<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 the following portfolios of
Advantus Series Fund, Inc.:
. Growth Portfolio . Small Company Growth Portfolio
. Bond Portfolio . Value Stock Portfolio
. Money Market Portfolio. Small Company Value Portfolio
. Asset Allocation Portfolio
. Global Bond Portfolio
. Mortgage Securities Portfolio
. Index 400 Mid-Cap Portfolio
. Index 500 Portfolio . Macro-Cap Value Portfolio
. Capital Appreciation Portfolio
. Micro-Cap Growth Portfolio
. International Stock Portfolio
. Real Estate Securities Portfolio
The Variable Life Account also invests in the following Fund portfolios:
Franklin Templeton Variable Insurance Products Trust:
. Templeton Developing Markets
Securities Fund--Class 2 Shares
.Templeton Asset Strategy Fund--
Class 2 Shares
.Franklin Small Cap Fund--Class 2
Shares
Fidelity Variable Insurance Products Funds:
. Mid Cap Portfolio--Service Class 2
Shares
. Contrafund(R) Portfolio--Service
Class 2 Shares
. Equity-Income Portfolio--Service
Class 2 Shares
Janus Aspen Series:
.Capital Appreciation Portfolio--
Service Shares
.International Growth Portfolio--
Service Shares
Warburg Pincus Trust:
. Global Post-Venture Capital
Portfolio
This prospectus must be accompanied by the current prospectuses of the Fund
portfolios shown above. 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 1, 2000
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Summary................................................................... 1
Condensed Financial Information........................................... 7
General Descriptions
Minnesota Life Insurance Company........................................ 9
Variable Life Account................................................... 9
The Funds............................................................... 10
Additions, Deletions or Substitutions................................... 11
Selection of Sub-Accounts............................................... 11
The Guaranteed Principal Account........................................ 12
Detailed Information about the Variable Adjustable Life Insurance Policy
Adjustable Life Insurance............................................... 13
Policy Adjustments...................................................... 15
Applications and Policy Issue........................................... 19
Policy Premiums......................................................... 20
Policy Values........................................................... 23
Death Benefit Options................................................... 26
Policy Loans............................................................ 27
Surrender............................................................... 29
Free Look............................................................... 30
Conversion.............................................................. 30
Policy Charges.......................................................... 30
Other Policy Provisions................................................. 33
Additional Benefits..................................................... 35
Other Matters
Federal Tax Status...................................................... 36
Directors and Principal Management Officers of Minnesota Life........... 39
Voting Rights........................................................... 40
Distribution of Policies................................................ 40
Legal Matters........................................................... 41
Legal Proceedings....................................................... 41
Experts................................................................. 41
Registration Statement.................................................. 41
Special Terms............................................................. 42
Financial Statements of Minnesota Life Variable Life Account.............. SA-1
Financial Statements of Minnesota Life Insurance Company.................. ML-1
Appendix A-Illustrations of Policy Values, Death Benefits and Premiums.... A-1
Appendix B-Understanding How Premium Becomes Cash Value................... B-1
Appendix C-Comparison of Death Benefit Options............................ C-1
Appendix D-Example of Sales Load Computation.............................. D-1
</TABLE>
<PAGE>
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 guaranteed insurance provisions, flexible
administrative procedures and significant and useful market sensitive
investment features.
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.
What makes the Policy "Adjustable"?
The Policy is termed "Adjustable" because it allows you the flexibility to
tailor your Policy to your needs 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.
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 plan of insurance provides the initial face amount and a
scheduled premium level, 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
1
<PAGE>
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 15.
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, 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. The claims-paying ability of Minnesota
Life as measured by independent rating agencies does not provide any
guarantees of the investment performance of the Variable Life Account.
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 the following portfolios of Advantus
Series Fund, Inc.:
. Growth
. Bond
. Money Market
. Asset Allocation
. 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
2
<PAGE>
In addition, the Variable Life Account invests in the following Fund
portfolios:
Franklin Templeton Variable Insurance Products Trust:
. Templeton Developing Markets Securities Fund--Class 2 Shares
. Templeton Asset Strategy Fund--Class 2 Shares
. Franklin Small Cap Fund--Class 2 Shares
Fidelity Variable Insurance Products Funds:
. Mid Cap Portfolio--Service Class 2 Shares
. Contrafund Portfolio--Service Class 2 Shares
. Equity-Income Portfolio--Service Class 2 Shares
Janus Aspen Series:
. Capital Appreciation Portfolio--Service Shares
. International Growth Portfolio--Service Shares
Warburg Pincus Trust:
. Global Post-Venture Capital Portfolio
The Portfolios of the Funds have different investment objectives and
different levels of risk. 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 accompany 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 we receive your request to change the allocation. You may
also request to transfer amounts from one sub-account to another.
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 which option best fits your need.
The Cash Option provides a fixed death benefit equal to the guaranteed face
amount. Favorable nonguaranteed elements, including investment returns, 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 42, 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 nonguaranteed elements,
including 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.
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 30. 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 at an annual rate of .50 percent of the Variable Life
Account average daily net assets. The charge is deducted from the Variable Life
Account assets on each date on which a Fund Portfolio is valued.
3
<PAGE>
In addition, the Funds impose certain fees and expenses shown in the table
below.
FUND ANNUAL EXPENSES
(As a percentage of average net assets for the described Advantus Series
Fund, Inc., the Franklin Templeton Variable Insurance Products Trust, Fidelity
Variable Insurance Products Funds, Janus Aspen Series, and Warburg Pincus
Trust)
<TABLE>
<CAPTION>
Total annual
fund operating Total annual
expenses Total fund operating
without waivers expenses with
Management Other Distribution waivers or and waivers or
fee expenses (12b-1) fees reductions reductions reductions
---------- -------- ------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Advantus Series Fund,
Inc.: (1)
Growth Portfolio 0.45% 0.03% 0.25% 0.73% -- 0.73%
Bond Portfolio 0.30% 0.06% 0.25% 0.61% -- 0.61%
Money Market Portfolio 0.25% 0.06% 0.25% 0.56% -- 0.56%
Asset Allocation
Portfolio 0.35% 0.03% 0.25% 0.63% -- 0.63%
Mortgage Securities
Portfolio 0.30% 0.06% 0.25% 0.61% -- 0.61%
Index 500 Portfolio 0.12% 0.05% 0.25% 0.42% -- 0.42%
Capital Appreciation
Portfolio 0.50% 0.04% 0.25% 0.79% -- 0.79%
International Stock
Portfolio (2) 0.59% 0.19% 0.25% 1.03% -- 1.03%
Small Company Growth
Portfolio 0.65% 0.05% 0.25% 0.95% -- 0.95%
Value Stock Portfolio 0.50% 0.05% 0.25% 0.80% -- 0.80%
Small Company Value
Portfolio (2) 0.70% 0.81% 0.25% 1.76% 0.66% 1.10%
Global Bond Portfolio
(2) 0.60% 0.34% 0.25% 1.19% -- 1.19%
Index 400 Mid-Cap
Portfolio (2) 0.15% 0.60% 0.25% 1.00% 0.45% 0.55%
Macro-Cap Value
Portfolio (2) 0.50% 0.78% 0.25% 1.53% 0.63% 0.90%
Micro-Cap Growth
Portfolio (2) 0.95% 0.47% 0.25% 1.67% 0.32% 1.35%
Real Estate Securities
Portfolio (2) 0.60% 1.30% 0.25% 2.15% 1.15% 1.00%
Franklin Templeton
Variable
Insurance Products
Trust--Class 2 Shares:
Templeton Developing
Markets Securities
Fund (7) 1.25% 0.31% 0.25% 1.81% -- 1.81%
Templeton Asset
Strategy
Fund (7) 0.60% 0.18% 0.25% 1.03% -- 1.03%
Franklin Small Cap Fund
(3) 0.55% 0.27% 0.25% 1.07% -- 1.07%
Fidelity Variable
Insurance Products
Funds--Service Class 2
Shares:
VIP Mid Cap Portfolio
(4) 0.57% 0.43% 0.25% 1.25% -- 1.25%
VIP Contrafund
Portfolio (4) 0.58% 0.12% 0.25% 0.95% -- 0.95%
VIP Equity-Income
Portfolio (4) 0.48% 0.10% 0.25% 0.83% -- 0.83%
Janus Aspen Series--
Service Shares:
Capital Appreciation
Portfolio (5) 0.65% 0.04% 0.25% 0.94% -- 0.94%
International Growth
Portfolio (5) 0.65% 0.11% 0.25% 1.01% -- 1.01%
Warburg Pincus Trust
Global Post-Venture
Capital Portfolio (6) 1.25% 0.33% -- 1.58% 0.18% 1.40%
</TABLE>
4
<PAGE>
(1) The shareholders of the fund approved new management fees for certain
portfolios and a distribution (12b-1) fee, effective May 1, 2000. The table
shows the new management and distribution fees that will be in effect May
1, 2000 and other expenses incurred in fiscal year 1999.
(2) Minnesota Life voluntarily waived certain expenses for these portfolios for
the period ended December 31, 1999. If these portfolios had been charged
for expenses, the ratio of expenses to average daily net assets would have
been as shown in the column "Total annual fund operating expenses without
waivers or reductions." It is Advantus Capital's intention to waive other
fund expenses during the current fiscal year which exceed, as a percentage
of average daily net assets, .15% except for the International Stock and
Global Bond Portfolios where other fund expenses must exceed 1.00%.
Advantus Capital reserves the option to reduce the level of other fund
expenses which it will voluntarily absorb.
(3) On February 8, 2000, a merger and reorganization was approved that combined
the assets of the fund with a similar fund of the Templeton Variable
Products Series Fund, effective May 1, 2000. On February 8, 2000, fund
shareholders approved new management fees, which apply to the combined fund
effective May 1, 2000. The table shows restated total expenses based on the
new fees and assets of the fund as of December 31, 1999, and not the assets
of the combined fund. However, if the table reflected both the new fees and
the combined assets, the fund's expenses after May 1, 2000 would be
estimated as: Franklin Small Cap Fund--Class 2 Management Fees 0.55%,
Distribution and Service Fees 0.25%, Other Expenses 0.27%, and Total Fund
Operating Expenses 1.07%. The fund's class 2 distribution plan or "Rule
12b-1 plan" is described in the fund's prospectus.
(4) Service Class 2 shares became effective January 11, 2000 and therefore
operating expenses are estimates for each fund for the fiscal year ended
December 31, 2000. The estimates do not reflect the effect of any expense
reimbursements or reduction during the period.
(5) Expenses are based on the estimated expenses that the new Service Shares
Class of each Portfolio expects to incur in its initial fiscal year.
(6) Fee waivers and expense reimbursements or credits reduced expenses of the
portfolio in 1999, but may be reduced at any time. See the fund prospectus
for more details.
(7) On February 8, 2000, shareholders approved a merger and reorganization
that combined the assets of the fund with a similar fund of the Franklin
Templeton Variable Insurance Products Trust ("VIP") effective May 1, 2000.
On February 8, 2000, VIP fund shareholders approved new management fees,
which apply to the combined fund effective May 1, 2000. The table shows
restated total expenses based on the new fees and the assets of the fund
as of December 31, 1999, and not the assets of the combined fund. However,
if the table reflected both the new fees and the combined assets, the
fund's expenses after May 1, 2000 would be estimated as: Templeton
Developing Markets Securities Fund--Class 2 Management Fees 1.25%,
Distribution and Service Fees 0.25%, Other Expenses 0.29%, and Total Fund
Operating Expenses 1.79%. Templeton Asset Strategy Fund--Class 2
Management Fees 0.60%, Distribution and Service Fees 0.25%, Other Expenses
0.14%, and Total Fund Operating Expenses 0.99%. The fund's Class 2
distribution plan or "Rule 12b-1 plan" is described in the fund's
prospectus.
SUMMARY OF POLICY CHARGES
<TABLE>
<CAPTION>
Rate Charged Against
---- ---------------
<S> <C> <C>
Base Premium
Sales Load 7.0% All base premiums
Premium Tax 2.5% All base premiums
Face Amount Guarantee Charge 1.5% All base premiums
First-Year Sales Load up to 23% First-year base premiums
Underwriting Charge up to $5/$1000 First-year base premiums
Nonrepeating Premium
Premium Tax 2.5% All nonrepeating premium
Actual Cash Value Charges
Administration Charge $5.00 per month Actual cash value
Cost of Insurance Charge varies by policy Actual cash value
Transaction Charge up to $25.00 per
adjustment
Separate Account Charge
Mortality and Expense Charge 0.50% annual rate Average daily net assets
Fund Charges
Advisory Fee varies by fund Average daily net assets
Other Fund Fees varies by fund Average daily net assets
</TABLE>
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
5
<PAGE>
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 36.
It should be noted, however, that 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 19.
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 30.
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.
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 23 and certain
transactions may have tax consequences as described under the heading "Federal
Tax Status" on page 36.
