<PAGE>
As filed with the Securities and Exchange Commission on April 29, 1996
Registration No. 33-54662
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
--------------------------
POST-EFFECTIVE AMENDMENT NO. 4
--------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
(Exact name of trust)
THE PENN MUTUAL LIFE INSURANCE COMPANY
(Name of depositor)
600 Dresher Road
Horsham, Pennsylvania 19044
(Complete address of depositor's principal executive offices)
--------------------------
Richard J. Liburdi
Senior Vice President, Insurance and Life Sales
The Penn Mutual Life Insurance Company
600 Dresher Road
Horsham, Pennsylvania 19044
(Name and complete address of agent for service)
--------------------------
Copy to:
Richard W. Grant, Esq.
C. Ronald Rubley
Morgan, Lewis & Bockius LLP
Philadelphia, PA 19103-6993
--------------------------
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to paragraph (b) of
Rule 485.
[X] On April 30, 1996 pursuant to paragraph (b) of Rule
485.
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485.
[ ] On _________________ pursuant to paragraph (a) of Rule 485.
--------------------------
Securities Being Offered -- Individual Variable Life Insurance Contracts.
Pursuant to Rule 24f-2 of the Investment Company Act of 1940, as amended, the
Registrant has registered an indefinite amount of the securities being offered.
Pursuant to Rule 24f-2 the Registrant filed a Rule 24f-2 Notice on February 29,
1996 to register securities sold during the year ended December 31, 1995.
================================================================================
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
===================================
THE PENN MUTUAL LIFE INSURANCE COMPANY
Cross Reference to Items Required by Form N-8B-2
N-8B-2 ITEM CAPTION IN PROSPECTUS
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1 Cover Page
2 Cover Page
3 Not applicable
4 Sale of the Policies
5 Penn Mutual Variable Life Account I
6 Penn Mutual Variable Life Account I
7 Not applicable
8 Not applicable
9 Litigation
10 Summary and Diagram of the Policy; Premiums and Allocations; Cash
Benefits; Other Policy Benefits and Provisions; Substitution of
Securities; Voting Rights
11 The Funds
12 The Funds
13 Charges and Deductions
14 Premiums and Allocations
15 Crediting Premiums
16 The Funds
17 Surrendering the Policy for Net Cash Surrender Value; Partial
Surrenders; When Proceeds Are Paid
18 Penn Mutual Variable Life Account I
19 Reports to Policy Owners
20 Changes in the Policy or Benefits
21 Policy Loans
22 Not applicable
23 Not applicable
24 Not applicable
25 The Penn Mutual Life Insurance Company
26 Charges and Deductions
27 The Penn Mutual Life Insurance Company
28 The Penn Mutual Life Insurance Company; Penn Mutual Trustees and
Officers
29 Not applicable
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
<PAGE>
35 The Penn Mutual Life Insurance Company; Premiums and Allocations;
Sale of the Policies
36 Not applicable
37 Not applicable
38 Sale of the Policies
39 Sale of the Policies
40 Sale of the Policies
41 Not applicable
42 Not applicable
43 Not applicable
44 Determining the Policy Value; The Funds
45 Not applicable
46 Determining the Policy Value; The Funds
47 Penn Mutual Variable Life Account I; The Funds
48 The Penn Mutual Life Insurance Company
49 Not applicable
50 Not applicable
51 Premiums and Allocations; Death Benefits and Changes in Specified
Amount; Sale of the Policies
52 Substitution of Securities
53 Tax Considerations
54 Not applicable
55 Illustrations of Policy Values, Net Cash Surrender Values, Death
Benefits and Accumulated Premiums
56 Not applicable
57 Not applicable
58 Not applicable
59 Financial Statements
<PAGE>
PROSPECTUS -- MAY 1, 1996
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE POLICIES
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
THE PENN MUTUAL LIFE INSURANCE COMPANY
INDEPENDENCE SQUARE . PHILADELPHIA, PA 19172 . TELEPHONE (215) 956-8000
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This prospectus describes an individual flexible premium variable universal
life insurance policy (the "Policy" or "Policies") offered by The Penn Mutual
Life Insurance Company ("Penn Mutual"). The Policy is designed to provide
lifetime insurance protection on the Insured named in the Policy and at the
same time provide flexibility to vary the amount and timing of premiums and to
change the amount of death benefits payable under the Policy. This flexibility
allows you to provide for changing insurance needs under a single insurance
policy.
You have the opportunity to allocate net premiums and Policy Value to one or
more subaccounts of the Penn Mutual Variable Life Account I (the "Separate
Account") and Penn Mutual's general account (the "Fixed Account"), within
limits. The assets of each subaccount are invested in a corresponding fund
(each, a "Fund," and together, the "Funds") of Penn Series Funds, Inc. ("Penn
Series"), Neuberger & Berman Advisers Management Trust ("AMT"), TCI Portfolios,
Inc. ("TCI Portfolios"), Variable Insurance Products Fund ("VIP Fund") or
Variable Insurance Products Fund II ("VIP Fund II"). Each Fund is managed by
the investment adviser shown below:
<TABLE>
<CAPTION>
FUNDS MANAGERS
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PENN SERIES
<S> <C>
Growth Equity Fund Independence Capital Management, Inc.
(a subsidiary of Penn Mutual)
Value Equity Fund OpCap Advisors (a subsidiary of Oppenheimer Capital)
Small Capitalization OpCap Advisors
Fund
Flexibly Managed Fund T. Rowe Price Associates, Inc.
International Equity Vontobel USA Inc.
Fund
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Money Market Fund Independence Capital Management, Inc.
- ------------------------------------------------------------------------------
AMT
Limited Maturity Bond Neuberger & Berman Management, Inc.
Portfolio
Balanced Portfolio Neuberger & Berman Management, Inc.
- ------------------------------------------------------------------------------
TCI PORTFOLIOS
TCI Growth Portfolio Investors Research Corporation
(a subsidiary of Twentieth Century Companies, Inc.)
- ------------------------------------------------------------------------------
VIP FUND
Equity-Income Portfolio Fidelity Management & Research Company
Growth Portfolio Fidelity Management & Research Company
- ------------------------------------------------------------------------------
VIP FUND II
Asset Manager Portfolio Fidelity Management & Research Company
- ------------------------------------------------------------------------------
</TABLE>
The accompanying prospectuses for the Funds describe the Funds, including the
risks of investing in the Funds, and provide other information on the Funds.
This prospectus generally describes only those features of the Policy related
to the Separate Account. For a brief summary of the Fixed Account, see "The
Fixed Account," page 14.
You can select from two death benefit options available under the Policy: a
level death benefit ("Specified Amount" or "Option 1") and an increasing death
benefit ("Specified Amount Plus Policy Value" or "Option 2"). Penn Mutual
guarantees that the death benefit will never be less than the Specified Amount
(less any unrepaid policy loans and past due charges) so long as the Policy is
in force.
The Policy provides for a net cash surrender value that can be obtained by
surrendering the Policy. Because this value is based on the performance of the
Funds, to the extent of allocations to the Separate Account, there is no
guaranteed net cash surrender value. If the net cash surrender value is
insufficient to cover the charges due under the Policy, the Policy will lapse
without value. However, Penn Mutual guarantees to keep the Policy in force
during the first three policy years so long as the Base Monthly Premium
requirement and other conditions have been met. The Policy also provides for
policy loans and permits partial surrenders within limits.
It may not be advantageous to replace existing insurance with the Policy.
Within certain limits, you may return the Policy or exchange it for another
life insurance policy with benefits that do not vary with the investment
results of a separate account.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION YOU SHOULD KNOW BEFORE
DECIDING TO PURCHASE A POLICY. IT SHOULD BE RETAINED FOR FUTURE REFERENCE. THIS
PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR EACH
FUND. THE FUND PROSPECTUSES SHOULD BE READ IN CONJUNCTION WITH THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS CONTENTS
<TABLE>
- -------------------
<S> <C>
DEFINITIONS OF
TERMS........ 4
- -------------------
SUMMARY AND
DIAGRAM OF
THE POLICY... 5
- -------------------
GENERAL INFOR-
MATION ABOUT
PENN MUTUAL,
THE SEPARATE
ACCOUNT AND
THE FUNDS.... 8
The Penn Mu-
tual Life
Insurance
Company.... 8
Penn Mutual
Variable
Life Ac-
count I.... 8
The Funds... 8
Substitution
of Securi-
ties....... 10
Voting
Rights..... 10
- -------------------
PREMIUMS AND
ALLOCATIONS.. 11
Applying for
a Policy... 11
Free Look
Right to
Cancel Pol-
icy........ 11
Premiums.... 11
Premiums to
Prevent
Lapse...... 12
Net Premium
Allocations. 12
Crediting
Premiums... 12
Transfers... 13
Dollar Cost
Averaging.. 13
Asset
Rebalancing. 13
- -------------------
FIXED ACCOUNT. 14
Fixed Ac-
count...... 14
Interest
Credited on
Policy
Value in
the Fixed
Account.... 14
Calculating
Fixed Ac-
count Val-
ue......... 15
Deductions,
Surrenders
and Trans-
fers from
the Fixed
Account.... 15
Payments
from the
Fixed Ac-
count...... 15
- -------------------
CHARGES AND
DEDUCTIONS... 15
Premium
Charge..... 15
Daily Mor-
tality and
Expense
Risk
Charge..... 15
Monthly De-
duction.... 16
Transfer
Charge..... 17
Surrender
Charges.... 17
Partial Sur-
render
Charge..... 18
Fund Ex-
penses..... 19
- -------------------
HOW YOUR POL-
ICY VALUES
VARY......... 19
Determining
the Policy
Value...... 19
Net Policy
Value...... 19
Cash Surren-
der Value.. 20
Net Cash
Surrender
Value...... 20
- -------------------
DEATH BENEFITS
AND CHANGES
IN SPECIFIED
AMOUNT....... 20
Amount of
Death Bene-
fit........ 20
Basic Death
Benefit and
Specified
Amount Op-
tions...... 20
Initial
Specified
Amount and
Option..... 21
Changes in
Specified
Amount Op-
tion....... 21
Changes in
Specified
Amount..... 21
Selecting
and Chang-
ing the
Beneficiary. 21
- -------------------
CASH BENEFITS. 21
Policy
Loans...... 21
Surrendering
the Policy
for Net
Cash Sur-
render Val-
ue......... 22
Partial Sur-
renders.... 22
Maturity
Benefit.... 23
Payment Op-
tions...... 23
</TABLE>
2
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------
<S> <C>
ILLUSTRATIONS OF POLICY VALUES, NET CASH SURRENDER VALUES, DEATH BENEFITS
AND ACCUMULATED PREMIUMS.................................................. 23
- ------------------------------------------------------------------------------
OTHER POLICY BENEFITS AND PROVISIONS...................................... 28
Right to Exchange to a Fixed Benefit Policy............................. 28
Dividends............................................................... 28
Limits on our Rights to Contest the Policy.............................. 28
Changes in the Policy or Benefits....................................... 28
When Proceeds are Paid.................................................. 28
Reports to Policy Owners................................................ 29
Assignment.............................................................. 29
Reinstatement........................................................... 29
Supplemental Benefits................................................... 29
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TAX CONSIDERATIONS........................................................ 30
Introduction............................................................ 30
Tax Status of the Policy................................................ 30
Tax Treatment of Policy Benefits........................................ 31
Possible Charge for Penn Mutual's Taxes................................. 32
- ------------------------------------------------------------------------------
OTHER INFORMATION ABOUT THE POLICIES AND PENN MUTUAL...................... 32
Sale of the Policies.................................................... 32
Penn Mutual Trustees and Officers....................................... 33
State Regulation........................................................ 34
Additional Information.................................................. 34
Experts................................................................. 35
Litigation.............................................................. 35
Legal Matters........................................................... 35
Financial Statements.................................................... 35
- ------------------------------------------------------------------------------
APPENDICES
A--Minimum Initial Premiums............................................. A-1
B--Administrative Surrender Charges Per $1,000.......................... B-1
C--Applicable Percentages............................................... C-1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND THE PROSPECTUSES OF THE FUNDS OR THEIR RESPECTIVE
STATEMENTS OF ADDITIONAL INFORMATION.
3
<PAGE>
- --------------------------------------------------------------------------------
DEFINITIONS OF TERMS
ACCOUNT: A Subaccount of the Separate Account or the Fixed Account.
ATTAINED AGE: The Insured's age on the Policy Date, plus the number of full
years since the Policy Date.
BASE MONTHLY PREMIUM: An amount used to measure premiums paid during the
first three Policy Years for purposes of the Three-Year Guarantee. See page
11.
BASIC DEATH BENEFIT: Specified Amount or Specified Amount Plus Policy Value,
depending on the option selected. See page 20.
BENEFICIARY: The person to whom the Death Benefit is paid.
CASH SURRENDER VALUE: Policy Value less any surrender charges that would be
deducted if the Policy were surrendered. See page 20.
DEATH BENEFIT: The amount of money payable to the Beneficiary if the Insured
dies while the Policy is in force. The calculation of the Death Benefit is
described on page 20
FIXED ACCOUNT: An account consisting of assets owned by Penn Mutual with
respect to the Policies, other than those in the Separate Account.
INDEBTEDNESS: The total amount owed Penn Mutual as a result of Policy loans,
including both principal and accrued interest.
INITIAL SPECIFIED AMOUNT: The Specified Amount on the Policy Date.
INSURED: The person whose life is covered by the Policy.
ISSUE DATE: The date the Policy is issued. A Policy is issued after
completion of underwriting. If the initial premium is received at our Office
and invested before underwriting has been completed, the Issue Date will be
later than the Policy Date. In that case, once issued, Policy coverage is
retroactive to the Policy Date. The Issue Date is used to measure
contestability periods. See page 28.
MATURITY DATE: The Policy Anniversary nearest the Insured's 95th birthday.
MONTHLY ANNIVERSARY: The same day as the Policy Date for each succeeding
month, except that, if the Policy Date is the 29th, 30th or 31st of a month,
the Monthly Anniversary is deemed to be the first of the following month.
The Monthly Deduction is deducted on each Monthly Anniversary.
NET CASH SURRENDER VALUE: Net Policy Value less any applicable surrender
charge that would be deducted upon surrender. See page 17.
NET POLICY VALUE: Policy Value less any Indebtedness.
NET PREMIUM: A premium minus the premium charge. See page 15.
OFFICE: Operations Offices, 600 Dresher Road, Horsham, PA, 19044.
OWNER, YOU: The person who purchases a Policy.
PENN MUTUAL, WE, US: The Penn Mutual Life Insurance Company.
POLICY ANNIVERSARY: An anniversary of the Policy Date.
POLICY DATE: The first date as of which we have received an application and
initial premium in good order. If a Policy is issued, insurance coverage is
effective as of the Policy Date.
POLICY LOAN ACCOUNT: A portion of the Policy Value held in the Fixed Account
as collateral for policy loans. See page 22.
POLICY VALUE: The total amount in the Accounts credited to a Policy.
Calculation of the Policy Value is described on page 19.
POLICY YEAR: The year commencing with the Policy Date and ending on the day
before the first Policy Anniversary, or any following year commencing with a
Policy Anniversary and ending on the day before the next Policy Anniversary.
SEPARATE ACCOUNT: Penn Mutual Variable Life Account I, a separate investment
account of The Penn Mutual Life Insurance Company.
SPECIFIED AMOUNT: A dollar amount used to determine the death benefit under a
Policy. See page 20.
SUBACCOUNT: A division of the Separate Account established to invest in a
particular Fund and available for investment under the Policies.
SURRENDER CHARGE PREMIUM: An amount used to determine the sales charge
deducted on surrender of the Policy. See page 17.
VALUATION DATE: Each day the New York Stock Exchange and our Office are open
for business.
VALUATION PERIOD: A period commencing with the close of business on the New
York Stock Exchange and ending at the close of business on the New York
Stock Exchange for the next succeeding Valuation Date.
4
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY AND DIAGRAM OF THE POLICY
THE FOLLOWING SUMMARY OF PROSPECTUS INFORMATION AND DIAGRAM OF THE POLICY
SHOULD BE READ IN CONJUNCTION WITH THE DETAILED INFORMATION APPEARING ELSEWHERE
IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE DESCRIPTION OF THE POLICY
IN THIS PROSPECTUS ASSUMES THAT THE POLICY IS IN FORCE AND THERE IS NO
OUTSTANDING INDEBTEDNESS.
The Policy is similar in many ways to fixed-benefit life insurance. As with
fixed-benefit life insurance, the Owner of a Policy pays premiums for insurance
coverage on the person insured. Also like fixed-benefit life insurance, the
Policy provides for accumulation of Net Premiums and a Net Cash Surrender Value
which is payable if the Policy is surrendered during the Insured's lifetime. As
with fixed-benefit life insurance, the Net Cash Surrender Value during the
early Policy Years may be substantially lower than the premiums paid.
However, the Policy differs from fixed-benefit life insurance in several
important respects. Unlike fixed-benefit life insurance, the Death Benefit of a
Policy may, and the Policy Value will, increase or decrease to reflect the
investment performance of the Subaccounts to which Policy Value is allocated.
Also, there is no guaranteed minimum Net Cash Surrender Value. Nonetheless,
Penn Mutual guarantees to keep the Policy in force during the first three
Policy Years so long as the Base Monthly Premium requirement has been met and
Indebtedness is not excessive. See "Three-Year Guarantee," page 11. Otherwise,
if the Net Cash Surrender Value is insufficient to pay charges due, the Policy
will lapse without value after a grace period. See "Premiums to Prevent Lapse,"
page 12.
The most important features of the Policy, such as charges, cash benefits,
death benefits, and calculation of Policy values, are summarized in the diagram
on the following pages.
PURPOSE OF THE POLICY. The Policy is designed to be a long-term investment
providing significant insurance benefits. The Policy should be considered in
conjunction with other insurance policies owned by the Owner. It may not be
advantageous to replace existing insurance policies with the Policy.
TAX CONSIDERATIONS. Penn Mutual intends for the Policy to satisfy the
definition of a life insurance contract under section 7702 of the Internal
Revenue Code. Under certain circumstances, a Policy could be treated as a
"modified endowment contract." Penn Mutual will monitor Policies and will
attempt to notify an Owner on a timely basis if his or her Policy is in
jeopardy of becoming a modified endowment contract. For further discussion of
the tax status of a Policy and the tax consequences of being treated as a life
insurance contract or a modified endowment contract, see page 31.
FREE LOOK RIGHT TO CANCEL AND EXCHANGE RIGHT. For a limited time after the
Policy is issued, you have the right to cancel your Policy and receive a full
refund of the initial premium paid. See "Free Look Right to Cancel Policy,"
page 11. Until the end of this limited period, Net Premiums paid will be
invested in the Subaccount investing in the Penn Series Money Market Fund. (See
"Net Premium Allocations," page 12.) At any time within the first 24 Policy
Months, you may exchange your Policy for a flexible premium (non-variable)
adjustable life insurance policy. See "Right to Exchange for a Fixed Benefit
Policy," page 28.
OWNER INQUIRIES. If you have any questions, you may write to us (The Penn
Mutual Life Insurance Company, Independence Square, Philadelphia, PA, 19172) or
call us (1-800-766-7366).
5
<PAGE>
DIAGRAM OF POLICY
PREMIUM PAYMENTS
. You select a payment plan but are not
required to pay premiums according to
the plan. You can vary the amount and
frequency and can skip planned
premiums. See page 11 for rules and
limits.
. Minimum initial premium and planned
premium depend on Insured's age, sex
and underwriting class, Specified
Amount selected, and any supplemental
riders. See Appendix A for sample
minimum initial premiums.
. Unplanned premiums may be made, within
limits. See page 11.
. Under certain circumstances, extra
premiums may be required to prevent
lapse. See page 12.
^^
DEDUCTIONS FROM PREMIUMS
. For sales load (4.0% of premiums; currently
reduced to 2.0% of premiums paid after the first
15 Policy Years).
. For state premium tax (2.5% of premiums). See page
15.
^^
NET PREMIUMS
. You direct the allocation of Net Premiums among 14 Subaccounts of the
Separate Account and the Fixed Account (the "Accounts"). See page 12
for rules and limits on Net Premium allocations.
. The Subaccounts invest in corresponding portfolios ("Funds") of Penn
Series Funds, Inc. ("Penn Series"), Neuberger & Berman Advisers
Management Trust ("AMT"), and TCI Portfolios, Inc. ("TCI Portfolios"),
Variable Insurance Products Fund ("VIP Fund") and Variable Insurance
Products Fund II ("VIP Fund II"). See page 8. Funds available are:
Penn Series - Growth Equity Fund Penn Series - Money Market Fund
Penn Series - Value Equity Fund AMT - Limited Maturity Bond
Portfolio
Penn Series - Small Capitalization Fund*
Penn Series - Flexibly Managed Fund AMT - Balanced Portfolio
TCI Portfolio - TCI Growth
Penn Series - International Equity Fund
Penn Series - Quality Bond Fund VIP Fund - Equity-Income Portfolio
Penn Series - High Yield Bond Fund VIP Fund - Growth Portfolio
VIP Fund II - Asset Manager
Portfolio
. Interest is credited on amounts allocated to the Fixed Account at a
minimum guaranteed rate of 4%. See page 14 for rules and limits on
Fixed Account allocations.
^^
DEDUCTIONS FROM ASSETS
. Monthly Deduction for cost of insurance, administrative expenses, and
charges for any supplemental benefits. Administrative expenses are
currently $9.00 per month the first Policy Year, $5.00 per month
thereafter, plus for the first 12 months after the Policy Date, and
for the 12 policy months following an increase in Specified Amount, a
$0.10 charge per $1,000 of the Initial Specified Amount or the
increase. See page 16.
. Daily charge at a current annual rate of 0.75% (guaranteed never to
exceed 0.90%) from Policy Value in the Subaccounts for mortality and
expense risks. See page 15. This charge is not deducted from Fixed
Account Value.
. Investment advisory fees and other fund expenses are deducted from the
assets of each Fund. See page 19.
^^
6
<PAGE>
POLICY VALUE
. Is the amount in the Accounts credited to your Policy. It is equal to
Net Premiums, as adjusted each Valuation Date to reflect Subaccount
investment experience, interest credited on Fixed Account Value, charges
deducted and other policy transactions (such as transfers and partial
surrenders). See page 19.
. Varies from day to day. There is no minimum guaranteed Policy Value. The
Policy may lapse if the Net Cash Surrender Value is insufficient to
cover the Monthly Deduction then due. See page 12.
. Policy Value can be transferred among the Accounts. See page 13 for
rules and limits. Policy loans reduce the amount available for
allocations and transfers.
. Dollar cost averaging and asset rebalancing programs are available. See
page 13.
. Policy Value is the starting point for calculating certain values under
a Policy, such as the Cash Surrender Value, Net Cash Surrender Value,
Net Policy Value and the Basic Death Benefit used to determine benefits.
^^ ^^
CASH BENEFITS DEATH BENEFITS
. Loans may be taken for . Income tax free to
amounts up to 90% of Cash Beneficiary.
Surrender Value, at a net
interest rate of 1.0%.
Currently, the net interest
rate is 0.25% after the
first 10 Policy Years. See
page 21 for rules and
limits.
. Available as lump sum or
under a variety of payment
options.
. Minimum Basic Death Benefit
("Specified Amount") of
$50,000.
. Partial surrenders generally
can be made up to four times . Two Specified Amount options
a Policy Year provided there available: Specified Amount
is sufficient remaining Net Option 1 (level Basic Death
Cash Surrender Value. An Benefit) and Specified
administrative charge of the Amount Plus Policy Value
lesser of $25 or 2% of the Option 2 (increasing Basic
surrender amount requested Death Benefit). See page 20.
will apply. See page 22 for
rules and limits.
. Flexibility to change
Specified Amount option and
change Specified Amount. See
page 21 for rules and
limits.
. The Policy may be
surrendered in full at any
time for its Net Cash
Surrender Value. A declining
sales load charge of up to
25% of the Surrender Charge
Premium (not more than 12
Base Monthly Premiums) will
apply to a full surrender
made during the first 11
Policy Years. In addition, a
declining administrative
charge will apply to a full
surrender made during the
first 11 Policy Years or the
11 years following an
increase in Specified
Amount. See page 17.
. Supplemental benefits
available by rider. See page
29.
. Payment options available.
See page 23.
7
<PAGE>
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GENERAL INFORMATION ABOUT PENN MUTUAL, THE SEPARATE ACCOUNT AND THE FUNDS
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
Penn Mutual is a Pennsylvania mutual life insurance company. We were
chartered in 1847 and have been continuously engaged in the life insurance
business since that date. We are authorized to sell insurance in all 50 states
and the District of Columbia. Our corporate headquarters are located at
Independence Square, Philadelphia, Pennsylvania, 19172, and our operations
offices are located at 600 Dresher Road, Horsham, Pennsylvania, 19044.
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
We established Penn Mutual Variable Life Account I (the "Separate Account")
as a separate investment account under Pennsylvania law on January 27, 1987. It
is used to support the Policies as well as other variable life insurance
policies, and for other purposes permitted by law. The Separate Account is
registered with the Securities and Exchange Commission (the "SEC") as a unit
investment trust under the Investment Company Act of 1940 (the "1940 Act") and
qualifies as a "separate account" within the meaning of the federal securities
laws. We have established other separate investment accounts, of which Penn
Mutual Variable Annuity Account III is registered with the SEC.
We own the assets in the Separate Account. The Separate Account is divided
into Subaccounts. The Subaccounts available under the Policies invest in shares
of a specific Fund of Penn Series Funds, Inc. ("Penn Series"), Neuberger &
Berman Advisers Management Trust ("AMT"), TCI Portfolios, Inc. ("TCI
Portfolios"), Variable Insurance Products Fund ("VIP Fund") and Variable
Insurance Products Fund II ("VIP Fund II"). The Separate Account includes other
Subaccounts which are not available under the Policy and are not otherwise
discussed in this prospectus.
Income, gains and losses, realized or unrealized, of a Subaccount are
credited to or charged against the Subaccount without regard to any other
income, gains or losses of Penn Mutual. Assets equal to the reserves and other
contract liabilities with respect to each Subaccount are not chargeable with
liabilities arising out of any other business or account of Penn Mutual. If the
assets exceed the required reserves and other liabilities, we may transfer the
excess to our general account. We are obligated to pay all benefits provided
under the Policies.
- --------------------------------------------------------------------------------
THE FUNDS
Penn Series, AMT, TCI Portfolios, VIP Fund and VIP Fund II are each
registered with the SEC as a diversified open-end management investment company
under the 1940 Act. Each is a series-type mutual fund made up of different
series or funds ("Funds"). The investment objectives of each of the Funds in
which Subaccounts invest is set forth below. There is, of course, no assurance
that these objectives will be met.
PENN SERIES - GROWTH EQUITY FUND - seeks long-term growth of capital and
increase of future income by investing primarily in common stocks of well-
established growth companies.
PENN SERIES - VALUE EQUITY FUND - seeks to maximize total return (capital
appreciation and income) primarily by investing in equity securities of
companies believed to be undervalued considering such factors as assets,
earnings, growth potential and cash flows.
PENN SERIES - SMALL CAPITALIZATION FUND - seeks capital appreciation through
investment in a diversified portfolio of securities consisting primarily of
equity securities of companies with market capitalization of under $1 billion.
PENN SERIES - FLEXIBLY MANAGED FUND - seeks to maximize total return (capital
appreciation and income) by investing in common stocks, other equity
securities, corporate debt securities, and/or short-term reserves, in
proportions considered appropriate in light of the availability of attractively
valued individual securities and current and expected economic and market
conditions.
PENN SERIES - INTERNATIONAL EQUITY FUND - seeks to maximize capital
appreciation by investing in a carefully selected diversified portfolio
consisting primarily of equity securities. The investments will consist
principally of equity securities of European and Pacific Basin countries.
PENN SERIES - QUALITY BOND FUND - seeks the highest income over the long term
consistent with the preservation of principal by investing primarily in
marketable investment-grade debt securities.
PENN SERIES - HIGH YIELD BOND FUND - seeks high current income by investing
primarily in a diversified portfolio of long term high-yield fixed income
securities in the medium to lower quality ranges; capital appreciation is a
secondary
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objective; such securities, which are commonly referred to as "junk" bonds,
generally involve greater risks of loss of income and principal than higher
rated securities.
PENN SERIES - MONEY MARKET FUND - seeks to preserve capital, maintain
liquidity and achieve the highest possible level of current income consistent
therewith, by investing in high quality money market instruments; an investment
in the Fund is neither insured nor guaranteed by the U.S. Government and there
can be no assurance that the Fund will be able to maintain a stable net asset
value of $1.00 per share.
AMT - LIMITED MATURITY BOND PORTFOLIO - seeks the highest current income
consistent with low risk to principal and liquidity; as a secondary objective,
seeks to enhance total return through capital appreciation when market factors,
such as falling interest rates and rising bond prices, indicate that capital
appreciation may be available without significant risk to principal;
investments are made by investing all of its net investable assets in a series
of Advisers Managers Trust (a diversified open-end management investment
company) with identical investment objective, policies and limitations; the
underlying series pursues objectives primarily by investing in a diversified
portfolio of limited maturity debt securities.
AMT - BALANCED PORTFOLIO - seeks long-term capital growth and reasonable
current income without undue risk to principal through investment in common
stocks and debt securities; investments are made by investing all of its net
investable assets in a series of Advisers Managers Trust (a diversified open-
end management investment company) with identical investment objective,
policies and limitations; as to the underlying series, it is anticipated that
normally 60% of total assets will be invested in common stocks and remaining
assets will be invested in debt securities; at least 25% of the Series' assets
will be invested in fixed income senior securities.
TCI PORTFOLIOS - TCI GROWTH PORTFOLIO - seeks capital growth by investing in
common stocks (including securities convertible into common stocks) and other
securities that meet certain fundamental and technical standards of selection
and, in the opinion of the Fund's management, have better than average
potential for appreciation; the Fund intends to stay fully invested in such
securities.
VIP FUND - EQUITY-INCOME PORTFOLIO - seeks reasonable income by investing
primarily in income-producing equity securities; in choosing these securities,
the Fund will also consider the potential for capital appreciation; the Fund's
goal is to achieve a yield which exceeds the composite yield on the securities
comprising the Standard & Poor's 500 Composite Stock Price Index.
VIP FUND - GROWTH PORTFOLIO - seeks to achieve capital appreciation; the
Fund normally purchases common stocks, although its investments are not
restricted to any one type of security; capital appreciation may also be found
in other types of securities, including bonds and preferred stocks.
VIP FUND II - ASSET MANAGER PORTFOLIO - seeks high total return with reduced
risk over the long-term by allocating its assets among domestic and foreign
stocks, bonds and short-term fixed-income instruments.
Each Fund sells and redeems its shares at net asset value without any sales
charge. Any dividend from net investment income or distribution from realized
gains from security transactions of a Fund is reinvested at net asset value in
shares of the same Fund.
INDEPENDENCE CAPITAL MANAGEMENT, INC. ("Independence Capital Management"), of
Horsham, Pennsylvania, serves as investment adviser to the Penn Series Growth
Equity Fund, the Penn Series Quality Bond Fund and the Penn Series Money Market
Fund.
T. ROWE PRICE ASSOCIATES, INC. ("Price Associates"), of Baltimore, Maryland,
serves as investment adviser to the Penn Series Flexibly Managed Fund and the
Penn Series High Yield Bond Fund.
OPCAP ADVISORS ("OpCap") (formerly Quest for Value Advisers), of New York,
New York, serves as investment adviser to the Penn Series Value Equity Fund and
the Penn Series Small Capitalization Fund.
VONTOBEL USA INC. ("Vontobel"), of New York, New York, is the investment
adviser to the Penn Series International Equity Fund.
NEUBERGER & BERMAN MANAGEMENT INCORPORATED ("N&B Management") of New York,
New York, is the investment adviser to each series of Advisers Managers Trust
underlying the AMT Limited Maturity Bond Portfolio and the AMT Balanced
Portfolio.
INVESTORS RESEARCH CORPORATION ("Investors Research") of Kansas City,
Missouri, is the investment adviser to TCI Growth Portfolio.
FIDELITY MANAGEMENT & RESEARCH CORPORATION ("FMR") of Boston, Massachusetts,
is the investment adviser to VIP Fund's Equity Income Portfolio and Growth
Portfolio and VIP Fund II's Asset Manager Portfolio. FMR utilizes the services
of two subsidiaries on a sub-advisory basis for foreign securities investments
for the Asset Manager Portfolio. These subsidiaries are Fidelity Management &
Research (U.K.) Inc. and Fidelity Management & Research (Far East) Inc.
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<PAGE>
Further information about the Funds is contained in the accompanying
prospectuses, which you should read in conjunction with this prospectus.
We have entered into agreements with Penn Series, AMT, TCI Portfolios, VIP
Fund and VIP Fund II governing the Separate Account's investment in those
Funds. Under the agreement with TCI Portfolios, the adviser to the TCI
Portfolios compensates Penn Mutual for certain administrative services provided
by Penn Mutual.
The shares of Penn Series, AMT, TCI Portfolios, VIP Fund and VIP Fund II are
sold not only to the Separate Account, but to other separate accounts of Penn
Mutual that fund benefits under variable annuity policies. The shares of AMT,
TCI Portfolios, VIP Fund and VIP Fund II are also sold to separate accounts of
other insurance companies and, in the case of AMT, also directly to qualified
pension and retirement plans. It is conceivable that in the future it may
become disadvantageous for both variable life and variable annuity policy
separate accounts (and also qualified pension and retirement plans with respect
to AMT) to invest in the same underlying mutual fund. Although neither we nor
Penn Series, AMT, TCI Portfolios, VIP Fund or VIP Fund II currently perceives
or anticipates any such disadvantage, the Boards of Directors of Penn Series
and TCI Portfolios, respectively, and the Boards of Trustees of AMT, VIP Fund
and VIP Fund II, respectively, will monitor events to determine whether any
material conflict between variable annuity policyowners and variable life
policyowners (and also qualified pension and retirement plans with respect to
AMT) arises.
Material conflicts could result from such things as: (1) changes in state
insurance laws; (2) changes in federal income tax law; (3) changes in the
investment management of any Fund or of Penn Series, AMT, TCI Portfolios, VIP
Fund or VIP Fund II, respectively; or (4) differences between voting
instructions given by variable annuity policyowners and those given by variable
life policyowners. In the event of a material irreconcilable conflict, we will
take the steps necessary to protect our variable annuity and variable life
policyowners. This could include discontinuance of investment in a Fund.
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SUBSTITUTION OF SECURITIES
If investment in a Subaccount should no longer be possible or, if in our
judgment, becomes inappropriate to the purposes of the Policies, or, if in our
judgment, investment in another subaccount or insurance company separate
account is in the interest of Owners, we may substitute another subaccount or
insurance company separate account. No substitution may take place without
notice to Owners and prior approval of the SEC and insurance regulatory
authorities, to the extent required by the 1940 Act and applicable law.
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VOTING RIGHTS
We are the legal owner of shares held by the Subaccounts and as such have the
right to vote on all matters submitted to shareholders of the Funds. However,
as required by law, we will vote shares held in the Subaccounts at regular and
special meetings of shareholders of the Funds in accordance with instructions
received from Owners with Policy Value in the Subaccounts. Should the
applicable federal securities laws, regulations or interpretations thereof
change so as to permit us to vote shares of the Funds in our own right, we may
elect to do so.
To obtain voting instructions from Owners, before a meeting we will send
Owners voting instruction material, a voting instruction form and any other
related material. The number of shares held by each Subaccount for which an
Owner may give voting instructions is currently determined by dividing the
portion of the Owner's Policy Value in the Subaccount by the net asset value of
one share of the applicable Fund. Fractional votes will be counted. The number
of votes for which an Owner may give instructions will be determined as of a
date chosen by Penn Mutual but not more than 90 days prior to the meeting of
shareholders. Shares held by a Subaccount for which no timely instructions are
received will be voted by Penn Mutual in the same proportion as those shares
for which voting instructions are received.
We may, if required by state insurance officials, disregard Owner voting
instructions if such instructions would require shares to be voted so as to
cause a change in sub-classification or investment objectives of one or more of
the Funds, or to approve or disapprove an investment advisory agreement. In
addition, we may under certain circumstances disregard voting instructions that
would require changes in the investment policy or investment adviser of one or
more of the Funds, provided that we reasonably disapprove of such changes in
accordance with applicable federal regulations. If we ever disregard voting
instructions, we will advise Owners of that action and of our reasons for such
action in the next semiannual report. Finally, we reserve the right to modify
the manner in which we calculate the weight to be given to pass-through voting
instructions where such a change is necessary to comply with current federal
regulations or the current interpretation thereof.
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PREMIUMS AND ALLOCATIONS
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APPLYING FOR A POLICY
If you want to purchase a Policy, you must complete an application and submit
it to one of our authorized agents. You also must pay an initial premium at
least equal to the minimum required. See "Premiums," below. Your premium can be
submitted with the application or at a later date, but Policy coverage will not
become effective until the initial premium in good order is received at our
Office.
We require satisfactory evidence of the Insured's insurability, which may
include a medical examination of the Insured. Generally, we will issue a Policy
covering an Insured up to age 70 if evidence of insurability satisfies our
underwriting rules. We may, in our sole discretion, issue a Policy covering an
Insured over age 70. Acceptance of an application depends on our underwriting
rules, and we reserve the right to reject an application for any reason.
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FREE LOOK RIGHT TO CANCEL POLICY
You may cancel your Policy for a refund of premium during your "free-look"
period. This period expires 10 days after you receive your Policy (30 days if
you live in Florida), 45 days after your application is signed, or 10 days
after we mail or deliver a Notice of Right of Withdrawal, whichever is latest.
If you decide to cancel the Policy, you must return it by mail or delivery to
us or to our authorized agent who sold it. Immediately after mailing or
delivery, the Policy will be deemed void from the beginning. We will refund
premiums paid within seven days after we receive the Policy.
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PREMIUMS
The minimum initial premium required depends on a number of factors, such as
the age, sex and rate class of the proposed Insured, the desired Specified
Amount, any supplemental benefits and the planned premiums you propose to make.
The initial premium must be at least equal to two Base Monthly Premiums. See
"Planned Premiums," below. Sample minimum initial premiums are shown in
Appendix A.
Additional premiums may be paid in any amount and at any time, subject to the
following limits. First, a premium must be at least $25 and must be sent to our
Office. We may require satisfactory evidence of insurability before accepting
any premium which results in an increase in the net amount at risk (defined on
page 16).
Second, we reserve the right to limit total premiums paid in a Policy Year to
the planned premiums selected (see "Planned Premiums," below). In addition,
total premiums paid in a Policy Year may not exceed guideline premium
limitations for life insurance set forth in the Internal Revenue Code. We will
refund any portion of any premium which is determined to be in excess of the
premium limit established by law to qualify a Policy as a policy for life
insurance. (The amount refunded will be the excess premium plus any gain
attributable to the excess premium.) In addition, we will monitor Policies and
will attempt to notify the Owner on a timely basis if his or her Policy is in
jeopardy of becoming a modified endowment contract under the Internal Revenue
Code. See "Tax Considerations," page 30.
Lastly, no premium will be accepted after the Maturity Date.
PLANNED PREMIUMS. When applying for a Policy, you select a plan for paying
level premiums at specified intervals, e.g., monthly, semi-annually or
annually, until the Maturity Date. You are not required to pay premiums in
accordance with this plan; rather, you can pay more or less than planned or
skip a planned premium entirely. You can change the amount and frequency of
planned premiums whenever you want by sending written notice to our Office.
However, we reserve the right to limit the amount of a premium or the total
premiums paid, as discussed above. We will send you reminder notices for
planned premiums, unless you have arranged to pay planned premiums by pre-
authorized check.
THREE-YEAR GUARANTEE. We guarantee that a Policy will remain in force during
the first three Policy Years, regardless of the sufficiency of the Net Cash
Surrender Value, if the total premiums paid less any partial surrenders is
greater than or equal to the Total Base Monthly Premium for the Policy. The
Total Base Monthly Premium is the Base Monthly Premium multiplied by the number
of months the Policy has been in force. The Base Monthly Premium is a benchmark
monthly premium calculated for each Policy based on the age, sex and rate class
of the Insured, the requested Specified Amount and any supplemental benefits.
The Base Monthly Premium for your Policy generally will be less than the
monthly amount of planned premiums you select to pay. The Three-Year guarantee
will not prevent the termination of the Policy if the Net Cash Surrender Value
becomes insufficient because of excessive Indebtedness. See "Loan Repayment;
Effect if Not Repaid," page 22.
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<PAGE>
PREMIUMS UPON INCREASE IN SPECIFIED AMOUNT. Depending on the Policy Value at
the time of an increase in the Specified Amount and the amount of the increase
requested, an additional premium or change in the amount of planned premiums
may be advisable. See "Changes in Specified Amount," page 21. We will notify
you if a premium is necessary or a change appropriate.
If you increase your Policy's Specified Amount during the first three Policy
Years, we will extend the Three-Year Guarantee (see above) to three years after
the effective date of the increase.
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PREMIUMS TO PREVENT LAPSE
Failure to pay planned premiums will not necessarily cause a Policy to lapse.
Conversely, paying all planned premiums will not necessarily guarantee that a
Policy will not lapse (except when the Three-Year Guarantee is in effect).
Rather, whether a Policy lapses depends on whether its Net Cash Surrender Value
is insufficient to cover the Monthly Deduction (see page 16) when due.
If the Net Cash Surrender Value on a Monthly Anniversary is less than the
amount of the Monthly Deduction to be deducted on that date and the Three-Year
Guarantee is not in effect, the Policy will be in default and a grace period
will begin. This could happen if investment experience has been sufficiently
unfavorable that it has resulted in a decrease in the Net Cash Surrender Value
or the Net Cash Surrender Value has decreased because insufficient premiums
have been paid to offset the Monthly Deduction.
GRACE PERIOD. If your Policy goes into default, you will be allowed a 61-day
grace period to pay a premium sufficient to cover the Monthly Deduction. We
will send notice of the amount required to be paid during the grace period
("grace period premium") to your last known address and to any assignee of
record. The grace period will begin when the notice is sent. Your Policy will
remain in effect during the grace period. If the Insured should die during the
grace period before the grace period premium is paid, the Death Benefit will
still be payable to the Beneficiary, although the amount paid will reflect a
reduction for the Monthly Deductions due on or before the date of the Insured's
death. See "Amount of Death Benefit," page 20. If the grace period premium has
not been paid before the grace period ends, your Policy will lapse. It will
have no value and no benefits will be payable. See "Reinstatement," page 29.
A grace period also may begin if Indebtedness becomes excessive. See "Loan
Repayment; Effect if not Repaid," page 22.
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NET PREMIUM ALLOCATIONS
In the application, you specify the percentage of a Net Premium to be
allocated to each Account. The sum of your allocations must equal 100%, and
each allocation percentage must be a whole number. However, until the free look
period expires, all Net Premiums received are invested in the Subaccount
investing in the Penn Series Money Market Fund (the "Money Market Subaccount").
At the end of this period (which for this purpose is assumed to begin 3 days
after we issue your Policy), the Policy Value in the Money Market Subaccount is
transferred to and allocated to the Accounts based on the premium allocation
percentages in the application. See "Determining the Policy Value," page 19.
The Net Premium allocation percentages specified in the application will
apply to subsequent premiums until you change them. You can change the
allocation percentages at any time, provided they total 100% and each is a
whole number, by sending written notice to our Office. The change will apply to
all premiums received with or after our receipt of your notice.
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CREDITING PREMIUMS
The initial Net Premium will be credited to the Policy as of the Policy Date.
Planned premiums and unplanned premiums not requiring additional underwriting
will be credited to the Policy and the resulting Net Premiums will be invested
as requested on the Valuation Date the premium was received by our Office.
However, any premium requiring additional underwriting will be allocated to the
Money Market Subaccount until underwriting has been completed and the premium
has been accepted. When accepted, the Policy Value in the Money Market
Subaccount attributable to the resulting Net Premium will be credited to the
Policy and allocated to the Accounts as requested. If an additional premium is
rejected, we will return the premium, without any adjustment for investment
experience.
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TRANSFERS
You may transfer Policy Value among the Accounts subject to the following
rules, some of which depend on whether Policy Value is to be transferred from a
Subaccount or the Fixed Account. You may request transfers by calling our
Office if you have applied for telephone transfer authorization. Otherwise,
transfer requests must be in writing. The Company will not be liable for
following transfer instructions communicated by telephone that we reasonably
believe to be genuine. We require certain identifying information to process a
telephone transfer.
Transfers may not be requested until after the end of the free-look period
(see page 11). A transfer will take effect on the date the request is received
at our Office. We may, however, defer transfers under the same conditions that
we may delay payment of proceeds. See "When Proceeds are Paid," page 28. There
is no limit on the number of transfers that may be made. However, after 12
transfers have been made during a Policy Year, we reserve the right to impose a
$10 transfer charge on subsequent transfers. See "Transfer Charge," page 17.
Also, until May 15, 1995, a transfer request will not be processed if Policy
Value would then be allocated among more than five Accounts.
SUBACCOUNT TRANSFER RULES. Transfers among Subaccounts and from Subaccounts
to the Fixed Account may be made at any time. The minimum amount of Policy
Value that may be transferred from a Subaccount is $250 or, if less, the
full amount held in the Subaccount. If less than the full amount of Policy
Value in a Subaccount is being transferred from the Subaccount, the amount
remaining must be at least $250.
FIXED ACCOUNT TRANSFER RULES. Policy Value held in the Fixed Account may be
transferred to a Subaccount or Subaccounts only during the 30-day period
following the end of each Policy Year. The amount transferred must be at
least $250, or if less, the Policy Value held in the Fixed Account. If the
amount transferred is less than the Policy Value then held in the Fixed
Account, at least $250 must remain in the Fixed Account. See "Deductions,
Surrenders and Transfers from the Fixed Account," page 15, for additional
rules and limits for the Fixed Account.
The transfer rules described above do not apply to transfers made under a
dollar cost averaging or asset rebalancing program.
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DOLLAR COST AVERAGING PROGRAM
You may elect a dollar cost averaging program for the allocation of your
Policy Value among the Accounts. A dollar cost averaging program allows you to
authorize in advance monthly transfers of set dollar amounts from the Money
Market Subaccount to one or more other Accounts.
The main objective of dollar cost averaging is to shield investments from
short term price fluctuations. Since the same dollar amount is transferred to
selected Accounts each month, more accumulation units are purchased in a
Subaccount when their value is low, and fewer accumulation units are purchased
when their value is high. As a result, a lower than average cost of purchasing
accumulation units may be achieved over the long term. This plan of investing
allows Owners to take advantage of investment fluctuations, but does not assure
a profit or protect against a loss in declining markets.
SELECTING DOLLAR COST AVERAGING. You may select a dollar cost averaging
program when you apply for the Policy or at a later date by contacting our Home
Office. You specify the Accounts to which amounts will be transferred and the
dollar amount to be allocated to each Account. To begin a program, the planned
premium for that year must be $600 and the amount to be transferred each month
must be at least $50.
OPERATION OF THE PROGRAM. Transfers will be made on the 15th of each month.
Transfers will continue until the earliest of the following:
. We receive a written or telephone request to stop making transfers.
. There no longer is sufficient Policy Value in the Money Market
Subaccount to make the specified transfer.
. The Policy is in a grace period.
. We receive notice that the Insured has died.
Transfers under a dollar cost averaging program are not counted for purposes
of the transfer rules discussed above.
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ASSET REBALANCING
You may elect an asset rebalancing program for your Policy Value. Policy
Value allocated to the Accounts can be expected to increase or decrease at
different rates. An asset rebalancing program automatically reallocates your
Policy Value
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<PAGE>
among the Accounts each quarter to return the allocation to the original
allocation percentages you specify. Asset rebalancing is intended to transfer
Policy Value from those Accounts that have increased in value to those that
have declined, or not increased as much, in value. Over time, this method of
investing may help an Owner "buy low and sell high," although there can be no
assurance that this objective will be achieved. Asset rebalancing does not
guarantee profits, nor does it assure that an Owner will not have losses.
