policy, which is on stop
premium, is being used to pay premiums for sub-standard risks or premiums on
any benefits and riders issued as part of the Policy. Transaction fees
otherwise applicable to such a partial withdrawal are also waived.
On a partial surrender, you may tell us which Variable Life Account sub-
accounts from which a partial surrender is to be taken or whether it is to be
taken in whole or in part from the guaranteed principal account. If you do
not, we will deduct partial surrenders from your guaranteed principal account
actual cash value and separate account actual cash value in the same
proportion that those values bear to each other and, as to the actual cash
value in the separate account, from each sub-account in the proportion that
the actual cash value in such sub-account bears to your actual cash value in
all of the sub-accounts. We will tell you, on request, what amounts are
available for a partial surrender under your Policy.
We will pay a surrender or partial surrender as soon as possible, but not
later
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than seven days after our receipt of your written request for surrender.
However, an exception to this is that if any portion of the actual cash value
to be surrendered is attributable to a premium or nonrepeating premium payment
made by non-guaranteed funds such as a personal check, we will delay mailing
that portion of the surrender proceeds until we have reasonable assurance that
the payment has cleared and that good payment has been collected. The amount
you receive on surrender may be more or less than the total premiums paid to
your Policy.
Free Look
It is important to us that you are satisfied with this Policy after it is
issued. If you are not satisfied with it, you may return the Policy to us or
your agent by the later of:
(1) ten days after you receive it;
(2) 45 days after you have signed the application; or
(3) ten days after we mail to you a notice of your right of withdrawal.
If you return the Policy, you will receive within seven days of the date we
receive your notice of cancellation a full refund of the premiums you have
paid.
If the Policy is adjusted, as described under the heading "Policy
Adjustments" in this prospectus on page 16, and if the adjustment results in
an increased premium, you will again have a right to examine the Policy and
you may return the Policy within the time periods stated in the immediately
preceding paragraph. If you return the Policy, the requested premium
adjustment will be cancelled. You will receive a refund of the additional
premiums paid within seven days of the date we receive your notice of
cancellation for that adjustment.
Conversion
So long as your Policy is in force and all scheduled premiums have been duly
paid, you may convert the Policy to an adjustable life policy, with a fixed
death benefit and cash values, which we may then offer. This right is in
addition to your right to make described policy adjustments. For VAL '95, this
conversion privilege is only available during the first 24 months from the
original policy date, but comparable fixed insurance coverage can be obtained
after 24 months from the original policy date by transferring all of the
policy value to the guaranteed principal account and thereafter allocating all
premiums to that account.
The converted Policy shall have the same face amount as is currently
provided by your Policy and premiums based upon the same issue age and risk
classification of the insured as stated in your Policy. The premiums and
actual cash values provided by the converted Policy may be different as a
result of an equitable adjustment made to reflect any variances in the
premiums and cash values under the Policy and the new Policy.
Policy Charges
Premium Charges Premium charges vary depending on whether the premium is a
scheduled premium or a nonrepeating premium. Generally, the word "premium"
when used in this prospectus means a scheduled premium only. With VAL '87,
charges for sub-standard risks are assessed against the actual cash values.
With VAL '95, charges for sub-standard risks are deducted from the premium, to
calculate the base premium. Charges for sub-standard risks include both table
ratings and cash extra charges. With both VAL '87 and VAL '95, charges for
additional benefits are deducted from the premium to calculate the base
premium.
From base premiums we deduct a sales load, an underwriting charge, a premium
tax charge and a face amount guarantee charge. The base premium excludes any
charge deducted from the premium to provide for any additional benefits
provided by rider and, in the case of VAL '95, any charge deducted for sub-
standard risks.
(1) The sales load consists of a deduction from each premium of 7 percent and
it may also include a first year sales load deduction not to exceed 23
percent. The first year sales load will apply only to base premiums,
scheduled to be paid in the 12 month period following the policy date, or
any policy adjustment involving an increase in base premium or any policy
adjustment occurring during a period when a first year sales load is being
assessed. It will also apply only to that portion of an annual base
premium necessary for an original issue whole life plan of insurance. In
other words, for base premiums greater than this whole life premium, the
amount of the base
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premium in excess of such whole life base premium will be subject only to
the 7 percent basic sales load.
Only adjustments that involve an increase in base premium will result in
additional first year sales load being assessed on that increase in premium.
If any adjustment occurs during a period when a first year sales load is
being collected and the adjustment results in an increase in base premium,
an additional first year sales load, not to exceed 23 percent of the
increase in base premium, will be added to the uncollected portion of the
first year sales load that was being collected prior to the adjustment. This
total amount of first year sales load will then be collected during the 12
month period following the adjustment.
If any adjustment occurs during the 12 month period when a first year
sales load is being collected and the adjustment does not result in an
increase in base premium, the first year sales load percentage not to exceed
23 percent, that was in effect prior to the adjustment is multiplied by the
base premium in effect after the adjustment; this number is then multiplied
by a fraction equal to the number of months remaining in the previous 12
month period divided by 12. This amount of first year sales load will then
be collected during the 12 month period following the adjustment.
All of the sales load charges are designed to average not more than 9
percent of the base premiums (in the case of a VAL '87 Policy, the base
premium less any charge for sub-standard risks) over the lesser of: the life
expectancy of the insured at policy issue or adjustment; or 15 years from
the policy issue or adjustment; or the premium paying period. Compliance
with the 9 percent ceiling will be achieved by reducing the amount of the
first year sales load, if necessary. For examples of how we compute sales
load charges, see the heading "Examples of Sales Load Computations" in this
prospectus on page 34.
The sales load is designed to compensate us for distribution expenses
incurred with respect to the Policies. The amount of the sales load in any
policy year cannot be specifically related to sales expenses for that year.
To the extent that sales expenses are not recovered from the sales load, we
will recover them from our other assets or surplus including profits from
mortality and expense risk charges.
(2) The underwriting charge currently is an amount not to exceed $5 per $1,000
of face amount of insurance. This amount may vary by the age of the
insured and the premium level for a given amount of insurance. This charge
is made ratably from premiums scheduled to be made during the first policy
year and during the twelve months following certain policy adjustments.
The underwriting charge is designed to compensate us for the
administrative costs associated with issuance or adjustment of the
Policies, including the cost of processing applications, conducting
medical exams, classifying risks, determining insurability and risk class
and establishing policy records. This charge is not guaranteed, so that on
a policy adjustment the then current underwriting charge will apply to any
increase in face amount which requires new evidence of insurability. In
the event of a policy adjustment which results in a face amount increase
and no premium, you must remit the underwriting charge attributable to the
policy adjustment to us prior to the effective date of the adjustment.
Otherwise we will assess the charge against your actual cash value as a
transaction charge on adjustment.
(3) The premium tax charge of 2.5 percent is deducted from each base premium.
This charge is designed to cover the aggregate premium taxes we pay to
state and local governments for this class of policies. Currently premium
taxes imposed by the states vary from .75 percent to 3.5 percent. We do
not guarantee this charge, and it may be increased in the future, but only
as necessary to cover our premium tax expenses.
(4) The face amount guarantee charge of 1.5 percent is deducted from each base
premium. This charge is designed to compensate us for our guarantee that
the death benefit will always be at least equal to the current face amount
in effect
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at the time of death regardless of the investment performance of the sub-
accounts in which net premiums have been invested. The face amount of a
Policy at issue or adjustment and the appropriate premium therefor reflect
a "tabular cash value" (defined on page 16 above) based upon an assumed
annual rate of return of 4 percent. If the policy value is less than the
tabular cash value at the time of death, it will not be sufficient to
support the face amount of the Policy under the actuarial assumptions made
in designing the Policy. The face amount guarantee is a guarantee that the
face amount will be available as a death benefit notwithstanding the
failure of the Policy to perform in accordance with the assumptions made in
its design. Thus, even if the policy value should be less than the amount
needed to pay the deductions to be made from the actual cash value on the
next monthly policy anniversary, see discussion below, the Policy's
guaranteed death benefit will remain in effect and the Policy will remain
in force. We guarantee not to increase this charge.
Carges Taken Fromh
Premium
Plus, in the
- --------------- First Year
---------------
7.00% Sales Additional
Load Sales Load (up
1.50% Face to 23%)
Amount Underwriting
Guarantee Charge (up to
2.50% Premium $5/$1000 of
Tax Insurance
- --------------- Coverage)
11.00% Total
Nonrepeating Premiums Nonrepeating premiums are currently subject to the 2.5
percent premium tax charge but not to a sales load charge. We do not assess a
face amount guarantee charge or underwriting charge against nonrepeating
premiums.
Actual Cash Value Charges In addition to deductions from premiums and
nonrepeating premiums, we assess from the actual cash value of a Policy an
administration charge, certain transaction charges and the cost of insurance
charge, (and in the case of a VAL '87 Policy, any charge for sub-standard
risks). These charges are as follows:
(1) The administration charge is designed to cover certain of our
administrative expenses, including those attributable to the records
maintained for your Policy. The administration charge is $60 for each
policy year.
(2) The transaction charges are for expenses associated with processing
transactions. There is a charge of $25 for each policy adjustment.
If the only policy adjustment is a partial surrender, the transaction
charge shall be the lesser of $25 or 2 percent of the amount surrendered.
We also reserve the right to make a charge, not to exceed $10, for each
transfer of actual cash value among the guaranteed principal account and
the sub-accounts of the Variable Life Account. Currently there is a $10
charge only for non-systematic transfers in excess of four per year.
(3) The cost of insurance charge compensates us for providing the death
benefit under a Policy. The charge is calculated by multiplying the net
amount at risk under your Policy by a rate which varies with the insured's
age, sex, risk class, the level of scheduled premiums for a given amount
of insurance, duration of the Policy and the smoking habits of the
insured. The rate is guaranteed not to exceed the maximum charges for
mortality derived from the 1980 Commissioners Standard Ordinary Mortality
Tables. The net amount at risk is the death benefit under your Policy less
your policy value. Where circumstances require, we will base our rates on
"unisex," rather than sex-based, mortality tables.
We assess administration and cost of insurance charges (and for a VAL '87
Policy, sub-standard risk charges, if any,) against your actual cash value on
the monthly policy anniversary. In addition, we assess such charges on the
occurrence of the death of the insured, policy surrender, lapse or a policy
adjustment.
We assess transaction charges against your actual cash value at the time of
a policy adjustment or when a transfer is made. In the case of a transfer, the
charge is assessed against the amount transferred.
We assess charges against your guaranteed principal account actual cash
value and separate account actual cash value in the same proportion that those
values bear to each other and, as to the actual cash value in the separate
account, from each sub-account in the proportion that the actual cash
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value in such sub-account bears to your actual cash value in all of the sub-
accounts.
Charges Taken from Actual Cash Value
. Administration Charge ($60/year)
. Cost of Insurance Charge
.If Applicable: Transaction Charge and Charge for Sub-Standard Risks
Separate Account Charges We assess a mortality and expense risk charge
directly against the assets held in the Variable Life Account. The mortality
and expense risk charge compensates us for assuming the risks that cost of
insurance charges will be insufficient to cover actual mortality experience
and that the other charges will not cover our expenses in connection with the
Policy. We deduct the mortality and expense risk charge from Variable Life
Account assets on each valuation date at an annual rate of .50 percent of the
average daily net assets of the Variable Life Account.
We reserve the right to charge or make provision for any taxes payable by us
with respect to the Variable Life Account or the Policies by a charge or
adjustment to such assets. No such charge or provision is made at the present
time.
Charges Taken from Separate Account
. .50% Mortality and Expense Risk Charge
Examples of Sales Load Computations
As noted previously, all sales load charges are designed to average not more
than 9 percent of base premiums (in the case of a VAL '87 Policy, the base
premium less any charge for sub-standard risks) over the lesser of: the life
expectancy of the insured at policy issue or adjustment, or 15 years from the
policy issue or adjustment; or the premium paying period. A number of examples
of sales load computations are included in Appendix V, Example of Sales Load
Computation, in this prospectus on page 109.
It should be noted from the above that the sales load charges are designed
to be spread over time and they assume a continuation of the Policy. Early
adjustment of the Policy to lower premium levels or early surrender of policy
values will have the effect of increasing the portion of premium payments used
for sales load charges. In addition, because a first year sales load is
applied to increases in premium, a pattern of increases and decreases in
premiums should be avoided.
Policies Issued in Exchange We will waive or modify certain charges assessed
against base premiums as described above in situations where our existing life
insurance policy owners wish to exchange their policies for the Policies
described herein. Those policy owners may do so, subject to their application
for this Policy and our approval of the exchange. Under certain circumstances,
we will require evidence of insurability for an exchange. A $150
administrative charge is currently required for the exchange.
In those situations where a Policy is issued in exchange for a current
policy issued by us, we will not assess any charges, except for the
administrative charge, to the existing cash values at the time they are
transferred to the Policy. Subsequent premium payments, absent adjustment and
unless the exchanged policy was not in force for at least one year, will not
be subject to a first year sales load or underwriting charge (unless evidence
of insurability has been required for the exchange) at the established face
amount and the level of premiums of the exchanged policy. All other charges
will apply to the Policy and premiums paid under it thereafter.
Other Policy Provisions
Beneficiary When we receive proof satisfactory to us of the insured's death,
we will pay the death proceeds of a Policy to the beneficiary or beneficiaries
named in the application for the Policy unless the owner has changed the
beneficiary. In that event, we will pay the death proceeds to the beneficiary
named in the last change of beneficiary request as provided below.
If a beneficiary dies before the insured, that beneficiary's interest in the
Policy ends with that beneficiary's death. Only those beneficiaries who
survive the insured will be eligible to share in the death proceeds. If no
beneficiary survives the insured we will pay the death proceeds of this Policy
to the owner, if living, otherwise to the owner's estate, or, if the owner is
a corporation, to it or its successor.
You may change the beneficiary designated to receive the proceeds. If you
have reserved the right to change the beneficiary, you can file a written
request with us to change the beneficiary. If you have not reserved the right
to change the beneficiary, the written consent of the irrevocable beneficiary
will be required.
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Your written request will not be effective until it is recorded in our home
office. After it has been so recorded, it will take effect as of the date you
signed the request. However, if the insured dies before the request has been
so recorded, the request will not be effective as to those death proceeds we
have paid before your request was recorded in our home office records.
Payment of Proceeds The amount payable as death proceeds upon the insured's
death will be the death benefit provided by the Policy, plus any additional
insurance on the insured's life provided by an additional benefit agreement,
if any, minus any policy charges and minus any policy loans. In addition, if
the Cash Option death benefit is in effect at the insured's death, we will pay
to the beneficiary any part of a paid premium that covers the period from the
end of the policy month in which the insured died to the date to which
premiums are paid. Normally, we will pay any policy proceeds within seven days
after our receipt of all the documents required for such a payment. Other than
the death proceeds, which are determined as of the date of death of the
insured, we will determine the amount of payment as of the end of the
valuation period during which a request is received at our home office.
We reserve the right to defer policy payments, including policy loans, for
up to six months from the date of your request, if such payments are based
upon policy values which do not depend on the investment performance of the
Variable Life Account. In that case, if we postpone a payment other than a
policy loan payment for more than 31 days, we will pay you interest at 3
percent per annum (4 percent for a VAL '87 Policy) for the period beyond that
time that payment is postponed. For payments based on policy values which do
depend on the investment performance of the Variable Life Account, we may
defer payment only:
(1) for any period during which the New York Stock Exchange is closed for
trading (except for normal holiday closing); or
(2) when the SEC has determined that a state of emergency exists which may
make such payment impractical.
Settlement Options The proceeds of a Policy will be payable if the Policy is
surrendered, or we receive proof satisfactory to us of the insured's death.
These events must occur while the Policy is in force. We will pay the proceeds
at our home office and in a single sum unless a settlement option has been
selected. We will deduct any indebtedness and unpaid charges from the
proceeds. Proof of any claim under this Policy must be submitted in writing to
our home office.
We will pay interest on single sum death proceeds from the date of the
insured's death until the date of payment. Interest will be at an annual rate
determined by us, but never less than 3 percent (4 percent for VAL '87).
The proceeds of a Policy may be paid in other than a single sum and you may,
during the lifetime of the insured, request that we pay the proceeds under one
of the Policy's settlement options. We may also use any other method of
payment that is agreeable between you and us. A settlement option may be
selected only if the payments are to be made to a natural person in that
person's own right.
Each settlement option is payable in fixed amounts as described below. The
payments do not vary with the investment performance of the Variable Life
Account.
Option 1--Interest Payments
This is an annuity based upon the payment of interest on the proceeds at
such times and for a period that is agreeable to you and us. Withdrawals of
proceeds may be made in amounts of at least $500. At the end of the period,
any remaining proceeds will be paid in either a single sum or under any other
method we approve.
Option 2--Payments for a Specified Period
This is an annuity payable for a specified number of years. The amount of
guaranteed payments for each $1,000 of proceeds applied is as shown in the
Policy. Monthly payments for periods not shown and current rates are available
from us at your request.
Option 3--Life Income
This is an annuity payable monthly during the lifetime of the person who is
to receive the income and terminating with the last monthly payment
immediately preceding that person's death. We may require proof of the age and
sex of the annuitant. The amount of guaranteed payments for each $1,000 of
proceeds applied is as shown in the Policy. Monthly payments for ages not
shown and current rates are available from us at your request. It would be
possible under this option for the annuitant to receive only one annuity
payment if death occurred prior to the
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due date of the second annuity payment, two if death occurred before the due
date of the third annuity payment, etc.
Option 4--Payments of a Specified Amount
This is an annuity payable in a specified amount until the proceeds and
interest are fully paid.
If you request a settlement option, you will be asked to sign an agreement
covering the election which will state the terms and conditions of the
payments. Unless you elect otherwise, a beneficiary may select a settlement
option after the insured's death.
The minimum amount of interest we will pay under any settlement option is 3
percent per annum (4 percent for a VAL '87 Policy). Additional interest
earnings, if any, on deposits under a settlement option will be payable as
determined by us.
Assignment The Policy may be assigned. The assignment must be in writing and
filed at our home office. We assume no responsibility for the validity or
effect of any assignment of the Policy or of any interest in it. Any proceeds
which become payable to an assignee will be payable in a single sum. Any claim
made by an assignee will be subject to proof of the assignee's interest and the
extent of the assignment.
Misstatement of Age If the insured's age has been misstated, we will adjust the
amount of proceeds payable under the Policy to reflect cost of insurance
charges based upon the insured's correct age.
Incontestability After a Policy has been in force during the insured's lifetime
for two years from the original policy date, we may not contest the Policy,
except for fraud or for nonpayment of premium. However, if there has been a
face amount increase for which we required evidence of insurability, we may
contest that increase for two years with respect to information provided at
that time, during the lifetime of the insured, from the effective date of the
increase.
Suicide If the insured, whether sane or insane, dies by suicide, within two
years of the original policy date, our liability will be limited to an amount
equal to the premiums paid for the Policy. If there has been a face amount
increase for which we required evidence of insurability, and if the insured
dies by suicide within two years from the effective date of the increase, our
liability with respect to the increase will be limited to an amount equal to
the premiums paid for such increase.
Dividends The Policies are participating policies. Each year we will determine
if this class of Policies and your Policy will share in our divisible surplus.
We call your share of this participation a dividend. We do not anticipate that
dividends will be declared with respect to these Policies.
Dividends, if received, may be added to your actual cash value or, if you so
elect, they may be paid in cash.
We will allocate any dividend applied to actual cash value to the guaranteed
principal account or to the sub-accounts of the separate account in accordance
with your instructions for new premiums. In the absence of instruction, we will
allocate dividends to the guaranteed principal account actual cash value and
separate account actual cash value in the same proportion that those actual
cash values bear to each other and, as to the actual cash value in the separate
account, to each sub-account in the proportion that the actual cash value in
such sub-account bears to your actual cash value in all of the sub-accounts.
Reports At least once each year we will send you a report. This report will
include the actual cash value, the tabular cash value, the face amount and the
variable death benefit as of the date of the report. It will also show the
premiums paid during the policy year, policy loan activity and the policy
value. We will send the report to you without cost. The report will be as of a
date within two months of its mailing.
Additional Benefits
Additional Benefits When a Policy is issued, you may be able to obtain
additional policy benefits. Subject to underwriting approval, we will provide
these benefits by a rider to the Policy, which may require the payment of
additional premium.
Waiver of Premium Agreement The Waiver of Premium Agreement requires an
additional premium and provides for the payment of policy premium in the event
of the insured's disability. We provide waiver of premium coverage on most
Policies, unless you elect not to have it.
Policy Enhancement Agreement and Cost of Living Agreement Both the Policy
Enhancement Agreement and the Cost of Living Agreement provide for increases in
the
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face amount, without evidence of insurability and help you maintain the
purchasing power of the protection provided by the Policy. The Policy
Enhancement Agreement requires an additional premium, but none is required for
the Cost of Living Agreement. Your Policy may not contain both of these
agreements.
The Policy Enhancement Agreement provides for an increase in the face amount
on each policy anniversary. The face amount will be increased by a specified
percent, between 3 percent and 10 percent, which you choose when you apply for
this benefit; the base premium will also be increased by the same percent. If
you reject an increase, the agreement will terminate.
Unless you choose the Policy Enhancement Agreement, we will issue most
Policies with a Cost of Living Agreement. The Cost of Living Agreement
provides for a face amount increase equal to the percentage increase in the
consumer price index during the previous three years, provided that you have
not made a face amount adjustment during that time. Unless we agree otherwise,
the cost of living increase may not exceed 20 percent of the Policy's face
amount before the increase or $100,000. The increase in premiums and face
amount is treated as a policy adjustment. Prior to the effective date of the
increased coverage we will notify you of the offered increase in face amount
and the required premium increase for the new face amount. You may elect to
accept the increase in face amount and premium. If you fail to accept the cost
of living face amount increase, no further increases will generally be offered
when the insured is over the age of 21.
Face Amount Increase Agreement The Face Amount Increase Agreement also
provides for increases in the face amount, without evidence of insurability.
The agreement requires an additional premium and allows increases for Policies
issued between an insured's age 0 and 37.
Survivorship Life Agreement The Survivorship Life Agreement requires an
additional premium and allows you to purchase a specified amount of additional
insurance, without evidence of insurability, at the death of another person
previously designated by you. This right extends for a period of 90 days after
the death of that other person. Typically, the person you designate will also
purchase a similar right to buy additional life insurance in the event of your
death. In the event you and the previously designated life die simultaneously,
we will pay your beneficiary one-half of the specified amount of this
agreement in addition to the death benefit due on your Policy.
Family Term Rider The Family Term Rider requires an additional premium and
provides a fixed amount of protection insurance on children of an insured.
Exchange of Insurance Agreement The Exchange of Insurance requires no
additional premium and allows for the transfer of existing insurance coverage
to another insured within a business setting.
Accelerated Benefits Agreement The Accelerated Benefits Agreement is issued
without additional premium on all Policies issued to individual insureds. It
allows you to receive a significant portion of your Policy's death benefit,
which for this purpose is essentially defined as the face amount less any
policy loan, while the insured is still living. Subject to certain conditions,
you may apply to receive a loan in excess of the Policy's maximum loan amount
if the insured develops a terminal condition due to sickness or injury. The
maximum accelerated benefit we will pay is the lesser of $1,000,000 or 75
percent of the death benefit. The minimum accelerated benefit we will pay is
$10,000.
The accelerated benefit will be treated as a loan, apart from the policy
loan provisions described elsewhere. Amounts received as a loan under the
Accelerated Benefit Agreement will be charged interest. Once the accelerated
benefit is paid, the interest rate will not change. Upon the death of the
insured, we will deduct the accrued loan balance prior to the payment of the
Policy's proceeds. A receipt of amounts under the agreement may be taxable.
You should seek assistance from your tax adviser.
Short Term Agreement The Short Term Agreement requires an additional premium
and provides temporary protection insurance, on a fixed death benefit basis
only, issued for a period of time less than a year. It is issued to provide
temporary life insurance coverage until the later issue date of the insured's
Policy. It may be used in situations where specific policy dating is required,
yet insurance coverage is needed immediately. The Short Term Agreement
terminates on the policy issue date of the Policy.
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Other Matters
Federal Tax Status
The discussion of federal taxes is general in nature and is not intended as
tax advice. Each person concerned should consult a tax adviser. This discussion
is based on our understanding of federal income tax laws as they are currently
interpreted. We have not considered any applicable state or other tax laws. No
representation is made regarding the likelihood of continuation of current
income tax laws or the current interpretations of the Internal Revenue Service
(the "IRS").
We are taxed as a "life insurance company" under the Internal Revenue Code
(the "Code"). The operations of the Variable Life Account form a part of, and
are taxed with, our other business activities. Currently, we pay no federal
income tax on income dividends received by the Variable Life Account or on
capital gains arising from the Variable Life Account's activities. The Variable
Life Account is not taxed as a "regulated investment company" under the Code
and it does not anticipate any change in that tax status.
Under Section 7702 of the Code, life insurance contracts such as the Policies
will be treated as life insurance if certain tests are met. There is limited
guidance on how these tests are to be applied. However, the IRS has issued
proposed regulations that would specify what will be considered reasonable
mortality charges under Section 7702. In light of these proposed regulations
and the other available guidance on the application of the tests under Section
7702, we generally believe that a Policy issued on a standard risk should meet
the statutory definition of a life insurance contract under Section 7702.
However, it remains unclear whether a substandard risk Policy will meet the
statutory life insurance contract definition.
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of the Variable Life Account to be
"adequately diversified" in order for the Policy to be treated as a life
insurance contract for Federal tax purposes. The Variable Life Account, through
the Funds, intends to comply with the diversification requirements prescribed
in Regulations Section 1.817-5, which affect how the Funds' assets may be
invested. Although the investment adviser of Advantus Series Fund is an
affiliate of Minnesota Life, we do not have control over the Funds or their
investments. Nonetheless, we believe that each Portfolio of the Funds in which
the Variable Life Account owns shares will be operated in compliance with the
requirements prescribed by the Treasury.
