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As filed with the Securities and Exchange Commission on April 30, 1999
Registration No. 33-54662
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
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POST-EFFECTIVE AMENDMENT NO. 9
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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)
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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)
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Copy to:
Richard W. Grant, Esq.
C. Ronald Rubley
Morgan, Lewis & Bockius LLP
Philadelphia, PA 19103-6993
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It is proposed that this filing will become effective:
|_| Immediately upon filing pursuant to paragraph (b) of Rule 485.
|_| On (date) pursuant to paragraph (b) of Rule 485.
|X| 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 III
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
- ----------------------------------------------------------------------------------------------------------------
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.
- ----------------------------------------------------------------------------------------------------------------
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.
July 1, 1999
</TABLE>
1
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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 start on page 21.
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 38.
o The financial statements for Penn Mutual and Penn Mutual Variable Life
Account I follow the Additional Information section. They start on page 53.
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
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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?...................................5
How Will the Value of the Policy Change Over Time?.............................7
What Are the Fees and Charges Under the Policy?................................8
Are There Other Charges That Penn Mutual Could Deduct in the Future?..........11
How Can I Change My Policy's Investment Allocations?..........................11
What Is a Policy Loan?........................................................12
How Can I Withdraw Money from My Policy?......................................13
What Is the Timing of Transactions Under the Policy?..........................13
How Much Life Insurance Does the Policy Provide?..............................14
Can I Change Insurance Coverage Under My Policy?..............................16
What Are the Supplemental Benefit Riders That I Can Buy?......................17
Do I Have the Right to Cancel My Policy?......................................18
Can I Choose Different Payout Options Under My Policy? .......................18
How Is the Policy Treated for Federal Income Tax Purposes?....................19
How Do I Communicate With Penn Mutual?........................................19
How Does Penn Mutual Communicate With Me?.....................................20
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 a Policy is the policy anniversary nearest the
insured's 100th 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.
4
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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. If you have chosen to
qualify your Policy as life insurance under the Guideline Premium\Cash Value
Corridor Test of the Internal Revenue Code, federal tax law limits the amount of
premium payments you may make in relation to the amount of life insurance
provided under the Policy. We will not accept or retain a premium payment that
exceeds the maximum permitted under federal tax law.
If you make a premium payment that exceeds certain other limits imposed
under federal tax law, you could incur a penalty on the amount you take out of
the Policy. We will monitor the Policy and will attempt to notify you on a
timely basis if you are about to exceed this limit is in jeopardy of becoming a
"modified endowment contract" under the Code. See HOW MUCH LIFE INSURANCE DOES
THE POLICY PROVIDE? and HOW IS THE 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.
5
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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,
equal 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.
6
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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.
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. 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 3%. 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.
7
<PAGE>
For more information on policy values and the variable and fixed
investment options, see MORE INFORMATION ABOUT POLICY VALUES in the ADDITIONAL
INFORMATION section of this prospectus.
WHAT ARE THE FEES AND CHARGES UNDER THE POLICY?
Premium Charge
o Premium Charge - 7.5% (currently reduced to 5.75% 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 3.5% to cover
state premium taxes and the federal income tax burden that we expect will
result from the receipt of premiums 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
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, 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 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 charge is $8 - 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 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
8
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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. Our
current charge is 0.45%. 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 and (ii)
the maximum surrender charge premium (which is an amount calculated
separately for each Policy);
(b) = an administrative charge based on the initial amount of insurance
and the Insured's age at the issue date (ranging from $1.00 up to
attained 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.
9
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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 attained 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 attained age on the effective
date of the increase (ranging from $1.00 up to attained age 9 to $7.00
at attained 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
- --------------------------------------------------------------------------------
9th .60
- --------------------------------------------------------------------------------
10th .40
- --------------------------------------------------------------------------------
11th .20
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12th and later 0
- --------------------------------------------------------------------------------
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 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 years, but within 11
years of an increase in the specified amount of insurance, the surrender charge
consists solely of an administrative charge for administrative expenses
associated with the increase in 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.
10
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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.
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.
11
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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.
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 4.0% 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 is guaranteed to earn
interest at 3.0% during the first ten policy years and 3.75% thereafter. With
the interest we credit to the special loan account, the net cost of the policy
loan is 1% during the first ten policy years and 0.25% thereafter.
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.
12
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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.
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 may reduce your specific
amount of insurance.
If you have increased the initial specified amount, any reduction will
be applied to the most recent increase.
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
13
<PAGE>
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 THE 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 that
you can purchase is $50,000.
Death Benefit Options
When the insured dies, we will pay the beneficiary the death benefit
less the amount of any outstanding 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 percentages" depend on the life insurance qualification
test you chose on the application. If you chose the Guideline Premium Test/Cash
Value Corridor Test, the "applicable percentage" is 250% when the insured has
attained age 40 or less and decreases to
14
<PAGE>
100% when the insured attains age 100. For the Cash Value Accumulation Test, the
"applicable percentages" will vary by attained age and the insurance risk
characteristics. A table showing "sample applicable percentages" 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.
IRC Qualification
For a Policy to be treated as a life insurance contract under the
Internal Revenue Code, it must pass one of two tests -- a cash value
accumulation test or a guideline premium/cash value corridor test. At the time
of issuance of the Policy, you choose which test you want to be applied. It may
not thereafter be changed. If you do not chose the test to be applied to your
Policy, the Guideline Premium/Cash Value Corridor Test will be applied.
o Cash Value Accumulation Test - Under the terms of the Policy, the policy
value may not at any time exceed the net single premium cost (at any such
time) for the benefits promised under the Policy.
o Guideline Premium/Cash Value Corridor Test - The Policy must at all times
satisfy a guideline premium requirement and a cash value corridor
requirement. Under the guideline premium requirement, the sum of the
premiums paid under the policy may not at any time exceed the greater of
the guideline single premium or the sum of the guideline level premiums,
for the benefits promised under the Policy. Under the cash value corridor
requirement, the death benefit at any time must be equal to or greater than
the applicable percentage of policy value specified in the Internal Revenue
Code.
The Cash Value Accumulation Test does not limit the amount of premiums
that may be paid under the Policy. If you desire to pay premiums in excess of
those permitted under the Guideline Premium/Cash Value Corridor Test, you should
consider electing to have your Policy qualify under the Cash Value Accumulation
Test. However, any premium that would increase the net amount at risk is subject
to evidence of insurability satisfactory to us. Required increases in the
minimum death benefit due to growth in the policy value will generally be
greater under the Cash Value Accumulation Test than under the Guideline
Premium/Cash Value Corridor Test.
The Guideline Premium/Cash Value Corridor Test limits the amount of
premium that may be paid under the Policy. If you do not desire to pay premiums
in excess of those permitted
15
<PAGE>
Guideline Premium/Cash Value Corridor Test limitations, you should consider
electing to have your Policy qualify under the Guideline Premium/Cash Value
Corridor Test.
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 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.
16
<PAGE>
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.
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.
BUSINESS ACCOUNTING BENEFIT. For Policies sold in certain corporate
markets, the rider provides enhanced early year surrender values.
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.
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 EXTEND MATURITY DATE. Allows the owner to extend the
maturity date of the Policy, subject to conditions and limitations.
GUARANTEED OPTION TO INCREASE SPECIFIED AMOUNT. Allows the owner to
increase the specified amount without evidence of insurability.
RETURN OF PREMIUM SUPPLEMENTAL TERM INSURANCE. Provides term insurance
which will not be less than the amount of all premiums paid up to the most
recent policy month.
17
<PAGE>
It is only available on policies that provide an Option 1 death benefit.
There is no cash value for this benefit.
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 longer in
some states). 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.
In some states, you will receive a refund of any premiums you have
paid. In these states money held under your Policy will be allocated to the Penn
Series Money Market investment option during the "free look" period. At the end
of the period, the money will be transferred to the investment options you have
chosen.
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.
18
<PAGE>
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.
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 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
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<PAGE>
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.
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.
20
<PAGE>
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 0.45% 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 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 -1.29%%, 4.71% and
10.71%, respectively, at current rates, and and -1.74%, 4.26% and 10.26%,
respectively, at guaranteed 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.
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.
21
<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
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 388 0 75000 420 0 75000 452 0 75000
2 1,614 866 403 75000 958 496 75000 1055 592 75000
3 2,483 1331 868 75000 1515 1052 75000 1715 1252 75000
4 3,394 1783 1320 75000 2090 1628 75000 2438 1976 75000
5 4,351 2222 1759 75000 2686 2224 75000 3232 2770 75000
6 5,357 2648 2186 75000 3304 2841 75000 4105 3642 75000
7 6,412 3061 2599 75000 3942 3480 75000 5064 4602 75000
8 7,520 3458 3088 75000 4600 4230 75000 6115 5745 75000
9 8,683 3834 3556 75000 5273 4996 75000 7265 6987 75000
10 9,905 4190 4005 75000 5964 5779 75000 8524 8339 75000
15 16,993 5625 5625 75000 9660 9660 75000 16910 16910 75000
20 26,039 6369 6369 75000 13726 13726 75000 30459 30459 75000
25 37,585 6234 6234 75000 18140 18140 75000 53079 53079 75000
30 52,321 4591 4591 75000 22544 22544 75000 91010 91010 111032
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(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
MALE ISSUE AGE: 35 NON-SMOKER
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 806 343 75806 863 401 75863 921 459 75921
2 2,583 1696 1233 76696 1865 1403 76865 2042 1579 77042
3 3,972 2567 2104 77567 2906 2444 77906 3274 2812 78274
4 5,431 3418 2956 78418 3988 3526 78988 4631 4168 79631
5 6,962 4251 3789 79251 5113 4650 80113 6124 5661 81124
6 8,570 5065 4603 80065 6283 5820 81283 7768 7306 82768
7 10,259 5860 5398 80860 7499 7036 82499 9580 9117 84580
8 12,032 6632 6262 81632 8758 8388 83758 11571 11201 86571
9 13,893 7377 7099 82377 10060 9782 85060 13759 13481 88759
10 15,848 8095 7910 83095 11405 11220 86405 16162 15977 91162
15 27,189 11238 11238 86238 18797 18797 93797 32252 32252 107252
20 41,663 13508 13508 88508 27319 27319 102319 58106 58106 133106
25 60,136 14712 14712 89712 36989 36989 111989 99899 99899 174899
30 83,713 14231 14231 89231 47305 47305 122305 167280 167280 242280
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(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>
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
LIFE INSURANCE QUALIFICATION TEST - CASH VALUE ACCUMULATION
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 388 0 75000 420 0 75000 452 0 75000
2 1,614 866 403 75000 958 496 75000 1055 592 75000
3 2,483 1331 868 75000 1515 1052 75000 1715 1252 75000
4 3,394 1783 1320 75000 2090 1628 75000 2438 1976 75000
5 4,351 2222 1759 75000 2686 2224 75000 3232 2770 75000
6 5,357 2648 2186 75000 3304 2841 75000 4105 3642 75000
7 6,412 3061 2599 75000 3942 3480 75000 5064 4602 75000
8 7,520 3458 3088 75000 4600 4230 75000 6115 5745 75000
9 8,683 3834 3556 75000 5273 4996 75000 7265 6987 75000
10 9,905 4190 4005 75000 5964 5779 75000 8524 8339 75000
15 16,993 5625 5625 75000 9660 9660 75000 16910 16910 75000
20 26,039 6369 6369 75000 13726 13726 75000 30459 30459 75000
25 37,585 6234 6234 75000 18140 18140 75000 52449 52449 105661
30 52,321 4591 4591 75000 22544 22544 75000 86778 86778 152807
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
24
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
MALE ISSUE AGE: 35 NON-SMOKER
$1,200 ANNUAL PREMIUM
$75,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - CASH VALUE ACCUMULATION
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 806 343 75806 863 401 75863 921 459 75921
2 2,583 1696 1233 76696 1865 1403 76865 2042 1579 77042
3 3,972 2567 2104 77567 2906 2444 77906 3274 2812 78274
4 5,431 3418 2956 78418 3988 3526 78988 4631 4168 79631
5 6,962 4251 3789 79251 5113 4650 80113 6124 5661 81124
6 8,570 5065 4603 80065 6283 5820 81283 7768 7306 82768
7 10,259 5860 5398 80860 7499 7036 82499 9580 9117 84580
8 12,032 6632 6262 81632 8758 8388 83758 11571 11201 86571
9 13,893 7377 7099 82377 10060 9782 85060 13759 13481 88759
10 15,848 8095 7910 83095 11405 11220 86405 16162 15977 91162
15 27,189 11238 11238 86238 18797 18797 93797 32252 32252 107252
20 41,663 13508 13508 88508 27319 27319 102319 58104 58104 135450
25 60,136 14712 14712 89712 36989 36989 111989 99312 99312 200067
30 83,713 14231 14231 89231 47305 47305 122305 163625 163625 288127
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
25
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 802 0 125000 867 0 125000 932 0 125000
2 3,229 1737 750 125000 1923 936 125000 2118 1131 125000
3 4,965 2630 1643 125000 3000 2013 125000 3401 2415 125000
4 6,788 3486 2499 125000 4101 3114 125000 4796 3809 125000
5 8,703 4304 3317 125000 5227 4240 125000 6313 5327 125000
6 10,713 5080 4093 125000 6376 5389 125000 7965 6978 125000
7 12,824 5825 4838 125000 7558 6571 125000 9774 8787 125000
8 15,040 6537 5748 125000 8775 7986 125000 11758 10969 125000
9 17,367 7212 6620 125000 10023 9431 125000 13933 13341 125000
10 19,810 7850 7456 125000 11305 10910 125000 16321 15926 125000
15 33,986 10333 10333 125000 18121 18121 125000 32267 32267 125000
20 52,079 11324 11324 125000 25487 25487 125000 58241 58241 125000
25 75,170 10260 10260 125000 33183 33183 125000 102169 102169 125000
30 104,641 6314 6314 125000 40952 40952 125000 177345 177345 189759
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
26
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$2,100 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 2
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1357 370 126357 1456 469 126456 1555 568 126555
2 4,520 2838 1851 127838 3126 2140 128126 3428 2441 128428
3 6,951 4267 3280 129267 4842 3855 129842 5466 4479 130466
4 9,504 5647 4660 130647 6608 5621 131608 7691 6704 132691
5 12,184 6979 5992 131979 8425 7438 133425 10122 9135 135122
6 14,998 8259 7272 133259 10291 9304 135291 12776 11789 137776
7 17,953 9497 8510 134497 12219 11232 137219 15686 14700 140686
8 21,056 10692 9902 135692 14210 13420 139210 18880 18091 143880
9 24,314 11837 11245 136837 16260 15668 141260 22380 21788 147380
10 27,734 12936 12541 137936 18373 17978 143373 26221 25826 151221
15 47,581 17537 17537 142537 29769 29769 154769 51707 51707 176707
20 72,910 20321 20321 145321 42352 42352 167352 92065 92065 217065
25 105,238 20733 20733 145733 55655 55655 180655 156267 156267 281267
30 146,498 18092 18092 143092 68905 68905 193905 259037 259037 384037
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
27
<PAGE>
ILLUSTRATION OF POLICY VALUES
PENN MUTUAL LIFE INSURANCE COMPANY
FEMALE ISSUE AGE: 45 NON-SMOKER
$1,500 ANNUAL PREMIUM
$125,000 SPECIFIED AMOUNT
DEATH BENEFIT OPTION 1
LIFE INSURANCE QUALIFICATION TEST - CASH VALUE ACCUMULATION
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 802 0 125000 867 0 125000 932 0 125000
2 3,229 1737 750 125000 1923 936 125000 2118 1131 125000
3 4,965 2630 1643 125000 3000 2013 125000 3401 2415 125000
4 6,788 3486 2499 125000 4101 3114 125000 4796 3809 125000
5 8,703 4304 3317 125000 5227 4240 125000 6313 5327 125000
6 10,713 5080 4093 125000 6376 5389 125000 7965 6978 125000
7 12,824 5825 4838 125000 7558 6571 125000 9774 8787 125000
8 15,040 6537 5748 125000 8775 7986 125000 11758 10969 125000
9 17,367 7212 6620 125000 10023 9431 125000 13933 13341 125000
10 19,810 7850 7456 125000 11305 10910 125000 16321 15926 125000
15 33,986 10333 10333 125000 18121 18121 125000 32267 32267 125000
20 52,079 11324 11324 125000 25487 25487 125000 58241 58241 125000
25 75,170 10260 10260 125000 33183 33183 125000 100869 100869 172721
30 104,641 6314 6314 125000 40952 40952 125000 168319 168319 254433
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of each policy year.