SELECTING ASSET REBALANCING. You may select an asset rebalancing program when
you apply for the Policy or at a later date by contacting our Home Office. You
specify the Accounts to be included in the program, and the percentage of
Policy Value to be allocated to each specified Account. Each allocation
percentage must be a whole number. You can elect to have your entire Policy
Value rebalanced among the specified Accounts each quarter, or limit the
program to the Policy Value in specified Accounts on each rebalancing date
(e.g., to restore a 60/40 ratio for Policy Value in the Value Equity Subaccount
and Quality Bond Subaccount on each rebalancing date). The minimum Policy Value
to start an asset rebalancing program is $1,000. If a dollar cost averaging
program is in effect, Policy Value in the Money Market Subaccount may not be
included in an asset rebalancing program.
OPERATION OF THE PROGRAM. Effective on the last day of each calendar quarter,
we will transfer Policy Value among the Accounts to the extent necessary to
return the allocation to your specifications. Asset rebalancing will continue
until we receive a written or telephone request at our Home Office to
terminate.
Transfers made under an asset rebalancing program are not counted for
purposes of the transfer rules described above.
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FIXED ACCOUNT
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED
ACCOUNT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 NOR HAS THE
FIXED ACCOUNT BEEN REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT
COMPANY ACT OF 1940. ACCORDINGLY, NEITHER THE FIXED ACCOUNT NOR ANY INTERESTS
THEREIN ARE SUBJECT TO THE PROVISIONS OF THESE ACTS AND, AS A RESULT, THE STAFF
OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT REVIEWED THE DISCLOSURE IN
THIS PROSPECTUS RELATING TO THE FIXED ACCOUNT. THE DISCLOSURE REGARDING THE
FIXED 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.
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FIXED ACCOUNT
The Fixed Account consists of assets owned by Penn Mutual with respect to the
Policies, other than those held in the Separate Account. It is part of our
general account assets. Our general account assets are used to support our
insurance and annuity obligations other than those funded by separate accounts.
Subject to applicable law, we have sole discretion over the investment of the
assets of the Fixed Account. The Policy Loan Account is part of the Fixed
Account.
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INTEREST CREDITED ON POLICY VALUE IN THE FIXED ACCOUNT
Net Premiums allocated to the Fixed Account and Policy Value transferred from
the Subaccounts to the Fixed Account are credited to the Fixed Account Value.
The Fixed Account Value also includes the portion of Policy Value transferred
to the Policy Loan Account as collateral for policy loans. We will credit
interest on these amounts at rates we determine in our sole discretion, but in
no event will interest credited on these amounts be less than an effective rate
of at least 4% per year, compounded annually.
However, if at the time of an allocation or transfer to the Fixed Account, we
are crediting a rate of interest higher than 4%, the higher rate will apply to
the amount from the date of its allocation or transfer to the Fixed Account
through to the end of the twelve-month period beginning on the first day of the
calendar month in which the allocation or transfer was made. If a higher rate
of interest is credited, different rates of interest may apply to amounts
allocated or transferred at different times, and different rates of interest
may apply to amounts held in a Policy Loan Account than to the remaining
portion of Policy Value held in the Fixed Account. ANY INTEREST CREDITED ON
POLICY VALUE IN THE FIXED ACCOUNT IN EXCESS OF THE GUARANTEED MINIMUM RATE OF
4% PER YEAR WILL BE DETERMINED IN OUR SOLE DISCRETION.
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CALCULATING FIXED ACCOUNT VALUE
The Fixed Account Value is calculated daily. See "Fixed Account Value," page
19.
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DEDUCTIONS, SURRENDERS AND TRANSFERS FROM THE FIXED ACCOUNT
Amounts allocated to the Fixed Account at different times, whether from Net
Premiums or transfers, may be credited with different rates of interest.
Whenever a charge is deducted from Policy Value in the Fixed Account, or an
amount is withdrawn from the Policy Value in the Fixed Account to satisfy a
partial surrender, transfer or policy loan request, the charge or withdrawal
will be taken first from the amount most recently allocated to the Fixed
Account, then the amount next most recently allocated, and so forth. See page
13 for limits and restrictions on transfers of Policy Value from the Fixed
Account.
If there is any Policy Value in the Policy Loan Account, it is not available
for transfers, partial surrenders or policy loans, nor are any charges deducted
from this portion of Policy Value. Amounts are transferred to or from the
Policy Loan Account only when policy loans are taken or repayments made. If an
amount is transferred from the Policy Loan Account to the remaining portion of
the Fixed Account Value, it will be treated as a new allocation to the Fixed
Account and will be credited with interest at the rate then in effect for Fixed
Account allocations. See "Policy Loan Account," page 22.
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PAYMENTS FROM THE FIXED ACCOUNT
We may defer payment of proceeds from the Fixed Account for a partial
surrender, full surrender or policy loan request for up to six months from the
date we receive the written request. However, we will not defer payment of a
partial surrender or policy loan requested to pay a premium due on a Penn
Mutual policy. If a payment from the Fixed Account is deferred for 30 days or
more, it will bear interest at a rate of 3% per year compounded annually while
it is deferred.
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CHARGES AND DEDUCTIONS
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PREMIUM CHARGE
We deduct a charge from each premium. This charge is 6.5% of each premium and
is deducted from a premium before allocating the resulting Net Premium to the
Policy Value. It consists of a 2.5% charge for premium taxes, with the
remaining 4.0% a sales charge. An additional sales charge may be deducted on
surrender of a Policy during the first 11 Policy Years. See "Surrender Charge
for Initial Specified Amount," page 17.
The 2.5% premium tax charge reimburses us for state premium taxes associated
with the Policies. We expect to pay premium taxes at an average rate for all
states of approximately 2.5% of premiums.
The 4.0% sales charge partially compensates us for the expenses of selling
and distributing the Policies, including paying sales commissions, printing
prospectuses, preparing sales literature and paying for other promotional
activities. We may reduce the sales charge portion of the premium charge, and
currently, the sales charge is reduced to 2.0% (corresponding to a total
premium charge of 4.5%) of premiums received after the first 15 Policy Years.
We will notify you before your fifteenth Policy Year if the sales charge on
your Policy will remain at 4.0% after your fifteenth Policy Year.
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DAILY MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from assets in the Subaccounts attributable to the
Policies. This charge does not apply to Fixed Account Value. The current charge
is at an annual rate of 0.75% of net assets. Although it may be increased, it
is guaranteed not to exceed 0.90% for the duration of a Policy. We will notify
you before we increase this charge. We may realize a profit from this charge.
The mortality risk we assume is that the Insureds on the Policies may die
sooner than anticipated and that therefore Penn Mutual will pay an aggregate
amount of death benefits greater than anticipated. The expense risk we assume
is that expenses incurred in issuing and administering the Policies and the
Separate Account will exceed the amounts realized from the administrative
charges assessed against the Policies.
15
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MONTHLY DEDUCTION
On the Issue Date and each Monthly Anniversary, we deduct the Monthly
Deduction from the Policy Value. The amount deducted on the Issue Date is for
the Policy Date and any Monthly Anniversaries that have elapsed since the
Policy Date. (For this purpose, the Policy Date is treated as a Monthly
Anniversary.) The Monthly Deduction consists of (1) insurance charges ("Cost of
Insurance Charge"), (2) administrative charges (the "Monthly Expense Charge"),
and (3) any charges for additional benefits added by supplemental agreement to
a Policy ("Supplemental Benefit Charges"), as described below. The Monthly
Deduction is deducted from the Accounts pro rata on the basis of the portion of
Policy Value in each Account. See "Deductions, Surrenders and Transfers from
the Fixed Account," page 15 for applicable rules.
COST OF INSURANCE CHARGE. This charge compensates us for providing insurance
coverage. The charge depends on a number of variables and therefore will vary
from Policy to Policy and from Monthly Anniversary to Monthly Anniversary. For
any Policy the cost of insurance on a Monthly Anniversary is calculated by
multiplying (a) the cost of insurance rate for the Insured by (b) the net
amount at risk under the Policy for that Monthly Anniversary.
The net amount at risk for a Monthly Anniversary is the difference between
the Basic Death Benefit (see page 20) for a Policy (as adjusted to take into
account assumed monthly earnings at an annual rate of 4%) and the Policy Value,
as calculated on that Monthly Anniversary before the Monthly Deduction is
taken.
The cost of insurance rate for a Policy is based on the Attained Age, sex and
rate class of the Insured, and therefore varies from time to time. We currently
place Insureds in the following rate classes, based on our underwriting: a
smoker or nonsmoker standard rate class or a rate class involving a higher
mortality risk (a "substandard class"). Insureds age 19 and under are placed in
a rate class that does not distinguish between smoker and nonsmoker, and are
assigned to a smoker class at age 20 unless they have provided satisfactory
evidence that they qualify for a nonsmoker class.
We place the Insured in a rate class when we issue the Policy, based on our
underwriting of the application. This original rate class applies to the
Initial Specified Amount. When an increase in Specified Amount is requested, we
conduct underwriting before approving the increase (except as noted below) to
determine whether a different rate class will apply to the increase. If the
rate class for the increase has lower cost of insurance rates than the original
rate class, the rate class for the increase also will be applied to the Initial
Specified Amount. If the rate class for the increase has higher cost of
insurance rates than the original rate class, the rate class for the increase
will apply only to the increase in Specified Amount, and the original rate
class will continue to apply to the Initial Specified Amount.
We do not conduct underwriting for an increase in Specified Amount if the
increase is requested as part of a conversion from a term policy or on exercise
of a guaranteed option to increase the Specified Amount without underwriting.
See "Supplemental Benefits," page 29. In the case of a term conversion, the
rate class that applies to the increase is the same rate class that applied to
the term policy. In the case of a guaranteed option, the Insured's rate class
for an increase will be the class in effect when the guaranteed option rider
was issued.
If we use different cost of insurance rates for increases, the following
rules will apply for purposes of determining the net amount at risk for each
rate. If the Specified Amount includes the Policy Value (Option 1) (see page
20), we will allocate the Policy Value solely to the Initial Specified Amount
unless it exceeds the Initial Specified Amount. If the Policy Value exceeds the
Initial Specified Amount, the excess will be considered part of the increases
in Specified Amount in the order of the increases. If there is a decrease in
Specified Amount after an increase, a decrease is applied first to decrease any
prior increases in Specified Amount, starting with the most recent increase and
then each prior increase. If the Specified Amount does not include the Policy
Value (Option 2) (see page 20), no Policy Value is allocated to the Initial
Specified Amount or any increase.
We guarantee that the cost of insurance rates used to calculate the monthly
cost of insurance charge will not exceed the maximum cost of insurance rates
set forth in the Policies. The guaranteed rates for standard classes are based
on the 1980 Commissioners' Standard Ordinary Mortality Tables, Age Nearest
Birthday ("1980 CSO Tables"). The guaranteed rates for substandard classes are
based on multiples or additives of the 1980 CSO Tables.
Our current cost of insurance rates may be less than the guaranteed rates.
Our current cost of insurance rates will be determined based on our
expectations as to future mortality, investment, expense and persistency
experience. These rates may change from time to time. Current cost of insurance
rates are currently less for the portion of the net amount at risk in excess of
$50,000 than for the initial $50,000. However, guaranteed rates do not change
if the net amount at risk exceeds $50,000.
Cost of insurance rates (whether guaranteed or current) for an Insured in a
nonsmoker standard class are lower than guaranteed rates for an Insured of the
same age and sex in a smoker standard class. Cost of insurance rates (whether
guaranteed or current) for an Insured in a nonsmoker or smoker standard class
are generally lower than guaranteed rates for an Insured of the same age and
sex and smoking status in a substandard class.
16
<PAGE>
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS.
Mortality tables for the Policies generally distinguish between males and
females. Thus, premiums and benefits under Policies covering males and females
of the same age will generally differ. We do, however, also offer Policies
based on unisex mortality tables if required by state law. Employers and
employee organizations considering purchase of a Policy should consult their
legal advisors to determine whether purchase of a Policy based on sex-distinct
actuarial tables is consistent with Title VII of the Civil Rights Act of 1964
or other applicable law. Upon request, we may offer Policies with unisex
mortality tables to such prospective purchasers.
MONTHLY EXPENSE CHARGE. This charge compensates us for administrative
expenses associated with the Policies and the Separate Account. These expenses
relate to premium billing and collection, recordkeeping, processing of death
benefit claims, policy loans and Policy changes, reporting and overhead costs,
processing applications and establishing Policy records. The Monthly Expense
Charge is the aggregate of the following:
a) a flat charge of $9.00 per month (currently only $5.00 per month after
the first Policy Year; we will notify you before it is increased);
b) for the first 12 policy months after the Policy Date, a charge based on
the Initial Specified Amount ($0.10 per $1,000 of Specified Amount per
month); and
c) for the 12 policy months following the effective date of an increase in
Specified Amount, a charge based on the increase ($0.10 per $1,000 of
the increase in Specified Amount per month).
Except for the $5.00 monthly charge (which is reduced after the first Policy
Year but may be later increased to $9.00), these charges are guaranteed not to
increase over the life of the Policy. We do not anticipate making any profit on
the Monthly Expense Charge.
SUPPLEMENTAL BENEFIT CHARGES. See "Supplemental Benefits," page 29.
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TRANSFER CHARGE
We reserve the right to impose a $10 transfer charge on any transfer of
Policy Value among the Accounts in excess of the 12 free transfers permitted
each Policy Year. We will notify you before imposing the charge. If the charge
is imposed, it will be deducted from the amount requested to be transferred
before allocation to the new Account(s). If an amount is being transferred from
more than one Account, the transfer charge will be deducted proportionately
from the amount being transferred from each Account. This charge, if imposed,
will reimburse us for administrative expenses incurred in effecting transfers.
We do not anticipate making any profit on this charge.
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SURRENDER CHARGES
If the Policy is surrendered during the first 11 Policy Years, we will deduct
a surrender charge for the Initial Specified Amount. If a Policy is surrendered
within 11 years after an increase in Specified Amount, we will deduct a
surrender charge for the increase in Specified Amount. The surrender charge
will be deducted before any surrender proceeds are paid.
SURRENDER CHARGE FOR INITIAL SPECIFIED AMOUNT. The surrender charge for the
Initial Specified Amount consists of a sales charge component and
administrative charge component and declines to 0 over time as follows. The
original amount of this surrender charge, which is deducted on a surrender made
during the first 7 Policy Years, is the sum of the following:
a) 25% of premiums paid on the Policy, up to the Surrender Charge Premium
(which is an amount calculated separately for each Policy and is never
more than 12 Base Monthly Premiums); and
b) an administrative charge based on the Initial Specified Amount and the
Insured's Attained Age on the Policy Date (ranging from $1.00 up to
Attained Age 9 to $7.00 at Attained Age 60 and over, per $1,000 of
Initial Specified Amount). See Appendix B.
17
<PAGE>
After the seventh completed Policy Year, the original amount of the surrender
charge is decreased by 20% for each subsequent Policy Year completed before the
date of surrender in accordance with the following table.
<TABLE>
<CAPTION>
PERCENTAGE OF ORIGINAL
SURRENDER DURING POLICY YEAR AMOUNT OF SURRENDER CHARGE
----------------------------------------------------------------------------
<S> <C>
1st through 7th 100%
----------------------------------------------------------------------------
8th 80%
----------------------------------------------------------------------------
9th 60%
----------------------------------------------------------------------------
10th 40%
----------------------------------------------------------------------------
11th 20%
----------------------------------------------------------------------------
after 11th 0%
----------------------------------------------------------------------------
</TABLE>
After the 11th Policy Year, there is no surrender charge for the Initial
Specified Amount.
The sales charge component of the surrender charge is to reimburse us for
some of the expenses incurred in the distribution of the Policies. We also
deduct a sales charge from each premium. See "Premium Charge," page 15. The
sales charge component, together with the sales charge included in the premium
charge, may be insufficient to recover distribution expenses related to the
sale of the Policies. Unrecovered expenses are borne by our general assets
which may include profits, if any, from the mortality and expense risk charge.
See "Daily Mortality and Expense Risk Charge," page 15.
The administrative charge component of the surrender charge is designed to
cover the administrative expenses associated with underwriting and issuing the
Policy, including the costs of processing applications, conducting medical
exams, determining insurability and the Insured's rate class, and establishing
Policy records, as well as the administrative costs of processing surrender
requests. We do not anticipate making any profit on the administrative charge
component of the surrender charge.
SURRENDER CHARGE FOR AN INCREASE IN SPECIFIED AMOUNT. The surrender charge
for an increase in Specified Amount consists solely of an administrative charge
and declines to 0 over time as follows. The original amount of this charge,
which is deducted in full on a surrender made during the first 7 years
following the effective date of an increase in Specified Amount, is based on
the increase in Specified Amount and the Insured's Attained Age as of the
effective date of the increase. It ranges from $1.00 up to Attained Age 9 to
$7.00 at Attained Age 60 and over per $1,000 of increase in Specified Amount.
See Appendix B.
After the seventh year following an increase in Specified Amount, the
original amount of the surrender charge for the increase is decreased by 20%
for each subsequent year completed before the surrender date in accordance with
the following table.
<TABLE>
<CAPTION>
SURRENDER DURING YEAR PERCENTAGE OF ORIGINAL
AFTER INCREASE SURRENDER CHARGE
----------------------------------------------------------------------------
<S> <C>
1st through 7th 100%
----------------------------------------------------------------------------
8th 80%
----------------------------------------------------------------------------
9th 60%
----------------------------------------------------------------------------
10th 40%
----------------------------------------------------------------------------
11th 20%
----------------------------------------------------------------------------
after 11th 0%
----------------------------------------------------------------------------
</TABLE>
After the 11th year following an increase in Specified Amount, there is no
surrender charge for the increase.
The surrender charge is designed to cover the administrative expenses
associated with increasing the Specified Amount. We do not anticipate making a
profit on this charge.
- --------------------------------------------------------------------------------
PARTIAL SURRENDER CHARGE
We will deduct an administrative charge upon a partial surrender. This charge
is the lesser of 2% of the amount surrendered or $25. This charge will be
deducted from the Policy Value in addition to the amount requested to be
surrendered and will be considered to be part of the partial surrender amount.
See page 22 for rules for allocating the deduction. We do not anticipate making
a profit on this charge.
18
<PAGE>
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FUND EXPENSES
The value of the net assets of the Separate Account reflect the investment
advisory fees and other expenses incurred by the Funds. See the prospectuses
for Penn Series, AMT, TCI Portfolios, VIP Fund and VIP Fund II.
- --------------------------------------------------------------------------------
HOW YOUR POLICY VALUES VARY
There is no guaranteed minimum Policy Value or Net Cash Surrender Value.
These values will vary with the investment experience of the Subaccounts and/or
the daily crediting of interest in the Fixed Account, and will depend on the
allocation of Policy Value. If the Net Cash Surrender Value on a Monthly
Anniversary is less than the amount of the Monthly Deduction to be deducted on
that date (see page 12) and the Three-Year Guarantee is not then in effect, the
Policy will be in default and a grace period will begin. See "Three-Year
Guarantee," page 11, and "Grace Period," page 12.
- --------------------------------------------------------------------------------
DETERMINING THE POLICY VALUE
On the Policy Date the Policy Value is equal to the initial Net Premium. If
the Policy Date and the Issue Date are the same day, the Policy Value is equal
to the initial Net Premium, less the Monthly Deduction. On each Valuation Date
thereafter, the Policy Value is the aggregate of the Variable Accumulation
Values in the Subaccounts and the Fixed Account Value credited to the Policy.
The Policy Value will vary to reflect the performance of the Subaccounts to
which amounts have been allocated, interest credited on amounts allocated to
the Fixed Account, charges, transfers, withdrawals, policy loans and policy
loan repayments.
VARIABLE ACCUMULATION VALUES. When you allocate an amount to a Subaccount,
either by Net Premium allocation or transfer of Policy Value, your Policy is
credited with accumulation units in that Subaccount. The number of accumulation
units is determined by dividing the amount allocated to the Subaccount by the
Subaccount's accumulation unit value for the Valuation Date when the allocation
is effected.
The number of Subaccount accumulation units credited to your Policy will
increase when Net Premiums are allocated to the Subaccount, amounts are
transferred to the Subaccount and loan repayments are credited to the
Subaccount. The number of Subaccount accumulation units credited to a Policy
will decrease when the allocated portion of the Monthly Deduction is taken from
the Subaccount, a policy loan is taken from the Subaccount, an amount is
transferred from the Subaccount, or a partial surrender, including the partial
surrender charge, is taken from the Subaccount.
ACCUMULATION UNIT VALUES. A Subaccount's accumulation unit value varies to
reflect the investment experience of the underlying Fund, and may increase or
decrease from one Valuation Date to the next. The accumulation unit value for
each Subaccount was arbitrarily set at $10 when the Subaccount was established.
For each Valuation Period after the date of establishment, the accumulation
unit value is determined by multiplying the value of an accumulation unit for a
Subaccount for the prior valuation period by the net investment factor for the
Subaccount for the current valuation period.
NET INVESTMENT FACTOR. The net investment factor is an index used to measure
the investment performance of a Subaccount from one Valuation Period to the
next. It is based on the change in net asset value of the Fund shares held by
the Subaccount, and reflects any dividend or capital gain distributions on Fund
shares and the deduction of the daily mortality and expense risk charge (see
page 15).
FIXED ACCOUNT VALUE. On any Valuation Date, the Fixed Account Value of a
Policy is the total of all Net Premiums allocated to the Fixed Account, plus
any amounts transferred to the Fixed Account, plus interest credited on such
Net Premiums and transferred amounts, less the amount of any transfers from the
Fixed Account, less the amount of any partial surrenders, including the partial
surrender charges, taken from the Fixed Account, and less the pro rata portion
of the Monthly Deduction deducted from the Fixed Account. If there have been
any policy loans, the Fixed Account Value is further adjusted to reflect the
amount in the Policy Loan Account held in the Fixed Account, including
transfers to and from the Policy Loan Account as loans are taken and repayments
are made, and interest credited on the Policy Loan Account.
- --------------------------------------------------------------------------------
NET POLICY VALUE
The Net Policy Value on a Valuation Date is the Policy Value less
Indebtedness on that date.
19
<PAGE>
- --------------------------------------------------------------------------------
CASH SURRENDER VALUE
The Cash Surrender Value on a Valuation Date is the Policy Value reduced by
any surrender charge that would be assessed if the Policy were surrendered on
that date. The Cash Surrender Value is used to calculate the Loan Value and to
determine whether Indebtedness is excessive (see page 22). The Loan Value is
90% of the Cash Surrender Value.
- --------------------------------------------------------------------------------
NET CASH SURRENDER VALUE
The Net Cash Surrender Value on a Valuation Date is equal to the Net Policy
Value reduced by any surrender charge that would be imposed if the Policy were
surrendered on that date. The Net Cash Surrender Value is used to calculate the
amount available for partial surrenders. It is the amount received upon a full
surrender of the Policy.
- --------------------------------------------------------------------------------
DEATH BENEFIT AND CHANGES IN SPECIFIED AMOUNT
As long as the Policy remains in force, we will pay the Death Benefit upon
receipt at our Office of satisfactory proof of the Insured's death. We may
require return of the Policy. The Death Benefit will be paid in a lump sum
generally within seven days after receipt of such proof (see "When Proceeds Are
Paid," page 28) or, if elected, under a payment option (see "Payment Options,"
page 23). The Death Benefit will be paid to the Beneficiary. See "Selecting and
Changing the Beneficiary," page 21.
- --------------------------------------------------------------------------------
AMOUNT OF DEATH BENEFIT
The Death Benefit is equal to the sum of the Basic Death Benefit on the date
of the Insured's death, plus any dividend payable on that date (see
"Dividends," page 28), plus any supplemental benefits provided by rider, minus
any Indebtedness on that date and, if the date of death occurred during a grace
period, minus the past due Monthly Deductions. Under certain circumstances, the
amount of the Death Benefit may be further adjusted. See "Limits on Our Rights
to Contest the Policy" and "Misstatement of Age or Sex," page 28.
If part or all of the Death Benefit is paid in one sum, Penn Mutual will pay
interest on this sum from the date of the Insured's death to the date of
payment. We determine the interest rate, but it will not be less than a rate of
3% per year compounded annually.
- --------------------------------------------------------------------------------
BASIC DEATH BENEFIT AND SPECIFIED AMOUNT OPTIONS
The Policy Owner may choose one of two Specified Amount Options, which will
determine the Basic Death Benefit. Under Option 1, the Basic Death Benefit is
the greater of the Specified Amount or the Applicable Percentage of Policy
Value on the date of the Insured's death. Under Option 2, the Basic Death
Benefit is the greater of the Specified Amount plus the Policy Value, or the
Applicable Percentage of the Policy Value, on the date of the Insured's death.
If investment performance is favorable the amount of the Basic Death Benefit
may increase. However, under Option 1, the Basic Death Benefit ordinarily will
not change for several years to reflect any favorable investment performance
and may not change at all, whereas under Option 2, the Basic Death Benefit will
vary directly with the investment performance of the Policy Value. To see how
and when investment performance may begin to affect the Basic Death Benefit,
please see the illustrations beginning on page 24.
The "Applicable Percentage" is 250% when the Insured is Attained Age 40 or
less, and decreases each year thereafter to 100% when the Insured is Attained
Age 95. A table showing the Applicable Percentages for Attained Ages 0 to 95 is
included in Appendix C.
20
<PAGE>
- --------------------------------------------------------------------------------
INITIAL SPECIFIED AMOUNT AND OPTION
The Initial Specified Amount is set at the time the Policy is issued. You may
change the Initial Specified Amount from time to time, as discussed below. You
select the Specified Amount Option when you apply for the Policy. You also may
change the Specified Amount Option, as discussed below.
- --------------------------------------------------------------------------------
CHANGES IN SPECIFIED AMOUNT OPTION
You may change the Specified Amount Option on your Policy subject to the
following rules. After any change, the Specified Amount must be at least
$50,000. No more than one change in the Specified Amount Option may be made in
any Policy Year and no change may be made during the first Policy Year. The
effective date of the change will be the Monthly Anniversary that coincides
with or next follows the Valuation Date when we receive the request for the
change. If you request a change from Option 1 to Option 2, we may require
satisfactory evidence of insurability. If the evidence of insurability
indicates a different rate class for the Insured, the requested change will not
be allowed.
When a change from Option 1 to Option 2 is made, the Specified Amount after
the change is effected will be equal to the Specified Amount before the change
less the Policy Value on the effective date of the change. When a change from
Option 2 to Option 1 is made, the Specified Amount after the change will be
equal to the Specified Amount before the change is effected plus the Policy
Value on the effective date of the change.
- --------------------------------------------------------------------------------
CHANGES IN SPECIFIED AMOUNT
After the first Policy Year, you may request a change in the Specified
Amount, subject to the following conditions. No change will be permitted that
would result in your Policy's Death Benefit not being excludable from gross
income due to not satisfying the requirements of Section 7702 of the Internal
Revenue Code.
Any increase in the Specified Amount must be at least $10,000 and an
application must be submitted, along with evidence of insurability satisfactory
to Penn Mutual. A change in planned premiums may be advisable. See "Premiums
Upon Increase in Specified Amount," page 12. The increase in Specified Amount
will become effective on the Monthly Anniversary on or preceding the date the
increase is approved, and the Policy Value will be adjusted to the extent
necessary to reflect a Monthly Deduction as of the effective date based on the
increase in Specified Amount. You must return your Policy so we can amend the
Policy to reflect the increase. If the increase becomes effective during the
first three Policy Years, the three-year guarantee will be extended. See
"Three-Year Guarantee," page 11.
Any decrease in the Specified Amount must be at least $5,000, and the
Specified Amount after the decrease must be at least $50,000. In addition, no
decrease may be made in the first year following the effective date of an
increase in Specified Amount. A decrease in Specified Amount will become
effective on the Monthly Anniversary that coincides with or next follows our
receipt of a request at our Office.
- --------------------------------------------------------------------------------
SELECTING AND CHANGING THE BENEFICIARY
You select a Beneficiary in your application. You may later change the
Beneficiary in accordance with the terms of the Policy. If the Insured dies and
there is no surviving Beneficiary, the Insured's estate will be the
Beneficiary.
- --------------------------------------------------------------------------------
CASH BENEFITS
- --------------------------------------------------------------------------------
POLICY LOANS
You may borrow up to the Loan Value of your Policy at any time by submitting
a written request to our Office. The minimum amount you may borrow is $250. The
Loan Value is 90% of your Cash Surrender Value. Outstanding policy loans reduce
the amount of the Loan Value available for new loans. Policy loans will be
processed as of the date your written request is received and loan proceeds
generally will be sent to you within seven days. See "When Proceeds Are Paid,"
page 28, and "Payments from the Fixed Account," page 15. Loans under a Policy
classified as a modified endowment contract may be
21
<PAGE>
subject to adverse tax consequences, including a 10% penalty. See
"Distributions from Policies Classified as Modified Endowment Contracts," page
31.
INTEREST. We will charge interest daily on any outstanding policy loan at an
annual rate of 5.0%. Interest is due and payable at the end of each Policy Year
while a policy loan is outstanding. If interest is not paid when due, the
amount of the interest is added to the loan and becomes part of the outstanding
policy loan.
INDEBTEDNESS. Unrepaid policy loans (including unpaid interest added to the
loan) plus accrued interest not yet due equals the Indebtedness.
LOAN REPAYMENT; EFFECT IF NOT REPAID. You may repay all or part of your
Indebtedness at any time while the Insured is living and the Policy is in
force. Loan repayments must be sent to our Office and will be credited as of
the date received. If the Death Benefit becomes payable while a policy loan is
outstanding, the Indebtedness will be deducted in calculating the Death
Benefit. If the Indebtedness exceeds the Cash Surrender Value on any Valuation
Date, the Policy will be in default. We will send you, and any assignee of
record, notice of the default. You will have a 61-day grace period to submit a
sufficient payment to avoid termination. The notice will specify the amount
that must be repaid to prevent termination. If your Policy terminates because
of excessive Indebtedness, it cannot be reinstated.
POLICY LOAN ACCOUNT. When a policy loan is made, an amount equal to the loan
proceeds is withdrawn from the Policy Value in the Accounts (other than in the
Policy Loan Account). This withdrawal is made pro rata on the basis of Policy
Value in each Account unless you direct a different allocation when requesting
the loan. The amount withdrawn is then transferred to the Policy Loan Account
in the Fixed Account and will become part of the Fixed Account Value.
Conversely, when a loan is repaid, an amount equal to the repayment will be
transferred from the Policy Loan Account to the Accounts and allocated as you
direct when submitting the repayment. If you provide no direction, the amount
will be allocated in accordance with your then effective Net Premium allocation
percentages. Thus, a loan or loan repayment will have no immediate effect on
the Policy Value, but other Policy values, such as the Net Policy Value and Net
Cash Surrender Value, will be reduced or increased immediately by the amount
transferred to or from the Policy Loan Account.
The amount in the Policy Loan Account will be credited with interest at a
minimum guaranteed annual rate of 4.0%. We may in our discretion credit
interest on this amount at a rate greater than 4%. Thus, the maximum net cost
of a loan is 1.0% per year (the difference between the rate of interest we
charge on Policy loans and the amount we credit on the equivalent amount held
in the Policy Loan Account). We currently intend to credit 4.0% on the amount
held in the Policy Loan Account during the first 10 Policy Years (a net loan
cost of 1.0%), and 4.75% after the first 10 Policy Years (a net loan cost of
0.25%).
EFFECT OF POLICY LOAN. A policy loan, whether or not repaid, will have a
permanent effect on the Death Benefit and Policy values because the investment
results of the Subaccounts of the Separate Account and current interest rates
credited on Policy Value in the Fixed Account will apply only to the non-loaned
portion of the Policy Value. The longer the loan is outstanding, the greater
the effect is likely to be. Depending on the investment results of the
Subaccounts or credited interest rates for the Fixed Account while the policy
loan is outstanding, the effect could be favorable or unfavorable. Policy loans
may increase the potential for lapse if investment results of the Subaccounts
are less than anticipated. Also, policy loans could, particularly if not
repaid, make it more likely than otherwise for a Policy to terminate. See "Tax
Considerations," page 30, for a discussion of adverse tax consequences if a
Policy lapses with policy loans outstanding.
- --------------------------------------------------------------------------------
SURRENDERING THE POLICY FOR NET CASH SURRENDER VALUE
You may surrender your Policy at any time for its Net Cash Surrender Value by
submitting a written request to our Office. We may require return of the
Policy. A surrender charge may apply. See "Surrender Charges," page 17. A
surrender request will be processed as of the date your written request and all
required documents are received and generally will be paid within seven days.
See "When Proceeds are Paid," page 28, and "Payments from the Fixed Account,"
page 15. The Net Cash Surrender Value may be taken in one sum or it may be
applied to a payment option. See "Payment Options," page 23. Your Policy will
terminate and cease to be in force if it is surrendered for one sum. It cannot
later be reinstated.
- --------------------------------------------------------------------------------
PARTIAL SURRENDERS
You may make partial surrenders under your Policy subject to the following
conditions. You must submit a written request to our Office. The Net Cash
Surrender Value must exceed $1,000 after the partial surrender is deducted from
the Policy Value. No more than four partial surrenders may be made during a
Policy Year, and each partial surrender must be at least $250. During the first
five Policy Years, no partial surrender may be made that would reduce the
Specified Amount to less than $50,000. An administrative charge will be
assessed on a partial surrender. See "Partial Surrender Charge," page 18. This
charge
22
<PAGE>
will be deducted from your Policy Value along with the amount requested to be
withdrawn and will be considered part of the partial surrender (together, the
"partial surrender amount"). Policy values will be reduced by the partial
surrender amount.
When you request a partial surrender, you can direct how the partial
surrender amount will be deducted from your Policy Value in the Accounts,
provided that the minimum amount remaining in an Account as a result of the
deduction is $250. If you provide no directions, the partial surrender amount
will be deducted from your Policy Value in the Accounts on a pro rata basis.
See "Deductions, Surrenders and Transfers from the Fixed Account," page 15.
If Specified Amount Option 1 is in effect, the Specified Amount will also be
reduced by the partial surrender amount. If the Specified Amount reflects
increases in the Initial Specified Amount, the partial surrender will reduce
first the most recent increase, and then the next most recent increase, if any,
in reverse order, and finally the Initial Specified Amount.
Partial surrender requests will be processed as of the date your written
request is received, and generally will be paid within seven days. See "When
Proceeds Are Paid," page 28, and "Payments from the Fixed Account," page 15.
- --------------------------------------------------------------------------------
MATURITY BENEFIT
The Maturity Date is the Policy Anniversary nearest the Insured's 95th
birthday. If the Policy is still in force on the Maturity Date, the Maturity
Benefit will be paid to you. The Maturity Benefit is equal to the Net Policy
Value on the Maturity Date.
- --------------------------------------------------------------------------------
PAYMENT OPTIONS
The Policy offers a wide variety of optional ways of receiving proceeds
payable under the Policy, such as on surrender, death or maturity, other than
in a lump sum. Any agent authorized to sell this Policy can explain these
options upon request. None of these options vary with the investment
performance of a separate account because they are all forms of fixed-benefit
annuities.
- --------------------------------------------------------------------------------
ILLUSTRATIONS OF POLICY VALUES, NET CASH SURRENDER VALUES, DEATH BENEFITS AND
ACCUMULATED PREMIUMS
The following tables have been prepared to show how certain values under a
hypothetical Policy change with investment performance over an extended period
of time. The tables illustrate how Policy Values, Net Cash Surrender Values and
Death Benefits under a Policy covering an Insured of a given age on the Issue
Date, would vary over time if planned premiums were paid annually and the
return on the assets in the selected Funds were a uniform gross annual rate of
0%, 6% and 12%. The values would be different from those shown if the returns
averaged 0%, 6% or 12% but fluctuated over and under those averages throughout
the years shown. The tables also show planned premiums accumulated at 5%
interest. The hypothetical investment rates of return are illustrative only and
should not be deemed a representation of past or future investment rates of
return. Actual rates of return for a particular Policy may be more or less than
the hypothetical investment rates of return and will depend on a number of
factors including the investment allocations made by an Owner, prevailing rates
and rates of inflation.
The tables reflect the fact that the net investment return on the assets held
in the Subaccounts is lower than the gross after tax return of the selected
Funds. The tables assume an average annual expense ratio of .84% of the average
daily net assets of the Funds available under the Policies. This average annual
expense ratio is based on the expense ratios of each of the Funds for the last
fiscal year. For information on Fund expenses, see the prospectuses for the
Funds accompanying this prospectus.
In addition, the tables reflect the daily charge against Separate Account
assets for Penn Mutual's assumption of mortality and expense risks, which is
equivalent to an effective annual charge of 0.75% of assets at the current rate
and 0.90% at the maximum guaranteed rate. After deduction of Fund expenses and
the mortality and expense risk charge, the illustrated gross annual investment
rates of return of 0%, 6% and 12% would correspond to approximate net annual
rates of -1.59%, 4.41% and 10.41%, respectively, at current rates, and -1.74%,
4.26% and 10.26%, respectively, at the guaranteed maximum rates.
The tables also reflect the deduction of the Monthly Expense Charge and the
monthly Cost of Insurance Charge for the hypothetical Insured. Our current cost
of insurance charges and the higher guaranteed maximum cost of insurance
charges we have the contractual right to charge are reflected in separate
tables on each of the following pages. All the tables reflect the fact that no
charges for Federal or state income taxes are currently made against the
Separate Account and assume no Indebtedness or charges for supplemental
benefits.
The illustrations are based on our sex distinct rates for nonsmokers. Upon
request, we will furnish a comparable illustration based upon the proposed
Insured's individual circumstances. Such illustrations may assume different
hypothetical rates of return than those illustrated in the following tables.
23
<PAGE>
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------- -------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 369 0 75,000 400 0 75,000 432 0 75,000
2 1,614 815 352 75,000 905 442 75,000 998 536 75,000
3 2,483 1,246 784 75,000 1,423 960 75,000 1,615 1,153 75,000
4 3,394 1,662 1,200 75,000 1,956 1,493 75,000 2,288 1,825 75,000
5 4,351 2,062 1,599 75,000 2,502 2,039 75,000 3,020 2,557 75,000
6 5,357 2,444 1,982 75,000 3,061 2,599 75,000 3,817 3,355 75,000
7 6,412 2,808 2,346 75,000 3,633 3,170 75,000 4,686 4,223 75,000
8 7,520 3,154 2,784 75,000 4,217 3,847 75,000 5,632 5,262 75,000
9 8,683 3,480 3,202 75,000 4,813 4,536 75,000 6,664 6,386 75,000
10 9,905 3,786 3,601 75,000 5,421 5,236 75,000 7,789 7,604 75,000
15 16,993 4,969 4,969 75,000 8,603 8,603 75,000 15,165 15,165 75,000
20 26,039 5,396 5,396 75,000 11,877 11,877 75,000 26,723 26,723 75,000
25 37,585 4,569 4,569 75,000 14,787 14,787 75,000 45,203 45,203 75,000
30 52,321 1,651 1,651 75,000 16,540 16,540 75,000 75,804 75,804 92,481
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------- -------------------------- ---------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 781 319 75,781 838 376 75,838 895 433 75,895
2 2,583 1,632 1,170 76,632 1,798 1,335 76,798 1,971 1,508 76,971
3 3,972 2,460 1,997 77,460 2,790 2,328 77,790 3,148 2,685 78,148
4 5,431 3,265 2,802 78,265 3,815 3,353 78,815 4,437 3,974 79,437
5 6,962 4,045 3,582 79,045 4,874 4,411 79,874 5,846 5,384 80,846
6 8,570 4,801 4,338 79,801 5,966 5,503 80,966 7,389 6,927 82,389
7 10,259 5,530 5,067 80,530 7,090 6,628 82,090 9,076 8,613 84,076
8 12,032 6,233 5,863 81,233 8,249 7,879 83,249 10,922 10,551 85,922
9 13,893 6,908 6,631 81,908 9,441 9,164 84,441 12,940 12,662 87,940
10 15,848 7,556 7,371 82,556 10,668 10,483 85,668 15,149 14,964 90,149
15 27,189 10,329 10,329 85,329 17,296 17,296 92,296 29,722 29,722 104,722
20 41,663 12,142 12,142 87,142 24,628 24,628 99,628 52,516 52,516 127,516
25 60,136 12,496 12,496 87,496 32,159 32,159 107,159 87,943 87,943 162,943
30 83,713 10,641 10,641 85,641 38,938 38,938 113,938 142,826 142,826 217,826
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
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, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A
PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
24
<PAGE>
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ -------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,305 318 126,305 1,402 415 126,402 1,500 513 126,500
2 4,520 2,711 1,724 127,711 2,992 2,005 127,992 3,286 2,299 128,286
3 6,951 4,065 3,078 129,065 4,622 3,635 129,622 5,226 4,239 130,226
4 9,504 5,366 4,379 130,366 6,290 5,303 131,290 7,334 6,347 132,334
5 12,184 6,614 5,627 131,614 7,998 7,011 132,998 9,625 8,638 134,625
6 14,998 7,804 6,817 132,804 9,741 8,754 134,741 12,113 11,126 137,113
7 17,953 8,935 7,948 133,935 11,519 10,533 136,519 14,816 13,829 139,816
8 21,056 10,003 9,214 135,003 13,329 12,539 138,329 17,750 16,960 142,750
9 24,314 11,002 10,410 136,002 15,163 14,571 140,163 20,931 20,339 145,931
10 27,734 11,932 11,537 136,932 17,022 16,627 142,022 24,384 23,989 149,384
15 47,581 15,522 15,522 140,522 26,654 26,654 151,654 46,718 46,718 171,718
20 72,910 16,930 16,930 141,930 36,372 36,372 161,372 80,666 80,666 205,666
25 105,238 14,470 14,470 139,470 44,028 44,028 169,028 131,035 131,035 256,035
30 146,498 6,135 6,135 131,135 46,512 46,512 171,512 205,223 205,223 330,223
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ -------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 757 0 125,000 821 0 125,000 885 0 125,000
2 3,229 1,627 640 125,000 1,808 821 125,000 1,997 1,010 125,000
3 4,965 2,458 1,471 125,000 2,812 1,825 125,000 3,198 2,211 125,000
4 6,788 3,249 2,262 125,000 3,834 2,847 125,000 4,496 3,509 125,000
5 8,703 3,999 3,012 125,000 4,872 3,885 125,000 5,902 4,915 125,000
6 10,713 4,704 3,717 125,000 5,923 4,937 125,000 7,422 6,435 125,000
7 12,824 5,364 4,377 125,000 6,987 6,000 125,000 9,067 8,080 125,000
8 15,040 5,973 5,184 125,000 8,059 7,270 125,000 10,847 10,057 125,000
9 17,367 6,528 5,935 125,000 9,134 8,542 125,000 12,770 12,178 125,000
10 19,810 7,026 6,631 125,000 10,211 9,816 125,000 14,853 14,458 125,000
15 33,986 8,660 8,660 125,000 15,610 15,610 125,000 28,358 28,358 125,000
20 52,079 8,445 8,445 125,000 20,648 20,648 125,000 49,438 49,438 125,000
25 75,170 4,624 4,624 125,000 23,565 23,565 125,000 83,142 83,142 125,000
30 104,641 0 0 0 21,618 21,618 125,000 140,969 140,969 150,837
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
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, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A
PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
25
<PAGE>
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ -------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 794 332 75,794 852 389 75,852 909 447 75,909
2 2,583 1,707 1,244 76,707 1,876 1,413 76,876 2,052 1,589 77,052
3 3,972 2,597 2,135 77,597 2,937 2,475 77,937 3,306 2,843 78,306
4 5,431 3,469 3,006 78,469 4,041 3,578 79,041 4,685 4,222 79,685
5 6,962 4,319 3,857 79,319 5,185 4,723 80,185 6,200 5,737 81,200
6 8,570 5,150 4,687 80,150 6,374 5,911 81,374 7,866 7,403 82,866
7 10,259 5,959 5,497 80,959 7,607 7,145 82,607 9,698 9,235 84,698
8 12,032 6,745 6,375 81,745 8,883 8,513 83,883 11,708 11,338 86,708
9 13,893 7,505 7,227 82,505 10,201 9,924 85,201 13,913 13,635 88,913
10 15,848 8,237 8,052 83,237 11,562 11,377 86,562 16,331 16,146 91,331
15 27,189 11,463 11,463 86,463 19,027 19,027 94,027 32,441 32,441 107,441
20 41,663 13,974 13,974 88,974 27,752 27,752 102,752 58,258 58,258 133,258
25 60,136 15,462 15,462 90,462 37,631 37,631 112,631 99,538 99,538 174,538
30 83,713 15,371 15,371 90,371 48,202 48,202 123,202 165,335 165,335 240,335
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 per month in year 1 and $5.00 thereafter,
and a mortality and expense risk charge of 0.75% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ ------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 381 0 75,000 413 0 75,000 445 0 75,000
2 1,614 887 425 75,000 980 517 75,000 1,077 614 75,000
3 2,483 1,379 916 75,000 1,565 1,103 75,000 1,767 1,305 75,000
4 3,394 1,858 1,396 75,000 2,172 1,709 75,000 2,525 2,063 75,000
5 4,351 2,324 1,861 75,000 2,799 2,337 75,000 3,356 2,894 75,000
6 5,357 2,777 2,314 75,000 3,449 2,986 75,000 4,269 3,806 75,000
7 6,412 3,216 2,753 75,000 4,121 3,659 75,000 5,271 4,808 75,000
8 7,520 3,638 3,268 75,000 4,813 4,443 75,000 6,368 5,998 75,000
9 8,683 4,042 3,764 75,000 5,524 5,247 75,000 7,568 7,290 75,000
10 9,905 4,425 4,240 75,000 6,254 6,069 75,000 8,882 8,697 75,000
15 16,993 6,022 6,022 75,000 10,184 10,184 75,000 17,610 17,610 75,000
20 26,039 7,058 7,058 75,000 14,655 14,655 75,000 31,719 31,719 75,000
25 37,585 7,284 7,284 75,000 19,599 19,599 75,000 54,992 54,992 75,000
30 52,321 6,152 6,152 75,000 24,746 24,746 75,000 93,355 93,355 113,893
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 per month in year 1 and $5.00 per month
thereafter, and a mortality and expense risk charge of 0.75% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
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, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A
PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
26
<PAGE>
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ -------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 835 0 125,000 902 0 125,000 969 0 125,000
2 3,229 1,826 839 125,000 2,018 1,031 125,000 2,218 1,232 125,000
3 4,965 2,774 1,787 125,000 3,155 2,169 125,000 3,570 2,583 125,000
4 6,788 3,684 2,697 125,000 4,320 3,333 125,000 5,039 4,053 125,000
5 8,703 4,555 3,568 125,000 5,513 4,526 125,000 6,639 5,652 125,000
6 10,713 5,387 4,401 125,000 6,733 5,746 125,000 8,381 7,394 125,000
7 12,824 6,190 5,203 125,000 7,993 7,006 125,000 10,292 9,305 125,000
8 15,040 6,961 6,172 125,000 9,289 8,500 125,000 12,386 11,596 125,000
9 17,367 7,693 7,101 125,000 10,619 10,027 125,000 14,677 14,805 125,000
10 19,810 8,389 7,995 125,000 11,986 11,591 125,000 17,190 16,795 125,000
15 33,986 11,171 11,171 125,000 19,270 19,270 125,000 33,885 33,885 125,000
20 52,079 12,672 12,672 125,000 27,392 27,392 125,000 61,016 61,016 125,000
25 75,170 12,277 12,277 125,000 36,097 36,097 125,000 106,311 106,311 125,000
30 104,641 9,265 9,265 125,000 45,266 45,266 125,000 182,275 182,275 195,034
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 per month in year 1 and $5.00 thereafter,
and a mortality and expense risk charge of 0.75% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ -------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,385 398 126,385 1,485 498 126,485 1,585 598 126,585
2 4,520 2,914 1,928 127,914 3,207 2,221 128,207 3,513 2,526 128,513
3 6,951 4,389 3,402 129,389 4,974 3,987 129,974 5,608 4,622 130,609
4 9,504 5,814 4,827 130,814 6,792 5,805 131,792 7,895 6,908 132,895
5 12,184 7,189 6,202 132,189 8,662 7,675 133,662 10,390 9,403 135,390
6 14,998 8,513 7,526 133,513 10,583 9,597 135,583 13,113 12,126 138,113
7 17,953 9,796 8,809 134,796 12,570 11,583 137,570 16,099 15,112 141,099
8 21,056 11,035 10,245 136,035 14,619 13,830 139,619 19,371 18,581 144,371
9 24,314 12,223 11,631 137,223 16,727 16,135 141,727 22,951 22,358 147,951
10 27,734 13,363 12,969 138,363 18,898 18,503 143,898 26,871 26,477 151,871
15 47,581 18,169 18,169 143,169 30,575 30,575 155,575 52,743 52,743 177,743
20 72,910 21,398 21,398 146,398 43,682 43,682 168,682 93,611 93,611 218,611
25 105,238 22,361 22,361 147,361 57,618 57,618 182,618 157,988 157,988 282,988
30 146,498 20,429 20,429 145,429 71,658 71,658 196,658 259,894 259,894 384,894
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 per month in year 1 and $5.00 thereafter,
and a mortality and expense risk charge of 0.75% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
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, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A
PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
27
<PAGE>
- --------------------------------------------------------------------------------
OTHER POLICY BENEFITS AND PROVISIONS
- --------------------------------------------------------------------------------
RIGHT TO EXCHANGE TO A FIXED BENEFIT POLICY
At any time within the first 24 policy months, you may exchange your Policy
for a flexible premium (non-variable) adjustable life insurance policy offered
by Penn Mutual on the Issue Date of your Policy. The Policy Value will be
transferred to the new policy and the benefits for the new policy will not vary
with the investment experience of a separate account. The exchange must be
elected within 24 months from the Policy Date. No evidence of insurability will
be required.