In certain circumstances, owners of variable life policies may be considered
the owners, for federal income tax purposes, of the assets of the separate
account used to support their policies. In those circumstances, income and
gains from the separate account assets would be includable in the variable life
policy owner's gross income. The IRS has stated in published rulings that a
variable policy owner will be considered the owner of separate account assets
if the policy owner possesses incidents of ownership in those assets, such as
the ability to exercise the investment control over the assets. The Treasury
Department has also announced, in connection with the issuance of regulations
concerning investment diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
contract owner), rather than the insurance company, to be treated as the owner
of the assets in the account." This announcement also states that guidance
would be issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular subaccounts without
being treated as owners of the underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the owner of a Policy has the choice of more sub-accounts in which to
allocate net purchase payments and policy values, and may be able to transfer
among sub-accounts more frequently than in such rulings. These differences
could result in a policy owner being treated as the owner of
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the assets of the Variable Life Account. In addition, we do not know what
standards, if any, will be set forth in the regulations or rulings which the
Treasury Department has stated it expects to issue. We therefore reserve the
right to modify the Policy as necessary to attempt to prevent a policy owner
from being considered the owner of a pro rata share of the assets of the
Variable Life Account.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
On the death of the insured, we believe that the death benefit provided by
the Policies will be excludable from the gross income of the beneficiary under
Section 101(a) of the Code. If you receive an accelerated benefit, that
benefit may be taxable and you should seek assistance from a tax adviser.
You are not currently taxed on any part of your interest until you actually
receive cash from the Policy. However, taxability may also be determined by
your contributions to the Policy and prior Policy activity.
Depending on the circumstances, the exchange of a Policy, the receipt of a
Policy in an exchange, a change in the Policy's death benefit option (e.g., a
change from Cash Option to Protection Option), a policy loan, a partial
surrender, a surrender, a change in ownership, a change of insured, an
adjustment of the face amount, or an assignment of the Policy may have federal
income tax consequences. If you are considering any such transactions, you
should consult a tax adviser before effecting the transaction.
We also believe that policy loans will be treated as indebtedness and will
not be currently taxable as income to you. However, whether a modified
endowment contract or not, the interest paid on policy loans will generally
not be tax deductible. There may be adverse tax consequences when a Policy
with a policy loan is lapsed or surrendered.
A surrender or partial surrender of the actual cash values of a Policy may
have tax consequences. On surrender, you will not be taxed on values received
except to the extent that they exceed the gross premiums paid under the
Policy. An exception to this general rule occurs in the case of a partial
withdrawal, a decrease in the face amount, or any other change that reduces
benefits under the Policy in the first 15 years after the Policy is issued and
that results in a cash distribution to you in order for the Policy to continue
complying with the Section 7702 definitional limits. In that case, such
distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in Section 7702.
Premiums for additional benefits are not used in the calculation for computing
the tax on actual cash values. Finally, upon a complete surrender or lapse of
a Policy or when benefits are paid at a Policy's maturity date, if the amount
received plus the amount of any policy loan exceeds the total investment in
the Policy, the excess will generally be treated as ordinary income, subject
to tax.
It should be noted, however, that under the Code the tax treatment described
above is not available for policies characterized as modified endowment
contracts. In general, policies with a high premium in relation to the death
benefit may be considered modified endowment contracts. The Code requires that
the cumulative premiums paid on a life insurance policy during the first seven
contract years not exceed the sum of the net level premiums which would be
paid under a 7-pay life policy. If those cumulative premiums exceed the 7-pay
life premiums, the policy is a modified endowment contract.
Modified endowment contracts would still be treated as life insurance with
respect to the tax treatment of death proceeds and to the extent that the
inside build-up of cash value would not be taxed on a yearly basis. However,
any amounts you received, such as dividends, cash withdrawals, loans and
amounts received from partial or total surrender of the contract would be
subject to the same tax treatment as the same amounts received under an
annuity. This annuity tax treatment includes the 10 percent additional income
tax which would be imposed on the portion of any distribution that is included
in income except where the distribution or loan is made on or after the date
you attain age 59 1/2, or is attributable to your becoming disabled, or as
part of a series of substantially equal periodic payments for your life or the
joint lives of you and your beneficiary.
The modified endowment contract provisions of the Code apply to all policies
entered into on or after June 21, 1988. It should be noted, in addition, that
a policy which is subject to a "material change" shall
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be treated as newly entered into on the date on which such material change
takes effect. Appropriate adjustment shall be made in determining whether such
a policy meets the 7-pay test by taking into account the previously existing
cash surrender value. The addition of the guaranteed principal account to an
outstanding Policy may have Federal income tax implications, e.g., whether the
addition of such account causes a "material change." While certain adjustments
described herein may result in a material change, the law provides that any
cost of living increase described in the regulations and based upon an
established broad-based index will not be treated as a material change if any
increase is funded ratably over the remaining period during which premiums are
required to be paid under the policy. To date, no regulations under this
provision have been issued.
If a Policy becomes a modified endowment contract, distributions that occur
during the policy year it becomes a modified endowment contract and any
subsequent policy year will be taxed as distributions from a modified
endowment contract. Distributions from a Policy within two years before it
becomes a modified endowment contract will be taxed in this manner. This means
that a distribution made from a Policy that is not a modified endowment
contract could later become taxable as a distribution from a modified
endowment contract.
Due to the Policy's flexibility, classification of a Policy as a modified
endowment contract will depend upon the circumstances of each Policy.
Accordingly, a prospective policy owner should contact a tax adviser before
purchasing a policy to determine the circumstances under which the Policy
would be a modified endowment contract. You should also contact a tax adviser
before paying any nonrepeating premiums or making any other change to,
including an exchange of, a Policy to determine whether such premium or change
would cause the Policy (or the new Policy in the case of an exchange) to be
treated as a modified endowment contract.
Under the Code, all modified endowment contracts, issued by us (or an
affiliated company) to the same policy owner during any calendar year will be
treated as one modified endowment contract for purposes of determining the
amount includable in gross income under Section 72(e) of the Code. Additional
rules may be promulgated under this provision to prevent avoidance of its
effects through serial contracts or otherwise. A life insurance policy
received in exchange for a modified endowment contract will also be treated as
a modified endowment contract.
Federal estate and state and local estate, inheritance, and other tax
consequences of ownership or receipt of Policy proceeds depend upon the
circumstances of each policy owner or beneficiary. A tax adviser should be
consulted for further information.
The Policies may be used in various arrangements, including nonqualified
deferred compensation or salary continuance plans, split dollar insurance
plans, executive bonus plans, retiree medical benefit plans and others. The
tax consequences of such plans may vary depending on the particular facts and
circumstances of each individual arrangement. Therefore, if you are
contemplating the use of such Policies in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a tax
adviser regarding the tax attributes of the particular arrangement. Moreover,
in recent years, Congress has adopted new rules relating to corporate owned
life insurance. Any business contemplating the purchase of a new life
insurance contract or a change in an existing contract should consult a tax
adviser.
It should be understood that the foregoing description of the federal income
tax consequences under the Policies is not exhaustive and that special rules
are provided with respect to situations not discussed. Statutory changes in
the Code, with varying effective dates, and regulations adopted thereunder may
also alter the tax consequences of specific factual situations. Due to the
complexity of the applicable laws, a person contemplating the purchase of a
variable life insurance policy or exercising elections under such a policy
should consult a tax adviser.
At the present time, we make no charge to the Variable Life Account for any
Federal, state or local taxes that we incur that may be attributable to such
Account or to the Policies. We, however, reserve the right in the future to
make a charge for any such tax or other economic burden resulting from the
application of the tax laws that we determine to be properly attributable to
the Variable Life Account or the Policies.
40
<PAGE>
Directors and Principal Management Officers of Minnesota Life
<TABLE>
<CAPTION>
Directors Principal Occupation
--------- --------------------
<C> <S>
Giulio Agostini Senior Vice President, Finance and Administrative
Services, 3M, St. Paul, Minnesota
Anthony L. Andersen Chair-Board of Directors, H. B. Fuller Company, St.
Paul, Minnesota (Adhesive Products) since June 1995,
prior thereto for more than five years President and
Chief Executive Officer, H. B. Fuller Company
Leslie S. Biller Vice Chairman and Chief Operating Officer, Wells
Fargo & Company, San Francisco, California (Banking)
John F. Grundhofer President, Chairman and Chief Executive Officer,
U.S. Bancorp, Minneapolis, Minnesota (Banking)
David S. Kidwell, Ph.D. Dean and Professor of Finance, The Curtis L. Carlson
School of Management, University of Minnesota,
Minneapolis, Minnesota
Reatha C. King, Ph.D. President and Executive Director, General Mills
Foundation, Minneapolis, Minnesota
Thomas E. Rohricht Of Counsel, Doherty, Rumble & Butler Professional
Association, St. Paul, Minnesota (Attorneys)
Robert L. Senkler Chairman of the Board, President and Chief Executive
Officer, Minnesota Life Insurance Company since
August 1995; prior thereto for more than five years
Vice President and Actuary, Minnesota Life Insurance
Company
Michael E. Shannon Chairman, Chief Financial and Administrative
Officer, Ecolab Inc., St. Paul, Minnesota (Develops
and Markets Cleaning and Sanitizing Products)
Frederick T. Weyerhaeuser Retired since April 1998, prior thereto Chairman and
Treasurer, Clearwater Investment Trust since May
1996, prior thereto for more than five years
Chairman, Clearwater Management Company, St. Paul,
Minnesota (Financial Management)
</TABLE>
Principal Officers (other than Directors)
<TABLE>
<CAPTION>
Name Position
---- --------
<C> <S>
John F. Bruder Senior Vice President
Keith M. Campbell Senior Vice President
Robert E. Hunstad Executive Vice President
James E. Johnson Senior Vice President and Actuary
Dennis E. Prohofsky Senior Vice President, General Counsel and Secretary
</TABLE>
<TABLE>
<CAPTION>
Name Position
---- --------
<C> <S>
Gregory S. Strong Senior Vice President and Chief Financial Officer
Terrence M. Sullivan Senior Vice President
Randy F. Wallake Senior Vice President
William N. Westhoff Senior Vice President and Treasurer
</TABLE>
41
<PAGE>
All Directors who are not also officers of Minnesota Life have had the
principal occupation (or employers) shown for at least five years. All
officers of Minnesota Life have been employed by us for at least five years
with the exception of Mr. Westhoff. Mr. Westhoff has been employed by
Minnesota Life since April 1998. Prior thereto, Mr. Westhoff was employed by
American Express Financial Corporation, Minneapolis, Minnesota, from August
1994 to October 1997 as Senior Vice President, Global Investments and from
November 1989 to July 1994 as Senior Vice President, Fixed Income Management.
Voting Rights
We will vote the Fund shares held in the various sub-accounts of the
Variable Life Account at regular and special shareholder meetings of the Funds
in accordance with your instructions. If, however, the 1940 Act or any
regulation thereunder should change and we determine that it is permissible to
vote the Fund shares in our own right, we may elect to do so. The number of
votes as to which you have the right to instruct will be determined by
dividing your Policy's actual cash value in a sub-account by the net asset
value per share of the corresponding Fund portfolio. Fractional shares will be
counted. The number of votes as to which you have the right to instruct will
be determined as of the date coincident with the date established by the Funds
for determining shareholders eligible to vote at the meeting of the Funds.
Voting instructions will be solicited in writing prior to such meeting in
accordance with procedures established by the Funds. We will vote Fund shares
held by the Variable Life Account as to which no instructions are received in
proportion to the voting instructions which are received from policy owners
with respect to all Policies participating in the Variable Life Account. Each
policy owner having a voting interest will receive proxy material, reports and
other material relating to the Funds.
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that shares be voted so as to
cause a change in subclassification or investment policies of the Funds or
approve or disapprove an investment advisory contract of the Funds. In
addition, we may disregard voting instructions in favor of changes in the
investment policies or the investment advisers of the Funds if we reasonably
disapprove of such changes. A change would be disapproved only
. if the proposed change is contrary to state law or disapproved by state
regulatory authorities on a determination that the change would be
detrimental to the interests of policy owners or
. if we determined that the change would be inconsistent with the investment
objectives of the Funds or would result in the purchase of securities for
the Funds which vary from the general quality and nature of investments and
investment techniques utilized by other separate accounts created by us or
any of our affiliates which have similar investment objectives.
In the event that we disregard voting instructions, a summary of that action
and the reason for such action will be included in your next semi-annual
report.
Distribution of Policies
The Policies will be sold by our state licensed life insurance agents who
are also registered representatives of Ascend Financial Services, Inc.
("Ascend Financial") or of other broker-dealers who have entered into selling
agreements with Ascend Financial. Ascend Financial acts as principal
underwriter for the Policies. Ascend Financial is a wholly-owned subsidiary of
Advantus Capital Management, Inc., which in turn is a wholly-owned subsidiary
of Minnesota Life.
Ascend Financial, whose address is 400 Robert Street North, St. Paul,
Minnesota 55101-2098, is a registered broker-dealer under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. Ascend Financial was incorporated in 1984 under the laws of the
State of Minnesota. The Policies are sold in the states where their sale is
lawful. The insurance underwriting and the determination of a proposed
insured's risk classification and whether to accept or reject an application
for a Policy is done in accordance with our rules and standards.
Commissions to registered representatives on the sale of Policies include:
up to 50 percent of gross premium in the first policy year; up to 6 percent of
the gross premium in policy years two through ten; up to 2 percent in policy
years thereafter; and 0 percent of nonrepeating premiums. This description of
commissions shows the maximum amount of commissions payable
42
<PAGE>
under the Variable Adjustable Life Insurance Policy for plans of insurance
described as protection and whole life insurance plans. The commissions
payable on premiums received for plans described as greater than whole life
plans will differ from the percentages shown above, as a first year commission
will be paid only on such amounts as we may classify as a first year premium,
based upon a whole life premium per $1,000 of face amount and a Policy face
amount of $100,000. On premiums received in excess of that amount we will pay
commissions at a rate of 4 percent.
In addition, Ascend Financial or we will pay, based uniformly on the sales
of insurance policies by registered representatives, credits which allow
registered representatives (Agents) who are responsible for sales of the
Policies to attend conventions and other meetings sponsored by us or our
affiliates for the purpose of promoting the sale of insurance and/or
investment products offered by us and our affiliates. Such credits may cover
the registered representatives' transportation, hotel accommodations, meals,
registration fees and the like. We may also pay registered representatives
additional amounts based upon their production and the persistency of life
insurance and annuity business placed with us.
Legal Matters
Legal matters in connection with federal securities laws applicable to the
issue and sale of the Variable Adjustable Life Policies have been passed upon
by Jones & Blouch L.L.P., 1025 Thomas Jefferson Street, N.W., Washington, D.C.
20007. All other legal matters, including the right to issue such Policies
under Minnesota law and applicable regulations thereunder, have been passed
upon by Donald F. Gruber, Esquire, 400 Robert Street North, St. Paul,
Minnesota 55101.
Legal Proceedings
As an insurance company, we are ordinarily involved in litigation. We are of
the opinion that such litigation is not material with respect to the Policies
or the Variable Life Account.
Year 2000 Computer Problems
The services we provide to the Separate Account and our policy owners depend
on the smooth functioning of our computer systems. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1990
because of the way that dates are encoded, stored and calculated. That failure
could have a negative impact on our ability and that of Advantus Capital to
provide services to policy owners. We have been actively working on necessary
changes to our computer systems to deal with the year 2000. Although there can
be no assurance of complete success, we believe that we will be able to
resolve these issues on a timely basis and that there will be no material
adverse impact on our ability to provide services to the Separate Account.
In addition, our operations could be impacted by our service providers' or
suppliers' year 2000 efforts. We have undertaken an initiative to assess the
efforts of organizations where there is a significant business relationship;
however there is no assurance that we will not be affected by year 2000
problems of other organizations.
Experts
Our financial statements and those of the Variable Life Account included in
this prospectus have been audited by KPMG Peat Marwick LLP, independent
auditors, 4200 Norwest Center, 90 South Seventh Street, Minneapolis, Minnesota
55402, whose reports thereon appears elsewhere herein, and have been so
included in reliance upon the report of KPMG Peat Marwick LLP and upon the
authority of said firm as experts in accounting and auditing.
Actuarial matters included in this prospectus have been examined by Jaymes
G. Hubbell, F.S.A., Second Vice President and Actuary of Minnesota Life, as
stated in his opinion filed as an exhibit to the Registration Statement.
Registration Statement
We have filed with the Securities and Exchange Commission a Registration
Statement under the Securities Act of 1933, as amended, with respect to the
Policies offered hereby. This prospectus does not contain all the information
set forth in the registration statement and amendments thereto and the
exhibits filed as a part thereof, to all of which reference is hereby made for
further information concerning the Variable Life Account, Minnesota Life, and
the Policies. Statements contained in this prospectus as to the contents of
Policies and other legal instruments are summaries, and reference is made to
such instruments as filed.
43
<PAGE>
Special Terms
As used in this prospectus, the following terms have the indicated meanings:
Actual Cash Value: the value of your Variable Life Account and guaranteed
principal account interest under a Policy. It is composed of a Policy's
interest in the guaranteed principal account and in one or more sub-accounts
of the Variable Life Account. The interest in each is valued separately. For
each Variable Life Account sub-account, the value is determined by multiplying
the current number of sub-account units credited to a Policy by the current
sub-account unit value. Actual cash value does not include the loan account.
Base Premium: the premium less any amount deducted from the premium for
additional benefits and, for VAL '95, for sub-standard risks.
Code: the Internal Revenue Code of 1986, as amended.
Funds: the mutual funds or separate investment portfolios within series
mutual funds which we have designated as an eligible investment for the
Variable Life Account, currently, Advantus Series Fund, Inc., its Portfolios
and the Templeton Developing Markets Fund, Class 2.
General Account: all of our assets other than those in the Variable Life
Account or in other separate accounts established by us.
Guaranteed Principal Account: the portion of the general account of
Minnesota Life which is attributable to Policies of this class, exclusive of
policy loans. It is not a separate account or a division of the general
account.
Loan Account: the portion of the general account attributable to policy
loans under Policies of this type. The loan account balance is the sum of all
outstanding loans under this Policy.
Net Single Premium: the amount of money necessary, at the insured's attained
age, to pay for all future guaranteed cost of insurance charges for the entire
lifetime of the insured, or for the coverage period in the case of extended
term insurance, without the payment of additional premium. This determination
shall assume that the current face amount of the Policy will remain constant
and that the Policy will perform at its assumed rate of return.
Nonrepeating Premium: a payment made to this Policy in addition to its
scheduled payments.
Policy Owner: the owner of a Policy.
Policy Value: the actual cash value of a Policy plus any policy loan.
Policy Year: a period of one year beginning with the policy date or a policy
anniversary.
Premium: a scheduled payment required for this Policy.
Unit: an accounting device used to determine the interest of a Policy in the
sub-accounts of the Variable Life Account.
Valuation Date: each date on which a Fund Portfolio is valued.
Valuation Period: the period between successive valuation dates measured
from the time of one determination to the next.
Variable Life Account: a separate investment account called the Minnesota
Life Variable Life Account, where the investment experience of its assets is
kept separate from our other assets.
We, Our, Us: Minnesota Life Insurance Company.
You, Your: the policy owner.