Values would be different if the premiums are paid with a different
frequency or in different amounts.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
28
<PAGE>
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
LIFE INSURANCE QUALIFICATION TEST - CASH VALUE ACCUMULATION
USING CURRENT COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1357 370 126357 1456 469 126456 1555 568 126555
2 4,520 2838 1851 127838 3126 2140 128126 3428 2441 128428
3 6,951 4267 3280 129267 4842 3855 129842 5466 4479 130466
4 9,504 5647 4660 130647 6608 5621 131608 7691 6704 132691
5 12,184 6979 5992 131979 8425 7438 133425 10122 9135 135122
6 14,998 8259 7272 133259 10291 9304 135291 12776 11789 137776
7 17,953 9497 8510 134497 12219 11232 137219 15686 14700 140686
8 21,056 10692 9902 135692 14210 13420 139210 18880 18091 143880
9 24,314 11837 11245 136837 16260 15668 141260 22380 21788 147380
10 27,734 12936 12541 137936 18373 17978 143373 26221 25826 151221
15 47,581 17537 17537 142537 29769 29769 154769 51707 51707 176707
20 72,910 20321 20321 145321 42352 42352 167352 92065 92065 217065
25 105,238 20733 20733 145733 55655 55655 180655 156267 156267 281267
30 146,498 18092 18092 143092 68905 68905 193905 258988 258988 391490
</TABLE>
(1) Assumes that no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a monthly
administrative charge of $8.00 in all years and a mortality and expense
risk charge of 0.45% of assets in all years.
(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.
29
<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
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 361 0 75000 392 0 75000 424 0 75000
2 1,614 800 338 75000 888 426 75000 981 518 75000
3 2,483 1224 762 75000 1398 935 75000 1587 1125 75000
4 3,394 1633 1170 75000 1922 1459 75000 2248 1785 75000
5 4,351 2025 1563 75000 2458 1995 75000 2968 2505 75000
6 5,357 2401 1938 75000 3008 2545 75000 3751 3289 75000
7 6,412 2758 2295 75000 3569 3106 75000 4604 4141 75000
8 7,520 3097 2727 75000 4142 3772 75000 5533 5163 75000
9 8,683 3416 3139 75000 4727 4449 75000 6546 6268 75000
10 9,905 3716 3531 75000 5323 5138 75000 7650 7465 75000
15 16,993 4867 4867 75000 8434 8434 75000 14880 14880 75000
20 26,039 5261 5261 75000 11618 11618 75000 26191 26191 75000
25 37,585 4400 4400 75000 14404 14404 75000 44236 44236 75000
30 52,321 1442 1442 75000 15978 15978 75000 74122 74122 90429
</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.
30
<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
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 769 307 75769 825 363 75825 882 419 75882
2 2,583 1609 1146 76609 1772 1309 76772 1942 1480 76942
3 3,972 2425 1962 77425 2750 2288 77750 3103 2641 78103
4 5,431 3218 2756 78218 3761 3299 78761 4374 3912 79374
5 6,962 3988 3525 78988 4805 4342 79805 5764 5302 80764
6 8,570 4732 4270 79732 5881 5419 80881 7285 6822 82285
7 10,259 5451 4988 80451 6989 6527 81989 8947 8485 83947
8 12,032 6143 5773 81143 8131 7761 83131 10766 10396 85766
9 13,893 6808 6531 81808 9306 9028 84306 12755 12478 87755
10 15,848 7446 7261 82446 10514 10329 85514 14932 14747 89932
15 27,189 10170 10170 85170 17037 17037 92037 29284 29284 104284
20 41,663 11937 11937 86937 24237 24237 99237 51717 51717 126717
25 60,136 12249 12249 87249 31604 31604 106604 86552 86552 161552
30 83,713 10353 10353 85353 38177 38177 113177 140460 140460 215460
</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.
31
<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
LIFE INSURANCE QUALIFICATION TEST - CASH VALUE ACCUMULATION
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 788 361 0 75000 392 0 75000 424 0 75000
2 1,614 800 338 75000 888 426 75000 981 518 75000
3 2,483 1224 762 75000 1398 935 75000 1587 1125 75000
4 3,394 1633 1170 75000 1922 1459 75000 2248 1785 75000
5 4,351 2025 1563 75000 2458 1995 75000 2968 2505 75000
6 5,357 2401 1938 75000 3008 2545 75000 3751 3289 75000
7 6,412 2758 2295 75000 3569 3106 75000 4604 4141 75000
8 7,520 3097 2727 75000 4142 3772 75000 5533 5163 75000
9 8,683 3416 3139 75000 4727 4449 75000 6546 6268 75000
10 9,905 3716 3531 75000 5323 5138 75000 7650 7465 75000
15 16,993 4867 4867 75000 8434 8434 75000 14880 14880 75000
20 26,039 5261 5261 75000 11618 11618 75000 26191 26191 75000
25 37,585 4400 4400 75000 14404 14404 75000 44067 44067 88775
30 52,321 1442 1442 75000 15978 15978 75000 71049 71049 125110
</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.
32
<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
LIFE INSURANCE QUALIFICATION TEST - CASH VALUE ACCUMULATION
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,260 769 307 75769 825 363 75825 882 419 75882
2 2,583 1609 1146 76609 1772 1309 76772 1942 1480 76942
3 3,972 2425 1962 77425 2750 2288 77750 3103 2641 78103
4 5,431 3218 2756 78218 3761 3299 78761 4374 3912 79374
5 6,962 3988 3525 78988 4805 4342 79805 5764 5302 80764
6 8,570 4732 4270 79732 5881 5419 80881 7285 6822 82285
7 10,259 5451 4988 80451 6989 6527 81989 8947 8485 83947
8 12,032 6143 5773 81143 8131 7761 83131 10766 10396 85766
9 13,893 6808 6531 81808 9306 9028 84306 12755 12478 87755
10 15,848 7446 7261 82446 10514 10329 85514 14932 14747 89932
15 27,189 10170 10170 85170 17037 17037 92037 29284 29284 104284
20 41,663 11937 11937 86937 24237 24237 99237 51717 51717 126717
25 60,136 12249 12249 87249 31604 31604 106604 86364 86364 173983
30 83,713 10353 10353 85353 38177 38177 113177 138274 138274 243485
</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.
33
<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
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 742 0 125000 805 0 125000 868 0 125000
2 3,229 1597 610 125000 1775 788 125000 1961 974 125000
3 4,965 2414 1427 125000 2762 1775 125000 3141 2154 125000
4 6,788 3190 2203 125000 3765 2778 125000 4416 3429 125000
5 8,703 3925 2938 125000 4784 3797 125000 5796 4809 125000
6 10,713 4617 3630 125000 5815 4828 125000 7288 6301 125000
7 12,824 5262 4275 125000 6857 5870 125000 8901 7914 125000
8 15,040 5858 5068 125000 7907 7117 125000 10645 9856 125000
9 17,367 6398 5806 125000 8958 8365 125000 12530 11937 125000
10 19,810 6883 6488 125000 10010 9615 125000 14569 14174 125000
15 33,986 8448 8448 125000 15261 15261 125000 27768 27768 125000
20 52,079 8162 8162 125000 20102 20102 125000 48313 48313 125000
25 75,170 4260 4260 125000 22734 22734 125000 81030 81030 125000
30 104,641 0 0 0 20337 20337 125000 137155 137155 146756
</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.
34
<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
LIFE INSURANCE QUALIFICATION TEST - GUIDELINE PREMIUM
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1284 297 126284 1380 393 126380 1476 490 126476
2 4,520 2669 1682 127669 2947 1960 127947 3236 2249 128236
3 6,951 4003 3016 129003 4552 3565 129552 5148 4161 130148
4 9,504 5284 4298 130284 6195 5208 131195 7224 6237 132224
5 12,184 6512 5526 131512 7876 6889 132876 9480 8493 134480
6 14,998 7683 6696 132683 9592 8605 134592 11929 10942 136929
7 17,953 8795 7809 133795 11341 10355 136341 14589 13602 139589
8 21,056 9845 9056 134845 13121 12331 138121 17476 16686 142476
9 24,314 10826 10234 135826 14923 14331 139923 20605 20013 145605
10 27,734 11737 11343 136737 16749 16355 141749 24000 23605 149000
15 47,581 15240 15240 140240 26194 26194 151194 45944 45944 170944
20 72,910 16567 16567 141567 35678 35678 160678 79250 79250 204250
25 105,238 14029 14029 139029 43040 43040 168040 128562 128562 253562
30 146,498 5618 5618 130618 45154 45154 170154 201004 201004 326004
</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.
35
<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
LIFE INSURANCE QUALIFICATION TEST - CASH VALUE ACCUMULATION
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 742 0 125000 805 0 125000 868 0 125000
2 3,229 1597 610 125000 1775 788 125000 1961 974 125000
3 4,965 2414 1427 125000 2762 1775 125000 3141 2154 125000
4 6,788 3190 2203 125000 3765 2778 125000 4416 3429 125000
5 8,703 3925 2938 125000 4784 3797 125000 5796 4809 125000
6 10,713 4617 3630 125000 5815 4828 125000 7288 6301 125000
7 12,824 5262 4275 125000 6857 5870 125000 8901 7914 125000
8 15,040 5858 5068 125000 7907 7117 125000 10645 9856 125000
9 17,367 6398 5806 125000 8958 8365 125000 12530 11937 125000
10 19,810 6883 6488 125000 10010 9615 125000 14569 14174 125000
15 33,986 8448 8448 125000 15261 15261 125000 27768 27768 125000
20 52,079 8162 8162 125000 20102 20102 125000 48313 48313 125000
25 75,170 4260 4260 125000 22734 22734 125000 80870 80870 138475
30 104,641 0 0 0 20337 20337 125000 130324 130324 196999
</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.
36
<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
LIFE INSURANCE QUALIFICATION TEST - CASH VALUE ACCUMULATION
USING GUARANTEED COST OF INSURANCE RATES
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED ----------------------- ----------------------- -----------------------
END OF AT NET CASH NET CASH NET CASH
POLICY 5% INTEREST POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
---- -------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,205 1284 297 126284 1380 393 126380 1476 490 126476
2 4,520 2669 1682 127669 2947 1960 127947 3236 2249 128236
3 6,951 4003 3016 129003 4552 3565 129552 5148 4161 130148
4 9,504 5284 4298 130284 6195 5208 131195 7224 6237 132224
5 12,184 6512 5526 131512 7876 6889 132876 9480 8493 134480
6 14,998 7683 6696 132683 9592 8605 134592 11929 10942 136929
7 17,953 8795 7809 133795 11341 10355 136341 14589 13602 139589
8 21,056 9845 9056 134845 13121 12331 138121 17476 16686 142476
9 24,314 10826 10234 135826 14923 14331 139923 20605 20013 145605
10 27,734 11737 11343 136737 16749 16355 141749 24000 23605 149000
15 47,581 15240 15240 140240 26194 26194 151194 45944 45944 170944
20 72,910 16567 16567 141567 35678 35678 160678 79250 79250 204250
25 105,238 14029 14029 139029 43040 43040 168040 128562 128562 253562
30 146,498 5618 5618 130618 45154 45154 170154 201004 201004 326004
</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.
37
<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......................................39
Year 2000...................................................................39
Penn Mutual Variable Life Account I.........................................39
The Funds...................................................................41
More Information About Policy Values........................................44
Federal Income Tax Considerations...........................................45
Sale of Policies............................................................49
Penn Mutual Trustee and Officers............................................49
State Regulation............................................................51
Additional Information......................................................52
Experts.....................................................................52
Litigation..................................................................52
Independent Auditors........................................................52
Legal Matters...............................................................52
Financial Statements........................................................52
Appendix A.................................................................A-1
- - Sample Minimum Initial Premiums
Appendix B.................................................................B-1
- - Applicable Percentages Under Guideline Value/Cash Value Corridor Test
- - Sample Applicable Percentages Under the Cash Value Accumulation Life
Insurance Qualification Test
38
<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 business 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.
39
<PAGE>
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.
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.
40
<PAGE>
THE FUNDS
Penn Series Funds, Inc., Neuberger Berman Advisors Management Trust,
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 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.
41
<PAGE>
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.
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.