The Owner and Beneficiary under the new policy will be the same as those
under the original Policy on the effective date of the exchange. The new policy
will provide the same amount of death benefit or the same net amount at risk,
whichever you elect, as the original Policy immediately prior to the exchange
date. All Indebtedness must be paid and cannot be transferred to the new
policy.
- --------------------------------------------------------------------------------
DIVIDENDS
The Policies are participating policies in that they are eligible to
participate in Penn Mutual's surplus. However, we do not anticipate that any
dividends will be paid on the Policies. If dividends are paid, you will have
the option of having them added to your Policy Value or paid to you in cash.
- --------------------------------------------------------------------------------
LIMITS ON OUR RIGHTS TO CONTEST THE POLICY
INCONTESTABILITY. We will not contest the Policy after it has been in force
during the Insured's lifetime for two years from the Issue Date. Any increase
in the Specified Amount will be incontestable with respect to statements made
in the evidence of insurability for that increase after the increase has been
in force during the life of the Insured for two years after the effective date
of the increase.
SUICIDE EXCLUSION. If the Insured dies by suicide within two years after the
Issue Date, the Death Benefit will be limited to the premiums paid less any
Indebtedness and any partial surrenders. If the Insured dies by suicide within
two years after an increase in Specified Amount, the Death Benefit with respect
to the increase will be limited to the Monthly Deductions made for that
increase.
- --------------------------------------------------------------------------------
CHANGES IN THE POLICY OR BENEFITS
MISSTATEMENT OF AGE OR SEX. If the Insured's age or sex has been misstated in
the Policy, the Death Benefit under the Policy will be the amount which would
have been provided by the most recent Cost of Insurance Charge at the correct
age and sex.
OTHER CHANGES. At any time we may make such changes in the Policy as are
necessary to assure compliance at all times with the definition of life
insurance prescribed by the Internal Revenue Code or to make the Policy conform
with any law or regulation issued by any government agency to which it is
subject. Any such change, however, may be accepted or rejected by the Owner.
- --------------------------------------------------------------------------------
WHEN PROCEEDS ARE PAID
We will ordinarily pay any Death Benefit, loan proceeds or partial or full
surrender proceeds within seven days after receipt at our Office of all the
documents required for such a payment. Other than the Death Benefit, which is
determined as of the date of death, the amount will be determined as of the
date of receipt of required documents. However, we may delay making a payment
or processing a transfer request if (1) the disposal or valuation of the
Separate Account's assets is not reasonably practicable because the New York
Stock Exchange is closed for other than a regular holiday or weekend, trading
is restricted by the SEC, or the SEC declares that an emergency exists; or (2)
the SEC by order permits postponement of payment to protect Penn Mutual's
policy owners. See also "Payments from the Fixed Account," page 15.
28
<PAGE>
- --------------------------------------------------------------------------------
REPORTS TO POLICY OWNERS
Each year you will be sent a report showing the current Policy values,
premiums paid and deductions made since the last report, any outstanding policy
loans, and any additional premiums permitted under your Policy. You will also
be sent an annual and a semi-annual report for the Separate Account and for
each Fund underlying a Subaccount to which you have allocated Policy Value, as
required by the 1940 Act. In addition, when you pay premiums (other than by
pre-authorized check), or if you take out a policy loan, transfer amounts among
the Accounts or make partial surrenders, you will receive a written
confirmation of these transactions.
- --------------------------------------------------------------------------------
ASSIGNMENT
The Policy may be assigned in accordance with its terms on a form provided by
us. We will not be deemed to know of an assignment unless we receive a copy of
it at our Office. We assume no responsibility for the validity or sufficiency
of any assignment.
- --------------------------------------------------------------------------------
REINSTATEMENT
The Policy may be reinstated within five years after lapse, subject to
compliance with certain conditions, including the payment of a necessary
premium and submission of satisfactory evidence of insurability. See your
Policy for further information.
- --------------------------------------------------------------------------------
SUPPLEMENTAL BENEFITS
The following supplemental benefits are available and may be added to your
Policy. There are monthly charges for these benefits that are in addition to
the Cost of Insurance and Monthly Expense Charges described above. (See
"Monthly Deduction," page 16.) If any of these benefits are added to your
Policy, monthly charges for the supplemental benefits will be deducted from
your Policy Value as part of the Monthly Deduction.
ADDITIONAL INSURED TERM INSURANCE. Provides a death benefit payable on the
death of an additional insured. More than one rider can be added to your
Policy. There is no cash value for this benefit.
CHILDREN'S TERM INSURANCE. Provides a death benefit payable on the death of
a covered child. More than one child can be covered. There is no cash value
for this benefit.
ACCIDENTAL DEATH BENEFIT. Provides a death benefit payable if the Insured's
death results from certain accidental causes. There is no cash value for
this benefit.
DISABILITY WAIVER OF MONTHLY DEDUCTION AND DISABILITY MONTHLY PREMIUM
DEPOSIT. Provides for the waiver of the Monthly Deductions and payment of
stipulated premiums upon total disability of the Insured. If Specified
Amount Option 1 is in effect at the time this benefit becomes effective, it
will be changed to Specified Amount Option 2. See "Basic Death Benefit and
Specified Amount Options," page 20.
DISABILITY WAIVER OF MONTHLY DEDUCTION. Provides for the waiver of the
Monthly Deductions upon total disability of the Insured.
GUARANTEED CONTINUATION OF POLICY. Guarantees that the Policy will remain
in force and a death benefit will be payable regardless of the sufficiency
of the Net Cash Surrender Value.
GUARANTEED OPTION TO INCREASE SPECIFIED AMOUNT. Allows the Owner to
increase the Specified Amount without evidence of insurability. See
"Changes in Specified Amount," page 21.
SUPPLEMENTAL TERM INSURANCE. Provides a death benefit payable on the death
of the primary insured. There is no cash value for this benefit.
Additional rules and limits apply to these supplemental benefits. Please ask
your authorized Penn Mutual agent for further information or contact our
Office.
29
<PAGE>
- --------------------------------------------------------------------------------
TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon Penn Mutual's understanding
of the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service (the "Service"). No representation is made as to the
likelihood of continuation of the present Federal income tax laws or of the
current interpretations by the Service.
- --------------------------------------------------------------------------------
TAX STATUS OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code")
sets forth a definition of a life insurance contract for Federal tax purposes.
The Secretary of the Treasury (the "Treasury") is authorized to prescribe
regulations implementing Section 7702. While proposed regulations and other
interim guidance has been issued, final regulations have not been adopted. In
short, guidance as to how Section 7702 is to be applied is limited. If a Policy
were determined not to be a life insurance contract for purposes of Section
7702, such Policy would not qualify for the favorable tax treatment normally
provided to a life insurance policy.
With respect to a Policy issued on the basis of a standard rate class, Penn
Mutual believes (largely in reliance on IRS Notice 88-128 and the proposed
regulations under Section 7702, issued on July 5, 1991) that such a Policy
should meet the Section 7702 definition of a life insurance contract.
With respect to a Policy that is issued on a substandard basis (i.e., a
premium class involving higher than standard mortality risk), there is less
guidance, in particular as to how the mortality and other expense requirements
of Section 7702 are to be applied in determining whether such a Policy meets
the section 7702 definition of a life insurance contract. Thus, it is not clear
whether or not such a Policy would satisfy section 7702, particularly if the
Owner pays the full amount of premiums permitted under the Policy.
If it is subsequently determined that a Policy does not satisfy Section 7702,
Penn Mutual may take whatever steps are appropriate and necessary to attempt to
cause such a Policy to comply with Section 7702. For these reasons, Penn Mutual
reserves the right to restrict Policy transactions as necessary to attempt to
qualify it as a life insurance contract under Section 7702.
Section 817(h) of the Code requires that the investments of the Separate
Account must be "adequately diversified" in accordance with Treasury
regulations in order for the Policy to qualify as a life insurance contract
under Section 7702 of the Code. The Separate Account, through the Funds,
intends to comply with the diversification requirements prescribed in Treas.
Reg. (S)1.817-5, which affect how the Funds' assets are to be invested.
In certain circumstances, owners of variable life insurance contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includable in the
variable contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The
Treasury Department also announced, in connection with the issuance of
regulations concerning diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
Policyowner), rather than the insurance company, to be treated as the owner of
the assets in the account." This announcement also stated that guidance would
be issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular subaccounts without
being treated as owners of the underlying assets." As of the date of this
prospectus, no such guidance has been issued.
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating premium payments
and policy values. These differences could result in an Owner being treated as
the owner of a pro rata portion of the assets of the Separate Account. In
addition, Penn Mutual does not know what standards will be set forth, if any,
in the regulations or rulings which the Treasury Department has stated it
expects to issue. Penn Mutual therefore reserves the right to modify the Policy
as necessary to attempt to prevent an Owner from being
30
<PAGE>
considered the owner of a pro rata share of the assets of the Separate Account
or to otherwise qualify the Policy for favorable tax treatment.
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 the Policies in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
- --------------------------------------------------------------------------------
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. Penn Mutual believes that the proceeds and cash value increases
of a Policy should be treated in a manner consistent with a fixed-benefit life
insurance policy for Federal income tax purposes. Thus, the Death Benefit under
the Policy should be excludable from the gross income of the Beneficiary under
Section 101(a)(1) of the Code.
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's Death Benefit Option (i.e., a change from Specified Amount Option 1 to
Specified Amount Option 2 or vice versa), a policy loan, a partial surrender, a
surrender, a change in ownership, or an assignment of the Policy may have
Federal income tax consequences. In addition, Federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy proceeds
depend on the circumstances of each Owner or Beneficiary.
Generally, the Owner will not be deemed to be in constructive receipt of the
Policy Value, including increments thereof, until there is a distribution. The
tax consequences of distributions from, and loans taken from or secured by a
Policy, depend on whether the Policy is classified as a "Modified Endowment
Contract." Whether a Policy is or is not treated as a Modified Endowment
Contract, upon a complete surrender or lapse of a Policy or when benefits are
paid at a Policy's endowment date, if the amount received plus the amount of
indebtedness exceeds the total investment in the Policy, the excess will
generally be treated as ordinary income subject to tax.
MODIFIED ENDOWMENT CONTRACTS. Section 7702A establishes a class of life
insurance contracts designated as "Modified Endowment Contracts," which applies
to Policies entered into or materially changed after June 20, 1988.
Due to the Policy's flexibility, classification as a Modified Endowment
Contract will depend on the individual circumstances of each Policy. In
general, a Policy will be a Modified Endowment Contract if the accumulated
premiums paid at any time during the first seven Policy Years exceeds the sum
of the net level premiums which would have been paid on or before such time if
the Policy provided for paid-up future benefits after the payment of seven
level annual premiums. The determination of whether a Policy will be a Modified
Endowment Contract after a material change generally depends upon the
relationship of the Death Benefit and Policy Value at the time of such change
and the additional premiums paid in the seven years following the material
change.
The rules relating to whether a Policy will be treated as a Modified
Endowment Contract are extremely complex and cannot be adequately described in
the limited confines of this summary. Therefore, a current or prospective Owner
should consult with a competent advisor to determine whether a policy
transaction will cause the Policy to be treated as a Modified Endowment
Contract. Penn Mutual will, however, monitor Policies and will attempt to
notify an Owner on a timely basis if his or her Policy is in jeopardy of
becoming a Modified Endowment Contract.
DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Policies classified as Modified Endowment Contracts will be subject to the
following tax rules. First, all distributions, including distributions upon
surrender and partial surrenders from such a Policy, are treated as ordinary
income subject to tax up to the amount equal to the excess (if any) of the
Policy Value immediately before the distribution over the investment in the
Policy (described below) at such time. Second, loans taken from or secured by,
such a Policy are treated as distributions from such a Policy and taxed
accordingly. Past due loan interest that is added to the loan amount will be
treated as a loan. Third, a 10 percent additional income tax is included in
income except where the distribution or loan is made on or after the Owner
attains age 59 1/2, is attributable to the Owner's becoming disabled, or is
part of a series of substantially equal periodic payments for the life (or life
expectancy) of the Owner or the joint lives (or joint life expectancies) of the
Owner and the Owner's Beneficiary.
DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Distributions from a Policy that is not a Modified Endowment Contract, are
generally treated as first recovering the investment in the Policy (described
below) and then, only after the return of all such investment in the Policy, as
distributing taxable income. An exception to this general rule occurs in the
case of a decrease in the Policy's Death Benefit or any other change that
reduces benefits under the Policy in the first fifteen years after the Policy
is issued and that results in a cash distribution to the Owner in order for the
Policy to continue
31
<PAGE>
complying with the Section 7702 definitional limits. Such a cash distribution
will be taxed in whole or in part as ordinary income (to the extent of any gain
in the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a Modified Endowment Contract
are not treated as distributions. Instead, such loans generally are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon surrender) nor
loans from, or secured by, a Policy that is not a Modified Endowment Contract
are subject to the 10 percent additional tax.
POLICY LOANS. Generally, consumer interest paid on any loan under a Policy
which is owned by an individual is not deductible. In addition, interest on any
loan under a Policy owned by a taxpayer and covering the life of any individual
who is an officer or employee of or is financially interested in the business
carried on by that taxpayer will not be tax deductible to the extent the
aggregate amount of such loans with respect to contracts covering such
individual exceeds $50,000. The deduction of interest on Policy loans may also
be subject to certain other restrictions set forth in Section 264 of the Code.
Before taking a Policy loan, an Owner should consult a tax adviser as to the
tax consequences of such a loan.
INVESTMENT IN THE POLICY. Investment in the Policy means (i) the aggregate
amount of any premiums or other consideration paid for a Policy, minus (ii) the
aggregate amount received under the Policy which is excluded from gross income
of the Owner (except that the amount of any loan from, or secured by, a Policy
that is a Modified Endowment Contract, to the extent such amount is excluded
from gross income, will be disregarded), plus (iii) the amount of any loan
from, or secured by, a Policy that is a Modified Endowment Contract to the
extent that such amount is included in the gross income of the Owner.
MULTIPLE POLICIES. All Modified Endowment Contracts that are issued by Penn
Mutual (or its affiliates) to the same Owner during any calendar year are
treated as one Modified Endowment Contract for purposes of determining the
amount includable in the gross income under Section 72(e) of the Code.
- --------------------------------------------------------------------------------
POSSIBLE CHARGE FOR PENN MUTUAL'S TAXES
At the present time, Penn Mutual makes no charge for any Federal, state or
local taxes (other than state premium taxes) that it incurs that may be
attributable to the Separate and Fixed Accounts or to the Policies. Penn
Mutual, however, reserves the right in the future to make a charge for any such
tax or other economic burden resulting from the application of the tax laws
that it determines to be properly attributable to the Accounts or to the
Policies.
- --------------------------------------------------------------------------------
OTHER INFORMATION ABOUT THE POLICIES AND PENN MUTUAL
- --------------------------------------------------------------------------------
SALE OF THE POLICIES
Hornor, Townsend & Kent, Inc. ("HTK"), a wholly-owned subsidiary of Penn
Mutual, acts as a principal underwriter of the Policies. HTK also acts as
principal underwriter for Penn Mutual Variable Annuity Account III, a separate
account also established by Penn Mutual, and for PIA Variable Annuity Account
I, a separate account established by The Penn Insurance and Annuity Company, a
wholly-owned subsidiary of Penn Mutual. HTK is a registered broker-dealer under
the Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. The Policies are available in all states. The Policies
are sold by certain registered representatives of HTK who are also appointed
and licensed as insurance agents. The Policies may also be offered through
insurance and securities brokers who have lawfully qualified to sell the
Policies. Registered representatives may be paid commissions on Policies they
sell based on premiums paid in amounts up to 50% of first year premiums, 4% on
premiums paid during the second through fifteenth Policy Years, and 1.2% on
premiums paid after the first fifteen Policy Years. Other allowances and
overrides also may be paid. Registered representatives who meet certain
productivity and profitability standards may be eligible for additional
compensation.
For 1995 and 1994, Penn Mutual received premium payments on the Policies in
the approximate amounts of $11,201,000 and $20,670,872, respectively, and
compensated HTK in the approximate amount of $52,800 and $143,483,
respectively, for its services as principal underwriter.
32
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL TRUSTEES AND OFFICERS
Penn Mutual is managed by a board of trustees. The following table sets forth
the name, address and principal occupations during the past five years of each
of Penn Mutual's trustees.
BOARD OF TRUSTEES
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS PENN MUTUAL DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------
<C> <C> <S>
John E. Tait Chairman of the Chairman of the Board (since
Independence Square Board April 1995), Chairman and Chief
Philadelphia, PA 19172 Executive Officer (January 1994
to April 1995), Chairman,
President and Chief Executive
Officer (September 1991 to
January 1994), Chairman of the
Board and Chief Executive
Officer (prior thereto), The
Penn Mutual Life Insurance
Company.
- ------------------------------------------------------------------------------
Robert E. Chappell President and Chief President and Chief Executive
Independence Square Executive Officer Officer (since April 1995),
Philadelphia, PA 19172 President and Chief Operating
Officer, The Penn Mutual Life
Insurance Company (January 1994
to April 1995); Executive Vice
President, PNC Bank Corp.
(January 1992 to December 1993);
Chairman of the Board (June 1991
to January 1992) and Chairman,
President and Chief Executive
Officer, Provident National Bank
(prior thereto).
- ------------------------------------------------------------------------------
James A. Hagen Trustee Chairman of the Board, Conrail,
2001 Market Street Inc.
P.O. Box 41417
Philadelphia, PA 19101-
1417
- ------------------------------------------------------------------------------
Philip E. Lippincott Trustee Retired (since April 1994),
P.O. Box 497 Chairman and Chief Executive
Lima, PA 19037 Officer, Scott Paper Company
(prior thereto).
- ------------------------------------------------------------------------------
Claudine B. Malone Trustee President, Financial and
7570 Potomac Fall Road Management Consulting, Inc.
McLean, VA 22102
- ------------------------------------------------------------------------------
John F. McCaughan Trustee Chairman of the Board, Betz
Betz Laboratories, Inc. Laboratories, Inc.
200 Witmer Road
Horsham, PA 19044
- ------------------------------------------------------------------------------
Alan B. Miller Trustee Chairman and President,
367 Gulph Road Universal Health Services, Inc.
King of Prussia, PA
19406
- ------------------------------------------------------------------------------
Joseph Neubauer Trustee Chairman, Chief Executive
ARAMARK Tower Officer and President, ARAMARK
1101 Market Street Corporation.
Philadelphia, PA 19107
- ------------------------------------------------------------------------------
Norman T. Wilde, Jr. Trustee President and Chief Executive
1801 Market Street Officer, Janney Montgomery Scott
Philadelphia, PA 19103 Inc.
(a securities broker/dealer and
subsidiary of The Penn Mutual
Life Insurance Company).
- ------------------------------------------------------------------------------
Wesley S. Williams, Jr., Trustee Partner, Covington & Burling
Esq. 1201 Pennsylvania (law firm).
Ave., N.W. P.O. Box 7566
Washington, D.C. 20004
</TABLE>
33
<PAGE>
The following table sets forth the names, addresses and principal occupations
during the past five years of the senior officers of Penn Mutual (other than
officers who are members of Penn Mutual's Board of Trustees).
SENIOR OFFICERS
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------------------------------------------------------------
<C> <S>
John M. Albanese Vice President, Systems and Service (since July 1995),
Independence Square Vice President, Information Systems Application (August
Philadelphia, PA 19172 1992 to July 1995), Manager (prior thereto) Price
Waterhouse.
- -------------------------------------------------------------------------------
Nancy S. Brodie Executive Vice President and Chief Financial Officer
Independence Square (since December 1995), Senior Vice President and Chief
Philadelphia, PA 19172 Financial Officer (January 1994 to December 1995), Vice
President and Controller (November 1991 to January
1994), General Auditor (October 1989 to November 1991),
Assistant Vice President, Taxation (prior thereto), The
Penn Mutual Life Insurance Company.
- -------------------------------------------------------------------------------
Phillip E. Collins Senior Vice President, Career Financial Network (since
Independence Square August 1992), Vice President, Career Financial Network
Philadelphia, PA 19172 (January 1992 to August 1992), The Penn Mutual Life
Insurance Company, Senior Vice President, Career Sales,
Monarch Life Insurance Company (prior thereto).
- -------------------------------------------------------------------------------
Joseph J. Horvath Executive Vice President, General Counsel and Secretary
Independence Square (since January 1992), Senior Vice President, General
Philadelphia, PA 19172 Counsel and Secretary (prior thereto), The Penn Mutual
Life Insurance Company.
- -------------------------------------------------------------------------------
L. Stockton Illoway Senior Vice President, Annuity and Pension Business
Independence Square (since December 1993) Senior Vice President, Individual
Philadelphia, PA 19172 Retirement Investment Service (September 1993 to
December 1993), Regional Vice President (prior
thereto), The Penn Mutual Life Insurance Company.
- -------------------------------------------------------------------------------
Richard J. Liburdi Senior Vice President, Insurance and Life Sales (since
Independence Square January 1991), Vice President and Product Manager
Philadelphia, PA 19172 (November 1988 to January 1991), Assistant Vice
President and Product Manager (prior thereto), The Penn
Mutual Life Insurance Company.
- -------------------------------------------------------------------------------
Nina M. Mulrooney General Auditor (since November 1991), Assistant Vice
Independence Square President, Corporate Accounting and Controls (December
Philadelphia, PA 19172 1988 to November 1991), Director, Cost Accounting and
Budget (prior thereto), The Penn Mutual Life Insurance
Company.
- -------------------------------------------------------------------------------
Steven C. Palmitier Senior Vice President, Independent Financial Network
Independence Square (since January 1995), Vice President, Independent
Philadelphia, PA 19172 Financial Network (April 1991 to January 1995), The
Penn Mutual Life Insurance Company
- -------------------------------------------------------------------------------
Peter M. Sherman Senior Vice President and Chief Investment Officer
Independence Square (since May 1996), Vice President, Investments (January
Philadelphia, PA 19172 1996 to April 1996); Vice President, Fixed Income
Portfolio Management (prior thereto), The Penn Mutual
Life Insurance Company; President, Independence Capital
Management, Inc. (an investment advisory organization
and subsidiary of Penn Mutual), since September 1995.
</TABLE>
- --------------------------------------------------------------------------------
STATE REGULATION
Penn Mutual is subject to regulation by the Department of Insurance of the
Commonwealth of Pennsylvania, which periodically examines our financial
condition and operations. We are also subject to the insurance laws and
regulations of all jurisdictions where we do business. The Policy described in
this prospectus has been filed with and, where required, approved by, insurance
officials in those jurisdictions where it is sold.
We are required to submit annual statements of our operations, including
financial statements, to the insurance departments of the various jurisdictions
where we do business to determine solvency and compliance with applicable
insurance laws and regulations.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
A registration statement under the Securities Act of 1933 has been filed with
the SEC relating to the offering described in this prospectus. This prospectus
does not include all the information set forth in the registration statement.
The omitted information may be obtained at the SEC's principal office in
Washington, D.C. by paying the SEC's prescribed fees.
34
<PAGE>
- --------------------------------------------------------------------------------
EXPERTS
The statement of assets and liabilities of Penn Mutual Variable Life Account
I - Cornerstone VUL as of December 31, 1995, and the related statement of
operations for the year then ended, and the statements of changes in net assets
for each of the two years or periods in the period then ended, and the
statements of financial condition of The Penn Mutual Life Insurance Company as
of December 31, 1995 and 1994, and the related statements of operations and
surplus and cash flows for each of the three years in the period ended December
31, 1995, included in this prospectus, have been audited by Coopers & Lybrand
L.L.P., independent accountants. The reports and the financial statements have
been included upon authority of said firm as experts in accounting and
auditing.
Actuarial matters included in this prospectus have been examined by Peter R.
Schaefer, F.S.A., M.A.A.A., Actuary of Penn Mutual, whose opinion is filed as
an exhibit to the registration statement.
- --------------------------------------------------------------------------------
LITIGATION
No litigation is pending that would have a material effect upon the Separate
Account or Penn Series.
- --------------------------------------------------------------------------------
LEGAL MATTERS
Morgan, Lewis & Bockius LLP of Philadelphia, Pennsylvania, has provided
advice on certain matters relating to the federal securities laws and the
offering of the Policies.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The financial statements of the Subaccounts and of Penn Mutual appear on the
following pages. The financial statements of Penn Mutual should be
distinguished from financial statements of the Subaccounts and should be
considered only as bearing upon Penn Mutual's ability to meet its obligations
under the Policies.
35
<PAGE>
- -----------------------------------------------------
THIS PAGE LEFT INTENTIONALLY BLANK
36
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE PENN MUTUAL LIFE INSURANCE COMPANY
AND CONTRACT OWNERS OF PENN MUTUAL VARIABLE LIFE ACCOUNT I--CORNERSTONE VUL:
We have audited the accompanying statements of assets and liabilities of the
Penn Mutual Variable Life Account I--Cornerstone VUL (Cornerstone) [comprising,
respectively, the Money Market Fund, Quality Bond Fund, High Yield Bond Fund,
Growth Equity Fund, Value Equity Fund, Flexibly Managed Fund, Small
Capitalization Fund, International Equity Fund, Limited Maturity Bond
Portfolio, Balanced Portfolio, TCI Growth Portfolio, Equity-Income Portfolio,
Growth Portfolio, and Asset Manager Portfolio] as of December 31, 1995, and the
related statements of operations for the year or period then ended, and the
statements of changes in net assets for the two years or periods in the period
then ended. These financial statements are the responsibility of the management
of Cornerstone. Our responsibility is to express an opinion on these 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. Our
procedures included confirmation of securities owned as of December 31, 1995 by
correspondence with the transfer agents. 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 Penn Mutual Variable Life
Account I--Cornerstone VUL as of December 31, 1995, the results of its
operations for the year or period then ended and changes in net assets for each
of the two years or periods in the period then ended in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 4, 1996
37
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1995
<TABLE>
<CAPTION>
MONEY MARKET QUALITY BOND HIGH YIELD BOND GROWTH EQUITY
TOTAL FUND + FUND+ FUND+ FUND+
----------- ------------ ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT IN COMMON
STOCK:
Number of shares....... 2,388,608 200,140 219,881 172,821
Identified cost........ $38,744,464 $2,388,608 $2,007,038 $2,039,731 $3,415,744
ASSETS:
Investments at value... $41,894,744 $2,388,608 $2,049,436 $1,855,799 $3,456,414
Dividends receivable... 10,446 10,446 0 0 0
LIABILITIES:
Due from (to) the Penn
Mutual Life Insurance
Company............... 7,366 11,470 (225) (199) (333)
----------- ---------- ---------- ---------- ----------
NET ASSETS.............. $41,912,556 $2,410,524 $2,049,211 $1,855,600 $3,456,081
=========== ========== ========== ========== ==========
Variable life accumula-
tion units............ 221,097 174,051 159,241 259,145
Accumulation unit val-
ues................... $ 10.90 $ 11.77 $ 11.65 $ 13.34
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
MONEY MARKET QUALITY BOND HIGH YIELD BOND GROWTH EQUITY
TOTAL FUND+ FUND+ FUND+ FUND+
---------- ------------ ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................ $1,059,020 $142,987 $117,281 $161,261 $ 13,833
EXPENSE:
Mortality and expense
risk charges............ 265,402 20,169 13,298 12,813 21,685
---------- -------- -------- -------- --------
Net investment income
(loss).................. 793,618 122,818 103,983 148,448 (7,852)
---------- -------- -------- -------- --------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses)
from redemption of fund
shares.................. 9,954 0 949 2,597 81
Capital gains distribu-
tions................... 1,193,254 0 0 0 455,875
---------- -------- -------- -------- --------
Net realized gains
(losses)................ 1,203,208 0 949 2,597 455,956
Net change in unrealized
appreciation/depreciation
of investments.......... 4,342,387 0 189,692 81,342 157,200
---------- -------- -------- -------- --------
Net realized and
unrealized gains (loss-
es) on investments...... 5,545,595 0 190,641 83,939 613,156
---------- -------- -------- -------- --------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS......... $6,339,213 $122,818 $294,624 $232,387 $605,304
========== ======== ======== ======== ========
</TABLE>
- -----------------------
(a) For the period from May 1, 1995 (date funds became available for investment
to contractholders) to December 31, 1995.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL INTERNATIONAL LIMITED
VALUE EQUITY MANAGED CAPITALIZATION EQUITY BALANCED MATURITY BOND
FUND+ FUND+ FUND+ FUND+ PORTFOLIO++ PORTFOLIO++
- ------------ ----------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
306,939 789,512 8,174 341,062 124,635 13,709
$4,211,903 $12,852,627 $87,987 $4,585,345 $1,886,198 $191,861
$4,996,969 $13,737,508 $89,588 $4,935,163 $2,183,608 $201,658
0 0 0 0 0 0
(518) (1,413) (9) (528) (223) (21)
---------- ----------- ------- ---------- ---------- --------
$4,996,451 $13,736,095 $89,579 $4,934,635 $2,183,385 $201,637
========== =========== ======= ========== ========== ========
342,220 997,457 7,992 380,331 172,524 18,090
$ 14.60 $ 13.77 $ 11.21 $ 12.97 $ 12.66 $ 11.15
- ----------------------------------------------------------------------------------
<CAPTION>
FLEXIBLY SMALL INTERNATIONAL LIMITED
VALUE EQUITY MANAGED CAPITALIZATION EQUITY BALANCED MATURITY BOND
FUND+ FUND+ FUND+(A) FUND+ PORTFOLIO++ PORTFOLIO++
- ------------ ----------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ 70,466 $ 398,252 $ 698 $ 111,919 $ 28,275 $ 4,923
30,369 86,605 263 31,950 14,336 1,289
---------- ----------- ------- ---------- ---------- --------
40,097 311,647 435 79,969 13,939 3,634
---------- ----------- ------- ---------- ---------- --------
(251) 1,242 (8) 4,144 3,726 492
255,980 470,478 1,833 0 9,088 0
---------- ----------- ------- ---------- ---------- --------
255,729 471,720 1,825 4,144 12,814 492
839,097 1,314,004 1,601 495,756 333,686 11,309
---------- ----------- ------- ---------- ---------- --------
1,094,826 1,785,724 3,426 499,900 346,500 11,801
---------- ----------- ------- ---------- ---------- --------
$1,134,923 $ 2,097,371 $ 3,861 $ 579,869 $ 360,439 $ 15,435
========== =========== ======= ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1995 (CONT'D.)
<TABLE>
<CAPTION>
TCI
GROWTH EQUITY INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT IN COMMON
STOCK
Number of shares....... 339,350 44,044 33,360 5,357
Identified cost........ $3,223,538 $793,189 $978,792 $81,903
ASSETS:
Investments at value... $4,092,557 $848,731 $974,124 $84,581
Dividends receivable... 0 0 0 0
LIABILITIES:
Due from (to) the Penn
Mutual
Life Insurance
Company............... (448) (91) (88) (8)
---------- -------- -------- -------
NET ASSETS.............. $4,092,109 $848,640 $974,036 $84,573
========== ======== ======== =======
Variable life accumula-
tion units............. 287,256 70,955 78,549 7,558
Accumulation unit val-
ues.................... $ 14.25 $ 11.96 $ 12.40 $ 11.19
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1995 (CONT'D.)
<TABLE>
<CAPTION>
TCI
GROWTH EQUITY INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++(A) PORTFOLIO++++(A) PORTFOLIO++++(A)
------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................ $ 2,667 $ 6,458 $ 0 $ 0
EXPENSE:
Mortality and expense
risk charges............ 28,693 1,703 2,128 101
-------- ------- ------- ------
Net investment income
(loss).................. (26,026) 4,755 (2,128) (101)
-------- ------- ------- ------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses)
from redemption of fund
shares.................. (1,432) 92 (1,691) 13
Capital gains
distributions........... 0 0 0 0
-------- ------- ------- ------
Net realized gains
(losses)................ (1,432) 92 (1,691) 13
Net change in unrealized
appreciation/depreciation
of investments.......... 865,148 55,542 (4,668) 2,678
-------- ------- ------- ------
Net realized and
unrealized gains
(losses) on investments. 863,716 55,634 (6,359) 2,691
-------- ------- ------- ------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS............... $837,690 $60,389 $(8,487) $2,590
======== ======= ======= ======
</TABLE>
- -----------------------
(a)For the period from May 1, 1995 (date funds became available for investment
to contractholders) to December 31, 1995.
+Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMBER 31, 1995 AND
1994
<TABLE>
<CAPTION>
TOTAL MONEY MARKET FUND+ QUALITY BOND FUND+
------------------------ ----------------------- ----------------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM:
OPERATIONS:
Net investment income
(loss).................. $ 793,618 $ 470,587 $ 122,818 $ 48,591 $ 103,983 $ 77,538
Net realized gain (loss)
from investment
transactions............ 1,203,208 430,622 0 0 949 (104)
Net change in unrealized
appreciation/depreciation
of investments.......... 4,342,387 (1,161,526) 0 0 189,692 (117,432)
Net increase (decrease) in
net assets resulting from
operations............... 6,339,213 (260,317) 122,818 48,591 294,624 (39,998)
----------- ----------- ---------- ----------- ---------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments under
variable life contracts. 17,990,994 20,670,872 7,004,477 12,999,822 503,095 496,373
Cost of insurance........ (3,058,410) (1,847,669) (401,738) (292,428) (145,157) (100,019)
Contract administration
charges................. (915,062) (899,656) (129,945) (134,462) (34,766) (44,090)
Transfer of policy loans. 24,516 (15,657) (2) 0 2,860 (1,020)
Net transfers............ (1,376,067) (459,859) (5,999,373) (11,470,919) 142,961 673,504
Death benefits........... (176,857) 0 (54,766) 0 (4,834) 0
Surrender benefits....... (935,084) (479,837) (105,894) (218,513) (32,492) (14,894)
----------- ----------- ---------- ----------- ---------- ----------
Net increase in net assets
resulting from variable
life activities.......... 11,554,030 16,968,194 312,759 883,500 431,667 1,009,854
----------- ----------- ---------- ----------- ---------- ----------
Total increase in net
assets................... 17,893,243 16,707,877 435,577 932,091 726,291 969,856
NET ASSETS:
Beginning of period...... 24,019,313 7,311,436 1,974,947 1,042,856 1,322,920 353,064
----------- ----------- ---------- ----------- ---------- ----------
END OF PERIOD............ $41,912,556 $24,019,313 $2,410,524 $ 1,974,947 $2,049,211 $1,322,920
=========== =========== ========== =========== ========== ==========
<CAPTION>
HIGH YIELD BOND FUND+ GROWTH EQUITY FUND+ VALUE EQUITY FUND+
------------------------ ----------------------- ----------------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM:
OPERATIONS:
Net investment income
(loss).................. $ 148,448 $ 135,669 $ (7,852) $ 4,917 $ 40,097 $ 25,459
Net realized gain (loss)
from investment
transactions............ 2,597 (1,293) 455,956 42,168 255,729 33,327
Net change in unrealized
appreciation/depreciation
of investments.......... 81,342 (241,232) 157,200 (115,169) 839,097 (43,932)
----------- ----------- ---------- ----------- ---------- ----------
Net increase (decrease) in
net assets resulting from
operations............... 232,387 (106,856) 605,304 (68,084) 1,134,923 14,854
----------- ----------- ---------- ----------- ---------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments under
variable life contracts. 684,579 684,427 1,119,490 896,721 1,299,369 938,549
Cost of insurance........ (163,167) (125,932) (271,382) (167,630) (340,110) (185,484)
Contract administration
charges................. (42,823) (58,616) (85,088) (86,459) (96,570) (90,563)
Transfer of policy loans. 348 (613) 2,744 162 5,502 (1,679)
Net transfers............ (188,912) 539,513 177,895 952,164 662,164 972,181
Death benefits........... (5,578) 0 (12,064) 0 (28,299) 0
Surrender benefits....... (50,935) (16,726) (55,271) (16,620) (63,364) (24,616)
----------- ----------- ---------- ----------- ---------- ----------
Net increase in net assets
resulting from variable
life activities.......... 233,512 1,022,053 876,324 1,578,338 1,438,692 1,608,388
----------- ----------- ---------- ----------- ---------- ----------
Total increase in net
assets................... 465,899 915,197 1,481,628 1,510,254 2,573,615 1,623,242
NET ASSETS:
Beginning of period...... 1,389,701 474,504 1,974,453 464,199 2,422,836 799,594
----------- ----------- ---------- ----------- ---------- ----------
END OF PERIOD............ $ 1,855,600 $ 1,389,701 $3,456,081 $ 1,974,453 $4,996,451 $2,422,836
=========== =========== ========== =========== ========== ==========
</TABLE>
- -----------------------
(a) For the period May 1, 1995 (date funds first became available for
investment to contract holders) to December 31, 1995.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMBER 31, 1995 AND
1994 (CONT'D.)
<TABLE>
<CAPTION>
SMALL
CAPITALIZATION INTERNATIONAL
FLEXIBLY MANAGED FUND+ FUND+ EQUITY FUND+
----------------------- -------------- ---------------------------
1995 1994 1995(A) 1995 1994
----------- ---------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM:
OPERATIONS:
Net investment income
(loss).................. $ 311,647 $ 184,935 $ 435 $ 79,969 $ (418)
Net realized gain (loss)
from investment
transactions............ 471,720 342,547 1,825 4,144 (627)
Net change in unrealized
appreciation/depreciation
of investments.......... 1,314,004 (387,282) 1,601 495,756 (207,249)
----------- ---------- -------- ---------- ----------
Net increase (decrease) in
net assets resulting from
operations............... 2,097,371 140,200 3,861 579,869 (208,294)
----------- ---------- -------- ---------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments under
variable life contracts. 3,407,436 2,169,390 18,031 1,708,561 1,117,070
Cost of insurance........ (861,418) (466,174) (3,810) (370,006) (219,386)
Contract administration
charges................. (255,754) (220,239) (1,451) (133,279) (119,746)
Transfer of policy loans. 6,064 (9,077) 0 1,449 (2,039)
Net transfers............ 1,853,549 4,217,195 72,948 55,362 1,955,296
Death benefits........... (24,559) 0 0 (9,668) 0
Surrender benefits....... (387,157) (115,056) 0 (149,580) (24,531)
----------- ---------- -------- ---------- ----------
Net increase in net assets
resulting from variable
life activities.......... 3,738,161 5,576,039 85,718 1,102,839 2,706,664
----------- ---------- -------- ---------- ----------
Total increase in net
assets................... 5,835,532 5,716,239 89,579 1,682,708 2,498,370
NET ASSETS:
Beginning of period...... 7,900,563 2,184,324 0 3,251,927 753,557
----------- ---------- -------- ---------- ----------
END OF PERIOD............ $13,736,095 $7,900,563 $ 89,579 $4,934,635 $3,251,927
=========== ========== ======== ========== ==========
<CAPTION>
ASSET
TCI EQUITY INCOME GROWTH MANAGER
GROWTH PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
----------------------- -------------- ------------- -------------
1995 1994 1995(A) 1995(A) 1995(A)
----------- ---------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM:
OPERATIONS:
Net investment income
(loss).................. $ (26,026) $ (9,609) $ 4,755 $ (2,128) $ (101)
Net realized gain (loss)
from investment
transactions............ (1,432) (468) 92 (1,691) 13
Net change in unrealized
appreciation/depreciation
of investments.......... 865,148 (3,825) 55,542 (4,668) 2,678
----------- ---------- -------- ---------- ----------
Net increase (decrease) in
net assets resulting from
operations............... 837,690 (13,902) 60,389 (8,487) 2,590
----------- ---------- -------- ---------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments under
variable life contracts. 1,240,823 877,756 108,297 130,927 20,547
Cost of insurance........ (301,409) (185,079) (17,216) (23,352) (1,524)
Contract administration
charges................. (91,567) (100,801) (4,313) (7,293) (932)
Transfer of policy loans. 3,590 150 0 0 0
Net transfers............ 190,878 1,088,359 702,320 882,895 63,892
Death benefits........... (16,221) 0 0 0 0
Surrender benefits....... (61,979) (34,936) (837) (654) 0
----------- ---------- -------- ---------- ----------
Net increase in net assets
resulting from variable
life activities.......... 964,115 1,645,449 788,251 982,523 81,983
----------- ---------- -------- ---------- ----------
Total increase in net
assets................... 1,801,805 1,631,547 848,640 974,036 84,573
NET ASSETS:
Beginning of period...... 2,290,304 658,757 0 0 0
----------- ---------- -------- ---------- ----------
END OF PERIOD............ $ 4,092,109 $2,290,304 $848,640 $ 974,036 $ 84,573
=========== ========== ======== ========== ==========
</TABLE>
- -----------------------
(a) For the period May 1, 1995 (date funds first became available for
investment to contract holders) to December 31, 1995.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED MATURITY
BALANCED PORTFOLIO++ BOND PORTFOLIO++
- --------------------------------- --------------------------------------------------
1995 1994 1995 1994
- ---------- ---------- -------- -------
<S> <C> <C> <C>
$ 13,939 $ 2,370 $ 3,634 $ 1,135
12,814 14,853 492 219
333,686 (43,691) 11,309 (1,714)
- ---------- ---------- -------- -------
360,439 (26,468) 15,435 (360)
- ---------- ---------- -------- -------
717,791 451,615 27,571 39,149
(147,373) (99,100) (10,748) (6,437)
(29,232) (42,593) (2,049) (2,087)
1,967 (1,541) (6) 0
(85,875) 593,696 93,229 19,152
(15,356) 0 (5,512) 0
(26,344) (11,936) (577) (2,009)
- ---------- ---------- -------- -------
415,578 890,141 101,908 47,768
- ---------- ---------- -------- -------
776,017 863,673 117,343 47,408
1,407,368 543,695 84,294 36,886
- ---------- ---------- -------- -------
$2,183,385 $1,407,368 $201,637 $84,294
========== ========== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995
- --------------------------------------------------------------------------------
NOTE 1.
The significant accounting policies of Penn Mutual Variable Life Account
I - Cornerstone VUL subaccounts (Cornerstone) are as follows:
GENERAL - Cornerstone was established by the Penn Mutual Life Insurance
Company (Penn Mutual) under the provisions of the Pennsylvania Insurance
Law. Penn Mutual has structured Cornerstone as a unit investment trust
registered under the Investment Company Act of 1940. Cornerstone offers
units to individual flexible premium variable universal life
contractholders to provide for the accumulation of value and for the
payment of benefits. Net payments are deposited into Cornerstone. Contract
holders allocate and transfer between subaccounts. Contractholders may
borrow up to a specified amount depending on policy value at any time by
submitting a written request for a policy loan. The preparation of the
accompanying financial statements require management to make estimates and
assumptions that affect the reported values of assets and liabilities as of
December 31, 1995 and the reported amounts from operations and contract
transactions during 1995 and 1994. Actual results could differ from those
estimates.
- --------------------------------------------------------------------------------
NOTE 2.
For the years ended December 31, 1995 and 1994 transactions in Cornerstone
were as follows:
<TABLE>
<CAPTION>
HIGH YIELD
MONEY MARKET FUND+ QUALITY BOND FUND+ BOND FUND+
----------------------- ------------------- ---------------------
1995 1994 1995 1994 1995 1994
----------- ----------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased........ 5,622,002 8,177,019 69,557 114,845 86,146 135,448
Shares received from re-
investment of:
Net investment income. 140,992 53,510 11,453 9,263 19,107 17,997
Capital gains
distributions........ 0 0 0 0 0 0
----------- ----------- -------- ---------- --------- ----------
Total shares acquired... 5,762,994 8,230,529 81,010 124,108 105,253 153,445
Shares redeemed......... (5,260,429) (7,325,340) (27,219) (12,409) (60,409) (28,098)
----------- ----------- -------- ---------- --------- ----------
Net increase in shares
owned.................. 502,565 905,189 53,791 111,699 44,844 125,347
Shares owned beginning
of period.............. 1,886,043 980,854 146,349 34,650 175,037 49,690
----------- ----------- -------- ---------- --------- ----------
Shares owned end of pe-
riod................... 2,388,608 1,886,043 200,140 146,349 219,881 175,037
=========== =========== ======== ========== ========= ==========
Cost of shares acquired. $ 5,762,994 $ 8,230,529 $815,295 $1,206,454 $ 907,291 $1,416,849
Proceeds from shares re-
deemed................. $ 5,260,429 $ 7,325,340 $279,490 $ 119,017 $ 525,229 $ 259,068
<CAPTION>
INTERNATIONAL BALANCED LIMITED MATURITY
EQUITY FUND+ PORTFOLIO++ BOND PORTFOLIO++
----------------------- ------------------- ---------------------
1995 1994 1995 1994 1995 1994
----------- ----------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased........ 147,450 210,436 50,074 69,368 10,633 5,190
Shares received from re-
investment of:
Net investment income. 7,735 967 1,908 573 362 105
Capital gains
distributions........ 0 0 613 946 0 16
----------- ----------- -------- ---------- --------- ----------
Total shares acquired... 155,185 211,403 52,595 70,887 10,995 5,311
Shares redeemed......... (64,097) (15,491) (24,959) (8,698) (3,293) (1,820)
----------- ----------- -------- ---------- --------- ----------
Net increase in shares
owned.................. 91,088 195,912 27,636 62,189 7,702 3,491
Shares owned beginning
of period.............. 249,974 54,062 96,999 34,810 6,007 2,516
----------- ----------- -------- ---------- --------- ----------
Shares owned end of pe-
riod................... 341,062 249,974 124,635 96,999 13,709 6,007
=========== =========== ======== ========== ========= ==========
Cost of shares acquired. $2,052,818 $ 2,916,818 $839,523 $1,035,148 $ 152,205 $ 74,539
Proceeds from shares re-
deemed................. $ 869,721 $ 210,399 $400,784 $ 128,280 $ 46,559 $ 25,501
</TABLE>
The cost of shares redeemed is determined on a last-in, first-out basis.
- -----------------------
(a) For the Period of May 1, 1995 (commencement of operations) to December 31,
1995.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
44
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1., CONT'D.
INVESTMENTS - Assets of Cornerstone are invested in shares of Penn Series
Funds, Inc. (Penn Series): Money Market, Quality Bond, High Yield Bond,
Growth Equity, Value Equity, Flexibly Managed, International Equity and
Small Capitalization Funds; Neuberger and Berman Advisers Management Trust
(AMT): Limited Maturity Bond and Balanced Portfolios; TCI Portfolios, Inc.