44
<PAGE>
Independent Auditors' Report
The Board of Trustees of Minnesota Life Insurance Company
and Policy Owners of Minnesota Life Variable Life Account:
We have audited the accompanying statements of assets and liabilities of the
Growth, Bond, Money Market, Asset Allocation, Mortgage Securities, Index 500,
Capital Appreciation, International Stock, Small Company, Value Stock, Small
Company Value, Global Bond, Index 400 Mid-Cap, Macro-Cap Value, Micro-Cap
Growth, Real Estate Securities and Templeton Development Markets Segregated
Sub-Accounts of Minnesota Life Variable Life Account (the Account), formerly
Minnesota Mutual Variable Life Account, as of December 31, 1998 and the related
statements of operations, changes in net assets and the financial highlights
for the periods presented. These financial statements and the financial
highlights are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investments owned at December 31, 1998 were confirmed to us by the
respective Sub-Account mutual fund, or for Advantus Series Fund, Inc., verified
by examination of the underlying portfolios. An audit also includes assessing
the accounting principles used and significant estimates made by management as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Growth, Bond, Money
Market, Asset Allocation, Mortgage Securities, Index 500, Capital Appreciation,
International Stock, Small Company, Value Stock, Small Company Value, Global
Bond, Index 400 Mid-Cap, Macro-Cap Value, Micro-Cap Growth, Real Estate
Securities and Templeton Development Markets Segregated Sub-Accounts of
Minnesota Life Variable Life Account at December 31, 1998 and the results of
their operations, changes in their net assets and the financial highlights for
the periods presented, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 26, 1999
45
<PAGE>
Minnesota Life Variable Life Account
Statements of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-----------------------------------------------------------------------------------------------------------
Money Asset Mortgage Index Capital International Small
Assets Growth Bond Market Allocation Securities 500 Appreciation Stock Company
------ ------------ ---------- ---------- ----------- ---------- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments in
shares of Advantus
Series Fund, Inc.:
Growth Portfolio,
38,074,136 shares
at net asset
value of $2.74
per share (cost
$84,713,621)..... $104,243,139 -- -- -- -- -- -- -- --
Bond Portfolio,
23,441,918 shares
at net asset
value of $1.31
per share (cost
$29,891,334)..... -- 30,657,462 -- -- -- -- -- -- --
Money Market
Portfolio,
10,248,099 shares
at net asset
value of $1.00
per share
(cost $10,248,099). -- -- 10,248,099 -- -- -- -- -- --
Asset Allocation
Portfolio,
61,085,540 shares
at net asset
value of $2.28
per share
(cost $111,865,358). -- -- -- 139,205,176 -- -- -- -- --
Mortgage Securi-
ties Portfolio,
10,771,049 shares
at net asset
value of $1.22
per share
(cost $12,636,193). -- -- -- -- 13,116,021 -- -- -- --
Index 500
Portfolio,
35,339,747 shares
at net asset
value of $3.91
per share
(cost $97,451,656). -- -- -- -- -- 138,175,797 -- -- --
Capital Apprecia-
tion Portfolio,
34,870,222 shares
at net asset
value of $3.54
per share
(cost $86,158,823). -- -- -- -- -- -- 123,311,563 -- --
International
Stock Portfolio,
52,547,586 shares
at net asset
value of $1.73
per share
(cost $84,422,558). -- -- -- -- -- -- -- 90,894,552 --
Small Company
Portfolio,
36,935,246 shares
at net asset
value of $1.68
per share
(cost $57,668,940). -- -- -- -- -- -- -- -- 61,877,291
------------ ---------- ---------- ----------- ---------- ----------- ----------- ---------- ----------
104,243,139 30,657,462 10,248,099 139,205,176 13,116,021 138,175,797 123,311,563 90,894,552 61,877,291
Receivable from
Minnesota Life for
policy purchase
payments.......... 175,141 79,233 49,273 206,498 55,860 646,823 213,548 180,455 233,235
Receivable for in-
vestments sold.... 129,299 55,057 188,830 189,625 5,873 115,259 83,604 64,140 43,026
------------ ---------- ---------- ----------- ---------- ----------- ----------- ---------- ----------
Total assets.... 104,547,579 30,791,752 10,486,202 139,601,299 13,177,754 138,937,879 123,608,715 91,139,147 62,153,552
------------ ---------- ---------- ----------- ---------- ----------- ----------- ---------- ----------
<CAPTION>
Liabilities
-----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payable for in-
vestments pur-
chased............ 175,141 79,233 49,273 206,498 55,860 646,823 213,548 180,455 233,235
Payable to Minne-
sota Life for pol-
icy terminations
and mortality and
expense charges... 129,299 55,057 188,830 189,625 5,873 115,259 83,604 64,140 43,026
------------ ---------- ---------- ----------- ---------- ----------- ----------- ---------- ----------
Total liabili-
ties............ 304,440 134,290 238,103 396,123 61,733 762,082 297,152 244,595 276,261
------------ ---------- ---------- ----------- ---------- ----------- ----------- ---------- ----------
NET ASSETS
APPLICABLE TO
POLICY OWNERS..... $104,243,139 30,657,462 10,248,099 139,205,176 13,116,021 138,175,797 123,311,563 90,894,552 61,877,291
============ ========== ========== =========== ========== =========== =========== ========== ==========
UNITS OUTSTANDING. 22,653,190 13,380,650 5,915,721 38,273,621 5,351,168 28,132,934 24,802,737 42,958,209 33,912,334
============ ========== ========== =========== ========== =========== =========== ========== ==========
NET ASSET VALUE
PER UNIT.......... $ 4.60 2.29 1.73 3.64 2.45 4.92 4.98 2.11 1.82
============ ========== ========== =========== ========== =========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
46
<PAGE>
Minnesota Life Variable Life Account
Statements of Assets and Liabilities (Continued)
December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
----------------------------------------------------------------------------
Small Macro- Micro- Templeton
Value Company Global Index 400 Cap Cap Real Estate Developing
Assets Stock Value Bond Mid-Cap Value Growth Securities Markets
------ ----------- ------- ------- --------- ------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments in shares of
Advantus Series Fund,
Inc.:
Value Stock Portfolio,
29,362,368 shares at
net asset value of
$1.76 per share (cost
$49,655,353)........... $51,663,668 -- -- -- -- -- -- --
Small Company Value
Portfolio, 816,134
shares at net asset
value of $.95 per share
(cost $757,506)........ -- 773,935 -- -- -- -- -- --
Global Bond Portfolio,
311,723 shares at net
asset value of $1.05
per share (cost
$340,096).............. -- -- 326,879 -- -- -- -- --
Index 400 Mid-Cap Port-
folio, 943,258 shares
at net asset value of
$1.15 per share (cost
$971,924).............. -- -- -- 1,084,202 -- -- -- --
Macro-Cap Value Portfo-
lio, 767,512 shares at
net asset value of
$1.14 per share (cost
$811,590).............. -- -- -- -- 874,651 -- -- --
Micro-Cap Growth Port-
folio, 749,528 shares
at net asset value of
$1.01 per share (cost
$653,059).............. -- -- -- -- -- 755,995 -- --
Real Estate Securities
Portfolio, 296,443
shares at net asset
value of $.83 per share
(cost $256,192)........ -- -- -- -- -- -- 246,595 --
Investment in Templeton
Variable Products Series
Fund:
Templeton Developing
Markets Fund--Class 2,
130,608 shares at net
asset value of $5.12
per share (cost
$608,489).............. -- -- -- -- -- -- -- 668,711
----------- ------- ------- --------- ------- ------- ------- -------
51,663,668 773,935 326,879 1,084,202 874,651 755,995 246,595 668,711
Receivable from Minne-
sota Life for policy
purchase payments....... 104,295 6,295 6,972 29,330 24,862 9,253 7,346 4,405
Receivable for invest-
ments sold.............. 38,753 312 61 555 515 763 23 223
----------- ------- ------- --------- ------- ------- ------- -------
Total assets.......... 51,806,716 780,542 333,912 1,114,087 900,028 766,011 253,964 673,339
----------- ------- ------- --------- ------- ------- ------- -------
<CAPTION>
Liabilities
-----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Payable for investments
purchased............... 104,295 6,295 6,972 29,330 24,862 9,253 7,346 4,405
Payable to Minnesota
Life for policy termina-
tions and mortality and
expense charges......... 38,753 312 61 555 515 763 23 223
----------- ------- ------- --------- ------- ------- ------- -------
Total liabilities..... 143,048 6,607 7,033 29,885 25,377 10,016 7,369 4,628
----------- ------- ------- --------- ------- ------- ------- -------
NET ASSETS APPLICABLE TO
POLICY OWNERS........... $51,663,668 773,935 326,879 1,084,202 874,651 755,995 246,595 668,711
=========== ======= ======= ========= ======= ======= ======= =======
UNITS OUTSTANDING....... 23,718,362 894,678 293,075 1,020,446 823,503 733,049 284,627 778,238
=========== ======= ======= ========= ======= ======= ======= =======
NET ASSET VALUE PER
UNIT.................... $ 2.18 0.86 1.12 1.05 1.06 1.03 0.87 0.86
=========== ======= ======= ========= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
47
<PAGE>
Minnesota Life Variable Life Account
Statements of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
---------------------------------------------------------------------------------------------------------
Money Asset Mortgage Index Capital International
Growth Bond Market Allocation Securities 500 Appreciation Stock
------------ ----------- ----------- ----------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income
distributions
from underlying
mutual fund
(note 4)......... $ 698,525 1,338,221 449,098 2,922,443 604,913 911,517 -- 2,121,828
Mortality and
expense charges
(note 3)......... (404,953) (129,237) (46,453) (587,038) (58,011) (547,730) (503,496) (418,056)
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Investment
income (loss)--
net............ 293,572 1,208,984 402,645 2,335,405 546,902 363,787 (503,496) 1,703,772
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Realized and
unrealized gains
(losses) on
investments--
net:
Realized gain
distributions
from underlying
mutual fund
(note 4)....... 11,109,561 281,896 -- 7,426,667 -- 571,352 5,324,035 2,088,998
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Realized gains on
sales of
investments:
Proceeds from
sales.......... 7,003,108 10,067,912 19,969,206 26,184,761 3,771,554 31,615,282 26,513,720 25,063,915
Cost of
investments
sold........... (24,628,270) (9,893,680) (19,969,206) (22,795,505) (3,652,500) (23,425,350) (20,848,774) (22,654,514)
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
2,374,838 174,232 -- 3,389,256 119,054 8,189,932 5,664,946 2,409,401
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net realized
gains on
investments.... 13,484,399 456,128 -- 10,815,923 119,054 8,761,284 10,988,981 4,498,399
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net change in
unrealized appre-
ciation or depre-
ciation of invest-
ments............. 11,101,163 (256,619) -- 11,996,966 3,276 17,656,536 17,334,011 (1,715,008)
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net gains on
investments.... 24,585,562 199,509 -- 22,812,889 122,330 26,417,820 28,322,992 2,783,391
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net increase in
net assets
resulting from
operations..... $ 24,879,134 1,408,493 402,645 25,148,294 669,232 26,781,607 27,819,496 4,487,163
============ =========== =========== =========== ========== =========== =========== ===========
<CAPTION>
Small
Company
------------
<S> <C>
Investment income
(loss):
Investment income
distributions
from underlying
mutual fund
(note 4)......... --
Mortality and
expense charges
(note 3)......... (265,824)
------------
Investment
income (loss)--
net............ (265,824)
------------
Realized and
unrealized gains
(losses) on
investments--
net:
Realized gain
distributions
from underlying
mutual fund
(note 4)....... --
------------
Realized gains on
sales of
investments:
Proceeds from
sales.......... 17,975,194
Cost of
investments
sold........... (17,656,969)
------------
318,225
------------
Net realized
gains on
investments.... 318,225
------------
Net change in
unrealized appre-
ciation or depre-
ciation of invest-
ments............. 876,621
------------
Net gains on
investments.... 1,194,846
------------
Net increase in
net assets
resulting from
operations..... 929,022
============
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
Minnesota Life Variable Life Account
Statements of Operations (Continued)
Year ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-----------------------------------------------------------------------------------------
Small Templeton
Value Company Global Index 400 Macro-Cap Micro-Cap Real Estate Developing
Stock Value(a) Bond(a) Mid-Cap(a) Value(a) Growth(a) Securities(a) Markets(a)
------------ -------- ------- ---------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income
distributions from
underlying mutual
fund (note 4)......... $ -- 8,491 15,866 5,286 3,488 -- 9,387 --
Mortality and expense
charges (note 3)...... (221,650) (961) (331) (1,123) (1,064) (1,067) (719) (900)
------------ ------- ------- -------- ------- -------- ------- -------
Investment income
(loss)--net......... (221,650) 7,530 15,535 4,163 2,424 (1,067) 8,668 (900)
------------ ------- ------- -------- ------- -------- ------- -------
Realized and
unrealized gains
(losses) on
investments--net:
Realized gain
distributions from
underlying mutual
fund (note 4)......... 67,256 -- 8,113 18,418 33,791 -- -- --
------------ ------- ------- -------- ------- -------- ------- -------
Realized gains on
sales of investments:
Proceeds from sales.. 14,868,851 93,721 27,025 293,103 102,220 103,427 37,726 16,519
Cost of investments
sold................ (14,819,476) (97,433) (26,487) (291,094) (98,709) (103,574) (39,357) (16,278)
------------ ------- ------- -------- ------- -------- ------- -------
49,375 (3,712) 538 2,009 3,511 (147) (1,631) 241
------------ ------- ------- -------- ------- -------- ------- -------
Net realized gains
(losses) on invest-
ments............... 116,631 (3,712) 8,651 20,427 37,302 (147) (1,631) 241
------------ ------- ------- -------- ------- -------- ------- -------
Net change in
unrealized
appreciation or
depreciation of
investments........... 863,403 16,429 (13,217) 112,278 63,061 102,936 (9,597) 60,222
------------ ------- ------- -------- ------- -------- ------- -------
Net gains (losses) on
investments......... 980,034 12,717 (4,566) 132,705 100,363 102,789 (11,228) 60,463
------------ ------- ------- -------- ------- -------- ------- -------
Net increase (de-
crease) in net as-
sets resulting from
operations.......... $ 758,385 20,247 10,969 136,868 102,787 101,722 (2,560) 59,563
============ ======= ======= ======== ======= ======== ======= =======
</TABLE>
- ------
(a) For the period from May 19, 1998, commencement of operations, to December
31, 1998.
See accompanying notes to financial statements.
49
<PAGE>
Minnesota Life Variable Life Account
Statements of Operations (Continued)
Year ended December 31, 1997
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-------------------------------------------------------------------------------------------------------
Money Asset Mortgage Index Capital International
Growth Bond Market Allocation Securities 500 Appreciation Stock
------------ ---------- ---------- ----------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income
distributions
from underlying
mutual fund
(note 4)......... $ 402,228 870,434 331,689 2,294,552 585,018 713,950 -- 1,700,559
Mortality and
expense charges
(note 3)......... (263,066) (88,316) (33,136) (450,565) (47,250) (345,963) (359,192) (315,047)
------------ ---------- ---------- ----------- ---------- ----------- ----------- -----------
Investment in-
come (loss)--
net............ 139,162 782,118 298,553 1,843,987 537,768 367,987 (359,192) 1,385,512
------------ ---------- ---------- ----------- ---------- ----------- ----------- -----------
Realized and
unrealized gains
(losses) on
investments--net:
Realized gain
distributions
from underlying
mutual fund
(note 4)......... 10,393,363 -- -- 4,763,693 -- 902,006 6,002,097 848,376
------------ ---------- ---------- ----------- ---------- ----------- ----------- -----------
Realized gains on
sales of
investments:
Proceeds from
sales.......... 15,684,889 7,023,299 9,785,041 23,263,361 3,450,756 16,510,404 17,747,694 17,240,951
Cost of invest-
ments sold..... (14,635,767) (6,842,596) (9,785,041) (20,785,498) (3,367,243) (12,299,647) (14,670,799) (14,680,146)
------------ ---------- ---------- ----------- ---------- ----------- ----------- -----------
1,049,122 180,703 -- 2,477,863 83,513 4,210,757 3,076,895 2,560,805
------------ ---------- ---------- ----------- ---------- ----------- ----------- -----------
Net realized
gains on in-
vestments...... 11,442,485 180,703 -- 7,241,556 83,513 5,112,763 9,078,992 3,409,181
------------ ---------- ---------- ----------- ---------- ----------- ----------- -----------
Net change in
unrealized
appreciation or
depreciation of
investments....... 3,414,900 561,234 -- 6,261,254 169,605 12,660,399 9,108,606 1,199,797
------------ ---------- ---------- ----------- ---------- ----------- ----------- -----------
Net gains on in-
vestments...... 14,857,385 741,937 -- 13,502,810 253,118 17,773,162 18,187,598 4,608,978
------------ ---------- ---------- ----------- ---------- ----------- ----------- -----------
Net increase in
net assets re-
sulting from
operations..... $ 14,996,547 1,524,055 298,553 15,346,797 790,886 18,141,149 17,828,406 5,994,490
============ ========== ========== =========== ========== =========== =========== ===========
<CAPTION>
Small Value
Company Stock
------------ -----------
<S> <C> <C>
Investment income
(loss):
Investment income
distributions
from underlying
mutual fund
(note 4)......... 579 402,534
Mortality and
expense charges
(note 3)......... (204,439) (138,510)
------------ -----------
Investment in-
come (loss)--
net............ (203,860) 264,024
------------ -----------
Realized and
unrealized gains
(losses) on
investments--net:
Realized gain
distributions
from underlying
mutual fund
(note 4)......... -- 3,195,383
------------ -----------
Realized gains on
sales of
investments:
Proceeds from
sales.......... 12,901,283 10,061,048
Cost of invest-
ments sold..... (12,333,703) (8,568,072)
------------ -----------
567,580 1,492,976
------------ -----------
Net realized
gains on in-
vestments...... 567,580 4,688,359
------------ -----------
Net change in
unrealized
appreciation or
depreciation of
investments....... 2,548,501 (516,947)
------------ -----------
Net gains on in-
vestments...... 3,116,081 4,171,412
------------ -----------
Net increase in
net assets re-
sulting from
operations..... 2,912,221 4,435,436
============ ===========
</TABLE>
See accompanying notes to financial statements.
50
<PAGE>
Minnesota Life Variable Life Account
Statements of Operations (continued)
Year ended December 31, 1996
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-------------------------------------------------------------------------------------------------------
Money Asset Mortgage Index Capital International
Growth Bond Market Allocation Securities 500 Appreciation Stock
----------- ---------- ----------- ----------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income
distributions
from underlying
mutual fund
(note 4)......... $ 278,451 603,154 294,271 2,095,397 499,341 476,493 -- 928,852
Mortality and
expense charges
(note 3)......... (173,630) (60,937) (30,589) (350,927) (39,632) (195,010) (255,630) (199,522)
----------- ---------- ----------- ----------- ---------- ----------- ----------- -----------
Investment
income (loss)--
net............. 104,821 542,217 263,682 1,744,470 459,709 281,483 (255,630) 729,330
----------- ---------- ----------- ----------- ---------- ----------- ----------- -----------
Realized and
unrealized gains
(losses) on
investments--net:
Realized gain
distributions
from underlying
mutual fund
(note 4)......... 2,616,611 108,728 -- 3,836,599 -- 246,659 1,271,186 1,016,871
----------- ---------- ----------- ----------- ---------- ----------- ----------- -----------
Realized gains on
sales of
investments:
Proceeds from
sales.......... 10,268,042 4,634,557 11,833,538 17,461,424 2,268,982 12,438,876 13,655,575 11,921,319
Cost of
investments
sold........... (9,164,050) (4,546,166) (11,833,538) (15,718,684) (2,242,472) (10,121,928) (11,287,215) (10,844,232)
----------- ---------- ----------- ----------- ---------- ----------- ----------- -----------
1,103,992 88,391 -- 1,742,740 26,510 2,316,948 2,368,360 1,077,087
----------- ---------- ----------- ----------- ---------- ----------- ----------- -----------
Net realized
gains on
investments..... 3,720,603 197,119 -- 5,579,339 26,510 2,563,607 3,639,546 2,093,958
----------- ---------- ----------- ----------- ---------- ----------- ----------- -----------
Net change in
unrealized
appreciation or
depreciation of
investments....... 1,398,787 (343,676) -- 682,688 (107,111) 4,756,817 4,331,602 4,335,633
----------- ---------- ----------- ----------- ---------- ----------- ----------- -----------
Net gains
(losses) on
investments..... 5,119,390 (146,557) -- 6,262,027 (80,601) 7,320,424 7,971,148 6,429,591
----------- ---------- ----------- ----------- ---------- ----------- ----------- -----------
Net increase in net
assets resulting
from operations... $ 5,224,211 395,660 263,682 8,006,497 379,108 7,601,907 7,715,518 7,158,921
=========== ========== =========== =========== ========== =========== =========== ===========
<CAPTION>
Small Value
Company Stock
----------- -----------
<S> <C> <C>
Investment income
(loss):
Investment income
distributions
from underlying
mutual fund
(note 4)......... 70,099 134,162
Mortality and
expense charges
(note 3)......... (136,946) (51,183)
----------- -----------
Investment
income (loss)--
net............. (66,847) 82,979
----------- -----------
Realized and
unrealized gains
(losses) on
investments--net:
Realized gain
distributions
from underlying
mutual fund
(note 4)......... 3,093,113 1,024,043
----------- -----------
Realized gains on
sales of
investments:
Proceeds from
sales.......... 8,855,781 3,885,317
Cost of
investments
sold........... (7,746,510) (3,415,633)
----------- -----------
1,109,271 469,684
----------- -----------
Net realized
gains on
investments..... 4,202,384 1,493,727
----------- -----------
Net change in
unrealized
appreciation or
depreciation of
investments....... (2,840,532) 1,239,111
----------- -----------
Net gains
(losses) on
investments..... 1,361,852 2,732,838
----------- -----------
Net increase in net
assets resulting
from operations... 1,295,005 2,815,817
=========== ===========
</TABLE>
See accompanying notes to financial statements.
51
<PAGE>
Minnesota Life Variable Life Account
Statements of Changes in Net Assets
Year ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
--------------------------------------------------------------------------------------------------------
Money Asset Mortgage Index Capital International
Growth Bond Market Allocation Securities 500 Appreciation Stock
------------ ---------- ----------- ----------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment
income (loss)--
net............ $ 293,572 1,208,984 402,645 2,335,405 546,902 363,787 (503,496) 1,703,772
Net realized
gains on
investments.... 13,484,399 456,128 -- 10,815,923 119,054 8,761,284 10,988,981 4,498,399
Net change in
unrealized
appreciation or
depreciation of
investments.... 11,101,163 (256,619) -- 11,996,966 3,276 17,656,536 17,334,011 (1,715,008)
------------ ---------- ----------- ----------- ---------- ----------- ----------- -----------
Net increase in
net assets
resulting from
operations...... 24,879,134 1,408,493 402,645 25,148,294 669,232 26,781,607 27,819,496 4,487,163
------------ ---------- ----------- ----------- ---------- ----------- ----------- -----------
Policy
transactions
(notes 3, 4 and
5):
Policy purchase
payments....... 39,789,274 18,197,885 22,597,674 36,353,193 5,839,283 55,781,942 33,631,794 39,752,735
Policy
withdrawals and
charges........ (26,598,154) (9,938,676) (19,922,753) (25,597,723) (3,713,544) (31,067,552) (26,010,224) (24,645,860)
------------ ---------- ----------- ----------- ---------- ----------- ----------- -----------
Increase in net
assets from
policy
transactions.... 13,191,120 8,259,209 2,674,921 10,755,470 2,125,739 24,714,390 7,621,570 15,106,875
------------ ---------- ----------- ----------- ---------- ----------- ----------- -----------
Increase in net
assets.......... 38,070,254 9,667,702 3,077,566 35,903,764 2,794,971 51,495,997 35,441,066 19,594,038
Net assets at the
beginning of
year............ 66,172,885 20,989,760 7,170,533 103,301,412 10,321,050 86,679,800 87,870,497 71,300,514
------------ ---------- ----------- ----------- ---------- ----------- ----------- -----------
Net assets at the
end of year..... $104,243,139 30,657,462 10,248,099 139,205,176 13,116,021 138,175,797 123,311,563 90,894,552
============ ========== =========== =========== ========== =========== =========== ===========
<CAPTION>
Small
Company
------------
<S> <C>
Operations:
Investment
income (loss)--
net............ (265,824)
Net realized
gains on
investments.... 318,225
Net change in
unrealized
appreciation or
depreciation of
investments.... 876,621
------------
Net increase in
net assets
resulting from
operations...... 929,022
------------
Policy
transactions
(notes 3, 4 and
5):
Policy purchase
payments....... 29,383,489
Policy
withdrawals and
charges........ (17,709,370)
------------
Increase in net
assets from
policy
transactions.... 11,674,119
------------
Increase in net
assets.......... 12,603,141
Net assets at the
beginning of
year............ 49,274,150
------------
Net assets at the
end of year..... 61,877,291
============
</TABLE>
See accompanying notes to financial statements.
52
<PAGE>
Minnesota Life Variable Life Account
Statements of Changes in Net Assets (Continued)
Year ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-------------------------------------------------------------------------------------------
Small Templeton
Value Company Global Index 400 Macro-Cap Micro-Cap Real Estate Developing
Stock Value(a) Bond(a) Mid-Cap(a) Value(a) Growth(a) Securities(a) Markets(a)
------------ -------- ------- ---------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment income
(loss)--net........... $ (221,650) 7,530 15,535 4,163 2,424 (1,067) 8,668 (900)
Net realized gains
(losses) on invest-
ments................. 116,631 (3,712) 8,652 20,427 37,302 (147) (1,631) 241
Net change in
unrealized apprecia-
tion or
depreciation of in-
vestments............. 863,403 16,429 (13,217) 112,278 63,061 102,936 (9,597) 60,222
------------ ------- ------- --------- -------- -------- ------- -------
Net increase (decrease)
in net assets resulting
from
operations............. 758,385 20,247 10,970 136,868 102,787 101,722 (2,560) 59,563
------------ ------- ------- --------- -------- -------- ------- -------
Policy transactions
(notes 3, 4 and 5):
Policy purchase pay-
ments................. 28,395,796 846,448 342,604 1,239,314 873,020 756,634 286,162 676,668
Policy withdrawals and
charges............... (14,647,201) (92,760) (26,694) (291,980) (101,156) (102,360) (37,007) (67,520)
------------ ------- ------- --------- -------- -------- ------- -------
Increase in net assets
from policy transac-
tions.................. 13,748,593 753,688 315,910 947,334 771,864 654,274 249,155 609,148
------------ ------- ------- --------- -------- -------- ------- -------
Increase in net assets.. 14,506,978 773,935 326,880 1,084,202 874,651 755,995 246,595 668,711
Net assets at the begin-
ning of year........... 37,156,690 -- -- -- -- -- -- --
------------ ------- ------- --------- -------- -------- ------- -------
Net assets at the end of
year................... $ 51,663,668 773,935 326,880 1,084,202 874,651 755,995 246,595 668,711
============ ======= ======= ========= ======== ======== ======= =======
</TABLE>
- ------
(a) For the period from May 19, 1998, commencement of operations, to December
31, 1998.
See accompanying notes to financial statements.
53
<PAGE>
Minnesota Life Variable Life Account
Statements of Changes in Net Assets (Continued)
Year ended December 31, 1997
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-------------------------------------------------------------------------------------------------------
Money Asset Mortgage Index Capital International
Growth Bond Market Allocation Securities 500 Appreciation Stock
------------ ---------- ---------- ----------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment in-
come (loss)--
net............ $ 139,162 782,118 298,553 1,843,987 537,768 367,987 (359,192) 1,385,512
Net realized
gains on in-
vestments...... 11,442,485 180,703 -- 7,241,556 83,513 5,112,763 9,078,992 3,409,181
Net change in
unrealized ap-
preciation or
depreciation of
investments.... 3,414,900 561,234 -- 6,261,254 169,605 12,660,399 9,108,606 1,199,797
------------ ---------- ---------- ----------- ---------- ----------- ----------- -----------
Net increase in
net assets re-
sulting from op-
erations........ 14,996,547 1,524,055 298,553 15,346,797 790,886 18,141,149 17,828,406 5,994,490
------------ ---------- ---------- ----------- ---------- ----------- ----------- -----------
Policy transac-
tions (notes 3,
4 and 5):
Policy purchase
payments....... 24,785,458 11,710,496 10,151,149 30,593,582 4,047,794 34,152,463 28,190,241 32,014,886
Policy withdraw-
als and
charges........ (15,421,823) (6,934,983) (9,751,905) (22,812,796) (3,403,506) (16,164,441) (17,388,503) (16,925,904)
------------ ---------- ---------- ----------- ---------- ----------- ----------- -----------
Increase in net
assets from pol-
icy transac-
tions........... 9,363,635 4,775,513 399,244 7,780,786 644,288 17,988,022 10,801,738 15,088,982
------------ ---------- ---------- ----------- ---------- ----------- ----------- -----------
Increase in net
assets.......... 24,360,182 6,299,568 697,797 23,127,583 1,435,174 36,129,171 28,630,144 21,083,472
Net assets at the
beginning of
year............ 41,812,703 14,690,192 6,472,736 80,173,829 8,885,876 50,550,629 59,240,353 50,217,042
------------ ---------- ---------- ----------- ---------- ----------- ----------- -----------
Net assets at the
end of year..... $ 66,172,885 20,989,760 7,170,533 103,301,412 10,321,050 86,679,800 87,870,497 71,300,514
============ ========== ========== =========== ========== =========== =========== ===========
<CAPTION>
Small Value
Company Stock
------------ -----------
<S> <C> <C>
Operations:
Investment in-
come (loss)--
net............ (203,860) 264,024
Net realized
gains on in-
vestments...... 567,580 4,688,359
Net change in
unrealized ap-
preciation or
depreciation of
investments.... 2,548,501 (516,947)
------------ -----------
Net increase in
net assets re-
sulting from op-
erations........ 2,912,221 4,435,436
------------ -----------
Policy transac-
tions (notes 3,
4 and 5):
Policy purchase
payments....... 25,428,738 25,430,667
Policy withdraw-
als and
charges........ (12,696,844) (9,922,538)
------------ -----------
Increase in net
assets from pol-
icy transac-
tions........... 12,731,894 15,508,129
------------ -----------
Increase in net
assets.......... 15,644,115 19,943,565
Net assets at the
beginning of
year............ 33,630,035 17,213,125
------------ -----------
Net assets at the
end of year..... 49,274,150 37,156,690
============ ===========
</TABLE>
See accompanying notes to financial statements.
54
<PAGE>
Minnesota Life Variable Life Account
Statements of Changes in Net Assets (Continued)
Year ended December 31, 1996
<TABLE>
<CAPTION>
Segregated Sub-Accounts
--------------------------------------------------------------------------------------------------------
Money Asset Mortgage Index Capital International
Growth Bond Market Allocation Securities 500 Appreciation Stock
------------ ---------- ----------- ----------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment in-
come (loss)--
net............ $ 104,821 542,217 263,682 1,744,470 459,709 281,483 (255,630) 729,330
Net realized
gains on
investments.... 3,720,603 197,119 -- 5,579,339 26,510 2,563,607 3,639,546 2,093,958
Net change in
unrealized
appreciation or
depreciation of
investments.... 1,398,787 (343,676) -- 682,688 (107,111) 4,756,817 4,331,602 4,335,633
------------ ---------- ----------- ----------- ---------- ----------- ----------- -----------
Net increase in
net assets
resulting from
operations...... 5,224,211 395,660 263,682 8,006,497 379,108 7,601,907 7,715,518 7,158,921
------------ ---------- ----------- ----------- ---------- ----------- ----------- -----------
Policy transac-
tions (notes 3,
4 and 5):
Policy purchase
payments....... 18,240,045 8,476,494 12,682,354 27,630,678 3,385,663 26,341,081 22,471,971 23,422,864
Policy withdraw-
als and
charges........ (10,094,412) (4,573,620) (11,802,949) (17,110,497) (2,229,350) (12,243,866) (13,399,945) (11,721,797)
------------ ---------- ----------- ----------- ---------- ----------- ----------- -----------
Increase in net
assets from pol-
icy transac-
tions........... 8,145,633 3,902,874 879,405 10,520,181 1,156,313 14,097,215 9,072,026 11,701,067
------------ ---------- ----------- ----------- ---------- ----------- ----------- -----------
Increase in net
assets.......... 13,369,844 4,298,534 1,143,087 18,526,678 1,535,421 21,699,122 16,787,544 18,859,988
Net assets at the
beginning of
year............ 28,442,859 10,391,658 5,329,649 61,647,151 7,350,455 28,851,507 42,452,809 31,357,054
------------ ---------- ----------- ----------- ---------- ----------- ----------- -----------
Net assets at the
end of year..... $ 41,812,703 14,690,192 6,472,736 80,173,829 8,885,876 50,550,629 59,240,353 50,217,042
============ ========== =========== =========== ========== =========== =========== ===========
<CAPTION>
Small Value
Company Stock
----------- -----------
<S> <C> <C>
Operations:
Investment in-
come (loss)--
net............ (66,847) 82,979
Net realized
gains on
investments.... 4,202,384 1,493,727
Net change in
unrealized
appreciation or
depreciation of
investments.... (2,840,532) 1,239,111
----------- -----------
Net increase in
net assets
resulting from
operations...... 1,295,005 2,815,817
----------- -----------
Policy transac-
tions (notes 3,
4 and 5):
Policy purchase
payments....... 20,175,123 12,940,411
Policy withdraw-
als and
charges........ (8,718,835) (3,834,134)
----------- -----------
Increase in net
assets from pol-
icy transac-
tions........... 11,456,288 9,106,277
----------- -----------
Increase in net
assets.......... 12,751,293 11,922,094
Net assets at the
beginning of
year............ 20,878,742 5,291,031
----------- -----------
Net assets at the
end of year..... 33,630,035 17,213,125
=========== ===========
</TABLE>
See accompanying notes to financial statements.