42
<PAGE>
Morgan Stanley Dean Witter Investment Management Inc. ("Morgan Stanley
Dean Witter"), of New York, New York, is the investment adviser to Morgan
Stanley Universal Funds' Emerging Markets Equity (International) Portfolio.
Further information about the Funds is contained in the accompanying
prospectuses, which you should read in conjunction with this prospectus.
We have entered into agreements with Penn Series, Neuberger Berman,
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 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, 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, 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,
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 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,
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.
43
<PAGE>
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).
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.
44
<PAGE>
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
45
<PAGE>
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.
46
<PAGE>
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.
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.
47
<PAGE>
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.
48
<PAGE>
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.
SALE OF 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 53.5% 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.
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 Chairman of the Board and Chief Executive Officer
The Penn Mutual Life Board (since December 1996), President and Chief Executive
Insurance Company and Chief Officer (April 1995-December 1996), President and
Philadelphia, PA 19172 Executive Chief Operating Officer, (January 1994 to April 1995),
Officer The Penn Mutual Life Insurance Company.
- ----------------------------------------------------------------------------------------------------------
Daniel J. Toran President, Chief President and Chief Operating Officer (since January
The Penn Mutual Life Operating Officer 1997), Executive Vice President, (May 1996-January
Insurance Company and Trustee 1997), The Penn Mutual Life Insurance Company;
Philadelphia, PA 19172 Executive Vice President, The New England Mutual
Life Insurance Company (prior thereto).
- ----------------------------------------------------------------------------------------------------------
Julia Chang Bloch Trustee Visiting Professor, Institute of International Relations
1743 22nd Street, NW in Beijing, China, and distinguished adviser, American
Washington, DC 20008 Studies Center (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).
- ----------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS PENN MUTUAL PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James A. Hagen Trustee Retired (since May 1996), Chairman of the Board,
2040 Montrose Lane Conrail, Inc. (prior thereto).
Wilmington, NC 28405
- ------------------------------------------------------------------------------------------------------------------
Philip E. Lippincott Trustee Retired (since April 1994), Chairman and Chief
4301 Bayberry Drive Executive Officer, Scott Paper Company (prior
Avalon, NJ 08202 thereto).
- ------------------------------------------------------------------------------------------------------------------
John F. McCaughan Trustee Retired Chairman (since 1996), Chairman of the Board
921 Pebble Hill Road (prior thereto) Betz Laboratories, Inc.
Doylestown, PA 18901
- ------------------------------------------------------------------------------------------------------------------
Alan B. Miller Trustee Chairman and President, Universal Health Services,
367 S. Gulph Road Inc.
King of Prussia, PA 19406
- ------------------------------------------------------------------------------------------------------------------
Edmond F. Notebaert Trustee President and Chief Executive Officer, The Children's
34th and Civic Center Blvd. Hospital of 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
1801 Market Street Montgomery Scott Inc. (a securities broker/dealer and
Philadelphia, PA 19103 subsidiary of The Penn Mutual Life Insurance
Company).
- ------------------------------------------------------------------------------------------------------------------
Wesley S. Williams, Jr., Esq. Trustee Partner, Covington & Burling (law firm).
1201 Pennsylvania Ave., NW
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
The Penn Mutual Life (since June 1997), Vice President, Information Systems Application
Philadelphia, PA 19172 (prior thereto), The Penn Mutual Life Insurance Company.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------------
<S> <C>
George W. Bentham Senior Vice President, Career Agency System (since April 1998), The
The Penn Mutual Life Penn Mutual Life Insurance Company, Independent Consultant (1997);
Insurance Company Senior Vice President & Chief of Marketing Officer (1995-1996),
Philadelphia, PA 19172 American General Life; Vice President, Individual Marketing (prior
thereto), Alexander Hamilton Life.
- ----------------------------------------------------------------------------------------------------------
Michael A. Biondolillo Senior Vice President, Human Resources (since June 1997); Corporate
The Penn Mutual Life Vice President and General Manager, Human Resources and Quality --
Insurance Company MG Industries, America (prior thereto).
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------
Nancy S. Brodie Executive Vice President and Chief Financial Officer (since December
The Penn Mutual Life 1995), Senior Vice President and Chief Financial Officer (prior thereto),
Insurance Company The Penn Mutual Life Insurance Company.
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------
Larry L. Mast Executive Vice President, The Penn Mutual Life Insurance Company
The Penn Mutual Life (May 1997 to present). Formerly Senior Vice President, Lafayette Life
Insurance Company Insurance Company (September 1994 to May 1997); Vice President,
Philadelphia, PA 19172 Security Benefit Insurance Company (May 1993 to September 1994);
Vice President, Home Life Insurance Company (July 1990 to May 1993);
Agency Manager, The Equitable Life Insurance Company (August 1978
to July 1990).
- ----------------------------------------------------------------------------------------------------------
Harold E. Maude, Jr. Senior Vice President, Independence Financial Network (since July
The Penn Mutual Life 1996), Vice President, Independence Financial Network (prior thereto),
Insurance Company The Penn Mutual Life Insurance Company.
Philadelphia, PA 19172
- ----------------------------------------------------------------------------------------------------------
Nina M. Mulrooney General Auditor (since November 1991), Vice President, Market
The Penn Mutual Life Conduct (since December 1997), Assistant Vice President, Corporate
Insurance Company Accounting and Controls (prior thereto), The Penn Mutual Life Insurance
Philadelphia, PA 19172 Company.
- ----------------------------------------------------------------------------------------------------------
Peter M. Sherman Executive Vice President (since December 1998), Chief Investment
The Penn Mutual Life Officer (since May 1996), Senior Vice President (May 1996 to December
Insurance Company 1996), Vice President, Investments (January 1996 to April 1996), Vice
Philadelphia, PA 19172 President, Fixed Income Portfolio Management (prior thereto), The Penn
Mutual Life Insurance Company; President, Independence Capital
Management, Inc. (an investment advisory organization and subsidiary of
Penn Mutual).
- ----------------------------------------------------------------------------------------------------------
</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.
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<PAGE>
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.
EXPERTS
Actuarial matters included in this prospectus have been examined by
Edward S. Attarian, FSA, MAAA, Actuary, Penn Mutual, whose opinion is filed as
an exhibit to the Registration Statement.
LITIGATION
No litigation is pending that would have a material effect upon the
subaccounts or Penn Mutual.
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, Pennsylvania.
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 Penn Mutual appear
on the following pages. The financial statements of Penn Mutual should be
considered only as bearing upon Penn Mutual's ability to meet its obligations
under the Policies.
New subaccounts of the Separate Account have been established under the
Policies subsequent to December 31, 1998. No amounts were allocated to the
subaccounts as of December 31, 1998. There are, therefore, no unit values for
the subaccounts at December 31, 1998.
52
<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
53
<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.
54
<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.
55
<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.
56
<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.
57
<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
============= ============
MONEY MARKET FUND++ QUALITY BOND FUND++
---------------------------------- ----------------------------
1998 1997 1998 1997
---------------- ---------------- ------------- -------------
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
========== ========== =========== ==========
VALUE EQUITY FUND++
--------------------------------
1998 1997
--------------- ---------------
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.
58
<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
============ ============
SMALL
INTERNATIONAL EQUITY FUND++ CAPITALIZATION FUND++
-------------------------------- -----------------------------
1998 1997 1998 1997
--------------- --------------- ------------- --------------
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
========== ==========
LIMITED MATURITY
BALANCED PORTFOLIO++++ BOND PORTFOLIO++++
---------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- -------------- ------------
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.
59
<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
========== ========== ============ ==========
EQUITY INCOME
PORTFOLIO++++++++
--------------------------------
1998 1997
--------------- ---------------
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
=========== ===========
ASSET MANAGER INDEX 500
PORTFOLIO++++++++ PORTFOLIO++++++++
---------------------------- -------------------------------
1998 1997 1998 1997*
------------- ------------- --------------- --------------
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 $1,940,659
========== ========== =========== ==========
</TABLE>
- ----------
* For the period from May 1, 1997 (date fund became available for
investment to contract owners) to December 31, 1997.
++ Investment in Penn Series Funds, Inc.
++++ Investment in Neuberger Berman Advisers Management Trust
++++++ Investment in American Century Variable Portfolios, Inc. (TCI
Portfolios, Inc.'s name changed to American Century Variable
Portfolios, Inc. as of May 1, 1997)
++++++++ Investment in Fidelity Investments' Variable Insurance Products Funds
I and II
++++++++++ Investment in Morgan Stanley Dean Witter Universal Funds, Inc.
The accompanying notes are an integral part of these financial statements.
60
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE LIFE ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D)
<TABLE>
<CAPTION>
EMERGING MARKETS
PORTFOLIO++++++++++
------------------------------
1998 1997*
-------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ...................... ($ 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.
61
<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.
62
<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:
PURCHASES SALES
-------------- --------------
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
============ ===========
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.
63
<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
64
<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
65
<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
66
<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.
67
<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.
68
<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.
69
<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.
70
<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.
71
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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.
72
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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.
73
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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.
74
<PAGE>
- --------------------------------------------------------------------------------
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>
75
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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.
76
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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
======== ========
77
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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.
78
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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.
1998 1997 1996
------------ ------------ ----------
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
========= ========= =========
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.
1998 1997 1996
----------- ----------- ------------
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)
======== ======== ==========
79
<PAGE>
- --------------------------------------------------------------------------------
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.
1998 1997 1996
----------- ------------ -----------
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)
========= ========= ===========
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:
1998 1997 1996
----------- ----------- -------------
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)
======== ======== ==========
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.
80
<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.
81
<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.
82
<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:
1998 1997 1996
----------- ----------- -----------
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
======== ======== ========
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.
83
<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.
84
<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.
85
<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).
86
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
- --------------------------------------------------------------------------------
SAMPLE MINIMUM INITIAL PREMIUMS
The following table shows for Insureds of varying ages, the minimum initial
premium for a Policy with a basic death benefit indicated. The table assumes the
Insureds will be placed in a nonsmoker class and that no supplemental benefits
will be added to the base Policy.
ISSUE AGE MINIMUM INITIAL
OF INSURED SEX OF INSURED BASE DEATH BENEFIT PREMIUM
- --------------------------------------------------------------------------------
25 M $50,000 $286
- --------------------------------------------------------------------------------
30 F $75,000 $390
- --------------------------------------------------------------------------------
35 M $75,000 $448
- --------------------------------------------------------------------------------
40 F $100,000 $640
- --------------------------------------------------------------------------------
45 M $100,000 $827
- --------------------------------------------------------------------------------
50 F $100,000 $975
- --------------------------------------------------------------------------------
55 M $100,000 $1,377
- --------------------------------------------------------------------------------
60 F $75,000 $1,155
- --------------------------------------------------------------------------------
65 M $75,000 $2,022
- --------------------------------------------------------------------------------
70 F $50,000 $1,327
- --------------------------------------------------------------------------------
A-1
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
APPLICABLE PERCENTAGES UNDER THE GUIDELINE PREMIUM / CASH VALUE CORRIDOR TEST
-----------------------------------------------------------------------------
ATTAINED ATTAINED ATTAINED ATTAINED ATTAINED
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
- -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-40 250% 51 178% 62 126% 73 109% 84 105%
41 243% 52 171% 63 124% 74 107% 85 105%
42 236% 53 164% 64 122% 75 105% 86 105%
43 229% 54 157% 65 120% 76 105% 87 105%
44 222% 55 150% 66 119% 77 105% 88 105%
45 215% 56 146% 67 118% 78 105% 89 105%
46 209% 57 142% 68 117% 79 105% 90 105%