(TCI): TCI Growth Portfolio; and Fidelity Investments' Variable Insurance
Products (Fidelity): Equity Income, Growth, and Asset Manager Portfolios.
Penn Series, AMT, TCI, and Fidelity are open-end diversified investment
companies. The shares are carried at market value as determined by the
underlying net asset value of the respective funds or portfolios. Dividend
income is recorded on the ex-dividend date. Investment transactions are
accounted for on a trade date basis.
FEDERAL INCOME TAXES - Penn Mutual is taxed under federal law as a life
insurance company. Cornerstone is part of Penn Mutual's total operations
and is not taxed separately. Under existing federal law, no taxes are
payable on investment income and realized gains of Cornerstone.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL
CAPITALIZATION
GROWTH EQUITY FUND+ VALUE EQUITY FUND+ FLEXIBLY MANAGED FUND+ FUND+
- ---------------------- --------------------------- ------------------------ --------------
1995 1994 1995 1994 1995 1994 1995(A)
- ---------- ---------- ------------- ------------- ------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
65,342 96,302 139,924 137,357 281,033 354,608 8,777
692 758 4,328 2,882 22,888 14,343 64
22,793 2,260 15,724 2,709 27,039 22,539 166
- ---------- ---------- ---------- ---------- ---------- ---------- -------
88,827 99,320 159,976 142,948 330,960 391,490 9,007
(23,908) (14,075) (44,273) (14,777) (61,594) (10,484) (833)
- ---------- ---------- ---------- ---------- ---------- ---------- -------
64,919 85,245 115,703 128,171 269,366 381,006 8,174
107,902 22,657 191,236 63,065 520,146 139,140 0
- ---------- ---------- ---------- ---------- ---------- ---------- -------
172,821 107,902 306,939 191,236 789,512 520,146 8,174
========== ========== ========== ========== ========== ========== =======
$1,823,144 $1,888,539 $2,446,800 $1,859,892 $5,585,188 $6,272,280 $96,971
$ 498,609 $ 263,821 $ 711,642 $ 191,657 $1,063,942 $ 168,673 $ 8,976
<CAPTION>
EQUITY ASSET
TCI INCOME GROWTH MANAGER
GROWTH PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
- ---------------------- ------------- ------------- -------------
1995 1994 1995(A) 1995(A) 1995(A)
- ---------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
142,767 190,089 45,655 43,514 6,259
293 12 345 0 0
0 0 0 0 0
- ---------- ---------- ---------- ---------- ----------
143,060 190,101 46,000 43,514 6,259
(52,411) (12,076) (1,956) (10,154) (902)
- ---------- ---------- ---------- ---------- ----------
90,649 178,025 44,044 33,360 5,357
248,701 70,676 0 0 0
- ---------- ---------- ---------- ---------- ----------
339,350 248,701 44,044 33,360 5,357
========== ========== ========== ========== ==========
$1,536,841 $1,746,090 $ 828,141 $1,278,456 $ 95,392
$ 598,536 $ 109,957 $ 35,044 $ 297,973 $ 13,502
</TABLE>
45
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995 (CONT'D.)
- --------------------------------------------------------------------------------
NOTE 3.
Operations are charged for mortality and expense risks assumed by Penn
Mutual as determined daily at a current annual rate of 0.75% (guaranteed
never to exceed 0.90%) of the average value of Cornerstone.
On the date of issue and each monthly anniversary a monthly deduction is
made from the policy value. The monthly deduction consists of (1) insurance
charges (2) administrative charges and (3) any charges for additional
benefits added by supplemental agreement to a policy. See original policy
documents for specific charges assessed.
If a policy is surrendered within the first 11 years in Cornerstone, a
contingent deferred sales charge will be assessed. This charge will be
deducted before any surrender proceeds are paid. See original policy
documents for specific charges assessed.
46
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF TRUSTEES
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA
We have audited the accompanying statements of financial condition of The Penn
Mutual Life Insurance Company as of December 31, 1995 and 1994, and the related
statements of operations and surplus and cash flows for each of the three years
in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of The Penn Mutual Life Insurance
Company as of December 31, 1995 and 1994, and the results of its operations and
cash flows for each of the three years in the period ended December 31, 1995,
in conformity with the accounting principles prescribed or permitted by the
Insurance Department of the Commonwealth of Pennsylvania, which are considered
generally accepted accounting principles for mutual life insurance companies.
As discussed in Note 2 to the financial statements, during 1995, the Company
changed its accounting methods for certain components of the federal income tax
expense and the valuation of reserves of certain annuity products.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 26, 1996
47
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands of dollars)
ASSETS
Bonds............................................ $3,695,516 $3,693,295
Stocks
Preferred....................................... 15,049 31,574
Common--affiliated.............................. 171,193 236,266
--unaffiliated............................... 8,182 1,986
--- ---
Mortgage loans................................... 960,692 950,219
Real estate...................................... 138,329 218,268
Policy loans..................................... 422,865 438,500
Cash and short-term investments.................. 75,962 7,796
Other invested assets 59,561 64,362
---------- ----------
TOTAL........................................... 5,547,349 5,642,266
Investment income due and accrued................ 94,350 101,027
Premiums due and deferred........................ 26,926 28,060
Other assets..................................... 41,082 36,104
Separate account assets 911,683 658,074
---------- ----------
TOTAL ASSETS.................................... $6,621,390 $6,465,531
========== ==========
LIABILITIES
Reserves and funds for payment of future life and
annuity benefits................................ $5,064,298 $5,139,779
Dividends to policyholders payable in the follow-
ing year........................................ 72,653 72,400
Policy claims in process......................... 27,241 39,295
Interest maintenance reserve..................... 36,084 5,355
Asset valuation reserve.......................... 83,157 111,885
Other liabilities................................ 77,063 130,108
Separate account liabilities 905,960 651,388
---------- ----------
TOTAL........................................... 6,266,456 6,150,210
SURPLUS
Special surplus funds............................ 1,576 1,523
Unassigned surplus............................... 353,358 313,798
---------- ----------
TOTAL........................................... 354,934 315,321
---------- ----------
TOTAL LIABILITIES AND SURPLUS.................. $6,621,390 $6,465,531
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND SURPLUS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands of dollars)
INCOME
Premium and annuity considerations............. $ 707,048 $ 768,534 $ 626,374
Net investment income.......................... 456,108 446,354 464,663
Other income................................... (2,238) 13,510 7,887
--------- --------- ---------
TOTAL INCOME.................................. 1,160,918 1,228,398 1,098,924
--------- --------- ---------
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficia-
ries.......................................... 859,798 766,598 839,310
Increase (decrease) in reserves and funds for
the payment of future life and annuity bene-
fits.......................................... (50,775) 54,380 (141,412)
Commissions.................................... 38,044 45,579 38,955
Operating expenses............................. 116,673 124,920 122,806
Net transfers to separate accounts............. 86,944 128,773 124,007
--------- --------- ---------
TOTAL BENEFITS AND EXPENSES................... 1,050,684 1,120,250 983,666
--------- --------- ---------
INCOME FROM OPERATIONS BEFORE DIVIDENDS AND
FEDERAL INCOME TAXES......................... 110,234 108,148 115,258
Dividends to policyholders..................... 70,057 69,098 71,129
--------- --------- ---------
INCOME FROM OPERATIONS BEFORE FEDERAL INCOME
TAXES........................................ 40,177 39,050 44,129
Federal income tax expense (benefit)........... (52,442) 197 (23,717)
--------- --------- ---------
INCOME FROM OPERATIONS........................ 92,619 38,853 67,846
Net realized capital losses, net of taxes...... 91,890 37,399 35,396
--------- --------- ---------
NET INCOME.................................... 729 1,454 32,450
SURPLUS
Change in asset valuation reserve.............. 28,728 29,060 (4,729)
Change in net unrealized capital gains and
losses........................................ 2,395 (3,376) 33,958
Changes in accounting methods.................. 7,984 -- --
Other.......................................... (223) 8,618 760
--------- --------- ---------
TOTAL CONTRIBUTION TO SURPLUS................. 39,613 35,756 62,439
Surplus, Beginning of Year.................... 315,321 279,565 217,126
--------- --------- ---------
SURPLUS, END OF YEAR.......................... $ 354,934 $ 315,321 $ 279,565
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands of dollars)
CASH PROVIDED
Net cash from operations:
Premium and annuity considerations.......... $ 708,301 $ 767,017 $ 629,725
Net investment income....................... 439,508 420,917 456,516
Other income................................ (2,511) 15,704 16,660
---------- ---------- ----------
1,145,298 1,203,638 1,102,901
Benefits to policyholders................... 871,983 750,019 834,700
Commissions................................. 38,139 45,540 38,947
Operating expenses and taxes................ 152,907 96,050 111,224
Net transfers to separate accounts.......... 86,944 129,858 128,299
Dividends to policyholders.................. 69,804 70,246 69,818
Net decrease in policy loans................ (15,202) (22,361) (35,734)
---------- ---------- ----------
NET CASH FROM OPERATIONS.................... (59,277) 134,286 (44,353)
---------- ---------- ----------
Investments sold, matured or repaid:
Bonds....................................... 1,410,126 1,038,593 1,844,108
Stocks...................................... 95,347 197,503 1,042,421
Mortgage loans.............................. 102,394 45,255 112,448
Real estate and other invested assets....... 10,837 12,701 17,057
---------- ---------- ----------
Total investments sold, matured or repaid.. 1,618,704 1,294,052 3,016,034
Taxes on realized investment gains........... 3,253 (17,722) (14,963)
Other cash provided.......................... 4,275 10,035 1,190
---------- ---------- ----------
1,626,232 1,286,365 3,002,261
---------- ---------- ----------
TOTAL CASH PROVIDED......................... 1,566,955 1,420,651 2,957,908
---------- ---------- ----------
CASH APPLIED
Cost of investments acquired:
Bonds....................................... 1,357,008 1,218,880 1,858,996
Stocks...................................... 26,114 131,248 958,060
Mortgage loans.............................. 100,466 71,427 96,435
Real estate and other invested assets....... 8,970 14,909 13,417
---------- ---------- ----------
Total cost of investments acquired......... 1,492,558 1,436,464 2,926,908
Other cash applied........................... 6,231 24,452 27,125
---------- ---------- ----------
TOTAL CASH APPLIED.......................... 1,498,789 1,460,916 2,954,033
---------- ---------- ----------
Net change in cash and short-term invest-
ments....................................... 68,166 (40,265) 3,875
CASH AND SHORT-TERM INVESTMENTS:
Beginning of year........................... 7,796 48,061 44,186
---------- ---------- ----------
END OF YEAR................................. $ 75,962 $ 7,796 $ 48,061
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
The Penn Mutual Life Insurance Company (the "Company"), is a mutual life
insurance company which concentrates primarily in the sale of individual life
insurance and annuity products. The primary products that the Company currently
markets are traditional whole life, yearly renewable term, universal life,
immediate annuities, variable life insurance and variable annuities. The
Company markets its products through a network of career agents, independent
agents, and independent agents, and independent marketing organizations. The
Company sells its products in all fifty states, the District of Columbia and
five Canadian provinces.
BASIS OF PRESENTATION
The financial statements of the Company have been prepared in conformity with
accounting principles prescribed or permitted by the Insurance Department of
the Commonwealth of Pennsylvania, which are considered generally accepted
accounting principles for mutual life insurance companies. Prescribed statutory
accounting principles include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners (NAIC). Permitted statutory accounting
principles encompass all accounting practices that are not prescribed. In
accordance with Pennsylvania Insurance Laws and Regulations, the Company's
subsidiaries are not consolidated for statutory filing purposes. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
In April 1993, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises" (Interpretation No.
40), which was amended by Statement of Financial Accounting Standards (SFAS)
No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises for
Certain Long-Duration Participating Contracts". SFAS No. 120 deferred the
effective date of Interpretation No. 40 to fiscal years beginning after
December 15, 1995. Under Interpretation No. 40, the financial statements of
mutual life insurance companies which are prepared on the basis of statutory
accounting principles can no longer be described as prepared in conformity with
generally accepted accounting principles (GAAP). After 1995, the Company will
continue to issue financial statements prepared in accordance with statutory
accounting principles for regulatory purposes.
When the Company prepares financial statements in conformity with
Interpretation No. 40, the accounting treatment for certain items, such as
policy reserves, new business acquisition costs, asset valuation reserves,
employee benefit liabilities and income taxes will be different than for
financial statements issued in conformity with statutory accounting principles.
In addition, the Company believes surplus presented in accordance with
Interpretation No. 40 will be greater than surplus presented in accordance with
statutory accounting principles.
VALUATION OF INVESTMENTS
Bonds and stocks are carried in the accompanying Statements of Financial
Condition at values prescribed by the NAIC. In general, bonds are stated at
amortized cost, preferred stocks at cost and unaffiliated common stocks at
market value. The Company's subsidiaries are carried on the equity basis with
the net income from subsidiaries recorded in net investment income. Real estate
is carried at cost less encumbrances and accumulated depreciation. Real estate
acquired through foreclosure is recorded at the lower of cost or market value
at the time of foreclosure. Real estate is depreciated using the straight-line
method. Mortgage loans are carried at the unpaid principal amount, less any
unamortized discount. Policy loans are stated at the unpaid principal balance
less amounts unsecured by cash surrender and dividend accumulation values. Cash
and short-term investments include cash on deposit and securities purchased
with a maturity date of less than one year. Short-term investments are valued
at cost, which approximates market. Other invested assets include joint venture
real estate partnerships, which are valued on the equity basis, and venture
capital limited partnerships, which are carried at market value. Certain assets
which are considered to be non-admitted for statutory purposes have been
excluded from the Statement of Financial Condition by a direct charge to
surplus.
Financial instruments utilized to hedge the Company's assets are recorded using
a valuation method consistent with the valuation method of the assets hedged.
Gains and losses on financial futures contracts used as hedges against interest
rate fluctuations are deferred and recognized in the Statements of Operations
over the remaining life of the hedged securities.
51
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Changes in the market value of financial futures contracts used as hedges
against market fluctuations of equity securities are reported as unrealized
gains or losses. They are recognized as realized gains or losses when the
hedged securities are sold.
Statutory accounting principles require insurance companies to hold an Asset
Valuation Reserve (AVR) and an Interest Maintenance Reserve (IMR). The purpose
of the AVR is to maintain consistent and prescribed valuation reserves for
invested assets. Changes in the AVR are recorded directly to surplus. The
purpose of the IMR is to defer recognition of realized gains and losses which
result from interest rate movements and to amortize these gains and losses into
income over the original expected life of the investment sold. Amortization of
gains and losses included in the IMR are reflected as a component of net
investment income.
Realized gains and losses are determined on the specific identification method
and are presented in the Statements of Operations net of taxes and excluding
net gains and losses transferred to the IMR. Unrealized gains and losses are
accounted for as direct increases or decreases in surplus.
RESERVES AND FUNDS FOR THE PAYMENT OF FUTURE LIFE AND ANNUITY BENEFITS
Reserves and funds for the payment of future life and annuity benefits are
developed using actuarial methods based on statutory mortality and interest
requirements. Reserves for life insurance are computed principally on the net
level or modified preliminary term methods using the 1941, 1958 and 1980
Commissioners' Standard Ordinary Mortality and American Experience Tables and
assumed interest rates ranging from 2.25% to 4.5%. Reserves for annuity
contracts are based principally on the 1949, 1971 and 1983 Individual Annuity
Mortality Tables for individual annuities and the 1971 and 1983 Group Annuity
Mortality Tables for group annuities and assumed interest rates ranging from
2.5% to 13.25%. Policy claims in process include provisions for payments to be
made on reported claims and claims incurred but not reported. Any adjustments
that are made to the reserve balances are reflected in the Statements of
Operations in the year in which such adjustments are made, with the exception
of changes in valuation bases which are accounted for as a charge or credit to
surplus.
REVENUE AND RELATED EXPENSE RECOGNITION
Premiums are recognized as income over the premium payment period of the
related policies. Annuity considerations are recognized as income as they are
received. Premium and annuity considerations are recorded net of reinsurance
premiums. Benefits are reported net of the amounts received from reinsurers.
Commissions and other expenses related to the acquisition of new policies are
charged to operations as incurred.
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its insurance
and non-insurance subsidiaries. Each subsidiary's tax liability or refund is
accrued on a separate company basis. The Company reimburses subsidiaries for
losses utilized in the consolidated return based on inter-company tax
allocation agreements. In accordance with statutory accounting practices, no
deferred taxes are provided for temporary differences between pre-tax
accounting income and taxable income.
POLICYHOLDER DIVIDENDS
All insurance policies are participating. A liability for the dividends to be
paid or credited to policyholders during the following calendar year is
established at each year end. The amount of dividends to be paid is approved
annually by the Board of Trustees.
SEPARATE ACCOUNTS
Separate Account assets and liabilities represent segregated funds administered
and invested by the Company primarily for the benefit of variable life
insurance policyholders and annuity and pension contractholders, including
certain of the Company's benefit plans. The value of the assets in the Separate
Accounts reflects the actual investment performance of the respective accounts
and is not guaranteed by the Company. The carrying value for Separate Account
assets and liabilities approximates the estimated fair value of the underlying
assets.
RECLASSIFICATIONS
Certain 1994 and 1993 amounts have been reclassified to conform with the 1995
presentation.
52
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 2 - ACCOUNTING CHANGES:
The sections of the Internal Revenue Code (IRC) applicable to mutual life
insurance companies require that mutual, but not stock, life insurance
companies include the Differential Earnings Amount (DEA) in each year's taxable
income. This amount is computed by multiplying the Company's average taxable
equity base by a rate that represents the difference between stock and mutual
companies' earnings rates. Under the IRC, the enacted DEA rate for the current
year is an Internal Revenue Service (IRS) estimate and is recomputed in the
following year to reflect the actual industry results.
Prior to 1995, the Company recorded its federal income tax expense for the DEA
based on the enacted IRS rates for the current year along with any adjustment
to the DEA related to the recomputation of the prior year's estimate. The
portion of the Company's federal income tax expense associated with the DEA was
recorded directly to surplus.
In 1995, the Company changed its method of accounting for the DEA to record the
tax based on management's best estimate of the final DEA rates. The impact of
this accounting change resulting in a $16,723 direct charge to surplus in 1995.
In addition, in 1995 the Company began recording the portion of its federal
income tax expense associated with the DEA in the Statement of Operations.
During 1995, the Company changed the reserve valuation bases for certain of its
annuity products. These changes resulted in the release of $24,707 of
policyholder reserves and a corresponding credit directly to surplus.
NOTE 3 - INVESTMENTS
DEBT SECURITIES
The following summarizes the statement value and estimated fair value of the
Company's investment in debt securities, including redeemable preferred stocks,
as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
United States Government........... $ 63,477 $ 1,875 $ -- $ 65,352
Other governmental units........... 103,090 2,893 -- 105,983
Public utility..................... 509,120 51,946 347 560,719
Industrial and other............... 2,184,414 197,075 13,208 2,368,281
Mortgage and other asset-backed se-
curities.......................... 835,415 32,504 3,951 863,968
---------- -------- -------- ----------
3,695,516 286,293 17,506 3,964,303
Redeemable preferred stocks........ 3,964 -- 237 3,727
---------- -------- -------- ----------
TOTAL............................. $3,699,480 $286,293 $ 17,743 $3,968,030
========== ======== ======== ==========
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
United States Government........... $ 10,216 $ -- $ 289 $ 9,927
Other governmental units........... 162,618 129 8,761 153,986
Public utility..................... 667,737 5,891 37,122 636,506
Industrial and other............... 2,248,385 34,377 86,461 2,196,301
Mortgage and other asset-backed se-
curities.......................... 604,339 3,797 48,812 559,324
---------- -------- -------- ----------
3,693,295 44,194 181,445 3,556,044
Redeemable preferred stocks........ 4,378 25 211 4,192
---------- -------- -------- ----------
TOTAL............................. $3,697,673 $ 44,219 $181,656 $3,560,236
========== ======== ======== ==========
</TABLE>
53
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following summarizes the statement value and estimated fair value of debt
securities as of December 31, 1995, by contractual maturity.
<TABLE>
<CAPTION>
STATEMENT ESTIMATED
VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Maturity:
Within one year......................................... $ 102,028 $ 103,261
After one year through five years....................... 654,102 676,888
After five years through ten years...................... 265,388 283,297
After ten years through twenty years.................... 413,267 471,355
After twenty years...................................... 1,425,316 1,565,534
Mortgage and other asset-backed securities.............. 835,415 863,968
---------- ----------
3,695,516 3,964,303
Redeemable preferred stocks............................. 3,964 3,727
---------- ----------
TOTAL.................................................. $3,699,480 $3,968,030
========== ==========
</TABLE>
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.
During 1995, 1994 and 1993, proceeds from dispositions of investments in debt
securities amounted to $1,410,126, $1,038,593, and $1,844,108, respectively.
The gross gains realized on those dispositions were $57,295, $5,876 and
$37,797, and the gross losses realized on those dispositions were $10,069,
$27,348 and $15,935 during 1995, 1994 and 1993, respectively. Net realized
gains, net of taxes, transferred to the IMR in 1995 were $32,211. Net realized
losses, net of taxes, transferred to the IMR in 1994 were $14,089. Net realized
gains, net of taxes, transferred to the IMR, in 1993 were $11,144. Amortization
of the IMR included in net investment income amounted to $1,482, $1,056 and
$964 in 1995, 1994 and 1993, respectively.
The Company's investment portfolio of debt securities is comprised
predominantly of investment grade securities. As of December 31, 1995 and 1994,
debt securities totaling $100,013 and $125,737, respectively, were classified
by the NAIC as less than investment grade. The Company did not hold any debt
securities which were non-income producing for the preceding twelve months as
of December 31, 1995. The statement value of debt securities which were non-
income producing for the preceding twelve months was $900 as of December 31,
1994.
MORTGAGE LOANS
The following summarizes the statement value of mortgage loans, by property
type and geographic concentration, as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
PROPERTY TYPE
Office buildings.............................................. $296,976 $300,156
Retail........................................................ 230,902 263,178
Dwellings..................................................... 223,192 219,860
Other......................................................... 209,622 167,025
-------- --------
TOTAL........................................................ $960,692 $950,219
======== ========
GEOGRAPHIC CONCENTRATION
Northeast..................................................... $328,397 $373,627
Midwest....................................................... 358,203 299,239
South......................................................... 132,382 136,416
West.......................................................... 139,979 138,793
Canada........................................................ 1,731 2,144
-------- --------
TOTAL........................................................ $960,692 $950,219
======== ========
</TABLE>
The Company originates commercial mortgage loans through a network of
commercial mortgage bankers throughout the country. All mortgage loans are
collateralized by the underlying real estate and insurance is required on all
properties up to
54
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
their replacement values. The maximum and minimum lending rates for mortgage
loans originated during 1995 were 10.05% and 7.50%, respectively. For loans
originated during 1995, the maximum percentage of any one loan to the value of
the collateral at the time of the loan, exclusive of insured, guaranteed and
purchase money mortgages, was 75%. The Company controls credit risk through
credit approvals, limits and monitoring procedures. The Company's investments
included $27,295 and $21,684 of mortgage loans delinquent over 90 days,
including $8,033 and $14,889 of mortgage loans which were non-income producing
for the preceding twelve months as of December 31, 1995 and 1994, respectively.
The mortgage loan portfolio includes $19,928 and $27,405 of restructured
mortgage loans as of December 31, 1995 and 1994, respectively. Restructured
mortgage loans include commercial loans for which the basic terms, such as
interest rate, amortization, maturity date, or collateral have been changed as
a result of actual or anticipated delinquency. Restructures do not include
mortgages refinanced prior to or upon maturity at or above current market
terms.
REAL ESTATE
As of December 31, 1995 and 1994, accumulated depreciation on real estate
amounted to $43,069 and $33,580, respectively. Depreciation expense on real
estate totaled $10,019, $8,445 and $10,824 for the years ended December 31,
1995, 1994 and 1993, respectively. The Company's investments include $27,944
and $21,889 of foreclosed real estate as of December 31, 1995 and 1994,
respectively. The Statement value of the Company's largest real estate
investment amounted to $54,858 and $130,756 as of December 31, 1995 and 1994,
respectively. During 1995, the Company wrote down the statement value of this
property by $76,500 to its current estimated fair value. This write down
reflects the Company's determination that the value of the property was
permanently impaired due in part to the notification by the major tenant that
it did not intend to exercise lease extension options. In addition, the Company
no longer intends to hold this property as a long-term investment. The write
down has been recognized as a realized loss in the Statement of Operations.
NOTE 4 - RESERVES AND FUNDS FOR PAYMENT OF FUTURE LIFE AND ANNUITY BENEFITS:
The following summarizes the withdrawal characteristics of the Company's
reserves and deposit funds as of December 31, 1995.
<TABLE>
<CAPTION>
STATEMENT
VALUE
-----------
<S> <C>
Total policyholders' reserves and funds including separate account
liabilities...................................................... $ 5,970,258
Amounts not subject to discretionary withdrawal................... (1,242,000)
-----------
AMOUNTS SUBJECT TO DISCRETIONARY WITHDRAWAL...................... $ 4,728,258
===========
</TABLE>
Of the total reserves and deposit funds which are subject to discretionary
withdrawal, $1,927,100, which is net of applicable policy loans, may be
withdrawn without the policyholder incurring surrender charges or market value
adjustments to the funds.
55
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISK:
The following table summarizes the statement value and estimated fair value of
the Company's financial instruments as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
--------------------- ---------------------
STATEMENT ESTIMATED STATEMENT ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities
Bonds............................. $3,695,516 $3,964,303 $3,693,295 $3,556,044
Redeemable preferred stocks....... 3,964 3,727 4,378 4,192
Equity securities
Common stock--unaffiliated........ 8,182 8,182 1,986 1,986
Non-redeemable preferred stocks... 11,085 13,607 27,196 27,498
Mortgage loans
Commercial........................ 958,079 1,000,003 946,031 917,062
Residential....................... 2,613 2,930 4,188 4,562
Policy loans....................... 422,865 405,721 438,500 417,121
Venture capital limited partner-
ships............................. 30,325 30,325 36,305 36,305
Separate account assets............ 911,683 911,683 658,074 658,704
FINANCIAL LIABILITIES:
Investment-type contracts
Individual annuities.............. $1,248,138 $1,287,644 $1,186,097 $1,203,684
Guaranteed investment contracts... 222,991 226,255 408,479 409,470
Other group annuities............. 216,686 219,857 222,863 221,696
Dividends to policyholders payable
in the following year............. 72,653 72,653 72,400 72,400
Separate account liabilities....... 905,960 905,960 651,388 651,388
</TABLE>
The estimated fair values for the Company's investments in debt and equity
securities are based on quoted market prices, where available. In situations
where market prices are not readily available, primarily private placements,
fair values are estimated using a formula pricing method based on fair values
of securities with similar characteristics. The fair value of currently
performing mortgage loans is estimated by discounting the cash flows associated
with the investment, using an interest rate currently offered for similar loans
to borrowers with similar credit ratings. Loans with similar credit quality,
characteristics and time to maturity are aggregated for purposes of estimating
fair value. Assumptions regarding credit risk, cash flows and discount rates
are determined using the available market and borrower-specific information.
The estimated fair value for non-performing loans is based on the estimated
fair value of the underlying real estate, which is based on recent appraisals
or other estimation techniques. The estimated fair value of policy loans is
calculated by discounting estimated future cash flows using interest rates
currently being offered for similar loans. Loans with similar characteristics
are aggregated for purposes of estimating fair value. The statement of values
of cash and short-term investments and separate account assets approximate
their fair values. The estimated fair value for venture capital limited
partnerships is based on values determined by the partnerships' managing
general partners. The resulting estimated fair values may not be indicative of
the value negotiated in an actual sale.
The fair values of the Company's liabilities for individual annuities,
guaranteed investment contracts and other group annuities are estimated by
discounting the cash flows associated with the contracts, using an interest
rate currently offered for similar contracts with maturities similar to those
remaining for the contracts being valued. The statement value for certain of
the other group annuities, totaling $43,490 and $42,472 as of December 31, 1995
and 1994, respectively, approximates the fair value due to the nature of the
contracts. The statement values of dividends to policyholders payable in the
following year and separate account liabilities approximate their fair values.
Currently, disclosure of estimated fair values is not required for all of the
Company's assets and liabilities. Therefore, presentation of the estimated fair
value of a significant portion of assets without a corresponding valuation of
liabilities associated with insurance contracts can be misinterpreted. The
continuing management of the relationship between the maturities of the
Company's investments and the amounts due under insurance contracts reduces the
Company's exposure to changing interest rates.
56
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The Company is exposed to interest risk on its interest sensitive products. The
Company's investment strategy is designed to minimize interest risk by managing
the durations and anticipated cash flows of the Company's assets and
liabilities.
To minimize exposure and reduce risk from exchange and interest rate
fluctuations in the normal course of business, the Company is party to
financial instruments with off-balance-sheet risk. As of December 31, 1995 and
1994, the Company had interest rate swaps with aggregate notional amounts equal
to $115,000 with average unexpired terms of 39 and 51 months, respectively.
Interest rate swap agreements involve the exchange of fixed and floating rate
interest payment obligations without an exchange of the underlying notional
principal amounts. During the term of the swap, the net settlement amount is
accrued as an adjustment to interest income. If the counterparty defaults, the
Company is exposed only to the loss of the interest rate differential. If the
positions were closed as of December 31, 1995 and 1994, the Company would have
recognized gains of $12,880 and $4,479, respectively. The fair value for
interest rate swaps and futures contracts are based on dealers' quotes and
represent the estimated amounts the Company would receive to terminate the
contracts taking into account current interest rates and the creditworthiness
of the counterparties, where appropriate.
In the normal course of business, the Company loans securities under
arrangements in which collateral is obtained in amounts greater than the
current market value of loaned securities. This collateral is held in the form
of cash, cash equivalents or securities issued or guaranteed by the United
States Government. The Company is at risk to the extent the value of loaned
securities exceeds the value of the collateral obtained. The Company controls
this risk by requiring collateral of the highest quality and requiring that
additional collateral be deposited when the market value of loaned securities
increases in relation to the collateral held or the value of the collateral
decreases in relation to the value of the loaned securities. The Company had no
loaned securities outstanding as of December 31, 1995 and 1994.
NOTE 6 - BENEFIT PLANS:
The Company maintains both qualified and non-qualified defined benefit plans as
well as qualified defined contribution plans covering substantially all of its
employees and full-time agents. The total pension expense related to these
plans, including amounts allocated to the Company's subsidiaries, amounted to
$8,848, $7,757 and $11,591 in 1995, 1994 and 1993, respectively.
DEFINED BENEFIT PLANS
The Company's expense and funding policy for the qualified defined benefit plan
is to contribute an amount between the minimum required contribution and the
maximum deductible amount in accordance with the Internal Revenue Code. The
benefits for the plan are based on years of service and the employee's
compensation prior to termination of employment.
The following summarizes the accumulated plan benefits, calculated using the
projected unit credit method and plan net assets for the Company's qualified
defined benefit plan as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested........................................................ $29,744 $21,105
Non-vested.................................................... 763 526
------- -------
TOTAL........................................................ $30,507 $21,631
======= =======
Net assets available for plan benefits......................... $34,067 $27,029
======= =======
</TABLE>
The actuarial present value of accumulated plan benefits was determined using a
7.0% and an 8.75% assumed discount rate for December 31, 1995 and 1994,
respectively.
The Company also sponsors defined benefit plans for certain employees in excess
of limits for qualified retirement plans. Pension assets are maintained in the
Company's general account. As of December 31, 1995, the plans' total
accumulated benefit obligation, determined in accordance with SFAS No. 87 and
based on a 7% assumed discount rate amounted to $17,609. As of December 31,
1994, the plans' total accumulated benefit obligation, determined in accordance
with SFAS No. 87 and based on an 8.75% assumed discount rate amounted to
$13,690. The additional obligation for future salary increases was $2,539 and
$2,363 as of December 31, 1995 and 1994, respectively.
57
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
DEFINED CONTRIBUTION PLANS
Defined contribution plan benefits are based on the participant's account
balance. Designated contributions of up to 8% of each employee's annual
compensation are eligible to be matched by the Company. As of December 31, 1995
and 1994, the estimated fair value of the defined contribution plans' assets
was $126,378 and $116,698, respectively.
POSTRETIREMENT BENEFITS
The Company also provides certain health care and life insurance benefits
(postretirement benefits) for retired employees. Substantially all employees
become eligible for these benefits if they reach retirement age eligibility
while working for the Company.
In 1993, the Company changed its method of accounting for the costs of these
postretirement benefits to an accrual method and elected to amortize the
transition obligation of $33,744 over 20 years. As of December 31, 1995 and
1994, the unamortized transition obligation was $28,683 and $30,370,
respectively.
Postretirement benefit expense for the year ended December 31, 1995, 1994 and
1993 was $4,426, $4,346, and $4,366 respectively, which includes the expected
cost of postretirement benefits for newly eligible or vested employees,
interest cost, service cost, and amortization of the transition obligation. The
interest cost and service cost were $2,471 and $268, respectively, for the year
ended December 31, 1995. The interest and cost and service cost were $2,366 and
$293, respectively, for the year ended December 31, 1994. The interest cost was
$2,679 for the year ended December 31, 1993. The Company made contributions to
the plans of $2,629, $2,438 and $2,594 in 1995, 1994 and 1993, respectively, as
claims were incurred.
As of December 31, 1995 and 1994, the unfunded postretirement benefit
obligation for retirees and other full, eligible or vested plan participants
was $36,150 and $32,678, respectively. For December 31, 1995 the discount rate
used in determining the accumulated postretirement benefit obligation was 7.0%,
and the health care cost trend rate was 9.0%, graded to 5.0% over 9 years. For
December 31, 1994, the discount rate used in determining the accumulated
postretirement benefit obligation was 8.75%, and the health care cost trend
rate was 9.5%, graded to 5.0% over 10 years.
The health care cost trend rate assumption has a significant effect on the
amount reported. To illustrate, increasing the assumed health care cost trend
rate by one percentage point in each year would increase the postretirement
benefit obligation as of January 1, 1995 by $2,974 and the estimated
eligibility cost and interest cost components of net periodic postretirement
benefit cost for the year ended December 31, 1995 by $186.
NOTE 7 - FEDERAL INCOME TAXES:
The provision for federal income taxes is computed in accordance with the
sections of the Internal Revenue Code applicable to mutual life insurance
companies.
The taxable income reflected in the Company's federal tax return differs from
statutory income as reflected in the accompanying Statements of Operations.
Significant differences relate to the DEA, treatment of policy acquisition
costs, differences in policy reserve valuation methods, and settled tax issues.
The IRS has examined the Company's income tax returns through the year 1987 and
is currently examining years 1988 through 1990. Management believes that an
adequate provision has been made for potential assessments.
In 1995, the Company settled various tax issues with the IRS, including an
issue surrounding the tax treatment of certain traditional life insurance
policy updates. As a result of these settlements, the 1995 federal income tax
expense was decreased in the Statement of Operations by approximately $57,000.
During 1993, the Company resolved a tax issue related to reserves held on its
universal life insurance contracts. As a result, previously recorded provisions
of $32,500 were reduced and recorded in the Statement of Operations as a
reduction to federal income tax expense in 1993.
58
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 8 - REINSURANCE:
The Company has assumed and ceded reinsurance on certain life and annuity
contracts under various agreements. The Company remains primarily liable as the
direct insurer on all risks reinsured, and performs due diligence to ensure
that amounts due from reinsurers are collectable. The table below includes the
reinsurance amounts recorded in the accompanying financial statements, which
are presented net of reinsurance activity.
<TABLE>
<CAPTION>
ASSUMED CEDED TO
GROSS FROM OTHER OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995:
Life Insurance in-force.......... $26,290,414 $7,668,076 $4,982,235 $28,976,255
Premium and annuity considera-
tions........................... 720,794 19,762 33,508 707,048
Reserves and funds for payment of
future life and annuity bene-
fits............................ 5,364,721 3,937 304,360 5,064,298
DECEMBER 31, 1994:
Life Insurance in-force.......... $26,226,662 $7,668,048 $5,067,815 $28,826,895
Premium and annuity considera-
tions........................... 769,448 40,418 41,332 768,534
Reserves and funds for payment of
future life and annuity bene-
fits............................ 5,439,027 19,533 318,781 5,139,779
</TABLE>
During 1993, the Company had gross premiums of $634,003, assumed premiums of
$36,623 and ceded premiums of $40,497.
Under reinsurance agreements with The Penn Insurance and Annuity Company (PIA),
a wholly-owned subsidiary, the Company has assumed and ceded certain risks. As
a result of these reinsurance agreements with PIA, net life insurance in-force
ceded to PIA totaled $342,694 and $368,473 as of December 31, 1995 and 1994,
respectively. The Company reduced its reserves by $242,691 and $226,751 as of
December 31, 1995 and 1994, respectively. Net premium and annuity
considerations ceded to PIA in 1995 were $11,056, which includes an experience
refund of $2,257. Net premium and annuity considerations assumed from PIA in
1994 and 1993 were $10,069 and $5,288, respectively.
During 1995, PIA recaptured its single premium immediate annuity business which
it had previously ceded entirely to the Company. The transaction resulted in
the transfer of approximately $31,000 of invested assets and policyholder
liabilities from the Company to PIA.
During 1995, the Company recaptured the portion of its disability income
business that was previously reinsured under a quota share and excess
reinsurance agreement with the Monarch Life Insurance Company ("Monarch"). As a
result of this recapture, approximately $21,200 of cash and policyholder
reserves were transferred to the Company from Monarch.
NOTE 9 - RELATED PARTIES:
The following summarizes the statement value of the Company's unconsolidated
subsidiaries and affiliates as of December 31, 1995 and 1994. As of December
31, 1995, the Company owned 100% of the common stock of these subsidiaries
(except as noted below).
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Independence Square Properties, Inc. ........................ $ 88,607 $ 69,544
PIA.......................................................... 65,601 56,523
Penn CMO Corp. (0%).......................................... -- 39,315
Independence Capital Group of Funds:
Total Return Bond (0%)...................................... -- 19,231
Total Return Growth (0%).................................... -- 18,670
Opportunities (0%).......................................... -- 15,712
Other affiliates............................................. 16,985 17,271
-------- --------
TOTAL...................................................... $171,193 $236,266
======== ========
</TABLE>
59
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The Company's unconsolidated subsidiaries had combined assets of $1,373,745 and
$1,306,729, and combined liabilities of $1,202,552 and $1,070,463 as of
December 31, 1995 and 1994, respectively. The Company recorded earnings from
these subsidiaries of $23,642, $24,311 and $16,833 for the years ended December
31, 1995, 1994 and 1993, respectively.
As of December 31, 1995 and 1994, bonds include notes receivable from
subsidiaries of $31,130 and $37,035, respectively. Investment income on notes
receivable from subsidiaries amounted to $3,118, $2,527 and $2,805 for 1995,
1994 and 1993, respectively.
During 1995, Penn CMO Corp. (Penn CMO), a wholly-owned subsidiary of the
Company, which had debt obligations outstanding that were collateralized by
mortgages owned by Penn CMO, was dissolved. Sufficient funds were collected
from these mortgages to satisfy the outstanding principal on the debt
obligations and the remaining assets of $40,395 were transferred to the Company
as a return of capital. As of December 31, 1994, Penn CMO had $24,887 of debt
obligations outstanding, which were collateralized by mortgages of $62,661.
Pursuant to a service agreement with Penn CMO, the Company was obligated to
advance delinquent payments of principal and interest on the mortgages and to
purchase or substitute other mortgages in place of delinquent and defective
mortgages. The Company purchased $5,878 and $2,761 of mortgages during 1995 and
1994, respectively. No substitutions were made under this agreement in 1995 and
1994.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries are respondents in a number of proceedings,
some of which involve extra-contractual damage in addition to other damages. In
addition, insurance companies are subject to assessments, up to statutory
limits, by state guaranty funds for losses of policyholders of insolvent
insurance companies. In the opinion of management, the outcome of the
proceedings and assessments are not likely to have a material adverse effect on
the financial position of the Company.
The Company has undertaken to its wholly-owned subsidiary, PIA, to provide
sufficient financial support so that PIA will have adequate capital and surplus
as required by applicable laws to meet its obligations to its policyholders
under the terms of PIA's policies and contracts.
The Company, in the ordinary course of business, extends commitments relating
to its investment activities. As of December 31, 1995, the Company had
outstanding commitments totaling $8,725 relating to these investment
activities. The fair value of these commitments approximates the face amount.
As of December 31, 1995, unused lines of credit available to the Company
amounted to $40,000.
60
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
- --------------------------------------------------------------------------------
MINIMUM INITIAL PREMIUMS
The following table shows for Insureds of varying ages, the minimum initial
premium for a Policy with the Basic Death Benefit indicated. The table assumes
the Insured will be placed in a nonsmoker class and that no supplemental
benefits will be added to the base Policy.
<TABLE>
<CAPTION>
BASIC MINIMUM BASE
ISSUE AGE SEX OF DEATH INITIAL MONTHLY
OF INSURED INSURED BENEFIT PREMIUM PREMIUM
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
25 M $ 50,000 $ 48.00 $ 24.00
--------------------------------------------------------------------------------------------
30 F $ 75,000 $ 76.40 $ 38.20
--------------------------------------------------------------------------------------------
35 M $ 75,000 $108.40 $ 54.20
--------------------------------------------------------------------------------------------
40 F $100,000 $155.00 $ 77.50
--------------------------------------------------------------------------------------------
45 M $100,000 $227.86 $113.93
--------------------------------------------------------------------------------------------
50 F $100,000 $242.52 $121.26
--------------------------------------------------------------------------------------------
55 M $100,000 $376.16 $188.08
--------------------------------------------------------------------------------------------
60 F $ 75,000 $297.76 $148.88
--------------------------------------------------------------------------------------------
65 M $ 75,000 $491.62 $245.81
--------------------------------------------------------------------------------------------
70 F $ 50,000 $352.78 $176.39
--------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
ADMINISTRATIVE SURRENDER CHARGES PER $1,000
<TABLE>
<CAPTION>
ATTAINED AGE OF INSURED CHARGE PER EACH $1,000 OF
ON SURRENDER DATE INITIAL SPECIFIED AMOUNT
-----------------------------------------------------------------------------
<S> <C>
0-9 $1.00
-----------------------------------------------------------------------------
10-19 $2.00
-----------------------------------------------------------------------------
20-29 $3.00
-----------------------------------------------------------------------------
30-39 $4.00
-----------------------------------------------------------------------------
40-49 $5.00
-----------------------------------------------------------------------------
50-59 $6.00
-----------------------------------------------------------------------------
60-over $7.00
-----------------------------------------------------------------------------
</TABLE>
B-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX C
- --------------------------------------------------------------------------------
APPLICABLE PERCENTAGES
<TABLE>
<CAPTION>
ATTAINED AGE PERCENTAGE
-----------------------
<S> <C>
0-40 250
-----------------------
41 243
-----------------------
42 236
-----------------------
43 229
-----------------------
44 222
-----------------------
45 215
-----------------------
46 209
-----------------------
47 203
-----------------------
48 197
-----------------------
49 191
-----------------------
50 185
-----------------------
51 178
-----------------------
52 171
-----------------------
53 164
-----------------------
54 157
-----------------------
55 150
-----------------------
56 146
-----------------------
57 142
-----------------------
58 138
-----------------------
59 134
-----------------------
60 130
-----------------------
</TABLE>
<TABLE>
<CAPTION>
ATTAINED AGE PERCENTAGE
<S> <C>
61 128
62 126
63 124
64 122
65 120
66 119
67 118
68 117
69 116
70 115
71 113
72 111
73 109
74 107
75-90 105
91 104
92 103
93 102
94 101
95 100
</TABLE>
C-1
<PAGE>
PROSPECTUS -- MAY 1, 1996
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE POLICIES
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
THE PENN MUTUAL LIFE INSURANCE COMPANY
INDEPENDENCE SQUARE, PHILADELPHIA, PA 19172 . TELEPHONE (215) 956-8000
- --------------------------------------------------------------------------------
This prospectus describes an individual flexible premium variable universal
life insurance policy (the "Policy" or "Policies") offered by The Penn Mutual
Life Insurance Company ("Penn Mutual"). The Policy is designed to provide
lifetime insurance protection on the Insured named in the Policy and at the
same time provide flexibility to vary the amount and timing of premiums and to
change the amount of death benefits payable under the Policy. This flexibility
allows you to provide for changing insurance needs under a single insurance
policy.
You have the opportunity to allocate net premiums and Policy Value to one or
more subaccounts of the Penn Mutual Variable Life Account I (the "Separate
Account") and Penn Mutual's general account (the "Fixed Account"), within
limits. The assets of each subaccount are invested in a corresponding fund
(each, a "Fund," and together, the "Funds") of Penn Series Funds, Inc. ("Penn
Series"), Neuberger & Berman Advisers Management Trust ("AMT"), TCI Portfolios,
Inc. ("TCI Portfolios"), Variable Insurance Products Fund ("VIP Fund") or
Variable Insurance Products Fund II ("VIP Fund II"). Each Fund is managed by
the investment adviser shown below:
<TABLE>
<CAPTION>
FUNDS MANAGERS
- -------------------------------------------------------------------------------
PENN SERIES
<S> <C>
Growth Equity Fund Independence Capital Management, Inc.
(a subsidiary of Penn Mutual)
Value Equity Fund OpCap Advisors (a subsidiary of Oppenheimer Capital)
Small Capitalization OpCap Advisors
Fund
Flexibly Managed Fund T. Rowe Price Associates, Inc.
International Equity Vontobel USA Inc.
Fund
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Money Market Fund Independence Capital Management, Inc.
- -------------------------------------------------------------------------------
AMT
Limited Maturity Bond Neuberger & Berman Management, Inc.
Portfolio
Balanced Portfolio Neuberger & Berman Management, Inc.
- -------------------------------------------------------------------------------
TCI PORTFOLIOS
TCI Growth Portfolio Investors Research Corporation
(a subsidiary of the Twentieth Century Companies, Inc.)
- -------------------------------------------------------------------------------
VIP FUND
Equity-Income Portfo- Fidelity Management & Research Company
lio
Growth Portfolio Fidelity Management & Research Company
- -------------------------------------------------------------------------------
VIP FUND II
Asset Manager Portfo- Fidelity Management & Research Company
lio
- -------------------------------------------------------------------------------
</TABLE>
The accompanying prospectuses for the Funds describe the Funds, including the
risks of investing in the Funds, and provide other information on the Funds.
This prospectus generally describes only those features of the Policy related
to the Separate Account. For a brief summary of the Fixed Account, see "The
Fixed Account," page 14.
You can select from two death benefit options available under the Policy: a
level death benefit ("Specified Amount" or "Option 1") and an increasing death
benefit ("Specified Amount Plus Policy Value" or "Option 2"). Penn Mutual
guarantees that the death benefit will never be less than the Specified Amount
(less any unrepaid policy loans and past due charges) so long as the Policy is
in force.
The Policy provides for a net cash surrender value that can be obtained by
surrendering the Policy. Because this value is based on the performance of the
Funds, to the extent of allocations to the Separate Account, there is no
guaranteed net cash surrender value. If the net cash surrender value is
insufficient to cover the charges due under the Policy, the Policy will lapse
without value. However, Penn Mutual guarantees to keep the Policy in force
during the first three policy years so long as the No-Lapse Premium requirement
and other conditions have been met. The Policy also provides for policy loans
and permits partial surrenders within limits.
It may not be advantageous to replace existing insurance with the Policy.
