<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1999
Registration No. 33-54662
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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. 8
----------------------
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
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.
================================================================================
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
THE PENN MUTUAL LIFE INSURANCE COMPANY
Cross Reference to Items Required by Form N-8B-2
<TABLE>
<CAPTION>
N-8B-2 ITEM CAPTION IN PROSPECTUS
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<S> <C>
1 Cover Page
2 Cover Page
3 Not applicable
4 Additional Information - Sale of Policies
5 Additional Information - Penn Mutual Variable Life Account I
6 Additional Information - Penn Mutual Variable Life Account I
7 Not applicable
8 Not applicable
9 Additional Information - Litigation
10 Basic Information; Additional Information - The Penn Mutual
Life Insurance Company - Penn Mutual Variable Life Account I -
The Funds
11 Additional Information - The Funds
12 Additional Information - The Funds
13 Basic Information - What Are the Fees and Charges Under the Policy?
14 Basic Information - What Payments Must Be Made Under the Policy?
15 Basic Information - What Payments Must Be Made Under the Policy?
16 Additional Information - The Funds
17 Basic Information; Additional Information
18 Basic Information
19 Basic Information - How Does Penn Mutual Communicate With Me?
20 Basic Information
21 Basic Information - What Is a Policy Loan?
22 Not applicable
23 Not applicable
24 Not applicable
25 Additional Information - The Penn Mutual Life Insurance Company
26 Basic Information - What Are the Fees and Charges Under the Policy?
27 Additional Information - The Penn Mutual Life Insurance Company
28 Additional Information - The Penn Mutual Life Insurance Company
Additional Information - Penn Mutual Trustees and Officers
29 Not applicable
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
35 Additional Information - The Penn Mutual Life Insurance Company
36 Not applicable
37 Not applicable
38 Additional Information - Sale of Policies
39 Additional Information - Sale of Policies
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
40 Additional Information - Sale of Policies
41 Not applicable
42 Not applicable
43 Not applicable
44 Basic Information - How Will the Value of the Policy Change Over Time?;
Additional Information - More Information About Policy Values
45 Not applicable
46 Basic Information - How Will the Value of the Policy Change Over Time?;
Additional Information - More Information About Policy Values
47 Basic Information; Additional Information - Penn Mutual Variable Life
Account I - The Funds
48 Additional Information - The Penn Mutual Life Insurance Company
49 Not applicable
50 Not applicable
51 Basic Information
52 Additional Information - Penn Mutual Variable Life Account I
53 Additional Information - Federal Income Tax Considerations
54 Not applicable
55 Illustrations
56 Not applicable
57 Not applicable
58 Not applicable
59 Additional Information - Financial Statements
</TABLE>
<PAGE>
PART I
Information Required in Prospectus
<PAGE>
PROSPECTUS
FOR
CORNERSTONE VUL I
a flexible premium adjustable variable life insurance policy
issued by
THE PENN MUTUAL LIFE INSURANCE COMPANY
and funded through
PENN MUTUAL VARIABLE LIFE ACCOUNT I
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172
800-523-0650
The Policy provides life insurance and a cash surrender value that varies
with the investment performance of one or more of the funds set forth below.
These and other Policy provisions are described in this Prospectus.
<TABLE>
<CAPTION>
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<S> <C>
PENN SERIES FUNDS, INC. MANAGER
Growth Equity Fund Independence Capital Management, Inc.
Value Equity Fund OpCap Advisors
Small Capitalization Fund OpCap Advisors
Emerging Growth Fund RS Investment Management, Inc.
Flexibly Managed 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.
- ----------------------------------------------------------------------------------------------------------------
NEUBERGER BERMAN ADVISORS MANAGEMENT TRUST MANAGER
Balanced Portfolio Neuberger Berman Management Incorporated
Limited Maturity Bond Portfolio Neuberger Berman Management Incorporated
Partners Fund Portfolio Neuberger Berman Management Incorporated
- ----------------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. MANAGER
Capital Appreciation Portfolios American Century Investment Management, Inc.
- ----------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND MANAGER
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
- ----------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND MANAGER
Asset Manager Portfolio Fidelity Management and Research Company
Index 500 Portfolio Fidelity Management and Research Company
- ----------------------------------------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. MANAGER
Emerging Markets Equity (International) Portfolio Morgan Stanley Dean Witter Investment Management Inc.
- ----------------------------------------------------------------------------------------------------------------
Please note that the Securities and Exchange Commission ("SEC") has not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
</TABLE>
May 1, 1999
<PAGE>
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GUIDE TO READING THIS PROSPECTUS
This prospectus contains information that you should know before you buy
the Policy or exercise any of your rights under the Policy. The purpose of this
prospectus is to provide information on the essential features and provisions of
the Policy and the investment options available under the Policy. Your rights
and obligations under the Policy are determined by the language of the Policy
itself. When you receive your Policy, read it carefully.
The prospectus is arranged as follows:
o The first section is called "Basic Information". It is in a question and
answer format. We suggest you read the Basic Information section before
reading any other section of the prospectus.
o The next section contains illustrations of a hypothetical Policy that
help clarify how the Policy works. The "Illustrations" section starts on
page 15.
o After the Illustrations section is the "Additional Information"
section. It gives additional information about Penn Mutual, Penn Mutual
Variable Life Account I and the Policy. It generally does not repeat
information that is in the Basic Information section. A table of
contents for the Additional Information section appears on page 24.
o The financial statements for Penn Mutual and for Penn Mutual Variable
Life Account I follow the Additional Information section. They start on
page 37.
o Appendices A and B are after the financial statements. The Appendices
are referred to in the Basic Information section. They provide specific
information and examples to help you understand how the Policy works.
**********
The prospectuses of the funds that accompany this prospectus contains
important information that you should know about the investments that may be
made under the Policy. You should read the relevant prospectus(es) carefully
before you invest.
**********
2
<PAGE>
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BASIC INFORMATION
This part of the prospectus provides answers to basic questions that may be
asked about the Policy. Here are the page numbers where the questions and
answers appear.
QUESTION PAGE
- -------- ----
What Is the Policy?...................................................... 4
Who Owns the Policy?..................................................... 4
What Payments Must Be Made Under the Policy?............................. 4
How Will the Value of the Policy Change Over Time?....................... 6
What Are the Fees and Charges Under the Policy?.......................... 6
Are There Other Charges That Penn Mutual Could Deduct in the Future?..... 9
How Can I Change My Policy's Investment Allocations?..................... 9
What Is a Policy Loan?................................................... 10
How Can I Withdraw Money from My Policy?................................. 10
What Is the Timing of Transactions Under the Policy?..................... 11
How Much Life Insurance Does My Policy Provide?.......................... 11
Can I Change Insurance Coverage Under My Policy?......................... 12
What Are the Supplemental Benefit Riders That I Can Buy?................. 12
Do I Have the Right to Cancel My Policy?................................. 13
Can I Choose Different Payout Options Under My Policy? .................. 13
How Is the Policy Treated for Federal Income Tax Purposes?............... 13
How Do I Communicate With Penn Mutual?................................... 14
How Does Penn Mutual Communicate With Me?................................ 15
3
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WHAT IS THE POLICY?
The Policy provides life insurance on you or another individual you name.
The value of your Policy will increase or decrease based upon the performance of
the investment options you choose. The death benefit may also increase or
decrease based on investment performance. In addition, the Policy allows you to
allocate a part of your policy value to a fixed interest option where the value
will accumulate interest.
You will have several options under the Policy. Here are some major ones:
o Determine when and how much you pay to us under the Policy
o Determine when and how much to allocate your policy value to the
investment options
o Borrow from your Policy
o Change the beneficiary who will receive the death benefit
o Change the amount of insurance protection
o Change the death benefit option you have selected under your Policy
o Surrender or partially surrender your Policy for all or part of its
net cash surrender value
o Choose the form in which you would like the death benefit or other
proceeds paid out from your Policy
Most of these options are subject to limits that are explained later in
this prospectus.
If you want to purchase a Policy, you must complete an application and
submit it to one of our authorized agents. We require satisfactory evidence of
insurability, which may include a medical examination of the proposed insured.
We evaluate the information provided in accordance with our underwriting rules
and then decide whether to accept or not accept the application.
The maturity date of your Policy is the policy anniversary nearest the
insured's 95th birthday. If the Policy is still in force on the maturity date, a
maturity benefit will be paid to you. The maturity benefit is equal to the
policy value less any policy loan 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.
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WHO OWNS THE POLICY?
You decide who owns the Policy when you apply for it. The owner of the
Policy is the person who can exercise most of the rights under the Policy, such
as the right to choose the death benefit option, the beneficiary, the investment
options, and the right to surrender the Policy. Whenever we have used the term
"you" in this prospectus, we have assumed that the reader is the owner or the
person who has whatever right or privilege we are discussing.
- --------------------------------------------------------------------------------
WHAT PAYMENTS MUST BE MADE UNDER THE POLICY?
PREMIUM PAYMENTS
Amounts you pay to us under your Policy are called "premiums" or "premium
payments." The amount we require as your first premium depends on a number of
factors, such as age, sex, rate classification, the amount of insurance
specified in the application, and any supplemental benefits. Sample minimum
initial premiums are shown in Appendix A at the end of this prospectus. Within
limits, you can make premium payments when you wish. That is why the Policy is
called a "flexible premium" Policy.
Additional premiums may be paid in any amount and at any time. A premium
must be at least $25. We may require satisfactory evidence of insurability
before accepting any premium which increases our net amount of risk.
We reserve the right to limit total premiums paid in a policy year to the
planned premiums you select in your application. Federal tax law limits the
amount of premium payments you can make relative to the amount of insurance
4
<PAGE>
coverage provided. We will not accept or retain a premium payment that exceeds
the maximum permitted under federal tax law. Also, if you make a premium payment
that exceeds certain other limits imposed under federal tax law, you could incur
a penalty on amount you take out of your policy. We will monitor the Policy and
will attempt to notify you on a timely basis if you are about to exceed this
limit. See HOW IS THIS POLICY TREATED FOR FEDERAL INCOME TAX PURPOSES? below.
PLANNED PREMIUMS
The Policy Specifications page of your Policy will show the "planned
premium" for the Policy. You choose this amount in the Policy application. We
will send a premium reminder notice to you based upon the planned premium that
you specified in your application. You also chose in your application how often
to pay planned premiums -- annually, semi-annually, quarterly or monthly. You
are not required to pay the planned premium as long as your Policy has
sufficient net cash surrender value to pay Policy charges. You need only pay
enough premium to maintain net cash surrender value sufficient to pay Policy
charges. See THREE YEAR NO-LAPSE FEATURE and LAPSE AND REINSTATEMENT below.
WAYS TO PAY PREMIUMS
If you pay premiums by check or money order, they must be drawn on a U.S.
bank in U.S. dollars and made payable to The Penn Mutual Life Insurance Company.
Premiums after the first must be sent to our office.
We will also accept premiums:
o by wire or by exchange from another insurance company,
o via an electronic funds transfer program (any owner interested in making
monthly premium payments must use this method), or
o if we agree to it, through a salary deduction plan with your employer.
You can obtain information on these other methods of premium payment by
contacting your Penn Mutual representative or by contacting our office.
THREE YEAR NO-LAPSE FEATURE
Your Policy will remain in force during the first three policy years,
regardless of investment performance your net cash surrender value, if
(a) the total premiums you have paid, less any partial surrenders you made,
equals or exceeds
(b) the "no-lapse premium" specified in your Policy, multiplied by the
number of months the Policy has been in force.
If you increase the specified amount of insurance under your Policy during
the first three policy years, we will extend the three year no-lapse provision
to three years after the effective date of the increase.
The "no-lapse premium" will generally be less than the monthly equivalent of
the planned premium you specified.
The three year no-lapse feature will not apply if the amount borrowed under
your Policy results in excessive indebtedness. See WHAT IS A POLICY LOAN? later
in this section.
LAPSE AND REINSTATEMENT
If the net cash surrender value of your Policy is not sufficient to pay
Policy charges, and the three-year no-lapse feature is not in effect, we will
notify you of how much premium you will need to pay to keep the Policy in force.
You will have a 61 day "grace period" to make that payment. If you don't pay at
least the required amount by the end of the grace period, your Policy will
terminate (i.e., lapse). All coverage under the Policy will then cease.
If you die during the grace period, we will pay the death benefit to your
beneficiary less any unpaid Policy charges and outstanding policy loan.
5
<PAGE>
If the Policy terminates, you can reinstate it within five years from the
beginning of the grace period if the insured is alive. You will have to provide
evidence that the insured person still meets our requirements for issuing
insurance. You will also have to pay a minimum amount of premium and be subject
to the other terms and conditions applicable to reinstatements, as specified in
the Policy.
PREMIUMS UPON AN INCREASE IN THE SPECIFIED AMOUNT.
If you increase the specified amount of insurance, you may wish to pay an
additional premium or make a change in planned premiums. See "CHANGES IN THE
SPECIFIED AMOUNT" on page 11. We will notify you if an additional premium or a
change in planned premiums is necessary.
- --------------------------------------------------------------------------------
HOW WILL THE VALUE OF THE POLICY CHANGE OVER TIME?
From each premium payment you make, we deduct a premium charge. We allocate
the rest to the investment options you have selected (except for the first
premium payment which will be invested in the Penn Series Money Market Fund
during the free look period of time).
Your policy value, which is allocated (or transferred) to the variable
investment options, will vary with the investment performance of the underlying
investment funds. The amount you allocate to the fixed interest option will earn
interest at a rate we declare from time to time. We guarantee that this rate
will be at least 4%. The current declared rate will appear in the annual
statement we will send to you. If you want to know what the current declared
rate is, simply call or write to us. Amounts you allocate to the fixed interest
option will not be subject to the mortality and expense risk charge described
later in this section. Your policy value will be affected by deductions we make
from your Policy for policy charges.
At any time, your policy value is equal to:
o the net premiums you have paid,
o plus or minus the investment results in the part of your policy value
allocated to the variable investment options,
o plus interest credited to the amount in the part of your policy value
(if any) allocated to the fixed interest option,
o minus policies charges we deduct, and
o minus partial surrenders you have made.
If you borrow money under your Policy, other factors affect your policy
value. See WHAT IS A POLICY LOAN? later in this section.
For more information on policy values and the variable and fixed investment
options, see the Additional Information section of this prospectus.
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WHAT ARE THE FEES AND CHARGES UNDER THE POLICY?
PREMIUM CHARGE
o Premium Charge -- 6.5% is deducted from premium payments before
allocation to the investment options. It consists of 2.5% to cover
state premium taxes and 4% to partially compensate us for the expense
of selling and distributing the Policies. For premiums received after
the first 15 policy years, we intend to reduce the rate for the sales
charge portion to 2%, which will result in a total premium charge of
4.5% in those years. We will notify you in advance if we change our
current rates.
MONTHLY DEDUCTIONS
o Insurance Charge -- A monthly charge for the cost of insurance
protection. The amount of insurance risk we assume varies from Policy
to Policy and from month to month. The insurance charge therefore also
varies. To determine the charge for a particular month, we multiply
the amount of insurance for which we are at risk by a
6
<PAGE>
cost of insurance rate based upon an actuarial table. The table in
your Policy will show the maximum cost of insurance rates that we can
charge. The cost of insurance rates that we currently apply are
generally less than the maximum rates shown in your Policy. The table
of rates we use will vary by attained age and the insurance risk
characteristics. We place insureds in a rate class when we issue the
Policy, based on our examination of information bearing on insurance
risk. Regardless of the table used, cost of insurance rates generally
increase each year that you own your Policy, as the insured's attained
age increases. We currently place people we insure in the following
rate classes: 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. They are
assigned to a smoker class at age 20 unless they have provided
satisfactory evidence that they qualify for a nonsmoker class. When an
increase in the specified amount of insurance is requested, we
determine whether a different rate will apply to the increase. The
charge is deducted pro-rata from your variable investment and fixed
interest accounts.
o Administrative Charge -- A maximum monthly charge to help cover our
administrative costs. This charge has two parts: (1) a flat dollar
charge of up to $9 (Currently, the flat dollar charge is $9 in the
first policy year and $5 thereafter - we will notify you in advance if
we change our current rates) and (2) for the first 12 months after the
policy date, a charge based on the initial specified amount of
insurance ($0.10 per $1,000 per month of initial specified amount of
insurance); and (3) for the first 12 months after an increase in the
specified amount of insurance, a charge based on the increase ($0.10
per $1,000 increase in the specified amount of insurance).
Administrative 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. We do not anticipate making any
profit from this charge. The charge is deducted pro-rata from your
variable investment and fixed interest accounts.
o Optional Supplemental benefit charges -- Monthly charges for any
optional supplemental insurance benefits that are added to the Policy
by means of a rider.
DAILY MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from your policy value which is allocated to the
variable investment options. The charge does not apply to fixed interest option.
Our current charge is 0.75%. Although it may be increased, it is guaranteed not
to exceed 0.90% for the duration of the policy. We will notify you before we
increase this charge. We may realize a profit from this charge, and if we do, it
will be added to our surplus.
The mortality risk we assume is the risk that the persons we insure may die
sooner than anticipated and that Penn Mutual will pay an aggregate amount of
death benefits greater than anticipated. The expense risk we assume is the risk
that expenses incurred in issuing and administering the policies and the
Separate Account will exceed the amount we charge for administration.
TRANSFER CHARGE
We reserve the right to impose a $10 transfer charge on any transfer of
policy value among the variable investment options and/or fixed interest option
in excess of the 12 transfers each policy year. We will notify you before
imposing the charge.
SURRENDER CHARGE
If you surrender your Policy within the first 11 policy years or within 11
years of an increase in the specified amount of insurance under your Policy, we
will deduct a surrender charge from your policy value.
With respect to a surrender within the first 11 policy years, the surrender
charge equals (a) plus (b), multiplied by (c), where:
(a) = 25% of the lesser of (i) the sum of all premiums paid in the Policy
and (ii) the maximum surrender charge premium (which is an amount
calculated separately for each policy and is never more than 12 no
lapse premiums);
7
<PAGE>
(b) = an administrative charge based on the initial amount of insurance and
the insured's age at the policy date (ranging from $1.00 up to age 9 to
$7.00 at age 60 and over, per $1,000 of initial specified amount of
insurance); and
(c) = the applicable surrender factor from the table below in which the
policy year is determined.
With respect to a surrender within 11 years of an increase in the specified
amount of insurance under your Policy, the surrender charge is based on the
amount of the increase and on the age of the insured at the time of the
increase. The charge equals (a) multiplied by (b), where:
(a) = an administrative charge based on the increase in the initial amount
of insurance and the insured's age on the effective date of the
increase (ranging from $1.00 up to age 9 to $7.00 at age 60 and over,
per $1,000 is initial specified amount of insurance; and
(b) = the applicable surrender factor from the table below, assuming for
this purpose only that the first policy year commences with the policy
year in which the increase in specified amount of insurance becomes
effective.
Surrender During Policy Year Surrender Factor
--------------------------------------------------------------------
1st through 7th 1.00
--------------------------------------------------------------------
8th .80
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9th .60
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10th .40
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11th .20
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12th and later 0
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The surrender charge under both of the above scenarios declines by 20% each
policy year after the seventh, to $0 by the 12th policy year so that, after the
11th policy year, there is no surrender charge.
If the Policy is surrendered within the first 11 policy years, the surrender
charge consists of a sales charge component and an administrative charge
component. The sales charge component is to reimburse us for some of the
expenses incurred in the distribution of the Policies. The sales charge
component, together with the sales charge component of the premium charge, may
be insufficient to recover distribution expenses related to the sale of the
Policies. Our unrecovered sales expenses are paid for from our surplus. The
administrative charge component for surrenders within the first 11 policy years
covers 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 creating and
maintaining Policy records, as well as the administrative costs of processing
surrender requests.
If the Policy is surrendered after the first 11 policy years, but within 11
years of an increase in the specified amount of insurance, the surrender charge
consists solely of an administrative charge for expenses we incur which are
associated with increasing the specified amount of insurance.
We do not anticipate making any profit on the administrative charge
component of the surrender charge.
PARTIAL SURRENDER CHARGE
If you partially surrender your Policy, we will deduct the lesser of $25 or
2% of the amount surrendered. The charge will be deducted from the available net
cash surrender value and will be considered part of the partial surrender. We
also do not anticipate making a profit on this charge.
FEES AND CHARGES OF INVESTMENT FUNDS
The funds must pay investment management fees and other operating expenses.
The fees and expenses are different for each fund. They reduce the investment
return of each fund. Current fees and expenses of the funds are as set forth in
the Additional Information section of this prospectus.
8
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ARE THERE OTHER CHARGES THAT PENN MUTUAL COULD DEDUCT IN THE FUTURE?
We currently make no charge against policy values to pay federal income
taxes. However, we reserve the right to do so in the event there is a change in
the tax laws. We currently do not expect that any such charge will be necessary.
Under current laws, we may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant.
If there is a material change in applicable state or local tax laws, we reserve
the right to make such deductions for such taxes.
- --------------------------------------------------------------------------------
HOW CAN I CHANGE MY POLICY'S INVESTMENT ALLOCATIONS?
FUTURE PREMIUM PAYMENTS
You may change the investment allocation for future premium payments at any
time. You make your original allocation in the application for your Policy. The
percentages you select for allocating premium payments must be in whole numbers
and must equal 100% in total.
TRANSFERS AMONG EXISTING INVESTMENT OPTIONS
You may also transfer amounts from one investment option to another, and to
and from the fixed interest option. To do so, you must tell us how much to
transfer, either as a percentage or as a specific dollar amount. Transfers are
subject to the following conditions:
o the minimum amount that may be transferred is $250 (or the amount held
under the investment options from which you are making the transfer, if
less);
o if less than the full amount held under an investment option is
transferred, the amount remaining under the investment option must be at
least $250;
o we may defer transfers under certain conditions;
o transfers may not be made during the free look period;
o transfers may be made from the fixed interest option only during the 30
day period following the end of each policy year.
DOLLAR COST AVERAGING
This program automatically makes monthly transfers from the money market
variable investment option to one or more of the other investment options and to
the fixed interested option. You choose the investment options and the dollar
amount and timing of the transfers. The program is designed to reduce the risks
that result from market fluctuations. It does this by spreading out the
allocation of your money to investment options over a longer period of time.
This allows you to reduce the risk of investing most of your money at a time
when market prices are high. The success of this strategy depends on market
trends. The program allows owners to take advantage of investment fluctuations,
but does not assume a profit or protect against lows in a declining market. To
begin the program, the planned premium for the year must be $600 and the amount
transferred each month must be at least $50. You may discontinue the program at
any time.
ASSET REBALANCING
This program automatically reallocates your policy value among the variable
investment options in accordance with the proportions you originally specified.
Over time, variations in investment results will change the allocation
percentage. On a quarterly basis, the rebalancing program will periodically
transfer your policy value among the variable investment options to reestablish
the percentages you had chosen. Rebalancing can result in transferring amounts
from a variable investment option with relatively higher investment performance
to one with relatively lower investment performance. The minimum policy value to
start the program is $1,000. If you also have a dollar cost averaging program in
effect, the portion of your policy value invested in the Money Market Fund may
not be included in the Rebalancing Program. You may discontinue the program at
any time.
9
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WHAT IS A POLICY LOAN?
You may borrow up to 90% of your cash surrender value. The minimum amount
you may borrow is $250.
Interest charged on a policy loan is 5.0% and is payable at the end of each
policy year. If interest is not paid when due, it is added to the loan. A policy
loan does not reduce your policy value. An amount equivalent to the loan is
deducted from the variable investment options and the fixed interest option on a
prorated basis (unless you designate a different withdrawal allocation when you
request the loan) and is transferred to a special loan account. Amounts
withdrawn from the investment options cease to participate in the investment
experience of the options. The special loan account will earn interest at 4.0%
(or more in our discretion). With the interest we credit to the special loan
account, the net cost of the policy loan is 1%. After the tenth policy year, we
intend to credit interest at the rate of 4.75% (which will result in a net
policy loan cost of 0.25% in those years).
You may repay all or part of a loan at any time. Upon repayment, an amount
equal to the repayment will be transferred from the special loan account to the
investment options you specify. If you do not specify the allocation for the
repayment, the amount will be allocated in accordance with your current standing
allocation instructions.
The amount of any loan outstanding under your Policy on the death of the
surviving insured will reduce the amount of the death benefit by the amount of
such loan.
If you want a payment to us to be used as a loan repayment, you must include
instructions to that effect. Otherwise, all payments will be assumed to be
premium payments.
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HOW CAN I WITHDRAW MONEY FROM MY POLICY?
FULL SURRENDER
You may surrender your Policy in full at any time. If you do, we will pay
you the policy value, less any policy loan outstanding and less any surrender
charge that then applies. This is called your "net cash surrender value." You
must return your Policy when you request a full surrender.
PARTIAL SURRENDER
You may partially surrender your Policy for net cash surrender value,
subject to the following conditions:
o the net cash surrender value remaining in the Policy after the partial
surrender must exceed $1,000;
o no more than four partial surrenders may be made in a policy year;
o each partial surrender must be at least $250;
o a partial surrender may not be made from an investment option if the
amount remaining under the option is less than $250;
o during the first five policy years, the partial surrender may not
reduce the specified amount of insurance under your Policy to less
than $50,000.
If you elected the Option 1 insurance coverage (see HOW MUCH INSURANCE DOES
MY POLICY PROVIDE? below), a partial surrender will reduce your specific amount
of insurance.
If you have increased the initial specified amount, any reduction will be
applied to the most recent increase.
10
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS THE TIMING OF TRANSACTIONS UNDER THE POLICY?
We will ordinarily pay any death benefit, loan proceeds or partial or full
surrender proceeds, and will make transfers among the investment options and the
fixed interest option, within seven days after receipt at our office of all the
documents required for completion of the transaction. Other than the death
benefit, which is determined as of the date of death, transactions will be based
on values at the end of the valuation period in which we receive all required
instructions and necessary documentation. A valuation period is the period
commencing with the close of the New York Stock Exchange and ending at the close
of the next succeeding business day of the New York Stock Exchange.
A planned premium and an unplanned premium which does not require evaluation
of additional insurance risk will be credited to the Policy and the net premium
will be allocated to the designated investment options based on values at the
end of the valuation period in which we receive the premium.
Any premium requiring evaluation of additional insurance risk will be
allocated to the Penn Series money market investment option until our evaluation
has been completed and the premium has been accepted. When accepted, the net
premium will be allocated to the investment options you have designated.
We may defer making a payment or transfer from a variable account investment
option 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 our Policy owners.
We may also defer making a payment or transfer from the fixed interest
option 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 interest option is deferred for 30 days or more, it will bear interest at
a rate of 3% per year compounded annually while it is deferred.
- --------------------------------------------------------------------------------
HOW MUCH LIFE INSURANCE DOES MY POLICY PROVIDE?
In your application for the Policy, you will tell us how much life insurance
coverage you want on the life of the insured. This is called the "specified
amount" of insurance. The minimum specified amount of insurance under the Policy
is $50,000.
When the insured persons dies, we will pay the death benefit less the amount
of any outstanding policy loan. We offer two different types of death benefits
payable under the policy. You choose which one you want in the application. They
are:
o Option 1 -- The death benefit is the greater of (a) the specified amount
of insurance or (b) the "applicable percentage" of the policy value on
the date of the insured's death.
o Option 2 -- The death benefit is the greater of (a) the specified amount
of insurance plus your policy value on the date of death, or (b) the
"applicable percentage" of the policy value on the date of the insured's
death.
The "applicable percentage" is 250% when the insured has attained age 40 or
less and decreases each year to 100% when the insured attains age 95. A table
showing the "applicable percentages" for attained ages 0 to 95 is included as
Appendix B.
If the investment performance of the variable account investment options you
have chosen is favorable, the amount of the death benefit may increase. However,
under Option 1, favorable investment performance will not ordinarily increase
the death benefit for several years and may not increase it at all, whereas
under Option 2, the 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 death benefit, see the Illustrations section of this
prospectus.
Assuming favorable investment performance, the death benefit under Option 2
will tend to be higher than the death benefit under Option 1. On the other hand,
the monthly insurance charge will be higher under Option 2 to compensate us for
the additional insurance risk we take. Because of that, the policy value will
tend to be higher under Option 1 than under Option 2 for the same premium
payments.
11
<PAGE>
- --------------------------------------------------------------------------------
CAN I CHANGE INSURANCE COVERAGE UNDER MY POLICY?
CHANGE OF DEATH BENEFIT OPTION
You may change your insurance coverage from Option 1 to Option 2 and
vice-versa, subject to the following conditions:
o after the change, the specified amount of insurance must be at least
$50,000;
o no change may be made in the first policy year and no more than one
change may be made in any policy year;
o if you request a change from Option 1 to Option 2, we may request
evidence of insurability; if a different rate class is indicated for
the insureds, the requested change will not be allowed.
CHANGES IN SPECIFIED AMOUNT OF INSURANCE
You may increase the specified amount of insurance, subject to the following
conditions:
o you must submit an application along with evidence of insurability
acceptable to Penn Mutual;
o you must return your policy so we can amend it to reflect the
increase;
o any increase in the specified amount must be at least $10,000;
o no change may be made if it would cause the Policy not to qualify as
insurance under federal income tax law.
If you increase the specified amount within the first three policy years,
the three year no lapse period will be extended.
You may decrease the specified amount of insurance, subject to the following
conditions:
o no change may be made in the first policy year;
o no change may be made if it would cause the Policy not to qualify as
insurance under federal income tax law;
o no decrease may be made within one year of an increase in the
specified amount;
o any decrease in the specified amount of insurance must be at least
$5,000 and the specified amount after the decrease must be at least
$50,000.
TAX CONSEQUENCES
See FEDERAL INCOME TAX CONSIDERATIONS in the Additional Information section
of this Prospectus to learn about possible tax consequences of changing your
insurance coverage under the Policy.
- --------------------------------------------------------------------------------
WHAT ARE THE SUPPLEMENTAL BENEFIT RIDERS THAT I CAN BUY?
We offer supplemental benefit riders that may be added to your Policy. There
are monthly charges for the riders, in addition to the charges described above.
If any of these riders 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 Option 1 is in
effect at the time this benefit becomes effective, it will be changed to Option
2.
12
<PAGE>
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.
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. All
supplemental benefits may not be available in your state. Please ask your
authorized Penn Mutual representative for further information or contact our
office.
- --------------------------------------------------------------------------------
DO I HAVE THE RIGHT TO CANCEL MY POLICY?
You have the right to cancel your Policy within 10 days or within 45 days
after you signed your application. This is referred to as the "free look"
period. To cancel your Policy, simply deliver or mail the Policy to our office
or to our representative who delivered the Policy to you.
In most states, you will receive a refund of your Policy value as of the
date of cancellation plus the premium charge and the monthly deductions. The
date of cancellation will be the date we receive the Policy.
During the "free look" period, money held under your Policy will be
allocated to the Penn Series Money Market investment option.
- --------------------------------------------------------------------------------
CAN I CHOOSE DIFFERENT PAYOUT OPTIONS UNDER MY POLICY?
CHOOSING A PAYOUT OPTION
You may choose to receive proceeds from the Policy as a single sum. This
includes proceeds that become payable because of death or full surrender.
Alternatively, you can elect to have proceeds of $5,000 or more applied to any
of a number of other payment options as set forth in your Policy. Periodic
payments may not be less than $50 each.
CHANGING A PAYMENT OPTION
You can change the payment option at any time before the proceeds are
payable. If you have not made a choice, the payee may change the payment option
within the period specified in the Policy. The person entitled to the proceeds
may elect a payment option as set forth in the Policy.
TAX IMPACT
There may be tax consequences to you or your beneficiary depending upon
which payment option is chosen. You should consult a qualified tax adviser
before making that choice.
- --------------------------------------------------------------------------------
HOW IS THE POLICY TREATED FOR FEDERAL INCOME TAX PURPOSES?
Death benefits paid under life insurance policies are not subject to income
tax. Investment gains from your Policy are not subject to income tax as long as
we do not pay them out to you.
Assuming your Policy is not treated as a "modified endowment contract" under
federal income tax law, distributions from the Policy are generally treated as
first recovering the investments in the Policy and then, only after the return
of all investment in the Policy, as receiving taxable income. Amounts borrowed
under the Policy also are not generally subject to federal income tax at the
time of the borrowing.
13
<PAGE>
However, some of the tax rules change if your Policy is found to be a
"modified endowment contract." This can happen if you have paid more than a
certain amount of premiums in relation to the insurance provided under the
Policy. Under those circumstances, additional taxes and penalties may be payable
for Policy distributions and loans.
For further information about the qualifications of the Policy as life
insurance under federal tax law and the tax consequences of owning a Policy, see
FEDERAL INCOME TAX CONSIDERATIONS IN THE ADDITIONAL INFORMATION section of this
prospectus.
- --------------------------------------------------------------------------------
HOW DO I COMMUNICATE WITH PENN MUTUAL?
GENERAL RULES
You may mail all checks and money orders for premium payments to The Penn
Mutual Life Insurance Company, P.O. Box 7460, Philadelphia, Pennsylvania,
19101-7460, or express all checks and money orders to The Penn Mutual Life
Insurance Company, Receipts Processing C3V, 600 Dresher Road, Horsham,
Pennsylvania, 19044.
Certain requests pertaining to your Policy must be made in writing and be
signed and dated by you. They include the following:
o policy loans in excess of $5,000, and full and partial surrenders,
o change of allocation among investment options for new premium payments,
o change of death benefit option,
o changes in specified amount of insurance,
o change of beneficiary,
o election of payment option for Policy proceeds,
o tax withholding elections,
o grant of telephone transaction privileges to third parties,
You should mail or express these requests to our office. You should also
send notice of the insured person's death and related documentation to our
office. Communications are not treated as "received" until such time as they are
arrived at our office in proper form. Any communication that arrives after the
close of our business day, or on a day that is not a business day, will be
considered "received" by us on the next following business day. Our business day
currently closes at 5:00 p.m. Eastern Standard Time, but special circumstances
(such as suspension of trading on a major exchange) may dictate an earlier
closing time.
We have special forms that must be used for a number of the requests
mentioned above. You can obtain these forms from your Penn Mutual representative
or by calling our office 800-523-0650. Each communication to us must include
your name, your Policy number and the name of the insured person. We cannot
process any request that doesn't include this required information.
TELEPHONE TRANSACTIONS
You may request transfers among investment options by calling our office. In
addition, if you complete a special authorizing form, you may authorize your
Penn Mutual agent or other third person to act on your behalf in giving us
telephone transfer instructions. We will not be liable for following transfer
instructions communicated by telephone that we reasonably believe to be genuine.
We may require certain identifying information to process a telephone transfer.
The policies are not designed for professional market timing organizations
or other entities that use programmed and frequent transfers among investment
options. For reasons such as that, we reserve the right to change our telephone
transaction policies or procedures at any time. We also reserve the right to
suspend or terminate the privilege altogether.
14
<PAGE>
- --------------------------------------------------------------------------------
HOW DOES PENN MUTUAL COMMUNICATE WITH ME?
At least each year we will send to you a report showing your current policy
values, premiums paid and deductions made since the last report, any outstanding
policy loans, and any additional premiums permitted under your Policy. We will
also send to you 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 borrow money under your policy, transfer
amounts among the investment options or make partial surrenders, we will send a
written confirmation to you.
- --------------------------------------------------------------------------------
ILLUSTRATIONS
The tables on the following pages show how 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 the 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 daily charge against the investments for the
mortality and expense risks we assume, 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. In addition, the tables assume an average annual expense ratio
of 0.84% of the underlying investment funds available under the Policies. The
average annual expense ratio is based on the expense ratios of each of the funds
for their last fiscal year. For information on fund expenses, see the
prospectuses of the funds that accompany this prospectus.
After deduction of fund expenses and the mortality and expense risk charge,
the illustrated gross annual investment rates of return of 0%, 6% and 12% would
correspond to approximate net annual rates of -1.59%, 4.41% and 10.41%,
respectively, at current rates, and and -1.74%, 4.26% and 10.26%, respectively,
at the guaranteed maximum rates.
The tables also reflect the deduction of the monthly administrative charge
and the monthly cost of insurance charge for the hypothetical insured persons.
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 the following pages. All the tables reflect the fact that no
charges for federal or state income taxes are currently made against the
investments made under a hypothetical policy account and assume no policy loans
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 Insureds' individual circumstances. Such illustrations may assume
different hypothetical rates of return than those illustrated in the following
tables.
15
<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
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 381 0 75,000 413 0 75,000 445 0 75,000
2 1,614 887 425 75,000 980 517 75,000 1,077 614 75,000
3 2,483 1,379 916 75,000 1,565 1,102 75,000 1,767 1,305 75,000
4 3,394 1,858 1,396 75,000 2,172 1,709 75,000 2,525 2,062 75,000
5 4,351 2,324 1,861 75,000 2,799 2,337 75,000 3,356 2,894 75,000
6 5,357 2,777 2,314 75,000 3,449 2,986 75,000 4,269 3,806 75,000
7 6,412 3,216 2,753 75,000 4,121 3,658 75,000 5,270 4,808 75,000
8 7,520 3,638 3,268 75,000 4,813 4,443 75,000 6,368 5,998 75,000
9 8,683 4,042 3,764 75,000 5,524 5,246 75,000 7,568 7,290 75,000
10 9,905 4,425 4,240 75,000 6,254 6,069 75,000 8,881 8,696 75,000
15 16,993 6,022 6,022 75,000 10,183 10,183 75,000 17,609 17,609 75,000
20 26,039 7,058 7,058 75,000 14,655 14,655 75,000 31,718 31,718 75,000
25 37,585 7,284 7,284 75,000 19,598 19,598 75,000 54,989 54,989 75,000
30 52,321 6,152 6,152 75,000 24,745 24,745 75,000 93,349 93,349 113,886
- --------------------------------------------------------------------------------------------------------------------
</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 0.75% 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.
16
<PAGE>
- --------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
Male Issue Age: 35 Non-Smoker
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 794 332 75,794 852 389 75,852 909 447 75,909
2 2,583 1,707 1,244 76,707 1,876 1,413 76,876 2,052 1,589 77,052
3 3,972 2,597 2,135 77,597 2,937 2,475 77,937 3,306 2,843 78,306
4 5,431 3,469 3,006 78,469 4,040 3,578 79,040 4,685 4,222 79,685
5 6,962 4,319 3,857 79,319 5,185 4,723 80,185 6,200 5,737 81,200
6 8,570 5,150 4,687 80,150 6,374 5,911 81,374 7,866 7,403 82,866
7 10,259 5,959 5,497 80,959 7,607 7,144 82,607 9,697 9,235 84,697
8 12,032 6,745 6,375 81,745 8,883 8,513 83,883 11,708 11,338 86,708
9 13,893 7,505 7,227 82,505 10,201 9,923 85,201 13,912 13,635 88,912
10 15,848 8,237 8,052 83,237 11,562 11,377 86,562 16,331 16,146 91,331
15 27,189 11,463 11,463 86,463 19,026 19,026 94,026 32,440 32,440 107,440
20 41,663 13,974 13,974 88,974 27,752 27,752 102,752 58,257 58,257 133,257
25 60,136 15,462 15,462 90,462 37,630 37,630 112,630 99,534 99,534 174,534
30 83,713 15,371 15,371 90,371 48,200 48,200 123,200 165,329 165,329 240,329
- --------------------------------------------------------------------------------------------------------------------
</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 0.75% 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.
17
<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
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 835 0 125,000 902 0 125,000 969 0 125,000
2 3,229 1,826 839 125,000 2,018 1,031 125,000 2,218 1,232 125,000
3 4,965 2,774 1,787 125,000 3,155 2,169 125,000 3,570 2,583 125,000
4 6,788 3,684 2,697 125,000 4,320 3,333 125,000 5,039 4,052 125,000
5 8,703 4,555 3,568 125,000 5,513 4,526 125,000 6,639 5,652 125,000
6 10,713 5,387 4,401 125,000 6,733 5,746 125,000 8,381 7,394 125,000
7 12,824 6,190 5,204 125,000 7,992 7,005 125,000 10,291 9,304 125,000
8 15,040 6,961 6,172 125,000 9,289 8,500 125,000 12,385 11,596 125,000
9 17,367 7,694 7,101 125,000 10,619 10,027 125,000 14,677 14,084 125,000
10 19,810 8,389 7,995 125,000 11,985 11,590 125,000 17,189 16,794 125,000
15 33,986 11,171 11,171 125,000 19,270 19,270 125,000 33,883 33,883 125,000
20 52,079 12,673 12,673 125,000 27,391 27,391 125,000 61,011 61,011 125,000
25 75,170 12,277 12,277 125,000 36,095 36,095 125,000 106,302 106,302 125,000
30 104,641 9,266 9,266 125,000 45,263 45,263 125,000 182,260 182,260 195,018
- --------------------------------------------------------------------------------------------------------------------
</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 0.75% 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.
18
<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
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,385 398 126,385 1,485 498 126,485 1,585 598 126,585
2 4,520 2,914 1,928 127,914 3,207 2,220 128,207 3,513 2,526 128,513
3 6,951 4,389 3,402 129,389 4,974 3,987 129,974 5,608 4,621 130,608
4 9,504 5,814 4,827 130,814 6,792 5,805 131,792 7,894 6,908 132,894
5 12,184 7,189 6,202 132,189 8,662 7,675 133,662 10,389 9,403 135,389
6 14,998 8,513 7,526 133,513 10,583 9,596 135,583 13,113 12,126 138,113
7 17,953 9,796 8,809 134,796 12,569 11,583 137,569 16,099 15,112 141,099
8 21,056 11,035 10,245 136,035 14,619 13,829 139,619 19,370 18,581 144,370
9 24,314 12,223 11,631 137,223 16,727 16,135 141,727 22,950 22,358 147,950
10 27,734 13,363 12,969 138,363 18,897 18,503 143,897 26,870 26,476 151,870
15 47,581 18,169 18,169 143,169 30,575 30,575 155,575 52,741 52,741 177,741
20 72,910 21,398 21,398 146,398 43,681 43,681 168,681 93,607 93,607 218,607
25 105,238 22,361 22,361 147,361 57,616 57,616 182,616 157,980 157,980 282,980
30 146,498 20,430 20,430 145,430 71,655 71,655 196,655 259,879 259,879 384,879
- --------------------------------------------------------------------------------------------------------------------
</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 0.75% 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.
19
<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
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 369 0 75,000 400 0 75,000 432 0 75,000
2 1,614 815 352 75,000 905 442 75,000 998 536 75,000
3 2,483 1,246 784 75,000 1,423 960 75,000 1,615 1,153 75,000
4 3,394 1,662 1,200 75,000 1,956 1,493 75,000 2,287 1,825 75,000
5 4,351 2,062 1,599 75,000 2,502 2,039 75,000 3,020 2,557 75,000
6 5,357 2,444 1,982 75,000 3,061 2,599 75,000 3,817 3,355 75,000
7 6,412 2,808 2,346 75,000 3,633 3,170 75,000 4,685 4,223 75,000
8 7,520 3,154 2,784 75,000 4,217 3,847 75,000 5,632 5,262 75,000
9 8,683 3,480 3,202 75,000 4,813 4,535 75,000 6,663 6,385 75,000
10 9,905 3,786 3,601 75,000 5,421 5,236 75,000 7,789 7,604 75,000
15 16,993 4,969 4,969 75,000 8,602 8,602 75,000 15,163 15,163 75,000
20 26,039 5,396 5,396 75,000 11,876 11,876 75,000 26,721 26,721 75,000
25 37,585 4,570 4,570 75,000 14,786 14,786 75,000 45,198 45,198 75,000
30 52,321 1,652 1,652 75,000 16,538 16,538 75,000 75,796 75,796 92,471
- --------------------------------------------------------------------------------------------------------------------
</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.
20
<PAGE>
- --------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
Male Issue Age: 35 Non-Smoker
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 781 319 75,781 838 376 75,838 895 433 75,895
2 2,583 1,632 1,170 76,632 1,798 1,335 76,798 1,971 1,508 76,971
3 3,972 2,460 1,997 77,460 2,790 2,327 77,790 3,148 2,685 78,148
4 5,431 3,265 2,802 78,265 3,815 3,353 78,815 4,437 3,974 79,437
5 6,962 4,045 3,582 79,045 4,874 4,411 79,874 5,846 5,384 80,846
6 8,570 4,801 4,338 79,801 5,966 5,503 80,966 7,389 6,926 82,389
7 10,259 5,530 5,067 80,530 7,090 6,628 82,090 9,076 8,613 84,076
8 12,032 6,233 5,863 81,233 8,249 7,879 83,249 10,921 10,551 85,921
9 13,893 6,908 6,631 81,908 9,441 9,164 84,441 12,940 12,662 87,940
10 15,848 7,556 7,371 82,556 10,668 10,483 85,668 15,149 14,964 90,149
15 27,189 10,329 10,329 85,329 17,296 17,296 92,296 29,721 29,721 104,721
20 41,663 12,142 12,142 87,142 24,628 24,628 99,628 52,514 52,514 127,514
25 60,136 12,496 12,496 87,496 32,159 32,159 107,159 87,939 87,939 162,939
30 83,713 10,642 10,642 85,642 38,937 38,937 113,937 142,818 142,818 217,818
- --------------------------------------------------------------------------------------------------------------------
</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.
21
<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
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 757 0 125,000 821 0 125,000 885 0 125,000
2 3,229 1,627 640 125,000 1,807 821 125,000 1,996 1,010 125,000
3 4,965 2,458 1,471 125,000 2,812 1,825 125,000 3,198 2,211 125,000
4 6,788 3,249 2,262 125,000 3,834 2,847 125,000 4,496 3,509 125,000
5 8,703 3,999 3,012 125,000 4,872 3,885 125,000 5,901 4,915 125,000
6 10,713 4,704 3,717 125,000 5,923 4,936 125,000 7,421 6,434 125,000
7 12,824 5,364 4,377 125,000 6,987 6,000 125,000 9,066 8,079 125,000
8 15,040 5,974 5,184 125,000 8,059 7,269 125,000 10,846 10,056 125,000
9 17,367 6,528 5,936 125,000 9,133 8,541 125,000 12,769 12,177 125,000
10 19,810 7,026 6,631 125,000 10,211 9,816 125,000 14,852 14,457 125,000
15 33,986 8,660 8,660 125,000 15,609 15,609 125,000 28,355 28,355 125,000
20 52,079 8,446 8,446 125,000 20,647 20,647 125,000 49,432 49,432 125,000
25 75,170 4,625 4,625 125,000 23,563 23,563 125,000 83,130 83,130 125,000
30 104,641 0 0 0 21,613 21,613 125,000 140,947 140,947 150,814
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Guaranteed values reflect guaranteed cost of insurance rates, a monthly
administrative charge o $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.
22
<PAGE>
- --------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
Female Issue Age: 45 Non-Smoker
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,305 318 126,305 1,402 415 126,402 1,500 513 126,500
2 4,520 2,711 1,724 127,711 2,992 2,005 127,992 3,286 2,299 128,286
3 6,951 4,065 3,078 129,065 4,622 3,635 129,622 5,226 4,239 130,226
4 9,504 5,366 4,379 130,366 6,290 5,303 131,290 7,333 6,347 132,333
5 12,184 6,614 5,627 131,614 7,997 7,011 132,998 9,624 8,638 134,624
6 14,998 7,804 6,817 132,804 9,741 8,754 134,741 12,113 11,126 137,113
7 17,953 8,935 7,948 133,935 11,519 10,532 136,519 14,815 13,828 139,815
8 21,056 10,003 9,214 135,003 13,328 12,539 138,328 17,749 16,960 142,749
9 24,314 11,002 10,410 136,002 15,163 14,570 140,163 20,930 20,338 145,930
10 27,734 11,932 11,538 136,932 17,021 16,627 142,021 24,382 23,988 149,382
15 47,581 15,522 15,522 140,522 26,653 26,653 151,653 46,716 46,716 171,716
20 72,910 16,930 16,930 141,930 36,371 36,371 161,371 80,661 80,661 205,661
25 105,238 14,470 14,470 139,470 44,026 44,026 169,026 131,025 131,025 256,025
30 146,498 6,136 6,136 131,136 46,509 46,509 171,509 205,204 205,204 330,204
- --------------------------------------------------------------------------------------------------------------------
</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.
23
<PAGE>
- ------------------------------------------------------------------------
ADDITIONAL INFORMATION
This section of the prospectus provides information about Penn Mutual, Penn
Mutual Variable Life Account I, the investment funds and the Policy.
Contents of this Section Page
- --------------------------------------------------------------------------------
The Penn Mutual Life Insurance Company............................. 25
Year 2000.......................................................... 25
Penn Mutual Variable Life Account I................................ 25
The Funds.......................................................... 26
More Information About Policy Values............................... 28
Federal Income Tax Considerations.................................. 29
Sale of the Policies............................................... 32
Penn Mutual Trustees and Officers.................................. 32
State Regulation................................................... 34
Additional Information............................................. 34
Independent Auditors............................................... 34
Experts............................................................ 34
Litigation......................................................... 35
Legal Matters...................................................... 35
Financial Statements............................................... 35
Appendix A -- Minimum Initial Premiums............................. A-1
Appendix B -- Applicable Percentages............................... B-1
24
<PAGE>
- ------------------------------------------------------------------------
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 600
Dresher Road, Horsham, Pennsylvania, 19044, a suburb of Philadelphia. Our
mailing address is The Penn Mutual Life Insurance Company, Philadelphia,
Pennsylvania, 19172.
- ------------------------------------------------------------------------
YEAR 2000
The services we provide, as well as services provided by other companies,
organizations and governmental entities generally, depend on the smooth
functioning of computer systems. Many computer systems in use today cannot
recognize the Year 2000, and may return to 1900 or some other date after
December 31, 1999. If not corrected, these systems could fail or create
erroneous results. We began addressing the Year 2000 problem actively in 1996.
The effort involves assessing all of our computers, computer programs, and
related equipment, making necessary changes, and assuring that all systems
process dates correctly. We believe that we have designed and implemented an
efficient process for identifying what needs to be changed. Although we cannot
give assurance that we will have no Year 2000 problem, we expect our computer
systems to perform satisfactorily in the Year 2000.
Penn Mutual and the mutual funds that serve as investment options for the
Separate Account have relationships with investment advisers, broker-dealers,
transfer agents, custodians, and other service providers. We are contacting the
funds and their vendors and service providers to obtain reasonable assurances
that such service providers have taken appropriate measures to address the Year
2000 problem. Where practicable, we will assess and attempt to mitigate risks
that the businesses and organizations upon which we depend are not Year 2000
compliant. We cannot, however, give assurance that failure of these firms to
complete adequate preparations in a timely manner will not have an adverse
effect on the Contracts.
The Year 2000 Information and Readiness Disclosure Act passed by Congress in
1998 encourages businesses and other organizations to provide information about
the readiness of their computer systems. The Act also provides certain
protections to these organizations against potential liability for what they say
about their readiness. We specifically designate the information about our
readiness as readiness disclosure under the protections of the Act.
- ------------------------------------------------------------------------
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. 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.
Net premiums received under the Policy and under other variable life
insurance policies are allocated to subaccounts of the Separate Account for
investment in shares of investment funds. They are allocated in accordance with
instructions from Policy owners
Income, gains and losses, realized or unrealized, in a subaccount are
credited or charged without regard to any other income, gains or losses of Penn
Mutual. Assets equal to the reserves and other contract liabilities with respect
to the investments held in 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.
If investment in a shares of a fund 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 fund is in the interest of owners, we may
substitute another fund. 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.
25
<PAGE>
VOTING SHARES OF THE FUNDS
We are the legal owner of shares of the funds 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 Separate Account at regular and special
meetings of shareholders of the funds in accordance with instructions received
from owners. 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 for which an owner may give voting
instructions is currently determined by dividing the portion of the owner's
policy value allocated to the Separate Account 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 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.
- ------------------------------------------------------------------------
THE FUNDS
Penn Series Funds, Inc., Neuberger Berman Advisors Management Trust,
American Century Variable Portfolios, Inc., Fidelity Investments' Variable
Insurance Products Fund, Fidelity Investments' Variable Insurance Products Fund
II and Morgan Stanley Dean Witter Universal Funds, Inc. 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.
The investment objective of each of the Funds available as investment
options under the Policy is set forth below. There is, of course, no assurance
that these objectives will be met.
Penn Series -- Growth Equity Fund -- long-term growth of capital and
increase of future income.
Penn Series -- Value Equity Fund -- maximize total return (capital
appreciation and income).
Penn Series -- Small Capitalization Fund -- capital appreciation.
Penn Series -- Emerging Growth Fund -- capital appreciation.
Penn Series -- Flexibly Managed Fund -- maximize total return (capital
appreciation and income).
Penn Series -- International Equity Fund -- capital appreciation.
Penn Series -- Quality Bond Fund -- highest income over the long term
consistent with the preservation of principal.
Penn Series -- High Yield Bond Fund -- high current income.
Penn Series -- Money Market Fund -- preserve capital, maintain liquidity
and achieve the highest possible level of current income consistent
therewith.
Neuberger Berman -- Limited Maturity Bond Portfolio -- the highest
current income consistent with low risk to principal and liquidity; a
secondary objective -- enhance total return through capital
appreciation when
26
<PAGE>
market factors, such as falling interest rates and
rising bond prices, indicate that capital appreciation may be
available without significant risk to principal.
Neuberger Berman -- Balanced Portfolio -- long-term capital growth and
reasonable current income without undue risk to principal.
Neuberger Berman -- Partners Portfolio -- capital growth; 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) -- capital growth.
Fidelity Investments' VIP Fund -- Equity-Income Portfolio -- 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.
Fidelity Investments' VIP Fund -- Growth Portfolio -- capital
appreciation.
Fidelity Investments' VIP Fund II -- Asset Manager Portfolio -- high
total return with reduced risk over the long-term.
Fidelity Investments' VIP Fund II -- Index 500 Portfolio -- 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 Dean Witter Universal Funds, Inc. -- Emerging Markets
Equity (International) Portfolio -- long term capital appreciation.
THE MANAGERS
Independence Capital Management, Inc. ("Independence Capital Management"),
of Horsham, Pennsylvania, is investment adviser to each of the Penn Series
Funds.
T. Rowe Price Associates, Inc., of Baltimore, Maryland, is investment
sub-adviser to the Penn Series Flexibly Managed Fund and Penn Series High Yield
Bond Fund.
OpCap Advisors (formerly Quest for Value Advisors), of New York, New York,
is investment sub-adviser to the Penn Series Value Equity Fund and the Penn
Series Small Capitalization Fund.
Vontobel USA Inc., of New York, New York, is the investment sub-adviser to
the Penn Series International Equity Fund.
RS Investment Management, Inc. (formerly Robertson Stephens Investment
Management, Inc.), of San Francisco, California, is investment sub-adviser to
the Penn Series Emerging Growth Fund.
Neuberger Berman Management Incorporated, of New York, New York, is the
investment adviser to each series of Advisers Managers Trust underlying the
Neuberger Berman Limited Maturity Bond Portfolio, the Neuberger Berman Balanced
Portfolio and the Neuberger Berman Partner 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 Dean Witter Investment Management Inc. ("Morgan Stanley Dean
Witter"), of New York, New York, is the investment adviser to Morgan Stanley
Dean Witter Universal Funds' Emerging Markets Equity (International) Portfolio.
27
<PAGE>
Further information about the Funds is contained in the accompanying
prospectuses, which you should read in conjunction with this prospectus.
We have entered into agreements with Penn Series, Neuberger Berman, American
Century Variable Portfolios, Fidelity Investments' VIP Fund, Fidelity
Investments' VIP Fund II and Morgan Stanley Dean Witter governing the Separate
Account's investment in those Funds. The advisers to American Century Variable
Portfolios, Fidelity Investments' VIP Fund, Fidelity Investments' VIP Fund II
and Morgan Stanley Dean Witter Portfolios, or their affiliates, compensate Penn
Mutual for administrative and other services rendered in making shares of the
portfolios available under the Policies.
The shares of Penn Series, Neuberger Berman, American Century Variable
Portfolios, Fidelity Investments' VIP Fund, Fidelity Investments' VIP Fund II
and Morgan Stanley Dean Witter 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 Neuberger Berman, American Century Variable Portfolios,
Fidelity Investments' VIP Fund, Fidelity Investments' VIP Fund II and Morgan
Stanley Dean Witter are also sold to separate accounts of other insurance
companies, and may also be sold 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) to invest in the same underlying mutual
fund. Although neither we nor Penn Series, Neuberger Berman, American Century
Variable Portfolios, Fidelity Investments' VIP Fund, Fidelity Investments' VIP
Fund II or Morgan Stanley Dean Witter currently perceives or anticipates any
such disadvantage, the Boards of Directors of Penn Series, American Century
Variable Portfolios and Morgan Stanley Dean Witter, respectively, and the Boards
of Trustees of Neuberger Berman, Fidelity Investments' VIP Fund and Fidelity
Investments' 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
Neuberger Berman) arises.
Material conflicts could result from such things as: (1) changes in state
insurance laws; (2) changes in federal income tax law; (3) changes in the
investment management of any Fund or of Penn Series, Neuberger Berman, American
Century Variable Portfolios, Fidelity Investments' VIP Fund, Fidelity
Investments' VIP Fund II and Morgan Stanley Dean Witter, 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.
- --------------------------------------------------------------------------------
MORE INFORMATION ABOUT POLICY VALUES
On the policy date (the date from which policy years and monthly
anniversaries are measured), the policy value is equal to the initial net
premium. If the policy date and the policy issue date (the date the policy is
issued) are the same day, the policy value is equal to the initial net premium,
less the monthly deduction.
On each valuation date (each day the New York Stock Exchange and our office
is open for business) thereafter, the policy value is the aggregate of the
Policy's variable account values and the fixed interest account value. The
policy value will vary to reflect the variable account values, interest credited
to the fixed interest account, policy charges, transfers, partial surrenders,
policy loans and policy loan repayments.
VARIABLE ACCOUNT VALUES
When you allocate an amount to a variable account investment option, either
by net premium allocation or transfer, your Policy is credited with accumulation
units. The number of accumulation units is determined by dividing the amount
allocated to the variable account investment option by the variable account's
accumulation unit value for the valuation period in which the allocation was
made.
The number of accumulation units credited to your Policy for a variable
account investment option will increase when net premiums are allocated to the
variable account, amounts are transferred to the variable account and loan
repayments are credited to the variable account. The number of accumulation
units will decrease when the allocated portion of the monthly deduction is taken
from the variable account, a policy loan is taken from the variable account, an
amount is
28
<PAGE>
transferred from the variable account or a partial surrender is made from the
variable account (including the partial surrender charge).
ACCUMULATION UNIT VALUES
An accumulation unit value varies to reflect the investment experience of
the underlying investment fund in which the Policy is invested and the mortality
and expense risk charge assessed against the investment, and may increase or
decrease from one valuation date to the next. The accumulation unit value of
each subaccount of the Separate Account that invests in a fund 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.
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, taken from the fixed account (including the
partial surrender charges), and less the pro rata portion of the monthly
deduction deducted from the fixed account. If there have been any policy loans,
the fixed account value is further adjusted to reflect the amount in the special
loan account, including transfers to and from the special loan account as loans
are taken and repayments are made, and interest credited on the policy special
loan account.
NET POLICY VALUE
The net policy value on a valuation date is the policy value less the amount
of any policy loan 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.
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 to you for full or partial surrenders.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS
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 on Penn Mutual's understanding of
the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service (the "IRS"). No representation is made as to the
likelihood of continuation of the present Federal income tax laws or of the
current interpretations by the IRS.
TAX STATUS OF THE POLICY
To qualify as a life insurance contract for federal income tax purposes, the
Policy must meet the definition of a life insurance contract which is set forth
in Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code").
The manner in which Section 7702 should be applied to certain features of the
Policy offered in this prospectus is not
29
<PAGE>
directly addressed by Section 7702 or any guidance issued to date under Section
7702. Nevertheless, Penn Mutual believes it is reasonable to conclude that the
Policy will meet the Section 7702 definition of a life insurance contract. In
the absence of final regulations or other pertinent interpretations of Section
7702, however, there is necessarily some uncertainty as to whether a Policy will
meet the statutory life insurance contract definition, particularly if it
insures a substandard risk. If a Policy were determined not to be a life
insurance contract for purposes of Section 7702, such contract would not provide
most of the tax advantages normally provided by a life insurance contract.
If it is subsequently determined that a Policy does not satisfy Section
7702, we may take whatever steps that are appropriate and reasonable to comply
with Section 7702. For these reasons, we reserve 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 each Subaccount
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 (discussed above). The Separate Account,
through the funds, intends to comply with the diversification requirements
prescribed in Treas. Reg. ss. 1.817-5, which affect how the funds' assets are to
be invested. Penn Mutual believes that the Separate Account will thus meet the
diversification requirement, and Penn Mutual will monitor continued compliance
with this requirement.
