<PAGE>
As filed with the Securities and Exchange Commission on April 29, 1997
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. 5
----------------------
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 F. Plush
Vice President, Products and Programs
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:
[X] Immediately upon filing pursuant to paragraph (b) of Rule 485.
[_] On (date) pursuant to paragraph (b) of Rule 485.
[_] 60 days after filing pursuant to paragraph (a) of Rule 485.
[_] On (date) 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 11, 1997 to register securities sold during the year ended December
31, 1996.
================================================================================
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
THE PENN MUTUAL LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
Cross Reference to Items Required by Form N-8B-2
N-8B-2 Item Caption in Prospectus
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<S> <C>
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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
33 Not applicable
34 Not applicable
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
</TABLE>
<PAGE>
PART I
Information Required in Prospectus
<PAGE>
PROSPECTUS -- MAY 1, 1997
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE POLICIES
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
THE PENN MUTUAL LIFE INSURANCE COMPANY
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"), American
Century Variable Portfolios, Inc. ("American Century Variable Portfolios"),
Variable Insurance Products Fund ("VIP Fund"), Variable Insurance Products Fund
II ("VIP Fund II" or Morgan Stanley Universal Funds, Inc. ("Morgan Stanley").
Each Fund is managed by the investment adviser shown below:
<TABLE>
<CAPTION>
FUNDS MANAGERS
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<S> <C>
PENN SERIES
Growth Equity Fund Independence Capital Management, Inc.
(a subsidiary of Penn Mutual)
Value Equity Fund OpCap Advisors
Small Capitalization Fund OpCap Advisors
Emerging Growth Fund Independence Capital Management, Inc./
Robertson Stephens Investment Management, Inc.
Flexibly Equity Fund T. Rowe Price Associates, Inc.
International Equity Fund Vontobel USA Inc.
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 Port- Neuberger & Berman Management, Inc.
folio
Balanced Portfolio Neuberger & Berman Management, Inc.
Partners Portfolio Neuberger & Berman Management, Inc.
- -----------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE
PORTFOLIOS
Capital Appreciation Portfo- American Century Investment Management, Inc.
lio
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VIP FUND
Equity-Income Portfolio Fidelity Management & Research Company
Growth Portfolio Fidelity Management & Research Company
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VIP FUND II
Asset Manager Portfolio Fidelity Management & Research Company
Index 500 Portfolio Fidelity Management & Research Company
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MORGAN STANLEY UNIVERSAL
FUNDS, INC.
Emerging Markets Equity (In- Morgan Stanley Asset Management Inc.
ternational) Portfolio
- -----------------------------------------------------------------------------
</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>
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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........................................................ 13
Transfers................................................................. 13
Dollar Cost Averaging Program............................................. 13
Asset Rebalancing......................................................... 14
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FIXED ACCOUNT............................................................... 14
Fixed Account............................................................. 14
Interest Credited on Policy Value in the Fixed Account.................... 15
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................................... 16
Monthly Deduction......................................................... 16
Transfer Charge........................................................... 17
Surrender Charges......................................................... 17
Partial Surrender Charge.................................................. 19
Fund Expenses............................................................. 19
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HOW YOUR POLICY VALUES VARY................................................. 19
Determining the Policy Value.............................................. 19
Net Policy Value.......................................................... 20
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....................................... 21
Changes in Specified Amount Option........................................ 21
Changes in Specified Amount............................................... 21
Selecting and Changing the Beneficiary.................................... 21
- --------------------------------------------------------------------------------
CASH BENEFITS............................................................... 21
Policy Loans.............................................................. 21
Surrendering the Policy for Net Cash Surrender Value...................... 22
Partial Surrenders........................................................ 22
Maturity Benefit.......................................................... 23
Payment Options........................................................... 23
</TABLE>
2
<PAGE>
<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....................................... 29
Right to Exchange to a Fixed Benefit Policy.............................. 29
Dividends................................................................ 29
Limits on Our Rights to Contest the Policy............................... 29
Changes in the Policy or Benefits........................................ 29
When Proceeds Are Paid................................................... 29
Reports to Policy Owners................................................. 30
Assignment............................................................... 30
Reinstatement............................................................ 30
Supplemental Benefits.................................................... 30
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TAX CONSIDERATIONS......................................................... 31
Introduction............................................................. 31
Tax Status of the Policy................................................. 31
Tax Treatment of Policy Benefits......................................... 32
Possible Charge for Penn Mutual's Taxes.................................. 33
- -------------------------------------------------------------------------------
OTHER INFORMATION ABOUT THE POLICIES AND PENN MUTUAL....................... 33
Sale of the Policies..................................................... 33
Penn Mutual Trustees and Officers........................................ 34
State Regulation......................................................... 35
Additional Information................................................... 35
Experts.................................................................. 36
Litigation............................................................... 36
Legal Matters............................................................ 36
Financial Statements..................................................... 36
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APPENDICES
A--Minimum Initial Premiums.............................................. A-1
B--Administrative Surrender Charges Per $1,000........................... B-1
C--Applicable Percentages................................................ C-1
</TABLE>
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 29.
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 date from which Policy Years and Monthly Anniversaries are
measured.
POLICY LOAN ACCOUNT: A portion of the Policy Value held in the Fixed Account
as collateral for policy loans. See page 12.
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 12. 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 29.
OWNER INQUIRIES. If you have any questions, you may write to us (The Penn
Mutual Life Insurance Company, Philadelphia, PA, 19172) or call us (1-800-523-
0650).
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"), American Century Variable Portfolios, Inc.
("American Century Variable Portfolios"), Variable Insurance Products
Fund ("VIP Fund"), Variable Insurance Products Fund II ("VIP Fund II")
and Morgan Stanley Universal Funds, Inc. ("Morgan Stanley"). See page 8.
Funds available are:
<TABLE>
<S> <C>
Penn Series - Growth Equity Fund AMT - Limited Maturity Bond Portfolio
Penn Series - Value Equity Fund AMT - Balanced Portfolio
Penn Series - Small Capitalization Fund AMT - Partners Portfolio
Penn Series - Emerging Growth Fund American Century Variable Portfolio--Capital Appreciation
Penn Series - Flexibly Managed Fund VIP Fund - Equity-Income Portfolio
Penn Series - International Equity Fund VIP Fund - Growth Portfolio
Penn Series - Quality Bond Fund VIP Fund II - Asset Manager Portfolio
Penn Series - High Yield Bond Fund VIP Fund II - Index 500 Portfolio
Penn Series - Money Market Fund Morgan Stanley - Emerging Markets Equity (International) Portfolio
</TABLE>
. 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.
. .
<TABLE>
CASH BENEFITS DEATH BENEFITS
<S> <C>
. 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%. . Available as lump sum or
Currently, the net interest under a variety of payment
rate is 0.25% after the options.
first 10 Policy Years. See
page 21 for rules and . Minimum Basic Death Benefit
limits. ("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
. The Policy may be change Specified Amount. See
surrendered in full at any page 21 for rules and
time for its Net Cash limits.
Surrender Value. A declining
sales load charge of up to . Supplemental benefits
25% of the Surrender Charge available by rider. See page
Premium (not more than 12 30.
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.
. Payment options available.
See page 23.
</TABLE>
7
<PAGE>
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 The
Penn Mutual Life Insurance Company, 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 Life Account I 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"), American Century Variable Portfolios,
Inc. ("American Century Variable Portfolios") (formerly TCI Portfolios, Inc.) ,
Variable Insurance Products Fund ("VIP Fund"), Variable Insurance Products Fund
II ("VIP Fund II") and Morgan Stanley Universal Funds, Inc. ("Morgan Stanley").
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, American Century Variable Portfolios, VIP Fund, VIP Fund II
and Morgan Stanley 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 - EMERGING GROWTH FUND - seeks capital appreciation by investing
primarily in common stocks of emerging growth companies with above-average
growth prospects.
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.
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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 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.
AMT - PARTNERS PORTFOLIO - seeks capital growth by investing primarily in
common stocks of established companies, using the value oriented investment
approach. Neuberger & Berman reserves the right to make changes in the
investment objectives, but will notify shareholders thirty days in advance of
any proposed material change.
AMERICAN CENTURY VARIABLE PORTFOLIOS - CAPITAL APPRECIATION PORTFOLIO
(FORMERLY 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.
VIP FUND II - INDEX 500 PORTFOLIO - seeks to match the total return of the
S&P 500 while keeping expenses low. The S&P 500 is an index of 500 common
stocks, most of which trade on the New York Stock Exchange.
MORGAN STANLEY - EMERGING MARKETS EQUITY (INTERNATIONAL) PORTFOLIO - seeks
long term capital appreciation by investing primarily in equity securities of
emerging market country issuers. The Portfolio will focus on economies which
are developing strongly and in which the markets are becoming more
sophisticated.
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, Emerging Growth, Quality Bond and Money Market Funds.
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.
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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, the AMT Balanced Portfolio
and the AMT Partners Portfolio.
ROBERTSON STEPHENS INVESTMENT MANAGEMENT, INC., San Francisco, California, is
investment sub-adviser to the Penn Series Emerging Growth Fund.
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. ("American Century") of Kansas
City, Missouri, is the investment adviser to Capital Appreciation 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 and Index 500 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.
MORGAN STANLEY ASSET MANAGEMENT INC. ("Morgan Stanley") of New York, New
York, is the investment adviser to Morgan Stanley Universal Funds' Emerging
Markets Equity (International) Portfolio.
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, American Century
Variable Portfolios, VIP Fund, VIP Fund II and Morgan Stanley governing the
Separate Account's investment in those Funds. Under the agreement with American
Century Variable Portfolios, the adviser to the American Century Variable
Portfolios compensates Penn Mutual for certain administrative services provided
by Penn Mutual.
The shares of Penn Series, AMT, American Century Variable Portfolios, VIP
Fund, VIP, Fund II and Morgan Stanley 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, American Century Variable
Portfolios, VIP Fund, VIP Fund II and Morgan Stanley 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, American Century Variable Portfolios, VIP Fund, VIP Fund II
or Morgan Stanley currently perceives or anticipates any such disadvantage, the
Boards of Directors of Penn Series, American Century Variable Portfolios and
Morgan Stanley, 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 of Penn Series, AMT, American Century
Variable Portfolios, VIP Fund, VIP Fund II or Morgan Stanley, 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
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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
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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 31.
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.
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 30.
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
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<PAGE>
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,
or as of the Valuation Date the first premium is received at our office if
later. 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 29. 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.
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<PAGE>
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 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 18.
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
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<PAGE>
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.
- --------------------------------------------------------------------------------
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.
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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, standard nonsmoker or preferred nonsmoker 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 30. 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
16
<PAGE>
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.
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, record keeping, 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 30.
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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.
17
<PAGE>
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.
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.
18
<PAGE>
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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.
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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, American Century Variable Portfolios, VIP Fund, VIP Fund
II and Morgan Stanley.
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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 12, and "Grace Period," page 12.
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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 16).
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
19
<PAGE>
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.
- --------------------------------------------------------------------------------
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 29) 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 29), 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 29.
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 25.
20
<PAGE>
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.
- --------------------------------------------------------------------------------
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 12.
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
21
<PAGE>
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 29, 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 32.
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 31, 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 29, 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.
22
<PAGE>
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 19. 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, 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 29, 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. Upon the written request of the Owner, this policy
will continue in force beyond the Maturity Date. Thereafter, the Death Benefit
will be the Net Policy Value.
- --------------------------------------------------------------------------------
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 0.88% 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 -1.63%, 4.37% and 10.37%, respectively, at current rates, and -1.78%,
4.22% and 10.22%, respectively, at the guaranteed maximum rates.
23
<PAGE>
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 standard
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.
24
<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 1,614 814 352 75,000 904 441 75,000 998 535 75,000
3 2,483 1,245 783 75,000 1,422 959 75,000 1,614 1,151 75,000
4 3,394 1,660 1,198 75,000 1,954 1,491 75,000 2,285 1,823 75,000
5 4,351 2,059 1,596 75,000 2,498 2,036 75,000 3,016 2,553 75,000
6 5,357 2,441 1,978 75,000 3,057 2,594 75,000 3,812 3,349 75,000
7 6,412 2,803 2,341 75,000 3,626 3,164 75,000 4,678 4,215 75,000
8 7,520 3,148 2,778 75,000 4,209 3,839 75,000 5,621 5,251 75,000
9 8,683 3,472 3,195 75,000 4,803 4,525 75,000 6,649 6,371 75,000
10 9,905 3,777 3,592 75,000 5,408 5,223 75,000 7,770 7,585 75,000
15 16,993 4,952 4,952 75,000 8,570 8,570 75,000 15,105 15,105 75,000
20 26,039 5,368 5,368 75,000 11,813 11,813 75,000 26,576 26,576 75,000
25 37,585 4,532 4,532 75,000 14,675 14,675 75,000 44,867 44,867 75,000
30 52,321 1,607 1,607 75,000 16,354 16,354 75,000 75,105 75,105 91,628
</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 1,260 781 318 75,781 838 375 75,838 895 432 75,895
2 2,583 1,631 1,168 76,631 1,797 1,334 76,797 1,969 1,507 76,969
3 3,972 2,458 1,995 77,458 2,788 2,325 77,788 3,145 2,683 78,145
4 5,431 3,261 2,799 78,261 3,811 3,349 78,811 4,432 3,970 79,432
5 6,962 4,040 3,577 79,040 4,868 4,405 79,868 5,839 5,377 80,839
6 8,570 4,794 4,331 79,794 5,957 5,494 80,957 7,378 6,916 82,378
7 10,259 5,521 5,058 80,521 7,079 6,616 82,079 9,061 8,598 84,061
8 12,032 6,221 5,851 81,221 8,234 7,864 83,234 10,901 10,531 85,901
9 13,893 6,894 6,616 81,894 9,421 9,144 84,421 12,912 12,635 87,912
10 15,848 7,539 7,354 82,539 10,643 10,458 85,643 15,113 14,928 90,113
15 27,189 10,295 10,295 85,295 17,235 17,235 92,235 29,612 29,612 104,612
20 41,663 12,088 12,088 87,088 24,507 24,507 99,507 52,243 52,243 127,243
25 60,136 12,421 12,421 87,421 31,948 31,948 106,948 87,339 87,339 162,339
30 83,713 10,549 10,549 85,549 38,601 38,601 113,601 141,581 141,581 216,581
</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
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 1,575 756 0 125,000 820 0 125,000 885 0 125,000
2 3,229 1,626 639 125,000 1,806 819 125,000 1,995 1,008 125,000
3 4,965 2,456 1,469 125,000 2,810 1,823 125,000 3,195 2,208 125,000
4 6,788 3,245 2,258 125,000 3,829 2,843 125,000 4,491 3,504 125,000
5 8,703 3,994 3,007 125,000 4,865 3,879 125,000 5,894 4,907 125,000
6 10,713 4,697 3,710 125,000 5,914 4,927 125,000 7,410 6,423 125,000
7 12,824 5,354 4,367 125,000 6,975 5,988 125,000 9,051 8,064 125,000
8 15,040 5,962 5,172 125,000 8,043 7,253 125,000 10,824 10,035 125,000
9 17,367 6,513 5,921 125,000 9,113 8,521 125,000 12,740 12,148 125,000
10 19,810 7,009 6,614 125,000 10,185 9,790 125,000 14,815 14,420 125,000
15 33,986 8,627 8,627 125,000 15,547 15,547 125,000 28,242 28,242 125,000
20 52,079 8,394 8,394 125,000 20,526 20,526 125,000 49,148 49,148 125,000
25 75,170 4,559 4,559 125,000 23,350 23,350 125,000 82,470 82,470 125,000
30 104,641 0 0 0 21,259 21,259 125,000 139,545 139,545 149,313
</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
$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 1,304 317 126,304 1,402 415 126,402 1,499 512 126,499
2 4,520 2,709 1,722 127,709 2,990 2,003 127,990 3,284 2,297 128,284
3 6,951 4,061 3,075 129,061 4,618 3,631 129,618 5,222 4,235 130,222
4 9,504 5,360 4,373 130,360 6,283 5,297 131,283 7,326 6,339 132,326
5 12,184 6,605 5,618 131,605 7,987 7,001 132,987 9,613 8,626 134,613
6 14,998 7,792 6,805 132,792 9,727 8,740 134,727 12,095 11,108 137,095
7 17,953 8,920 7,933 133,920 11,500 10,513 136,500 14,790 13,804 139,790
8 21,056 9,984 9,195 134,984 13,303 12,513 138,303 17,715 16,926 142,715
9 24,314 10,979 10,387 135,979 15,130 14,538 140,130 20,885 20,293 145,885
10 27,734 11,904 11,510 136,904 16,981 16,586 141,981 24,324 23,929 149,324
15 47,581 15,467 15,467 140,467 26,555 26,555 151,555 46,539 46,539 171,539
20 72,910 16,847 16,847 141,847 36,181 36,181 161,181 80,228 80,228 205,228
25 105,238 14,361 14,361 139,361 43,704 43,704 168,704 130,080 130,080 255,080
30 146,498 6,013 6,013 131,013 46,013 46,013 171,013 203,283 203,283 328,283
</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.
26
<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 75,000 445 0 75,000
2 1,614 887 424 75,000 979 517 75,000 1,076 613 75,000
3 2,483 1,378 915 75,000 1,564 1,101 75,000 1,766 1,303 75,000
4 3,394 1,856 1,394 75,000 2,169 1,707 75,000 2,523 2,060 75,000
5 4,351 2,321 1,858 75,000 2,796 2,333 75,000 3,352 2,890 75,000
6 5,357 2,773 2,310 75,000 3,444 2,981 75,000 4,263 3,800 75,000
7 6,412 3,211 2,748 75,000 4,114 3,652 75,000 5,262 4,799 75,000
8 7,520 3,632 3,262 75,000 4,804 4,434 75,000 6,356 5,986 75,000
9 8,683 4,033 3,756 75,000 5,512 5,235 75,000 7,552 7,274 75,000
10 9,905 4,415 4,230 75,000 6,239 6,054 75,000 8,860 8,675 75,000
15 16,993 6,001 6,001 75,000 10,147 10,147 75,000 17,544 17,544 75,000
20 26,039 7,025 7,025 75,000 14,581 14,581 75,000 31,551 31,551 75,000
25 37,585 7,237 7,237 75,000 19,466 19,466 75,000 54,606 54,606 75,000
30 52,321 6,092 6,092 75,000 24,523 24,523 75,000 92,562 92,562 112,925
</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.