47 203% 58 138% 69 116% 80 105% 91 104%
48 197% 59 134% 70 115% 81 105% 92 103%
49 191% 60 130% 71 113% 82 105% 93 102%
50 185% 61 128% 72 111% 83 105% 94-99 101%
</TABLE>
B-1
<PAGE>
<TABLE>
<CAPTION>
SAMPLE APPLICABLE PERCENTAGES UNDER THE CASH VALUE ACCUMULATION TEST
--------------------------------------------------------------------
MALE NON-SMOKER
---------------
ATTAINED ATTAINED ATTAINED ATTAINED ATTAINED
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
- -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-19 N/A 36 417.61% 53 240.32% 69 156.24% 85 119.81%
20 699.48% 37 403.76% 54 233.12% 70 152.83% 86 118.55%
21 679.26% 38 390.40% 55 226.22% 71 149.57% 87 117.38%
22 659.36% 39 377.52% 56 219.61% 72 146.49% 88 116.28%
23 639.73% 40 365.11% 57 213.30% 73 143.58% 89 115.23%
24 620.39% 41 353.15% 58 207.25% 74 140.85% 90 114.21%
25 601.33% 42 341.65% 59 201.45% 75 138.30% 91 113.20%
26 582.53% 43 330.57% 60 195.91% 76 135.91% 92 112.17%
27 564.06% 44 319.91% 61 190.60% 77 133.67% 93 111.08%
28 545.97% 45 309.63% 62 185.53% 78 131.57% 94 109.92%
29 528.29% 46 299.75% 63 180.70% 79 129.58% 95 108.65%
30 511.04% 47 290.24% 64 176.09% 80 127.70% 96 107.27%
31 494.24% 48 281.10% 65 171.71% 81 125.91% 97 105.80%
32 477.93% 49 272.29% 66 167.55% 82 124.22% 98 104.25%
33 462.11% 50 263.82% 67 163.60% 83 122.64% 99 102.60%
34 446.78% 51 255.67% 68 159.83% 84 121.17% 100 100.00%
35 431.94% 52 247.84%
</TABLE>
<TABLE>
<CAPTION>
FEMALE NON-SMOKER
-----------------
ATTAINED ATTAINED ATTAINED ATTAINED ATTAINED
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
- -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-19 N/A 36 468.31% 53 270.97% 69 171.23% 85 122.77%
20 796.54% 37 452.83% 54 262.85% 70 166.87% 86 121.08%
21 771.20% 38 437.93% 55 255.03% 71 162.66% 87 119.50%
22 746.54% 39 423.58% 56 247.50% 72 158.63% 88 118.03%
23 722.57% 40 409.78% 57 240.24% 73 154.80% 89 116.64%
24 699.24% 41 396.51% 58 233.24% 74 151.16% 90 115.32%
25 676.63% 42 383.77% 59 226.46% 75 147.74% 91 114.03%
26 654.62% 43 371.51% 60 219.89% 76 144.52% 92 112.76%
27 633.28% 44 359.71% 61 213.54% 77 141.49% 93 111.49%
28 612.56% 45 348.34% 62 207.41% 78 138.64% 94 110.17%
29 592.47% 46 337.38% 63 201.52% 79 135.95% 95 108.79%
30 572.99% 47 326.82% 64 195.89% 80 133.39% 96 107.34%
31 554.12% 48 316.63% 65 190.51% 81 130.98% 97 105.82%
32 535.83% 49 306.81% 66 185.37% 82 128.71% 98 104.26%
33 518.10% 50 297.34% 67 180.47% 83 126.58% 99 102.60%
34 500.93% 51 288.22% 68 175.76% 84 124.60% 100 100.00%
35 484.36% 52 279.43%
</TABLE>
B-2
<PAGE>
<TABLE>
<CAPTION>
SAMPLE APPLICABLE PERCENTAGES UNDER THE CASH VALUE ACCUMULATION TEST
--------------------------------------------------------------------
MALE SMOKER
-----------
ATTAINED ATTAINED ATTAINED ATTAINED ATTAINED
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
- -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-19 N/A 36 342.96% 53 206.34% 69 144.93% 85 118.30%
20 567.36% 37 331.98% 54 201.00% 70 142.45% 86 117.35%
21 551.35% 38 321.41% 55 195.91% 71 140.09% 87 116.44%
22 535.65% 39 311.26% 56 191.05% 72 137.84% 88 115.56%
23 520.14% 40 301.52% 57 186.43% 73 135.71% 89 114.71%
24 504.81% 41 292.18% 58 182.01% 74 133.71% 90 113.85%
25 489.67% 42 283.23% 59 177.78% 75 131.84% 91 112.97%
26 474.70% 43 274.66% 60 173.72% 76 130.10% 92 112.04%
27 459.94% 44 266.46% 61 169.84% 77 128.48% 93 111.02%
28 445.46% 45 258.59% 62 166.14% 78 126.96% 94 109.89%
29 431.30% 46 251.07% 63 162.61% 79 125.52% 95 108.65%
30 417.48% 47 243.85% 64 159.26% 80 124.15% 96 107.27%
31 404.05% 48 236.93% 65 156.08% 81 122.84% 97 105.80%
32 391.02% 49 230.29% 66 153.08% 82 121.59% 98 104.25%
33 378.39% 50 223.92% 67 150.23% 83 120.42% 99 102.60%
34 366.17% 51 217.79% 68 147.52% 84 119.32% 100 100.00%
35 354.36% 52 211.94%
</TABLE>
<TABLE>
<CAPTION>
FEMALE SMOKER
-------------
ATTAINED ATTAINED ATTAINED ATTAINED ATTAINED
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
- -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-19 N/A 36 413.45% 53 247.46% 69 163.93% 85 121.86%
20 700.22% 37 400.10% 54 240.74% 70 160.19% 86 120.34%
21 677.90% 38 387.29% 55 234.28% 71 156.56% 87 118.94%
22 656.20% 39 375.01% 56 228.06% 72 153.07% 88 117.61%
23 635.13% 40 363.24% 57 222.06% 73 149.74% 89 116.35%
24 614.65% 41 351.98% 58 216.25% 74 146.59% 90 115.11%
25 594.81% 42 341.22% 59 210.60% 75 143.63% 91 113.90%
26 575.52% 43 330.93% 60 205.10% 76 140.85% 92 112.70%
27 556.84% 44 321.06% 61 199.75% 77 138.24% 93 111.46%
28 538.74% 45 311.58% 62 194.58% 78 135.78% 94 110.17%
29 521.19% 46 302.46% 63 189.59% 79 133.44% 95 108.79%
30 504.21% 47 293.69% 64 184.82% 80 131.22% 96 107.34%
31 487.80% 48 285.25% 65 180.27% 81 129.11% 97 105.82%
32 471.91% 49 277.11% 66 175.93% 82 127.12% 98 104.26%
33 456.54% 50 269.27% 67 171.78% 83 125.23% 99 102.60%
34 441.67% 51 261.73% 68 167.79% 84 123.48% 100 100.00%
35 427.33% 52 254.46%
</TABLE>
B-3
<PAGE>
The Prospectuses for Cornerstone Vul I and Cornerstone Vul II, included as part
of Post-Effective Amendment No. 8 to the Registrant's Registration Statement on
Form S-6 (File No. 33-54663), as filed with the Securities and Exchange
Commission on April 30, 1999, pursuant to Rule 485(b) under the Securities Act
of 1933, are incorporated herein by reference.
<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.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 prospectus consisting of 89 pages. 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. 8 to
this Form S-6
II-2
<PAGE>
Registration Statement filed on April 30, 1999
(Accession No. 0000950116-99-000880).
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. 333-62811)
filed on November 30, 1999 (Accession No.
0001036050-98-002055).
II-3
<PAGE>
(c) Schedule of Sales Commissions. Incorporated herein by
reference to Exhibit A(3)(c) to Post-Effective
Amendment No. 8 to this Form S-6 Registration
Statement filed on April 30, 1999 (Accession No.
0000950116-99-000880).
A(4) Not Applicable
A(5) (a) Specimen Flexible Premium Adjustable Variable Life
Insurance Policy. Incorporated herein by reference to
Exhibit A5(a) to Post-Effective Amendment No. 8 to
this Form S-6 Registration Statement filed on April
30, 1999 (Accession No. 0000950116-99-000880).
(b) Specimen Flexible Premium Adjustable Variable Life
Insurance Policy (Sex distinct). Filed herewith.
(c) Specimen Flexible Premium Adjustable Variable Life
Insurance Policy (Unisex). Filed herewith.
(d) Additional Insured Term Insurance Agreement Rider.
Incorporated herein by reference to Exhibit A5(b) to
Post-Effective Amendment No. 8 to this Form S-6
Registration Statement filed on April 30, 1999
(Accession No. 0000950116-99-000880).
(e) Children's Term Insurance Agreement Rider.
Incorporated herein by reference to Exhibit A5(c) to
Post-Effective Amendment No. 8 to this Form S-6
Registration Statement filed on April 30, 1999
(Accession No. 0000950116-99-000880).
(f) Accidental Death Benefit Agreement Rider.
Incorporated herein by reference to Exhibit A5(d) to
Post-Effective Amendment No. 8 to this Form S-6
Registration Statement filed on April 30, 1999
(Accession No. 0000950116-99-000880).
(g) Disability Waiver of Monthly Deduction and Disability
Monthly Premium Deposit Agreement Rider. Incorporated
herein by reference to Exhibit A5(e) to
Post-Effective Amendment No. 8 to this Form S-6
Registration Statement filed on April 30, 1999
(Accession No. 0000950116-99-000880).
(h) Disability Waiver of Monthly Deduction Agreement
Rider. Incorporated herein by reference to Exhibit
A5(f) to Post-Effective Amendment No. 8 to this Form
S-6 Registration Statement filed on April 30, 1999
(Accession No. 0000950116-99-000880).
II-4
<PAGE>
(i) Guaranteed Continuation of Policy Agreement Rider.
Incorporated herein by reference to Exhibit A5(g) to
Post-Effective Amendment No. 8 to this Form S-6
Registration Statement filed on April 30, 1999
(Accession No. 0000950116-99-000880).
(j) Guaranteed Option to Increase Specified Amount
Agreement Rider. Incorporated herein by reference to
Exhibit A5(h) to Post-Effective Amendment No. 8 to
this Form S-6 Registration Statement filed on April
30, 1999 (Accession No. 0000950116-99-000880).
(k) Supplemental Term Insurance Agreement Rider.
Incorporated herein by reference to Exhibit A5(i) to
Post-Effective Amendment No. 8 to this Form S-6
Registration Statement filed on April 30, 1999
(Accession No. 0000950116-99-000880).
(l) Specimen Flexible Premium Adjustable Variable Life
Insurance Policy (revised). Incorporated herein by
reference to Exhibit A5(j) to PostEffective Amendment
No. 8 to this Form S-6 Registration Statement filed
on April 30, 1999 (Accession No.
0000950116-99-000880).
(m) Flexible Periodic Supplemental Term Insurance
Agreement Rider. Incorporated herein by reference to
Exhibit A5(k) to Post-Effective Amendment No. 8 to
this Form S-6 Registration Statement filed on April
30, 1999 (Accession No. 0000950116-99-000880).
(n) Option to Extend the Maturity Date. Filed herewith.
(o) Option to Extend the Maturity Date. Filed herewith.
(p) Return of Premium Term Insurance Agreement. Filed
herewith.
(q) Return of Premium Term Insurance Agreement. Filed
herewith.
(r) Supplemental Exchange Agreement. Filed herewith.
(s) Endorsement - Business Accounting Benefit. Filed
herewith.
(t) Endorsement - Cost of Insurance. 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).
<PAGE>
A(7) Not Applicable.
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
II-5
<PAGE>
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).
(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 Dean Witter
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. Incorporated herein by reference to Exhibit A(11)
to Post-Effective Amendment No. 8 to this Form S-6
Registration Statement filed on April 30, 1999 (Accession No.
0000950116-99-000880).
II-6
<PAGE>
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. Incorporated
herein by reference to Exhibit 2 to PostEffective Amendment No. 8 to
this Form S-6 Registration Statement filed on April 30, 1999 (Accession
No. 0000950116-99-000880).
3. Opinion and consent of Edward S. Attarian, FSA, MAAA, Actuary, The Penn
Mutual Life Insurance Company, dated April 23, 1999. 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. 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. Incorporated herein by
reference to Exhibit 5(c) to Post-Effective Amendment No. 8 to
this Form S-6 Registration Statement filed on April 30, 1999
(Accession No. 0000950116-99-000880).
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. 9 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. 9 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
*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-8
<PAGE>
Exhibit Index
Ex-99.A(5)(b) Specimen Flexible Premium Adjustable Variable Life
Insurance Policy (Sex Distinct).
Ex-99.A(5)(c) Specimen Flexible Premium Adjustable Variable Life
Insurance Policy (Unisex ).
Ex-99.A(5)(n) Option to Extend the Maturity Date.
Ex-99.A(5)(o) Option to Extend the Maturity Date.
Ex-99.A(5)(p) Return of Premium Term Insurance Agreement.
Ex-99.A(5)(q) Return of Premium Term Insurance Agreement.
Ex-99.A(5)(r) Supplemental Exchange Agreement.
Ex-99.A(5)(s) Endorsement - Business Accounting Benefit.
Ex-99.A(5)(t) Endorsement - Cost of Insurance.
Ex-99.3 Opinion and consent of Edward S. Attarian, FSA, MAAA,
Actuary, The Penn Mutual Life Insurance Company,
dated April 23, 1999.
Ex-99.4(a) Consent of Ernst & Young, LLP.
Ex-99.4(b) Consent of Morgan, Lewis & Bockius LLP.
II-10
<PAGE>
THE PENN MUTUAL LIFE INSURANCE COMPANY
FOUNDED 1847
Insured William Penn $100,000 Specified Amount
Policy Number 0 000 000 July 1, 1999 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
- -------------------- -----------------------
Secretary Chairman and
Chief Executive Officer
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 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. The Policy Value, premium charge and the monthly deductions
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, Philadelphia, Pennsylvania 19172
VU-99(S)
<PAGE>
GUIDE TO POLICY SECTIONS =======================================================
1. Life Insurance Qualification Test
2. Policy Specifications
3. Endorsements
4. Premiums
5. Lapse and Reinstatement
6. The Separate Account
7. The Fixed Account
8. Policy Value
9. Death and Maturity Benefits
10. Policy Loans
11. Surrender of Policy
12. Policy Changes
13. Transfer to Fixed Account
14. Owner and Beneficiary
15. General Provisions
16. Income Payment Options
17. Income Payment Option Table
Supplemental Agreements and a copy of any applications follow the Additional
Policy Specifications Section.
<PAGE>
ALPHABETICAL INDEX
Section
Age.............................................................. 1,15
Allocation of Net Premiums....................................... 4
Annual Report.................................................... 15
Assignment....................................................... 14
Beneficiary...................................................... 1,14
Cash Surrender Value............................................. 11
Cash Value Accumulation Test .................................... 3
Continuation of Insurance........................................ 4
Contract......................................................... 15
Cost of Insurance................................................ 8
Cost of Insurance Rates.......................................... 8
Date of Issue.................................................... 1
Death Benefit.................................................... 9
Deferment of Transactions........................................ 15
Dividends........................................................ 15
Free Look Period................................................. Cover
Grace Period..................................................... 4
Guideline Premium Test........................................... 3
Income Payment Options........................................... 16
Income Payment Option Tables..................................... 17
Incontestability................................................. 15
Indebtedness..................................................... 10
Lapse............................................................ 5
Loan Interest.................................................... 10
Loan Value....................................................... 10
Maturity Date.................................................... 1
Maturity Benefit................................................. 9
<PAGE>
Section
Monthly Anniversary.............................................. 15
Monthly Deduction................................................ 8
Mortality and Expense Risk Charge................................ 8
Net Cash Surrender Value......................................... 11
No-Lapse Date.................................................... 1,4
No-Lapse Premium................................................. 1,4
Owner............................................................ 14
Partial Surrender................................................ 11
Policy Date...................................................... 1,15
Policy Loan Account.............................................. 10
Policy Loans..................................................... 10
Policy Value..................................................... 8
Premium Charge................................................... 4
Premiums......................................................... 1,4
Rate Class....................................................... 1
Reinstatement.................................................... 5
Schedule of Benefits............................................. 1
Schedule of Premiums............................................. 1
Separate Account................................................. 1,6
Service Office................................................... 1
Specified Amount................................................. 1
Subaccounts...................................................... 6
Suicide Exclusion................................................ 9
Surrender........................................................ 11
Surrender Charge................................................. 11
<PAGE>
1. POLICY SPECIFICATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INSURED WILLIAM PENN $100,000 SPECIFIED AMOUNT
(INCLUDES POLICY VALUE)
POLICY NUMBER 0 000 000 JULY 1, 1999 POLICY DATE
AGE 35 MALE STANDARD NONSMOKER RATE CLASS
</TABLE>
LIFE INSURANCE QUALIFICATION TEST IS GUIDELINE PREMIUM TEST
MATURITY DATE IS JULY 1, 2064
DATE OF ISSUE IS THE POLICY DATE
OWNER AND BENEFICIARY AS PROVIDED IN APPLICATION
SEPARATE ACCOUNT IS 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%
ALLOCATION DATE IS AUGUST 1, 1999
Schedule of Benefits
Description Amount
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE $100,000 SPECIFIED AMOUNT
RETURN OF PREMIUM TERM INSURANCE AGREEMENT
OPTION TO EXTEND THE MATURITY DATE
Schedule of Premiums
THE INITIAL PREMIUM OF $ 1328.06 WAS PAID ON THE POILCY DATE FOR 12 MONTHS.