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. In circumstances where the variable
contract owner is considered the owner of separate account assets, income and
gain from the assets would be includable in the variable contract owner's gross
income. In connection with the issuance of regulations on the phrase "adequate
diversification," the Treasury Department announced in 1984 that guidance would
be given, by way of regulation or ruling, on the "extent to which Policyholders
may direct their investments to particular subaccounts without being treated as
owners of underlying assets." As of the date of this Prospectus, no ruling or
regulation has been issued.
The following discussion assumes that the Policy qualifies as a life
insurance contract for federal income tax purposes.
We believe 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.
MODIFIED ENDOWMENT CONTRACTS
The Internal Revenue Code 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. At the time a
premium is credited which would cause the Policy to become a modified endowment
contract, we will notify you that unless a refund of the excess premium (with
interest) is requested, your Policy will become a modified endowment contract.
You will have 30 days after receiving such notification to request the refund.
All policies that we or our affiliate issues to the same owner during any
calendar year, which are treated as modified endowment contracts, 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.
The rules relating to whether a Policy will be treated as a modified
endowment contract are complex and make it impracticable to adequately describe
in the limited confines of this summary. Therefore, you may wish to consult with
a competent advisor to determine whether a Policy transaction will cause the
Policy to be treated as a modified endowment contract.
30
<PAGE>
DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS
Policies classified as a modified endowment contract will be subject to the
following tax rules. First, all distributions, including distributions upon
surrender and partial withdrawals 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 imposed on the
portion of any distribution from, or loan taken from or secured by, such a
Policy that 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 15 years after the Policy is
issued and that results in a cash distribution to the owner in order for the
Policy to 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 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 LOAN INTEREST
Generally, personal interest paid on a 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 will
generally not be tax deductible. The deduction of interest on policy loans may
also be subject to the restrictions of Section 264 of the Code. An owner should
consult a tax adviser before deducting any interest paid in respect of a policy
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.
OTHER TAX CONSIDERATIONS
The transfer of the Policy or the designation of a beneficiary may have
federal, state, and/or local transfer and inheritance tax consequences,
including the imposition of gift, estate and generation-skipping transfer taxes.
For example, the transfer of the Policy to, or the designation as beneficiary
of, or the payment of proceeds to, a person who is assigned to a generation
which is two or more generations below the generation of the owner, may have
generation skipping transfer tax considerations under Section 2601 of the Code.
The individual situation of each owner or beneficiary will determine the
extent, if any, to which federal, state and local transfer taxes may be imposed.
Consult with your tax adviser for specific information in connection with these
taxes.
31
<PAGE>
- --------------------------------------------------------------------------------
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 Policy is sold by registered representatives of HTK
who are also appointed and licensed as insurance agents. The Policy may also be
offered through other insurance and securities brokers. Registered
representatives may be paid commissions on a Policy 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 1998, 1997 and 1996, Penn Mutual received premium payments on the Policy
in the approximate amount of $2,711,652, $2,174,964 and $3,458,000,
respectively, and compensated HTK in the approximate amounts of $14,136,
$14,741, and $19,024, respectively, for its services as principal underwriter.
- --------------------------------------------------------------------------------
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
NAME AND ADDRESS PENN MUTUAL PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert E. Chappell Chairman of the Board Chairman of the Board and Chief Executive Officer (since
The Penn Mutual Life and Chief Executive December 1996), President and Chief Executive Officer
Insurance Company Officer (April 1995-December 1996), President and Chief Operating
Philadelphia, PA 19172 Officer, (January 1994 to April 1995), The Penn Mutual Life
Insurance Company.
- ----------------------------------------------------------------------------------------------------------------------------
Daniel J. Toran President, Chief President and Chief Operating Officer (since January 1997),
The Penn Mutual Life Operating Officer Executive Vice President, (May 1996-January 1997), The Penn
Insurance Company and Trustee Mutual Life Insurance Company; Executive Vice President, The
Philadelphia, PA 19172 New England Mutual Life Insurance Company (prior thereto).
- ----------------------------------------------------------------------------------------------------------------------------
Julia Chang Bloch Trustee Visiting Professor, Institute of International Relations in Beijing,
1743 22nd Street, NW China, and distinguished adviser, American Studies Center
Washington, DC 20008 (April 1998 to present); President, US-Japan Foundation (July 1996
to March 1998); Group Executive Vice President, Bank America NT
& SA (June 1993 to June 1996).
- ----------------------------------------------------------------------------------------------------------------------------
James A. Hagen Trustee Retired (since May 1996), Chairman of the Board, Conrail, Inc.
2040 Montrose Lane (prior thereto).
Wilmington, NC 28405
- ----------------------------------------------------------------------------------------------------------------------------
Philip E. Lippincott Trustee Retired (since April 1994), Chairman and Chief Executive Officer,
4301 Bayberry Drive Scott Paper Company (prior thereto).
Avalon, NJ 08202
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John F. McCaughan Trustee Retired Chairman (since 1996), Chairman of the Board, (prior thereto).
921 Pebble Hill Road Betz Laboratories, Inc.
Doylestown, PA 18901
- ----------------------------------------------------------------------------------------------------------------------------
Alan B. Miller Trustee Chairman and President, Universal Health Services, Inc.
367 S. Gulph Road
King of Prussia, PA 19406
- ----------------------------------------------------------------------------------------------------------------------------
Edmond F. Notebaert Trustee President and Chief Executive Officer, The Children's Hospital of
34th & Civic Center Blvd. Philadelphia (since 1987).
Philadelphia, PA 19104
- ----------------------------------------------------------------------------------------------------------------------------
Robert H. Rock Trustee President, MLR Holdings, LLC (since 1987).
9th Floor
1845 Walnut Street
Philadelphia, PA 19103
- ----------------------------------------------------------------------------------------------------------------------------
Norman T. Wilde, Jr. Trustee President and Chief Executive Officer, Janney Montgomery Scott
1801 Market Street Inc. (a securities broker/dealer and subsidiary of The Penn Mutual
Philadelphia, PA 19103 Life Insurance Company).
- ----------------------------------------------------------------------------------------------------------------------------
Wesley S. Williams, Jr., Esq. Trustee Partner, Covington & Burling (law firm).
1201 Pennsylvania Ave., N.W.
P.O. Box 7566
Washington, D.C. 20004
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
John M. Albanese Senior Vice President, Customer Service and Information Systems (since June 1997),
The Penn Mutual Life Vice President, Information Systems Application (prior thereto), The Penn Mutual Life
Insurance Company Insurance Company.
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------------------------
George W. Bentham Senior Vice President, Career Agency System (since April 1998), The Penn Mutual Life
The Penn Mutual Life Insurance Company, Independent Consultant (1997); Senior Vice President & Chief of
Insurance Company Marketing Officer (1995-1996), American General Life; Vice President,
Philadelphia, PA 19172 Individual Marketing (prior thereto), Alexander Hamilton Life.
- ----------------------------------------------------------------------------------------------------------------------------
Michael A. Biondolillo Senior Vice President, Human Resources (since June 1997); Corporate Vice President and
The Penn Mutual Life General Manager, Human Resources and Quality MG Industries, America (prior thereto).
Insurance Company
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------------------------
Nancy S. Brodie Executive Vice President and Chief Financial Officer (since December 1995), Senior Vice
The Penn Mutual Life President and Chief Financial Officer (prior thereto), The Penn Mutual Life Insurance
Insurance Company Company.
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------------------------
Larry L. Mast Executive Vice President, The Penn Mutual Life Insurance Company (May 1997 to present).
The Penn Mutual Life Formerly Senior Vice President, Lafayette Life Insurance Company (September 1994 to
Insurance Company May 1997); Vice President, Security Benefit Insurance Company (May 1993 to September
Philadelphia, PA 19172 1994); Vice President, Home Life Insurance Company (July 1990 to May 1993); Agency
Manager, The Equitable Life Insurance Company (August 1978 to July 1990).
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
Harold E. Maude, Jr. Senior Vice President, Independence Financial Network (since July 1996), Vice President,
The Penn Mutual Life Independence Financial Network (prior thereto), The Penn Mutual Life Insurance Company.
Insurance Company
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------------------------
Nina M. Mulrooney General Auditor (since November 1991), Vice President, Market Conduct (since December
The Penn Mutual Life 1997), Assistant Vice President, Corporate Accounting and Controls (prior thereto),
Insurance Company The Penn Mutual Life Insurance Company.
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------------------------
Peter M. Sherman Executive Vice President (since December 1998), Chief Investment Officer (since May
The Penn Mutual Life 1996), Senior Vice President (May 1996 to December 1996), Vice President, Investments
Insurance Company (January 1996 to April 1996), Vice President, Fixed Income Portfolio Management (prior
Philadelphia, PA 19172 thereto), The Penn Mutual Life Insurance Company; President, Independence Capital
Management, Inc. (an investment advisory organization and subsidiary of Penn Mutual).
</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.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS
Ernst & Young LLP serve as independent auditors of The Penn Mutual Life
Insurance Company and Penn Mutual Variable Life Account I. Their offices are
located at 2001 Market Street, Suite 4000, Philadelphia, PA.
- --------------------------------------------------------------------------------
EXPERTS
Actuarial matters included in this prospectus have been examined by Edward
S. Attarian, FSA, MAAA, Actuary of Penn Mutual, whose opinion is filed as an
exhibit to the Registration Statement.
34
<PAGE>
- --------------------------------------------------------------------------------
LITIGATION
No litigation is pending that would have a material effect upon the
subaccounts or Penn Mutual.
- --------------------------------------------------------------------------------
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 Separate Account and of Penn Mutual appear
on the following pages. The financial statements of Penn Mutual should be
distinguished from any financial statements of the Separate Accounts and should
be considered only as bearing upon Penn Mutual's ability to meet its obligations
under the Policies.
35
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Penn Mutual Life Insurance Company and Contract Owners of Penn Mutual
Variable Life Account I
We have audited the accompanying statement of assets and liabilities of Penn
Mutual Variable Life Account I (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,
Emerging Growth Fund, Balanced Portfolio, Limited Maturity Bond Portfolio,
Partners Portfolio, Capital Appreciation Portfolio, Equity Income Portfolio,
Growth Portfolio, Asset Manager Portfolio, Index 500 Portfolio, Emerging
Markets Equity Portfolio) as of December 31, 1998 and the related statement of
operations and statements of changes in net assets for the each of the periods
indicated therein. These financial statements are the responsibility of the
management of Penn Mutual Variable Life Account I. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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, 1998,
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 audit provides 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 each of the portfolios
constituting the Penn Mutual Variable Life Account I at December 31, 1998, the
results of their operations and changes in their net assets for each of the
periods indicted therein, in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania ERNST & YOUNG LLP
April 2, 1999
36
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD GROWTH EQUITY
TOTAL MARKET FUND++ BOND FUND++ BOND FUND++ FUND++
--------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT IN COMMON STOCK
Number of Shares .................... 11,334,098 638,649 861,738 489,993
Cost ................................ $235,497,972 $11,334,098 $6,652,404 $8,192,626 $11,729,650
ASSETS:
Investments at Market Value ......... $257,521,685 $11,334,098 $6,641,947 $7,919,370 $15,130,985
Dividends receivable ................ 49,116 49,116 -- -- --
LIABILITIES:
Due to (from) The Penn Mutual
Life Insurance Company ............. 221,956 (36,363) 1,424 1,812 3,933
------------ ----------- ---------- ---------- -----------
NET ASSETS ........................... $257,348,845 $11,419,577 $6,640,523 $7,917,558 $15,127,052
============ =========== ========== ========== ===========
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD GROWTH EQUITY
TOTAL MARKET FUND++ BOND FUND++ BOND FUND++ FUND++
------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ............................ $ 4,222,562 $523,576 $ 294,435 $ 615,511 $ 10,136
EXPENSE:
Mortality and expense risk
charges ............................. 1,744,648 90,068 42,394 52,081 86,351
----------- -------- --------- ---------- -----------
Net investment income (loss) ......... 2,477,914 433,508 252,041 563,430 (76,215)
----------- -------- --------- ---------- -----------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses) from
redemption of fund shares ........... 672,191 -- 5,291 291 11,013
Capital gains distributions .......... 15,495,765 -- 198,445 -- 1,579,046
----------- -------- --------- ---------- -----------
Net realized gains from
investment transactions ............. 16,167,956 -- 203,736 291 1,590,059
Net change in unrealized
appreciation/depreciation of
investments ......................... 6,282,694 -- (14,899) (318,691) 2,350,499
----------- -------- --------- ---------- -----------
Net realized and unrealized
gains (losses) on investments 22,450,650 -- 188,837 (318,400) 3,940,558
----------- -------- --------- ---------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS .......................... $24,928,564 $433,508 $ 440,878 $ 245,030 $ 3,864,343
=========== ======== ========= ========== ===========
</TABLE>
- ----------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds
I and II
+++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL EMERGING
VALUE EQUITY MANAGED INTERNATIONAL CAPITALIZATION GROWTH
FUND++ FUND++ EQUITY FUND++ FUND++ FUND++
- -------------- -------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
1,585,105 3,017,417 1,218,820 650,958 340,754
$31,453,934 $56,227,637 $19,383,461 $8,691,334 $4,774,068
$35,490,505 $55,248,910 $22,401,909 $8,338,774 $5,939,334
-- -- -- -- --
8,841 12,414 5,512 1,984 1,797
----------- ----------- ----------- ---------- ----------
$35,481,664 $55,236,496 $22,396,397 $8,336,790 $5,937,537
=========== =========== =========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL EMERGING
VALUE EQUITY MANAGED INTERNATIONAL CAPITALIZATION GROWTH
FUND++ FUND++ EQUITY FUND++ FUND++ FUND++
- -------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
$ 441,858 $ 1,554,726 $ 206,500 $ 52,380 $ --
260,226 409,962 149,839 57,923 29,768
----------- ------------ ----------- -------- -----------
181,632 1,144,764 56,661 (5,543) (29,768)
----------- ------------ ----------- -------- -----------
289,563 246,644 250,872 (4) 9,622
2,887,717 5,538,196 719,716 135,420 790
----------- ------------ ----------- ---------- -----------
3,177,280 5,784,840 970,588 135,416 10,412
(904,321) (4,524,890) 2,087,405 (791,507) 1,277,385
----------- ------------ ----------- ---------- -----------
2,272,959 1,259,950 3,057,993 (656,091) 1,287,797
----------- ------------ ----------- ---------- -----------
$ 2,454,591 $ 2,404,714 $ 3,114,654 ($661,634) $ 1,258,029
=========== ============ =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1998 (CONT'D.)
<TABLE>
<CAPTION>
LIMITED CAPITAL
BALANCED MATURITY BOND PARTNERS APPRECIATION
PORTFOLIO++ PORTFOLIO++ PORTFOLIO++ PORTFOLIO+++
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT IN COMMON STOCK
Number of Shares .................... 314,303 88,920 433,797 639,216
Cost ................................ $4,865,196 $1,233,751 $8,393,609 $6,249,378
ASSETS:
Investments at Market Value ......... $5,135,714 $1,228,881 $8,211,769 $5,765,731
Dividends receivable ................ -- -- -- --
LIABILITIES:
Due to The Penn Mutual Life Insurance
Company ............................ 1,231 283 2,075 1,584
---------- ---------- ---------- ----------
NET ASSETS .......................... $5,134,483 $1,228,598 $8,209,694 $5,764,147
========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED DECEMBER 31, 1998 (CONT'D.)
<TABLE>
<CAPTION>
LIMITED CAPITAL
BALANCED MATURITY BOND PARTNERS APPRECIATION
PORTFOLIO++ PORTFOLIO++ PORTFOLIO++ PORTFOLIO+++
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ..................................... $ 87,653 $ 49,871 $ 15,266 $ --
Expense:
Mortality and expense risk charges ............ 34,876 7,976 49,221 47,491
---------- --------- ---------- ---------
Net investment income (loss) .................. 52,777 41,895 (33,955) (47,491)
---------- --------- ---------- ---------
REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses) from redemption of
fund shares .................................. (5,003) 242 5,188 (164,376)
Capital gains distributions ................... 615,658 -- 480,865 304,408
---------- --------- ---------- ---------
Net realized gains from investment transactions 610,655 242 486,053 140,032
Net change in unrealized appreciation/
depreciation of investments .................. (184,479) (13,221) (271,429) (261,202)
---------- --------- ---------- ---------
Net realized and unrealized gains (losses) on
investments .................................. 426,176 (12,979) 214,624 (121,170)
---------- --------- ---------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .................... $ 478,953 $ 28,916 $ 180,669 ($ 168,661)
========== ========= ========== =========
</TABLE>
- ----------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II
+++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
EQUITY INCOME GROWTH ASSET MANAGER INDEX 500 MARKETS EQUITY
PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO+++++
- ------------------- ------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
781,731 636,718 204,814 104,596 253,025
$16,956,543 $21,094,184 $3,351,168 $12,706,988 $2,207,943
$19,871,602 $28,569,544 $3,719,433 $14,774,172 $1,799,007
-- -- -- -- --
5,352 7,739 948 4,001 197,389
----------- ----------- ---------- ----------- ----------
$19,866,250 $28,561,805 $3,718,485 $14,770,171 $1,601,618
=========== =========== ========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
EQUITY INCOME GROWTH ASSET MANAGER INDEX 500 MARKETS EQUITY
PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO+++++
- ------------------- ------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
$ 182,863 $ 80,651 $ 68,039 $ 30,625 $ 8,472
142,405 186,928 24,502 62,991 9,646
----------- ----------- --------- ----------- ---------
40,458 (106,277) 43,537 (32,366) (1,174)
----------- ----------- --------- ----------- ---------
(1,038) 33,351 (1,881) (9,976) 2,392
650,775 2,109,678 204,117 70,934 --
----------- ----------- --------- ----------- ---------
649,737 2,143,029 202,236 60,958 2,392
963,306 5,047,623 136,988 1,980,793 (276,666)
----------- ----------- --------- ----------- ---------
1,613,043 7,190,652 339,224 2,041,751 (274,274)
----------- ----------- --------- ----------- ---------
$ 1,653,501 $ 7,084,375 $ 382,761 $ 2,009,385 ($ 275,448)
=========== =========== ========= =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997
<TABLE>
<CAPTION>
TOTAL
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) .......................... $ 2,477,914 $ 2,286,799
Net realized gains (losses) from investment
transactions ......................................... $ 16,167,956 $ 6,873,413
Net change in unrealized appreciation/
depreciation of investments .......................... $ 6,282,694 $ 8,957,231
------------- ------------
Net increase (decrease) in net assets resulting from
operations ............................................ $ 24,928,564 $ 18,117,443
------------- ------------
VARIABLE LIFE ACTIVITIES:
Purchase payments ..................................... $ 96,529,479 $ 68,853,918
Death benefits ........................................ (121,041) (227,121)
Cost of Insurance ..................................... (14,082,492) (9,134,776)
Net Transfers ......................................... (3,175,599) (1,981,811)
Transfers of Policy Loans ............................. 577,625 571,227
Contract administration charges ....................... (3,850,403) (2,917,736)
Surrender benefits .................................... (5,921,782) (3,480,445)
------------- ------------
Net increase (decrease) in net assets resulting from
variable life activities .............................. 69,955,787 51,683,256
------------- ------------
Total increase (decrease) in net assets ............... 94,884,351 69,800,699
NET ASSETS:
Beginning of year ..................................... 162,464,494 92,663,795
------------- ------------
END OF YEAR ........................................... $ 257,348,845 $162,464,494
============= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MONEY MARKET FUND+ QUALITY BOND FUND+
---------------------------------- ----------------------------
1998 1997 1998 1997
---------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) .......................... $ 433,508 $ 300,710 $ 252,041 $ 215,998
Net realized gains (losses) from investment
transactions ......................................... -- -- 203,736 7,913
Net change in unrealized appreciation/
depreciation of investments .......................... -- -- (14,899) 32,551
-------------- -------------- ---------- ----------
Net increase (decrease) in net assets resulting from
operations ............................................ 433,508 300,710 440,878 256,462
-------------- -------------- ---------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments ..................................... 42,019,252 28,866,480 1,155,232 1,215,245
Death benefits ........................................ (2,035) -- (249) (1,336)
Cost of Insurance ..................................... (1,191,497) (872,326) (259,658) (199,435)
Net Transfers ......................................... (36,872,301) (25,581,701) 1,041,850 458,596
Transfers of Policy Loans ............................. (251) 89,746 10,440 13,339
Contract administration charges ....................... (488,180) (378,302) (42,018) (47,774)
Surrender benefits .................................... (418,927) (145,321) (105,331) (105,819)
-------------- -------------- ---------- ----------
Net increase (decrease) in net assets resulting from
variable life activities .............................. 3,046,061 1,978,576 1,800,266 1,332,816
-------------- -------------- ---------- ----------
Total increase (decrease) in net assets ............... 3,479,569 2,279,286 2,241,144 1,589,278
NET ASSETS:
Beginning of year ..................................... 7,940,008 5,660,722 4,399,379 2,810,101
-------------- -------------- ---------- ----------
END OF YEAR ........................................... $ 11,419,577 $ 7,940,008 $6,640,523 $4,399,379
============== ============== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND+ GROWTH EQUITY FUND+
---------------------------- ------------------------------
1998 1997 1998 1997
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ $ 563,430 $ 374,009 ($ 76,215) ($ 23,309)
Net realized gains (losses) from investment
transactions ....................................... 291 12,914 1,590,059 811,998
Net change in unrealized appreciation/
depreciation of investments ........................ (318,691) 186,727 2,350,499 691,676
---------- ---------- ---------- ---------
Net increase (decrease) in net assets resulting from
operations .......................................... 245,030 573,650 3,864,343 1,480,365
---------- ---------- ---------- ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 1,768,367 1,004,141 2,036,864 1,437,064
Death benefits ...................................... (232) (1,457) (413) (50,472)
Cost of Insurance ................................... (377,793) (250,416) (570,484) (399,675)
Net Transfers ....................................... 1,334,768 818,234 2,177,912 596,566
Transfers of Policy Loans ........................... 8,460 2,899 15,214 29,423
Contract administration charges ..................... (95,903) (62,569) (129,899) (94,210)
Surrender benefits .................................. (220,758) (134,700) (316,681) (244,609)
---------- ---------- ---------- ---------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 2,416,909 1,376,132 3,212,513 1,274,087
---------- ---------- ---------- ---------
Total increase (decrease) in net assets ............. 2,661,939 1,949,782 7,076,856 2,754,452
NET ASSETS:
Beginning of year ................................... 5,255,619 3,305,837 8,050,196 5,295,744
---------- ---------- ---------- ---------
END OF YEAR ......................................... $7,917,558 $5,255,619 $15,127,052 $8,050,196
========== ========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALUE EQUITY FUND+
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ $ 181,632 $ 155,892
Net realized gains (losses) from investment
transactions ....................................... 3,177,280 1,423,465
Net change in unrealized appreciation/
depreciation of investments ........................ (904,321) 2,544,660
------------ ------------
Net increase (decrease) in net assets resulting from
operations .......................................... 2,454,591 4,124,017
------------ ------------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 7,712,812 6,366,819
Death benefits ...................................... (3,109) (70,127)
Cost of Insurance ................................... (2,002,921) (1,349,019)
Net Transfers ....................................... 2,352,575 4,591,570
Transfers of Policy Loans ........................... 129,894 47,924
Contract administration charges ..................... (471,036) (409,821)
Surrender benefits .................................. (800,734) (498,860)
------------ ------------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 6,917,481 8,678,486
------------ ------------
Total increase (decrease) in net assets ............. 9,372,072 12,802,503
NET ASSETS:
Beginning of year ................................... 26,109,592 13,307,089
------------ ------------
END OF YEAR ......................................... $ 35,481,664 $ 26,109,592
============ ============
</TABLE>
- ----------
* For the period from May 1, 1997 (date fund became available for
investment to contract owners) to December 31, 1997.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Portfolios,
Inc.'s name changed to American Century Variable Portfolios, Inc. as of
May 1, 1997)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II
+++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D)
<TABLE>
<CAPTION>
FLEXIBLY MANAGED FUND+
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ $ 1,144,764 $ 949,494
Net realized gains (losses) from investment
transactions ....................................... 5,784,840 2,543,108
Net change in unrealized appreciation/
depreciation of investments ........................ (4,524,890) 1,371,189
------------ ------------
Net increase (decrease) in net assets resulting from
operations .......................................... 2,404,714 4,863,791
------------ ------------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 12,234,331 11,469,514
Death benefits ...................................... (17,851) (71,412)
Cost of Insurance ................................... (3,137,840) (2,384,305)
Net Transfers ....................................... 1,345,485 4,080,131
Transfers of Policy Loans ........................... 139,613 217,489
Contract administration charges ..................... (646,642) (635,429)
Surrender benefits .................................. (1,299,724) (1,056,819)
------------ ------------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 8,617,372 11,619,169
------------ ------------
Total increase (decrease) in net assets ............. 11,022,086 16,482,960
NET ASSETS:
Beginning of year ................................... 44,214,410 27,731,450
------------ ------------
END OF YEAR ......................................... $ 55,236,496 $ 44,214,410
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SMALL
INTERNATIONAL EQUITY FUND+ CAPITALIZATION FUND+
-------------------------------- -----------------------------
1998 1997 1998 1997
--------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ $ 56,661 $ 327,027 ($ 5,543) ($ 5,769)
Net realized gains (losses) from investment
transactions ....................................... 970,588 477,764 135,416 305,901
Net change in unrealized appreciation/
depreciation of investments ........................ 2,087,405 167,910 (791,507) 335,317
------------ ----------- --------- ---------
Net increase (decrease) in net assets resulting from
operations .......................................... 3,114,654 972,701 (661,634) 635,449
------------ ----------- --------- ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 4,244,414 3,663,296 2,372,356 1,432,627
Death benefits ...................................... (15,627) (5,840) (10,571) --
Cost of Insurance ................................... (1,050,548) (773,212) (505,718) (271,482)
Net Transfers ....................................... 3,160,776 970,906 2,227,491 1,740,303
Transfers of Policy Loans ........................... 65,814 39,319 11,010 1,886
Contract administration charges ..................... (252,405) (242,507) (165,296) (137,928)
Surrender benefits .................................. (633,058) (317,635) (129,707) (87,759)
------------ ----------- --------- ---------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 5,519,366 3,334,327 3,799,565 2,677,647
------------ ----------- --------- ---------
Total increase (decrease) in net assets ............. 8,634,020 4,307,028 3,137,931 3,313,096
NET ASSETS:
Beginning of year ................................... 13,762,377 9,455,349 5,198,859 1,885,763
------------ ----------- --------- ---------
END OF YEAR ......................................... $ 22,396,397 $13,762,377 $8,336,790 $5,198,859
============ =========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EMERGING GROWTH
PORTFOLIO+
----------------------------
1998 1997*
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ....................... ($ 29,768) ($ 3,056)
Net realized gains (losses) from
investment transactions ........................... 10,412 103,234
Net change in unrealized appreciation/
depreciation of investments ....................... 1,277,385 (112,119)
--------- ---------
Net increase (decrease) in net assets resulting from
operations ......................................... 1,258,029 (11,941)
--------- ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments .................................. 1,376,626 213,011
Death benefits ..................................... -- --
Cost of Insurance .................................. (270,389) (37,401)
Net Transfers ...................................... 2,271,306 1,339,220
Transfers of Policy Loans .......................... 949 1,315
Contract administration charges .................... (117,695) (14,740)
Surrender benefits ................................. (61,482) (9,271)
--------- ---------
Net increase (decrease) in net assets resulting from
variable life activities 3,199,315 1,492,134
--------- ---------
Total increase (decrease) in net assets ............ 4,457,344 1,480,193
NET ASSETS:
Beginning of year .................................. 1,480,193 --
--------- ---------
END OF YEAR ........................................ $5,937,537 $1,480,193
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIMITED MATURITY
BALANCED PORTFOLIO++ BOND PORTFOLIO++
---------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ....................... $ 52,777 $ 24,109 $ 41,895 $ 19,870
Net realized gains (losses) from
investment transactions ........................... 610,655 143,065 242 1,045
Net change in unrealized appreciation/
depreciation of investments ....................... (184,479) 329,788 (13,221) 6,174
---------- ---------- ---------- ---------
Net increase (decrease) in net assets resulting from
operations ......................................... 478,953 496,962 28,916 27,089
---------- ---------- ---------- ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments .................................. 1,068,630 750,229 300,887 129,943
Death benefits ..................................... (2,001) -- -- --
Cost of Insurance .................................. (278,391) (204,934) (58,968) (37,130)
Net Transfers ...................................... 526,196 21,044 318,853 195,109
Transfers of Policy Loans .......................... 83,335 8,450 5,849 136
Contract administration charges .................... (50,297) (46,472) (14,141) (10,627)
Surrender benefits ................................. (163,220) (117,124) (9,313) (20,203)
---------- ---------- ---------- ---------
Net increase (decrease) in net assets resulting from
variable life activities 1,184,252 411,193 543,167 257,228
---------- ---------- ---------- ---------
Total increase (decrease) in net assets ............ 1,663,205 908,155 572,083 284,317
NET ASSETS:
Beginning of year .................................. 3,471,278 2,563,123 656,515 372,198
---------- ---------- ---------- ---------
END OF YEAR ........................................ $5,134,483 $3,471,278 $1,228,598 $ 656,515
========== ========== ========== =========
</TABLE>
- ----------
* For the period from May 1, 1997 (date fund became available for
investment to contract owners) to December 31, 1997.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI
Portfolios, Inc.'s name changed to American Century Variable
Portfolios, Inc.
as of May 1, 1997)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II
+++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D)
<TABLE>
<CAPTION>
PARTNERS CAPITAL APPRECIATION
PORTFOLIO++ PORTFOLIO+++
---------------------------- ------------------------------
1998 1997* 1998 1997
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ ($ 33,955) ($ 5,104) ($ 47,491) ($ 48,298)
Net realized gains (losses) from investment
transactions ....................................... 486,053 668 140,032 97,458
Net change in unrealized appreciation/
depreciation of investments ........................ (271,429) 89,588 (261,202) (284,767)
--------- --------- ------------ ---------
Net increase (decrease) in net assets resulting from
operations .......................................... 180,669 85,152 (168,661) (235,607)
--------- --------- ------------ ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 2,301,846 386,750 1,577,063 2,020,105
Death benefits ...................................... -- -- (3,745) (1,604)
Cost of Insurance ................................... (484,655) (47,124) (342,552) (421,351)
Net Transfers ....................................... 3,388,292 2,721,133 (1,352,477) (623,011)
Transfers of Policy Loans ........................... 11,914 61,300 35,632 38,426
Contract administration charges ..................... (201,761) (21,320) (53,636) (105,328)
Surrender benefits .................................. (138,687) (33,815) (244,500) (146,305)
--------- --------- ------------ ---------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 4,876,949 3,066,924 (384,215) 760,932
--------- --------- ------------ ---------
Total increase (decrease) in net assets ............. 5,057,618 3,152,076 (552,876) 525,325
NET ASSETS:
Beginning of year ................................... 3,152,076 -- 6,317,023 5,791,698
--------- --------- ------------ ---------
END OF YEAR ......................................... $8,209,694 $3,152,076 $ 5,764,147 $6,317,023
========== ========== ============ ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EQUITY INCOME
PORTFOLIO++++
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ $ 40,458 $ 27,835
Net realized gains (losses) from investment
transactions ....................................... 649,737 527,069
Net change in unrealized appreciation/
depreciation of investments ........................ 963,306 1,460,290
------------ -----------
Net increase (decrease) in net assets resulting from
operations .......................................... 1,653,501 2,015,194
------------ -----------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 4,640,276 3,478,226
Death benefits ...................................... (20,055) (417)
Cost of Insurance ................................... (1,115,035) (658,142)
Net Transfers ....................................... 2,979,305 2,552,951
Transfers of Policy Loans ........................... 25,171 7,118
Contract administration charges ..................... (297,186) (250,922)
Surrender benefits .................................. (430,380) (233,942)
------------ -----------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 5,782,096 4,894,872
------------ -----------
Total increase (decrease) in net assets ............. 7,435,597 6,910,066
NET ASSETS:
Beginning of year ................................... 12,430,653 5,520,587
------------ -----------
END OF YEAR ......................................... $ 19,866,250 $12,430,653
============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROWTH
PORTFOLIO++++
-------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ ($ 106,277) ($ 43,860)
Net realized gains (losses) from investment
transactions ....................................... 2,143,029 304,537
Net change in unrealized appreciation/
depreciation of investments ........................ 5,047,623 2,035,646
----------- ----------
Net increase (decrease) in net assets resulting from
operations .......................................... 7,084,375 2,296,323
----------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 5,974,648 5,099,758
Death benefits ...................................... (45,153) (24,456)
Cost of Insurance ................................... (1,459,882) (998,857)
Net Transfers ....................................... 2,873,583 1,434,688
Transfers of Policy Loans ........................... 22,413 9,883
Contract administration charges ..................... (385,848) (376,844)
Surrender benefits .................................. (689,227) (260,882)
----------- ----------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 6,290,534 4,883,290
----------- ----------
Total increase (decrease) in net assets ............. 13,374,909 7,179,613
NET ASSETS:
Beginning of year ................................... 15,186,896 8,007,283
----------- ----------
END OF YEAR ......................................... $28,561,805 $15,186,896
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ASSET MANAGER INDEX 500
PORTFOLIO++++ PORTFOLIO++++
---------------------------- -------------------------------
1998 1997 1998 1997*
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ $ 43,537 $ 22,295 $ (32,366) ($ 4,612)
Net realized gains (losses) from investment
transactions ....................................... 202,236 93,523 60,958 (281)
Net change in unrealized appreciation/
depreciation of investments ........................ 136,988 148,479 1,980,793 86,391
---------- ---------- ----------- ---------
Net increase (decrease) in net assets resulting from
operations .......................................... 382,761 264,297 2,009,385 81,498
---------- ---------- ----------- ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 834,804 597,121 4,295,628 551,343
Death benefits ...................................... -- -- -- --
Cost of Insurance ................................... (216,443) (142,702) (664,534) (67,988)
Net Transfers ....................................... 807,683 466,840 7,630,497 1,438,291
Transfers of Policy Loans ........................... 1,050 1,178 9,823 1,000
Contract administration charges ..................... (49,185) (42,870) (335,545) (30,351)
Surrender benefits .................................. (115,461) (27,439) (115,742) (33,134)
---------- ---------- ----------- ---------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 1,262,448 852,128 10,820,127 1,859,161
---------- ---------- ----------- ---------
Total increase (decrease) in net assets ............. 1,645,209 1,116,425 12,829,512 1,940,659
NET ASSETS:
Beginning of year ................................... 2,073,276 956,851 1,940,659 --
---------- ---------- ----------- ---------
END OF YEAR ......................................... $3,718,485 $2,073,276 $14,770,171 $1,940,659
========== ========== =========== ==========
</TABLE>
- ----------
* For the period from May 1, 1997 (date fund became available for
investment to contract owners) to December 31, 1997.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI
Portfolios, Inc.'s name changed to American Century Variable
Portfolios, Inc. as of May 1, 1997)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II
+++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D)
<TABLE>
<CAPTION>
EMERGING MARKETS
PORTFOLIO+++++
------------------------------
1998 1997*
-------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ...................... ($ 1,174) $ 3,568
Net realized gains (losses) from investment
transactions ..................................... 2,392 20,032
Net change in unrealized appreciation/
depreciation of investments ...................... (276,666) (132,269)
--------- ----------
Net increase (decrease) in net assets resulting from
operations ........................................ (275,448) (108,669)
--------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................. 615,443 172,246
Death benefits .................................... -- --
Cost of Insurance ................................. (95,184) (19,277)
Net Transfers ..................................... 612,607 797,319
Transfers of Policy Loans ......................... 1,295 396
Contract administration charges ................... (53,730) (9,722)
Surrender benefits ................................ (28,850) (6,808)
--------- ----------
Net increase (decrease) in net assets resulting from
variable life activities .......................... 1,051,581 934,154
--------- ----------
Total increase (decrease) in net assets ........... 776,133 825,485
NET ASSETS:
Beginning of year ................................. 825,485 --
--------- ----------
END OF YEAR ....................................... $1,601,618 $ 825,485
========== ==========
</TABLE>
- ----------
* For the period from May 1, 1997 (date fund became available for
investment to contract owners) to December 31, 1997.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI
Portfolios, Inc.'s name changed to American Century Variable
Portfolios, Inc. as of May 1, 1997)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II
+++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of Penn Mutual Variable Life Account I
(Account I) are as follows:
GENERAL -- Account I was established by The Penn Mutual Life Insurance
Company (Penn Mutual) under the provisions of the Pennsylvania Insurance Law.
Account I is registered under the Investment Company Act of 1940, as amended,
as a unit investment trust. Account I offers units to variable life contract
owners to provide for the accumulation of value and for the payment of
benefits. Account I contains contracts of the Cornerstone VUL, Cornerstone VUL
II, Variable Estate Max and Momentum Builder variable life products. Contract
owners may borrow up to a specified amount depending on the 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, 1998 and the reported amounts from operations and variable life
activities during 1998 and 1997. Actual results could differ from those
estimates. Certain 1997 amounts have been reclassified to conform with 1998
presentation.
INVESTMENTS -- Assets of Account I 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, Small
Capitalization and Emerging Growth Funds; Neuberger Berman Advisers Management
Trust (AMT): Limited Maturity Bond, Balanced and Partners Portfolios; American
Century Variable Portfolios, Inc. (ACI): Capital Appreciation Portfolio;
Fidelity Investments' Variable Insurance Products (Fidelity): Equity Income,
Growth, Asset Manager and Index 500 Portfolios; and Morgan Stanley Dean Witter
Universal Funds, Inc. (Morgan Stanley): Emerging Markets Equity Portfolio. Penn
Series, AMT, ACI, Fidelity and Morgan Stanley are open-end diversified
management investment companies. The investment in shares of these funds or
portfolios 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. Account I 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 Account I.
DIVERSIFICATION REQUIREMENTS -- Under the provisions of Section 817(h) of
the Internal Revenue Code, a variable annuity contract other than a contract
issued in connection with certain types of employee benefit plans will not be
treated as an annuity contract for federal tax purposes for any period for
which the investments of the segregated asset account on which the contract is
based are not adequately diversified. The Code provides that the "adequately
diversified" requirement may be met if the underlying investments satisfy
either a statutory safe harbor test or diversification requirements set forth
in regulations issued by the Secretary of Treasury. The Internal Revenue
Service has issued regulations under 817(h) of the Code. Penn Mutual believes
that Account I satisfies the current requirements of the regulations, and it
intends that Account I will continue to meet such requirements.
45
<PAGE>
NOTE 2. PURCHASES AND SALES OF INVESTMENTS
The following table shows aggregate cost of shares purchased and proceeds
from sales of each fund or portfolio for the year ended December 31, 1998:
<TABLE>
<CAPTION>
PURCHASES SALES
-------------- --------------
<S> <C> <C>
Money Market Fund .......................... $ 36,054,655 $32,550,918
Quality Bond Fund .......................... 4,363,783 2,107,488
High Yield Bond Fund ....................... 4,563,016 1,581,939
Growth Equity Fund ......................... 6,091,870 1,363,231
Value Equity Fund .......................... 13,092,213 2,816,555
Flexibly Managed Fund ...................... 20,607,570 5,059,318
International Equity Fund .................. 17,810,109 11,263,407
Small Capitalization Fund .................. 4,456,976 527,145
Emerging Growth Fund ....................... 3,852,901 672,705
Limited Maturity Bond Portfolio ............ 797,187 211,784
Balanced Portfolio ......................... 2,576,819 728,784
Partners Portfolio ......................... 5,994,086 663,770
Capital Appreciation Portfolio ............. 1,786,184 2,077,878
Equity Income Portfolio .................... 7,326,892 852,484
Growth Portfolio ........................... 10,298,847 1,967,533
Asset Manager Portfolio .................... 1,825,283 316,669
Index 500 Portfolio ........................ 11,645,446 793,223
Emerging Markets Equity Portfolio .......... 1,534,095 284,124
------------ -----------
Total ...................................... $154,677,932 $65,838,955
============ ===========
</TABLE>
NOTE 3. CONTRACT CHARGES
Operations are charged for mortality and expense risks assumed by Penn
Mutual as follows:
Cornerstone VUL is determined daily at a current annual rate of 0.75%
(guaranteed not to exceed 0.90%) of the average value of Cornerstone VUL;
Cornerstone VUL II is determined daily at a current annual rate guaranteed not
to exceed 0.90% of the average value of Cornerstone VUL II; Variable Estate Max
is determined daily at a current annual rate guaranteed not to exceed 0.90% of
the average value of Variable Estate Max; Momentum Builder is determined daily
at an annual rate of 0.65% of the average value of Momentum Builder.
For each Cornerstone VUL, Cornerstone VUL II and Variable Estate Max
policy, on the date of issue and each monthly anniversary, a monthly deduction
is made from the policy value. The monthly deduction consists of insurance
charges, administrative charges and any charges for additional benefits added
by supplemental agreement to a policy. See original policy documents for
specific charges assessed.
For each Momentum Builder policy, each month on the date specified in the
contract (or on the date the contract is withdrawn in full if other than the
date specified), a $4 contract administration charge, or a lesser amount under
state insurance laws, is deducted from the contract value. See original policy
documents for specific charges assessed.
If a Cornerstone VUL or Cornerstone VUL II policy is surrendered within
the first 11 years, or a Variable Estate Max policy is surrendered within the
first 13 years, 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>
NOTE 4. UNIT VALUES
As of December 31, 1998, the accumulation Units and accumulation Unit
Values For Variable Life Account I are as follows:
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE
-------------- -------------
MONEY MARKET FUND
Cornerstone VUL 180,163 $ 12.35
Cornerstone VUL II 477,687 $ 11.59
Variable Estate Max 104,128 $ 11.60
Momentum Builder 144,571 $ 16.95
QUALITY BOND FUND
Cornerstone VUL 161,612 $ 14.27
Cornerstone VUL II/Variable Estate Max 303,952 $ 13.41
Momentum Builder 10,559 $ 24.41
HIGH YIELD BOND FUND
Cornerstone VUL 185,358 $ 15.74
Cornerstone VUL II/Variable Estate Max 301,994 $ 14.37
Momentum Builder 24,304 $ 27.19
GROWTH EQUITY FUND
Cornerstone VUL 286,826 $ 28.04
Cornerstone VUL II/Variable Estate Max 239,949 $ 24.30
Momentum Builder 32,676 $ 38.33
VALUE EQUITY FUND
Cornerstone VUL 513,869 $ 24.48
Cornerstone VUL II/Variable Estate Max 1,117,950 $ 20.09
FLEXIBLY MANAGED FUND
Cornerstone VUL 1,210,608 $ 19.23
Cornerstone VUL II/Variable Estate Max 2,031,273 $ 15.67
Momentum Builder 10,945 $ 40.29
INTERNATIONAL EQUITY FUND
Cornerstone VUL 464,576 $ 19.49
Cornerstone VUL II/Variable Estate Max 789,966 $ 16.91
SMALL CAPITALIZATION FUND
Cornerstone VUL 81,463 $ 14.67
Cornerstone VUL II/Variable Estate Max 489,652 $ 14.59
EMERGING GROWTH FUND
Cornerstone VUL 44,758 $ 18.66
Cornerstone VUL II/Variable Estate Max 274,162 $ 18.61
LIMITED MATURITY BOND PORTFOLIO
Cornerstone VUL 11,610 $ 12.67
Cornerstone VUL II/Variable Estate Max 90,231 $ 11.99
BALANCED PORTFOLIO
Cornerstone VUL 138,657 $ 17.72
Cornerstone VUL II/Variable Estate Max 169,155 $ 15.83
PARTNERS PORTFOLIO
Cornerstone VUL 162,349 $ 12.88
Cornerstone VUL II/Variable Estate Max 476,249 $ 12.85
CAPITAL APPRECIATION PORTFOLIO
Cornerstone VUL 283,529 $ 10.60
Cornerstone VUL II/Variable Estate Max 218,719 $ 12.61
EQUITY INCOME PORTFOLIO
Cornerstone VUL 183,634 $ 19.11
Cornerstone VUL II/Variable Estate Max 860,589 $ 19.01
GROWTH PORTFOLIO
Cornerstone VUL 269,190 $ 23.95
Cornerstone VUL II/Variable Estate Max 928,250 $ 23.82
47
<PAGE>
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE
-------------- -------------
ASSET MANAGER PORTFOLIO
Cornerstone VUL 42,834 $ 17.41
Cornerstone VUL II/Variable Estate Max 171,750 $ 17.31
INDEX 500 PORTFOLIO
Cornerstone VUL 133,377 $ 15.54
Cornerstone VUL II/Variable Estate Max 818,962 $ 15.50
EMERGING MARKETS EQUITY PORTFOLIO
Cornerstone VUL 51,104 $ 6.78
Cornerstone VUL II/Variable Estate Max 185,708 $ 6.76
48
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA
We have audited the accompanying consolidated balance sheets of The Penn Mutual
Life Insurance Company and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated income statements, statements of changes in equity,
and statements of cash flows for the years then ended. These consolidated
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. The financial statements of the Company for the year ended December
31, 1996 were audited by other auditors whose report dated January 31, 1997
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Penn Mutual Life Insurance Company and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 29, 1999
49
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 1997
- ------------------------------------------------------------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Debt securities, at fair value .................................... $ 5,500,924 $5,427,652
Equity securities, at fair value .................................. 4,161 12,502
Mortgage loans on real estate ..................................... 38,828 52,996
Real estate, net of accumulated depreciation ...................... 15,791 22,358
Policy loans ...................................................... 638,376 642,989
Short-term investments ............................................ 1,024 43,470
Other invested assets ............................................. 98,571 88,928
----------- ----------
TOTAL INVESTMENTS ................................................ 6,297,675 6,290,895
Cash and cash equivalents ......................................... 24,468 37,064
Investment income due and accrued ................................. 104,208 103,072
Deferred acquisition costs ........................................ 399,742 384,542
Amounts recoverable from reinsurers ............................... 69,583 63,211
Broker/dealer receivables ......................................... 793,522 526,797
Other assets ...................................................... 94,179 92,203
Separate account assets ........................................... 2,302,937 1,869,094
----------- ----------
TOTAL ASSETS ..................................................... $10,086,314 $9,366,878
=========== ==========
LIABILITIES
Reserves for payment of future policy benefits .................... $ 2,761,319 $2,770,015
Other policyholder funds .......................................... 2,835,081 2,973,434
Policyholders' dividends payable .................................. 30,532 35,273
Broker/dealer payables ............................................ 488,783 333,104
Accrued income tax payable: .......................................
Current .......................................................... 34,853 17,476
Deferred ......................................................... 107,781 75,096
Other liabilities ................................................. 383,744 283,666
Separate account liabilities ...................................... 2,302,937 1,869,094
----------- ----------
TOTAL LIABILITIES ................................................ 8,945,030 8,357,158
----------- ----------
EQUITY
Retained earnings ................................................. 944,145 857,711
Accumulated other comprehensive income - unrealized gains ......... 197,139 152,009
----------- ----------
TOTAL EQUITY ..................................................... 1,141,284 1,009,720
----------- ----------
TOTAL LIABILITIES AND EQUITY .................................... $10,086,314 $9,366,878
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
50
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Premium and annuity considerations .................................. $ 171,354 $ 195,220 $ 199,821
Policy fee income ................................................... 114,681 102,398 89,349
Net investment income ............................................... 444,697 460,206 475,315
Net realized capital gains/(losses) ................................. 3,912 9,655 (10,078)
Broker/dealer fees and commissions .................................. 331,285 290,005 241,068
Other income ........................................................ 16,491 11,851 11,544
---------- ---------- ----------
TOTAL REVENUE ...................................................... 1,082,420 1,069,335 1,007,019
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficiaries .................... 455,036 480,234 462,412
Policyholder dividends .............................................. 61,369 67,412 67,596
Increase/(decrease) in liability for future policy benefits ......... (12,356) (11,972) 42,652
General expenses .................................................... 211,770 202,731 178,554
Broker/dealer sales expense ......................................... 180,255 160,730 132,724
Amortization of deferred acquisition costs .......................... 42,223 43,223 46,137
---------- ---------- ----------
TOTAL BENEFITS AND EXPENSES ........................................ 938,297 942,358 930,075
---------- ---------- ----------
Income Before Income Taxes .......................................... 144,123 126,977 76,944
---------- ---------- ----------
Income taxes:
Current ............................................................ 49,509 50,061 37,944
Deferred ........................................................... 8,180 3,851 (9,919)
---------- ---------- ----------
NET INCOME ........................................................ $ 86,434 $ 73,065 $ 48,919
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
51
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
OTHER
COMPREHENSIVE RETAINED TOTAL
FOR THE YEARS ENDED DECEMBER 31, INCOME EARNINGS EQUITY
- --------------------------------------------------------------- --------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 .................................... $ 158,941 $735,727 $ 894,668
Comprehensive Income
Net income for 1996 .......................................... -- 48,919 48,919
Other comprehensive loss, net of tax .........................
Unrealized depreciation of securities, net of reclassification
adjustment .................................................. (73,211) -- (73,211)
----------
Comprehensive Loss ............................................ (24,292)
--------- -------- ----------
BALANCE AT DECEMBER 31, 1996 .................................. 85,730 784,646 870,376
Comprehensive Income
Net income for 1997 .......................................... -- 73,065 73,065
Other comprehensive income, net of tax .......................
Unrealized appreciation of securities, net of reclassification
adjustment .................................................. 66,279 -- 66,279
----------
Comprehensive Income .......................................... 139,344
--------- -------- ----------
BALANCE AT DECEMBER 31, 1997 .................................. 152,009 857,711 1,009,720
Comprehensive Income
Net income for 1998 .......................................... -- 86,434 86,434
Other comprehensive income, net of tax .......................
Unrealized appreciation of securities, net of reclassification
adjustment .................................................. 45,130 -- 45,130
----------
Comprehensive Income .......................................... 131,564
----------
BALANCE AT DECEMBER 31, 1998 .................................. $ 197,139 $944,145 $1,141,284
========= ======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
52
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------------- --------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .............................................................. $ 86,434 $ 73,065 $ 48,919
Adjustments to reconcile net income to net cash provided by operations:
Capitalization of policy acquisition costs ............................ (72,356) (64,427) (60,234)
Amortization of deferred acquisition costs ............................ 42,223 43,223 46,137
Policy fees on universal life and investment contracts ................ (120,315) (104,342) (89,349)
Interest credited on universal life and investment contracts .......... 146,081 160,417 171,051
Depreciation and amortization ......................................... 4,750 18,682 11,613
Premiums due and other receivables .................................... (1,293) (7,291) (105)
Realized capital (gains)/losses ....................................... (3,912) (9,655) 10,078
(Increase)/decrease in accrued investment income ...................... (1,136) 60 6,474
(Increase)/decrease in amounts due from reinsurers .................... (6,372) (4,329) (14,200)
Increase/(decrease) in future policy benefit reserves ................. (8,696) (13,358) 58,697
Increase/(decrease) in income tax payable ............................. 25,622 (4,526) 7,798
Other, net ............................................................ 3,805 (6,693) 39,625
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................... 94,835 80,826 236,504
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments:
Debt securities available for sale .................................... 1,837,209 1,235,274 927,905
Equity securities ..................................................... 35,496 20,374 25,413
Real estate ........................................................... 9,937 87,875 40,209
Other ................................................................. 18,074 14,355 15,284
Maturity and other principal repayments:
Debt securities available for sale .................................... 496,283 472,474 278,290
Mortgage loans ........................................................ 2,357 61,813 156,643
Cost of investments acquired:
Debt securities available for sale .................................... (2,315,067) (1,772,007) (1,427,048)
Equity securities ..................................................... (26,390) (15,268) (11,752)
Mortgage loans ........................................................ -- -- (36,155)
Real estate ........................................................... (293) (15,600) (8,542)
Other ................................................................. (17,917) (15,503) (8,789)
Change in policy loans, net ............................................. 4,613 13,084 1,234
(Increase)/decrease in short-term investments, net ...................... 42,446 (5,955) 51,290
Purchases of furniture and equipment, net ............................... (9,446) (4,116) (6,449)
------------ ------------ ------------
NET CASH (USED)/PROVIDED BY INVESTING
ACTIVITIES ........................................................ 77,302 76,800 (2,467)
------------ ------------ ------------
</TABLE>
-continued-
The accompanying notes are an integral part of the consolidated financial
statements.
53
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits for universal life and investment contracts ............. $ 589,070 $ 653,233 $ 625,816
Withdrawals from universal life and investment contracts ......... (605,821) (552,311) (567,697)
Transfers to separate accounts ................................... (147,708) (236,008) (269,735)
Issuance/(repayment) of debt ..................................... 90,772 24,842 (18,424)
(Increase)/decrease in net broker dealer receivables ............. (111,046) (47,632) 296
---------- ---------- ----------
NET CASH USED BY FINANCING ACTIVITIES ........................ (184,733) (157,876) (229,744)
---------- ---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................... (12,596) (250) 4,293
CASH AND CASH EQUIVALENTS ........................................
Beginning of the year .......................................... 37,064 37,314 33,021
---------- ---------- ----------
End of the year ................................................ $ 24,468 $ 37,064 $ 37,314
========== ========== ==========
</TABLE>
The accompanying notes are an intergal part of the consolidated financial
statements.
54
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
The Penn Mutual Life Insurance Company was founded and commenced business
in 1847 as a mutual life insurance company. The Company concentrates primarily
on the sale of individual life insurance and annuity products. The primary
products that the Company currently markets are traditional whole life, term
life, 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 is also involved in the broker-dealer business which
offers a variety of investment products and services and is conducted through
the Company's non-insurance subsidiaries. The Company sells its products in all
fifty states and the District of Columbia. The Company is pursuing the sale of
its disability income line of business. This business had total assets of
$226,672 as of December 31, 1998 and premium and annuity considerations of
$16,739 for the year then ended.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts of The Penn Mutual Life Insurance Company, its wholly owned life
insurance subsidiary, The Penn Insurance and Annuity Company ("PIA"), and
non-insurance subsidiaries (principally broker/dealer and investment advisory
subsidiaries) (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of
financial statements requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and notes
to the consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. (SFAS) 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for the reporting and display of comprehensive income
and its components in the financial statements. The initial application of SFAS
No. 130, required the reclassification of prior-year financial statements to
reflect the components of comprehensive income.
During 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revised disclosures
about pension and other postretirement benefit plans. As SFAS No. 132 does not
change the measurement or recognition of these plans, its adoption had no
impact on the Company's financial condition or results of operations.
In June 1998, The FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to
be recognized in the statement of financial position as either assets or
liabilities and measured at fair value. The corresponding derivative gains and
losses should be reported based on hedge relationships that exist. Changes in
the fair value of derivatives that are not designated as hedges or that do not
meet the hedge accounting criteria in SFAS No. 133, are required to be reported
in earning. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. Adoption of SFAS No. 133 is not expected to have a material effect on the
Company's financial condition or results of operations.
INVESTMENTS
Debt securities (bonds, notes, redeemable preferred stocks and
mortgage-backed securities) which might be sold prior to maturity are
classified as available for sale. These securities are carried at fair value,
with the change in unrealized gains and losses reported in other comprehensive
income. Interest on debt securities is credited to income as it is earned. Debt
securities are amortized using the scientific method. These assumptions are
consistent with the current interest rate and economic environments. The
retrospective adjustment method is used to value all securities.
Equity securities are classified as available for sale and carried at fair
value. Dividends on equity securities are credited to income on their
ex-dividend dates.
The Company regularly evaluates the carrying value of debt and equity
securities based on current economic conditions, past credit loss experience
and other circumstances of the investee. A decline in a security's fair value
that is deemed to be other than temporary is treated as a realized loss and a
reduction in the cost basis of the security.
55
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and valuation allowances. Valuation allowances on
impaired loans are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or the collateral
value if the loan is collateral dependent. However, if foreclosure is or
becomes probable, the measurement method used is collateral value.
Investment real estate, which the Company has the intent to hold, is
carried at cost less accumulated depreciation and valuation reserves. The
Company establishes valuation reserves for investment real estate when declines
in value are deemed to be other then temporary based on an analysis of
discounted future cash flows. Properties held for sale are carried at the lower
of depreciated cost or fair value less selling costs. Valuation reserves are
established for properties held for sale when the fair value less estimated
selling costs is below depreciated cost. Real estate acquired through
foreclosure is recorded at the lower of cost or fair value less estimated
selling costs at the time of foreclosure. Depreciation is calculated using the
straight-line method over the estimated useful lives of the real estate.
Policy loans are carried at the unpaid principal balances.
Short-term investments include securities purchased with a maturity date
of 90 days to less than one year. Short-term investments are valued at cost.
Other invested assets primarily include venture capital limited
partnerships which are carried at fair value.
Realized gains and losses are determined by specific identification and
are included in income on the trade date, net of amortization of deferred
acquisition costs. Unrealized gains and losses, net of appropriate taxes and
amortization of deferred acquisition costs, are accounted for as a separate
component of other comprehensive income.
The Company utilizes various financial instruments, such as interest rate
swaps, financial futures and structured notes, to hedge against interest rate
fluctuation. Most of these investments are recorded as accounting hedges using
a valuation method consistent with the valuation method of the assets hedged.
Gains and losses on these instruments are deferred and recognized in the
Consolidated Income Statements over the remaining life of the hedged security.
Changes in the fair value of these instruments are reported as unrealized gains
or losses. Realized gains or losses are recognized when the hedged securities
are sold.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments
and other debt securities with a maturity of 90 days or less when purchased.
OTHER ASSETS
Property and equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is calculated using the straight-line
method over the lesser of the term of the leases or the estimated useful life
of the improvements. Accumulated depreciation and amortization on property and
equipment and leasehold improvements was $49,816 and $44,329 at December 31,
1998 and 1997, respectively. Related depreciation and amortization expense was
$8,586, $8,183 and $7,510 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Goodwill represents the excess of the cost of the businesses acquired over
the fair value of their net assets. These costs are amortized on a
straight-line basis over not more than 40 years and are included in other
assets in the Consolidated Balance Sheets. Unamortized goodwill amounted to
$16,126 and $16,932 at December 31, 1998 and 1997, respectively. Goodwill
amortization was $806, $808 and $909 for 1998, 1997 and 1996, respectively.
DEFERRED ACQUISITION COSTS
Costs of acquiring new insurance and annuity contracts, which vary with
and are primarily related to the production of new business, have been deferred
to the extent that such costs are deemed recoverable from future gross profits.
Such costs include commissions, certain costs of policy issuance and
underwriting, and certain variable agency expenses.
56
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Deferred acquisition costs related to participating traditional and
universal life insurance policies and annuity products without mortality risk
that include significant surrender charges are being amortized over the lesser
of the estimated or actual contract life in proportion to estimated gross
profits arising principally from interest, mortality and expense margins and
surrender charges. The effects on amortization of deferred acquisition costs of
revisions to estimated gross profits are reflected in earnings in the period
such estimated gross profits are revised. Deferred acquisition costs are
reviewed to determine that the unamortized portion of such costs is recoverable
from future estimated gross profits. Certain costs and expenses reported in the
consolidated income statements are net of amounts deferred.
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.
INSURANCE LIABILITIES AND REVENUE RECOGNITION
Participating Traditional Life and Life Contingent Annuity Products
Future policy benefits include reserves for participating traditional life
insurance and life contingent annuity products and are established in amounts
adequate to meet the estimated future obligations of the policies in force.
Liabilities for participating traditional life products are computed using the
net level premium method, using assumptions for investment yields, mortality,
morbidity and withdrawals, which are consistent with the dividend fund interest
rate and mortality rates used in calculating cash surrender values. Interest
rate assumptions used in the calculation of the liabilities for participating
traditional life products ranged from 2.25% to 4.5%. Premiums are recognized as
income when due. Death and surrender benefits are reported in expense as
incurred.
Liabilities for life contingent annuity products are computed by
estimating future benefits and expenses. Assumptions are based on Company
experience projected at the time of policy issue, with provision for adverse
deviations. Interest rate assumptions range from 2.25% to 13.25%. Premiums are
recognized as income as they are received. Death and surrender benefits are
reported in expense as incurred.
Universal Life Products and Other Annuity Products
Other policyholder funds represent liabilities for universal life and
investment-type annuity products. The liabilities for these products are based
on the contract account value which consists of deposits received from
customers and investment earnings on the account value, less administrative and
expense charges. The liability for universal life products is also reduced by
mortality charges. Liabilities for the non-life contingent annuity products are
computed by estimating future benefits and expenses. Assumptions are based on
Company experience projected at the time of policy issue. Interest rate
assumptions range from 2.0% to 11.25%.