Within certain limits, you may return the Policy or convert it to a life
insurance policy with benefits that do not vary with the investment results of
a separate account.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION YOU SHOULD KNOW BEFORE
DECIDING TO PURCHASE A POLICY. IT SHOULD BE RETAINED FOR FUTURE REFERENCE. THIS
PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR EACH
FUND. THE FUND PROSPECTUSES SHOULD BE READ IN CONJUNCTION WITH THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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PROSPECTUS CONTENTS
<TABLE>
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<S> <C>
DEFINITIONS OF TERMS...................................................... 4
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SUMMARY AND DIAGRAM OF THE POLICY......................................... 5
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GENERAL INFORMATION ABOUT PENN MUTUAL, THE SEPARATE ACCOUNT AND THE FUNDS. 8
The Penn Mutual Life Insurance Company.................................. 8
Penn Mutual Variable Life Account I..................................... 8
The Funds............................................................... 8
Substitution of Securities.............................................. 10
Voting Rights........................................................... 10
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PREMIUMS AND ALLOCATIONS.................................................. 11
Applying for a Policy................................................... 11
Free Look Right to Cancel Policy........................................ 11
Premiums................................................................ 11
Premiums to Prevent Lapse............................................... 12
Net Premium Allocations................................................. 12
Crediting Premiums...................................................... 12
Transfers............................................................... 13
Dollar Cost Averaging Program........................................... 13
Asset Rebalancing....................................................... 13
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FIXED ACCOUNT............................................................. 14
Fixed Account........................................................... 14
Interest Credited on Policy Value in the Fixed Account.................. 14
Calculating Fixed Account Value......................................... 15
Deductions, Surrenders and Transfers from the Fixed Account............. 15
Payments from the Fixed Account......................................... 15
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CHARGES AND DEDUCTIONS.................................................... 15
Premium Charge.......................................................... 15
Daily Mortality and Expense Risk Charge................................. 15
Monthly Deduction....................................................... 16
Transfer Charge......................................................... 17
Surrender Charges....................................................... 17
Partial Surrender Charge................................................ 18
Fund Expenses........................................................... 19
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HOW YOUR POLICY VALUES VARY............................................... 19
Determining the Policy Value............................................ 19
Net Policy Value........................................................ 19
Cash Surrender Value.................................................... 20
Net Cash Surrender Value................................................ 20
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DEATH BENEFIT AND CHANGES IN SPECIFIED AMOUNT............................. 20
Amount of Death Benefit................................................. 20
Basic Death Benefit and Specified Amount Options........................ 20
Initial Specified Amount and Option..................................... 20
Changes in Specified Amount Option...................................... 21
Changes in Specified Amount............................................. 21
Selecting and Changing the Beneficiary.................................. 21
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CASH BENEFITS............................................................. 21
Policy Loans............................................................ 21
Surrendering the Policy for Net Cash Surrender Val ue................... 22
Partial Surrenders...................................................... 22
Maturity Benefit........................................................ 23
Payment Options......................................................... 23
</TABLE>
2
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<TABLE>
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<S> <C>
ILLUSTRATIONS OF POLICY VALUES, NET CASH SURRENDER VALUES, DEATH BENEFITS
AND ACCUMULATED PREMIUMS.................................................. 23
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OTHER POLICY BENEFITS AND PROVISIONS...................................... 28
Right to Convert to a Fixed Benefit Policy.............................. 28
Dividends............................................................... 28
Limits on Our Rights to Contest the Policy.............................. 28
Changes in the Policy or Benefits....................................... 28
When Proceeds Are Paid.................................................. 28
Reports to Policy Owners................................................ 28
Assignment.............................................................. 29
Reinstatement........................................................... 29
Supplemental Benefits................................................... 29
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TAX CONSIDERATIONS........................................................ 30
Introduction............................................................ 30
Tax Status of the Policy................................................ 30
Tax Treatment of Policy Benefits........................................ 31
Possible Charge for Penn Mutual's Taxes................................. 32
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OTHER INFORMATION ABOUT THE POLICIES AND PENN MUTUAL...................... 32
Sale of the Policies.................................................... 32
Penn Mutual Trustees and Officers....................................... 33
State Regulation........................................................ 34
Additional Information.................................................. 34
Experts................................................................. 35
Litigation.............................................................. 35
Legal Matters........................................................... 35
Financial Statements.................................................... 35
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APPENDICES
A--Sample Minimum Initial Premiums...................................... A-1
B--Sample Maximum Surrender Charge Premiums Per $1,000 of Initial Speci-
fied Amount............................................................ B-1
C--Administrative Surrender Charges Per $1,000.......................... C-1
D--Applicable Percentages............................................... D-1
</TABLE>
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THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND THE PROSPECTUSES OF THE FUNDS OR THEIR RESPECTIVE
STATEMENTS OF ADDITIONAL INFORMATION.
3
<PAGE>
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DEFINITIONS OF TERMS
ACCOUNT: A Subaccount of the Separate Account or the Fixed Account.
ATTAINED AGE: The Insured's age on the Policy Date, plus the number of full
years since the Policy Date.
BASIC DEATH BENEFIT: Specified Amount or Specified Amount Plus Policy Value,
depending on the option selected. See page 20.
BENEFICIARY: The person to whom the Death Benefit is paid.
CASH SURRENDER VALUE: Policy Value less any surrender charges that would be
deducted if the Policy were surrendered. See page 20.
DEATH BENEFIT: The amount of money payable to the Beneficiary if the Insured
dies while the Policy is in force. The calculation of the Death Benefit is
described on page 20.
FIXED ACCOUNT: An account consisting of assets owned by Penn Mutual with
respect to the Policies, other than those in the Separate Account.
INDEBTEDNESS: The total amount owed Penn Mutual as a result of Policy loans,
including both principal and accrued interest.
INITIAL SPECIFIED AMOUNT: The Specified Amount on the Policy Date.
INSURED: The person whose life is covered by the Policy.
ISSUE DATE: The date the Policy is issued. A Policy is issued after
completion of underwriting. If the initial premium is received at our Office
and invested before underwriting has been completed, the Issue Date will be
later than the Policy Date. In that case, once issued, Policy coverage is
retroactive to the Policy Date. The Issue Date is used to measure
contestability periods. See page 28.
MATURITY DATE: The Policy Anniversary nearest the Insured's 95th birthday.
MAXIMUM SURRENDER CHARGE PREMIUM: An amount calculated separately for each
Policy based on the Initial Specified Amount. It is used to determine the
surrender charge assessable if the Policy is surrendered during the first 11
Policy Years. The Maximum Surrender Charge Premium for any Policy is not
more than the first year No-Lapse Premiums. See Appendix B.
MONTHLY ANNIVERSARY: The same day as the Policy Date for each succeeding
month, except that, if the Policy Date is the 29th, 30th or 31st of a month,
the Monthly Anniversary is deemed to be the first of the following month.
The Monthly Deduction is deducted on each Monthly Anniversary.
NET CASH SURRENDER VALUE: Net Policy Value less any applicable surrender
charge that would be deducted upon surrender. See page 17.
NET POLICY VALUE: Policy Value less any Indebtedness.
NET PREMIUM: A premium minus the premium charge. See page 15.
NO-LAPSE PREMIUM: An amount used to measure premiums paid during the first
three Policy Years for purposes of the Three-Year Guarantee. See page 11.
OFFICE: Operations Offices, 600 Dresher Road, Horsham, PA, 19044.
OWNER, YOU: The person who purchases a Policy.
PENN MUTUAL, WE, US: The Penn Mutual Life Insurance Company.
POLICY ANNIVERSARY: An anniversary of the Policy Date.
POLICY DATE: The first date as of which we have received an application and
initial premium in good order. If a Policy is issued, insurance coverage is
effective as of the Policy Date.
POLICY LOAN ACCOUNT: A portion of the Policy Value held in the Fixed Account
as collateral for policy loans. See page 22.
POLICY VALUE: The total amount in the Accounts credited to a Policy.
Calculation of the Policy Value is described on page 19.
POLICY YEAR: The year commencing with the Policy Date and ending on the day
before the first Policy Anniversary, or any following year commencing with a
Policy Anniversary and ending on the day before the next Policy Anniversary.
SEPARATE ACCOUNT: Penn Mutual Variable Life Account I, a separate investment
account of The Penn Mutual Life Insurance Company.
SPECIFIED AMOUNT: A dollar amount used to determine the death benefit under a
Policy. See page 20.
SUBACCOUNT: A division of the Separate Account established to invest in a
particular Fund and available for investment under the Policies.
SURRENDER CHARGE PREMIUM: An amount used to determine the sales charge
deducted on surrender of the Policy. See page 17.
VALUATION DATE: Each day the New York Stock Exchange and our Office are open
for business.
VALUATION PERIOD: A period commencing with the close of business on the New
York Stock Exchange and ending at the close of business on the New York
Stock Exchange for the next succeeding Valuation Date.
4
<PAGE>
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SUMMARY AND DIAGRAM OF THE POLICY
THE FOLLOWING SUMMARY OF PROSPECTUS INFORMATION AND DIAGRAM OF THE POLICY
SHOULD BE READ IN CONJUNCTION WITH THE DETAILED INFORMATION APPEARING ELSEWHERE
IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE DESCRIPTION OF THE POLICY
IN THIS PROSPECTUS ASSUMES THAT THE POLICY IS IN FORCE AND THERE IS NO
OUTSTANDING INDEBTEDNESS.
The Policy is similar in many ways to fixed-benefit life insurance. As with
fixed-benefit life insurance, the Owner of a Policy pays premiums for insurance
coverage on the person insured. Also like fixed-benefit life insurance, the
Policy provides for accumulation of Net Premiums and a Net Cash Surrender Value
which is payable if the Policy is surrendered during the Insured's lifetime. As
with fixed-benefit life insurance, the Net Cash Surrender Value during the
early Policy Years may be substantially lower than the premiums paid.
However, the Policy differs from fixed-benefit life insurance in several
important respects. Unlike fixed-benefit life insurance, the Death Benefit of a
Policy may, and the Policy Value will, increase or decrease to reflect the
investment performance of the Subaccounts to which Policy Value is allocated.
Also, there is no guaranteed minimum Net Cash Surrender Value. Nonetheless,
Penn Mutual guarantees to keep the Policy in force during the first three
Policy Years so long as the No-Lapse Premium requirement has been met and
Indebtedness is not excessive. See "Three-Year Guarantee," page 11. Otherwise,
if the Net Cash Surrender Value is insufficient to pay charges due, the Policy
will lapse without value after a grace period. See "Premiums to Prevent Lapse,"
page 12.
The most important features of the Policy, such as charges, cash benefits,
death benefits, and calculation of Policy values, are summarized in the diagram
on the following pages.
PURPOSE OF THE POLICY. The Policy is designed to be a long-term investment
providing significant insurance benefits. The Policy should be considered in
conjunction with other insurance policies owned by the Owner. It may not be
advantageous to replace existing insurance policies with the Policy.
TAX CONSIDERATIONS. Penn Mutual intends for the Policy to satisfy the
definition of a life insurance contract under section 7702 of the Internal
Revenue Code. Under certain circumstances, a Policy could be treated as a
"modified endowment contract." Penn Mutual will monitor Policies and will
attempt to notify an Owner on a timely basis if his or her Policy is in
jeopardy of becoming a modified endowment contract. For further discussion of
the tax status of a Policy and the tax consequences of being treated as a life
insurance contract or a modified endowment contract, see page 31.
FREE LOOK RIGHT TO CANCEL AND CONVERSION RIGHT. For a limited time after the
Policy is issued, you have the right to cancel your Policy and receive a full
refund of the initial premium paid. See "Free Look Right to Cancel Policy,"
page 11. Until the end of this limited period, Net Premiums paid will be
invested in the Subaccount investing in the Penn Series Money Market Fund. (See
"Net Premium Allocations," page 12.) At any time within the first 24 Policy
Months, you may convert your Policy to a flexible premium (non-variable)
adjustable life insurance policy. See "Right to Convert to a Fixed Benefit
Policy," page 28.
OWNER INQUIRIES. If you have any questions, you may write to us (The Penn
Mutual Life Insurance Company, Independence Square, Philadelphia, PA, 19172) or
call us (1-800-766-7366).
5
<PAGE>
DIAGRAM OF POLICY
PREMIUM PAYMENTS
. You select a payment plan but are not
required to pay premiums according to
the plan. You can vary the amount and
frequency and can skip planned
premiums. See page 11 for rules and
limits.
. Minimum initial premium and planned
premium depend on the Insureds' age,
sex and underwriting class, Specified
Amount selected, and any supplemental
riders. See Appendix A for sample
minimum initial premiums.
. Unplanned premiums may be made, within
limits. See page 11.
. Under certain circumstances, extra
premiums may be required to prevent
lapse. See page 12.
^^
DEDUCTIONS FROM PREMIUMS
. For sales load (4.0% of premiums; currently
reduced to 2.25% of premiums paid in excess of the
Maximum Surrender Charge Premium).
. For state premium tax (2.5% of premiums). See page
15.
^^
NET PREMIUMS
. You direct the allocation of Net Premiums among 14 Subaccounts of the
Separate Account and the Fixed Account (the "Accounts"). See page 12
for rules and limits on Net Premium allocations.
. The Subaccounts invest in corresponding portfolios ("Funds") of Penn
Series Funds, Inc. ("Penn Series"), Neuberger & Berman Advisers
Management Trust ("AMT"), and TCI Portfolios, Inc. ("TCI Portfolios"),
Variable Insurance Products Fund ("VIP Fund") and Variable Insurance
Products Fund II ("VIP Fund II"). See page 8. Funds available are:
Penn Series - Growth Equity Fund Penn Series - Money Market Fund
Penn Series - Value Equity Fund AMT - Limited Maturity Bond
Portfolio
Penn Series - Small Capitalization Fund
Penn Series - Flexibly Managed Fund AMT - Balanced Portfolio
TCI Portfolio - TCI Growth
Penn Series - International Equity Fund
Penn Series - Quality Bond Fund VIP Fund - Equity-Income Portfolio
Penn Series - High Yield Bond Fund VIP Fund - Growth Portfolio
VIP Fund II - Asset Manager
Portfolio
. Interest is credited on amounts allocated to the Fixed Account at a
minimum guaranteed rate of 4%. See page 14 for rules and limits on
Fixed Account allocations.
^^
DEDUCTIONS FROM ASSETS
. Monthly Deduction for cost of insurance, administrative expenses, and
charges for any supplemental benefits. Administrative expenses are
currently $9.00 per month the first Policy Year, $5.00 per month
thereafter, plus for the first 12 months after the Policy Date, and
for the 12 policy months following an increase in Specified Amount, a
$0.10 charge per $1,000 of the Initial Specified Amount or the
increase. See page 16.
. Daily charge at an annual rate of 0.90% (currently reduced to 0.60%
after the 15th Policy Year) from Policy Value in the Subaccounts for
mortality and expense risks. See page 15. This charge is not deducted
from Fixed Account Value.
. Investment advisory fees and other fund expenses are deducted from the
assets of each Fund. See page 19.
^^
6
<PAGE>
POLICY VALUE
. Is the amount in the Accounts credited to your Policy. It is equal to
Net Premiums, as adjusted each Valuation Date to reflect Subaccount
investment experience, interest credited on Fixed Account Value, charges
deducted and other policy transactions (such as transfers and partial
surrenders). See page 19.
. Varies from day to day. There is no minimum guaranteed Policy Value. The
Policy may lapse if the Net Cash Surrender Value is insufficient to
cover the Monthly Deduction then due. See page 12.
. Policy Value can be transferred among the Accounts. See page 13 for
rules and limits. Policy loans reduce the amount available for
allocations and transfers.
. Dollar cost averaging and asset rebalancing programs are available. See
page 13.
. Policy Value is the starting point for calculating certain values under
a Policy, such as the Cash Surrender Value, Net Cash Surrender Value,
Net Policy Value and the Basic Death Benefit used to determine benefits.
^^ ^^
CASH BENEFITS DEATH BENEFITS
. Loans may be taken for . Income tax free to
amounts up to 90% of Cash Beneficiary.
Surrender Value, at a net
interest rate of 1.0%.
Currently, the net interest
rate is 0.25% after the
first 10 Policy Years. See
page 21 for rules and
limits.
. Available as lump sum or
under a variety of payment
options.
. Minimum Basic Death Benefit
("Specified Amount") of
$50,000.
. Partial surrenders generally
can be made up to four times . Two Specified Amount options
a Policy Year provided there available: Specified Amount
is sufficient remaining Net Option 1 (level Basic Death
Cash Surrender Value. An Benefit) and Specified
administrative charge of the Amount Plus Policy Value
lesser of $25 or 2% of the Option 2 (increasing Basic
surrender amount requested Death Benefit). See page 20.
will apply. See page 22 for
rules and limits.
. Flexibility to change
Specified Amount option and
change Specified Amount. See
page 21 for rules and
limits.
. The Policy may be
surrendered in full at any
time for its Net Cash
Surrender Value. A declining
sales load charge of up to
25% of the Maximum Surrender
Charge Premium (not more
than the first year No-Lapse
Premiums) will apply to a
full surrender made during
the first 11 Policy Years.
In addition, a declining
administrative charge will
apply to a full surrender
made during the first 11
Policy Years or the 11 years
following an increase in
Specified Amount. See page
17.
. Supplemental benefits
available by rider. See page
29.
. Payment options available.
See page 23.
7
<PAGE>
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GENERAL INFORMATION ABOUT PENN MUTUAL, THE SEPARATE ACCOUNT AND THE FUNDS
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
Penn Mutual is a Pennsylvania mutual life insurance company. We were
chartered in 1847 and have been continuously engaged in the life insurance
business since that date. We are authorized to sell insurance in all 50 states
and the District of Columbia. Our corporate headquarters are located at
Independence Square, Philadelphia, Pennsylvania, 19172, and our operations
offices are located at 600 Dresher Road, Horsham, Pennsylvania, 19044.
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
We established Penn Mutual Variable Life Account I (the "Separate Account")
as a separate investment account under Pennsylvania law on January 27, 1987. It
is used to support the Policies as well as other variable life insurance
policies, and for other purposes permitted by law. The Separate Account is
registered with the Securities and Exchange Commission (the "SEC") as a unit
investment trust under the Investment Company Act of 1940 (the "1940 Act") and
qualifies as a "separate account" within the meaning of the federal securities
laws. We have established other separate investment accounts, of which Penn
Mutual Variable Annuity Account III is registered with the SEC.
We own the assets in the Separate Account. The Separate Account is divided
into Subaccounts. The Subaccounts available under the Policies invest in shares
of a specific Fund of Penn Series Funds, Inc. ("Penn Series"), Neuberger &
Berman Advisers Management Trust ("AMT"), TCI Portfolios, Inc. ("TCI
Portfolios"), Variable Insurance Products Fund ("VIP Fund") and Variable
Insurance Products Fund II ("VIP Fund II"). The Separate Account includes other
Subaccounts which are not available under the Policy and are not otherwise
discussed in this prospectus.
Income, gains and losses, realized or unrealized, of a Subaccount are
credited to or charged against the Subaccount without regard to any other
income, gains or losses of Penn Mutual. Assets equal to the reserves and other
contract liabilities with respect to each Subaccount are not chargeable with
liabilities arising out of any other business or account of Penn Mutual. If the
assets exceed the required reserves and other liabilities, we may transfer the
excess to our general account. We are obligated to pay all benefits provided
under the Policies.
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THE FUNDS
Penn Series, AMT, TCI Portfolios, VIP Fund and VIP Fund II are each
registered with the SEC as a diversified open-end management investment company
under the 1940 Act. Each is a series-type mutual fund made up of different
series or funds ("Funds"). The investment objectives of each of the Funds in
which Subaccounts invest is set forth below. There is, of course, no assurance
that these objectives will be met.
PENN SERIES - GROWTH EQUITY FUND - seeks long-term growth of capital and
increase of future income by investing primarily in common stocks of well-
established growth companies.
PENN SERIES - VALUE EQUITY FUND - seeks to maximize total return (capital
appreciation and income) primarily by investing in equity securities of
companies believed to be undervalued considering such factors as assets,
earnings, growth potential and cash flows.
PENN SERIES - SMALL CAPITALIZATION FUND - seeks capital appreciation through
investment in a diversified portfolio of securities consisting primarily of
equity securities of companies with market capitalization of under $1 billion.
PENN SERIES - FLEXIBLY MANAGED FUND - seeks to maximize total return (capital
appreciation and income) by investing in common stocks, other equity
securities, corporate debt securities, and/or short-term reserves, in
proportions considered appropriate in light of the availability of attractively
valued individual securities and current and expected economic and market
conditions.
PENN SERIES - INTERNATIONAL EQUITY FUND - seeks to maximize capital
appreciation by investing in a carefully selected diversified portfolio
consisting primarily of equity securities. The investments will consist
principally of equity securities of European and Pacific Basin countries.
PENN SERIES - QUALITY BOND FUND - seeks the highest income over the long term
consistent with the preservation of principal by investing primarily in
marketable investment-grade debt securities.
PENN SERIES - HIGH YIELD BOND FUND - seeks high current income by investing
primarily in a diversified portfolio of long term high-yield fixed income
securities in the medium to lower quality ranges; capital appreciation is a
secondary
8
<PAGE>
objective; such securities, which are commonly referred to as "junk" bonds,
generally involve greater risks of loss of income and principal than higher
rated securities.
PENN SERIES - MONEY MARKET FUND - seeks to preserve capital, maintain
liquidity and achieve the highest possible level of current income consistent
therewith, by investing in high quality money market instruments; an investment
in the Fund is neither insured nor guaranteed by the U.S. Government and there
can be no assurance that the Fund will be able to maintain a stable net asset
value of $1.00 per share.
AMT - LIMITED MATURITY BOND PORTFOLIO - seeks the highest current income
consistent with low risk to principal and liquidity; as a secondary objective,
seeks to enhance its total return through capital appreciation when market
factors, such as falling interest rates and rising bond prices, indicate that
capital appreciation may be available without significant risk to principal;
investments are made by investing all of its net investable assets in a series
of Advisers Managers Trust (a diversified open-end management investment
company) with identical investment objective, policies and limitations; the
underlying series pursues objectives primarily by investing in a diversified
portfolio of limited maturity debt securities.
AMT - BALANCED PORTFOLIO - seeks long-term capital growth and reasonable
current income without undue risk to principal through investment in common
stocks and debt securities; investments are made by investing all of its net
investable assets in a series of Advisers Managers Trust (a diversified open-
end management investment company) with identical investment objective,
policies and limitations; as to the underlying series, it is anticipated that
normally 60% of total assets will be invested in common stocks and remaining
assets will be invested in debt securities; at least 25% of the Series assets
will be invested in fixed income senior securities.
TCI PORTFOLIOS - TCI GROWTH PORTFOLIO - seeks capital growth by investing in
common stocks (including securities convertible into common stocks) and other
securities that meet certain fundamental and technical standards of selection
and, in the opinion of the Fund's management, have better than average
potential for appreciation; the Fund intends to stay fully invested in such
securities.
VIP FUND - EQUITY-INCOME PORTFOLIO - seeks reasonable income by investing
primarily in income-producing equity securities; in choosing these securities,
the Fund will also consider the potential for capital appreciation; the Fund's
goal is to achieve a yield which exceeds the composite yield on the securities
comprising the Standard & Poor's 500 Composite Stock Price Index.
VIP FUND - GROWTH PORTFOLIO - seeks to achieve capital appreciation; the Fund
normally purchases common stocks, although its investments are not restricted
to any one type of security; capital appreciation may also be found in other
types of securities, including bonds and preferred stocks.
VIP FUND II - ASSET MANAGER PORTFOLIO - seeks high total return with reduced
risk over the long-term by allocating its assets among domestic and foreign
stocks, bonds and short-term fixed-income instruments.
Each Fund sells and redeems its shares at net asset value without any sales
charge. Any dividend from net investment income or distribution from realized
gains from security transactions of a Fund is reinvested at net asset value in
shares of the same Fund.
INDEPENDENCE CAPITAL MANAGEMENT, INC. ("Independence Capital Management"), of
Horsham, Pennsylvania, serves as investment adviser to the Penn Series Growth
Equity Fund, the Penn Series Quality Bond Fund and the Penn Series Money Market
Fund.
T. ROWE PRICE ASSOCIATES, INC. ("Price Associates"), of Baltimore, Maryland,
serves as investment adviser to the Penn Series Flexibly Managed Fund and the
Penn Series High Yield Bond Fund.
OPCAP ADVISORS ("OpCap") (formerly Quest for Value Advisors), of New York,
New York, serves as investment adviser to the Penn Series Value Equity and the
Penn Series Small Capitalization Fund.
VONTOBEL USA INC. ("Vontobel"), of New York, New York, is the investment
adviser to the Penn Series International Equity Fund.
NEUBERGER & BERMAN MANAGEMENT INCORPORATED ("N&B Management") of New York,
New York, is the investment adviser to each series of Advisers Managers Trust
underlying the AMT Limited Maturity Bond Portfolio and the AMT Balanced
Portfolio.
INVESTORS RESEARCH CORPORATION ("Investors Research") of Kansas City,
Missouri, is the investment adviser to TCI Growth Portfolio.
FIDELITY MANAGEMENT & RESEARCH CORPORATION ("FMR") of Boston, Massachusetts,
is the investment adviser to VIP Fund's Equity Income Portfolio and Growth
Portfolio and VIP Fund II's Asset Manager Portfolio. FMR utilizes the services
of two subsidiaries on a sub-advisory basis for foreign securities investments
for the Asset Manager Portfolio. These subsidiaries are Fidelity Management &
Research (U.K.) Inc. and Fidelity Management & Research (Far East) Inc.
Further information about the Funds is contained in the accompanying
prospectuses, which you should read in conjunction with this prospectus.
9
<PAGE>
We have entered into agreements with Penn Series, AMT, TCI Portfolios, VIP
Fund and VIP Fund II governing the Separate Account's investment in those
Funds. Under the agreement with TCI Portfolios, the adviser to the TCI
Portfolios compensates Penn Mutual for certain administrative services provided
by Penn Mutual.
The shares of Penn Series, AMT, TCI Portfolios, VIP Fund and VIP Fund II are
sold not only to the Separate Account, but to other separate accounts of Penn
Mutual that fund benefits under variable annuity policies. The shares of AMT,
TCI Portfolios, VIP Fund and VIP Fund II are also sold to separate accounts of
other insurance companies and, in the case of AMT, also directly to qualified
pension and retirement plans. It is conceivable that in the future it may
become disadvantageous for both variable life and variable annuity policy
separate accounts (and also qualified pension and retirement plans with respect
to AMT) to invest in the same underlying mutual fund. Although neither we nor
Penn Series, AMT, TCI Portfolios, VIP Fund or VIP Fund II currently perceives
or anticipates any such disadvantage, the Boards of Directors of Penn Series
and TCI Portfolios, respectively, and the Boards of Trustees of AMT, VIP Fund
and VIP Fund II, respectively, will monitor events to determine whether any
material conflict between variable annuity policyowners and variable life
policyowners (and also qualified pension and retirement plans with respect to
AMT) arises.
Material conflicts could result from such things as: (1) changes in state
insurance laws; (2) changes in federal income tax law; (3) changes in the
investment management of any Fund or of Penn Series, AMT, TCI Portfolios, VIP
Fund or VIP Fund II, respectively; or (4) differences between voting
instructions given by variable annuity policyowners and those given by variable
life policyowners. In the event of a material irreconcilable conflict, we will
take the steps necessary to protect our variable life and variable annuity
policyowners. This could include discontinuance of investment in a Fund.
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SUBSTITUTION OF SECURITIES
If investment in a Subaccount should no longer be possible or, if in our
judgment, becomes inappropriate to the purposes of the Policies, or, if in our
judgment, investment in another subaccount or insurance company separate
account is in the interest of Owners, we may substitute another subaccount or
insurance company separate account. No substitution may take place without
notice to Owners and prior approval of the SEC and insurance regulatory
authorities, to the extent required by the 1940 Act and applicable law.
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VOTING RIGHTS
We are the legal owner of shares held by the Subaccounts and as such have the
right to vote on all matters submitted to shareholders of the Funds. However,
as required by law, we will vote shares held in the Subaccounts at regular and
special meetings of shareholders of the Funds in accordance with instructions
received from Owners with Policy Value in the Subaccounts. Should the
applicable federal securities laws, regulations or interpretations thereof
change so as to permit us to vote shares of the Funds in our own right, we may
elect to do so.
To obtain voting instructions from Owners, before a meeting we will send
Owners voting instruction material, a voting instruction form and any other
related material. The number of shares held by each Subaccount for which an
Owner may give voting instructions is currently determined by dividing the
portion of the Owner's Policy Value in the Subaccount by the net asset value of
one share of the applicable Fund. Fractional votes will be counted. The number
of votes for which an Owner may give instructions will be determined as of a
date chosen by Penn Mutual but not more than 90 days prior to the meeting of
shareholders. Shares held by a Subaccount for which no timely instructions are
received will be voted by Penn Mutual in the same proportion as those shares
for which voting instructions are received.
We may, if required by state insurance officials, disregard Owner voting
instructions if such instructions would require shares to be voted so as to
cause a change in sub-classification or investment objectives of one or more of
the Funds, or to approve or disapprove an investment advisory agreement. In
addition, we may under certain circumstances disregard voting instructions that
would require changes in the investment policy or investment adviser of one or
more of the Funds, provided that we reasonably disapprove of such changes in
accordance with applicable federal regulations. If we ever disregard voting
instructions, we will advise Owners of that action and of our reasons for such
action in the next semiannual report. Finally, we reserve the right to modify
the manner in which we calculate the weight to be given to pass-through voting
instructions where such a change is necessary to comply with current federal
regulations or the current interpretation thereof.
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PREMIUMS AND ALLOCATIONS
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APPLYING FOR A POLICY
If you want to purchase a Policy, you must complete an application and submit
it to one of our authorized agents. You also must pay an initial premium at
least equal to the minimum required. See "Premiums," below. Your premium can be
submitted with the application or at a later date, but Policy coverage will not
become effective until the initial premium in good order is received at our
Office.
We require satisfactory evidence of the Insured's insurability, which may
include a medical examination of the Insured. Generally, we will issue a Policy
covering an Insured up to age 70 if evidence of insurability satisfies our
underwriting rules. We may, in our sole discretion, issue a Policy covering an
Insured over age 70. Acceptance of an application depends on our underwriting
rules, and we reserve the right to reject an application for any reason.
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FREE LOOK RIGHT TO CANCEL POLICY
You may cancel your Policy for a refund of premium during your "free-look"
period. This period expires 10 days after you receive your Policy, 45 days
after your application is signed, or 10 days after we mail or deliver a Notice
of Right of Withdrawal, whichever is latest. If you decide to cancel the
Policy, you must return it by mail or delivery to us or to our authorized agent
who sold it. Immediately after mailing or delivery, the Policy will be deemed
void from the beginning. We will refund premiums paid within seven days after
we receive the Policy.
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PREMIUMS
The minimum initial premium required depends on a number of factors, such as
the age, sex and rate class of the proposed Insured, the desired Specified
Amount, any supplemental benefits and the planned premiums you propose to make.
The initial premium must be at least equal to two No-Lapse Premiums. See
"Planned Premiums," below. Sample minimum initial premiums are shown in
Appendix A.
Additional premiums may be paid in any amount and at any time, subject to the
following limits. First, a premium must be at least $25 and must be sent to our
Office. We may require satisfactory evidence of insurability before accepting
any premium which results in an increase in the net amount at risk (defined on
page 16).
Second, we reserve the right to limit total premiums paid in a Policy Year to
the planned premiums selected (see "Planned Premiums," below). In addition,
total premiums paid in a Policy Year may not exceed guideline premium
limitations for life insurance set forth in the Internal Revenue Code. We will
refund any portion of any premium which is determined to be in excess of the
premium limit established by law to qualify a Policy as a policy for life
insurance. (The amount refunded will be the excess premium plus any gain
attributable to the excess premium.) In addition, we will monitor Policies and
will attempt to notify the Owner on a timely basis if his or her Policy is in
jeopardy of becoming a modified endowment contract under the Internal Revenue
Code. See "Tax Considerations," page 30.
Lastly, no premium will be accepted after the Maturity Date.
PLANNED PREMIUMS. When applying for a Policy, you select a plan for paying
level premiums at specified intervals, e.g., monthly, semi-annually or
annually, until the Maturity Date. You are not required to pay premiums in
accordance with this plan; rather, you can pay more or less than planned or
skip a planned premium entirely. You can change the amount and frequency of
planned premiums whenever you want by sending written notice to our Office.
However, we reserve the right to limit the amount of a premium or the total
premiums paid, as discussed above. We will send you reminder notices for
planned premiums, unless you have arranged to pay planned premiums by pre-
authorized check.
THREE-YEAR GUARANTEE. We guarantee that a Policy will remain in force during
the first three Policy Years, regardless of the sufficiency of the Net Cash
Surrender Value, if the total premiums paid less any partial surrenders is
greater than or equal to the No-Lapse Premium multiplied by the number of
months the Policy has been in force. The No-Lapse Premium is a benchmark
monthly premium calculated for each Policy based on the age, sex and rate class
of the Insured, the requested Specified Amount and any supplemental benefits.
The No-Lapse Premium for your Policy generally will be less than the monthly
amount of planned premiums you select to pay. The Three-Year guarantee will not
prevent the termination of the Policy if the Net Cash Surrender Value becomes
insufficient because of excessive Indebtedness. See "Loan Repayment; Effect if
Not Repaid," page 21.
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<PAGE>
PREMIUMS UPON INCREASE IN SPECIFIED AMOUNT. Depending on the Policy Value at
the time of an increase in the Specified Amount and the amount of the increase
requested, an additional premium or change in the amount of planned premiums
may be advisable. See "Changes in Specified Amount," page 21 . We will notify
you if a premium is necessary or a change appropriate.
If you increase your Policy's Specified Amount during the first three Policy
Years, we will extend the Three-Year Guarantee (see above) to three years after
the effective date of the increase.
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PREMIUMS TO PREVENT LAPSE
Failure to pay planned premiums will not necessarily cause a Policy to lapse.
Conversely, paying all planned premiums will not necessarily guarantee that a
Policy will not lapse (except when the Three-Year Guarantee is in effect).
Rather, whether a Policy lapses depends on whether its Net Cash Surrender Value
is insufficient to cover the Monthly Deduction (see page 16) when due.
If the Net Cash Surrender Value on a Monthly Anniversary is less than the
amount of the Monthly Deduction to be deducted on that date and the Three-Year
Guarantee is not in effect, the Policy will be in default and a grace period
will begin. This could happen if investment experience has been sufficiently
unfavorable that it has resulted in a decrease in the Net Cash Surrender Value
or the Net Cash Surrender Value has decreased because insufficient premiums
have been paid to offset the Monthly Deduction.
GRACE PERIOD. If your Policy goes into default, you will be allowed a 61-day
grace period to pay a premium sufficient to cover the Monthly Deduction. We
will send notice of the amount required to be paid during the grace period
("grace period premium") to your last known address and to any assignee of
record. The grace period will begin when the notice is sent. Your Policy will
remain in effect during the grace period. If the Insured should die during the
grace period before the grace period premium is paid, the Death Benefit will
still be payable to the Beneficiary, although the amount paid will reflect a
reduction for the Monthly Deductions due on or before the date of the Insured's
death. See "Amount of Death Benefit," page 20. If the grace period premium has
not been paid before the grace period ends, your Policy will lapse. It will
have no value and no benefits will be payable. See "Reinstatement," page 29.
A grace period also may begin if Indebtedness becomes excessive. See "Loan
Repayment; Effect if not Repaid," page 22.
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NET PREMIUM ALLOCATIONS
In the application, you specify the percentage of a Net Premium to be
allocated to each Account. The sum of your allocations must equal 100%, and
each allocation percentage must be a whole number. However, until the free look
period expires, all Net Premiums received are invested in the Subaccount
investing in the Penn Series Money Market Fund (the "Money Market Subaccount").
At the end of this period (which for this purpose is assumed to begin 3 days
after we issue your Policy), the Policy Value in the Money Market Subaccount is
transferred to and allocated to the Accounts based on the premium allocation
percentages in the application. See "Determining the Policy Value," page 19.
The Net Premium allocation percentages specified in the application will
apply to subsequent premiums until you change them. You can change the
allocation percentages at any time provided they total 100% and each is a whole
number, by sending written notice to our Office. The change will apply to all
premiums received with or after our receipt of your notice.
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CREDITING PREMIUMS
The initial Net Premium will be credited to the Policy as of the Policy Date.
Planned premiums and unplanned premiums not requiring additional underwriting
will be credited to the Policy and the resulting Net Premiums will be invested
as requested on the Valuation Date the premium was received by our Office.
However, any premium requiring additional underwriting will be allocated to the
Money Market Subaccount until underwriting has been completed and the premium
has been accepted. When accepted, the Policy Value in the Money Market
Subaccount attributable to the resulting Net Premium will be credited to the
Policy and allocated to the Accounts as requested. If an additional premium is
rejected, we will return the premium, without any adjustment for investment
experience.
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TRANSFERS
You may transfer Policy Value among the Accounts subject to the following
rules, some of which depend on whether Policy Value is to be transferred from a
Subaccount or the Fixed Account. You may request transfers by calling our
Office if you have applied for telephone transfer authorization. Otherwise,
transfer requests must be in writing. The Company will not be liable for
following transfer instructions communicated by telephone that we reasonably
believe to be genuine. We require certain identifying information to process a
telephone transfer.
Transfers may not be requested until after the end of the free-look period
(see page 11). A transfer will take effect on the date the request is received
at our Office. We may, however, defer transfers under the same conditions that
we may delay payment of proceeds. See "When Proceeds are Paid," page 28. There
is no limit on the number of transfers that may be made. However, after 12
transfers have been made during a Policy Year, we reserve the right to impose a
$10 transfer charge on subsequent transfers. See "Transfer Charge," page 17.
SUBACCOUNT TRANSFER RULES. Transfers among Subaccounts and from Subaccounts
to the Fixed Account may be made at any time. The minimum amount of Policy
Value that may be transferred from a Subaccount is $250 or, if less, the
full amount held in the Subaccount. If less than the full amount of Policy
Value in a Subaccount is being transferred from the Subaccount, the amount
remaining must be at least $250.
FIXED ACCOUNT TRANSFER RULES. Policy Value held in the Fixed Account may be
transferred to a Subaccount or Subaccounts only during the 30-day period
following the end of each Policy Year. The amount transferred must be at
least $250, or if less, the Policy Value held in the Fixed Account. If the
amount transferred is less than the Policy Value then held in the Fixed
Account, at least $250 must remain in the Fixed Account. See "Deductions,
Surrenders and Transfers from the Fixed Account," page 15, for additional
rules and limits for the Fixed Account.
The transfer rules described above do not apply to transfers made under a
dollar cost averaging or asset rebalancing program.
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DOLLAR COST AVERAGING PROGRAM
You may elect a dollar cost averaging program for the allocation of your
Policy Value among the Accounts. A dollar cost averaging program allows you to
authorize in advance monthly transfers of set dollar amounts from the Money
Market Subaccount to one or more other Accounts.
The main objective of dollar cost averaging is to shield investments from
short term price fluctuations. Since the same dollar amount is transferred to
selected Accounts each month, more accumulation units are purchased in a
Subaccount when their value is low, and fewer accumulation units are purchased
when their value is high. As a result, a lower than average cost of purchasing
accumulation units may be achieved over the long term. This plan of investing
allows Owners to take advantage of investment fluctuations, but does not assure
a profit or protect against a loss in declining markets.
SELECTING DOLLAR COST AVERAGING. You may select a dollar cost averaging
program when you apply for the Policy or at a later date by contacting our Home
Office. You specify the Accounts to which amounts will be transferred and the
dollar amount to be allocated to each Account. To begin a program, the planned
premium for that year must be $600 and the amount to be transferred each month
must be at least $50.
OPERATION OF THE PROGRAM. Transfers will be made on the 15th of each month.
Transfers will continue until the earliest of the following:
. We receive a written or telephone request to stop making transfers.
. There no longer is sufficient Policy Value in the Money Market Subaccount
to make the specified transfer.
. The Policy is in a grace period.
. We receive notice that the Insured has died.
Transfers under a dollar cost averaging program are not counted for purposes
of the transfer rules discussed above.
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ASSET REBALANCING
You may elect an asset rebalancing program for your Policy Value. Policy
Value allocated to the Accounts can be expected to increase or decrease at
different rates. An asset rebalancing program automatically reallocates your
Policy Value among the Accounts each quarter to return the allocation to the
original allocation percentages you specify. Asset rebalancing is
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<PAGE>
intended to transfer Policy Value from those Accounts that have increased in
value to those that have declined, or not increased as much, in value. Over
time, this method of investing may help an Owner "buy low and sell high,"
although there can be no assurance that this objective will be achieved. Asset
rebalancing does not guarantee profits, nor does it assure that an Owner will
not have losses.
SELECTING ASSET REBALANCING. You may select an asset rebalancing program when
you apply for the Policy or at a later date by contacting our Home Office. You
specify the Accounts to be included in the program, and the percentage of
Policy Value to be allocated to each specified Account. Each allocation
percentage must be a whole number. You can elect to have your entire Policy
Value rebalanced among the specified Accounts each quarter, or limit the
program to the Policy Value in specified Accounts on each rebalancing date
(e.g., to restore a 60/40 ratio for Policy Value in the Value Equity Subaccount
and Quality Bond Subaccount on each rebalancing date). The minimum Policy Value
to start an asset rebalancing program is $1,000. If a dollar cost averaging
program is in effect, Policy Value in the Money Market Subaccount may not be
included in an asset rebalancing program.
OPERATION OF THE PROGRAM. Effective on the last day of each calendar quarter,
we will transfer Policy Value among the Accounts to the extent necessary to
return the allocation to your specifications. Asset rebalancing will continue
until we receive a written or telephone request at our Home Office to
terminate.
Transfers made under an asset rebalancing program are not counted for
purposes of the transfer rules described above.
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FIXED ACCOUNT
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED
ACCOUNT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 NOR HAS THE
FIXED ACCOUNT BEEN REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT
COMPANY ACT OF 1940. ACCORDINGLY, NEITHER THE FIXED ACCOUNT NOR ANY INTERESTS
THEREIN ARE SUBJECT TO THE PROVISIONS OF THESE ACTS AND, AS A RESULT, THE STAFF
OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT REVIEWED THE DISCLOSURE IN
THIS PROSPECTUS RELATING TO THE FIXED ACCOUNT. THE DISCLOSURE REGARDING THE
FIXED 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.
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FIXED ACCOUNT
The Fixed Account consists of assets owned by Penn Mutual with respect to the
Policies, other than those held in the Separate Account. It is part of our
general account assets. Our general account assets are used to support our
insurance and annuity obligations other than those funded by separate accounts.
Subject to applicable law, we have sole discretion over the investment of the
assets of the Fixed Account. The Policy Loan Account is part of the Fixed
Account.
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INTEREST CREDITED ON POLICY VALUE IN THE FIXED ACCOUNT
Net Premiums allocated to the Fixed Account and Policy Value transferred from
the Subaccounts to the Fixed Account are credited to the Fixed Account Value.
The Fixed Account Value also includes the portion of Policy Value transferred
to the Policy Loan Account as collateral for policy loans. We will credit
interest on these amounts at rates we determine in our sole discretion, but in
no event will interest credited on these amounts be less than an effective rate
of at least 4% per year, compounded annually.
However, if at the time of an allocation or transfer to the Fixed Account, we
are crediting a rate of interest higher than 4%, the higher rate will apply to
the amount from the date of its allocation or transfer to the Fixed Account
through to the end of the twelve-month period beginning on the first day of the
calendar month in which the allocation or transfer was made. If a higher rate
of interest is credited, different rates of interest may apply to amounts
allocated or transferred at different times, and different rates of interest
may apply to amounts held in a Policy Loan Account than to the remaining
portion of Policy Value held in the Fixed Account. ANY INTEREST CREDITED ON
POLICY VALUE IN THE FIXED ACCOUNT IN EXCESS OF THE GUARANTEED MINIMUM RATE OF
4% PER YEAR WILL BE DETERMINED IN OUR SOLE DISCRETION.
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CALCULATING FIXED ACCOUNT VALUE
The Fixed Account Value is calculated daily. See "Fixed Account Value," page
19.
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DEDUCTIONS, SURRENDERS AND TRANSFERS FROM THE FIXED ACCOUNT
Amounts allocated to the Fixed Account at different times, whether from Net
Premiums or transfers, may be credited with different rates of interest.
Whenever a charge is deducted from Policy Value in the Fixed Account, or an
amount is withdrawn from the Policy Value in the Fixed Account to satisfy a
partial surrender, transfer or policy loan request, the charge or withdrawal
will be taken first from the amount most recently allocated to the Fixed
Account, then the amount next most recently allocated, and so forth. See page
13 for limits and restrictions on transfers of Policy Value from the Fixed
Account.
If there is any Policy Value in the Policy Loan Account, it is not available
for transfers, partial surrenders or policy loans, nor are any charges deducted
from this portion of Policy Value. Amounts are transferred to or from the
Policy Loan Account only when policy loans are taken or repayments made. If an
amount is transferred from the Policy Loan Account to the remaining portion of
the Fixed Account Value, it will be treated as a new allocation to the Fixed
Account and will be credited with interest at the rate then in effect for Fixed
Account allocations. See "Policy Loan Account," page 22.
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PAYMENTS FROM THE FIXED ACCOUNT
We may defer payment of proceeds from the Fixed Account for a partial
surrender, full surrender or policy loan request for up to six months from the
date we receive the written request. However, we will not defer payment of a
partial surrender or policy loan requested to pay a premium due on a Penn
Mutual policy. If a payment from the Fixed Account is deferred for 30 days or
more, it will bear interest at a rate of 3% per year compounded annually while
it is deferred.
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CHARGES AND DEDUCTIONS
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PREMIUM CHARGE
We deduct a charge from each premium before allocating the resulting Net
Premium to the Policy Value. It consists of a charge for premium taxes and a
sales charge. The premium charge is guaranteed not to exceed 6.5%. Currently,
we reduce the charge to 4.75% for all premiums paid in excess of the Maximum
Surrender Charge Premium for your Policy.
The premium tax portion of the premium charge is 2.5%. This portion
reimburses us for state premium taxes associated with the Policies. We expect
to pay premium taxes at an average rate for all states of approximately 2.5% of
premiums.
The sales portion of the premium charge is 4.0% (currently 2.25% of premiums
paid in excess of the Maximum Surrender Charge Premium). The sales portion
partially compensates us for the expenses of selling and distributing the
Policies, including paying sales commissions, printing prospectuses, preparing
sales literature and paying for other promotional activities. An additional
sales charge may be deducted on surrender of a Policy during the first 11
Policy Years. See "Surrender Charge for Initial Specified Amount," page 17.
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DAILY MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from assets in the Subaccounts attributable to the
Policies. This charge does not apply to Fixed Account Value. The charge is
guaranteed not to exceed an annual rate of 0.90% of Subaccount assets for the
duration of a Policy. Currently, we reduce this charge to 0.60% after the
fifteenth Policy Year. We will notify you if we change our intention to reduce
the charge after the fifteenth Policy Year. We may realize a profit from this
charge.
The mortality risk we assume is that the Insureds on the Policies may die
sooner than anticipated and that therefore Penn Mutual will pay an aggregate
amount of death benefits greater than anticipated. The expense risk we assume
is that expenses incurred in issuing and administering the Policies and the
Separate Account will exceed the amounts realized from the administrative
charges assessed against the Policies.
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MONTHLY DEDUCTION
On the Issue Date and each Monthly Anniversary, we deduct the Monthly
Deduction from the Policy Value. The amount deducted on the Issue Date is for
the Policy Date and any Monthly Anniversaries that have elapsed since the
Policy Date. (For this purpose, the Policy Date is treated as a Monthly
Anniversary.) The Monthly Deduction consists of (1) insurance charges ("Cost of
Insurance Charge"), (2) administrative charges (the "Monthly Expense Charge"),
and (3) any charges for additional benefits added by supplemental agreement to
a Policy ("Supplemental Benefit Charges"), as described below. The Monthly
Deduction is deducted from the Accounts pro rata on the basis of the portion of
Policy Value in each Account. See "Deductions, Surrenders and Transfers from
the Fixed Account," page 15 for applicable rules.
COST OF INSURANCE CHARGE. This charge compensates us for providing insurance
coverage. The charge depends on a number of variables and therefore will vary
from Policy to Policy and from Monthly Anniversary to Monthly Anniversary. For
any Policy the cost of insurance on a Monthly Anniversary is calculated by
multiplying (a) the cost of insurance rate for the Insured by (b) the net
amount at risk under the Policy for that Monthly Anniversary.