- -------------------------------------------------------------------------------
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 1,260 794 331 75,794 851 389 75,851 909 446 75,909
2 2,583 1,706 1,243 76,706 1,875 1,412 76,875 2,051 1,588 77,051
3 3,972 2,595 2,133 77,595 2,935 2,472 77,935 3,303 2,841 78,303
4 5,431 3,465 3,002 78,465 4,036 3,574 79,036 4,680 4,217 79,680
5 6,962 4,314 3,851 79,314 5,179 4,717 80,179 6,193 5,730 81,193
6 8,570 5,142 4,680 80,142 6,365 5,902 81,365 7,855 7,392 82,855
7 10,259 5,950 5,487 80,950 7,595 7,132 82,595 9,682 9,219 84,682
8 12,032 6,733 6,363 81,733 8,867 8,497 83,867 11,686 11,316 86,686
9 13,893 7,489 7,212 82,489 10,180 9,902 85,180 13,883 13,606 88,883
10 15,848 8,219 8,034 83,219 11,535 11,350 86,535 16,293 16,108 91,293
15 27,189 11,426 11,426 86,426 18,960 18,960 93,960 32,323 32,323 107,323
20 41,663 13,914 13,914 88,914 27,619 27,619 102,619 57,961 57,961 132,961
25 60,136 15,377 15,377 90,377 37,396 37,396 112,396 98,871 98,871 173,871
30 83,713 15,261 15,261 90,261 47,818 47,818 122,818 163,944 163,944 238,944
</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>
- -------------------------------------------------------------------------------
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 0 125,000 901 0 125,000 968 0 125,000
2 3,229 1,825 838 125,000 2,017 1,030 125,000 2,217 1,230 125,000
3 4,965 2,771 1,785 125,000 3,153 2,166 125,000 3,567 2,580 125,000
4 6,788 3,680 2,693 125,000 4,316 3,329 125,000 5,034 4,047 125,000
5 8,703 4,549 3,563 125,000 5,506 4,519 125,000 6,631 5,644 125,000
6 10,713 5,379 4,393 125,000 6,723 5,736 125,000 8,369 7,382 125,000
7 12,824 6,180 5,193 125,000 7,979 6,992 125,000 10,274 9,287 125,000
8 15,040 6,948 6,158 125,000 9,271 8,482 125,000 12,361 11,572 125,000
9 17,367 7,677 7,085 125,000 10,596 10,004 125,000 14,645 14,053 125,000
10 19,810 8,370 7,975 125,000 11,957 11,562 125,000 17,147 16,753 125,000
15 33,986 11,131 11,131 125,000 19,198 19,198 125,000 33,754 33,754 125,000
20 52,079 12,609 12,609 125,000 27,247 27,247 125,000 60,682 60,682 125,000
25 75,170 12,189 12,189 125,000 35,837 35,837 125,000 105,537 105,537 125,000
30 104,641 9,154 9,154 125,000 44,825 44,825 125,000 180,690 180,690 193,338
</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 1,384 397 126,384 1,484 497 126,484 1,585 598 126,585
2 4,520 2,913 1,926 127,913 3,205 2,218 128,205 3,511 2,524 128,511
3 6,951 4,385 3,398 129,385 4,970 3,983 129,970 5,604 4,617 130,604
4 9,504 5,808 4,821 130,808 6,785 5,798 131,785 7,887 6,900 132,887
5 12,184 7,180 6,193 132,180 8,651 7,664 133,651 10,377 9,390 135,377
6 14,998 8,500 7,514 133,500 10,568 9,581 135,568 13,094 12,107 138,094
7 17,953 9,779 8,793 134,779 12,549 11,562 137,549 16,072 15,085 141,072
8 21,056 11,014 10,225 136,014 14,591 13,802 139,591 19,334 18,544 144,334
9 24,314 12,198 11,606 137,198 16,692 16,100 141,692 22,901 22,309 147,901
10 27,734 13,333 12,938 138,333 18,853 18,459 143,853 26,807 26,412 151,807
15 47,581 18,108 18,108 143,108 30,466 30,466 155,466 52,546 52,546 177,546
20 72,910 21,301 21,301 146,301 43,466 43,466 168,466 93,121 93,121 218,121
25 105,238 22,227 22,227 147,227 57,239 57,239 182,239 156,899 156,899 281,899
30 146,498 20,262 20,262 145,262 71,049 71,049 196,049 257,634 257,634 382,634
</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.
28
<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.
29
<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.
30
<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 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
31
<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 totally and
permanently 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
32
<PAGE>
continue 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. Registered representatives
may also be paid commissions of up to 0.25% of Policy Value. Other allowances
and overrides also may be paid. Registered representatives who meet certain
productivity and profitability standards may be eligible for additional
compensation.
For 1996 and 1995, Penn Mutual received premium payments on the Policies in
the approximate amounts of $3,458,000 and $11,201,000, respectively, and
compensated HTK in the approximate amount of $19,024 and $52,800, respectively,
for its services as principal underwriter.
33
<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>
Robert E. Chappell Chairman of the Board Chairman of the Board and
The Penn Mutual Life and Chief Executive Chief Executive Officer
Insurance Company Officer (since December 1996),
Philadelphia, PA 19172 President and Chief
Executive Officer (April
1995-December 1996),
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).
- -------------------------------------------------------------------------------
Daniel J. Toran President and Chief President and Chief
The Penn Mutual Life Operating Officer Operating Officer (since
Insurance Company January 1997), Executive
Philadelphia, PA 19172 Vice President, The Penn
Mutual Life Insurance
Company (May 1996-January
1997), Executive Vice
President, The New England
Mutual Life Insurance
Company (prior thereto).
- -------------------------------------------------------------------------------
James A. Hagen Trustee Retired (since May 1996),
2001 Market Street Chairman of the Board,
P.O. Box 41417 Conrail, Inc. (prior
Philadelphia, PA 19101-1417 thereto).
- -------------------------------------------------------------------------------
Philip E. Lippincott Trustee Retired (since April
3578 Oakwood Drive 1994), Chairman and Chief
Park City, UT 84060 Executive Officer, Scott
Paper Company (prior
thereto).
- -------------------------------------------------------------------------------
John F. McCaughan Trustee Retired (since April
Betz Dearborn Foundation 1996), President, Betz
200 Witmer Road Dearborn Foundation (since
Horsham, PA 19044 March 1996, Chairman of
the Board, Betz
Laboratories, Inc. (prior
thereto).
- -------------------------------------------------------------------------------
Alan B. Miller Trustee Chairman and President,
367 S. Gulph Road Universal Health Services,
King of Prussia, PA 19406 Inc.
- -------------------------------------------------------------------------------
Norman T. Wilde, Jr. Trustee President and Chief
1801 Market Street Executive Officer, Janney
Philadelphia, PA 19103 Montgomery Scott Inc. (a
securities broker/dealer
and subsidiary of The Penn
Mutual Life Insurance
Company).
- -------------------------------------------------------------------------------
Wesley S. Williams, Jr., Esq. Trustee Partner, Covington &
1201 Pennsylvania Ave., N.W. Burling (law firm).
P.O. Box 7566
Washington, D.C. 20004
</TABLE>
34
<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),
The PennMutual Life Vice President, Information Systems Application (August
Insurance Company 1992 to July 1995); Manager Price Waterhouse (prior
Philadelphia, PA 19172 thereto).
- -------------------------------------------------------------------------------
Michael A. Biondolillo Vice President, Human Resources, The Penn Mutual Life
The Penn Mutual Life Insurance Company (since October 1996); Corporate Vice
Insurance Company President and General Manager, Human Resources and
Philadelphia, PA 19172 Quality MG Industries, America (prior thereto).
- -------------------------------------------------------------------------------
Nancy S. Brodie Executive Vice President and Chief Financial Officer
The Penn Mutual Life (since December 1995), Senior Vice President and Chief
Insurance Company Financial Officer (January 1994 to December 1995), Vice
Philadelphia, PA 19172 President and Controller (November 1991 to January
1994), General Auditor (October 1989 to November 1991),
Assistant Vice President, Taxation, The Penn Mutual
Life Insurance Company (prior thereto). ^
- -------------------------------------------------------------------------------
L. Stockton Illoway Senior Vice President, Marketing and Sales Support
The Penn Mutual Life (since June 1996), Senior Vice President, Annuity and
Insurance Company Pension Business ^(December 1993 to June 1996) Senior
Philadelphia, PA 19172 Vice President, Individual Retirement Investment
Service (September 1993 to December 1993), Regional
Vice President, The Penn Mutual Life Insurance Company
(prior thereto).
- -------------------------------------------------------------------------------
Richard J. Liburdi Senior Vice President, Career Agency System (since June
The Penn Mutual Life 1996), Senior Vice President, Insurance and Life Sales
Insurance Company (January 1991 to June 1996), Vice President and Product
Philadelphia, PA 19172 Manager (November 1988 to January 1991), Assistant Vice
President and Product Manager, The Penn Mutual Life
Insurance Company (prior thereto).
- -------------------------------------------------------------------------------
Nina M. Mulrooney General Auditor (since November 1991), Assistant Vice
The Penn Mutual Life President, Corporate Accounting and Controls (December
Insurance Company 1988 to November 1991), Director, Cost Accounting and
Philadelphia, PA 19172 Budget, The Penn Mutual Life Insurance Company (prior
thereto).
- -------------------------------------------------------------------------------
Harold E. Maude, Jr. Senior Vice President, Independence Financial Network
The Penn Mutual Life (since July 1996), Vice President, Independence
Insurance Company Financial Network (1991 to July 1996), Regional
Philadelphia, PA 19172 Director (1989 to 1991).
- -------------------------------------------------------------------------------
Peter M. Sherman Senior Vice President and Chief Investment Officer
The Penn Mutual Life (since May 1996), Vice President, Investments (January
Insurance Company 1996 to April 1996); Vice President, Fixed Income
Philadelphia, PA 19172 Portfolio Management, The Penn Mutual Life Insurance
Company (prior thereto); 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.
35
<PAGE>
- --------------------------------------------------------------------------------
EXPERTS
The statement of assets and liabilities of Penn Mutual Variable Life Account
I--Cornerstone VUL as of December 31, 1996, 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
statutory statements of financial condition of The Penn Mutual Life Insurance
Company as of December 31, 1996 and 1995, and the related statutory statements
of operations, surplus and cash flows for the three years in the period ended
December 31, 1996, 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.
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 statement of assets and liabilities of the
Penn Mutual Variable Life Account I--Cornerstone VUL (Cornerstone) [comprising,
respectively, 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, Balanced Portfolio, Limited
Maturity Bond Portfolio, Capital Appreciation Portfolio (formerly TCI Growth
Portfolio), Equity Income Portfolio, Growth Portfolio, and Asset Manager
Portfolio] as of December 31, 1996, and the related statements of operations
for the year then ended, and the statement 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, 1996 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, 1996, the results of its
operations for the year then ended and its 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 7, 1997
37
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1996
<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....... 2,101,874 203,788 247,468 196,316
Identified cost........ $49,712,614 $2,101,874 $2,041,366 $2,292,681 $3,944,408
ASSETS:
Investments at value... $55,149,422 $2,101,874 $2,037,883 $2,204,938 $4,212,941
Dividends receivable... 8,846 8,846 0 0 0
LIABILITIES:
Due to The Penn Mutual
Life Insurance Compa-
ny.................... 10,604 605 389 406 800
----------- ---------- ---------- ---------- ----------
NET ASSETS.............. $55,147,664 $2,110,115 $2,037,494 $2,204,532 $4,212,141
=========== ========== ========== ========== ==========
Variable life accumula-
tion units............ 185,870 167,426 167,390 265,705
Accumulated unit val-
ues................... $ 11.35 $ 12.17 $ 13.17 $ 15.85
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1996
<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.............. $1,386,608 $111,809 $126,911 $160,322 $ 18,888
EXPENSE:
Mortality and expense
risk charges.......... 372,348 17,378 15,334 15,036 29,018
---------- -------- -------- -------- --------
Net investment income
(loss)................ 1,014,260 94,431 111,577 145,286 (10,130)
---------- -------- -------- -------- --------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses)
from redemption of
fund shares........... 11,980 0 4,964 3,165 2,218
Capital gains distribu-
tions................. 2,684,034 0 0 0 419,318
---------- -------- -------- -------- --------
Net realized gains.... 2,696,014 0 4,964 3,165 421,536
Net change in
unrealized apprecia-
tion (depreciation) of
investments........... 2,286,524 0 (45,882) 96,192 227,863
---------- -------- -------- -------- --------
Net realized and
unrealized gains
(losses) on
investments........... 4,982,538 0 (40,918) 99,357 649,399
---------- -------- -------- -------- --------
NET INCREASE (DECREASE)
IN NET ASSETS RESULT-
ING FROM OPERATIONS... $5,996,798 $ 94,431 $ 70,659 $244,643 $639,269
========== ======== ======== ======== ========
</TABLE>
- -----------------------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997).
++++ 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>
389,191 969,102 47,366 442,975 128,052 10,857
$5,731,532 $16,189,723 $550,571 $6,172,398 $1,916,201 $152,149
$7,519,168 $18,160,971 $593,497 $6,914,832 $2,038,582 $152,536
0 0 0 0 0 0
1,385 3,429 110 1,264 375 32
- ---------- ----------- -------- ---------- ---------- --------
$7,517,783 $18,157,542 $593,387 $6,913,568 $2,038,207 $152,504
========== =========== ======== ========== ========== ========
414,409 1,141,569 44,541 459,393 151,815 13,216
$18.14 $ 15.91 $ 13.32 $ 15.05 $ 13.43 $ 11.54
</TABLE>
- --------------------------------------------------------------------------------
<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>
$ 82,736 $ 587,432 $ 3,224 $ 228,105 $ 46,362 $ 12,459
47,890 122,708 2,948 44,843 15,299 1,192
- ---------- ----------- -------- --------- --------- --------
34,846 464,724 276 183,262 31,063 11,267
- ---------- ----------- -------- --------- --------- --------
(7,635) 4,596 199 2,927 11,435 4,002
308,946 766,307 22,472 303,870 257,818 0
- ---------- ----------- -------- --------- --------- --------
301,311 770,903 22,671 306,797 269,253 4,002
1,002,569 1,086,367 41,325 392,612 (175,031) (9,407)
- ---------- ----------- -------- --------- --------- --------
1,303,880 1,857,270 63,996 699,409 94,222 (5,405)
- ---------- ----------- -------- --------- --------- --------
$1,338,726 $ 2,321,994 $ 64,272 $ 882,671 $ 125,285 $ 5,862
========== =========== ======== ========= ========= ========
</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, 1996 (CONT'D.)
<TABLE>
<CAPTION>
CAPITAL
APPRECIATION EQUITY INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT IN COMMON
STOCK
Number of shares....... 410,148 89,769 92,456 14,492
Identified cost........ $ 4,002,245 $ 1,682,491 $ 2,712,738 $ 222,237
ASSETS:
Investments at value... $ 4,199,917 $ 1,887,842 $ 2,879,095 $ 245,346
Dividends receivable... 0 0 0 0
LIABILITIES:
Due to The Penn Mutual
Life Insurance
Company............... 903 351 510 45
----------- ----------- ----------- ---------
NET ASSETS.............. $ 4,199,014 $ 1,887,491 $ 2,878,585 $ 245,301
=========== =========== =========== =========
Variable life
accumulation units.... 310,397 139,131 203,903 19,272
Accumulated unit
values................ $ 13.53 $ 13.57 $ 14.12 $ 12.73
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1996 (CONT'D.)
<TABLE>
<CAPTION>
CAPITAL
APPRECIATION EQUITY INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.............. $ 0 $ 1,578 $ 3,240 $ 3,542
EXPENSE:
Mortality and expense
risk charges.......... 32,015 10,972 15,995 1,720
--------- -------- -------- -------
Net investment income
(loss)................ (32,015) (9,394) (12,755) 1,822
--------- -------- -------- -------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses)
from redemption of
fund shares........... (10,671) (127) (5,184) 2,091
Capital gains
distributions......... 475,347 45,233 81,803 2,920
--------- -------- -------- -------
Net realized gains..... 464,676 45,106 76,619 5,011
Net change in
unrealized
appreciation
(depreciation) of
investments........... (671,349) 149,809 171,025 20,431
--------- -------- -------- -------
Net realized and
unrealized gains
(losses) on
investments........... (206,673) 194,915 247,644 25,442
--------- -------- -------- -------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS........ $(238,688) $185,521 $234,889 $27,264
========= ======== ======== =======
</TABLE>
- -----------------------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997).
++++ 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, 1996 AND
1995
<TABLE>
<CAPTION>
TOTAL MONEY MARKET FUND+ QUALITY BOND FUND+
------------------------ ---------------------- ----------------------
1996 1995 1996 1995 1996 1995
----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ 1,014,260 $ 793,618 $ 94,431 $ 122,818 $ 111,577 $ 103,983
Net realized gain
(loss) from investment
transactions.......... 2,696,014 1,203,208 0 0 4,964 949
Net change in
unrealized
appreciation
(depreciation) of
investments........... 2,286,524 4,342,387 0 0 (45,882) 189,692
----------- ----------- ---------- ---------- ---------- ----------
Net increase (decrease)
in net assets resulting
from operations........ 5,996,798 6,339,213 94,431 122,818 70,659 294,624
----------- ----------- ---------- ---------- ---------- ----------
VARIABLE LIFE ACTIVI-
TIES:
Purchase payments under
variable life
contracts............. 13,892,170 17,990,994 2,011,674 7,004,477 438,173 503,095
Cost of insurance...... (3,438,272) (3,058,410) (202,738) (401,738) (133,539) (145,157)
Contract administration
charges............... (541,639) (915,062) (41,069) (129,945) (17,842) (34,766)
Transfers of policy
loans................. 358,967 24,516 (150) (2) 57,180 2,860
Net transfers.......... (1,180,575) (1,376,067) (2,062,636) (5,999,373) (309,763) 142,961
Death benefits......... (47,421) (176,857) 0 (54,766) (942) (4,834)
Surrender benefits..... (1,804,920) (935,084) (99,921) (105,894) (115,643) (32,492)
----------- ----------- ---------- ---------- ---------- ----------
Net increase (decrease)
in net assets resulting
from variable life
activities............. 7,238,310 11,554,030 (394,840) 312,759 (82,376) 431,667
----------- ----------- ---------- ---------- ---------- ----------
Total increase
(decrease) in net
assets................. 13,235,108 17,893,243 (300,409) 435,577 (11,717) 726,291
NET ASSETS:
Beginning of period.... 41,912,556 24,019,313 2,410,524 1,974,947 2,049,211 1,322,920
----------- ----------- ---------- ---------- ---------- ----------
END OF PERIOD.......... $55,147,664 $41,912,556 $2,110,115 $2,410,524 $2,037,494 $2,049,211
=========== =========== ========== ========== ========== ==========
<CAPTION>
HIGH YIELD BOND FUND+ GROWTH EQUITY FUND+ VALUE EQUITY FUND+
------------------------ ---------------------- ----------------------
1996 1995 1996 1995 1996 1995
----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ 145,286 $ 148,448 $ (10,130) $ (7,852) $ 34,846 $ 40,097
Net realized gain
(loss) from investment
transactions.......... 3,165 2,597 421,536 455,956 301,311 255,729
Net change in
unrealized
appreciation
(depreciation) of
investments........... 96,192 81,342 227,863 157,200 1,002,569 839,097
----------- ----------- ---------- ---------- ---------- ----------
Net increase (decrease)
in net assets resulting
from operations........ 244,643 232,387 639,269 605,304 1,338,726 1,134,923
----------- ----------- ---------- ---------- ---------- ----------
VARIABLE LIFE ACTIVI-
TIES:
Purchase payments under
variable life
contracts............. 571,914 684,579 975,209 1,119,490 1,579,926 1,299,369
Cost of insurance...... (154,286) (163,167) (279,366) (271,382) (463,888) (340,110)
Contract administration
charges............... (24,027) (42,823) (47,593) (85,088) (69,971) (96,570)
Transfers of policy
loans................. 613 348 9,833 2,744 10,338 5,502
Net transfers.......... (229,781) (188,912) (427,754) 177,895 289,772 662,164
Death benefits......... (2,541) (5,578) (8,908) (12,064) (10,887) (28,299)
Surrender benefits..... (57,603) (50,935) (104,630) (55,271) (152,684) (63,364)
----------- ----------- ---------- ---------- ---------- ----------
Net increase (decrease)
in net assets resulting
from variable life
activities............. 104,289 233,512 116,791 876,324 1,182,606 1,438,692
----------- ----------- ---------- ---------- ---------- ----------
Total increase
(decrease) in net
assets................. 348,932 465,899 756,060 1,481,628 2,521,332 2,573,615
NET ASSETS:
Beginning of period.... 1,855,600 1,389,701 3,456,081 1,974,453 4,996,451 2,422,836
----------- ----------- ---------- ---------- ---------- ----------
END OF PERIOD.......... $ 2,204,532 $ 1,855,600 $4,212,141 $3,456,081 $7,517,783 $4,996,451
=========== =========== ========== ========== ========== ==========
</TABLE>
- -----------------------
(a) For the period May 1, 1995 (date funds first became available for
investment to contract owners) to December 31, 1995
+ Investment in Penn Series Funds, Inc.