Contract charges assessed against account value for universal life and
investment-type annuities are reflected as policy fee income in revenue.
Interest credited to account values and universal life benefit claims in excess
of fund values are reflected as benefit expense.
Policyholders' Dividends
The majority of the Company's insurance products have been issued on a
participating basis. As of December 31, 1998, participating insurance expressed
as a percentage of insurance in force is 92%, and as a percentage of premium
income is 89%. The amount of policyholders' dividends to be paid is approved
annually by the Board of Trustees. The aggregate amount of policyholders'
dividends is calculated based on actual interest, mortality, morbidity and
expense experience for the year and on management's judgment as to the
appropriate level of equity to be retained by the Company. The carrying value
of this liability approximates the earned amount and fair value at December 31,
1998.
57
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
BROKER/DEALER REVENUE RECOGNITION
Broker-dealer transactions in securities and listed options, including
related commission revenue and expense, are recorded on a settlement-date
basis. There would be no material effect on the financial statements if such
transactions were recorded on a trade-date basis.
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its life
and non-life insurance subsidiaries. Federal income taxes are charged or
credited to operations based upon amounts estimated to be payable or
recoverable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are established to reflect the impact of
temporary differences between the amount of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes.
These deferred tax assets or liabilities are measured by using the enacted tax
rates expected to apply to taxable income in the period in which the deferred
tax liabilities or assets are expected to be settled or realized.
REINSURANCE
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid by
ceding reinsurance to other insurance enterprises or reinsurers under excess
coverage and coinsurance contracts. The Company has set its retention limit for
acceptance of risk on life insurance policies at various levels up to $1,250.
Insurance liabilities are reported before the effects of reinsurance.
Reinsurance receivables (including amounts related to insurance liabilities)
are reported as assets. Estimated reinsurance receivables are recognized in a
manner consistent with the liabilities related to the underlying reinsured
contracts.
2. INVESTMENTS:
DEBT SECURITIES
The following tables summarize the Company's investment in debt
securities, including redeemable preferred stocks. All debt securities are
classified as available for sale and are carried at estimated fair value.
Amortized cost is net of cumulative writedowns for other than temporary
declines in value of $3,056 and $1,208 as of December 31, 1998 and 1997,
respectively.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. Government and agency
securities ........................................... $ 13,109 $ 1,271 $ -- $ 14,380
States and political subdivisions ..................... 12,094 2,216 -- 14,310
Foreign governments ................................... 24,920 3,323 -- 28,243
Corporate securities .................................. 3,058,066 299,489 4,956 3,352,599
Mortgage and other asset-backed securities ............ 2,006,891 86,271 4,399 2,088,763
----------- --------- ------- -----------
Total bonds ........................................... 5,115,080 392,570 9,355 5,498,295
Redeemable preferred stocks ........................... 2,696 -- 67 2,629
----------- --------- ------- -----------
TOTAL .............................................. $ 5,117,776 $ 392,570 $ 9,422 $ 5,500,924
=========== ========= ======= ===========
</TABLE>
58
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. Government and agency
securities ........................................... $ 107,539 $ 6,302 $ -- $ 113,841
States and political subdivisions ..................... 12,085 569 -- 12,654
Foreign governments ................................... 20,397 3,049 -- 23,446
Corporate securities .................................. 2,854,234 218,145 6,748 3,065,631
Mortgage and other asset-backed securities ............ 2,133,758 76,160 757 2,209,161
----------- --------- ------- -----------
Total bonds ........................................... 5,128,013 304,225 7,505 5,424,733
Redeemable preferred stocks ........................... 3,085 -- 166 2,919
----------- --------- ------- -----------
TOTAL .............................................. $ 5,131,098 $ 304,225 $ 7,671 $ 5,427,652
=========== ========= ======= ===========
</TABLE>
The following tables summarize the amortized cost and estimated fair value
of debt securities, including redeemable preferred stocks, as of December 31,
1998 by contractual maturity.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
-------------- --------------
<S> <C> <C>
Years to Maturity:
One or less ........................................ $ 279,580 $ 294,068
After one through five ............................. 357,684 369,099
After five through ten ............................. 566,864 631,968
After ten .......................................... 1,904,061 2,114,397
Mortgage and other asset-backed securities ......... 2,006,891 2,088,763
----------- -----------
Total bonds ...................................... 5,115,080 5,498,295
Redeemable preferred stocks ........................ 2,696 2,629
----------- -----------
TOTAL ............................................ $ 5,117,776 $ 5,500,924
=========== ===========
</TABLE>
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage and other asset-backed securities are presented
separately in the maturity schedule due to the potential for prepayment. The
weighted average life of these securities is 7.1 years.
At December 31, 1998, the Company held $2,088,763 in mortgage and other
asset-backed securities. The structured securities portfolio consists of
commercial and residential mortgage pass-through holdings totaling $1,865,556
and securities backed by credit card receivables, auto loans, home equity and
manufactured housing loans totaling $223,207. These securities follow a
structured principal repayment schedule and are of high credit quality.
Securities totaling $1,512,963 are rated AAA and include $20,394 of
interest-only tranches that were retained from the securitization of the
Company's mortgage loan portfolio.
At December 31, 1998, the largest industry concentration of the Company's
portfolio was investments in the finance industry of $624,768 representing 11%
of the total debt portfolio.
Proceeds during 1998, 1997 and 1996 from sales of available-for-sale
securities were $1,931,269, $1,353,112 and $927,905, respectively. Gross gains
and gross losses realized on those sales were $37,324 and $35,257,
respectively, during 1998, $21,799 and $8,990, respectively, during 1997 and
$15,932 and $6,899, respectively, during 1996.
The Company's investment portfolio of debt securities is predominantly
comprised of investment grade securities. At December 31, 1998 and 1997, debt
securities with amortized cost totaling $192,724 and $198,943, respectively,
were less than investment grade. At December 31, 1998 the Company held
securities with a carrying value of $9,170 which are to be restructured
pursuant to commenced negotiations. At December 31 1997, the Company did not
hold any securities which were either in default as to principal and/or
interest payments, were to be restructured pursuant to commenced negotiations
or were in situations where the borrowers went into bankruptcy subsequent to
acquisition. The Company did not hold any debt securities which were non-income
producing for the preceding twelve months as of December 31, 1998 and 1997.
59
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
EQUITY SECURITIES
During 1998, 1997 and 1996, the proceeds from sales of equity securities
amounted to $18,487, $20,374 and $25,413, respectively. The gross gains and
gross losses realized on those sales were $3,095 and $239, $975 and $239 and
$1,369 and $247 for 1998, 1997 and 1996, respectively.
MORTGAGE LOANS
On August 29, 1996, the Company securitized the majority of its mortgage
loan portfolio by transferring the loans to a trust which qualifies as a REMIC
(Real Estate Mortgage Investment Conduit) under the Internal Revenue Code.
Prior to transferring the loans with a principal value of $781,564 and a book
value of $780,942, the loans were written down to a fair market value of
$755,559, and the related reserve of $25,285 was released. The trust issued
sixteen classes of Commercial Mortgage Pass-Through Certificates with a total
par value of $781,564. 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 $98 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.
The Company retained the highest quality classes of certificates with a
par value of $715,126 and a fair market value of $734,326 at the time of the
securitization. As of December 31, 1998, the par value and fair value of these
securities were $460,753 and $475,699, respectively. As of December 31, 1997,
the par value and fair value of these securities were $570,130 and $597,248,
respectively. The Company sold the lowest rated classes of certificates with a
par value of $66,438 and a fair market value of $24,838.
The mortgage loans which were not included in the securitization and were
retained by the Company had a book value of $171,555 with a related reserve of
$21,907 and an estimated fair value of $153,405 on the date of the
securitization. Loans which the Company intended 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 $99,817 and an estimated net realizable value
of $81,310 at the time of the securitization. The writedown of $18,507 was
fully offset by a release in mortgage loss reserve. As of December 31, 1998 and
1997, the Company held $0 and $12,368 of these loans, respectively. The Company
intended to hold mortgage loans with a book value of $71,738 on the date of the
securitization through their remaining terms. As of December 31, 1998 and 1997,
the Company continued to hold $42,628 and $44,428 of these mortgages,
respectively. The Company discontinued the origination of commercial mortgage
loans in 1996.
The following tables summarize the carrying value of mortgage loans, by
property type and geographic concentration, at December 31.
1998 1997
------------ -----------
Property Type
Office buildings ............ $ 9,204 $ 20,012
Retail ...................... 5,553 7,862
Dwellings ................... 24,741 25,237
Other ....................... 3,130 3,685
Valuation allowance ......... (3,800) (3,800)
-------- --------
TOTAL ..................... $ 38,828 $ 52,996
======== ========
60
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
1998 1997
---------- ----------
Geographic Concentration
Northeast ................... $ 10,273 $ 23,313
Midwest ..................... 5,728 5,922
South ....................... 12,075 12,502
West ........................ 14,552 15,059
Valuation allowance ......... (3,800) (3,800)
-------- --------
TOTAL ..................... $ 38,828 $ 52,996
======== ========
The following table presents changes in the mortgage loan valuation
allowance for the years presented:
1998 1997
---------- ----------
Balance at January 1 .............. $ 3,800 $ 3,400
Provision ......................... -- 400
Charge-offs ....................... -- --
------- -------
BALANCE AT DECEMBER 31 .......... $ 3,800 $ 3,800
======= =======
As of December 31, 1998 and 1997, the Company's mortgage loan portfolio
contained no loans delinquent over 60 days or in foreclosure and there were no
non-income producing mortgage loans for the preceding twelve months.
During 1998 and 1997, the Company did not restructure the terms of any
outstanding mortgages. As of December 31, 1998 and 1997, the mortgage loan
portfolio included $2,555 and $2,834, respectively, of restructured mortgage
loans. Restructured mortgage loans include commercial loans for which the basic
terms, such as interest rate, maturity date, collateral or guaranty have been
changed as a result of actual or anticipated delinquency. Restructures do not
include mortgages refinanced upon maturity at or above current market rates.
Gross interest income on restructured mortgage loans on real estate that would
have been recorded in accordance with the original terms of such loans amounted
to $258 and $298 in 1998 and 1997, respectively. Gross interest income from
these loans included in net investment income totaled $236 and $262 in 1998 and
1997, respectively.
At December 31, 1998, no loans were considered to be impaired. At December
31, 1997, the recorded investment in loans that were considered to be impaired
was $12,368 that, as a result of writedowns, did not have a valuation
allowance. The average recorded investment in impaired loans during the year
ended December 31, 1998 and 1997 was approximately $6,184 and $38,096,
respectively. During 1998 and 1997, $163 and $1,454 was received, respectively,
on these impaired loans which was applied to the outstanding principal balance
or will be applied to principal at the date of foreclosure.
REAL ESTATE
The following table summarizes the carrying value of the Company's real
estate holdings at December 31.
1998 1997
----------- -----------
Investment ......................... $ 19,111 $ 19,999
Properties held for sale ........... 1,914 7,828
Less: Valuation allowance .......... (5,234) (5,469)
-------- --------
TOTAL ............................ $ 15,791 $ 22,358
======== ========
At December 31, 1998 and 1997, accumulated depreciation on real estate
amounted to $6,218 and $6,498, respectively. Depreciation expense on real
estate totaled $1,071, $5,709 and $6,488 for the years ended December 31, 1998,
1997 and 1996, respectively. During 1997, the Company sold its largest real
estate investment for $65,007 cash to an unrelated buyer. At the date of the
sale, this property had a carrying value of $61,914, net of related reserves,
resulting in a gain of $3,093. During 1996, the Company wrote down the
statement value of this property by $16,000 to its estimated fair value, based
on changes in future valuation assumptions.
61
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
OTHER
Investments on deposit with regulatory authorities as required by law were
$7,104 and $7,106 at December 31, 1998 and 1997, respectively.
As of December 31, 1998 and 1997, the Company's investments included
$475,699 and $597,248, respectively, of the tranches retained from the 1996
securitization of the Company's commercial mortgage loan portfolio. These
investments represented 42% and 59% of equity at December 31, 1998 and 1997,
respectively.
3. INVESTMENT INCOME AND CAPITAL GAINS:
The following table summarizes the sources of investment income, excluding
investment gains/(losses), for the year ended December 31.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Debt securities ..................... $ 395,628 $ 390,852 $ 356,669
Equity securities ................... 206 1,371 1,313
Mortgages ........................... 4,268 12,098 62,454
Real estate ......................... 2,903 17,519 24,143
Policy loans ........................ 39,760 40,921 40,580
Short-term investments .............. 2,029 2,426 6,052
Other invested assets ............... 11,330 21,268 14,665
Cash and cash equivalents ........... 3 2 44
--------- --------- ---------
Gross investment income ............. 456,127 486,457 505,920
Less: Investment expenses .......... 11,430 26,251 30,605
--------- --------- ---------
Investment income, net .............. $ 444,697 $ 460,206 $ 475,315
========= ========= =========
</TABLE>
The following table summarizes net realized capital gains/(losses) on
investments for the year ended December 31. Net realized capital gains/(losses)
include decreases in valuation allowances of $235, $3,154 and $44,164 in 1998,
1997 and 1996, respectively.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- --------------
<S> <C> <C> <C>
Debt securities ..................................... $ 110 $ 12,991 $ 10,412
Equity securities ................................... 2,856 417 1,122
Mortgage loans ...................................... 210 280 (2,821)
Real estate ......................................... 4,148 (684) (22,356)
Other ............................................... (2,109) (811) 3,565
Amortization of deferred acquisition costs .......... (1,303) (2,538) --
-------- -------- ----------
Realized gains/(losses) ............................. $ 3,912 $ 9,655 $ (10,078)
======== ======== ==========
</TABLE>
62
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following table summarizes the change in unrealized gains and losses
for investments carried at fair value which are reflected in other
comprehensive income for the year ended December 31.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ---------------
<S> <C> <C> <C>
Unrealized gains/(losses):
Debt securities ................................ $ 86,594 $ 160,850 $ (149,259)
Equity securities .............................. (2,092) 408 (582)
Other .......................................... (2,091) (14,581) (1,545)
--------- --------- -----------
82,411 146,677 (151,386)
--------- --------- -----------
Less:
Deferred policy acquisition costs .............. (12,841) (45,043) 38,324
Deferred income taxes .......................... (24,440) (35,355) 39,851
--------- --------- -----------
Net change in unrealized gains/(losses) ......... $ 45,130 $ 66,279 $ (73,211)
========= ========= ===========
</TABLE>
The following table sets forth the reclassification adjustment required to
avoid double-counting in comprehensive income items that are included as part
of net income for a period that also had been part of other comprehensive
income in earlier periods:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- --------------
<S> <C> <C> <C>
Reclassification Adjustments
Unrealized holding gains/(losses) arising during period .............. $ 53,576 $ 71,797 $ (57,160)
Reclassification adjustment for gains included in net income ......... 8,446 5,518 16,051
-------- -------- ----------
Unrealized gains/(losses) on investments, net of
reclassification adjustment ......................................... $ 45,130 $ 66,279 $ (73,211)
======== ======== ==========
</TABLE>
Reclassification adjustments reported in the above table for the years
ended December 31, 1998, 1997 and 1996 are net of income tax expense of $7,679,
$4,519 and $13,350, respectively, and $5,815, $2,875 and $8,740, respectively,
relating to the effects of such amounts on deferred acquisition costs.
63
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
4. FAIR VALUE INFORMATION:
The following table summarizes the carrying value and estimated fair value
of the Company's financial instruments as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities
Available for sale ...................... $ 5,500,924 $ 5,500,924 $ 5,427,652 $ 5,427,652
Equity securities
Common stock ............................ 158 158 3,051 3,051
Non-redeemable preferred stocks ........... 4,003 4,003 9,451 9,451
Mortgage loans ............................ 38,828 42,678 52,996 57,224
Policy loans .............................. 638,376 605,144 642,989 606,681
Cash and cash equivalents ................. 24,468 24,468 37,064 37,064
Short-term investments .................... 1,024 1,024 43,470 43,470
Separate account assets ................... 2,302,937 2,302,937 1,869,094 1,869,094
Other invested assets ..................... 98,571 98,571 88,928 88,928
FINANCIAL LIABILITIES:
Investment-type contracts
Individual annuities .................... $ 1,108,274 $ 1,143,373 $ 1,225,192 $ 1,260,639
Guaranteed investment contracts ......... 39,571 40,556 59,809 61,456
Other group annuities ................... 113,974 115,422 147,061 148,257
Other policyholder funds ................ 1,573,262 1,573,262 1,541,372 1,541,372
----------- ----------- ----------- -----------
Total policyholder funds .................. 2,835,081 2,866,627 2,973,434 3,011,724
Policyholders' dividends payable .......... 30,532 30,532 35,273 35,273
Separate account liabilities .............. 2,302,937 2,302,937 1,869,094 1,869,094
</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 estimated fair value of
currently performing mortgage loans is estimated by discounting the cash flows
associated with the investment, using an interest rate currently offered for
similar loans to borrowers with similar credit ratings. Loans with similar
credit quality, characteristics and time to maturity are aggregated for
purposes of discounted cash flow analysis. 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 the calculations.
The carrying values of cash, cash equivalents, short-term investments and
separate account assets approximate their fair values. The estimated fair
values for the venture capital limited partnerships are based on values
determined by the partnerships' managing general partners. The resulting
estimated fair values may not be indicative of the value which could be
negotiated in an actual sale.
The fair values of the Company's liabilities for individual annuities,
guaranteed investment contracts and certain 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 approximates their fair value due to the nature of
the contracts. The statement values of other policyholder funds, policyholders'
dividends payable and separate account liabilities approximate their fair
values.
64
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Currently, disclosure of estimated fair values is not required for all 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
estimated fair values of liabilities under all of the Company's contracts are
considered in the overall management of interest rate risk. 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 durations and anticipated cash flows of the Company's
assets and liabilities.
To minimize exposure and reduce risk from exchange and interest rate
fluctuations in the normal course of business, the Company enters into interest
rate swap programs for purposes other than trading. As of December 31, 1998 and
1997, the Company had interest rate swaps with aggregate notional amounts equal
to $95,000 and $105,000, respectively, with average unexpired terms of 8 and 19
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. Gross
unrealized gains and losses, which represent fair value based on dealer-quoted
prices, were $2,248 and $0, respectively, at December 31, 1998 and $5,164 and
$0, respectively, at December 31, 1997. These fair values represent the amount
at risk if the counterparties default and the amount that the Company would
receive to terminate the contracts, taking into account current interest rates
and, where appropriate, the current creditworthiness of the counterparties.
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
held decreases in relation to the value of the loaned securities. The Company
had loaned securities outstanding of $38,144 and $155,356 as of December 31,
1998 and 1997, respectively.
5. INCOME TAXES:
The Company follows the asset and liability method of accounting for
income taxes whereby current and deferred tax assets and liabilities are
recognized utilizing currently enacted tax laws and rates. Deferred taxes are
adjusted to reflect tax rates at which future tax liabilities or assets are
expected to be settled or realized.
65
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities. The significant temporary
differences that give rise to the deferred tax assets and liabilities at
December 31 relate to the following:
1998 1997
----------- -----------
DEFERRED TAX ASSETS
Future policy benefits ................... $ 92,909 $ 88,172
Dividend award ........................... 10,255 11,970
Allowances for investment losses ......... 4,232 3,667
Employee benefit liabilities ............. 29,762 27,979
Other .................................... 18,677 24,728
--------- --------
Total deferred tax asset ............... 155,835 156,516
--------- --------
DEFERRED TAX LIABILITIES
Deferred acquisition costs ............... 135,248 127,495
Unrealized investment gains .............. 105,993 81,553
Other .................................... 22,375 22,564
--------- --------
Total deferred tax liability ........... 263,616 231,612
--------- --------
NET DEFERRED TAX LIABILITY ................ $ 107,781 $ 75,096
========= ========
The federal income taxes attributable to consolidated net income are
different from the amounts determined by multiplying consolidated net income
before federal income taxes by the expected federal income tax rate. The
difference between the amount of tax at the U.S. federal income tax rate of 35%
and the consolidated tax provision is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tax expense at 35% ................................ $ 50,443 $ 44,442 $ 26,930
Increase/(decrease) in income taxes resulting from:
Differential earnings amount ..................... 2,681 6,942 500
Other ............................................ 4,565 2,528 595
-------- -------- --------
Federal income tax expense/(benefit) .............. $ 57,689 $ 53,912 $ 28,025
======== ======== ========
</TABLE>
As a mutual life insurance company, the Company is subject to Internal
Revenue Code provisions which require mutual, but not stock, life insurance
companies to 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 prescribed rate, which is intended to reflect the
difference between stock and mutual companies' earnings rates.
The Internal Revenue Service has examined the Company's income tax returns
through the year 1994. Management believes that an adequate provision has been
made for potential assessments.
66
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
6. BENEFIT PLANS:
The following table summarizes the funded status and accrued benefit cost
for the Company's defined benefit plans and other postretirement benefit plans:
As of December 31,
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Benefit obligation ................................ $ (90,428) $ (84,051) $ (26,439) $ (31,413)
Fair value of plan assets ......................... 53,349 42,783 -- --
---------- ---------- ---------- ----------
Funded Status ..................................... $ (37,079) $ (41,268) $ (26,439) $ (31,413)
========== ========== ========== ==========
Accrued benefit cost recognized in the consolidated
balance sheet .................................... $ (22,530) $ (23,527) $ (44,558) $ (45,143)
</TABLE>
The weighted-average assumptions used to measure the actuarial present
value of the projected benefit obligation were:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Discount rate .......................... 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets ......... 8.00% 8.00% -- --
Rate of compensation increase .......... 5.50% 5.50% 5.00% 5.50%
</TABLE>
At December 31, 1998, the assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation was 8% in 1999,
grading to 5% in the year 2004. At December 31, 1997, the assumed health care
cost trend rate used in measuring the accumulated postretirement benefit
obligation was 8.5% in 1998, grading to 5.0% in the year 2004. The assumed
health care cost trend rate used at December 31, 1996 in measuring the
accumulated postretirement benefit obligation was 8.5% in 1997, grading to 5.0%
in the year 2004. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plans.
The contributions made and the benefits paid from the plan were:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------- ---------------------
1998 1997 1998 1997
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Benefit cost recognized in consolidated income
statement ................................... $ 5,692 $ 5,917 $ 831 $ 1,515
Employer contribution ........................ 6,687 3,006 1,415 2,191
Plan participants' contribution .............. -- -- -- --
Benefits paid ................................ 3,229 3,085 1,415 2,191
</TABLE>
The Company maintains four defined contribution pension plans for
substantially all of its employees and full-time agents. For two plans,
designated contributions of up to 6% or 8% of annual compensation are eligible
to be matched by the Company. Contributions for the third plan are based on
tiered earnings of full-time agents. The last plan, which covers employees of a
subsidiary, are determined on a discretionary basis by the Board of Directors
of that subsidiary. For the years ended December 31, 1998, 1997 and 1996, the
expense recognized for these plans was $9,526, $8,345 and $6,092, respectively.
The estimated fair value of the defined contribution plans' assets at December
31, 1998 and 1997 was $260,706 and $229,378, respectively.
67
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
7. REINSURANCE:
The Company has assumed and ceded reinsurance on certain life and annuity
contracts under various agreements. Reinsurance permits recovery of a portion
of losses from reinsurers, although the Company remains primarily liable as the
direct insurer on all risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of present reinsurers to ensure that amounts due from reinsurers are
collectible. The table below highlights the amounts shown in the accompanying
financial statements.
<TABLE>
<CAPTION>
ASSUMED CEDED TO
GROSS FROM OTHER OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
Life Insurance in Force ......... $32,066,821 $5,115,520 $5,954,701 $31,227,640
Premiums ........................ 166,708 10,586 5,940 171,354
Benefits ........................ 457,239 15,710 17,913 455,036
Reserves ........................ 5,594,712 1,688 62,198 5,534,202
DECEMBER 31, 1997:
Life Insurance in Force ......... $31,027,764 $5,217,856 $4,620,599 $31,625,021
Premiums ........................ 190,754 11,189 6,723 195,220
Benefits ........................ 492,857 14,293 26,916 480,234
Reserves ........................ 5,741,456 1,993 59,322 5,684,127
</TABLE>
During 1996, the Company had gross premiums of $196,897, assumed premiums
of $12,745 and ceded premiums of $9,821 and gross benefits of $293,270, assumed
benefits of $16,466 and ceded benefits of $16,808. Reinsurance receivables with
a carrying value of $55,119 and $50,617 were associated with a single reinsurer
at December 31, 1998 and 1997, respectively.
8. 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, in the ordinary course of business, extends commitments
relating to its investment activities. As of December 31, 1998, the Company had
outstanding commitments totaling $19,413 relating to these investment
activities. The fair value of these commitments approximates the face amount.
9. STATUTORY INFORMATION:
State insurance regulatory authorities prescribe or permit statutory
accounting practices for calculating net income and capital and surplus which
differ in certain respects from generally accepted accounting principles
(GAAP). The significant differences relate to deferred acquisition costs, which
are charged to expenses as incurred; federal income taxes, which reflect
amounts that are currently taxable; and benefit reserves, which are determined
using prescribed mortality, morbidity and interest assumptions, and which, when
considered in light of the assets supporting these reserves, adequately provide
for obligations under policies and contracts. In addition, the recording of
impairments in the value of investments generally lags recognition under GAAP.
The combined insurance companies' statutory capital and surplus at
December 31, 1998 and 1997 was $495,212 and $435,861, respectively. The
combined insurance companies' net income, determined in accordance with
statutory accounting practices, for the years ended December 31, 1998, 1997 and
1996, was $83,676 $63,613 and $25,905, respectively.
68
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
10. YEAR 2000 (UNAUDITED):
The services provided by the Company depend on the smooth functioning of
computer systems. Many computer systems in use today cannot recognize the Year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated earlier in this century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. Failure of computer systems could affect pricing, account services, and
the handling of investment transactions, among other things. The Company began
preparing for the Year 2000 actively in 1996. The effort involves assessing all
computers, computer programs and related equipment, making necessary changes
and ensuring that all systems process dates correctly. The Company believes
that it has designed and implemented an efficient process for identifying what
needs to be changed and is working to correct and test systems that research
shows will be affected by dates in the Year 2000 and beyond. The Company
expects its computer systems to be Year 2000 compliant.
The Company has relationships with vendors and other service providers
that are not affiliated with the Company. As part of its plan, the Company is
contacting vendors and service providers to obtain assurances that such service
providers have taken appropriate measures to address the Year 2000 issue. The
Company will assess and attempt to mitigate risks where outside service
providers are not Year 2000 ready. However, there is no assurance that the
failure of outside service providers to complete adequate preparations in a
timely manner, which results in systems interruptions or other consequences,
will not have an adverse effect, directly or indirectly, on the Company.
The cost of addressing the Year 2000 issue is significant but not material
to the Company's financial condition or results of operations. The Company will
continue to incur costs in addressing the Year 2000, but does not anticipate
that the costs will be material going forward.
The foregoing statements are designated Year 2000 Readiness Disclosure
within the meaning of The Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271,S.2392).
69
<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.
ISSUE AGE BASIC DEATH MINIMUM INITIAL
OF INSURED SEX OF INSURED BENEFIT PREMIUM
-----------------------------------------------------------------------
25 M $ 50,000 $289.00
-----------------------------------------------------------------------
30 F $ 75,000 $459.00
-----------------------------------------------------------------------
35 M $ 75,000 $651.00
-----------------------------------------------------------------------
40 F $100,000 $931.00
-----------------------------------------------------------------------
45 M $100,000 $1,368.00
-----------------------------------------------------------------------
50 F $100,000 $1,456.00
-----------------------------------------------------------------------
55 M $100,000 $2,257.00
-----------------------------------------------------------------------
60 F $ 75,000 $1,787.00
-----------------------------------------------------------------------
65 M $ 75,000 $2,950.00
-----------------------------------------------------------------------
70 F $ 50,000 $2,117.00
-----------------------------------------------------------------------
A-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
APPLICABLE PERCENTAGES
ATTAINED AGE PERCENTAGE ATTAINED AGE PERCENTAGE
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
B-1
<PAGE>
PENN
MUTUAL
A BETTER WAY OF LIFE
THE PENN MUTUAL
LIFE INSURANCE COMPANY
Philadelphia, PA 19172
<PAGE>
PROSPECTUS
FOR
CORNERSTONE VUL II
a flexible premium adjustable variable life insurance policy
issued by
THE PENN MUTUAL LIFE INSURANCE COMPANY
and funded through
PENN MUTUAL VARIABLE LIFE ACCOUNT I
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172
800-523-0650
The Policy provides life insurance and a cash surrender value that varies
with the investment performance of one or more of the funds set forth below.
These and other Policy provisions are described in this Prospectus.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
PENN SERIES FUNDS, INC. MANAGER
Growth Equity Fund Independence Capital Management, Inc.
Value Equity Fund OpCap Advisors
Small Capitalization Fund OpCap Advisors
Emerging Growth Fund RS Investment Management, Inc.
Flexibly Managed 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.
- -------------------------------------------------------------------------------------------------------------------
NEUBERGER BERMAN ADVISORS MANAGEMENT TRUST MANAGER
Balanced Portfolio Neuberger Berman Management Incorporated
Limited Maturity Bond Portfolio Neuberger Berman Management Incorporated
Partners Fund Portfolio Neuberger Berman Management Incorporated
- -------------------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. MANAGER
Capital Appreciation Portfolios American Century Investment Management, Inc.
- -------------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND MANAGER
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
- -------------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II MANAGER
Asset Manager Portfolio Fidelity Management and Research Company
Index 500 Portfolio Fidelity Management and Research Company
- -------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. MANAGER
Emerging Markets Equity (International) Portfolio Morgan Stanley Dean Witter Investment Management Inc.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Please note that the Securities and Exchange Commission ("SEC") has not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
May 1, 1999
<PAGE>
- --------------------------------------------------------------------------------
GUIDE TO READING THIS PROSPECTUS
This prospectus contains information that you should know before you buy the
Policy or exercise any of your rights under the Policy. The purpose of this
prospectus is to provide information on the essential features and provisions of
the Policy and the investment options available under the Policy. Your rights
and obligations under the Policy are determined by the language of the Policy
itself. When you receive your Policy, read it carefully.
The prospectus is arranged as follows:
o The first section is called "Basic Information". It is in a question and
answer format. We suggest you read the Basic Information section before
reading any other section of the prospectus.
o The next section contains illustrations of a hypothetical Policy that
help clarify how the Policy works. The "Illustrations" section starts on
page 15.
o After the Illustrations section is the "Additional Information"
section. It gives additional information about Penn Mutual, Penn Mutual
Variable Life Account I and the Policy. It generally does not repeat
information that is in the Basic Information section. A table of
contents for the Additional Information section appears on page 24.
o The financial statements for Penn Mutual and for the Penn Mutual
Variable Life Account I follow the Additional Information section. They
start on page 37.
o Appendices A and B are after the financial statements. The Appendices
are referred to in the Basic Information section. They provide specific
information and examples to help you understand how the Policy works.
**********
The prospectuses of the funds that accompany this prospectus contains
important information that you should know about the investments that may be
made under the Policy. You should read the relevant prospectus(es) carefully
before you invest.
**********
2
<PAGE>
- --------------------------------------------------------------------------------
BASIC INFORMATION
This part of the prospectus provides answers to basic questions that may be
asked about the Policy. Here are the page numbers where the questions and
answers appear.
QUESTION PAGE
- -------- ----
What Is the Policy?....................................................... 4
Who Owns the Policy?...................................................... 4
What Payments Must Be Made Under the Policy?.............................. 4
How Will the Value of the Policy Change Over Time?........................ 6
What Are the Fees and Charges Under the Policy?........................... 6
Are There Other Charges That Penn Mutual Could Deduct in the Future?...... 9
How Can I Change My Policy's Investment Allocations?...................... 9
What Is a Policy Loan?.................................................... 10
How Can I Withdraw Money from My Policy?.................................. 10
What Is the Timing of Transactions Under the Policy?...................... 11
How Much Life Insurance Does My Policy Provide?........................... 11
Can I Change Insurance Coverage Under My Policy?.......................... 12
What Are the Supplemental Benefit Riders That I Can Buy?.................. 12
Do I Have the Right to Cancel My Policy?.................................. 13
Can I Choose Different Payout Options Under My Policy? ................... 13
How Is the Policy Treated for Federal Income Tax Purposes?................ 13
How Do I Communicate With Penn Mutual?.................................... 14
How Does Penn Mutual Communicate With Me?................................. 15
3
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS THE POLICY?
The Policy provides life insurance on you or another individual you name.
The value of your Policy will increase or decrease based upon the performance of
the investment options you choose. The death benefit may also increase or
decrease based on investment performance. In addition, the Policy allows you to
allocate a part of your policy value to a fixed interest option where the value
will accumulate interest.
You will have several options under the Policy. Here are some major ones:
o Determine when and how much you pay to us under the Policy
o Determine when and how much to allocate your policy value to the
investment options
o Borrow from your Policy
o Change the beneficiary who will receive the death benefit
o Change the amount of insurance protection
o Change the death benefit option you have selected under your Policy
o Surrender or partially surrender your Policy for all or part of its
net cash surrender value
o Choose the form in which you would like the death benefit or other
proceeds paid out from your Policy
Most of these options are subject to limits that are explained later in this
prospectus.
If you want to purchase a Policy, you must complete an application and
submit it to one of our authorized agents. We require satisfactory evidence of
insurability, which may include a medical examination of the proposed insured.
We evaluate the information provided in accordance with our underwriting rules
and then decide whether to accept or not accept the application.
The maturity date of a Policy is the policy anniversary nearest the
insured's 95th birthday. If the Policy is still in force on the maturity date, a
maturity benefit will be paid. The maturity benefit is equal to the policy value
less any policy loan on the maturity date. Upon written request of the owner,
the policy will continue in force beyond the maturity date. Thereafter, the
death benefit will be the net policy value.
- --------------------------------------------------------------------------------
WHO OWNS THE POLICY?
You decide who owns the Policy when you apply for it. The owner of the
Policy is the person who can exercise most of the rights under the Policy, such
as the right to choose the death benefit option, the beneficiary, the investment
options, and the right to surrender the Policy. Whenever we have used the term
"you" in this prospectus, we have assumed that the reader is the owner or the
person who has whatever right or privilege we are discussing.
- ------------------------------------------------------------------------------
WHAT PAYMENTS MUST BE MADE UNDER THE POLICY?
PREMIUM PAYMENTS
Amounts you pay to us under your Policy are called "premiums" or "premium
payments." The amount we require as your first premium depends on a number of
factors, such as age, sex, rate classification, the amount of insurance
specified in the application, and any supplemental benefits. Sample minimum
initial premiums are shown in Appendix A at the end of this prospectus. Within
limits, you can make premium payments when you wish. That is why the Policy is
called a "flexible premium" Policy.
Additional premiums may be paid in any amount and at any time. A premium
must be at least $25. We may require satisfactory evidence of insurability
before accepting any premium which increases our net amount of risk.
We reserve the right to limit total premiums paid in a policy year to the
planned premiums you select in your application. Federal tax law limits the
amount of premium payments you can make relative to the amount of insurance
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coverage provided. We will not accept or retain a premium payment that exceeds
the maximum permitted under federal tax law. Also, if you make a premium payment
that exceeds certain other limits imposed under federal tax law, you could incur
a penalty on amount you take out of your policy. We will monitor the Policy and
will attempt to notify you on a timely basis if you are about to exceed this
limit. See HOW IS THIS POLICY TREATED FOR FEDERAL INCOME TAX PURPOSES? below.
PLANNED PREMIUMS
The Policy Specifications page of your Policy will show the "planned
premium" for the Policy. You choose this amount in the Policy application. We
will send a premium reminder notice to you based upon the planned premium that
you specified in your application. You also chose in your application how often
to pay planned premiums -- annually, semi-annually, quarterly or monthly. You
are not required to pay the planned premium as long as your Policy has
sufficient net cash surrender value to pay Policy charges. You need only pay
enough premium to maintain net cash surrender value sufficient to pay Policy
charges. See THREE YEAR NO-LAPSE FEATURE and LAPSE AND REINSTATEMENT below.
WAYS TO PAY PREMIUMS
If you pay premiums by check or money order, they must be drawn on a U.S.
bank in U.S. dollars and made payable to The Penn Mutual Life Insurance Company.
Premiums after the first must be sent to our office.
We will also accept premiums:
o by wire or by exchange from another insurance company,
o via an electronic funds transfer program (any owner interested in making
monthly premium payments must use this method), or
o if we agree to it, through a salary deduction plan with your employer.
You can obtain information on these other methods of premium payment by
contacting your Penn Mutual representative or by contacting our office.
THREE YEAR NO-LAPSE FEATURE
Your Policy will remain in force during the first three policy years,
regardless of investment performance and your net cash surrender value, if
(a) the total premiums you have paid, less any partial surrenders you made,
equals or exceeds
(b) the "no-lapse premium" specified in your Policy, multiplied by the
number of months the Policy has been in force.
If you increase the specified amount of insurance under your Policy during
the first three policy years, we will extend the three year no-lapse provision
to three years after the effective date of the increase.
The "no-lapse premium" will generally be less than the monthly equivalent
of the planned premium you specified.
The three year no-lapse feature will not apply if the amount borrowed under
your Policy results in excessive indebtedness. See WHAT IS A POLICY LOAN? later
in this section.
LAPSE AND REINSTATEMENT
If the net cash surrender value of your Policy is not sufficient to pay
Policy charges, and the three-year no-lapse feature is not in effect, we will
notify you of how much premium you will need to pay to keep the Policy in force.
You will have a 61 day "grace period" to make that payment. If you don't pay at
least the required amount by the end of the grace period, your Policy will
terminate (i.e., lapse). All coverage under the Policy will then cease.
If you die during the grace period, we will pay the death benefit to your
beneficiary less any unpaid Policy charges and outstanding policy loan.
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If the Policy terminates, you can reinstate it within five years from the
beginning of the grace period if the insured is alive. You will have to provide
evidence that the insured person still meets our requirements for issuing
insurance. You will also have to pay a minimum amount of premium and be subject
to the other terms and conditions applicable to reinstatements, as specified in
the Policy.
PREMIUMS UPON AN INCREASE IN THE SPECIFIED AMOUNT.
If you increase the specified amount of insurance, you may wish to pay an
additional premium or make a change in planned premiums. See "CHANGES IN THE
SPECIFIED AMOUNT OF INSURANCE" on page 11. We will notify you if an additional
premium or a change in planned premiums is necessary.
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HOW WILL THE VALUE OF THE POLICY CHANGE OVER TIME?
From each premium payment you make, we deduct a premium charge. We allocate
the rest to the investment options you have selected (except for the first
premium payment which will be invested in the Penn Series Money Market Fund
during the free look period of time).
Your policy value, which is allocated (or transferred) to the variable
investment options, will vary with the investment performance of the underlying
investment funds.
The amount you allocate to the fixed interest option will earn interest at a
rate we declare from time to time. We guarantee that this rate will be at least
4%. The current declared rate will appear in the annual statement we will send
to you. If you want to know what the current declared rate is, simply call or
write to us. Amounts you allocate to the fixed interest option will not be
subject to the mortality and expense risk charge described later in this
section. Your policy value will be affected by deductions we make from your
Policy for policy charges.
At any time, your policy value is equal to:
o the net premiums you have paid,
o plus or minus the investment results in the part of your policy value
allocated to the variable investment options,
o plus interest credited to the amount in the part of your policy value
(if any) allocated to the fixed interest option,
o minus policies charges we deduct, and
o minus partial surrenders you have made.
If you borrow money under your Policy, other factors affect your policy
value. See WHAT IS A POLICY LOAN? later in this section.
For more information on policy values and the variable and fixed investment
options, see also the Additional Information section of this prospectus.
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WHAT ARE THE FEES AND CHARGES UNDER THE POLICY?
PREMIUM CHARGE
o Premium Charge -- 6.5% (currently reduced to 4.75% for all premiums
paid in excess of the maximum surrender charge) is deducted from
premium payments before allocation to the investment options. It
consists of 2.5% to cover state premium taxes and 4% (currently
reduced to 2.25% for all premiums paid in excess of the maximum
surrender charge) to partially compensate us for the expense of
selling and distributing the Policies. We will notify you in advance
if we change our current rates.
MONTHLY DEDUCTIONS
o Insurance Charge -- A monthly charge for the cost of insurance
protection. The amount of insurance risk we assume varies from Policy
to Policy and from month to month. The insurance charge therefore also
varies. To
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determine the charge for a particular month, we multiply the amount of
insurance for which we are at risk by a cost of insurance rate based
upon an actuarial table. The table in your Policy will show the
maximum cost of insurance rates that we can charge. The cost of
insurance rates that we currently apply are generally less than the
maximum rates shown in your Policy. The table of rates we use will
vary by attained age and the insurance risk characteristics. We place
insureds in a rate class when we issue the Policy, based on our
examination of information bearing on insurance risk. Regardless of
the table used, cost of insurance rates generally increase each year
that you own your Policy, as the insured's attained age increases. We
currently place people we insure in the following rate classes: 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. They are assigned to a
smoker class at age 20 unless they have provided satisfactory evidence
that they qualify for a nonsmoker class. When an increase in the
specified amount of insurance is requested, we determine whether a
different rate will apply to the increase. The charge is deducted
pro-rata from your variable investment and fixed interest accounts.
o Administrative Charge -- A maximum monthly charge to help cover our
administrative costs. This charge has two parts: (1) a flat dollar
charge of up to $9. (Currently, the flat dollar charge is $9 in the
first policy year and $5 thereafter - we will notify you in advance if
we change our current rates) and (2) for the first 12 months after the
policy date, a charge based on the initial specified amount of
insurance ($0.10 per $1,000 per month of initial specified amount of
insurance); and (3) for the first 12 months after an increase in the
specified amount of insurance, a charge based on the increase ($0.10
per $1,000 increase in the specified amount of insurance).
Administrative 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. We do not anticipate making any
profit from this charge. The charge is deducted pro-rata from your
variable investment and fixed interest accounts.
o Optional Supplemental benefit charges -- Monthly charges for any
optional supplemental insurance benefits that are added to the Policy
by means of a rider.
DAILY MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from your policy value which is allocated to the
variable investment options. The charge does not apply to fixed interest option.
It is guaranteed not to exceed 0.90% for the duration of the policy. Currently,
the charge is an annual rate of 0.90% of assets of the policy value allocated in
the variable accounts. After the fifteenth policy year, we intend to charge
0.60%. We will notify you in advance if we change our current rates. We may
realize a profit from this charge, and if we do, it will be added to our
surplus.
The mortality risk we assume is the risk that the persons we insure may die
sooner than anticipated and that Penn Mutual will pay an aggregate amount of
death benefits greater than anticipated. The expense risk we assume is the risk
that expenses incurred in issuing and administering the policies and the
Separate Account will exceed the amount we charge for administration.
TRANSFER CHARGE
We reserve the right to impose a $10 transfer charge on any transfer of
policy value among the variable investment options and/or fixed interest option
in excess of the 12 transfers each policy year. No transfer charge will be made
if the specified amount exceeds $4,999,999. We will notify you before imposing
the charge.
SURRENDER CHARGE
If you surrender your Policy within the first 11 policy years or within 11
years of an increase in the specified amount of insurance under your Policy, we
will deduct a surrender charge from your policy value.
With respect to a surrender within the first 11 policy years, the surrender
charge equals (a) plus (b), multiplied by (c), where:
(a) = 25% of the lesser of (i) the sum of all premiums paid in the Policy and
(ii) the maximum surrender charge premium (which is an amount
calculated separately for each policy and is never more than 12 no
lapse premiums);
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(b) = an administrative charge based on the initial amount of insurance and
the insured's age at the policy date (ranging from $1.00 up to age 9 to
$7.00 at age 60 and over, per $1,000 of initial specified amount of
insurance); and
(c) = the applicable surrender factor from the table below in which the
policy year is determined.
With respect to a surrender within 11 years of an increase in the specified
amount of insurance under your Policy, the surrender charge is based on the
amount of the increase and on the age of the insured at the time of the
increase. The charge equals (a) multiplied by (b), where:
(a) = an administrative charge based on the increase in the initial amount of
insurance and the insured's age on the effective date of the increase
(ranging from $1.00 up to age 9 to $7.00 at age 60 and over, per $1,000
is initial specified amount of insurance; and
(b) = the applicable surrender factor from the table below, assuming for this
purpose only that the first policy year commences with the policy year
in which the increase in specified amount of insurance becomes
effective.
SURRENDER DURING POLICY YEAR SURRENDER FACTOR
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1st through 7th 1.00
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8th .80
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9th .60
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10th .40
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11th .20
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12th and later 0
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The surrender charge under both of the above scenarios declines by 20% each
policy year after the seventh, to $0 by the 12th policy year so that, after the
11th policy year, there is no surrender charge.
If the Policy is surrendered within the first 11 policy years, the surrender
charge consists of a sales charge component and an administrative charge
component. The sales charge component is to reimburse us for some of the
expenses incurred in the distribution of the Policies. The sales charge
component, together with the sales charge component of the premium charge, may
be insufficient to recover distribution expenses related to the sale of the
Policies. Our unrecovered sales expenses are paid for from our surplus. The
administrative charge component for surrenders within the first 11 policy years
covers 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 creating and
maintaining Policy records, as well as the administrative costs of processing
surrender requests.
If the Policy is surrendered after the first 11 policy years, but within 11
years of an increase in the specified amount of insurance, the surrender charge
consists solely of an administrative charge for expenses we incur which are
associated with increasing the specified amount of insurance.
We do not anticipate making any profit on the administrative charge
component of the surrender charge.
PARTIAL SURRENDER CHARGE
If you partially surrender your Policy, we will deduct the lesser of $25 or
2% of the amount surrendered. The charge will be deducted from the available net
cash surrender value and will be considered part of the partial surrender. We
also do not anticipate making a profit on this charge.
FEES AND CHARGES OF INVESTMENT FUNDS
The funds must pay investment management fees and other operating expenses.
The fees and expenses are different for each fund. They reduce the investment
return of each fund. Current fees and expenses of the funds are as set forth in
the Additional Information section of this prospectus.
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ARE THERE OTHER CHARGES THAT PENN MUTUAL COULD DEDUCT IN THE FUTURE?
We currently make no charge against policy values to pay federal income
taxes. However, we reserve the right to do so in the event there is a change in
the tax laws. We currently do not expect that any such charge will be necessary.
Under current laws, we may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant.
If there is a material change in applicable state or local tax laws, we reserve
the right to make such deductions for such taxes.
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HOW CAN I CHANGE MY POLICY'S INVESTMENT ALLOCATIONS?
FUTURE PREMIUM PAYMENTS
You may change the investment allocation for future premium payments at any
time. You make your original allocation in the application for your Policy. The
percentages you select for allocating premium payments must be in whole numbers
and must equal 100% in total.
TRANSFERS AMONG EXISTING INVESTMENT OPTIONS
You may also transfer amounts from one investment option to another, and to
and from the fixed interest option. To do so, you must tell us how much to
transfer, either as a percentage or as a specific dollar amount. Transfers are
subject to the following conditions:
o the minimum amount that may be transferred is $250 (or the amount held
under the investment options from which you are making the transfer, if
less);
o if less than the full amount held under an investment option is
transferred, the amount remaining under the investment option must be at
least $250;
o we may defer transfers under certain conditions;
o transfers may not be made during the free look period;
o transfers may be made from the fixed interest option only during the 30
day period following the end of each policy year.
DOLLAR COST AVERAGING
This program automatically makes monthly transfers from the money market
variable investment option to one or more of the other investment options and to
the fixed interested option. You choose the investment options and the dollar
amount and timing of the transfers. The program is designed to reduce the risks
that result from market fluctuations. It does this by spreading out the
allocation of your money to investment options over a longer period of time.
This allows you to reduce the risk of investing most of your money at a time
when market prices are high. The success of this strategy depends on market
trends. The program allows owners to take advantage of investment fluctuations,
but does not assume a profit or protect against lows in a declining market. To
begin the program, the planned premium for the year must be $600 and the amount
transferred each month must be at least $50. You may discontinue the program at
any time.
ASSET REBALANCING
This program automatically reallocates your policy value among the variable
investment options in accordance with the proportions you originally specified.
Over time, variations in investment results will change the allocation
percentage. On a quarterly basis, the rebalancing program will periodically
transfer your policy value among the variable investment options to reestablish
the percentages you had chosen. Rebalancing can result in transferring amounts
from a variable investment option with relatively higher investment performance
to one with relatively lower investment performance. The minimum policy value to
start the program is $1,000. If you also have a dollar cost averaging program in
effect, the portion of your policy value invested in the Money Market Fund may
not be included in the Rebalancing Program. You may discontinue the program at
any time.
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WHAT IS A POLICY LOAN?
You may borrow up to 90% of your cash surrender value. The minimum amount
you may borrow is $250.
Interest charged on a policy loan is 5.0% and is payable at the end of each
policy year. If interest is not paid when due, it is added to the loan. A policy
loan does not reduce your policy value. An amount equivalent to the loan is
withdrawn from the variable investment options and the fixed interest option on
a prorated basis (unless you designate a different withdrawal allocation when
you request the loan) and is transferred to a special loan account. Amounts
withdrawn from the investment options cease to participate in the investment
experience of the options. The special loan account will earn interest at 4.0%
(or more in our discretion). With the interest we credit to the special loan
account, the net cost of the policy loan is 1%. After the tenth policy year, we
intend to credit interest at the rate of 4.75% (which will result in a net
policy loan cost of 0.25% in those years).
You may repay all or part of a loan at any time. Upon repayment, an amount
equal to the repayment will be transferred from the special loan account to the
investment options you specify. If you do not specify the allocation for the
repayment, the amount will be allocated in accordance with your current standing
allocation instructions.
The amount of any loan outstanding under your Policy on the death of the
surviving insured will reduce the amount of the death benefit by the amount of
such loan.
If you want a payment to us to be used as a loan repayment, you must include
instructions to that effect. Otherwise, all payments will be assumed to be
premium payments.
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HOW CAN I WITHDRAW MONEY FROM MY POLICY?
FULL SURRENDER
You may surrender your Policy in full at any time. If you do, we will pay
you the policy value, less any policy loan outstanding and less any surrender
charge that then applies. This is called your "net cash surrender value." You
must return your Policy when you request a full surrender.
PARTIAL SURRENDER
You may partially surrender your Policy for net cash surrender value,
subject to the following conditions:
o the net cash surrender value remaining in the Policy after the partial
surrender must exceed $1,000;
o no more than four partial surrenders may be made in a policy year;
o each partial surrender must be at least $250;
o a partial surrender may not be made from an investment option if the
amount remaining under the option is less than $250;
o during the first five policy years, the partial surrender may not
reduce the specified amount of insurance under your Policy to less
than $50,000.
If you elected the Option 1 insurance coverage (see HOW MUCH INSURANCE DOES
MY POLICY PROVIDE? below), a partial surrender will reduce your specific amount
of insurance.
If you have increased the initial specified amount, any reduction will be
applied to the most recent increase.
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WHAT IS THE TIMING OF TRANSACTIONS UNDER THE POLICY?
We will ordinarily pay any death benefit, loan proceeds or partial or full
surrender proceeds, and will make transfers among the investment options and the
fixed interest option, within seven days after receipt at our office of all the
documents required for completion of the transaction. Other than the death
benefit, which is determined as of the date of death, transactions will be based
on values at the end of the valuation period in which we receive all required
instructions and necessary documentation. A valuation period is the period
commencing with the close of the New York Stock Exchange and ending at the close
of the next succeeding business day of the New York Stock Exchange.
A planned premium and an unplanned premium which does not require evaluation
of additional insurance risk will be credited to the Policy and the net premium
will be allocated to the designated investment options based on values at the
end of the valuation period in which we receive the premium.
Any premium requiring evaluation of additional insurance risk will be
allocated to the Penn Series money market investment option until our evaluation
has been completed and the premium has been accepted. When accepted, the net
premium will be allocated to the investment options you have designated.
We may defer making a payment or transfer from a variable account investment
option 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 our Policy owners.
We may also defer making a payment or transfer from the fixed interest
option 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 interest option 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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HOW MUCH LIFE INSURANCE DOES MY POLICY PROVIDE?
In your application for the Policy, you will tell us how much life insurance
coverage you want on the life of the insured. This is called the "specified
amount" of insurance. The minimum specified amount of insurance under the Policy
is $50,000.
When the insured persons dies, we will pay the death benefit less the amount
of any outstanding policy loan. We offer two different types of death benefits
payable under the Policy. You choose which one you want in the application. They
are:
o Option 1 -- The death benefit is the greater of (a) the specified amount
of insurance or (b) the "applicable percentage" of the policy value on
the date of the insured's death.
o Option 2 -- The death benefit is the greater of (a) the specified amount
of insurance plus your policy value on the date of death, or (b) the
"applicable percentage" of the policy value on the date of the insured's
death.
The "applicable percentage" is 250% when the insured has attained age 40 or
less and decreases each year to 100% when the insured attains age 95. A table
showing the "applicable percentages" for attained ages 0 to 95 is included as
Appendix B.
If the investment performance of the variable account investment options you
have chosen is favorable, the amount of the death benefit may increase. However,
under Option 1, favorable investment performance will not ordinarily increase
the death benefit for several years and may not increase it at all, whereas
under Option 2, the 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 death benefit, see the Illustrations section of this
prospectus.
Assuming favorable investment performance, the death benefit under Option 2
will tend to be higher than the death benefit under Option 1. On the other hand,
the monthly insurance charge will be higher under Option 2 to compensate us for
the additional insurance risk we take. Because of that, the policy value will
tend to be higher under Option 1 than under Option 2 for the same premium
payments.
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CAN I CHANGE INSURANCE COVERAGE UNDER MY POLICY?
CHANGE OF DEATH BENEFIT OPTION
You may change your insurance coverage from Option 1 to Option 2 and
vice-versa, subject to the following conditions:
o after the change, the specified amount of insurance must be at least
$50,000;
o no change may be made in the first policy year and no more than one
change may be made in any policy year;
o if you request a change from Option 1 to Option 2, we may request
evidence of insurability; if a different rate class is indicated for
the insureds, the requested change will not be allowed.
CHANGES IN SPECIFIED AMOUNT OF INSURANCE
You may increase the specified amount of insurance, subject to the following
conditions:
o you must submit an application along with evidence of insurability
acceptable to Penn Mutual;
o you must return your policy so we can amend it to reflect the
increase;
o any increase in the specified amount must be at least $10,000;
o no change may be made if it would cause the Policy not to qualify as
insurance under federal income tax law.
If you increase the specified amount within the first three policy years,
the three year no lapse period will be extended.
You may decrease the specified amount of insurance, subject to the following
conditions:
o no change may be made in the first policy year;
o no change may be made if it would cause the Policy not to qualify as
insurance under federal income tax law;
o no decrease may be made within one year of an increase in the
specified amount;
o any decrease in the specified amount of insurance must be at least
$5,000 and the specified amount after the decrease must be at least
$50,000.
TAX CONSEQUENCES
See FEDERAL INCOME TAX CONSIDERATIONS in the Additional Information section
of this Prospectus to learn about possible tax consequences of changing your
insurance coverage under the Policy.
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WHAT ARE THE SUPPLEMENTAL BENEFIT RIDERS THAT I CAN BUY?
We offer supplemental benefit riders that may be added to your Policy. There
are monthly charges for the riders, in addition to the charges described above.
If any of these riders are added to your Policy, monthly charges for the
supplemental benefits will be deducted from your policy value as part of the
monthly deduction.
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.
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.
DISABILITY WAIVER OF MONTHLY DEDUCTION. Provides for the waiver of the
monthly deductions upon total disability of the insured.
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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 Option 1 is in
effect at the time this benefit becomes effective, it will be changed to Option
2.
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.
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. All
supplemental benefits may not be available in your state. Please ask your
authorized Penn Mutual representative for further information or contact our
office.
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DO I HAVE THE RIGHT TO CANCEL MY POLICY?
You have the right to cancel your Policy within 10 days or within 45 days
after you signed your application. This is referred to as the "free look"
period. To cancel your Policy, simply deliver or mail the Policy to our office
or to our representative who delivered the Policy to you.
In most states, you will receive a refund of your Policy value as of the
date of cancellation plus the premium charges and the monthly deductions. The
date of cancellation will be the date we receive the Policy.
During the "free look" period, money held under your Policy will be
allocated to the Penn Series Money Market investment option.
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CAN I CHOOSE DIFFERENT PAYOUT OPTIONS UNDER MY POLICY?
CHOOSING A PAYOUT OPTION
You may choose to receive proceeds from the Policy as a single sum. This
includes proceeds that become payable because of death or full surrender.
Alternatively, you can elect to have proceeds of $5,000 or more applied to any
of a number of other payment options as set forth in your Policy. Periodic
payments may not be less than $50 each.
CHANGING A PAYMENT OPTION
You can change the payment option at any time before the proceeds are
payable. If you have not made a choice, the payee may change the payment option
within the period specified in the Policy. The person entitled to the proceeds
may elect a payment option as set forth in the Policy.
TAX IMPACT
There may be tax consequences to you or your beneficiary depending upon
which payment option is chosen. You should consult a qualified tax adviser
before making that choice.
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HOW IS THE POLICY TREATED FOR FEDERAL INCOME TAX PURPOSES?
Death benefits paid under life insurance policies are not subject to income
tax. Investment gains from your Policy are not subject to income tax as long as
we do not pay them out to you.
Assuming your Policy is not treated as a "modified endowment contract" under
federal income tax law, distributions from the Policy are generally treated as
first recovering the investments in the Policy and then, only after the return
of all investment in the Policy, as receiving taxable income. Amounts borrowed
under the Policy also are not generally subject to federal income tax at the
time of the borrowing.
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However, some of the tax rules change if your Policy is found to be a
"modified endowment contract." This can happen if you have paid more than a
certain amount of premiums in relation to the insurance provided under the
Policy. Under those circumstances, additional taxes and penalties may be payable
for Policy distributions and loans.
For further information about the qualifications of the Policy as life
insurance under federal tax law and the tax consequences of owning a Policy, see
FEDERAL INCOME TAX CONSIDERATIONS IN THE ADDITIONAL INFORMATION section of this
prospectus.
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HOW DO I COMMUNICATE WITH PENN MUTUAL?
GENERAL RULES
You may mail all checks and money orders for premium payments to The Penn
Mutual Life Insurance Company, P.O. Box 7460, Philadelphia, Pennsylvania,
19101-7460, or express all checks and money orders to The Penn Mutual Life
Insurance Company, Receipts Processing C3V, 600 Dresher Road, Horsham,
Pennsylvania, 19044.
Certain requests pertaining to your Policy must be made in writing and be
signed and dated by you. They include the following:
o policy loans in excess of $5,000, and full and partial surrenders,
o change of death benefit option,
o changes in specified amount of insurance,
o change of beneficiary,
o election of payment option for Policy proceeds,
o tax withholding elections,
o grant of telephone transaction privileges to third parties,
You should mail or express these requests to our office. You should also
send notice of the insured person's death and related documentation to our
office. Communications are not treated as "received" until such time as they are
arrived at our office in proper form. Any communication that arrives after the
close of our business day, or on a day that is not a business day, will be
considered "received" by us on the next following business day. Our business day
currently closes at 5:00 p.m. Eastern Standard Time, but special circumstances
(such as suspension of trading on a major exchange) may dictate an earlier
closing time.
We have special forms that must be used for a number of the requests
mentioned above. You can obtain these forms from your Penn Mutual representative
or by calling our office 800-523-0650. Each communication to us must include
your name, your Policy number and the name of the insured person. We cannot
process any request that doesn't include this required information.
TELEPHONE TRANSACTIONS
You may request transfers among investment options by calling our office. In
addition, if you complete a special authorizing form, you may authorize your
Penn Mutual agent or other third person to act on your behalf in giving us
telephone transfer instructions. We will not be liable for following transfer
instructions communicated by telephone that we reasonably believe to be genuine.
We may require certain identifying information to process a telephone transfer.
The policies are not designed for professional market timing organizations
or other entities that use programmed and frequent transfers among investment
options. For reasons such as that, we reserve the right to change our telephone
transaction policies or procedures at any time. We also reserve the right to
suspend or terminate the privilege altogether.
14
<PAGE>
- --------------------------------------------------------------------------------
HOW DOES PENN MUTUAL COMMUNICATE WITH ME?
At least each year we will send to you a report showing your current policy
values, premiums paid and deductions made since the last report, any outstanding
policy loans, and any additional premiums permitted under your Policy. We will
also send to you 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 borrow money under your policy, transfer
amounts among the investment options or make partial surrenders, we will send a
written confirmation to you.