The net amount at risk for a Monthly Anniversary is the difference between
the Basic Death Benefit (see page 20) for a Policy (as adjusted to take into
account assumed monthly earnings at an annual rate of 4%) and the Policy Value,
as calculated on that Monthly Anniversary before the Monthly Deduction is
taken.
The cost of insurance rate for a Policy is based on the Attained Age, sex and
rate class of the Insured, and therefore varies from time to time. We currently
place Insureds in the following rate classes, based on our underwriting: a
smoker, nonsmoker or preferred nonsmoker standard rate class or a rate class
involving a higher mortality risk (a "substandard class"). Insureds age 19 and
under are placed in a rate class that does not distinguish between smoker and
nonsmoker, and are assigned to a smoker class at age 20 unless they have
provided satisfactory evidence that they qualify for a nonsmoker class.
We place the Insured in a rate class when we issue the Policy, based on our
underwriting of the application. This original rate class applies to the
Initial Specified Amount. When an increase in Specified Amount is requested, we
conduct underwriting before approving the increase (except as noted below) to
determine whether a different rate class will apply to the increase. If the
rate class for the increase has lower cost of insurance rates than the original
rate class, the rate class for the increase also will be applied to the Initial
Specified Amount. If the rate class for the increase has higher cost of
insurance rates than the original rate class, the rate class for the increase
will apply only to the increase in Specified Amount, and the original rate
class will continue to apply to the Initial Specified Amount.
We do not conduct underwriting for an increase in Specified Amount if the
increase is requested as part of a conversion from a term policy or on exercise
of a guaranteed option to increase the Specified Amount without underwriting.
See "Supplemental Benefits," page 29. In the case of a term conversion, the
rate class that applies to the increase is the same rate class that applied to
the term policy. In the case of a guaranteed option, the Insured's rate class
for an increase will be the class in effect when the guaranteed option rider
was issued.
If we use different cost of insurance rates for increases, the following
rules will apply for purposes of determining the net amount at risk for each
rate. If the Specified Amount includes the Policy Value (Option 1) (see page
20), we will allocate the Policy Value solely to the Initial Specified Amount
unless it exceeds the Initial Specified Amount. If the Policy Value exceeds the
Initial Specified Amount, the excess will be considered part of the increases
in Specified Amount in the order of the increases. If there is a decrease in
Specified Amount after an increase, a decrease is applied first to decrease any
prior increases in Specified Amount, starting with the most recent increase and
then each prior increase. If the Specified Amount does not include the Policy
Value (Option 2) (see page 20), no Policy Value is allocated to the Initial
Specified Amount or any increase.
We guarantee that the cost of insurance rates used to calculate the monthly
cost of insurance charge will not exceed the maximum cost of insurance rates
set forth in the Policies. The guaranteed rates for standard classes are based
on the 1980 Commissioners' Standard Ordinary Mortality Tables, Age Nearest
Birthday ("1980 CSO Tables"). The guaranteed rates for substandard classes are
based on multiples or additives of the 1980 CSO Tables.
Our current cost of insurance rates may be less than the guaranteed rates.
Our current cost of insurance rates will be determined based on our
expectations as to future mortality, investment, expense and persistency
experience. These rates may change from time to time. Current cost of insurance
rates are currently less for the portion of the net amount at risk in excess of
$50,000 than for the initial $50,000. As to the portion in excess of $50,000,
current cost of insurance rates are lower for Policies with a Specified Amount
of $250,000 or more than for Policies with a lower Specified Amount. However,
guaranteed rates do not change if the net amount at risk exceeds $50,000 or
Specified Amount exceeds $250,000.
Cost of insurance rates (whether guaranteed or current) for an Insured in a
nonsmoker standard class are lower than guaranteed rates for an Insured of the
same age and sex in a smoker standard class. Cost of insurance rates (whether
guaranteed
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or current) for an Insured in a nonsmoker or smoker standard class are
generally lower than guaranteed rates for an Insured of the same age and sex
and smoking status in a substandard class.
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS.
Mortality tables for the Policies generally distinguish between males and
females. Thus, premiums and benefits under Policies covering males and females
of the same age will generally differ. We do, however, also offer Policies
based on unisex mortality tables if required by state law. Employers and
employee organizations considering purchase of a Policy should consult their
legal advisors to determine whether purchase of a Policy based on sex-distinct
actuarial tables is consistent with Title VII of the Civil Rights Act of 1964
or other applicable law. Upon request, we may offer Policies with unisex
mortality tables to such prospective purchasers.
MONTHLY EXPENSE CHARGE. This charge compensates us for administrative
expenses associated with the Policies and the Separate Account. These expenses
relate to premium billing and collection, recordkeeping, processing of death
benefit claims, policy loans and Policy changes, reporting and overhead costs,
processing applications and establishing Policy records. The Monthly Expense
Charge is the aggregate of the following:
a) a flat charge of $9.00 per month (currently only $5.00 per month after
the first Policy Year; we will notify you before it is increased);
b) for the first 12 policy months after the Policy Date, a charge based on
the Initial Specified Amount ($0.10 per $1,000 of Specified Amount per
month); and
c) for the 12 policy months following the effective date of an increase in
Specified Amount, a charge based on the increase ($0.10 per $1,000 of
the increase in Specified Amount per month).
Except for the flat monthly charge (which is reduced to $5.00 after the first
Policy Year but may be later increased to $9.00), these charges are guaranteed
not to increase over the life of the Policy. We do not anticipate making any
profit on the Monthly Expense Charge.
SUPPLEMENTAL BENEFIT CHARGES. See "Supplemental Benefits," page 29.
- --------------------------------------------------------------------------------
TRANSFER CHARGE
We reserve the right to impose a $10 transfer charge on any transfer of
Policy Value among the Accounts in excess of the 12 free transfers permitted
each Policy Year. We will notify you before imposing the charge. If the charge
is imposed, it will be deducted from the amount requested to be transferred
before allocation to the new Account(s). If an amount is being transferred from
more than one Account, the transfer charge will be deducted proportionately
from the amount being transferred from each Account. This charge, if imposed,
will reimburse us for administrative expenses incurred in effecting transfers.
We do not anticipate making any profit on this charge.
- --------------------------------------------------------------------------------
SURRENDER CHARGES
If the Policy is surrendered during the first 11 Policy Years, we will deduct
a surrender charge for the Initial Specified Amount. If a Policy is surrendered
within 11 years after an increase in Specified Amount, we will deduct a
surrender charge for the increase in Specified Amount. The surrender charge
will be deducted before any surrender proceeds are paid.
SURRENDER CHARGE FOR INITIAL SPECIFIED AMOUNT. The surrender charge for the
Initial Specified Amount consists of a sales charge component and
administrative charge component and declines to 0 over time as follows. The
original amount of this surrender charge, which is deducted on a surrender made
during the first 7 Policy Years, is the sum of the following:
a) 25% of premiums paid on the Policy, up to the Maximum Surrender Charge
Premium (which is an amount calculated separately for each Policy and is
never more than 12 No-Lapse Premiums)--See Appendix B; and
b) an administrative charge based on the Initial Specified Amount and the
Insured's Attained Age on the Policy Date (ranging from $1.00 up to
Attained Age 9 to $7.00 at Attained Age 60 and over, per $1,000 of
Initial Specified Amount)--See Appendix C.
17
<PAGE>
After the seventh completed Policy Year, the original amount of the surrender
charge is decreased by 20% for each subsequent Policy Year completed before the
date of surrender in accordance with the following table.
<TABLE>
<CAPTION>
PERCENTAGE OF ORIGINAL
SURRENDER DURING POLICY YEAR AMOUNT OF SURRENDER CHARGE
----------------------------------------------------------------------------
<S> <C>
1st through 7th 100%
----------------------------------------------------------------------------
8th 80%
----------------------------------------------------------------------------
9th 60%
----------------------------------------------------------------------------
10th 40%
----------------------------------------------------------------------------
11th 20%
----------------------------------------------------------------------------
after 11th 0%
----------------------------------------------------------------------------
</TABLE>
After the 11th Policy Year, there is no surrender charge for the Initial
Specified Amount.
The sales charge component of the surrender charge is to reimburse us for
some of the expenses incurred in the distribution of the Policies. We also
deduct a sales charge from each premium. See "Premium Charge," page 15. The
sales charge component, together with the sales charge included in the premium
charge, may be insufficient to recover distribution expenses related to the
sale of the Policies. Unrecovered expenses are borne by our general assets
which may include profits, if any, from the mortality and expense risk charge.
See "Daily Mortality and Expense Risk Charge," page 15.
The administrative charge component of the surrender charge is designed to
cover the administrative expenses associated with underwriting and issuing the
Policy, including the costs of processing applications, conducting medical
exams, determining insurability and the Insured's rate class, and establishing
Policy records, as well as the administrative costs of processing surrender
requests. We do not anticipate making any profit on the administrative charge
component of the surrender charge.
SURRENDER CHARGE FOR AN INCREASE IN SPECIFIED AMOUNT. The surrender charge
for an increase in Specified Amount consists solely of an administrative charge
and declines to 0 over time as follows. The original amount of this charge,
which is deducted in full on a surrender made during the first 7 years
following the effective date of an increase in Specified Amount, is based on
the increase in Specified Amount and the Insured's Attained Age as of the
effective date of the increase. It ranges from $1.00 up to Attained Age 9 to
$7.00 at Attained Age 60 and over per $1,000 of increase in Specified Amount.
See Appendix C.
After the seventh year following an increase in Specified Amount, the
original amount of the surrender charge for the increase is decreased by 20%
for each subsequent year completed before the surrender date in accordance with
the following table.
<TABLE>
<CAPTION>
PERCENTAGE OF ORIGINAL
SURRENDER DURING YEAR AMOUNT OF SURRENDER CHARGE
AFTER INCREASE FOR INCREASE
----------------------------------------------------------------------------
<S> <C>
1st through 7th 100%
----------------------------------------------------------------------------
8th 80%
----------------------------------------------------------------------------
9th 60%
----------------------------------------------------------------------------
10th 40%
----------------------------------------------------------------------------
11th 20%
----------------------------------------------------------------------------
after 11th 0%
----------------------------------------------------------------------------
</TABLE>
After the 11th year following an increase in Specified Amount, there is no
surrender charge for the increase.
The surrender charge is designed to cover the administrative expenses
associated with increasing the Specified Amount. We do not anticipate making a
profit on this charge.
- --------------------------------------------------------------------------------
PARTIAL SURRENDER CHARGE
We will deduct an administrative charge upon a partial surrender. This charge
is the lesser of 2% of the amount surrendered or $25. This charge will be
deducted from the Policy Value in addition to the amount requested to be
surrendered and will be considered to be part of the partial surrender amount.
See page 22 for rules for allocating the deduction. We do not anticipate making
a profit on this charge.
18
<PAGE>
- --------------------------------------------------------------------------------
FUND EXPENSES
The value of the net assets of the Separate Account reflect the investment
advisory fees and other expenses incurred by the Funds. See the prospectuses
for Penn Series, AMT, TCI Portfolios, VIP Fund and VIP Fund II.
- --------------------------------------------------------------------------------
HOW YOUR POLICY VALUES VARY
There is no guaranteed minimum Policy Value or Net Cash Surrender Value. These
values will vary with the investment experience of the Subaccounts and/or the
daily crediting of interest in the Fixed Account, and will depend on the
allocation of Policy Value. If the Net Cash Surrender Value on a Monthly
Anniversary is less than the amount of the Monthly Deduction to be deducted on
that date (see page 12) and the Three-Year Guarantee is not then in effect, the
Policy will be in default and a grace period will begin. See "Three-Year
Guarantee," page 11, and "Grace Period," page 12.
- --------------------------------------------------------------------------------
DETERMINING THE POLICY VALUE
On the Policy Date the Policy Value is equal to the initial Net Premium. If
the Policy Date and the Issue Date are the same day, the Policy Value is equal
to the initial Net Premium, less the Monthly Deduction. On each Valuation Date
thereafter, the Policy Value is the aggregate of the Variable Accumulation
Values in the Subaccounts and the Fixed Account Value credited to the Policy.
The Policy Value will vary to reflect the performance of the Subaccounts to
which amounts have been allocated, interest credited on amounts allocated to
the Fixed Account, charges, transfers, withdrawals, policy loans and policy
loan repayments.
VARIABLE ACCUMULATION VALUES. When you allocate an amount to a Subaccount,
either by Net Premium allocation or transfer of Policy Value, your Policy is
credited with accumulation units in that Subaccount. The number of accumulation
units is determined by dividing the amount allocated to the Subaccount by the
Subaccount's accumulation unit value for the Valuation Date when the allocation
is effected.
The number of Subaccount accumulation units credited to your Policy will
increase when Net Premiums are allocated to the Subaccount, amounts are
transferred to the Subaccount and loan repayments are credited to the
Subaccount. The number of Subaccount accumulation units credited to a Policy
will decrease when the allocated portion of the Monthly Deduction is taken from
the Subaccount, a policy loan is taken from the Subaccount, an amount is
transferred from the Subaccount, or a partial surrender, including the partial
surrender charge, is taken from the Subaccount.
ACCUMULATION UNIT VALUES. A Subaccount's accumulation unit value varies to
reflect the investment experience of the underlying Fund, and may increase or
decrease from one Valuation Date to the next. The accumulation unit value for
each Subaccount was arbitrarily set at $10 when the Subaccount was established.
For each Valuation Period after the date of establishment, the accumulation
unit value is determined by multiplying the value of an accumulation unit for a
Subaccount for the prior valuation period by the net investment factor for the
Subaccount for the current valuation period.
NET INVESTMENT FACTOR. The net investment factor is an index used to measure
the investment performance of a Subaccount from one Valuation Period to the
next. It is based on the change in net asset value of the Fund shares held by
the Subaccount, and reflects any dividend or capital gain distributions on Fund
shares and the deduction of the daily mortality and expense risk charge (see
page 15).
FIXED ACCOUNT VALUE. On any Valuation Date, the Fixed Account Value of a
Policy is the total of all Net Premiums allocated to the Fixed Account, plus
any amounts transferred to the Fixed Account, plus interest credited on such
Net Premiums and transferred amounts, less the amount of any transfers from the
Fixed Account, less the amount of any partial surrenders, including the partial
surrender charges, taken from the Fixed Account, and less the pro rata portion
of the Monthly Deduction deducted from the Fixed Account. If there have been
any policy loans, the Fixed Account Value is further adjusted to reflect the
amount in the Policy Loan Account held in the Fixed Account, including
transfers to and from the Policy Loan Account as loans are taken and repayments
are made, and interest credited on the Policy Loan Account.
- --------------------------------------------------------------------------------
NET POLICY VALUE
The Net Policy Value on a Valuation Date is the Policy Value less
Indebtedness on that date.
19
<PAGE>
- --------------------------------------------------------------------------------
CASH SURRENDER VALUE
The Cash Surrender Value on a Valuation Date is the Policy Value reduced by
any surrender charge that would be assessed if the Policy were surrendered on
that date. The Cash Surrender Value is used to calculate the Loan Value and to
determine whether Indebtedness is excessive (see page 22). The Loan Value is
90% of the Cash Surrender Value.
- --------------------------------------------------------------------------------
NET CASH SURRENDER VALUE
The Net Cash Surrender Value on a Valuation Date is equal to the Net Policy
Value reduced by any surrender charge that would be imposed if the Policy were
surrendered on that date. The Net Cash Surrender Value is used to calculate the
amount available for partial surrenders. It is the amount received upon a full
surrender of the Policy.
- --------------------------------------------------------------------------------
DEATH BENEFIT AND CHANGES IN SPECIFIED AMOUNT
As long as the Policy remains in force, we will pay the Death Benefit upon
receipt at our Office of satisfactory proof of the Insured's death. We may
require return of the Policy. The Death Benefit will be paid in a lump sum
generally within seven days after receipt of such proof (see "When Proceeds Are
Paid," page 28) or, if elected, under a payment option (see "Payment Options,"
page 23). The Death Benefit will be paid to the Beneficiary. See "Selecting and
Changing the Beneficiary," page 21.
- --------------------------------------------------------------------------------
AMOUNT OF DEATH BENEFIT
The Death Benefit is equal to the sum of the Basic Death Benefit on the date
of the Insured's death, plus any dividend payable on that date (see
"Dividends," page 28), plus any supplemental benefits provided by rider, minus
any Indebtedness on that date and, if the date of death occurred during a grace
period, minus the past due Monthly Deductions. Under certain circumstances, the
amount of the Death Benefit may be further adjusted. See "Limits on Our Rights
to Contest the Policy" and "Misstatement of Age or Sex," page 28.
If part or all of the Death Benefit is paid in one sum, Penn Mutual will pay
interest on this sum from the date of the Insured's death to the date of
payment. We determine the interest rate, but it will not be less than a rate of
3% per year compounded annually.
- --------------------------------------------------------------------------------
BASIC DEATH BENEFIT AND SPECIFIED AMOUNT OPTIONS
The Policy Owner may choose one of two Specified Amount Options, which will
determine the Basic Death Benefit. Under Option 1, the Basic Death Benefit is
the greater of the Specified Amount or the Applicable Percentage of Policy
Value on the date of the Insured's death. Under Option 2, the Basic Death
Benefit is the greater of the Specified Amount plus the Policy Value, or the
Applicable Percentage of the Policy Value, on the date of the Insured's death.
If investment performance is favorable the amount of the Basic Death Benefit
may increase. However, under Option 1, the Basic Death Benefit ordinarily will
not change for several years to reflect any favorable investment performance
and may not change at all, whereas under Option 2, the Basic Death Benefit will
vary directly with the investment performance of the Policy Value. To see how
and when investment performance may begin to affect the Basic Death Benefit,
please see the illustrations beginning on page 23.
The "Applicable Percentage" is 250% when the Insured is Attained Age 40 or
less, and decreases each year thereafter to 100% when the Insured is Attained
Age 95. A table showing the Applicable Percentages for Attained Ages 0 to 95 is
included in Appendix D.
- --------------------------------------------------------------------------------
INITIAL SPECIFIED AMOUNT AND OPTION
The Initial Specified Amount is set at the time the Policy is issued. You may
change the Initial Specified Amount from time to time, as discussed below. You
select the Specified Amount Option when you apply for the Policy. You also may
change the Specified Amount Option, as discussed below.
20
<PAGE>
- --------------------------------------------------------------------------------
CHANGES IN SPECIFIED AMOUNT OPTION
You may change the Specified Amount Option on your Policy subject to the
following rules. After any change, the Specified Amount must be at least
$50,000. No more than one change in the Specified Amount Option may be made in
any Policy Year and no change may be made during the first Policy Year. The
effective date of the change will be the Monthly Anniversary that coincides
with or next follows the Valuation Date when we receive the request for the
change. If you request a change from Option 1 to Option 2, we may require
satisfactory evidence of insurability. If the evidence of insurability
indicates a different rate class for the Insured, the requested change will not
be allowed.
When a change from Option 1 to Option 2 is made, the Specified Amount after
the change is effected will be equal to the Specified Amount before the change
less the Policy Value on the effective date of the change. When a change from
Option 2 to Option 1 is made, the Specified Amount after the change will be
equal to the Specified Amount before the change is effected plus the Policy
Value on the effective date of the change.
- --------------------------------------------------------------------------------
CHANGES IN SPECIFIED AMOUNT
After the first Policy Year, you may request a change in the Specified
Amount, subject to the following conditions. No change will be permitted that
would result in your Policy's Death Benefit not being excludable from gross
income due to not satisfying the requirements of Section 7702 of the Internal
Revenue Code.
Any increase in the Specified Amount must be at least $10,000 and an
application must be submitted, along with evidence of insurability satisfactory
to Penn Mutual. A change in planned premiums may be advisable. See "Premiums
Upon Increase in Specified Amount," page 12. The increase in Specified Amount
will become effective on the Monthly Anniversary on or preceding the date the
increase is approved, and the Policy Value will be adjusted to the extent
necessary to reflect a Monthly Deduction as of the effective date based on the
increase in Specified Amount. You must return your Policy so we can amend the
Policy to reflect the increase. If the increase becomes effective during the
first three Policy Years, the three-year guarantee will be extended. See
"Three-Year Guarantee," page 11.
Any decrease in the Specified Amount must be at least $5,000, and the
Specified Amount after the decrease must be at least $50,000. In addition, no
decrease may be made in the first year following the effective date of an
increase in Specified Amount. A decrease in Specified Amount will become
effective on the Monthly Anniversary that coincides with or next follows our
receipt of a request at our Office.
- --------------------------------------------------------------------------------
SELECTING AND CHANGING THE BENEFICIARY
You select a Beneficiary in your application. You may later change the
Beneficiary in accordance with the terms of the Policy. If the Insured dies and
there is no surviving Beneficiary, the Insured's estate will be the
Beneficiary.
- --------------------------------------------------------------------------------
CASH BENEFITS
- --------------------------------------------------------------------------------
POLICY LOANS
You may borrow up to the Loan Value of your Policy at any time by submitting
a written request to our Office. The minimum amount you may borrow is $250. The
Loan Value is 90% of your Cash Surrender Value. Outstanding policy loans reduce
the amount of the Loan Value available for new loans. Policy loans will be
processed as of the date your written request is received and loan proceeds
generally will be sent to you within seven days. See "When Proceeds Are Paid,"
page 28, and "Payments from the Fixed Account," page 15. Loans under a Policy
classified as a modified endowment contract may be subject to adverse tax
consequences, including a 10% penalty. See "Distributions from Policies
Classified as Modified Endowment Contracts," page 31.)
INTEREST. We will charge interest daily on any outstanding policy loan at an
annual rate of 5.0%. Interest is due and payable at the end of each Policy Year
while a policy loan is outstanding. If interest is not paid when due, the
amount of the interest is added to the loan and becomes part of the outstanding
policy loan.
INDEBTEDNESS. Unrepaid policy loans (including unpaid interest added to the
loan) plus accrued interest not yet due equals the Indebtedness.
21
<PAGE>
LOAN REPAYMENT; EFFECT IF NOT REPAID. You may repay all or part of your
Indebtedness at any time while the Insured is living and the Policy is in
force. Loan repayments must be sent to our Office and will be credited as of
the date received. If the Death Benefit becomes payable while a policy loan is
outstanding, the Indebtedness will be deducted in calculating the Death
Benefit. If the Indebtedness exceeds the Cash Surrender Value on any Valuation
Date, the Policy will be in default. We will send you, and any assignee of
record, notice of the default. You will have a 61-day grace period to submit a
sufficient payment to avoid termination. The notice will specify the amount
that must be repaid to prevent termination. If your Policy terminates because
of excessive Indebtedness, it cannot be reinstated.
POLICY LOAN ACCOUNT. When a policy loan is made, an amount equal to the loan
proceeds is withdrawn from the Policy Value in the Accounts (other than in the
Policy Loan Account). This withdrawal is made pro rata on the basis of Policy
Value in each Account unless you direct a different allocation when requesting
the loan. The amount withdrawn is then transferred to the Policy Loan Account
in the Fixed Account and will become part of the Fixed Account Value.
Conversely, when a loan is repaid, an amount equal to the repayment will be
transferred from the Policy Loan Account to the Accounts and allocated as you
direct when submitting the repayment. If you provide no direction, the amount
will be allocated in accordance with your then effective Net Premium allocation
percentages. Thus, a loan or loan repayment will have no immediate effect on
the Policy Value, but other Policy values, such as the Net Policy Value and Net
Cash Surrender Value, will be reduced or increased immediately by the amount
transferred to or from the Policy Loan Account.
The amount in the Policy Loan Account will be credited with interest at a
minimum guaranteed annual rate of 4.0%. We may in our discretion credit
interest on this amount at a rate greater than 4%. Thus, the maximum net cost
of a loan is 1.0% per year (the difference between the rate of interest we
charge on Policy loans and the amount we credit on the equivalent amount held
in the Policy Loan Account). We currently intend to credit 4.0% on the amount
held in the Policy Loan Account during the first 10 Policy Years (a net loan
cost of 1.0%), and 4.75% after the first 10 Policy Years (a net loan cost of
0.25%).
EFFECT OF POLICY LOAN. A policy loan, whether or not repaid, will have a
permanent effect on the Death Benefit and Policy values because the investment
results of the Subaccounts of the Separate Account and current interest rates
credited on Policy Value in the Fixed Account will apply only to the non-loaned
portion of the Policy Value. The longer the loan is outstanding, the greater
the effect is likely to be. Depending on the investment results of the
Subaccounts or credited interest rates for the Fixed Account while the policy
loan is outstanding, the effect could be favorable or unfavorable. Policy loans
may increase the potential for lapse if investment results of the Subaccounts
are less than anticipated. Also, policy loans could, particularly if not
repaid, make it more likely than otherwise for a Policy to terminate. See "Tax
Considerations," page 30, for a discussion of adverse tax consequences if a
Policy lapses with policy loans outstanding.
- --------------------------------------------------------------------------------
SURRENDERING THE POLICY FOR NET CASH SURRENDER VALUE
You may surrender your Policy at any time for its Net Cash Surrender Value by
submitting a written request to our Office. We may require return of the
Policy. A surrender charge may apply. See "Surrender Charges," page 17. A
surrender request will be processed as of the date your written request and all
required documents are received and generally will be paid within seven days.
See "When Proceeds are Paid," page 28, and "Payments from the Fixed Account,"
page 15. The Net Cash Surrender Value may be taken in one sum or it may be
applied to a payment option. See "Payment Options," page 23. Your Policy will
terminate and cease to be in force if it is surrendered for one sum. It cannot
later be reinstated.
- --------------------------------------------------------------------------------
PARTIAL SURRENDERS
You may make partial surrenders under your Policy subject to the following
conditions. You must submit a written request to our Office. The Net Cash
Surrender Value must exceed $1,000 after the partial surrender is deducted from
the Policy Value. No more than four partial surrenders may be made during a
Policy Year, and each partial surrender must be at least $250. During the first
five Policy Years, no partial surrender may be made that would reduce the
Specified Amount to less than $50,000. An administrative charge will be
assessed on a partial surrender. See "Partial Surrender Charge," page 18. This
charge will be deducted from your Policy Value along with the amount requested
to be withdrawn and will be considered part of the partial surrender (together,
the "partial surrender amount"). Policy values will be reduced by the partial
surrender amount.
When you request a partial surrender, you can direct how the partial
surrender amount will be deducted from your Policy Value in the Accounts,
provided that the minimum amount remaining in an Account as a result of the
deduction is $250. If you provide no directions, the partial surrender amount
will be deducted from your Policy Value in the Accounts on a pro rata basis.
See "Deductions from the Fixed Account," page 15.
22
<PAGE>
If Specified Amount Option 1 is in effect, the Specified Amount will also be
reduced by the partial surrender amount. If the Specified Amount reflects
increases in the Initial Specified Amount, the partial surrender will reduce
first the most recent increase, and then the next most recent increase, if any,
in reverse order, and finally the Initial Specified Amount.
Partial surrender requests will be processed as of the date your written
request is received, and generally will be paid within seven days. See "When
Proceeds Are Paid," page 28, and "Payments from the Fixed Account," page 15.
- --------------------------------------------------------------------------------
MATURITY BENEFIT
The Maturity Date is the Policy Anniversary nearest the Insured's 95th
birthday. If the Policy is still in force on the Maturity Date, the Maturity
Benefit will be paid to you. The Maturity Benefit is equal to the Net Policy
Value on the Maturity Date.
- --------------------------------------------------------------------------------
PAYMENT OPTIONS
The Policy offers a wide variety of optional ways of receiving proceeds
payable under the Policy, such as on surrender, death or maturity, other than
in a lump sum. Any agent authorized to sell this Policy can explain these
options upon request. None of these options vary with the investment
performance of a separate account because they are all forms of fixed-benefit
annuities.
- --------------------------------------------------------------------------------
ILLUSTRATIONS OF POLICY VALUES, NET CASH SURRENDER VALUES, DEATH BENEFITS AND
ACCUMULATED PREMIUMS
The following tables have been prepared to show how certain values under a
hypothetical Policy change with investment performance over an extended period
of time. The tables illustrate how Policy Values, Net Cash Surrender Values and
Death Benefits under a Policy covering an Insured of a given age on the Issue
Date, would vary over time if planned premiums were paid annually and the
return on the assets in the selected Funds were a uniform gross annual rate of
0%, 6% and 12%. The values would be different from those shown if the returns
averaged 0%, 6% or 12% but fluctuated over and under those averages throughout
the years shown. The tables also show planned premiums accumulated at 5%
interest. The hypothetical investment rates of return are illustrative only and
should not be deemed a representation of past or future investment rates of
return. Actual rates of return for a particular Policy may be more or less than
the hypothetical investment rates of return and will depend on a number of
factors including the investment allocations made by an Owner, prevailing rates
and rates of inflation.
The tables reflect the fact that the net investment return on the assets held
in the Subaccounts is lower than the gross after tax return of the selected
Funds. The tables assume an average annual expense ratio of .84% of the average
daily net assets of the Funds available under the Policies. This average annual
expense ratio is based on the expense ratios of each of the Funds for the last
fiscal year. For information on Fund expenses, see the prospectuses for the
Funds accompanying this prospectus.
In addition, the tables also reflect the daily charge against Separate
Account assets attributable to the Policies for Penn Mutual's assumption of
mortality and expense risks, which is equivalent to an effective annual charge
of 0.90% of assets and currently is reduced to 0.60% of assets after the
fifteenth Policy Year. After deduction of Fund expenses and the mortality and
expense risk charge, the illustrated gross annual investment rates of return of
0%, 6% and 12% would correspond to approximate net annual rates of -1.74%,
4.26% and 10.26%, respectively, and -1.44%, 4.56% and 10.56%, respectively, at
current rates after the fifteenth Policy Year.
The tables also reflect the deduction of the Monthly Expense Charge and the
monthly Cost of Insurance Charge for the hypothetical Insured. Our current cost
of insurance charges and the higher guaranteed maximum cost of insurance
charges we have the contractual right to charge are reflected in separate
tables on each of the following pages. All the tables reflect the fact that no
charges for Federal or state income taxes are currently made against the
Separate Account and assume no Indebtedness or charges for supplemental
benefits.
The illustrations are based on our sex distinct rates for preferred
nonsmokers. Upon request, we will furnish a comparable illustration based upon
the proposed Insured's individual circumstances. Such illustrations may assume
different hypothetical rates of return than those illustrated in the following
tables.
23
<PAGE>
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ ------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 369 0 75,000 400 0 75,000 432 0 75,000
2 1,614 815 352 75,000 905 442 75,000 998 536 75,000
3 2,483 1,246 784 75,000 1,423 960 75,000 1,615 1,153 75,000
4 3,394 1,662 1,200 75,000 1,956 1,493 75,000 2,288 1,825 75,000
5 4,351 2,062 1,599 75,000 2,502 2,039 75,000 3,020 2,557 75,000
6 5,357 2,444 1,982 75,000 3,061 2,599 75,000 3,817 3,355 75,000
7 6,412 2,808 2,346 75,000 3,633 3,170 75,000 4,686 4,223 75,000
8 7,520 3,154 2,784 75,000 4,217 3,847 75,000 5,632 5,262 75,000
9 8,683 3,480 3,202 75,000 4,813 4,536 75,000 6,664 6,386 75,000
10 9,905 3,786 3,601 75,000 5,421 5,236 75,000 7,789 7,604 75,000
15 16,993 4,969 4,969 75,000 8,603 8,603 75,000 15,165 15,165 75,000
20 26,039 5,396 5,396 75,000 11,877 11,877 75,000 26,723 26,723 75,000
25 37,585 4,569 4,569 75,000 14,787 14,787 75,000 45,203 45,203 75,000
30 52,321 1,651 1,651 75,000 16,540 16,540 75,000 75,804 75,804 92,481
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ -------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 781 319 75,781 838 376 75,838 895 433 75,895
2 2,583 1,632 1,170 76,632 1,798 1,335 76,798 1,971 1,508 76,971
3 3,972 2,460 1,997 77,460 2,790 2,328 77,790 3,148 2,685 78,148
4 5,431 3,265 2,802 78,265 3,815 3,353 78,815 4,437 3,974 79,437
5 6,962 4,045 3,582 79,045 4,874 4,411 79,874 5,846 5,384 80,846
6 8,570 4,801 4,338 79,801 5,966 5,503 80,966 7,389 6,927 82,389
7 10,259 5,530 5,067 80,530 7,090 6,628 82,090 9,076 8,613 84,076
8 12,032 6,233 5,863 81,233 8,249 7,879 83,249 10,922 10,551 85,922
9 13,893 6,908 6,631 81,908 9,441 9,164 84,441 12,940 12,662 87,940
10 15,848 7,556 7,371 82,556 10,668 10,483 85,668 15,149 14,964 90,149
15 27,189 10,329 10,329 85,329 17,296 17,296 92,296 29,722 29,722 104,722
20 41,663 12,142 12,142 87,142 24,628 24,628 99,628 52,516 52,516 127,516
25 60,136 12,496 12,496 87,496 32,159 32,159 107,159 87,943 87,943 162,943
30 83,713 10,641 10,641 85,641 38,938 38,938 113,938 142,826 142,826 217,826
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
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, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A
PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
24
<PAGE>
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ -------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,305 318 126,305 1,402 415 126,402 1,500 513 126,500
2 4,520 2,711 1,724 127,711 2,992 2,005 127,992 3,286 2,299 128,286
3 6,951 4,065 3,078 129,065 4,622 3,635 129,622 5,226 4,239 130,226
4 9,504 5,366 4,379 130,366 6,290 5,303 131,290 7,334 6,347 132,334
5 12,184 6,614 5,627 131,614 7,998 7,011 132,998 9,625 8,638 134,625
6 14,998 7,804 6,817 132,804 9,741 8,754 134,741 12,113 11,126 137,113
7 17,953 8,935 7,948 133,935 11,519 10,533 136,519 14,816 13,829 139,816
8 21,056 10,003 9,214 135,003 13,329 12,539 138,329 17,750 16,960 142,750
9 24,314 11,002 10,410 136,002 15,163 14,571 140,163 20,931 20,339 145,931
10 27,734 11,932 11,537 136,932 17,022 16,627 142,022 24,384 23,989 149,384
15 47,581 15,522 15,522 140,522 26,654 26,654 151,654 46,718 46,718 171,718
20 72,910 16,930 16,930 141,930 36,372 36,372 161,372 80,666 80,666 205,666
25 105,238 14,470 14,470 139,470 44,028 44,028 169,028 131,035 131,035 256,035
30 146,498 6,135 6,135 131,135 46,512 46,512 171,512 205,223 205,223 330,223
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ -------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 757 0 125,000 821 0 125,000 885 0 125,000
2 3,229 1,627 640 125,000 1,808 821 125,000 1,997 1,010 125,000
3 4,965 2,458 1,471 125,000 2,812 1,825 125,000 3,198 2,211 125,000
4 6,788 3,249 2,262 125,000 3,834 2,847 125,000 4,496 3,509 125,000
5 8,703 3,999 3,012 125,000 4,872 3,885 125,000 5,902 4,915 125,000
6 10,713 4,704 3,717 125,000 5,923 4,937 125,000 7,422 6,435 125,000
7 12,824 5,364 4,377 125,000 6,987 6,000 125,000 9,067 8,080 125,000
8 15,040 5,973 5,184 125,000 8,059 7,270 125,000 10,847 10,057 125,000
9 17,367 6,528 5,935 125,000 9,134 8,542 125,000 12,770 12,178 125,000
10 19,810 7,026 6,631 125,000 10,211 9,816 125,000 14,853 14,458 125,000
15 33,986 8,660 8,660 125,000 15,610 15,610 125,000 28,358 28,358 125,000
20 52,079 8,445 8,445 125,000 20,648 20,648 125,000 49,438 49,438 125,000
25 75,170 4,624 4,624 125,000 23,565 23,565 125,000 83,142 83,142 125,000
30 104,641 0 0 0 21,618 21,618 125,000 140,969 140,969 150,837
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge of $9.00 per month, and a mortality and expense
risk charge of 0.90% of assets.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
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, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A
PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
25
<PAGE>
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$750 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ ------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 381 0 75,000 413 0 75,000 446 0 75,000
2 1,614 898 435 75,000 991 529 75,000 1,089 627 75,000
3 2,483 1,399 936 75,000 1,587 1,125 75,000 1,792 1,329 75,000
4 3,394 1,884 1,422 75,000 2,201 1,739 75,000 2,559 2,097 75,000
5 4,351 2,354 1,891 75,000 2,835 2,372 75,000 3,399 2,936 75,000
6 5,357 2,809 2,347 75,000 3,489 3,026 75,000 4,318 3,856 75,000
7 6,412 3,249 2,786 75,000 4,163 3,701 75,000 5,325 4,862 75,000
8 7,520 3,669 3,299 75,000 4,855 4,485 75,000 6,424 6,054 75,000
9 8,683 4,067 3,789 75,000 5,562 5,284 75,000 7,623 7,345 75,000
10 9,905 4,443 4,258 75,000 6,284 6,099 75,000 8,931 8,746 75,000
15 16,993 5,954 5,954 75,000 10,113 10,113 75,000 17,545 17,545 75,000
20 26,039 6,850 6,850 75,000 14,460 14,460 75,000 31,624 31,624 75,000
25 37,585 6,864 6,864 75,000 19,215 19,215 75,000 55,020 55,020 75,000
30 52,321 5,389 5,389 75,000 24,060 24,060 75,000 93,875 93,875 114,528
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.90% of assets in years 1-15 and
0.60% thereafter.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ -------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 802 339 75,802 860 397 75,860 917 455 75,917
2 2,583 1,731 1,268 76,731 1,902 1,439 76,902 2,080 1,618 77,080
3 3,972 2,636 2,174 77,636 2,981 2,519 77,981 3,355 2,892 78,355
4 5,431 3,518 3,056 78,518 4,098 3,636 79,098 4,751 4,288 79,751
5 6,962 4,377 3,915 79,377 5,255 4,792 80,255 6,282 5,820 81,282
6 8,570 5,213 4,751 80,213 6,452 5,990 81,452 7,963 7,500 82,963
7 10,259 6,026 5,563 81,026 7,692 7,230 82,692 9,806 9,344 84,806
8 12,032 6,811 6,441 81,811 8,971 8,601 83,971 11,825 11,455 86,825
9 13,893 7,567 7,289 82,567 10,288 10,010 85,288 14,033 13,755 89,033
10 15,848 8,292 8,106 83,292 11,642 11,457 86,642 16,449 16,264 91,449
15 27,189 11,423 11,423 86,423 18,990 18,990 93,990 32,420 32,420 107,420
20 41,663 13,818 13,818 88,818 27,647 27,647 102,647 58,321 58,321 133,321
25 60,136 15,125 15,125 90,125 37,412 37,412 112,412 99,907 99,907 174,907
30 83,713 14,739 14,739 89,739 47,772 47,772 122,772 166,490 166,490 241,490
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.90% of assets in years 1-15 and
0.60% thereafter.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
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, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A
PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
26
<PAGE>
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ -------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 800 0 125,000 865 0 125,000 931 0 125,000
2 3,229 1,775 788 125,000 1,964 977 125,000 2,161 1,175 125,000
3 4,965 2,701 1,714 125,000 3,076 2,089 125,000 3,484 2,497 125,000
4 6,788 3,584 2,597 125,000 4,210 3,223 125,000 4,916 3,929 125,000
5 8,703 4,425 3,438 125,000 5,364 4,378 125,000 6,469 5,482 125,000
6 10,713 5,222 4,235 125,000 6,540 5,553 125,000 8,154 7,167 125,000
7 12,824 5,988 5,001 125,000 7,749 6,762 125,000 9,998 9,011 125,000
8 15,040 6,718 5,929 125,000 8,989 8,200 125,000 12,013 11,223 125,000
9 17,367 7,407 6,815 125,000 10,256 9,664 125,000 14,212 13,620 125,000
10 19,810 8,057 7,662 125,000 11,552 11,157 125,000 16,618 16,223 125,000
15 33,986 10,558 10,558 125,000 18,359 18,359 125,000 32,478 32,478 125,000
20 52,079 11,710 11,710 125,000 25,914 25,914 125,000 58,563 58,563 125,000
25 75,170 10,813 10,813 125,000 33,809 33,809 125,000 102,394 102,394 125,000
30 104,641 7,068 7,068 125,000 41,801 41,801 125,000 176,889 176,889 189,272
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.90% of assets in years 1-15 and
0.60% thereafter.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ------------------------ ------------------------ -------------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------ --------- ------- ------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,359 372 126,359 1,458 472 126,458 1,558 571 126,558
2 4,520 2,881 1,894 127,881 3,172 2,185 128,172 3,476 2,490 128,476
3 6,951 4,339 3,353 129,339 4,922 3,935 129,922 5,553 4,566 130,553
4 9,504 5,743 4,757 130,743 6,715 5,728 131,715 7,811 6,824 132,811
5 12,184 7,092 6,105 132,092 8,553 7,566 133,553 10,267 9,281 135,267
6 14,998 8,384 7,397 133,384 10,434 9,447 135,434 12,940 11,953 137,940
7 17,953 9,631 8,644 134,631 12,374 11,387 137,374 15,865 14,878 140,865
8 21,056 10,830 10,041 135,830 14,368 13,579 139,368 19,061 18,271 144,061
9 24,314 11,975 11,383 136,975 16,413 15,821 141,413 22,549 21,957 147,549
10 27,734 13,068 12,673 138,068 18,511 18,117 143,511 26,361 25,966 151,361
15 47,581 17,574 17,574 142,574 29,672 29,672 154,672 51,319 51,319 176,319
20 72,910 20,487 20,487 145,487 42,265 42,265 167,265 91,199 91,199 216,199
25 105,238 21,010 21,010 146,010 55,479 55,479 180,479 154,176 154,176 279,176
30 146,498 18,483 18,483 143,483 68,518 68,518 193,518 254,227 254,227 379,227
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $9.00 in year 1 and $5.00 thereafter, and a
mortality and expense risk charge of 0.90% of assets in years 1-15 and
0.60% thereafter.
(3) Net investment returns are calculated as the hypothetical gross
investment returns less all charges and deductions shown in the
prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
- -------------------------------------------------------------------------------
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, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A
PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE
FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
27
<PAGE>
- --------------------------------------------------------------------------------
OTHER POLICY BENEFITS AND PROVISIONS
- --------------------------------------------------------------------------------
RIGHT TO CONVERT TO A FIXED BENEFIT POLICY
At any time within the first 24 policy months, you may transfer your Policy
Value in the Subaccounts to the Fixed Account and thereby convert your Policy
to a flexible premium (non-variable) adjustable life insurance policy.
Thereafter, the benefits for your Policy will not vary with the investment
experience of a separate account. Premiums paid thereafter will be allocated
automatically to the Fixed Account. The conversion must be elected within 24
months from the Policy Date. No evidence of insurability will be required. The
Policy will provide the same amount of death benefit and the same net amount at
risk as was in effect immediately prior to the conversion date.
- --------------------------------------------------------------------------------
DIVIDENDS
The Policies are participating policies in that they are eligible to
participate in Penn Mutual's surplus. However, we do not anticipate that any
dividends will be paid on the Policies. If dividends are paid, you will have
the option of having them added to your Policy Value or paid to you in cash.
- --------------------------------------------------------------------------------
LIMITS ON OUR RIGHTS TO CONTEST THE POLICY
INCONTESTABILITY. We will not contest the Policy after it has been in force
during the Insured's lifetime for two years from the Issue Date. Any increase
in the Specified Amount will be incontestable with respect to statements made
in the evidence of insurability for that increase after the increase has been
in force during the life of the Insured for two years after the effective date
of the increase.
SUICIDE EXCLUSION. If the Insured dies by suicide within two years after the
Issue Date, the Death Benefit will be limited to the premiums paid less any
Indebtedness and any partial surrenders. If the Insured dies by suicide within
two years after an increase in Specified Amount, the Death Benefit with respect
to the increase will be limited to the Monthly Deductions made for that
increase.
- --------------------------------------------------------------------------------
CHANGES IN THE POLICY OR BENEFITS
MISSTATEMENT OF AGE OR SEX. If the Insured's age or sex has been misstated in
the Policy, the Death Benefit under the Policy will be the amount which would
have been provided by the most recent Cost of Insurance Charge at the correct
age and sex.
OTHER CHANGES. At any time we may make such changes in the Policy as are
necessary to assure compliance at all times with the definition of life
insurance prescribed by the Internal Revenue Code or to make the Policy conform
with any law or regulation issued by any government agency to which it is
subject. Any such change, however, may be accepted or rejected by the Owner.
- --------------------------------------------------------------------------------
WHEN PROCEEDS ARE PAID
We will ordinarily pay any Death Benefit, loan proceeds or partial or full
surrender proceeds within seven days after receipt at our Office of all the
documents required for such a payment. Other than the Death Benefit, which is
determined as of the date of death, the amount will be determined as of the
date of receipt of required documents. However, we may delay making a payment
or processing a transfer request if (1) the disposal or valuation of the
Separate Account's assets is not reasonably practicable because the New York
Stock Exchange is closed for other than a regular holiday or weekend, trading
is restricted by the SEC, or the SEC declares that an emergency exists; or (2)
the SEC by order permits postponement of payment to protect Penn Mutual's
policy owners. See also "Payments from the Fixed Account," page 15.
- --------------------------------------------------------------------------------
REPORTS TO POLICY OWNERS
Each year you will be sent a report showing the current Policy values,
premiums paid and deductions made since the last report, any outstanding policy
loans, and any additional premiums permitted under your Policy. You will also
be sent an annual
28
<PAGE>
and a semi-annual report for the Separate Account and for each Fund underlying
a Subaccount to which you have allocated Policy Value, as required by the 1940
Act. In addition, when you pay premiums (other than by pre-authorized check),
or if you take out a policy loan, transfer amounts among the Accounts or make
partial surrenders, you will receive a written confirmation of these
transactions.
- --------------------------------------------------------------------------------
ASSIGNMENT
The Policy may be assigned in accordance with its terms on a form provided by
us. We will not be deemed to know of an assignment unless we receive a copy of
it at our Office. We assume no responsibility for the validity or sufficiency
of any assignment.
- --------------------------------------------------------------------------------
REINSTATEMENT
The Policy may be reinstated within five years after lapse, subject to
compliance with certain conditions, including the payment of a necessary
premium and submission of satisfactory evidence of insurability. See your
Policy for further information.
- --------------------------------------------------------------------------------
SUPPLEMENTAL BENEFITS
The following supplemental benefits are available and may be added to your
Policy. There are monthly charges for these benefits that are in addition to
the Cost of Insurance and Monthly Expense Charges described above. (See
"Monthly Deduction," page 16.) If any of these benefits are added to your
Policy, monthly charges for the supplemental benefits will be deducted from
your Policy Value as part of the Monthly Deduction.
ADDITIONAL INSURED TERM INSURANCE. Provides a death benefit payable on the
death of an additional insured. More than one rider can be added to your
Policy. There is no cash value for this benefit.
CHILDREN'S TERM INSURANCE. Provides a death benefit payable on the death of
a covered child. More than one child can be covered. There is no cash value
for this benefit.
ACCIDENTAL DEATH BENEFIT. Provides a death benefit payable if the Insured's
death results from certain accidental causes. There is no cash value for
this benefit.
DISABILITY WAIVER OF MONTHLY DEDUCTION AND DISABILITY MONTHLY PREMIUM
DEPOSIT. Provides for the waiver of the Monthly Deductions and payment of
stipulated premiums upon total disability of the Insured. If Specified
Amount Option 1 is in effect at the time this benefit becomes effective, it
will be changed to Specified Amount Option 2. See "Basic Death Benefit and
Specified Amount Options," page 20.
DISABILITY WAIVER OF MONTHLY DEDUCTION. Provides for the waiver of the
Monthly Deductions upon total disability of the Insured.
GUARANTEED CONTINUATION OF POLICY. Guarantees that the Policy will remain
in force and a death benefit will be payable regardless of the sufficiency
of the Net Cash Surrender Value.
GUARANTEED OPTION TO INCREASE SPECIFIED AMOUNT. Allows the Owner to
increase the Specified Amount without evidence of insurability. See
"Changes in Specified Amount," page 21.