6
<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, 1999. 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,
----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Sub-
Account:
Unit value at
beginning of
year $4.60 $3.43 $2.59 $2.22 $1.79 $1.79 $1.72 $1.65 $1.23 $1.24
Unit value at
end of year $5.75 $4.60 $3.43 $2.59 $2.22 $1.79 $1.79 $1.72 $1.65 $1.23
Number of units
outstanding at
end of year 25,947,087 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
Bond Sub-
Account:
Unit value at
beginning of
year $2.29 $2.17 $1.99 $1.95 $1.63 $1.72 $1.57 $1.48 $1.26 $1.18
Unit value at
end of year $2.22 $2.29 $2.17 $1.99 $1.95 $1.63 $1.72 $1.57 $1.48 $1.26
Number of units
outstanding at
end of year 15,498,228 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
Money Market
Sub-Account:
Unit value at
beginning of
year $1.73 $1.66 $1.58 $1.52 $1.45 $1.40 $1.37 $1.34 $1.27 $1.19
Unit value at
end of year $1.80 $1.73 $1.66 $1.58 $1.52 $1.45 $1.40 $1.37 $1.34 $1.27
Number of units
outstanding at
end of year 8,537,295 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
Asset Allocation
Sub-Account:
Unit value at
beginning of
year $3.64 $2.96 $2.50 $2.23 $1.79 $1.83 $1.73 $1.62 $1.26 $1.22
Unit value at
end of year $4.17 $3.64 $2.96 $2.50 $2.23 $1.79 $1.83 $1.73 $1.62 $1.26
Number of units
outstanding at
end of year 41,923,737 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
Mortgage
Securities
Sub-Account:
Unit value at
beginning of
year $2.45 $2.31 $2.13 $2.03 $1.73 $1.80 $1.66 $1.56 $1.35 $1.24
Unit value at
end of year $2.49 $2.45 $2.31 $2.13 $2.03 $1.73 $1.80 $1.66 $1.56 $1.35
Number of units
outstanding at
end of year 6,357,179 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
Index 500 Sub-
Account:
Unit value at
beginning of
year $4.92 $3.86 $2.93 $2.42 $1.78 $1.77 $1.62 $1.51 $1.17 $1.23
Unit value at
end of year $5.88 $4.92 $3.86 $2.93 $2.42 $1.78 $1.77 $1.62 $1.51 $1.17
Number of units
outstanding at
end of year 34,132,820 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
Capital
Appreciation
Sub-Account:
Unit value at
beginning of
year $4.98 $3.82 $3.00 $2.56 $2.10 $2.06 $1.87 $1.79 $1.27 $1.30
Unit value at
end of year $6.02 $4.98 $3.82 $3.00 $2.56 $2.10 $2.06 $1.87 $1.79 $1.27
Number of units
outstanding at
end of year 26,226,878 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
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
International Stock Sub-
Account:
Unit value at beginning
of year $2.11 $1.99 $1.79 $1.50 $1.32 $1.33 $0.93 $1.00(a)
Unit value at end of
year $2.56 $2.11 $1.99 $1.79 $1.50 $1.32 $1.33 $0.93
Number of units
outstanding at end of
year 45,292,311 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 $1.82 $1.81 $1.69 $1.59 $1.21 $1.15 $1.00(b)
Unit value at end of
year $2.64 $1.82 $1.81 $1.69 $1.59 $1.21 $1.15
Number of units
outstanding at end of
year 36,120,491 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 $2.18 $2.15 $1.78 $1.37 $1.04 $1.00(c)
Unit value at end of
year $2.17 $2.18 $2.15 $1.78 $1.37 $1.04
Number of units
outstanding at end of
year 26,260,066 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 $0.86 $1.00(d)
Unit value at end of
year $0.83 $0.86
Number of units
outstanding at end of
year 2,831,365 894,678
Global Bond Sub-Account:
Unit value at beginning
of year $1.12 $1.00(d)
Unit value at end of
year $1.02 $1.12
Number of units
outstanding at end of
year 1,257,783 293,075
Index 400 Mid-Cap Sub-
Account:
Unit value at beginning
of year $1.05 $1.00(d)
Unit value at end of
year $1.22 $1.05
Number of units
outstanding at end of
year 3,509,018 1,020,446
Macro-Cap Value Sub-Ac-
count:
Unit value at beginning
of year $1.06 $1.00(d)
Unit value at end of
year $1.13 $1.06
Number of units
outstanding at end of
year 3,488,610 823,503
Micro-Cap Growth Sub-Ac-
count:
Unit value at beginning
of year $1.03 $1.00(d)
Unit value at end of
year $2.55 $1.03
Number of units
outstanding at end of
year 4,222,084 733,049
Real Estate Securities
Sub-Account:
Unit value at beginning
of year $0.87 $1.00(d)
Unit value at end of
year $0.83 $0.87
Number of units
outstanding at end of
year 794,290 284,627
Templeton Development
Markets Securities Sub-
Account:
Unit value at beginning
of year $0.86 $1.00(d)
Unit value at end of
year $1.31 $0.86
Number of units
outstanding at end of
year 2,898,791 778,238
</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.
8
<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 ("1940 Act").
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 twenty-five sub-accounts to which you
may allocate premiums. Each sub-account invests in shares of a corresponding
Portfolio of the Funds.
9
<PAGE>
The Funds
Below is a list of the Portfolios and their investment adviser or sub-adviser.
Prospectuses for the Funds must accompany this Prospectus. You should carefully
read these Prospectuses before investing in the Policy.
<TABLE>
<CAPTION>
Fund/Portfolio Investment Adviser Investment Sub-Adviser
-------------- ------------------ ----------------------
<S> <C> <C>
Advantus Series Fund,
Inc.:
Growth Portfolio Advantus Capital Management,
Inc.
Bond Portfolio Advantus Capital Management,
Inc.
Money Market Portfolio Advantus Capital Management,
Inc.
Asset Allocation Advantus Capital Management,
Portfolio Inc.
Mortgage Securities Advantus Capital Management,
Portfolio Inc.
Index 500 Portfolio Advantus Capital Management,
Inc.
Capital Appreciation Advantus Capital Management, Credit Suisse Asset
Portfolio Inc. Management, LLC
International Stock Advantus Capital Management, Templeton Investment
Portfolio Inc. Counsel, Inc.
Small Company Growth Advantus Capital Management, Credit Suisse Asset
Portfolio Inc. Management, LLC
Value Stock Portfolio Advantus Capital Management,
Inc.
Small Company Value Advantus Capital Management, State Street Research &
Portfolio Inc. Management Company
Global Bond Portfolio Advantus Capital Management, Julius Baer Investment
Inc. Management Inc.
Index 400 Mid-Cap Advantus Capital Management,
Portfolio Inc.
Macro-Cap Value Advantus Capital Management, J.P. Morgan Investment
Portfolio Inc. Management Inc.
Micro-Cap Growth Advantus Capital Management, Wall Street Associates
Portfolio Inc.
Real Estate Securities Advantus Capital Management,
Portfolio Inc.
Franklin Templeton
Variable Insurance
Products Trust:
Templeton Developing Templeton Asset Management
Markets Securities Ltd.
Fund--Class 2 Shares
Templeton Asset Strategy Templeton Investment
Fund--Class 2 Shares Council, Inc.
Franklin Small Cap Franklin Advisers, Inc.
Fund--Class 2 Shares
Fidelity Variable
Insurance Products
Funds:
Mid Cap Portfolio-- Fidelity Management &
Service Class 2 Shares Research
Contrafund Portfolio-- Fidelity Management &
Service Class 2 Shares Research
Equity-Income Fidelity Management &
Portfolio--Service Research
Class 2 Shares
Janus Aspen Series:
Capital Appreciation Janus Capital
Portfolio--Service
Shares
International Growth Janus Capital
Portfolio--Service
Shares
Warburg Pincus Trust:
Global Post-Venture Credit Suisse Asset
Capital Portfolio Management, LLC
</TABLE>
10
<PAGE>
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 1940 Act, 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.
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 match the risks and performance
of those common stocks included in the underlying index.
Some policy owners, who desire the greatest safety of principal may prefer
the
11
<PAGE>
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
1940 Act. 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 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.
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.
12
<PAGE>
Detailed Information about the
Variable Adjustable Life Insurance Policy
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. You may adjust the face amount and premium level, and thus the plan of
insurance, subject to the limitations described herein, so long as the Policy
remains in force.
Flexibility at Issue 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 refers to the level of cash value accumulation
assumed in the design of the Policy and, for whole life plans, the period
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 insurance. The tabular cash value is
described on page 15 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 larger the premium you pay, 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.
Whole life plans may become paid-up upon the payment of a designated number
of annual premiums or at a designated age of the insured. 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
13
<PAGE>
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 net annual investment return of 6
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
$14,613. Based on this policy value, a whole life plan, and the continued
payment of the $926 premium, the face amount would be reduced to $39,983
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 $ 2,038 $100,000 $100,000
10 55 926 5,662 100,000 100,000
15 60 926 10,059 100,000 100,000
20 65 926 14,613 100,000 100,000
21 66 926 16,116 39,983 14,701
22 67 926 17,709 39,983 14,701
23 68 926 19,402 39,983 14,701
24 69 926 21,203 39,983 14,701
25 70 926 23,124 39,983 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 73, at which time the face amount would be reduced
to not less than $11,871, 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 $ 2,038 $100,000 $100,000
10 55 926 5,662 100,000 100,000
15 60 926 10,059 100,000 100,000
20 65 926 14,613 100,000 100,000
21 66 926 15,501 100,000 100,000
22 67 926 16,372 100,000 100,000
23 68 926 17,222 100,000 100,000
24 69 926 18,041 100,000 100,000
25 70 926 18,819 100,000 100,000
</TABLE>
14
<PAGE>
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>
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 you 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. 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 23. 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.
15
<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 net annual
investment return of 6 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 $2,023 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 $14,712.
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 $ 11 $100,000
2 47 926 437 468 100,011
3 48 926 865 929 100,468
4 49 926 1,280 1,448 100,929
5 50 926 1,680 2,023 101,448
6 51 1,500 2,789 2,849 102,023
7 52 1,500 3,712 3,930 102,849
8 53 1,500 4,627 5,117 103,930
9 54 1,500 5,531 6,402 105,117
10 55 1,500 6,415 7,778 106,402
</TABLE>
Adjustments can be made on any monthly anniversary of 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.
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.
Restrictions on Adjustments 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
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<PAGE>
limits on adjustments are those described here. We reserve the right to change
these limitations from time to time.
(1) 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.
(2) 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.
(3) 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.
(4) After age 85, increases in face amount requiring evidence of insurability
may not be allowed.
(5) An adjustment may not result in more than a paid-up whole life plan for the
then current face amount.
(6) 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.
(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.
(9) If you are disabled and receiving, or are entitled to receive, waiver of
premium benefits under a Waiver of Premium Agreement attached to this
Policy, no adjustments will be permitted, except as provided in the Waiver
of Premium Agreement.
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 than the minimum plan of
five years. If the owner elected to increase the premium in order to maintain
the new face amount of
17
<PAGE>
$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 30. 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.
18
<PAGE>
The chart below illustrates the effects of certain policy adjustments:
ADJUSTMENT EFFECT
<TABLE>
<S> <C>
Decrease the current face amount and keep a scheduled decrease in the current
the premiums the same face amount, if any, will take place at
a later policy anniversary
OR OR
Keep the current face amount and increase a scheduled decrease in the face
the premiums amount will be eliminated
OR
the premium paying period will be
shortened
- --------------------------------------------------------------------------------
Increase the current face amount and keep a scheduled decrease in the current
the premiums the same face amount, if any, will take place at
an earlier policy anniversary
OR OR
Keep the current face amount and decrease a scheduled decrease in the face
the premiums amount will occur
OR OR
Make a partial surrender and keep the the premium paying period will be
premiums and face amount the same lengthened
- --------------------------------------------------------------------------------
Stop base premium and keep the face a scheduled decrease in the current
amount the same face amount, if any, will take place at
an earlier policy anniversary and no
insurance will be provided after the
decrease
OR
a scheduled decrease in the face
amount will occur. However, you must
continue to pay the charge for a sub-
standard risk, or your Policy will lapse
</TABLE>
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 date, as described on page 15. The Policy must be issued
on an insured 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 present a lower mortality risk. 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
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<PAGE>
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. We have determined 15 days to be the normal time during which
delivery of the Policy 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 16,
you may choose to adjust the Policy at any time and alter the amount of future
premiums.
The 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
your bank approves.
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.
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 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 or by
20
<PAGE>
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. 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.
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.
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.
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.
The payment of a nonrepeating premium may have federal income tax
consequences. See the heading "Federal Tax Status" in this prospectus on page
36.
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
21
<PAGE>
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.
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 27.
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. 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.
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 27 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
22
<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 with the actual cash value. 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. 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.
The actual cash value equals 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.
23
<PAGE>
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. 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. The information will
be current 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. We will credit interest 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 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. The number of 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 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
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(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 A, "Illustrations of Policy
Values, Death Benefits and Premiums," found on page A-1 of this prospectus. For
additional information about the Policy's cash value, please see Appendix B,
"Understanding How Premium Becomes Cash Value," found on page B-1 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, subject to a maximum of 20 accounts. The amount to be
transferred to or from a sub-account or the guaranteed principal account must
be at least $250. If the actual cash value 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 your agent
if 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
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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.
With all telephone transactions, 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 we deem 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. Currently, we do not
impose this time restriction. Written requests for transfers which meet these
conditions will be effective after we approve and record them at our home
office.
The Funds may restrict the amounts or frequency of transfers to or from the
sub-accounts of the separate account in order to protect Fund shareholders. 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.
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.
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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 policy performance 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 policy
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
policy 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 policy experience.
You may change the death benefit option 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 36.
For an illustration of the calculation of the death benefit under the Policy
options, please see Appendix C, "Comparison of Death Benefit Options," on page
C-1 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
36.
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. You may obtain
a policy loan with a written request or 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.
If you call 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 request at our home office.
When you take a loan, we will reduce the actual cash value 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 value in all of the sub-accounts. The number
of units to be sold 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.
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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 36. 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 year. 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 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
year. 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 year. 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 a premium is unpaid at the end of the grace period. 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, you can repay your loan in
part or in full at any time before the insured's death. 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. We will waive this minimum loan
repayment provision for loan repayments made under our automatic payment plan
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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.
Surrender
You may request a surrender or partial surrender of your Policy at any time
while the insured is living. 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,
alternatively, applied on a settlement option or to provide extended term
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. In addition, the amount of a partial surrender may
not exceed the amount available as a policy loan. 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 the restriction 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 than seven days after our receipt of your written request for surrender.
However, 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 for your Policy.
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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 15, 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 above. 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 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
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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 Appendix D "Example of Sales Load
Computations" in this prospectus on page D-1.
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.
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.
(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
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equal to the current face amount in effect 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
15 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.
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 value in
such sub-account bears to your actual cash value in all of the sub-accounts.
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
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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.
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.
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 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
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<PAGE>
than a policy loan payment for more than 31 days, we will pay you interest at
3 percent per year (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 to both 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, and if the periodic installment or interest payment is at
least $20.
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
We will pay 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
We will make payments 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
We will make payments 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 gender 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.
Option 4--Payments of a Specified Amount
We will pay 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 year (4 percent for a VAL '87 Policy). Additional interest
earnings, if any, on deposits under a settlement option will be payable as we
determine.
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
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<PAGE>
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 Each year, if your Policy is a participating policy, 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 information in the
report will be current as of a date within two months of its mailing.
Additional Benefits
Additional Benefits 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.
Policy Enhancement Agreement and Cost of Living Agreement Both the Policy
Enhancement Agreement and the Cost of Living Agreement provide for increases in
the 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.
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.
Face Amount Increase Agreement The Face Amount Increase Agreement requires an
additional premium and, at specified ages of the insured.
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.
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
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Other Matters
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 if
the insured develops a terminal condition due to sickness or injury.
The accelerated benefit will be treated as a loan, apart from the policy
loan provisions described elsewhere. 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.
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 have been
considered the owners, for federal income tax purposes, of the assets of the
separate account supporting their policies due to their ability to exercise
control over those assets. Where this is the case, the contract owners have
been currently taxed on income and gains attributable to the separate account
assets. There is little guidance in this area, and some features of the
Policies, such as the flexibility to allocate premiums and policy account
values, have not been explicitly addressed in published rulings. While we
believe that the Policy does not give you investment control over the separate
account assets, we reserve the right to modify
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<PAGE>
the Policy as necessary to prevent you from being treated as the owner of the
separate account assets supporting the Policy.
In addition, the Code requires that the investments of the Variable Life
Account be "adequately diversified" in order to treat the Policy as a life
insurance contract for federal income tax purposes. We intend that the Variable
Life Account, through the Funds and the Portfolios, will satisfy these
diversification requirements.
The following discussion assumes that the Policy will qualify as a life
insurance contract for federal income tax purposes.
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 unless your Policy is a modified
endowment contract, as described below. 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.
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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 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."
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.
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Directors and Principal Management Officers of Minnesota Life
<TABLE>
<CAPTION>
Directors Principal Occupation
--------- --------------------
<C> <S>
Anthony L. Andersen Retired since November 1999, prior thereto 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)
Robert E. Hunstad Executive Vice President, Minnesota Life Insurance
Company
Dennis E. Prohofsky Senior Vice President, General Counsel and
Secretary, Minnesota Life Insurance Company
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 Retired since December 1999, prior thereto for more
than five years Chairman, Chief Financial and
Administrative Officer, Ecolab Inc., St. Paul,
Minnesota (Develops and Markets Cleaning and
Sanitizing Products)
William N. Westhoff Senior Vice President and Treasurer, Minnesota Life
Insurance Company since April 1998, prior thereto
from August 1994 to October 1997, Senior Vice
President, Global Investments, American Express
Financial Corporation, Minneapolis, Minnesota
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
---- --------
<S> <C>
John F. Bruder Senior Vice President
Keith M. Campbell Senior Vice President
James E. Johnson Senior Vice President
Gregory S. Strong Senior Vice President and Chief Financial Officer
Terrence M. Sullivan Senior Vice President
Randy F. Wallake Senior Vice President
</TABLE>
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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.