- --------------------------------------------------------------------------------
ILLUSTRATIONS
The tables on the following pages show how 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 the 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 daily charge against the investments for the
mortality and expense risks we assume, 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. In addition, the tables assume an average
annual expense ratio of 0.84% of the underlying investment funds available under
the Policies. The average annual expense ratio is based on the expense ratios of
the funds for their last fiscal year. For information on fund expenses, see the
prospectuses of the funds that accompany this prospectus.
After deduction of fund expenses and the mortality and expense risk charge,
the illustrated gross annual investment rates of return of 0%, 6% and 12% would
correspond to approximate net annual rates of -1.74%, 4.26% and 10.26%,
respectively, at current rates, and and -1.44%, 4.56% and 10.56%, respectively,
at current rates after the fifteenth policy year.
The tables also reflect the deduction of the monthly administrative charge
and the monthly cost of insurance charge for the hypothetical insured persons.
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 the following pages. All the tables reflect the fact that no
charges for federal or state income taxes are currently made against the
investments made under a hypothetical policy account and assume no policy loans
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 Insureds' individual circumstances. Such illustrations may assume
different hypothetical rates of return than those illustrated in the following
tables.
15
<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
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy 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 1,614 898 435 75,000 991 529 75,000 1,089 626 75,000
3 2,483 1,399 936 75,000 1,587 1,125 75,000 1,792 1,329 75,000
4 3,394 1,884 1,422 75,000 2,201 1,739 75,000 2,559 2,097 75,000
5 4,351 2,354 1,892 75,000 2,835 2,372 75,000 3,399 2,936 75,000
6 5,357 2,809 2,347 75,000 3,489 3,026 75,000 4,318 3,855 75,000
7 6,412 3,249 2,786 75,000 4,163 3,701 75,000 5,325 4,862 75,000
8 7,520 3,669 3,299 75,000 4,855 4,485 75,000 6,424 6,054 75,000
9 8,683 4,067 3,789 75,000 5,562 5,284 75,000 7,623 7,345 75,000
10 9,905 4,443 4,258 75,000 6,284 6,099 75,000 8,931 8,746 75,000
15 16,993 5,954 5,954 75,000 10,113 10,113 75,000 17,544 17,544 75,000
20 26,039 6,850 6,850 75,000 14,460 14,460 75,000 31,622 31,622 75,000
25 37,585 6,864 6,864 75,000 19,215 19,215 75,000 55,016 55,016 75,000
30 52,321 5,390 5,390 75,000 24,058 24,058 75,000 93,869 93,869 114,520
- --------------------------------------------------------------------------------------------------------------------
</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
THISPROSPECTUS 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.
16
<PAGE>
- --------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
Male Issue Age: 35 Non-Smoker
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 802 339 75,802 859 397 75,859 917 455 75,917
2 2,583 1,731 1,268 76,731 1,902 1,439 76,902 2,080 1,618 77,080
3 3,972 2,636 2,174 77,636 2,981 2,519 77,981 3,354 2,892 78,354
4 5,431 3,518 3,056 78,518 4,098 3,636 79,098 4,751 4,288 79,751
5 6,962 4,377 3,915 79,377 5,255 4,792 80,255 6,282 5,820 81,282
6 8,570 5,213 4,751 80,213 6,452 5,990 81,452 7,963 7,500 82,963
7 10,259 6,026 5,563 81,026 7,692 7,230 82,692 9,806 9,343 84,806
8 12,032 6,811 6,441 81,811 8,971 8,601 83,971 11,825 11,454 86,825
9 13,893 7,567 7,289 82,567 10,288 10,010 85,288 14,033 13,755 89,033
10 15,848 8,292 8,107 83,292 11,642 11,457 86,642 16,449 16,264 91,449
15 27,189 11,423 11,423 86,423 18,990 18,990 93,990 32,419 32,419 107,419
20 41,663 13,818 13,818 88,818 27,646 27,646 102,646 58,319 58,319 133,319
25 60,136 15,125 15,125 90,125 37,412 37,412 112,412 99,903 99,903 174,903
30 83,713 14,739 14,739 89,739 47,770 47,770 122,770 166,483 166,483 241,483
- --------------------------------------------------------------------------------------------------------------------
</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.
17
<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
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy 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 1,777 790 125,000 1,966 979 125,000 2,163 1,176 125,000
3 4,965 2,708 1,721 125,000 3,083 2,096 125,000 3,491 2,504 125,000
4 6,788 3,596 2,609 125,000 4,222 3,235 125,000 4,930 3,943 125,000
5 8,703 4,442 3,455 125,000 5,383 4,396 125,000 6,490 5,503 125,000
6 10,713 5,243 4,257 125,000 6,564 5,577 125,000 8,181 7,194 125,000
7 12,824 6,009 5,022 125,000 7,774 6,787 125,000 10,028 9,041 125,000
8 15,040 6,739 5,949 125,000 9,016 8,226 125,000 12,046 11,256 125,000
9 17,367 7,427 6,835 125,000 10,283 9,691 125,000 14,249 13,656 125,000
10 19,810 8,077 7,682 125,000 11,581 11,186 125,000 16,658 16,263 125,000
15 33,986 10,577 10,577 125,000 18,395 18,395 125,000 32,546 32,546 125,000
20 52,079 11,729 11,729 125,000 25,961 25,961 125,000 58,678 58,678 125,000
25 75,170 10,831 10,831 125,000 33,870 33,870 125,000 102,596 102,596 125,000
30 104,641 7,087 7,087 125,000 41,885 41,885 125,000 177,221 177,221 189,627
- --------------------------------------------------------------------------------------------------------------------
</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.
18
<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
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,359 372 126,359 1,458 471 126,458 1,558 571 126,558
2 4,520 2,882 1,895 127,882 3,174 2,187 128,174 3,478 2,491 128,478
3 6,951 4,346 3,359 129,346 4,929 3,942 129,929 5,560 4,573 130,560
4 9,504 5,755 4,768 130,755 6,728 5,741 131,728 7,824 6,837 132,824
5 12,184 7,109 6,122 132,109 8,571 7,584 133,571 10,288 9,301 135,288
6 14,998 8,405 7,418 133,405 10,458 9,471 135,458 12,967 11,980 137,967
7 17,953 9,652 8,665 134,652 12,398 11,412 137,398 15,894 14,907 140,894
8 21,056 10,851 10,061 135,851 14,394 13,604 139,394 19,093 18,304 144,093
9 24,314 11,995 11,403 136,995 16,440 15,847 141,440 22,585 21,992 147,585
10 27,734 13,087 12,693 138,087 18,539 18,145 143,539 26,400 26,005 151,400
15 47,581 17,592 17,592 142,593 29,706 29,706 154,706 51,383 51,383 176,383
20 72,910 20,504 20,504 145,504 42,307 42,307 167,307 91,303 91,303 216,303
25 105,238 21,026 21,026 146,026 55,532 55,532 180,532 154,347 154,347 279,347
30 146,498 18,497 18,497 143,497 68,583 68,583 193,583 254,509 254,509 379,509
- --------------------------------------------------------------------------------------------------------------------
</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.
19
<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
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 369 0 75,000 400 0 75,000 432 0 75,000
2 1,614 815 352 75,000 905 442 75,000 998 536 75,000
3 2,483 1,246 784 75,000 1,423 960 75,000 1,615 1,153 75,000
4 3,394 1,662 1,200 75,000 1,956 1,493 75,000 2,287 1,825 75,000
5 4,351 2,062 1,599 75,000 2,502 2,039 75,000 3,020 2,557 75,000
6 5,357 2,444 1,982 75,000 3,061 2,599 75,000 3,817 3,355 75,000
7 6,412 2,808 2,346 75,000 3,633 3,170 75,000 4,685 4,223 75,000
8 7,520 3,154 2,784 75,000 4,217 3,847 75,000 5,632 5,262 75,000
9 8,683 3,480 3,202 75,000 4,813 4,535 75,000 6,663 6,386 75,000
10 9,905 3,786 3,601 75,000 5,421 5,236 75,000 7,789 7,604 75,000
15 16,993 4,969 4,969 75,000 8,602 8,602 75,000 15,163 15,163 75,000
20 26,039 5,396 5,396 75,000 11,876 11,876 75,000 26,721 26,721 75,000
25 37,585 4,570 4,570 75,000 14,786 14,786 75,000 45,198 45,198 75,000
30 52,321 1,652 1,652 75,000 16,538 16,538 75,000 75,796 75,796 92,471
- --------------------------------------------------------------------------------------------------------------------
</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.
20
<PAGE>
- --------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
Male Issue Age: 35 Non-Smoker
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 781 319 75,781 838 376 75,838 895 433 75,895
2 2,583 1,632 1,170 76,632 1,798 1,335 76,798 1,971 1,508 76,971
3 3,972 2,460 1,997 77,460 2,790 2,327 77,790 3,148 2,685 78,148
4 5,431 3,265 2,802 78,265 3,815 3,353 78,815 4,437 3,974 79,437
5 6,962 4,045 3,582 79,045 4,874 4,411 79,874 5,846 5,384 80,846
6 8,570 4,801 4,338 79,801 5,966 5,503 80,966 7,389 6,926 82,389
7 10,259 5,530 5,067 80,530 7,090 6,628 82,090 9,076 8,613 84,076
8 12,032 6,233 5,863 81,233 8,249 7,879 83,249 10,921 10,551 85,921
9 13,893 6,908 6,631 81,908 9,441 9,164 84,441 12,940 12,662 87,940
10 15,848 7,556 7,371 82,556 10,668 10,483 85,668 15,149 14,964 90,149
15 27,189 10,329 10,329 85,329 17,296 17,296 92,296 29,721 29,721 104,721
20 41,663 12,142 12,142 87,142 24,628 24,628 99,628 52,514 52,514 127,514
25 60,136 12,496 12,496 87,496 32,159 32,159 107,159 87,939 87,939 162,939
30 83,713 10,642 10,642 85,642 38,937 38,937 113,937 142,818 142,818 217,818
- --------------------------------------------------------------------------------------------------------------------
</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.
21
<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
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 757 0 125,000 821 0 125,000 885 0 125,000
2 3,229 1,627 640 125,000 1,807 821 125,000 1,996 1,010 125,000
3 4,965 2,458 1,471 125,000 2,812 1,825 125,000 3,198 2,211 125,000
4 6,788 3,249 2,262 125,000 3,834 2,847 125,000 4,496 3,509 125,000
5 8,703 3,999 3,012 125,000 4,872 3,885 125,000 5,901 4,915 125,000
6 10,713 4,704 3,717 125,000 5,923 4,936 125,000 7,421 6,434 125,000
7 12,824 5,364 4,377 125,000 6,987 6,000 125,000 9,066 8,079 125,000
8 15,040 5,974 5,184 125,000 8,059 7,269 125,000 10,846 10,056 125,000
9 17,367 6,528 5,936 125,000 9,133 8,541 125,000 12,769 12,177 125,000
10 19,810 7,026 6,631 125,000 10,211 9,816 125,000 14,852 14,457 125,000
15 33,986 8,660 8,660 125,000 15,609 15,609 125,000 28,355 28,355 125,000
20 52,079 8,446 8,446 125,000 20,647 20,647 125,000 49,432 49,432 125,000
25 75,170 4,625 4,625 125,000 23,563 23,563 125,000 83,130 83,130 125,000
30 104,641 0 0 0 21,613 21,613 125,000 140,947 140,947 150,814
- --------------------------------------------------------------------------------------------------------------------
</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.
22
<PAGE>
- --------------------------------------------------------------------------------
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
Female Issue Age: 45 Non-Smoker
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
- --------------------------------------------------------------------------------------------------------------------
Premiums
Accumulated
End of at 5% Net Cash Net Cash Net Cash
Policy Interest Policy Surrender Death Policy Surrender Death Policy Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1,305 318 126,305 1,402 415 126,402 1,500 513 126,500
2 4,520 2,711 1,724 127,711 2,992 2,005 127,992 3,286 2,299 128,286
3 6,951 4,065 3,078 129,065 4,622 3,635 129,622 5,226 4,239 130,226
4 9,504 5,366 4,379 130,366 6,290 5,303 131,290 7,333 6,347 132,333
5 12,184 6,614 5,627 131,614 7,997 7,011 132,998 9,624 8,638 134,624
6 14,998 7,804 6,817 132,804 9,741 8,754 134,741 12,113 11,126 137,113
7 17,953 8,935 7,948 133,935 11,519 10,532 136,519 14,815 13,828 139,815
8 21,056 10,003 9,214 135,003 13,328 12,539 138,328 17,749 16,960 142,749
9 24,314 11,002 10,410 136,002 15,163 14,570 140,163 20,930 20,338 145,930
10 27,734 11,932 11,538 136,932 17,021 16,627 142,021 24,382 23,988 149,382
15 47,581 15,522 15,522 140,522 26,653 26,653 151,653 46,716 46,716 171,716
20 72,910 16,930 16,930 141,930 36,371 36,371 161,371 80,661 80,661 205,661
25 105,238 14,470 14,470 139,470 44,026 44,026 169,026 131,025 131,025 256,025
30 146,498 6,136 6,136 131,136 46,509 46,509 171,509 205,204 205,204 330,204
- --------------------------------------------------------------------------------------------------------------------
</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.
23
<PAGE>
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
This section of the prospectus provides information about Penn Mutual, Penn
Mutual Variable Life Account I, the investment funds and the Policy.
CONTENTS OF THIS SECTION PAGE
-------------------------------------------------------------------
The Penn Mutual Life Insurance Company...................... 25
Year 2000................................................... 25
Penn Mutual Variable Life Account I......................... 25
The Funds................................................... 26
More Information About Policy Values........................ 28
Federal Income Tax Considerations........................... 29
Sale of the Policies........................................ 32
Penn Mutual Trustees and Officers........................... 32
State Regulation............................................ 34
Additional Information...................................... 34
Experts..................................................... 34
Independent Auditors........................................ 34
Litigation.................................................. 35
Legal Matters............................................... 35
Financial Statements........................................ 35
Appendix A -- Minimum Initial Premiums...................... A-1
Appendix B -- Applicable Percentages........................ B-1
24
<PAGE>
- --------------------------------------------------------------------------------
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 600
Dresher Road, Horsham, Pennsylvania, 19044, a suburb of Philadelphia. Our
mailing address is The Penn Mutual Life Insurance Company, Philadelphia,
Pennsylvania, 19172.
- --------------------------------------------------------------------------------
YEAR 2000
The services we provide, as well as services provided by other companies,
organizations and governmental entities generally, depend on the smooth
functioning of computer systems. Many computer systems in use today cannot
recognize the Year 2000, and may return to 1900 or some other date after
December 31, 1999. If not corrected, these systems could fail or create
erroneous results. We began addressing the Year 2000 problem actively in 1996.
The effort involves assessing all of our computers, computer programs, and
related equipment, making necessary changes, and assuring that all systems
process dates correctly. We believe that we have designed and implemented an
efficient process for identifying what needs to be changed. Although we cannot
give assurance that we will have no Year 2000 problem, we expect our computer
systems to perform satisfactorily in the Year 2000.
Penn Mutual and the mutual funds that serve as investment options for the
Separate Account have relationships with investment advisers, broker-dealers,
transfer agents, custodians, and other service providers. We are contacting the
funds and their vendors and service providers to obtain reasonable assurances
that such service providers have taken appropriate measures to address the Year
2000 problem. Where practicable, we will assess and attempt to mitigate risks
that the businesses and organizations upon which we depend are not Year 2000
compliant. We cannot, however, give assurance that failure of these firms to
complete adequate preparations in a timely manner will not have an adverse
effect on the Contracts.
The Year 2000 Information and Readiness Disclosure Act passed by Congress in
1998 encourages businesses and other organizations to provide information about
the readiness of their computer systems. The Act also provides certain
protections to these organizations against potential liability for what they say
about their readiness. We specifically designate the information about our
readiness as readiness disclosure under the protections of the Act.
- --------------------------------------------------------------------------------
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. 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.
Net premiums received under the Policy and under other variable life
insurance policies are allocated to subaccounts of the Separate Account for
investment in shares of investment funds. They are allocated in accordance with
instructions from Policy owners
Income, gains and losses, realized or unrealized, in a subaccount are
credited or charged without regard to any other income, gains or losses of Penn
Mutual. Assets equal to the reserves and other contract liabilities with respect
to the investments held in 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.
If investment in a shares of a fund 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 fund is in the interest of owners, we may
substitute another fund. 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.
25
<PAGE>
VOTING SHARES OF THE FUNDS
We are the legal owner of shares of the funds 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 Separate Account at regular and special
meetings of shareholders of the funds in accordance with instructions received
from owners. 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 for which an owner may give voting
instructions is currently determined by dividing the portion of the owner's
policy value allocated to the Separate Account 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 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.
- --------------------------------------------------------------------------------
THE FUNDS
Penn Series Funds, Inc., Neuberger Berman Advisors Management Trust,
American Century Variable Portfolios, Inc., Fidelity Investments' Variable
Insurance Products Fund, Fidelity Investments' Variable Insurance Products Fund
II and Morgan Stanley Dean Witter Universal Funds, Inc. 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.
The investment objective of each of the Funds available as investment
options under the Policy is set forth below. There is, of course, no assurance
that these objectives will be met.
Penn Series -- Growth Equity Fund -- long-term growth of capital and
increase of future income.
Penn Series -- Value Equity Fund -- maximize total return (capital
appreciation and income).
Penn Series -- Small Capitalization Fund -- capital appreciation.
Penn Series -- Emerging Growth Fund -- capital appreciation.
Penn Series -- Flexibly Managed Fund -- maximize total return (capital
appreciation and income).
Penn Series -- International Equity Fund -- capital appreciation.
Penn Series -- Quality Bond Fund -- highest income over the long term
consistent with the preservation of principal.
Penn Series -- High Yield Bond Fund -- high current income.
Penn Series -- Money Market Fund -- preserve capital, maintain liquidity
and achieve the highest possible level of current income consistent
therewith.
Neuberger Berman -- Limited Maturity Bond Portfolio -- the highest
current income consistent with low risk to principal and liquidity; a
secondary objective -- enhance total return through capital
appreciation when
26
<PAGE>
market factors, such as falling interest rates and
rising bond prices, indicate that capital appreciation may be
available without significant risk to principal.
Neuberger Berman -- Balanced Portfolio -- long-term capital growth and
reasonable current income without undue risk to principal.
Neuberger Berman -- Partners Portfolio -- capital growth; 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) -- capital growth.
Fidelity Investments' VIP Fund -- Equity-Income Portfolio -- 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.
Fidelity Investments' VIP Fund -- Growth Portfolio -- capital
appreciation.
Fidelity Investments' VIP Fund II -- Asset Manager Portfolio -- high
total return with reduced risk over the long-term.
Fidelity Investments' VIP Fund II -- Index 500 Portfolio -- 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 Dean Witter Universal Funds, Inc. -- Emerging Markets
Equity (International) Portfolio -- long term capital appreciation.
THE MANAGERS
Independence Capital Management, Inc. ("Independence Capital Management"),
of Horsham, Pennsylvania, is investment adviser to each of the Penn Series
Funds.
T. Rowe Price Associates, Inc., of Baltimore, Maryland, is investment
sub-adviser to the Penn Series Flexibly Managed Fund and Penn Series High Yield
Bond Fund.
OpCap Advisors (formerly Quest for Value Advisors), of New York, New York,
is investment sub-adviser to the Penn Series Value Equity Fund and the Penn
Series Small Capitalization Fund.
Vontobel USA Inc., of New York, New York, is the investment sub-adviser to
the Penn Series International Equity Fund.
RS Investment Management, Inc. (formerly Robertson Stephens Investment
Management, Inc.), of San Francisco, California, is investment sub-adviser to
the Penn Series Emerging Growth Fund.
Neuberger Berman Management Incorporated, of New York, New York, is the
investment adviser to each series of Advisers Managers Trust underlying the
Neuberger Berman Limited Maturity Bond Portfolio, the Neuberger Berman Balanced
Portfolio and the Neuberger Berman Partner 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 Dean Witter Investment Management Inc. ("Morgan Stanley Dean
Witter"), of New York, New York, is the investment adviser to Morgan Stanley
Dean Witter Universal Funds' Emerging Markets Equity (International) Portfolio.
27
<PAGE>
Further information about the Funds is contained in the accompanying
prospectuses, which you should read in conjunction with this prospectus.
We have entered into agreements with Penn Series, Neuberger Berman,
American Century Variable Portfolios, Fidelity Investments' VIP Fund, Fidelity
Investments' VIP Fund II and Morgan Stanley Dean Witter governing the Separate
Account's investment in those Funds. The advisers to American Century Variable
Portfolios, Fidelity Investments' VIP Fund, Fidelity Investments' VIP Fund II
and Morgan Stanley Dean Witter Portfolios, or their affiliates, compensate Penn
Mutual for administrative and other services rendered in making shares of the
portfolios available under the Policies.
The shares of Penn Series, Neuberger Berman, American Century Variable
Portfolios, Fidelity Investments' VIP Fund, Fidelity Investments' VIP Fund II
and Morgan Stanley Dean Witter 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 Neuberger Berman, American Century Variable Portfolios,
Fidelity Investments' VIP Fund, Fidelity Investments' VIP Fund II and Morgan
Stanley Dean Witter are also sold to separate accounts of other insurance
companies, and may also be sold 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) to invest in the same underlying mutual
fund. Although neither we nor Penn Series, Neuberger Berman, American Century
Variable Portfolios, Fidelity Investments' VIP Fund, Fidelity Investments' VIP
Fund II or Morgan Stanley Dean Witter currently perceives or anticipates any
such disadvantage, the Boards of Directors of Penn Series, American Century
Variable Portfolios and Morgan Stanley Dean Witter, respectively, and the Boards
of Trustees of Neuberger Berman, Fidelity Investments' VIP Fund and Fidelity
Investments' 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
Neuberger Berman) arises.
Material conflicts could result from such things as: (1) changes in state
insurance laws; (2) changes in federal income tax law; (3) changes in the
investment management of any Fund or of Penn Series, Neuberger Berman, American
Century Variable Portfolios, Fidelity Investments' VIP Fund, Fidelity
Investments' VIP Fund II and Morgan Stanley Dean Witter, 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.
- --------------------------------------------------------------------------------
MORE INFORMATION ABOUT POLICY VALUES
On the policy date (the date from which policy years and monthly
anniversaries are measured), the policy value is equal to the initial net
premium. If the policy date and the policy issue date (the date the policy is
issued) are the same day, the policy value is equal to the initial net premium,
less the monthly deduction.
On each valuation date (each day the New York Stock Exchange and our office
is open for business) thereafter, the policy value is the aggregate of the
Policy's variable account values and the fixed interest account value. The
policy value will vary to reflect the variable account values, interest credited
to the fixed interest account, policy charges, transfers, partial surrenders,
policy loans and policy loan repayments.
VARIABLE ACCOUNT VALUES
When you allocate an amount to a variable account investment option, either
by net premium allocation or transfer, your Policy is credited with accumulation
units. The number of accumulation units is determined by dividing the amount
allocated to the variable account investment option by the variable account's
accumulation unit value for the valuation period in which the allocation was
made.
The number of accumulation units credited to your Policy for a variable
account investment option will increase when net premiums are allocated to the
variable account, amounts are transferred to the variable account and loan
repayments are credited to the variable account. The number of accumulation
units will decrease when the allocated portion of the monthly deduction is taken
from the variable account, a policy loan is taken from the variable account, an
amount is transferred from the variable account or a partial surrender is made
from the variable account (including the partial surrender charge).
28
<PAGE>
ACCUMULATION UNIT VALUES
An accumulation unit value varies to reflect the investment experience of
the underlying investment fund in which the Policy is invested and the mortality
and expense risk charge assessed against the investment, and may increase or
decrease from one valuation date to the next. The accumulation unit value of
each subaccount of the Separate Account that invests in a fund 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.
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 taken from the fixed account (including the
partial surrender charges), and less the pro rata portion of the monthly
deduction deducted from the fixed account. If there have been any policy loans,
the fixed account value is further adjusted to reflect the amount in the special
loan account, including transfers to and from the special loan account as loans
are taken and repayments are made, and interest credited on the policy special
loan account.
NET POLICY VALUE
The net policy value on a valuation date is the policy value less the amount
of any policy loan 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.
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 to you for full or partial surrenders.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS
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 on Penn Mutual's understanding of
the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service (the "IRS"). No representation is made as to the
likelihood of continuation of the present Federal income tax laws or of the
current interpretations by the IRS.
TAX STATUS OF THE POLICY
To qualify as a life insurance contract for federal income tax purposes, the
Policy must meet the definition of a life insurance contract which is set forth
in Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code").
The manner in which Section 7702 should be applied to certain features of the
Policy offered in this prospectus is not directly addressed by Section 7702 or
any guidance issued to date under Section 7702. Nevertheless, Penn Mutual
believes it is reasonable to conclude that the Policy will meet the Section 7702
definition of a life insurance contract. In the absence of final regulations or
other pertinent interpretations of Section 7702, however, there is necessarily
some
29
<PAGE>
uncertainty as to whether a Policy will meet the statutory life insurance
contract definition, particularly if it insures a substandard risk. If a Policy
were determined not to be a life insurance contract for purposes of Section
7702, such contract would not provide most of the tax advantages normally
provided by a life insurance contract.
If it is subsequently determined that a Policy does not satisfy Section
7702, we may take whatever steps that are appropriate and reasonable to comply
with Section 7702. For these reasons, we reserve 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 each Subaccount
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 (discussed above). The Separate Account,
through the funds, intends to comply with the diversification requirements
prescribed in Treas. Reg. ss. 1.817-5, which affect how the funds' assets are to
be invested. Penn Mutual believes that the Separate Account will thus meet the
diversification requirement, and Penn Mutual will monitor continued compliance
with this requirement.
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. In circumstances where the variable
contract owner is considered the owner of separate account assets, income and
gain from the assets would be includable in the variable contract owner's gross
income. In connection with the issuance of regulations on the phrase "adequate
diversification," the Treasury Department announced in 1984 that guidance would
be given, by way of regulation or ruling, on the "extent to which Policyholders
may direct their investments to particular subaccounts without being treated as
owners of underlying assets." As of the date of this Prospectus, no ruling or
regulation has been issued.
The following discussion assumes that the Policy qualifies as a life
insurance contract for federal income tax purposes.
We believe 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.
MODIFIED ENDOWMENT CONTRACTS
The Internal Revenue Code 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. At the time a
premium is credited which would cause the Policy to become a modified endowment
contract, we will notify you that unless a refund of the excess premium (with
interest) is requested, your Policy will become a modified endowment contract.
You will have 30 days after receiving such notification to request the refund.
All policies that we or our affiliate issues to the same owner during any
calendar year, which are treated as modified endowment contracts, 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.
The rules relating to whether a Policy will be treated as a modified
endowment contract are complex and make it impracticable to adequately describe
in the limited confines of this summary. Therefore, you may wish to consult with
a competent advisor to determine whether a Policy transaction will cause the
Policy to be treated as a modified endowment contract.
30
<PAGE>
DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS
Policies classified as a modified endowment contract will be subject to
the following tax rules. First, all distributions, including distributions upon
surrender and partial withdrawals 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 imposed on the
portion of any distribution from, or loan taken from or secured by, such a
Policy that 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 15 years after the Policy is
issued and that results in a cash distribution to the owner in order for the
Policy to 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 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 LOAN INTEREST
Generally, personal interest paid on a 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 will
generally not be tax deductible. The deduction of interest on policy loans may
also be subject to the restrictions of Section 264 of the Code. An owner should
consult a tax adviser before deducting any interest paid in respect of a policy
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.
OTHER TAX CONSIDERATIONS
The transfer of the Policy or the designation of a beneficiary may have
federal, state, and/or local transfer and inheritance tax consequences,
including the imposition of gift, estate and generation-skipping transfer taxes.
For example, the transfer of the Policy to, or the designation as beneficiary
of, or the payment of proceeds to, a person who is assigned to a generation
which is two or more generations below the generation of the owner, may have
generation skipping transfer tax considerations under Section 2601 of the Code.
The individual situation of each owner or beneficiary will determine the
extent, if any, to which federal, state and local transfer taxes may be imposed.
Consult with your tax adviser for specific information in connection with these
taxes.
31
<PAGE>
- --------------------------------------------------------------------------------
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 Policy is sold by registered representatives of HTK
who are also appointed and licensed as insurance agents. The Policy may also be
offered through other insurance and securities brokers. Registered
representatives may be paid commissions on a Policy 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 1998, 1997 and 1996, Penn Mutual received premium payments on the
Policy in the approximate amount of $50,165,566, $37,235,661 and $24,697,000,
respectively, and compensated HTK in the approximate amounts of $261,524,
$152,836, and $27,800, respectively, for its services as principal underwriter.
- --------------------------------------------------------------------------------
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
NAME AND ADDRESS PENN MUTUAL PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert E. Chappell Chairman of the Board Chairman of the Board and Chief Executive Officer (since
The Penn Mutual Life and Chief Executive December 1996), President and Chief Executive Officer
Insurance Company Officer (April 1995-December 1996), President and Chief Operating
Philadelphia, PA 19172 Officer, (January1994 to April 1995), The Penn Mutual Life
Insurance Company.
- -----------------------------------------------------------------------------------------------------------------------------
Daniel J. Toran President, Chief President and Chief Operating Officer (since January 1997),
The Penn Mutual Life Operating Officer Executive Vice President, (May 1996-January 1997), The Penn
Insurance Company and Trustee Mutual Life Insurance Company; Executive Vice President, The
Philadelphia, PA 19172 New England Mutual Life Insurance Company (prior thereto).
- -----------------------------------------------------------------------------------------------------------------------------
Julia Chang Bloch Trustee Visiting Professor, Institute of International Relations in Beijing,
1743 22nd Street, NW China, and distinguished adviser, American Studies Center
Washington, DC 20008 (April 1998 to present); President, US-Japan Foundation (July 1996
to March 1998); Group Executive Vice President, Bank America NT
& SA (June 1993 to June 1996).
- -----------------------------------------------------------------------------------------------------------------------------
James A. Hagen Trustee Retired (since May 1996), Chairman of the Board, Conrail, Inc.
2040 Montrose Lane (prior thereto).
Wilmington, NC 28405
- -----------------------------------------------------------------------------------------------------------------------------
Philip E. Lippincott Trustee Retired (since April 1994), Chairman and Chief Executive Officer,
4301 Bayberry Drive Scott Paper Company (prior thereto).
Avalon, NJ 08202
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John F. McCaughan Trustee Retired Chairman (since 1996), Chairman of the Board, (prior thereto).
921 Pebble Hill Road Betz Laboratories, Inc.
Doylestown, PA 18901
- -----------------------------------------------------------------------------------------------------------------------------
Alan B. Miller Trustee Chairman and President, Universal Health Services, Inc.
367 S. Gulph Road
King of Prussia, PA 19406
- -----------------------------------------------------------------------------------------------------------------------------
Edmond F. Notebaert Trustee President and Chief Executive Officer, The Children's Hospital of
34th & Civic Center Blvd. Philadelphia (since 1987).
Philadelphia, PA 19104
- -----------------------------------------------------------------------------------------------------------------------------
Robert H. Rock Trustee President, MLR Holdings, LLC (since 1987).
9th Floor
1845 Walnut Street
Philadelphia, PA 19103
- -----------------------------------------------------------------------------------------------------------------------------
Norman T. Wilde, Jr. Trustee President and Chief Executive Officer, Janney Montgomery Scott
1801 Market Street Inc. (a securities broker/dealer and subsidiary of The Penn Mutual
Philadelphia, PA 19103 Life Insurance Company).
- -----------------------------------------------------------------------------------------------------------------------------
Wesley S. Williams, Jr., Esq. Trustee Partner, Covington & Burling (law firm).
1201 Pennsylvania Ave., N.W.
P.O. Box 7566
Washington, D.C. 20004
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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>
<S> <C>
NAME PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------
John M. Albanese Senior Vice President, Customer Service and Information Systems (since June 1997),
The Penn Mutual Life Vice President, Information Systems Application (prior thereto), The Penn Mutual Life
Insurance Company Insurance Company.
Philadelphia, PA 19172
- -----------------------------------------------------------------------------------------------------------------------------
George W. Bentham Senior Vice President, Career Agency System (since April 1998), The Penn Mutual Life
The Penn Mutual Life Insurance Company, Independent Consultant (1997); Senior Vice President & Chief of
Insurance Company Marketing Officer (1995-1996), American General Life; Vice President,
Philadelphia, PA 19172 Individual Marketing (prior thereto), Alexander Hamilton Life.
- -----------------------------------------------------------------------------------------------------------------------------
Michael A. Biondolillo Senior Vice President, Human Resources (since June 1997); Corporate Vice President and
The Penn Mutual Life General Manager, Human Resources and Quality MG Industries, America (prior thereto).
Insurance Company
Philadelphia, PA 19172
- -----------------------------------------------------------------------------------------------------------------------------
Nancy S. Brodie Executive Vice President and Chief Financial Officer (since December 1995), Senior Vice
The Penn Mutual Life President and Chief Financial Officer (prior thereto), The Penn Mutual Life Insurance
Insurance Company Company.
Philadelphia, PA 19172
- -----------------------------------------------------------------------------------------------------------------------------
Larry L. Mast Executive Vice President, The Penn Mutual Life Insurance Company (May 1997 to present).
The Penn Mutual Life Formerly Senior Vice President, Lafayette Life Insurance Company (September 1994 to
Insurance Company May 1997); Vice President, Security Benefit Insurance Company (May 1993 to September
Philadelphia, PA 19172 1994); Vice President, Home Life Insurance Company (July 1990 to May 1993); Agency
Manager, The Equitable Life Insurance Company (August 1978 to July 1990).
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harold E. Maude, Jr. Senior Vice President, Independence Financial Network (since July 1996), Vice President,
The Penn Mutual Life Independence Financial Network (prior thereto), The Penn Mutual Life Insurance Company.
Insurance Company
Philadelphia, PA 19172
- -----------------------------------------------------------------------------------------------------------------------------
Nina M. Mulrooney General Auditor (since November 1991), Vice President, Market Conduct (since December
The Penn Mutual Life 1997), Assistant Vice President, Corporate Accounting and Controls (prior thereto),
Insurance Company The Penn Mutual Life Insurance Company.
Philadelphia, PA 19172
- -----------------------------------------------------------------------------------------------------------------------------
Peter M. Sherman Executive Vice President (since December 1998), Chief Investment Officer (since May
The Penn Mutual Life 1996), Senior Vice President (May 1996 to December 1996), Vice President, Investments
Insurance Company (January 1996 to April 1996), Vice President, Fixed Income Portfolio Management (prior
Philadelphia, PA 19172 thereto), The Penn Mutual Life Insurance Company; President, Independence Capital
Management, Inc. (an investment advisory organization and subsidiary of Penn Mutual).
</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.
- ------------------------------------------------------------------------
INDEPENDENT AUDITORS
Ernst & Young LLP serve as independent auditors of The Penn Mutual Life
Insurance Company and Penn Mutual Variable Life Account I. Their offices are
located at 2001 Market Street, Suite 4000, Philadelphia, PA.
- ------------------------------------------------------------------------
EXPERTS
Actuarial matters included in this prospectus have been examined by Edward
S. Attarian, FSA, MAAA, Actuary of Penn Mutual, whose opinion is filed as an
exhibit to the Registration Statement.
34
<PAGE>
- ------------------------------------------------------------------------
LITIGATION
No litigation is pending that would have a material effect upon the
subaccounts or Penn Mutual.
- ------------------------------------------------------------------------
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 Separate Account and of Penn Mutual appear
on the following pages. The financial statements of Penn Mutual should be
distinguished from any financial statements of the Separate Accounts and should
be considered only as bearing upon Penn Mutual's ability to meet its obligations
under the Policies.
35
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Penn Mutual Life Insurance Company and Contract Owners of Penn Mutual
Variable Life Account I
We have audited the accompanying statement of assets and liabilities of Penn
Mutual Variable Life Account I (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,
Emerging Growth Fund, Balanced Portfolio, Limited Maturity Bond Portfolio,
Partners Portfolio, Capital Appreciation Portfolio, Equity Income Portfolio,
Growth Portfolio, Asset Manager Portfolio, Index 500 Portfolio, Emerging
Markets Equity Portfolio) as of December 31, 1998 and the related statement of
operations and statements of changes in net assets for the each of the periods
indicated therein. These financial statements are the responsibility of the
management of Penn Mutual Variable Life Account I. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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, 1998,
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 audit provides 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 each of the portfolios
constituting the Penn Mutual Variable Life Account I at December 31, 1998, the
results of their operations and changes in their net assets for each of the
periods indicted therein, in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania ERNST & YOUNG LLP
April 2, 1999
36
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD GROWTH EQUITY
TOTAL MARKET FUND+ BOND FUND+ BOND FUND+ FUND+
--------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT IN COMMON STOCK
Number of Shares .................... 11,334,098 638,649 861,738 489,993
Cost ................................ $235,497,972 $11,334,098 $6,652,404 $8,192,626 $11,729,650
ASSETS:
Investments at Market Value ......... $257,521,685 $11,334,098 $6,641,947 $7,919,370 $15,130,985
Dividends receivable ................ 49,116 49,116 -- -- --
Liabilities:
Due to (from) The Penn Mutual
Life Insurance Company ............. 221,956 (36,363) 1,424 1,812 3,933
------------ ----------- ---------- ---------- -----------
NET ASSETS ........................... $257,348,845 $11,419,577 $6,640,523 $7,917,558 $15,127,052
============ =========== ========== ========== ===========
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD GROWTH EQUITY
TOTAL MARKET FUND++ BOND FUND++ BOND FUND++ FUND++
------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ............................ $ 4,222,562 $523,576 $ 294,435 $ 615,511 $ 10,136
Expense:
Mortality and expense risk
charges ............................. 1,744,648 90,068 42,394 52,081 86,351
----------- -------- --------- ---------- -----------
Net investment income (loss) ......... 2,477,914 433,508 252,041 563,430 (76,215)
----------- -------- --------- ---------- -----------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses) from
redemption of fund shares ........... 672,191 -- 5,291 291 11,013
Capital gains distributions .......... 15,495,765 -- 198,445 -- 1,579,046
----------- -------- --------- ---------- -----------
Net realized gains from
investment transactions ............. 16,167,956 -- 203,736 291 1,590,059
Net change in unrealized
appreciation/depreciation of
investments ......................... 6,282,694 -- (14,899) (318,691) 2,350,499
----------- -------- --------- ---------- -----------
Net realized and unrealized
gains (losses) on investments 22,450,650 -- 188,837 (318,400) 3,940,558
----------- -------- --------- ---------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS .......................... $24,928,564 $433,508 $ 440,878 $ 245,030 $ 3,864,343
=========== ======== ========= ========== ===========
</TABLE>
- ----------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds
I and II
+++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL EMERGING
VALUE EQUITY MANAGED INTERNATIONAL CAPITALIZATION GROWTH
FUND+ FUND+ EQUITY FUND+ FUND+ FUND+
- -------------- -------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
1,585,105 3,017,417 1,218,820 650,958 340,754
$31,453,934 $56,227,637 $19,383,461 $8,691,334 $4,774,068
$35,490,505 $55,248,910 $22,401,909 $8,338,774 $5,939,334
-- -- -- -- --
8,841 12,414 5,512 1,984 1,797
----------- ----------- ----------- ---------- ----------
$35,481,664 $55,236,496 $22,396,397 $8,336,790 $5,937,537
=========== =========== =========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL EMERGING
VALUE EQUITY MANAGED INTERNATIONAL CAPITALIZATION GROWTH
FUND++ FUND++ EQUITY FUND++ FUND++ FUND++
- -------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
$ 441,858 $ 1,554,726 $ 206,500 $ 52,380 $ --
260,226 409,962 149,839 57,923 29,768
----------- ------------ ----------- -------- -----------
181,632 1,144,764 56,661 (5,543) (29,768)
----------- ------------ ----------- -------- -----------
289,563 246,644 250,872 (4) 9,622
2,887,717 5,538,196 719,716 135,420 790
----------- ------------ ----------- ---------- -----------
3,177,280 5,784,840 970,588 135,416 10,412
(904,321) (4,524,890) 2,087,405 (791,507) 1,277,385
----------- ------------ ----------- ---------- -----------
2,272,959 1,259,950 3,057,993 (656,091) 1,287,797
----------- ------------ ----------- ---------- -----------
$ 2,454,591 $ 2,404,714 $ 3,114,654 ($661,634) $ 1,258,029
=========== ============ =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1998 (CONT'D.)
<TABLE>
<CAPTION>
LIMITED CAPITAL
BALANCED MATURITY BOND PARTNERS APPRECIATION
PORTFOLIO++ PORTFOLIO++ PORTFOLIO++ PORTFOLIO+++
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Investment in Common Stock
Number of Shares .................... 314,303 88,920 433,797 639,216
Cost ................................ $4,865,196 $1,233,751 $8,393,609 $6,249,378
Assets:
Investments at Market Value ......... $5,135,714 $1,228,881 $8,211,769 $5,765,731
Dividends receivable ................ -- -- -- --
Liabilities:
Due to The Penn Mutual Life Insurance
Company ............................ 1,231 283 2,075 1,584
---------- ---------- ---------- ----------
Net Assets .......................... $5,134,483 $1,228,598 $8,209,694 $5,764,147
========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED DECEMBER 31, 1998 (CONT'D.)
<TABLE>
<CAPTION>
LIMITED CAPITAL
BALANCED MATURITY BOND PARTNERS APPRECIATION
PORTFOLIO++ PORTFOLIO++ PORTFOLIO++ PORTFOLIO+++
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends ..................................... $ 87,653 $ 49,871 $ 15,266 $ --
Expense:
Mortality and expense risk charges ............ 34,876 7,976 49,221 47,491
---------- --------- ---------- ---------
Net investment income (loss) .................. 52,777 41,895 (33,955) (47,491)
---------- --------- ---------- ---------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of
fund shares .................................. (5,003) 242 5,188 (164,376)
Capital gains distributions ................... 615,658 -- 480,865 304,408
---------- --------- ---------- ---------
Net realized gains from investment transactions 610,655 242 486,053 140,032
Net change in unrealized appreciation/
depreciation of investments .................. (184,479) (13,221) (271,429) (261,202)
---------- --------- ---------- ---------
Net realized and unrealized gains (losses) on
investments .................................. 426,176 (12,979) 214,624 (121,170)
---------- --------- ---------- ---------
Net increase (decrease) in net assets
resulting from operations .................... $ 478,953 $ 28,916 $ 180,669 ($ 168,661)
========== ========= ========== =========
</TABLE>
- ----------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products Funds
I and II
+++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
EQUITY INCOME GROWTH ASSET MANAGER INDEX 500 MARKETS EQUITY
PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO+++++
- ------------------- ------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
781,731 636,718 204,814 104,596 253,025
$16,956,543 $21,094,184 $3,351,168 $12,706,988 $2,207,943
$19,871,602 $28,569,544 $3,719,433 $14,774,172 $1,799,007
-- -- -- -- --
5,352 7,739 948 4,001 197,389
----------- ----------- ---------- ----------- ----------
$19,866,250 $28,561,805 $3,718,485 $14,770,171 $1,601,618
=========== =========== ========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
EQUITY INCOME GROWTH ASSET MANAGER INDEX 500 MARKETS EQUITY
PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO+++++
- ------------------- ------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
$ 182,863 $ 80,651 $ 68,039 $ 30,625 $ 8,472
142,405 186,928 24,502 62,991 9,646
----------- ----------- --------- ----------- ---------
40,458 (106,277) 43,537 (32,366) (1,174)
----------- ----------- --------- ----------- ---------
(1,038) 33,351 (1,881) (9,976) 2,392
650,775 2,109,678 204,117 70,934 --
----------- ----------- --------- ----------- ---------
649,737 2,143,029 202,236 60,958 2,392
963,306 5,047,623 136,988 1,980,793 (276,666)
----------- ----------- --------- ----------- ---------
1,613,043 7,190,652 339,224 2,041,751 (274,274)
----------- ----------- --------- ----------- ---------
$ 1,653,501 $ 7,084,375 $ 382,761 $ 2,009,385 ($ 275,448)
=========== =========== ========= =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997
<TABLE>
<CAPTION>
TOTAL
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) .......................... $ 2,477,914 $ 2,286,799
Net realized gains (losses) from investment
transactions ......................................... $ 16,167,956 $ 6,873,413
Net change in unrealized appreciation/
depreciation of investments .......................... $ 6,282,694 $ 8,957,231
------------- ------------
Net increase (decrease) in net assets resulting from
operations ............................................ $ 24,928,564 $ 18,117,443
------------- ------------
VARIABLE LIFE ACTIVITIES:
Purchase payments ..................................... $ 96,529,479 $ 68,853,918
Death benefits ........................................ (121,041) (227,121)
Cost of Insurance ..................................... (14,082,492) (9,134,776)
Net Transfers ......................................... (3,175,599) (1,981,811)
Transfers of Policy Loans ............................. 577,625 571,227
Contract administration charges ....................... (3,850,403) (2,917,736)
Surrender benefits .................................... (5,921,782) (3,480,445)
------------- ------------
Net increase (decrease) in net assets resulting from
variable life activities .............................. 69,955,787 51,683,256
------------- ------------
Total increase (decrease) in net assets ............... 94,884,351 69,800,699
NET ASSETS:
Beginning of year ..................................... 162,464,494 92,663,795
------------- ------------
END OF YEAR ........................................... $ 257,348,845 $162,464,494
============= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MONEY MARKET FUND+ QUALITY BOND FUND+
---------------------------------- ----------------------------
1998 1997 1998 1997
---------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) .......................... $ 433,508 $ 300,710 $ 252,041 $ 215,998
Net realized gains (losses) from investment
transactions ......................................... -- -- 203,736 7,913
Net change in unrealized appreciation/
depreciation of investments .......................... -- -- (14,899) 32,551
-------------- -------------- ---------- ----------
Net increase (decrease) in net assets resulting from
operations ............................................ 433,508 300,710 440,878 256,462
-------------- -------------- ---------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments ..................................... 42,019,252 28,866,480 1,155,232 1,215,245
Death benefits ........................................ (2,035) -- (249) (1,336)
Cost of Insurance ..................................... (1,191,497) (872,326) (259,658) (199,435)
Net Transfers ......................................... (36,872,301) (25,581,701) 1,041,850 458,596
Transfers of Policy Loans ............................. (251) 89,746 10,440 13,339
Contract administration charges ....................... (488,180) (378,302) (42,018) (47,774)
Surrender benefits .................................... (418,927) (145,321) (105,331) (105,819)
-------------- -------------- ---------- ----------
Net increase (decrease) in net assets resulting from
variable life activities .............................. 3,046,061 1,978,576 1,800,266 1,332,816
-------------- -------------- ---------- ----------
Total increase (decrease) in net assets ............... 3,479,569 2,279,286 2,241,144 1,589,278
NET ASSETS:
Beginning of year ..................................... 7,940,008 5,660,722 4,399,379 2,810,101
-------------- -------------- ---------- ----------
END OF YEAR ........................................... $ 11,419,577 $ 7,940,008 $6,640,523 $4,399,379
============== ============== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND+ GROWTH EQUITY FUND+
---------------------------- ------------------------------
1998 1997 1998 1997
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ $ 563,430 $ 374,009 ($ 76,215) ($ 23,309)
Net realized gains (losses) from investment
transactions ....................................... 291 12,914 1,590,059 811,998
Net change in unrealized appreciation/
depreciation of investments ........................ (318,691) 186,727 2,350,499 691,676
---------- ---------- ---------- ---------
Net increase (decrease) in net assets resulting from
operations .......................................... 245,030 573,650 3,864,343 1,480,365
---------- ---------- ---------- ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 1,768,367 1,004,141 2,036,864 1,437,064
Death benefits ...................................... (232) (1,457) (413) (50,472)
Cost of Insurance ................................... (377,793) (250,416) (570,484) (399,675)
Net Transfers ....................................... 1,334,768 818,234 2,177,912 596,566
Transfers of Policy Loans ........................... 8,460 2,899 15,214 29,423
Contract administration charges ..................... (95,903) (62,569) (129,899) (94,210)
Surrender benefits .................................. (220,758) (134,700) (316,681) (244,609)
---------- ---------- ---------- ---------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 2,416,909 1,376,132 3,212,513 1,274,087
---------- ---------- ---------- ---------
Total increase (decrease) in net assets ............. 2,661,939 1,949,782 7,076,856 2,754,452
NET ASSETS:
Beginning of year ................................... 5,255,619 3,305,837 8,050,196 5,295,744
---------- ---------- ---------- ---------
END OF YEAR ......................................... $7,917,558 $5,255,619 $15,127,052 $8,050,196
========== ========== =========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VALUE EQUITY FUND+
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ $ 181,632 $ 155,892
Net realized gains (losses) from investment
transactions ....................................... 3,177,280 1,423,465
Net change in unrealized appreciation/
depreciation of investments ........................ (904,321) 2,544,660
------------ ------------
Net increase (decrease) in net assets resulting from
operations .......................................... 2,454,591 4,124,017
------------ ------------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 7,712,812 6,366,819
Death benefits ...................................... (3,109) (70,127)
Cost of Insurance ................................... (2,002,921) (1,349,019)
Net Transfers ....................................... 2,352,575 4,591,570
Transfers of Policy Loans ........................... 129,894 47,924
Contract administration charges ..................... (471,036) (409,821)
Surrender benefits .................................. (800,734) (498,860)
------------ ------------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 6,917,481 8,678,486
------------ ------------
Total increase (decrease) in net assets ............. 9,372,072 12,802,503
NET ASSETS:
Beginning of year ................................... 26,109,592 13,307,089
------------ ------------
END OF YEAR ......................................... $ 35,481,664 $ 26,109,592
============ ============
</TABLE>
- ----------
* For the period from May 1, 1997 (date fund became available for
investment to contract owners) to December 31, 1997.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI
Portfolios, Inc.'s name changed to American Century Variable
Portfolios, Inc. as of May 1, 1997)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds
I and II
+++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D)
<TABLE>
<CAPTION>
FLEXIBLY MANAGED FUND+
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ $ 1,144,764 $ 949,494
Net realized gains (losses) from investment
transactions ....................................... 5,784,840 2,543,108
Net change in unrealized appreciation/
depreciation of investments ........................ (4,524,890) 1,371,189
------------ ------------
Net increase (decrease) in net assets resulting from
operations .......................................... 2,404,714 4,863,791
------------ ------------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 12,234,331 11,469,514
Death benefits ...................................... (17,851) (71,412)
Cost of Insurance ................................... (3,137,840) (2,384,305)
Net Transfers ....................................... 1,345,485 4,080,131
Transfers of Policy Loans ........................... 139,613 217,489
Contract administration charges ..................... (646,642) (635,429)
Surrender benefits .................................. (1,299,724) (1,056,819)
------------ ------------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 8,617,372 11,619,169
------------ ------------
Total increase (decrease) in net assets ............. 11,022,086 16,482,960
NET ASSETS:
Beginning of year ................................... 44,214,410 27,731,450
------------ ------------
END OF YEAR ......................................... $ 55,236,496 $ 44,214,410
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SMALL
INTERNATIONAL EQUITY FUND+ CAPITALIZATION FUND+
-------------------------------- -----------------------------
1998 1997 1998 1997
--------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ $ 56,661 $ 327,027 ($ 5,543) ($ 5,769)
Net realized gains (losses) from investment
transactions ....................................... 970,588 477,764 135,416 305,901
Net change in unrealized appreciation/
depreciation of investments ........................ 2,087,405 167,910 (791,507) 335,317
------------ ----------- --------- ---------
Net increase (decrease) in net assets resulting from
operations .......................................... 3,114,654 972,701 (661,634) 635,449
------------ ----------- --------- ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 4,244,414 3,663,296 2,372,356 1,432,627
Death benefits ...................................... (15,627) (5,840) (10,571) --
Cost of Insurance ................................... (1,050,548) (773,212) (505,718) (271,482)
Net Transfers ....................................... 3,160,776 970,906 2,227,491 1,740,303
Transfers of Policy Loans ........................... 65,814 39,319 11,010 1,886
Contract administration charges ..................... (252,405) (242,507) (165,296) (137,928)
Surrender benefits .................................. (633,058) (317,635) (129,707) (87,759)
------------ ----------- --------- ---------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 5,519,366 3,334,327 3,799,565 2,677,647
------------ ----------- --------- ---------
Total increase (decrease) in net assets ............. 8,634,020 4,307,028 3,137,931 3,313,096
NET ASSETS:
Beginning of year ................................... 13,762,377 9,455,349 5,198,859 1,885,763
------------ ----------- --------- ---------
END OF YEAR ......................................... $ 22,396,397 $13,762,377 $8,336,790 $5,198,859
============ =========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EMERGING GROWTH
PORTFOLIO+
----------------------------
1998 1997*
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ....................... ($ 29,768) ($ 3,056)
Net realized gains (losses) from
investment transactions ........................... 10,412 103,234
Net change in unrealized appreciation/
depreciation of investments ....................... 1,277,385 (112,119)
--------- ---------
Net increase (decrease) in net assets resulting from
operations ......................................... 1,258,029 (11,941)
--------- ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments .................................. 1,376,626 213,011
Death benefits ..................................... -- --
Cost of Insurance .................................. (270,389) (37,401)
Net Transfers ...................................... 2,271,306 1,339,220
Transfers of Policy Loans .......................... 949 1,315
Contract administration charges .................... (117,695) (14,740)
Surrender benefits ................................. (61,482) (9,271)
--------- ---------
Net increase (decrease) in net assets resulting from
variable life activities 3,199,315 1,492,134
--------- ---------
Total increase (decrease) in net assets ............ 4,457,344 1,480,193
NET ASSETS:
Beginning of year .................................. 1,480,193 --
--------- ---------
END OF YEAR ........................................ $5,937,537 $1,480,193
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIMITED MATURITY
BALANCED PORTFOLIO++ BOND PORTFOLIO++
---------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ....................... $ 52,777 $ 24,109 $ 41,895 $ 19,870
Net realized gains (losses) from
investment transactions ........................... 610,655 143,065 242 1,045
Net change in unrealized appreciation/
depreciation of investments ....................... (184,479) 329,788 (13,221) 6,174
---------- ---------- ---------- ---------
Net increase (decrease) in net assets resulting from
operations ......................................... 478,953 496,962 28,916 27,089
---------- ---------- ---------- ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments .................................. 1,068,630 750,229 300,887 129,943
Death benefits ..................................... (2,001) -- -- --
Cost of Insurance .................................. (278,391) (204,934) (58,968) (37,130)
Net Transfers ...................................... 526,196 21,044 318,853 195,109
Transfers of Policy Loans .......................... 83,335 8,450 5,849 136
Contract administration charges .................... (50,297) (46,472) (14,141) (10,627)
Surrender benefits ................................. (163,220) (117,124) (9,313) (20,203)
---------- ---------- ---------- ---------
Net increase (decrease) in net assets resulting from
variable life activities 1,184,252 411,193 543,167 257,228
---------- ---------- ---------- ---------
Total increase (decrease) in net assets ............ 1,663,205 908,155 572,083 284,317
NET ASSETS:
Beginning of year .................................. 3,471,278 2,563,123 656,515 372,198
---------- ---------- ---------- ---------
END OF YEAR ........................................ $5,134,483 $3,471,278 $1,228,598 $ 656,515
========== ========== ========== =========
</TABLE>
- ----------
* For the period from May 1, 1997 (date fund became available for
investment to contract owners) to December 31, 1997.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI
Portfolios, Inc.'s name changed to American Century Variable
Portfolios, Inc.
as of May 1, 1997)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds
I and II
+++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D)
<TABLE>
<CAPTION>
PARTNERS CAPITAL APPRECIATION
PORTFOLIO++ PORTFOLIO+++
---------------------------- ------------------------------
1998 1997* 1998 1997
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ ($ 33,955) ($ 5,104) ($ 47,491) ($ 48,298)
Net realized gains (losses) from investment
transactions ....................................... 486,053 668 140,032 97,458
Net change in unrealized appreciation/
depreciation of investments ........................ (271,429) 89,588 (261,202) (284,767)
--------- --------- ------------ ---------
Net increase (decrease) in net assets resulting from
operations .......................................... 180,669 85,152 (168,661) (235,607)
--------- --------- ------------ ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 2,301,846 386,750 1,577,063 2,020,105
Death benefits ...................................... -- -- (3,745) (1,604)
Cost of Insurance ................................... (484,655) (47,124) (342,552) (421,351)
Net Transfers ....................................... 3,388,292 2,721,133 (1,352,477) (623,011)
Transfers of Policy Loans ........................... 11,914 61,300 35,632 38,426
Contract administration charges ..................... (201,761) (21,320) (53,636) (105,328)
Surrender benefits .................................. (138,687) (33,815) (244,500) (146,305)
--------- --------- ------------ ---------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 4,876,949 3,066,924 (384,215) 760,932
--------- --------- ------------ ---------
Total increase (decrease) in net assets ............. 5,057,618 3,152,076 (552,876) 525,325
NET ASSETS:
Beginning of year ................................... 3,152,076 -- 6,317,023 5,791,698
--------- --------- ------------ ---------
END OF YEAR ......................................... $8,209,694 $3,152,076 $ 5,764,147 $6,317,023
========== ========== ============ ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EQUITY INCOME
PORTFOLIO+++++
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ $ 40,458 $ 27,835
Net realized gains (losses) from investment
transactions ....................................... 649,737 527,069
Net change in unrealized appreciation/
depreciation of investments ........................ 963,306 1,460,290
------------ -----------
Net increase (decrease) in net assets resulting from
operations .......................................... 1,653,501 2,015,194
------------ -----------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 4,640,276 3,478,226
Death benefits ...................................... (20,055) (417)
Cost of Insurance ................................... (1,115,035) (658,142)
Net Transfers ....................................... 2,979,305 2,552,951
Transfers of Policy Loans ........................... 25,171 7,118
Contract administration charges ..................... (297,186) (250,922)
Surrender benefits .................................. (430,380) (233,942)
------------ -----------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 5,782,096 4,894,872
------------ -----------
Total increase (decrease) in net assets ............. 7,435,597 6,910,066
NET ASSETS:
Beginning of year ................................... 12,430,653 5,520,587
------------ -----------
END OF YEAR ......................................... $ 19,866,250 $12,430,653
============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROWTH
PORTFOLIO++++
-------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ ($ 106,277) ($ 43,860)
Net realized gains (losses) from investment
transactions ....................................... 2,143,029 304,537
Net change in unrealized appreciation/
depreciation of investments ........................ 5,047,623 2,035,646
----------- ----------
Net increase (decrease) in net assets resulting from
operations .......................................... 7,084,375 2,296,323
----------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 5,974,648 5,099,758
Death benefits ...................................... (45,153) (24,456)
Cost of Insurance ................................... (1,459,882) (998,857)
Net Transfers ....................................... 2,873,583 1,434,688
Transfers of Policy Loans ........................... 22,413 9,883
Contract administration charges ..................... (385,848) (376,844)
Surrender benefits .................................. (689,227) (260,882)
----------- ----------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 6,290,534 4,883,290
----------- ----------
Total increase (decrease) in net assets ............. 13,374,909 7,179,613
NET ASSETS:
Beginning of year ................................... 15,186,896 8,007,283
----------- ----------
END OF YEAR ......................................... $28,561,805 $15,186,896
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ASSET MANAGER INDEX 500
PORTFOLIO++++ PORTFOLIO++++
---------------------------- -------------------------------
1998 1997 1998 1997*
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ........................ $ 43,537 $ 22,295 $ (32,366) ($ 4,612)
Net realized gains (losses) from investment
transactions ....................................... 202,236 93,523 60,958 (281)
Net change in unrealized appreciation/
depreciation of investments ........................ 136,988 148,479 1,980,793 86,391
---------- ---------- ----------- ---------
Net increase (decrease) in net assets resulting from
operations .......................................... 382,761 264,297 2,009,385 81,498
---------- ---------- ----------- ---------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................... 834,804 597,121 4,295,628 551,343
Death benefits ...................................... -- -- -- --
Cost of Insurance ................................... (216,443) (142,702) (664,534) (67,988)
Net Transfers ....................................... 807,683 466,840 7,630,497 1,438,291
Transfers of Policy Loans ........................... 1,050 1,178 9,823 1,000
Contract administration charges ..................... (49,185) (42,870) (335,545) (30,351)
Surrender benefits .................................. (115,461) (27,439) (115,742) (33,134)
---------- ---------- ----------- ---------
Net increase (decrease) in net assets resulting from
variable life activities ............................ 1,262,448 852,128 10,820,127 1,859,161
---------- ---------- ----------- ---------
Total increase (decrease) in net assets ............. 1,645,209 1,116,425 12,829,512 1,940,659
NET ASSETS:
Beginning of year ................................... 2,073,276 956,851 1,940,659 --
---------- ---------- ----------- ---------
END OF YEAR ......................................... $3,718,485 $2,073,276 $14,770,171 $1,940,659
========== ========== =========== ==========
</TABLE>
- ----------
* For the period from May 1, 1997 (date fund became available for investment
to contract owners) to December 31, 1997.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Portfolios,
Inc.'s name changed to American Century Variable Portfolios, Inc. as of
May 1, 1997)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II
+++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D)
<TABLE>
<CAPTION>
EMERGING MARKETS
PORTFOLIO+++++
------------------------------
1998 1997*
-------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ...................... ($ 1,174) $ 3,568
Net realized gains (losses) from investment
transactions ..................................... 2,392 20,032
Net change in unrealized appreciation/
depreciation of investments ...................... (276,666) (132,269)
--------- ----------
Net increase (decrease) in net assets resulting from
operations ........................................ (275,448) (108,669)
--------- ----------
VARIABLE LIFE ACTIVITIES:
Purchase payments ................................. 615,443 172,246
Death benefits .................................... -- --
Cost of Insurance ................................. (95,184) (19,277)
Net Transfers ..................................... 612,607 797,319
Transfers of Policy Loans ......................... 1,295 396
Contract administration charges ................... (53,730) (9,722)
Surrender benefits ................................ (28,850) (6,808)
--------- ----------
Net increase (decrease) in net assets resulting from
variable life activities .......................... 1,051,581 934,154
--------- ----------
Total increase (decrease) in net assets ........... 776,133 825,485
NET ASSETS:
Beginning of year ................................. 825,485 --
--------- ----------
END OF YEAR ....................................... $1,601,618 $ 825,485
========== ==========
</TABLE>
- ----------
* For the period from May 1, 1997 (date fund became available for investment
to contract owners) to December 31, 1997.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Portfolios,
Inc.'s name changed to American Century Variable Portfolios, Inc. as of
May 1, 1997)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II
+++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
PENN MUTUAL VARIABLE LIFE ACCOUNT I
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of Penn Mutual Variable Life Account I
(Account I) are as follows:
GENERAL -- Account I was established by The Penn Mutual Life Insurance
Company (Penn Mutual) under the provisions of the Pennsylvania Insurance Law.