++ Investment in Newberger & Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997).
++++ 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, 1996 AND
1995 (CONT'D.)
<TABLE>
<CAPTION>
SMALL
CAPITALIZATION INTERNATIONAL
FLEXIBLY MANAGED FUND+ FUND+ EQUITY FUND+
------------------------ -------------------- ----------------------
1996 1995 1996 1995(a) 1996 1995
----------- ----------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ 464,724 $ 311,647 $ 276 $ 435 $ 183,262 $ 79,969
Net realized gain
(loss) from investment
transactions.......... 770,903 471,720 22,671 1,825 306,797 4,144
Net change in
unrealized
appreciation
(depreciation) of
investments........... 1,086,367 1,314,004 41,325 1,601 392,612 495,756
----------- ----------- ---------- -------- ---------- ----------
Net increase (decrease)
in net assets resulting
from operations........ 2,321,994 2,097,371 64,272 3,861 882,671 579,869
----------- ----------- ---------- -------- ---------- ----------
VARIABLE LIFE
ACTIVITIES:
Purchase payments under
variable life
contracts............. 3,714,405 3,407,436 101,377 18,031 1,627,625 1,708,561
Cost of insurance...... (1,045,337) (861,418) (29,508) (3,810) (394,740) (370,006)
Contract administration
charges............... (149,971) (255,754) (5,437) (1,451) (62,389) (133,279)
Transfers of policy
loans................. 132,675 6,064 (3) 0 27,691 1,449
Net transfers.......... 74,976 1,853,549 375,756 72,948 52,813 55,362
Death benefits......... (7,828) (24,559) 0 0 (1,541) (9,668)
Surrender benefits..... (619,467) (387,157) (2,649) 0 (153,197) (149,580)
----------- ----------- ---------- -------- ---------- ----------
Net increase (decrease)
in net assets resulting
from variable life
activities............. 2,099,453 3,738,161 439,536 85,718 1,096,262 1,102,839
----------- ----------- ---------- -------- ---------- ----------
Total increase
(decrease) in net
assets................. 4,421,447 5,835,532 503,808 89,579 1,978,933 1,682,708
NET ASSETS:
Beginning of period.... 13,736,095 7,900,563 89,579 0 4,934,635 3,251,927
----------- ----------- ---------- -------- ---------- ----------
END OF PERIOD.......... $18,157,542 $13,736,095 $ 593,387 $ 89,579 $6,913,568 $4,934,635
=========== =========== ========== ======== ========== ==========
<CAPTION>
EQUITY INCOME GROWTH ASSET
PORTFOLIO++++ PORTFOLIO++++ MANAGER PORTFOLIO++++
------------------------ -------------------- ----------------------
1996 1995(A) 1996 1995(A) 1996 1995(A)
----------- ----------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ (9,394) $ 4,755 $ (12,755) $ (2,128) $ 1,822 $ (101)
Net realized gain
(loss) from investment
transactions.......... 45,106 92 76,619 (1,691) 5,011 13
Net change in
unrealized
appreciation
(depreciation) of
investments........... 149,809 55,542 171,025 (4,668) 20,431 2,678
----------- ----------- ---------- -------- ---------- ----------
Net increase (decrease)
in net assets resulting
from operations........ 185,521 60,389 234,889 (8,487) 27,264 2,590
----------- ----------- ---------- -------- ---------- ----------
VARIABLE LIFE
ACTIVITIES:
Purchase payments under
variable life
contracts............. 408,853 108,297 770,051 130,927 53,654 20,547
Cost of insurance...... (94,941) (17,216) (175,709) (23,352) (21,451) (1,524)
Contract administration
charges............... (17,442) (4,313) (35,446) (7,293) (3,682) (932)
Transfers of policy
loans................. 1,339 0 1,260 0 193 0
Net transfers.......... 603,069 702,320 1,189,065 882,895 105,397 63,892
Death benefits......... 0 0 0 0 0 0
Surrender benefits..... (47,548) (837) (79,561) (654) (647) 0
----------- ----------- ---------- -------- ---------- ----------
Net increase (decrease)
in net assets resulting
from variable life
activities............. 853,330 788,251 1,669,660 982,523 133,464 81,983
----------- ----------- ---------- -------- ---------- ----------
Total increase
(decrease) in net
assets................. 1,038,851 848,640 1,904,549 974,036 160,728 84,573
NET ASSETS:
Beginning of period.... 848,640 0 974,036 0 84,573 0
----------- ----------- ---------- -------- ---------- ----------
END OF PERIOD.......... $ 1,887,491 $ 848,640 $2,878,585 $974,036 $ 245,301 $ 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 American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997).
++++ 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>
CAPITAL
LIMITED MATURITY APPRECIATION
BALANCED PORTFOLIO++ BOND PORTFOLIO++ PORTFOLIO+++
- ----------------------- --------------------- -------------------------
1996 1995 1996 1995 1996 1995
- ---------- ---------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 31,063 $ 13,939 $ 11,267 $ 3,634 $ (32,015) $ (26,026)
269,253 12,814 4,002 492 464,676 (1,432)
(175,031) 333,686 (9,407) 11,309 (671,349) 865,148
- ---------- ---------- -------- -------- ---------- ----------
125,285 360,439 5,862 15,435 (238,688) 837,690
- ---------- ---------- -------- -------- ---------- ----------
400,623 717,791 33,890 27,571 1,204,796 1,240,823
(132,301) (147,373) (10,463) (10,748) (300,005) (301,409)
(16,602) (29,232) (1,322) (2,049) (48,846) (91,567)
102,578 1,967 1,767 (6) 13,653 3,590
(420,150) (85,875) (75,936) 93,229 (345,403) 190,878
(7,016) (15,356) 0 (5,512) (7,758) (16,221)
(197,595) (26,344) (2,931) (577) (170,844) (61,979)
- ---------- ---------- -------- -------- ---------- ----------
(270,463) 415,578 (54,995) 101,908 345,593 964,115
- ---------- ---------- -------- -------- ---------- ----------
(145,178) 776,017 (49,133) 117,343 106,905 1,801,805
2,183,385 1,407,368 201,637 84,294 4,092,109 2,290,304
- ---------- ---------- -------- -------- ---------- ----------
$2,038,207 $2,183,385 $152,504 $201,637 $4,199,014 $4,092,109
========== ========== ======== ======== ========== ==========
</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, 1996
- --------------------------------------------------------------------------------
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 contract
owners to provide for the accumulation of value and for the payment of
benefits. Net payments are deposited into Cornerstone. Contract owners
allocate and transfer between subaccounts. Contract owners 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 requires management to make estimates and assumptions
that affect the reported values of assets and liabilities as of December
31, 1996 and the reported amounts from operations and contract transactions
during 1996 and 1995. Actual results could differ from those estimates.
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 Fund
and Small Capitalization Funds; Neuberger and
- --------------------------------------------------------------------------------
NOTE 2.
For the year ended December 31, 1996 and 1995 transactions in Cornerstone
were as follows:
<TABLE>
<CAPTION>
QUALITY BOND HIGH YIELD
MONEY MARKET FUND+ FUND+ BOND FUND+
------------------------ ------------------ ------------------
1996 1995 1996 1995 1996 1995
----------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased........ 2,989,321 5,622,002 42,828 69,557 56,963 86,146
Shares received from re-
investment of:
Net investment income. 111,809 140,992 12,691 11,453 17,994 19,107
Capital gains
distribution......... 0 0 0 0 0 0
----------- ----------- -------- -------- -------- --------
Total shares acquired... 3,101,130 5,762,994 55,519 81,010 74,957 105,253
Shares redeemed......... (3,387,864) (5,260,429) (51,870) (27,219) (47,370) (60,409)
----------- ----------- -------- -------- -------- --------
Net increase (decrease)
in shares owned........ (286,734) 502,565 3,649 53,790 27,587 44,844
Shares owned beginning
of period.............. 2,388,608 1,886,043 200,139 146,349 219,881 175,037
----------- ----------- -------- -------- -------- --------
Shares owned end of pe-
riod................... 2,101,874 2,388,608 203,788 200,139 247,468 219,881
=========== =========== ======== ======== ======== ========
Cost of shares acquired. $ 3,101,130 $ 5,762,994 $566,148 $815,295 $667,607 $907,291
Proceeds from shares re-
deemed................. $ 3,387,864 $ 5,260,429 $536,784 $279,490 $417,822 $525,229
<CAPTION>
INTERNATIONAL BALANCED LIMITED MATURITY
EQUITY FUND+ PORTFOLIO++ BOND PORTFOLIO++
------------------------ ------------------ ------------------
1996 1995 1996 1995 1996 1995
----------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased........ 119,022 147,450 30,693 50,074 8,420 10,633
Shares received from re-
investment of:
Net investment income. 14,613 7,735 3,038 1,908 925 362
Capital gains
distribution......... 19,466 0 16,895 613 0 0
----------- ----------- -------- -------- -------- --------
Total shares acquired... 153,101 155,185 50,626 52,595 9,345 10,995
Shares redeemed......... (51,189) (64,097) (47,209) (24,959) (12,197) (3,293)
----------- ----------- -------- -------- -------- --------
Net increase (decrease)
in shares owned........ 101,912 91,089 3,417 27,636 (2,852) 7,702
Shares owned beginning
of period.............. 341,063 249,974 124,635 96,999 13,709 6,007
----------- ----------- -------- -------- -------- --------
Shares owned end of pe-
riod................... 442,975 341,063 128,052 124,635 10,857 13,709
=========== =========== ======== ======== ======== ========
Cost of shares acquired. $ 2,368,168 $ 2,052,818 $787,691 $839,523 $132,442 $152,205
Proceeds from shares re-
deemed................. $ 784,038 $ 869,721 $769,121 $400,787 $176,156 $ 46,559
</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 American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997).
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
44
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1., CONT'D.
Berman Advisers Management Trust (AMT): Limited Maturity Bond and Balanced
Portfolios; American Century Variable Portfolios, Inc. (American Century):
Capital Appreciation Portfolio; and Fidelity Investments' Variable
Insurance Products (Fidelity): Equity Income, Growth, and Asset Manager
Portfolios. Penn Series, AMT, American Century, 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
FLEXIBLY MANAGED CAPITALIZATION
GROWTH EQUITY FUND+ VALUE EQUITY FUND+ FUND+ FUND+
- ---------------------- ---------------------- ---------------------- -----------------
1996 1995 1996 1995 1996 1995 1996 1995(A)
- ---------- ---------- ---------- ---------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
42,995 65,342 115,184 139,924 195,610 281,033 57,921 8,777
880 692 4,282 4,328 31,346 22,888 257 64
19,540 22,793 15,991 15,724 40,891 27,039 1,802 166
- ---------- ---------- ---------- ---------- ---------- ---------- -------- -------
63,415 88,827 135,457 159,976 267,847 330,960 59,980 9,007
(39,920) (23,908) (53,205) (44,273) (88,257) (61,594) (20,788) (833)
- ---------- ---------- ---------- ---------- ---------- ---------- -------- -------
23,495 64,919 82,252 115,703 179,590 269,366 39,192 8,174
172,821 107,902 306,939 191,236 789,512 520,146 8,174 0
- ---------- ---------- ---------- ---------- ---------- ---------- -------- -------
196,316 172,821 389,191 306,939 969,102 789,512 47,366 8,174
========== ========== ========== ========== ========== ========== ======== =======
$1,382,176 $1,823,144 $2,463,084 $2,446,800 $4,971,537 $5,585,188 $711,958 $96,971
$855,731 $ 498,609 $ 935,819 $ 711,639 $1,639,037 $1,063,942 $249,574 $ 8,976
<CAPTION>
CAPITAL APPRECIATION EQUITY INCOME ASSET MANAGER
PORTFOLIO+++ GROWTH PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
- ---------------------- ---------------------- ---------------------- -----------------
1996 1995 1996 1995(A) 1996 1995(A) 1996 1995(A)
- ---------- ---------- ---------- ---------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
112,581 142,767 68,757 43,514 50,511 45,655 16,021 6,259
44,467 293 116 0 84 345 235 0
0 0 2,945 0 2,398 0 193 0
- ---------- ---------- ---------- ---------- ---------- ---------- -------- -------
157,048 143,060 71,818 43,514 52,993 46,000 16,449 6,259
(86,250) (52,411) (12,722) (10,154) (7,268) (1,956) (7,314) (902)
- ---------- ---------- ---------- ---------- ---------- ---------- -------- -------
70,798 90,649 59,096 33,360 45,725 44,044 9,135 5,357
339,350 248,701 33,360 0 44,044 0 5,357 0
- ---------- ---------- ---------- ---------- ---------- ---------- -------- -------
410,148 339,350 92,456 33,360 89,769 44,044 14,492 5,357
========== ========== ========== ========== ========== ========== ======== =======
$1,724,039 $1,536,841 $2,108,652 $1,278,456 $1,032,056 $ 828,141 $254,680 $95,392
$ 934,687 $ 598,536 $ 369,467 $ 297,973 $ 142,627 $ 35,044 $116,437 $13,502
</TABLE>
45
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1996 (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>
- --------------------------------------------------------------------------------
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 POLICY 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 ATTAINED AGE PERCENTAGE
------------------------------------------------------------------------------
<S> <C> <C> <C>
0-40 250 61 128
------------------------------------------------------------------------------
41 243 62 126
------------------------------------------------------------------------------
42 236 63 124
------------------------------------------------------------------------------
43 229 64 122
------------------------------------------------------------------------------
44 222 65 120
------------------------------------------------------------------------------
45 215 66 119
------------------------------------------------------------------------------
46 209 67 118
------------------------------------------------------------------------------
47 203 68 117
------------------------------------------------------------------------------
48 197 69 116
------------------------------------------------------------------------------
49 191 70 115
------------------------------------------------------------------------------
50 185 71 113
------------------------------------------------------------------------------
51 178 72 111
------------------------------------------------------------------------------
52 171 73 109
------------------------------------------------------------------------------
53 164 74 107
------------------------------------------------------------------------------
54 157 75-90 105
------------------------------------------------------------------------------
55 150 91 104
------------------------------------------------------------------------------
56 146 92 103
------------------------------------------------------------------------------
57 142 93 102
------------------------------------------------------------------------------
58 138 94 101
------------------------------------------------------------------------------
59 134 95 100
------------------------------------------------------------------------------
60 130
------------------------------------------------------------------------------
</TABLE>
C-1
<PAGE>
PROSPECTUS -- MAY 1, 1997
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE POLICIES
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
THE PENN MUTUAL LIFE INSURANCE COMPANY
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"), American
Century Variable Portfolios, Inc. ("American Century Variable Portfolios"),
Variable Insurance Products Fund ("VIP Fund"), Variable Insurance Products Fund
II ("VIP Fund II") or Morgan Stanley Universal Funds, Inc. ("Morgan Stanley").
Each Fund is managed by the investment adviser shown below:
<TABLE>
<CAPTION>
FUNDS MANAGERS
- ----------------------------------------------------------------------
<S> <C>
PENN SERIES
Growth Equity Fund Independence Capital Management, Inc.
(a subsidiary of Penn Mutual)
Value Equity Fund OpCap Advisors
Small Capitalization OpCap Advisors
Fund
Emerging Growth Fund Independence Capital Management, Inc./
Robertson Stephens Investment Management, Inc.
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.
Partners Portfolio Neuberger & Berman Management, Inc.
- ----------------------------------------------------------------------
AMERICAN CENTURY VARI-
ABLE PORTFOLIOS
Capital Appreciation American Century Investment Management, Inc.
Portfolio
- ----------------------------------------------------------------------
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
Index 500 Portfolio Fidelity Management & Research Company
- ----------------------------------------------------------------------
MORGAN STANLEY UNIVER-
SAL FUNDS, INC.
Emerging Markets Eq- Morgan Stanley Asset Management Inc.
uity (International)
Portfolio
- ----------------------------------------------------------------------
</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>
- --------------------------------------------------------------------------------
PROSPECTUS CONTENTS
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
DEFINITIONS OF TERMS........................................................ 4
- --------------------------------------------------------------------------------
SUMMARY AND DIAGRAM OF THE POLICY........................................... 5
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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........................................................ 13
Transfers................................................................. 13
Dollar Cost Averaging Program............................................. 13
Asset Rebalancing......................................................... 14
- --------------------------------------------------------------------------------
FIXED ACCOUNT............................................................... 14
Fixed Account............................................................. 14
Interest Credited on Policy Value in the Fixed Account.................... 15
Calculating Fixed Account Value........................................... 15
Deductions, Surrenders and Transfers from the Fixed Account............... 15
Payments from the Fixed Account........................................... 15
- --------------------------------------------------------------------------------
CHARGES AND DEDUCTIONS...................................................... 15
Premium Charge............................................................ 15
Daily Mortality and Expense Risk Charge................................... 16
Monthly Deduction......................................................... 16
Transfer Charge........................................................... 17
Surrender Charges......................................................... 17
Partial Surrender Charge.................................................. 19
Fund Expenses............................................................. 19
- --------------------------------------------------------------------------------
HOW YOUR POLICY VALUES VARY................................................. 19
Determining the Policy Value.............................................. 19
Net Policy Value.......................................................... 20
Cash Surrender Value...................................................... 20
Net Cash Surrender Value.................................................. 20
- --------------------------------------------------------------------------------
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....................................... 21
Changes in Specified Amount Option........................................ 21
Changes in Specified Amount............................................... 21
Selecting and Changing the Beneficiary.................................... 21
- --------------------------------------------------------------------------------
CASH BENEFITS............................................................... 22
Policy Loans.............................................................. 22
Surrendering the Policy for Net Cash Surrender Value...................... 22
Partial Surrenders........................................................ 23
Maturity Benefit.......................................................... 23
Payment Options........................................................... 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....................................... 29
Right to Convert to a Fixed Benefit Policy............................... 29
Dividends................................................................ 29
Limits on Our Rights to Contest the Policy............................... 29
Changes in the Policy or Benefits........................................ 29
When Proceeds Are Paid................................................... 29
Reports to Policy Owners................................................. 30
Assignment............................................................... 30
Reinstatement............................................................ 30
Supplemental Benefits.................................................... 30
- ------------------------------------------------------------------------------------------------------------------------------------
TAX CONSIDERATIONS......................................................... 31
Introduction............................................................. 31
Tax Status of the Policy................................................. 31
Tax Treatment of Policy Benefits......................................... 32
Possible Charge for Penn Mutual's Taxes.................................. 33
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION ABOUT THE POLICIES AND PENN MUTUAL....................... 33
Sale of the Policies..................................................... 33
Board of Trustees........................................................ 34
Senior Officers.......................................................... 35
State Regulation......................................................... 35
Additional Information................................................... 35
Experts.................................................................. 36
Litigation............................................................... 36
Legal Matters............................................................ 36
Financial Statements..................................................... 36
- ------------------------------------------------------------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
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.