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 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
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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.
Experts
Our financial statements and those of the Variable Life Account included in
this prospectus have been audited by KPMG LLP, independent auditors, 4200
Norwest Center, 90 South Seventh Street, Minneapolis, Minnesota 55402, whose
reports thereon appear elsewhere herein, and have been so included in reliance
upon the report of KPMG LLP and upon the authority of said firm as experts in
accounting and auditing.
Actuarial matters included in this prospectus have been examined by Robert J.
Ehren, F.S.A., Director 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.
41
<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 these are Advantus Series Fund, Inc., the
Franklin Templeton Insurance Variable Product Trust, Fidelity Variable
Insurance Products Funds, Janus Aspen Series, and Warburg Pincus Trust.
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.
Paid-up: the status of the Policy when its policy value is such that no
further premiums are required to provide the death benefit.
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: a measure of 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.
42
<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 Growth, Value Stock,
Small Company Value, Global Bond, Index 400 Mid-Cap, Macro-Cap Value, Micro-Cap
Growth, Real Estate Securities and Templeton Developing Markets Segregated Sub-
Accounts of Minnesota Life Variable Life Account (the Account) as of December
31, 1999 and the related statements of operations, the statements of 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, 1999 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 Growth, Value Stock, Small Company Value,
Global Bond, Index 400 Mid-Cap, Macro-Cap Value, Micro-Cap Growth, Real Estate
Securities and Templeton Developing Markets Segregated Sub-Accounts of
Minnesota Life Variable Life Account at December 31, 1999 and the results of
their operations, changes in their net assets and the financial highlights for
the periods stated in the first paragraph above, in conformity with generally
accepted accounting principles.
KPMG LLP
Minneapolis, Minnesota
February 4, 2000
SA-1
<PAGE>
Minnesota Life Variable Life Account
Statements of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-----------------------------------------------------------------------------------------------------------
Small
Money Asset Mortgage Index Capital International Company
Assets Growth Bond Market Allocation Securities 500 Appreciation Stock Growth
------ ------------ ---------- ---------- ----------- ---------- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments in
shares of Advantus
Series Fund, Inc.:
Growth Portfolio,
44,788,616
shares at net
asset value of
$3.33 per share
(cost
$110,881,177).... $149,269,764 -- -- -- -- -- -- -- --
Bond Portfolio,
29,147,341
shares at net
asset value of
$1.18 per share
(cost
$36,222,516)..... -- 34,382,870 -- -- -- -- -- -- --
Money Market
Portfolio,
15,408,451
shares at net
asset value of
$1.00 per share
(cost
$15,408,451)..... -- -- 15,408,451 -- -- -- -- -- --
Asset Allocation
Portfolio,
73,231,896
shares at net
asset value of
$2.39 per share
(cost
$142,807,941).... -- -- -- 174,765,035 -- -- -- -- --
Mortgage
Securities
Portfolio,
13,535,875
shares at net
asset value of
$1.17 per share
(cost
$15,880,519)..... -- -- -- -- 15,818,084 -- -- -- --
Index 500
Portfolio,
43,979,933
shares at net
asset value of
$4.56 per share
(cost
$144,752,668).... -- -- -- -- -- 200,716,837 -- -- --
Capital
Appreciation
Portfolio,
42,591,072
shares at net
asset value of
$3.70 per share
(cost
$113,884,300).... -- -- -- -- -- -- 157,767,226 -- --
International
Stock Portfolio,
59,670,858
shares at net
asset value of
$1.94 per share
(cost
$98,893,504)..... -- -- -- -- -- -- -- 115,728,540 --
Small Company
Growth
Portfolio,
39,144,306
shares at net
asset value of
$2.44 per share
(cost
$63,532,911)..... -- -- -- -- -- -- -- -- 95,488,124
------------ ---------- ---------- ----------- ---------- ----------- ----------- ----------- ----------
149,269,764 34,382,870 15,408,451 174,765,035 15,818,084 200,716,837 157,767,226 115,728,540 95,488,124
Receivable from
Minnesota Life for
policy purchase
payments.......... 133,747 66,659 51,612 91,805 43,444 261,543 90,940 110,707 86,018
Receivable from
Advantus Series
Fund, Inc. for
investments sold.. 71,369 18,781 9,918 62,322 8,764 109,579 107,207 292,242 46,189
------------ ---------- ---------- ----------- ---------- ----------- ----------- ----------- ----------
Total assets.... 149,474,880 34,468,310 15,469,981 174,919,162 15,870,292 201,087,959 157,965,373 116,131,489 95,620,331
------------ ---------- ---------- ----------- ---------- ----------- ----------- ----------- ----------
<CAPTION>
Liabilities
-----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payable to Advantus
Series Fund, Inc.
for investments
purchased......... 133,747 66,659 51,612 91,805 43,444 261,543 90,940 110,707 86,018
Payable to
Minnesota Life for
policy
terminations and
mortality and
expense charges... 71,369 18,781 9,918 62,322 8,764 109,579 107,207 292,242 46,189
------------ ---------- ---------- ----------- ---------- ----------- ----------- ----------- ----------
Total
liabilities..... 205,116 85,440 61,530 154,127 52,208 371,122 198,147 402,949 132,207
------------ ---------- ---------- ----------- ---------- ----------- ----------- ----------- ----------
NET ASSETS
APPLICABLE TO
POLICY OWNERS..... $149,269,764 34,382,870 15,408,451 174,765,035 15,818,084 200,716,837 157,767,226 115,728,540 95,488,124
============ ========== ========== =========== ========== =========== =========== =========== ==========
UNITS OUTSTANDING.. 25,947,087 15,498,228 8,537,295 41,923,737 6,357,179 34,132,820 26,226,878 45,292,311 36,120,491
============ ========== ========== =========== ========== =========== =========== =========== ==========
NET ASSET VALUE PER
UNIT.............. $ 5.75 2.22 1.80 4.17 2.49 5.88 6.02 2.56 2.64
============ ========== ========== =========== ========== =========== =========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
SA-2
<PAGE>
Minnesota Life Variable Life Account
Statements of Assets and Liabilities (continued)
December 31, 1999
<TABLE>
<CAPTION>
Segregated Sub-Accounts
------------------------------------------------------------------------------------
Small Real Templeton
Company Global Index 400 Macro- Micro- Estate Developing
Assets Value Stock Value Bond Mid-Cap Cap Value Cap Growth Securities Markets
------ ----------- --------- --------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments in shares of
Advantus Series Fund,
Inc.:
Value Stock Portfolio,
33,306,274 shares at
net asset value
of $1.71 per share
(cost $56,922,516).... $57,037,890 -- -- -- -- -- -- --
Small Company Value
Portfolio, 2,601,565
shares at net asset
value of $0.91 per
share (cost
$2,354,356)........... -- 2,361,848 -- -- -- -- -- --
Global Bond Portfolio,
1,376,350 shares at
net asset value
of $0.94 per share
(cost $1,350,302)..... -- -- 1,286,884 -- -- -- -- --
Index 400 Mid-Cap
Portfolio, 3,605,600
shares at net asset
value of $1.18 per
share (cost
$4,005,250)........... -- -- -- 4,267,363 -- -- -- --
Macro-Cap Value
Portfolio, 3,396,126
shares at net asset
value of $1.16 per
share (cost
$3,887,750)........... -- -- -- -- 3,950,829 -- -- --
Micro-Cap Growth
Portfolio, 4,295,529
shares at net asset
value of $2.51 per
share (cost
$7,241,855)........... -- -- -- -- -- 10,776,326 -- --
Real Estate Securities
Portfolio, 870,516
shares at net asset
value of $0.76 per
share (cost
$715,905)............. -- -- -- -- -- -- 658,318 --
Investment in Templeton
Variable Products
Series Fund:
Templeton Developing
Markets Fund--Class
2, 490,790 shares at
net asset value of
$7.74 per share (cost
$2,924,941)........... -- -- -- -- -- -- -- 3,798,711
----------- --------- --------- --------- --------- ---------- ------- ---------
57,037,890 2,361,848 1,286,884 4,267,363 3,950,829 10,776,326 658,318 3,798,711
Receivable from
Minnesota Life for
policy purchase
payments............... 67,624 38,339 72,416 53,910 43,738 89,506 10,042 --
Receivable from Advantus
Series Fund, Inc. for
investments
sold................... 35,323 1,869 1,259 852 1,334 2,184 127 --
----------- --------- --------- --------- --------- ---------- ------- ---------
Total assets......... 57,140,837 2,402,056 1,360,559 4,322,125 3,995,901 10,868,016 668,487 3,798,711
----------- --------- --------- --------- --------- ---------- ------- ---------
<CAPTION>
Liabilities
-----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Payable to Advantus
Series Fund, Inc. for
investments purchased.. 67,624 38,339 72,416 53,910 43,738 89,506 10,042 --
Payable to Minnesota
Life for policy
terminations and
mortality
and expense charges.... 35,323 1,869 1,259 852 1,334 2,184 127 --
----------- --------- --------- --------- --------- ---------- ------- ---------
Total liabilities.... 102,947 40,208 73,675 54,762 45,072 91,690 10,169 --
----------- --------- --------- --------- --------- ---------- ------- ---------
NET ASSETS APPLICABLE TO
POLICY OWNERS.......... $57,037,890 2,361,848 1,286,884 4,267,363 3,950,829 10,776,326 658,318 3,798,711
=========== ========= ========= ========= ========= ========== ======= =========
UNITS OUTSTANDING....... 26,260,066 2,831,365 1,257,783 3,509,018 3,488,610 4,222,084 794,290 2,898,791
=========== ========= ========= ========= ========= ========== ======= =========
NET ASSET VALUE PER
UNIT................... $ 2.17 0.83 1.02 1.22 1.13 2.55 0.83 1.31
=========== ========= ========= ========= ========= ========== ======= =========
</TABLE>
See accompanying notes to financial statements.
SA-3
<PAGE>
Minnesota Life Variable Life Account
Statements of Operations
Year Ended December 31, 1999
<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)......... $ 506,360 1,626,766 616,032 6,527,423 833,516 2,856,661 -- 2,400,935
Mortality and
expense charges
(note 3)......... (592,113) (162,488) (66,448) (751,238) (72,636) (833,392) (626,087) (493,146)
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Investment
income (loss)--
net............ (85,753) 1,464,278 549,584 5,776,185 760,880 2,023,269 (626,087) 1,907,789
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Realized and
unrealized gains
(losses) on
investments--net:
Realized gain
distributions
from underlying
mutual fund
(note 4)......... 2,985,736 654,481 -- 7,241,701 -- 2,139,618 16,619,653 4,664,200
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Realized gains
(losses) on
sales of
investments:
Proceeds from
sales.......... 43,353,091 12,967,909 26,634,486 31,970,185 4,632,062 42,082,164 31,217,758 34,347,541
Cost of
investments
sold........... (36,042,059) (13,523,189) (26,634,486) (27,553,460) (4,634,891) (30,803,572) (26,385,087) (32,044,170)
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
7,311,032 (555,280) -- 4,416,725 (2,829) 11,278,592 4,832,671 2,303,371
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net realized
gains (losses)
on investments. 10,296,768 99,201 -- 11,658,426 (2,829) 13,418,210 21,452,323 6,967,570
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net change in
unrealized
appreciation or
depreciation of
investments...... 18,859,069 (2,605,774) -- 4,617,276 (542,263) 15,240,028 6,730,186 10,363,042
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net gains
(losses) on
investments.... 29,155,837 (2,506,573) -- 16,275,702 (545,092) 28,658,238 28,182,509 17,330,612
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net increase
(decrease) in
net assets
resulting from
operations..... $ 29,070,084 (1,042,295) 549,584 22,051,887 215,788 30,681,507 27,556,422 19,238,401
============ =========== =========== =========== ========== =========== =========== ===========
<CAPTION>
Small
Company
Growth
------------
<S> <C>
Investment income
(loss):
Investment income
distributions
from underlying
mutual fund
(note 4)......... --
Mortality and
expense charges
(note 3)......... (325,988)
------------
Investment
income (loss)--
net............ (325,988)
------------
Realized and
unrealized gains
(losses) on
investments--net:
Realized gain
distributions
from underlying
mutual fund
(note 4)......... --
------------
Realized gains
(losses) on
sales of
investments:
Proceeds from
sales.......... 24,364,340
Cost of
investments
sold........... (22,537,893)
------------
1,826,447
------------
Net realized
gains (losses)
on investments. 1,826,447
------------
Net change in
unrealized
appreciation or
depreciation of
investments...... 27,746,862
------------
Net gains
(losses) on
investments.... 29,573,309
------------
Net increase
(decrease) in
net assets
resulting from
operations..... 29,247,321
============
</TABLE>
See accompanying notes to financial statements.
SA-4
<PAGE>
Minnesota Life Variable Life Account
Statements of Operations (continued)
Year ended December 31, 1999
<TABLE>
<CAPTION>
Segregated Sub-Accounts
------------------------------------------------------------------------------------------
Small Templeton
Value Company Global Index 400 Macro-Cap Micro-Cap Real Estate Developing
Stock Value Bond Mid-Cap Value Growth Securities Markets
----------- -------- -------- ---------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income
distributions from
underlying mutual
fund (note 4)......... $ 1,547,297 28,039 30,022 17,227 16,884 -- 34,702 11,707
Mortality and expense
charges (note 3)...... (268,331) (7,359) (3,636) (11,621) (11,281) (13,660) (2,028) (5,284)
----------- -------- -------- ---------- -------- ---------- -------- --------
Investment income
(loss)--net......... 1,278,966 20,680 26,386 5,606 5,603 (13,660) 32,674 6,423
----------- -------- -------- ---------- -------- ---------- -------- --------
Realized and unrealized
gains (losses) on
investments--net:
Realized gain
distributions from
underlying mutual
fund (note 4)......... -- -- 2,202 244,929 129,047 -- -- --
----------- -------- -------- ---------- -------- ---------- -------- --------
Realized gains
(losses) on sales of
investments:
Proceeds from sales.. 20,529,800 703,644 491,697 1,602,249 779,516 2,864,382 419,002 211,340
Cost of investments
sold................ (20,082,330) (704,456) (518,288) (1,548,875) (761,003) (2,299,612) (421,895) (245,020)
----------- -------- -------- ---------- -------- ---------- -------- --------
447,470 (812) (26,591) 53,374 18,513 564,770 (2,893) (33,680)
----------- -------- -------- ---------- -------- ---------- -------- --------
Net realized (losses)
gains on
investments......... 447,470 (812) (24,389) 298,303 147,560 564,770 (2,893) (33,680)
----------- -------- -------- ---------- -------- ---------- -------- --------
Net change in
unrealized
appreciation or
depreciation of
investments........... (1,892,941) (8,937) (50,201) 149,835 18 3,431,535 (47,990) 813,548
----------- -------- -------- ---------- -------- ---------- -------- --------
Net gains (losses) on
investments......... (1,445,471) (9,749) (74,590) 448,138 147,578 3,996,305 (50,883) 779,868
----------- -------- -------- ---------- -------- ---------- -------- --------
Net increase
(decrease) in net
assets resulting
from operations..... $ (166,505) 10,931 (48,204) 453,744 153,181 3,982,645 (18,209) 786,291
=========== ======== ======== ========== ======== ========== ======== ========
</TABLE>
See accompanying notes to financial statements.