55
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements
(1) Organization
The Minnesota Life Variable Life Account (the Account), formerly Minnesota
Mutual Variable Life Account, was established on October 21, 1985 as a
segregated asset account of Minnesota Life Insurance Company (Minnesota Life),
formerly The Minnesota Mutual Life Insurance Company, under Minnesota law and
is registered as a unit investment trust under the Investment Company Act of
1940 (as amended). There are currently two types of variable life policies each
consisting of seventeen segregated sub-accounts to which policy owners may
allocate their purchase payments. The financial statements presented herein
include both types of variable life policies, Variable Adjustable Life and
Variable Adjustable Life Second Death, offered by the Account.
The assets of each segregated sub-account are held for the exclusive benefit
of the variable life policy owners and are not chargeable with liabilities
arising out of the business conducted by any other account or by Minnesota
Life. Variable life policy owners allocate their purchase payments to one or
more of the seventeen segregated sub-accounts. Such payments are then invested
in shares of Advantus Series Fund, Inc. (the Fund) and Templeton Variable
Products Series Fund (Underlying Funds). The Advantus Series Fund, Inc. was
organized by Minnesota Life as the investment vehicle for its variable life
insurance policies and variable annuity contracts. Each of the Underling Funds
is registered under the Investment Company Act of 1940 (as amended) as a
diversified, open-end management investment company.
Payments allocated to the Growth, Bond, Money Market, Asset Allocation,
Mortgage Securities, Index 500, Capital Appreciation, International Stock,
Small Company, Value Stock, Small Company Value, Global Bond, Index 400 Mid-
Cap, Macro-Cap Value, Micro-Cap Growth, Real Estate Securities and Templeton
Development Markets segregated sub-accounts are invested in shares of the
Growth, Bond, Money Market, Asset Allocation, Mortgage Securities, Index 500,
Capital Appreciation, International Stock, Small Company, Value Stock, Small
Company Value, Global Bond, Index 400 Mid-Cap, Macro-Cap Value, Micro-Cap
Growth, Real Estate Securities and Templeton Development Markets Portfolios of
the Fund, respectively.
Ascend Financial Services, Inc. acts as the underwriter for the Account.
Advantus Capital Management, Inc. acts as the investment adviser for the Fund.
Ascend Financial Services, Inc. is a wholly-owned subsidiary of Advantus
Capital Management, Inc. and Advantus Capital Management, Inc. is a wholly-
owned subsidiary of Minnesota Life.
(2) Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts in the financial statements. Actual results
could differ from those estimates.
Investments in Advantus Series Fund, Inc.
Investments in shares of the Fund portfolios are stated at market value which
is the net asset value per share as determined daily by the Fund. Investment
transactions are accounted for on the date the shares are purchased or sold.
The cost of investments sold is determined on the average cost method. All
dividend distributions received from the Fund are reinvested in additional
shares of the Fund and are recorded by the sub-accounts on the ex-dividend
date.
Federal Income Taxes
The Account is treated as part of Minnesota Life for federal income tax
purposes. Under current interpretations of existing federal income tax law, no
income taxes are payable on investment income or capital gain distributions
received by the Account from the Fund.
56
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements (continued)
(3) Mortality and Expense and Other Policy Charges
The mortality and expense charge paid to Minnesota Life is computed daily and
is equal, on an annual basis, to .50 percent of the average daily net assets of
the Account. This charge is an expense of the Account and is deducted daily
from net assets of the Account.
Policy purchase payments are reflected net of the following charges paid to
Minnesota Life:
A basic sales load of 7 percent is deducted from each premium payment. A
first year sales load not to exceed 23 percent may also be deducted. Total
sales charges deducted from premium payments for the years ended December
31, 1998, 1997 and 1996 amounted to $23,671,583, $19,600,016 and
$13,357,161, respectively.
An underwriting charge is deducted from first year purchase payments in
an amount not to exceed $5 per $1,000 of face amount of insurance. The
amount may vary by the age of the insured and the premium level for a given
amount of insurance. The underwriting charge is paid for administrative
costs associated with issuance or adjustment of policies. Total
underwriting charges deducted from premium payments for the years ended
December 31, 1998, 1997 and 1996 amounted to $11,866,348, $10,756,148 and
$6,155,712, respectively.
A premium tax charge in the amount of 2.5 percent is deducted from each
premium payment. Premium taxes are paid to state and local governments.
Total premium tax charges deducted from premium payments for the years
ended December 31, 1998, 1997 and 1996 amounted to $5,549,756, $4,479,422
and $3,465,457, respectively.
A face amount guarantee charge of 1.5 percent is deducted from each
Variable Adjustable Life policy premium payment. The charge is paid for the
guarantee that the death benefit will always be at least equal to the
current face amount of insurance regardless of the investment performance.
Total face amount guarantee charges deducted from premium payments for the
years ended December 31, 1998, 1997 and 1996 amounted to $2,625,973,
$2,188,497 and $1,794,822, respectively.
Beginning in 1996, a federal tax charge of 1.25 percent is deducted from
each Variable Adjustable Life Second Death policy premium payment. The
federal tax charge is paid to offset additional corporate federal income
taxes incurred by Minnesota Life under the Omnibus Budget Reconciliation
Act of 1990. Total federal tax charges for the years ended December 31,
1998, 1997 and 1996 amounted to $293,094, $158,590 and $14,298,
respectively.
In addition to deductions from premium payments, an administration charge,
certain transaction charges, a cost of insurance charge and a charge for sub-
standard risks, if any, are assessed from the actual cash value of each policy.
In addition, a face amount guarantee charge is assessed from the actual cash
value of each Variable Adjustable Second Death policy. These charges are paid
by redeeming units of the Account held by the individual policy owner. The
administration charge is $60 for each policy year for Variable Adjustable Life
policies and $120 for each policy year for Variable Adjustable Life Second
Death policies. The transaction charges are for expenses incurred by Minnesota
Life for processing certain transactions. A charge of $25 is assessed for each
policy adjustment. A charge, not to exceed $10, may be assessed for each
transfer of actual cash value among the segregated sub-accounts. The face
amount guarantee charge is guaranteed not to exceed 3 cents per thousand
dollars of face amount per month.
57
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements (continued)
(3) Mortality and Expense and Other Policy Charges (continued)
The cost of insurance charge varies with the amount of insurance, the
insured's age, sex, risk class, level of scheduled premium and duration of the
policy. The charge for substandard risks is for providing death benefits for
policies which have mortality risks in excess of the standard.
The total of cash value charges for the years ended December 31, 1998, 1997
and 1996 for each segregated sub-account are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Growth $6,634,203 $4,939,701 $3,958,312
Bond 2,823,226 2,200,814 1,780,681
Money Market 887,191 777,111 741,727
Asset Allocation 8,357,447 7,770,546 7,673,171
Mortgage Securities 1,109,636 925,967 859,703
Index 500 9,049,753 6,357,141 4,389,029
Capital Appreciation 7,338,162 6,374,197 5,701,873
International Stock 7,798,999 6,665,104 5,145,385
Small Company 5,816,447 5,041,725 3,921,958
Value Stock 5,414,078 3,775,010 1,802,043
Small Company Value 30,916 -- --
Global Bond 11,215 -- --
Index 400 Mid-Cap 28,011 -- --
Macro-Cap Value 31,069 -- --
Micro-Cap Growth 28,588 -- --
Real Estate Securities 9,868 -- --
Templeton Developing Markets 22,325 -- --
</TABLE>
(4) Investment Transactions
The Account's purchases of Fund shares, including reinvestment of dividend
distributions, were as follows during the years ended December 31, 1997, 1996
and 1995:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Growth Portfolio $51,597,361 $35,581,049 $21,135,107
Bond Portfolio 19,818,000 12,580,930 9,188,376
Money Market Portfolio 23,046,773 10,482,839 12,978,090
Asset Allocation Portfolio 46,702,304 37,651,827 33,562,674
Mortgage Securities Portfolio 6,444,196 4,632,812 3,885,004
Index 500 Portfolio 57,264,811 35,768,419 27,064,233
Capital Appreciation Portfolio 38,955,829 34,192,337 23,743,157
International Stock Portfolio 43,963,560 34,563,821 25,368,587
Small Company Portfolio 29,383,488 25,429,317 23,338,335
Value Stock Portfolio 28,463,051 29,028,584 14,098,616
Small Company Value Portfolio 854,939 -- --
Global Bond Portfolio 366,583 -- --
Index 400 Mid-Cap Portfolio 1,263,018 -- --
Macro-Cap Value Portfolio 910,298 -- --
Micro-Cap Growth Portfolio 756,633 -- --
Real Estate Securities Portfolio 295,549 -- --
Templeton Developing Markets Portfolio 624,766 -- --
</TABLE>
58
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements (continued)
(5) Unit Activity from Contract Transactions
Transactions in units for each segregated sub-account for the years ended
December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Segregated Sub-Accounts
--------------------------------------------------------------
Money Asset Mortgage
Growth Bond Market Allocation Securities
---------- ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1995 12,822,494 5,340,539 3,509,791 27,633,273 3,616,256
Policy purchase
payments 7,527,990 4,397,925 8,165,940 11,761,903 1,651,580
Deductions for policy
withdrawals and
charges (4,174,113) (2,372,242) (7,592,940) (7,290,581) (1,092,188)
---------- ---------- ----------- ----------- ----------
Units outstanding at
December 31, 1996 16,176,371 7,366,222 4,082,791 32,104,595 4,175,648
Policy purchase
payments 8,261,616 5,661,131 6,242,859 11,295,279 1,827,938
Deductions for policy
withdrawals and
charges (5,153,568) (3,347,910) (6,002,049) (8,457,357) (1,538,969)
---------- ---------- ----------- ----------- ----------
Units outstanding at
December 31, 1997 19,284,419 9,679,443 4,323,601 34,942,517 4,464,617
Policy purchase
payments 10,210,991 8,153,555 13,291,240 11,321,429 2,442,614
Deductions for policy
withdrawals and
charges (6,842,220) (4,452,348) (11,699,120) (7,990,325) (1,556,063)
---------- ---------- ----------- ----------- ----------
Units outstanding at
December 31, 1998 22,653,190 13,380,650 5,915,721 38,273,621 5,351,168
========== ========== =========== =========== ==========
<CAPTION>
Segregated Sub-Accounts
--------------------------------------------------------------
Index Capital International Small Value
500 Appreciation Stock Company Stock
---------- ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1995 11,917,281 16,587,673 20,883,317 13,089,758 3,864,294
Policy purchase
payments 9,927,022 7,957,386 14,398,443 12,096,257 8,210,018
Deductions for policy
withdrawals and
charges (4,593,774) (4,766,785) (7,225,632) (5,267,965) (2,425,981)
---------- ---------- ----------- ----------- ----------
Units outstanding at
December 31, 1996 17,250,529 19,778,274 28,056,128 19,918,050 9,648,331
Policy purchase
payments 9,815,943 8,385,341 16,284,208 14,622,555 12,392,543
Deductions for policy
withdrawals and
charges (4,632,985) (5,177,010) (8,575,503) (7,333,234) (4,767,664)
---------- ---------- ----------- ----------- ----------
Units outstanding at
December 31, 1997 22,433,487 22,986,605 35,764,833 27,207,371 17,273,210
Policy purchase
payments 12,909,414 8,023,992 18,838,978 16,824,546 13,385,774
Deductions for policy
withdrawals and
charges (7,209,967) (6,207,860) (11,645,602) (10,119,583) (6,940,622)
---------- ---------- ----------- ----------- ----------
Units outstanding at
December 31, 1998 28,132,934 24,802,737 42,958,209 33,912,334 23,718,362
========== ========== =========== =========== ==========
</TABLE>
59
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements (continued)
(5) Unit Activity from Contract Transactions (continued)
<TABLE>
<CAPTION>
Segregated Sub-Accounts
------------------------------------------------------
Macro- Micro-
Small Company Global Index 400 Cap Cap
Value Bond Mid-Cap Value Growth
------------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1997 -- -- -- -- --
Policy purchase
payments 1,006,556 318,188 1,315,286 927,227 847,841
Deductions for policy
withdrawals and
charges (111,878) (25,113) (294,840) (103,724) (114,792)
--------- ------- --------- -------- --------
Units outstanding at
December 31, 1998 894,678 293,075 1,020,446 823,503 733,049
========= ======= ========= ======== ========
<CAPTION>
Segregated Sub-Accounts
------------------------
Templeton
Real Estate Developing
Securities Markets
------------- ----------
<S> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1997 -- --
Policy purchase
payments 327,276 877,028
Deductions for policy
withdrawals and
charges (42,649) (98,790)
--------- -------
Units outstanding at
December 31, 1998 284,627 778,238
========= =======
</TABLE>
60
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements (continued)
(6) Financial Highlights
The following tables for each segregated sub-account show certain data for an
accumulation unit outstanding during the periods indicated:
Growth
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1998 1997 1996 1995 1994
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $3.43 2.59 2.22 1.79 1.79
----- ---- ---- ---- ----
Income from investment operations:
Net investment income .01 .01 .01 .01 .01
Net gains or losses on securities (both realized
and unrealized) 1.16 .83 .36 .42 (.01)
----- ---- ---- ---- ----
Total from investment operations 1.17 .84 .37 .43 --
----- ---- ---- ---- ----
Unit value, end of year $4.60 3.43 2.59 2.22 1.79
===== ==== ==== ==== ====
Bond
<CAPTION>
Year ended December 31,
--------------------------
1998 1997 1996 1995 1994
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $2.17 1.99 1.95 1.63 1.72
----- ---- ---- ---- ----
Income (loss) from investment operations:
Net investment income .10 .09 .08 .05 .05
Net gains or losses on securities (both realized
and unrealized) .02 .09 (.04) .27 (.14)
----- ---- ---- ---- ----
Total from investment operations .12 .18 .04 .32 (.09)
----- ---- ---- ---- ----
Unit value, end of year $2.29 2.17 1.99 1.95 1.63
===== ==== ==== ==== ====
Money Market
<CAPTION>
Year ended December 31,
--------------------------
1998 1997 1996 1995 1994
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $1.66 1.58 1.52 1.45 1.40
----- ---- ---- ---- ----
Income from investment operations:
Net investment income .07 .08 .06 .07 .05
----- ---- ---- ---- ----
Total from investment operations .07 .08 .06 .07 .05
----- ---- ---- ---- ----
Unit value, end of year $1.73 1.66 1.58 1.52 1.45
===== ==== ==== ==== ====
Asset Allocation
<CAPTION>
Year ended December 31,
--------------------------
1998 1997 1996 1995 1994
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $2.96 2.50 2.23 1.79 1.83
----- ---- ---- ---- ----
Income (loss) from investment operations:
Net investment income .06 .06 .06 .05 .03
Net gains or losses on securities (both realized
and unrealized) .62 .40 .21 .39 (.07)
----- ---- ---- ---- ----
Total from investment operations .68 .46 .27 .44 (.04)
----- ---- ---- ---- ----
Unit value, end of year $3.64 2.96 2.50 2.23 1.79
===== ==== ==== ==== ====
</TABLE>
61
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements (continued)
(6) Financial Highlights (continued)
Mortgage Securities
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1998 1997 1996 1995 1994
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $2.31 2.13 2.03 1.73 1.80
----- ---- ---- ---- ----
Income (loss) from investment operations:
Net investment income .11 .13 .12 .11 .06
Net gains or losses on securities (both real-
ized and unrealized) .03 .05 (.02) .19 (.14)
----- ---- ---- ---- ----
Total from investment operations .14 .18 .10 .30 (.07)
----- ---- ---- ---- ----
Unit value, end of year $2.45 2.31 2.13 2.03 1.73
===== ==== ==== ==== ====
Index 500
<CAPTION>
Year ended December 31,
-----------------------------
1998 1997 1996 1995 1994
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $3.86 2.93 2.42 1.78 1.77
----- ---- ---- ---- ----
Income from investment operations:
Net investment income .01 .02 .02 .02 .02
Net gains or losses on securities (both real-
ized and unrealized) 1.05 .91 .49 .62 (.01)
----- ---- ---- ---- ----
Total from investment operations 1.06 .93 .51 .64 .01
----- ---- ---- ---- ----
Unit value, end of year $4.92 3.86 2.93 2.42 1.78
===== ==== ==== ==== ====
Capital Appreciation
<CAPTION>
Year ended December 31,
-----------------------------
1998 1997 1996 1995 1994
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $3.82 3.00 2.56 2.10 2.06
----- ---- ---- ---- ----
Income from investment operations:
Net investment income (loss) (.02) (.02) (.01) (.01) (.01)
Net gains or losses on securities (both real-
ized and unrealized) 1.18 .84 .45 .47 .05
----- ---- ---- ---- ----
Total from investment operations 1.16 .82 .44 .46 .04
----- ---- ---- ---- ----
Unit value, end of year $4.98 3.82 3.00 2.56 2.10
===== ==== ==== ==== ====
International Stock
<CAPTION>
Year ended December 31,
-----------------------------
1998 1997 1996 1995 1994
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $1.99 1.79 1.50 1.32 1.33
----- ---- ---- ---- ----
Income (loss) from investment operations:
Net investment income (loss) .04 .04 .03 (.01) .03
Net gains or losses on securities (both real-
ized and unrealized) .08 .16 .26 .19 (.04)
----- ---- ---- ---- ----
Total from investment operations .12 .20 .29 .18 (.01)
----- ---- ---- ---- ----
Unit value, end of year $2.11 1.99 1.79 1.50 1.32
===== ==== ==== ==== ====
</TABLE>
62
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements (continued)
(6) Financial Highlights (continued)
Small Company
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1998 1997 1996 1995 1994
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of period $1.81 1.69 1.59 1.21 1.15
----- ---- ---- ---- ----
Income from investment operations:
Net investment income (loss) (.01) (.01) -- (.01) --
Net gains or losses on securities (both realized
and unrealized) .02 .13 .10 .39 .06
----- ---- ---- ---- ----
Total from investment operations .01 .12 .10 .38 .06
----- ---- ---- ---- ----
Unit value, end of period $1.82 1.81 1.69 1.59 1.21
===== ==== ==== ==== ====
</TABLE>
Value Stock
<TABLE>
<CAPTION>
Year ended December
31,
---------------------
Period from
May 2, 1994*
to December
1998 1997 1996 1995 31, 1994
----- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of period $2.15 1.78 1.37 1.04 1.00
----- ---- ---- ---- ----
Income from investment operations:
Net investment income (loss) (.01) .02 .01 .01 .02
Net gains or losses on securities (both re-
alized and unrealized) .04 .35 .40 .32 .02
----- ---- ---- ---- ----
Total from investment operations .03 .37 .41 .33 .04
----- ---- ---- ---- ----
Unit value, end of period $2.18 2.15 1.78 1.37 1.04
===== ==== ==== ==== ====
</TABLE>
Small Company Value
<TABLE>
<CAPTION>
Period from
May 19, 1998*
to December
31, 1998
-------------
<S> <C>
Unit value, beginning of
period $1.00
-----
Income (loss) from in-
vestment operations:
Net investment income .02
Net gains or losses on
securities (both real-
ized and unrealized) (.16)
-----
Total from investment
operations (.14)
-----
Unit value, end of period $ .86
=====
</TABLE>
* Commencement of the segregated sub-account's operations.
63
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements (continued)
(6) Financial Highlights (continued)
Global Bond
<TABLE>
<CAPTION>
Period from
May 19, 1998*
to December
31, 1998
-------------
<S> <C>
Unit value, beginning of
period $1.00
-----
Income from investment
operations:
Net investment income .16
Net gains or losses on
securities (both real-
ized and unrealized) (.04)
-----
Total from investment
operations .12
-----
Unit value, end of period $1.12
=====
Index 400 Mid-Cap
<CAPTION>
Period from
May 19, 1998*
to December
31, 1998
-------------
<S> <C>
Unit value, beginning of
period $1.00
-----
Income from investment
operations:
Net investment income .01
Net gains or losses on
securities (both real-
ized and unrealized) .04
-----
Total from investment
operations .05
-----
Unit value, end of period $1.05
=====
Macro-Cap Value
<CAPTION>
Period from
May 19, 1998*
to December
31, 1998
-------------
<S> <C>
Unit value, beginning of
period $1.00
-----
Income from investment
operations:
Net investment income .01
Net gains or losses on
securities (both real-
ized and unrealized) .05
-----
Total from investment
operations .06
-----
Unit value, end of period $1.06
=====
</TABLE>
*Commencement of the segregated sub-account's operations.
64
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements (continued)
(6) Financial Highlights (continued)
Micro-Cap Growth
<TABLE>
<CAPTION>
Period from
May 19, 1998*
to December
31, 1998
-------------
<S> <C>
Unit value, beginning of
period $1.00
-----
Income from investment
operations:
Net investment income --
Net gains or losses on
securities (both real-
ized and unrealized) .03
-----
Total from investment
operations .03
-----
Unit value, end of period $1.03
=====
Real Estate Securities
<CAPTION>
Period from
May 19, 1998*
to December
31, 1998
-------------
<S> <C>
Unit value, beginning of
period $1.00
-----
Income (loss) from in-
vestment operations:
Net investment income .07
Net gains or losses on
securities (both real-
ized and unrealized) (.20)
-----
Total from investment
operations (.13)
-----
Unit value, end of period $ .87
=====
Templeton Developing Markets
<CAPTION>
Period from
May 19, 1998*
to December
31, 1998
-------------
<S> <C>
Unit value, beginning of
period $1.00
-----
Income (loss) from in-
vestment operations:
Net investment income --
Net gains or losses on
securities (both real-
ized and unrealized) (.14)
-----
Total from investment
operations (.14)
-----
Unit value, end of period $ .86
=====
</TABLE>
*Commencement of the segregated sub-account's operations.
65
<PAGE>
Independent Auditors' Report
The Board of Directors
Minnesota Life Insurance Company
We have audited the accompanying consolidated balance sheets of the Minnesota
Life Insurance Company and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations and comprehensive income,
changes in stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Minnesota Life Insurance Company and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information included in the accompanying schedules is presented for purpose of
additional analysis and is not a required part of the basic consolidated
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic consolidated financial statements taken as a whole.