SUPPLEMENTAL TERM INSURANCE. Provides a death benefit payable on the death
of the primary insured if death occurs during the term selected. There is
no cash value for this benefit.
Additional rules and limits apply to these supplemental benefits. Please ask
your authorized Penn Mutual agent for further information or contact our
Office.
29
<PAGE>
- --------------------------------------------------------------------------------
TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon Penn Mutual's understanding
of the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service (the "Service"). No representation is made as to the
likelihood of continuation of the present Federal income tax laws or of the
current interpretations by the Service.
- --------------------------------------------------------------------------------
TAX STATUS OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code")
sets forth a definition of a life insurance contract for Federal tax purposes.
The Secretary of the Treasury (the "Treasury") is authorized to prescribe
regulations implementing Section 7702. While proposed regulations and other
interim guidance has been issued, final regulations have not been adopted. In
short, guidance as to how Section 7702 is to be applied is limited. If a Policy
were determined not to be a life insurance contract for purposes of Section
7702, such Policy would not qualify for the favorable tax treatment normally
provided to a life insurance policy.
With respect to a Policy issued on the basis of a standard rate class, Penn
Mutual believes (largely in reliance on IRS Notice 88-128 and the proposed
regulations under Section 7702, issued on July 5, 1991) that such a Policy
should meet the Section 7702 definition of a life insurance contract.
With respect to a Policy that is issued on a substandard basis (i.e., a
premium class involving higher than standard mortality risk), there is less
guidance, in particular as to how the mortality and other expense requirements
of Section 7702 are to be applied in determining whether such a Policy meets
the section 7702 definition of a life insurance contract. Thus, it is not clear
whether or not such a Policy would satisfy section 7702, particularly if the
Owner pays the full amount of premiums permitted under the Policy.
If it is subsequently determined that a Policy does not satisfy Section 7702,
Penn Mutual may take whatever steps are appropriate and necessary to attempt to
cause such a Policy to comply with Section 7702. For these reasons, Penn Mutual
reserves the right to restrict Policy transactions as necessary to attempt to
qualify it as a life insurance contract under Section 7702.
Section 817(h) of the Code requires that the investments of the Separate
Account must be "adequately diversified" in accordance with Treasury
regulations in order for the Policy to qualify as a life insurance contract
under Section 7702 of the Code. The Separate Account, through the Funds,
intends to comply with the diversification requirements prescribed in Treas.
Reg. (S)1.817-5, which affect how the Funds' assets are to be invested.
In certain circumstances, owners of variable life insurance contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includable in the
variable contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The
Treasury Department also announced, in connection with the issuance of
regulations concerning diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
Policyowner), rather than the insurance company, to be treated as the owner of
the assets in the account." This announcement also stated that guidance would
be issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular subaccounts without
being treated as owners of the underlying assets." As of the date of this
prospectus, no such guidance has been issued.
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating premium payments
and policy values. These differences could result in an Owner being treated as
the owner of a pro rata portion of the assets of the Separate Account. In
addition, Penn Mutual does not know what standards will be set forth, if any,
in the regulations or rulings which the Treasury Department has stated it
expects to issue. Penn Mutual therefore reserves the right to modify the Policy
as necessary to attempt to prevent an Owner from being
30
<PAGE>
considered the owner of a pro rata share of the assets of the Separate Account
or to otherwise qualify the Policy for favorable tax treatment.
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 the Policies in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
- --------------------------------------------------------------------------------
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. Penn Mutual believes that the proceeds and cash value increases
of a Policy should be treated in a manner consistent with a fixed-benefit life
insurance policy for Federal income tax purposes. Thus, the Death Benefit under
the Policy should be excludable from the gross income of the Beneficiary under
Section 101(a)(1) of the Code.
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's Death Benefit Option (i.e., a change from Specified Amount Option 1 to
Specified Amount Option 2 or vice versa), a policy loan, a partial surrender, a
surrender, a change in ownership, or an assignment of the Policy may have
Federal income tax consequences. In addition, Federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy proceeds
depend on the circumstances of each Owner or Beneficiary.
Generally, the Owner will not be deemed to be in constructive receipt of the
Policy Value, including increments thereof, until there is a distribution. The
tax consequences of distributions from, and loans taken from or secured by a
Policy, depend on whether the Policy is classified as a "Modified Endowment
Contract." Whether a Policy is or is not treated as a Modified Endowment
Contract, upon a complete surrender or lapse of a Policy or when benefits are
paid at a Policy's endowment date, if the amount received plus the amount of
indebtedness exceeds the total investment in the Policy, the excess will
generally be treated as ordinary income subject to tax.
MODIFIED ENDOWMENT CONTRACTS. Section 7702A establishes a class of life
insurance contracts designated as "Modified Endowment Contracts," which applies
to Policies entered into or materially changed after June 20, 1988.
Due to the Policy's flexibility, classification as a Modified Endowment
Contract will depend on the individual circumstances of each Policy. In
general, a Policy will be a Modified Endowment Contract if the accumulated
premiums paid at any time during the first seven Policy Years exceeds the sum
of the net level premiums which would have been paid on or before such time if
the Policy provided for paid-up future benefits after the payment of seven
level annual premiums. The determination of whether a Policy will be a Modified
Endowment Contract after a material change generally depends upon the
relationship of the Death Benefit and Policy Value at the time of such change
and the additional premiums paid in the seven years following the material
change.
The rules relating to whether a Policy will be treated as a Modified
Endowment Contract are extremely complex and cannot be adequately described in
the limited confines of this summary. Therefore, a current or prospective Owner
should consult with a competent advisor to determine whether a policy
transaction will cause the Policy to be treated as a Modified Endowment
Contract. Penn Mutual will, however, monitor Policies and will attempt to
notify an Owner on a timely basis if his or her Policy is in jeopardy of
becoming a Modified Endowment Contract.
DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Policies classified as Modified Endowment Contracts will be subject to the
following tax rules. First, all distributions, including distributions upon
surrender and partial surrenders from such a Policy, are treated as ordinary
income subject to tax up to the amount equal to the excess (if any) of the
Policy Value immediately before the distribution over the investment in the
Policy (described below) at such time. Second, loans taken from or secured by,
such a Policy are treated as distributions from such a Policy and taxed
accordingly. Past due loan interest that is added to the loan amount will be
treated as a loan. Third, a 10 percent additional income tax is included in
income except where the distribution or loan is made on or after the Owner
attains age 59 1/2, is attributable to the Owner's becoming disabled, or is
part of a series of substantially equal periodic payments for the life (or life
expectancy) of the Owner or the joint lives (or joint life expectancies) of the
Owner and the Owner's Beneficiary.
DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Distributions from a Policy that is not a Modified Endowment Contract, are
generally treated as first recovering the investment in the Policy (described
below) and then, only after the return of all such investment in the Policy, as
distributing taxable income. An exception to this general rule occurs in the
case of a decrease in the Policy's Death Benefit or any other change that
reduces benefits under the Policy in the first fifteen years after the Policy
is issued and that results in a cash distribution to the Owner in order for the
Policy to continue
31
<PAGE>
complying with the Section 7702 definitional limits. Such a cash distribution
will be taxed in whole or in part as ordinary income (to the extent of any gain
in the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a Modified Endowment Contract
are not treated as distributions. Instead, such loans generally are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon surrender) nor
loans from, or secured by, a Policy that is not a Modified Endowment Contract
are subject to the 10 percent additional tax.
POLICY LOANS. Generally, consumer interest paid on any loan under a Policy
which is owned by an individual is not deductible. In addition, interest on any
loan under a Policy owned by a taxpayer and covering the life of any individual
who is an officer or employee of or is financially interested in the business
carried on by that taxpayer will not be tax deductible to the extent the
aggregate amount of such loans with respect to contracts covering such
individual exceeds $50,000. The deduction of interest on Policy loans may also
be subject to certain other restrictions set forth in Section 264 of the Code.
Before taking a Policy loan, an Owner should consult a tax adviser as to the
tax consequences of such a loan.
INVESTMENT IN THE POLICY. Investment in the Policy means (i) the aggregate
amount of any premiums or other consideration paid for a Policy, minus (ii) the
aggregate amount received under the Policy which is excluded from gross income
of the Owner (except that the amount of any loan from, or secured by, a Policy
that is a Modified Endowment Contract, to the extent such amount is excluded
from gross income, will be disregarded), plus (iii) the amount of any loan
from, or secured by, a Policy that is a Modified Endowment Contract to the
extent that such amount is included in the gross income of the Owner.
MULTIPLE POLICIES. All Modified Endowment Contracts that are issued by Penn
Mutual (or its affiliates) to the same Owner during any calendar year are
treated as one Modified Endowment Contract for purposes of determining the
amount includable in the gross income under Section 72(e) of the Code.
- --------------------------------------------------------------------------------
POSSIBLE CHARGE FOR PENN MUTUAL'S TAXES
At the present time, Penn Mutual makes no charge for any Federal, state or
local taxes (other than state premium taxes) that it incurs that may be
attributable to the Separate and Fixed Accounts or to the Policies. Penn
Mutual, however, reserves the right in the future to make a charge for any such
tax or other economic burden resulting from the application of the tax laws
that it determines to be properly attributable to the Accounts or to the
Policies.
- --------------------------------------------------------------------------------
OTHER INFORMATION ABOUT THE POLICIES AND PENN MUTUAL
- --------------------------------------------------------------------------------
SALE OF THE POLICIES
Hornor, Townsend & Kent, Inc. ("HTK"), a wholly-owned subsidiary of Penn
Mutual, acts as a principal underwriter of the Policies. HTK also acts as
principal underwriter for Penn Mutual Variable Annuity Account III, a separate
account also established by Penn Mutual, and for PIA Variable Annuity Account
I, a separate account established by The Penn Insurance and Annuity Company, a
wholly-owned subsidiary of Penn Mutual. HTK is a registered broker-dealer under
the Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. Regulatory approvals are being sought for the Policies
so that the Policies can be offered in all states. The Policies are sold by
certain registered representatives of HTK who are also appointed and licensed
as insurance agents. The Policies may also be offered through insurance and
securities brokers who have lawfully qualified to sell the Policies. Registered
representatives may be paid commissions on Policies they sell based on premiums
paid in amounts up to 50% of first year premiums, 3% on premiums paid during
the second through fifteenth Policy Years, and 1.2% on premiums paid after the
first fifteen Policy Years. Other allowances and overrides also may be paid.
Registered representatives who meet certain productivity and profitability
standards may be eligible for additional compensation.
For 1995, Penn Mutual received premium payments on the Policy in the
approximate amount of $5,895,000, and compensated HTK in the approximate amount
of $27,800 for its services as principal underwriter.
32
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL TRUSTEES AND OFFICERS
Penn Mutual is managed by a board of trustees. The following table sets forth
the name, address and principal occupations during the past five years of each
of Penn Mutual's trustees.
BOARD OF TRUSTEES
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS PENN MUTUAL DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------
<C> <C> <S>
John E. Tait Chairman of the Chairman of the Board (since
Independence Square Board April 1995), Chairman and Chief
Philadelphia, PA 19172 Executive Officer (January 1994
to April 1995), Chairman,
President and Chief Executive
Officer (September 1991 to
January 1994), Chairman of the
Board and Chief Executive
Officer (prior thereto), The
Penn Mutual Life Insurance
Company.
- ------------------------------------------------------------------------------
Robert E. Chappell President and Chief President and Chief Executive
Independence Square Executive Officer Officer (since April 1995),
Philadelphia, PA 19172 President and Chief Operating
Officer, The Penn Mutual Life
Insurance Company (January 1994
to April 1995); Executive Vice
President, PNC Bank Corp.
(January 1992 to December 1993);
Chairman of the Board (June 1991
to January 1992) and Chairman,
President and Chief Executive
Officer, Provident National Bank
(prior thereto).
- ------------------------------------------------------------------------------
James A. Hagen Trustee Chairman of the Board, Conrail,
2001 Market Street Inc.
P.O. Box 41417
Philadelphia, PA 19101-
1417
- ------------------------------------------------------------------------------
Philip E. Lippincott Trustee Retired (since April 1994),
P.O. Box 497 Chairman and Chief Executive
Lima, PA 19037 Officer, Scott Paper Company
(prior thereto).
- ------------------------------------------------------------------------------
Claudine B. Malone Trustee President, Financial and
7570 Potomac Fall Road Management Consulting, Inc.
McLean, VA 22102
- ------------------------------------------------------------------------------
John F. McCaughan Trustee Chairman of the Board, Betz
Betz Laboratories, Inc. Laboratories, Inc.
200 Witmer Road
Horsham, PA 19044
- ------------------------------------------------------------------------------
Alan B. Miller Trustee Chairman and President,
367 Gulph Road Universal Health Services, Inc.
King of Prussia, PA
19406
- ------------------------------------------------------------------------------
Joseph Neubauer Trustee Chairman, Chief Executive
ARAMARK Tower Officer and President, ARAMARK
1101 Market Street Corporation.
Philadelphia, PA 19107
- ------------------------------------------------------------------------------
Norman T. Wilde, Jr. Trustee President and Chief Executive
1801 Market Street Officer, Janney Montgomery Scott
Philadelphia, PA 19103 Inc. (a securities broker/dealer
and subsidiary of The Penn
Mutual Life Insurance Company).
- ------------------------------------------------------------------------------
Wesley S. Williams, Jr., Trustee Partner, Covington & Burling
Esq. (law firm).
1201 Pennsylvania Ave.,
N.W.
P.O. Box 7566
Washington, D.C. 20004
</TABLE>
33
<PAGE>
The following table sets forth the names, addresses and principal occupations
during the past five years of the senior officers of Penn Mutual (other than
officers who are members of Penn Mutual's Board of Trustees).
SENIOR OFFICERS
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------------------------------------------------------------
<C> <S>
John M. Albanese Vice President, Systems and Service (since July 1995),
Independence Square Vice President, Information Systems Application (August
Philadelphia, PA 19172 1992 to July 1995), Manager (prior thereto), Price
Waterhouse.
- -------------------------------------------------------------------------------
Nancy S. Brodie Executive Vice President and Chief Financial Officer
Independence Square (since December 1995), Senior Vice President and Chief
Philadelphia, PA 19172 Financial Officer (January 1994 to December 1995), Vice
President and Controller (November 1991 to January
1994), General Auditor (October 1989 to November 1991),
Assistant Vice President, Taxation (prior thereto), The
Penn Mutual Life Insurance Company.
- -------------------------------------------------------------------------------
Phillip E. Collins Senior Vice President, Career Financial Network (since
Independence Square August 1992), Vice President, Career Financial Network
Philadelphia, PA 19172 (January 1992 to August 1992), The Penn Mutual Life
Insurance Company, Senior Vice President, Career Sales,
Monarch Life Insurance Company (prior thereto).
- -------------------------------------------------------------------------------
Joseph J. Horvath Executive Vice President, General Counsel and Secretary
Independence Square (since January 1992), Senior Vice President, General
Philadelphia, PA 19172 Counsel and Secretary (prior thereto), The Penn Mutual
Life Insurance Company.
- -------------------------------------------------------------------------------
L. Stockton Illoway Senior Vice President, Annuity and Pension Business
Independence Square (since December 1993) Senior Vice President, Individual
Philadelphia, PA 19172 Retirement Investment Service (September 1993 to
December 1993), Regional Vice President (prior
thereto), The Penn Mutual Life Insurance Company.
- -------------------------------------------------------------------------------
Richard J. Liburdi Senior Vice President, Insurance and Life Sales (since
Independence Square January 1991), Vice President and Product Manager
Philadelphia, PA 19172 (November 1988 to January 1991), Assistant Vice
President and Product Manager (prior thereto), The Penn
Mutual Life Insurance Company.
- -------------------------------------------------------------------------------
Nina M. Mulrooney General Auditor (since November 1991), Assistant Vice
Independence Square President, Corporate Accounting and Controls (December
Philadelphia, PA 19172 1988 to November 1991), Director, Cost Accounting and
Budget (prior thereto), The Penn Mutual Life Insurance
Company.
- -------------------------------------------------------------------------------
Steven C. Palmitier Senior Vice President, Independent Financial Network
Independence Square (since January 1995), Vice President, Independent
Philadelphia, PA 19172 Financial Network (April 1991 to January 1995), The
Penn Mutual Life Insurance Company.
- -------------------------------------------------------------------------------
Peter M. Sherman Senior Vice President and Chief Investment Officer
Independence Square (since May 1996), Vice President, Investments (January
Philadelphia, PA 19172 1996 to April 1996), Vice President, Fixed Income
Portfolio Management (prior thereto), The Penn Mutual
Life Insurance Company; President, Independence Capital
Management, Inc. (an investment advisory organization
and subsidiary of Penn Mutual), since September 1995.
</TABLE>
- --------------------------------------------------------------------------------
STATE REGULATION
Penn Mutual is subject to regulation by the Department of Insurance of the
Commonwealth of Pennsylvania, which periodically examines our financial
condition and operations. We are also subject to the insurance laws and
regulations of all jurisdictions where we do business. The Policy described in
this prospectus has been filed with and, where required, approved by, insurance
officials in those jurisdictions where it is sold.
We are required to submit annual statements of our operations, including
financial statements, to the insurance departments of the various jurisdictions
where we do business to determine solvency and compliance with applicable
insurance laws and regulations.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
A registration statement under the Securities Act of 1933 has been filed with
the SEC relating to the offering described in this prospectus. This prospectus
does not include all the information set forth in the registration statement.
The omitted information may be obtained at the SEC's principal office in
Washington, D.C. by paying the SEC's prescribed fees.
34
<PAGE>
- --------------------------------------------------------------------------------
EXPERTS
The statement of assets and liabilities of Penn Mutual Variable Life Account
I- Cornerstone VUL II/Variable EstateMax as of December 31, 1995, and the
related statement of operations and the statements of changes in net assets for
the period May 1, 1995 (commencement of operations) to December 31, 1995, and
the statements of financial condition of The Penn Mutual Life Insurance Company
as of December 31, 1995 and 1994 and the related statements of operations and
surplus and cash flows for each of the three years in the period ended December
31, 1995, included in this prospectus, have been audited by Coopers & Lybrand
L.L.P., independent accountants. The reports and the financial statements have
been included upon authority of said firm as experts in accounting and
auditing.
Actuarial matters included in this prospectus have been examined by Peter R.
Schaefer, F.S.A., M.A.A.A., Actuary of Penn Mutual, whose opinion is filed as
an exhibit to the Registration Statement.
- --------------------------------------------------------------------------------
LITIGATION
No litigation is pending that would have a material effect upon the Separate
Account or Penn Series.
- --------------------------------------------------------------------------------
LEGAL MATTERS
Morgan, Lewis & Bockius LLP of Philadelphia, Pennsylvania has provided advice
on certain matters relating to the federal securities laws and the offering of
the Policies.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The financial statements of the Subaccounts and of Penn Mutual appear on the
following pages. The financial statements of Penn Mutual should be
distinguished from any financial statements of the Subaccounts and should be
considered only as bearing upon Penn Mutual's ability to meet its obligations
under the Policies.
35
<PAGE>
- -----------------------------------------------------
THIS PAGE LEFT INTENTIONALLY BLANK
36
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE PENN MUTUAL LIFE INSURANCE COMPANY AND CONTRACT OWNERS
OF PENN MUTUAL VARIABLE LIFE ACCOUNT I--CORNERSTONE VUL II/VARIABLE ESTATE MAX:
We have audited the accompanying statements of assets and liabilities of the
Penn Mutual Variable Life Account I--Cornerstone VUL II/Variable Estate Max
(VUL II/VMAX) [comprising, respectively, the Money Market Fund, Quality Bond
Fund, High Yield Bond Fund, Growth Equity Fund, Value Equity Fund, Flexibly
Managed Fund, Small Capitalization Fund, International Equity Fund, Limited
Maturity Bond Portfolio, Balanced Portfolio, TCI Growth Portfolio, Equity-
Income Portfolio, Growth Portfolio, and Asset Manager Portfolio] as of December
31, 1995, and the related statements of operations and of changes in net assets
for the period from May 1, 1995 (commencement of operations) to December 31,
1995. These financial statements are the responsibility of the management of
VUL II/VMAX. Our responsibility is to express an opinion on these 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. Our
procedures included confirmation of securities owned as of December 31, 1995 by
correspondence with the transfer agents. 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 Penn Mutual Variable Life
Account I--Cornerstone VUL II/Variable Estate Max as of December 31, 1995, the
results of its operations and changes in net assets for the period from May 1,
1995 (commencement of operations) to December 31, 1995 in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND, L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 4, 1996
37
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - VUL II/VARIABLE ESTATE MAX
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1995
<TABLE>
<CAPTION>
MONEY MARKET MONEY MARKET QUALITY BOND HIGH YIELD BOND
TOTAL FUND+(A) FUND+(B) FUND+ FUND+
---------- ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT IN COMMON
STOCK:
Number of shares......... 1,064,691 41,147 8,511 10,953
Identified cost.......... $5,948,988 $1,064,691 $41,147 $88,932 $96,842
ASSETS:
Investments at value..... $5,935,065 $1,064,691 $41,147 $87,148 $92,442
Dividends receivable..... 4,412 4,344 68 0 0
LIABILITIES:
Due to (from) the Penn
Mutual Life Insurance
Company................. 84,689 61,399 23,889 (12) (12)
---------- ---------- ------- ------- -------
NET ASSETS................ $6,024,166 $1,130,434 $65,104 $87,136 $92,430
========== ========== ======= ======= =======
Variable life accumulation
units.................... 109,836 6,316 7,837 8,652
Accumulation unit values.. $ 10.29 $ 10.31 $ 11.12 $ 10.68
- ----------------------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - VUL II/VARIABLE ESTATE MAX
STATEMENT OF OPERATIONS - FOR THE PERIOD MAY 1, 1995 (COMMENCEMENT OF
OPERATIONS)
TO DECEMBER 31, 1995
<CAPTION>
MONEY MARKET MONEY MARKET QUALITY BOND HIGH YIELD BOND
TOTAL FUND+(A) FUND+(B) FUND+ FUND+
---------- ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................ $ 97,291 $ 18,434 $ 871 $ 4,981 $ 8,033
EXPENSE:
Mortality and expense
risk charges ........... 14,400 3,207 152 170 318
---------- ---------- ------- ------- -------
Net investment income
(loss).................. 82,891 15,227 719 4,811 7,715
---------- ---------- ------- ------- -------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses)
from redemption of fund
shares ................. 1,831 0 0 122 2
Capital gains distribu-
tions .................. 105,862 0 0 0 0
---------- ---------- ------- ------- -------
Net realized gains (loss-
es)..................... 107,693 0 0 122 2
Net change in unrealized
appreciation/depreciation
of investments.......... (13,949) 0 0 (1,784) (4,400)
---------- ---------- ------- ------- -------
Net realized and
unrealized gains
(losses) on investments. 93,744 0 0 (1,662) (4,398)
---------- ---------- ------- ------- -------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS......... $ 176,635 $ 15,227 $ 719 $ 3,149 $ 3,317
========== ========== ======= ======= =======
</TABLE>
- -----------------------
(a) Represents only the Cornerstone VUL II product.
(b) Represents only the Variable Estate Max product.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Fund's I
and II.
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL INTERNATIONAL LIMITED
GROWTH EQUITY VALUE EQUITY MANAGED CAPITALIZATION EQUITY BALANCED MATURITY BOND
FUND+ FUND+ FUND+ FUND+ FUND+ PORTFOLIO++ PORTFOLIO++
------------- ------------ ---------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
2,558 57,478 80,333 15,042 18,207 5,798 2,649
$56,620 $935,833 $1,434,518 $166,821 $256,689 $101,586 $38,077
$51,151 $935,742 $1,397,794 $164,862 $263,462 $101,580 $38,966
0 0 0 0 0 0 0
(5) (116) (171) (20) (33) (12) (5)
------- -------- ---------- -------- -------- -------- -------
$51,146 $935,626 $1,397,623 $164,842 $263,429 $101,568 $38,961
======= ======== ========== ======== ======== ======== =======
4,405 77,709 123,994 14,722 23,252 8,947 3,677
$ 11.61 $ 12.04 $ 11.27 $ 11.20 $ 11.33 $ 11.35 $ 10.60
- ----------------------------------------------------------------------------------------------
<CAPTION>
FLEXIBLY SMALL INTERNATIONAL LIMITED
GROWTH EQUITY VALUE EQUITY MANAGED CAPITALIZATION EQUITY BALANCED MATURITY BOND
FUND+ FUND+ FUND+ FUND+ FUND+ PORTFOLIO++ PORTFOLIO++
------------- ------------ ---------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
$ 204 $ 13,192 $ 40,509 $ 1,273 $ 5,972 $ 0 $ 0
130 2,824 3,297 474 523 169 76
------- -------- ---------- -------- -------- -------- -------
74 10,368 37,212 799 5,449 (169) (76)
------- -------- ---------- -------- -------- -------- -------
(18) 1,266 406 82 25 28 4
6,737 47,924 47,856 3,345 0 0 0
------- -------- ---------- -------- -------- -------- -------
6,719 49,190 48,262 3,427 25 28 4
(5,469) (91) (36,724) (1,959) 6,773 (6) 889
------- -------- ---------- -------- -------- -------- -------
1,250 49,099 11,538 1,468 6,798 22 893
------- -------- ---------- -------- -------- -------- -------
$ 1,324 $ 59,467 $ 48,750 $ 2,267 $ 12,247 $ (147) $ 817
======= ======== ========== ======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - VUL II/VARIABLE ESTATE MAX
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1995 (CONT'D.)
<TABLE>
<CAPTION>
TCI GROWTH EQUITY INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT IN COMMON
STOCK:
Number of shares.......... 23,694 28,061 24,297 10,140
Identified cost........... $286,006 $ 508,141 $ 719,330 $ 153,755
ASSETS:
Investments at value...... $285,754 $ 540,744 $ 709,472 $ 160,110
Dividends receivable...... 0 0 0 0
LIABILITIES:
Due to (from) the Penn Mu-
tual Life Insurance Com-
pany..................... (44) (69) (81) (19)
-------- --------- --------- ---------
NET ASSETS................ $285,710 $ 540,675 $ 709,391 $ 160,091
======== ========= ========= =========
Variable life accumulation
units.................... 23,762 45,251 57,265 14,321
Accumulation unit values.. $ 12.02 $ 11.95 $ 12.39 $ 11.18
- ----------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - VUL II/VARIABLE ESTATE MAX
STATEMENT OF OPERATIONS - FOR THE PERIOD MAY 1, 1995 (COMMENCEMENT OF
OPERATIONS)
TO DECEMBER 31, 1995 (CONT'D.)
<CAPTION>
TCI GROWTH EQUITY INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO+++
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 0 $ 3,822 $ 0 $ 0
EXPENSE:
Mortality and expense risk
charges ................. 476 1,265 946 373
-------- --------- --------- ---------
Net investment income
(loss)................... (476) 2,557 (946) (373)
-------- --------- --------- ---------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses)
from redemption of fund
shares .................. 469 (243) (309) (3)
Capital gain distribution
......................... 0 0 0 0
-------- --------- --------- ---------
Net realized gains (loss-
es)...................... 469 (243) (309) (3)
Net change in unrealized
appreciation/depreciation
of investments........... (280) 32,603 (9,857) 6,356
-------- --------- --------- ---------
Net realized and
unrealized gains (losses)
on
investments.............. 189 32,360 (10,166) 6,353
-------- --------- --------- ---------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS............... (287) $ 34,917 $ (11,112) $ 5,980
======== ========= ========= =========
</TABLE>
- -----------------------
(a) Represents only the Cornerstone VUL II product.
(b) Represents only the Variable Estate Max product.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - VUL II/VARIABLE ESTATE MAX
STATEMENT OF CHANGES IN NET ASSETS - FOR THE PERIOD MAY 1, 1995 (COMMENCEMENT
OF OPERATIONS) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
MONEY MONEY MARKET QUALITY
TOTAL MARKET FUND+(A) FUND+(B) BOND FUND+
---------- --------------- ------------ -------------
1995 1995 1995 1995
---------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM:
OPERATIONS:
Net investment income
(loss).................. $ 82,891 $ 15,227 $ 719 $ 4,811
Net realized gain (loss)
from investment
transactions............ 107,693 0 0 122
Net change in unrealized
appreciation/depreciation
of investments.......... (13,949) 0 0 (1,784)
---------- ----------- --------- ----------
Net increase (decrease) in
net assets resulting from
operations............... 176,635 15,227 719 3,149
---------- ----------- --------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments under
variable life contracts. 5,759,715 4,084,747 440,146 31,077
Surrender benefits....... (34) 0 0 0
Net transfers ........... 471,816 (2,833,877) (364,402) 56,550
Contract administration
charges................. (141,962) (45,854) (7,862) (1,442)
Cost of insurance........ (242,072) (89,809) (3,565) (2,198)
---------- ----------- --------- ----------
Net increase in net assets
resulting from variable
life activities.......... 5,847,463 1,115,207 64,317 83,987
---------- ----------- --------- ----------
Total increase (decrease)
in net assets............ 6,024,098 1,130,434 65,036 87,136
NET ASSETS:
Beginning of period...... 0 0 0 0
---------- ----------- --------- ----------
END OF PERIOD............ $6,024,098 $ 1,130,434 $ 65,036 $ 87,136
========== =========== ========= ==========
<CAPTION>
HIGH YIELD GROWTH VALUE FLEXIBLY
FUND + EQUITY FUND+ EQUITY FUND+ MANAGED FUND+
---------- --------------- ------------ ------------- ---
1995 1995 1995 1995
---------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM:
OPERATIONS:
Net investment income
(loss).................. $ 7,715 $ 74 $ 10,368 $ 37,212
Net realized gain (loss)
from investment
transactions............ 2 6,719 49,190 48,262
Net change in unrealized
appreciation/depreciation
of investments.......... (4,400) (5,469) (91) (36,724)
---------- ----------- --------- ----------
Net increase (decrease) in
net assets resulting from
operations............... 3,317 1,324 59,467 48,750
---------- ----------- --------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments under
variable life contracts. 10,712 16,993 136,674 361,651
Surrender benefits....... 0 0 0 (14)
Net transfers ........... 81,913 36,960 772,784 1,057,640
Contract administration
charges................. (1,270) (1,346) (11,403) (26,150)
Cost of insurance........ (2,242) (2,785) (21,896) (44,254)
---------- ----------- --------- ----------
Net increase in net assets
resulting from variable
life activities.......... 89,113 49,822 876,159 1,348,873
---------- ----------- --------- ----------
Total increase (decrease)
in net assets............ 92,430 51,146 935,626 1,397,623
NET ASSETS:
Beginning of period...... 0 0 0 0
---------- ----------- --------- ----------
END OF PERIOD............ $ 92,430 $ 51,146 $ 935,626 $1,397,623
========== =========== ========= ==========
</TABLE>
- -----------------------
(a) Represents only the Cornerstone VUL II product.
(b) Represents only the Variable Estate Max product.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - VUL II/VARIABLE ESTATE MAX
STATEMENT OF CHANGES IN NET ASSETS - FOR THE PERIOD MAY 1, 1995 (COMMENCEMENT
OF OPERATIONS)TO DECEMBER 31, 1995 (CONT'D.)
<TABLE>
<CAPTION>
SMALL
CAPITALIZATION INTERNATIONAL BALANCED LIMITED MATURITY
FUND+ EQUITY FUND+ PORTFOLIO++ PORTFOLIO++
-------------- ------------- ------------- ----------------
1995 1995 1995 1995
-------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM:
OPERATIONS:
Net investment income
(loss).................. $ 799 $ 5,449 $ (169) $ (76)
Net realized gain (loss)
from investment
transactions............ 3,427 25 28 4
Net change in unrealized
appreciation/depreciation
of investments.......... (1,959) 6,773 (6) 889
-------- -------- -------- --------
Net increase (decrease) in
net assets resulting from
operations............... 2,267 12,247 (147) 817
-------- -------- -------- --------
VARIABLE LIFE ACTIVITIES:
Purchase payments under
variable life contracts. 66,532 124,822 20,792 6,858
Surrender benefits....... (10) 0 0 0
Net transfers ........... 106,381 143,874 86,515 32,606
Contract administration
charges................. (4,603) (6,540) (1,898) (503)
Cost of insurance........ (5,725) (10,974) (3,694) (817)
-------- -------- -------- --------
Net increase in net assets
resulting from variable
life activities.......... 162,575 251,182 101,715 38,144
-------- -------- -------- --------
Total increase (decrease)
in net assets............ 164,842 263,429 101,568 38,961
NET ASSETS:
Beginning of period...... 0 0 0 0
-------- -------- -------- --------
END OF PERIOD............ $164,842 $263,429 $101,568 $ 38,961
======== ======== ======== ========
<CAPTION>
ASSET
TCI GROWTH EQUITY INCOME GROWTH MANAGER
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
-------------- ------------- ------------- ----------------
1995 1995 1995 1995
-------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM:
OPERATIONS:
Net investment income
(loss).................. $ (476) $ 2,557 $ (946) $ (373)
Net realized gain (loss)
from investment
transactions............ 469 (243) (309) (3)
Net change in unrealized
appreciation/depreciation
of investments.......... (280) 32,603 (9,857) 6,356
-------- -------- -------- --------
Net increase (decrease) in
net assets resulting from
operations............... (287) 34,917 (11,112) 5,980
-------- -------- -------- --------
VARIABLE LIFE ACTIVITIES:
Purchase payments under
variable life contracts. 89,544 119,945 219,332 29,890
Surrender benefits....... 0 0 (10) 0
Net transfers ........... 213,357 411,297 537,988 132,230
Contract administration
charges................. (6,609) (9,829) (14,116) (2,537)
Cost of insurance........ (10,295) (15,655) (22,691) (5,472)
-------- -------- -------- --------
Net increase in net assets
resulting from variable
life activities.......... 285,997 505,758 720,503 154,111
-------- -------- -------- --------
Total increase (decrease)
in net assets............ 285,710 540,675 709,391 160,091
NET ASSETS:
Beginning of period...... 0 0 0 0
-------- -------- -------- --------
END OF PERIOD............ $285,710 $540,675 $709,391 $160,091
======== ======== ======== ========
</TABLE>
- -----------------------
(a) Represents only the Cornerstone VUL II product.
(b) Represents only the Variable Estate Max product.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
- -----------------------------------------------------
THIS PAGE LEFT INTENTIONALLY BLANK
43
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL II/VARIABLE ESTATE MAX
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995
- --------------------------------------------------------------------------------
NOTE 1.
The significant accounting policies of Penn Mutual Variable Life Account
I--Cornerstone VUL II/Variable Estate Max sub-accounts (Cornerstone
II/Estate Max) are as follows:
For presentation purposes Cornerstone VUL II and Variable Estate Max are
presented in one financial statement.
GENERAL - Cornerstone II/Estate Max were established by the Penn Mutual
Life Insurance Company (Penn Mutual) under the provisions of the
Pennsylvania Insurance Law. Penn Mutual has structured Variable Life
Account I as a unit investment trust registered under the Investment
Company Act of 1940. Cornerstone II/Estate Max offers units to variable
life contractholders to provide for the accumulation of value and for the
payment of benefits. Contractholders may borrow up to a specified amount
depending on policy value at any time by submitting a written request for a
policy loan. The preparation of the accompanying financial statements
require management to make estimates and assumptions that affect the
reported values of assets and liabilities as of December 31, 1995 and the
reported amounts from operations and contract transactions during 1995.
Actual results could differ from those estimates.
- --------------------------------------------------------------------------------
NOTE 2.
For the period May 1, 1995 (commencement of operations) to December 31,
1995 transactions in Cornerstone II/Estate Max were as follows:
<TABLE>
<CAPTION>
MONEY MARKET QUALITY BOND HIGH YIELD
FUND+ FUND+ BOND FUND+
------------- ------------ -------------
1995 1995 1995
------------- ------------ -------------
<S> <C> <C> <C>
Shares purchased...................... 3,348,369 9,741 10,274
Shares received from reinvestment of:
Net investment income............... 19,306 486 952
Capital gains distribution.......... 0 0 0
----------- -------- -------
Total shares acquired................. 3,367,675 10,227 11,226
Shares redeemed....................... (2,261,837) (1,716) (273)
----------- -------- -------
Net increase in shares owned.......... 1,105,838 8,511 10,953
Shares owned beginning of period...... 0 0 0
----------- -------- -------
Shares owned end of period............ 1,105,838 8,511 10,953
=========== ======== =======
Cost of shares acquired............... $ 3,367,675 $106,815 $99,320
Proceeds from shares redeemed......... $ 2,261,837 $ 18,005 $ 2,480
<CAPTION>
LIMITED
INTERNATIONAL BALANCED MATURITY BOND
EQUITY FUND PORTFOLIO++ PORTFOLIO++
------------- ------------ -------------
1995 1995 1995
------------- ------------ -------------
<S> <C> <C> <C>
Shares purchased...................... 18,851 6,311 2,748
Shares received from reinvestment of:
Net investment income............... 413 0 0
Capital gains distribution.......... 0 0 0
----------- -------- -------
Total shares acquired................. 19,264 6,311 2,748
Shares redeemed....................... (1,057) (513) (99)
----------- -------- -------
Net increase in shares owned.......... 18,207 5,798 2,649
Shares owned beginning of period...... 0 0 0
----------- -------- -------
Shares owned end of period............ 18,207 5,798 2,649
=========== ======== =======
Cost of shares acquired............... $ 271,701 $110,500 $39,519
Proceeds from shares redeemed......... $ 15,037 $ 8,942 $ 1,446
</TABLE>
The cost of shares redeemed is determined on a last-in, first-out basis.
- -----------------------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
44
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1., CONT'D.
INVESTMENTS - Assets of Cornerstone II/Estate Max are invested in shares of
Penn Series Funds, Inc. (Penn Series): Money Market, Quality Bond, High
Yield Bond, Growth Equity, Value Equity, Flexibly Managed, International
Equity Fund and Small Capitalization Funds; Neuberger and Berman Advisers
Management Trust (AMT): Limited Maturity Bond and Balanced Portfolios; TCI
Portfolios, Inc. (TCI): Growth Portfolio; and Fidelity Investments'
Variable Insurance Products (Fidelity): Equity Income, Growth, and Asset
Manager Portfolios. Penn Series, AMT, TCI, and Fidelity are open-end
diversified investment companies. The shares are carried at market value as
determined by the underlying net asset value of the respective Funds or
Portfolios. Dividend income is recorded on the ex-dividend date. Investment
transactions are accounted for on a trade date basis.
FEDERAL INCOME TAXES - Penn Mutual is taxed under federal law as a life
insurance company. Cornerstone II/Estate Max is part of Penn Mutual'stotal
operations and is not taxed separately. Under existing federal law, no
taxes are payable on investment income and realized gains of Cornerstone
II/Estate Max.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL
GROWTH EQUITY VALUE EQUITY FLEXIBLY MANAGED CAPITALIZATION
FUND+ FUND+ FUND+ FUND+
------------- ------------- ---------------- --------------
1995 1995 1995 1995
------------- ------------- ---------------- --------------
<S> <C> <C> <C>
2,786 57,004 81,492 16,139
10 810 2,328 116
337 2,944 2,750 305
-------- -------- ---------- --------
3,133 60,758 86,570 16,560
(575) (3,280) (6,237) (1,518)
-------- -------- ---------- --------
2,558 57,478 80,333 15,042
0 0 0 0
-------- -------- ---------- --------
2,558 57,478 80,333 15,042
======== ======== ========== ========
$ 69,532 $991,706 $1,547,895 $183,496
$ 12,868 $ 57,139 $ 113,783 $ 16,757
<CAPTION>
TCI
GROWTH EQUITY INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
------------- ------------- ---------------- --------------
1995 1995 1995 1995
------------- ------------- ---------------- --------------
<S> <C> <C> <C>
28,845 30,938 27,337 10,425
0 204 0 0
0 0 0 0
-------- -------- ---------- --------
28,845 31,142 27,337 10,425
(5,151) (3,081) (3,040) (285)
-------- -------- ---------- --------
23,694 28,061 24,297 10,140
0 0 0 0
-------- -------- ---------- --------
23,694 28,061 24,297 10,140
======== ======== ========== ========
$347,755 $566,137 $ 810,160 $158,075
$ 62,218 $ 57,753 $ 90,521 $ 4,317
</TABLE>
45
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL II/VARIABLE ESTATE MAX
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 3.
Operations are charged for mortality and expense risks assumed by Penn
Mutual as determined daily at a current rate guaranteed never to exceed
0.90% of the average value of Cornerstone II/Estate Max.
On the date of issue and each monthly anniversary a monthly deduction is
made from the policy value. The monthly deduction consists of (1) insurance
charges (2) administrative charges and (3) any charges for additional
benefits added by supplemental agreement to a policy. See original policy
documents for specific charges assessed.
If a policy is surrendered within the first 11 years in Cornerstone VUL II,
or the first 16 years for Variable Estate Max, a contingent deferred sales
charge and /or contingent deferred administrative charge will be assessed.
These charges will be deducted before any surrender proceeds are paid. See
original policy documents for specific charges assessed.
46
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF TRUSTEES
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA
We have audited the accompanying statements of financial condition of The Penn
Mutual Life Insurance Company as of December 31, 1995 and 1994, and the related
statements of operations and surplus and cash flows for each of the three years
in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of The Penn Mutual Life Insurance
Company as of December 31, 1995 and 1994, and the results of its operations and
cash flows for each of the three years in the period ended December 31, 1995,
in conformity with the accounting principles prescribed or permitted by the
Insurance Department of the Commonwealth of Pennsylvania, which are considered
generally accepted accounting principles for mutual life insurance companies.
As discussed in Note 2 to the financial statements, during 1995, the Company
changed its accounting methods for certain components of the federal income tax
expense and the valuation of reserves of certain annuity products.
/s/ Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 26, 1996
47
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands of dollars)
ASSETS
Bonds............................................ $3,695,516 $3,693,295
Stocks
Preferred....................................... 15,049 31,574
Common--affiliated.............................. 171,193 236,266
--unaffiliated............................... 8,182 1,986
--- ---
Mortgage loans................................... 960,692 950,219
Real estate...................................... 138,329 218,268
Policy loans..................................... 422,865 438,500
Cash and short-term investments.................. 75,962 7,796
Other invested assets 59,561 64,362
---------- ----------
TOTAL........................................... 5,547,349 5,642,266
Investment income due and accrued................ 94,350 101,027
Premiums due and deferred........................ 26,926 28,060
Other assets..................................... 41,082 36,104
Separate account assets 911,683 658,074
---------- ----------
TOTAL ASSETS.................................... $6,621,390 $6,465,531
========== ==========
LIABILITIES
Reserves and funds for payment of future life and
annuity benefits................................ $5,064,298 $5,139,779
Dividends to policyholders payable in the follow-
ing year........................................ 72,653 72,400
Policy claims in process......................... 27,241 39,295
Interest maintenance reserve..................... 36,084 5,355
Asset valuation reserve.......................... 83,157 111,885
Other liabilities................................ 77,063 130,108
Separate account liabilities 905,960 651,388
---------- ----------
TOTAL........................................... 6,266,456 6,150,210
SURPLUS
Special surplus funds............................ 1,576 1,523
Unassigned surplus............................... 353,358 313,798
---------- ----------
TOTAL........................................... 354,934 315,321
---------- ----------
TOTAL LIABILITIES AND SURPLUS.................. $6,621,390 $6,465,531
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND SURPLUS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands of dollars)
INCOME
Premium and annuity considerations............. $ 707,048 $ 768,534 $ 626,374
Net investment income.......................... 456,108 446,354 464,663
Other income................................... (2,238) 13,510 7,887
--------- --------- ---------
TOTAL INCOME.................................. 1,160,918 1,228,398 1,098,924
--------- --------- ---------
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficia-
ries.......................................... 859,798 766,598 839,310
Increase (decrease) in reserves and funds for
the payment of future life and annuity bene-
fits.......................................... (50,775) 54,380 (141,412)
Commissions.................................... 38,044 45,579 38,955
Operating expenses............................. 116,673 124,920 122,806
Net transfers to separate accounts............. 86,944 128,773 124,007
--------- --------- ---------
TOTAL BENEFITS AND EXPENSES................... 1,050,684 1,120,250 983,666
--------- --------- ---------
INCOME FROM OPERATIONS BEFORE DIVIDENDS AND
FEDERAL INCOME TAXES......................... 110,234 108,148 115,258
Dividends to policyholders..................... 70,057 69,098 71,129
--------- --------- ---------
INCOME FROM OPERATIONS BEFORE FEDERAL INCOME
TAXES........................................ 40,177 39,050 44,129
Federal income tax expense (benefit)........... (52,442) 197 (23,717)
--------- --------- ---------
INCOME FROM OPERATIONS........................ 92,619 38,853 67,846
Net realized capital losses, net of taxes...... 91,890 37,399 35,396
--------- --------- ---------
NET INCOME.................................... 729 1,454 32,450
SURPLUS
Change in asset valuation reserve.............. 28,728 29,060 (4,729)
Change in net unrealized capital gains and
losses........................................ 2,395 (3,376) 33,958
Changes in accounting methods.................. 7,984 -- --
Other.......................................... (223) 8,618 760
--------- --------- ---------
TOTAL CONTRIBUTION TO SURPLUS................. 39,613 35,756 62,439
Surplus, Beginning of Year.................... 315,321 279,565 217,126
--------- --------- ---------
SURPLUS, END OF YEAR.......................... $ 354,934 $ 315,321 $ 279,565
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands of dollars)
CASH PROVIDED
Net cash from operations:
Premium and annuity considerations.......... $ 708,301 $ 767,017 $ 629,725
Net investment income....................... 439,508 420,917 456,516
Other income................................ (2,511) 15,704 16,660
---------- ---------- ----------
1,145,298 1,203,638 1,102,901
Benefits to policyholders................... 871,983 750,019 834,700
Commissions................................. 38,139 45,540 38,947
Operating expenses and taxes................ 152,907 96,050 111,224
Net transfers to separate accounts.......... 86,944 129,858 128,299
Dividends to policyholders.................. 69,804 70,246 69,818
Net decrease in policy loans................ (15,202) (22,361) (35,734)
---------- ---------- ----------
NET CASH FROM OPERATIONS.................... (59,277) 134,286 (44,353)
---------- ---------- ----------
Investments sold, matured or repaid:
Bonds....................................... 1,410,126 1,038,593 1,844,108
Stocks...................................... 95,347 197,503 1,042,421
Mortgage loans.............................. 102,394 45,255 112,448
Real estate and other invested assets....... 10,837 12,701 17,057
---------- ---------- ----------
Total investments sold, matured or repaid.. 1,618,704 1,294,052 3,016,034
Taxes on realized investment gains........... 3,253 (17,722) (14,963)
Other cash provided.......................... 4,275 10,035 1,190
---------- ---------- ----------
1,626,232 1,286,365 3,002,261
---------- ---------- ----------
TOTAL CASH PROVIDED......................... 1,566,955 1,420,651 2,957,908
---------- ---------- ----------
CASH APPLIED
Cost of investments acquired:
Bonds....................................... 1,357,008 1,218,880 1,858,996
Stocks...................................... 26,114 131,248 958,060
Mortgage loans.............................. 100,466 71,427 96,435
Real estate and other invested assets....... 8,970 14,909 13,417
---------- ---------- ----------
Total cost of investments acquired......... 1,492,558 1,436,464 2,926,908
Other cash applied........................... 6,231 24,452 27,125
---------- ---------- ----------
TOTAL CASH APPLIED.......................... 1,498,789 1,460,916 2,954,033
---------- ---------- ----------
Net change in cash and short-term invest-
ments....................................... 68,166 (40,265) 3,875
CASH AND SHORT-TERM INVESTMENTS:
Beginning of year........................... 7,796 48,061 44,186
---------- ---------- ----------
END OF YEAR................................. $ 75,962 $ 7,796 $ 48,061
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
The Penn Mutual Life Insurance Company (the "Company"), is a mutual life
insurance company which concentrates primarily in the sale of individual life
insurance and annuity products. The primary products that the Company currently
markets are traditional whole life, yearly renewable term, universal life,
immediate annuities, variable life insurance and variable annuities. The
Company markets its products through a network of career agents, independent
agents, and independent agents, and independent marketing organizations. The
Company sells its products in all fifty states, the District of Columbia and
five Canadian provinces.