SA-5
<PAGE>
Minnesota Life Variable Life Account
Statements of Operations (continued)
Year ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-------------------------------------------------------------------------------------------------------
Money Asset Mortgage Capital International
Growth Bond Market Allocation Securities Index 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.......... 27,003,108 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
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 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
Growth
------------
<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
appreciation or
depreciation of
investments...... 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.
SA-6
<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
(losses) 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
investments......... 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
(decrease) in net
assets 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.
SA-7
<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 ex-
pense charges
(note 3)......... (263,066) (88,316) (33,136) (450,565) (47,250) (345,963) (359,192) (315,047)
------------ ---------- ---------- ----------- ---------- ----------- ----------- -----------
Investment
income (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
investments.... 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
resulting 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
Company Value
Growth Stock
------------ -----------
<S> <C> <C>
Investment income
(loss):
Investment income
distributions
from underlying
mutual fund
(note 4)......... 579 402,534
Mortality and ex-
pense charges
(note 3)......... (204,439) (138,510)
------------ -----------
Investment
income (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
investments.... 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
resulting from
operations..... 2,912,221 4,435,436
============ ===========
</TABLE>
See accompanying notes to financial statements.
SA-8
<PAGE>
Minnesota Life Variable Life Account
Statements of Changes in Net Assets
Year Ended December 31, 1999
<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............ $ (85,753) 1,464,278 549,584 5,776,185 760,880 2,023,269 (626,087) 1,907,789
Net realized
gains (losses)
on investments. 10,296,768 99,201 -- 11,658,426 (2,829) 13,418,210 21,452,323 6,967,570
Net change in
unrealized
appreciation or
depreciation of
investments.... 18,859,069 (2,605,774) -- 4,617,276 (542,263) 15,240,028 6,730,186 10,363,042
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net increase
(decrease) in
net assets
resulting from
operations...... 29,070,084 (1,042,295) 549,584 22,051,887 215,788 30,681,507 27,556,422 19,238,401
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Policy transac-
tions (notes 3,
4 and 5):
Policy purchase
payments....... 58,717,519 17,573,124 31,178,806 44,726,919 7,045,702 73,108,305 37,490,912 39,449,982
Policy withdraw-
als and
charges........ (42,760,978) (12,805,421) (26,568,038) (31,218,947) (4,559,427) (41,248,772) (30,591,671) (33,854,395)
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Increase in net
assets from
policy
transactions.... 15,956,541 4,767,703 4,610,768 13,507,972 2,486,275 31,859,533 6,899,241 5,595,587
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Increase in net
assets.......... 45,026,625 3,725,408 5,160,352 35,559,859 2,702,063 62,541,040 34,455,663 24,833,988
Net assets at the
beginning 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
------------ ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net assets at the
end of year..... $149,269,764 34,382,870 15,408,451 174,765,035 15,818,084 200,716,837 157,767,226 115,728,540
============ =========== =========== =========== ========== =========== =========== ===========
<CAPTION>
Small
Company
Growth
------------
<S> <C>
Operations:
Investment in-
come (loss)--
net............ (325,988)
Net realized
gains (losses)
on investments. 1,826,447
Net change in
unrealized
appreciation or
depreciation of
investments.... 27,746,862
------------
Net increase
(decrease) in
net assets
resulting from
operations...... 29,247,321
------------
Policy transac-
tions (notes 3,
4 and 5):
Policy purchase
payments....... 28,401,864
Policy withdraw-
als and
charges........ (24,038,352)
------------
Increase in net
assets from
policy
transactions.... 4,363,512
------------
Increase in net
assets.......... 33,610,833
Net assets at the
beginning of
year............ 61,877,291
------------
Net assets at the
end of year..... 95,488,124
============
</TABLE>
See accompanying notes to financial statements.
SA-9
<PAGE>
Minnesota Life Variable Life Account
Statements of Changes in Net Assets (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Segregated Sub-Accounts
---------------------------------------------------------------------------------------------
Small Templeton
Value Company Global Index 400 Macro-Cap Micro-Cap Real Estate Developing
Stock Value Bond Mid-Cap Value Growth Securities Markets
------------ --------- --------- ---------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment income
(loss)--net........... $ 1,278,966 20,680 26,386 5,606 5,603 (13,660) 32,674 6,423
Net realized gains
(losses) on
investments........... 447,470 (812) (24,389) 298,303 147,560 564,770 (2,893) (33,680)
Net change in
unrealized
appreciation or
depreciation of
investments........... (1,892,941) (8,937) (50,201) 149,835 18 3,431,535 (47,990) 813,548
------------ --------- --------- ---------- --------- ---------- -------- ---------
Net increase (decrease)
in net assets resulting
from operations........ (166,505) 10,931 (48,204) 453,744 153,181 3,982,645 (18,209) 786,291
------------ --------- --------- ---------- --------- ---------- -------- ---------
Policy transactions
(notes 3, 4 and 5):
Policy purchase
payments.............. 25,802,197 2,273,267 1,496,270 4,320,045 3,691,232 8,888,408 846,906 2,969,560
Policy withdrawals and
charges............... (20,261,470) (696,285) (488,062) (1,590,628) (768,235) (2,850,722) (416,974) (625,851)
------------ --------- --------- ---------- --------- ---------- -------- ---------
Increase in net assets
from policy
transactions........... 5,540,727 1,576,982 1,008,208 2,729,417 2,922,997 6,037,686 429,932 2,343,709
------------ --------- --------- ---------- --------- ---------- -------- ---------
Increase in net assets.. 5,374,222 1,587,913 960,004 3,183,161 3,076,178 10,020,331 411,723 3,130,000
Net assets at the
beginning of year...... 51,663,668 773,935 326,880 1,084,202 874,651 755,995 246,595 668,711
------------ --------- --------- ---------- --------- ---------- -------- ---------
Net assets at the end of
year................... $ 57,037,890 2,361,848 1,286,884 4,267,363 3,950,829 10,776,326 658,318 3,798,711
============ ========= ========= ========== ========= ========== ======== =========
</TABLE>
See accompanying notes to financial statements.
SA-10
<PAGE>
Minnesota Life Variable Life Account
Statements of Changes in Net Assets (continued)
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
Growth
------------
<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.
SA-11
<PAGE>
Minnesota Life Variable Life Account
Statements of Changes in Net Assets (continued)
Year ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
--------------------------------------------------------------------------------------------------
Templeton
Value Small 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> <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
appreciation or
depreciation of
investments.......... 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 be-
ginning 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.
SA-12
<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
income (loss)--
net............ $ 139,162 782,118 298,553 1,843,987 537,768 367,987 (359,192) 1,385,512
Net realized
gains on
investments.... 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
resulting from
operations...... 14,996,547 1,524,055 298,553 15,346,797 790,886 18,141,149 17,828,406 5,994,490
----------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Policy
transactions
(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
withdrawals 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
Company Value
Growth Stock
------------ -----------
<S> <C> <C>
Operations:
Investment
income (loss)--
net............ (203,860) 264,024
Net realized
gains on
investments.... 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
resulting from
operations...... 2,912,221 4,435,436
------------ -----------
Policy
transactions
(notes 3, 4 and
5):
Policy purchase
payments....... 25,428,738 25,430,667
Policy
withdrawals 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.
SA-13
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements
(1) Organization
The Minnesota Life Variable Life Account (the Account) was established on
October 21, 1985 as a segregated asset account of Minnesota Life Insurance
Company (Minnesota Life) 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 (collectively, the 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
Underlying Funds is registered under the Investment Company Act of 1940 (as
amended) as a diversified (except Global Bond Portfolio which is non-
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 Growth, Value Stock, Small Company Value, Global Bond, Index 400
Mid-Cap, Macro-Cap Value, Micro-Cap Growth, Real Estate Securities and
Templeton Developing 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 Growth, Value
Stock, Small Company Value, Global Bond, Index 400 Mid-Cap, Macro-Cap Value,
Micro-Cap Growth and Real Estate Securities Portfolios of the Fund and
Templeton Developing Markets--Class 2 of Templeton Variable Products Series
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. Actuals could
differ from those estimates.
Investments in Underlying Funds
Investments in shares of the Underlying Funds are stated at market value which
is the net asset value per share as determined daily by each Underlying 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 Underlying Funds are reinvested in
additional shares of the Underlying Funds 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.
SA-14
<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, 1999, 1998 and 1997 amounted to $25,083,967, $23,671,583 and
$19,600,016, 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, 1999, 1998 and 1997 amounted to $11,334,978, $11,866,348 and
$10,756,148, 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, 1999, 1998 and 1997 amounted to $6,710,372, $5,549,756
and $4,479,422, 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, 1999, 1998 and 1997 amounted to $2,955,662,
$2,625,973 and $2,188,497, 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,
1999, 1998 and 1997 amounted to $445,398, $293,094 and $158,590,
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.
SA-15
<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, 1999, 1998
and 1997 for each segregated sub-account are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Growth $ 8,310,823 $6,634,203 $4,939,701
Bond 3,100,298 2,823,226 2,200,814
Money Market 1,052,976 887,191 777,111
Asset Allocation 9,399,193 8,357,447 7,770,546
Mortgage Securities 1,296,517 1,109,636 925,967
Index 500 12,217,269 9,049,753 6,357,141
Capital Appreciation 7,862,310 7,338,162 6,374,197
International Stock 8,122,296 7,798,999 6,665,104
Small Company Growth 6,184,813 5,816,447 5,041,725
Value Stock 5,595,949 5,414,078 3,775,010
Small Company Value 211,204 30,916 --
Global Bond 135,546 11,215 --
Index 400 Mid-Cap 253,145 28,011 --
Macro-Cap Value 267,783 31,069 --
Micro-Cap Growth 260,034 28,588 --
Real Estate Securities 58,860 9,868 --
Templeton Developing Markets 153,038 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, 1999, 1998
and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Growth Portfolio $62,209,615 $51,597,361 $35,581,049
Bond Portfolio 19,854,371 19,818,000 12,580,930
Money Market Portfolio 31,794,838 23,046,773 10,482,839
Asset Allocation Portfolio 58,496,043 46,702,304 37,651,827
Mortgage Securities Portfolio 7,879,217 6,444,196 4,632,812
Index 500 Portfolio 78,104,584 57,264,811 35,768,419
Capital Appreciation Portfolio 54,110,564 38,955,829 34,192,337
International Stock Portfolio 46,515,116 43,963,560 34,563,821
Small Company Growth Portfolio 28,401,864 29,383,488 25,429,317
Value Stock Portfolio 27,349,493 28,463,051 29,028,584
Small Company Value Portfolio 2,301,306 854,939 --
Global Bond Portfolio 1,528,494 366,583 --
Index 400 Mid-Cap Portfolio 4,582,201 1,263,018 --
Macro-Cap Value Portfolio 3,837,163 910,298 --
Micro-Cap Growth Portfolio 8,888,408 756,633 --
Real Estate Securities Portfolio 881,608 295,549 --
Templeton Developing Markets Portfolio 2,561,472 624,766 --
</TABLE>
SA-16
<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, 1999, 1998 and 1997 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, 1996 16,176,371 7,366,222 4,082,791 32,104,595 4,175,648
Policy purchase pay-
ments 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 pay-
ments 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
Policy purchase pay-
ments 12,085,761 7,825,478 17,577,397 12,030,571 2,849,941
Deductions for policy
withdrawals and
charges (8,791,864) (5,707,900) (14,955,823) (8,380,455) (1,843,930)
---------- ---------- ----------- ---------- ----------
Units outstanding at
December 31, 1999 25,947,087 15,498,228 8,537,295 41,923,737 6,357,179
========== ========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Segregated Sub-Accounts
--------------------------------------------------------------
Small
Index Capital International Company Value
500 Appreciation Stock Growth Stock
---------- ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1996 17,250,529 19,778,274 28,056,128 19,918,050 9,648,331
Policy purchase pay-
ments 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 pay-
ments 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
Policy purchase pay-
ments 13,741,224 7,710,867 17,300,757 15,198,270 11,861,976
Deductions for policy
withdrawals and
charges (7,741,338) (6,286,726) (14,966,655) (12,990,113) (9,320,272)
---------- ---------- ----------- ----------- ----------
Units outstanding at
December 31, 1999 34,132,820 26,226,878 45,292,311 36,120,491 26,260,066
========== ========== =========== =========== ==========
</TABLE>
SA-17
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements (continued)
(5) Unit Activity from Contract Transactions (continued)
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-----------------------------------------------------------
Small Company Global Index 400 Macro-Cap Micro-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
Policy purchase pay-
ments 2,780,613 1,433,901 3,949,094 3,370,441 5,320,722
Deductions for policy
withdrawals and
charges (843,926) (469,193) (1,460,522) (705,334) (1,831,687)
--------- --------- ---------- --------- ----------
Units outstanding at
December 31, 1999 2,831,365 1,257,783 3,509,018 3,488,610 4,222,084
========= ========= ========== ========= ==========
<CAPTION>
Segregated Sub-Accounts
------------------------
Templeton
Real Estate Developing
Securities Markets
------------- ----------
<S> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1997 -- --
Policy purchase pay-
ments 327,276 877,028
Deductions for policy
withdrawals and
charges (42,649) (98,790)
--------- ---------
Units outstanding at
December 31, 1998 284,627 778,238
Policy purchase pay-
ments 978,387 2,737,134
Deductions for policy
withdrawals and
charges (468,724) (616,581)
--------- ---------
Units outstanding at
December 31, 1999 794,290 2,898,791
========= =========
</TABLE>
SA-18
<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,
--------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $4.60 3.43 2.59 2.22 1.79
----- ---- ---- ---- ----
Income from investment operations:
Net investment income (loss) (.01) .01 .01 .01 .01
Net gains or losses on securities (both realized
and unrealized) 1.16 1.16 .83 .36 .42
----- ---- ---- ---- ----
Total from investment operations 1.15 1.17 .84 .37 .43
----- ---- ---- ---- ----
Unit value, end of year $5.75 4.60 3.43 2.59 2.22
===== ==== ==== ==== ====
</TABLE>
Bond
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $2.29 2.17 1.99 1.95 1.63
----- ---- ---- ---- ----
Income from investment operations:
Net investment income .10 .10 .09 .08 .05
Net gains or losses on securities (both realized
and unrealized) (.17) .02 .09 (.04) .27
----- ---- ---- ---- ----
Total from investment operations (.07) .12 .18 .04 .32
----- ---- ---- ---- ----
Unit value, end of year $2.22 2.29 2.17 1.99 1.95
===== ==== ==== ==== ====
</TABLE>
Money Market