Minneapolis, Minnesota
February 8, 1999
66
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(In thousands)
<S> <C> <C>
Fixed maturity securities:
Available-for-sale, at fair value (amortized cost
$4,667,688 and $4,518,807) $ 4,914,012 $ 4,719,801
Held-to-maturity, at amortized cost (fair value
$1,161,784 and $1,158,227) 1,086,548 1,088,312
Equity securities, at fair value (cost $579,546 and
$537,441) 749,800 686,638
Mortgage loans, net 681,219 661,337
Real estate, net 38,530 39,964
Policy loans 226,409 213,488
Short-term investments 136,435 112,352
Other invested assets 261,625 216,838
----------- -----------
Total investments 8,094,578 7,738,730
Cash 175,660 96,179
Finance receivables, net 163,411 211,794
Deferred policy acquisition costs 564,382 576,030
Accrued investment income 86,974 83,439
Premiums receivable, net 62,609 68,030
Property and equipment, net 67,448 58,123
Reinsurance recoverables 162,553 150,126
Other assets 61,183 52,852
Separate account assets 6,994,752 5,366,810
----------- -----------
Total assets $16,433,550 $14,402,113
=========== ===========
Liabilities and Stockholder's Equity
Liabilities:
Policy and contract account balances $ 4,242,802 $ 4,275,221
Future policy and contract benefits 1,744,245 1,687,529
Pending policy and contract claims 70,564 64,356
Other policyholders' funds 438,595 416,752
Policyholders' dividends payable 53,957 55,321
Stockholder dividend payable 24,700 --
Unearned premiums and fees 180,191 202,070
Federal income tax liability:
Current 53,039 45,300
Deferred 173,907 166,057
Other liabilities 514,468 334,305
Notes payable 267,000 298,000
Separate account liabilities 6,947,806 5,320,517
----------- -----------
Total liabilities 14,711,274 12,865,428
----------- -----------
Stockholder's equity:
Common stock, $1 par value, 5,000,000 shares
authorized, issued and outstanding 5,000 --
Retained earnings 1,513,661 1,380,012
Accumulated other comprehensive income 203,615 156,673
----------- -----------
Total stockholder's equity 1,722,276 1,536,685
----------- -----------
Total liabilities and stockholder's equity $16,433,550 $14,402,113
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
67
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
Statements of Operations
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Revenues:
Premiums $ 577,693 $ 615,253 $ 612,359
Policy and contract fees 300,361 272,037 245,966
Net investment income 531,081 553,773 530,987
Net realized investment gains 114,652 114,367 55,574
Finance charge income 35,880 43,650 46,932
Other income 73,498 71,707 51,630
---------- ---------- ----------
Total revenues 1,633,165 1,670,787 1,543,448
---------- ---------- ----------
Benefits and expenses:
Policyholders' benefits 519,926 515,873 541,520
Interest credited to policies and con-
tracts 290,870 298,033 288,967
General operating expenses 360,916 369,961 302,618
Commissions 110,211 114,404 103,370
Administrative and sponsorship fees 80,183 81,750 79,360
Dividends to policyholders 25,159 26,776 24,804
Interest on notes payable 22,360 24,192 22,798
Increase in deferred policy acquisition
costs (18,042) (26,878) (19,284)
---------- ---------- ----------
Total benefits and expenses 1,391,583 1,404,111 1,344,153
---------- ---------- ----------
Income from operations before taxes 241,582 266,676 199,295
Federal income tax expense (benefit):
Current 93,584 84,612 68,033
Deferred (15,351) (7,832) 744
---------- ---------- ----------
Total federal income tax expense 78,233 76,780 68,777
---------- ---------- ----------
Net income $ 163,349 $ 189,896 $ 130,518
========== ========== ==========
Other comprehensive income, after tax:
Foreign currency translation adjust-
ments $ (947) $ 947 $ --
Unrealized gains (losses) on securities 47,889 47,414 (44,940)
---------- ---------- ----------
Other comprehensive income, net of tax 46,942 48,361 (44,940)
---------- ---------- ----------
Comprehensive income $ 210,291 $ 238,257 $ 85,578
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
68
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Common stock:
Issued during the year $ 5,000 $ -- $ --
---------- ---------- ----------
Total common stock $ 5,000 $ -- $ --
========== ========== ==========
Retained earnings:
Beginning balance $1,380,012 $1,190,116 $1,059,598
Net income 163,349 189,896 130,518
Retained earnings transfer for common
stock issued (5,000) -- --
Dividends to stockholder (24,700) -- --
---------- ---------- ----------
Total retained earnings $1,513,661 $1,380,012 $1,190,116
========== ========== ==========
Accumulated other comprehensive income:
Beginning balance $ 156,673 $ 108,312 $ 153,252
Change in unrealized appreciation (de-
preciation) of investments 47,889 47,414 (44,940)
Change in unrealized gain on foreign
currency translation (947) 947 --
---------- ---------- ----------
Total accumulated other comprehensive
income $ 203,615 $ 156,673 $ 108,312
========== ========== ==========
Total stockholder's equity $1,722,276 $1,536,685 $1,298,428
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
69
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 163,349 $ 189,896 $ 130,518
Adjustments to reconcile net income to
net cash provided by operating activi-
ties:
Interest credited to annuity and in-
surance contracts 265,841 276,719 275,968
Fees deducted from policy and con-
tract balances (212,901) (214,803) (206,780)
Change in future policy benefits 56,716 76,358 84,389
Change in other policyholders' lia-
bilities (20,802) 7,597 16,099
Change in deferred policy acquisition
costs (18,042) (26,878) (19,284)
Change in premiums due and other re-
ceivables 5,421 (9,280) (26,142)
Change in federal income tax liabili-
ties 15,589 36,049 (38,113)
Net realized investment gains (114,652) (114,367) (55,574)
Other, net 32,380 (23,213) 56,045
----------- ----------- -----------
Net cash provided by operating ac-
tivities 172,899 198,078 217,126
----------- ----------- -----------
Cash Flows from Investing Activities
Proceeds from sales of:
Fixed maturity securities, available-
for-sale 1,835,726 1,099,114 877,682
Equity securities 523,617 601,936 352,901
Mortgage loans -- -- 15,567
Real estate 7,800 9,279 11,678
Other invested assets 21,682 26,877 12,280
Proceeds from maturities and repayments
of:
Fixed maturity securities, available-
for-sale 414,726 403,829 329,550
Fixed maturity securities, held-to-
maturity 148,848 139,394 114,222
Mortgage loans 126,066 109,246 94,703
Purchases of:
Fixed maturity securities, available-
for-sale (2,384,720) (1,498,048) (1,228,048)
Fixed maturity securities, held-to-
maturity (99,530) (82,835) (60,612)
Equity securities (516,907) (585,349) (446,599)
Mortgage loans (141,008) (157,247) (108,691)
Real estate (5,612) (3,908) (3,786)
Other invested assets (75,682) (55,988) (29,271)
Finance receivable originations or pur-
chases (77,141) (115,248) (175,876)
Finance receivable principal payments 109,277 133,762 142,723
Other, net 141,768 (88,626) (40,062)
----------- ----------- -----------
Net cash provided by (used for) in-
vesting activities 28,910 (63,812) (141,639)
----------- ----------- -----------
Cash Flows from Financing Activities
Deposits credited to annuity and insur-
ance contracts 952,622 928,696 657,405
Withdrawals from annuity and insurance
contracts (1,053,844) (1,013,588) (702,681)
Proceeds from issuance of debt 40,000 -- 60,000
Payments on debt (31,000) (21,000) (21,000)
Other, net (6,023) (3,355) (6,898)
----------- ----------- -----------
Net cash used for financing activi-
ties (98,245) (109,247) (13,174)
----------- ----------- -----------
Net increase in cash and short-term in-
vestments 103,564 25,019 62,313
Cash and short-term investments, begin-
ning of year 208,531 183,512 121,199
----------- ----------- -----------
Cash and short-term investments, end of
year $ 312,095 $ 208,531 $ 183,512
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
70
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
(1) Nature of Operations
Conversion to a Mutual Holding Company Structure
Consent was given from the Minnesota Department of Commerce (Department of
Commerce) allowing The Minnesota Mutual Life Insurance Company to implement a
conversion to a mutual holding company. The Minnesota Mutual Life Insurance
Company enacted this privilege effective October 1, 1998. The conversion
created Minnesota Mutual Companies, Inc., a mutual holding company, Securian
Holding Company and Securian Financial Group, Inc., which are intermediate
stock holding companies. The Minnesota Mutual Life Insurance Company was
converted into a stock life insurance company and renamed Minnesota Life
Insurance Company. Minnesota Mutual Companies, Inc. will at all times, in
accordance with the conversion plan and as required by the Mutual Insurance
Holding Company Act, directly or indirectly control Minnesota Life Insurance
Company through the ownership of at least a majority of the voting power of the
voting shares of the capital stock of Minnesota Life Insurance Company. Annuity
contract and life insurance policyholders of Minnesota Life Insurance Company
have certain membership interests consisting primarily of the right to vote on
certain matters involving Minnesota Mutual Companies, Inc. and the right to
receive distributions of surplus in the event of demutualization, dissolution
or liquidation of Minnesota Mutual Companies, Inc.
Description of Business
Minnesota Life Insurance Company, both directly and through its subsidiaries
(collectively, the Company), provides a diversified array of insurance and
financial products and services designed principally to protect and enhance the
long-term financial well-being of individuals and families.
The Company's strategy is to be successful in carefully selected niche
markets, primarily in the United States, while focusing on the retention of
existing business and the maintenance of profitability. To achieve this
objective, the Company has divided its businesses into five strategic business
units which focus on various markets: Individual Insurance, Financial Services,
Group Insurance, Pension and Asset Management. Revenues in 1998 for these
business units were $862,240,000, $273,511,000, $258,928,000, $102,061,000 and
$20,723,000, respectively. Additional revenues of $115,702,000 were reported by
the Company's subsidiaries.
The Company serves over six million people through more than 4,000 associates
located at its St. Paul, Minnesota headquarters and in 75 general agencies and
45 regional offices throughout the United States.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP), which vary in
certain respects from accounting practices prescribed or permitted by state
insurance regulatory authorities. The consolidated financial statements include
the accounts of the Minnesota Life Insurance Company and its subsidiaries. All
material intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions that affect reported
assets and liabilities, including reporting or disclosure of contingent assets
and liabilities as of the balance sheet date and the reported amounts of
revenues and expenses during the reporting period. Future events, including
changes in mortality, morbidity, interest rates and asset valuations, could
cause actual results to differ from the estimates used in the financial
statements.
Insurance Revenues and Expenses
Premiums on traditional life products, which include individual whole life and
term insurance and immediate annuities, are credited to revenue when due. For
accident and health and group life products, premiums are credited to revenue
over the contract period as earned. Benefits and expenses are recognized in
relation to premiums over the contract period via a provision for future policy
benefits and the amortization of deferred policy acquisition costs.
71
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
Nontraditional life products include individual adjustable and variable life
insurance and group universal and variable life insurance. Revenue from
nontraditional life products and deferred annuities is comprised of policy and
contract fees charged for the cost of insurance, policy administration and
surrenders. Expenses include the portion of claims not covered by and interest
credited to the related policy and contract account balances. Policy
acquisition costs are amortized relative to estimated gross profits or margins.
Deferred Policy Acquisition Costs
The costs of acquiring new and renewal business, which vary with and are
primarily related to the production of new and renewal business, are generally
deferred to the extent recoverable from future premiums or expected gross
profits. Deferrable costs include commissions, underwriting expenses and
certain other selling and issue costs.
For traditional life, accident and health and group life products, deferred
policy acquisition costs are amortized over the premium paying period in
proportion to the ratio of annual premium revenues to ultimate anticipated
premium revenues. The ultimate premium revenues are estimated based upon the
same assumptions used to calculate the future policy benefits.
For nontraditional life products and deferred annuities, deferred policy
acquisition costs are amortized over the estimated lives of the contracts in
relation to the present value of estimated gross profits from surrender charges
and investment, mortality and expense margins.
Deferred policy acquisition costs amortized were $148,098,000, $128,176,000
and $125,978,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Finance Charge Income and Receivables
Finance charge income represents fees and interest charged on consumer loans.
The Company uses the interest (actuarial) method of accounting for finance
charges and interest on finance receivables. Accrual of finance charges and
interest on the smaller balance homogeneous finance receivables is suspended
when a loan is contractually delinquent for more than 60 days and is
subsequently recognized when received. Accrual is resumed when the loan is
contractually less than 60 days past due. Finance charges and interest is
suspended when a loan is considered by management to be impaired. Loan
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical expedient,
at the observable market price of the loan or the fair value of the collateral
if the loan is collateral dependent. When a loan is identified as impaired,
interest previously accrued in the current year is reversed. Interest payments
received on impaired loans are generally applied to principal unless the
remaining principal balance has been determined to be fully collectible. An
allowance for uncollectible amounts is maintained by direct charges to
operations at an amount which management believes, based upon historical losses
and economic conditions, is adequate to absorb probable losses on existing
receivables that may become uncollectible. The reported receivables are net of
this allowance.
Valuation of Investments
Fixed maturity securities (bonds) which the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity and are carried
at amortized cost, net of write-downs for other than temporary declines in
value. Premiums and discounts are amortized or accreted over the estimated
lives of the securities based on the interest yield method. Fixed maturity
securities, which may be sold prior to maturity, are classified as available-
for-sale and are carried at fair value.
Equity securities (common stocks and preferred stocks) are carried at fair
value. Equity securities also include initial contributions to affiliated
registered investment funds that are managed by a subsidiary of the Company.
These contributions are carried at the market value of the underlying net
assets of the funds.
Mortgage loans are carried at amortized cost less an allowance for
uncollectible amounts. Premiums and discounts are amortized or accreted over
the terms of the mortgage loans based on the interest yield method. A
72
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
mortgage loan is considered impaired if it is probable that contractual amounts
due will not be collected. Impaired mortgage loans are valued at the fair value
of the underlying collateral. Interest income on impaired mortgage loans is
recorded on an accrual basis. However, when the likelihood of collection is
doubtful, interest income is recognized when received.
Fair values of fixed maturity securities and equity securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are estimated using values obtained from independent
pricing services which specialize in matrix pricing and modeling techniques for
estimating fair values. Fair values of mortgage loans are based upon discounted
cash flows, quoted market prices and matrix pricing.
Venture capital limited partnerships are carried at cost, net of write-downs
for other than temporary declines in value and allowances for temporary
declines in value. Cash distributions are recorded as a return of capital
and/or income as appropriate. In-kind distributions are recorded as a return of
capital for the cost basis of the stock received.
Real estate is carried at cost less accumulated depreciation and an allowance
for estimated losses. Accumulated depreciation on real estate at December 31,
1998 and 1997, was $6,713,000 and $6,269,000, respectively.
Policy loans are carried at the unpaid principal balance.
Derivative Financial Instruments
The Company entered into equity swaps in 1996 as part of an overall risk
management strategy. The swaps were used to hedge exposure to market risk on
$400,000,000 of the Company's common stock portfolio. The swaps were based upon
certain stock indices. If, at the time of settlement for a particular swap, the
designated stock index had fallen below a specified level, the counterparty
would pay the Company an amount based upon the decline in the index and the
stock portfolio value protected by the swap. If, at the time of settlement, the
designated stock index had risen, the Company would pay the counterparty an
amount based upon the increase in the index and 25% of the stock portfolio
value protected by the swap. The equity swaps were settled with the
counterparties in August 1997. The swaps were carried at fair value, which were
based upon dealer quotes. Changes in fair value were recorded directly in
stockholder's equity. Upon settlement of the swaps, gains or losses were
recognized in income, and the Company realized a loss of approximately
$31,000,000 in 1997, upon settlement of these equity swaps.
The Company began investing in international bonds denominated in foreign
currencies in 1997. Unrealized gains or losses are recorded on foreign
denominated securities due to the fluctuation in foreign currency exchange
rates and/or related payables and receivables and interest on foreign
securities. The Company uses forward foreign exchange currency contracts as
part of its risk management strategy for international investments. The forward
foreign exchange currency contracts are used to reduce market risks from
changes in foreign exchange rates. These forward foreign exchange currency
contracts are agreements to purchase a specified amount of one currency in
exchange for a specified amount of another currency at a future point in time
at a foreign exchange currency rate agreed upon on the contract open date. No
cash is exchanged at the outset of the contract and no payments are made by
either party until the contract close date. On the contract close date the
contracted amount of the purchased currency is received from the counterparty
and the contracted amount of the sold currency is sent to the counterparty.
Realized and unrealized gains and losses on these forward foreign exchange
contracts are recorded in income as incurred. In addition, these contracts are
generally short-term in nature and there is no material exposure to the Company
at December 31, 1998. Notional amounts for the years ended December 31, 1998
and 1997, were $115,194,000 and $80,997,000, respectively.
73
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
Capital Gains and Losses
Realized and unrealized capital gains and losses are determined on the specific
identification method. Write-downs of held-to-maturity securities and the
provision for credit losses on mortgage loans and real estate are recorded as
realized losses.
Changes in the fair value of fixed maturity securities available-for-sale and
equity securities are recorded as a separate component of stockholder's equity,
net of taxes and related adjustments to deferred policy acquisition costs and
unearned policy and contract fees.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation of
$101,692,000 and $90,926,000 at December 31, 1998 and 1997, respectively.
Buildings are depreciated over 40 years and equipment is generally depreciated
over 5 to 10 years. Depreciation expenses for the years ended December 31,
1998, 1997 and 1996, were $10,765,000, $8,965,000 and $6,454,000, respectively.
Separate Accounts
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the exclusive benefit of pension, variable
annuity and variable life insurance policyholders and contractholders. Assets
consist principally of marketable securities and both assets and liabilities
are reported at fair value, based upon the market value of the investments held
in the segregated funds. The Company receives administrative and investment
advisory fees for services rendered on behalf of these accounts.
The Company periodically invests money in its separate accounts. The market
value of such investments, included with separate account assets, amounted to
$46,945,000 and $46,293,000 at December 31, 1998 and 1997, respectively.
Policyholders' Liabilities
Policy and contract account balances represent the net accumulation of funds
associated with nontraditional life products and deferred annuities. Additions
to the account balances include premiums, deposits and interest credited by the
Company. Decreases in the account balances include surrenders, withdrawals,
benefit payments, and charges assessed for the cost of insurance, policy
administration and surrenders.
Future policy and contract benefits are comprised of reserves for traditional
life, group life, and accident and health products. The reserves were
calculated using the net level premium method based upon assumptions regarding
investment yield, mortality, morbidity, and withdrawal rates determined at the
date of issue, commensurate with the Company's experience. Provision has been
made in certain cases for adverse deviations from these assumptions.
Other policyholders' funds are comprised of dividend accumulations, premium
deposit funds and supplementary contracts without life contingencies.
Participating Business
Dividends on participating policies and other discretionary payments are
declared by the Board of Directors based upon actuarial determinations, which
take into consideration current mortality, interest earnings, expense factors
and federal income taxes. Dividends are recognized as expenses consistent with
the recognition of premiums.
Income Taxes
Current income taxes are charged to operations based upon amounts estimated to
be payable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between financial statement
carrying amounts and income tax bases of assets and liabilities.
74
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Account Policies (continued)
Reinsurance Recoverables
Insurance liabilities are reported before the effects of ceded reinsurance.
Reinsurance recoverables represent amounts due from reinsurers for paid and
unpaid benefits, expense reimbursements, prepaid premiums and future policy
benefits.
Reclassifications
Certain 1997 and 1996 consolidated financial statement balances have been
reclassified to conform to the 1998 presentation.
(3) Investments
Net investment income for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities $445,220 $457,391 $433,985
Equity securities 12,183 16,182 14,275
Mortgage loans 54,785 55,929 63,865
Real estate (236) (407) (475)
Policy loans 15,502 15,231 13,828
Short-term investments 6,147 6,995 6,535
Other invested assets 3,826 3,871 4,901
-------- -------- --------
Gross investment income 537,427 555,192 536,914
Investment expenses (6,346) (1,419) (5,927)
-------- -------- --------
Total $531,081 $553,773 $530,987
======== ======== ========
Net realized investment gains (losses) for the years ended December 31 were
as follows:
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities $ 43,244 $ 3,711 $ (6,536)
Equity securities 47,526 92,765 57,770
Mortgage loans 3,399 2,011 (721)
Real estate 7,809 1,598 7,088
Other invested assets 12,674 14,282 (2,027)
-------- -------- --------
Total $114,652 $114,367 $ 55,574
======== ======== ========
Gross realized gains (losses) on the sales of fixed maturity securities and
equity securities for the years ended December 31 were as follows:
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Gross realized gains $ 56,428 $ 18,804 $ 19,750
Gross realized losses (13,184) (15,093) (26,286)
Equity securities:
Gross realized gains 107,342 120,437 79,982
Gross realized losses (59,816) (27,672) (22,212)
</TABLE>
75
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(3)Investments (continued)
Net unrealized gains (losses) included in stockholder's equity at December 31
were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
Gross unrealized gains $ 487,479 $ 472,671
Gross unrealized losses (73,440) (118,863)
Adjustment to deferred acquisition costs (119,542) (100,299)
Adjustment to unearned policy and contract fees 15,912 (13,087)
Deferred federal income taxes (106,794) (83,749)
--------- ---------
Net unrealized gains $ 203,615 $ 156,673
========= =========
</TABLE>
76
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(3)Investments (continued)
The amortized cost and fair value of investments in marketable securities by
type of investment were as follows:
<TABLE>
<CAPTION>
Gross Unrealized
-----------------
Amortized Fair
Cost Gains Losses Value
---------- -------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
December 31, 1998
Available-for-sale:
United States government and
government agencies and
authorities $ 195,650 $ 17,389 $ 201 $ 212,838
Foreign governments 784 -- 311 473
Corporate securities 2,357,861 204,277 30,648 2,531,490
International bond securities 188,448 22,636 1,298 209,786
Mortgage-backed securities 1,924,945 52,580 18,100 1,959,425
---------- -------- -------- ----------
Total fixed maturities 4,667,688 296,882 50,558 4,914,012
Equity securities-unaffiliated 463,777 157,585 15,057 606,305
Equity securities-affiliated
mutual funds 115,769 27,726 -- 143,495
---------- -------- -------- ----------
Total equity securities 579,546 185,311 15,057 749,800
---------- -------- -------- ----------
Total available-for-sale 5,247,234 482,193 65,615 5,663,812
Held-to maturity:
Corporate securities 894,064 67,496 235 961,325
Mortgage-backed securities 192,484 9,030 1,055 200,459
---------- -------- -------- ----------
Total held-to-maturity 1,086,548 76,526 1,290 1,161,784
---------- -------- -------- ----------
Total $6,333,782 $558,719 $ 66,905 $6,825,596
========== ======== ======== ==========
<CAPTION>
Gross Unrealized
-----------------
Amortized Fair
Cost Gains Losses Value
---------- -------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
December 31, 1997
Available-for-sale:
United States government and
government agencies and authori-
ties $ 239,613 $ 18,627 $ -- $ 258,240
Foreign governments 1,044 -- 29 1,015
Corporate securities 2,273,474 216,056 70,484 2,419,046
International bond securities 150,157 2,565 23,530 129,192
Mortgage-backed securities 1,854,519 66,934 9,145 1,912,308
---------- -------- -------- ----------
Total fixed maturities 4,518,807 304,182 103,188 4,719,801
Equity securities-unaffiliated 421,672 134,558 14,575 541,655
Equity securities-affiliated mu-
tual funds 115,769 29,214 -- 144,983
---------- -------- -------- ----------
Total equity securities 537,441 163,772 14,575 686,638
---------- -------- -------- ----------
Total available-for-sale 5,056,248 467,954 117,763 5,406,439
Held-to maturity:
Corporate securities 893,407 59,850 752 952,505
Mortgage-backed securities 194,905 10,817 -- 205,722
---------- -------- -------- ----------
Total held-to-maturity 1,088,312 70,667 752 1,158,227
---------- -------- -------- ----------
Total $6,144,560 $538,621 $118,515 $6,564,666
========== ======== ======== ==========
</TABLE>
77
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(3) Investments (continued)
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1998, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 38,375 $ 35,299 $ 11,109 $ 11,346
Due after one year through five
years 529,019 616,064 128,658 133,657
Due after five years through ten
years 1,251,763 1,316,512 373,294 403,159
Due after ten years 923,586 986,712 381,003 413,163
---------- ---------- ---------- ----------
2,742,743 2,954,587 894,064 961,325
Mortgage-backed securities 1,924,945 1,959,425 192,484 200,459
---------- ---------- ---------- ----------
Total $4,667,688 $4,914,012 $1,086,548 $1,161,784
========== ========== ========== ==========
</TABLE>
At December 31, 1998 and 1997, fixed maturity securities and short-term
investments with a carrying value of $6,361,000 and $8,000,000, respectively,
were on deposit with various regulatory authorities as required by law.
Allowances for credit losses on investments are reflected on the consolidated
balance sheets as a reduction of the related assets and were as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Mortgage loans $ 1,500 $ 1,500
Investment real estate 841 2,248
------- -------
Total $ 2,341 $ 3,748
======= =======
</TABLE>
At December 31, 1998, the recorded investment in mortgage loans that were
considered to be impaired was $8,798 before allowance for credit losses. These
impaired loans, due to adequate fair market value of underlying collateral, do
not have an allowance for credit losses.
At December 31, 1997, the recorded investment in mortgage loans that were
considered to be impaired was $18,400 before allowance for credit losses. These
impaired loans, due to adequate fair market value of underlying collateral, do
not have an allowance for credit losses.
A general allowance for credit losses was established for potential
impairments in the remainder of the mortgage loan portfolio. The general
allowance was $1,500,000 at December 31, 1998 and 1997.
Changes in the allowance for credit losses on mortgage loans were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $1,500 $1,895 $1,711
Provision for credit losses -- -- 381
Charge-offs -- (395) (197)
------ ------ ------
Balance at end of year $1,500 $1,500 $1,895
====== ====== ======
</TABLE>
78
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(3) Investments (continued)
Below is a summary of interest income on impaired mortgage loans.
<TABLE>
<CAPTION>
1998 1997 1996
---- ------ ------
(In thousands)
<S> <C> <C> <C>
Average impaired mortgage loans $14 $3,268 $9,375
Interest income on impaired mortgage loans--contractual 18 556 1,796
Interest income on impaired mortgage loans--collected 17 554 1,742
</TABLE>
(4) Notes Receivable
In connection with the Company's planned construction of an additional home
office facility in St. Paul, Minnesota, the Company entered into a loan
contingency agreement with the Housing and Redevelopment Authority of the City
of St. Paul, Minnesota (HRA) in November 1997. A maximum of $15 million in
funds is available under this loan for condemnation and demolition of the
Company's proposed building site. The note bears interest at a rate of 8.625%,
with principal payments commencing February 2004 and a maturity date of August
2025. Interest payments are accrued and are payable February and August of each
year commencing February 2001. All principal and interest payments are due only
to the extent of available tax increments. As of December 31, 1998, HRA has
drawn $9,669,128 on this loan contingency agreement and accrued interest of
$673,435.
(5) Net Finance Receivables
Finance receivables as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Direct installment loans $147,425 $183,424
Retail installment notes 12,209 20,373
Retail revolving credit 17,170 25,426
Accrued interest 2,683 3,116
-------- --------
Gross receivables 179,487 232,339
Allowance for uncollectible amounts (16,076) (20,545)
-------- --------
Finance receivables, net $163,411 $211,794
======== ========
</TABLE>
Direct installment loans at December 31, 1998, consisted of $81,066,000 of
discount basis loans (net of unearned finance charges) and $66,359,000 of
interest-bearing loans. Direct installment loans at December 31, 1997,
consisted of $83,836,000 of discount basis loans (net of unearned finance
charges) and $99,588,000 of interest-bearing loans. Direct installment loans
generally have a maximum term of 84 months. Retail installment notes are
principally discount basis, arise from the sale of household appliances,
furniture, and sundry services, and generally have a maximum term of 48 months.
Direct installment loans included approximately $44,000,000 and $65,000,000 of
real estate secured loans at December 31, 1998 and 1997, respectively.
Revolving credit loans included approximately $16,000,000 and $24,000,000 of
real estate secured loans at December 31, 1998 and 1997, respectively.
Experience has shown that a substantial portion of finance receivables will be
renewed, converted or paid in full prior to maturity.
Principal cash collections of direct installment loans amounted to
$75,011,000, $90,940,000 and $92,438,000 and the percentage of these cash
collections to the average net balances were 47%, 47% and 48% for the years
ended December 31, 1998, 1997 and 1996, respectively.