SUBSEQUENT PREMIUMS ARE PAYABLE ANNUALLY AS FOLLOWS:
BEGINNING AS OF PREMIUM
JULY 1,2000 $1328.06
NO LAPSE MONTHLY PREMIUM IS $55.50
NO LAPSE PREMIUM DATE IS JULY 1, 2002
NOTE: INSURANCE WILL TERMINATE IF THE PREMIUMS PAID AND THE INTEREST CREDITED
ARE INSUFFICIENT TO COVER THE MONTHLY DEDUCTIONS, EXCEPT AS PROVIDED IN SECTION
4.
THE SCHEDULED PREMIUMS SECTION 7702A OF THE INTERNAL REVENUE CODE OF 1986
ESTABLISHES A CLASS OF LIFE INSURANCE CONTRACTS DESIGNATED AS "MODIFIED
ENDOWMENT CONTRACTS." THE RULES RELATING TO WHETHER A POICY WILL BE TREATED AS
A MODIFIED ENDOWMENT CONTRACT ARE EXTREMELY COMPLEX. PLEASE CONSULT WITH A
QUALIFIED TAX ADVISOR REGARDING YOUR OWN PERSONAL SITUATION.
<PAGE>
1. POLICY SPECIFICATIONS
SCHEDULE OF SURRENDER CHARGES
MAXIMUM SURRENDER CHARGE PREMIUM $867.00
TABLE OF SURRENDER CHARGE FACTORS
POLICY YEAR SURRENDER FACTOR
1-7 1.00
8 .80
9 .60
10 .40
11 .20
12 AND LATER 0
SURRENDER CHARGE TABLE
(per $1,000 of Specified Amount)
AGE SURRENDER CHARGE
0 - 9 1.00
10 - 19 2.00
20 - 29 3.00
30 - 39 4.00
40 - 49 5.00
50 - 59 6.00
60 - 85 7.00
<TABLE>
<CAPTION>
<S> <C>
SCHEDULE OF POLICY LOADS AND EXPENSE CHARGES
Maximum percent of premium load 7.5%
(applied to each premium applied to the policy)
Maximum per policy monthly expense charge $9.00
Maximum expense charge per $1,000 of Specified Amount $0.10
(for the first twelve months following the policy date)
Maximum expense charge per $1,000 of Specified Amount $0.10
(for the first twelve months following an increase in Specified Amount)
Maximum Moratlity and Expense Risk Charge 0.90%
SCHEDULE OF INTEREST RATES
Guaranteed Interest Rate 3% Effective Annual Rate
Death Benefit Discount Factor 1.0024663
Loan Interest Rate 4% Effective Annual Rate
Policy Loan Account Rates 3% Policy Years 1 -10
3.75% Policy Years 11 and after
</TABLE>
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<PAGE>
2. ENDORSEMENTS
TO BE MADE ONLY BY THE COMPANY
THIS PAGE IS INTENTIONALLY
LEFT BLANK.
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<PAGE>
3. QUALIFICATION AS LIFE INSURANCE
Your policy must qualify as life insurance under one of the following tests as
defined in Section 7702 of the Internal Revenue Code of 1986. The life insurance
qualification test for this policy will be the Guideline Premium Test unless
otherwise elected in the application. The Life Insurance Qualification Test for
this Policy is shown on Page 3. The test may not be changed at anytime after the
policy is issued.
GUIDELINE PREMIUM TEST - Under this test, the amount of premium that can be paid
in a policy year may not exceed the Maximum Premium Limit. 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 thereto. The Maximum Premium Limit for the following policy
year will be shown on the Annual Report sent to the Owner.
In addition, a minimum margin must exist between the Death Benefit and the
Policy Value. The margin is defined in Section 7702 and is based on the attained
age of the Insured. The Basic Death Benefit of the policy will be adjusted
accordingly with factors shown in the Table of Death Benefit Factors to satisfy
the requirements of this portion of the test. See the Death Benefit Section for
further details.
CASH VALUE ACCUMULATION TEST - Under this test, the Policy Value cannot at any
time exceed the net single premium required to fund the future benefits under
the policy. The net single premium is defined in Section 7702 of the Internal
Revenue Code. The Basic Death Benefit of the policy will be adjusted accordingly
with factors shown in the Table of Death Benefit Factors to satisfy the
requirements of this test. See the Death Benefit Section for further details.
The Company reserves the right to restrict Policy transactions as necessary in
order to qualify the policy as a life insurance contract under Section 7702. If
it is subsequently determined that a policy does not satisfy Section 7702, the
Company may take whatever steps are appropriate and necessary to attempt to
cause such a policy to comply with Section 7702.
<PAGE>
4. PREMIUMS
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) We reserve the right to require submission of evidence of insurability
satisfactory to the Company on subsequent premiums that would cause an
immediate increase in the difference between the Death Benefit and the
Policy Value.
(d) If the Guideline Premium Test is in effect, total premiums paid in any
policy year may not exceed the Maximum Premium Limit for that policy year.
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 the Policy Value
Section. In no event will the percent of premium charge assessed on each premium
paid be greater than that shown on Page 3.
NET PREMIUM--Net premium is the amount of any premium payment reduced by the
percent of premium charge.
5
<PAGE>
4. PREMIUMS (CONTINUED)
ALLOCATION OF NET PREMIUMS--The initial net premium and any additional premium
paid before the policy is issued will be allocated based on the Initial
Allocation specified on Page 3. On the Allocation Date listed on Page 3, 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. 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.
<PAGE>
5. 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
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<PAGE>
5. LAPSE AND REINSTATEMENT(CONTINUED)
(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 the guaranteed interest rate until the date of
reinstatement;
(c) any dividend credited to the policy since the date of lapse;
(d) interest on (c) at the guaranteed interest rate 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 the guaranteed interest rate 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 the Surrender of Policy Section 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 the Policy Loans Section.
Following reinstatement, the provisions of No-Lapse Premium set forth in the
Premiums Section 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. THE SEPARATE ACCOUNT
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.
7
<PAGE>
6. THE SEPARATE ACCOUNT(CONTINUED)
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 Allocation Date listed on Page 3, 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.
7. 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 the Policy Value Section. 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 the
effective annual guaranteed interest rate listed on Page 3.
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 the Separate Account Section:
(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>
8. 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.
8
<PAGE>
8. POLICY VALUE (CONTINUED)
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
the Death Benefit Discount Factor; 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
on Page 3.
<PAGE>
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.
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.
9
<PAGE>
8. POLICY VALUE (CONTINUED)
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 maximum percentage listed on Page 3.
<PAGE>
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 if required.
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<PAGE>
9. 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 Policy Value multiplied by an attained age factor shown in Table of
Death Benefit Factors.
(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 Policy Value multiplied by an attained age factor shown in Table of
Death Benefit Factors.
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. 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 loan interest rate listed on Page
3. 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.
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<PAGE>
10. 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
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 the Policy Loan Account Rate listed on Page 3. 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.
11. 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 of Surrender Factors
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 of Surrender Factors
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.
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
12
<PAGE>
11. SURRENDER OF POLICY (CONTINUED)
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 be reduced by the amount of the partial surrender that exceeds the
difference between the Death Benefit and the Specified Amount. In those
instances, the Specified Amount will be reduced 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.
12. 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--An increase in Specified Amount must be applied
for on a written application and is subject to the Company's underwriting
guidelines in effect at the time of the increase. 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:
<PAGE>
(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.
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
13
<PAGE>
12. POLICY CHANGES (CONTINUED)
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.
13. 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.
14. 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.
15. 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
14
<PAGE>
15. GENERAL PROVISIONS (CONTINUED)
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.
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.
15
<PAGE>
15. GENERAL PROVISIONS (CONTINUED)
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.
16. 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.
In no event will the monthly income under these life income options be less than
the income stated in the Income Payment Option Tables. The tables are based the
Annuity 2000 Basic Table, without projections, 50% male/50% female. Options 4,
5, 6 and 7 will not participate in divisible surplus.
16
<PAGE>
16. INCOME PAYMENT OPTIONS (CONTINUED)
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.
17. INCOME PAYMENT OPTION TABLE
Amount of income provided by each $1,000 applied under an income payment option
<TABLE>
<CAPTION>
OPTION 1--Interest Income OPTION 2--Income for Fixed Period of Years
- ----------------------------------------------- ----------------------------------------------------------------------------
Monthly Monthly Monthly
Payment Interval Amount Years Income Years Income Years Income
<S> <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>
17
<PAGE>
17. INCOME PAYMENT OPTION TABLE(CONTINUED)
"Age" as used in the tables for Options 4, 5, 6 and 7 means an adjusted age
determined in the following manner from the actual age of the Annuitant on the
birthday nearest the date of the first payment:
DATE OF FIRST PAYMENT ADJUSTED AGE
Before calendar year 2010 Actual Age
2010-2019 Actual age decreased by 1
2020-2029 Actual age decreased by 2
2030 and later Actual age decreased by 3
OPTIONS 4, 5 AND 6--Monthly Life Income
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Option 4 Option 5 Option 6
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Age of 20 Year 10 Year 5 Year with
Option Life Guaranteed Guaranteed Guaranteed Refund
Annui- Income Period Period Period Period
tant Male Female Male Female Male Female Male Female Male Female
- --------------------------------------------------------------------------------
15 and
under $2.91 $2.84 $2.90 $2.84 $2.91 $2.84 $2.91 $2.84 $2.89 $2.83
16 2.92 2.85 2.91 2.85 2.92 2.85 2.92 2.85 2.91 2.85
17 2.94 2.87 2.93 2.86 2.93 2.87 2.94 2.87 2.92 2.86
18 2.95 2.88 2.94 2.88 2.95 2.88 2.95 2.88 2.94 2.87
19 2.97 2.90 2.96 2.89 2.97 2.89 2.97 2.90 2.95 2.89
20 2.99 2.91 2.98 2.91 2.98 2.91 2.99 2.91 2.97 2.90
21 3.00 2.93 3.00 2.92 3.00 2.92 3.00 2.93 2.99 2.92
22 3.02 2.94 3.01 2.94 3.02 2.94 3.02 2.94 3.00 2.93
23 3.04 2.96 3.03 2.95 3.04 2.96 3.04 2.96 3.02 2.95
24 3.06 2.98 3.05 2.97 3.06 2.97 3.06 2.97 3.04 2.96
25 3.08 2.99 3.07 2.99 3.08 2.99 3.08 2.99 3.06 2.98
26 3.10 3.01 3.09 3.01 3.10 3.01 3.10 3.01 3.08 3.00
27 3.13 3.03 3.11 3.02 3.12 3.03 3.13 3.03 3.10 3.02
28 3.15 3.05 3.14 3.04 3.15 3.05 3.15 3.05 3.19 3.06
29 3.17 3.07 3.16 3.06 3.17 3.07 3.17 3.07 3.15 3.06
30 3.20 3.09 3.19 3.20 3.09 3.20 3.09 3.17 3.17 3.08
31 3.23 3.12 3.21 3.11 3.22 3.11 3.23 3.12 3.20 3.10
32 3.26 3.14 3.24 3.13 3.25 3.14 3.25 3.14 3.22 3.12
33 3.29 3.17 3.27 3.16 3.28 3.16 3.28 3.17 3.25 3.15
34 3.32 3.19 3.30 3.18 3.31 3.19 3.32 3.19 3.28 3.17
35 3.35 3.22 3.33 3.21 3.34 3.22 3.35 3.22 3.31 3.20
36 3.38 3.25 3.36 3.23 3.38 3.24 3.38 3.25 3.34 3.22
37 3.42 3.28 3.39 3.26 3.41 3.27 3.42 3.28 3.37 3.25
38 3.46 3.31 3.42 3.29 3.45 3.31 3.46 3.31 3.40 3.28
39 3.50 3.34 3.46 3.32 3.49 3.34 3.49 3.34 3.44 3.31
40 3.54 3.38 3.50 3.35 3.53 3.37 3.54 3.37 3.47 3.34
41 3.58 3.41 3.53 3.39 3.57 3.41 3.58 3.41 3.51 3.37
42 3.63 3.45 3.57 3.42 3.62 3.44 3.62 3.45 3.55 3.41
43 3.68 3.49 3.62 3.46 3.66 3.48 3.67 3.49 3.59 3.44
44 3.73 3.53 3.66 3.50 3.71 3.52 3.72 3.53 3.64 3.48
45 3.78 3.57 3.70 3.54 3.76 3.57 3.77 3.57 3.68 3.52
46 3.83 3.62 3.75 3.58 3.81 3.61 3.83 3.62 3.73 3.56
47 3.89 3.67 3.80 3.62 3.87 3.66 3.88 3.67 3.77 3.60
48 3.95 3.72 3.85 3.67 3.93 3.71 3.94 3.72 3.82 3.65
49 4.01 3.77 3.90 3.71 3.99 3.76 4.01 3.77 3.88 3.69
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Option 4 Option 5 Option 6
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Age of 20 Year 10 Year 5 Year with
Option Life Guaranteed Guaranteed Guaranteed Refund
Annui- Income Period Period Period Period