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 29.
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 20.
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 12.
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 date from which Policy Years and Monthly Anniversaries are
measured.
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 No-Lapse Premium requirement has been met and
Indebtedness is not excessive. See "Three-Year Guarantee," page 12. 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 29.
OWNER INQUIRIES. If you have any questions, you may write to us (The Penn
Mutual Life Insurance Company, Philadelphia, PA, 19172) or call us (1-800-523-
0650).
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"), American Century Variable Portfolios, Inc.
("American Century Variable Portfolios"), Variable Insurance Products
Fund ("VIP Fund"), Variable Insurance Products Fund II ("VIP Fund II")
and Morgan Stanley Universal Funds, Inc. ("Morgan Stanley"). See page 8.
Funds available are:
<TABLE>
<CAPTION>
<S> <C>
Penn Series - Growth Equity Fund AMT - Limited Maturity Bond Portfolio
Penn Series - Value Equity Fund AMT - Balanced Portfolio
Penn Series - Small Capitalization Fund AMT - Partners Portfolio
Penn Series - Emerging Growth Fund TCI Portfolio - TCI Growth
Penn Series - Flexibly Managed Fund VIP Fund - Equity-Income Portfolio
Penn Series - International Equity Fund VIP Fund - Growth Portfolio
Penn Series - Quality Bond Fund VIP Fund II - Asset Manager Portfolio
Penn Series - High Yield Bond Fund VIP Fund II - Index 500 Portfolio
Penn Series - Money Market Fund Morgan Stanley - Emerging Markets Equity (International) Portfolio
</TABLE>
. 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 16. 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
. Loans may be taken for amounts up to 90% of Cash 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 22 for rules and limits.
. Partial surrenders generally can be made up to four times a Policy Year
provided there is sufficient remaining Net Cash Surrender Value. An
administrative charge of the lesser of $25 or 2% of the surrender amount
requested will apply. See page 22 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.
. Payment options available. See page 23.
DEATH BENEFITS
. Income tax free to Beneficiary.
. Available as lump sum or under a variety of payment options.
. Minimum Basic Death Benefit ("Specified Amount") of $50,000.
. Two Specified Amount options available: Specified Amount Option 1 (level Basic
Death Benefit) and Specified Amount Plus Policy Value Option 2 (increasing
Basic Death Benefit). See page 20.
. Flexibility to change Specified Amount option and change Specified Amount. See
page 21 for rules and limits.
. Supplemental benefits available by rider. See page 30.
7
<PAGE>
GENERAL INFORMATION ABOUT PENN MUTUAL, THE SEPARATE ACCOUNT AND THE FUNDS
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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 The
Penn Mutual Life Insurance Company, Philadelphia, Pennsylvania, 19172, and our
operations offices are located at 600 Dresher Road, Horsham, Pennsylvania,
19044.
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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 Life Account I 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"), American Century Variable Portfolios,
Inc. ("American Century Variable Portfolios") (formerly TCI Portfolios, Inc.),
Variable Insurance Products Fund ("VIP Fund"), Variable Insurance Products Fund
II ("VIP Fund II") and Morgan Stanley Universal Funds, Inc. ("Morgan Stanley").
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, American Century Variable Portfolios, VIP Fund, VIP Fund II
and Morgan Stanley 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 - EMERGING GROWTH FUND - seeks capital appreciation through
investing primarily in commons stocks of emerging growth companies with above-
average growth prospects.
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.
8
<PAGE>
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 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.
AMT - PARTNERS PORTFOLIO - seeks capital growth by investing primarily in
common stocks of established companies, using the value oriented investment
approach. Neuberger & Berman reserves the right to make changes in the
investment objectives, but will notify shareholders thirty days in advance of
any proposed material change.
AMERICAN CENTURY VARIABLE PORTFOLIOS - CAPITAL APPRECIATION PORTFOLIO
(FORMERLY 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.
VIP FUND II - INDEX 500 PORTFOLIO - seeks to match the total return of the
S&P 500 while keeping expenses low. The S&P 500 is an index of 500 common
stocks, most of which trade on the New York Stock Exchange.
MORGAN STANLEY - EMERGING MARKETS EQUITY (INTERNATIONAL) PORTFOLIO - seeks
long term capital appreciation by investing primarily in equity securities of
emerging market country issuers. The Portfolio will focus on economies which
are developing strongly and in which the markets are becoming more
sophisticated.
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, Emerging Growth, Quality Bond and Money Market Funds.
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.
9
<PAGE>
VONTOBEL USA INC. ("Vontobel"), of New York, New York, is the investment
adviser to the Penn Series International Equity Fund.
ROBERTSON STEPHENS INVESTMENT MANAGEMENT, INC., San Francisco, California, is
investment sub-adviser to the Penn Series Emerging Growth 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, the AMT Balanced Portfolio
and the AMT Partners Portfolio.
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. ("American Century") of Kansas
City, Missouri, is the investment adviser to Capital Appreciation 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 and Index 500 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.
MORGAN STANLEY ASSET MANAGEMENT INC. ("Morgan Stanley") of New York, New
York, is the investment adviser to Morgan Stanley Universal Funds' Emerging
Markets Equity (International) Portfolio.
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, American Century
Variable Portfolios, VIP Fund, VIP Fund II and Morgan Stanley governing the
Separate Account's investment in those Funds. Under the agreement with American
Century Variable Portfolios, the adviser to the American Century Variable
Portfolios compensates Penn Mutual for certain administrative services provided
by Penn Mutual.
The shares of Penn Series, AMT, American Century Variable Portfolios, VIP
Fund, VIP Fund II and Morgan Stanley 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, American Century Variable Portfolios, VIP
Fund, VIP Fund II and Morgan Stanley 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, American Century Variable Portfolios, VIP Fund, VIP Fund II
or Morgan Stanley currently perceives or anticipates any such disadvantage, the
Boards of Directors of Penn Series, American Century Variable Portfolios and
Morgan Stanley, 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 of Penn Series, AMT, American Century
Variable Portfolios, VIP Fund, VIP Fund or Morgan Stanley, 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
10
<PAGE>
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.
- --------------------------------------------------------------------------------
PREMIUMS AND ALLOCATIONS
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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
11
<PAGE>
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 31.
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 22.
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.
- --------------------------------------------------------------------------------
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 30.
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
12
<PAGE>
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.
- --------------------------------------------------------------------------------
CREDITING PREMIUMS
The initial Net Premium will be credited to the Policy as of the Policy Date,
or as of the Valuation Date the first premium is received at our office if
later. 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.
- --------------------------------------------------------------------------------
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 29. 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. No transfer charge will be made if
the Specified Amount exceeds $4,999,999. 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.
- --------------------------------------------------------------------------------
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
13
<PAGE>
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.
- --------------------------------------------------------------------------------
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 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
14
<PAGE>
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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.
- --------------------------------------------------------------------------------
CALCULATING FIXED ACCOUNT VALUE
The Fixed Account Value is calculated daily. See "Fixed Account Value," page
19.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
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
15
<PAGE>
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 18.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 30. 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
16
<PAGE>
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 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 30.
- --------------------------------------------------------------------------------
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. No transfer
charge will be made if the Specified Amount exceeds $4,999,999. 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.
17
<PAGE>
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.
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 16.
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.
18
<PAGE>
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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.
- --------------------------------------------------------------------------------
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, American Century Variable Portfolios, VIP Fund, VIP Fund
II and Morgan Stanley Universal Funds, Inc.
- --------------------------------------------------------------------------------
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 12, 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 16).
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
19
<PAGE>
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.
- --------------------------------------------------------------------------------
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 29) 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 29), 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 29.
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.
20
<PAGE>
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.
- --------------------------------------------------------------------------------
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 12.
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.
21
<PAGE>
- --------------------------------------------------------------------------------
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 29, 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 32.)
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 [^], 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 29, and "Payments from the Fixed Account,"
page 15. The Net Cash
22
<PAGE>
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 19. 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.
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 29, 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. Upon the written request of the Owner, this policy
will continue in force beyond the Maturity Date. Thereafter, the Death Benefit
will be the Net Policy Benefit.
- --------------------------------------------------------------------------------
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 0.88% of the
average daily net assets
23
<PAGE>
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 -1.78%,
4.22% and 10.22%, respectively, and -1.48%, 4.52% and 10.52%, 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 standard
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.
- -------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUESPENN 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>
1 788 368 0 75,000 400 0 75,000 432 0 75,000
2 1,614 814 352 75,000 904 441 75,000 998 535 75,000
3 2,483 1,245 783 75,000 1,422 959 75,000 1,614 1,151 75,000
4 3,394 1,660 1,198 75,000 1,954 1,491 75,000 2,285 1,823 75,000
5 4,351 2,059 1,596 75,000 2,499 2,036 75,000 3,016 2,554 75,000
6 5,357 2,440 1,978 75,000 3,057 2,594 75,000 3,812 3,349 75,000
7 6,412 2,803 2,341 75,000 3,627 3,164 75,000 4,678 4,215 75,000
8 7,520 3,148 2,778 75,000 4,209 3,839 75,000 5,622 5,252 75,000
9 8,683 3,472 3,195 75,000 4,803 4,525 75,000 6,649 6,372 75,000
10 9,905 3,777 3,592 75,000 5,408 5,223 75,000 7,770 7,585 75,000
15 16,993 4,952 4,952 75,000 8,571 8,571 75,000 15,107 15,107 75,000
20 26,039 5,368 5,368 75,000 11,814 11,814 75,000 26,579 26,579 75,000
25 37,585 4,532 4,532 75,000 14,676 14,676 75,000 44,873 44,873 75,000
30 52,321 1,607 1,607 75,000 16,356 16,356 75,000 75,116 75,116 91,642
</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
$1,200 ANNUAL PREMIUM
MALE ISSUE AGE: 35 NON-SMOKER
$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 1,260 781 318 75,781 838 375 75,838 895 432 75,895
2 2,583 1,631 1,168 76,631 1,797 1,334 76,797 1,970 1,507 76,970
3 3,972 2,458 1,995 77,458 2,788 2,325 77,788 3,146 2,683 78,146
4 5,431 3,261 2,799 78,261 3,812 3,349 78,812 4,432 3,970 79,432
5 6,962 4,040 3,577 79,040 4,868 4,405 79,868 5,840 5,377 80,840
6 8,570 4,794 4,331 79,794 5,957 5,495 80,957 7,379 6,916 82,379
7 10,259 5,521 5,058 80,521 7,079 6,616 82,079 9,061 8,599 84,061
8 12,032 6,221 5,851 81,221 8,234 7,864 83,234 10,901 10,531 85,901
9 13,893 6,894 6,616 81,894 9,422 9,144 84,422 12,913 12,635 87,913
10 15,848 7,539 7,354 82,539 10,644 10,459 85,644 15,114 14,929 90,114
15 27,189 10,295 10,295 85,295 17,235 17,235 92,235 29,613 29,613 104,613
20 41,663 12,087 12,087 87,087 24,508 24,508 99,508 52,246 52,246 127,246
25 60,136 12,421 12,421 87,421 31,950 31,950 106,950 87,345 87,345 162,345
30 83,713 10,549 10,549 85,549 38,603 38,603 113,603 141,592 141,592 216,592
</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
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
FEMALE ISSUE AGE: 45 DEATH BENEFIT OPTION 1 NON-SMOKER
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 1,575 756 0 125,000 820 0 125,000 885 0 125,000
2 3,229 1,626 639 125,000 1,806 819 125,000 1,995 1,008 125,000
3 4,965 2,456 1,469 125,000 2,810 1,823 125,000 3,195 2,208 125,000
4 6,788 3,245 2,258 125,000 3,830 2,843 125,000 4,492 3,505 125,000
5 8,703 3,993 3,007 125,000 4,866 3,879 125,000 5,895 4,908 125,000
6 10,713 4,697 3,710 125,000 5,915 4,928 125,000 7,411 6,424 125,000
7 12,824 5,354 4,367 125,000 6,975 5,988 125,000 9,051 8,065 125,000
8 15,040 5,961 5,172 125,000 8,043 7,254 125,000 10,826 10,036 125,000
9 17,367 6,513 5,921 125,000 9,113 8,521 125,000 12,742 12,150 125,000
10 19,810 7,009 6,614 125,000 10,186 9,791 125,000 14,816 14,422 125,000
15 33,986 8,626 8,626 125,000 15,548 15,548 125,000 28,246 28,246 125,000
20 52,079 8,394 8,394 125,000 20,527 20,527 125,000 49,155 49,155 125,000
25 75,170 4,558 4,558 125,000 23,353 23,353 125,000 82,486 82,486 125,000
30 104,641 0 0 0 21,265 21,265 125,000 139,575 139,575 149,346
</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
$2,100 ANNUAL PREMIUM
FEMALE ISSUE AGE: 45 NON-SMOKER
$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 1,304 317 126,304 1,402 415 126,402 1,499 513 126,499
2 4,520 2,709 1,722 127,709 2,990 2,003 127,990 3,284 2,297 128,284
3 6,951 4,061 3,074 129,061 4,618 3,631 129,618 5,222 4,235 130,222
4 9,504 5,360 4,373 130,360 6,284 5,297 131,284 7,326 6,340 132,327
5 12,184 6,605 5,618 131,605 7,988 7,001 132,988 9,613 8,626 134,613
6 14,998 7,792 6,805 132,792 9,727 8,740 134,727 12,096 11,109 137,096
7 17,953 8,920 7,933 133,920 11,500 10,513 136,500 14,791 13,804 139,791
8 21,056 9,984 9,195 134,984 13,303 12,514 138,303 17,716 16,927 142,716
9 24,314 10,979 10,387 135,979 15,130 14,538 140,130 20,886 20,294 145,886
10 27,734 11,904 11,509 136,904 16,981 16,587 141,981 24,325 23,931 149,325
15 47,581 15,467 15,467 140,467 26,556 26,556 151,556 46,542 46,542 171,542
20 72,910 16,846 16,846 141,846 36,183 36,183 161,183 80,235 80,235 205,235
25 105,238 14,360 14,360 139,360 43,707 43,707 168,707 130,094 130,094 255,094
30 146,498 6,012 6,012 131,012 46,018 46,018 171,018 203,309 203,309 328,309
</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
$750 ANNUAL PREMIUM
MALE ISSUE AGE: 35 NON-SMOKER
$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 1,614 897 435 75,000 991 528 75,000 1,088 626 75,000
3 2,483 1,398 935 75,000 1,586 1,123 75,000 1,790 1,328 75,000
4 3,394 1,882 1,420 75,000 2,199 1,737 75,000 2,557 2,094 75,000
5 4,351 2,351 1,889 75,000 2,832 2,369 75,000 3,395 2,932 75,000
6 5,357 2,805 2,342 75,000 3,484 3,021 75,000 4,312 3,850 75,000
7 6,412 3,243 2,781 75,000 4,156 3,694 75,000 5,316 4,854 75,000
8 7,520 3,662 3,292 75,000 4,846 4,476 75,000 6,412 6,042 75,000
9 8,683 4,058 3,781 75,000 5,550 5,273 75,000 7,607 7,329 75,000
10 9,905 4,433 4,248 75,000 6,270 6,085 75,000 8,910 8,725 75,000
15 16,993 5,933 5,933 75,000 10,077 10,077 75,000 17,480 17,480 75,000
20 26,039 6,817 6,817 75,000 14,387 14,387 75,000 31,458 31,458 75,000
25 37,585 6,818 6,818 75,000 19,083 19,083 75,000 54,635 54,635 75,000
30 52,321 5,330 5,330 75,000 23,836 23,836 75,000 93,079 93,079 113,557
</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
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
MALE ISSUE AGE: 35 NON-SMOKER
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 1,260 801 339 75,801 859 397 75,859 917 455 75,917
2 2,583 1,730 1,267 76,730 1,901 1,438 76,901 2,079 1,617 77,079
3 3,972 2,634 2,172 77,634 2,979 2,516 77,979 3,352 2,889 78,352
4 5,431 3,515 3,052 78,515 4,094 3,632 79,094 4,746 4,284 79,746
5 6,962 4,372 3,909 79,372 5,248 4,786 80,248 6,275 5,813 81,275
6 8,570 5,206 4,743 80,206 6,443 5,981 81,443 7,952 7,489 82,952
7 10,259 6,016 5,553 81,016 7,680 7,217 82,680 9,790 9,328 84,790
8 12,032 6,799 6,429 81,799 8,955 8,585 83,955 11,803 11,433 86,803
9 13,893 7,551 7,274 82,551 10,267 9,989 85,267 14,004 13,726 89,004
10 15,848 8,273 8,088 83,273 11,616 11,431 86,616 16,411 16,226 91,411
15 27,189 11,385 11,385 86,385 18,924 18,924 93,924 32,303 32,303 107,303
20 41,663 13,757 13,757 88,757 27,514 27,514 102,514 58,025 58,025 133,025
25 60,136 15,039 15,039 90,039 37,176 37,176 112,176 99,240 99,240 174,240
30 83,713 14,629 14,629 89,629 47,386 47,386 122,386 165,089 165,089 240,089
</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
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
FEMALE ISSUE AGE: 45 DEATH BENEFIT OPTION 1 NON-SMOKER
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 1,776 789 125,000 1,964 978 125,000 2,162 1,175 125,000
3 4,965 2,705 1,718 125,000 3,081 2,094 125,000 3,489 2,502 125,000
4 6,788 3,592 2,605 125,000 4,218 3,231 125,000 4,925 3,938 125,000
5 8,703 4,436 3,449 125,000 5,376 4,390 125,000 6,482 5,495 125,000
6 10,713 5,235 4,249 125,000 6,554 5,567 125,000 8,170 7,183 125,000
7 12,824 5,998 5,012 125,000 7,761 6,774 125,000 10,012 9,025 125,000
8 15,040 6,726 5,936 125,000 8,998 8,209 125,000 12,024 11,234 125,000
9 17,367 7,411 6,819 125,000 10,261 9,669 125,000 14,219 13,627 125,000
10 19,810 8,058 7,663 125,000 11,553 11,158 125,000 16,619 16,224 125,000
15 33,986 10,539 10,539 125,000 18,327 18,327 125,000 32,424 32,424 125,000
20 52,079 11,667 11,667 125,000 25,823 25,823 125,000 58,364 58,364 125,000
25 75,170 10,746 10,746 125,000 33,621 33,621 125,000 101,859 101,859 125,000
30 104,641 6,981 6,981 125,000 41,461 41,461 125,000 175,693 175,693 187,991
</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>
- -------------------------------------------------------------------------------
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 1,358 371 126,358 1,458 471 126,458 1,558 571 126,558
2 4,520 2,880 1,893 127,880 3,172 2,185 128,172 3,476 2,489 128,476
3 6,951 4,343 3,356 129,343 4,925 3,938 129,925 5,556 4,569 130,556
4 9,504 5,749 4,762 130,749 6,721 5,734 131,721 7,817 6,830 132,817
5 12,184 7,100 6,113 132,100 8,561 7,574 133,561 10,276 9,289 135,276
6 14,998 8,392 7,405 133,392 10,443 9,456 135,443 12,949 11,963 137,949
7 17,953 9,636 8,649 134,636 12,378 11,391 137,378 15,869 14,882 140,869
8 21,056 10,830 10,041 135,830 14,367 13,578 139,367 19,058 18,269 144,058
9 24,314 11,970 11,378 136,970 16,405 15,813 141,405 22,538 21,946 147,538
10 27,734 13,057 12,662 138,057 18,496 18,102 143,496 26,339 25,944 151,339
15 47,581 17,533 17,533 142,533 29,600 29,600 154,600 51,195 51,195 176,195
20 72,910 20,409 20,409 145,409 42,098 42,098 167,098 90,833 90,833 215,833
25 105,238 20,895 20,895 145,895 55,165 55,165 180,165 153,295 153,295 278,295
30 146,498 18,334 18,334 143,334 67,991 67,991 192,991 252,313 252,313 377,313
</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.