79
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(5) Net Finance Receivables (continued)
Changes in the allowance for uncollectible amounts for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $20,545 $ 7,497 $ 6,377
Provision for credit losses 10,712 28,206 10,086
Charge-offs (18,440) (17,869) (11,036)
Recoveries 3,259 2,711 2,070
------- ------- -------
Balance at end of year $16,076 $20,545 $ 7,497
======= ======= =======
</TABLE>
At December 31, 1998, the recorded investment in certain direct installment
loans and direct revolving credit loans were considered to be impaired. The
balances of such loans at December 31, 1998 and the related allowance for
credit losses were as follows:
<TABLE>
<CAPTION>
Installment Revolving
Loans Credit Total
----------- --------- -------
(In thousands)
<S> <C> <C> <C>
Balances at December 31, 1998 $7,546 11,190 $18,736
Related allowance for credit losses $3,033 5,486 $ 8,519
</TABLE>
All loans deemed to be impaired are placed on a non-accrual status. No
accrued or unpaid interest was recognized on impaired loans during 1998. The
average quarterly balances of impaired loans during the year ended December 31,
1998 and 1997, was $6,354,000 and $7,397,000, respectively, for installment
basis loans and $12,471,000 and $12,793,000, respectively for revolving credit
direct loans.
There were no material commitments to lend additional funds to customers
whose loans were classified as non-accrual at December 31, 1998.
(6) Income Taxes
Income tax expense varies from the amount computed by applying the federal
income tax rate of 35% to income from operations before taxes. The significant
components of this difference were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Computed tax expense $84,553 $93,337 $69,753
Difference between computed and actual tax ex-
pense:
Dividends received deduction (1,730) (5,573) (2,534)
Special tax on mutual life insurance companies (3,455) 3,341 2,760
Sale of subsidiary -- (4,408) --
Foundation gain -- (4,042) (1,260)
Tax credits (4,416) (3,600) (3,475)
Expense adjustments and other 3,281 (2,275) 3,533
------- ------- -------
Total tax expense $78,233 $76,780 $68,777
======= ======= =======
</TABLE>
80
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(6) Income Taxes (continued)
The tax effects of temporary differences that give rise to the Company's net
deferred federal tax liability were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Policyholders' liabilities $ 16,999 $ 14,374
Pension and post retirement benefits 27,003 23,434
Tax deferred policy acquisition costs 82,940 73,134
Net realized capital losses 8,221 9,609
Other 18,487 20,524
-------- --------
Gross deferred tax assets 153,650 141,075
-------- --------
Deferred tax liabilities:
Deferred policy acquisition costs 155,655 152,337
Real estate and property and equipment depreciation 10,275 11,165
Basis difference on investments 10,798 11,061
Net unrealized capital gains 143,354 122,876
Other 7,475 9,693
-------- --------
Gross deferred tax liabilities 327,557 307,132
-------- --------
Net deferred tax liability $173,907 $166,057
======== ========
</TABLE>
A valuation allowance for deferred tax assets was not considered necessary as
of December 31, 1998 and 1997, because the Company believes that it is more
likely than not that the deferred tax assets will be realized through future
reversals of existing taxable temporary differences and future taxable income.
Income taxes paid for the years ended December 31, 1998, 1997 and 1996, were
$91,259,000, $71,108,000 and $79,026,000, respectively.
The Company's tax returns for 1997, 1996 and 1995 are under examination by
the Internal Revenue Service. The Company believes additional taxes, if any,
assessed as a result of these examinations, will not have a material effect on
its financial position.
81
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(7) Liability for Unpaid Accident and Health Claims, Reserve for Losses, and
Claim and Loss Adjustment Expenses
Activity in the liability for unpaid accident and health claims, reserve for
losses and claim and loss adjustment expenses is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at January 1 $409,249 $416,910 $377,302
Less: reinsurance recoverable 104,741 102,161 80,333
-------- -------- --------
Net balance at January 1 304,508 314,749 296,969
-------- -------- --------
Incurred related to:
Current year 92,793 121,153 134,727
Prior years 14,644 7,809 4,821
-------- -------- --------
Total incurred 107,437 128,962 139,548
-------- -------- --------
Paid related to:
Current year 27,660 51,275 51,695
Prior years 58,124 57,475 70,073
-------- -------- --------
Total paid 85,784 108,750 121,768
-------- -------- --------
Decrease in liabilities due to sale of subsidiary -- 30,453 --
-------- -------- --------
Net balance at December 31 326,161 304,508 314,749
Plus: reinsurance recoverable 108,918 104,741 102,161
-------- -------- --------
Balance at December 31 $435,079 $409,249 $416,910
======== ======== ========
</TABLE>
The liability for unpaid accident and health claims, reserve for losses and
claim and loss adjustment expenses is included in future policy and contract
benefits and pending policy and contract claims on the consolidated balance
sheets.
As a result of changes in estimates of claims incurred in prior years, the
accident and health claims, reserve for losses and claim and loss adjustment
expenses incurred increased by $14,644,000, $7,809,000 and $4,821,000 in 1998,
1997 and 1996, respectively. These amounts are the result of normal reserve
development inherent in the uncertainty of establishing the liability for
unpaid accident and health claims, reserve for losses and claim and loss
adjustment expenses.
(8) Employee Benefit Plans
Pension Plans and Post Retirement Plans Other than Pensions
The Company has noncontributory defined benefit retirement plans covering
substantially all employees and certain agents. Benefits are based upon years
of participation and the employee's average monthly compensation or the agent's
adjusted annual compensation. Plan assets are comprised of mostly stocks and
bonds, which are held in the general and separate accounts of the Company and
administered under group annuity contracts issued by the Company. The Company's
funding policy is to contribute annually the minimum amount required by
applicable regulations. The Company also has an unfunded noncontributory
defined benefit retirement plan, which provides certain employees with benefits
in excess of limits for qualified retirement plans.
The Company also has unfunded post retirement plans that provide certain
health care and life insurance benefits to substantially all retired employees
and agents. Eligibility is determined by age at retirement and years of service
after age 30. Health care premiums are shared with retirees, and other cost-
sharing features include deductibles and co-payments.
82
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(8) Employee Benefit Plans (continued)
The change in the benefit obligation and plan assets for the Company's plans
as of December 31 was calculated as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of
year $151,509 $134,959 $ 24,467 $ 24,836
Service cost 8,402 6,847 1,375 1,047
Interest cost 10,436 9,956 1,713 1,872
Amendments 6 -- -- (99)
Actuarial gain 16,298 3,816 4,542 (1,930)
Benefits paid (5,212) (4,069) (861) (1,259)
-------- -------- -------- --------
Benefit obligation at end of year $181,439 $151,509 $ 31,236 $ 24,467
======== ======== ======== ========
Change in plan assets:
Fair value of plan assets at the
beginning of the year $133,505 $118,963 $ -- $ --
Actual return on plan assets 13,068 13,670 -- --
Employer contribution 5,349 4,940 861 1,259
Benefits paid (5,212) (4,069) (861) (1,259)
-------- -------- -------- --------
Fair value of plan assets at the
end of year $146,710 $133,504 $ -- $ --
======== ======== ======== ========
Funded status $(34,729) $(18,005) $(31,236) $(24,467)
Unrecognized net actuarial loss
(gain) 12,283 (1,735) (6,251) (11,353)
Unrecognized prior service cost
(benefit) 5,293 5,865 (2,986) (3,499)
-------- -------- -------- --------
Net amount recognized $(17,153) $(13,875) $(40,473) $(39,319)
======== ======== ======== ========
Amounts recognized in the balance
sheet statement consist of:
Accrued benefit cost $(23,242) $(18,059) $(40,473) $(39,319)
Intangible asset 6,089 4,184 -- --
-------- -------- -------- --------
Net amount recognized $(17,153) $(13,875) $(40,473) $(39,319)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Pension Other
Benefits Benefits
----------- -----------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Weighted average assumptions as of December 31
Discount rate 7.00% 7.48% 7.00% 7.50%
Expected return on plan assets 8.27% 8.32% -- --
Rate of compensation increase 5.32% 5.29% -- --
</TABLE>
83
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(8) Employee Benefit Plans (continued)
For measurement purposes, an 8 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 5.5 percent for 2003 and remain at that level
thereafter.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------- ----------------------
1998 1997 1996 1998 1997 1996
------- ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost
Service cost $ 8,402 $6,847 $6,315 $1,375 $1,047 $1,041
Interest cost 10,436 9,956 8,852 1,713 1,872 2,074
Expected return on plan as-
sets (10,978) (9,859) (8,751) -- -- --
Amortization of prior serv-
ice cost (benefits) 578 578 578 (513) (510) (501)
Recognized net actuarial
loss (gain) 190 77 10 (559) (480) (177)
------- ------ ------ ------ ------ ------
Net periodic benefit cost $ 8,628 $7,599 $7,004 $2,016 $1,929 $2,437
======= ====== ====== ====== ====== ======
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
vale of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets were $39,470,000, $31,546,000 and $17,334,000 as of
December 31, 1998, respectively, and $32,622,000, $24,894,000 and $16,703,000
respectively, as of December 31, 1997.
The assumptions presented herein are based on pertinent information available
to management as of December 31, 1998 and 1997. Actual results could differ
from those estimates and assumptions. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would
increase the post retirement benefit obligation as of December 31, 1998 by
$5,875,000 and the estimated eligibility cost and interest cost components of
net periodic benefit costs for 1998 by $788,000. Decreasing the assumed health
care cost trend rates by one percentage point in each year would decrease the
post retirement benefit obligation as of December 31, 1998 by $4,618,000 and
the estimated eligibility cost and interest cost components of net periodic
post retirement benefit costs for 1998 by $598,000.
Profit Sharing Plans
The Company also has profit sharing plans covering substantially all employees
and agents. The Company's contribution rate to the employee plan is determined
annually by the directors of the Company and is applied to each participant's
prior year earnings. The Company's contribution to the agent plan is made as a
certain percentage, based upon years of service, applied to each agent's total
annual compensation. The Company recognized contributions to the plans during
1998, 1997 and 1996 of $8,395,000, $7,173,000 and $6,092,000, respectively.
Participants may elect to receive a portion of their contributions in cash.
(9) Sale of Subsidiary
On October 1, 1997, the Company sold Minnesota Fire and Casualty Company (MFC),
a wholly owned subsidiary, to Harleysville Group, Inc. The Company received net
cash proceeds of approximately $33.5 million from the sale, and realized a gain
of approximately $14.5 million. HomePlus Insurance Company (HomePlus), a
previously wholly owned subsidiary of MFC, was excluded from the sale of
assets. In accordance with the agreement, prior to September 30, 1997, MFC made
a distribution of private placement bonds to the Company with an amortized cost
of approximately $4.3 million and transferred all issued and outstanding shares
of HomePlus to the Company. The carrying value of the transferred shares was
approximately $5.8 million. Under an administrative services agreement with
MFC, the Company has retained MFC to provide financial and other services for
HomePlus.
84
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(10) Reinsurance
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance companies. To the extent that a reinsurer is
unable to meet its obligation under the reinsurance agreement, the Company
remains liable. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies. Allowances are established for
amounts deemed to be uncollectible.
Reinsurance is accounted for over the life of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies.
The effect of reinsurance on premiums for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Direct premiums $553,408 $595,686 $615,098
Reinsurance assumed 91,548 78,097 64,489
Reinsurance ceded (67,263) (58,530) (67,228)
-------- -------- --------
Net premiums $577,693 $615,253 $612,359
======== ======== ========
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $54,174,000,
$58,072,000 and $72,330,000 during 1998, 1997 and 1996, respectively.
(11) Fair Value of Financial Instruments
The estimated fair value of the Company's financial instruments has been
determined using available market information as of December 31, 1998 and 1997.
Although management is not aware of any factors that would significantly affect
the estimated fair value, such amounts have not been comprehensively revalued
since those dates. Therefore, estimates of fair value subsequent to the
valuation dates may differ significantly from the amounts presented herein.
Considerable judgement is required to interpret market data to develop the
estimates of fair value. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Please refer to Note 2 for additional fair value disclosures concerning fixed
maturity securities, equity securities, mortgages and derivatives. The carrying
amounts for policy loans, cash, short-term investments and finance receivables
approximate the assets' fair values.
The interest rates on the finance receivables outstanding as of December 31,
1998 and 1997, are consistent with the rates at which loans would currently be
made to borrowers of similar credit quality and for the same maturity; as such,
the carrying value of the finance receivables outstanding as of December 31,
1998 and 1997, approximate the fair value for those respective dates.
The fair values of deferred annuities, annuity certain contracts and other
fund deposits, which have guaranteed interest rates and surrender charges are
estimated to be the amount payable on demand as of December 31, 1998 and 1997
as those investment contracts have no defined maturity and are similar to a
deposit liability. The amount payable on demand equates to the account balance
less applicable surrender charges. Contracts without guaranteed interest rates
and surrender charges have fair values equal to their accumulation values plus
applicable market value adjustments. The fair values of guaranteed investment
contracts and supplementary contracts without life contingencies are calculated
using discounted cash flows, based on interest rates currently offered for
similar products with maturities consistent with those remaining for the
contracts being valued.
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of notes payable.
85
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(11) Fair Value of Financial Instruments (continued)
The carrying amounts and fair values of the Company's financial instruments,
which were classified as assets as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Available-for-sale $4,914,012 $4,914,012 $4,719,801 $4,719,801
Held-to-maturity 1,086,548 1,161,784 1,088,312 1,158,227
Equity securities 749,800 749,800 686,638 686,638
Mortgage loans:
Commercial 579,890 603,173 506,860 527,994
Residential 101,329 104,315 154,477 158,334
Policy loans 226,409 226,409 213,488 213,488
Short-term investments 136,435 136,435 112,352 112,352
Cash 175,660 175,660 96,179 96,179
Finance receivables, net 163,411 163,411 211,794 211,794
Venture capital 160,958 164,332 115,856 122,742
Foreign currency exchange con-
tract 1,594 1,594 1,457 1,457
---------- ---------- ---------- ----------
Total financial assets $8,296,046 $8,400,925 $7,907,214 $8,009,006
========== ========== ========== ==========
</TABLE>
The carrying amounts and fair values of the Company's financial instruments,
which were classified as liabilities as of December 31, were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Deferred annuities $2,085,408 $2,075,738 $2,131,806 $2,112,301
Annuity certain contracts 57,528 60,766 55,431 57,017
Other fund deposits 722,321 731,122 754,960 753,905
Guaranteed investment contracts 862 862 8,188 8,187
Supplementary contracts without
life contingencies 44,696 44,251 46,700 45,223
Notes payable 267,000 272,834 298,000 302,000
---------- ---------- ---------- ----------
Total financial liabilities $3,177,815 $3,185,573 $3,295,085 $3,278,633
========== ========== ========== ==========
</TABLE>
(12) Notes Payable
In September 1995, the Company issued surplus notes with a face value of
$125,000,000, at 8.25%, due in 2025. The surplus notes are subordinate to all
current and future policyholders' interests, including claims, and indebtedness
of the Company. All payments of interest and principal on the notes are subject
to the approval of the Department of Commerce. The approved accrued interest
was $3,008,000 as of December 31, 1998 and 1997. The issuance costs of
$1,421,000 are deferred and amortized over 30 years on straight-line basis.
86
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(12) Notes Payable (continued)
Notes payable as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Corporate-surplus notes, 8.25%, 2025 $125,000 $125,000
Consumer finance subsidiary-senior, 6.53%-8.77%, through
2003 142,000 173,000
-------- --------
Total notes payable $267,000 $298,000
======== ========
</TABLE>
At December 31, 1998, the aggregate minimum annual notes payable maturities
for the next five years were as follows: 1999, $49,000,000; 2000, $33,000,000;
2001, $26,000,000; 2002, $22,000,000; 2003, $12,000,000; thereafter
$125,000,000.
Long-term borrowing agreements involving the consumer finance subsidiary
include provisions with respect to borrowing limitations, payment of cash
dividends on or purchases of common stock, and maintenance of liquid net worth
of $44,070,000. The consumer finance subsidiary was in compliance with all such
provisions at December 31, 1998.
Interest paid on debt for the years ended December 31, 1998, 1997 and 1996,
was $25,008,000, $18,197,000 and $21,849,000, respectively.
(13) Other Comprehensive Income
Effective December 31, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." Comprehensive income is defined as any
change in stockholder's equity originating from non-owner transactions. The
Company had identified those changes as being comprised of net income,
unrealized appreciation (depreciation) on securities, and unrealized foreign
currency translation adjustments. The components of comprehensive income, other
than net income are illustrated below:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Other comprehensive income, before tax:
Foreign currency translation adjustment $ -- $ 1,457 $ --
Less: reclassification adjustment for gains in-
cluded in net income (1,457) -- --
------- ------- --------
(1,457) 1,457 --
Unrealized gains (loss) on securities 162,214 171,654 (18,746)
Less: reclassification adjustment for gains in-
cluded in net income (90,770) (96,476) (51,234)
------- ------- --------
71,444 75,178 (69,980)
Income tax expense related to items of other com-
prehensive income (23,045) (28,274) 25,040
------- ------- --------
Other comprehensive income, net of tax $46,942 $48,361 $(44,940)
======= ======= ========
</TABLE>
(14) Stock Dividends
On December 14, 1998, the Company declared and accrued a dividend to Securian
Financial Group, Inc. in the amount of $24,700,000 to be paid in 1999.
Dividend payments by Minnesota Life Insurance Company to its parent cannot
exceed the greater of 10% of statutory capital and surplus as of the preceding
year end or the statutory net gain from operations for the current calendar
year, without prior approval from the Department of Commerce. Based on this
limitation and 1997 statutory results, Minnesota Life Insurance Company could
have paid $87,069,000 in dividends in 1998 without prior approval.
87
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(15) Year 2000 (Unaudited)
The Company's business units utilize products and systems in the normal course
of business. Some of the Company's products and systems will have been replaced
or modified in order to process dates including the year 2000 and beyond.
The Company began preparing for the new millennium in the early 1980s by
designing systems with the year 2000 in mind. The Company began a comprehensive
Year 2000 project in 1995 to prepare all components of its business to function
properly before, during and after the year 2000.
The Company's goal is to have all computer systems and data prepared for the
year 2000. While the Company has taken extensive steps to renovate, upgrade and
replace applications, it is impossible to guarantee there will be no problems
associated with the year 2000 date change. The Company is currently developing
contingency and continuity plans to help minimize any impact of problems that
do arise.
(16) Commitments and Contingencies
The Company is involved in various pending or threatened legal proceedings
arising out of the normal course of business. In the opinion of management, the
ultimate resolution of such litigation will not have a material adverse effect
on operations or the financial position of the Company.
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance companies. To the extent that a reinsurer is
unable to meet its obligations under the reinsurance agreement, the Company
remains liable. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies. Allowances are established for
amounts deemed uncollectible.
The Company has issued certain participating group annuity and group life
insurance contracts jointly with another life insurance company. The joint
contract issuer has liabilities related to these contracts of $41,010,000 as of
December 31, 1998. To the extent the joint contract issuer is unable to meet
its obligation under the agreement, the Company remains liable.
The Company has long-term commitments to fund venture capital and real estate
investments totaling $165,191,000 as of December 31, 1998. The Company
estimates that $60,000,000 of these commitments will be invested in 1999, with
the remaining $105,191,000 invested over the next four years.
As of December 31, 1998, the Company had committed to purchase bonds and
mortgage loans totaling $198,907,000 but had not completed the purchase
transactions.
At December 31, 1998, the Company had guaranteed the payment of $75,100,000
in policyholders' dividends and discretionary amounts payable in 1999. The
Company has pledged bonds, valued at $76,596,000 to secure this guarantee.
The Company is contingently liable under state regulatory requirements for
possible assessments pertaining to future insolvencies and impairments of
unaffiliated insurance companies. The Company records a liability for future
guaranty fund assessments based upon known insolvencies, according to data
received from the National Organization of Life and Health Insurance Guaranty
Association. An asset is recorded for the amount of guaranty fund assessments
paid, which can be recovered through future premium tax credits.
88
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(17) Statutory Financial Data
The Company also prepares financial statements according to statutory
accounting practices prescribed or permitted by the Department of Commerce for
purposes of filing with the Department of Commerce, the National Association of
Insurance Commissioners and states in which the Company is licensed to do
business. Statutory accounting practices focus primarily on solvency and
surplus adequacy. The significant differences that exist between statutory and
GAAP accounting, and their effects are illustrated below:
<TABLE>
<CAPTION>
Year ended December
----------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Statutory capital and surplus $ 947,885 $ 870,688
Adjustments:
Deferred policy acquisition costs 564,382 576,030
Net unrealized investment gains 281,226 213,026
Statutory asset valuation reserve 239,455 242,100
Statutory interest maintenance reserve 49,915 24,169
Premiums and fees deferred or receivable (73,312) (74,025)
Change in reserve basis 117,806 101,415
Separate accounts (56,816) (51,172)
Unearned policy and contract fees (134,373) (126,477)
Surplus notes (125,000) (125,000)
Net deferred income taxes (173,907) (166,057)
Non-admitted assets 36,764 32,611
Policyholders' dividends 60,648 60,036
Other (12,397) (40,659)
---------- ----------
Stockholder's equity as reported in the accompanying
consolidated financial statements $1,722,276 $1,536,685
========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31
----------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Statutory net income $104,609 $167,078 $115,797
Adjustments:
Deferred policy acquisition costs 18,042 26,878 19,284
Statutory interest maintenance reserve 25,746 (538) (8,192)
Premiums and fees deferred or receivable 708 2,175 1,587
Change in reserve basis 3,011 9,699 20,114
Separate accounts (5,644) (6,272) (6,304)
Unearned policy and contract fees (7,896) (12,825) (2,530)
Net deferred income taxes 15,351 7,832 (744)
Policyholders' dividends 1,194 2,708 502
Other 8,228 (6,839) (8,996)
-------- -------- --------
Net income as reported in the accompanying
consolidated financial statements $163,349 $189,896 $130,518
======== ======== ========
</TABLE>
89
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Schedule I
Summary of Investments--Other than Investments in Related Parties
December 31, 1998
<TABLE>
<CAPTION>
As Shown
Market on the balance
Type of investment Cost(3) Value sheet(1)
- ------------------ ---------- ---------- --------------
(In thousands)
<S> <C> <C> <C>
Bonds:
United States government and government
agencies and authorities $ 195,650 $ 212,838 $ 212,838
Foreign governments 784 473 473
Public utilities 343,230 368,246 357,795
Mortgage-backed securities 2,117,429 2,159,884 2,151,909
All other corporate bonds 3,097,143 3,334,355 3,277,545
---------- ---------- ----------
Total bonds 5,754,236 6,075,796 6,000,560
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities 14,403 18,472 18,472
Banks, trusts and insurance companies 42,538 43,615 43,615
Industrial, miscellaneous and all
other 495,635 659,177 659,177
Nonredeemable preferred stocks 26,970 28,536 28,536
---------- ---------- ----------
Total equity securities 579,546 749,800 749,800
---------- ---------- ----------
Mortgage loans on real estate 681,219 XXXXXX 681,219
Real estate (2) 38,530 XXXXXX 38,530
Policy loans 226,409 XXXXXX 226,409
Other long-term investments 261,625 XXXXXX 261,625
Short-term investments 136,435 XXXXXX 136,435
---------- ---------- ----------
Total 1,344,218 -- 1,344,218
---------- ---------- ----------
Total investments $7,678,000 $6,825,596 $8,094,578
========== ========== ==========
</TABLE>
- -------
(1) Amortized cost for bonds classified as held-to-maturity and fair value for
common stocks and bonds classified as available-for-sale.
(2) The carrying value of real estate acquired in satisfaction of indebtedness
is $-0-.
(3) Original cost for equity securities and original cost reduced by repayments
and adjusted for amortization of premiums or accrual of discounts for bonds
and other investments
See independent auditors' report.
90
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Schedule III
Supplementary Insurance Information
(In thousands)
<TABLE>
<CAPTION>
As of December 31 For the years ended December 31
--------------------------------------------------- -----------------------------------------------------------
Future policy Amortization
Deferred benefits Other policy Benefits, of deferred
policy losses, claims claims and Net claims, losses policy Other
acquisition and settlement Unearned benefits Premium investment and settlement acquisition operating
Segment costs expenses(1) premiums(2) payable revenue(3) income expenses costs expenses
- ------- ----------- -------------- ----------- ------------ ---------- ---------- -------------- ------------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998:
Life insurance $421,057 $2,303,580 $146,042 $51,798 $615,856 $246,303 $502,767 $114,589 $342,080
Accident and
health insurance 74,606 496,839 33,568 18,342 167,544 35,822 105,336 12,261 93,876
Annuity 68,719 3,186,148 25 424 93,992 247,970 225,004 21,248 136,527
Property and li-
ability insur-
ance -- 480 556 -- 662 986 2,848 -- 1,187
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$564,382 $5,987,047 $180,191 $70,564 $878,054 $531,081 $835,955 $148,098 $573,670
======== ========== ======== ======= ======== ======== ======== ======== ========
1997:
Life insurance $434,012 $2,229,396 $166,704 $42,627 $576,468 $247,267 $476,747 $102,473 $345,938
Accident and
health insurance 70,593 466,109 34,250 17,153 205,869 40,343 87,424 9,451 101,960
Annuity 71,425 3,266,965 -- 4,576 64,637 261,768 242,738 16,252 129,263
Property and li-
ability insur-
ance -- 280 1,116 -- 40,316 4,395 33,773 -- 13,146
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$576,030 $5,962,750 $202,070 $64,356 $887,290 $553,773 $840,682 $128,176 $590,307
======== ========== ======== ======= ======== ======== ======== ======== ========
1996:
Life insurance $456,461 $2,123,148 $149,152 $51,772 $568,874 $223,762 $478,228 $ 97,386 $290,525
Accident and
health insurance 62,407 437,118 33,770 18,774 160,097 34,202 96,743 14,017 87,222
Annuity 70,649 3,360,614 -- 31 79,245 267,473 243,387 14,575 111,366
Property and li-
ability insur-
ance -- 27,855 24,189 -- 50,109 5,550 36,933 -- 19,033
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$589,517 $5,948,735 $207,111 $70,577 $858,325 $530,987 $855,291 $125,978 $508,146
======== ========== ======== ======= ======== ======== ======== ======== ========
<CAPTION>
Premiums
Segment written(4)
- ------- ----------
<S> <C>
1998:
Life insurance
Accident and
health insurance
Annuity
Property and li-
ability insur-
ance 103
----------
$ 103
==========
1997:
Life insurance
Accident and
health insurance
Annuity
Property and li-
ability insur-
ance 43,376
----------
$43,376
==========
1996:
Life insurance
Accident and
health insurance
Annuity
Property and li-
ability insur-
ance 50,515
----------
$50,515
==========
</TABLE>
- -----
(1) Includes policy and contract account balances
(2) Includes unearned policy and contract fees
(3) Includes policy and contract fees
(4) Applies only to property and liability insurance
See independent auditors' report.