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $1.73 1.66 1.58 1.52 1.45
----- ---- ---- ---- ----
Income from investment operations:
Net investment income .07 .07 .08 .06 .07
----- ---- ---- ---- ----
Total from investment operations .07 .07 .08 .06 .07
----- ---- ---- ---- ----
Unit value, end of year $1.80 1.73 1.66 1.58 1.52
===== ==== ==== ==== ====
</TABLE>
Asset Allocation
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $3.64 2.96 2.50 2.23 1.79
----- ---- ---- ---- ----
Income from investment operations:
Net investment income .14 .06 .06 .06 .05
Net gains or losses on securities (both realized and
unrealized) .39 .62 .40 .21 .39
----- ---- ---- ---- ----
Total from investment operations .53 .68 .46 .27 .44
----- ---- ---- ---- ----
Unit value, end of year $4.17 3.64 2.96 2.50 2.23
===== ==== ==== ==== ====
</TABLE>
SA-19
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements (continued)
(6) Financial Highlights (continued)
Mortgage Securities
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $2.45 2.31 2.13 2.03 1.73
----- ---- ---- ---- ----
Income from investment operations:
Net investment income .13 .11 .13 .12 .11
Net gains or losses on securities (both realized
and unrealized) (.09) .03 .05 (.02) .19
----- ---- ---- ---- ----
Total from investment operations .04 .14 .18 .10 .30
----- ---- ---- ---- ----
Unit value, end of year $2.49 2.45 2.31 2.13 2.03
===== ==== ==== ==== ====
</TABLE>
Index 500
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $4.92 3.86 2.93 2.42 1.78
----- ---- ---- ---- ----
Income from investment operations:
Net investment income .06 .01 .02 .02 .02
Net gains or losses on securities (both realized and
unrealized) .90 1.05 .91 .49 .62
----- ---- ---- ---- ----
Total from investment operations .96 1.06 .93 .51 .64
----- ---- ---- ---- ----
Unit value, end of year $5.88 4.92 3.86 2.93 2.42
===== ==== ==== ==== ====
</TABLE>
Capital Appreciation
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $4.98 3.82 3.00 2.56 2.10
----- ---- ---- ---- ----
Income from investment operations:
Net investment income (loss) (.02) (.02) (.02) (.01) (.01)
Net gains or losses on securities (both real-
ized and unrealized) 1.06 1.18 .84 .45 .47
----- ---- ---- ---- ----
Total from investment operations 1.04 1.16 .82 .44 .46
----- ---- ---- ---- ----
Unit value, end of year $6.02 4.98 3.82 3.00 2.56
===== ==== ==== ==== ====
</TABLE>
International Stock
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $2.11 1.99 1.79 1.50 1.32
----- ---- ---- ---- ----
Income (loss) from investment operations:
Net investment income (loss) .04 .04 .04 .03 (.01)
Net gains or losses on securities (both realized
and unrealized) .41 .08 .16 .26 .19
----- ---- ---- ---- ----
Total from investment operations .45 .12 .20 .29 .18
----- ---- ---- ---- ----
Unit value, end of year $2.56 2.11 1.99 1.79 1.50
===== ==== ==== ==== ====
</TABLE>
SA-20
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements (continued)
(6) Financial Highlights (continued)
Small Company Growth
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $1.82 1.81 1.69 1.59 1.21
----- ---- ---- ---- ----
Income from investment operations:
Net investment income (loss) (.01) (.01) (.01) -- (.01)
Net gains or losses on securities (both realized
and unrealized) .83 .02 .13 .10 .39
----- ---- ---- ---- ----
Total from investment operations .82 .01 .12 .10 .38
----- ---- ---- ---- ----
Unit value, end of year $2.64 1.82 1.81 1.69 1.59
===== ==== ==== ==== ====
</TABLE>
Value Stock
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1999 1998 1997 1996 1995
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $2.18 2.15 1.78 1.37 1.04
----- ---- ---- ---- ----
Income (loss) from investment operations:
Net investment income (loss) .05 (.01) .02 .01 .01
Net gains or losses on securities (both realized
and unrealized) (.06) .04 .35 .40 .32
----- ---- ---- ---- ----
Total from investment operations (.01) .03 .37 .41 .33
----- ---- ---- ---- ----
Unit value, end of year $2.17 2.18 2.15 1.78 1.37
===== ==== ==== ==== ====
</TABLE>
Small Company Value
<TABLE>
<CAPTION>
Period from
Year Ended May 19, 1998*
December 31, to December 31,
1999 1998
------------ ---------------
<S> <C> <C>
Unit value, beginning of period $ .86 1.00
----- ----
Income (loss) from investment operations:
Net investment income .01 .02
Net gains or losses on securities (both realized
and unrealized) (.04) (.16)
----- ----
Total from investment operations (.03) (.14)
----- ----
Unit value, end of period $ .83 .86
===== ====
</TABLE>
* Commencement of the segregated sub-account's operations.
SA-21
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements (continued)
(6) Financial Highlights (continued)
Global Bond
<TABLE>
<CAPTION>
Period from
Year Ended May 19, 1998*
December 31, to December 31,
1999 1998
------------ ---------------
<S> <C> <C>
Unit value, beginning of period $1.12 1.00
----- ----
Income (loss) from investment operations:
Net investment income .03 .16
Net gains or losses on securities (both realized
and unrealized) (.13) (.04)
----- ----
Total from investment operations (.10) .12
----- ----
Unit value, end of period $1.02 1.12
===== ====
</TABLE>
Index 400 Mid-Cap
<TABLE>
<CAPTION>
Period from
Year Ended May 19, 1998*
December 31, to December 31,
1999 1998
------------ ---------------
<S> <C> <C>
Unit value, beginning of period $1.05 1.00
----- ----
Income from investment operations:
Net investment income -- .01
Net gains or losses on securities (both realized
and unrealized) .17 .04
----- ----
Total from investment operations .17 .05
----- ----
Unit value, end of period $1.22 1.05
===== ====
</TABLE>
Macro-Cap Value
<TABLE>
<CAPTION>
Period from
Year Ended May 19, 1998*
December 31, to December 31,
1999 1998
------------ ---------------
<S> <C> <C>
Unit value, beginning of period $1.06 1.00
----- ----
Income from investment operations:
Net investment income -- .01
Net gains or losses on securities (both realized
and unrealized) .07 .05
----- ----
Total from investment operations .07 .06
----- ----
Unit value, end of period $1.13 1.06
===== ====
</TABLE>
* Commencement of the segregated sub-account's operations.
SA-22
<PAGE>
Minnesota Life Variable Life Account
Notes to Financial Statements (continued)
(6) Financial Highlights (continued)
Micro-Cap Growth
<TABLE>
<CAPTION>
Period from
Year Ended May 19, 1998*
December 31, to December 31,
1999 1998
------------ ---------------
<S> <C> <C>
Unit value, beginning of period $1.03 1.00
----- ----
Income from investment operations:
Net investment income (loss) (.01) --
Net gains or losses on securities (both realized
and unrealized) 1.53 .03
----- ----
Total from investment operations 1.52 .03
----- ----
Unit value, end of period $2.55 1.03
===== ====
</TABLE>
Real Estate Securities
<TABLE>
<CAPTION>
Period from
Year Ended May 19, 1998*
December 31, to December 31,
1999 1998
------------ ---------------
<S> <C> <C>
Unit value, beginning of period $.87 1.00
---- ----
Income (loss) from investment operations:
Net investment income .07 .07
Net gains or losses on securities (both realized
and unrealized) (.11) (.20)
---- ----
Total from investment operations (.04) (.13)
---- ----
Unit value, end of period $.83 .87
==== ====
</TABLE>
Templeton Development Markets
<TABLE>
<CAPTION>
Period from
Year Ended May 19, 1998*
December 31, to December 31,
1999 1998
------------ ---------------
<S> <C> <C>
Unit value, beginning of period $ .86 1.00
----- ----
Income from investment operations:
Net investment income -- --
Net gains or losses on securities (both realized
and unrealized) .45 (.14)
----- ----
Total from investment operations .45 (.14)
----- ----
Unit value, end of period $1.31 .86
===== ====
</TABLE>
* Commencement of the segregated sub-account's operations.
SA-23
<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, 1999 and
1998, 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, 1999. 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, 1999 and
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999 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 11, 2000
ML-1
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Balance Sheets
December 31, 1999 and 1998
Assets
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
Fixed maturity securities:
Available-for-sale, at fair value (amortized cost
$4,868,584 and $4,667,688) $ 4,803,568 $ 4,914,012
Held-to-maturity, at amortized cost (fair value
$968,852 and $1,161,784) 974,814 1,086,548
Equity securities, at fair value (cost $587,014 and
$579,546) 770,269 749,800
Mortgage loans, net 696,672 681,219
Real estate, net 36,793 38,530
Finance receivables, net 134,812 163,411
Policy loans 237,335 226,409
Short-term investments 93,993 136,435
Private equities 284,797 160,958
Other invested assets 53,919 100,667
----------- -----------
Total investments 8,086,972 8,257,989
Cash 116,803 175,660
Deferred policy acquisition costs 713,217 564,382
Accrued investment income 93,385 86,974
Premiums receivable, net 94,171 62,609
Property and equipment, net 59,223 67,448
Reinsurance recoverables 194,940 176,683
Other assets 64,256 61,183
Separate account assets 8,931,456 6,994,752
----------- -----------
Total assets $18,354,423 $16,447,680
=========== ===========
Liabilities and Stockholder's Equity
Liabilities:
Policy and contract account balances $ 4,234,183 $ 4,242,802
Future policy and contract benefits 1,826,953 1,758,375
Pending policy and contract claims 90,762 70,564
Other policyholders funds 451,056 438,595
Policyholders dividends payable 51,749 53,957
Stockholder dividend payable -- 24,700
Unearned premiums and fees 208,013 180,191
Federal income tax liability:
Current 68,320 53,039
Deferred 125,094 173,907
Other liabilities 442,369 514,468
Notes payable 218,000 267,000
Separate account liabilities 8,882,060 6,947,806
----------- -----------
Total liabilities 16,598,559 14,725,404
----------- -----------
Stockholder's equity:
Common stock, $1 par value, 5,000,000 shares autho-
rized, issued and outstanding 5,000 5,000
Additional paid in capital 3,000 --
Retained earnings 1,629,787 1,513,661
Accumulated other comprehensive income 118,077 203,615
----------- -----------
Total stockholder's equity 1,755,864 1,722,276
----------- -----------
Total liabilities and stockholder's equity $18,354,423 $16,447,680
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
ML-2
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Revenues:
Premiums $ 697,799 $ 577,693 $ 615,253
Policy and contract fees 331,110 300,361 272,037
Net investment income 540,056 531,081 553,773
Net realized investment gains 79,615 114,652 114,367
Finance charge income 31,969 35,880 43,650
Other income 81,135 73,498 71,707
---------- ---------- ----------
Total revenues 1,761,684 1,633,165 1,670,787
---------- ---------- ----------
Benefits and expenses:
Policyholders benefits 667,207 519,926 515,873
Interest credited to policies and con-
tracts 282,627 290,870 298,033
General operating expenses 358,387 360,916 369,961
Commissions 110,645 110,211 114,404
Administrative and sponsorship fees 79,787 80,183 81,750
Dividends to policyholders 18,928 25,159 26,776
Interest on notes payable 24,282 22,360 24,192
Amortization of deferred policy acqui-
sition costs 123,455 148,098 128,176
Capitalization of policy acquisition
costs (152,602) (166,140) (155,054)
---------- ---------- ----------
Total benefits and expenses 1,512,716 1,391,583 1,404,111
---------- ---------- ----------
Income from operations before taxes 248,968 241,582 266,676
Federal income tax expense (benefit):
Current 75,172 93,584 84,612
Deferred (1,439) (15,351) (7,832)
---------- ---------- ----------
Total federal income tax expense 73,733 78,233 76,780
---------- ---------- ----------
Net income $ 175,235 $ 163,349 $ 189,896
========== ========== ==========
Other comprehensive income (loss), after
tax:
Foreign currency translation adjust-
ments $ -- $ (947) $ 947
Unrealized gains (losses) on securities (85,538) 47,889 47,414
---------- ---------- ----------
Other comprehensive income (loss), net
of tax (85,538) 46,942 48,361
---------- ---------- ----------
Comprehensive income $ 89,697 $ 210,291 $ 238,257
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
ML-3
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Common stock:
Beginning balance $ 5,000 $ -- $ --
Issued during the year -- 5,000 --
---------- ---------- ----------
Total common stock $ 5,000 $ 5,000 $ --
========== ========== ==========
Additional paid in capital:
Beginning balance $ -- $ -- $ --
Contribution 3,000 -- --
---------- ---------- ----------
Total additional paid in capital $ 3,000 $ -- $ --
========== ========== ==========
Retained earnings:
Beginning balance $1,513,661 $1,380,012 $1,190,116
Net income 175,235 163,349 189,896
Retained earnings transfer for common
stock issued -- (5,000) --
Dividends to stockholder (59,109) (24,700) --
---------- ---------- ----------
Total retained earnings $1,629,787 $1,513,661 $1,380,012
========== ========== ==========
Accumulated other comprehensive income:
Beginning balance $ 203,615 $ 156,673 $ 108,312
Change in unrealized appreciation of
investments (85,538) 47,889 47,414
Change in unrealized gain on foreign
currency translation -- (947) 947
---------- ---------- ----------
Total accumulated other comprehensive
income $ 118,077 $ 203,615 $ 156,673
========== ========== ==========
Total stockholder's equity $1,755,864 $1,722,276 $1,536,685
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
ML-4
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 175,235 $ 163,349 $ 189,896
Adjustments to reconcile net income to
net cash
provided by operating activities:
Interest credited to annuity and in-
surance contracts 282,627 290,870 298,033
Fees deducted from policy and con-
tract balances (217,941) (212,901) (214,803)
Change in future policy benefits 68,578 56,716 76,358
Change in other policyholders lia-
bilities 29,426 11,965 7,597
Amortization of deferred policy ac-
quisition costs 123,455 148,098 128,176
Capitalization of policy acquisition
costs (152,602) (166,140) (155,054)
Change in premiums receivable (31,562) 5,421 (9,280)
Change in federal income tax liabil-
ities 14,598 (7,455) 36,049
Net realized investment gains (79,615) (114,652) (114,367)
Other, net (27,314) 30,524 (44,527)
----------- ----------- -----------
Net cash provided by operating ac-
tivities 184,885 205,795 198,078
----------- ----------- -----------
Cash Flows from Investing Activities
Proceeds from sales of:
Fixed maturity securities, avail-
able-for-sale 1,856,757 1,835,955 1,099,114
Equity securities 705,050 621,125 601,936
Real estate 7,341 7,800 9,279
Private equities 28,128 20,025 19,817
Other invested assets 5,731 822 7,060
Proceeds from maturities and repay-
ments of:
Fixed maturity securities, avail-
able-for-sale 345,677 414,726 403,829
Fixed maturity securities, held-to-
maturity 122,704 148,848 139,394
Mortgage loans 116,785 126,066 109,246
Purchases of:
Fixed maturity securities, avail-
able-for-sale (2,432,049) (2,384,720) (1,498,048)
Fixed maturity securities, held-to-
maturity (8,446) (99,989) (82,835)
Equity securities (613,596) (610,553) (585,349)
Mortgage loans (130,013) (141,008) (157,247)
Real estate (1,016) (5,612) (3,908)
Private equities (79,584) (64,811) (48,778)
Other invested assets (11,435) (10,871) (7,210)
Finance receivable originations or
purchases (74,989) (77,141) (115,248)
Finance receivable principal payments 88,697 109,277 133,762
Other, net (91,346) 104,519 (88,626)
----------- ----------- -----------
Net cash used for investing activi-
ties (165,604) (5,542) (63,812)
----------- ----------- -----------
Cash Flows from Financing Activities
Deposits credited to annuity and in-
surance contracts 448,012 952,622 928,696
Withdrawals from annuity and insurance
contracts (478,775) (1,053,844) (1,013,588)
Proceeds from issuance of debt 50,000 40,000 --
Payments on debt (49,000) (31,000) (21,000)
Dividends paid to stockholder (83,809) -- --
Other, net (7,008) (4,467) (3,355)
----------- ----------- -----------
Net cash used for financing activi-
ties (120,580) (96,689) (109,247)
----------- ----------- -----------
Net increase (decrease) in cash and
short-term investments (101,299) 103,564 25,019
Cash and short-term investments, be-
ginning of year 312,095 208,531 183,512
----------- ----------- -----------
Cash and short-term investments, end
of year $ 210,796 $ 312,095 $ 208,531
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
ML-5
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
(1) Nature of Operations
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 1999 for
these business units were $703,473,000, $263,418,000, $388,792,000,
$164,774,000, and $66,594,000, respectively. Additional revenues of
$174,633,000 were reported by the Company's subsidiaries and corporate product
line.