28
<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.
29
<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 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.
30
<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 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
31
<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 totally and
permanently 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
32
<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. Registered representatives may also be paid
commissions of up to 0.25% of Policy Value. Other allowances and overrides also
may be paid. Registered representatives who meet certain productivity and
profitability standards may be eligible for additional compensation.
For 1996 and 1995, Penn Mutual received premium payments on the Policy in the
approximate amount of $24,697,000 and $5,895,000, respectively, and compensated
HTK in the approximate amount of $152,836 and $27,800, respectively, for its
services as principal underwriter.
33
<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>
Robert E. Chappell Chairman of the Chairman of the Board and Chief
The Penn Mutual Life Board and Chief Executive Officer (since
Insurance Company Executive Officer December 1996), President and
Philadelphia, PA 19172 Chief Executive Officer (April
1995-December 1996), 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).
- ------------------------------------------------------------------------------
Daniel J. Toran President and Chief President and Chief Operating
The Penn Mutual Life Operating Officer Officer (since January 1997),
Insurance Company Executive Vice President, The
Philadelphia, PA 19172 Penn Mutual Life Insurance
Company (May 1996-January 1997),
The New England Mutual Life
Insurance Company (prior
thereto).
- ------------------------------------------------------------------------------
James A. Hagen Trustee Retired (since May 1996),
2001 Market Street Chairman of the Board, Conrail,
P.O. Box 41417 Inc. (prior thereto).
Philadelphia, PA 19101-
1417
- ------------------------------------------------------------------------------
Philip E. Lippincott Trustee Retired (since April 1994),
3578 Oakwood Drive Chairman and Chief Executive
Park City, UT 84060 Officer, Scott Paper Company
(prior thereto).
- ------------------------------------------------------------------------------
John F. McCaughan Trustee Retired (since April 1996),
Betz Dearborn Foundation President, Betz Dearborn
200 Witmer Road Foundation (since March 1996),
Horsham, PA 19044 Chairman of the Board, Betz
Laboratories, Inc. (prior
thereto).
- ------------------------------------------------------------------------------
Alan B. Miller Trustee Chairman and President,
367 Gulph Road Universal Health Services, Inc.
King of Prussia, PA
19406
- ------------------------------------------------------------------------------
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>
34
<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),
The Penn Mutual Life Vice President, Information Systems Application (August
Insurance Company 1992 to July 1995); Manager , Price Waterhouse (prior
Philadelphia, PA 19172 thereto).
- -------------------------------------------------------------------------------
Michael A. Biondolillo Vice President, Human Resources, The Penn Mutual Life
The Penn Mutual Life Insurance Company (since October 1996); Corporate Vice
Insurance Company President and General Manager, Human Resources and
Philadelphia, PA 19172 Quality MG Industries, America (prior thereto).
- -------------------------------------------------------------------------------
Nancy S. Brodie Executive Vice President and Chief Financial Officer
The Penn Mutual Life (since December 1995), Senior Vice President and Chief
Insurance Company Financial Officer (January 1994 to December 1995), Vice
Philadelphia, PA 19172 President and Controller (November 1991 to January
1994), General Auditor (October 1989 to November 1991),
Assistant Vice President, Taxation, The Penn Mutual
Life Insurance Company (prior thereto).
- -------------------------------------------------------------------------------
L. Stockton Illoway Senior Vice President, Marketing and Sales Support
The Penn Mutual Life (since June 1996), Senior Vice President, Annuity and
Insurance Company Pension Business (December 1993 to June 1996) Senior
Philadelphia, PA 19172 Vice President, Individual Retirement Investment
Service (September 1993 to December 1993), Regional
Vice President, The Penn Mutual Life Insurance Company
(prior thereto).
- -------------------------------------------------------------------------------
Richard J. Liburdi Senior Vice President, Career Agency System (since June
The Penn Mutual Life 1996), Senior Vice President, Insurance and Life Sales
Insurance Company (January 1991 to June 1996), Vice President and Product
Philadelphia, PA 19172 Manager (November 1988 to January 1991), Assistant Vice
President and Product Manager, The Penn Mutual Life
Insurance Company (prior thereto).
- -------------------------------------------------------------------------------
Nina M. Mulrooney General Auditor (since November 1991), Assistant Vice
The Penn Mutual Life President, Corporate Accounting and Controls (December
Insurance Company 1988 to November 1991), Director, Cost Accounting and
Philadelphia, PA 19172 Budget, The Penn Mutual Life Insurance Company (prior
thereto).
- -------------------------------------------------------------------------------
Harold E. Maude, Jr. Senior Vice President, Independence Financial Network
The Penn Mutual Life (since July 1996), Vice President, Independence
Insurance Company Financial Network (1991 to July 1996), Regional
Philadelphia, PA 19172 Director (1989 to 1991).
- -------------------------------------------------------------------------------
Peter M. Sherman Senior Vice President and Chief Investment Officer
The Penn Mutual Life (since May 1996), Vice President, Investments (January
Insurance Company 1996 to April 1996), Vice President, Fixed Income
Philadelphia, PA 19172 Portfolio Management, The Penn Mutual Life Insurance
Company (prior thereto); 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.
35
<PAGE>
- --------------------------------------------------------------------------------
EXPERTS
The statement of assets and liabilities of Penn Mutual Variable Life Account
I-Cornerstone VUL II/Variable EstateMax as of December 31, 1996, and the
related statement of operations for the year then ended and the statements of
changes in net assets for the year then ended and for the period May 1, 1995
(commencement of operations) to December 31, 1995, and the statutory statements
of financial condition of The Penn Mutual Life Insurance Company as of December
31, 1996 and 1995 and the related statutory statements of operations, surplus
and cash flows for the three years in the period ended December 31, 1996,
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.
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 statement of assets and liabilities of Penn
Mutual Variable Life Account I--Cornerstone VUL II/Variable Estate Max (VUL
II/VMAX) [comprising, respectively, 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, Balanced Portfolio,
Limited Maturity Bond Portfolio, Capital Appreciation Portfolio (formerly TCI
Growth Portfolio), Equity Income Portfolio, Growth Portfolio, and Asset Manager
Portfolio] as of December 31, 1996, and the related statement of operations for
the year then ended, and the statements of changes in net assets for the year
then ended and 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, 1996 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 Penn Mutual Variable Life
Account I--Cornerstone VUL II/Variable Estate Max as of December 31, 1996, the
results of its operations for the year then ended and its changes in net assets
for the year then ended and the period from May 1, 1995 (commencement of
operations) to December 31, 1995 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 7, 1997
37
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - VUL II/VARIABLE ESTATE MAX
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1996
<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....... 2,721,787 866,474 54,620 56,501
Identified cost........ $32,739,350 $2,721,787 $866,474 $572,212 $510,015
ASSETS:
Investments at value... $33,510,725 $2,721,787 $866,474 $546,197 $503,423
Dividends receivable... 14,523 11,104 3,419 0 0
LIABILITIES:
Due to (from) The Penn
Mutual Life Insurance
Company............... 91,057 82,348 3,892 122 105
----------- ---------- -------- -------- --------
NET ASSETS.............. $33,434,191 $2,650,543 $866,001 $546,075 $503,318
=========== ========== ======== ======== ========
Variable life accumula-
tion units............. 247,647 80,811 47,590 41,747
Accumulation unit val-
ues.................... $ 10.70 $ 10.72 $ 11.47 $ 12.06
- --------------------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - VUL II/VARIABLE ESTATE MAX
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1996
<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.............. $ 612,816 $ 96,731 $ 21,290 $ 34,073 $ 36,843
EXPENSE:
Mortality and expense
risk charges.......... 154,468 18,162 3,982 1,812 2,276
----------- ---------- -------- -------- --------
Net investment income.. 458,348 78,569 17,308 32,261 34,567
----------- ---------- -------- -------- --------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses)
from redemption of
shares of Penn Series
Funds, Inc............ 2,709 0 0 94 360
Capital gains distribu-
tions................. 917,424 0 0 0 0
----------- ---------- -------- -------- --------
Net realized gains
(losses).............. 920,133 0 0 94 360
Net change in
unrealized
appreciation
(depreciation) of
investments........... 785,327 0 0 (24,231) (2,192)
----------- ---------- -------- -------- --------
Net realized and
unrealized gains
(losses) on
investments........... 1,705,460 0 0 (24,137) (1,832)
----------- ---------- -------- -------- --------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS........ $ 2,163,808 $ 78,569 $ 17,308 $ 8,124 $ 32,735
=========== ========== ======== ======== ========
</TABLE>
- -----------------------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997).
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
(a) Represents only the Cornerstone VUL II product.
(b) Represents only the Variable Estate Max product.
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>
17,523 247,116 430,952 103,024 162,866 32,980 15,640
$383,627 $4,510,103 $8,050,766 $1,230,184 $2,521,631 $522,217 $217,956
$376,047 $4,774,282 $8,076,040 $1,290,887 $2,542,333 $525,047 $219,743
0 0 0 0 0 0 0
83 1,035 1,792 (1,489) 552 131 49
-------- ---------- ---------- ---------- ---------- -------- --------
$375,964 $4,773,247 $8,074,248 $1,292,376 $2,541,781 $524,916 $219,694
======== ========== ========== ========== ========== ======== ========
27,281 319,544 621,124 97,253 193,714 43,651 20,059
$ 13.78 $ 14.94 $ 13.00 $ 13.29 $ 13.12 $ 12.03 $ 10.95
- ---------------------------------------------------------------------------------------------
<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>
$ 1,635 $ 51,995 $ 259,738 $ 6,965 $ 83,272 $ 3,556 $ 4,961
1,669 19,807 37,310 5,420 10,480 2,798 1,062
-------- ---------- ---------- ---------- ---------- -------- --------
(34) 32,188 222,428 1,545 72,792 758 3,899
-------- ---------- ---------- ---------- ---------- -------- --------
(39) 1,827 1,306 1,590 (805) 926 (33)
36,293 194,155 338,828 47,534 110,931 19,775 0
-------- ---------- ---------- ---------- ---------- -------- --------
36,254 195,982 340,134 49,124 110,126 20,701 (33)
(2,111) 264,271 61,997 62,662 13,930 2,836 898
-------- ---------- ---------- ---------- ---------- -------- --------
34,143 460,253 402,131 111,786 124,056 23,537 865
-------- ---------- ---------- ---------- ---------- -------- --------
$ 34,109 $ 492,441 $ 624,559 $ 113,331 $ 196,848 $ 24,295 $ 4,764
======== ========== ========== ========== ========== ======== ========
</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, 1996 (CONT'D.)
<TABLE>
<CAPTION>
CAPITAL
APPRECIATION EQUITY INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT IN COMMON
STOCK:
Number of shares....... 155,575 172,796 164,733 42,038
Identified cost........ $1,728,534 $3,347,783 $4,904,041 $652,020
ASSETS:
Investments at value... 1,593,085 3,633,895 5,129,774 711,711
Dividends receivable... 0 0 0 0
LIABILITIES:
Due to (from) The Penn
Mutual Life Insurance
Company............... 401 799 1,076 161
---------- ---------- ---------- --------
NET ASSETS.............. $1,592,684 $3,633,096 $5,128,698 $711,550
========== ========== ========== ========
Variable life accumula-
tion units............. 139,698 268,476 364,202 56,043
Accumulation unit val-
ues.................... $ 11.40 $ 13.53 $ 14.08 $ 12.70
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - VUL II/VARIABLE ESTATE MAX
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1996 (CONT'D.)
<CAPTION>
CAPITAL
APPRECIATION EQUITY INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.............. $ 0 $ 2,337 $ 2,539 $ 6,881
EXPENSE:
Mortality and expense
risk charges ......... 8,636 16,925 23,494 635
---------- ---------- ---------- --------
Net investment income.. (8,636) (14,588) (20,955) 6,246
---------- ---------- ---------- --------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses)
from redemption of
shares
of Penn Series Funds,
Inc. ................. (378) (1,148) (1,555) 564
Capital gains distribu-
tions................. 68,944 31,190 64,100 5,674
---------- ---------- ---------- --------
Net realized gains
(losses).............. 68,566 30,042 62,545 6,238
Net change in
unrealized
appreciation
(depreciation) of
investments........... (135,169) 253,509 235,591 53,336
---------- ---------- ---------- --------
Net realized and
unrealized gains
(losses) on
investments........... (66,603) 283,551 298,136 59,574
---------- ---------- ---------- --------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS........ $ (75,239) $ 268,963 $ 277,181 $ 65,820
========== ========== ========== ========
</TABLE>
- -----------------------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997).
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
(a) Represents only the Cornerstone VUL II product.
(b) Represents only the Variable Estate Max product.
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 YEAR ENDED DECEMBER 31, 1996, AND
THE PERIOD MAY 1, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
MONEY MONEY MARKET
TOTAL MARKET FUND+(a) FUND+(b)
----------------------- ------------------------ ----------------------
1996 1995 1996 1995 1996 1995
----------- ---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ 458,348 $ 82,891 $ 78,569 $ 15,227 $ 17,308 $ 719
Net realized gain
(loss) from investment
transactions.......... 920,133 107,693 0 0 0 0
Net change in
unrealized
appreciation
(depreciation) of
investments........... 785,327 (13,949) 0 0 0 0
----------- ---------- ----------- ----------- ----------- ---------
Net increase (decrease)
in net assets resulting
from operations........ 2,163,808 176,635 78,569 15,227 17,308 719
----------- ---------- ----------- ----------- ----------- ---------
VARIABLE LIFE
ACTIVITIES:
Purchase payments under
variable life
contracts............. 29,546,396 5,759,715 15,559,938 4,084,747 2,858,896 440,146
Surrender benefits..... (253,954) (34) (13,953) 0 0 0
Net transfers.......... (350,840) 471,816 (13,489,878) (2,833,877) (2,006,542) (364,402)
Contract administration
charges............... (1,438,914) (141,962) (205,795) (45,854) (50,964) (7,862)
Cost of insurance...... (2,256,403) (242,072) (408,772) (89,809) (17,733) (3,565)
----------- ---------- ----------- ----------- ----------- ---------
Net increase in net
assets resulting from
variable life
activities............. 25,246,285 5,847,463 1,441,540 1,115,207 783,657 64,317
----------- ---------- ----------- ----------- ----------- ---------
Total increase in net
assets................. 27,410,093 6,024,098 1,520,109 1,130,434 800,965 65,036
NET ASSETS:
Beginning of period.... 6,024,098 0 1,130,434 0 65,036 0
----------- ---------- ----------- ----------- ----------- ---------
END OF PERIOD.......... $33,434,191 $6,024,098 $ 2,650,543 $ 1,130,434 $ 866,001 $ 65,036
=========== ========== =========== =========== =========== =========
<CAPTION>
QUALITY HIGH YIELD GROWTH
BOND FUND+ BOND FUND+ EQUITY FUND+
----------------------- ------------------------ ----------------------
1996 1995 1996 1995 1996 1995
----------- ---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ 32,261 $ 4,811 $ 34,567 $ 7,715 $ (34) $ 74
Net realized gain
(loss) from investment
transactions.......... 94 122 360 2 36,254 6,719
Net change in
unrealized
appreciation
(depreciation) of
investments........... (24,231) (1,784) (2,192) (4,400) (2,111) (5,469)
----------- ---------- ----------- ----------- ----------- ---------
Net increase (decrease)
in net assets resulting
from operations........ 8,124 3,149 32,735 3,317 34,109 1,324
----------- ---------- ----------- ----------- ----------- ---------
VARIABLE LIFE
ACTIVITIES:
Purchase payments under
variable life
contracts............. 154,180 31,077 165,686 10,712 152,803 16,993
Surrender benefits..... (2,649) 0 (2,074) 0 (842) 0
Net transfers.......... 336,072 56,550 262,002 81,913 181,764 36,960
Contract administration
charges............... (13,801) (1,442) (18,004) (1,270) (16,807) (1,346)
Cost of insurance...... (22,987) (2,198) (29,457) (2,242) (26,209) (2,785)
----------- ---------- ----------- ----------- ----------- ---------
Net increase in net
assets resulting from
variable life
activities............. 450,815 83,987 378,153 89,113 290,709 49,822
----------- ---------- ----------- ----------- ----------- ---------
Total increase in net
assets................. 458,939 87,136 410,888 92,430 324,818 51,146
NET ASSETS:
Beginning of period.... 87,136 0 92,430 0 51,146 0
----------- ---------- ----------- ----------- ----------- ---------
END OF PERIOD.......... $ 546,075 $ 87,136 $ 503,318 $ 92,430 $ 375,964 $ 51,146
=========== ========== =========== =========== =========== =========
</TABLE>
- -----------------------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997).
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
(a) Represents only the Cornerstone VUL II product
(b) Represents only the Variable Estate Max product
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 YEAR ENDED DECEMBER 31, 1996, AND
THE PERIOD MAY 1, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1995
(CONT'D.)