91
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Schedule IV
Reinsurance
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
other from other Net assumed to
Gross amount companies companies amount net
------------ ----------- ----------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
1998:
Life insurance in
force $158,229,143 $18,656,917 $28,559,482 $168,131,708 17.0%
============ =========== =========== ============
Premiums:
Life insurance $ 338,909 $ 30,532 $ 71,198 $ 379,575 18.8%
Accident and health
insurance 180,081 17,894 1,432 163,619 0.9%
Annuity 33,837 -- -- 33,837 --
Property and liabil-
ity insurance 581 18,837 18,918 662 2857.7%
------------ ----------- ----------- ------------
Total premiums $ 553,408 $ 67,263 $ 91,548 $ 577,693 15.8%
============ =========== =========== ============
1997:
Life insurance in
force $122,120,394 $14,813,351 $25,566,734 $132,873,777 19.2%
============ =========== =========== ============
Premiums:
Life insurance $ 340,984 $ 30,547 $ 63,815 $ 374,252 17.1%
Accident and health
insurance 175,647 16,332 1,310 160,625 0.8%
Annuity 40,060 -- -- 40,060 --
Property and liabil-
ity insurance 38,995 11,651 12,972 40,316 32.2%
------------ ----------- ----------- ------------
Total premiums $ 595,686 $ 58,530 $ 78,097 $ 615,253 12.7%
============ =========== =========== ============
1996:
Life insurance in
force $116,445,975 $15,164,764 $22,957,287 $124,238,498 18.5%
============ =========== =========== ============
Premiums:
Life insurance $ 347,056 $ 45,988 $ 63,044 $ 364,112 17.3%
Accident and health
insurance 174,219 15,511 1,389 160,097 0.9%
Annuity 38,041 -- -- 38,041 --
Property and liabil-
ity insurance 55,782 5,729 56 50,109 0.1%
------------ ----------- ----------- ------------
Total premiums $ 615,098 $ 67,228 $ 64,489 $ 612,359 10.5%
============ =========== =========== ============
</TABLE>
See independent auditors' report.
92
<PAGE>
Appendix I
Illustrations of Policy Values, Death Benefits and Premiums
The Appendix I illustrations beginning on page 94, are provided for a non-
smoking male age 40. The illustrations show the projected actual cash values,
death benefits and premiums for the various scenarios. The plan of insurance
for each illustration is a whole life plan, each with an initial face amount of
$250,000. Both death benefit options--the Cash Option and the Protection
Option--are shown. We show all illustrations based on both guaranteed maximum
and current mortality charges, and we include all charges. Finally
illustrations for both VAL '87 and VAL '95 are included.
Guaranteed maximum cost of insurance charges will vary by age, sex, risk
class, and policy form. We use the male, female and unisex 1980 Commissioners
Standard Ordinary Mortality Tables ("1980 CSO"), as appropriate. The unisex
tables are used in circumstances where legal considerations require the
elimination of sex-based distinctions in the calculation of mortality costs.
Our maximum cost of insurance charges are based on an assumption of mortality
not greater than the mortality rates reflected in 1980 CSO Tables.
In most cases we intend to impose cost of insurance charges which are
substantially lower than the maximum charges determined as described above. In
addition to the factors governing maximum cost of insurance charges, actual
charges will vary depending on the level of scheduled premiums for a given
amount of insurance, the duration of the Policy and the smoking habits of the
insured. We illustrate current cost of insurance charges since they represent
our current practices with respect to mortality charges for this class of
Policies. Accordingly, the illustrations based upon the guaranteed maximum
mortality charges are provided primarily to show, by comparison with the other
tables, the consequences of our charging less than the full 1980 CSO based
charges.
The illustrations show how actual cash values and death benefits would vary
over time if the return on the assets held in the Variable Life Account equaled
a gross annual rate after tax, of 0 percent, 6 percent and 12 percent. The
actual cash values and death benefits would be different from those shown if
the returns averaged 0 percent, 6 percent and 12 percent but fluctuated over
the life of the Policy. The illustrations assume scheduled premiums are paid
when due.
The amounts shown for the hypothetical actual cash value and death benefit as
of each policy year reflect the fact that the net investment return on the
assets held in the sub-accounts is lower than the gross, after-tax return. This
is because a daily investment management fee assessed against the net assets of
the Funds and a daily mortality and expense risk charge assessed against the
net assets of the Variable Life Account are deducted from the gross return. The
mortality and expense risk charge reflected in the illustrations are at an
annual rate of .50 percent. The investment management fee illustrated is .67
percent and represents an average of the annual fee charged for all portfolios
of the Funds. In addition to the deduction for the investment management fee,
the illustrations also reflect a deduction for those Fund costs and expenses
borne by the Funds. Fund expenses illustrated are .15 percent, representing an
average of the 1998 expense ratios of the portfolios of the Funds. Minnesota
Life voluntarily absorbed certain expenses for certain portfolios of the Funds,
as detailed in the footnote to the expense table on page 6. We do not
anticipate any change to the voluntary absorption of expenses policy during the
current fiscal year. Therefore, gross annual rates of return of 0 percent, 6
percent and 12 percent correspond to approximate net annual rates of return of
- -1.32 percent, 4.68 percent and 10.68 percent.
The tables reflect the fact that no charges for federal, state or local
income taxes are currently made against the Variable Life Account. If such a
charge is made in the future, it will take a higher gross rate of return to
produce after-tax returns of 0 percent, 6 percent and 12 percent than it does
now.
Upon request, we will furnish a comparable illustration based upon a proposed
insured's age, sex and risk classification, and on the face amount, premium,
plan of insurance and gross annual rate of return requested. It should be
remembered that actual illustrations may be materially different from those
illustrated, depending upon the proposed insured's actual situation. For
example, illustrations for females, smokers or individuals who are rated sub-
standard will differ materially in premium amount and illustrated values, even
though the proposed insured may be the same age as the proposed insured in our
sample illustration.
93
<PAGE>
Variable Adjustable Life Insurance
VAL '95
DEATH BENEFIT OPTION--CASH OPTION
MALE ISSUE AGE 40 FOR NON-SMOKERS
INITIAL DEATH BENEFIT--$250,000(1)
$4,205.30 INITIAL SCHEDULED PREMIUM(2)
USING CURRENT MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(3) 6% GROSS(3) 12% GROSS(3)
INITIAL (-1.32% NET) (4.68% NET) (10.68% NET)
POL ATT BASE POLICY DEATH POLICY DEATH POLICY DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- --- --- ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 4,205 900 250,000 975 250,000 1,050 250,000
2 42 4,205 3,941 250,000 4,281 250,000 4,631 250,000
3 43 4,205 6,907 250,000 7,707 250,000 8,559 250,000
4 44 4,205 9,794 250,000 11,254 250,000 12,868 250,000
5 45 4,205 12,602 250,000 14,928 250,000 17,601 250,000
6 46 4,205 15,326 250,000 18,729 250,000 22,799 250,000
7 47 4,205 17,966 250,000 22,666 250,000 28,518 250,000
8 48 4,205 20,634 250,000 26,867 250,000 34,950 250,000
9 49 4,205 23,350 250,000 31,359 250,000 42,179 250,000
10 50 4,205 26,086 250,000 36,130 250,000 50,269 250,000
15 55 4,205 39,545 250,000 64,182 250,000 106,937 250,000
20 60 4,205 51,306 250,000 99,523 250,000 203,482 367,088
25 65 4,205 59,498 250,000 143,376 250,000 360,737 575,126
30 70 4,205 62,601 250,000 198,799 294,778 613,604 872,747
</TABLE>
(1) The initial death benefit is guaranteed to age 100.
(2) If premiums are paid more frequently than annually, the payments would be
$2,102.65 semi-annually, $1,051.33 quarterly, or $350.45 monthly. The death
benefits and policy values would be slightly different for a policy with
more frequent premium payments.
(3) Assumes no policy loan has been made.
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 rates of return may be more
or less than those shown and will depend on a number of factors, including the
investment allocations made by an owner, and prevailing interest rates. The
death benefits and policy values for a Policy would be different from those
shown if the actual rates of return averaged 0%, 6%, and 12% over a period of
years but also fluctuated above or below those averages for individual policy
years. No representations can be made by Minnesota Life or the Funds that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
94
<PAGE>
Variable Adjustable Life Insurance (continued)
VAL '95
DEATH BENEFIT OPTION--CASH OPTION
MALE ISSUE AGE 40 FOR NON-SMOKERS
INITIAL DEATH BENEFIT--$250,000(1)
$4,205.30 INITIAL SCHEDULED PREMIUM(2)
USING MAXIMUM CONTRACTUAL MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(3) 6% GROSS(3) 12% GROSS(3)
INITIAL (-1.32% NET) (4.68% NET) (10.68% NET)
POL ATT BASE POLICY DEATH POLICY DEATH POLICY DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- --- --- ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $4,205 $ 900 $250,000 $ 975 $250,000 $ 1,050 $250,000
2 42 4,205 3,941 250,000 4,281 250,000 4,631 250,000
3 43 4,205 6,907 250,000 7,707 250,000 8,559 250,000
4 44 4,205 9,794 250,000 11,254 250,000 12,868 250,000
5 45 4,205 12,602 250,000 14,928 250,000 17,601 250,000
6 46 4,205 15,326 250,000 18,729 250,000 22,799 250,000
7 47 4,205 17,963 250,000 22,661 250,000 28,509 250,000
8 48 4,205 20,511 250,000 26,728 250,000 34,789 250,000
9 49 4,205 22,967 250,000 30,934 250,000 41,701 250,000
10 50 4,205 25,326 250,000 35,282 250,000 49,311 250,000
15 55 4,205 35,391 250,000 59,186 250,000 100,857 250,000
20 60 4,205 41,466 250,000 86,695 250,000 185,559 337,137
25 65 4,205 41,365 250,000 118,186 250,000 316,527 508,776
30 70 4,205 30,179 250,000 154,601 250,000 513,902 738,448
</TABLE>
(1) The initial death benefit is guaranteed to age 100.
(2) If premiums are paid more frequently than annually, the payments would be
$2,102.65 semi-annually, $1,051.33 quarterly, or $350.45 monthly. The death
benefits and policy values would be slightly different for a policy with
more frequent premium payments.
(3) Assumes no policy loan has been made.
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 rates of return may be more
or less than those shown and will depend on a number of factors, including the
investment allocations made by an owner, and prevailing interest rates. The
death benefits and policy values for a Policy would be different from those
shown if the actual rates of return averaged 0%, 6%, and 12% over a period of
years but also fluctuated above or below those averages for individual policy
years. No representations can be made by Minnesota Life or the Funds that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
95
<PAGE>
Variable Adjustable Life Insurance (continued)
VAL '95
DEATH BENEFIT OPTION--PROTECTION OPTION
MALE ISSUE AGE 40 FOR NON-SMOKERS
INITIAL DEATH BENEFIT--$250,000(1)
$4,205.30 INITIAL SCHEDULED PREMIUM(2)
USING CURRENT MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(3) 6% GROSS(3) 12% GROSS(3)
INITIAL (-1.32% NET) (4.68% NET) (10.68% NET)
POL ATT BASE POLICY DEATH POLICY DEATH POLICY DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- --- --- ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $4,205 $ 897 $250,000 $ 972 $250,000 $ 1,047 $ 250,000
2 42 4,205 3,928 250,897 4,264 250,972 4,615 251,047
3 43 4,205 6,875 253,928 7,665 254,264 8,518 254,615
4 44 4,205 9,732 256,875 11,172 257,665 12,784 258,518
5 45 4,205 12,502 259,732 14,789 261,172 17,454 262,784
6 46 4,205 15,174 262,502 18,513 264,789 22,558 267,454
7 47 4,205 17,777 265,174 22,388 268,513 28,207 272,558
8 48 4,205 20,435 267,777 26,545 272,388 34,573 278,207
9 49 4,205 23,126 270,435 30,969 276,545 41,702 284,573
10 50 4,205 25,824 273,126 35,647 280,969 49,653 291,702
15 55 4,205 38,883 286,363 62,747 306,827 104,667 341,286
20 60 4,205 49,664 297,814 95,492 338,558 195,693 528,739
25 65 4,205 55,647 304,977 132,402 374,797 334,630 840,949
30 70 4,205 54,658 305,424 172,170 422,741 533,878 1,259,373
</TABLE>
(1) The initial death benefit is guaranteed to age 100.
(2) If premiums are paid more frequently than annually, the payments would be
$2,102.65 semi-annually, $1,051.33 quarterly, or $350.45 monthly. The death
benefits and policy values would be slightly different for a policy with
more frequent premium payments.
(3)Assumes no policy loan has been made.
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 rates of return may be more
or less than those shown and will depend on a number of factors, including the
investment allocations made by an owner, and prevailing interest rates. The
death benefits and policy values for a Policy would be different from those
shown if the actual rates of return averaged 0%, 6%, and 12% over a period of
years but also fluctuated above or below those averages for individual policy
years. No representations can be made by Minnesota Life or the Funds that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
96
<PAGE>
Variable Adjustable Life Insurance (continued)
VAL '95
DEATH BENEFIT OPTION--PROTECTION OPTION
MALE ISSUE AGE 40 FOR NON-SMOKERS
INITIAL DEATH BENEFIT--$250,000(1)
$4,205.30 INITIAL SCHEDULED PREMIUM(2)
USING MAXIMUM CONTRACTUAL MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(3) 6% GROSS(3) 12% GROSS(3)
INITIAL (-1.32% NET) (4.68% NET) (10.68% NET)
POL ATT BASE POLICY DEATH POLICY DEATH POLICY DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- --- --- ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $4,205 $ 897 $250,000 $ 972 $250,000 $ 1,047 $250,000
2 42 4,205 3,928 250,897 4,266 250,972 4,615 251,047
3 43 4,205 6,875 253,928 7,670 254,266 8,518 254,615
4 44 4,205 9,732 256,875 11,182 257,670 12,784 258,518
5 45 4,205 12,502 259,732 14,806 261,182 17,454 262,784
6 46 4,205 15,174 262,502 18,537 264,806 22,558 267,454
7 47 4,205 17,747 265,174 22,377 268,537 28,139 272,558
8 48 4,205 20,216 267,747 26,324 272,377 34,242 278,139
9 49 4,205 22,577 270,216 30,380 276,324 40,919 284,242
10 50 4,205 24,823 272,577 34,539 280,380 48,220 290,919
15 55 4,205 33,966 282,467 56,617 302,076 96,209 334,864
20 60 4,205 38,210 287,848 79,432 324,918 169,624 463,830
25 65 4,205 34,922 286,401 99,816 346,216 270,068 689,714
30 70 4,205 19,147 273,565 110,893 359,849 388,070 938,577
</TABLE>
(1) The initial death benefit is guaranteed to age 100.
(2) If premiums are paid more frequently than annually, the payments would be
$2,102.65 semi-annually, $1,051.33 quarterly, or $350.45 monthly. The death
benefits and policy values would be slightly different for a policy with
more frequent premium payments.
(3) Assumes no policy loan has been made.
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 rates of return may be more
or less than those shown and will depend on a number of factors, including the
investment allocations made by an owner, and prevailing interest rates. The
death benefits and policy values for a Policy would be different from those
shown if the actual rates of return averaged 0%, 6%, and 12% over a period of
years but also fluctuated above or below those averages for individual policy
years. No representations can be made by Minnesota Life or the Funds that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
97
<PAGE>
Variable Adjustable Life Insurance (continued)
VAL '87
DEATH BENEFIT OPTION--CASH OPTION
MALE ISSUE AGE 40 FOR NON-SMOKERS
INITIAL DEATH BENEFIT--$250,000(1)
$4,641.31 INITIAL SCHEDULED PREMIUM(2)
USING CURRENT MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(3) 6% GROSS(3) 12% GROSS(3)
INITIAL (-1.32% NET) (4.68% NET) (10.68% NET)
POL ATT BASE POLICY DEATH POLICY DEATH POLICY DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- --- --- ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $4,641 $ 1,010 $250,000 $ 1,098 $250,000 $ 1,186 $250,000
2 42 4,641 4,240 250,000 4,618 250,000 5,008 250,000
3 43 4,641 7,375 250,000 8,251 250,000 9,186 250,000
4 44 4,641 10,409 250,000 11,995 250,000 13,753 250,000
5 45 4,641 13,344 250,000 15,858 250,000 18,754 250,000
6 46 4,641 16,339 250,000 20,010 250,000 24,410 250,000
7 47 4,641 19,426 250,000 24,498 250,000 30,824 250,000
8 48 4,641 22,560 250,000 29,295 250,000 38,037 250,000
9 49 4,641 25,714 250,000 34,391 250,000 46,114 250,000
10 50 4,641 28,870 250,000 39,782 250,000 55,131 250,000
15 55 4,641 44,251 250,000 71,327 250,000 118,033 250,000
20 60 4,641 57,824 250,000 111,181 250,000 225,334 391,052
25 65 4,641 67,898 250,000 161,360 259,974 400,260 620,305
30 70 4,641 73,146 250,000 224,259 326,378 682,241 952,051
</TABLE>
(1) The initial death benefit is guaranteed to age 100.
(2) If premiums are paid more frequently than annually, the payments would be
$2,320.66 semi-annually, $1,160.33 quarterly, or $386.78 monthly. The death
benefits and policy values would be slightly different for a policy with
more frequent premium payments.
(3)Assumes no policy loan has been made.
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 rates of return may be more
or less than those shown and will depend on a number of factors, including the
investment allocations made by an owner, and prevailing interest rates. The
death benefits and policy values for a Policy would be different from those
shown if the actual rates of return averaged 0%, 6%, and 12% over a period of
years but also fluctuated above or below those averages for individual policy
years. No representations can be made by Minnesota Life or the Funds that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
98
<PAGE>
Variable Adjustable Life Insurance (continued)
VAL '87
DEATH BENEFIT OPTION--CASH OPTION
MALE ISSUE AGE 40 FOR NON-SMOKERS
INITIAL DEATH BENEFIT--$250,000(1)
$4,641.31 INITIAL SCHEDULED PREMIUM(2)
USING MAXIMUM CONTRACTUAL MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(3) 6% GROSS(3) 12% GROSS(3)
INITIAL (-1.32% NET) (4.68% NET) (10.68% NET)
POL ATT BASE POLICY DEATH POLICY DEATH POLICY DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
--- --- ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $4,641 $ 1,010 $250,000 $ 1,098 $250,000 $ 1,186 $250,000
2 42 4,641 4,240 250,000 4,618 250,000 5,008 250,000
3 43 4,641 7,375 250,000 8,251 250,000 9,186 250,000
4 44 4,641 10,409 250,000 11,995 250,000 13,753 250,000
5 45 4,641 13,341 250,000 15,855 250,000 18,751 250,000
6 46 4,641 16,166 250,000 19,831 250,000 24,224 250,000
7 47 4,641 18,885 250,000 23,929 250,000 30,227 250,000
8 48 4,641 21,493 250,000 28,153 250,000 36,816 250,000
9 49 4,641 23,989 250,000 32,507 250,000 44,060 250,000
10 50 4,641 26,365 250,000 36,992 250,000 52,028 250,000
15 55 4,641 36,109 250,000 61,377 250,000 105,956 250,000
20 60 4,641 41,070 250,000 89,030 250,000 194,410 340,185
25 65 4,641 39,027 250,000 120,661 250,000 329,987 516,352
30 70 4,641 24,565 250,000 157,682 250,000 532,906 752,354
</TABLE>
(1) The initial death benefit is guaranteed to age 100.
(2) If premiums are paid more frequently than annually, the payments would be
$2,320.66 semi-annually, $1,160.33 quarterly, or $386.78 monthly. The death
benefits and policy values would be slightly different for a policy with
more frequent premium payments.
(3)Assumes no policy loan has been made.
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 rates of return may be more
or less than those shown and will depend on a number of factors, including the
investment allocations made by an owner, and prevailing interest rates. The
death benefits and policy values for a Policy would be different from those
shown if the actual rates of return averaged 0%, 6%, and 12% over a period of
years but also fluctuated above or below those averages for individual policy
years. No representations can be made by Minnesota Life or the Funds that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
99
<PAGE>
Variable Adjustable Life Insurance (continued)
VAL '87
DEATH BENEFIT OPTION--PROTECTION OPTION
MALE ISSUE AGE 40 FOR NON-SMOKERS
INITIAL DEATH BENEFIT--$250,000(1)
$4,641.31 INITIAL SCHEDULED PREMIUM(2)
USING CURRENT MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(3) 6% GROSS(3) 12% GROSS(3)
INITIAL (-1.32% NET) (4.68% NET) (10.68% NET)
POL ATT BASE POLICY DEATH POLICY DEATH POLICY DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
--- --- ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $4,641 $ 1,010 $250,000 $ 1,097 $250,000 $ 1,184 $250,000
2 42 4,641 4,240 250,000 4,616 250,085 5,002 250,376
3 43 4,641 7,375 250,000 8,247 250,245 9,170 251,490
4 44 4,641 10,409 250,000 11,987 250,477 13,715 253,361
5 45 4,641 13,343 250,000 15,845 250,780 18,687 256,011
6 46 4,641 16,339 250,000 19,996 251,161 24,327 259,503
7 47 4,641 19,425 250,000 24,480 252,120 30,709 264,443
8 48 4,641 22,559 250,000 29,268 253,700 37,870 270,895
9 49 4,641 25,714 250,000 34,350 255,772 45,867 278,806
10 50 4,641 28,869 250,000 39,719 258,251 54,767 288,174
15 55 4,641 44,251 250,000 70,953 275,607 116,113 358,964
20 60 4,641 57,824 250,000 109,634 300,224 222,164 385,427
25 65 4,641 67,898 250,000 157,016 252,766 395,056 612,139
30 70 4,641 73,146 250,000 218,903 318,418 673,764 940,136
</TABLE>
(1) The initial death benefit is guaranteed to age 100.
(2) If premiums are paid more frequently than annually, the payments would be
$2,320.66 semi-annually, $1,160.33 quarterly, or $386.78 monthly. The death
benefits and policy values would be slightly different for a policy with
more frequent premium payments.
(3)Assumes no policy loan has been made.
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 rates of return may be more
or less than those shown and will depend on a number of factors, including the
investment allocations made by an owner, and prevailing interest rates. The
death benefits and policy values for a Policy would be different from those
shown if the actual rates of return averaged 0%, 6%, and 12% over a period of
years but also fluctuated above or below those averages for individual policy
years. No representations can be made by Minnesota Life or the Funds that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
100
<PAGE>
Variable Adjustable Life Insurance (continued)
VAL '87
DEATH BENEFIT OPTION--PROTECTION OPTION
MALE ISSUE AGE 40 FOR NON-SMOKERS
INITIAL DEATH BENEFIT--$250,000(1)
$4,641.31 INITIAL SCHEDULED PREMIUM(2)
USING MAXIMUM CONTRACTUAL MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(3) 6% GROSS(3) 12% GROSS(3)
INITIAL (-1.32% NET) (4.68% NET) (10.68% NET)
POL ATT BASE POLICY DEATH POLICY DEATH POLICY DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
--- --- ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $4,641 $ 1,010 $250,000 $ 1,097 $250,000 $ 1,184 $250,000
2 42 4,641 4,240 250,000 4,616 250,085 5,002 250,376
3 43 4,641 7,375 250,000 8,247 250,245 9,170 251,490
4 44 4,641 10,409 250,000 11,987 250,477 13,715 253,361
5 45 4,641 13,341 250,000 15,842 250,780 18,674 256,011
6 46 4,641 16,166 250,000 19,809 251,151 24,082 259,465
7 47 4,641 18,884 250,000 23,896 251,588 29,983 263,748
8 48 4,641 21,492 250,000 28,104 252,090 36,421 268,891
9 49 4,641 23,988 250,000 32,437 252,655 43,447 274,925
10 50 4,641 26,365 250,000 36,894 253,280 51,109 281,887
15 55 4,641 36,109 250,000 60,959 257,265 100,931 332,066
20 60 4,641 41,070 250,000 87,650 262,554 182,327 318,496
25 65 4,641 39,026 250,000 116,742 268,973 311,292 486,662
30 70 4,641 24,565 250,000 147,256 276,364 504,357 711,679
</TABLE>
(1) The initial death benefit is guaranteed to age 100.
(2) If premiums are paid more frequently than annually, the payments would be
$2,320.66 semi-annually, $1,160.33 quarterly, or $386.78 monthly. The death
benefits and policy values would be slightly different for a policy with
more frequent premium payments.
(3)Assumes no policy loan has been made.
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 rates of return may be more
or less than those shown and will depend on a number of factors, including the
investment allocations made by an owner, and prevailing interest rates. The
death benefits and policy values for a Policy would be different from those
shown if the actual rates of return averaged 0%, 6%, and 12% over a period of
years but also fluctuated above or below those averages for individual policy
years. No representations can be made by Minnesota Life or the Funds that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
101
<PAGE>
Appendix II
Summary of Policy Charges
What sets cash value life insurance apart from other types of savings and
investment vehicles? It is the only product creating immediate and substantial
dollars in the form of a death benefit plus offering an accumulation component.
This is unlike other vehicles that can only create dollars over time as
contributions are made.
All life insurance policies have basically the same charges, although the
charges may be taken in different ways or at different points in time. VAL has
two distinct ways to recover expenses from a standard policy:
I. Charges taken from the base premium:
As we receive premium contributions each year, we take a certain percentage
to partially cover expenses. A sales load is taken to pay commissions to the
agent. Two charges are also taken as a percentage of the premium to cover the
state premium tax and provide a guaranteed death benefit.
Also, in the first year of any life insurance policy, two things are
different than in ongoing years: a larger commission is paid, and the policy
must be underwritten. To begin to cover these costs, an additional sales load
and an underwriting charge are taken from the premium in just the first year.