BASIS OF PRESENTATION
The financial statements of the Company have been prepared in conformity with
accounting principles prescribed or permitted by the Insurance Department of
the Commonwealth of Pennsylvania, which are considered generally accepted
accounting principles for mutual life insurance companies. Prescribed statutory
accounting principles include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners (NAIC). Permitted statutory accounting
principles encompass all accounting practices that are not prescribed. In
accordance with Pennsylvania Insurance Laws and Regulations, the Company's
subsidiaries are not consolidated for statutory filing purposes. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
In April 1993, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises" (Interpretation No.
40), which was amended by Statement of Financial Accounting Standards (SFAS)
No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises for
Certain Long-Duration Participating Contracts". SFAS No. 120 deferred the
effective date of Interpretation No. 40 to fiscal years beginning after
December 15, 1995. Under Interpretation No. 40, the financial statements of
mutual life insurance companies which are prepared on the basis of statutory
accounting principles can no longer be described as prepared in conformity with
generally accepted accounting principles (GAAP). After 1995, the Company will
continue to issue financial statements prepared in accordance with statutory
accounting principles for regulatory purposes.
When the Company prepares financial statements in conformity with
Interpretation No. 40, the accounting treatment for certain items, such as
policy reserves, new business acquisition costs, asset valuation reserves,
employee benefit liabilities and income taxes will be different than for
financial statements issued in conformity with statutory accounting principles.
In addition, the Company believes surplus presented in accordance with
Interpretation No. 40 will be greater than surplus presented in accordance with
statutory accounting principles.
VALUATION OF INVESTMENTS
Bonds and stocks are carried in the accompanying Statements of Financial
Condition at values prescribed by the NAIC. In general, bonds are stated at
amortized cost, preferred stocks at cost and unaffiliated common stocks at
market value. The Company's subsidiaries are carried on the equity basis with
the net income from subsidiaries recorded in net investment income. Real estate
is carried at cost less encumbrances and accumulated depreciation. Real estate
acquired through foreclosure is recorded at the lower of cost or market value
at the time of foreclosure. Real estate is depreciated using the straight-line
method. Mortgage loans are carried at the unpaid principal amount, less any
unamortized discount. Policy loans are stated at the unpaid principal balance
less amounts unsecured by cash surrender and dividend accumulation values. Cash
and short-term investments include cash on deposit and securities purchased
with a maturity date of less than one year. Short-term investments are valued
at cost, which approximates market. Other invested assets include joint venture
real estate partnerships, which are valued on the equity basis, and venture
capital limited partnerships, which are carried at market value. Certain assets
which are considered to be non-admitted for statutory purposes have been
excluded from the Statement of Financial Condition by a direct charge to
surplus.
Financial instruments utilized to hedge the Company's assets are recorded using
a valuation method consistent with the valuation method of the assets hedged.
Gains and losses on financial futures contracts used as hedges against interest
rate fluctuations are deferred and recognized in the Statements of Operations
over the remaining life of the hedged securities.
51
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Changes in the market value of financial futures contracts used as hedges
against market fluctuations of equity securities are reported as unrealized
gains or losses. They are recognized as realized gains or losses when the
hedged securities are sold.
Statutory accounting principles require insurance companies to hold an Asset
Valuation Reserve (AVR) and an Interest Maintenance Reserve (IMR). The purpose
of the AVR is to maintain consistent and prescribed valuation reserves for
invested assets. Changes in the AVR are recorded directly to surplus. The
purpose of the IMR is to defer recognition of realized gains and losses which
result from interest rate movements and to amortize these gains and losses into
income over the original expected life of the investment sold. Amortization of
gains and losses included in the IMR are reflected as a component of net
investment income.
Realized gains and losses are determined on the specific identification method
and are presented in the Statements of Operations net of taxes and excluding
net gains and losses transferred to the IMR. Unrealized gains and losses are
accounted for as direct increases or decreases in surplus.
RESERVES AND FUNDS FOR THE PAYMENT OF FUTURE LIFE AND ANNUITY BENEFITS
Reserves and funds for the payment of future life and annuity benefits are
developed using actuarial methods based on statutory mortality and interest
requirements. Reserves for life insurance are computed principally on the net
level or modified preliminary term methods using the 1941, 1958 and 1980
Commissioners' Standard Ordinary Mortality and American Experience Tables and
assumed interest rates ranging from 2.25% to 4.5%. Reserves for annuity
contracts are based principally on the 1949, 1971 and 1983 Individual Annuity
Mortality Tables for individual annuities and the 1971 and 1983 Group Annuity
Mortality Tables for group annuities and assumed interest rates ranging from
2.5% to 13.25%. Policy claims in process include provisions for payments to be
made on reported claims and claims incurred but not reported. Any adjustments
that are made to the reserve balances are reflected in the Statements of
Operations in the year in which such adjustments are made, with the exception
of changes in valuation bases which are accounted for as a charge or credit to
surplus.
REVENUE AND RELATED EXPENSE RECOGNITION
Premiums are recognized as income over the premium payment period of the
related policies. Annuity considerations are recognized as income as they are
received. Premium and annuity considerations are recorded net of reinsurance
premiums. Benefits are reported net of the amounts received from reinsurers.
Commissions and other expenses related to the acquisition of new policies are
charged to operations as incurred.
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its insurance
and non-insurance subsidiaries. Each subsidiary's tax liability or refund is
accrued on a separate company basis. The Company reimburses subsidiaries for
losses utilized in the consolidated return based on inter-company tax
allocation agreements. In accordance with statutory accounting practices, no
deferred taxes are provided for temporary differences between pre-tax
accounting income and taxable income.
POLICYHOLDER DIVIDENDS
All insurance policies are participating. A liability for the dividends to be
paid or credited to policyholders during the following calendar year is
established at each year end. The amount of dividends to be paid is approved
annually by the Board of Trustees.
SEPARATE ACCOUNTS
Separate Account assets and liabilities represent segregated funds administered
and invested by the Company primarily for the benefit of variable life
insurance policyholders and annuity and pension contractholders, including
certain of the Company's benefit plans. The value of the assets in the Separate
Accounts reflects the actual investment performance of the respective accounts
and is not guaranteed by the Company. The carrying value for Separate Account
assets and liabilities approximates the estimated fair value of the underlying
assets.
RECLASSIFICATIONS
Certain 1994 and 1993 amounts have been reclassified to conform with the 1995
presentation.
52
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 2 - ACCOUNTING CHANGES:
The sections of the Internal Revenue Code (IRC) applicable to mutual life
insurance companies require that mutual, but not stock, life insurance
companies include the Differential Earnings Amount (DEA) in each year's taxable
income. This amount is computed by multiplying the Company's average taxable
equity base by a rate that represents the difference between stock and mutual
companies' earnings rates. Under the IRC, the enacted DEA rate for the current
year is an Internal Revenue Service (IRS) estimate and is recomputed in the
following year to reflect the actual industry results.
Prior to 1995, the Company recorded its federal income tax expense for the DEA
based on the enacted IRS rates for the current year along with any adjustment
to the DEA related to the recomputation of the prior year's estimate. The
portion of the Company's federal income tax expense associated with the DEA was
recorded directly to surplus.
In 1995, the Company changed its method of accounting for the DEA to record the
tax based on management's best estimate of the final DEA rates. The impact of
this accounting change resulting in a $16,723 direct charge to surplus in 1995.
In addition, in 1995 the Company began recording the portion of its federal
income tax expense associated with the DEA in the Statement of Operations.
During 1995, the Company changed the reserve valuation bases for certain of its
annuity products. These changes resulted in the release of $24,707 of
policyholder reserves and a corresponding credit directly to surplus.
NOTE 3 - INVESTMENTS
DEBT SECURITIES
The following summarizes the statement value and estimated fair value of the
Company's investment in debt securities, including redeemable preferred stocks,
as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
United States Government........... $ 63,477 $ 1,875 $ -- $ 65,352
Other governmental units........... 103,090 2,893 -- 105,983
Public utility..................... 509,120 51,946 347 560,719
Industrial and other............... 2,184,414 197,075 13,208 2,368,281
Mortgage and other asset-backed se-
curities.......................... 835,415 32,504 3,951 863,968
---------- -------- -------- ----------
3,695,516 286,293 17,506 3,964,303
Redeemable preferred stocks........ 3,964 -- 237 3,727
---------- -------- -------- ----------
TOTAL............................. $3,699,480 $286,293 $ 17,743 $3,968,030
========== ======== ======== ==========
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
United States Government........... $ 10,216 $ -- $ 289 $ 9,927
Other governmental units........... 162,618 129 8,761 153,986
Public utility..................... 667,737 5,891 37,122 636,506
Industrial and other............... 2,248,385 34,377 86,461 2,196,301
Mortgage and other asset-backed se-
curities.......................... 604,339 3,797 48,812 559,324
---------- -------- -------- ----------
3,693,295 44,194 181,445 3,556,044
Redeemable preferred stocks........ 4,378 25 211 4,192
---------- -------- -------- ----------
TOTAL............................. $3,697,673 $ 44,219 $181,656 $3,560,236
========== ======== ======== ==========
</TABLE>
53
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following summarizes the statement value and estimated fair value of debt
securities as of December 31, 1995, by contractual maturity.
<TABLE>
<CAPTION>
STATEMENT ESTIMATED
VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Maturity:
Within one year......................................... $ 102,028 $ 103,261
After one year through five years....................... 654,102 676,888
After five years through ten years...................... 265,388 283,297
After ten years through twenty years.................... 413,267 471,355
After twenty years...................................... 1,425,316 1,565,534
Mortgage and other asset-backed securities.............. 835,415 863,968
---------- ----------
3,695,516 3,964,303
Redeemable preferred stocks............................. 3,964 3,727
---------- ----------
TOTAL.................................................. $3,699,480 $3,968,030
========== ==========
</TABLE>
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.
During 1995, 1994 and 1993, proceeds from dispositions of investments in debt
securities amounted to $1,410,126, $1,038,593, and $1,844,108, respectively.
The gross gains realized on those dispositions were $57,295, $5,876 and
$37,797, and the gross losses realized on those dispositions were $10,069,
$27,348 and $15,935 during 1995, 1994 and 1993, respectively. Net realized
gains, net of taxes, transferred to the IMR in 1995 were $32,211. Net realized
losses, net of taxes, transferred to the IMR in 1994 were $14,089. Net realized
gains, net of taxes, transferred to the IMR, in 1993 were $11,144. Amortization
of the IMR included in net investment income amounted to $1,482, $1,056 and
$964 in 1995, 1994 and 1993, respectively.
The Company's investment portfolio of debt securities is comprised
predominantly of investment grade securities. As of December 31, 1995 and 1994,
debt securities totaling $100,013 and $125,737, respectively, were classified
by the NAIC as less than investment grade. The Company did not hold any debt
securities which were non-income producing for the preceding twelve months as
of December 31, 1995. The statement value of debt securities which were non-
income producing for the preceding twelve months was $900 as of December 31,
1994.
MORTGAGE LOANS
The following summarizes the statement value of mortgage loans, by property
type and geographic concentration, as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
PROPERTY TYPE
Office buildings.............................................. $296,976 $300,156
Retail........................................................ 230,902 263,178
Dwellings..................................................... 223,192 219,860
Other......................................................... 209,622 167,025
-------- --------
TOTAL........................................................ $960,692 $950,219
======== ========
GEOGRAPHIC CONCENTRATION
Northeast..................................................... $328,397 $373,627
Midwest....................................................... 358,203 299,239
South......................................................... 132,382 136,416
West.......................................................... 139,979 138,793
Canada........................................................ 1,731 2,144
-------- --------
TOTAL........................................................ $960,692 $950,219
======== ========
</TABLE>
The Company originates commercial mortgage loans through a network of
commercial mortgage bankers throughout the country. All mortgage loans are
collateralized by the underlying real estate and insurance is required on all
properties up to
54
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
their replacement values. The maximum and minimum lending rates for mortgage
loans originated during 1995 were 10.05% and 7.50%, respectively. For loans
originated during 1995, the maximum percentage of any one loan to the value of
the collateral at the time of the loan, exclusive of insured, guaranteed and
purchase money mortgages, was 75%. The Company controls credit risk through
credit approvals, limits and monitoring procedures. The Company's investments
included $27,295 and $21,684 of mortgage loans delinquent over 90 days,
including $8,033 and $14,889 of mortgage loans which were non-income producing
for the preceding twelve months as of December 31, 1995 and 1994, respectively.
The mortgage loan portfolio includes $19,928 and $27,405 of restructured
mortgage loans as of December 31, 1995 and 1994, respectively. Restructured
mortgage loans include commercial loans for which the basic terms, such as
interest rate, amortization, maturity date, or collateral have been changed as
a result of actual or anticipated delinquency. Restructures do not include
mortgages refinanced prior to or upon maturity at or above current market
terms.
REAL ESTATE
As of December 31, 1995 and 1994, accumulated depreciation on real estate
amounted to $43,069 and $33,580, respectively. Depreciation expense on real
estate totaled $10,019, $8,445 and $10,824 for the years ended December 31,
1995, 1994 and 1993, respectively. The Company's investments include $27,944
and $21,889 of foreclosed real estate as of December 31, 1995 and 1994,
respectively. The Statement value of the Company's largest real estate
investment amounted to $54,858 and $130,756 as of December 31, 1995 and 1994,
respectively. During 1995, the Company wrote down the statement value of this
property by $76,500 to its current estimated fair value. This write down
reflects the Company's determination that the value of the property was
permanently impaired due in part to the notification by the major tenant that
it did not intend to exercise lease extension options. In addition, the Company
no longer intends to hold this property as a long-term investment. The write
down has been recognized as a realized loss in the Statement of Operations.
NOTE 4 - RESERVES AND FUNDS FOR PAYMENT OF FUTURE LIFE AND ANNUITY BENEFITS:
The following summarizes the withdrawal characteristics of the Company's
reserves and deposit funds as of December 31, 1995.
<TABLE>
<CAPTION>
STATEMENT
VALUE
-----------
<S> <C>
Total policyholders' reserves and funds including separate account
liabilities...................................................... $ 5,970,258
Amounts not subject to discretionary withdrawal................... (1,242,000)
-----------
AMOUNTS SUBJECT TO DISCRETIONARY WITHDRAWAL...................... $ 4,728,258
===========
</TABLE>
Of the total reserves and deposit funds which are subject to discretionary
withdrawal, $1,927,100, which is net of applicable policy loans, may be
withdrawn without the policyholder incurring surrender charges or market value
adjustments to the funds.
55
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISK:
The following table summarizes the statement value and estimated fair value of
the Company's financial instruments as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
--------------------- ---------------------
STATEMENT ESTIMATED STATEMENT ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities
Bonds............................. $3,695,516 $3,964,303 $3,693,295 $3,556,044
Redeemable preferred stocks....... 3,964 3,727 4,378 4,192
Equity securities
Common stock--unaffiliated........ 8,182 8,182 1,986 1,986
Non-redeemable preferred stocks... 11,085 13,607 27,196 27,498
Mortgage loans
Commercial........................ 958,079 1,000,003 946,031 917,062
Residential....................... 2,613 2,930 4,188 4,562
Policy loans....................... 422,865 405,721 438,500 417,121
Venture capital limited partner-
ships............................. 30,325 30,325 36,305 36,305
Separate account assets............ 911,683 911,683 658,074 658,704
FINANCIAL LIABILITIES:
Investment-type contracts
Individual annuities.............. $1,248,138 $1,287,644 $1,186,097 $1,203,684
Guaranteed investment contracts... 222,991 226,255 408,479 409,470
Other group annuities............. 216,686 219,857 222,863 221,696
Dividends to policyholders payable
in the following year............. 72,653 72,653 72,400 72,400
Separate account liabilities....... 905,960 905,960 651,388 651,388
</TABLE>
The estimated fair values for the Company's investments in debt and equity
securities are based on quoted market prices, where available. In situations
where market prices are not readily available, primarily private placements,
fair values are estimated using a formula pricing method based on fair values
of securities with similar characteristics. The fair value of currently
performing mortgage loans is estimated by discounting the cash flows associated
with the investment, using an interest rate currently offered for similar loans
to borrowers with similar credit ratings. Loans with similar credit quality,
characteristics and time to maturity are aggregated for purposes of estimating
fair value. Assumptions regarding credit risk, cash flows and discount rates
are determined using the available market and borrower-specific information.
The estimated fair value for non-performing loans is based on the estimated
fair value of the underlying real estate, which is based on recent appraisals
or other estimation techniques. The estimated fair value of policy loans is
calculated by discounting estimated future cash flows using interest rates
currently being offered for similar loans. Loans with similar characteristics
are aggregated for purposes of estimating fair value. The statement of values
of cash and short-term investments and separate account assets approximate
their fair values. The estimated fair value for venture capital limited
partnerships is based on values determined by the partnerships' managing
general partners. The resulting estimated fair values may not be indicative of
the value negotiated in an actual sale.
The fair values of the Company's liabilities for individual annuities,
guaranteed investment contracts and other group annuities are estimated by
discounting the cash flows associated with the contracts, using an interest
rate currently offered for similar contracts with maturities similar to those
remaining for the contracts being valued. The statement value for certain of
the other group annuities, totaling $43,490 and $42,472 as of December 31, 1995
and 1994, respectively, approximates the fair value due to the nature of the
contracts. The statement values of dividends to policyholders payable in the
following year and separate account liabilities approximate their fair values.
Currently, disclosure of estimated fair values is not required for all of the
Company's assets and liabilities. Therefore, presentation of the estimated fair
value of a significant portion of assets without a corresponding valuation of
liabilities associated with insurance contracts can be misinterpreted. The
continuing management of the relationship between the maturities of the
Company's investments and the amounts due under insurance contracts reduces the
Company's exposure to changing interest rates.
56
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The Company is exposed to interest risk on its interest sensitive products. The
Company's investment strategy is designed to minimize interest risk by managing
the durations and anticipated cash flows of the Company's assets and
liabilities.
To minimize exposure and reduce risk from exchange and interest rate
fluctuations in the normal course of business, the Company is party to
financial instruments with off-balance-sheet risk. As of December 31, 1995 and
1994, the Company had interest rate swaps with aggregate notional amounts equal
to $115,000 with average unexpired terms of 39 and 51 months, respectively.
Interest rate swap agreements involve the exchange of fixed and floating rate
interest payment obligations without an exchange of the underlying notional
principal amounts. During the term of the swap, the net settlement amount is
accrued as an adjustment to interest income. If the counterparty defaults, the
Company is exposed only to the loss of the interest rate differential. If the
positions were closed as of December 31, 1995 and 1994, the Company would have
recognized gains of $12,880 and $4,479, respectively. The fair value for
interest rate swaps and futures contracts are based on dealers' quotes and
represent the estimated amounts the Company would receive to terminate the
contracts taking into account current interest rates and the creditworthiness
of the counterparties, where appropriate.
In the normal course of business, the Company loans securities under
arrangements in which collateral is obtained in amounts greater than the
current market value of loaned securities. This collateral is held in the form
of cash, cash equivalents or securities issued or guaranteed by the United
States Government. The Company is at risk to the extent the value of loaned
securities exceeds the value of the collateral obtained. The Company controls
this risk by requiring collateral of the highest quality and requiring that
additional collateral be deposited when the market value of loaned securities
increases in relation to the collateral held or the value of the collateral
decreases in relation to the value of the loaned securities. The Company had no
loaned securities outstanding as of December 31, 1995 and 1994.
NOTE 6 - BENEFIT PLANS:
The Company maintains both qualified and non-qualified defined benefit plans as
well as qualified defined contribution plans covering substantially all of its
employees and full-time agents. The total pension expense related to these
plans, including amounts allocated to the Company's subsidiaries, amounted to
$8,848, $7,757 and $11,591 in 1995, 1994 and 1993, respectively.
DEFINED BENEFIT PLANS
The Company's expense and funding policy for the qualified defined benefit plan
is to contribute an amount between the minimum required contribution and the
maximum deductible amount in accordance with the Internal Revenue Code. The
benefits for the plan are based on years of service and the employee's
compensation prior to termination of employment.
The following summarizes the accumulated plan benefits, calculated using the
projected unit credit method and plan net assets for the Company's qualified
defined benefit plan as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested........................................................ $29,744 $21,105
Non-vested.................................................... 763 526
------- -------
TOTAL........................................................ $30,507 $21,631
======= =======
Net assets available for plan benefits......................... $34,067 $27,029
======= =======
</TABLE>
The actuarial present value of accumulated plan benefits was determined using a
7.0% and an 8.75% assumed discount rate for December 31, 1995 and 1994,
respectively.
The Company also sponsors defined benefit plans for certain employees in excess
of limits for qualified retirement plans. Pension assets are maintained in the
Company's general account. As of December 31, 1995, the plans' total
accumulated benefit obligation, determined in accordance with SFAS No. 87 and
based on a 7% assumed discount rate amounted to $17,609. As of December 31,
1994, the plans' total accumulated benefit obligation, determined in accordance
with SFAS No. 87 and based on an 8.75% assumed discount rate amounted to
$13,690. The additional obligation for future salary increases was $2,539 and
$2,363 as of December 31, 1995 and 1994, respectively.
57
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUE
(IN THOUSANDS OF DOLLARS)
DEFINED CONTRIBUTION PLANS
Defined contribution plan benefits are based on the participant's account
balance. Designated contributions of up to 8% of each employee's annual
compensation are eligible to be matched by the Company. As of December 31, 1995
and 1994, the estimated fair value of the defined contribution plans' assets
was $126,378 and $116,698, respectively.
POSTRETIREMENT BENEFITS
The Company also provides certain health care and life insurance benefits
(postretirement benefits) for retired employees. Substantially all employees
become eligible for these benefits if they reach retirement age eligibility
while working for the Company.
In 1993, the Company changed its method of accounting for the costs of these
postretirement benefits to an accrual method and elected to amortize the
transition obligation of $33,744 over 20 years. As of December 31, 1995 and
1994, the unamortized transition obligation was $28,683 and $30,370,
respectively.
Postretirement benefit expense for the year ended December 31, 1995, 1994 and
1993 was $4,426, $4,346, and $4,366 respectively, which includes the expected
cost of postretirement benefits for newly eligible or vested employees,
interest cost, service cost, and amortization of the transition obligation. The
interest cost and service cost were $2,471 and $268, respectively, for the year
ended December 31, 1995. The interest and cost and service cost were $2,366 and
$293, respectively, for the year ended December 31, 1994. The interest cost was
$2,679 for the year ended December 31, 1993. The Company made contributions to
the plans of $2,629, $2,438 and $2,594 in 1995, 1994 and 1993, respectively, as
claims were incurred.
As of December 31, 1995 and 1994, the unfunded postretirement benefit
obligation for retirees and other full, eligible or vested plan participants
was $36,150 and $32,678, respectively. For December 31, 1995 the discount rate
used in determining the accumulated postretirement benefit obligation was 7.0%,
and the health care cost trend rate was 9.0%, graded to 5.0% over 9 years. For
December 31, 1994, the discount rate used in determining the accumulated
postretirement benefit obligation was 8.75%, and the health care cost trend
rate was 9.5%, graded to 5.0% over 10 years.
The health care cost trend rate assumption has a significant effect on the
amount reported. To illustrate, increasing the assumed health care cost trend
rate by one percentage point in each year would increase the postretirement
benefit obligation as of January 1, 1995 by $2,974 and the estimated
eligibility cost and interest cost components of net periodic postretirement
benefit cost for the year ended December 31, 1995 by $186.
NOTE 7 - FEDERAL INCOME TAXES:
The provision for federal income taxes is computed in accordance with the
sections of the Internal Revenue Code applicable to mutual life insurance
companies.
The taxable income reflected in the Company's federal tax return differs from
statutory income as reflected in the accompanying Statements of Operations.
Significant differences relate to the DEA, treatment of policy acquisition
costs, differences in policy reserve valuation methods, and settled tax issues.
The IRS has examined the Company's income tax returns through the year 1987 and
is currently examining years 1988 through 1990. Management believes that an
adequate provision has been made for potential assessments.
In 1995, the Company settled various tax issues with the IRS, including an
issue surrounding the tax treatment of certain traditional life insurance
policy updates. As a result of these settlements, the 1995 federal income tax
expense was decreased in the Statement of Operations by approximately $57,000.
During 1993, the Company resolved a tax issue related to reserves held on its
universal life insurance contracts. As a result, previously recorded provisions
of $32,500 were reduced and recorded in the Statement of Operations as a
reduction to federal income tax expense in 1993.
58
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 8 - REINSURANCE:
The Company has assumed and ceded reinsurance on certain life and annuity
contracts under various agreements. The Company remains primarily liable as the
direct insurer on all risks reinsured, and performs due diligence to ensure
that amounts due from reinsurers are collectable. The table below includes the
reinsurance amounts recorded in the accompanying financial statements, which
are presented net of reinsurance activity.
<TABLE>
<CAPTION>
ASSUMED CEDED TO
GROSS FROM OTHER OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995:
Life Insurance in-force.......... $26,290,414 $7,668,076 $4,982,235 $28,976,255
Premium and annuity considera-
tions........................... 720,794 19,762 33,508 707,048
Reserves and funds for payment of
future life and annuity bene-
fits............................ 5,364,721 3,937 304,360 5,064,298
DECEMBER 31, 1994:
Life Insurance in-force.......... $26,226,662 $7,668,048 $5,067,815 $28,826,895
Premium and annuity considera-
tions........................... 769,448 40,418 41,332 768,534
Reserves and funds for payment of
future life and annuity bene-
fits............................ 5,439,027 19,533 318,781 5,139,779
</TABLE>
During 1993, the Company had gross premiums of $634,003, assumed premiums of
$36,623 and ceded premiums of $40,497.
Under reinsurance agreements with The Penn Insurance and Annuity Company (PIA),
a wholly-owned subsidiary, the Company has assumed and ceded certain risks. As
a result of these reinsurance agreements with PIA, net life insurance in-force
ceded to PIA totaled $342,694 and $368,473 as of December 31, 1995 and 1994,
respectively. The Company reduced its reserves by $242,691 and $226,751 as of
December 31, 1995 and 1994, respectively. Net premium and annuity
considerations ceded to PIA in 1995 were $11,056, which includes an experience
refund of $2,257. Net premium and annuity considerations assumed from PIA in
1994 and 1993 were $10,069 and $5,288, respectively.
During 1995, PIA recaptured its single premium immediate annuity business which
it had previously ceded entirely to the Company. The transaction resulted in
the transfer of approximately $31,000 of invested assets and policyholder
liabilities from the Company to PIA.
During 1995, the Company recaptured the portion of its disability income
business that was previously reinsured under a quota share and excess
reinsurance agreement with the Monarch Life Insurance Company ("Monarch"). As a
result of this recapture, approximately $21,200 of cash and policyholder
reserves were transferred to the Company from Monarch.
NOTE 9 - RELATED PARTIES:
The following summarizes the statement value of the Company's unconsolidated
subsidiaries and affiliates as of December 31, 1995 and 1994. As of December
31, 1995, the Company owned 100% of the common stock of these subsidiaries
(except as noted below).
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Independence Square Properties, Inc. ........................ $ 88,607 $ 69,544
PIA.......................................................... 65,601 56,523
Penn CMO Corp. (0%).......................................... -- 39,315
Independence Capital Group of Funds:
Total Return Bond (0%)...................................... -- 19,231
Total Return Growth (0%).................................... -- 18,670
Opportunities (0%).......................................... -- 15,712
Other affiliates............................................. 16,985 17,271
-------- --------
TOTAL...................................................... $171,193 $236,266
======== ========
</TABLE>
59
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The Company's unconsolidated subsidiaries had combined assets of $1,373,745 and
$1,306,729, and combined liabilities of $1,202,552 and $1,070,463 as of
December 31, 1995 and 1994, respectively. The Company recorded earnings from
these subsidiaries of $23,642, $24,311 and $16,833 for the years ended December
31, 1995, 1994 and 1993, respectively.
As of December 31, 1995 and 1994, bonds include notes receivable from
subsidiaries of $31,130 and $37,035, respectively. Investment income on notes
receivable from subsidiaries amounted to $3,118, $2,527 and $2,805 for 1995,
1994 and 1993, respectively.
During 1995, Penn CMO Corp. (Penn CMO), a wholly-owned subsidiary of the
Company, which had debt obligations outstanding that were collateralized by
mortgages owned by Penn CMO, was dissolved. Sufficient funds were collected
from these mortgages to satisfy the outstanding principal on the debt
obligations and the remaining assets of $40,395 were transferred to the Company
as a return of capital. As of December 31, 1994, Penn CMO had $24,887 of debt
obligations outstanding, which were collateralized by mortgages of $62,661.
Pursuant to a service agreement with Penn CMO, the Company was obligated to
advance delinquent payments of principal and interest on the mortgages and to
purchase or substitute other mortgages in place of delinquent and defective
mortgages. The Company purchased $5,878 and $2,761 of mortgages during 1995 and
1994, respectively. No substitutions were made under this agreement in 1995 and
1994.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
The Company and its subsidiaries are respondents in a number of proceedings,
some of which involve extra-contractual damage in addition to other damages. In
addition, insurance companies are subject to assessments, up to statutory
limits, by state guaranty funds for losses of policyholders of insolvent
insurance companies. In the opinion of management, the outcome of the
proceedings and assessments are not likely to have a material adverse effect on
the financial position of the Company.
The Company has undertaken to its wholly-owned subsidiary, PIA, to provide
sufficient financial support so that PIA will have adequate capital and surplus
as required by applicable laws to meet its obligations to its policyholders
under the terms of PIA's policies and contracts.
The Company, in the ordinary course of business, extends commitments relating
to its investment activities. As of December 31, 1995, the Company had
outstanding commitments totaling $8,725 relating to these investment
activities. The fair value of these commitments approximates the face amount.
As of December 31, 1995, unused lines of credit available to the Company
amounted to $40,000.
60
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
- --------------------------------------------------------------------------------
SAMPLE MINIMUM INITIAL PREMIUMS
The following table shows for Insureds of varying ages, the minimum initial
premium for a Policy with the Basic Death Benefit indicated. The table assumes
the Insured will be placed in a nonsmoker class and that no supplemental
benefits will be added to the base Policy.
<TABLE>
<CAPTION>
BASIC MINIMUM BASE
ISSUE AGE SEX OF DEATH INITIAL MONTHLY
OF INSURED INSURED BENEFIT PREMIUM PREMIUM
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
25 M $ 50,000 $ 48.00 $ 24.00
--------------------------------------------------------------------------------------------
30 F $ 75,000 $ 76.40 $ 38.20
--------------------------------------------------------------------------------------------
35 M $ 75,000 $108.40 $ 54.20
--------------------------------------------------------------------------------------------
40 F $100,000 $155.00 $ 77.50
--------------------------------------------------------------------------------------------
45 M $100,000 $227.86 $113.93
--------------------------------------------------------------------------------------------
50 F $100,000 $242.52 $121.26
--------------------------------------------------------------------------------------------
55 M $100,000 $376.16 $188.08
--------------------------------------------------------------------------------------------
60 F $ 75,000 $297.76 $148.88
--------------------------------------------------------------------------------------------
65 M $ 75,000 $491.62 $245.81
--------------------------------------------------------------------------------------------
70 F $ 50,000 $352.78 $176.39
--------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
SAMPLE MAXIMUM SURRENDER CHARGE PREMIUMS PER $1,000 OF INITIAL SPECIFIED AMOUNT
<TABLE>
<CAPTION>
MALE FEMALE
-----------------------------------------------------------------------------------------------
AGE NONSMOKER SMOKER NONSMOKER SMOKER
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
35 8.67 10.31 7.51 8.80
-----------------------------------------------------------------------------------------------
40 10.84 12.99 9.30 10.92
-----------------------------------------------------------------------------------------------
45 13.67 16.45 11.58 13.56
-----------------------------------------------------------------------------------------------
50 17.45 20.98 14.55 16.91
-----------------------------------------------------------------------------------------------
55 22.57 26.99 18.47 21.26
-----------------------------------------------------------------------------------------------
60 29.57 34.91 23.82 27.07
-----------------------------------------------------------------------------------------------
</TABLE>
B-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX C
- --------------------------------------------------------------------------------
ADMINISTRATIVE SURRENDER CHARGES PER $1,000
<TABLE>
<CAPTION>
ATTAINED AGE OF CHARGE PER EACH $1,000 OF
INSURED ON SURRENDER DATE INITIAL SPECIFIED AMOUNT
----------------------------------------------------------------------------
<S> <C>
0-9 $1.00
----------------------------------------------------------------------------
10-19 $2.00
----------------------------------------------------------------------------
20-29 $3.00
----------------------------------------------------------------------------
30-39 $4.00
----------------------------------------------------------------------------
40-49 $5.00
----------------------------------------------------------------------------
50-59 $6.00
----------------------------------------------------------------------------
60-over $7.00
----------------------------------------------------------------------------
</TABLE>
C-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX D
- --------------------------------------------------------------------------------
APPLICABLE PERCENTAGES
<TABLE>
<CAPTION>
ATTAINED AGE PERCENTAGE
-----------------------
<S> <C>
0-40 250
-----------------------
41 243
-----------------------
42 236
-----------------------
43 229
-----------------------
44 222
-----------------------
45 215
-----------------------
46 209
-----------------------
47 203
-----------------------
48 197
-----------------------
49 191
-----------------------
50 185
-----------------------
51 178
-----------------------
52 171
-----------------------
53 164
-----------------------
54 157
-----------------------
55 150
-----------------------
56 146
-----------------------
57 142
-----------------------
58 138
-----------------------
59 134
-----------------------
60 130
-----------------------
61 128
-----------------------
62 126
-----------------------
63 124
-----------------------
64 122
-----------------------
65 120
-----------------------
66 119
-----------------------
67 118
-----------------------
68 117
-----------------------
69 116
-----------------------
70 115
-----------------------
71 113
-----------------------
72 111
-----------------------
73 109
-----------------------
74 107
-----------------------
75-90 105
-----------------------
91 104
-----------------------
92 103
-----------------------
93 102
-----------------------
94 101
-----------------------
95 100
-----------------------
</TABLE>
D-1
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Section 6.2 of the By-laws of The Penn Mutual Life Insurance Company ("Penn
Mutual" or the "Company") provides that, in accordance with the provisions of
the Section, the Company shall indemnify trustees and officers against expenses
(including attorneys' fees), judgments, fines, excise taxes and amounts paid in
settlement actually and reasonably incurred in connection with actions, suits
and proceedings, to the extent such indemnification is not prohibited by law,
and may provide other indemnification to the extent not prohibited by law. The
By-laws are filed as Exhibit 6(b) to Post-Effective Amendment No. 12 to the Form
N-4 Registration Statement of Penn Mutual Variable Annuity Account III filed in
April 1990 (File No. 2-77283).
Pennsylvania law (15 Pa. C.S.A. (S)(S) 1741-1750) authorizes Pennsylvania
corporations to provide indemnification to directors, officers and other
persons.
Penn Mutual owns a directors and officers liability insurance policy
covering liabilities that trustees and officers of Penn Mutual and its
subsidiaries may incur in acting as trustees and officers.
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-1
<PAGE>
REPRESENTATIONS PURSUANT TO RULE 6E-3(T)
This filing is made pursuant to Rule 6e-3(T) under the Investment Company
Act of 1940.
Registrant elects to be governed by Rule 6e-3(T)(b)(13)(i)(A) under
the Investment Company Act of 1940 with respect to the policies described in the
Prospectus.
Registrant makes the following representations:
(1) Rule 6e-3(T)(b)(13)(iii)(F) has been relied upon.
(2) The level of the mortality and expense risk charge is within the
range of industry practice for comparable flexible or scheduled contracts.
(3) Registrant has concluded that there is a reasonable likelihood
that the distribution financing arrangement of the Separate Account will
benefit the Separate Account and policyowners and will keep and make
available to the Commission on request a memorandum setting forth the basis
for this representation.
(4) The Separate Account will invest only in management investment
companies which have undertaken to have a board of directors, a majority of
whom are not interested persons of the company, formulate and approve any
plan under Rule 12b-1 to finance distribution expenses.
The methodology used to support the representation made in paragraph (2)
above is based on an analysis of the mortality and expense risk charge contained
in other variable life insurance contracts. Registrant undertakes to keep and
make available to the Commission on request the documents used to support the
representation in paragraph (2) above.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
The prospectuses consisting of 60 pages.
Undertaking to file reports.
Rule 484 undertaking.
Representations pursuant to Rule 6e-3(T).
The signatures.
II-2
<PAGE>
Written consents of the following persons:
(a) Peter R. Schaefer, F.S.A., M.A.A.A.
(b) Coopers & Lybrand
(c) Morgan, Lewis & Bockius LLP
The following exhibits:
1. Copies of all exhibits which would be required by paragraph A of the
instructions as to exhibits in Form N-8B-2 if a Registration Statement on
that Form were currently being filed.
A(1) (a) Resolution of the Board of Trustees of The Penn Mutual Life
Insurance Company establishing the Penn Mutual Variable Life
Account I./a////
(b) Resolution of the Executive Committee of the Board of Trustees of
The Penn Mutual Life Insurance Company relating to investments
held in Penn Mutual Variable Life Account I./b////
A(2) Not Applicable.
A(3) (a) Distribution Agreement between The Penn Mutual Life Insurance
Company and Hornor, Townsend & Kent./a////
(b) Sales Support Agreement between The Penn Mutual Life Insurance
Company and Hornor, Townsend & Kent, Inc./c////
(c) Agent's Agreement./c////
(d) Broker-Dealer Selling Agreement./a////
(e) Companion Broker-Dealer Selling Agreement and Corporate Insurance
Agent Selling Agreement./a////
(f) Schedule of Sales Commissions./c////
A(4) Not Applicable
A(5) (a) Specimen Flexible Premium Adjustable Variable Life Insurance
Policy./d////
(b) Additional Insured Term Insurance Agreement Rider./d////
(c) Children's Term Insurance Agreement Rider./d////
(d) Accidental Death Benefit Agreement Rider./d////
(e) Disability Waiver of Monthly Deduction and Disability Monthly
Premium Deposit Agreement Rider./d////
(f) Disability Waiver of Monthly Deduction Agreement Rider./d////
(g) Guaranteed Continuation of Policy Agreement Rider./d////
(h) Guaranteed Option to Increase Specified Amount Agreement
Rider./d////
(i) Supplemental Term Insurance Agreement Rider./d////
(j) Specimen Flexible Premium Adjustable Variable Life Insurance
Policy (revised)./e////
(k) Flexible Periodic Supplemental Term Insurance Agreement Rider.(?)
II-3
<PAGE>
A(6) (a) Charter of the Penn Mutual Life Insurance Company (May 1983).
Incorporated by reference to Exhibit 6(a) to Post-Effective
Amendment No. 10 to a Registration Statement on Form N-4 (File
No. 2-77283) filed in April 1988.
(b) By-laws of The Penn Mutual Life Insurance Company, as amended
through December 8, 1989. Incorporated by reference to Exhibit
6(b) to Post-Effective Amendment No. 12 to a Registration
Statement on Form N-4 (File No. 2-77283) filed on April 30, 1990.
A(7) Not Applicable.
A(8) (a) Agreement between The Penn Mutual Life Insurance Company and
Penn Series Funds, Inc. Incorporated by reference to Exhibit 8(a)
to Pre-Effective Amendment No. 1 to a Registration Statement on
Form S-6 (File No. 3-87276) filed on April 13, 1995.
(b)(1) Agreement between The Penn Mutual Life Insurance Company and
Neuberger & Berman Advisers Management Trust. Filed as exhibit
and incorporated by reference to Post-Effective Amendment No. 1
to the Form S-6 Registration Statement (File No. 33-87276) for
Penn Mutual Variable Life Account I filed on April 29, 1996.
(b)(2) Assignment and Modification Agreement between Neuberger & Berman
Advisers Management Trust and The Penn Mutual Life Insurance
Company. Filed as exhibit and incorporated by reference to Post-
Effective Amendment No. 1 to the Form S-6 Registration Statement
(File No. 33-87276) for Penn Mutual Variable Life Account I filed
in April 29, 1996.
(c) Agreement between The Penn Mutual Life Insurance Company and TCI
Portfolios, Inc./c/
(d) Agreement between The Penn Mutual Life Insurance Company and
Variable Insurance Products Fund. Incorporated by reference to
Exhibit 8(d) to Pre-Effective Amendment No. 1 to a Registration
Statement on Form S-6 (File No. 33-87276) filed on April 13,
1995.
(e) Agreement between The Penn Mutual Life Insurance Company and
Variable Insurance Products Fund II. Incorporated by reference to
Exhibit 8(e) to Pre-Effective Amendment No. 1 to a Registration
Statement on Form S-6 (File No. 33-87276 filed on April 13, 1995.
A(9) Not applicable.
A(10)(a) Application Form for Flexible Premium Adjustable Life
Insurance./d/
(b) Supplemental Application Form for Flexible Premium Adjustable
Variable Life Insurance./d/
A(11) Memorandum describing issuance, transfer and redemption
procedures./e/
2. See Exhibit 1.A(5).
3. Opinion and consent of C. Ronald Rubley, Esq., as to the legality of the
securities being registered./b/
4. Not applicable.
II-4
<PAGE>
5. Not applicable.
6. Opinion and consent of Peter R. Schaefer, F.S.A., as to actuarial matters
pertaining to the securities being registered.
7.(a) Consent of Coopers & Lybrand.
(b) Consent of Morgan, Lewis & Bockius LLP.
8.(a) Powers of Attorney for Trustees. Incorporated by reference to Exhibit 8
to Pre-Effective Amendment No. 1 to a Registration Statement on Form S-6
(File No. 33-87276) filed on April 13, 1995.
_______________________
/a/ Filed as an exhibit incorporated herein by reference to the Form S-6
Registration Statement (File No. 33-11883) for Penn Mutual Variable Life
Account I filed on February 10, 1987.
/b/ Filed as exhibit and incorporated herein by reference to Post-Effective
Amendment No. 3 to this Form S-6 Registration Statement for Penn Mutual
Variable Life Account I filed on April 26, 1995.
/c/ Filed as an exhibit incorporated herein by reference to Pre-Effective
Amendment No. 1 to this Form S-6 Registration Statement for Penn Mutual
Variable Life Account I filed on March 22, 1993.
/d/ Filed as an exhibit and incorporated herein by reference to this Form
S-6 Registration for Penn Mutual Variable Life Account Statement I filed
on November 17, 1992.
/e/ Filed as an exhibit and incorporated herein by reference to Post-
Effective Amendment No. 2 to this Form S-6 Registration Statement for
Penn Mutual Variable Life Account I filed on March 1, 1995.
II-5
<PAGE>
SIGNATURES
On its behalf and on behalf of Penn Mutual Variable Life Account I,
pursuant to the requirements of the Securities Act of 1933, The Penn Mutual Life
Insurance Company certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has duly caused
this Post-Effective Amendment No. 4 to the Registration Statement to be signed
on its behalf by the undersigned thereunto duly authorized, and its seal to be
hereunto affixed and attested, all in the Township of Horsham and the
Commonwealth of Pennsylvania, on the 22nd day of April, 1996.
[SEAL] THE PENN MUTUAL LIFE INSURANCE COMPANY
on its behalf and on behalf of Penn
Mutual Variable Life Account I
Attest: ______________ By: /s/ Robert E. Chappell
-------------------------------------
Robert E. Chappell
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 4 to the Registration Statement has been signed below by
the following persons in the capacities indicated on the day of April,
1995.
Signature Title
- --------- -----
/s/ Robert E. Chappell
------------------------------ President, Chief Executive
Robert E. Chappell Officer and Trustee
/s/ Nancy S. Brodie
----------------------------- Executive Vice President
Nancy S. Brodie and Chief Financial Officer
II-6
<PAGE>
*JAMES A. HAGEN Trustee
*PHILIP E. LIPPINCOTT Trustee
*CLAUDINE B. MALONE Trustee
*JOHN F. McCAUGHAN Trustee
*ALAN B. MILLER Trustee
*JOSEPH NEUBAUER Trustee
*JOHN E. TAIT Trustee
*NORMAN T. WILDE, JR. Trustee
*WESLEY S. WILLIAMS, JR. Trustee
*By /s/ Robert E. Chappell
-------------------------------------
Robert E. Chappell, attorney-in-fact
II-7
<PAGE>
EXHIBIT INDEX
-------------
C1 Consent of Coopers & Lybrand LLP.
C6(a) Opinion and consent of Peter R. Schaefer, F.S.A., M.A.A.A., as to
actuarial matters pertaining to the securities being registered.
C6(b) Consent of Morgan, Lewis & Bockius LLP.
II-8
<PAGE>
Exhibit C1
Consent of Coopers & Lybrand
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the following with respect to Post-Effective Amendment No.
4 and Amendment No. 4 to the Registration Statement on Form S-6 (File No. 33-
54662), filed on behalf of The Penn Mutual Life Insurance Company and Penn
Mutual Variable Life Account I under the Securities Act of 1933:
1. The inclusion of our report dated January 26, 1996 on our audits of
the financial statements of The Penn Mutual Life Insurance Company as
of December 31, 1995 and 1994 and for the three years in the period
ended December 31, 1995.
2. The inclusion of our reports dated April 4, 1996 on our audits of the
financial statements of Penn Mutual Variable Life Account I -
Cornerstone VUL and Penn Mutual Variable Life Account I - Cornerstone
VUL II/Variable Estate Max as of December 31, 1995 and for the year
or period then ended.
3. The reference to our Firm under the heading of "Experts" in the
Registration Statement.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 25, 1996
<PAGE>
Exhibit C-6(a)
Opinion and consent of Peter R. Schaefer, F.S.A.,
as to actuarial matters pertaining to the securities being registered
April 25, 1996
Board of Trustees
The Penn Mutual Life Insurance Company
Independence Square
Philadelphia, PA 19172
Re: Flexible Premium Adjustable
Variable Life Insurance Policies
To the Board of Trustees:
This opinion is furnished in connection with the filing of Post-Effective
Amendment No. 4 to Penn Mutual's Registration Statement on Form S-6 (the
"Registration Statement") covering flexible premium adjustable variable life
insurance policies ("Policies" or "Policy") to be issued by The Penn Mutual Life
Insurance Company (the "Company") (S.E.C. file No. 33-54662).
The Prospectus included in the Registration Statement describes the Policies.
The Policy forms were reviewed under my direction, and I am familiar with the
Registration Statement and Exhibits thereto. In my opinion:
1. Using the interest rate and cost of insurance tables guaranteed in the
Policy, current cost of insurance rates cannot be established at levels such
that the "sales load", as defined in paragraph (c)(4) of Rule 6e-3T under the
Investment Company Act of 1940, would exceed 9 percent of any premium payment.
2. The illustrations of Policy Values, Net Cash Surrender Values, Death
Benefits and Accumulated Premiums included in the Registration Statement and
based on the assumptions stated in the illustrations, are consistent with the
provisions of the Policy. The rate structure of the Policy has not been designed
so as to make the relationship between premiums and benefits, as shown in the
illustrations, appear more favorable to a prospective purchaser of a Policy for
the ages and sexes shown, than to prospective purchasers of a Policy for other
ages and sex.
3. The tables of minimum initial premiums, administrative surrender charges
and applicable percentages included in the appendices to the Prospectus included
in the Registration Statement are consistent with the provisions of the Policy.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of my name relating to actuarial matters under the
heading "Experts" in the Prospectus.
Very truly yours,
Peter R. Schaefer, F.S.A., M.A.A.A.
Actuary
<PAGE>
Exhibit C6(B)
Consent of Morgan, Lewis & Bockius LLP
April 25, 1996
Board of Trustees
The Penn Mutual Life Insurance Company
Independence Square
Philadelphia, PA 19172
RE: PENN MUTUAL VARIABLE LIFE ACCOUNT I
SEC REGISTRATION NO. 33-54662
--------------------------------------
Gentlemen:
We hereby consent to the reference to our name under the caption
"Legal Matters" in the Prospectus filed as part of the Post-Effective Amendment
No. 4. In giving this consent, we do not admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
MORGAN, LEWIS & BOCKIUS LLP