<TABLE>
<CAPTION>
VALUE FLEXIBLY SMALL CAPITALIZATION
EQUITY FUND+ MANAGED FUND+ FUND+
-------------------- ---------------------- -----------------------
1996 1995 1996 1995 1996 1995
---------- -------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ 32,188 $ 10,368 $ 222,428 $ 37,212 $ 1,545 $ 799
Net realized gain
(loss) from investment
transactions.......... 195,982 49,190 340,134 48,262 49,124 3,427
Net change in
unrealized
appreciation
(depreciation) of
investments........... 264,271 (91) 61,997 (36,724) 62,662 (1,959)
---------- -------- ---------- ---------- ----------- ---------
Net increase (decrease)
in net assets resulting
from operations........ 492,441 59,467 624,559 48,750 113,331 2,267
---------- -------- ---------- ---------- ----------- ---------
VARIABLE LIFE
ACTIVITIES:
Purchase payments under
variable life
contracts............. 1,360,144 136,674 2,664,444 361,651 498,674 66,532
Surrender benefits..... (32,419) 0 (74,122) (14) (13,130) (10)
Net transfers.......... 2,385,789 772,784 4,216,930 1,057,640 660,016 106,381
Contract administration
charges............... (141,826) (11,403) (285,785) (26,150) (52,877) (4,603)
Cost of insurance...... (226,508) (21,896) (469,401) (44,254) (78,480) (5,725)
---------- -------- ---------- ---------- ----------- ---------
Net increase in net
assets resulting from
variable life
activities............. 3,345,180 876,159 6,052,066 1,348,873 1,014,203 162,575
---------- -------- ---------- ---------- ----------- ---------
Total increase in net
assets................. 3,837,621 935,626 6,676,625 1,397,623 1,127,534 164,842
NET ASSETS:
Beginning of period.... 935,626 0 1,397,623 0 164,842 0
---------- -------- ---------- ---------- ----------- ---------
END OF PERIOD.......... $4,773,247 $935,626 $8,074,248 $1,397,623 $ 1,292,376 $ 164,842
========== ======== ========== ========== =========== =========
<CAPTION>
INTERNATIONAL BALANCED LIMITED MATURITY
EQUITY FUND+ PORTFOLIO++ BOND PORTFOLIO++
-------------------- ---------------------- -----------------------
1996 1995 1996 1995 1996 1995
---------- -------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ 72,792 $ 5,449 $ 758 $ (169) $ 3,899 $ (76)
Net realized gain
(loss) from investment
transactions.......... 110,126 25 20,701 28 (33) 4
Net change in
unrealized
appreciation
(depreciation) of
investments........... 13,930 6,773 2,836 (6) 898 889
---------- -------- ---------- ---------- ----------- ---------
Net increase (decrease)
in net assets resulting
from operations........ 196,848 12,247 24,295 (147) 4,764 817
---------- -------- ---------- ---------- ----------- ---------
VARIABLE LIFE
ACTIVITIES:
Purchase payments under
variable life
contracts............. 861,883 124,822 360,163 20,792 89,190 6,858
Surrender benefits..... (17,014) 0 (6,240) 0 (135) 0
Net transfers.......... 1,483,081 143,874 120,901 86,515 103,331 32,606
Contract administration
charges............... (102,391) (6,540) (28,971) (1,898) (5,179) (503)
Cost of insurance...... (144,055) (10,974) (46,800) (3,694) (11,238) (817)
---------- -------- ---------- ---------- ----------- ---------
Net increase in net
assets resulting from
variable life
activities............. 2,081,504 251,182 399,053 101,715 175,969 38,144
---------- -------- ---------- ---------- ----------- ---------
Total increase in net
assets................. 2,278,352 263,429 423,348 101,568 180,733 38,961
NET ASSETS:
Beginning of period.... 263,429 0 101,568 0 38,961 0
---------- -------- ---------- ---------- ----------- ---------
END OF PERIOD.......... $2,541,781 $263,429 $ 524,916 $ 101,568 $ 219,694 $ 38,961
========== ======== ========== ========== =========== =========
</TABLE>
- -----------------------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997).
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
(a) Represents only the Cornerstone VUL II product
(b) Represents only the Variable Estate Max product
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - VUL II/VARIABLE ESTATE MAX
STATEMENT OF CHANGES IN NET ASSETS - FOR THE YEAR ENDED DECEMBER 31, 1996, AND
THE PERIOD MAY 1, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1995
(CONT'D.)
<TABLE>
<CAPTION>
CAPITAL APPRECIATION EQUITY INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
----------------------- -------------------- -------------------- ------------------
1996 1995 1996 1995 1996 1995 1996 1995
----------- ---------- ---------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ (8,636) $ (476) $ (14,588) $ 2,557 $ (20,955) $ (946) $ 6,246 $ (373)
Net realized gain
(loss) from investment
transactions.......... 68,566 469 30,042 (243) 62,545 (309) 6,238 (3)
Net change in
unrealized
appreciation
(depreciation) of
investments........... (135,169) (280) 253,509 32,603 235,591 (9,857) 53,336 6,356
----------- --------- ---------- -------- ---------- -------- -------- --------
Net increase (decrease)
in net assets resulting
from operations........ (75,239) (287) 268,963 34,917 277,181 (11,112) 65,820 5,980
----------- --------- ---------- -------- ---------- -------- -------- --------
VARIABLE LIFE
ACTIVITIES:
Purchase payments under
variable life
contracts............. 840,551 89,544 1,456,967 119,945 2,213,494 219,332 309,383 29,890
Surrender benefits..... (20,881) 0 (31,547) 0 (34,941) (10) (4,007) 0
Net transfers.......... 798,967 213,357 1,764,383 411,297 2,566,211 537,988 266,133 132,230
Contract administration
charges............... (98,540) (6,609) (144,237) (9,829) (246,323) (14,116) (27,414) (2,537)
Cost of insurance...... (137,884) (10,295) (222,108) (15,655) (356,315) (22,691) (58,456) (5,472)
----------- --------- ---------- -------- ---------- -------- -------- --------
Net increase in net
assets resulting from
variable life
activities............. 1,382,213 285,997 2,823,458 505,758 4,142,126 720,503 485,639 154,111
----------- --------- ---------- -------- ---------- -------- -------- --------
Total increase in net
assets................. 1,306,974 285,710 3,092,421 540,675 4,419,307 709,391 551,459 160,091
NET ASSETS:
Beginning of period.... 285,710 0 540,675 0 709,391 0 160,091 0
----------- --------- ---------- -------- ---------- -------- -------- --------
END OF PERIOD.......... $ 1,592,684 $ 285,710 $3,633,096 $540,675 $5,128,698 $709,391 $711,550 $160,091
=========== ========= ========== ======== ========== ======== ======== ========
</TABLE>
- -----------------------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolio, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997).
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
(a) Represents only the Cornerstone VUL II product
(b) Represents only the Variable Estate Max product
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL II/VARIABLE ESTATE MAX
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1996
- --------------------------------------------------------------------------------
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 the Cornerstone VUL II and Variable Estate Max
products 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 Cornerstone
II/Estate Max as a unit investment trust registered under the Investment
Company Act of 1940. Cornerstone II/Estate Max offers units to variable
life contract owners to provide for the accumulation of value and for the
payment of benefits. Contract owners may borrow up to a specific amount
depending on policy value at any time by submitting a written request for a
policy loan. The preparation of the accompanying financial statements
requires management to make estimates and assumptions that affect the
reported values of assets and liabilities as of December 31, 1996 and the
reported amounts from operations and contract transactions during 1996 and
1995. Actual results could differ from those estimates.
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
- --------------------------------------------------------------------------------
NOTE 2.
For the year ended December 31, 1996 and 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 GROWTH EQUITY
FUND+ FUND+ BOND FUND+ FUND +
----------------------- ------------------ ----------------- --------------------
1996 1995 1996 1995 1996 1995 1996 1995
----------- ---------- -------- -------- -------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares purchased........ 12,518,440 3,348,369 56,687 9,741 60,481 10,274 17,079 2,786
Shares received from re-
investment of:
Net investment income.. 118,022 19,306 3,407 486 4,135 952 76 10
Capital gains distribu-
tion.................. 0 0 0 0 0 1,691 337
----------- ---------- -------- -------- -------- ------- ---------- --------
Total shares acquired... 12,636,462 3,367,675 60,094 10,227 64,616 11,226 18,846 3,133
Shares redeemed......... (10,154,039) (2,261,837) (13,985) (1,716) (19,068) (273) (3,881) (575)
----------- ---------- -------- -------- -------- ------- ---------- --------
Net increase in shares
owned.................. 2,482,423 1,105,838 46,109 8,511 45,548 10,953 14,965 2,558
Shares owned beginning
of period.............. 1,105,838 0 8,511 0 10,953 0 2,558 0
----------- ---------- -------- -------- -------- ------- ---------- --------
Shares owned end of pe-
riod................... 3,588,261 1,105,838 54,620 8,511 56,501 10,953 17,523 2,558
=========== ========== ======== ======== ======== ======= ========== ========
Cost of shares acquired. $12,636,462 $3,367,675 $626,412 $106,815 $585,899 $99,320 $ 413,350 $ 69,532
Proceeds from shares re-
deemed................. $10,154,039 $2,261,837 $143,226 $ 18,005 $173,086 $ 2,480 $ 86,303 $ 12,868
<CAPTION>
LIMITED CAPITAL
INTERNATIONAL BALANCED MATURITY BOND APPRECIATION
EQUITY FUND+ PORTFOLIO++ PORTFOLIO++ PORTFOLIO+++
----------------------- ------------------ ----------------- --------------------
1996 1995 1996 1995 1996 1995 1996 1995
----------- ---------- -------- -------- -------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares purchased........ 171,806 18,851 35,598 6,311 23,930 2,748 133,027 28,845
Shares received from re-
investment of:
Net investment income.. 5,335 413 233 0 368 0 0 0
Capital gains distribu-
tion.................. 7,106 0 1,296 0 0 0 6,448 0
----------- ---------- -------- -------- -------- ------- ---------- --------
Total shares acquired... 184,247 19,264 37,127 6,311 24,298 2,748 139,475 28,845
Shares redeemed......... (39,588) (1,057) (9,945) (513) (11,307) (99) (7,594) (5,151)
----------- ---------- -------- -------- -------- ------- ---------- --------
Net increase in shares
owned.................. 144,659 18,207 27,182 5,798 12,991 2,649 131,881 23,694
Shares owned beginning
of period.............. 18,207 0 5,798 0 2,649 0 23,694 0
----------- ---------- -------- -------- -------- ------- ---------- --------
Shares owned end of pe-
riod................... 162,866 18,207 32,980 5,798 15,640 2,649 155,575 23,694
=========== ========== ======== ======== ======== ======= ========== ========
Cost of shares acquired. $ 2,884,014 $ 271,701 $582,671 $110,500 $337,832 $39,519 $1,523,998 $347,755
Proceeds from shares re-
deemed................. $ 618,269 $ 15,037 $162,966 $ 8,942 $157,920 $ 1,446 $ 81,197 $ 62,319
</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 American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997).
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
44
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1., CONT'D.
American Century Variable Portfolios, Inc. (American Century): Capital
Appreciation Portfolio; and Fidelity Investments' Variable Insurance
Products (Fidelity): Equity Income, Growth, and Asset Manager Portfolios.
Penn Series, AMT, American Century, 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's total
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
VALUE EQUITY CAPITALIZATION
FUND+ FLEXIBLY MANAGED FUND+ FUND+
- --------------------- ------------------------- -----------------------
1996 1995 1996 1995 1996 1995
- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
192,908 57,004 342,661 81,492 114,111 16,139
2,691 810 13,860 2,328 556 116
10,049 2,944 18,080 2,750 3,801 305
- ---------- -------- ---------- ---------- ---------- --------
205,648 60,758 374,601 86,570 118,468 16,560
(16,010) (3,280) (23,982) (6,237) (30,486) (1,518)
- ---------- -------- ---------- ---------- ---------- --------
189,638 57,478 350,619 80,333 87,982 15,042
57,478 0 80,333 0 15,042 0
- ---------- -------- ---------- ---------- ---------- --------
247,116 57,478 430,952 80,333 103,024 15,042
========== ======== ========== ========== ========== ========
$3,863,030 $991,706 $7,070,311 $1,547,895 $1,430,164 $183,496
$ 290,587 $ 57,139 $ 455,369 $ 113,783 $ 368,391 $ 16,757
<CAPTION>
ASSET
EQUITY INCOME GROWTH MANAGER
PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
- --------------------- ------------------------- -----------------------
1996 1995 1996 1995 1996 1995
- ---------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
167,613 30,938 145,505 27,337 37,160 10,425
56 204 92 0 456 0
1,654 0 2,307 0 376 0
- ---------- -------- ---------- ---------- ---------- --------
169,323 31,142 147,904 27,337 37,992 10,425
(24,588) (3,081) (7,468) (3,040) (6,094) (285)
- ---------- -------- ---------- ---------- ---------- --------
144,735 28,061 140,436 24,297 31,898 10,140
28,061 0 24,297 0 10,140 0
- ---------- -------- ---------- ---------- ---------- --------
172,796 28,061 164,733 24,297 42,038 10,140
========== ======== ========== ========== ========== ========
$3,317,836 $566,137 $4,408,108 $ 810,160 $ 596,147 $158,075
$ 477,046 $ 57,753 $ 221,841 $ 90,521 $ 98,446 $ 4,317
</TABLE>
45
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I - CORNERSTONE VUL II/VARIABLE ESTATE MAX
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 3.
Operations are charged for mortality and expense risks assumed by Penn
Mutual as determined daily at a current annual rate guaranteed never to
exceed 0.90% of the average value of Cornerstone II/Estate Max.
On the date of issue and on 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 agreements 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 13 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 document for specific charges assessed.
46
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF TRUSTEES OF
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA
We have audited the accompanying statutory statements of financial condition of
The Penn Mutual Life Insurance Company as of December 31, 1996 and 1995, and
the related statutory statements of operations, surplus and cash flows for the
three years in the period ended December 31, 1996. These statutory 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.
As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the Commonwealth of Pennsylvania
(SAP), which practices differ from generally accepted accounting principles
(GAAP). The effects on the financial statements of the variances between SAP
and GAAP are described in Note 1 to the financial statements.
In our report dated January 26, 1996, we expressed our opinion that the 1995
and 1994 financial statements, prepared using SAP, presented fairly, in all
material respects, the financial position of The Penn Mutual Life Insurance
Company as of December 31, 1995, and the results of its operations, and its
cash flows for the two years then ended in conformity with GAAP. As described
in Note 1 to the financial statements, financial statements of mutual life
insurance enterprises issued or reissued after 1996, which are prepared in
accordance with SAP, are no longer considered to be presented in conformity
with GAAP. Accordingly, our present opinion on the 1995 and 1994 financial
statements as presented herein is different from that expressed in our previous
report.
In our opinion, because of the effects of the matter discussed in the second
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with GAAP, the financial position of The Penn Mutual Life
Insurance Company as of December 31, 1996 and 1995, or the results of its
operations or its cash flows for the three years in the period ended December
31, 1996.
In our opinion, the statutory financial statements referred to above present
fairly, in all material respects, the financial condition of The Penn Mutual
Life Insurance Company as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the three years in the period ended December
31, 1996, on the basis of accounting described in Note 1.
As discussed in Note 2 to the financial statements, during 1995, the Company
changed its accounting method for certain components of the federal income tax
expense. Also as discussed in Note 2, in 1996 and 1995, the Company changed the
reserve valuation basis for disability income and certain annuity contracts,
respectively.
Coopers & Lybrand L.L.P
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 28, 1997
47
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
(in thousands of dollars)
ASSETS
Bonds.................................................... $4,541,972 $3,695,516
Stocks
Preferred............................................... 13,042 15,049
Common--affiliated...................................... 205,574 171,193
- --unaffiliated........................................... 160 8,182
Mortgage loans........................................... 117,046 960,692
Real estate.............................................. 99,575 138,329
Policy loans............................................. 409,344 422,865
Cash and short-term investments.......................... 14,532 75,962
Other invested assets.................................... 76,500 59,561
---------- ----------
TOTAL CASH AND INVESTED ASSETS.......................... 5,477,745 5,547,349
Investment income due and accrued........................ 83,573 94,350
Premiums due and deferred................................ 25,297 26,926
Other assets............................................. 36,479 41,082
Separate account assets.................................. 1,225,038 911,683
---------- ----------
TOTAL ASSETS............................................ $6,848,132 $6,621,390
========== ==========
LIABILITIES
Reserves and funds for payment of future life and annuity
benefits................................................ $4,948,254 $5,064,298
Dividends to policyholders payable in the following year. 69,445 72,653
Policy claims in process................................. 25,626 27,241
Interest maintenance reserve............................. 18,716 36,084
Asset valuation reserve.................................. 77,408 83,157
Other liabilities........................................ 103,871 77,063
Separate account liabilities............................. 1,225,038 905,960
---------- ----------
TOTAL LIABILITIES....................................... 6,468,358 6,266,456
---------- ----------
SURPLUS
Special surplus funds.................................... 1,629 1,576
Unassigned surplus....................................... 378,145 353,358
---------- ----------
TOTAL................................................... 379,774 354,934
---------- ----------
TOTAL LIABILITIES AND SURPLUS.......................... $6,848,132 $6,621,390
========== ==========
</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, 1996 1995 1994
- ---------------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C> <C>
INCOME
Premium and annuity considerations.......... $ 641,183 $ 710,442 $ 771,547
Net investment income....................... 455,278 456,108 446,354
Other income................................ 3,340 (5,632) 10,497
---------- ---------- ----------
TOTAL INCOME............................... 1,099,801 1,160,918 1,228,398
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits paid to policyholders and benefi-
ciaries.................................... 816,583 859,798 766,598
Increase (decrease) in reserves and funds
for payment of future life and annuity
benefits................................... (135,705) (50,775) 54,380
Commissions................................. 37,487 38,044 45,579
Operating expenses.......................... 110,194 116,673 124,920
Net transfers to separate accounts.......... 125,532 86,944 128,773
---------- ---------- ----------
TOTAL BENEFITS AND EXPENSES................ 954,091 1,050,684 1,120,250
---------- ---------- ----------
INCOME FROM OPERATIONS BEFORE DIVIDENDS AND
FEDERAL INCOME TAXES...................... 145,710 110,234 108,148
Dividends to policyholders.................. 65,996 70,057 69,098
---------- ---------- ----------
INCOME FROM OPERATIONS BEFORE FEDERAL IN-
COME TAXES................................ 79,714 40,177 39,050
Federal income tax expense (benefit)........ 13,073 (52,442) 197
---------- ---------- ----------
INCOME FROM OPERATIONS..................... 66,641 92,619 38,853
Net realized capital losses, net of taxes... 40,736 91,890 37,399
---------- ---------- ----------
NET INCOME................................. 25,905 729 1,454
SURPLUS
Change in asset valuation reserve........... 5,749 28,728 29,060
Change in net unrealized capital gains and
losses..................................... 5,433 2,395 (3,376)
Changes in accounting methods, net of taxes. (14,773) 7,984 --
Other....................................... 2,526 (223) 8,618
---------- ---------- ----------
TOTAL CONTRIBUTION TO SURPLUS.............. 24,840 39,613 35,756
Surplus, Beginning of Year................. 354,934 315,321 279,565
---------- ---------- ----------
SURPLUS, END OF YEAR....................... $ 379,774 $ 354,934 $ 315,321
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- ---------------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C> <C>
CASH PROVIDED
Net cash from operations:
Premium and annuity considerations.......... $ 642,997 $ 708,301 $ 767,017
Net investment income....................... 429,532 439,508 420,917
Other income................................ 76,756 (2,511) 15,704
---------- ---------- ----------
1,149,285 1,145,298 1,203,638
Benefits to policyholders................... 816,297 871,983 750,019
Commissions................................. 37,456 38,139 45,540
Operating expenses and taxes................ 107,115 152,907 96,050
Net transfers to separate accounts.......... 165,495 86,944 129,858
Dividends to policyholders.................. 69,204 69,804 70,246
Net decrease in policy loans................ (12,884) (15,202) (22,361)
---------- ---------- ----------
NET CASH FROM OPERATIONS................... (33,398) (59,277) 134,286
---------- ---------- ----------
Investments sold, matured or repaid:
Bonds....................................... 1,079,993 1,410,126 1,038,593
Stocks...................................... 27,131 95,347 197,503
Mortgage loans.............................. 819,237 102,394 45,255
Real estate and other invested assets....... 36,968 10,837 12,701
---------- ---------- ----------
Total investments sold, matured or repaid.. 1,963,329 1,618,704 1,294,052
Taxes on realized investment gains........... (3,694) 3,253 (17,722)
Other cash provided.......................... 5,852 4,275 10,035
---------- ---------- ----------
1,965,487 1,626,232 1,286,365
---------- ---------- ----------
TOTAL CASH PROVIDED........................ 1,932,089 1,566,955 1,420,651
---------- ---------- ----------
CASH APPLIED
Cost of investments acquired:
Bonds....................................... 1,916,791 1,357,008 1,218,880
Stocks...................................... 15,035 26,114 131,248
Mortgage loans.............................. 38,768 100,466 71,427
Real estate and other invested assets....... 17,456 8,970 14,909
---------- ---------- ----------
Total cost of investments acquired......... 1,988,050 1,492,558 1,436,464
Other cash applied........................... 5,469 6,231 24,452
---------- ---------- ----------
TOTAL CASH APPLIED......................... 1,993,519 1,498,789 1,460,916
---------- ---------- ----------
Net change in cash and short-term invest-
ments....................................... (61,430) 68,166 (40,265)
Cash and short-term investments:
Beginning of year........................... 75,962 7,796 48,061
---------- ---------- ----------
END OF YEAR................................. $ 14,532 $ 75,962 $ 7,796
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(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,
variable life, immediate annuities and deferred annuities, both fixed and
variable. The Company markets its products through a network of career agents,
independent agents, and independent marketing organizations. The Company sells
its products in all fifty states and the District of Columbia.