Account I is registered under the Investment Company Act of 1940, as amended,
as a unit investment trust. Account I offers units to variable life contract
owners to provide for the accumulation of value and for the payment of
benefits. Account I contains contracts of the Cornerstone VUL, Cornerstone VUL
II, Variable Estate Max and Momentum Builder variable life products. Contract
owners may borrow up to a specified amount depending on the 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, 1998 and the reported amounts from operations and variable life
activities during 1998 and 1997. Actual results could differ from those
estimates. Certain 1997 amounts have been reclassified to conform with 1998
presentation.
INVESTMENTS -- Assets of Account I 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, Small
Capitalization and Emerging Growth Funds; Neuberger Berman Advisers Management
Trust (AMT): Limited Maturity Bond, Balanced and Partners Portfolios; American
Century Variable Portfolios, Inc. (ACI): Capital Appreciation Portfolio;
Fidelity Investments' Variable Insurance Products (Fidelity): Equity Income,
Growth, Asset Manager and Index 500 Portfolios; and Morgan Stanley Dean Witter
Universal Funds, Inc. (Morgan Stanley): Emerging Markets Equity Portfolio. Penn
Series, AMT, ACI, Fidelity and Morgan Stanley are open-end diversified
management investment companies. The investment in shares of these funds or
portfolios 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. Account I 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 Account I.
DIVERSIFICATION REQUIREMENTS -- Under the provisions of Section 817(h) of
the Internal Revenue Code, a variable annuity contract other than a contract
issued in connection with certain types of employee benefit plans will not be
treated as an annuity contract for federal tax purposes for any period for
which the investments of the segregated asset account on which the contract is
based are not adequately diversified. The Code provides that the "adequately
diversified" requirement may be met if the underlying investments satisfy
either a statutory safe harbor test or diversification requirements set forth
in regulations issued by the Secretary of Treasury. The Internal Revenue
Service has issued regulations under 817(h) of the Code. Penn Mutual believes
that Account I satisfies the current requirements of the regulations, and it
intends that Account I will continue to meet such requirements.
45
<PAGE>
NOTE 2. PURCHASES AND SALES OF INVESTMENTS
The following table shows aggregate cost of shares purchased and proceeds
from sales of each fund or portfolio for the year ended December 31, 1998:
<TABLE>
<CAPTION>
PURCHASES SALES
-------------- --------------
<S> <C> <C>
Money Market Fund .......................... $ 36,054,655 $32,550,918
Quality Bond Fund .......................... 4,363,783 2,107,488
High Yield Bond Fund ....................... 4,563,016 1,581,939
Growth Equity Fund ......................... 6,091,870 1,363,231
Value Equity Fund .......................... 13,092,213 2,816,555
Flexibly Managed Fund ...................... 20,607,570 5,059,318
International Equity Fund .................. 17,810,109 11,263,407
Small Capitalization Fund .................. 4,456,976 527,145
Emerging Growth Fund ....................... 3,852,901 672,705
Limited Maturity Bond Portfolio ............ 797,187 211,784
Balanced Portfolio ......................... 2,576,819 728,784
Partners Portfolio ......................... 5,994,086 663,770
Capital Appreciation Portfolio ............. 1,786,184 2,077,878
Equity Income Portfolio .................... 7,326,892 852,484
Growth Portfolio ........................... 10,298,847 1,967,533
Asset Manager Portfolio .................... 1,825,283 316,669
Index 500 Portfolio ........................ 11,645,446 793,223
Emerging Markets Equity Portfolio .......... 1,534,095 284,124
------------ -----------
Total ...................................... $154,677,932 $65,838,955
============ ===========
</TABLE>
NOTE 3. CONTRACT CHARGES
Operations are charged for mortality and expense risks assumed by Penn
Mutual as follows:
Cornerstone VUL is determined daily at a current annual rate of 0.75%
(guaranteed not to exceed 0.90%) of the average value of Cornerstone VUL;
Cornerstone VUL II is determined daily at a current annual rate guaranteed not
to exceed 0.90% of the average value of Cornerstone VUL II; Variable Estate Max
is determined daily at a current annual rate guaranteed not to exceed 0.90% of
the average value of Variable Estate Max; Momentum Builder is determined daily
at an annual rate of 0.65% of the average value of Momentum Builder.
For each Cornerstone VUL, Cornerstone VUL II and Variable Estate Max
policy, on the date of issue and each monthly anniversary, a monthly deduction
is made from the policy value. The monthly deduction consists of insurance
charges, administrative charges and any charges for additional benefits added
by supplemental agreement to a policy. See original policy documents for
specific charges assessed.
For each Momentum Builder policy, each month on the date specified in the
contract (or on the date the contract is withdrawn in full if other than the
date specified), a $4 contract administration charge, or a lesser amount under
state insurance laws, is deducted from the contract value. See original policy
documents for specific charges assessed.
If a Cornerstone VUL or Cornerstone VUL II policy is surrendered within
the first 11 years, or a Variable Estate Max policy is surrendered within the
first 13 years, 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>
NOTE 4. UNIT VALUES
As of December 31, 1998, the accumulation Units and accumulation Unit
Values For Variable Life Account I are as follows:
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE
-------------- -------------
MONEY MARKET FUND
Cornerstone VUL 180,163 $ 12.35
Cornerstone VUL II 477,687 $ 11.59
Variable Estate Max 104,128 $ 11.60
Momentum Builder 144,571 $ 16.95
QUALITY BOND FUND
Cornerstone VUL 161,612 $ 14.27
Cornerstone VUL II/Variable Estate Max 303,952 $ 13.41
Momentum Builder 10,559 $ 24.41
HIGH YIELD BOND FUND
Cornerstone VUL 185,358 $ 15.74
Cornerstone VUL II/Variable Estate Max 301,994 $ 14.37
Momentum Builder 24,304 $ 27.19
GROWTH EQUITY FUND
Cornerstone VUL 286,826 $ 28.04
Cornerstone VUL II/Variable Estate Max 239,949 $ 24.30
Momentum Builder 32,676 $ 38.33
VALUE EQUITY FUND
Cornerstone VUL 513,869 $ 24.48
Cornerstone VUL II/Variable Estate Max 1,117,950 $ 20.09
FLEXIBLY MANAGED FUND
Cornerstone VUL 1,210,608 $ 19.23
Cornerstone VUL II/Variable Estate Max 2,031,273 $ 15.67
Momentum Builder 10,945 $ 40.29
INTERNATIONAL EQUITY FUND
Cornerstone VUL 464,576 $ 19.49
Cornerstone VUL II/Variable Estate Max 789,966 $ 16.91
SMALL CAPITALIZATION FUND
Cornerstone VUL 81,463 $ 14.67
Cornerstone VUL II/Variable Estate Max 489,652 $ 14.59
EMERGING GROWTH FUND
Cornerstone VUL 44,758 $ 18.66
Cornerstone VUL II/Variable Estate Max 274,162 $ 18.61
LIMITED MATURITY BOND PORTFOLIO
Cornerstone VUL 11,610 $ 12.67
Cornerstone VUL II/Variable Estate Max 90,231 $ 11.99
BALANCED PORTFOLIO
Cornerstone VUL 138,657 $ 17.72
Cornerstone VUL II/Variable Estate Max 169,155 $ 15.83
PARTNERS PORTFOLIO
Cornerstone VUL 162,349 $ 12.88
Cornerstone VUL II/Variable Estate Max 476,249 $ 12.85
CAPITAL APPRECIATION PORTFOLIO
Cornerstone VUL 283,529 $ 10.60
Cornerstone VUL II/Variable Estate Max 218,719 $ 12.61
EQUITY INCOME PORTFOLIO
Cornerstone VUL 183,634 $ 19.11
Cornerstone VUL II/Variable Estate Max 860,589 $ 19.01
GROWTH PORTFOLIO
Cornerstone VUL 269,190 $ 23.95
Cornerstone VUL II/Variable Estate Max 928,250 $ 23.82
47
<PAGE>
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE
-------------- -------------
ASSET MANAGER PORTFOLIO
Cornerstone VUL 42,834 $ 17.41
Cornerstone VUL II/Variable Estate Max 171,750 $ 17.31
INDEX 500 PORTFOLIO
Cornerstone VUL 133,377 $ 15.54
Cornerstone VUL II/Variable Estate Max 818,962 $ 15.50
EMERGING MARKETS EQUITY PORTFOLIO
Cornerstone VUL 51,104 $ 6.78
Cornerstone VUL II/Variable Estate Max 185,708 $ 6.76
48
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA
We have audited the accompanying consolidated balance sheets of The Penn Mutual
Life Insurance Company and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated income statements, statements of changes in equity,
and statements of cash flows for the years then ended. These consolidated
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. The financial statements of the Company for the year ended December
31, 1996 were audited by other auditors whose report dated January 31, 1997
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Penn Mutual Life Insurance Company and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 29, 1999
49
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 1997
- ------------------------------------------------------------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Debt securities, at fair value .................................... $ 5,500,924 $5,427,652
Equity securities, at fair value .................................. 4,161 12,502
Mortgage loans on real estate ..................................... 38,828 52,996
Real estate, net of accumulated depreciation ...................... 15,791 22,358
Policy loans ...................................................... 638,376 642,989
Short-term investments ............................................ 1,024 43,470
Other invested assets ............................................. 98,571 88,928
----------- ----------
TOTAL INVESTMENTS ................................................ 6,297,675 6,290,895
Cash and cash equivalents ......................................... 24,468 37,064
Investment income due and accrued ................................. 104,208 103,072
Deferred acquisition costs ........................................ 399,742 384,542
Amounts recoverable from reinsurers ............................... 69,583 63,211
Broker/dealer receivables ......................................... 793,522 526,797
Other assets ...................................................... 94,179 92,203
Separate account assets ........................................... 2,302,937 1,869,094
----------- ----------
TOTAL ASSETS ..................................................... $10,086,314 $9,366,878
=========== ==========
LIABILITIES
Reserves for payment of future policy benefits .................... $ 2,761,319 $2,770,015
Other policyholder funds .......................................... 2,835,081 2,973,434
Policyholders' dividends payable .................................. 30,532 35,273
Broker/dealer payables ............................................ 488,783 333,104
Accrued income tax payable: .......................................
Current .......................................................... 34,853 17,476
Deferred ......................................................... 107,781 75,096
Other liabilities ................................................. 383,744 283,666
Separate account liabilities ...................................... 2,302,937 1,869,094
----------- ----------
TOTAL LIABILITIES ................................................ 8,945,030 8,357,158
----------- ----------
EQUITY
Retained earnings ................................................. 944,145 857,711
Accumulated other comprehensive income - unrealized gains ......... 197,139 152,009
----------- ----------
TOTAL EQUITY ..................................................... 1,141,284 1,009,720
----------- ----------
TOTAL LIABILITIES AND EQUITY .................................... $10,086,314 $9,366,878
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
50
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Premium and annuity considerations .................................. $ 171,354 $ 195,220 $ 199,821
Policy fee income ................................................... 114,681 102,398 89,349
Net investment income ............................................... 444,697 460,206 475,315
Net realized capital gains/(losses) ................................. 3,912 9,655 (10,078)
Broker/dealer fees and commissions .................................. 331,285 290,005 241,068
Other income ........................................................ 16,491 11,851 11,544
---------- ---------- ----------
TOTAL REVENUE ...................................................... 1,082,420 1,069,335 1,007,019
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficiaries .................... 455,036 480,234 462,412
Policyholder dividends .............................................. 61,369 67,412 67,596
Increase/(decrease) in liability for future policy benefits ......... (12,356) (11,972) 42,652
General expenses .................................................... 211,770 202,731 178,554
Broker/dealer sales expense ......................................... 180,255 160,730 132,724
Amortization of deferred acquisition costs .......................... 42,223 43,223 46,137
---------- ---------- ----------
TOTAL BENEFITS AND EXPENSES ........................................ 938,297 942,358 930,075
---------- ---------- ----------
Income Before Income Taxes .......................................... 144,123 126,977 76,944
---------- ---------- ----------
Income taxes:
Current ............................................................ 49,509 50,061 37,944
Deferred ........................................................... 8,180 3,851 (9,919)
---------- ---------- ----------
NET INCOME ........................................................ $ 86,434 $ 73,065 $ 48,919
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
51
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
OTHER
COMPREHENSIVE RETAINED TOTAL
FOR THE YEARS ENDED DECEMBER 31, INCOME EARNINGS EQUITY
- --------------------------------------------------------------- --------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 .................................... $ 158,941 $735,727 $ 894,668
Comprehensive Income
Net income for 1996 .......................................... -- 48,919 48,919
Other comprehensive loss, net of tax .........................
Unrealized depreciation of securities, net of reclassification
adjustment .................................................. (73,211) -- (73,211)
--------- -------- ----------
Comprehensive Loss ............................................ (24,292)
--------- -------- ----------
BALANCE AT DECEMBER 31, 1996 .................................. 85,730 784,646 870,376
Comprehensive Income
Net income for 1997 .......................................... -- 73,065 73,065
Other comprehensive income, net of tax .......................
Unrealized appreciation of securities, net of reclassification
adjustment .................................................. 66,279 -- 66,279
--------- -------- ----------
Comprehensive Income .......................................... 139,344
--------- -------- ----------
BALANCE AT DECEMBER 31, 1997 .................................. 152,009 857,711 1,009,720
Comprehensive Income
Net income for 1998 .......................................... -- 86,434 86,434
Other comprehensive income, net of tax .......................
Unrealized appreciation of securities, net of reclassification
adjustment .................................................. 45,130 -- 45,130
--------- -------- ----------
Comprehensive Income .......................................... 131,564
--------- -------- ----------
BALANCE AT DECEMBER 31, 1998 .................................. $ 197,139 $944,145 $1,141,284
========= ======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
52
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------------- --------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .............................................................. $ 86,434 $ 73,065 $ 48,919
Adjustments to reconcile net income to net cash provided by operations:
Capitalization of policy acquisition costs ............................ (72,356) (64,427) (60,234)
Amortization of deferred acquisition costs ............................ 42,223 43,223 46,137
Policy fees on universal life and investment contracts ................ (120,315) (104,342) (89,349)
Interest credited on universal life and investment contracts .......... 146,081 160,417 171,051
Depreciation and amortization ......................................... 4,750 18,682 11,613
Premiums due and other receivables .................................... (1,293) (7,291) (105)
Realized capital (gains)/losses ....................................... (3,912) (9,655) 10,078
(Increase)/decrease in accrued investment income ...................... (1,136) 60 6,474
(Increase)/decrease in amounts due from reinsurers .................... (6,372) (4,329) (14,200)
Increase/(decrease) in future policy benefit reserves ................. (8,696) (13,358) 58,697
Increase/(decrease) in income tax payable ............................. 25,622 (4,526) 7,798
Other, net ............................................................ 3,805 (6,693) 39,625
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................... 94,835 80,826 236,504
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments:
Debt securities available for sale .................................... 1,837,209 1,235,274 927,905
Equity securities ..................................................... 35,496 20,374 25,413
Real estate ........................................................... 9,937 87,875 40,209
Other ................................................................. 18,074 14,355 15,284
Maturity and other principal repayments:
Debt securities available for sale .................................... 496,283 472,474 278,290
Mortgage loans ........................................................ 2,357 61,813 156,643
Cost of investments acquired:
Debt securities available for sale .................................... (2,315,067) (1,772,007) (1,427,048)
Equity securities ..................................................... (26,390) (15,268) (11,752)
Mortgage loans ........................................................ -- -- (36,155)
Real estate ........................................................... (293) (15,600) (8,542)
Other ................................................................. (17,917) (15,503) (8,789)
Change in policy loans, net ............................................. 4,613 13,084 1,234
(Increase)/decrease in short-term investments, net ...................... 42,446 (5,955) 51,290
Purchases of furniture and equipment, net ............................... (9,446) (4,116) (6,449)
------------ ------------ ------------
NET CASH (USED)/PROVIDED BY INVESTING
ACTIVITIES ........................................................ 77,302 76,800 (2,467)
------------ ------------ ------------
</TABLE>
-continued-
The accompanying notes are an integral part of the consolidated financial
statements.
53
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits for universal life and investment contracts ............. $ 589,070 $ 653,233 $ 625,816
Withdrawals from universal life and investment contracts ......... (605,821) (552,311) (567,697)
Transfers to separate accounts ................................... (147,708) (236,008) (269,735)
Issuance/(repayment) of debt ..................................... 90,772 24,842 (18,424)
(Increase)/decrease in net broker dealer receivables ............. (111,046) (47,632) 296
---------- ---------- ----------
NET CASH USED BY FINANCING ACTIVITIES ........................ (184,733) (157,876) (229,744)
---------- ---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................... (12,596) (250) 4,293
CASH AND CASH EQUIVALENTS ........................................
Beginning of the year .......................................... 37,064 37,314 33,021
---------- ---------- ----------
End of the year ................................................ $ 24,468 $ 37,064 $ 37,314
========== ========== ==========
</TABLE>
The accompanying notes are an intergal part of the consolidated financial
statements.
54
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
The Penn Mutual Life Insurance Company was founded and commenced business
in 1847 as a mutual life insurance company. The Company concentrates primarily
on the sale of individual life insurance and annuity products. The primary
products that the Company currently markets are traditional whole life, term
life, 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 is also involved in the broker-dealer business which
offers a variety of investment products and services and is conducted through
the Company's non-insurance subsidiaries. The Company sells its products in all
fifty states and the District of Columbia. The Company is pursuing the sale of
its disability income line of business. This business had total assets of
$226,672 as of December 31, 1998 and premium and annuity considerations of
$16,739 for the year then ended.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts of The Penn Mutual Life Insurance Company, its wholly owned life
insurance subsidiary, The Penn Insurance and Annuity Company ("PIA"), and
non-insurance subsidiaries (principally broker/dealer and investment advisory
subsidiaries) (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of
financial statements requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and notes
to the consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. (SFAS) 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for the reporting and display of comprehensive income
and its components in the financial statements. The initial application of SFAS
No. 130, required the reclassification of prior-year financial statements to
reflect the components of comprehensive income.
During 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revised disclosures
about pension and other postretirement benefit plans. As SFAS No. 132 does not
change the measurement or recognition of these plans, its adoption had no
impact on the Company's financial condition or results of operations.
In June 1998, The FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to
be recognized in the statement of financial position as either assets or
liabilities and measured at fair value. The corresponding derivative gains and
losses should be reported based on hedge relationships that exist. Changes in
the fair value of derivatives that are not designated as hedges or that do not
meet the hedge accounting criteria in SFAS No. 133, are required to be reported
in earning. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. Adoption of SFAS No. 133 is not expected to have a material effect on the
Company's financial condition or results of operations.
INVESTMENTS
Debt securities (bonds, notes, redeemable preferred stocks and
mortgage-backed securities) which might be sold prior to maturity are
classified as available for sale. These securities are carried at fair value,
with the change in unrealized gains and losses reported in other comprehensive
income. Interest on debt securities is credited to income as it is earned. Debt
securities are amortized using the scientific method. These assumptions are
consistent with the current interest rate and economic environments. The
retrospective adjustment method is used to value all securities.
Equity securities are classified as available for sale and carried at fair
value. Dividends on equity securities are credited to income on their
ex-dividend dates.
The Company regularly evaluates the carrying value of debt and equity
securities based on current economic conditions, past credit loss experience
and other circumstances of the investee. A decline in a security's fair value
that is deemed to be other than temporary is treated as a realized loss and a
reduction in the cost basis of the security.
55
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and valuation allowances. Valuation allowances on
impaired loans are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or the collateral
value if the loan is collateral dependent. However, if foreclosure is or
becomes probable, the measurement method used is collateral value.
Investment real estate, which the Company has the intent to hold, is
carried at cost less accumulated depreciation and valuation reserves. The
Company establishes valuation reserves for investment real estate when declines
in value are deemed to be other then temporary based on an analysis of
discounted future cash flows. Properties held for sale are carried at the lower
of depreciated cost or fair value less selling costs. Valuation reserves are
established for properties held for sale when the fair value less estimated
selling costs is below depreciated cost. Real estate acquired through
foreclosure is recorded at the lower of cost or fair value less estimated
selling costs at the time of foreclosure. Depreciation is calculated using the
straight-line method over the estimated useful lives of the real estate.
Policy loans are carried at the unpaid principal balances.
Short-term investments include securities purchased with a maturity date
of 90 days to less than one year. Short-term investments are valued at cost.
Other invested assets primarily include venture capital limited
partnerships which are carried at fair value.
Realized gains and losses are determined by specific identification and
are included in income on the trade date, net of amortization of deferred
acquisition costs. Unrealized gains and losses, net of appropriate taxes and
amortization of deferred acquisition costs, are accounted for as a separate
component of other comprehensive income.
The Company utilizes various financial instruments, such as interest rate
swaps, financial futures and structured notes, to hedge against interest rate
fluctuation. Most of these investments are recorded as accounting hedges using
a valuation method consistent with the valuation method of the assets hedged.
Gains and losses on these instruments are deferred and recognized in the
Consolidated Income Statements over the remaining life of the hedged security.
Changes in the fair value of these instruments are reported as unrealized gains
or losses. Realized gains or losses are recognized when the hedged securities
are sold.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments
and other debt securities with a maturity of 90 days or less when purchased.
OTHER ASSETS
Property and equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is calculated using the straight-line
method over the lesser of the term of the leases or the estimated useful life
of the improvements. Accumulated depreciation and amortization on property and
equipment and leasehold improvements was $49,816 and $44,329 at December 31,
1998 and 1997, respectively. Related depreciation and amortization expense was
$8,586, $8,183 and $7,510 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Goodwill represents the excess of the cost of the businesses acquired over
the fair value of their net assets. These costs are amortized on a
straight-line basis over not more than 40 years and are included in other
assets in the Consolidated Balance Sheets. Unamortized goodwill amounted to
$16,126 and $16,932 at December 31, 1998 and 1997, respectively. Goodwill
amortization was $806, $808 and $909 for 1998, 1997 and 1996, respectively.
DEFERRED ACQUISITION COSTS
Costs of acquiring new insurance and annuity contracts, which vary with
and are primarily related to the production of new business, have been deferred
to the extent that such costs are deemed recoverable from future gross profits.
Such costs include commissions, certain costs of policy issuance and
underwriting, and certain variable agency expenses.
56
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Deferred acquisition costs related to participating traditional and
universal life insurance policies and annuity products without mortality risk
that include significant surrender charges are being amortized over the lesser
of the estimated or actual contract life in proportion to estimated gross
profits arising principally from interest, mortality and expense margins and
surrender charges. The effects on amortization of deferred acquisition costs of
revisions to estimated gross profits are reflected in earnings in the period
such estimated gross profits are revised. Deferred acquisition costs are
reviewed to determine that the unamortized portion of such costs is recoverable
from future estimated gross profits. Certain costs and expenses reported in the
consolidated income statements are net of amounts deferred.
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.
INSURANCE LIABILITIES AND REVENUE RECOGNITION
Participating Traditional Life and Life Contingent Annuity Products
Future policy benefits include reserves for participating traditional life
insurance and life contingent annuity products and are established in amounts
adequate to meet the estimated future obligations of the policies in force.
Liabilities for participating traditional life products are computed using the
net level premium method, using assumptions for investment yields, mortality,
morbidity and withdrawals, which are consistent with the dividend fund interest
rate and mortality rates used in calculating cash surrender values. Interest
rate assumptions used in the calculation of the liabilities for participating
traditional life products ranged from 2.25% to 4.5%. Premiums are recognized as
income when due. Death and surrender benefits are reported in expense as
incurred.
Liabilities for life contingent annuity products are computed by
estimating future benefits and expenses. Assumptions are based on Company
experience projected at the time of policy issue, with provision for adverse
deviations. Interest rate assumptions range from 2.25% to 13.25%. Premiums are
recognized as income as they are received. Death and surrender benefits are
reported in expense as incurred.
Universal Life Products and Other Annuity Products
Other policyholder funds represent liabilities for universal life and
investment-type annuity products. The liabilities for these products are based
on the contract account value which consists of deposits received from
customers and investment earnings on the account value, less administrative and
expense charges. The liability for universal life products is also reduced by
mortality charges. Liabilities for the non-life contingent annuity products are
computed by estimating future benefits and expenses. Assumptions are based on
Company experience projected at the time of policy issue. Interest rate
assumptions range from 2.0% to 11.25%.
Contract charges assessed against account value for universal life and
investment-type annuities are reflected as policy fee income in revenue.
Interest credited to account values and universal life benefit claims in excess
of fund values are reflected as benefit expense.
Policyholders' Dividends
The majority of the Company's insurance products have been issued on a
participating basis. As of December 31, 1998, participating insurance expressed
as a percentage of insurance in force is 92%, and as a percentage of premium
income is 89%. The amount of policyholders' dividends to be paid is approved
annually by the Board of Trustees. The aggregate amount of policyholders'
dividends is calculated based on actual interest, mortality, morbidity and
expense experience for the year and on management's judgment as to the
appropriate level of equity to be retained by the Company. The carrying value
of this liability approximates the earned amount and fair value at December 31,
1998.
57
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
BROKER/DEALER REVENUE RECOGNITION
Broker-dealer transactions in securities and listed options, including
related commission revenue and expense, are recorded on a settlement-date
basis. There would be no material effect on the financial statements if such
transactions were recorded on a trade-date basis.
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its life
and non-life insurance subsidiaries. Federal income taxes are charged or
credited to operations based upon amounts estimated to be payable or
recoverable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are established to reflect the impact of
temporary differences between the amount of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes.
These deferred tax assets or liabilities are measured by using the enacted tax
rates expected to apply to taxable income in the period in which the deferred
tax liabilities or assets are expected to be settled or realized.
REINSURANCE
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid by
ceding reinsurance to other insurance enterprises or reinsurers under excess
coverage and coinsurance contracts. The Company has set its retention limit for
acceptance of risk on life insurance policies at various levels up to $1,250.
Insurance liabilities are reported before the effects of reinsurance.
Reinsurance receivables (including amounts related to insurance liabilities)
are reported as assets. Estimated reinsurance receivables are recognized in a
manner consistent with the liabilities related to the underlying reinsured
contracts.
2. INVESTMENTS:
DEBT SECURITIES
The following tables summarize the Company's investment in debt
securities, including redeemable preferred stocks. All debt securities are
classified as available for sale and are carried at estimated fair value.
Amortized cost is net of cumulative writedowns for other than temporary
declines in value of $3,056 and $1,208 as of December 31, 1998 and 1997,
respectively.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. Government and agency
securities ........................................... $ 13,109 $ 1,271 $ -- $ 14,380
States and political subdivisions ..................... 12,094 2,216 -- 14,310
Foreign governments ................................... 24,920 3,323 -- 28,243
Corporate securities .................................. 3,058,066 299,489 4,956 3,352,599
Mortgage and other asset-backed securities ............ 2,006,891 86,271 4,399 2,088,763
----------- --------- ------- -----------
Total bonds ........................................... 5,115,080 392,570 9,355 5,498,295
Redeemable preferred stocks ........................... 2,696 -- 67 2,629
----------- --------- ------- -----------
TOTAL .............................................. $ 5,117,776 $ 392,570 $ 9,422 $ 5,500,924
=========== ========= ======= ===========
</TABLE>
58
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. Government and agency
securities ........................................... $ 107,539 $ 6,302 $ -- $ 113,841
States and political subdivisions ..................... 12,085 569 -- 12,654
Foreign governments ................................... 20,397 3,049 -- 23,446
Corporate securities .................................. 2,854,234 218,145 6,748 3,065,631
Mortgage and other asset-backed securities ............ 2,133,758 76,160 757 2,209,161
----------- --------- ------- -----------
Total bonds ........................................... 5,128,013 304,225 7,505 5,424,733
Redeemable preferred stocks ........................... 3,085 -- 166 2,919
----------- --------- ------- -----------
TOTAL .............................................. $ 5,131,098 $ 304,225 $ 7,671 $ 5,427,652
=========== ========= ======= ===========
</TABLE>
The following tables summarize the amortized cost and estimated fair value
of debt securities, including redeemable preferred stocks, as of December 31,
1998 by contractual maturity.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
-------------- --------------
<S> <C> <C>
Years to Maturity:
One or less ........................................ $ 279,580 $ 294,068
After one through five ............................. 357,684 369,099
After five through ten ............................. 566,864 631,968
After ten .......................................... 1,904,061 2,114,397
Mortgage and other asset-backed securities ......... 2,006,891 2,088,763
----------- -----------
Total bonds ...................................... 5,115,080 5,498,295
Redeemable preferred stocks ........................ 2,696 2,629
----------- -----------
TOTAL ............................................ $ 5,117,776 $ 5,500,924
=========== ===========
</TABLE>
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage and other asset-backed securities are presented
separately in the maturity schedule due to the potential for prepayment. The
weighted average life of these securities is 7.1 years.
At December 31, 1998, the Company held $2,088,763 in mortgage and other
asset-backed securities. The structured securities portfolio consists of
commercial and residential mortgage pass-through holdings totaling $1,865,556
and securities backed by credit card receivables, auto loans, home equity and
manufactured housing loans totaling $223,207. These securities follow a
structured principal repayment schedule and are of high credit quality.
Securities totaling $1,512,963 are rated AAA and include $20,394 of
interest-only tranches that were retained from the securitization of the
Company's mortgage loan portfolio.
At December 31, 1998, the largest industry concentration of the Company's
portfolio was investments in the finance industry of $624,768 representing 11%
of the total debt portfolio.
Proceeds during 1998, 1997 and 1996 from sales of available-for-sale
securities were $1,931,269, $1,353,112 and $927,905, respectively. Gross gains
and gross losses realized on those sales were $37,324 and $35,257,
respectively, during 1998, $21,799 and $8,990, respectively, during 1997 and
$15,932 and $6,899, respectively, during 1996.
The Company's investment portfolio of debt securities is predominantly
comprised of investment grade securities. At December 31, 1998 and 1997, debt
securities with amortized cost totaling $192,724 and $198,943, respectively,
were less than investment grade. At December 31, 1998 the Company held
securities with a carrying value of $9,170 which are to be restructured
pursuant to commenced negotiations. At December 31 1997, the Company did not
hold any securities which were either in default as to principal and/or
interest payments, were to be restructured pursuant to commenced negotiations
or were in situations where the borrowers went into bankruptcy subsequent to
acquisition. The Company did not hold any debt securities which were non-income
producing for the preceding twelve months as of December 31, 1998 and 1997.
59
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
EQUITY SECURITIES
During 1998, 1997 and 1996, the proceeds from sales of equity securities
amounted to $18,487, $20,374 and $25,413, respectively. The gross gains and
gross losses realized on those sales were $3,095 and $239, $975 and $239 and
$1,369 and $247 for 1998, 1997 and 1996, respectively.
MORTGAGE LOANS
On August 29, 1996, the Company securitized the majority of its mortgage
loan portfolio by transferring the loans to a trust which qualifies as a REMIC
(Real Estate Mortgage Investment Conduit) under the Internal Revenue Code.
Prior to transferring the loans with a principal value of $781,564 and a book
value of $780,942, the loans were written down to a fair market value of
$755,559, and the related reserve of $25,285 was released. The trust issued
sixteen classes of Commercial Mortgage Pass-Through Certificates with a total
par value of $781,564. 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 $98 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.
The Company retained the highest quality classes of certificates with a
par value of $715,126 and a fair market value of $734,326 at the time of the
securitization. As of December 31, 1998, the par value and fair value of these
securities were $460,753 and $475,699, respectively. As of December 31, 1997,
the par value and fair value of these securities were $570,130 and $597,248,
respectively. The Company sold the lowest rated classes of certificates with a
par value of $66,438 and a fair market value of $24,838.
The mortgage loans which were not included in the securitization and were
retained by the Company had a book value of $171,555 with a related reserve of
$21,907 and an estimated fair value of $153,405 on the date of the
securitization. Loans which the Company intended 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 $99,817 and an estimated net realizable value
of $81,310 at the time of the securitization. The writedown of $18,507 was
fully offset by a release in mortgage loss reserve. As of December 31, 1998 and
1997, the Company held $0 and $12,368 of these loans, respectively. The Company
intended to hold mortgage loans with a book value of $71,738 on the date of the
securitization through their remaining terms. As of December 31, 1998 and 1997,
the Company continued to hold $42,628 and $44,428 of these mortgages,
respectively. The Company discontinued the origination of commercial mortgage
loans in 1996.
The following tables summarize the carrying value of mortgage loans, by
property type and geographic concentration, at December 31.
1998 1997
------------ -----------
Property Type
Office buildings ............ $ 9,204 $ 20,012
Retail ...................... 5,553 7,862
Dwellings ................... 24,741 25,237
Other ....................... 3,130 3,685
Valuation allowance ......... (3,800) (3,800)
-------- --------
TOTAL ..................... $ 38,828 $ 52,996
======== ========
60
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
1998 1997
---------- ----------
Geographic Concentration
Northeast ................... $ 10,273 $ 23,313
Midwest ..................... 5,728 5,922
South ....................... 12,075 12,502
West ........................ 14,552 15,059
Valuation allowance ......... (3,800) (3,800)
-------- --------
TOTAL ..................... $ 38,828 $ 52,996
======== ========
The following table presents changes in the mortgage loan valuation
allowance for the years presented:
1998 1997
---------- ----------
Balance at January 1 .............. $ 3,800 $ 3,400
Provision ......................... -- 400
Charge-offs ....................... -- --
------- -------
BALANCE AT DECEMBER 31 .......... $ 3,800 $ 3,800
======= =======
As of December 31, 1998 and 1997, the Company's mortgage loan portfolio
contained no loans delinquent over 60 days or in foreclosure and there were no
non-income producing mortgage loans for the preceding twelve months.
During 1998 and 1997, the Company did not restructure the terms of any
outstanding mortgages. As of December 31, 1998 and 1997, the mortgage loan
portfolio included $2,555 and $2,834, respectively, of restructured mortgage
loans. Restructured mortgage loans include commercial loans for which the basic
terms, such as interest rate, maturity date, collateral or guaranty have been
changed as a result of actual or anticipated delinquency. Restructures do not
include mortgages refinanced upon maturity at or above current market rates.
Gross interest income on restructured mortgage loans on real estate that would
have been recorded in accordance with the original terms of such loans amounted
to $258 and $298 in 1998 and 1997, respectively. Gross interest income from
these loans included in net investment income totaled $236 and $262 in 1998 and
1997, respectively.
At December 31, 1998, no loans were considered to be impaired. At December
31, 1997, the recorded investment in loans that were considered to be impaired
was $12,368 that, as a result of writedowns, did not have a valuation
allowance. The average recorded investment in impaired loans during the year
ended December 31, 1998 and 1997 was approximately $6,184 and $38,096,
respectively. During 1998 and 1997, $163 and $1,454 was received, respectively,
on these impaired loans which was applied to the outstanding principal balance
or will be applied to principal at the date of foreclosure.
REAL ESTATE
The following table summarizes the carrying value of the Company's real
estate holdings at December 31.
1998 1997
----------- -----------
Investment ......................... $ 19,111 $ 19,999
Properties held for sale ........... 1,914 7,828
Less: Valuation allowance .......... (5,234) (5,469)
-------- --------
TOTAL ............................ $ 15,791 $ 22,358
======== ========
At December 31, 1998 and 1997, accumulated depreciation on real estate
amounted to $6,218 and $6,498, respectively. Depreciation expense on real
estate totaled $1,071, $5,709 and $6,488 for the years ended December 31, 1998,
1997 and 1996, respectively. During 1997, the Company sold its largest real
estate investment for $65,007 cash to an unrelated buyer. At the date of the
sale, this property had a carrying value of $61,914, net of related reserves,
resulting in a gain of $3,093. During 1996, the Company wrote down the
statement value of this property by $16,000 to its estimated fair value, based
on changes in future valuation assumptions.
61
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
OTHER
Investments on deposit with regulatory authorities as required by law were
$7,104 and $7,106 at December 31, 1998 and 1997, respectively.
As of December 31, 1998 and 1997, the Company's investments included
$475,699 and $597,248, respectively, of the tranches retained from the 1996
securitization of the Company's commercial mortgage loan portfolio. These
investments represented 42% and 59% of equity at December 31, 1998 and 1997,
respectively.
3. INVESTMENT INCOME AND CAPITAL GAINS:
The following table summarizes the sources of investment income, excluding
investment gains/(losses), for the year ended December 31.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Debt securities ..................... $ 395,628 $ 390,852 $ 356,669
Equity securities ................... 206 1,371 1,313
Mortgages ........................... 4,268 12,098 62,454
Real estate ......................... 2,903 17,519 24,143
Policy loans ........................ 39,760 40,921 40,580
Short-term investments .............. 2,029 2,426 6,052
Other invested assets ............... 11,330 21,268 14,665
Cash and cash equivalents ........... 3 2 44
--------- --------- ---------
Gross investment income ............. 456,127 486,457 505,920
Less: Investment expenses .......... 11,430 26,251 30,605
--------- --------- ---------
Investment income, net .............. $ 444,697 $ 460,206 $ 475,315
========= ========= =========
</TABLE>
The following table summarizes net realized capital gains/(losses) on
investments for the year ended December 31. Net realized capital gains/(losses)
include decreases in valuation allowances of $235, $3,154 and $44,164 in 1998,
1997 and 1996, respectively.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- --------------
<S> <C> <C> <C>
Debt securities ..................................... $ 110 $ 12,991 $ 10,412
Equity securities ................................... 2,856 417 1,122
Mortgage loans ...................................... 210 280 (2,821)
Real estate ......................................... 4,148 (684) (22,356)
Other ............................................... (2,109) (811) 3,565
Amortization of deferred acquisition costs .......... (1,303) (2,538) --
-------- -------- ----------
Realized gains/(losses) ............................. $ 3,912 $ 9,655 $ (10,078)
======== ======== ==========
</TABLE>
62
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following table summarizes the change in unrealized gains and losses
for investments carried at fair value which are reflected in other
comprehensive income for the year ended December 31.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ---------------
<S> <C> <C> <C>
Unrealized gains/(losses):
Debt securities ................................ $ 86,594 $ 160,850 $ (149,259)
Equity securities .............................. (2,092) 408 (582)
Other .......................................... (2,091) (14,581) (1,545)
--------- --------- -----------
82,411 146,677 (151,386)
--------- --------- -----------
Less:
Deferred policy acquisition costs .............. (12,841) (45,043) 38,324
Deferred income taxes .......................... (24,440) (35,355) 39,851
--------- --------- -----------
Net change in unrealized gains/(losses) ......... $ 45,130 $ 66,279 $ (73,211)
========= ========= ===========
</TABLE>
The following table sets forth the reclassification adjustment required to
avoid double-counting in comprehensive income items that are included as part
of net income for a period that also had been part of other comprehensive
income in earlier periods:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- --------------
<S> <C> <C> <C>
Reclassification Adjustments
Unrealized holding gains/(losses) arising during period .............. $ 53,576 $ 71,797 $ (57,160)
Reclassification adjustment for gains included in net income ......... 8,446 5,518 16,051
-------- -------- ----------
Unrealized gains/(losses) on investments, net of
reclassification adjustment ......................................... $ 45,130 $ 66,279 $ (73,211)
======== ======== ==========
</TABLE>
Reclassification adjustments reported in the above table for the years
ended December 31, 1998, 1997 and 1996 are net of income tax expense of $7,679,
$4,519 and $13,350, respectively, and $5,815, $2,875 and $8,740, respectively,
relating to the effects of such amounts on deferred acquisition costs.
63
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
4. FAIR VALUE INFORMATION:
The following table summarizes the carrying value and estimated fair value
of the Company's financial instruments as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities
Available for sale ...................... $ 5,500,924 $ 5,500,924 $ 5,427,652 $ 5,427,652
Equity securities
Common stock ............................ 158 158 3,051 3,051
Non-redeemable preferred stocks ........... 4,003 4,003 9,451 9,451
Mortgage loans ............................ 38,828 42,678 52,996 57,224
Policy loans .............................. 638,376 605,144 642,989 606,681
Cash and cash equivalents ................. 24,468 24,468 37,064 37,064
Short-term investments .................... 1,024 1,024 43,470 43,470
Separate account assets ................... 2,302,937 2,302,937 1,869,094 1,869,094
Other invested assets ..................... 98,571 98,571 88,928 88,928
FINANCIAL LIABILITIES:
Investment-type contracts
Individual annuities .................... $ 1,108,274 $ 1,143,373 $ 1,225,192 $ 1,260,639
Guaranteed investment contracts ......... 39,571 40,556 59,809 61,456
Other group annuities ................... 113,974 115,422 147,061 148,257
Other policyholder funds ................ 1,573,262 1,573,262 1,541,372 1,541,372
----------- ----------- ----------- -----------
Total policyholder funds .................. 2,835,081 2,866,627 2,973,434 3,011,724
Policyholders' dividends payable .......... 30,532 30,532 35,273 35,273
Separate account liabilities .............. 2,302,937 2,302,937 1,869,094 1,869,094
</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 estimated fair value of
currently performing mortgage loans is estimated by discounting the cash flows
associated with the investment, using an interest rate currently offered for
similar loans to borrowers with similar credit ratings. Loans with similar
credit quality, characteristics and time to maturity are aggregated for
purposes of discounted cash flow analysis. 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 the calculations.
The carrying values of cash, cash equivalents, short-term investments and
separate account assets approximate their fair values. The estimated fair
values for the venture capital limited partnerships are based on values
determined by the partnerships' managing general partners. The resulting
estimated fair values may not be indicative of the value which could be
negotiated in an actual sale.
The fair values of the Company's liabilities for individual annuities,
guaranteed investment contracts and certain 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 approximates their fair value due to the nature of
the contracts. The statement values of other policyholder funds, policyholders'
dividends payable and separate account liabilities approximate their fair
values.
64
<PAGE>
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Currently, disclosure of estimated fair values is not required for all 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
estimated fair values of liabilities under all of the Company's contracts are
considered in the overall management of interest rate risk. 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 durations and anticipated cash flows of the Company's
assets and liabilities.
To minimize exposure and reduce risk from exchange and interest rate
fluctuations in the normal course of business, the Company enters into interest
rate swap programs for purposes other than trading. As of December 31, 1998 and
1997, the Company had interest rate swaps with aggregate notional amounts equal
to $95,000 and $105,000, respectively, with average unexpired terms of 8 and 19
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. Gross
unrealized gains and losses, which represent fair value based on dealer-quoted
prices, were $2,248 and $0, respectively, at December 31, 1998 and $5,164 and
$0, respectively, at December 31, 1997. These fair values represent the amount
at risk if the counterparties default and the amount that the Company would
receive to terminate the contracts, taking into account current interest rates
and, where appropriate, the current creditworthiness of the counterparties.
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
held decreases in relation to the value of the loaned securities. The Company
had loaned securities outstanding of $38,144 and $155,356 as of December 31,
1998 and 1997, respectively.
5. INCOME TAXES:
The Company follows the asset and liability method of accounting for
income taxes whereby current and deferred tax assets and liabilities are
recognized utilizing currently enacted tax laws and rates. Deferred taxes are
adjusted to reflect tax rates at which future tax liabilities or assets are
expected to be settled or realized.
65
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities. The significant temporary
differences that give rise to the deferred tax assets and liabilities at
December 31 relate to the following:
1998 1997
----------- -----------
DEFERRED TAX ASSETS
Future policy benefits ................... $ 92,909 $ 88,172
Dividend award ........................... 10,255 11,970
Allowances for investment losses ......... 4,232 3,667
Employee benefit liabilities ............. 29,762 27,979
Other .................................... 18,677 24,728
--------- --------
Total deferred tax asset ............... 155,835 156,516
--------- --------
DEFERRED TAX LIABILITIES
Deferred acquisition costs ............... 135,248 127,495
Unrealized investment gains .............. 105,993 81,553
Other .................................... 22,375 22,564
--------- --------
Total deferred tax liability ........... 263,616 231,612
--------- --------
NET DEFERRED TAX LIABILITY ................ $ 107,781 $ 75,096
========= ========
The federal income taxes attributable to consolidated net income are
different from the amounts determined by multiplying consolidated net income
before federal income taxes by the expected federal income tax rate. The
difference between the amount of tax at the U.S. federal income tax rate of 35%
and the consolidated tax provision is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tax expense at 35% ................................ $ 50,443 $ 44,442 $ 26,930
Increase/(decrease) in income taxes resulting from:
Differential earnings amount ..................... 2,681 6,942 500
Other ............................................ 4,565 2,528 595
-------- -------- --------
Federal income tax expense/(benefit) .............. $ 57,689 $ 53,912 $ 28,025
======== ======== ========
</TABLE>
As a mutual life insurance company, the Company is subject to Internal
Revenue Code provisions which require mutual, but not stock, life insurance
companies to 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 prescribed rate, which is intended to reflect the
difference between stock and mutual companies' earnings rates.
The Internal Revenue Service has examined the Company's income tax returns
through the year 1994. Management believes that an adequate provision has been
made for potential assessments.
66
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THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
6. BENEFIT PLANS:
The following table summarizes the funded status and accrued benefit cost
for the Company's defined benefit plans and other postretirement benefit plans:
As of December 31,
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Benefit obligation ................................ $ (90,428) $ (84,051) $ (26,439) $ (31,413)
Fair value of plan assets ......................... 53,349 42,783 -- --
---------- ---------- ---------- ----------
Funded Status ..................................... $ (37,079) $ (41,268) $ (26,439) $ (31,413)
========== ========== ========== ==========
Accrued benefit cost recognized in the consolidated
balance sheet .................................... $ (22,530) $ (23,527) $ (44,558) $ (45,143)
</TABLE>
The weighted-average assumptions used to measure the actuarial present
value of the projected benefit obligation were:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Discount rate .......................... 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets ......... 8.00% 8.00% -- --
Rate of compensation increase .......... 5.50% 5.50% 5.00% 5.50%
</TABLE>
At December 31, 1998, the assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation was 8% in 1999,
grading to 5% in the year 2004. At December 31, 1997, the assumed health care
cost trend rate used in measuring the accumulated postretirement benefit
obligation was 8.5% in 1998, grading to 5.0% in the year 2004. The assumed
health care cost trend rate used at December 31, 1996 in measuring the
accumulated postretirement benefit obligation was 8.5% in 1997, grading to 5.0%
in the year 2004. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plans.
The contributions made and the benefits paid from the plan were:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------- ---------------------
1998 1997 1998 1997
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Benefit cost recognized in consolidated income
statement ................................... $ 5,692 $ 5,917 $ 831 $ 1,515
Employer contribution ........................ 6,687 3,006 1,415 2,191
Plan participants' contribution .............. -- -- -- --
Benefits paid ................................ 3,229 3,085 1,415 2,191
</TABLE>
The Company maintains four defined contribution pension plans for
substantially all of its employees and full-time agents. For two plans,
designated contributions of up to 6% or 8% of annual compensation are eligible
to be matched by the Company. Contributions for the third plan are based on
tiered earnings of full-time agents. The last plan, which covers employees of a
subsidiary, are determined on a discretionary basis by the Board of Directors
of that subsidiary. For the years ended December 31, 1998, 1997 and 1996, the
expense recognized for these plans was $9,526, $8,345 and $6,092, respectively.
The estimated fair value of the defined contribution plans' assets at December
31, 1998 and 1997 was $260,706 and $229,378, respectively.
67
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
7. REINSURANCE:
The Company has assumed and ceded reinsurance on certain life and annuity
contracts under various agreements. Reinsurance permits recovery of a portion
of losses from reinsurers, although the Company remains primarily liable as the
direct insurer on all risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of present reinsurers to ensure that amounts due from reinsurers are
collectible. The table below highlights the amounts shown in the accompanying
financial statements.
<TABLE>
<CAPTION>
ASSUMED CEDED TO
GROSS FROM OTHER OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
Life Insurance in Force ......... $32,066,821 $5,115,520 $5,954,701 $31,227,640
Premiums ........................ 166,708 10,586 5,940 171,354
Benefits ........................ 457,239 15,710 17,913 455,036
Reserves ........................ 5,594,712 1,688 62,198 5,534,202
DECEMBER 31, 1997:
Life Insurance in Force ......... $31,027,764 $5,217,856 $4,620,599 $31,625,021
Premiums ........................ 190,754 11,189 6,723 195,220
Benefits ........................ 492,857 14,293 26,916 480,234
Reserves ........................ 5,741,456 1,993 59,322 5,684,127
</TABLE>
During 1996, the Company had gross premiums of $196,897, assumed premiums
of $12,745 and ceded premiums of $9,821 and gross benefits of $293,270, assumed
benefits of $16,466 and ceded benefits of $16,808. Reinsurance receivables with
a carrying value of $55,119 and $50,617 were associated with a single reinsurer
at December 31, 1998 and 1997, respectively.
8. 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, in the ordinary course of business, extends commitments
relating to its investment activities. As of December 31, 1998, the Company had
outstanding commitments totaling $19,413 relating to these investment
activities. The fair value of these commitments approximates the face amount.
9. STATUTORY INFORMATION:
State insurance regulatory authorities prescribe or permit statutory
accounting practices for calculating net income and capital and surplus which
differ in certain respects from generally accepted accounting principles
(GAAP). The significant differences relate to deferred acquisition costs, which
are charged to expenses as incurred; federal income taxes, which reflect
amounts that are currently taxable; and benefit reserves, which are determined
using prescribed mortality, morbidity and interest assumptions, and which, when
considered in light of the assets supporting these reserves, adequately provide
for obligations under policies and contracts. In addition, the recording of
impairments in the value of investments generally lags recognition under GAAP.
The combined insurance companies' statutory capital and surplus at
December 31, 1998 and 1997 was $495,212 and $435,861, respectively. The
combined insurance companies' net income, determined in accordance with
statutory accounting practices, for the years ended December 31, 1998, 1997 and
1996, was $83,676 $63,613 and $25,905, respectively.
68
<PAGE>
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
10. YEAR 2000 (UNAUDITED):
The services provided by the Company depend on the smooth functioning of
computer systems. Many computer systems in use today cannot recognize the Year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated earlier in this century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. Failure of computer systems could affect pricing, account services, and
the handling of investment transactions, among other things. The Company began
preparing for the Year 2000 actively in 1996. The effort involves assessing all
computers, computer programs and related equipment, making necessary changes
and ensuring that all systems process dates correctly. The Company believes
that it has designed and implemented an efficient process for identifying what
needs to be changed and is working to correct and test systems that research
shows will be affected by dates in the Year 2000 and beyond. The Company
expects its computer systems to be Year 2000 compliant.
The Company has relationships with vendors and other service providers
that are not affiliated with the Company. As part of its plan, the Company is
contacting vendors and service providers to obtain assurances that such service
providers have taken appropriate measures to address the Year 2000 issue. The
Company will assess and attempt to mitigate risks where outside service
providers are not Year 2000 ready. However, there is no assurance that the
failure of outside service providers to complete adequate preparations in a
timely manner, which results in systems interruptions or other consequences,
will not have an adverse effect, directly or indirectly, on the Company.
The cost of addressing the Year 2000 issue is significant but not material
to the Company's financial condition or results of operations. The Company will
continue to incur costs in addressing the Year 2000, but does not anticipate
that the costs will be material going forward.
The foregoing statements are designated Year 2000 Readiness Disclosure
within the meaning of The Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271,S.2392).
69
<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.
ISSUE AGE BASIC DEATH MINIMUM INITIAL
OF INSURED SEX OF INSURED BENEFIT PREMIUM
- --------------------------------------------------------------------------------
25 M $ 50,000 $289.00
- --------------------------------------------------------------------------------
30 F $ 75,000 $459.00
- --------------------------------------------------------------------------------
35 M $ 75,000 $651.00
- --------------------------------------------------------------------------------
40 F $100,000 $931.00
- --------------------------------------------------------------------------------
45 M $100,000 $1,368.00
- --------------------------------------------------------------------------------
50 F $100,000 $1,456.00
- --------------------------------------------------------------------------------
55 M $100,000 $2,257.00
- --------------------------------------------------------------------------------
60 F $ 75,000 $1,787.00
- --------------------------------------------------------------------------------
65 M $ 75,000 $2,950.00
- --------------------------------------------------------------------------------
70 F $ 50,000 $2,117.00
- --------------------------------------------------------------------------------
A-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
APPLICABLE PERCENTAGES
ATTAINED AGE PERCENTAGE ATTAINED AGE PERCENTAGE
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
B-1
<PAGE>
PENN
MUTUAL
A better way of life
THE PENN MUTUAL
LIFE INSURANCE COMPANY
Philadelphia, PA 19172
<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.
The undersigned Registrant represents that the fees and charges
deducted under the Flexible Premium Adjustable Variable Life Insurance Policies,
in the aggregate, are reasonable in relation to the services rendered, the
expenses expected to be incurred, and the risks assumed by the Registrant.
UNDERTAKING PURSUANT TO RULE 484 UNDER THE SECURITIES ACT OF 1933
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 the Form N-4
Registration Statement of Penn Mutual Variable Annuity Account III filed
September 3, 1998 (File No. 33-62811).
Pennsylvania law (15 Pa. C.S.A. ss. 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>
REPRESENTATION PURSUANT TO SECTION 26(e)(2)(A)
OF THE INVESTMENT COMPANY ACT OF 1940
Registrant represents that the fees and charges deducted under the
Flexible Premium Adjustable Variable Life Insurance Policies, in the aggregate,
are reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by the Registrant.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
The prospectuses consisting of 70 pages each.
Undertaking to file reports.
Rule 484 Undertaking.
Section 26(e)(2)(A) Representation.
The signatures.
Written consents of the following persons:
(a) Ernst & Young, LLP
(b) Morgan, Lewis & Bockius LLP
The following exhibits:
1. Copies of all exhibits which would be required by paragraph A of the
instructions as to exhibits in Form N-8B-2 if a Registration Statement on
that Form were currently being filed.
A(1) (a) Resolution of the Board of Trustees of The Penn Mutual Life
Insurance Company establishing the Penn Mutual Variable Life Account
I. Incorporated herein by reference to Exhibit A(1)(a) to
Post-Effective Amendment No. 6 to the Form S-6 Registration
Statement of Penn Mutual Variable Life Account I (File No. 33-87276)
filed on April 30, 1999 (Accession No. 0000950116-99-000867).
(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. Incorporated herein by
reference to Exhibit A(1)(b) to Post-Effective Amendment No. 6 to
the Form S-6
II-2
<PAGE>
Registration Statement of Penn Mutual Variable Life Account I (File
No. 33-87276) filed on April 30, 1999
(Accession No. 0000950116-99-000867).
A(2) Not Applicable.
A(3) (a)(1) Distribution Agreement between The Penn Mutual Life Insurance
Company and Hornor, Townsend & Kent. Incorporated herein by
reference to Exhibit A(3)(a)(1) to Post-Effective Amendment No.
6 to the Form S-6 Registration Statement of Penn Mutual Variable
Life Account I (File No. 333-87276) filed on April 30, 1999
(Accession No. 0000950116-99-000867).
(2) Sales Support Agreement between The Penn Mutual Life Insurance
Company and Hornor, Townsend & Kent, Inc. Incorporated herein by
reference to Exhibit A(3)(a)(2) to Post-Effective Amendment No. 6
to the Form S-6 Registration Statement of Penn Mutual Variable
Life Account I (File No. 333-87276) filed on April 30, 1999
(Accession No. 0000950116-99-000867).
(b)(1) Form of Agent's Agreement relating to broker-dealer supervision.
Incorporated herein by reference to Exhibit 3(c) to the Form N-4
Registration Statement of Penn Mutual Variable Annuity Account
III (File No. 333-62811) filed on September 3, 1998(Accession No.
0001036050-98-001504).
(b)(2) Form of Broker-Dealer Selling Agreement (for broker-dealers
licensed to sell variable annuity contracts and/or variable life
insurance contracts under state insurance laws). Incorporated
herein by reference to Exhibit 3(d) to Pre-Effective Amendment
No. 1 to the Form N-4 Registration Statement of Penn Mutual
Variable Annuity Account III (File No. 333-62811) filed on
November 30, 1998 (Accession No. 0001036050-98-002055).
(b)(3) Form of Broker-Dealer Selling Agreement (for broker-dealers with
affiliated corporations licensed to sell variable annuity
contracts and/or variable life insurance policies under state
insurance laws, and companion Form of Corporate Insurance Agent
Selling Agreement. Incorporated herein by reference to Exhibit
3(e) to Pre-Effective Amendment to the Form N-4 Registration
Statement of Penn Mutual Variable Annuity Account III (File No.
333-62825) filed on April 27, 1999 (Accession No.
0000950116-99-000834).
(c) Schedule of Sales Commissions. Filed herewith.
II-3
<PAGE>
A(4) Not Applicable
A(5) (a) Specimen Flexible Premium Adjustable Variable Life Insurance
Policy. Filed herewith.
(b) Additional Insured Term Insurance Agreement Rider. Filed
herewith.
(c) Children's Term Insurance Agreement Rider. Filed herewith.
(d) Accidental Death Benefit Agreement Rider. Filed herewith.
(e) Disability Waiver of Monthly Deduction and Disability Monthly
Premium Deposit Agreement Rider. Filed herewith.
(f) Disability Waiver of Monthly Deduction Agreement Rider. Filed
herewith.
(g) Guaranteed Continuation of Policy Agreement Rider. Filed
herewith.
(h) Guaranteed Option to Increase Specified Amount
Agreement Rider. Filed herewith.
(i) Supplemental Term Insurance Agreement Rider. Filed herewith.
(j) Specimen Flexible Premium Adjustable Variable Life Insurance
Policy (revised). Filed herewith.
(k) Flexible Periodic Supplemental Term Insurance Agreement Rider.
Filed herewith.
A(6) (a) Charter of the Penn Mutual Life Insurance Company. Incorporated
herein by reference to Exhibit 6(a) to the Form N-4 Registration
Statement of Penn Mutual Variable Annuity Account III (File
No. 333-62811) filed on September 3, 1998(Accession No.
0001036050-98-001504).
(b) By-laws of The Penn Mutual Life Insurance Company. Incorporated
herein by reference to Exhibit 6(b) to the Form N-4 Registration
Statement of Penn Mutual Variable Annuity Account III (File No.
333-62811) filed on September 3, 1998 (Accession No.
0001036050-98-001504).
A(7) Not Applicable.