The Company serves over six million people through more than 4,000
associates located at its St. Paul, Minnesota headquarters and in sales offices
nationwide.
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.
(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). 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 consolidated
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.
ML-6
<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 both 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 $123,455,000, $148,098,000
and $128,176,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Software Capitalization
The Accounting Standards Executive Committee issued Statement of Position 98-1,
Accounting for Costs of Computer Software for Internal Use, effective for
fiscal years beginning after December 15, 1998. The Company has adopted the
capitalization of software cost beginning in 1999. At December 1999, the
Company had unamortized cost of $7,459,000 and amortized software expense of
$1,643,000. Costs are amortized over a three-year period.
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.
ML-7
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
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 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.
On January 1, 1999, the Company converted to the equity method of accounting
for its private equity investments. Prior to 1999 the Company accounted for
these investments using the cost method. The change to this method of
accounting was not material to prior year amounts. Private equity investments
are now carried at our equity in the estimated fair value of the underlying
investments of these limited partnerships. In-kind distributions are recorded
as a return of capital for the cost basis of the stock received. Changes in
fair value are recorded directly in stockholder's equity.
Fair values of fixed maturity securities, equity securities and private
equities 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.
Real estate is carried at cost less accumulated depreciation and an
allowance for estimated losses. Accumulated depreciation on real estate at
December 31, 1999 and 1998, was $7,101,000 and $6,713,000, 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
ML-8
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
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. Notional amounts for the
years ended December 31, 1999 and 1998, were $98,606,000 and $115,194,000,
respectively.
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,
equity securities and private equity investments in limited partnerships 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
$113,441,000 and $101,692,000 at December 31, 1999 and 1998, 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,
1999, 1998 and 1997, were $11,749,000, $10,765,000 and $8,965,000,
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
$49,396,000 and $46,946,000 at December 31, 1999 and 1998, 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. At December 31, 1999 and 1998, the total
participating business in force was $50,305,164,000 and $55,683,649,000,
respectively.
ML-9
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
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.
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 1998 and 1997 consolidated financial statement balances have been
reclassified to conform to the 1999 presentation.
(3) Investments
Net investment income for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities $428,286 $445,220 $457,391
Equity securities 29,282 12,183 16,182
Mortgage loans 54,596 54,785 55,929
Real estate 11 (236) (407)
Policy loans 16,016 15,502 15,231
Short-term investments 5,829 6,147 6,995
Private equities 4,114 1,908 2,081
Other invested assets 6,278 1,918 1,790
-------- -------- --------
Gross investment income 544,412 537,427 555,192
Investment expenses (4,356) (6,346) (1,419)
-------- -------- --------
Total $540,056 $531,081 $553,773
======== ======== ========
Net realized investment gains (losses) for the years ended December 31 were
as follows:
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities $(31,404) $ 43,244 $ 3,711
Equity securities 91,591 47,526 92,765
Mortgage loans 1,344 3,399 2,011
Real estate 4,806 7,809 1,598
Private equities 13,983 6,336 8,431
Other invested assets (705) 6,338 5,851
-------- -------- --------
Total $ 79,615 $114,652 $114,367
======== ======== ========
</TABLE>
ML-10
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(3) Investments (continued)
Gross realized gains (losses) on the sales of fixed maturity securities and
equity securities for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Gross realized gains $ 28,619 $ 56,428 $ 18,804
Gross realized losses (60,023) (13,184) (15,093)
Equity securities:
Gross realized gains 143,180 107,342 120,437
Gross realized losses (51,589) (59,816) (27,672)
Private equities:
Gross realized gains 14,558 13,563 10,515
Gross realized losses (575) (7,227) (2,084)
</TABLE>
Net unrealized gains (losses) included in stockholder's equity at December
31 were as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Gross unrealized gains $ 361,895 $ 487,479
Gross unrealized losses (184,268) (73,440)
Adjustment to deferred acquisition costs (414) (119,542)
Adjustment to unearned policy and contract fees (473) 15,912
Deferred federal income taxes (58,663) (106,794)
--------- ---------
Net unrealized gains $ 118,077 $ 203,615
========= =========
</TABLE>
ML-11
<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, 1999
Available-for-sale:
United States government and gov-
ernment
agencies and authorities $ 151,864 $ 32 $ 8,299 $ 143,597
Foreign governments 122,505 678 7,913 115,270
Corporate securities 3,088,999 108,203 117,543 3,079,659
International bond securities 28,979 -- 2,633 26,346
Mortgage-backed securities 1,476,237 4,867 42,408 1,438,696
---------- -------- -------- ----------
Total fixed maturities 4,868,584 113,780 178,796 4,803,568
Equity securities-unaffiliated 463,089 142,583 2,745 602,927
Equity securities-affiliated mu-
tual funds 123,925 44,014 597 167,342
---------- -------- -------- ----------
Total equity securities 587,014 186,597 3,342 770,269
---------- -------- -------- ----------
Total available-for-sale 5,455,598 300,377 182,138 5,573,837
Held-to maturity:
Corporate securities 848,689 15,965 21,492 843,162
Mortgage-backed securities 126,125 2,584 3,019 125,690
---------- -------- -------- ----------
Total held-to-maturity 974,814 18,549 24,511 968,852
---------- -------- -------- ----------
Total $6,430,412 $318,926 $206,649 $6,542,689
========== ======== ======== ==========
</TABLE>
<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 gov-
ernment
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 mu-
tual 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
========== ======== ======= ==========
</TABLE>
ML-12
<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, 1999, 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 $ 39,213 $ 39,542 $ 5,628 $ 5,589
Due after one year through five years 1,065,644 1,125,653 175,672 176,672
Due after five years through ten
years 1,305,697 1,271,316 376,752 375,480
Due after ten years 981,793 928,361 290,637 285,421
---------- ---------- -------- --------
3,392,347 3,364,872 848,689 843,162
Mortgage-backed securities 1,476,237 1,438,696 126,125 125,690
---------- ---------- -------- --------
Total $4,868,584 $4,803,568 $974,814 $968,852
========== ========== ======== ========
</TABLE>
At December 31, 1999 and 1998, fixed maturity securities and short-term
investments with a carrying value of $13,945,000 and $6,361,000, 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>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Mortgage loans $ 1,500 $ 1,500
Investment real estate -- 841
------- -------
Total $ 1,500 $ 2,341
======= =======
</TABLE>
At December 31, 1999, no mortgage loans were considered impaired. At
December 31, 1998, the recorded investment in mortgage loans that were
considered to be impaired was $8,798, before the 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, 1999 and 1998.
Changes in the allowance for credit losses on mortgage loans were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $1,500 $1,500 $1,895
Provision for credit losses -- -- --
Charge-offs -- -- (395)
------ ------ ------
Balance at end of year $1,500 $1,500 $1,500
====== ====== ======
Below is a summary of interest income on impaired mortgage loans.
<CAPTION>
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Average impaired mortgage loans $ 4 $ 14 $3,268
Interest income on impaired mortgage loans--contractual 4 18 556
Interest income on impaired mortgage loans--collected 4 17 554
</TABLE>
ML-13
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(4) Notes Receivable
In connection with the Company's 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, 1999 and 1998, HRA
has drawn $13,574,000 and $9,669,000 on this loan contingency agreement and
accrued interest of $1,795,000 and $673,000, respectively.
(5) Net Finance Receivables
Finance receivables as of December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Direct installment loans $127,379 $147,425
Retail installment notes 9,199 12,209
Retail revolving credit 3,457 17,170
Accrued interest 2,505 2,683
-------- --------
Gross receivables 142,540 179,487
Allowance for uncollectible amounts (7,728) (16,076)
-------- --------
Finance receivables, net $134,812 $163,411
======== ========
</TABLE>
The direct installment loans, at December 31, 1999 and 1998, consisted of
$83,376,000 and $81,066,000, respectively, of discount basis loans (net of
unearned finance charges) and $44,003,000 and $66,359,000, respectively, of
interest-bearing loans and generally have a maximum term of 84 months; the
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 $29
million and $44 million of real estate secured loans at December 31, 1999 and
1998, respectively. Revolving credit loans included approximately $3 million
and $16 million of real estate secured loans at December 31, 1999 and 1998,
respectively. Contractual maturities of the finance receivables by year, as
required by the industry audit guide for finance companies, were not readily
available at December 31, 1999 and 1998, but experience has shown that such
information is not significant in that a substantial portion of receivables
will be renewed, converted, or paid in full prior to maturity.
During the years ended December 31, 1999 and 1998, principal cash
collections of direct installment loans were $57,665,000 and $75,011,000,
respectively, and the percentages of these cash collections to average net
balances were 43% and 47%, respectively. Retail installment notes' principal
cash collections to average net balances were $12,180,000 and $15,990,000,
respectively, and the percentages of these cash collections to average net
balances were 121% and 101%, respectively.
ML-14
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(5) Net Finance Receivables (continued)
The ratio for the allowance for losses to net outstanding receivables
balances at December 31, 1999 and 1998 was 5.4% and 9.0%, respectively. Changes
in the allowance for losses for the periods ended December 31, 1999 and 1998
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 16,076 $ 20,545 $ 7,497
Provision for credit losses 5,434 10,712 28,206
Allowance applicable to bulk purchase 125 -- --
Charge-offs (16,712) (18,440) (17,869)
Recoveries 2,805 3,259 2,711
-------- -------- --------
Balance at end of year $ 7,728 $ 16,076 $ 20,545
======== ======== ========
</TABLE>
At December 31, 1999, 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, 1999 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, 1999 $5,539 692 $6,231
Related allowance for credit losses $1,478 330 $1,808
</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 1999. The
average quarterly balance of impaired loans during the year ended December 31,
1999 and 1998, was $5,758,000 and $6,354,000 for installment basis loans and
$6,214,000 and $12,471,000 for revolving credit loans, respectively.
There were no material commitments to lend additional funds to customers
whose loans were classified as impaired at December 31, 1999.
(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>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Computed tax expense $87,139 $84,553 $93,337
Difference between computed and actual tax ex-
pense:
Dividends received deduction (3,127) (1,730) (5,573)
Special tax on mutual life insurance companies (9,568) (3,455) 3,341
Sale of subsidiary -- -- (4,408)
Foundation gain (538) -- (4,042)
Tax credits (4,500) (4,416) (3,600)
Expense adjustments and other 4,327 3,281 (2,275)
------- ------- -------
Total tax expense $73,733 $78,233 $76,780
======= ======= =======
</TABLE>
ML-15
<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>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Policyholders liabilities $ 17,461 $ 16,999
Pension and post retirement benefits 30,151 27,003
Tax deferred policy acquisition costs 91,976 82,940
Net realized capital losses 6,709 8,221
Other 16,612 18,487
-------- --------
Gross deferred tax assets 162,909 153,650
-------- --------
Deferred tax liabilities:
Deferred policy acquisition costs $198,501 $155,655
Real estate and property and equipment depreciation 14,642 10,275
Basis difference on investments 8,092 10,798
Net unrealized capital gains 59,411 143,354
Other 7,357 7,475
-------- --------
Gross deferred tax liabilities 288,003 327,557
-------- --------
Net deferred tax liability $125,094 $173,907
======== ========
</TABLE>
A valuation allowance for deferred tax assets was not considered necessary
as of December 31, 1999 and 1998 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, 1999, 1998 and 1997, were
$59,905,000, $91,259,000 and $71,108,000, respectively.
The Company's tax returns for 1995, 1996, and 1997 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.
ML-16
<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>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at January 1 $435,079 $409,249 $416,910
Less: reinsurance recoverable 108,918 104,741 102,161
-------- -------- --------
Net balance at January 1 326,161 304,508 314,749
-------- -------- --------
Incurred related to:
Current year 92,421 92,793 121,153
Prior years 19,435 14,644 7,809
-------- -------- --------
Total incurred 111,856 107,437 128,962
-------- -------- --------
Paid related to:
Current year 25,084 27,660 51,275
Prior years 63,827 58,124 57,475
-------- -------- --------
Total paid 88,911 85,784 108,750
-------- -------- --------
Decrease in liabilities due to sale of subsidiary -- -- 30,453
-------- -------- --------
Net balance at December 31 349,106 326,161 304,508
Plus: reinsurance recoverable 121,395 108,918 104,741
-------- -------- --------
Balance at December 31 $470,501 $435,079 $409,249
======== ======== ========
</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 $19,435,000, $14,644,000 and $7,809,000 in 1999,
1998 and 1997, respectively which includes the amortization of discount on
individual accident and health claim reserves of $13,918,000, $14,256,000,
$11,522,000 in 1999, 1998 and 1997, respectively. The remaining changes in
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 postretirement 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.