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 (SAP). Prescribed SAP include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the National Association of Insurance Commissioners (NAIC).
Permitted SAP encompass all accounting practices that are not prescribed. These
principles were considered to be in conformity with generally accepted
accounting principles (GAAP) prior to the issuance of Financial Accounting
Standards Board Interpretation No. 40, "Applicability of Generally Accepted
Accounting Principles to Mutual Life Insurance and other Enterprises," (FIN No.
40) and Statement of Financial Accounting Standards (SFAS) No. 120, "Accounting
and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises
for Certain Long-Duration Participating Contracts". Effective for fiscal years
beginning after December 15, 1995, in accordance with FIN No. 40, the financial
statements of mutual life insurance companies which are prepared on the basis
of SAP can no longer be described as prepared in conformity GAAP. Therefore, as
required by generally accepted auditing standards, the opinion expressed by our
independent accountants on the 1995 and 1994 financial statements is different
from that expressed in their previous report.
In financial statements prepared in conformity with SAP, the accounting
treatment of certain items is different than for financial statements issued in
conformity with GAAP. Significant differences include:
. Policy acquisition costs, such as commissions and other costs incurred in
connection with acquiring new and renewal business, are expensed when
incurred; under GAAP, such costs are deferred and amortized over the expected
premium paying period.
. Premiums for universal life and investment-type products are recognized as
revenue when due; under GAAP, they are accounted for as deposits and excluded
from revenue.
. Policy reserves are based on statutory mortality and interest requirements
and without consideration of withdrawals and are reported net of reinsurance
reserve credits; under GAAP, the reserves are based on expected investment
yield, mortality and withdrawals and are reported gross of reinsurance
reserve credits. Changes in reserves on account of change in valuation basis
during the year are charged directly to surplus rather than reflected in the
net gain from operations, as is the case under GAAP.
. No provision is made for deferred income taxes; under GAAP, deferred taxes
result from temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements.
. An asset valuation reserve (AVR) is established as a liability to offset
potential investment losses and changes in the AVR are charged or credited to
surplus; under GAAP, reserves are established for invested assets based on
evaluation of impairment and are recorded through realized gains/(losses).
. An interest maintenance reserve (IMR) is established as a liability to
capture gains and losses, net of tax, on the sale of fixed maturities
resulting from changes in the general level of interest rates; no such
reserve is required under GAAP.
. Investments in bonds and preferred stocks are generally carried at amortized
cost; under GAAP, investments in bonds and preferred stocks, other than those
classified as held to maturity, are carried at fair value.
. Certain assets, designated as nonadmitted, are excluded from assets by a
direct charge to surplus; under GAAP, such assets are carried on the
statement of financial condition with appropriate valuation allowances.
51
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
. Pension expense for the qualified noncontributory pension plan (Plan) is
recognized when pension contributions are deductible for federal income tax
purposes, rather than incurred over the service lives of employees
participating in the Plan, as is the case under GAAP.
. Postretirement benefits are recognized for vested employees and current
retirees, rather than accruing an obligation over the service period for all
eligible employees, as is the case under GAAP.
.In accordance with Pennsylvania Insurance Laws and Regulations, the Company's
subsidiaries are not consolidated for statutory filing purposes; under GAAP,
majority-owned subsidiaries are consolidated.
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.
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. 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 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 to 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, modified preliminary term or CRVM 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
2.25% 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
52
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
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 1995 and 1994 amounts have been reclassified to conform with the 1996
presentation.
NOTE 2 - ACCOUNTING CHANGES:
During 1996, the Company changed its valuation basis for disability income and
certain other contracts. The increase in reserves of $14,773, net of taxes, was
taken as a direct charge to surplus.
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 resulted 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.
53
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
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, 1996 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
United States Government........... $ 15,541 $ 549 $ -- $ 16,090
Other governmental units........... 34,451 1,601 -- 36,052
Public utility..................... 415,874 28,379 2,020 442,233
Industrial and other............... 2,102,134 100,466 8,138 2,194,462
Mortgage and other asset-backed se-
curities.......................... 1,973,972 24,969 15,587 1,983,354
---------- -------- ------- ----------
4,541,972 155,964 25,745 4,672,191
Redeemable preferred stocks........ 3,575 -- 266 3,309
---------- -------- ------- ----------
TOTAL............................. $4,545,547 $155,964 $26,011 $4,675,500
========== ======== ======= ==========
</TABLE>
<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
========== ======== ======= ==========
</TABLE>
The following summarizes the statement value and estimated fair value of debt
securities as of December 31, 1996 by contractual maturity.
<TABLE>
<CAPTION>
ESTIMATED
STATEMENT FAIR
VALUE VALUE
---------- ----------
<S> <C> <C>
Maturity:
Within one year......................................... $ 211,786 $ 211,591
After one year through five years....................... 621,748 631,662
After five years through ten years...................... 296,615 307,622
After ten years through twenty years.................... 435,475 478,638
After twenty years...................................... 1,002,376 1,059,324
Mortgage and other asset-backed securities.............. 1,973,972 1,983,354
---------- ----------
4,541,972 4,672,191
Redeemable preferred stocks.............................. 3,575 3,309
---------- ----------
TOTAL................................................... $4,545,547 $4,675,500
========== ==========
</TABLE>
54
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
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. Mortgage and other asset-backed securities consist of
commercial and residential mortgage pass-through holdings and securities backed
by credit card receivables, auto loans and home equity and manufactured housing
loans. These securities follow a structured principal repayment schedule and
are of high credit quality. These securities are rated investment grade, other
than $60,547 in commercial mortgage-backed securities retained from the
securitization of the Company's commercial mortgage loan portfolio. The
mortgage and other asset-backed securities portfolio is presented separately in
the maturity schedule due to the potential for prepayment. The weighted average
life of this portfolio is 7.6 years.
During 1996, 1995 and 1994, proceeds from dispositions of investments in debt
securities amounted to $1,079,993, $1,410,126, and $1,038,593, respectively.
The gross gains realized on those dispositions were $13,794, $57,295 and
$5,876, and the gross losses realized on those dispositions were $6,535,
$10,069 and $27,348 during 1996, 1995 and 1994, respectively. Total net
realized losses, net of taxes, transferred to the IMR in 1996 were $16,208.
Total net realized gains, net of taxes, transferred to the IMR in 1995 were
$32,211. Total net realized losses, net of taxes, transferred to the IMR, in
1994 were $14,089. Amortization of the IMR included in net investment income
amounted to $1,160, $1,482 and $1,056 in 1996, 1995 and 1994, respectively.
The Company's investment portfolio of debt securities is comprised
predominantly of investment grade securities. As of December 31, 1996 and 1995,
debt securities totaling $168,313 and $100,013, 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, 1996 and 1995.
MORTGAGE LOANS
On August 29, 1996, the Company securitized the majority of its mortgage loan
portfolio, by transferring mortgage loans with a principal value of $715,712
and a book value of $715,121 to a trust which qualifies as a REMIC (Real Estate
Mortgage Investment Conduit) under the Internal Revenue Code. The trust issued
sixteen classes of Commercial Mortgage Pass-Through Certificates with a total
par value of $715,912. The certificates evidence the entire beneficial
ownership interest in the trust. The cash flow from the mortgages will be used
to repay the certificates over an average life of 4.28 years. The actual date
on which the principal amount of the notes may be paid in full could be
substantially earlier or later based on performance of the mortgages. The cash
flows of the assets of the trust will be the sole source of payments on the
notes. The Company has not guaranteed these certificates or the mortgage loans
held by the trust. As a result of this transaction, the Company recognized a
loss of $23,029 upon the transfer of the mortgages to the trust, representing
the difference between the fair market value of the certificates and the book
value of the mortgage loans transferred to the trust. This loss was deferred
through the Interest Maintenance Reserve (IMR), net of related taxes, and will
be amortized into income over the remaining life of the mortgages sold.
Included in the Company's bond portfolio are the highest quality classes of
certificates with a par value of $655,055 and a fair market value of $672,643
at the time of the securitization, which the Company retained. The Company sold
the lowest rated classes of certificates with a par value of $60,857 and a fair
market value of $22,752.
The mortgage loans which were not included in the securitization were retained
by the Company and had a book value of $152,480 and an estimated fair value of
$140,691 on the date of the securitization. Loans which the Company intends to
dispose of within a period of 6 to 24 months were written down to their
estimated net realizable value. These loans had a book value of $83,428 and an
estimated net realizable value of $67,642, which resulted in a credit-related
realized loss of $15,786. The Company intends to hold mortgage loans with a
book value of $69,052 on the date of the securitization, through their
remaining terms. The Company has discontinued the origination of commercial
mortgage loans.
55
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following summarizes the statement value of mortgage loans, by property
type and geographic concentration, as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Property Type
Office buildings.............................................. $ 40,243 $296,976
Retail........................................................ 39,090 230,902
Dwellings..................................................... 33,539 223,192
Other......................................................... 4,174 209,622
-------- --------
Total........................................................ $117,046 $960,692
======== ========
Geographic Concentration
Northeast..................................................... $ 43,552 $328,397
Midwest....................................................... 17,539 358,203
South......................................................... 20,715 132,382
West.......................................................... 35,240 139,979
Canada........................................................ -- 1,731
-------- --------
Total........................................................ $117,046 $960,692
======== ========
</TABLE>
The Company's investments at December 31, 1996 included $12,983 of mortgage
loans delinquent over 60 days and no mortgage loans which were non-income
producing for the preceding twelve months as of December 31, 1996. The
Company's investments at December 31, 1995 included $27,295 of mortgage loans
delinquent over 60 days, including $8,033 of mortgage loans which were non-
income producing for the preceding twelve months as of December 31, 1995. The
mortgage loan portfolio includes $7,110 and $19,928 of restructured mortgage
loans as of December 31, 1996 and 1995, 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, 1996 and 1995, accumulated depreciation on real estate
amounted to $32,592 and $43,069, respectively. Depreciation expense on real
estate totaled $5,769, $10,019 and $8,445 for the years ended December 31,
1996, 1995 and 1994, respectively. The Company's investments include $14,330
and $27,944 of foreclosed real estate as of December 31, 1996 and 1995,
respectively. The statement value of the Company's largest real estate
investment amounted to $49,923 and $54,858 as of December 31, 1996 and 1995,
respectively. During 1996, the Company wrote down the statement value of this
property by $16,000 to its current estimated fair value based on changes in
future valuation assumptions. During 1995, the Company wrote down the statement
value of this property by $76,500 to its estimated fair value at that date.
This write down reflected 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,
as of 1995, the Company no longer intended to hold this property as a long-term
investment.
NOTE 4 - RESERVES AND FUNDS FOR PAYMENT OF FUTURE LIFE AND ANNUITY BENEFITS:
The following summarizes the withdrawal characteristics of the Company's
reserve and deposit funds as of December 31, 1996.
<TABLE>
<CAPTION>
STATEMENT
VALUE
-----------
<S> <C>
Total policyholders' reserves and funds, including separate ac-
count liabilities................................................ $ 6,173,292
Amounts not subject to discretionary withdrawal................... (1,207,000)
-----------
Amounts subject to discretionary withdrawal...................... $ 4,966,292
===========
</TABLE>
56
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Of the total reserves and deposit funds which are subject to discretionary
withdrawal, $1,958,656, which is net of applicable policy loans, may be
withdrawn without the policyholder incurring surrender charges or market value
adjustments to those funds.
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, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
STATEMENT ESTIMATED STATEMENT ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities
Bonds............................. $4,541,972 $4,672,192 $3,695,516 $3,964,303
Redeemable preferred stocks....... 3,575 3,309 3,964 3,727
Equity securities
Common stock--unaffiliated........ 160 160 8,182 8,182
Non-redeemable preferred stocks... 9,467 12,112 11,085 13,607
Mortgage loans
Commercial........................ 117,046 120,281 958,079 1,000,003
Residential....................... -- -- 2,613 2,930
Policy loans....................... 409,344 387,562 422,865 405,721
Venture capital limited partner-
ships............................. 37,792 37,792 30,325 30,325
Separate account assets............ 1,225,038 1,225,038 911,683 911,683
FINANCIAL LIABILITIES:
Investment-type contracts
Individual annuities.............. 1,216,161 1,246,695 $1,248,138 $1,287,644
Guaranteed investment contracts... 111,276 112,300 222,991 226,255
Other group annuities............. 188,565 189,853 216,686 219,857
Dividends to policyholders payable
in the following year............. 69,445 69,445 72,653 72,653
Separate account liabilities....... 1,225,038 1,225,038 905,960 905,960
</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 investments, 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 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 $34,803 and $43,490 as of December 31, 1996
and 1995, respectively, approximates the fair value due
57
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
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.
The Company is exposed to interest rate risk on its interest sensitive
products. The Company's investment strategy is designed to minimize interest
risk by managing the duration of both assets and liabilities 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, 1996 and
1995, the Company had interest rate swaps with aggregate notional amounts equal
to $115,000, with average unexpired terms of 29 and 39 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, 1996 and 1995, the Company would have
recognized gains of $7,605 and $12,880, respectively. The fair values for
interest rate swaps and futures contracts are based on dealers' quotes and
represent the estimated amount 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, 1996 and 1995.
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
$8,310, $8,848 and $7,757 in 1996, 1995 and 1994, 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, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested........................................................ $32,572 $29,744
Non-vested.................................................... 935 763
------- -------
TOTAL........................................................ $33,507 $30,507
======= =======
Net assets available for plan benefits......................... $37,938 $34,067
======= =======
</TABLE>
58
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The actuarial present value of accumulated plan benefits was determined using a
7.5% and a 7.0% assumed discount rate for December 31, 1996 and 1995,
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, 1996, the plans' total
accumulated benefit obligation, determined in accordance with SFAS No. 87 and
based on a 7.5% assumed discount rate amounted to $16,439. As of December 31,
1995, the plans' total accumulated benefit obligation, determined in accordance
with SFAS No. 87 and based on an 7.0% assumed discount rate amounted to
$17,609. The additional obligation for future salary increases was $1,899 and
$2,539 as of December 31, 1996 and 1995, respectively.
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, 1996
and 1995, the estimated fair value of the defined contribution plans' assets
was $134,778 and $126,378, 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.
The Company accounts for the costs of postretirement benefits using an accrual
method and is amortizing a transition obligation of $33,744 over 20 years. As
of December 31, 1996 and 1995, the unamortized transition obligation was
$26,996 and $28,683, respectively.
Postretirement benefit expense for the year ended December 31, 1996, 1995 and
1994 was $3,778, $4,426, and $4,346 respectively, which includes the expected
cost of postretirement benefits for vested employees, interest cost, service
cost, and amortization of the transition obligation and the unrecognized
gains/(losses) on the obligation. The interest cost, service cost and
amortization of the unrecognized gain on the obligation were $1,948, $590 and
$447, respectively, for the year ended December 31, 1996. The interest cost and
service cost were $2,471 and $268, respectively, for the year ended December
31, 1995. The interest cost and service cost were $2,366 and $293,
respectively, for the year ended December 31, 1994. There was no unrecognized
gain/(losses) on the obligation in 1995 and 1994. The Company made
contributions to the plans of $2,107, $2,629 and $2,438 in 1996, 1995 and 1994,
respectively, as claims were incurred.
As of December 31, 1996 and 1995, the unfunded postretirement benefit
obligation for retirees and other fully eligible or vested plan participants
was $25,960 and $36,150, respectively. For December 31, 1996 the discount rate
used in determining the accumulated postretirement benefit obligation was 7.5%,
and the health care cost trend rate was 8.5%, graded to 5% over 8 years. 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.
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, 1996 by $1,833 and the estimated
eligibility cost and interest cost components of net periodic postretirement
benefit cost for the year ended December 31, 1996 by $135.
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.
59
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The IRS has examined the Company's income tax returns through the year 1990 and
is currently examining years 1991 through 1994. 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 with 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.
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, 1996:
Life Insurance in-force.......... $26,822,820 $7,829,755 $5,517,369 $29,135,206
Premium and annuity considera-
tions........................... 656,437 17,831 33,085 641,183
Reserves and funds for payment of
future life and annuity bene-
fits............................ 5,942,388 3,945 320,167 5,626,166
DECEMBER 31, 1995:
Life Insurance in-force.......... $26,290,414 $7,668,076 $4,982,235 $28,976,255
Premium and annuity considera-
tions........................... 724,188 19,762 33,508 710,442
Reserves and funds for payment of
future life and annuity bene-
fits............................ 5,364,721 3,937 304,360 5,064,298
</TABLE>
During 1994, the Company had gross premiums of $772,461, assumed premiums of
$40,418 and ceded premiums of $41,332.
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 $327,897 and $342,694 as of December 31, 1996 and 1995,
respectively. The Company reduced its reserves by $243,426 and $242,691 as of
December 31, 1996 and 1995, respectively. Net premium and annuity
considerations ceded to PIA were $11,620 and $11,056, which include an
experience refund paid of $4,461 and $2,257 in 1996 and 1995, respectively. Net
premium and annuity considerations assumed from PIA in 1994 were $10,069.