tant Male Female Male Female Male Female Male Female Male Female
- --------------------------------------------------------------------------------
50 $4.08 $3.83 $3.95 $3.76 $4.05 $3.81 $4.07 $3.82 $3.93 $3.74
51 4.15 3.89 4.00 3.81 4.11 3.87 4.14 3.88 3.99 3.79
52 4.22 3.95 4.06 3.86 4.18 3.93 4.21 3.94 4.05 3.85
53 4.30 4.01 4.12 3.92 4.26 3.99 4.29 4.01 4.11 3.90
54 4.38 4.08 4.18 3.97 4.33 4.06 4.37 4.08 4.18 3.96
55 4.47 4.15 4.24 4.03 4.41 4.13 4.45 4.15 4.25 4.02
56 4.56 4.23 4.30 4.09 4.50 4.20 4.54 4.22 4.32 4.09
57 4.65 4.31 4.36 4.15 4.59 4.28 4.64 4.31 4.39 4.15
58 4.75 4.40 4.43 4.22 4.68 4.36 4.74 4.39 4.47 4.23
59 4.86 4.49 4.49 4.29 4.78 4.45 4.84 4.48 4.56 4.30
60 4.98 4.59 4.56 4.35 4.88 4.54 4.96 4.58 4.64 4.38
61 5.10 4.69 4.62 4.42 4.99 4.63 5.08 4.68 4.74 4.46
62 5.23 4.80 4.69 4.49 5.11 4.73 5.20 4.79 4.83 4.55
63 5.38 4.92 4.76 4.57 5.23 4.84 5.34 4.90 4.93 4.64
64 5.53 5.05 4.82 4.64 5.35 4.96 5.49 5.02 5.04 4.74
65 5.69 5.18 4.88 4.71 5.49 5.07 5.64 5.16 5.15 4.84
66 5.86 5.32 4.95 4.78 5.62 5.20 5.80 5.29 5.27 4.95
67 6.04 5.48 5.00 4.85 5.77 5.33 5.98 5.44 5.39 5.07
68 6.24 5.64 5.06 4.92 5.92 5.48 6.16 5.60 5.52 5.19
69 6.45 5.82 5.11 4.99 6.07 5.62 6.36 5.77 5.66 5.31
70 6.67 6.01 5.17 5.05 6.23 5.78 6.56 5.96 5.80 5.45
71 6.91 6.22 5.21 5.11 6.39 5.94 6.78 6.15 5.96 5.59
72 7.16 6.44 5.25 5.17 6.56 6.12 7.01 6.36 6.11 5.75
73 7.43 6.68 5.29 5.22 6.73 6.29 7.25 6.59 6.28 5.91
74 7.72 6.94 5.33 5.27 6.91 6.48 7.50 6.83 6.46 6.08
75 8.03 7.23 5.36 5.31 7.08 6.67 7.77 7.09 6.64 6.26
76 8.36 7.53 5.39 5.35 7.26 6.87 8.05 7.37 6.83 6.46
77 8.71 7.86 5.41 5.38 7.44 7.07 8.35 7.66 7.04 6.66
78 9.09 8.22 5.43 5.41 7.61 7.27 8.66 7.97 7.25 6.88
79 9.49 8.61 5.45 5.43 7.78 7.47 8.98 8.30 7.48 7.10
80 and 9.92 9.03 5.46 5.45 7.95 7.67 9.32 8.66 7.71 7.35
over
- ------------------------------------------------------------------------------------------------------------------------------------
OPTION 7--Joint and Survivor Monthly Life Income
- ------------------------------------------------------------------------------------------------------------------------------------
Age of Female Age of Male Option Annuitant
Option Annuitant 45 50 55 60 62 65 70 75 80
- ------------------------------------------------------------------------------------------------------------------------------------
45 $3.33 $3.40 $3.45 $3.49 $3.50 $3.58 $3.52 $3.55 $3.56
50 3.43 3.53 3.61 3.68 3.70 3.73 3.76 3.79 3.80
55 3.52 3.65 3.78 3.88 3.92 3.97 4.04 4.08 4.01
60 3.59 3.76 3.94 4.10 4.16 4.25 4.36 4.45 4.50
62 3.62 3.80 4.00 4.19 4.26 4.37 4.51 4.62 4.69
65 3.65 3.86 4.08 4.32 4.41 4.55 4.74 4.90 5.01
70 3.69 3.93 4.21 4.52 4.65 4.84 5.16 5.43 5.64
75 3.72 3.99 4.30 4.68 4.84 5.11 5.57 6.02 6.41
80 3.75 4.02 4.37 4.80 5.00 5.32 5.94 6.60 7.26
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
ADDITIONAL POLICY SPECIFICATIONS
TABLE OF GUARANTEED MAXIMUM MONTHLY COST OF INSURANCE RATES PER $1,000
ATTAINED BASE TERM
AGE RATE RATE
35 0.1408 0.1408
36 0.1475 0.1475
37 0.1566 0.1566
38 0.1666 0.1666
39 0.1783 0.1783
40 0.1908 0.1908
41 0.2058 0.2058
42 0.2208 0.2208
43 0.2383 0.2383
44 0.2558 0.2558
45 0.2767 0.2767
46 0.2992 0.2992
47 0.3234 0.3234
48 0.3492 0.3492
49 0.3784 0.3784
50 0.4093 0.4093
51 0.4460 0.4460
52 0.4885 0.4885
53 0.5361 0.5361
54 0.5911 0.5911
55 0.6520 0.6520
56 0.7196 0.7196
57 0.7914 0.7914
58 0.8690 0.8690
59 0.9567 0.9567
60 1.0544 1.0544
61 1.1630 1.1630
62 1.2866 1.2866
63 1.4278 1.4278
64 1.5875 1.5875
65 1.7639 1.7639
66 1.9538 1.9538
67 2.1596 2.1596
68 2.3806 2.3806
69 2.6218 2.6218
70 2.8941 2.8941
71 3.2027 3.2027
72 3.5592 3.5592
73 3.9690 3.9690
74 4.4295 4.4295
75 4.9241 4.9241
76 5.4512 5.4512
POLICY NUMBER 0 000 000
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE POLICY
WILLIAM PENN
AGE 35 MALE
19
<PAGE>
ADDITIONAL POLICY SPECIFICATIONS
TABLE OF GUARANTEED MAXIMUM MONTHLY COST OF INSURANCE RATES PER $1,000
ATTAINED BASE TERM
AGE RATE RATE
77 6.0058 6.0058
78 6.5822 6.5822
79 7.1947 7.1947
80 7.8672 7.8672
81 8.6169 8.6169
82 9.4654 9.4654
83 10.4233 10.4233
84 11.4726 11.4726
85 12.5898 12.5898
86 13.7532 13.7532
87 14.9527 14.9527
88 16.1646 16.1646
89 17.4052 17.4052
90 18.6921 18.6921
91 20.0473 20.0473
92 21.5156 21.5156
93 23.1600 23.1600
94 25.2598 25.2598
95 28.2741 28.2741
96 33.1067 33.1067
97 41.6847 41.6847
98 58.0125 58.0125
99 83.3333 83.3333
POLICY NUMBER 0 000 000
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE POLICY
WILLIAM PENN
AGE 35 MALE
20
<PAGE>
ADDITIONAL POLICY SPECIFICATIONS
TABLE OF DEATH BENEFIT FACTORS
ATTAINED
AGE FACTOR
0-40 2.50
41 2.43
42 2.36
43 2.29
44 2.22
45 2.15
46 2.09
47 2.03
48 1.97
49 1.91
50 1.85
51 1.78
52 1.71
53 1.64
54 1.57
55 1.50
56 1.46
57 1.42
58 1.38
59 1.34
60 1.30
61 1.28
62 1.26
63 1.24
64 1.22
65 1.20
66 1.19
67 1.18
68 1.17
69 1.16
70 1.15
71 1.13
72 1.11
73 1.09
74 1.07
75-90 1.05
91 1.04
92 1.03
93 1.02
94-99 1.01
21
<PAGE>
ADDITIONAL POLICY SPECIFICATIONS
Eligible Mutual Funds
Penn Series Funds, Inc.
Independence Capital (ICMI) Vontobel USA
Money Market International Equity
Quality Bond
Growth Equity
OpCap Advisors T. Rowe Price
Value Equity High Yield Bond
Small Capitalization Flexibly Managed
ICMI/Robertson Stephens
Emerging Growth
Neuberger & Berman Advisers Management Trust
Neuberger & Berman
Limited Maturity Bond Portfolio
Balanced Portfolio
Partners Portfolio
Variable Insurance Product Funds Variable Insurance Product Funds II
Fidelity Management Fidelity Management
Equity Income Asset Manager
Growth Index 500
Morgan Stanley Universal Funds, Inc.
Morgan Stanley Asset Management
Emerging Markets Equity
Eligible Fixed Interest Option
Penn Mutual General Account
<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, 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, Philadelphia, Pennsylvania 19172
<PAGE>
THE PENN MUTUAL LIFE INSURANCE COMPANY
FOUNDED 1847
Insured William Penn $100,000 Specified Amount
Policy Number 0 000 000 July 1, 1999 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/ Robeert E. Chappell
- ------------------- -------------------------
Secretary Chairman and
Chief Executive Officer
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 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. The Policy Value, premium charge and the monthly deductions
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, Philadelphia, Pennsylvania 19172
VU-99(U)
<PAGE>
GUIDE TO POLICY SECTIONS
- --------------------------------------------------------------------------------
1. Life Insurance Qualification Test
2. Policy Specifications
3. Endorsements
4. Premiums
5. Lapse and Reinstatement
6. The Separate Account
7. The Fixed Account
8. Policy Value
9. Death and Maturity Benefits
10. Policy Loans
11. Surrender of Policy
12. Policy Changes
13. Transfer to Fixed Account
14. Owner and Beneficiary
15. General Provisions
16. Income Payment Options
17. Income Payment Option Table
Supplemental Agreements and a copy of any applications follow the Additional
Policy Specifications Section.
ALPHABETICAL INDEX
Section
Age.............................................................. 1,15
Allocation of Net Premiums....................................... 4
Annual Report.................................................... 15
Assignment....................................................... 14
Beneficiary...................................................... 1,14
Cash Surrender Value............................................. 11
Cash Value Accumulation Test .................................... 3
Continuation of Insurance........................................ 4
Contract......................................................... 15
Cost of Insurance................................................ 8
Cost of Insurance Rates.......................................... 8
Date of Issue.................................................... 1
Death Benefit.................................................... 9
Deferment of Transactions........................................ 15
Dividends........................................................ 15
Free Look Period................................................. Cover
Grace Period..................................................... 4
Guideline Premium Test........................................... 3
Income Payment Options........................................... 16
Income Payment Option Tables..................................... 17
Incontestability................................................. 15
Indebtedness..................................................... 10
Lapse............................................................ 5
Loan Interest.................................................... 10
Loan Value....................................................... 10
Maturity Date.................................................... 1
Maturity Benefit................................................. 9
Section
Monthly Anniversary.............................................. 15
Monthly Deduction................................................ 8
Mortality and Expense Risk Charge................................ 8
Net Cash Surrender Value......................................... 11
No-Lapse Date.................................................... 1,4
No-Lapse Premium................................................. 1,4
Owner............................................................ 14
Partial Surrender................................................ 11
Policy Date...................................................... 1,15
Policy Loan Account.............................................. 10
Policy Loans..................................................... 10
Policy Value..................................................... 8
Premium Charge................................................... 4
Premiums......................................................... 1,4
Rate Class....................................................... 1
Reinstatement.................................................... 5
Schedule of Benefits............................................. 1
Schedule of Premiums............................................. 1
Separate Account................................................. 1,6
Service Office................................................... 1
Specified Amount................................................. 1
Subaccounts...................................................... 6
Suicide Exclusion................................................ 9
Surrender........................................................ 11
Surrender Charge................................................. 11
<PAGE>
1. POLICY SPECIFICATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INSURED WILLIAM PENN $100,000 SPECIFIED AMOUNT
(INCLUDES POLICY VALUE)
POLICY NUMBER 0 000 000 JULY 1, 1999 POLICY DATE
AGE 35 STANDARD NONSMOKER RATE CLASS
</TABLE>
LIFE INSURANCE QUALIFICATION TEST IS GUIDELINE PREMIUM TEST
MATURITY DATE IS JULY 1, 2064
DATE OF ISSUE IS THE POLICY DATE
OWNER AND BENEFICIARY AS PROVIDED IN APPLICATION
SEPARATE ACCOUNT IS 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%
ALLOCATION DATE IS AUGUST 1, 1999
Schedule of Benefits
Description Amount
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE $100,000 SPECIFIED AMOUNT
RETURN OF PREMIUM TERM INSURANCE AGREEMENT
OPTION TO EXTEND THE MATURITY DATE
Schedule of Premiums
THE INITIAL PREMIUM OF $ 1294.66 WAS PAID ON THE POILCY DATE FOR 12 MONTHS.
SUBSEQUENT PREMIUMS ARE PAYABLE ANNUALLY AS FOLLOWS:
BEGINNING AS OF PREMIUM
JULY 1,2000 $ 1294.66
NO LAPSE MONTHLY PREMIUM IS $54.91
NO LAPSE PREMIUM DATE IS JULY 1, 2002
NOTE: INSURANCE WILL TERMINATE IF THE PREMIUMS PAID AND THE INTEREST CREDITED
ARE INSUFFICIENT TO COVER THE MONTHLY DEDUCTIONS, EXCEPT AS PROVIDED IN
SECTION 4.
THE SCHEDULED PREMIUMS SECTION 7702A OF THE INTERNAL REVENUE CODE OF 1986
ESTABLISHES A CLASS OF LIFE INSURANCE CONTRACTS DESIGNATED AS "MODIFIED
ENDOWMENT CONTRACTS.". THE RULES RELATING TO WHETHER A POICY WILL BE TREATED AS
A MODIFIED ENDOWMENT CONTRACT ARE EXTREMELY COMPLEX. PLEASE CONSULT WITH A
QUALIFIED TAX ADVISOR REGARDING YOUR OWN PERSONAL SITUATION.
Page 2
<PAGE>
1. POLICY SPECIFICATIONS
SCHEDULE OF SURRENDER CHARGES
MAXIMUM SURRENDER CHARGE PREMIUM $ 844.00
TABLE OF SURRENDER CHARGE FACTORS
POLICY YEAR SURRENDER FACTOR
1-7 1.00
8 .80
9 .60
10 .40
11 .20
12 AND LATER 0
SURRENDER CHARGE TABLE
(per $1,000 of Specified Amount)
AGE SURRENDER CHARGE
0 - 9 1.00
10 - 19 2.00
20 - 29 3.00
30 - 39 4.00
40 - 49 5.00
50 - 59 6.00
60 - 85 7.00
<TABLE>
<CAPTION>
SCHEDULE OF POLICY LOADS AND EXPENSE CHARGES
<S> <C>
Maximum percent of premium load 7.5%
(applied to each premium applied to the policy)
Maximum per policy monthly expense charge $9.00
Maximum expense charge per $1,000 of Specified Amount $0.10
(for the first twelve months following the policy date)
Maximum expense charge per $1,000 of Specified Amount $0.10 (for the first
twelve months following an increase in Specified Amount)
Maximum Moratlity and Expense Risk Charge 0.90%
SCHEDULE OF INTEREST RATES
Guaranteed Interest Rate 3% Effective Annual Rate
Death Benefit Discount Factor 1.0024663
Loan Interest Rate 4% Effective Annual Rate
Policy Loan Account Rates 3% Policy Years 1 -10
3.75% Policy Years 11 and after
</TABLE>
Page 3
<PAGE>
2. ENDORSEMENTS
TO BE MADE ONLY BY THE COMPANY
THIS PAGE IS INTENTIONALLY
LEFT BLANK.