II-4
<PAGE>
A(8) (a) Agreement between The Penn Mutual Life Insurance Company and Penn
Series Funds, Inc. Incorporated herein by reference to Exhibit
A(1)(a) to Post-Effective Amendment No. 6 to the Form S-6
Registration Statement of Penn Mutual Variable Life Account I
(File No. 333-87276) filed on April 30, 1999
(Accession No. 0000950116-99-000867).
(b)(1) Form of Sales Agreement between The Penn Mutual Life Insurance
Company and Neuberger & Berman Advisers Management Trust.
Incorporated herein by reference to Exhibit 8(b)(1) to the Form
N-4 Registration Statement of Penn Mutual Variable Annuity
Account III (File No. 333-62811) filed on September 3, 1998
(Accession No. 0001036050-98-001504).
(b)(2) Assignment and Modification Agreement between Neuberger & Berman
Management Incorporated, Neuberger & Berman Advisers Management
Trust and The Penn Mutual Life Insurance Company. Incorporated
herein by reference to Exhibit 8(b)(2) to Post Effective
Amendment No. 1 to Form S-6 Registration Statement (File No.
333-87276) of Penn Mutual Variable Life Account I filed on April
29, 1996. (Accession No. 0000950109-96-002471).
(b)(3) Amendment to Agreement between The Penn Mutual Life Insurance
Company and Neuberger & Berman Advisers Management Trust.
Incorporated herein by reference to Exhibit 8(b)(3) to
Post-Effective Amendment No. 5 to this Form S-6 Registration
Statement filed on April 30, 1997. (Accession No.
0000950109-97-003328).
(c) Form of Fund Participation Agreement between The Penn Mutual Life
Insurance Company, TCI Portfolios, Inc. (renamed American Century
Variable Portfolios, Inc. effective May 1, 1997) and Investors
Research Company (renamed American Century Investment Management,
Inc). Incorporated herein by reference to Exhibit 8(a) to the
Form N-4 Registration Statement of Penn Mutual Variable Annuity
Account III (File No. 333-62811) filed on September 3, 1998
(Accession No. 0001036050-98-001504).
(d) Form of Participation Agreement between The Penn Mutual Life
Insurance Company, Variable Insurance Products Fund and Fidelity
Distributors Corporation. Incorporated herein by reference to
Exhibit 8(d) to the Form N-4 Registration Statement of Penn
Mutual Variable Annuity Account III (File No. 333-62811) filed on
September 3, 1998 (Accession No. 0001036050-98-001504).
II-5
<PAGE>
(e) Form of Participation Agreement between The Penn Mutual Life
Insurance Company and Variable Insurance Products Fund II.
Incorporated herein by reference to Exhibit 8(e) to the Form N-4
Registration Statement of Penn Mutual Variable Annuity Account
III (File No. 333-62811) filed on September 3, 1998 (Accession
No. 0001036050-98-001504).
(f) Participation Agreement between The Penn Mutual Life Insurance
Company and Morgan Stanley Universal Funds, Inc. Incorporated
herein by reference to Exhibit 8(f) to Post-Effective Amendment
No. 22 to the Form N-4 Registration Statement of Penn Mutual
Variable Annuity Account III (File No. 2-77283) filed on April
29, 1997 (Accession No. 0001021408-97-000161).
A(9) Not applicable.
A(10) (a) Application Form for Flexible Premium Adjustable Life
Insurance. Incorporated herein by reference to Exhibit A(1)(b)
to Post-Effective Amendment No. 6 to the Form S-6 Registration
Statement of Penn Mutual Variable Life Account I (File No.
33-87276) filed on April 30, 1999
(Accession No. 0000950116-99-000867).
(b) Supplemental Application Form for Flexible Premium Adjustable
Variable Life Insurance. Incorporated herein by reference to
Exhibit A(1)(b) to Post-Effective Amendment No. 6 to the Form
S-6 Registration Statement of Penn Mutual Variable Life
Account I (File No.33-87276) filed on April 30, 1999
(Accession No. 0000950116-99-000867).
A(11) Memorandum describing issuance, transfer and redemption
procedures. Filed herewith.
2. Opinion and consent of C. Ronald Rubley, Esq., Associate General
Counsel, The Penn Mutual Life Insurance Company, dated April 25, 1995,
as to the legality of the securities being registered. Filed herewith.
3. Opinion and consent of Edward S. Attarian, FSA, MAAA, actuary, The Penn
Mutual Life Insurance Company, dated April 23, 1999, as to actuarial
matters pertaining to the securities being registered. Filed herewith.
4. (a) Consent of Ernst & Young, LLP. Filed herewith.
(b) Consent of Morgan, Lewis & Bockius LLP. Filed herewith.
5. (a) Powers of Attorney of Robert E. Chappell, James A. Hagen, Phillip E.
Lippincott, John F. McCaughan, Alan B. Miller, Daniel J. Toran,
Norman T.
II-6
<PAGE>
Wilde, Jr., Wesley S. Williams, Jr. and Nancy S. Brodie. Filed as
exhibits and incorporated herein by reference to Exhibit 5(a) to
Post-Effective Amendment No. 5 to this Form S-6 Registration
Statement filed on April 29, 1997. (Accession No.
0000950109-97-003328).
(b) Powers of Attorney of Edmond F. Notebaert and Robert H. Rock. Filed
as exhibits and incorporated herein by reference to Exhibit 5(b) to
Post-Effective Amendment No. 7 to this Form S-6 Registration
Statement filed on April 23, 1998 (Accession No.
0001036050-98-000671).
(c) Power of Attorney of Julia Chang Bloch. Filed herewith.
II-7
<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. 8 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, 1999.
[SEAL] THE PENN MUTUAL LIFE INSURANCE COMPANY
on its behalf and on behalf of Penn Mutual
Variable Life Account I
Attest: /s/ Laura M. Ritzko By:/s/ Robert E. Chappell
--------------------------- ---------------------------------
Laura M. Ritzko Robert E. Chappell
Chairman of the Board of Trustees
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 8 to the Registration Statement has been signed
below by the following persons in the capacities indicated on the 28th day of
April, 1999.
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
*JULIA CHANG BLOCH Trustee
*JAMES A. HAGEN Trustee
*PHILIP E. LIPPINCOTT Trustee
*JOHN F. McCAUGHAN Trustee
*ALAN B. MILLER Trustee
*EDMOND F. NOTEBAERT Trustee
*ROBERT H. ROCK Trustee
II-8
<PAGE>
*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-9
<PAGE>
EXHIBIT INDEX
-------------
Ex-99.A(3)(c) Schedule of Sales Commissions.
Ex-99.A(5)(a) Specimen Flexible Premium Adjustable Variable Life
Insurance Policy.
Ex-99.A(5)(b) Additional Insured Term Insurance Agreement Rider.
Ex-99.A(5)(c) Children's Term Insurance Agreement Rider.
Ex-99.A(5)(d) Accidental Death Benefit Agreement Rider.
Ex-99.A(5)(e) Disability Waiver of Monthly Deduction and Disability
Monthly Premium Deposit Agreement Rider.
Ex-99.A(5)(f) Disability Waiver of Monthly Deduction Agreement
Rider.
Ex-99.A(5)(g) Guaranteed Continuation of Policy Agreement Rider.
Ex-99.A(5)(h) Guaranteed Option to Increase Specified Amount
Agreement Rider.
Ex-99.A(5)(i) Supplemental Term Insurance Agreement Rider.
Ex-99.A(5)(j) Specimen Flexible Premium Adjustable Variable Life
Insurance Policy (revised).
Ex-99.A(5)(k) Flexible Periodic Supplemental Term Insurance
Agreement Rider.
Ex-99.A(11) Memorandum describing issuance, transfer and
redemption procedures.
Ex-99.2 Opinion and consent of C. Ronald Rubley, Esq.,
Associate General Counsel, The Penn Mutual Life
Insurance Company, dated April 25, 1995, as to the
legality of the securities being registered.
Ex-99.3 Opinion and consent of Edward S. Attarian, FSA, MAAA,
Actuary, The Penn Mutual Life Insurance Company, dated
April 23, 1999, as to actuarial matters pertaining to
the securities being registered.
Ex-99.4(a) Consent of Ernst & Young, LLP.
II-10
<PAGE>
Ex-99.4(b) Consent of Morgan, Lewis & Bockius LLP.
Ex-99.5(c) Power of Attorney of Julia Chang Bloch.
II-11
<PAGE>
THE PENN MUTUAL LIFE INSURANCE COMPANY
Schedule of Commissions
for
Flexible Premium Adjustable Variable Life Insurance Policies
I. Soliciting Agents
A. Up to 53.5% 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 annually.
II. General Agents, Managers and Regional Directors
A. Up to 17% 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 2% 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>
The Penn Mutual Life Insurance Company
Founded 1847
Insured Specified Amount
Policy Number Policy Date
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
policy, to pay the Death Benefit to the Beneficiary upon receipt of due proof of
the death of the Insured while this policy is in force.
Penn Mutual also agrees to provide all of the other benefits stated in this
policy.
This contract is made in consideration of the payment of premiums as provided in
this policy.
The provisions on this and the following pages are part of this policy.
Executed on the Date of Issue by The Penn Mutual Life Insurance Company.
/s/ Laura M. Ritzko /s/ Robert E. Chappell
- ------------------- ----------------------
Laura M. Ritzko Robert E. Chappell
THE DEATH BENEFIT AND DURATION OF COVERAGE MAY INCREASE OR DECREASE UNDER THE
CONDITIONS DESCRIBED IN SECTIONS 8 AND 11.
THE POLICY'S ACCUMULATION VALUE IN THE SEPARATE ACCOUNT MAY INCREASE OR DECREASE
DEPENDING ON THE INVESTMENT EXPERIENCE OF THAT ACCOUNT. THE POLICY VALUE IS NOT
GUARANTEED.
10 Day Free Look Period - This policy may be cancelled by returning it within 45
days of the date of execution of the application or within 10 days after it is
received by the policyholder. It must be returned to Penn Mutual or to the agent
through whom it was purchased. This policy will then be considered void as of
its inception. Any premium paid on it will be refunded.
READ YOUR POLICY CAREFULLY. This policy is a legal contract between the Owner
and Penn Mutual.
Flexible Premium Adjustable
Variable Life Insurance
Policy
o Death Benefit payable at death prior to Maturity Date
o Adjustable Death Benefit
o Maturity Benefit payable on Maturity Date
o Variable Policy Value
<PAGE>
o Flexible premiums payable until Maturity Date
o Participating
o Supplemental benefits, if any, listed on Page 3
The Penn Mutual Life Insurance Company, Independence Square, Philadelphia,
Pennsylvania 19172
VU-90(S)
<PAGE>
Guide to Policy Sections
- -------------------------------------------------------------------------------
1. Policy Specifications 9. Policy Loans
2. Endorsements 10. Surrender of Policy
3. Premiums 11. Policy Changes
4. Lapse and Reinstatement 12. Exchange of Policy
5. The Separate Account 13. Owner and Beneficiary
6. The Fixed Account 14. General Provisions
7. Policy Value 15. Income Payment Options
8. Death Benefit 16. Income Payment Option Tables
Additional Policy Specifications and a copy of
the application follows Section 16.
Alphabetical Index
------------------------------------------------------
<TABLE>
<CAPTION>
Section Section
<S> <C> <C>
Age..........................................1, 14 Maturity Date...................................1
Allocation of Net Premiums.......................3 Maturity Benefit................................8
Annual Report...................................14 Monthly Anniversary............................14
Assignment......................................13 Monthly Deduction...............................7
Base Monthly Premium...........................1,3 Mortality and Expense Risk Charge...............7
Base Premium Date..............................1,3 Net Cash Surrender Value.......................10
Beneficiary..................................1, 13 Owner.......................................1, 13
Cash Surrender Value............................10 Partial Surrender..............................10
Continuation of Insurance........................3 Policy Date.................................1, 14
Contract........................................14 Policy Loan Account.............................9
Cost of Insurance................................7 Policy Loans....................................9
Cost of Insurance Rates..........................7 Policy Value....................................7
Date of Issue....................................1 Premium Charge..................................6
Death Benefit....................................8 Premiums.....................................1, 3
Deferment of Transactions.......................14 Rate Class......................................1
Dividends.......................................14 Reinstatement...................................4
Exchange of Policy..............................12 Schedule of Benefits............................1
Free Look Period.............................Cover Schedule of Premiums............................1
Grace Period.....................................3 Separate Account.............................1, 5
Income Payment Options..........................15 Service Office..................................1
Income Payment Option Tables....................16 Specified Amount................................1
Incontestability................................14 Subaccounts.....................................5
Indebtedness.....................................9 Suicide Exclusion...............................8
Lapse............................................4 Surrender......................................10
Loan interest....................................9 Surrender Charge...............................10
Loan Value.......................................9
</TABLE>
<PAGE>
1. Policy Specifications
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INSURED WILLIAM PENN $50,000 SPECIFIED AMOUNT
(INCLUDES POLICY VALUE)
POLICY NUMBER 0 000 000 MAY 1, 1993 POLICY DATE
AGE 35 MALE STANDARD SMOKER RATE CLASS
</TABLE>
MATURITY DATE MAY 1, 2053
THE DATE OF ISSUE IS THE POLICY DATE
OWNER AND BENEFICIARY AS PROVIDED IN APPLICATION
SEPARATE ACCOUNT: THE PENN MUTUAL VARIABLE LIFE ACCOUNT I
ELIGIBLE INVESTMENT FUNDS: FUNDS OF PENN SERIES, INC AS
SPECIFIED IN THE ADDITIONAL POLICY SPECIFICATIONS
INITIAL ALLOCATION: PENN SERIES MONEY MARKET FUND - 100%
Schedule of Benefits
Description Amount
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE $50,000 SPECIFIED AMOUNT
GUARANTEED CONTINUATION OF POLICY AGREEMENT --
MAXIMUM SURRENDER CHARGE PREMIUM $515.50
Schedule of Premiums
THE INITIAL PREMIUM OF $810.60 WAS PAID ON THE POLICY DATE FOR 12 MONTHS.
SUBSEQUENT PREMIUMS ARE PAYABLE ANNUALLY AS FOLLOWS.
BEGINNING AS OF PREMIUM
MAY 1,1994 $810.60
THE BASE MONTHLY PREMIUM IS $42.96
THE BASE PREMIUM DATE IS MAY 1, 1996
THE GUARANTEED CONTINUATION OF POLICY PREMIUM IS $67.55
NOTE: INSURANCE WILL TERMINATE IF THE PREMIUMS PAID AND THE INTEREST CREDITED
ARE INSUFFICIENT TO COVER THE MONTHLY DEDUCTIONS, EXCEPT AS PROVIDED IN SECTION
3 AND IN THE GUARANTEED CONTINUATION OF POLICY AGREEMENT.
PAGE 3
<PAGE>
2. Endorsements A001490E
To be made only by the Company
Page 4
<PAGE>
3. Premiums
Payment of Premiums--Premiums are payable during the life of the Insured until
the Maturity Date. The first premium is due on the Policy Date. Premiums after
the first may be paid in any amount and at any interval subject to the following
conditions:
(a) No premium payment may be less than $25.
(b) Penn Mutual reserves the right to limit total premiums paid in any policy
year to the planned payments for that policy year as shown on Page 3. The
schedule of premiums shown on Page 3 is based on the premium amount and the
interval of payment specified in the application.
(c) Total premiums paid in any policy year may not exceed the Maximum Premium
Limit for that policy year. The Maximum Premium Limit for a policy year is
the largest amount of premium which can be paid in that policy year such
that the sum of the premiums paid under the policy will not at any time
exceed the guideline premium limitation referred to in Section 7702 of the
Internal Revenue Code of 1986, as amended, or as set forth in any
applicable successor provision thereto. The Maximum Premium Limit for the
following policy year will be shown on the Annual Report sent to the Owner.
Each premium after the first is payable at the Home Office. A receipt signed by
the President or the Secretary will be given on request.
Premium Charge--Each premium payment will be reduced by a percent of premium
charge. The percent of premium charge will be set by Penn Mutual based on
expectations as to future expense, mortality and persistency experience but in
no event will the percent of premium charge be greater than 6.5% of each premium
paid.
Net Premium--Net premium is the amount of any premium payment reduced by the
percent of premium charge.
Allocation of Net Premiums--The initial net premium and any additional premium
paid before the end of the Free Look Period will be allocated to the subaccount
of the Separate Account specified on Page 3 until the end of the Free Look
Period. At the end of such period the assets will be allocated to the
subaccounts of the Separate Account or to the Fixed Account as directed by the
Owner in the application for this policy. Subject to and in accordance with the
provisions of this policy, subsequent net premiums will be allocated as directed
by the Owner to the subaccounts of the Separate Account and the Fixed Account
set forth in the Additional Policy Specifications. The Owner may change the
allocation of future premium payments at any time. Allocation to any one
subaccount of the Separate Account or to the Fixed Account must be not less than
ten percent of the net premium.
Continuation of Insurance--If all premium payments cease, the insurance provided
under this policy, including benefits provided by any supplemental agreements
attached to this policy, will continue in accordance with the provisions of this
policy and any such supplemental agreements for as long as the values in this
policy are sufficient to keep it in force.
Base Monthly Premium--The base monthly premium is the amount stated on Page 3.
If, on a Monthly Anniversary prior to the base premium date shown on Page 3, the
sum of all premiums paid on this policy, reduced by any partial surrenders, is
greater than or equal to the base monthly premium multiplied by the number of
months that this policy has been in force, this policy will not then lapse as a
result of failure to pay a premium sufficient to pay the Monthly Deduction for
the following month. This provision will not prevent the termination of this
policy when indebtedness exceeds the Cash Surrender Value in accordance with the
indebtedness provision of the Policy Loans section of this policy.
Grace Period--If, on a Monthly Anniversary prior to the base premium date shown
on Page 3:
(a) the Net Cash Surrender Value is insufficient to cover the Monthly Deduction
for the following policy month; and
(b) the sum of all premiums paid on this policy, reduced by any partial
surrenders, is less than the base monthly premium shown on Page 3
multiplied by the number of months that this policy has been in force;
then a grace period of 61 days will be allowed for the payment of a premium
sufficient to keep this policy in force.
The payment of premiums at least as great as the base monthly premium multiplied
by the number of months the policy has been in force will have no effect on Penn
Mutual's right to terminate this policy due to indebtedness in excess of the
Cash Surrender Value as provided in the indebtedness provision of the Policy
Loans section.
Page 5
<PAGE>
A change in the Specified Amount or the addition or deletion of a Rider to this
policy prior to the base premium date shown on Page 3 may result in a change in
the base monthly premium and may change the base premium date.
3. Premiums (continued)
4. Lapse and Reinstatement
Lapse--If a premium sufficient to keep this policy in force is not paid during
the grace period, this policy will lapse. At lapse this policy will terminate
without Cash Surrender Value and cease to be in force. Any deduction for the
Cost of Insurance after termination will not be considered a reinstatement of
the policy nor a waiver by Penn Mutual of the termination.
Reinstatement--This policy may be reinstated within five years after lapse. A
reinstatement is subject to:
(a) the submission of evidence of insurability satisfactory to Penn Mutual;
(b) the payment or reinstatement of any indebtedness which existed at the end of
the grace period; and
(c) the payment of a premium (i) sufficient to cover the Monthly Deductions for
the grace period, and (ii) sufficient to keep the policy in force for two
policy months after reinstatement.
The effective date of a reinstatement will be the date of approval by Penn
Mutual of the application for reinstatement.
The policy value on the date of reinstatement is the sum of:
(a) the policy value at the beginning of the grace period
If, on a Monthly Anniversary on or after the base premium date shown on Page 3,
the Net Cash Surrender Value is insufficient to cover the Monthly
Deduction for the following month, a grace period of 61 days will be allowed for
the payment of a premium sufficient to pay the Monthly Deduction.
Notice of the amount of premium required to be paid during the grace period to
keep this policy in force will be sent at the beginning of the grace period to
the last known address of the Owner and of any assignee on record. The grace
period will end 61 days after the the notice is sent.
This policy will remain in force during the grace period.
of lapse;
(b) interest on (a) at a rate of 4% per year until the date of reinstatement;
(c) any dividend credited to the policy;
(d) interest on (c) at a rate of 4% per year until the date of reinstatement;
and
(e) the payment made upon reinstatement reduced by the percent of premium charge
less the sum of:
(a) the Monthly Deductions for the grace period;
(b) interest on (a) at a rate of 4% per year until the date of reinstatement;
and
(c) the Monthly Deduction for the policy month following the date of
reinstatement.
The surrender charge set forth in Section 10 will be applicable to any surrender
of this policy following reinstatement.
Any indebtedness which is reinstated will be subject to loan interest as set
forth in Section 9.
Following reinstatement, the provisions of Base Monthly Premium set forth in
Section 3 will again be applicable until the base premium date shown on Page 3
if sufficient premium is paid so that, as of the effective date of
reinstatement, the sum of all premiums paid, reduced by any partial surrenders,
is greater than the base monthly premium multiplied by the number of months that
this policy has been in force.
5. The Separate Account
The Separate Account--The Separate Account named on Page 3 was established by
Penn Mutual for this and other variable life insurance policies. The Separate
Account is divided into subaccounts for the investment of assets in shares of
the funds specified in the Additional Policy Specifications. Penn Mutual owns
the assets of the Separate Account. The assets of each subaccount of the
Separate Account equal to the reserves and other contract liabilities with
respect to the subaccount are not chargeable with liabilities arising out of any
other business Penn Mutual may conduct.
Income and realized and unrealized gains and losses from the assets held in each
subaccount are credited to or charged against the subaccount without regard to
the income, gains or losses in other investment accounts of Penn Mutual. Shares
of a fund held in a subaccount are valued at current net asset value on each
business day as required by the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended. Current net asset value of the
shares is based on current value of the portfolio securities and other assets of
the fund. Portfolio securities for which
Page 6
<PAGE>
5. The Separate Account (continued)
market quotations are readily available are valued at current market value.
Other portfolio securities and assets are valued at amortized cost or at fair
value as determined in good faith by the board of directors of the fund.
Shares of a fund held in a subaccount will be redeemed at current net asset
value to make transfers, pay benefits and cover applicable charges and
deductions. Any dividend or capital gain distribution from a fund will be
reinvested in shares of that fund.
Substitution of Investment--If investment in a subaccount should no longer be
possible or, in the judgement of Penn Mutual, investment in a subaccount becomes
inappropriate to the purposes of the policy, or if in the judgement of Penn
Mutual, investment in another subaccount or insurance company separate account
is in the interest of owners of this class of policies, Penn Mutual may
substitute another subaccount or insurance company separate account.
Substitution may be made with respect to existing investments and the investment
of future net premiums.
Substitution will be subject to the approval of the Insurance Department of the
jurisdiction in which this policy is delivered and all other approvals required
under applicable law.
Transfers--Subject to and in accordance with the provisions of this policy, at
any time after the end of the Free Look Period, amounts may be transferred among
the subaccounts of the Separate Account and the Fixed Account, provided that:
(a) the minimum amount which may be transferred is $250 or, if less, the full
amount held in the subaccount;
(b) for partial transfers, the amount remaining in a subaccount must be at least
$250; and
(c) the first 12 transfers per policy year will be allowed free of charge;
thereafter, a $10 transfer charge may be deducted from the amount
transferred.
6. The Fixed Account
The Fixed Account--Amounts allocated or transferred to the Fixed Account under
this policy become a part of the general account assets of Penn Mutual. Subject
to applicable law and regulation, investment of general account assets is at the
sole discretion of Penn Mutual.
Interest--Amounts held in the Fixed Account will be credited with interest at
rates determined by Penn Mutual. Different rates will normally apply to that
portion of the Fixed Account representing indebtedness. In no event will the
rate of interest credited be less than an effective annual rate of four percent
compounded annually.
Amounts allocated or transferred to the Fixed Account will be credited with
interest at an effective annual rate declared by Penn Mutual. The declared rate
will apply from the date of allocation or transfer through the end of the twelve
month period which begins on the first day of the calendar month in which the
allocation or transfer is made. Thereafter, interest will be credited on such
amount for successive twelve month periods at the declared effective annual rate
then applicable to new allocations to the account made as of the beginning of
each such period.
Transfers--Subject to and in accordance with the provisions of this policy:
(i) amounts may be transferred from one or more subaccounts into the Fixed
Account at any time after the end of the Free Look Period; and
(ii) an amount held in the Fixed Account may be transferred to one or more
subaccounts only during the period which is not more than thirty days
immediately following the end of each policy year. Any such transfer must
be at least $250, or if less, the amount held in the Fixed Account
(exclusive of any amount held in the Policy Loan Account). In the event of
a partial transfer, at least $250 must remain in the Fixed Account.
7. Policy Value
Policy Value--On the Policy Date the Policy Value is the initial premium paid
less the sum of (a) the percent of premium charge, and (b) the Monthly Deduction
for the first policy month. On each Monthly Anniversary while this
Page 7
<PAGE>
policy is in force, the Policy Value is the sum of (a) the current market value
of each subaccount and (b) the value of the Fixed Account, after deduction of
the Monthly Deduction for the next policy month.
Page 8
<PAGE>
7. Policy Value (continued)
On any date other than the Policy Date or a Monthly Anniversary, the Policy
Value will be the sum of (a) the current market value of each subaccount and (b)
the value of the Fixed Account.
Monthly Deduction--The Monthly Deduction is the sum of:
(a) the Cost of Insurance for the policy month;
(b) the monthly expense charge(s); and
(c) the Cost of Insurance and any other applicable monthly charge for the
policy month for any benefits provided by a supplemental agreement made a
part of this policy.
Cost of Insurance--The Cost of Insurance is determined on a monthly basis. It is
determined separately for each increase in the Specified Amount. The Cost of
Insurance for a policy month is calculated as (a) multiplied by the result of
(b) minus (c) where:
(a) is the Base Cost of Insurance Rate divided by 1,000;
(b) is the Basic Death Benefit at the beginning of the policy month divided by
1.0032737; and
(c) is the Policy Value at the beginning of the policy month before the Monthly
Deduction.
If the Specified Amount includes the Policy Value and if there have been any
increases in the Specified Amount, the Policy Value will be considered a part of
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.
Cost of Insurance Rate--The Base Cost of Insurance Rate is based on the attained
age, sex and rate class of the Insured. Cost of Insurance Rate will be
determined by Penn Mutual based on expectations as to future mortality,
investment, expense and persistency experience. However, the rates will not
exceed those shown in the Additional Policy Specifications. Such maximum rates
are based on the 1980 Commissioners Standard Ordinary Smoker and Nonsmoker
Mortality Tables, Age Nearest Birthday.
Cost of Insurance Rates will not be adjusted by Penn Mutual as a means of
recovering prior losses nor as a means of distributing prior profits.
Expense Charges--The actual expense charges will be set by Penn Mutual based on
expectations as to future expense, mortality and persistency experience.
However, these actual expense charges will not exceed the maximum expense
charges stated below.
The maximum expense charges applicable under this policy are:
(a) a monthly expense charge of $9.00;
(b) a monthly expense charge of $0.10 for each $1,000 of Specified Amount for
the first twelve months following the Policy Date; and
(c) if the Specified Amount has been increased within the past year, a monthly
expense charge of $0.10 for each $1,000 that the Specified Amount has been
increased.
The Monthly Deductions will be deducted from the subaccounts and the Fixed
Account on a pro-rata basis. However, no monthly deductions will be deducted
from the Policy Loan Account of the Fixed Account.
Variable Accumulation Values--At any valuation time, the current market value of
a subaccount is determined by multiplying that subaccount's accumulation unit
value times the number of subaccount units held under this policy.
The number of subaccount accumulation units will increase when:
(a) net premiums are allocated to that subaccount;
(b) amounts are transferred to that subaccount; and
(c) policy loans are repaid and credited to that subaccount.
The number of subaccount accumulation units will decrease when:
(a) a pro-rata portion of the monthly deduction is deducted from that
subaccount;
(b) a policy loan is taken from that subaccount;
(c) policy loan interest is not paid when due and is taken from that subaccount;
(d) an amount is transferred from that subaccount; and
(e) a partial surrender, including the partial surrender charge, is taken from
that subaccount.
Valuation Period--As used in this policy, Valuation Period is the interval from
one valuation time to the next valuation time. Valuation time is the time as of
which each underlying investment company determines the net asset value of its
shares.
Value of Each Accumulation Unit--For each subaccount of the Separate Account,
the value was arbitrarily set at $10 when the subaccount was established. The
value may increase or decrease from one valuation period to the next. For any
valuation period the value is:
Page 9
<PAGE>
7. Policy Value (continued)
The value of an Accumulation Unit for the prior valuation period multiplied by
the net investment factor for that subaccount for the current valuation period.
Net Investment Factor--As used in this policy, Net Investment Factor is an index
used to measure the investment performance of a subaccount from one valuation
period to the next. For any subaccount, the net investment factor for a
valuation period is found by dividing (a) by (b) and subtracting (c):
Where (a) is
The net asset value per share of the mutual fund held in the subaccount, as of
the end of the valuation period plus
The per-share amount of any dividend or capital gain distributions by the mutual
fund if the "exdividend" date occurs in the valuation period.
Where (b) is
The net asset value per share of the mutual fund held in the subaccount as of
the end of the last prior valuation period.
Where (c) is
The daily Mortality and Expense Risk Charge set by Penn Mutual. On an annual
basis, such charge will not exceed 0.90% of the daily net asset value of the
Separate Account.
Fixed Account Value--At any valuation time the value of the Fixed Account is
(a) the total of net premiums allocated to the Fixed Account; plus
(b) any transfers to the Fixed Account; plus
(c) any policy loan account (principal and unpaid interest) credited to the
Fixed Account; plus
(d) any repaid policy loan credited to the Fixed Account; plus
(e) interest credited to the Fixed Account.
less:
(a) the pro-rata portion of the Monthly Deduction deducted from the Fixed
Account;
(b) the amount of any transfers from the Fixed Account;
(c) the amount of any partial surrender, including the partial surrender charge,
taken from the Fixed Account;
(d) the amount of any policy loan taken from the Fixed Account;
(e) unpaid policy loan interest taken from the Fixed Account; and
(f) repaid policy loans deducted from the policy loan account.
Fixed Account Value Reductions--Monthly deductions, transfers and partial
surrenders will reduce the portion of the Fixed Account Value which results from
the most recent allocation to the Fixed Account. A policy loan will be secured
by the portion of the Net Policy Value which results from the most recent
allocation to the Fixed Account.
Computation of Values--Policy Values and reserves are based on the 1980
Commissioners Standard Ordinary Smoker and Nonsmoker Mortality Tables, Age
Nearest Birthday.
All policy values and benefits are equal to or greater than those required by
the law of the jurisdiction in which this policy is delivered. A detailed
statement of the method of computing reserves and Policy Values has been filed
with the insurance supervisory official of that jurisdiction.
8. Death Benefit
Basic Death Benefit--The Basic Death Benefit prior to the Maturity Date will be
as follows:
(1) If the Specified Amount includes the Policy Value, as shown on Page 3, the
Basic Death Benefit will be equal to the greater of:
(a) The Specified Amount; or
(b) the percentage of the Policy Value described below based on the
attained age of the Insured.
(2) If the Specified Amount does not include the Policy Value, as shown on Page
3, the Basic Death Benefit will be equal to the greater of;
(a) the Specified Amount plus the Policy Value; or
(b) the percentage of the Policy Value described below based on the
attained age of the Insured.
Page 10
<PAGE>
8. Death Benefit (continued)
The percentage of the Policy Value used in determining the Basic Death Benefit
is:
Attained Attained
Age Percentage Age Percentage
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
56 146 91 104
57 142 92 103
58 138 93 102
59 134 94 101
60 130
Amount of Death Benefit--The Death Benefit payable at the death of the Insured
while this policy is in force will be equal to the sum of:
(a) the Basic Death Benefit on the date of death;
(b) any dividend payable at death; and
(c) any benefit provided by a supplemental agreement attached to the policy and
payable because of the death of the Insured.
less the sum of:
(a) any indebtedness on this policy at the time of the death of the Insured; and
(b) if the death of the Insured occurs during a grace period, the past due
Monthly Deductions.
Suicide Exclusion--If the Insured dies by suicide, while sane or insane, within
two years from the Date of Issue, the Death Benefit will be limited to the
premiums paid less any indebtedness and any partial surrenders.
If the Insured dies by suicide, while sane or insane, within two years from the
effective date of any increase in the Specified Amount, the Death Benefit with
respect to that increase in the Specified Amount will be limited to the Monthly
Deductions made for that increase.
If the Insured dies by suicide, while sane or insane, within two years from the
effective date of a reinstatement of this policy, the Death Benefit will be
limited to the premiums paid since the reinstatement less any policy loans and
partial surrenders made since reinstatement.
Payment of Death Benefit--The Death Benefit will be paid to the Beneficiary in
one sum or, if elected, under an income payment option. 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 death to the date of payment. The interest rate will be determined
each year by Penn Mutual, but will not be less than a rate of 3% per year
compounded annually.
Amount of Maturity Benefit--The Maturity Benefit payable if the Insured is
living on the Maturity Date and if this policy is then in force will be equal to
the Net Policy Value on that date.
Payment of Maturity Benefit--The Maturity Benefit will be paid to the Owner in
one sum or, if elected, under an Income Payment Option.
Page 11
<PAGE>
9. Policy Loans
Policy Loans--The Owner may obtain a loan while this policy is in force during
the life of the Insured. The loan, plus any existing indebtedness, may not be
greater than the Loan Value of this policy on the date of the loan.
The minimum loan is $250.
Loan Value--The Loan Value of this policy on any date is equal to 90% of the
Cash Surrender Value.
Loan Interest--Loans will bear interest at the rate of 5% per year. Loan
interest is due and payable at the end of each policy year. If the interest is
not paid when due it will be added to the loan and will then bear interest at
the same rate.
Indebtedness--Indebtedness means outstanding loans on this policy plus any loan
interest due or accrued. Indebtedness may be repaid in full or in part at any
time while this policy is in force during the life of the Insured.
<PAGE>
9. Policy Loans (continued)
Excess Indebtedness--This policy is the only security for indebtedness on it.
If, at any time, the indebtedness is greater than the Cash Surrender Value, a
notice of pending termination will be mailed to the last known address of the
Owner and of any assignee on record. If the excess indebtedness is not paid to
Penn Mutual, this policy will terminate 61 days after the notice is mailed.
Policy Loan Account--When a loan is made, an amount equal to the amount of the
loan will be withdrawn from the assets held under this policy in subaccounts of
the Separate Account and in the Fixed Account and the amount will be placed in
the Policy Loan Account included within the Fixed Account. Subject to and in
accordance with the provisions of this policy withdrawals will be made from the
subaccounts and the Fixed Account on a pro-rata basis unless otherwise directed
by the Owner. The Policy Loan Account will be credited with interest. The rate
of interest will be determined each year by Penn Mutual but will not be less
than a rate of 4% per year compounded annually. Any repayment of indebtedness
will be withdrawn from the Policy Loan Account and reallocated to the
subaccounts and the Fixed Account as directed by the Owner. Except for such
repayment of indebtedness, no transfers or partial surrenders may be made from
the Policy Loan Account.
10. Surrender of Policy
Surrender--The Owner may surrender this policy for its Net Cash Surrender Value
by filing a written request with Penn Mutual. The Net Cash Surrender Value may
be taken in one sum or it may be left with Penn Mutual under an income payment
option. This policy will terminate and cease to be in force if it is surrendered
for one sum.
Net Cash Surrender Value--The Net Cash Surrender Value is the Net Policy Value
decreased by any surrender charge.
Net Policy Value--The Net Policy Value is the Policy Value decreased by any
indebtedness on this policy.
Cash Surrender Value--The Cash Surrender Value is the Policy Value decreased by
any surrender charge.
Surrender Charge--The surrender charge for the initial Specified Amount is
determined by multiplying (a) times the sum of (b) plus (c), where:
(a) is the appropriate surrender factor from the table below in which policy
year is determined from the Policy Date;
(b) is 25% of the lesser of:
(i) the sum of all premiums paid on this policy; and
(ii)the maximum surrender charge premium as shown on Page 3; and
(c) is the Per $1,000 Surrender Charge from the Table of Per $1,000 Surrender
Charges for the insurance age of the Insured multiplied by the initial
Specified Amount divided by 1,000.
The surrender charge for each increase in the Specified Amount is based on the
amount of the increase and on the attained age of the Insured at the time of the
increase. The surrender charge is determined by multiplying (a) times (b),
where:
(a) is the appropriate surrender factor from the table below in which policy
year is determined from the effective date of the increase;
(b) is the Per $1,000 Surrender Charge from the Table of Per $1,000 Surrender
Charges for the attained age of the Insured as of the effective date of the
increase multiplied by the increase in the Specified Amount divided by
1,000.
Policy Surrender
Year Factor
1-7 1.00
8 .80
9 .60
10 .40
11 .20
12 and 0
later
Page 12
<PAGE>
10. Surrender of Policy (continued)
Partial Surrender--The Owner may make a partial surrender of this policy for any
portion of the Net Cash Surrender Value which exceeds $1,000 by filing a written
request with Penn Mutual. However, no partial surrender may be made for less
than $250 and no more than four partial surrenders may be made under this policy
in any policy year. No partial surrender may be made in the first five policy
years which would reduce the Specified Amount to less than $50,000. A charge of
2% of the amount surrendered, but not more than $25 will be made for each
partial surrender. The charge will be deducted from the available Net Cash
Surrender Value and will be considered part of the partial surrender.
Any partial surrender will reduce the Policy Value by the amount of the partial
surrender. If the Specified Amount includes the Policy Value, the Specified
Amount will also be reduced by the amount of the partial surrender in the
following order:
(1) The most recent increase in the Specified Amount, if any, will be decreased
first.
(2) The next most recent increases in the Specified Amount, if any, will then be
successively decreased.
(3) The initial Specified Amount will then be decreased.
Partial surrenders will be deducted from the subaccounts and the Fixed Account
as directed by the Owner, provided that the minimum amount remaining in a
subaccount or the Fixed Account as a result of the allocation is $250. If no
allocation is directed, the partial surrender will be deducted from the
subaccounts and the Fixed Account on a pro-rata basis.
11. Policy Changes
Right to Make Change--At any time while this policy is in force after the first
policy year, the Owner may request in writing any of the following changes. No
change will be permitted that would result in the Death Benefit under this
policy not being excludable from gross income due to not satisfying the
requirements of Section 7702 of the Internal Revenue Code of 1986, as amended,
or as set forth in any applicable successor provision thereto. In addition, each
change is subject to the conditions stated.
Increase in Specified Amount--Any increase in the Specified Amount must be at
least $10,000 and must be applied for on a written application. Evidence of
insurability satisfactory to Penn Mutual must be submitted. This policy will be
amended to show the effective date of the increase.
Decrease in Specified Amount--Any decrease in the Specified Amount must be at
least $5,000. The Specified Amount may not be decreased to less than $50,000. No
decrease may be made in the first year following the effective date of an
increase in the Specified Amount.
Any decrease in the Specified Amount will become effective on the Monthly
Anniversary that coincides with or next follows the receipt by Penn Mutual of
the request. The decrease in the Specified Amount will be in the following
order:
(1) The most recent increase in the Specified Amount, if any, will be decreased
first.
(2) The next most recent increases in the Specified Amount, if any, will then be
successively decreased.
(3) The initial Specified Amount will then be decreased.
Change in Specified Amount Option--If the Specified Amount does not include the
Policy Value, a request may be made to change this policy so that the Specified
Amount includes the Policy Value. The Specified Amount after the change will be
equal to the Specified Amount before the change plus the Policy Value on the
date of the change. The effective date of the change will be the Monthly
Anniversary that coincides with or next follows the date of receipt by Penn
Mutual of the request to make the change.
If the Specified Amount includes the Policy Value, a request may be made to
change this policy so that the Specified Amount does not include the Policy
Value. The Specified Amount after the change will be equal to the Specified
Amount before the change less the Policy Value on the date of the change.
Evidence of insurability satisfactory to Penn Mutual may be required. The
effective date of the change will be the Monthly Anniversary that coincides with
or next follows the date of receipt by Penn Mutual of the request to make the
change.
The Specified Amount after the change must be at least $50,000. No more than one
change in the Specified Amount option may be made in any policy year.
Page 13
<PAGE>
12. Exchange of Policy
Exchange of Policy--At any time within the first 24 policy months while this
policy is in force during the life of the Insured, the Owner may exchange this
policy without evidence of insurability for a new policy on the life of the
Insured providing benefits which do not vary with the investment experience of a
separate account. The exchange will be subject to the following conditions:
(1) The new policy will be on the flexible premium adjustable life insurance
plan that was being issued by Penn Mutual on the Date of Issue of this
policy.
(2) The new policy will provide the same amount of Death Benefit or the same
net amount at risk to Penn Mutual as this policy and will have the same
Date of Issue and issue age as this policy.
(3) The Cost of Insurance Rates for the new policy will be those applicable to
flexible premium adjustable life policies in the same risk classification
as this policy and issued on the same date as the policy.
(4) All outstanding indebtedness under this policy must be paid.
The contestable period, suicide period, and surrender charge period of the new
policy will be measured from the issue date of this policy. The Policy Value of
this policy will be transferred to the new policy as of the effective date of
the exchange. The effective date of the exchange will be the date Penn Mutual
received written request for exchange at its Home Office.
13. Owner and Beneficiary
Owner--The Owner of this policy is as stated in the application unless changed
by a subsequent owner designation or assignment. While this policy is in force
before the death of the Insured, the Owner may exercise all of the rights in it
without the consent of any other person.
Beneficiary--The Beneficiary of this policy is as stated in the application
unless changed by a subsequent beneficiary designation on a form provided by
Penn Mutual. If no other provision is made, the interest of a Beneficiary who
dies before the death of the Insured will pass to the Owner.
Change of Owner or Beneficiary--The Owner may transfer ownership or change the
Beneficiary by filing a written designation at the Home Office on a form
provided by Penn Mutual. The designation will take effect as of the date it is
signed by the Owner, subject to any action taken by Penn Mutual prior to the
time that the designation is received at the Home Office. Unless otherwise
stated in a designation, the following rules will apply to terms of kinship:
(1) A legally adopted child of any person will be considered the child of the
adopting parent.
(2) The brothers and sisters of a person will include those who have only one
parent in common with the person, but will not include stepbrothers or
stepsisters.
(3) Any reference to children will not include stepchildren and any reference to
parents will not include stepparents.
Assignment--The Owner may assign this policy while it is in force during the
life of the Insured. The rights of the Owner and of any Beneficiary will be
subject to the rights of an assignee under the terms of an assignment. No
assignment will bind Penn Mutual until the original or a copy signed by the
Owner, on a form provided by Penn Mutual, has been filed at the Home Office.
Penn Mutual is not responsible for the effect or the validity of any assignment.
14. General Provisions
The Contract--This policy and the application for it constitute the entire
contract. A copy of the application is attached to this policy. Only the
President, a Vice President, the Secretary, the Chief Actuary, Actuary or an
Associate Actuary may, on behalf of Penn Mutual, modify this policy or waive any
of its conditions. No agent is authorized to modify this contract or to make any
promise as to the future payment of dividends or interest. At any time Penn
Mutual may make such changes in this policy as are necessary (i) to assure
compliance at all times with the definition of life insurance prescribed by
federal income tax law, or (ii) to make the policy conform with any law or
regulation issued by any government agency to which it is subject. Any such
change may, however, be accepted or rejected by the Owner.
Page 14
<PAGE>
14. General Provisions (continued)
Incontestability--All statements made in the application for this policy are
representations and not warranties. No statement will void this policy or be
used to contest a claim under it unless the statement is contained in a written
application, a copy of which is attached to and made a part of this policy.
This policy will be incontestable after it has been in force during the life of
the Insured for two years from the Date of Issue. 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 from its effective date.
This policy will be incontestable with respect to statements made in an
application for reinstatement after it has been in force during the life of the
Insured for two years from the effective date of the reinstatement.
Participation--This policy will participate in divisible surplus while it is in
force except as stated in the Income Payment Options Section. The share of such
surplus, if any, to be apportioned to this policy as a dividend will be
determined each year by Penn Mutual. Any dividend will be allocated to
subaccounts of the Separate Account as directed by the Owner, unless the Owner
elects to have it paid in cash. No divisible surplus is expected to be
apportioned to this policy in the foreseeable future.
Policy Date--The Policy Date shown on Page 3 is the date from which policy
years, months and anniversaries are determined.
Monthly Anniversary--The Monthly Anniversary is the day in each calendar month
which is the same day of the month as the Policy Date.
Age--The age shown on Page 3 is the insurance age of the Insured. This is the
age of the Insured on the birthday nearest the Policy Date. Attained age means
the insurance age of the Insured increased by the number of whole years and
months after the Policy Date.
Misstatement of Age or Sex--If the age or the sex of the Insured has been
misstated, the Death Benefit under this policy will be the amount which would
have been provided by the most recent Cost of Insurance charge at the correct
age and sex.
Policy Payments--All payments by Penn Mutual under this policy are payable at
the Home Office. Penn Mutual may require the return of this policy upon
surrender for the Net Cash Surrender Value or payment of the Death Benefit.
Deferment of Transactions--Penn Mutual may defer payment from the subaccounts of
a partial surrender or of the Net Cash Surrender Value, may defer making a loan,
may defer payment of any portion of the Death Benefit in excess of the Specified
Amount and may defer transfer from assets held in subaccounts of the Separate
Account under any of the following conditions:
(1) The New York Stock Exchange is closed (other than customary weekend and
holiday closings).
(2) Trading on the New York Stock Exchange is restricted.
(3) An emergency exists such that it is not reasonably practical to dispose of
securities held in the Separate Account or to determine the value of its
assets.
(4) The Securities and Exchange Commission by order so permits for the
protection of securityholders.
Conditions in (2) and (3) will be decided by, or in accordance with rules of,
the Securities and Exchange Commission.
Penn Mutual may defer payment from the Fixed Account of a partial surrender, of
the Net Cash Surrender Value, or of a policy loan for up to six months from the
date we receive a written request. However, a partial surrender or policy loan
to pay a premium due on a policy of Penn Mutual will not be deferred. If the
payment is deferred for 30 days or more, it will bear interest at a rate of 3%
per year compounded annually while it is deferred.
Annual Report--Each year a report will be sent to the Owner which shows the
current policy values, premiums paid and deductions made since the last report,
any outstanding policy loans, and any additional premiums permitted under this
policy.
15. Income Payment Options
Election of Income Payment Option--An income payment option may be elected in
place of a one sum payment of any amount payable upon the death of the Insured
or upon surrender. The Owner may elect an income payment option or change a
previous election while this policy is in force during the life of the Insured.
If no election is in effect on the date that the Death Benefit becomes payable,
the person entitled to such benefit
Page 15
<PAGE>
15. Income Payment Options (continued)
may elect an income payment option. The option must be elected before any
payment has been made and within one year after the date on which the benefit
becomes payable.
The amount applied under an income payment option must be at least $5,000.
No election may provide for income payments of less than $50 each.
Option 1--Interest Income--Penn Mutual will hold the amount applied at interest.
Interest will be paid monthly, quarterly, semiannually or annually.
Option 2--Income for a Fixed Period--Penn Mutual will pay the amount applied,
with interest, in equal monthly payments for a fixed period. The fixed period
may not be greater than 30 years.
Option 3--Income of a Fixed Amount--Penn Mutual will make payments of a fixed
amount until the total amount applied, with interest, has been paid. The
payments may be made monthly, quarterly, semiannually or annually. The final
payment may be less than the fixed amount. The total of the payments to be made
each year must be at least $75 for each $1,000 applied.
Option 4--Life Income--Penn Mutual will pay equal monthly payments during the
life of the option annuitant.
Option 5--Life Income with Guaranteed Period--Penn Mutual will pay equal monthly
payments for a stated guaranteed period and thereafter during the life of the
option annuitant. The guaranteed period may be 5 years, 10 years or 20 years.
Option 6--Life Income with Refund Period--Penn Mutual will pay equal monthly
payments during the life of the option annuitant. If necessary, the payments
will continue after the death of the option annuitant until the total of all
payments made, including a smaller final payment, if required, equals the total
amount applied.
Option 7--Joint and Survivor Life Income--Penn Mutual will pay equal monthly
payments during the joint life of two option annuitants and thereafter during
the life of the survivor.
Income Amount--Participation--The income under Options 1 and 2 will be based on
interest at a rate of 3% per year compounded annually. The unpaid balance of the
amount applied under Option 3 will be credited with interest at a rate of 3% per
year compounded annually. Options 1, 2 and 3 will participate in divisible
surplus by the payment or crediting of additional interest in such amount, if
any, as determined each year by Penn Mutual. Additional interest will increase
the income payments under Options 1 and 2. Additional interest will lengthen the
period during which payments are made under Option 3.
The monthly income under Options 4, 5, 6 and 7 will equal 103% of the monthly
income under a comparable Penn Mutual single premium nonparticipating annuity
available at the time that the income payments are to begin. In no event will
the monthly income under these life income options be less than the income
stated in the Income Payment Option Tables. Options 4, 5, 6 and 7 will not
participate in divisible surplus.
Income Period--The income period under an option will begin on the date of death
of the Insured or the date of surrender. Income payments under Options 1 and 3
will be made at the end of the payment interval. Income payments under Options
2, 4, 5, 6 and 7 will be made at the beginning of the payment interval.
Option Annuitant--Option annuitant means a natural person on whose life the
income payments under Options 4, 5, 6 and 7 are based.
Penn Mutual may require proof of the age and sex and of the continued life of an
option annuitant. If the age or the sex of an option annuitant has been
misstated, an appropriate adjustment will be made in the income payments.
Withdrawal Privilege--Unless the election states otherwise, the payee under an
income payment option may:
(a) before any income payment has been made, withdraw the amount applied under
the option; or
(b) withdraw the present value of the income payments to become due during any
fixed, guaranteed or refund period; or
(c) withdraw the balance held under Option 1 or 3 plus any accrued interest.
There will be no right to withdraw the present value of the income payments
falling due after the guaranteed or refund period under Option 5 and 6. There
will be no right to withdraw the present value of any income payments under
Options 4 and 7.
Page 16
<PAGE>
Penn Mutual may defer the payment of the amount withdrawn for up to six months
from the date of a withdrawal request.
15. Income Payment Options (continued)
Present Value--The present value of the income payments under Option 2 will be
based on interest at a rate of 3% per year compounded annually. The present
value of the remaining income payments during a guaranteed or refund period
under a life income option will be based on interest at a rate set by Penn
Mutual at the time income payments are to begin.
Death of Payee--Upon the death of the payee under an income payment option, Penn
Mutual will pay the following to the payee's executors or administrators unless
stated otherwise in an election consented to by Penn Mutual:
(a) the balance of the amount held under Option 1 or 3 plus any accrued
interest; or
(b) the present value of the income payments to become due during the fixed
period under Option 2; or
(c) if the option annuitant under Option 5 or 6 has died, the present value of
the income payments, if any, to become due during the guaranteed or refund
period; or
(d) if any option annuitant under Option 4, 5, 6 or 7 is living, any income
payments as they become due during the option annuitant's life plus, upon
the death of the option annuitant under Option 5 or 6, the present value of
the income payments, if any, to become due during the guaranteed or refund
period.
Assignment--Creditors--The amount applied under an income payment option and the
payments under the option may not be assigned and, to the extent permitted by
law, will not be available to anyone who has a claim against the payee.
Page 17
<PAGE>
ADDITIONAL POLICY SPECIFICATIONS
SUBACCOUNTS OF THE SEPARATE ACCOUNT
PENN SERIES FUNDS, INC.:
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;
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;
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;
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;
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;
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;
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 US 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;
FIXED ACCOUNT:
An account that is part of Penn Mutual's General Account to which all or a
portion of net premiums and transfers may be allocated for accumulation at fixed
rates of interest.
ALLOCATIONS AND TRANSFERS TO ACCOUNTS:
Except with the consent of Penn Mutual, there can be no allocation of net
premiums and transfers to more than five of the accounts set forth in these
Additional Policy Specifications at any one time, or more than four of the
accounts at any one time if there is a loan outstanding (or to be outstanding)
under the policy.
PAGE 18
<PAGE>
Additional Policy Specifications
TABLE OF GUARANTEED MAXIMUM MONTHLY COST OF INSURANCE RATES PER $1,000
ATTAINED BASE
AGE RATE
35 $ 0.2080
36 0.2224
37 0.2410
38 0.2617
39 0.2858
40 0.3131
41 0.3450
42 0.3777
43 0.4144
44 0.4525
45 0.4952
46 0.5381
47 0.5850
48 0.6337
49 0.6884
50 0.7425
51 0.8129
52 0.8867
53 0.9712
54 1.0652
55 1.1651
56 1.2719
57 1.3818
58 1.4967
59 1.6160
60 1.7477
61 1.8974
62 2.0669
63 2.2627
64 2.4783
65 2.7122
66 2.9528
67 3.2042
68 3.4575
69 3.7272
POLICY NUMBER 0 000 000
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE
William Penn
AGE 35
Page 18A
<PAGE>
Additional Policy Specifications
TABLE OF GUARANTEED MAXIMUM MONTHLY COST OF INSURANCE RATES PER $1,000
ATTAINED BASE
AGE RATE
70 $ 4.0221
71 4.3541
72 4.7360
73 5.1707
74 5.6486
75 6.1753
76 6.7210
77 7.2738
78 7.8257
79 8.3952
80 9.0091
81 9.6861
82 10.4448
83 11.2942
84 12.2295
85 13.1791
86 14.1775
87 15.1494
88 16.2384
89 17.3036
90 18.4550
91 19.6728
92 21.0083
93 22.6307
94 24.6881
POLICY NUMBER 0 000 000
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE
William Penn
AGE 35
Page 18B
<PAGE>
Additional Policy Specifications
TABLE OF PER $1,000 SURRENDER CHARGES
<TABLE>
<CAPTION>
PER $1,000 PER $1,000
SURRENDER ATTAINED SURRENDER
AGE CHARGE AGE CHARGE
<S> <C> <C> <C> <C> <C>
0 1.00 40 5.00
1 1.00 41 5.00
2 1.00 42 5.00
3 1.00 43 5.00
4 1.00 44 5.00
5 1.00 45 5.00
6 1.00 46 5.00
7 1.00 47 5.00
8 1.00 48 5.00
9 1.00 49 5.00
10 2.00 50 6.00
11 2.00 51 6.00
12 2.00 52 6.00
13 2.00 53 6.00
14 2.00 54 6.00
15 2.00 55 6.00
16 2.00 56 6.00
17 2.00 57 6.00
18 2.00 58 6.00
19 2.00 59 6.00
20 3.00 60 7.00
21 3.00 61 7.00
22 3.00 62 7.00
23 3.00 63 7.00
24 3.00 64 7.00
25 3.00 65 7.00
26 3.00 66 7.00
27 3.00 67 7.00
28 3.00 68 7.00
29 3.00 69 7.00
30 4.00 70 7.00
31 4.00 71 7.00
32 4.00 72 7.00
33 4.00 73 7.00
34 4.00 74 7.00
35 4.00 75 7.00
36 4.00 76 7.00
37 4.00 77 7.00
38 4.00 78 7.00
39 4.00 79 7.00
80 7.00
</TABLE>
POLICY NUMBER 0 000 000
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE
William Penn
AGE 35
Page 18C
<PAGE>
To obtain any of the benefits under this policy, write to Penn Mutual at its
Home Office, its Service Office or to its nearest agent.
Please notify Penn Mutual promptly of any change in address.
Annual Election - Penn Mutual is a mutual life insurance company. It has no
stockholders. The Owner of this policy is a member of Penn Mutual while this
policy is in force during the life of the Insured and before surrender of this
policy. Members have the right to vote in person or by proxy at the annual
election of Trustees held at the Home Office, Independence Square, Philadelphia,
Pennsylvania, on the first Tuesday of March. If more information is desired, it
may be obtained from the Secretary.
Flexible Premium Adjustable
Variable Life Insurance Policy
o Death Benefit payable at death prior to Maturity
Date
o Adjustable Death Benefit
o Maturity Benefit payable on Maturity Date
o Variable Policy Value
o Flexible premiums payable until Maturity Date
o Participating
o Supplemental benefits, if any, listed on Page 3
The Penn Mutual Life Insurance Company, Independence Square, Philadelphia,
Pennsylvania 19172
VU-90(S)
<PAGE>
Exhibit A5B
Rider -- Additional Insured Term Insurance Agreement
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
supplemental agreement, to provide the Additional Insured Term Insurance
Benefit. Penn Mutual also agrees to provide all of the other benefits which are
stated in this agreement.
This supplemental agreement is a part of the policy to which it is attached. It
is subject to all of the provisions of the policy unless stated otherwise in
this agreement.
Additional Insured Term Insurance Benefit--Penn Mutual will pay, upon receipt of
due proof of the death of an Additional Insured while this agreement is in
force, the Additional Insured Term Insurance Benefit. The amount of the term
insurance benefit for an Additional Insured is the Specified Amount for such
Additional Insured as shown in the Additional Policy Specifications.
The term insurance benefit payable upon the death of an Additional Insured will
be paid to the beneficiary of such benefit in one sum or, if elected, under an
income payment option. If part or all of the benefit is paid in one sum, Penn
Mutual will pay interest on this sum from the date of death to the date of
payment. The interest rate will be determined each year by Penn Mutual, but will
not be less than a rate of 3% per year compounded annually.
Suicide Exclusion--If an Additional Insured dies by suicide within two years
from the effective date of that Additional Insured's coverage under this
agreement, the term insurance benefit with respect to such death will be limited
to the cost of such benefit.
If an Additional Insured dies by suicide within two years from the effective
date of any increase in that Additional Insured's Specified Amount, the term
insurance benefit with respect to that increase will be limited to the cost for
that increase.
Beneficiary--The beneficiary of the term insurance benefit for an Additional
Insured is as stated in the application for that Additional Insured's coverage
under this agreement unless changed by a subsequent beneficiary designation. If
no other provision is made, the interest of a beneficiary of an Additional
Insured's term insurance benefit who dies before that Additional Insured will
pass to the Owner.
Right to Convert Term Insurance--The term insurance under this agreement for an
Additional Insured may be converted to a life or endowment policy without
evidence of insurability at any time while such insurance is in force. The Owner
must make a written request for the conversion. On or before the date of
conversion, the Owner must pay the first premium for the new policy.
<PAGE>
The new policy will be:
(a) on a plan which insures only the life of the Additional Insured;
(b) in the same rate class and subject to the same limitations of risk as the
term insurance on the Additional Insured under this agreement;
(c) issued at the age of the Additional Insured on the birthday which is
nearest to the date of the conversion;
(d) on the policy form and at the premium rates in use by Penn Mutual on the
date of the conversion; and
(e) subject to the rules of Penn Mutual as to minimum amount, plan of insurance
and age at issue which are in effect on the date of conversion.
The inclusion of any supplemental agreements in the new policy will be subject
to the consent of Penn Mutual and must comply with the rules of Penn Mutual.
Death of Insured--If the death of the Insured under this policy occurs while
this agreement is in force, the term insurance on each Additional Insured
covered by this agreement will continue for a period of 90 days beginning on the
date of death of the Insured. This term insurance may be converted during the 90
day period. At the end of the 90 day period all term insurance under this
agreement will terminate.
Change in Specified Amount--The Specified Amount for an Additional Insured may
be changed subject to the following conditions:
(1) Any change in the Specified Amount for an Additional Insured must be at
least $5,000.
(2) Any increase in the Specified Amount for an Additional Insured must be
applied for on a written application. Evidence of insurability satisfactory
to Penn Mutual must be submitted on such Additional Insured.
(3) The Specified Amount for an Additional Insured may not be decreased to less
than $10,000.
(4) The Specified Amount for an Additional Insured may not be increased to more
than the Specified Amount on the Insured under
this policy.
(5) Any decrease in the Specified Amount for an Additional Insured will
successively decrease in reverse order the most recent increases, if any,
in the Specified Amount for that Additional Insured.
<PAGE>
Additional Insured Term Insurance Agreement (continued)
Monthly Deduction--While this agreement is in force, the Monthly Deduction under
this policy will include the Monthly Deduction for this agreement. The Monthly
Deduction for this agreement is the sum of the following:
(a) the Cost of Insurance for the policy month for the term insurance benefit
under this agreement;
(b) if the term insurance benefit under this agreement for an Additional
Insured is in its first year, a monthly expense charge of $.10 for each
$1,000 of Specified Amount for that Additional Insured; and
(c) if the Specified Amount for an Additional Insured has been increased within
the past year, a monthly expense charge of $.10 for each $1,000 that the
Specified Amount has been increased.