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.
60
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 9 - RELATED PARTIES:
The following summarizes the statement value of the Company's unconsolidated
subsidiaries and affiliates as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Independence Square Properties, Inc. ........................ $108,817 $ 88,607
PIA.......................................................... 82,102 65,601
Other affiliates............................................. 14,655 16,985
-------- --------
TOTAL....................................................... $205,574 $171,193
======== ========
</TABLE>
The Company's unconsolidated subsidiaries had combined assets of $1,545,888 and
$1,373,745, and combined liabilities of $1,340,314 and $1,202,552 as of
December 31, 1996 and 1995, respectively. The Company records earnings from
these subsidiaries through investment income. The majority of the earnings of
$37,981, $23,642 and $24,311 for the years ended December 31, 1996, 1995 and
1994, respectively, relate to broker/dealer subsidiaries.
As of December 31, 1996 and 1995, bonds include notes receivable from
subsidiaries of $27,304 and $31,130, respectively. Investment income on notes
receivable from subsidiaries amounted to $1,989, $3,118 and $2,527 for 1996,
1995 and 1994, respectively.
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, 1996, the Company had
outstanding commitments totaling $13,079 relating to these investment
activities. The fair value of these commitments approximates the face amount.
As of December 31, 1996, unused lines of credit available to the Company
amounted to $40,000.
61
<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 POLICY 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 ATTAINED AGE PERCENTAGE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
0-40 250 61 128
- -------------------------------------------------------------------------------
41 243 62 126
- -------------------------------------------------------------------------------
42 236 63 124
- -------------------------------------------------------------------------------
43 229 64 122
- -------------------------------------------------------------------------------
44 222 65 120
- -------------------------------------------------------------------------------
45 215 66 119
- -------------------------------------------------------------------------------
46 209 67 118
- -------------------------------------------------------------------------------
47 203 68 117
- -------------------------------------------------------------------------------
48 197 69 116
- -------------------------------------------------------------------------------
49 191 70 115
- -------------------------------------------------------------------------------
50 185 71 113
- -------------------------------------------------------------------------------
51 178 72 111
- -------------------------------------------------------------------------------
52 171 73 109
- -------------------------------------------------------------------------------
53 164 74 107
- -------------------------------------------------------------------------------
54 157 75-90 105
- -------------------------------------------------------------------------------
55 150 91 104
- -------------------------------------------------------------------------------
56 146 92 103
- -------------------------------------------------------------------------------
57 142 93 102
- -------------------------------------------------------------------------------
58 138 94 101
- -------------------------------------------------------------------------------
59 134 95 100
- -------------------------------------------------------------------------------
60 130
- -------------------------------------------------------------------------------
</TABLE>
D-1
<PAGE>
PART II
<PAGE>
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 107 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) Coopers & Lybrand L.L.P.
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.*
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.(?)
A(6) (a) Charter of the Penn Mutual Life Insurance Company
(May 1983)./f/
(b) By-laws of The Penn Mutual Life Insurance Company, as
amended through December 8, 1989./g/
A(7) Not Applicable.
II-3
<PAGE>
A(8) (a) Agreement between The Penn Mutual Life Insurance Company
and Penn Series Funds, Inc. /h/
(b)(1) Agreement between The Penn Mutual Life Insurance Company
and Neuberger & Berman Advisers Management Trust./e/
(b)(2) Assignment and Modification Agreement between Neuberger
& Berman Management Incorporated, Neuberger & Berman
Advisers Management Trust and The Penn Mutual Life
Insurance Company./i/
(b)(3) Amendment to Sales Agreement between The Penn Mutual
Life Insurance Company and Neuberger & Berman Advisers
Management Trust. *
(c) Agreement between The Penn Mutual Life Insurance Company
and TCI Portfolios, Inc. (renamed American Century
Variable Portfolios, Inc., effective May 1, 1997.)/c/
(d) Agreement between The Penn Mutual Life Insurance Company
and Variable Insurance Products Fund. /h/
(e) Agreement between The Penn Mutual Life Insurance Company
and Variable Insurance Products Fund II. /h/
(f) Agreement between The Penn Mutual Life Insurance Company
and Morgan Stanley Universal Funds, Inc. /k/
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. Opinion and consent of C. Ronald Rubley, Esq., as to the legality of the
securities being registered./b/
3. Opinion and consent of Peter R. Schaefer, F.S.A., as to actuarial matters
pertaining to the securities being registered./j/
4.(a) Consent of Coopers & Lybrand L.L.P.*
(b) Consent of Morgan, Lewis & Bockius LLP. *
(c) Consent of Peter R. Schaefer, F.S.A., M.A.A.A.*
5.(a) Powers of Attorney for Trustees. *
II-4
<PAGE>
* Filed herewith
/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.
/f/ Filed as an exhibit and incorporated herein by reference to Post-Effective
Amendment No. 10 to a Registration Statement on Form N-4
(File No. 2-77283) filed in April 1988.
/g/ Filed as an exhibit and incorporated herein by reference to Post-Effective
Amendment No. 12 to a Registration Statement on Form N-4 (File No. 2-77283)
filed on April 30, 1990.
/h/ Filed as an exhibit and incorporated herein by reference to Pre-Effective
Amendment No. 1 to a Registration Statement on Form S-6 (File No. 3-87276)
filed on April 13, 1995.
/i/ Filed as an exhibit and incorporated herein 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.
/j/ Filed as an exhibit and incorporated herein by reference to Post-Effective
Amendment No. 4 to thisForm S-6 Registration Statement for Penn Mutual
Variable Life Account I filed on April 29, 1996.
/k/ Filed as an exhibit and incorporated herein by reference to Post-Effective
Amendment No. 22 to Form N-4 Registration Statement (File No. 2-77283) for
Penn Mutual Variable Annuity Account III filed on April 29, 1997.
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. 5 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 28th day of April, 1997.
[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
Chairman of the Board of Trustees
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed
below by the following persons in the capacities indicated on the 28th day of
April, 1997.
Signature Title
--------- ------
/s/ Robert E. Chappell Chairman of the Board of Trustees
- ------------------------ and Chief Executive Officer
Robert E.Chappell
/s/ Nancy S. Brodie Executive Vice President
- ------------------------ and Chief Financial Officer
Nancy S. Brodie
*JAMES A. HAGEN Trustee
*PHILIP E. LIPPINCOTT Trustee
*JOHN F. McCAUGHAN Trustee
*ALAN B. MILLER Trustee
*DANIEL J. TORAN Trustee
*NORMAN T. WILDE, JR. Trustee
*WESLEY S. WILLIAMS, JR. Trustee
*By /s/ Robert E. Chappell
------------------------------------
Robert E. Chappell, attorney-in-fact
II-6
<PAGE>
Exhibit Index
-------------
EX-99.B A(3)(c) Schedule of Sales Commissions.
EX-99.B A(8)(b)(3) Amendment to Sales Agreement between The Penn Mutual Life
Insurance Company and Neuberger & Berman Advisers Management
Trust.
EX-99.B (4)(a) Consent of Coopers & Lybrand L.L.P.
EX-99.B (4)(b) Consent of Morgan, Lewis & Bockius LLP.
EX-99.B (4)(c) Consent of Peter R. Schaefer, F.S.A., M.A.A.A.
EX-99.B (5)(a) Power of Attorney for Trustees.
II-7
<PAGE>
THE PENN MUTUAL LIFE INSURANCE COMPANY
Schedule of Commissions
-----------------------
for
---
Flexible premium Adjustable Variable Life Insurance Policies
------------------------------------------------------------
I. Soliciting Agents
-----------------
A. Up to 50% of premiums paid in the first policy year and up to 4% of
premiums paid in subsequent years.
B. Up to 0.25% of Policy Value.
II. General Agents, Managers and regional Directors
-----------------------------------------------
A. 15% of premiums paid in the first policy year and up to 5% of premiums
paid in the second and third policy years and up to 1.5% of premiums
paid in the fourth and subsequent policy years. The actual rate is
determined by the issue age of the insured, the sales distribution
system and other policy specific information.
Note: No commissions will be paid on transfers to flexible premium
adjustable variable life insurance policies, in any form, from other
policies issued by the Penn Mutual Life Insurance Company or, its
subsidiary, The Penn Insurance and Annuity Company.
<PAGE>
AMENDMENT TO FUND PARTICIPATION AGREEMENT
THIS AGREEMENT dated as of April 30, 1997 is made by and between NEUBERGER
& BERMAN ADVISERS MANAGEMENT TRUST, a Delaware Business Trust ("TRUST"),
ADVISERS MANAGERS TRUST, a New York Common Law Trust, NEUBERGER & BERMAN
MANAGEMENT INCORPORATED, a New York Corporation and THE PENN MUTUAL LIFE
INSURANCE COMPANY ("LIFE COMPANY"), a life insurance company organized under the
laws of the State of Delaware.
WHEREAS, the parties hereto have previously entered into a Sales Agreement
dated April 5, 1993, and a subsequent Assignment and Modification Agreement
dated May 1, 1995 (together the "FUND PARTICIPATION AGREEMENT"), and the parties
at time only contemplated making available two series of the trust, the Limited
Maturity Bond Portfolio and Balanced Portfolio, and
WHEREAS, the LIFE COMPANY desires to invest in additional series of the
TRUST:
NOW THEREFORE, it is hereby agreed by and between the parties as follows:
1. TRUST will hereby make available to the Separate Accounts of LIFE
COMPANY shares of the selected series of the TRUST as listed on Appendix B,
which Appendix may from time to time be updated by the parties, for investment
of purchase payments of Variable Contracts, allocated to the designated Separate
Accounts.
2. Terms used herein but not defined herein are to have the same meaning as
in the FUND PARTICIPATION AGREEMENT. All other terms of the FUND PARTICIPATION
AGREEMENT will remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers to
execute this Amendment to the FUND PARTICIPATION AGREEMENT
NEUBERGER & BERMAN ADVISORS
MANAGEMENT TRUST
By:________________________
Name:
Title:
ADVISORS MANAGERS TRUST
By:________________________
Name:
Title:
NEUBERGER & BERMANN MANAGEMENT INC.
By:________________________
Name:
Title:
THE PENN MUTUAL LIFE INSURANCE COMPANY
By:________________________
Name:
Title:
<PAGE>
SCHEDULE A
Separate Accounts Selected Portfolios
- ----------------- -------------------
Penn Mutual Variable Annuity Account III Limited Maturity Portfolio
Penn Mutual Variable Life Account I Partners Portfolio
Penn Mutual Separate Account E Balanced Portfolio
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the following with respect to Post-Effective Amendment No.
5 and Amendment No. 5 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 28, 1997 on our audits of the
statutory financial statements of The Penn Mutual Life Insurance Company
as of December 31, 1996 and 1995 and for the three years in the period
ended December 31, 1996.
2. The inclusion of our reports dated April 7, 1997 on our audits of the
financial statements of Penn Mutual Variable Life Account I -
Cornerstone VUL as of December 31, 1996 and for the two years then ended
and Penn Mutual Variable Life Account I - Cornerstone VUL II/Variable
Estate Max as of December 31, 1996 and for the year then ended and the
period from May 1, 1995 (commencement of operations) to December 31,
1995.
3. The reference to our Firm under the heading of "Experts" in the
Registration Statement.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 28, 1997
<PAGE>
Exhibit 4(b)
[letterhead of Morgan, Lewis & Bockius LLP]
April 28, 1997
Board of Trustees
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172
Re: Penn Mutual Variable Life Account I
SEC Registration No. 33-54662
-----------------------------------
Dear Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal Matters"
in the Prospectus filed as part of this Post-Effective Amendment No. 5. 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,
/s/ Morgan, Lewis & Bockius LLP
Morgan, Lewis & Bockius LLP
<PAGE>
Exhibit 4(c)
[letterhead of The Penn Mutual Life Insurance Company]
April 28, 1997
Board of Trustees
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172
Re: Penn Mutual Variable Life Account I
SEC Registration No. 33-54662
-----------------------------------
Ladies and Gentlemen:
I hereby consent to the use of my name relating to actuarial matters under the
heading "Experts" in the prospectuses included in the above-referenced
Registration Statement.
Very truly yours,
/s/ Peter R. Schaefer
Peter R. Schaefer, FSA, MAAA
Actuary
<PAGE>
The Penn Mutual Life Insurance Company
Power of Attorney
-----------------
Robert E. Chappell, whose signature appears below, does hereby constitute
and appoint Robert E. Chappell and Daniel J. Toran, and each of them severally,
his true and lawful attorneys and agents, with power of substitution and
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorney and agents, and each of them, may deem necessary
or advisable or which may be required to enable The Penn Mutual Life Insurance
Company (the "Company") to comply with the Investment Company Act of 1940 and
the Securities Act of 1933, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Company's Registration
Statement on Form S-6 (SEC Registration No. 33-54662) pursuant to such Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Company such Registration Statement and any and
all amendments and supplements to such Registration Statement filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
Date: April 15, 1997 /s/ Robert E. Chappell
----------------------
Robert E. Chappell
<PAGE>
The Penn Mutual Life Insurance Company
Power of Attorney
-----------------
Nancy S. Brodie, whose signature appears below, does hereby constitute and
appoint Robert E. Chappell and Daniel J. Toran, and each of them severally, his
true and lawful attorneys and agents, with power of substitution and
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorney and agents, and each of them, may deem necessary
or advisable or which may be required to enable The Penn Mutual Life Insurance
Company (the "Company") to comply with the Investment Company Act of 1940 and
the Securities Act of 1933, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Company's Registration
Statement on Form S-6 (SEC Registration No. 33-54662) pursuant to such Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Company such Registration Statement and any and
all amendments and supplements to such Registration Statement filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
Date: April 15, 1997 /s/ Nancy S. Brodie
-------------------
Nancy S. Brodie
<PAGE>
The Penn Mutual Life Insurance Company
Power of Attorney
-----------------
James A. Hagen, whose signature appears below, does hereby constitute and
appoint Robert E. Chappell and Daniel J. Toran, and each of them severally, his
true and lawful attorneys and agents, with power of substitution and
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorney and agents, and each of them, may deem necessary
or advisable or which may be required to enable The Penn Mutual Life Insurance
Company (the "Company") to comply with the Investment Company Act of 1940 and
the Securities Act of 1933, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Company's Registration
Statement on Form S-6 (SEC Registration No. 33-54662) pursuant to such Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Company such Registration Statement and any and
all amendments and supplements to such Registration Statement filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
Date: April 15, 1997 /s/ James A. Hagen
------------------
James A. Hagen
<PAGE>
The Penn Mutual Life Insurance Company
Power of Attorney
-----------------
Philip E. Lippincott, whose signature appears below, does hereby constitute
and appoint Robert E. Chappell and Daniel J. Toran, and each of them severally,
his true and lawful attorneys and agents, with power of substitution and
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorney and agents, and each of them, may deem necessary
or advisable or which may be required to enable The Penn Mutual Life Insurance
Company (the "Company") to comply with the Investment Company Act of 1940 and
the Securities Act of 1933, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Company's Registration
Statement on Form S-6 (SEC Registration No. 33-54662) pursuant to such Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Company such Registration Statement and any and
all amendments and supplements to such Registration Statement filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
Date: April 15, 1997 /s/ Philip E. Lippincott
------------------------
Philip E. Lippincott
<PAGE>
The Penn Mutual Life Insurance Company
Power of Attorney
-----------------
Alan B. Miller, whose signature appears below, does hereby constitute and
appoint Robert E. Chappell and Daniel J. Toran, and each of them severally, his
true and lawful attorneys and agents, with power of substitution and
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorney and agents, and each of them, may deem necessary
or advisable or which may be required to enable The Penn Mutual Life Insurance
Company (the "Company") to comply with the Investment Company Act of 1940 and
the Securities Act of 1933, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Company's Registration
Statement on Form S-6 (SEC Registration No. 33-54662) pursuant to such Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Company such Registration Statement and any and
all amendments and supplements to such Registration Statement filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
Date: April 15, 1997 /s/ Alan B. Miller
--------------------
Alan B. Miller
<PAGE>
The Penn Mutual Life Insurance Company
Power of Attorney
-----------------
Daniel J. Toran, whose signature appears below, does hereby constitute and
appoint Robert E. Chappell and Daniel J. Toran, and each of them severally, his
true and lawful attorneys and agents, with power of substitution and
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorney and agents, and each of them, may deem necessary
or advisable or which may be required to enable The Penn Mutual Life Insurance
Company (the "Company") to comply with the Investment Company Act of 1940 and
the Securities Act of 1933, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Company's Registration
Statement on Form S-6 (SEC Registration No. 33-54662) pursuant to such Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Company such Registration Statement and any and
all amendments and supplements to such Registration Statement filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
Date: April 15, 1997 /s/ Daniel J. Toran
---------------------
Daniel J. Toran
<PAGE>
The Penn Mutual Life Insurance Company
Power of Attorney
-----------------
Norman T. Wilde, Jr., whose signature appears below, does hereby constitute
and appoint Robert E. Chappell and Daniel J. Toran, and each of them severally,
his true and lawful attorneys and agents, with power of substitution and
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorney and agents, and each of them, may deem necessary
or advisable or which may be required to enable The Penn Mutual Life Insurance
Company (the "Company") to comply with the Investment Company Act of 1940 and
the Securities Act of 1933, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Company's Registration
Statement on Form S-6 (SEC Registration No. 33-54662) pursuant to such Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Company such Registration Statement and any and
all amendments and supplements to such Registration Statement filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
Date: April 15, 1997 /s/ Norman T. Wilde, Jr.
-------------------------
Norman T. Wilde, Jr.
<PAGE>
The Penn Mutual Life Insurance Company
Power of Attorney
-----------------
Wesley S. Williams, Jr., whose signature appears below, does hereby
constitute and appoint Robert E. Chappell and Daniel J. Toran, and each of them
severally, his true and lawful attorneys and agents, with power of substitution
and resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorney and agents, and each of them, may deem necessary
or advisable or which may be required to enable The Penn Mutual Life Insurance
Company (the "Company") to comply with the Investment Company Act of 1940 and
the Securities Act of 1933, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Company's Registration
Statement on Form S-6 (SEC Registration No. 33-54662) pursuant to such Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Company such Registration Statement and any and
all amendments and supplements to such Registration Statement filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
Date: April 15, 1997 /s/ Wesley S. Williams, Jr.
---------------------------
Wesley S. Williams, Jr.
<PAGE>
The Penn Mutual Life Insurance Company
Power of Attorney
-----------------
John F. McCaughan, whose signature appears below, does hereby constitute
and appoint Robert E. Chappell and Daniel J. Toran, and each of them severally,
his true and lawful attorneys and agents, with power of substitution and
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorney and agents, and each of them, may deem necessary
or advisable or which may be required to enable The Penn Mutual Life Insurance
Company (the "Company") to comply with the Investment Company Act of 1940 and
the Securities Act of 1933, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Company's Registration
Statement on Form S-6 (SEC Registration No. 33-54662) pursuant to such Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a trustee and/or officer of the Company such Registration Statement and any and
all amendments and supplements to such Registration Statement filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, and each of them, shall do or cause to be
done by virtue hereof.
Date: April 15, 1997 /s/ John F. McCaughan
---------------------
John F. McCaughan