Page 4
<PAGE>
3. QUALIFICATION AS LIFE INSURANCE
Your policy must qualify as life insurance under one of the following tests as
defined in Section 7702 of the Internal Revenue Code of 1986. The life insurance
qualification test for this policy will be the Guideline Premium Test unless
otherwise elected in the application. The Life Insurance Qualification Test for
this Policy is shown on Page 3. The test may not be changed at anytime after the
policy is issued.
GUIDELINE PREMIUM TEST - Under this test, the amount of premium that can be paid
in a policy year may not exceed the Maximum Premium Limit. 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 thereto. The Maximum Premium Limit for the following policy
year will be shown on the Annual Report sent to the Owner.
In addition, a minimum margin must exist between the Death Benefit and the
Policy Value. The margin is defined in Section 7702 and is based on the attained
age of the Insured. The Basic Death Benefit of the policy will be adjusted
accordingly with factors shown in the Table of Death Benefit Factors to satisfy
the requirements of this portion of the test. See the Death Benefit Section for
further details.
CASH VALUE ACCUMULATION TEST - Under this test, the Policy Value cannot at any
time exceed the net single premium required to fund the future benefits under
the policy. The net single premium is defined in Section 7702 of the Internal
Revenue Code. The Basic Death Benefit of the policy will be adjusted accordingly
with factors shown in the Table of Death Benefit Factors to satisfy the
requirements of this test. See the Death Benefit Section for further details.
The Company reserves the right to restrict Policy transactions as necessary in
order to qualify the policy as a life insurance contract under Section 7702. If
it is subsequently determined that a policy does not satisfy Section 7702, the
Company may take whatever steps are appropriate and necessary to attempt to
cause such a policy to comply with Section 7702.
4. PREMIUMS
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) We reserve the right to require submission of evidence of insurability
satisfactory to the Company on subsequent premiums that would cause an
immediate increase in the difference between the Death Benefit and the
Policy Value.
(d) If the Guideline Premium Test is in effect, total premiums paid in any
policy year may not exceed the Maximum Premium Limit for that policy year.
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 the Policy Value
Section. In no event will the percent of premium charge assessed on each premium
paid be greater than that shown on Page 3.
NET PREMIUM--Net premium is the amount of any premium payment reduced by the
percent of premium charge.
Page 5
<PAGE>
4. PREMIUMS (CONTINUED)
ALLOCATION OF NET PREMIUMS--The initial net premium and any additional premium
paid before the policy is issued will be allocated based on the Initial
Allocation specified on Page 3. On the Allocation Date listed on Page 3, 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. 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.
5. 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
Page 6
<PAGE>
5. LAPSE AND REINSTATEMENT(CONTINUED)
(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 the guaranteed interest rate until the date of
reinstatement;
(c) any dividend credited to the policy since the date of lapse;
(d) interest on (c) at the guaranteed interest rate 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 the guaranteed interest rate 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 the Surrender of Policy Section 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 the Policy Loans Section.
Following reinstatement, the provisions of No-Lapse Premium set forth in the
Premiums Section 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.
6. THE SEPARATE ACCOUNT
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.
Page 7
<PAGE>
6. THE SEPARATE ACCOUNT(CONTINUED)
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 Allocation Date listed on Page 3, 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.
7. 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 the Policy Value Section. 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 the
effective annual guaranteed interest rate listed on Page 3.
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 the Separate Account Section:
(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.
8. 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.
Page 8
<PAGE>
8. POLICY VALUE (CONTINUED)
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
the Death Benefit Discount Factor; 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 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
on Page 3.
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.
The number of subaccount accumulation units will increase when:
(a) net premiums are allocated to that subaccount;
(b) amounts are transferredto 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.
Page 9
<PAGE>
8. POLICY VALUE (CONTINUED)
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 maximum percentage listed on Page 3.
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 if required.
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<PAGE>
9. 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 Policy Value multiplied by an attained age factor shown in Table of
Death Benefit Factors.
(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 Policy Value multiplied by an attained age factor shown in Table of
Death Benefit Factors.
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.
10. 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 loan interest rate listed on Page
3. 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.
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<PAGE>
10. 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
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 the Policy Loan Account Rate listed on Page 3. 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.
11. 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 of Surrender Factors
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 of Surrender Factors
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.
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
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<PAGE>
11. SURRENDER OF POLICY (CONTINUED)
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 be reduced by the amount of the partial surrender that exceeds the
difference between the Death Benefit and the Specified Amount. In those
instances, the Specified Amount will be reduced 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.
12. 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--An increase in Specified Amount must be applied
for on a written application and is subject to the Company's underwriting
guidelines in effect at the time of the increase. 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.
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
Page 13
<PAGE>
12. POLICY CHANGES (CONTINUED)
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.
13. 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.
14. 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.
15. 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
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15. GENERAL PROVISIONS (CONTINUED)
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 --If the age 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.
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.
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.
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<PAGE>
15. GENERAL PROVISIONS (CONTINUED)
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.
16. 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.
In no event will the monthly income under these life income options be less than
the income stated in the Income Payment Option Tables. The tables are based the
Annuity 2000 Basic Table, without projections, 50% male/50% female. Options 4,
5, 6 and 7 will not participate in divisible surplus.
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16. INCOME PAYMENT OPTIONS (CONTINUED)
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 and of the continued life of an option
annuitant. If the age 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.
17. INCOME PAYMENT OPTION TABLE
Amount of income provided by each $1,000 applied under an income payment option
<TABLE>
<CAPTION>
OPTION 1--Interest Income OPTION 2--Income for Fixed Period of Years
- ----------------------------------------------- ----------------------------------------------------------------------------
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>
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17. INCOME PAYMENT OPTION TABLE(CONTINUED)
"Age" as used in the tables for Options 4, 5, 6 and 7 means an adjusted age
determined in the following manner from the actual age of the Annuitant on the
birthday nearest the date of the first payment:
DATE OF FIRST PAYMENT ADJUSTED AGE
Before calendar year 2010 Actual Age
2010-2019 Actual age decreased by 1
2020-2029 Actual age decreased by 2
2030 and later Actual age decreased by 3
<TABLE>
<CAPTION>
OPTIONS 4, 5 AND 6--Monthly Life Income
- --------------------------------------------------------------------------------------------------------------------------------
Option 4 Option 5 Option 6 Option 4 Option 5 Option 6
- --------------------------------------------------------------------------------------------------------------------------------
Age of Age of
Option 20 Year 10 Year 5 Year with Option 20 Year 10 Year 5 Year with
Annui- Life Guaranteed Guaranteed Guaranteed Refund Annui- Life Guaranteed Guaranteed Guaranteed Refund
tant Income Period Period Period Period tant Income Period Period Period Period
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
15 and under $2.88 $2.87 $2.87 $2.87 $2.86 50 $3.95 $3.86 $3.93 $3.95 $3.84
16 2.89 2.88 2.89 2.89 2.88 51 4.02 3.91 3.99 4.01 3.89
17 2.90 2.90 2.90 2.90 2.89 52 4.08 3.96 4.06 4.08 3.95
18 2.92 2.91 2.92 2.92 2.91 53 4.16 4.02 4.12 4.15 4.01
19 2.93 2.93 2.93 2.93 2.92 54 4.23 4.08 4.20 4.22 4.07
20 2.95 2.94 2.95 2.95 2.94 55 4.31 4.14 4.27 4.30 4.13
21 2.97 2.96 2.96 2.97 2.95 56 4.39 4.20 4.35 4.38 4.20
22 2.98 2.98 2.98 2.98 2.97 57 4.48 4.26 4.43 4.47 4.27
23 3.00 2.99 3.00 3.00 2.99 58 4.58 4.33 4.52 4.56 4.35
24 3.02 3.01 3.02 3.02 3.00 59 4.68 4.39 4.61 4.66 4.43
25 3.04 3.03 3.04 3.04 3.02 60 4.78 4.46 4.71 4.77 4.51
26 3.06 3.05 3.06 3.06 3.04 61 4.90 4.53 4.81 4.88 4.60
27 3.08 3.07 3.08 3.08 3.06 62 5.02 4.60 4.92 5.00 4.69
28 3.10 3.09 3.10 3.10 3.08 63 5.15 4.66 5.03 5.12 4.79
29 3.12 3.11 3.12 3.12 3.10 64 5.28 4.73 5.15 5.26 4.89
30 3.15 3.14 3.15 3.15 3.13 65 5.43 4.80 5.28 5.40 5.00
31 3.17 3.16 3.17 3.17 3.15 66 5.59 4.87 5.41 5.55 5.11
32 3.20 3.19 3.20 3.20 3.17 67 5.76 4.93 5.55 5.71 5.23
33 3.23 3.21 3.22 3.23 3.20 68 5.94 4.99 5.70 5.88 5.35
34 3.26 3.24 3.25 3.25 3.23 69 6.13 5.05 5.85 6.06 5.49
35 3.29 3.27 3.28 3.28 3.25 70 6.33 5.11 6.01 6.26 5.63
36 3.32 3.30 3.31 3.32 3.28 71 6.56 5.17 6.17 6.46 5.77
37 3.35 3.33 3.35 3.35 3.31 72 6.79 5.21 6.34 6.68 5.93
38 3.38 3.36 3.38 3.38 3.34 73 7.05 5.26 6.51 6.92 6.09
39 3.42 3.39 3.41 3.42 3.37 74 7.32 5.30 6.69 7.17 6.27
40 3.46 3.43 3.45 3.46 3.41 75 7.61 5.34 6.88 7.43 6.45
41 3.50 3.46 3.49 3.50 3.44 76 7.93 5.37 7.06 7.71 6.64
42 3.54 3.50 3.53 3.54 3.48 77 8.27 5.40 7.25 8.00 6.85
43 3.58 3.54 3.57 3.58 3.52 78 8.64 5.42 7.44 8.32 7.06
44 3.63 3.58 3.62 3.63 3.56 79 9.03 5.44 7.62 8.64 7.29
45 3.68 3.62 3.67 3.67 3.60 80 and 9.46 5.46 7.81 8.99 7.53
46 3.73 3.67 3.71 3.72 3.64 over
47 3.78 3.71 3.76 3.78 3.69
48 3.84 3.76 3.82 3.83 3.74
49 3.89 3.81 3.87 3.89 3.79
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
OPTION 7--Joint and Survivor Monthly Life Income
- ------------------------------------------------------------------------------------------------------------------------------------
Age of First Age of Second Option Annuitant
Option Annuitant 45 50 55 60 65 70 75 80
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
45 $3.34 $3.42 $3.49 $3.55 $3.59 $3.62 $3.64 $3.66
50 3.42 3.53 3.64 3.73 3.80 3.85 3.89 3.92
55 3.49 3.64 3.79 3.92 4.04 4.13 4.20 4.24
60 3.55 3.73 3.92 4.12 4.30 4.45 4.57 4.65
65 3.59 3.80 4.04 4.30 4.56 4.81 5.02 5.17
70 3.62 3.85 4.13 4.45 4.81 5.18 5.52 5.80
75 3.64 3.89 4.20 4.57 5.02 5.52 6.04 6.52
80 3.66 3.92 4.24 4.65 5.17 5.80 6.52 7.27
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 18
<PAGE>
ADDITIONAL POLICY SPECIFICATIONS
TABLE OF GUARANTEED MAXIMUM MONTHLY COST OF INSURANCE RATES PER $1,000
ATTAINED BASE TERM
AGE RATE RATE
35 0.1374 0.1374
36 0.1444 0.1444
37 0.1535 0.1535
38 0.1635 0.1635
39 0.1752 0.1752
40 0.1877 0.1877
41 0.2025 0.2025
42 0.2180 0.2180
43 0.2348 0.2348
44 0.2518 0.2518
45 0.2715 0.2715
46 0.2928 0.2928
47 0.3160 0.3160
48 0.3405 0.3405
49 0.3681 0.3681
50 0.3973 0.3973
51 0.4322 0.4322
52 0.4717 0.4717
53 0.5170 0.5170
54 0.5677 0.5677
55 0.6239 0.6239
56 0.6855 0.6855
57 0.7507 0.7507
58 0.8199 0.8199
59 0.8978 0.8978
60 0.9848 0.9848
61 1.0822 1.0822
62 1.1939 1.1939
63 1.3235 1.3235
64 1.4706 1.4706
65 1.6326 1.6326
66 1.8071 1.8071
67 1.9938 1.9938
68 2.1920 2.1920
69 2.4076 2.4076
70 2.6519 2.6519
71 2.9685 2.9685
72 3.2524 3.2524
73 3.6266 3.6266
74 4.0498 4.0498
75 4.5073 4.5073
76 4.9962 4.9962
POLICY NUMBER 0 000 000
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE POLICY
WILLIAM PENN
AGE 35
<PAGE>
ADDITIONAL POLICY SPECIFICATIONS
TABLE OF GUARANTEED MAXIMUM MONTHLY COST OF INSURANCE RATES PER $1,000
ATTAINED BASE TERM
AGE RATE RATE
77 5.5110 5.5110
78 6.0479 6.0479
79 6.6208 6.6208
80 7.2520 7.2520
81 7.9595 7.9595
82 8.7646 8.7646
83 9.6787 9.6787
84 10.6815 10.6815
85 11.7578 11.7578
86 12.8842 12.8842
87 14.0619 14.0619
88 15.2691 15.2691
89 16.5250 16.5250
90 17.8400 17.8400
91 19.2469 19.2469
92 20.7898 20.7898
93 22.5373 22.5373
94 24.7467 24.7467
95 27.8275 27.8275
96 32.7884 32.7884
97 41.4578 41.4578
98 57.9566 57.9566
99 83.3333 83.3333
POLICY NUMBER 0 000 000
FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE POLICY
WILLIAM PENN
AGE 35
<PAGE>
ADDITIONAL POLICY SPECIFICATIONS
Table of Death Benefit Factors
Attained
Age Factor
0-40 2.50
41 2.43
42 2.36
43 2.29
44 2.22
45 2.15
46 2.09
47 2.03
48 1.97
49 1.91
50 1.85
51 1.78
52 1.71
53 1.64
54 1.57
55 1.50
56 1.46
57 1.42
58 1.38
59 1.34
60 1.30
61 1.28
62 1.26
63 1.24
64 1.22
65 1.20
66 1.19
67 1.18
68 1.17
69 1.16
70 1.15
71 1.13
72 1.11
73 1.09
74 1.07
75-90 1.05
91 1.04
92 1.03
93 1.02
94-99 1.01
Page 19
<PAGE>
ADDITIONAL POLICY SPECIFICATIONS
<TABLE>
<CAPTION>
Eligible Mutual Funds
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Penn Series Funds, Inc.