Cost of Insurance--The Cost of Insurance for the term insurance benefit under
this agreement is determined separately on a monthly basis for each Additional
Insured. This Cost of Insurance is determined separately for each increase in
the term insurance benefit for an Additional Insured. The Cost of Insurance for
each Additional Insured for a policy month is calculated as (a) multiplied by
(b), where:
(a) is the Cost of Insurance rate for an Additional Insured; and
(b) is the Specified Amount for such Additional Insured.
The Cost of Insurance Rate for an Additional Insured is based on the attained
age, sex and rate class of that Additional Insured. Cost of Insurance Rates will
be determined by Penn Mutual based on expectations as to future experience.
However, these rates will not exceed those shown in the Additional Policy
Specifications.
If this policy includes a Disability Waiver of Monthly Deduction Benefit, the
Cost of Insurance for each policy month for such benefit is increased by (a)
multiplied by (b) for each Additional Insured, where:
(a) is the Cost of Insurance Rate for the waiver of Monthly Deduction for this
agreement; and
(b) is the Specified Amount for the Additional Insured.
For each Additional Insured the Cost of Insurance Rate for the waiver of the
Monthly Deduction for this agreement is based on the attained age, sex and rate
class of both the Insured and the Additional Insured. Cost of Insurance Rates
will be determined by Penn Mutual based on expectations of future experience.
However, these rates will not exceed those shown in the Additional Policy
Specifications.
Computation of Values--Reserves for this agreement are based on the 1980
Commissioners Standard Ordinary Smoker and Nonsmoker Mortality Tables, Age
Nearest Birthday. Interest is at a rate of 4% per year compounded annually.
All values and benefits in this agreement are equal to or greater than those
required by the law of the jurisdiction in which this policy is delivered.
<PAGE>
Attained Age--The attained age of an Additional Insured under this agreement is
the age nearest birthday of that Additional Insured on the most recent policy
anniversary.
Misstatement of Age or Sex--If the age or sex of an Additional Insured has been
misstated, the term insurance benefit for that Additional Insured will be the
amount which would have been provided by the most recent Cost of Insurance
charge at the correct age and sex.
Incontestability--An Additional Insured's coverage under this agreement will be
incontestable after it has been in force during the life of such Additional
Insured for two years from the effective date of such coverage. Any increase in
the term insurance benefit for an Additional Insured will be incontestable after
the increase has been in force during the life of such Additional Insured for
two years from its effective date.
This agreement will be incontestable with respect to statements made in an
application for reinstatement after it has been in force during the life of an
Additional Insured for two years from the effective date of the reinstatement.
Termination of Additional Insured's Coverage--
The coverage of an Additional Insured under this agreement will terminate:
(a) on the anniversary of this policy which is nearest to the Additional
Insured's 70th birthday;
(b) on the date of the conversion of the term insurance on such Additional
Insured;
(c) 90 days after the death of the Insured; or
(d) upon the termination of this agreement.
Termination of Agreement--This agreement will terminate upon:
(a) lapse of this policy;
(b) surrender of this policy;
(c) the date of the death of the Insured, provided that such termination will
not affect any benefit provided by this agreement during the 90 days
following the death of the Insured;
(d) the date on which there is no longer any Additional Insured covered under
this agreement; or
(e) the Monthly Anniversary that coincides with or next follows (i) the receipt
at the Home Office of a written request by the Owner to terminate this
agreement, and (ii) the return of this policy for appropriate endorsement.
The date of issue of this agreement is the same as the Date of Issue of this
policy unless another date of issue is shown below.
/s/ Robert E. Chappell
-----------------------
Chairman and
Chief Executive Officer
<PAGE>
Exhibit A5C
Rider -- Children's Term Insurance Agreement
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
supplemental agreement, to provide the Children's Term Insurance Benefit. The
amount of the Children's Term Insurance Benefit is the Specified Amount for the
Children's Term Insurance Agreement as shown in the Schedule of Benefits on Page
3. Penn Mutual also agrees to provide all of the other benefits which are stated
in this agreement.
This supplemental agreement is a part of the policy to which it is attached. It
is subject to all of the provisions of the policy unless stated otherwise in
this agreement.
Children's Term Insurance Benefit--Penn Mutual will pay, upon receipt of due
proof of the death of an Insured Child while this agreement is in force, a death
benefit in an amount equal to the Specified Amount of this agreement. The death
benefit will be paid to the beneficiary of such benefit in one sum or, if
elected, under an income payment option. 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
death to the date of payment. The interest rate will be determined each year by
Penn Mutual but will not be less than a rate of 3% per year compounded annually.
Suicide Exclusion--If an Insured Child dies by suicide within two years from the
effective date of that child's coverage under this agreement, the death benefit
with respect to such death will be limited to the Cost of Insurance for this
agreement for the period that such coverage was in effect.
If an Insured Child dies by suicide within two years from the effective date of
an increase in the Specified Amount under this agreement, the death benefit with
respect to that increase will be limited to the Cost of Insurance for that
increase.
Insured Child--Insured Child means a natural child, a stepchild or a legally
adopted child of the Insured who is at least 15 days and not more than 23 years
of age and who:
(a) is named in the application for this agreement and who, on the date of the
application, is less than 18 years of age; or
(b) is born to the Insured and the Insured's spouse after the date of the
application for this agreement; or
(c) after the date of the application for this agreement and prior to attaining
the age of 18 years, is legally adopted by the Insured and the Insured's
spouse.
Child's Beneficiary--The beneficiary of each Insured Child under this agreement
is the Insured, if living, otherwise the Insured's executors or administrators
unless otherwise provided.
<PAGE>
Conversion of Insurance on Insured Child--On the anniversary of this policy
nearest an Insured Child's 23rd birthday the term insurance then in force under
this agreement on the life of such Insured Child may be converted without
evidence of insurability to a new policy. The Owner must make a written request
for the conversion. The first premium for the new policy must be paid on or
before the date of conversion.
The new policy will be:
(a) for an amount not exceeding five times the Specified Amount under this
agreement;
(b) on a plan which insures only the life of the Insured Child;
(c) incontestable from its date of issue;
(d) on the policy form and at the premium rates in use by Penn Mutual on the
date of the conversion; and
(e) subject to the rules of Penn Mutual as to minimum amount, plan of insurance
and age at issue which are in effect on the date of conversion.
The inclusion of any supplemental agreements in the new policy will be subject
to the consent of Penn Mutual and must comply with the rules of Penn Mutual.
Death of Insured--If the death of the Insured under this policy occurs while
this agreement is in force, the term insurance on each Insured Child covered by
this agreement will continue in force until the anniversary of this policy
nearest the Insured Child's 23rd birthday. The Cost of Insurance for such term
insurance will be waived.
Monthly Deduction--While this agreement is in force, the Monthly Deduction under
this policy will include the Monthly Deduction for this agreement. The Monthly
Deduction for this agreement is the Cost of Insurance for the term insurance
benefit under this agreement.
Cost of Insurance--The Cost of Insurance for each policy month for this
agreement is calculated as (a) multiplied by (b), where
(a) is the Cost of Insurance rate for this agreement; and
(b) is the Specified Amount for this agreement.
<PAGE>
Children's Term Insurance Agreement (continued)
The Cost of Insurance Rate for this agreement will be determined by Penn Mutual
based on expectations as to future experience. However, this rate will not
exceed the guaranteed maximum rate shown in the Additional Policy
Specifications.
If this policy includes a Disability Waiver of Monthly Deduction Benefit, the
Cost of Insurance for each policy month for such benefit is increased by (a)
multiplied by (b), where:
(a) is the Cost of Insurance Rate for the waiver of the Monthly Deduction for
this agreement; and
(b) is the Specified Amount of this agreement.
The Cost of Insurance Rate for the waiver of the Monthly Deduction for this
agreement is based on the attained age, sex and rate class of the Insured. Cost
of Insurance Rates will be determined by Penn Mutual based on expectations of
future experience. However, these rates will not exceed those shown in the
Additional Policy Specifications.
Computation of Values--Reserves for this agreement are based on the 1980
Commissioners Standard Ordinary Smoker and Nonsmoker Mortality Tables, Age
Nearest Birthday. Interest is at a rate of 4% per year compounded annually.
All values and benefits in this agreement are equal to or greater than those
required by the law of the jurisdiction in which this policy is delivered.
Incontestability--An Insured Child's coverage under this agreement will be
incontestable after it has been in force during the life of such Insured Child
for two years from the effective date of such coverage.
This agreement will be incontestable with respect to statements made in an
application for reinstatement after it has been in force during the life of an
Insured Child for two years from the effective date of the reinstatement.
Termination of Insured Child's Coverage--The coverage of an Insured Child under
this agreement will terminate:
(a) on the anniversary of this policy which is nearest to the Insured Child's
23rd birthday; or
(b) upon termination of this agreement.
Termination of Agreement--This agreement will terminate upon:
(a) lapse of this policy;
(b) surrender of this policy; or
(c) the Monthly Anniversary that coincides with or next follows (i) the receipt
at the Home Office of a written request by the Owner to terminate this
agreement, and (ii) the return of this policy for appropriate endorsement.
Date of Issue--The date of issue of this agreement is the same as the Date of
Issue of this policy unless another date of issue is shown below.
/s/ Robert E. Chappell
- ------------------------------------
Chairman and Chief Executive Officer
<PAGE>
Exhibit A5D
Rider--Accidental Death Benefit Agreement
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
supplemental agreement, to provide the Accidental Death Benefit.
This supplemental agreement is a part of the policy to which it is attached. It
is subject to all of the provisions of the policy unless stated otherwise in
this agreement.
Accidental Death Benefit--The Accidental Death Benefit will be payable upon
receipt by Penn Mutual of due proof that:
(a) the Insured has died while this agreement was in force;
(b) the death is the result, directly and independently of all other causes, of
an accidental bodily injury which is evidenced by a visible contusion or a
wound on the exterior of the body, except in the case of drowning or in the
case of an internal injury which is revealed by an autopsy;
(c) The accidental bodily injury was sustained prior to the anniversary of this
policy which is nearest to the Insured's 70th birthday; and
(d) if this agreement was issued prior to the Insured's age five, the
accidental bodily injury was sustained on or after the anniversary of this
policy which is nearest to the Insured's fifth birthday.
The amount of the Accidental Death Benefit is shown on Page 3. This amount will
be doubled if due proof is furnished that the injury which resulted in the death
of the Insured was sustained while the Insured was a passenger in or upon a
public conveyance which was being operated by a common carrier to transport
passengers for hire.
Penn Mutual will have the right and the opportunity to examine the body. Unless
prohibited by law, Penn Mutual may have an autopsy performed at its own expense.
The amount of the Accidental Death Benefit will be included in the Death Benefit
of this policy and will be paid as part of that Death Benefit.
Risks Not Assumed--The Accidental Death Benefit will not be payable if the death
of the Insured is the result, directly or indirectly, of:
(a) an illness or disease of any kind;
(b) physical or mental infirmity;
(c) the voluntary taking of a drug, a medicine or a sedative, except that which
is prescribed by a physician as a medication;
(d) the voluntary taking of a poison;
(e) the voluntary inhaling of a gas of any kind, including carbon monoxide,
except the inhaling of a gas by the Insured while acting within the scope
of the Insured's employment;
(f) suicide of the Insured;
(g) the commission by the Insured of an assault or a felony;
(h) travel or flight in or descent from an aircraft of any kind (i) while the
Insured is a pilot, officer or member of the crew of the aircraft, (ii)
while the Insured is giving or receiving training or instruction aboard the
aircraft, or (iii) while the Insured has duty aboard the aircraft or has
duty which requires descent from the aircraft; or
(i) war or an act of war, where the term war includes declared war and armed
aggression by one or more countries which is resisted on the orders of
another country, group of countries or international organization.
Cost of Insurance--The Cost of Insurance for the Accidental Death Benefit is
determined on a monthly basis. It is determined separately for each increase in
the amount of Accidental Death Benefit. The Cost of Insurance for a policy month
is calculated as (a) multiplied by (b), where:
(a) is the Cost of Insurance Rate for this benefit; and
(b) is the amount of Accidental Death Benefit.
The Cost of Insurance Rate for this benefit is based on the attained age, sex
and rate class of the Insured. Cost of Insurance Rates will be determined by
Penn Mutual based on expectations as to future experience. However, these rates
will not exceed those shown in the Additional Policy Specifications.
Incontestability--This agreement will be incontestable after it has been in
force during the life of the Insured for two years from its date of issue.
<PAGE>
Accidental Death Benefit Agreement (continued)
Termination--This agreement will terminate upon:
(a) the anniversary of this policy which is nearest to the Insured's 70th
birthday;
(b) lapse of this policy;
(c) the date of the death of the Insured;
(d) surrender of this policy;
(e) expiry of this policy; or
(f) the Monthly Anniversary that coincides with or next follows (i) the receipt
at the Home Office of a written request by the Owner to terminate this
agreement, and (ii) the return of this policy for appropriate endorsement.
Date of Issue--The date of issue of this agreement is the same as the Date of
Issue of this policy unless another date of issue is shown below.
/s/ Robert E. Chappell
-------------------
Robert E. Chappell
Chairman and
Chief Executive Officer
<PAGE>
Rider -- Disability Waiver of Monthly Deduction and Disability Monthly Premium
Deposit Agreement
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
supplemental agreement, to provide the Disability Waiver of Monthly Deductions
Benefit and to provide the Disability Monthly Premium Deposit Benefit. This
supplemental agreement is a part of the policy to which it is attached. It is
subject to all of the provisions of the policy unless stated otherwise in this
agreement.
This Agreement provides for the waiver of the Monthly Deductions for this policy
and the monthly deposit of the Stipulated Premium to this policy. The Monthly
Deductions will be waived and the Stipulated Premium will be deposited as stated
below upon receipt by Penn Mutual of due proof of the total disability of the
Insured and due proof that the total disability:
(a) began while this agreement was in force prior to the anniversary of this
policy which is nearest to the Insured's 65th birthday;
(b) has continued without interruption for four months during the life of the
Insured; and
(c) if this agreement was issued prior to the Insured's age five, began on or
after the anniversary of this policy which is nearest to the Insured's fifth
birthday.
Waiver of Monthly Deductions--The Monthly Deductions will be waived as follows:
(1) If the total disability of the Insured begins prior to the anniversary of
this policy which is nearest to the Insured's 60th birthday, the Monthly
Deductions will be waived during the continuance of the total disability.
(2) If the total disability of the Insured begins on or after the anniversary of
this policy which is nearest to the Insured's 60th birthday, the Monthly
Deductions will be waived during the continuance of the total disability until
the policy anniversary nearest to the Insured's 65th birthday or, if longer,
during the first two years after the date that the disability begins.
Monthly Deductions after the date that the total disability of the Insured
begins but before it has continued for four months will be deducted from the
Policy Value as stated in this policy. If Monthly Deductions are waived because
of the total disability of the Insured, Monthly Deductions for the period beyond
the end of the policy month in which that disability began will be credited to
the Policy Value. However, no Monthly Deductions for a period more than one year
prior to the time that the notice of claim is given to Penn Mutual at its Home
Office will be waived or credited to the Policy Value unless it is shown that
the notice of claim was given as soon as was reasonably possible.
If the total disability of the Insured begins during a grace period, a premium
sufficient to cover the Monthly Deductions for the grace period must be paid to
Penn Mutual before any Monthly Deductions will be waived.
Deposit of Stipulated Premium--The amount of the Disability Monthly Premium
Deposit Benefit will be the Stipulated Premium shown on Page 3 of the policy.
The Stipulated Premium may be increased only if (i) The Specified Amount has
been increased in accordance with the provisions of the Policy Changes section
of this policy, and (ii) evidence of insurability satisfactory to Penn Mutual
has been submitted. Any increase in the Stipulated Premium must be at least
equal to Penn Mutual's then current minimum.
<PAGE>
The Stipulated Premium will be deposited to the policy as follows:
(1) If the total disability of the Insured begins prior to the anniversary of
this policy which is nearest to the Insured's 60th birthday, the Stipulated
Premium will be deposited each month during the continuance of the total
disability until the policy anniversary nearest to the Insured's 70th birthday.
(2) If the total disability of the Insured begins on or after the anniversary of
this policy which is nearest to the Insured's 60th birthday, the Stipulated
Premium will be deposited each month during the continuance of the total
disability until the policy anniversary nearest to the Insured's 65th birthday
or, if longer, during the first two years after the date that the disability
begins.
Stipulated Premium Benefits, beginning with the first day of the policy month
which is coincident with or next following the date that the total disability
begins and before a claim for monthly deposit of Stipulated Premiums is approved
by Penn Mutual, will be deposited in one sum at the time that the disability
claim is approved. However, no benefits will be deposited for a period which is
more than one year prior to the time that the notice of claim is given to Penn
Mutual at its Home Office unless it is shown that the notice of claim was given
as soon as was reasonably possible.
If, at the time that a claim for Waiver of Monthly Deductions and Monthly
Deposit of Stipulated Premiums is approved by Penn Mutual, the Specified Amount
under this policy includes the Policy Value, it will be changed so that the
Specified Amount does not include the Policy Value. Such change will be in
accordance with the provisions of the Policy Changes section of this policy.
<PAGE>
Disability Waiver of Monthly Deduction and Disability Monthly Premium Deposit
Agreement (continued)
Total Disability Defined--As used in this agreement, total disability
of the Insured means an incapacity of the Insured which:
(a) results from bodily injury or disease; and
(b) prevents the Insured from performing substantially all of the work which
pertains to an occupation.
The term occupation means:
(a) during the first 24 months of the disability, the Insured's own occupation;
and
(b) after the first 24 months of the disability, any occupation for which the
Insured is suited by education, training or experience.
The total and irrecoverable loss by the Insured of any of the following will be
considered to be total disability even though the Insured may be able to work at
an occupation:
(a) the sight of both eyes;
(b) the use of both hands or of both feet;
(c) the use of one hand and one foot;
(d) speech; or
(e) hearing.
Risks Not Assumed--Monthly Deductions will not be waived and Stipulated Premium
will not be deposited if the total disability of the Insured results from:
(a) war or an act of war while the Insured is in the military, naval or air
force of any country, group of countries or international organization; or
(b) injuries which were willfully and intentionally self-inflicted.
The term war, as used above, includes declared war and armed aggression by one
or more countries which is resisted on the orders of any other country, group of
countries or international organization.
Notice of Claim and Proof of Total Disability -- Monthly Deductions will be
waived and Stipluated Premium will be deposited only if a written notice of
claim and due proof of the total disability of the Insured are given to Penn
Mutual at its Home Office. The notice and the proof must be given:
(a) during the life of the Insured and during the continuance of the disability;
and
(b) not more than one year after the time that this agreement terminates.
The failure to give the notice and the proof will not invalidate or reduce a
claim if it is shown that the notice and the proof were given as soon as was
reasonably possible.
Penn Mutual may require due proof of the continuance of the total disability of
the Insured. At reasonable intervals, a medical examination of the Insured by a
medical examiner who is named by Penn Mutual may be required. Any such
examination will be at Penn Mutual's expense. Such proof or examination will not
be required more often than once a year after the total disability of the
Insured has continued for two years. The failure to give such proof or to submit
to such examinations will cause the benefits under this agreement to cease.
<PAGE>
If the Insured is totally disabled on the anniversary of this policy which is
nearest to the insured's 65th birthday and if the benefits have been provided
under this agreement for the five years prior to that anniversary, no further
proof will be required.
Cost of Insurance--The Cost of Insurance for the Disability Waiver of Monthly
Deduction Benefit is determined on a monthly basis. The Cost of Insurance for a
policy month is calculated as (a) multiplied by the result of (b) minus (c),
where:
(a) is the Cost of Insurance Rate for the Disability Waiver of Monthly
Deductions benefit;
(b) is the Basic Death Benefit under this policy at the beginning of the policy
month divided by 1.0032737; and
(c) is the Policy Value of this policy at the beginning of the policy month.
The Cost of Insurance for the Disability Monthly Premium Deposit Benefit is
determined on a monthly basis. The Cost of Insurance for a policy month is
calculated as (a) multiplied by (b) where
(a) is the Cost of Insurance Rate for the Disability Monthly Premium Deposit
benefit; and
(b) is the Stipulated Premium shown on Page 3.
The Cost of Insurance Rate for the Disability Waiver of Monthly Deductions
benefit and the Disability Monthly Premium Deposit benefit are based on the
attained age, sex and rate class of the Insured. Cost of Insurance Rates will be
determined by Penn Mutual based on expectations as to future experience.
However, these rates will not exceed those shown in the Additional Policy
Specifications.
Incontestability--This agreement will be incontestable after it has been in
force during the life of the Insured for two years from its date of issue except
as to total disability of the Insured which begins prior to the end of such two
year period.
Termination--This agreement will terminate upon:
(a) the anniversary of this policy which is nearest to the Insured's 65th
birthday; provided that such termination will not affect any benefit which
is payable because of a total disability of the Insured which began prior to
that anniversary;
(b) lapse of this policy;
(c) the date of the death of the Insured;
(d) surrender of this policy;
(e) expiry of this policy; or
(f) the Monthly Anniversary that coincides with or next follows (i) the receipt
at the Home Office of a written request by the Owner to terminate this
agreement, and (ii) the return of this policy for appropriate endorsement.
Date of Issue--The date of issue of this agreement is the same as the Date of
Issue of this policy unless another date of issue is shown below.
/s/ Robert E. Chappell
- ------------------------------------
Chairman and Chief Executive Officer
<PAGE>
Exhibit A5F
Rider--Disability Waiver of Monthly Deduction Agreement
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
supplemental agreement, to provide the Waiver of Monthly Deductions Benefit.
This supplemental agreement is a part of the policy to which it is attached. It
is subject to all of the provisions of the policy unless stated otherwise in
this agreement.
Waiver of Monthly Deductions Benefit--This benefit provides for the waiver of
the Monthly Deductions for this policy. The Monthly Deductions will be waived as
stated below upon receipt by Penn Mutual of due proof of the total disability of
the Insured and due proof that the total disability:
(a) began while this agreement was in force prior to the anniversary of this
policy which is nearest to the Insured's 65th birthday;
(b) has continued without interruption for four months during the life of the
Insured; and
(c) if this agreement was issued prior to the Insured's age five, began on or
after the anniversary of this policy which is nearest to the Insured's
fifth birthday.
The Monthly Deductions will be waived as follows:
(1) If the total disability of the Insured begins prior to the anniversary of
this policy which is nearest to the Insured's 60th birthday, the Monthly
Deductions will be waived during the continuance of the disability.
(2) If the total disability of the Insured begins on or after the anniversary
of this policy which is nearest to the Insured's 60th birthday, the Monthly
Deductions will be waived during the continuance of the disability until
the anniversary of this policy which is nearest to the Insured's 65th
birthday or, if longer, during the first two years after the date that the
disability begins.
Monthly Deductions after the date that the total disability of the Insured
begins but before it has continued for four months will be deducted from the
Cash Value as stated in this policy. If Monthly Deductions are waived because of
the total disability of the Insured, Monthly Deductions for the period beyond
the end of the policy month in which that disability began will be credited to
the Cash Value. However, no Monthly Deductions for a period more than one year
prior to the time that the notice of claim is given to Penn Mutual at its Home
Office will be waived or credited to the Cash Value unless it is shown that the
notice of claim was given as soon as was reasonably possible.
If the total disability of the Insured begins during a grace period, a premium
sufficient to cover the Monthly Deductions for the grace period must be paid to
Penn Mutual before any Monthly Deductions will be waived.
If, at the time that a claim for waiver of Monthly Deductions is approved by
Penn Mutual, the Specified Amount under this policy includes the Cash Value, it
will be changed so that the Specified Amount does not include the Cash Value.
Such change will be in accordance with the provisions in the Policy Changes
section of this policy.
Total Disability Defined--As used in this agreement, total disability of the
Insured means an incapacity of the Insured which:
(a) results from bodily injury or disease; and
(b) prevents the Insured from performing substantially all of the work which
pertains to an occupation.
The term occupation means:
(a) during the first 24 months of the disability, the Insured's own occupation;
and
(b) after the first 24 months of the disability, any occupation for which the
Insured is suited by education, training or experience.
The total and irrecoverable loss by the Insured of any of the following will be
considered to be total disability even though the Insured may be able to work at
an occupation:
(a) the sight of both eyes;
(b) the use of both hands or of both feet;
(c) the use of one hand and one foot;
(d) speech; or
(e) hearing.
Risks Not Assumed--Monthly Deductions will not be waived if the total disability
of the Insured results from:
(a) war or an act of war while the Insured is in the military, naval or air
force of any country, group of countries or international organization; or
<PAGE>
Disability Waiver of Monthly Deduction Agreement (continued)
(b) injuries which were willfully and intentionally self-inflicted.
The term war, as used above, includes declared war and armed aggression by one
or more countries which is resisted on the orders of any other country, group of
countries or international organization.
Notice of Claim and Proof of Total Disability--Monthly Deductions will be
waived only if a written notice of claim and due proof of the total disability
of the Insured are given to Penn Mutual at its Home Office. The notice and the
proof must be given:
(a) during the life of the Insured and during the continuance of the disability;
and
(b) not more than one year after the time that this agreement terminates.
The failure to give the notice and the proof will not invalidate or reduce a
claim if it is shown that the notice and the proof were given as soon as was
reasonably possible.
Penn Mutual may require due proof of the continuance of the total disability of
the Insured. At reasonable intervals, a medical examination of the Insured by a
medical examiner who is named by Penn Mutual may be required. Any such
examination will be at Penn Mutual's expense. Such proof or examination will not
be required more often than once a year after the total disability of the
Insured has continued for two years. The failure to give such proof or to submit
to such examinations will cause the benefit under this agreement to cease.
If the Insured is totally disabled on the anniversary of this policy which is
nearest to the insured's 65th birthday and if the Monthly Deductions for the
five years prior to that anniversary have been waived under this agreement, no
further proof will be required. Penn Mutual will then waive all future Monthly
Deductions under this policy.
Cost of Insurance--The Cost of Insurance for the Waiver of Monthly Deductions
Benefit is determined on a monthly basis. The Cost of Insurance for a policy
month is calculated as (a) multiplied by the result of (b) minus (c), where:
(a) is the Cost of Insurance Rate for this benefit;
(b) is the Basic Death Benefit under this policy at the beginning of the policy
month divided by 1.0032737; and
(c) is the Cash Value of this policy at the beginning of the policy month.
The Cost of Insurance Rate for this benefit is based on the attained age, sex
and rate class of the Insured. Cost of Insurance Rates will be determined by
Penn Mutual based on expectations as to future experience. However, these rates
will not exceed those shown in the Additional Policy Specifications.
Incontestability--This agreement will be incontest-able after it has been in
force during the life of the Insured for two years from its date of issue except
as to total disability of the Insured which begins prior to the end of such two
year period.
Termination--This agreement will terminate upon:
(a) the anniversary of this policy which is nearest to the Insured's 65th
birthday; provided that such termination will not affect any benefit which
is payable because of a total disability of the Insured which began prior
to that anniversary;
(b) lapse of this policy;
(c) the date of the death of the Insured;
(d) surrender of this policy;
(e) expiry of this policy; or
(f) the Monthly Anniversary that coincides with or next follows (i) the receipt
at the Home Office of a written request by the Owner to terminate this
agreement, and (ii) the return of this policy for appropriate endorsement.
Date of Issue--The date of issue of this agreement is the same as the Date of
Issue of this policy unless another date of issue is shown below.
/s/ Robert E. Chappell
------------------------
Robert E. Chappell
Chairman and
Chief Executive Officer
<PAGE>
Exhibit A5G
Rider--Guaranteed Continuation of Policy Agreement
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
agreement, that the policy will not lapse while this agreement is in force.
This supplemental agreement is a part of the policy to which it is attached. It
is subject to all of the provisions of the policy unless stated otherwise in
this agreement.
Benefit--Penn Mutual agrees that this policy will remain in force, if the
following conditions are satisfied:
(1) The Insured is alive;
(2) This agreement is in force;
(3) This policy has not been surrendered; and
(4) The Guaranteed Continuation of Policy Premium Requirement is satisfied.
Guaranteed Continuation of Policy Premium--The Guaranteed Continuation of Policy
Premium is based on the issue age, death benefit option, other policy riders,
and underwriting class of the Insured. It is shown on Page 3.
On any Monthly Anniversary that premiums are being deposited pursuant to a
Disability Monthly Premium Deposit Agreement, the Guaranteed Continuation of
Policy Premium is the Stipulated Premium as defined in that agreement.
Guaranteed Continuation of Policy Premium Requirement--The Guaranteed
Continuation of Policy Premium Requirement on each Monthly Anniversary is
satisfied if the sum of all premiums paid less any partial surrenders, policy
loans and unpaid loan interest is greater than or equal to the cumulative
monthly pro rata portion of the Guaranteed Continuation of Policy Premium.
Changes in Guaranteed Continuation of Policy Premium--The Guaranteed
Continuation of Policy Premium may change if:
(1) The Specified Amount is changed.
(2) The Death Benefit Option is changed.
(3) A rider is added or deleted.
(4) The underwriting class is changed.
As a result of such change, an additional premium may be required on the date of
change in order to meet the new Guaranteed Continuation of Policy Premium
Requirement.
Monthly Deduction--While this agreement is in force, the Monthly Deduction under
this policy will include the Monthly Deduction for this agreement. The Monthly
Deduction for this agreement is the Cost of Insurance for this agreement.
Cost of Insurance--The Cost of Insurance for this agreement will equal $.01 for
each $1,000 of Specified Amount.
Subaccount Restrictions--While this agreement is in force, transfers and
allocations of net premiums to certain subaccounts may be restricted.
Expiration Date--This agreement will expire on the earlier of the following
dates:
(1) the thirty-fifth anniversary of this policy; and
(2) the later of:
(a) the anniversary of this policy nearest the Insured's 70th birthday, and
(b) the tenth anniversary of this policy.
Grace Period--If on a Monthly Anniversary, the Guaranteed Continuation of Policy
Premium Requirement is not satisfied, a grace period of 61 days will be allowed
for the payment of a premium sufficient to keep this agreement in force.
Reinstatement--If this agreement terminates, it may not be reinstated.
<PAGE>
Termination--This agreement will terminate upon:
(a) the expiration of the grace period for this agreement if the required
premium is not received;
(b) lapse of this policy;
(c) surrender of this policy;
(d) the date of death of the Insured;
(e) the expiration date of this agreement; or
(f) the Monthly Anniversary that coincides with or next follows (i) the receipt
at the Home Office of a written request by the Owner to terminate this
agreement, and (ii) the return of this policy for appropriate endorsement.
Date of Issue--The date of issue of this agreement is the same as the Date of
Issue of this policy.
/s/ Robert E. Chappell
------------------------
Chairman, President and
Chief Executive Officer
<PAGE>
Exhibit A5H
Rider -- Guaranteed Option to Increase Specified Amount Agreement
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
supplemental agreement, to provide the Guaranteed Option to Increase the
Specified Amount described below. Penn Mutual also agrees to provide all of the
other benefits stated in this agreement.
This supplemental agreement is a part of the policy to which it is attached. It
is subject to all of the provisions of the policy unless stated otherwise in
this agreement.
Guaranteed Option to Increase Specified Amount--The Owner will have the option
to increase the Specified Amount under this policy without evidence of
insurability. The option may be exercised, while this agreement is in force, as
of any of the Regular Option Dates or as of any Alternate Option Date. The
Regular Option Dates are the anniversaries of this policy on which the Insured's
age nearest birthday is 22, 25, 28, 31, 34, 37 and 40. An Alternate Option Date
will be the 90th day following the date on which one of these events occurs:
(1) The marriage of the Insured.
(2) The live birth of a child of the Insured.
(3) The legal adoption by the Insured of a child who is less than 18 years of
age.
In the case of a multiple birth or adoption, there will be an Alternate Option
Date for each child born or adopted.
Option Amount--The amount that the Specified Amount may be increased by each
exercise of this option will, except as stated below, be the Option Amount shown
on Page 3.
The Option Amount is subject to reduction as follows:
(1) If this option is exercised as of an Alternate Option Date, the Option
Amount on the next Regular Option Date will be reduced by the amount that
the Specified Amount is increased by exercise of this option as of such
Alternate Option Date.
(2) If the amount that the Specified Amount is increased by exercise of this
option as of an Alternate Option Date is in excess of the Option Amount on
the next Regular Option Date, the excess will be used to reduce the Option
Amount on succeeding Regular Option Dates.
(3) If the total of the Option Amounts on all of the remaining Regular Option
Dates is less than the Option Amount shown on Page 3, the Option Amount
available as of any Alternate Option Date will be reduced to such total.
If this option is exercised as of more than one of the Alternate Option Dates
which arise from a multiple birth, all such exercises will, for the purpose of
reducing the Option Amounts on future Regular Option Dates, be considered as the
exercise of this option one time for the Option Amount.
Conditions for Exercise of Option--Each exercise of this option will be subject
to the following conditions:
(1) A written application for the increase in the Specified Amount must be made
on or before the date as of which this option is exercised.
(2) If the Insured is not the Owner, the written consent of the Insured must be
obtained.
(3) If this option is exercised as of an Alternate Option Date, proof of the
event which gave rise to such date must be submitted.
If the Owner does not exercise an option, the Insured may exercise it with the
Owner's written consent.
The increase in the Specified Amount which results from the exercise of this
option will be subject to any limitations of risk which are in this policy. The
rate class of the Insured at issue of this agreement will apply to the increase.
The effective date of the increase will be the date as of which the option is
exercised.
If this policy includes a Disability Waiver of Monthly Deductions benefit, such
benefit will apply to the increase in the Specified Amount.
If this policy includes an Accidental Death benefit, such benefit may also be
increased upon exercise of this option. The amount by which such benefit may be
increased cannot exceed the lesser of:
(a) the amount that the Specified Amount is being increased by exercise of this
option; and
(b) the amount of the Accidental Death Benefit in this policy
immediately prior to the exercise of this option.
In addition, the total amount of Accidental Death Benefit in force on the
Insured in Penn Mutual must not exceed Penn Mutual's then current limits.
<PAGE>
Guaranteed Option to Increase Specified Amount Agreement (continued)
With respect to the increase in the Specified Amount resulting from the exercise
of this option, the period stated in the Suicide Exclusion provision and the
period of contestability will be computed from the date of issue of this
agreement or, if this agreement has been reinstated, the date of reinstatement.
Automatic Term Insurance--Each event which gives rise to an Alternate Option
Date will also give rise to a Term Period. Term insurance will be provided on
the Insured's life during the Term Period. The amount of term insurance will be
equal to the maximum amount of new insurance which could be obtained by exercise
of this option as of the Alternate Option Date. If the Insured dies during the
Term Period, the amount of term insurance will be included in the Death Benefit
of this policy and will be paid as part of that Death Benefit.
A Term Period will begin on the date of the event which gives rise to an
Alternate Option Date and will end on the day preceding the Alternate Option
Date which results from such event.
Existing Disability--If each of the following conditions is met, Penn Mutual
will automatically increase the Specified Amount:
(1) This policy must include a Disability Waiver of Monthly Deductions Benefit.
(2) The Insured must be totally disabled on a Regular Option Date or on an
Alternate Option Date.
(3) Monthly Deductions under this policy must be waived as the result of such
disability.
(4) The option available as of such date has not been exercised.
The increase in the Specified Amount will be effective as of the Regular Option
Date or as of the Alternate Option Date. The increase will be for the largest
amount of insurance which could be obtained by exercise of this option as of
such date. The Monthly Deductions under this policy will be waived for as long
as the Insured continues to be totally disabled.
Cost of Insurance--The Cost of Insurance for the Guaranteed Option to Increase
the Specified Amount benefit is determined on a monthly basis. The Cost of
Insurance for a policy month is calculated as (a) multiplied by (b), where:
(a) is the Cost of Insurance Rate for this benefit; and
(b) is the Option Amount shown on Page 3.
The Cost of Insurance Rate for this benefit is based on the issue age, sex and
rate class of the Insured. Cost of Insurance Rates will be determined by Penn
Mutual based on expectations as to future experience. However, these rates will
not exceed those shown in the Additional Policy Specifications.
Incontestability--This agreement will be incontest-able after it has been in
force during the life of the Insured for two years from its date of issue.
Termination--This agreement will terminate upon:
(a) the anniversary of this policy which is nearest to the Insured's 40th
birthday;
(b) any date after which there is no remaining Option Amount available as of a
Regular Option Date;
(c) lapse of this policy;
(d) the date of the death of the Insured;
(e) surrender of this policy;
(f) expiry of this policy; or
(g) the Monthly Anniversary that coincides with or next follows (i) the receipt
at the Home Office of a written request by the Owner to terminate this
agreement, and (ii) the return of this policy for appropriate endorsement.
Date of Issue--The date of issue of this agreement is the same as the Date of
Issue of this policy unless another date of issue is shown below.
/s/ Robert E. Chappell
------------------------
Robert E. Chappell
Chairman and
Chief Executive Officer
<PAGE>
Exhibit A5I
Rider -- Supplemental Term Insurance Agreement
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
supplemental agreement, to provide the Term Insurance Benefit. Penn Mutual also
agrees to provide all of the other benefits which are stated in this agreement.
This agreement is a part of the policy to which it is attached. It is subject to
all of the provisions of the policy unless stated otherwise in this agreement.
Term Insurance Benefit--Penn Mutual will pay the Term Insurance Benefit upon
receipt of due proof of the death of the Insured while this agreement is in
force. The amount of the Term Insurance Benefit is the Specified Amount for Term
Insurance as shown in the Policy Specifications. The amount of the Term
Insurance Benefit may not at any time exceed four times the Specified Amount for
this policy.
The Term Insurance Benefit payable on the death of the Insured will be paid to
the beneficiary in one sum or, if elected, under an income payment option. If
part or all of the benefit is paid in one sum, Penn Mutual will pay interest on
this sum from the date of death to the date of payment. The interest rate will
be determined each year by Penn Mutual, but will not be less than a rate of 3%
per year compounded annually.
Suicide Exclusion--If the Insured dies by suicide within two years from the
effective date of this agreement, the Term Insurance Benefit will be limited to
the cost of such benefit.
If the Insured dies by suicide within two years from the effective date of any
increase in the Specified Amount for Term Insurance, the Term Insurance Benefit
with respect to that increase will be limited to the cost for that increase.
Change in Specified Amount--The Specified Amount for Term Insurance may be
changed subject to the following conditions:
(1) Any change in the Specified Amount for Term Insurance must be at least
$5,000.
(2) Any increase in the Specified Amount for Term Insurance must be applied for
on a written application provided by Penn Mutual. Evidence of insurability
satisfactory to Penn Mutual must be provided.
(3) The Specified Amount for Term Insurance may not be increased to an amount
which is greater than four times the Specified Amount for this policy.
(4) Any increase in the Specified Amount for Term Insurance must be accompanied
by an increase at the same time in the Specified Amount for this policy in
an amount equal to one-fourth of the increase in the Specified Amount for
Term Insurance.
(5) No increase in the Specified Amount for Term Insurance may be made after the
policy anniversary nearest to the Insured's 70th birthday.
(6) The Specified Amount for Term insurance may not be decreased to less than
$5,000.
(7) Any decrease in the Specified Amount for Term Insurance will successively
decrease, in reverse order, the most recent increases, if any.
Monthly Deduction--While this agreement is in force, the Monthly Deduction under
this policy will include the Monthly Deduction for this agreement. The Monthly
Deduction for this agreement is the sum of:
(a) the Cost of Insurance for the policy month for the Term Insurance Benefit
under this agreement;
(b) the Cost of Insurance for the policy month for Waiver of Monthly Deduction
for this agreement if a Waiver of Monthly Deduction Agreement is attached to
this policy;
(c) a monthly charge of $0.10 per $1,000 of Specified Amount for Term Insurance
for the first 12 months following the effective date of this agreement; and
(d) a monthly charge of $0.10 for each $1,000 of increase in the Specified
Amount for Term Insurance for the first 12 months following the effective
date of such increase.
Cost of Insurance--The Cost of Insurance for the term insurance under this
agreement is determined on a monthly basis. It is calculated as (a) multiplied
by (b) where:
(a) is the Cost of Insurance Rate for Term Insurance applicable to this policy,
and
(b) is the Specified Amount for Term Insurance under this agreement.
The Cost of Insurance Rate for Supplemental Term Insurance is based on the
attained age and rate class of the Insured. Cost of Insurance Rates will be
determined by Penn Mutual based on expectations as to future experience.
However, these rates will not exceed those shown for the policy in the
Additional Policy Specifications.
<PAGE>
Supplemental Term Insurance Agreement (continued)
Computation of Values--Reserves for this agreement are based on the 1980 CSO-SB
or 1980 CSO-NB Mortality Tables, Age Nearest Birthday. Interest is at a rate of
4% per year compounded annually.
All values and benefits in this agreement are equal to or greater than those
required by the law of the jurisdiction in which this policy is delivered.
Incontestability--This agreement will be incontestable after it has been in
force during the life of the Insured for two years from the effective date.
This agreement will be incontestable with respect to statements made in an
application for reinstatement after it has been in force during the life of the
Insured for two years from the effective date of the reinstatement.
Termination of Agreement--This agreement will terminate upon:
(a) the policy anniversary nearest to the Insured's 95th birthday;
(b) lapse of this policy;
(c) surrender of this policy; or
(d) the Monthly Anniversary that coincides with or next follows (i) receipt by
Penn Mutual of a written request by the Owner to terminate this agreement,
and (ii) return of this policy for appropriate endorsement.
Effective Date--The Effective Date of this agreement is the same as the Date of
Issue of this policy unless another effective date is shown below.
/s/ Robert E. Chappell
---------------------------
Robert E. Chappell
Chairman and
Chief Executive Officer
<PAGE>
Exhibit A5J
The Penn Mutual Life Insurance Company
Founded 1847
A001411C
Insured William Penn $50,000 Specified Amount
Policy Number 0 000 000 05/01/1995 Policy Date
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
policy, to pay the Death Benefit to the Beneficiary upon receipt of due proof of
the death of the Insured while this policy is in force.
Penn Mutual also agrees to provide all of the other benefits stated in this
policy.
This contract is made in consideration of the payment of premiums as provided in
this policy.
The provisions on this and the following pages are part of this policy.
/s/ Robert E. Chappell
------------------------
Robert E. Chappell
Chairman and
Chief Executive Officer
Executed on the Date of Issue by The Penn Mutual Life Insurance Company.
/s/ Laura M. Ritzko
-----------------------
Laura M. Ritzko
Secretary
THE DEATH BENEFIT AND DURATION OF COVERAGE MAY INCREASE OR DECREASE DEPENDING ON
THE INVESTMENT EXPERIENCE OF THE SEPARATE ACCOUNT. THE DEATH BENEFIT WILL NEVER
BE LESS THAN THE SPECIFIED AMOUNT SHOWN ON PAGE 3. THE POLICY'S ACCUMULATION
VALUE IN THE SEPARATE ACCOUNT MAY INCREASE OR DECREASE DEPENDING ON THE
INVESTMENT EXPERIENCE OF THAT ACCOUNT. THE POLICY VALUE IS NOT GUARANTEED.
Free Look Period - This policy may be cancelled by returning it within 45 days
of the date of execution of the application or within 10 days after it is
received by the owner. It must be returned to Penn Mutual or to the agent
through whom it was purchased. This policy will then be considered void as of
its inception. Any premium paid on it will be refunded.
READ YOUR POLICY CAREFULLY. This policy is a legal contract between the Owner
and Penn Mutual.
Flexible Premium Adjustable
Variable Life Insurance Policy
o Death Benefit payable at death prior to Maturity Date
o Adjustable Death Benefit
o Maturity Benefit payable on Maturity Date
o Variable Policy Value
o Flexible premiums payable until Maturity Date
o Participating
o Supplemental benefits, if any, listed on Page 3
The Penn Mutual Life Insurance Company, Independence Square, Philadelphia,
Pennsylvania 19172
VU-94(S)
<PAGE>
------------------------------------------------------
Guide to Policy Sections
1. Policy Specifications 10. Surrender of Policy
2. Endorsements 11. Policy Changes
3. Premiums 12. Transfer to Fixed Account
4. Lapse and Reinstatement 13. Owner and Beneficiary
5. The Separate Account 14. General Provisions
6. The Fixed Account 15. Income Payment Options
7. Policy Value 16. Income Payment Option Table
8. Death and Maturity Benefits
9. Policy Loans Additional Policy Specifications, any
Supplemental Agreements and a copy of
any applications follow Section 16.
Alphabetical Index Section
Age.....................................................1,14
Monthly Anniversary..... ................................14
Allocation of Net Premiums.................................3
Monthly Deduction..........................................7
Annual Report.............................................14
Mortality and Expense Risk Charge..........................7
Assignment................................................13
Net Cash Surrender Value..................................10
Beneficiary.............................................1,13
No-Lapse Date............................................1,3
Cash Surrender Value......................................10
No-Lapse Premium.........................................1,3
Continuation of Insurance..................................3
Owner.....................................................13
Contract..................................................14
Partial Surrender.........................................10
Cost of Insurance..........................................7
Policy Date.............................................1,14
Cost of Insurance Rates....................................7
Policy Loan Account........................................9
Date of Issue..............................................1
Policy Loans...............................................9
Death Benefit..............................................8
Policy Value...............................................7
Deferment of Transactions.................................14
Premium Charge.............................................3
Dividends.................................................14
Free Look Period.......................................Cover
Grace Period...............................................3
Income Payment Options....................................15
Income Payment Option Tables..............................16
Incontestability..........................................14
Indebtedness...............................................9
Lapse......................................................4
Loan Interest..............................................9
Loan Value.................................................9
Maturity Date..............................................1
Maturity Benefit...........................................8
Premiums.................................................1,3
Rate Class.................................................1
Reinstatement..............................................4
Schedule of Benefits.......................................1
Schedule of Premiums.......................................1
Separate Account.........................................1,5
Service Office.............................................1
Specified Amount...........................................1
Subaccounts................................................5
Suicide Exclusion..........................................8
Surrender.................................................10
Surrender Charge..........................................10
<PAGE>
1. Policy Specifications
INSURED WILLIAM PENN $50,000 SPECIFIED AMOUNT
(INCLUDES POLICY VALUE)
POLICY NUMBER 0 000 000 MAY 1, 1995 POLICY DATE
AGE 35 MALE SMOKER RATE CLASS
MATURITY DATE MAY 1, 2055
THE DATE OF ISSUE IS THE POLICY DATE
OWNER AND BENEFICIARY AS PROVIDED IN APPLICATION
SEPARATE ACCOUNT: THE PENN MUTUAL VARIABLE LIFE ACCOUNT I
ELIGIBLE INVESTMENT FUNDS: FUNDS AS
SPECIFIED IN THE ADDITIONAL POLICY SPECIFICATIONS
INITIAL ALLOCATION: PENN SERIES MONEY MARKET FUND - 100%
Schedule of Benefits
Description Amount
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE $50,000 SPECIFIED AMOUNT
FLEXIBLE PERIOD-SUPPLEMENTAL TERM INSURANCE AGREEMENT
SEE ADDITIONAL SPECIFICATIONS PAGE 18)
MAXIMUM SURRENDER CHARGE PREMIUM $515.50
Schedule of Premiums
THE INITIAL PREMIUM OF $1079.30 WAS PAID ON THE POLICY DATE FOR 12 MONTHS.
SUBSEQUENT PREMIUMS ARE PAYABLE ANNUALLY AS FOLLOWS.
BEGINNING AS OF PREMIUM
MAY 1,1996 $1079.30
THE NO LAPSE MONTHLY PREMIUM IS $45.24
THE NO LAPSE PREMIUM DATE IS MAY 1, 1998
NOTE: INSURANCE WILL TERMINATE IF THE PREMIUMS PAID AND THE INTEREST CREDITED
ARE INSUFFICIENT TO COVER THE MONTHLY
DEDUCTIONS, EXCEPT AS PROVIDED IN SECTION 3.
THE SCHEDULED PREMIUMS FOR THE FIRST SEVEN YEARS WILL COMPLY WITH OUR
UNDERSTANDING OF THE "7-PAY" PREMIUM AS DEFINED IN TAMRA `88 ASSUMING THAT NO
WITHDRAWALS OR CHANGES IN BENEFITS OCCUR WITHIN THE SEVEN YEAR PERIOD. CONSULT
YOUR TAX ADVISOR BEFORE MAKING A WITHDRAWAL OR CHANGE IN BENEFITS ON THIS
CONTRACT.
Page 3
<PAGE>
2. Endorsements A001490E
To be made only by the Company
Page 4
<PAGE>
3. Premiums
A001427P
Payment of Premiums--Premiums are payable while this policy is in force until
the Maturity Date. The first premium is due on the Policy Date. Premiums after
the first may be paid in any amount and at any interval subject to the following
conditions:
(a) No premium payment may be less than $25.
(b) The Company reserves the right to limit total premiums paid in any policy
year to the planned payments for that policy year as shown on Page 3. The
schedule of premiums shown on Page 3 is based on the premium amount and the
interval of payment specified in the application.
(c) Total premiums paid in any policy year may not exceed the Maximum Premium
Limit for that policy year. The Maximum Premium Limit for a policy year is
the largest amount of premium which can be paid in that policy year such
that the sum of the premiums paid under the policy will not at any time
exceed the guideline premium limitation referred to in Section 7702 of the
Internal Revenue Code of 1986, as amended, or as set forth in any
applicable successor provision thereto. The Maximum Premium Limit for the
following policy year will be shown on the Annual Report sent to the Owner.
Each premium after the first is payable at the Company's Home Office. A receipt
signed by the President or the Secretary will be given on request.
Premium Charge--Each premium payment will be reduced by a percent of premium
charge. The percent of premium charge will be set by the Company as described in
the Determination of Nonguaranteed Factors provision in Section 7. In no event
will the percent of premium charge be greater than 6.5% of each premium paid.
Net Premium--Net premium is the amount of any premium payment reduced by the
percent of premium charge.
Allocation of Net Premiums--The initial net premium and any additional premium
paid before the end of the Free Look Period will be allocated to the subaccount
of the Separate Account specified on Page 3 until the end of the Free Look
Period. At the end of such period the assets will be allocated to the
subaccounts of the Separate Account or to the Fixed Account as directed by the
Owner in the application for this policy. Subject to and in accordance with the
provisions of this policy, subsequent net premiums will be allocated as directed
by the Owner to the subaccounts of the Separate Account and the Fixed Account
set forth in the Additional Policy Specifications. The Owner may change the
allocation of future premium payments at any time. Allocations must be in whole
number percentages.
Continuation of Insurance--The insurance provided under this policy, including
benefits provided by any supplemental agreements attached to this policy, will
continue, subject to the grace period provision, in accordance with the
provisions of this policy and any such supplemental agreements for as long as
the values in this policy are sufficient to keep it in force.
No-Lapse Premium--The No-Lapse Premium is the amount stated on Page 3. If, on a
Monthly Anniversary prior to the No-Lapse Date shown on Page 3, the sum of all
premiums paid on this policy, reduced by any partial surrenders, is greater than
or equal to the No-Lapse Premium multiplied by the number of months since the
Policy Date, this policy will not then lapse as a result of a Net Cash Surrender
Value insufficient to pay the Monthly Deduction for the following month. This
provision will not prevent the termination of this policy when indebtedness
exceeds the Cash Surrender Value in accordance with the indebtedness provision
of the Policy Loans section of this policy.
A change in the Specified Amount, the addition or deletion of a supplemental
agreement to this policy, or a change in the rate class of the Insured prior to
the No-Lapse Date shown on Page 3 may result in a change in the No-Lapse Premium
and may change the No-Lapse Date.
Grace Period--If, on a Monthly Anniversary prior to the No-Lapse Date shown on
Page 3:
(a) the Net Cash Surrender Value is insufficient to cover the Monthly Deduction
for the following policy month and,
(b) the sum of all premiums paid on this policy, reduced by any partial
surrenders, is less than the No-Lapse Premium shown on Page 3 multiplied by
the number of elapsed months since the Policy Date;
then a grace period of 61 days will be allowed for the payment of a premium
sufficient to keep this policy in force.
Page 5
<PAGE>
A001428P
3. Premiums (Continued)
If, on a Monthly Anniversary on or after the No-Lapse Date shown on Page 3, the
Net Cash Surrender Value is insufficient to cover the Monthly Deduction for the
following month, a grace period of 61 days will be allowed for the payment of a
premium sufficient to pay the Monthly Deduction.
Notice of the amount of premium required to be paid during the grace period to
keep this policy in force will be sent at the beginning of the grace period to
the last known address of the Owner and of any assignee on record. The grace
period will end 61 days after the notice is sent. This policy will remain in
force during the grace period.
4. Lapse and Reinstatement
Lapse--If a premium sufficient to keep this policy in force is not paid during
the grace period, this policy will lapse at the end of the grace period. At
lapse this policy will terminate without value and cease to be in force. Any
deduction for the Cost of Insurance after termination will not be considered a
reinstatement of the policy nor a waiver by the Company of the termination.
Reinstatement--This policy may be reinstated within five years after lapse. A
reinstatement is subject to:
(a) the submission of evidence of insurability satisfactory to the Company;
(b) the payment or reinstatement of any indebtedness which existed at the end
of the grace period; and
(c) the payment of a premium sufficient to cover (i) the Monthly Deductions for
the grace period, (ii) any unpaid No-Lapse Premiums to the date of
reinstatement, and (iii) the Monthly Deductions or, if applicable, the
No-Lapse Premiums for two policy months after reinstatement.
The effective date of a reinstatement will be the date of approval by the
Company of the application for reinstatement. Such application will be attached
to and made a part of the reinstated policy.
The policy value on the date of reinstatement is the sum of:
(a) the policy value at the beginning of the grace period of lapse;
(b) interest on (a) at a rate of 4% per year until the date of reinstatement;
(c) any dividend credited to the policy since the date of lapse;
(d) interest on (c) at a rate of 4% per year until the date of reinstatement;
and
(e) the payment made upon reinstatement reduced by the percent of premium
charge
less the sum of:
(a) the Monthly Deductions for the grace period;
(b) interest on (a) at a rate of 4% per year until the date of reinstatement;
and
(c) the Monthly Deduction for the policy month following the date of
reinstatement.
The surrender charge set forth in Section 10 will be applicable to any surrender
of this policy following reinstatement.
Any indebtedness which is reinstated will be subject to loan interest as set
forth in Section 9.
Following reinstatement, the provisions of No-Lapse Premium set forth in Section
3 will again be applicable until the No-Lapse Date shown on Page 3 if sufficient
premium is paid so that, as of the effective date of reinstatement, the sum of
all premiums paid, reduced by any partial surrenders, is greater than the
No-Lapse Premium multiplied by the number of elapsed months since the Policy
Date.
Page 6
<PAGE>
5. The Separate Account
A001429P
The Separate Account--The Separate Account named on Page 3 was established by
the Company for this and other variable life insurance policies. The Separate
Account is divided into subaccounts for the investment of assets in shares of
the funds specified in the Additional Policy Specifications. The Company owns
the assets of the Separate Account. The assets of each subaccount of the
Separate Account equal to the reserves and other contract liabilities with
respect to the subaccount are not chargeable with liabilities arising out of any
other business the Company may conduct.
Income and realized and unrealized gains and losses from the assets held in each
subaccount are credited to or charged against the subaccount without regard to
the income, gains or losses in other investment accounts of the Company. Shares
of a fund held in a subaccount are valued at current net asset value on each
business day. Shares of a fund held in a subaccount will be redeemed at current
net asset value to make transfers, pay benefits and cover applicable charges and
deductions. Any dividend or capital gain distribution from a fund will be
reinvested in shares of that fund.
Substitution of Investment--If investment in a subaccount should no longer be
possible or, in the judgment of the Company, investment in a subaccount becomes
inappropriate to the purposes of the policy, or if in the judgment of the
Company, investment in another subaccount or insurance company separate account
is in the interest of owners of this class of policies, the Company may
substitute another subaccount or insurance company separate account.
Substitution may be made with respect to existing investments and the investment
of future net premiums.
Substitution will be subject to the approval of the Insurance Department of the
jurisdiction in which this policy is delivered and all other approvals required
under applicable law.
Transfers--Subject to and in accordance with the provisions of this policy, at
any time after the end of the Free Look Period, amounts may be transferred among
the subaccounts of the Separate Account and the Fixed Account, provided that:
(a) the minimum amount which may be transferred is $250 or, if less, the full
amount held in the subaccount or the Fixed Account;
(b) for partial transfers, the amount remaining in a subaccount or the Fixed
Account must be at least $250; and
(c) the first 12 transfers per policy year
will be allowed free of charge; thereafter, a $10 transfer charge may be
deducted from the amount transferred.
6. The Fixed Account
The Fixed Account--Amounts allocated or transferred to the Fixed Account under
this policy become a part of the general account assets of the Company. Subject
to applicable law and regulation, investment of general account assets is at the
sole discretion of the Company.
Interest--Amounts held in the Fixed Account will be credited with interest at
rates determined by the Company as described in the Determination of
Nonguaranteed Factors provision in Section 7. Different rates will normally
apply to that portion of the Fixed Account representing indebtedness. In no
event will the rate of interest credited be less than an effective annual rate
of four percent compounded annually.
Amounts allocated or transferred to the Fixed Account will be credited with
interest at an effective annual rate declared by the Company. The declared rate
will apply from the date of allocation or transfer through the end of the twelve
month period which begins on the first day of the calendar month in which the
allocation or transfer is made. Thereafter, interest will be credited on such
amount for successive twelve month periods at the declared effective annual rate
then applicable to new allocations to the account made as of the beginning of
each such period.
Transfers--Subject to and in accordance with the provisions of this policy,
including the Transfers provision of Section 5:
(a) an amount held in the Fixed Account may be transferred to one or more
subaccounts only during the period which is not more than thirty days
immediately following the end of each policy year; and
(b) the amount that may be transferred excludes any amount held in the Policy
Loan Account.
Page 7
<PAGE>
A001430P
7. Policy Value
Policy Value-- On the Policy Date the Policy Value is the initial premium paid
less the sum of (a) the percent of premium charge, and (b) the Monthly Deduction
for the first policy month. On each Monthly Anniversary while this policy is in
force, the Policy Value is the sum of (a) the current market value of each
subaccount and (b) the value of the Fixed Account, after deduction of the
Monthly Deduction for the next policy month.
On any date other than the Policy Date or a Monthly Anniversary, the Policy
Value will be the sum of (a) the current market value of each subaccount and (b)
the value of the Fixed Account.
Monthly Deduction--The Monthly Deduction is the sum of:
(a) the Cost of Insurance for the policy month;
(b) the monthly expense charge(s); and
(c) the Cost of Insurance and any other applicable monthly charge for the
policy month for any benefits provided by a supplemental agreement made a
part of this policy.
The Monthly Deductions will be deducted on the Policy Date and on each Monthly
Anniversary from the subaccounts and the Fixed Account on a pro-rata basis.
However, no monthly deductions will be deducted from the Policy Loan Account of
the Fixed Account.
Cost of Insurance--The Cost of Insurance is determined on a monthly basis. It is
determined separately for each increase in the Specified Amount. The Cost of
Insurance for a policy month is calculated as (a) multiplied by the result of
(b) minus (c) where:
(a) is the Base Cost of Insurance Rate divided by 1,000;
(b) is the Basic Death Benefit at the beginning of the policy month divided by
1.0032737; and
(c) is the Policy Value at the beginning of the policy month before the Monthly
Deduction.
If the Specified Amount includes the Policy Value and if there have been any
increases in the Specified Amount, the Policy Value will be considered a part of
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.
Cost of Insurance Rate--The Base Cost of Insurance Rate is based on the attained
age, sex and rate class of the Insured. The Cost of Insurance Rate will be
determined by the Company as described in the Determination of Nonguaranteed
Factors provision. However, the rates will not exceed those shown in the
Additional Policy Specifications. Such maximum rates are based on the 1980
Commissioners Standard Ordinary Smoker and Nonsmoker Mortality Tables, Age
Nearest Birthday.
Expense Charges--The actual expense charges will be determined by the Company as
described in the Determination of Nonguaranteed Factors provision. However,
these actual expense charges will not exceed the maximum expense charges stated
below.
The maximum expense charges applicable under this policy are:
(a) a monthly expense charge of $9.00;
(b) a monthly expense charge of $0.10 for each $1,000 of Specified Amount for
the first twelve months following the Policy Date; and
(c) if the Specified Amount has been increased within the past year, a monthly
expense charge of $0.10 for each $1,000 that the Specified Amount has been
increased.
Determination of Nonguaranteed Factors---Cost of Insurance Rates, Percent of
Premium Charges, Expense Charges, Mortality and Expense Risk Charges and
Interest Rates will be determined by the Company based on expectations as to
future mortality, investment, expense and persistency experience. The Company
will not adjust such rates or charges as a means of recovering prior losses nor
as a means of distributing prior profits.