These two charges may be assessed on future increases in premium and face
amount adjustments.
<TABLE>
<CAPTION>
Charges taken from premium: Plus, in the first year:
----------------------------------------------------------------------------------------
<S> <C>
7.00% Sales load Additional sales load (up to 23%)
Underwriting charge (up to $5/$1,000 of
1.50% Face amount guarantee insurance coverage)
2.50% State premium tax
-----------------------
11.00% Total
</TABLE>
II. Charges taken from the actual cash value:
After the above charges are taken from the premium, the remaining amount is
the net premium. The net premium is then invested in the guaranteed principal
account and/or in the portfolios of the Funds you have selected which is
referred to as the Variable Life Account. For a VAL insurance policy, the value
in the Variable Life Account is determined by the number or units in each of
your portfolios and their current value.
There are two sets of charges that affect your actual cash value. One set is
a direct charge and the other set is an indirect charge. The direct set is the
cost of insurance and an administration charge which is taken from the policy
actual cash value on a monthly basis. (Refer to Table A.) The cost of insurance
charge goes to cover the risk of death while the administration charge covers
the cost of maintaining each policy. Transaction charges are also taken from
the actual cash value as transactions occur.
Table A
Direct charges taken from actual cash value:
--------------------------------------------------------------
.Administration charge ($60/year)
.Cost of insurance charge
.If applicable: Transaction Charges
In addition to the charges described above, there are additional charges for
sub-standard risk policies. These charges are taken directly from the premium
in the case of VAL '95 policies and as charges against the policy value on VAL
'87 policies.
102
<PAGE>
The indirect set of charges include the Mortality and Expense Risk charge
taken from the Variable Life Account plus the Advisory Fee and Fund Expense
taken from the Funds. The Mortality and Expense Risk charge protects the
insurance company from the risk that total policy charges may not be adequate
to cover actual company expenses. The Fund charges cover the advisory fee of
the fund manager and portfolio expense for each of VAL's portfolios.
For illustration purposes, we use an average of the actual Mortality and
Expense Risk Charge, Advisory Fee and Fund Expense which is 1.32 percent. These
are listed for each portfolio in Table B.
Your actual cash value is determined daily, net of the charges associated
with the portfolios you have selected, so they do not appear as a direct
expense. This is reflected illustratively by an assumed net rate of return.
Consider this example: assumed gross rate of 9.00 percent--Average of actual
expenses total in Table B of 1.32 percent = assumed net rate of return of 7.68
percent.
Table B -- Indirect Charges
Actual Variable Life Separate Account Expenses and Fund Fees
<TABLE>
<CAPTION>
Mortality Other
and Expense Advisory Fund
Portfolio Name Risk Fee + Expenses = Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Advantus Series Fund, Inc.
Growth....................... 0.50% 0.50% + 0.03% = 1.03%
Bond......................... 0.50% 0.50% + 0.05% = 1.05%
Money Market................. 0.50% 0.50% + 0.08% = 1.08%
Asset Allocation............. 0.50% 0.50% + 0.03% = 1.03%
Mortgage Securities.......... 0.50% 0.50% + 0.07% = 1.07%
Index 500.................... 0.50% 0.40% + 0.04% = 0.94%
Capital Appreciation......... 0.50% 0.75% + 0.03% = 1.28%
International Stock.......... 0.50% 0.70% + 0.24% = 1.44%
Small Company Growth......... 0.50% 0.75% + 0.04% = 1.29%
Value Stock.................. 0.50% 0.75% + 0.04% = 1.29%
Small Company Value*......... 0.50% 0.75% + 0.15% = 1.40%
Global Bond.................. 0.50% 0.60% + 0.53% = 1.63%
Index 400 Mid-Cap*........... 0.50% 0.40% + 0.15% = 1.05%
Macro-Cap Value*............. 0.50% 0.70% + 0.15% = 1.35%
Micro-Cap Growth*............ 0.50% 1.10% + 0.15% = 1.75%
Real Estate Securities*...... 0.50% 0.75% + 0.15% = 1.40%
Templeton Variable Product
Series:
Developing Markets Fund Class
2........................... 0.50% 1.25% + 0.66% = 2.41%
Average.................... 0.50% 0.67% + 0.15% = 1.32%
</TABLE>
* We voluntarily absorbed certain expenses for these portfolios, as
detailed in the footnote to the expense table on page 6.
103
<PAGE>
[Flow Chart Appears Here]
YOUR VAL PREMIUM AT WORK
------------------------
- -------------------------------
- -------------------------------
Variable Adjustable Life
--------------------------
. Male, Age 40, Non-smoker
. $250,000 Insurance Benefit
. Cash Death Benefit Option
- -------------------------------
- -------------------------------
+ Net Rate X Actual Cash Value
- ----------------------------------------
9.00% Gross Rate
- -1.32% Charges from Variable Life
- ------ Account & Series Fund
7.68% Net Rate
- ----------------------------------------
- - Charges from Actual Cash Value
- -------------------------------
Administration Fee
Cost of Insurance Charge
- -------------------------------
= VAL Policy Values
Year 1 Year 2 Year 3 Year 4
$4,205 $4,205 $4,205 $4,205
Charges Charges Charges Charges
From From From
Premium Premium Premium
From
Net Net Net
Premium Premium Premium
Premium
Net
Premium
To Actual Cash Value
$1.013 $4,455 $8,126 $12,041
[_] Charges taken annually from the $4,205 premium: sales load (7%), premium tax
(2.5%) and death benefit guarantee (1.5%).
Charges taken from the $4,205 premium in the first year only: sales load
(23%) and underwriting charge (up to $5 per $1,000).
+ Net Rate reflect the Mortality & Expense Risk Charge of 0.50% is taken from
the Variable Life Account with the Advisory Fee and Fund Expenses taken from
the Funds. This rate is for illustrative purposes and is not an indication
of future results.
- - Administrative fee is $60 a year. Cost of insurance charge is the cost of
providing the death benefit which varies based on age, gender, health,
premium level and duration.
104
<PAGE>
Variable Adjustable Life Insurance (continued)
VAL '95
DEATH BENEFIT OPTION--CASH OPTION
MALE ISSUE AGE 40 FOR NON-SMOKERS
INITIAL DEATH BENEFIT--$250,000(1)
$4,205.30 INITIAL SCHEDULED PREMIUM(2)
USING CURRENT MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(3) 9% GROSS(3) 12% GROSS(3)
INITIAL (-1.32% NET) (7.68% NET) (10.68% NET)
POL ATT BASE POLICY DEATH POLICY DEATH POLICY DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
--- --- ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $4,205 $ ,900 $250,000 $ 1,013 $250,000 $ 1,050 $250,000
2 42 4,205 3,941 250,000 4,455 250,000 4,631 250,000
3 43 4,205 6,907 250,000 8,126 250,000 8,559 250,000
4 44 4,205 9,794 250,000 12,041 250,000 12,868 250,000
5 45 4,205 12,602 250,000 16,219 250,000 17,601 250,000
6 46 4,205 15,326 250,000 20,674 250,000 22,799 250,000
7 47 4,205 17,966 250,000 25,433 250,000 28,518 250,000
8 48 4,205 20,634 250,000 30,648 250,000 34,950 250,000
9 49 4,205 23,350 250,000 36,365 250,000 42,179 250,000
10 50 4,205 26,086 250,000 42,599 250,000 50,269 250,000
15 55 4,205 39,545 250,000 82,623 250,000 106,937 250,000
20 60 4,205 51,306 250,000 141,821 260,654 203,482 367,088
25 65 4,205 59,498 250,000 227,596 370,445 360,737 575,126
30 70 4,205 62,601 250,000 347,424 505,258 613,604 872,747
</TABLE>
(1) The initial death benefit is guaranteed to age 100.
(2) If premiums are paid more frequently than annually, the payments would be
$2,102.65 semi-annually, $1,051.33 quarterly, or $350.45 monthly. The death
benefits and policy values would be slightly different for a policy with
more frequent premium payments.
(3)Assumes no policy loan has been made.
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 rates of return may be more
or less than those shown and will depend on a number of factors, including the
investment allocations made by an owner, and prevailing interest rates. The
death benefits and policy values for a Policy would be different from those
shown if the actual rates of return averaged 0%, 9%, and 12% over a period of
years but also fluctuated above or below those averages for individual policy
years. No representations can be made by Minnesota Life or the Funds that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
105
<PAGE>
Variable Adjustable Life Insurance (continued)
VAL '95
DEATH BENEFIT OPTION--CASH OPTION
MALE ISSUE AGE 40 FOR NON-SMOKERS
INITIAL DEATH BENEFIT--$250,000(1)
$4,205.30 INITIAL SCHEDULED PREMIUM(2)
USING MAXIMUM CONTRACTUAL MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(3) 9% GROSS(3) 12% GROSS(3)
INITIAL (-1.32% NET) (7.68% NET) (10.68% NET)
POL ATT BASE POLICY DEATH POLICY DEATH POLICY DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- --- --- ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $4,205 $ ,900 $250,000 $ 1,013 $250,000 $ 1,050 $250,000
2 42 4,205 3,941 250,000 4,455 250,000 4,631 250,000
3 43 4,205 6,907 250,000 8,126 250,000 8,559 250,000
4 44 4,205 9,794 250,000 12,041 250,000 12,868 250,000
5 45 4,205 12,602 250,000 16,219 250,000 17,601 250,000
6 46 4,205 15,326 250,000 20,674 250,000 22,799 250,000
7 47 4,205 17,963 250,000 25,427 250,000 28,509 250,000
8 48 4,205 20,511 250,000 30,499 250,000 34,789 250,000
9 49 4,205 22,967 250,000 35,915 250,000 41,701 250,000
10 50 4,205 25,326 250,000 41,699 250,000 49,311 250,000
15 55 4,205 35,391 250,000 77,120 250,000 100,857 250,000
20 60 4,205 41,466 250,000 126,876 250,000 185,559 337,137
25 65 4,205 41,365 250,000 197,166 323,166 316,527 508,776
30 70 4,205 30,179 250,000 288,855 423,947 513,902 738,448
</TABLE>
(1) The initial death benefit is guaranteed to age 100.
(2) If premiums are paid more frequently than annually, the payments would be
$2,102.65 semi-annually, $1,051.33 quarterly, or $350.45 monthly. The death
benefits and policy values would be slightly different for a policy with
more frequent premium payments.
(3)Assumes no policy loan has been made.
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 rates of return may be more
or less than those shown and will depend on a number of factors, including the
investment allocations made by an owner, and prevailing interest rates. The
death benefits and policy values for a Policy would be different from those
shown if the actual rates of return averaged 0%, 9%, and 12% over a period of
years but also fluctuated above or below those averages for individual policy
years. No representations can be made by Minnesota Life or the Funds that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
106
<PAGE>
Appendix III
Illustration of Death Benefit Calculation
As an example of the calculation of the death benefit under the Policy,
assume a Policy and an insured with the following characteristics: The insured
is a male, age 40 at Policy issue, and a non-smoker. The Variable Adjustable
Life Insurance Policy has a face amount of $250,000, with a level face amount
and premiums for the life of the insured and the Protection Option has been
chosen as the form of the death benefit. Further, assume that 100 percent of
net premiums are invested in the Variable Life Account sub-accounts, that the
gross investment rate in the Variable Life Account was 12 percent each year and
that Minnesota Life deducted current mortality charges. This situation is shown
in Appendix I, "Illustrations of Policy Values, Death Benefits and Premiums,"
on page 93 of this prospectus.
Now, further assume that the insured dies at age 50, after the Policy has
been in force for a period of ten years and during which time all of the
premiums have been paid. No policy loans or withdrawals have been made under
the Policy.
Given these assumptions, the policy value of a VAL '95 Policy (the actual
cash value plus any policy loan) on the date of the insured's death--composed
of the Policy's interest in one or more of the sub-accounts of the Variable
Life Account--is equal to $49,653. Under the Protection Option the death
benefit will be $299,653.
Given these assumptions, the policy value of a VAL '87 Policy (the actual
cash value plus any policy loan) on the date of the insured's death--composed
of the Policy's interest in one or more of the sub-accounts of the Variable
Life Account--is equal to $54,767. Under the Protection Option the death
benefit will be $299,039.
The total proceeds payable under either Policy would be adjusted to include
any additional insurance provided by an additional benefit agreement and the
amount payable would be reduced by any unpaid policy charges or any policy
loan.
As an alternative, consider the same example, except that the owner elected
the Cash Option death benefit. This situation is shown in Appendix I,
"Illustrations of Policy Values, Death Benefits and Premiums," on page 93 of
this prospectus.
The death benefit under the Cash Option does not vary from the Policy's face
amount until the Policy becomes paid-up. In this example, again assuming timely
payment of premiums, no withdrawals and no policy loan activity, the policy
value on the date of the insured's death would be $50,269 in the case of a VAL
'95 Policy and $55,131 for a VAL '87 Policy. These are higher values than those
under the Protection Option, reflecting lower mortality costs charged to the
Policy because of the level death benefit. Here, the death benefit is the
current face amount or $250,000.
In determining the total proceeds payable under the Policy, the same
adjustments are made to the death benefit as described under the Protection
Option. However, under the Cash Option any premium paid beyond the end of the
policy month in which the insured died is also included as part of the Policy
proceeds.
107
<PAGE>
Appendix IV
Policy Loan Example
As an example of the effect of a policy loan upon the Policy and upon the
death benefit, assume a VAL '95 Policy and an insured with the following
characteristics: The insured is a male, age 40 at Policy issue, and a non-
smoker. The Variable Adjustable Life Insurance Policy has a face amount of
$250,000, with a level face amount and premiums for the life of the insured and
the Protection Option has been chosen as the form of the death benefit.
Further, assume that 100 percent of net premiums are invested in the sub-
accounts of the Variable Life Account, that the gross investment rate in the
Variable Life Account was 12 percent each year and that Minnesota Life deducted
current mortality charges. This situation is shown in Appendix I,
"Illustrations of Policy Values, Death Benefits and Premiums," on page 93 of
this prospectus.
Now assume that the insured, who is also the owner of the Policy, takes a
policy loan in the amount of $5,000 at the end of the fourth policy year and
after all premiums have been paid for that year.
When a loan is taken, the actual cash value invested in the Variable Life
Account is reduced by the amount borrowed and any unpaid interest. The amount
is then transferred to the loan account. Interest is charged on the policy loan
as described in the Policy, but for purposes of this example, assume a policy
loan interest rate of 8 percent per annum. Interest is also credited to a
Policy when there is a policy loan. Interest credits on a policy loan are at a
rate which is not less than the policy loan interest rate less 2 percent per
annum. The interest credit in this example would then be 6 percent.
The following table shows the effect on the year five values, namely those
values at the end of that year, if a policy loan of $5,000 is made at the end
of the fourth year.
<TABLE>
<CAPTION>
Policy Value
With Loan Without Loan
- --------- ------------
<S> <C>
$17,220 $17,454
</TABLE>
<TABLE>
<CAPTION>
End of Year
Total Death Benefit
With Loan Without Loan
--------- ------------
<S> <C>
$267,220 $267,454
</TABLE>
Note that the difference in policy values here represents the difference
between the actual Policy performance in the sub-accounts of the Variable Life
Account and the interest credited on the principal amount of the policy loan.
If interest credited on a policy loan exceeds the Policy performance, then a
Policy with a loan will have a greater value than a Policy with no loan
activity. Where Policy performance exceeds the interest credited on a policy
loan, the resulting policy value will be lower than it would have been if the
loan were not made.
Now consider an identical situation to that above except that the owner has
elected the Cash Option death benefit. The following table shows the effect on
the same year five values if a policy loan of $5,000 is made at the end of the
fourth year.
<TABLE>
<CAPTION>
Policy Value
With Loan Without Loan
- --------- ------------
<S> <C>
$17,366 $17,601
</TABLE>
<TABLE>
<CAPTION>
End of Year
Total Death Benefit
With Loan Without Loan
--------- ------------
<S> <C>
$250,000 $250,000
</TABLE>
The values above under the "With Loan" headings are policy values, which is
the actual cash value of a Policy plus any policy loan. If the owner were to
surrender the Policy at the end of the fifth year, he would receive only the
actual cash value in the sub-accounts of the Variable Life Account.
Similarly, if the insured were to die at the end of the fifth year we would
pay out the death benefit listed under the "With Loan" heading less the amount
of the policy loan.
108
<PAGE>
Appendix V
Example of Sales Load Computation
As an example of the method we use to compute sales load, assume a protection
type plan where the annual base premium is $1,000 and where the premium paying
period, prior to any reduction in face amount, is 20 years. The insured is a
male, age 35 with a life expectancy of 38 years. As premiums are paid in each
year, we will assess a basic sales load of 7 percent or $70 in each year. Also,
as premiums are paid in the first year, we will assess a first year sales load
of 23 percent or $230. Therefore, in the first year the sales load charges will
total $300 or 30 percent ($300 / $1,000), and over the 15 year period from
policy issue sales load charges will total $1,280 or 8.54 percent ($1,280 /
$15,000).
Compliance with the 9 percent limitation will be achieved by reducing the
first year sales load, if necessary. For example, consider a Policy with a
protection type plan where the annual base premium is $1,000 and where the
premium paying period prior to any reduction in face amount is 20 years.
Further assume that the insured is a male, age 72 at issue, with a life
expectancy of 9 years. In this case, the first year sales load must be reduced
so that the total sales load will not exceed 9 percent over the life expectancy
of the insured. As premiums are paid in each year we will assess the basic
sales load of 7 percent, or $70, but the first year sales load applicable to
premiums paid in the first year will be reduced from 23 percent to 18 percent,
or $180. Therefore, in the first year the sales load charges will total $250 or
25 percent ($250 / $1,000), and over the period of the insured's life
expectancy sales load charges will total $810 or 9 percent ($810 / $9,000).
As an example of the method we use to assess sales load when an adjustment
occurs during a period in which a first year sales load is being collected,
consider a Policy where an adjustment is made after one-half of the first
annual premium is paid. Assume that the premium is $1,000 annually as in the
example above and further assume that the premiums are being paid on a monthly
basis, $83.33 per month. As premiums are paid in each year we will assess a
basic sales load of 7 percent of premiums received or $70 in that year. A first
year sales load, taken in addition to the basic sales load, would also be
assessed in a total amount of $230. Now assume an adjustment is made, after the
payment of six monthly premiums, and that the premium is increased from $1,000
to $1,200. Both before and after the adjustment we will continue to assess a
basic sales load of 7 percent of the premiums received. However, since only
one-half of the first year sales load of $230 has been collected, a first year
sales load of $115 remains to be collected. The $200 increase in premium will
also be assessed a first year sales load of 23 percent, or $46. Both are added
together and will be collected in the 12 months following the adjustment.
Therefore, after the adjustment of the premium to a $1,200 amount, and assuming
that premiums continue to be paid on a monthly basis, each monthly premium of
$100 will be subjected to a total sales load amount of $20.42, consisting of $7
of basic sales load, and $13.42 of first year sales load.
109
<PAGE>
Appendix VI
Average Annual Returns
Twenty-Year Holding Periods
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
Type 1957 1962 1967 1972 1977 1982 1987 1992 1997 1998
- ---- ------ ------ ------ ------ ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury 0.912 1.496 2.378 3.387 4.439 6.513 7.444 7.700 7.289 7.171
Inflation 3.454 2.978 1.866 2.350 3.984 6.010 6.314 6.214 4.886 4.527
Bonds 2.516 2.484 2.011 2.948 3.988 4.471 7.885 9.541 10.288 10.857
Stocks 12.976 15.251 14.628 11.674 8.119 8.295 9.269 11.334 16.646 17.747
</TABLE>
Ending periods from 1957-1998
Source: Stocks, Bonds, Bills and Inflation (SBBI), Analyzer Software, Ibbotson
Associates, Inc., Chicago, All rights reserved.
The above information contains the average annual rate of return over twenty-
year holding periods for common stocks (S&P 500), high grade corporate bonds,
30-day U.S. Treasury bills, and inflation (example: 1938-1957, 1943-1962,
etc.). These average rates assume reinvestment of capital gains, dividends and
interest. This is a retrospective view of performance and should in no way be
construed as a projection of future trends.
This graph shows that even though stock investments tend to be more volatile
in short time intervals historically, they have generated rates of return that
have consistently been higher than inflation. Bonds and U.S. Treasury bills
have not always kept up with inflation. The figures do not take into account
the charges associated with a Variable Adjustable Life policy, but do indicate
the potential gain of holding the assets illustrated.
Some additional statistics on the performance of stocks in relation to high
grade, long-term corporate bonds and U.S. Treasury bills over the 54 twenty-
year periods beginning in 1926 and ending in 1998 include:
The average annual return of stocks was higher than that of bonds in 51
of the 54 periods.
The average annual return of stocks was higher than that of U.S. Treasury
bills in all of the 54 periods.
The average annual return of stocks was higher than inflation in all of
the 54 periods.
In the 44 thirty-year periods beginning in 1926 and ending in 1998, the
average annual return of stocks was higher than that of bonds, U.S. Treasury
bills and inflation in all 44 time periods.
From 1926 through 1998, the average annual return for this 73 year period
was:
11.2% for common stocks
5.80% for high grade, long-term corporate bonds
3.77% for U.S. Treasury bills
110
<PAGE>
Appendix VII
S&P 500
PERFORMANCE HISTORY 1926-1998
[BAR CHART APPEARS HERE]
Yr. ANNUAL TOTAL RETURN
26 11.62
37.5
43.6
-8.4
-24.9
-43.3
-8.2
54
-1.4
47.7
33.9
-35
31.1
0
40 -9.8
11.6
20.3
25.9
19.8
36.4
-8.1
5.7
5.5
18.8
50 31.7
24
18.4
-0.01
52.6
31.6
6.6
-10.8
43.4
12
60 0
26.9
-8.7
22.8
16.5
12.5
-10.1
24
11.1
-8.5
70 4
14.3
19
-14.7
-26.5
37.2
23.8
-7.2
6.6
18.4
80 32.4
-4.9
21.4
22.5
6.3
32.2
18.5
5.2
16.8
31.5
-3.2
30.4
7.67
9.99
1.31
95 37.43
96 23.07
97 33.36
98 28.58
Source: Stocks, Bonds, Bills and Inflation (SBBI), Analyzer Software, Ibbotson
Associates, Inc., Chicago. All rights reserved.
The above chart illustrates that, in any calendar year, the rate of return
for stocks can be positive or negative. However, when viewed over the entire
period of 73 years, stocks have had a positive return in more than two out of
every three years. For the person with a long term view, the results of this
pattern have been very rewarding.
111
<PAGE>
Appendix VIII
RANGE OF RETURNS
Rolling Period Returns Using Ibbotson Asset Class Information*
(1960 through 1998)
[BAR CHART APPEARS HERE]
1 YEAR HIGH % LOW % MEAN %
ROLLING PERIOD RETURN RETURN RETURN
- -------------- ------ ------ ------
Small Cap 83.569 -30.904 16.476
Large Cap Stocks (S&P 500) 37.430 -26.468 13.267
Corporate Bonds 42.562 -8.090 8.176
Government Bonds 29.097 -5.144 7.545
United States T-bills 14.709 2.127 5.672
5 YEAR HIGH % LOW % MEAN %
ROLLING PERIOD RETURN RETURN RETURN
- -------------- ------ ------ ------
Small Cap 39.804 -12.252 14.504
Large Cap Stocks (S&P 500) 24.057 -2.356 10.984
Corporate Bonds 22.513 -2.222 7.445
Government Bonds 16.978 2.080 7.366
United States T-bills 11.115 2.834 5.974
10 YEAR HIGH % LOW % MEAN %
ROLLING PERIOD RETURN RETURN RETURN
- -------------- ------ ------ ------
Small Cap 30.381 3.199 13.111
Large Cap Stocks (S&P 500) 19.185 1.238 10.277
Corporate Bonds 16.319 1.677 7.470
Government Bonds 13.126 3.484 7.584
United States T-bills 9.174 3.878 6.222
15 YEAR HIGH % LOW % MEAN %
ROLLING PERIOD RETURN RETURN RETURN
- -------------- ------ ------ ------
Small Cap 23.326 5.872 14.081
Large Cap Stocks (S&P 500) 17.904 4.307 10.333
Corporate Bonds 13.659 3.077 7.601
Government Bonds 11.272 4.755 7.864
United States T-bills 8.323 4.556 6.593
20 YEAR HIGH % LOW % MEAN %
ROLLING PERIOD RETURN RETURN RETURN
- -------------- ------ ------ ------
Small Cap 20.344 11.472 14.250
Large Cap Stocks (S&P 500) 17.747 6.761 9.732
Corporate Bonds 10.857 3.028 7.006
Government Bonds 9.851 4.836 7.451
United States T-bills 7.718 5.087 6.428
30 YEAR HIGH % LOW % MEAN %
ROLLING PERIOD RETURN RETURN RETURN
- -------------- ------ ------ ------
Small Cap 15.099 12.052 12.642
Large Cap Stocks (S&P 500) 12.668 9.946 9.900
Corporate Bonds 9.142 6.801 7.086
Government Bonds 8.714 7.338 7.283
United States T-bills 6.770 6.339 6.010
Source: Ibbotson & Associates.
* Past performance is no guarantee of future results.
The above chart illustrates the volatility in the rate of return for stocks,
represented by Small Cap Stocks, Large Cap Stocks (S&P 500), Corporate Bonds,
Government Bonds, and U.S. T-Bills for progressively longer holding periods.
The volatility is reduced as the holding period is increased from one year to
just five years. For holding periods of 10 years or longer, volatility of
return is reduced even more. These longer holding periods have produced returns
that are quite consistent, and are very attractive when compared with the
returns from U.S. Treasury bills and high-grade, long-term corporate bonds.
The strategy of reducing the year-to-year volatility in the rate of return
for stocks by lengthening the holding period can work to the advantage of a
person who buys a cash value life insurance policy like Variable Adjustable
Life, and utilizes stock sub-accounts. That's because the holding period for
such a policy typically can be extremely long--at least 10 years, and possibly
20, 30 or more years.
112