Independence Capital (ICMI) Vontobel USA
Money Market International Equity
Quality Bond
Growth Equity
OpCap Advisors T. Rowe Price
Value Equity High Yield Bond
Small Capitalization Flexibly Managed
ICMI/Robertson Stephens
Emerging Growth
Neuberger & Berman Advisers Management Trust
Neuberger & Berman
Limited Maturity Bond Portfolio
Balanced Portfolio
Partners Portfolio
Variable Insurance Product Funds Variable Insurance Product Funds II
Fidelity Management Fidelity Management
Equity Income Asset Manager
Growth Index 500
Morgan Stanley Universal Funds, Inc.
Morgan Stanley Asset Management
Emerging Markets Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Eligible Fixed Interest Option
- -------------------------------
Penn Mutual General Account
</TABLE>
<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.
A004893B
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, 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, Philadelphia, Pennsylvania 19172
VU-99(U)
<PAGE>
RIDER -- OPTION TO EXTEND THE MATURITY DATE
The Company agrees, subject to the provisions of this supplemental agreement, to
provide the Option to Extend the Maturity Date described below. The Company 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 and
supersedes the Deferral of Maturity provision. It is subject to all of the
provisions of the policy unless stated otherwise in this agreement.
OPTION TO EXTEND THE MATURITY DATE--The Owner will have the option to continue
the Basic Death Benefit under the base policy past the original Maturity Date
listed on Page 3 without evidence of insurability. The option may be exercised,
while this agreement is in force, as of the original Maturity Date. By
exercising this option, the original Maturity Date will be extended a period of
20 years.
A written request for the extension of the original Maturity Date must be made
within 30 days prior to the date as of which this option is exercised.
The Basic Death Benefit and the Policy Value will continue to be calculated as
defined in the base policy.
The attained age Death Benefit Factors will equal 1.00 for the maturity
extension period. The Basic Cost of Insurance Rate for attained ages during the
maturity extension period will be equal to zero.
New Policy Loans may not be made during the maturity extension period. Policy
Loans taken prior to the original Maturity Date will continue to accrue interest
and the Policy Loan Account will continue to operate as stated in the base
policy.
During the maturity extension period, premium payments will not be accepted
unless necessary to prevent lapse.
All riders and benefits attached to the base policy will terminate as of the
original Maturity Date.
COST OF INSURANCE--The Cost of Insurance for the Option to Extend the Maturity
Date is determined on a monthly basis. The Cost of Insurance for a policy month
is calculated as (a) multiplied by (b) minus (c), where:
(a) is the Cost of Insurance Rate for this benefit divided by 1,000;
<PAGE>
(b) is the Basic Death Benefit at the beginning of the policy month divided by
the Death Benefit Discount Factor; and
(c) is the Policy Value at the beginning of the policy month before the
Monthly Deduction.
The Cost of Insurance Rate for this benefit is based on the attained age, sex
and rate class of the Insured. The Cost of Insurance Rates will be determined by
Penn Mutual based on expectations as to future experience. However, these rates
combined with the Cost of Insurance rates on the base policy will not exceed The
Base Rates shown in the Additional Policy Specifications for the base policy.
TERMINATION--This agreement will terminate upon:
(a) lapse of this policy;
(b) the date of the death of the Insured;
(c) surrender of this policy;
(d) the Monthly Anniversary that coincides with or next follows the (i) receipt
at the Home Office of a written request by the Owner to terminate this
agreement and (ii) 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.
The Penn Mutual Life Insurance Company
/s/ Robert E. Chappell
- ---------------------------
Chairman and
Chief Executive Officer
THE POLICY MAY BE SUBJECT TO TAX CONSEQUENCES WHEN CONTINUED BEYOND AGE 100. YOU
SHOULD CONSULT A QUALIFIED TAX ADVISOR PRIOR TO EXERCISING THE OPTION.
<PAGE>
RIDER -- OPTION TO EXTEND THE MATURITY DATE
The Company agrees, subject to the provisions of this supplemental agreement, to
provide the Option to Extend the Maturity Date described below. The Company 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 and
supersedes the Deferral of Maturity provision. It is subject to all of the
provisions of the policy unless stated otherwise in this agreement.
OPTION TO EXTEND THE MATURITY DATE--The Owner will have the option to continue
the Basic Death Benefit under the base policy past the original Maturity Date
listed on Page 3 without evidence of insurability. The option may be exercised,
while this agreement is in force, as of the original Maturity Date. By
exercising this option, the original Maturity Date will be extended a period of
20 years.
A written request for the extension of the original Maturity Date must be made
within 30 days prior to the date as of which this option is exercised.
The Basic Death Benefit and the Policy Value will continue to be calculated as
defined in the base policy.
The attained age Death Benefit Factors will equal 1.00 for the maturity
extension period. The Basic Cost of Insurance Rate for attained ages during the
maturity extension period will be equal to zero.
New Policy Loans may not be made during the maturity extension period. Policy
Loans taken prior to the original Maturity Date will continue to accrue interest
and the Policy Loan Account will continue to operate as stated in the base
policy.
During the maturity extension period, premium payments will not be accepted
unless necessary to prevent lapse.
All riders and benefits attached to the base policy will terminate as of the
original Maturity Date.
COST OF INSURANCE--The Cost of Insurance for the Option to Extend the Maturity
Date is determined on a monthly basis. The Cost of Insurance for a policy month
is calculated as (a) multiplied by (b) minus (c), where:
(a) is the Cost of Insurance Rate for this benefit divided by 1,000;
(b) is the Basic Death Benefit at the beginning of the policy month divided by
the Death Benefit Discount Factor; and
(c) is the Policy Value at the
beginning of the policy month before the Monthly Deduction.
The Cost of Insurance Rate for this benefit is based on the attained age and
rate class of the Insured. The Cost of Insurance Rates will be determined by
Penn Mutual based on expectations as to future experience. However, these rates
combined with the Cost of Insurance rates on the base policy will not exceed The
Base Rates shown in the Additional Policy Specifications for the base policy.
TERMINATION--This agreement will terminate upon:
(a) lapse of this policy;
(b) the date of the death of the Insured;
(c) surrender of this policy;
(d) the Monthly Anniversary that coincides with or next follows the (i) receipt
at the Home Office of a written request by the Owner to terminate this
agreement and (ii) 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.
The Penn Mutual Life Insurance Company
/s/ Robert E. Chappell
- -------------------------
Chairman and
Chief Executive Officer
THE POLICY MAY BE SUBJECT TO TAX CONSEQUENCES WHEN CONTINUED BEYOND AGE 100. YOU
SHOULD CONSULT A QUALIFIED TAX ADVISOR PRIOR TO EXERCISING THIS OPTION.
<PAGE>
RIDER - RETURN OF PREMIUM TERM INSURANCE AGREEMENT
The 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.
RETURN OF PREMIUM 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 sum
of all premiums paid into the policy up to the most recent monthiversary less
any amounts paid into the policy or credited to the policy by the Company while
the Insured is disabled under a waiver of premium or a waiver of monthly
deductions agreement.
The Term Insurance Benefit will be paid on the death of the Insured 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.
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 under this
agreement; and
(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.
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 the Term Insurance
applicable to this policy, and
(b) is the amount of 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
<PAGE>
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. 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.
Availability. This agreement will not be considered a part of the policy unless
the Specified Amount for the base policy includes the Policy Value. A request at
a later date to change the Specified Amount Option so that the Specified Amount
does not include the Policy Value will not be allowed unless we also receive a
written request to terminate this rider.
TERMINATION OF AGREEMENT--This agreement will terminate upon :
(a) the original maturity date of the base policy;
(b) lapse of this policy;
(c) surrender of this policy;
(d) 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.
The Penn Mutual Life Insurance Company
/s/ Robert E. Chappell
- ------------------------
Chairman and
Chief Executive Officer
<PAGE>
RIDER - RETURN OF PREMIUM TERM INSURANCE AGREEMENT
The 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.
RETURN OF PREMIUM 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 sum
of all premiums paid into the policy up to the most recent monthiversary less
any amounts paid into the policy or credited to the policy by the Company while
the Insured is disabled under a waiver of premium or a waiver of monthly
deductions agreement.
The Term Insurance Benefit will be paid on the death of the Insured 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.
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 under this
agreement; and
(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.
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 the Term Insurance
applicable to this policy, and
(b) is the amount of Term Insurance under this agreement.
The Cost of Insurance Rate for the Term Insurance is based on the attained age
and rate class of the Insured. Cost of Insurance Rates will be determined
<PAGE>
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. 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.
Availability. This agreement will not be considered a part of the policy unless
the Specified Amount for the base policy includes the Policy Value. A request at
a later date to change the Specified Amount Option so that the Specified Amount
does not include the Policy Value will not be allowed unless we also receive a
written request to terminate this rider.
TERMINATION OF AGREEMENT--This agreement will terminate upon :
(a) the original maturity date of the base policy;
(b) lapse of this policy;
(c) surrender of this policy;
(d) 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.
The Penn Mutual Life Insurance Company
/s/ Robert E. Chappell
- -----------------------
Chairman and
Chief Executive Officer
<PAGE>
RIDER--SUPPLEMENTAL EXCHANGE AGREEMENT
The Penn Mutual Life Insurance Company agrees, subject to the provisions of this
supplemental agreement, to provide the Exchange Privilege described below.
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.
EXCHANGE PRIVILEGE--Within one year following the termination of the business
relationship which existed between the Owner and the Insured at the time that
this policy was issued, this policy may be exchanged for a new policy on the
life of a new Insured subject to the following conditions:
(1) At the time of the exchange the new Insured must have the same business
relationship to the Owner as did the Insured in this policy.
(2) The new Insured must submit evidence of insurability satisfactory to the
Company.
(3) This policy must be in force and not be in a grace period at the time of the
exchange.
(4) The Owner must make a written application for the exchange.
(5) The Owner must make any premium payment which would be necessary to keep the
new policy in force for two months.
(6) The Owner must surrender all rights in this policy in exchange for the new
policy.
NEW POLICY--The new policy will be on the same plan as this policy. The policy
form will be that which the Company would have used if the new policy had been
issued on the life of the new Insured on the Policy Date.
The Policy Date of the new policy will be the same as the Policy Date of this
policy. The Date of Issue of the new policy will be the date of the exchange.
The Specified Amount of the new policy will be as stated by the Owner in the
application for the exchange subject to the following conditions:
(1) The Specified Amount must comply with the rules of Penn Mutual as to minimum
amount.
(2) The Specified Amount must be such that the new policy will satisfy the
requirements of Section 7702 of the Internal Revenue Code of 1986, as
amended, or as set forth in any applicable successor provision thereto.
The Policy Value of the new policy on the date of the exchange will be equal to
the Policy Value of this policy on such date.
The surrender charges applicable to the new policy will be the surrender charges
which would have been applicable to the policy had it been issued on the life of
the Insured under the new policy.
<PAGE>
The new policy will be subject to the rules of Penn Mutual as to age at issue
which were in effect on the Policy Date. The Maturity Date of the new policy
will be listed on the policy endorsement.
The new policy will be subject to any assignment of this policy and will be
subject to any indebtedness on this policy.
Supplemental agreements may be included in the new policy only with the consent
of the Company and subject to the rules of the Company.
DATE OF EXCHANGE--The date of the exchange will be the first Monthly Anniversary
of this policy following the approval by Penn Mutual of the application for the
exchange. The new policy will be in force beginning on the date of the exchange.
This policy will terminate on the day prior to the date of the exchange.
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.
TERMINATION--This agreement will terminate upon:
(1) lapse of this policy;
(2) the date of death of the Insured;
(3) surrender of this policy; or
(4) 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.
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.
The Penn Mutual Life Insurance Company
/s/ Robert E. Chappell
- -------------------------
Chairman and
Chief Executive Officer
<PAGE>
Section 2 - Endorsement
Endorsement--Business Accounting Benefit
The contract is amended as follows:
1. The Schedule of Policy Loads and Expense Charges provision of the Policy
Specifications section is amended to add the following charges:
<TABLE>
<CAPTION>
<S> <C> <C>
Charge per $1,000 Policy
of Specified Amount Year
Maximum monthly additional expense charge $0.03 1 -11
0.00 12 and later
Charge per $1,000 Policy Year
of increase in Specified Amount after increase
Maximum monthly additional expense charge $0.03 1 -11
0.00 12 and later
</TABLE>
2. The Surrender Charge provision of the Surrender of Policy section is
replaced with the following:
Surrender Charge -- The surrender charge for the initial Specified Amount is
equal to zero. The surrender charge for each increase in the Specified
Amount is equal to zero.
3. This endorsement will terminate upon the Monthly Anniversary that coincides
with or next follows the (I) receipt at the Home Office of a written request
by the Owner to terminate this agreement and (ii) return of this policy for
appropriate endorsement.
4. The terms of this endorsement shall override any inconsistent or conflicting
provisions in the contract. The Effective Date of this endorsement is the
Contract Date.
Philadelphia, Pennsylvania The Penn Mutual Life Insurance Company
/s/ Robert E. Chappell
-------------------------
Chairman and
Chief Executive Officer
(Included at Issue)
Endorsement No. 1707-01
<PAGE>
2. Endorsement
Endorsement -- Cost of Insurance
The Cost of Insurance provision in the Riders that may be attached to this base
policy are amended so that item (b) in the Cost of Insurance calculation reads
as follows:
"(b) is the Basic Death Benefit under this policy at the beginning of the policy
month divided by 1.0024663."
Philadelphia, Pennsylvania The Penn Mutual Life Insurance Company
(Included at Issue)
/s/ Robert E. Chappell
-------------------------
Chairman and
Chief Executive Officer
Endorsement No. 1706-01
<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. 9 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. 9 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. 9 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