Variable Accumulation Values--At any valuation time, the current market value of
a subaccount is determined by multiplying that subaccount's accumulation unit
value times the number of subaccount units held under this policy.
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 made.
Page 8
<PAGE>
A001431P
7. Policy Value (Continued)
The number of subaccount accumulation units will increase when:
(a) net premiums are allocated to that subaccount;
(b) amounts are transferred to that subaccount; and
(c) policy loans are repaid and credited to that subaccount.
The number of subaccount accumulation units will decrease when:
(a) a pro-rata portion of the monthly deduction is deducted from that
subaccount;
(b) a policy loan is taken from that subaccount;
(c) policy loan interest is not paid when due and is taken from that
subaccount;
(d) an amount is transferred from that subaccount; and
(e) a partial surrender, including the partial surrender charge, is taken from
that subaccount.
Valuation Period--As used in this policy, Valuation Period is the interval from
one valuation time to the next valuation time. Valuation time is the time as of
which each underlying investment company determines the net asset value of its
shares.
Value of Each Accumulation Unit--For each subaccount of the Separate Account,
the value was arbitrarily set at $10 when the subaccount was established. The
value may increase or decrease from one valuation period to the next. For any
valuation period the value is:
The value of an Accumulation Unit for the prior valuation period multiplied by
the net investment factor for that subaccount for the current valuation period.
Net Investment Factor--As used in this policy, Net Investment Factor is an index
used to measure the investment performance of a subaccount from one valuation
period to the next. For any subaccount, the net investment factor for a
valuation period is found by dividing (a) by (b) and subtracting (c):
Where (a) is
The net asset value per share of the mutual fund held in the subaccount, as of
the end of the valuation period plus
The per-share amount of any dividend or capital gain distributions by the mutual
fund if the "ex-dividend" date occurs in the valuation period.
Where (b) is
The net asset value per share of the mutual fund held in the subaccount as of
the end of the last prior valuation period.
Where (c) is
The daily Mortality and Expense Risk Charge set by the Company. On an annual
basis, such charge will not exceed 0.90% of the daily net asset value of the
Separate Account.
Fixed Account Value--At any valuation time the value of the Fixed Account is
(a) the total of net premiums allocated to the Fixed Account; plus
(b) any transfers to the Fixed Account; plus
(c) any policy loan account (principal and unpaid interest) credited to the
Fixed Account; plus
(d) any repaid policy loan credited to the Fixed Account; plus
(e) interest credited to the Fixed Account.
less:
(a) the portion of the Monthly Deduction deducted pro-rata from the Fixed
Account;
(b) the amount of any transfers from the Fixed Account;
(c) the amount of any partial surrender, including the partial surrender
charge, taken from the Fixed Account;
(d) the amount of any policy loan taken from the Fixed Account;
(e) unpaid policy loan interest taken from the Fixed Account; and
(f) repaid policy loans deducted from the policy loan account.
Fixed Account Value Reductions--Monthly deductions, transfers and partial
surrenders will reduce the portion of the Fixed Account Value which results from
the most recent allocation to the Fixed Account. A policy loan will be secured
by the portion of the Net Policy Value which results from the most recent
allocation to the Fixed Account.
Computation of Values--All policy values and benefits are equal to or greater
than those required by the law of the jurisdiction in which this policy is
delivered. A detailed statement of the method of computing reserves and Policy
Values has been filed with the insurance supervisory official of that
jurisdiction.
Page 9
<PAGE>
A001432P
8. Death and Maturity Benefits
Basic Death Benefit--The Basic Death Benefit prior to the Maturity Date will be
as follows:
(a) If the Specified Amount includes the Policy Value, as shown on Page 3, the
Basic Death Benefit will be equal to the greater of: (1) The Specified
Amount; or (2) the percentage of the Policy Value described below based on
the attained age of the Insured.
(b) If the Specified Amount does not include the Policy Value, as shown on Page
3, the Basic Death Benefit will be equal to the greater of;
(1) the Specified Amount plus the Policy Value; or
(2) the percentage of the Policy Value described below based on the
attained age of the Insured.
The percentage of the Policy Value used in determining the Basic Death Benefit
is:
Attained Attained
Age Percentage Age Percentage
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
56 146 91 104
57 142 92 103
58 138 93 102
59 134 94 101
60 130
Amount of Death Benefit--The Death Benefit payable at the death of the Insured
while this policy is in force will be equal to the sum of:
(a) the Basic Death Benefit on the date of death;
(b) any dividend payable at death; and
(c) any benefit provided by a supplemental agreement attached to the policy and
payable because of the death of the Insured.
less the sum of:
(a) any indebtedness on this policy at the time of the death of the Insured;
and
(b) if the death of the Insured occurs during a grace period, the past due
Monthly Deductions.
Suicide Exclusion--If the Insured dies by suicide, while sane or insane, within
two years from the Date of Issue, the Death Benefit will be limited to the
premiums paid less any indebtedness and any partial surrenders.
If the Insured dies by suicide, while sane or insane, within two years from the
effective date of any increase in the Specified Amount, the Death Benefit with
respect to that increase in the Specified Amount will be limited to the Monthly
Deductions made for that increase.
If the Insured dies by suicide, while sane or insane, within two years from the
effective date of a reinstatement of this policy, the Death Benefit will be
limited to the premiums paid since the reinstatement less any policy loans and
partial surrenders made since reinstatement.
Payment of Death Benefit--The Death Benefit will be paid to the Beneficiary in
one sum or, if elected, under an income payment option. If part or all of the
Death Benefit is paid in one sum, the Company will pay interest on this sum from
the date of death to the date of payment. The interest rate will be determined
each year by the Company, but will not be less than a rate of 3% per year
compounded annually, or such higher rate as may be required by law.
Amount of Maturity Benefit--The Maturity Benefit payable if the Insured is
living on the Maturity Date and if this policy is then in force will be equal to
the Net Policy Value on that date.
Payment of Maturity Benefit--The Maturity Benefit will be paid to the Owner in
one sum or, if elected, under an Income Payment Option.
Page 10
<PAGE>
A001433P
9. Policy Loans
Policy Loans--The Owner may obtain a loan while this policy is in force during
the life of the Insured. The loan, plus any existing indebtedness, may not be
greater than the Loan Value of this policy on the date of the loan. The minimum
loan is $250.
Loan Value--The Loan Value of this policy on any date is equal to 90% of the
Cash Surrender Value.
Loan Interest--Loans will bear interest at the rate of 5% per year. Loan
interest is due and payable at the end of each policy year. If the interest is
not paid when due it will be added to the loan. It will then bear interest at
the rate of interest on loans.
Indebtedness--Indebtedness means outstanding loans on this policy plus any loan
interest due or accrued. Indebtedness may be repaid in full or in part at any
time while this policy is in force during the life of the Insured.
Excess Indebtedness--This policy is the only security for indebtedness on it.
If, at any time, the indebtedness is greater than the Cash Surrender Value, a
notice of pending termination will be mailed to the last known address of the
Owner and of any assignee on record. If the excess indebtedness is not paid to
the Company, this policy will terminate 61 days after the notice is mailed.
Policy Loan Account--When a loan is made, an amount equal to the amount of the
loan will be withdrawn from the assets held under this policy in subaccounts of
the Separate Account and in the Fixed Account and the amount will be placed in
the Policy Loan Account included within the Fixed Account. Subject to and in
accordance with the provisions of this policy withdrawals will be made from the
subaccounts and the Fixed Account on a pro-rata basis unless otherwise directed
by the Owner. The Policy Loan Account will be credited with interest. The rate
of interest will be determined each year by the Company but will not be less
than a rate of 4% per year compounded annually. Any repayment of indebtedness
will be withdrawn from the Policy Loan Account and reallocated to the
subaccounts and the Fixed Account as directed by the Owner. Except for such
repayment of indebtedness, no transfers or partial surrenders may be made from
the Policy Loan Account.
10. Surrender of Policy
Surrender--The Owner may surrender this policy for its Net Cash Surrender Value
by filing a written request with the Company. The Net Cash Surrender Value may
be taken in one sum or it may be left with the Company under an income payment
option. This policy will terminate and cease to be in force if it is surrendered
for one sum.
Net Cash Surrender Value--The Net Cash Surrender Value is the Net Policy Value
decreased by any surrender charge.
Net Policy Value--The Net Policy Value is the Policy Value decreased by any
indebtedness on this policy.
Cash Surrender Value--The Cash Surrender Value is the Policy Value decreased by
any surrender charge.
Surrender Charge--The surrender charge for the initial Specified Amount is
determined by multiplying (a) times the sum of (b) plus (c), where:
(a) is the appropriate surrender factor from the table below in which policy
year is determined from the Policy Date;
(b) is 25% of the lesser of:
(i) the sum of all premiums paid on this policy; and
(ii) the maximum surrender charge premium as shown on Page 3; and
(c) is the Per $1,000 Surrender Charge from the Table of Per $1,000 Surrender
Charges for the insurance age of the Insured multiplied by the initial
Specified Amount divided by 1,000.
The surrender charge for each increase in the Specified Amount is based on the
amount of the increase and on the attained age of the Insured at the time of the
increase. The surrender charge is determined by multiplying (a) times (b),
where:
(a) is the appropriate surrender factor from the table below in which policy
year is determined from the effective date of the increase;
Page 11
<PAGE>
A001434P
10. Surrender of Policy (Continued)
(b) is the Per $1,000 Surrender Charge from the Table of Per $1,000 Surrender
Charges for the attained age of the Insured as of the effective date of the
increase multiplied by the increase in the Specified Amount divided by
1,000.
Policy Surrender
Year Factor
1-7 1.00
8 .80
9 .60
10 .40
11 .20
12 and later 0
Partial Surrender--The Owner may make a partial surrender of this policy for any
portion of the Net Cash Surrender Value which exceeds $1,000 by filing a written
request with the Company. However, no partial surrender may be made for less
than $250 and no more than four partial surrenders may be made under this policy
in any policy year. No partial surrender may be made in the first five policy
years which would reduce the Specified Amount to less than $50,000. A charge of
2% of the amount surrendered, but not more than $25 will be made for each
partial surrender. The charge will be deducted from the available Net Cash
Surrender Value and will be considered part of the partial surrender.
Any partial surrender will reduce the Policy Value by the amount of the partial
surrender. If the Specified Amount includes the Policy Value, the Specified
Amount will also be reduced by the amount of the partial surrender in the
following order:
(a) The most recent increase in the Specified Amount, if any, will be decreased
first.
(b) The next most recent increases in the Specified Amount, if any, will
then be successively decreased.
(c) The initial Specified Amount will then be decreased.
Partial surrenders will be deducted from the subaccounts and the Fixed Account
as directed by the Owner, provided that the minimum amount remaining in a
subaccount or the Fixed Account as a result of the allocation is $250. If no
allocation is directed, the partial surrender will be deducted from the
subaccounts and the Fixed Account on a pro-rata basis.
The surrender charge will not be reduced as a result of a partial surrender.
11. Policy Changes
Right to Make Change--At any time while this policy is in force after the first
policy year, the Owner may request changes as set forth in this section. No
change will be permitted that would result in the Death Benefit under this
policy not being excludable from gross income due to not satisfying the
requirements of Section 7702 of the Internal Revenue Code of 1986, as amended,
or as set forth in any applicable successor provision thereto. In addition, each
change is subject to the conditions stated. This policy will be amended as the
result of any such change.
Increase in Specified Amount--Any increase in the Specified Amount must be at
least $10,000 and must be applied for on a written application. Evidence of
insurability satisfactory to the Company must be submitted.
Decrease in Specified Amount--Any decrease in the Specified Amount must be at
least $5,000. The Specified Amount may not be decreased to less than $50,000. No
decrease may be made in the first year following the effective date of an
increase in the Specified Amount.
Any decrease in the Specified Amount will become effective on the Monthly
Anniversary that coincides with or next follows the receipt by the Company of
the request. The decrease in the Specified Amount will be in the following
order:
(a) The most recent increase in the Specified Amount, if any, will be decreased
first.
(b) The next most recent increases in the Specified Amount, if any, will then
be successively decreased.
(c) The initial Specified Amount will then be decreased.
The surrender charge will not change as a result of a decrease in the Specified
Amount. No surrender charge will be deducted from the Policy Value upon a
decrease in the Specified Amount.
Page 12
<PAGE>
A001435P
11. Policy Changes (Continued)
Change in Specified Amount Option--If the Specified Amount does not include the
Policy Value, a request may be made to change this policy so that the Specified
Amount includes the Policy Value. The Specified Amount after the change will be
equal to the Specified Amount before the change plus the Policy Value on the
date of the change. The effective date of the change will be the Monthly
Anniversary that coincides with or next follows the date of receipt by the
Company of the request to make the change.
If the Specified Amount includes the Policy Value, a request may be made to
change this policy so that the Specified Amount does not include the Policy
Value. The Specified Amount after the change will be equal to the Specified
Amount before the change less the Policy Value on the date of the change.
Evidence of insurability satisfactory to the Company may be required. Such
evidence will be attached to and made a part of the policy. The effective date
of the change will be the Monthly Anniversary that coincides with or next
follows the date of receipt by the Company of the request to make the change.
The Specified Amount after the change must be at least $50,000. No more than one
change in the Specified Amount Option may be made in any policy year.
12. Transfer to Fixed Account
At any time within the first 24 policy months while this policy is in force
during the life of the Insured, the Owner may transfer all amounts held in
subaccounts of the Separate Account to the Fixed Account without restriction,
minimum or charge. Following such transfer, no future premiums may be allocated
to subaccounts of the Separate Account and no transfers may be made to the
subaccounts.
13. Owner and Beneficiary
Owner--The Owner of this policy is as stated in the application unless changed
by a subsequent owner designation or assignment. While this policy is in force
before the death of the Insured, the Owner may exercise all of the rights in it
without the consent of any other person.
Beneficiary--The Beneficiary of this policy is as stated in the application
unless changed by a subsequent beneficiary designation on a form provided by the
Company. If no other provision is made, the interest of a Beneficiary who dies
before the death of the Insured will pass to the Owner.
Change of Owner or Beneficiary--The Owner may transfer ownership or change the
Beneficiary by filing a written designation at the Home Office on a form
provided by the Company. The designation will take effect as of the date it is
signed by the Owner, subject to any action taken by the Company prior to the
time that the designation is received at the Home Office. Unless otherwise
stated in a designation, the following rules will apply to terms of kinship:
(a) A legally adopted child of any person will be considered the child of the
adopting parent.
(b) The brothers and sisters of a person will include those who have only one
parent in common with the person, but will not include stepbrothers or
stepsisters.
(c) Any reference to children will not include stepchildren and any reference
to parents will not include stepparents.
Assignment--The Owner may assign this policy while it is in force during the
life of the Insured. The rights of the Owner and of any Beneficiary will be
subject to the rights of an assignee under the terms of an assignment. No
assignment will bind the Company until the original or a copy signed by the
Owner, on a form provided by the Company, has been filed at the Home Office. The
Company is not responsible for the effect or the validity of any assignment.
Page 13
<PAGE>
A001436P
14. General Provisions
The Contract--This policy and the application for it constitute the entire
contract. A copy of the application is attached to this policy. Only the
President, a Vice President, the Secretary, the Chief Actuary, Actuary or an
Associate Actuary may, on behalf of the Company, modify this policy or waive any
of its conditions. No agent is authorized to modify this contract or to make any
promise as to the future payment of dividends or interest.
At any time the Company may make such changes in this policy as are necessary
(i) to assure compliance at all times with the definition of life insurance
prescribed by federal income tax law, or (ii) to make the policy conform with
any law or regulation issued by any government agency to which it is subject.
Any such change may, however, be accepted or rejected by the Owner.
Incontestability--All statements made in the application for this policy are
representations and not warranties. No statement will void this policy or be
used to contest a claim under it unless the statement is contained in a written
application, a copy of which is attached to and made a part of this policy.
This policy will be incontestable after it has been in force during the life of
the Insured for two years from the Date of Issue. 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 from its effective date.
This policy will be incontestable with respect to statements made in an
application for reinstatement after it has been in force during the life of the
Insured for two years from the effective date of the reinstatement.
Duration of Coverage--The duration of coverage under this policy will depend on
the amount, timing and frequency of premium payments; changes in the Specified
Amount or benefits; the interest rates credited or investment return; the cost
of insurance rates charged; and the amount and timing of any partial surrenders
or policy loans.
Participation--This policy will participate in divisible surplus while it is in
force except as stated in the Income Payment Options Section. The share of such
surplus, if any, to be apportioned to this policy as a dividend will be
determined each year by the Company. Any dividend will be allocated to
subaccounts of the Separate Account as directed by the Owner, unless the Owner
elects to have it paid in cash. No divisible surplus is expected to be
apportioned to this policy in the foreseeable future.
Policy Date--The Policy Date shown on Page 3 is the date from which policy
years, months and anniversaries are determined.
Monthly Anniversary--The Monthly Anniversary is the day in each calendar month
which is the same day of the month as the Policy Date.
Age--The age shown on Page 3 is the insurance age of the Insured. This is the
age of the Insured on the birthday nearest the Policy Date. Attained age means
the insurance age of the Insured increased by the number of whole years and
months after the Policy Date.
Misstatement of Age or Sex--If the age or the sex of the Insured has been
misstated, the Death Benefit under this policy will be the amount which would
have been provided by the most recent Cost of Insurance charge at the correct
age and sex.
Policy Payments--All payments by the Company under this policy are payable at
the Home Office The Company may require the return of this policy upon surrender
for the Net Cash Surrender Value or payment of the Death Benefit.
Deferment of Transactions--The Company may defer payment from the subaccounts of
a partial surrender or of the Net Cash Surrender Value, may defer making a loan,
may defer payment of any portion of the Death Benefit in excess of the Specified
Amount and may defer transfer from assets held in subaccounts of the Separate
Account under any of the following conditions:
(a) The New York Stock Exchange is closed (other than customary weekend and
holiday closings).
(b) Trading on the New York Stock Exchange is restricted.
(c) An emergency exists such that it is not reasonably practical to dispose of
securities held in the Separate Account or to determine the value of its
assets.
(d) The Securities and Exchange Commission by order so permits for the
protection of securityholders.
Conditions in (b) and (c) will be decided by, or in accordance with rules of,
the Securities and Exchange Commission.
Page 14
<PAGE>
A001437P
14. General Provisions (Continued)
The Company may defer payment from the Fixed Account of a partial surrender, of
the Net Cash Surrender Value, or of a policy loan for up to six months from the
date we receive a written request. However, a partial surrender or policy loan
to pay a premium due on a policy of the Company will not be deferred. If the
payment is deferred for 30 days or more, it will bear interest at a rate of 3%
per year compounded annually while it is deferred, or such higher rate as may be
required by law.
Annual Report--Each year a report will be sent to the Owner which shows the
current policy values, premiums paid and deductions made since the last report,
any outstanding policy loans, and any other information required by the
Insurance Department of the jurisdiction in which this policy is delivered.
Deferral of Maturity--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.
15. Income Payment Options
Election of Income Payment Option--An income payment option may be elected in
place of a one sum payment of any amount payable upon the death of the Insured
or upon surrender. The Owner may elect an income payment option or change a
previous election while this policy is in force during the life of the Insured.
If no election is in effect on the date that the Death Benefit becomes payable,
the person entitled to such benefit may elect an income payment option. The
option must be elected before any payment has been made and within one year
after the date on which the benefit becomes payable.
The amount applied under an income payment option must be at least $5,000. No
election may provide for income payments of less than $50 each.
Option 1--Interest Income--The Company will hold the amount applied at interest.
Interest will be paid monthly, quarterly, semiannually or annually.
Option 2--Income for a Fixed Period--The Company will pay the amount applied,
with interest, in equal monthly payments for a fixed period. The fixed period
may not be greater than 30 years.
Option 3--Income of a Fixed Amount--The Company will make payments of a fixed
amount until the total amount applied, with interest, has been paid. The
payments may be made monthly, quarterly, semiannually or annually. The final
payment may be less than the fixed amount. The total of the payments to be made
each year must be at least $75 for each $1,000 applied.
Option 4--Life Income--The Company will pay equal monthly payments during the
life of the option annuitant.
Option 5--Life Income with Guaranteed Period--The Company will pay equal monthly
payments for a stated guaranteed period and thereafter during the life of the
option annuitant. The guaranteed period may be 5 years, 10 years or 20 years. In
the event that the monthly income at any age is the same for different
guaranteed periods, the longest guaranteed period that could have been elected
for the same monthly income at that age will be deemed to have been elected.
Option 6--Life Income with Refund Period--The Company will pay equal monthly
payments during the life of the option annuitant. If necessary, the payments
will continue after the death of the option annuitant until the total of all
payments made, including a smaller final payment, if required, equals the total
amount applied.
Option 7--Joint and Survivor Life Income--The Company will pay equal monthly
payments during the joint life of two option annuitants and thereafter during
the life of the survivor.
Income Amount--Participation--The income under Options 1 and 2 will be based on
interest at a rate of 3% per year compounded annually. The unpaid balance of the
amount applied under Option 3 will be credited with interest at a rate of 3% per
year compounded annually. Options 1, 2 and 3 will participate in divisible
surplus by the payment or crediting of additional interest in such amount, if
any, as determined each year by the Company. Additional interest will increase
the income payments under Options 1 and 2. Additional interest will lengthen the
period during which payments are made under Option 3.
Page 15
<PAGE>
A001438P
15. Income Payment Options (Continued)
The monthly income under Options 4, 5, 6 and 7 will equal 103% of the monthly
income under a comparable single premium nonparticipating annuity available from
the Company at the time that the income payments are to begin. In no event will
the monthly income under these life income options be less than the income
stated in the Income Payment Option Tables. Options 4, 5, 6 and 7 will not
participate in divisible surplus.
Income Period--The income period under an option will begin on the date of death
of the Insured or the date of surrender. Income payments under Options 1 and 3
will be made at the end of the payment interval. Income payments under Options
2, 4, 5, 6 and 7 will be made at the beginning of the payment interval.
Option Annuitant--Option annuitant means a natural person on whose life the
income payments under Options 4, 5, 6 and 7 are based.
The Company may require proof of the age, sex and of the continued life of an
option annuitant. If the age or the sex of an option annuitant has been
misstated, an appropriate adjustment will be made in the income payments.
Withdrawal Privilege--Unless the election states otherwise, the payee under an
income payment option may:
(a) before any income payment has been made, withdraw the amount applied under
the option; or
(b) withdraw the present value of the income payments to become due during any
fixed, guaranteed or refund period; or
(c) withdraw the balance held under Option 1 or 3 plus any accrued interest.
There will be no right to withdraw the present value of the income payments
falling due after the guaranteed or refund period under Option 5 and 6.
There will be no right to withdraw the present value of any income payments
under Options 4 and 7.
The Company may defer the payment of the amount withdrawn for up to six months
from the date of a withdrawal request.
Present Value--The present value of the income payments under Option 2 will be
based on interest at a rate of 3% per year compounded annually. The present
value of the remaining income payments during a guaranteed or refund period
under a life income option will be based on interest at a rate set by the
Company at the time income payments are to begin.
Death of Payee--Upon the death of the payee under an income payment option, the
Company will pay the following to the payee's executors or administrators unless
stated otherwise in an election consented to by the Company:
(a) the balance of the amount held under Option 1 or 3 plus any accrued
interest; or
(b) the present value of the income payments to become due during the fixed
period under Option 2; or
(c) if the option annuitant under Option 5 or 6 has died, the present value of
the income payments, if any, to become due during the guaranteed or refund
period; or
(d) if any option annuitant under Option 4, 5, 6 or 7 is living, any income
payments as they become due during the option annuitant's life plus, upon
the death of the option annuitant under Option 5 or 6, the present value of
the income payments, if any, to become due during the guaranteed or refund
period.
Assignment--Creditors--The amount applied under an income payment option and the
payments under the option may not be assigned and, to the extent permitted by
law, will not be available to anyone who has a claim against the payee.
Page 16
<PAGE>
A001439P
16. Income Payment Option Table
Amount of income provided by each $1,000 applied under an income payment option
Option 1--Interest Income Option 2--Income for Fixed Period of Years
<TABLE>
<CAPTION>
- ----------------------------------------- --------------------------------------------------------------------------------
Monthly Monthly Monthly
Payment Interval Amount Years Income Years Income Years Income
- ----------------------------------------- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $84.47 11 $8.86 21 $5.32
Annually $30.00 2 42.86 12 8.24 22 5.15
3 28.99 13 7.71 23 4.99
Semiannually 14.89 4 22.06 14 7.26 24 4.84
5 17.91 15 6.87 25 4.71
Quarterly 7.42 6 15.14 16 6.53 26 4.59
7 13.16 17 6.23 27 4.47
Monthly 2.47 8 11.68 18 5.96 28 4.37
9 10.53 19 5.73 29 4.27
10 9.61 20 5.51 30 4.18
- ----------------------------------------- --------------------------------------------------------------------------------
</TABLE>
Options 4, 5 and 6--Monthly Life Income
The amount of income will be based on the age of the option annuitant on
the birthday nearest the date of the first payment.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Option 4 Option 5 Option 6
Age of _________ ________________________________________ __________
Option 20 Year 10 Year 5 Year with
Annui- Life Guaranteed Guaranteed Guaranteed Refund
tant Income Period Period Period Period
Male Female Male Female Male Female Male Female Male Female
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
15 and
under $3.00 $2.90 $2.97 $2.87 $2.98 $2.88 $2.99 $2.89 $2.96 $2.86
16 3.01 2.91 2.98 2.88 2.99 2.89 3.00 2.90 2.97 2.87
17 3.03 2.92 3.00 2.89 3.01 2.90 3.02 2.91 2.99 2.88
18 3.05 2.94 3.02 2.91 3.03 2.92 3.04 2.93 3.01 2.90
19 3.07 2.96 3.04 2.93 3.05 2.94 3.06 2.95 3.03 2.92
20 3.09 2.97 3.06 2.94 3.07 2.95 3.08 2.96 3.05 2.93
21 3.12 2.99 3.09 2.96 3.10 2.97 3.11 2.98 3.08 2.95
22 3.14 3.01 3.11 2.98 3.12 2.99 3.13 3.00 3.10 2.97
23 3.16 3.03 3.13 3.00 3.14 3.01 3.15 3.02 3.12 2.99
24 3.19 3.05 3.16 3.02 3.17 3.03 3.18 3.04 3.15 3.01
25 3.21 3.07 3.18 3.04 3.19 3.05 3.20 3.06 3.17 3.03
26 3.24 3.09 3.21 3.06 3.22 3.07 3.23 3.08 3.20 3.05
27 3.27 3.11 3.24 3.08 3.25 3.09 3.26 3.10 3.23 3.07
28 3.30 3.14 3.27 3.11 3.28 3.12 3.29 3.13 3.25 3.10
29 3.33 3.16 3.30 3.13 3.31 3.14 3.32 3.15 3.28 3.12
30 3.36 3.18 3.33 3.15 3.34 3.16 3.35 3.17 3.31 3.14
31 3.40 3.21 3.36 3.18 3.38 3.19 3.39 3.20 3.34 3.17
32 3.43 3.24 3.39 3.21 3.41 3.22 3.42 3.23 3.37 3.20
33 3.47 3.27 3.43 3.24 3.45 3.25 3.46 3.26 3.41 3.23
34 3.51 3.30 3.46 3.27 3.49 3.28 3.50 3.29 3.44 3.26
35 3.55 3.33 3.50 3.30 3.53 3.31 3.54 3.32 3.48 3.29
36 3.59 3.36 3.54 3.33 3.57 3.34 3.58 3.35 3.52 3.32
37 3.64 3.40 3.58 3.36 3.62 3.38 3.63 3.39 3.56 3.35
38 3.68 3.43 3.62 3.40 3.66 3.41 3.67 3.42 3.60 3.38
39 3.73 3.47 3.66 3.43 3.71 3.45 3.72 3.46 3.64 3.42
40 3.78 3.51 3.71 3.47 3.76 3.49 3.77 3.50 3.68 3.45
41 3.84 3.55 3.75 3.51 3.82 3.53 3.83 3.54 3.73 3.49
42 3.90 3.59 3.80 3.55 3.87 3.57 3.89 3.58 3.78 3.53
43 3.96 3.64 3.85 3.59 3.93 3.62 3.95 3.63 3.83 3.57
44 4.02 3.69 3.90 3.63 3.99 3.67 4.01 3.68 3.88 3.61
45 4.09 3.74 3.96 3.68 4.05 3.72 4.08 3.73 3.94 3.66
46 4.16 3.79 4.01 3.72 4.12 3.77 4.15 3.78 4.00 3.70
47 4.23 3.85 4.07 3.77 4.19 3.83 4.22 3.84 4.06 3.75
48 4.31 3.91 4.12 3.82 4.27 3.88 4.30 3.90 4.11 3.80
49 4.39 3.97 4.18 3.88 4.34 3.94 4.38 3.96 4.19 3.86
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Option 4 Option 5 Option 6
Age of _________ ________________________________________ __________
Option 20 Year 10 Year 5 Year with
Annui- Life Guaranteed Guaranteed Guaranteed Refund
tant Income Period Period Period Period
Male Female Male Female Male Female Male Female Male Female
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
50 $4.48 $4.03 $4.24 $3.93 $4.43 $4.01 $4.47 $4.02 $4.25 $3.91
51 4.57 4.11 4.30 3.99 4.51 4.08 4.56 4.09 4.33 3.97
52 4.67 4.19 4.37 4.05 4.60 4.15 4.65 4.17 4.40 4.04
53 4.78 4.27 4.43 4.11 4.70 4.22 4.76 4.24 4.48 4.10
54 4.89 4.35 4.49 4.17 4.80 4.30 4.87 4.33 4.56 4.17
55 5.01 4.44 4.56 4.23 4.90 4.38 4.98 4.41 4.65 4.24
56 5.14 4.53 4.62 4.30 5.01 4.47 5.10 4.50 4.74 4.31
57 5.28 4.63 4.69 4.36 5.13 4.56 5.23 4.60 4.84 4.39
58 5.42 4.74 4.75 4.43 5.25 4.66 5.37 4.71 4.94 4.48
59 5.57 4.86 4.81 4.50 5.37 4.76 5.51 4.82 5.04 4.56
60 5.73 4.98 4.88 4.57 5.50 4.87 5.67 4.93 5.15 4.66
61 5.90 5.11 4.94 4.64 5.64 4.98 5.83 5.06 5.26 4.75
62 6.07 5.25 4.99 4.72 5.78 5.10 6.00 5.19 5.38 4.85
63 6.26 5.39 5.05 4.79 5.93 5.23 6.18 5.33 5.51 4.96
64 6.45 5.55 5.10 4.86 6.09 5.36 6.37 5.48 5.64 5.08
65 6.65 5.71 5.15 4.92 6.25 5.50 6.56 5.64 5.78 5.20
66 6.86 5.89 5.20 4.99 6.41 5.65 6.77 5.81 5.92 5.32
67 7.09 6.08 5.24 5.05 6.56 5.80 6.99 6.00 6.07 5.46
68 7.32 6.27 5.25 5.11 6.71 5.96 7.22 6.19 6.23 5.60
69 7.57 6.49 5.25 5.17 6.87 6.13 7.46 6.40 6.40 5.75
70 7.83 6.71 5.25 5.22 7.03 6.30 7.72 6.62 6.57 5.91
71 8.14 6.95 5.25 5.25 7.20 6.48 7.98 6.85 6.76 6.07
72 8.47 7.20 5.25 5.25 7.37 6.66 8.26 7.10 6.95 6.25
73 8.83 7.47 5.25 5.25 7.54 6.85 8.56 7.36 7.16 6.44
74 9.20 7.76 5.25 5.25 7.71 7.05 8.86 7.65 7.37 6.64
75 9.61 8.06 5.25 5.25 7.87 7.25 9.18 7.95 7.60 6.87
76 10.03 8.43 5.25 5.25 8.03 7.44 9.51 8.27 7.83 7.08
77 10.49 8.84 5.25 5.25 8.19 7.64 9.85 8.61 8.08 7.32
78 10.98 9.28 5.25 5.25 8.34 7.84 10.21 8.97 8.35 7.58
79 11.51 9.75 5.25 5.25 8.49 8.04 10.58 9.35 8.62 7.85
80 and 12.07 10.27 5.25 5.25 8.62 8.23 10.95 9.75 8.92 8.15
over
</TABLE>
Page 17
<PAGE>
Option 7--Joint and Survivor Monthly Life Income
The amount of income will be based on the ages of the option annuitants on their
respective birthdays nearest the date of the first payment. The table shows
income for certain ages for one male and one female option annuitant. The amount
is shown under the age of the male and opposite the age of the female. Amounts
of income for other combinations of ages or for option annuitants of the same
sex will be furnished upon request.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Age of Female Age of Male Option Annuitant
Option 45 50 55 60 62 65 70 75 80
Annuitant
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
45 $3.40 $3.48 $3.54 $3.60 $3.62 $3.64 $3.67 $3.70 $3.71
50 3.52 3.64 3.74 3.82 3.85 3.89 3.94 3.97 3.99
55 3.65 3.80 3.95 4.08 4.13 4.19 4.27 4.33 4.38
60 3.76 3.96 4.17 4.37 4.44 4.54 4.68 4.79 4.86
62 3.80 4.02 4.26 4.49 4.57 4.69 4.86 5.00 5.09
65 3.85 4.11 4.38 4.67 4.77 4.93 5.15 5.34 5.48
70 3.93 4.22 4.57 4.95 5.10 5.32 5.68 6.00 6.25
75 3.99 4.31 4.72 5.19 5.39 5.70 6.21 6.74 7.18
80 4.03 4.38 4.84 5.39 5.64 6.03 6.75 7.55 8.32
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Additional Policy Specifications
FLEXIBLE PERIOD- SUPPLEMENTAL TERM INSURANCE AGREEMENT (FPTI-94(S))
INSURED: WILLIAM PENN SPECIFIED AMOUNT
AGE 35 MALE $10,000
EFFECTIVE DATE 05/01/95 RATE CLASS
TERMINATION DATE 05/01/2055 SMOKER
POLICY NUMBER 0 000 000
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE
Page 18
<PAGE>
Additional Policy Specifications
TABLE OF GUARANTEED MAXIMUM MONTHLY COST OF INSURANCE RATES PER $1,000
ATTAINED BASE FPTI
AGE RATE RATE
35 $ 0.2192 $ 0.2192
36 0.2342 0.2342
37 0.2533 0.2533
38 0.2750 0.2750
39 0.3000 0.3000
40 0.3284 0.3284
41 0.3617 0.3617
42 0.3959 0.3959
43 0.4351 0.4351
44 0.4760 0.4760
45 0.5227 0.5227
46 0.5694 0.5694
47 0.6203 0.6203
48 0.6737 0.6737
49 0.7338 0.7338
50 0.7922 0.7922
51 0.8707 0.8707
52 0.9525 0.9525
53 1.0460 1.0460
54 1.1513 1.1513
55 1.2632 1.2632
56 1.3844 1.3844
57 1.5097 1.5097
58 1.6435 1.6435
59 1.7823 1.7823
60 1.9362 1.9362
61 2.1094 2.1094
62 2.3044 2.3044
63 2.5255 2.5255
64 2.7693 2.7693
65 3.0333 3.0333
66 3.3084 3.3084
67 3.5970 3.5970
68 3.8942 3.8942
69 4.2109 4.2109
POLICY NUMBER 0 000 000
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE
William Penn
AGE 35 - MALE
Page 18A
<PAGE>
Additional Policy Specifications
TABLE OF GUARANTEED MAXIMUM MONTHLY COST OF INSURANCE RATES PER $1,000
ATTAINED BASE FPTI
AGE RATE RATE
70 $ 4.5607 $ 4.5607
71 4.9485 4.9485
72 5.3897 5.3897
73 5.8869 5.8869
74 6.4294 6.4294
75 7.0299 7.0299
76 7.6497 7.6497
77 8.2779 8.2779
78 8.9044 8.9044
79 9.5477 9.5477
80 10.2362 10.2362
81 10.9869 10.9869
82 11.8214 11.8214
83 12.7462 12.7462
84 13.7267 13.7267
85 14.7305 14.7305
86 15.7251 15.7251
87 16.6958 16.6958
88 17.7573 17.7573
89 18.8071 18.8071
90 19.8609 19.8609
91 20.9394 20.9394
92 22.0881 22.0881
93 23.5676 23.5676
94 25.4788 25.4788
POLICY NUMBER 0 000 000
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE
William Penn
AGE 35 - MALE
Page 18B
<PAGE>
Additional Policy Specifications
TABLE OF PER $1,000 SURRENDER CHARGES
PER $1,000 PER $1,000
SURRENDER ATTAINED SURRENDER
AGE CHARGE AGE CHARGE
0 1.00 40 5.00
1 1.00 41 5.00
2 1.00 42 5.00
3 1.00 43 5.00
4 1.00 44 5.00
5 1.00 45 5.00
6 1.00 46 5.00
7 1.00 47 5.00
8 1.00 48 5.00
9 1.00 49 5.00
10 2.00 50 6.00
11 2.00 51 6.00
12 2.00 52 6.00
13 2.00 53 6.00
14 2.00 54 6.00
15 2.00 55 6.00
16 2.00 56 6.00
17 2.00 57 6.00
18 2.00 58 6.00
19 2.00 59 6.00
20 3.00 60 7.00
21 3.00 61 7.00
22 3.00 62 7.00
23 3.00 63 7.00
24 3.00 64 7.00
25 3.00 65 7.00
26 3.00 66 7.00
27 3.00 67 7.00
28 3.00 68 7.00
29 3.00 69 7.00
30 4.00 70 7.00
31 4.00 71 7.00
32 4.00 72 7.00
33 4.00 73 7.00
34 4.00 74 7.00
35 4.00 75 7.00
36 4.00 76 7.00
37 4.00 77 7.00
38 4.00 78 7.00
39 4.00 79 7.00
80 7.00
POLICY NUMBER 0 000 000
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE
William Penn
AGE 35 - MALE
Page 18C
<PAGE>
Additional Policy Specifications
Eligible Mutual Funds
Penn Series Funds, Inc.
Independence Capital (ICMI) Vontobel USA
Money Market International Equity
Quality Bond
Growth Equity T. Rowe Price
High Yield Bond
Quest for Value Advisors Flexibly Managed
Value Equity
Small Capitalization
TCI Portfolios, Inc. Neuberger & Berman Advisers Management Trust
Twentieth Century Neuberger & Berman
(Investors Research) Limited Maturity Bond Portfolio
TCI Growth Portfolio Balanced Portfolio
Variable Insurance Product Funds Variable Insurance Product Funds II
Fidelity Management Fidelity Management
Equity Income Asset Manager
Growth
Eligible Fixed Interest Option
------------------------------
Penn Mutual General Account
Page 18D
<PAGE>
To obtain any of the benefits under this policy, write to Penn Mutual at its
Home Office, its Service Office or to its nearest agent.
Please notify Penn Mutual promptly of any change in address.
Annual Election - Penn Mutual is a mutual life insurance company. It has no
stockholders. The Owner of this policy is a member of Penn Mutual while this
policy is in force during the life of the Insured and before surrender of this
policy. Members have the right to vote in person or by proxy at the annual
election of Trustees held at the Home Office, Independence Square, Philadelphia,
Pennsylvania, on the first Tuesday of March. If more information is desired, it
may be obtained from the Secretary.
Flexible Premium Adjustable
Variable Life Insurance Policy
o Death Benefit payable at death
prior to Maturity Date
o Adjustable Death Benefit
o Maturity Benefit payable on
Maturity Date
o Variable Policy Value
o Flexible premiums payable until
Maturity Date
o Participating
o Supplemental benefits, if any,
listed on Page 3
The Penn Mutual Life Insurance Company, Independence Square, Philadelphia,
Pennsylvania 19172
VU-94(S)
<PAGE>
Exhibit A5K
Rider - Flexible Period -Supplemental
A001455R
Term Insurance Agreement
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
supplemental agreement, to provide the Term Insurance Benefit. The Company also
agrees to provide all of the other benefits which are stated in this agreement.
This agreement is a part of the policy to which it is attached. It is subject to
all of the provisions of the policy unless stated otherwise in this agreement.
Term Insurance Benefit -- The Company will pay the Term Insurance Benefit upon
receipt of due proof of the death of the Insured while this agreement is in
force. The amount of the Term Insurance Benefit is the Specified Amount for
Flexible Period Term Insurance as shown in the Additional Policy Specifications.
The amount of the Term Insurance Benefit may not at any time exceed four times
the Specified Amount for this policy.
The Term Insurance Benefit payable on the death of the Insured will be paid to
the beneficiary in one sum or, if elected, under an income payment option. If
part or all of the benefit is paid in one sum, the Company will pay interest on
this sum from the date of death to the date of payment. The interest rate will
be determined each year by the Company, but will not be less than a rate of 3%
per year compounded annually, or such higher rate as may be required by state
law.
Suicide Exclusion--If the Insured dies by suicide while sane or insane within
two years from the effective date of this agreement, the Term Insurance Benefit
will be limited to the cost of such benefit.
If the Insured dies by suicide, while sane or insane, within two years from the
effective date of any increase in the Specified Amount for Term Insurance, the
Term Insurance Benefit with respect to that increase will be limited to the cost
for that increase.
Change in Specified Amount--The Specified Amount for Term Insurance may be
changed subject to the following conditions:
(a) Any change in the Specified Amount for Term Insurance must be at least
$5,000.
(b) Any increase in the Specified Amount for Term Insurance must be applied for
on a written application provided by the Company. Evidence of insurability
satisfactory to the Company must be provided.
(c) The Specified Amount for Term Insurance may not be increased to an amount
which is greater than four times the Specified Amount for this policy.
<PAGE>
(d) The Specified Amount for Flexible Period Term Insurance may not be decreased
to less than $10,000
(e) Any decrease in the Specified Amount for Term Insurance will successively
decrease, in reverse order, the most recent increases, if any.
Monthly Deduction--While this agreement is in force, the Monthly Deduction under
this policy will include the Monthly Deduction for this agreement. The Monthly
Deduction for this agreement is the sum of
(a) the Cost of Insurance for the policy month for the Term Insurance Benefit
under this agreement;
(b) the Cost of Insurance for the policy month for Waiver of Monthly Deduction
for this agreement if a Waiver of Monthly Deduction Agreement is attached to
this policy;
(c) a monthly charge of $0.10 per $1,000 of Specified Amount for Term Insurance
for the first 12 months following the effective date of this agreement; and
(d) a monthly charge of $0.10 for each $1,000 of increase in the Specified
Amount for Term Insurance for the first 12 months following the effective
date of such increase.
Cost of Insurance--The Cost of Insurance for the Term Insurance under this
agreement is determined on a monthly basis. It is calculated as (a) multiplied
by (b) where:
(a) is the Cost of Insurance Rate divided by $1,000 for Term Insurance
applicable to this policy, and
(b) is the Specified Amount for Term Insurance under this agreement.
The Cost of Insurance Rate for the Term Insurance is based on the attained age,
sex and rate class of the Insured. Cost of Insurance Rates will be determined by
the Company based on expectations as to future mortality, investment, expense
and persistency experience. However, these rates will not exceed those shown for
this agreement in the Additional Policy Specifications.
Flexible Period- Supplemental
A001456R
Term Insurance Agreement (continued)
Cost of Insurance Rates will not be adjusted by the Company as a means of
recovering prior losses nor as a means of distributing prior profits.
Computation of Values--All values and benefits in this agreement are equal to or
greater than those required by the law of the jurisdiction in which this policy
is delivered.
Incontestability--This agreement will be incontestable after it has been in
force during the life of the Insured for two years from the effective date.
Any increase in the Specified Amount for Term Insurance 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 from its effective date.
This agreement will be incontestable with respect to statements made in an
application for reinstatement after it has been in force during the life of the
Insured for two years from the effective date of the reinstatement.
Attained Age -- The attained age of the Insured under this agreement is the age
nearest birthday of the Insured on the most recent policy anniversary.
Misstatement of Age or Sex -- If the age or sex of the Insured has been
misstated, the Term Insurance benefit will be the amount which would have been
provided by the most recent Cost of Insurance charge at the correct age and sex.
Right to Convert Term Insurance--The term insurance under this agreement may be
converted to a life or endowment policy without evidence of insurability at any
time while such insurance is in force before the earlier of (i) the policy
anniversary nearest to the Insured's 70th birthday, and (ii) the policy
anniversary which is three years prior to the Termination Date for this
agreement shown in the Additional Policy Specifications. The Owner must make a
written request for the conversion. On or before the date of conversion, the
Owner must pay the first premium for the new policy.
<PAGE>
The new policy will be:
(a) on a plan which insures only the life of the Insured;
(b) in the same rate class and subject to the same limitations of risk as the
term insurance under this agreement;
(c) issued at the age of the Insured on the birthday which is nearest to the
date of the conversion;
(d) on the policy form and at the premium rates in use by the Company on the
date of the conversion; and
(e) subject to the Company's rules as to minimum amount, plan of insurance and
age at issue which are in effect on the date of the conversion.
The inclusion of any supplemental agreements in the new policy will be subject
to the consent of the Company and must comply with the rules of the Company.
Termination of Agreement--This agreement will terminate upon :
(a) the Termination Date for this agreement shown in the Additional Policy
Specifications;
(b) lapse of this policy;
(c) surrender of this policy;
(d) conversion of the term insurance under this agreement; or
(e) the Monthly Anniversary which coincides with or next follows (i) receipt by
the Company of a written request by the Owner to terminate this agreement,
and (ii) return of this policy for appropriate endorsement.
Effective Date--The effective date of this agreement is the same as the Date of
Issue of this policy unless another effective date is shown below.
/s/ Robert E. Chappell
----------------------------
Robert E. Chappell
Chairman and
Chief Executive Officer
<PAGE>
THE PENN MUTUAL LIFE INSURANCE COMPANY
Description of Issuance, Transfer and Redemption Procedures
Pursuant to Rule 6e-3(T)(b)(12)(iii)
Under the Investment Company Act of 1940
For Flexible Premium Adjustable
Life Insurance Policies
This memorandum describes certain administrative procedures that are followed by
Penn Mutual in connection with the issuance of flexible premium adjustable
variable universal life insurance policies ("Policies") covering lives of two
insureds ("Insureds" or "Joint Insureds"), the transfer of assets held
thereunder, the redemption by policy owners ("Owners") of their interests in the
Policies, and the payment of a death benefit upon death of the named insured
(the "Insured"). Additional information regarding the issuance of Policies,
increases or additions of insurance benefits, transfers and redemptions, and
premium rate structure and premium processing, is set forth in the Prospectuses
included in the Registration Statement.
I. Procedures Relating to Purchase and Issuance of the Policies and
Acceptance of Premiums
A. Applications, Initial Premiums, and Issuance.
1. Offer of the Policies; Cost of Insurance. The Policies will
be offered and sold pursuant to established premium schedules
and underwriting procedures in accordance with state insurance
laws. The premium rates for the Policies will not be the same
for all Owners selecting the same specified amount. Insurance
is based on the principle of pooling and distribution of
mortality risks, which assumes that the Owner of each Policy
pays a premium commensurate with the Insured's mortality risk
as actuarially determined, utilizing factors such as age, sex,
health and occupation. Although there will be no uniform cost
of insurance for all Insureds, there will be a uniform cost of
insurance for all Insureds of the same risk classification. A
uniform cost of insurance for all Insureds would discriminate
unfairly in favor of those Insureds representing greater risk.
2. Applications. Persons wishing to purchase a Policy must
complete an application and submit it to a Penn Mutual
authorized agent. The applicant must specify each Joint
Insured, and provide certain required information about each
Joint Insured. The applicant must specify a plan for paying
level premiums of a specified amount at specified intervals,
e.g., monthly, semi-annually or annually, until the maturity
date ("planned premiums").
<PAGE>
3. Minimum Initial Premium. An applicant also must pay a
minimum initial premium, which can be submitted with the
application or at a later date. (Policy coverage does not
become effective until the initial premium in good order is
received at the designated Penn Mutual office ("Office").) The
minimum initial premium depends on a number of factors, such
as each Joint Insured's age, sex and rate class, the desired
specified amount, any supplemental benefits.
The initial premium must be at least equal to two no-lapse
premiums for a Policy covering the proposed Joint Insureds for
the desired specified amount. The no-lapse premium is an
amount used to measure premiums paid during the first three
policy years for purposes of the three-year guarantee. It is
based in part on the age, sex and rate class of each Joint
Insured, the requested specified amount and any supplemental
benefits.
4. Receipt of Application and Underwriting. Upon receipt of a
completed application from an applicant, Penn Mutual will
follow certain insurance underwriting (risk evaluation)
procedures designed to determine whether the proposed Insured
is insurable. This process may involve such verification
procedures as medical examinations and may require that
further information be provided about a proposed Insured
before a determination can be made. The underwriting process
determines the rate class to which the Insured is assigned.
A Policy generally is not issued until the initial
underwriting procedure has been completed. The issue date, the
date the Policy is issued, occurs when the application has
been accepted, the minimum initial premium has been received,
and the computerized issue system has generated a printed
Policy. The issue date is used to measure contestability
periods.
Penn Mutual reserves the right to reject an application for
any reason. If an application is rejected, any premium
received will be returned, without interest.
5. Acceptance of Application and Policy Date. If an
application is accepted, insurance coverage is effective as of
the policy date. The policy date is the first date as of which
Penn Mutual has received an application and initial premium in
good order. If the initial premium is received with the
application, the policy date will be the date of receipt at
the Office. If the initial premium is received at the Office
on a date after the application is received, the policy date
will be the date on which the initial premium is received. If
the initial premium is received at the Office and invested
before underwriting has been completed, the policy date will
be earlier than the issue date.
- 2 -
<PAGE>
The policy date marks the date on which Policy benefits begin
to vary in accordance with the investment performance of
subaccounts of the Penn Mutual Variable Life Account I (the
"Separate Account"). It is also the date as of which the
attained age of the proposed Insured is determined. It
represents the first day of the policy year and therefore
determines Policy anniversaries and also monthly
anniversaries.
Additional premiums may be paid in any amount and at any time,
as set forth in the prospectuses for the Policies.
II. Allocations and Transfers Among Variable and Fixed Accounts
A. Allocations Among the Separate Account Subaccounts. Premiums
and policy value are allocated to the subaccounts of the
Separate Account in accordance with the following procedures.
1. Initial Premiums. The Owner must specify in the application
the percentage of a net premium to be allocated to each
subaccount. The net premium allocation percentages specified
in the application applies to the initial premium and to
subsequent premiums until the Owner changes the allocation
percentages. An Owner can change the allocation percentages at
any time by sending written notice to the Office, provided
that the sum of the allocations specified in the application
must equal 100% and each allocation percentage must be a whole
number. The change will apply to all premiums received with or
after the notice.
In the case of an initial premium received at the Office
before the Policy is issued, the entire premium is invested in
the money market series of the Penn Series Funds, Inc. through
the money market subaccount. As of the date on which the
Policy is issued, a premium charge is deducted from the amount
attributable to the invested initial premium, and the balance
is credited to the Policy as the initial policy value. In the
case of an initial premium received at the Office at the time
that a Policy is issued, the premium, minus a premium charge,
is credited to the Policy as the initial policy value and is
allocated to the money market subaccount.
Policy value credited to the money market subaccount on the
issue date remains in the money market subaccount until the
free look period expires. When that period expires, the policy
value in the money market subaccount is then allocated to the
subaccounts in accordance with the Owner's then-effective net
premium percentage allocation. For these purposes, the free
look period is assumed to begin three days after the Policy is
issued. The length of the free look period depends on the
applicable law of the state in which the Owner resides.
- 3 -
<PAGE>
2. Additional Premiums. In the case of additional premiums not
requiring underwriting, a premium charge is deducted from the
premium (net premium) before allocation to the subaccounts.
The additional premium is credited to the Policy and the
resulting net premium is allocated to the subaccounts in
accordance with the Owner's then-effective net premium
percentage allocation on the valuation date that the premium
is received at the Office.
In the case of an additional premium requiring underwriting,
the entire additional premium is invested in the money market
series of the Penn Series Funds, Inc., through the money
market subaccount, until underwriting has been completed and
the premium has been accepted. As of the date on which
underwriting is completed and the premium is accepted, the
policy value in the money market subaccount attributable to
the resulting net premium is credited to the Policy and
allocated to the subaccounts. (As of that date, a premium
charge is deducted from the amount attributable to the
invested additional premium, and the balance is allocated to
the subaccounts in accordance with the Owner's then-effective
net premium percentage allocation.)
Any additional premium received before the free look period
ends is also allocated to the money market subaccount until
the free look period ends.
B. Dollar Cost Averaging Program.
Owners may implement a dollar cost averaging program for the
allocation of policy value among the subaccounts and the fixed
account. A dollar cost averaging program allows Owners to
authorize in advance monthly transfers of set dollar amounts
from the money market subaccount to one or more other
Accounts.
1. Selecting Dollar Cost Averaging. Owners may select a dollar
cost averaging program when applying for the Policy or at a
later date by contacting the Home Office. Owners specify the
accounts to which amounts will be transferred and the dollar
amounts 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.
2. Operation of the Program. Transfers will be made on the
15th of each month. Transfers will continue until the earliest
of the following:
o Penn Mutual receives a written or telephone request
to stop making transfers.
o There no longer is any policy value in the money
market subaccount.
- 4 -
<PAGE>
o The Policy is in a grace period.
o Penn Mutual receives notice that the Insured has
died.
C. Asset Rebalancing.
Owners may implement an asset rebalancing program for their
policy value. An asset rebalancing program automatically
reallocates policy value among the accounts each quarter to
return the allocation to the original allocation percentages
the Owner specifies.
1. Selecting Asset Rebalancing. Owners may select an asset
rebalancing program when applying for the Policy or at a later
date by contacting the Home Office. Owners specify the
accounts to be included in the program, and the percentage of
policy value to be allocated to each account. Each allocation
percentage must be a whole number. Owners may elect to have
their 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. 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.
2. Operation of the Program. On the last day of each calendar
quarter (or if not a valuation date, the first valuation date
of the following calendar quarter), Penn Mutual will transfer
policy value among the accounts to the extent necessary to
return the allocation to the Owner's specifications. Asset
rebalancing will continue until Penn Mutual receives a written
or telephone request at the Home Office to terminate.
Transfers made under an asset rebalancing program are not
counted for purposes of the transfer rules described above.
III. "Redemption" Procedures: Surrenders, Death Benefits, Loans, Maturity
Proceeds, Policy Conversions and Exchanges
A. Surrenders.
The Owner may surrender his or her Policy at any time for its
net cash surrender value by submitting a written request in
proper form to the Office. Penn Mutual may require return of
the Policy. The net cash surrender value may be taken in one
sum or it may be applied to a payment option. The net cash
surrender value on a valuation date is the net policy value
less the surrender charge that would be
- 5 -
<PAGE>
imposed if the Policy were surrendered on that date. A request
for a full surrender will be processed and effected as of the
date the written request and all required documents are
received at the Office, and ordinarily will be paid within
seven days.
B. Partial Surrenders.
An Owner may make partial surrenders under his or her Policy,
as described in the Prospectus for the Policy.
C. Lapse.
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. A
grace period also may begin if indebtedness becomes excessive.
If a Policy goes into default, the Owner will be allowed a
61-day grace period to pay a premium sufficient to cover the
monthly deduction. The Company will send notice of the amount
required to be paid during the grace period ("grace period
premium") to the Owner's last known address and to any
assignee of record. The grace period will begin when the
notice is sent. The 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 last surviving
lnsured's death. If the grace period premium has not been paid
before the grace period ends, the Policy will lapse. It will
have no value and no benefits will be payable.
D. Death Benefits.
Provided the Policy is in force at the time of death of the
Insured, Penn Mutual will pay the death benefit, less the
amount of any outstanding loan, to the beneficiary upon
receipt at the Office of satisfactory proof of death for the
Insured. Penn Mutual may require return of the Policy. The
death benefit will be paid in a lump sum or, if elected, under
a payment option, in either case, generally within seven days
after receipt of satisfactory proof of death. 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 death of the Insured to
the date of payment. Penn Mutual determines the interest rate,
but it will not be less than a rate of 3% per year compounded
annually. Payment of the death benefit is subject to the
provisions of the Policy regarding suicide and
incontestability.
- 6 -
<PAGE>
E. Loans.
An Owner may borrow up to the loan value of his Policy at any
time by submitting a written request to the Office. The loan
value is 90% of the cash surrender value. The minimum amount
that can be borrowed is $250. Outstanding Policy loans reduce
the amount of the loan value available for new loans. Policy
loans will be processed as of the date a written request is
received and loan proceeds generally will be sent to the Owner
within seven days.
F. Payment on Maturity.
If the Policy is still in force on the maturity date, the
maturity benefit will be paid to the Owner. The maturity
benefit is equal to the net policy value on the maturity date.
- 7 -
<PAGE>
[The Penn Mutual Life Insurance Company]
April 25, 1995
Board of Trustees
The Penn Mutual Life Insurance Company
Independence Square
Philadelphia, PA 19172
Re: Last Survivor Flexible Premium Adjustable Variable Life
Insurance Policies
To the Board of Trustees:
This opinion is furnished in connection with the filing of a Registration
Statement on Form S-6 covering flexible premium adjustable variable life
insurance policies proposed to be issued by The Penn Mutual Life Insurance
Company (SEC File No. 33-54662).
In my opinion, the last survivor flexible premium adjustable variable life
insurance policies, when issued as set forth in the Registration Statement, will
be legal and binding obligations of Penn Mutual in accordance with their terms.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to my name under the heading "Legal Matters" in
the Prospectus.
Sincerely,
/s/ C. RONALD RUBLEY
C. Ronald Rubley
Associate General Counsel
CRR:ed
<PAGE>
[PENN MUTUAL LETTERHEAD]
April 23, 1999
Board of Trustees
The Penn Mutual Life Insurance Company
Independence Square
Philadelphia, PA 19172
Re: Last Survivor Flexible Premium Adjustable Variable Life Insurance Policy
To the Board of Trustees:
This opinion is furnished in connection with the filing of Post-Effective
Amendment No. 8 to Penn Mutual's Registration Statement on Form S-6 (the
"Registration Statement") covering last survivor flexible premium adjustable
variable life insurance policies ("Policies" or "Policy") to be issued by The
Penn Mutual Life Insurance Company (the "Company") (S.E.C. file No. 33-54662).
The Prospectus included in the Registration Statement describes the Policy. The
Policy forms were reviewed under my direction, and I am familiar with the
Registration Statement and Exhibits thereto. In my opinion:
1. The illustrations of Policy Values, Net Cash Surrender Values, Death Benefits
and Accumulated Premiums included in the Prospectus and based on the assumptions
stated in the illustrations, are consistent with the provisions of the Policy.
The rate structure of the Policy has not been designed so as to make the
relationship between premiums and benefits, as shown in the illustrations,
appear more favorable to a prospective purchaser of a Policy for the ages and
sexes shown, than to prospective purchasers of a Policy for other ages and sex.
2. The tables of minimum initial premiums, administrative surrender charges,
surrender factors and net single premium factors included in the appendices to
the Prospectus, are consistent with the provisions of the Policy.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of my name relating to actuarial matters under the
heading "Experts" in the Prospectus.
Very truly yours,
/s/ Edward S. Attarian
-----------------------------------
Edward S. Attarian, F.S.A., M.A.A.A.
Actuary
<PAGE>
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
in the Prospectus, and to the use of our report dated January 29, 1999
accompanying the financial statements of The Penn Mutual Life Insurance Company
for the year ended December 31, 1998, and to the use of our report dated April
2, 1999 accompanying the financial statements of Penn Mutual Variable Life
Account I for the year ended December 31, 1998 in the Post-Effective Amendment
No. 8 to Registration Statement No. 33-54662 on Form S-6 and the related
Prospectus of Penn Mutual Variable Life Account I.
/s/ Ernst & Young LLP
- --------------------------
Philadelphia, Pennsylvania
April 26, 1999
<PAGE>
[Morgan, Lewis & Bockius LLP Letterhead]
April 28, 1999
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172
Re: Penn Mutual Variable Life Account I (the "Separate Account")
SEC Registration Statement on Form S-6 (File No. 33-54662)
------------------------------------------------------------
Dear Ladies and Gentleman:
We hereby consent to the reference of our name under the caption "Legal
Matters" in the Prospectus filed as part of Post-Effective Amendment No. 8 to
the above referred Registration Statement on Form S-6 under the Securities Act
of 1933 on behalf of the Separate Account. 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 99.5C
The Penn Mutual Life Insurance Company
Power of Attorney
Julia Chang Bloch, whose signature appears below, does hereby constitute and
appoint Robert E. Chappell and Daniel J. Toran, and each of them severally, her
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 30, 1998 /s/ Julia Chang Bloch
-----------------------
Julia Chang Bloch