ML-17
<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
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of
year $181,439 $151,509 $ 31,236 $ 24,467
Service cost 8,272 8,402 1,419 1,375
Interest cost 13,132 10,436 2,340 1,713
Amendments 4,385 6 -- --
Actuarial gain (4,143) 16,298 (33) 4,542
Benefits paid (6,060) (5,212) (1,242) (861)
-------- -------- -------- --------
Benefit obligation at end of year $197,025 $181,439 $ 33,720 $ 31,236
======== ======== ======== ========
Change in plan assets:
Fair value of plan assets at the
beginning of the year $146,710 $133,505 $ -- $ --
Actual return on plan assets 12,948 13,068 -- --
Employer contribution 6,096 5,349 1,242 861
Benefits paid (6,060) (5,212) (1,242) (861)
-------- -------- -------- --------
Fair value of plan assets at the
end of year $159,694 $146,710 $ -- $ --
======== ======== ======== ========
Funded status $(37,330) $(34,729) $(33,720) $(31,236)
Unrecognized net actuarial loss
(gain) 6,812 12,283 (6,089) (6,251)
Unrecognized prior service cost
(benefit) 8,723 5,293 (2,472) (2,986)
-------- -------- -------- --------
Net amount recognized $(21,795) $(17,153) $(42,281) $(40,473)
======== ======== ======== ========
Amounts recognized in the balance
sheet statement consist of:
Accrued benefit cost $(27,980) $(23,242) $(42,395) $(40,473)
Intangible asset 6,185 6,089 114 --
-------- -------- -------- --------
Net amount recognized $(21,795) $(17,153) $(42,281) $(40,473)
======== ======== ======== ========
Weighted average assumptions as of
December 31
Discount rate 7.50% 7.00% 7.50% 7.00%
Expected return on plan assets 8.27% 8.27% -- --
Rate of compensation increase 5.32% 5.32% -- --
</TABLE>
ML-18
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(8) Employee Benefit Plans (continued)
For measurement purposes, an 8.5 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2000. The rate was
assumed to decrease gradually to 5.5 percent for 2005 and remain at that level
thereafter.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------------- ----------------------
1999 1998 1997 1999 1998 1997
-------- -------- ------- ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost
Service cost $ 8,272 $ 8,402 $ 6,847 $1,419 $1,375 $1,047
Interest cost 13,132 10,436 9,956 2,340 1,713 1,872
Expected return on plan
assets (12,080) (10,978) (9,859) -- -- --
Amortization of prior
service cost (benefits) 954 578 578 (513) (513) (510)
Recognized net actuarial
loss (gain) 459 190 77 (195) (559) (480)
-------- -------- ------- ------ ------ ------
Net periodic benefit
cost $ 10,737 $ 8,628 $ 7,599 $3,051 $2,016 $1,929
======== ======== ======= ====== ====== ======
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets were $45,610,000, $36,376,000 and $18,500,000,
respectively, as of December 31, 1999, and $39,470,000, $31,546,000 and
$17,334,000, respectively, as of December 31, 1998.
The assumptions presented herein are based on pertinent information
available to management as of December 31, 1999 and 1998. 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 postretirement benefit obligation as of December 31, 1999 by
$6,164,000 and the estimated eligibility cost and interest cost components of
net periodic benefit costs for 1999 by $831,000. Decreasing the assumed health
care cost trend rates by one percentage point in each year would decrease the
postretirement benefit obligation as of December 31, 1999 by $4,879,000 and the
estimated eligibility cost and interest cost components of net periodic
postretirement benefit costs for 1999 by $637,000.
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
1999, 1998 and 1997 of $6,003,000, $7,145,000 and $7,173,000, 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.
ML-19
<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 lives 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>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Direct premiums $662,775 $553,408 $595,686
Reinsurance assumed 102,154 91,548 78,097
Reinsurance ceded (67,130) (67,263) (58,530)
-------- -------- --------
Net premiums $697,799 $577,693 $615,253
======== ======== ========
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $71,922,000,
$64,174,000 and $58,072,000 during 1999, 1998 and 1997, respectively.
On January 1, 1999, the Company entered into an agreement to sell its
assumed individual life reinsurance business representing $1,982,509,000 of in
force to RGA Reinsurance Company. The Company received cash of $1,284,000 from
the sale and recognized miscellaneous income of approximately $4,139,000,
representing the gain on the sale.
On October 1, 1999, the Company entered into an assumption reinsurance
agreement with Fort Dearborn Life Insurance Company. The agreement transfers
401(k) accounts with associated fixed and variable assets of approximately
$260,000,000.
(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, 1999 and 1998.
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, private equities 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,
1999 and 1998, 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,
1999 and 1998, 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, 1999 and 1998
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.
ML-20
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(11) Fair Value of Financial Instruments (continued)
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.
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>
1999 1998
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Available-for-sale $4,803,568 $4,803,568 $4,914,012 $4,914,012
Held-to-maturity 974,814 968,852 1,086,548 1,161,784
Equity securities 770,269 770,269 749,800 749,800
Mortgage loans:
Commercial 625,196 605,112 579,890 603,173
Residential 71,476 73,293 101,329 104,315
Policy loans 237,335 237,335 226,409 226,409
Short-term investments 93,993 93,993 136,435 136,435
Cash 116,803 116,803 175,660 175,660
Finance receivables, net 134,812 134,812 163,411 163,411
Private equities 284,797 284,797 160,958 164,332
Foreign currency exchange con-
tract 655 655 1,594 1,594
---------- ---------- ---------- ----------
Total financial assets $8,113,718 $8,089,489 $8,296,046 $8,400,925
========== ========== ========== ==========
</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>
1999 1998
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Deferred annuities $1,822,302 $1,810,820 $2,085,408 $2,075,738
Annuity certain contracts 39,513 39,421 57,528 60,766
Other fund deposits 945,575 936,590 722,321 731,122
Guaranteed investment contracts 116 116 862 862
Supplementary contracts without
life contingencies 43,050 43,126 44,696 44,251
Notes payable 218,000 221,233 267,000 272,834
---------- ---------- ---------- ----------
Total financial liabilities $3,068,556 $3,051,306 $3,177,815 $3,185,573
========== ========== ========== ==========
</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, 1999 and 1998. The issuance costs of
$1,421,000 are deferred and amortized over 30 years on straight-line basis.
ML-21
<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>
1999 1998
-------- --------
(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 93,000 142,000
-------- --------
Total notes payable $218,000 $267,000
======== ========
</TABLE>
At December 31, 1999, the aggregate minimum annual notes payable maturities
for the next four years were as follows: 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 $41,354,000. The consumer finance subsidiary was in compliance with all such
provisions at December 31, 1999.
The Company maintains a line of credit, which is drawn down periodically
throughout the year. As of December 1999 and 1998, the outstanding balance of
this line of credit was $90,000,000 and $40,000,000, respectively.
Interest paid on debt for the years ended December 31, 1999, 1998 and 1997,
was $24,120,000, $25,008,000 and $18,197,000, respectively.
(13) Other 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 (loss), other than net income are
illustrated below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
(In thousands)
<S> <C> <C> <C>
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment $ -- $ -- $ 1,457
Less: reclassification adjustment for gains
included in net income -- (1,457) --
---------- -------- --------
-- (1,457) 1,457
Unrealized gains (loss) on securities (59,499) 162,214 171,654
Less: reclassification adjustment for gains
included in net income (74,170) (90,770) (96,476)
---------- -------- --------
(133,669) 71,444 75,178
Income tax expense related to items of other
comprehensive income 48,131 (23,045) (28,274)
---------- -------- --------
Other comprehensive income (loss), net of tax $ (85,538) $ 46,942 $ 48,361
========== ======== ========
</TABLE>
(14) Stock Dividends
During 1999, the Company declared and paid dividends to Securian Financial
Group, Inc. totaling $59,109,000. These dividends were in the form of cash,
common stock and the affiliated stock of Capitol City Property Management and
HomePlus Insurance Agency, Inc. On December 14, 1998, the Company declared and
accrued a dividend to Securian Financial Group, Inc. in the amount of
$24,700,000, which was paid in 1999.
ML-22
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(14) Stock Dividends (continued)
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 1998 statutory results, Minnesota Life Insurance Company could
have paid $168,076,000 in dividends in 1999 without prior approval.
(15) 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 $183,200,000 as
of December 31, 1999. 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 private equities and real
estate investments totaling $147,652,000 as of December 31, 1999. The Company
estimates that $60,000,000 of these commitments will be invested in 2000, with
the remaining $87,652,000 invested over the next four years.
As of December 31, 1999, the Company had committed to purchase bonds and
mortgage loans totaling $54,130,000 but had not completed the purchase
transactions.
The Company has a long-term lease agreement for rental space in downtown St.
Paul and other locations. Minimum rental commitments under such leases are as
follows: 2000, $2,400,000; 2001, $2,227,000; 2002, $2,092,000; 2003,
$2,108,000; 2004, $1,261,000; 2005, $22,000.
At December 31, 1999, the Company had guaranteed the payment of $76,600,000
in policyholders dividends and discretionary amounts payable in 2000. The
Company has pledged bonds, valued at $79,333,000 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. At December 31, 1999 and 1998 the liability was ($352,000) and
$1,105,000, respectively. An asset is recorded for the amount of guaranty fund
assessments paid, which can be recovered through future premium tax credits.
This asset was $5,485,000 and $7,282,000 for the periods ending December 31,
1999 and 1998, respectively. These assets are being amortized over a five-year
period.
At December 1999, the Company has guaranteed the payment of approximately
$125,000,000 of senior notes issued by Capitol City Properties Management,
Inc., an affiliated company through the expiration date of the notes June 1,
2021 or by mutual agreement of the parties. These notes were issued in
conjunction with the financing of the Company's additional home office space.
ML-23
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(16) 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
----------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Statutory capital and surplus $1,089,474 $ 947,885
Adjustments:
Deferred policy acquisition costs 712,532 564,382
Net unrealized investment gains (losses) (49,572) 279,885
Statutory asset valuation reserve 310,626 239,455
Statutory interest maintenance reserve 30,984 49,915
Premiums and fees deferred or receivable (69,618) (73,312)
Change in reserve basis 115,718 113,648
Separate accounts (64,860) (56,816)
Unearned policy and contract fees (144,157) (118,459)
Surplus notes (125,000) (125,000)
Net deferred income taxes (125,094) (173,907)
Non-admitted assets 36,205 39,525
Policyholders dividends 62,268 60,648
Other (23,642) (25,573)
---------- ----------
Stockholder's equity as reported in the accompanying
consolidated financial statements $1,755,864 $1,722,276
========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31
--------------------------------
1999 1998 1997
-------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Statutory net income $167,957 $ 104,609 $ 167,078
Adjustments:
Deferred policy acquisition costs 29,164 18,042 26,878
Statutory interest maintenance reserve (18,931) 25,746 (538)
Premiums and fees deferred or receivable 3,686 708 2,175
Change in reserve basis 2,555 3,011 9,699
Separate accounts (8,044) (5,644) (6,272)
Unearned policy and contract fees (8,696) (7,896) (12,825)
Net deferred income taxes 1,439 15,351 7,832
Policyholders dividends 1,620 1,194 2,708
Other 4,485 8,228 (6,839)
-------- ---------- ----------
Net income as reported in the accompanying
consolidated financial statements $175,235 $ 163,349 $ 189,896
======== ========== ==========
</TABLE>
ML-24
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Schedule I
Summary of Investments--Other than Investments in Related Parties
December 31, 1999
<TABLE>
<CAPTION>
As Shown
on the
Market consolidated
Type of investment Cost(3) Value balance sheet(1)
- ------------------ ---------- ---------- ----------------
(In thousands)
<S> <C> <C> <C>
Bonds:
United States government and
government agencies and authorities $ 151,864 $ 143,597 $ 143,597
Foreign governments 122,505 115,270 115,270
Public utilities 287,970 276,558 276,558
Mortgage-backed securities 1,602,362 1,564,386 1,564,386
All other corporate bonds 3,678,697 3,672,609 3,678,571
---------- ---------- ----------
Total bonds 5,843,398 5,772,420 5,778,382
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities 7,475 9,072 9,072
Banks, trusts and insurance compa-
nies 25,959 25,399 25,399
Industrial, miscellaneous and all
other 525,152 708,848 708,848
Nonredeemable preferred stocks 28,428 26,950 26,950
---------- ---------- ----------
Total equity securities 587,014 770,269 770,269
---------- ---------- ----------
Mortgage loans on real estate 696,672 XXXXXX 696,672
Real estate (2) 36,793 XXXXXX 36,793
Policy loans 237,335 XXXXXX 237,335
Other long-term investments 473,528 XXXXXX 473,528
Short-term investments 93,993 XXXXXX 93,993
---------- ---------- ----------
Total 1,538,321 -- 1,538,321
---------- ---------- ----------
Total investments $7,968,733 $6,542,689 $8,086,972
========== ========== ==========
</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.
ML-25
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Schedule III
Supplementary Insurance Information
(In thousands)
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------
Future policy
Deferred benefits Other policy
policy losses, claims claims and
acquisition and settlement Unearned benefits
Segment costs expenses(1) premiums(2) payable
- ------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
1999:
Life insurance $535,709 $2,388,867 $172,430 $73,670
Accident and
health insur-
ance 80,371 552,833 35,558 16,858
Annuity 97,137 3,118,995 25 234
Property and li-
ability insur-
ance -- 441
-------- ---------- -------- -------
$713,217 $6,061,136 $208,013 $90,762
======== ========== ======== =======
1998:
Life insurance $421,057 $2,303,580 $146,042 $51,798
Accident and
health insur-
ance 74,606 510,969 33,568 18,342
Annuity 68,719 3,186,148 25 424
Property and li-
ability insur-
ance -- 480 556 --
-------- ---------- -------- -------
$564,382 $6,001,177 $180,191 $70,564
======== ========== ======== =======
1997:
Life insurance $434,012 $2,229,396 $166,704 $42,627
Accident and
health insur-
ance 70,593 466,109 34,250 17,153
Annuity 71,425 3,266,965 -- 4,576
Property and li-
ability insur-
ance -- 280 1,116 --
-------- ---------- -------- -------
$576,030 $5,962,750 $202,070 $64,356
======== ========== ======== =======
<CAPTION>
For the years ended December 31,
-----------------------------------------------------------------------
Amortization
Benefits, of deferred
Net claims, losses policy Other
Premium investment and settlement acquisition operating Premiums
Segment revenue(3) income expenses costs expenses written(4)
- ------- ----------- ---------- -------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1999:
Life insurance $ 762,745 $258,483 $645,695 $ 88,731 $391,454
Accident and
health insur-
ance 170,988 37,922 108,283 11,779 101,021
Annuity 95,190 243,160 214,461 22,945 79,883
Property and li-
ability insur-
ance (14) 491 323 743 (570)
----------- ---------- -------------- ------------ --------- ----------
$1,028,909 $540,056 $968,762 $123,455 $573,101 $ (570)
=========== ========== ============== ============ ========= ==========
1998:
Life insurance $ 615,856 $246,303 $502,767 $114,589 $342,080
Accident and
health insur-
ance 167,544 35,822 105,336 12,261 93,876
Annuity 93,992 247,970 225,004 21,248 136,527
Property and li-
ability insur-
ance 662 986 2,848 -- 1,187 103
----------- ---------- -------------- ------------ --------- ----------
$ 878,054 $531,081 $835,955 $148,098 $573,670 $ 103
=========== ========== ============== ============ ========= ==========
1997:
Life insurance $ 576,468 $247,267 $476,747 $102,473 $345,938
Accident and
health insur-
ance 205,869 40,343 87,424 9,451 101,960
Annuity 64,637 261,768 242,738 16,252 129,263
Property and li-
ability insur-
ance 40,316 4,395 33,773 -- 13,146 43,376
----------- ---------- -------------- ------------ --------- ----------
$ 887,290 $553,773 $840,682 $128,176 $590,307 $43,376
=========== ========== ============== ============ ========= ==========
</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.
ML-26
<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
Gross other from other Net assumed to
amount companies companies amount net
------------ ----------- ----------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
1999:
Life insurance in force $175,297,217 $21,279,606 $37,337,340 $191,354,951 19.5%
============ =========== =========== ============
Premiums:
Life insurance $ 455,857 $ 30,557 $ 83,681 $ 508,981 16.4%
Accident and health
insurance 183,765 18,776 1,281 166,270 0.8%
Annuity 22,562 -- -- 22,562 --
Property and liability
insurance 591 17,797 17,192 (14) n/a
------------ ----------- ----------- ------------
Total premiums $ 662,775 $ 67,130 $ 102,154 $ 697,799 14.6%
============ =========== =========== ============
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 liability
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 liability
insurance 38,995 11,651 12,972 40,316 32.2%
------------ ----------- ----------- ------------
Total premiums $ 595,686 $ 58,530 $ 78,097 $ 615,253 12.7%
============ =========== =========== ============
</TABLE>
See independent auditors' report.
ML-27
<PAGE>
Appendix A
Illustrations of Policy Values, Death Benefits and Premiums
The Appendix A illustrations beginning on page A-2, 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. Current cost of insurance charges reflect 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 certain fees and expenses are deducted from the gross return. The
table of Fund Annual Expenses on page 4, shows these fees, and expenses for
each portfolio. The mortality and expense risk charge reflected in the
illustrations is at an annual rate of .50 percent. The investment management
fee illustrated is .56 percent and represents an average of the annual fee
charged for all portfolios of the Funds. The illustrations also reflect a
deduction for those Fund costs and expenses borne by the Funds and for
distribution (12b-1) fees. Fund expenses illustrated are .14 percent,
representing an average of the 1999 expense ratios of the portfolios of the
Funds. Certain expenses for certain portfolios of the Funds were waived or
reduced, as detailed in the footnotes to the table of Fund Annual Expenses on
page 5. The 12b-1 fee illustrated is .24 percent and represents an average of
those fees charged for portfolios of the Funds. Therefore, gross annual rates
of return of 0 percent, 6 percent and 12 percent correspond to approximate net
annual rates of return of -1.44 percent, 4.56 percent and 10.56 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. 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.
A-1
<PAGE>
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 (-1.44% NET) (4.56% NET) (10.56% 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 $ 899 $250,000 $ 975 $250,000 $ 1,049 $250,000
2 42 4,205 3,934 250,000 4,281 250,000 4,624 250,000
3 43 4,205 6,892 250,000 7,707 250,000 8,541 250,000
4 44 4,205 9,766 250,000 11,254 250,000 12,834 250,000
5 45 4,205 12,559 250,000 14,928 250,000 17,544 250,000
6 46 4,205 15,264 250,000 18,729 250,000 22,710 250,000
7 47 4,205 17,882 250,000 22,666 250,000 28,388 250,000
8 48 4,205 20,526 250,000 26,867 250,000 34,767 250,000
9 49 4,205 23,213 250,000 31,359 250,000 41,929 250,000
10 50 4,205 25,918 250,000 36,130 250,000 49,936 250,000
15 55 4,205 39,177 250,000 64,182 250,000 105,830 250,000
20 60 4,205 50,665 250,000 99,523 250,000 200,528 362,095
25 65 4,205 58,867 250,000 143,605 250,000 354,292 565,073
30 70 4,205 62,705 250,000 199,684 294,971 601,788 856,272
</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.
A-2
<PAGE>
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 (-1.44% NET) (4.56% NET) (10.56% 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 $ 899 $250,000 $ 974 $250,000 $ 1,049 $250,000
2 42 4,205 3,934 250,000 4,274 250,000 4,624 250,000
3 43 4,205 6,892 250,000 7,691 250,000 8,541 250,000
4 44 4,205 9,766 250,000 11,223 250,000 12,834 250,000
5 45 4,205 12,559 250,000 14,878 250,000 17,544 250,000
6 46 4,205 15,264 250,000 18,655 250,000 22,710 250,000
7 47 4,205 17,879 250,000 22,556 250,000 28,379 250,000
8 48 4,205 20,403 250,000 26,587 250,000 34,607 250,000
9 49 4,205 22,832 250,000 30,750 250,000 41,452 250,000
10 50 4,205 25,160 250,000 35,047 250,000 48,981 250,000
15 55 4,205 35,038 250,000 58,568 250,000 99,774 250,000
20 60 4,205 40,876 250,000 85,396 250,000 182,882 332,523
25 65 4,205 40,500 250,000 115,736 250,000 310,705 499,837
30 70 4,205 29,013 250,000 150,153 250,000 502,255 722,358
</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.
A-3
<PAGE>
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 (-1.44% NET) (4.56% NET) (10.56% 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 $ 896 $250,000 $ 971 $250,000 $ 1,046 $ 250,000
2 42 4,205 3,921 250,896 4,259 250,971 4,608 251,046
3 43 4,205 6,859 253,921 7,654 254,259 8,500 254,608
4 44 4,205 9,705 256,859 11,151 257,654 12,751 258,500
5 45 4,205 12,459 259,705 14,756 261,151 17,397 262,751
6 46 4,205 15,113 262,459 18,464 264,756 22,470 267,397
7 47 4,205 17,694 265,113 22,320 268,464 28,079 272,470
8 48 4,205 20,328 267,694 26,452 272,320 34,392 278,079
9 49 4,205 22,991 270,328 30,847 276,452 41,456 284,392
10 50 4,205 25,659 272,991 35,492 280,847 49,326 291,456
15 55 4,205 38,523 286,047 62,334 306,479 103,587 340,415
20 60 4,205 49,048 297,253 94,620 337,797 192,855 521,552
25 65 4,205 55,194 304,383 131,293 373,638 329,289 827,154
30 70 4,205 55,372 305,911 171,854 421,502 527,853 1,244,136
</TABLE>
(1) The initial death benefit is guaranteed to age 100.
(2) If premiums are paid more frequently than annually, the payments would be
$2,102.65 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.
A-4
<PAGE>
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 (-1.44% NET) (4.56% NET) (10.56% 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 $ 896 $250,000 $ 971 $250,000 $ 1,046 $250,000
2 42 4,205 3,921 250,896 4,259 250,971 4,608 251,046
3 43 4,205 6,859 253,921 7,654 254,259 8,500 254,608
4 44 4,205 9,705 256,859 11,151 257,654 12,751 258,500
5 45 4,205 12,459 259,705 14,756 261,151 17,397 262,751
6 46 4,205 15,113 262,459 18,464 264,756 22,470 267,397
7 47 4,205 17,664 265,113 22,274 268,464 28,011 272,470
8 48 4,205 20,109 267,664 26,186 272,274 34,063 278,011
9 49 4,205 22,444 270,109 30,200 276,186 40,676 284,063
10 50 4,205 24,661 272,444 34,310 280,200 47,898 290,676
15 55 4,205 33,630 282,169 56,029 301,577 95,181 334,030
20 60 4,205 37,670 287,350 78,251 323,877 167,186 457,495
25 65 4,205 34,189 285,704 97,750 344,352 265,154 677,710
30 70 4,205 18,288 272,722 107,615 356,840 379,430 918,458
</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.
A-5
<PAGE>
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 (-1.44% NET) (4.56% NET) (10.56% 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 $ 1,009 $250,000 $ 1,096 $250,000 $ 1,184 $250,000
2 42 4,641 4,233 250,000 4,611 250,000 5,000 250,000
3 43 4,641 7,359 250,000 8,233 250,000 9,167 250,000
4 44 4,641 10,379 250,000 11,962 250,000 13,716 250,000
5 45 4,641 13,297 250,000 15,804 250,000 18,692 250,000
6 46 4,641 16,272 250,000 19,930 250,000 24,314 250,000
7 47 4,641 19,335 250,000 24,385 250,000 30,683 250,000
8 48 4,641 22,442 250,000 29,142 250,000 37,839 250,000
9 49 4,641 25,566 250,000 34,190 250,000 45,843 250,000
10 50 4,641 28,687 250,000 39,525 250,000 54,771 250,000
15 55 4,641 43,845 250,000 70,628 250,000 116,833 250,000
20 60 4,641 57,112 250,000 109,671 250,000 222,166 385,919
25 65 4,641 67,139 250,000 158,747 255,881 393,234 609,676
30 70 4,641 72,993 250,000 220,375 320,842 669,149 934,173
</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.
A-6
<PAGE>
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 (-1.44% NET) (4.56% NET) (10.56% 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 $ 1,009 $250,000 $ 1,096 $250,000 $ 1,184 $250,000
2 42 4,641 4,233 250,000 4,611 250,000 5,000 250,000
3 43 4,641 7,359 250,000 8,233 250,000 9,167 250,000
4 44 4,641 10,379 250,000 11,962 250,000 13,716 250,000
5 45 4,641 13,295 250,000 15,801 250,000 18,689 250,000
6 46 4,641 16,100 250,000 19,751 250,000 24,129 250,000
7 47 4,641 18,795 250,000 23,817 250,000 30,087 250,000
8 48 4,641 21,377 250,000 28,002 250,000 36,620 250,000
9 49 4,641 23,844 250,000 32,310 250,000 43,793 250,000
10 50 4,641 26,188 250,000 36,742 250,000 51,674 250,000
15 55 4,641 35,735 250,000 60,719 250,000 104,795 250,000
20 60 4,641 40,450 250,000 87,644 250,000 191,580 335,479
25 65 4,641 38,123 250,000 118,031 250,000 323,904 507,250
30 70 4,641 23,354 250,000 152,855 250,000 520,839 735,968
</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.
A-7
<PAGE>
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 (-1.44% NET) (4.56% NET) (10.56% 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 $ 1,008 $250,000 $ 1,095 $250,000 $ 1,183 $250,000
2 42 4,641 4,233 250,000 4,609 250,079 4,995 250,370
3 43 4,641 7,358 250,000 8,229 250,220 9,151 251,465
4 44 4,641 10,378 250,000 11,954 250,421 13,679 253,302
5 45 4,641 13,296 250,000 15,792 250,680 18,627 255,902
6 46 4,641 16,272 250,000 19,917 251,006 24,232 259,325
7 47 4,641 19,335 250,000 24,368 251,895 30,571 264,175
8 48 4,641 22,442 250,000 29,117 253,393 37,676 270,513
9 49 4,641 25,566 250,000 34,153 255,369 45,601 278,285
10 50 4,641 28,687 250,000 39,467 257,739 54,413 287,485
15 55 4,641 43,845 250,000 70,276 274,328 114,949 356,854
20 60 4,641 57,112 250,000 108,209 297,784 219,072 380,425
25 65 4,641 67,138 250,000 153,545 326,264 388,177 601,736
30 70 4,641 72,993 250,000 214,007 311,368 660,928 922,612
</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.
A-8
<PAGE>
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 (-1.44% NET) (4.56% NET) (10.56% 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 $ 1,008 $250,000 $ 1,095 $250,000 $ 1,183 $250,000
2 42 4,641 4,233 250,000 4,609 250,079 4,995 250,370
3 43 4,641 7,358 250,000 8,229 250,220 9,151 251,465
4 44 4,641 10,378 250,000 11,954 250,421 13,679 253,302
5 45 4,641 13,294 250,000 15,789 250,680 18,614 255,902
6 46 4,641 16,099 250,000 19,731 250,996 23,989 259,287
7 47 4,641 18,794 250,000 23,787 251,366 29,848 263,484
8 48 4,641 21,376 250,000 27,958 251,790 36,233 268,519
9 49 4,641 23,843 250,000 32,248 252,265 43,193 274,422
10 50 4,641 26,188 250,000 36,655 252,790 50,776 281,228
15 55 4,641 35,735 250,000 60,362 256,121 99,898 330,171
20 60 4,641 40,449 250,000 86,480 260,521 179,830 314,366
25 65 4,641 38,123 250,000 114,749 265,844 305,824 478,504
30 70 4,641 23,354 250,000 144,170 271,957 493,379 696,801
</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.
A-9
<PAGE>
Appendix B
[GRAPH]
Understanding How Premium Becomes Cash Value
The Cyclical Charges Inside a Variable Adjustable Life Policy
(Assumes Annual Payment of Premium)
Separate Account Activities
Rate of Return
* Net asset values are
determined daily, net of
separate account charges
Separate Account Charges
* Reflected in daily net asset values
* Annualized charges, which include
* Management fee: average
= .56 percent
* Fund expenses: average
= .14 percent
* Distribution(12b-1) fees:
average = .24 percent
* Mortality and expense risk
= .50 percent
*Total average charge is
1.44 percent
Beginning of Policy Year Cash Value
Policy Anniversary
End of Policy Year Cash Value
Client Pays Premium
Beginning of Policy Year
Charges Taken From Gross Base Premium
Annual charges taken:
* Sales load of 7 percent
* Premium tax of 2.5 percent
* Face amount guarantee charge of 1.5 percent of base premium
* Sub-standard risk if applicable for VALO95
Additional charges taken in the first year:
* Up to 23 percent sales load
* Underwriting charge of up to $5 per $1,000 of face amount
Charges on nonrepeating premiums:
* Premium tax of 2.5 percent
1st
Month of Policy Year
2nd
Month of Policy Year
3rd
Month of Policy Year
4th
Month of Policy Year
5th
Month of Policy Year
6th
Month of Policy Year
7th
Month of Policy Year
8th
Month of Policy Year
9th
Month of Policy Year
10th
Month of Policy Year
11th
Month of Policy Year
12th
Month of Policy Year
Monthly Charges Taken From the Policy Value
* Administrative charge of $5 per month.
* A cost of insurance charge, calculated by multiplying the net amount at risk
of the policy by a rate which is based on the 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 insureds. This rate is guaranteed not to exceed
1980 CSO table rate.
* Sub-standard risk if applicable for VALO87.
Benefits Available
from the Policy
* Death Benefit
* Policy Loans
* Policy Withdrawals
* Accelerated Benefits
* Rider Coverage
B-1
<PAGE>
Appendix C
Comparison of Death Benefit Options
To summarize the effect of the two death benefit options on the death
benefit and policy value, assume Policies with the following characteristics:
the insured is a male, age 40 at policy issue, and a non-smoker. The Policy has
a face amount of $250,000, with a level face amount for life. The premiums for
VAL '95 and VAL '87 are $4,205.30 and $4,641.31, respectively. 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.
These situations are shown in Appendix A, "Illustrations of Policy Values,
Death Benefits and Premiums," on page A-1 of this prospectus.
Now, further assume that the Policy has been in force for ten years and all
premiums have been paid during that time. No policy loans or withdrawals have
been made under the Policy.
Based on these assumptions, the table below shows the policy values and
death benefit under each death benefit option at the end of the 10th policy
year for both VAL '95 and VAL '87.
VAL '95
<TABLE>
<CAPTION>
Cash Option Protection Option
Policy Value Death Benefit Policy Value Death Benefit
------------ ------------- ------------ -------------
<S> <C> <C> <C>
$49,936 $250,000 $49,326 $299,326
VAL '87
<CAPTION>
Cash Option Protection Option
Policy Value Death Benefit Policy Value Death Benefit
------------ ------------- ------------ -------------
<S> <C> <C> <C>
$54,771 $250,000 $54,413 $298,148
</TABLE>
In addition, 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.
Under the Cash Option, the death benefit does not vary from the Policy's
face amount until the Policy becomes paid-up. Under the Protection Option the
death benefit varies with the performance of the Policy. Generally, the death
benefit under the Protection Option will be larger than under the Cash Option.
Because of the increased insurance protection, the policy value under the
Protection Option is generally smaller than under the Cash Option.
C-1
<PAGE>
Appendix D
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.
D-1
