SUPPLEMENT, DATED DECEMBER 18, 1996
TO THE PROSPECTUS DATED MAY 1, 1996
FOR PRINCIPAL MUTUAL LIFE INSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT
FLEX VARIABLE LIFE - FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
Effective December 18, 1996, the prospectus for the Flex Variable Life Policy
dated May 1, 1996 is amended by adding the following as the second paragraph
under the heading "Adjustment Options" on page 17:
Any payment submitted with a proposed face amount increase is held initially in
the General Account without interest. If the Company approves the adjustment,
then on the effective date of the adjustment the amount of the premium payment
so held, less the Premium Expense Charge, is allocated among the Divisions and
the Fixed Account in accordance with the policyowner's existing directions for
allocation of premium payments. Net premiums paid after an increase in face
amount also are allocated among the Divisions and the Fixed Account in
accordance with the policyowner's existing directions for allocation of premium
payments.
This change will apply to any request for a face amount increase received by the
Company on or after January 15, 1997.
LV10 S
Prospectus Dated May 1, 1996
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT FLEX
VARIABLE LIFE - FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
"Flex Variable Life," the flexible premium variable life insurance policy
(the "Policy" or the "Policies") offered by Principal Mutual Life Insurance
Company ("Company") and described in this Prospectus is designed to provide
lifetime insurance protection and maximum flexibility in connection with premium
payments and death benefits. A policyowner may, within limits, vary the
frequency and amount of premium payments and increase or decrease the face
amount of the life insurance benefit under the Policy. This flexibility allows a
policyowner to provide for changing life insurance needs within a single
insurance policy.
A schedule of premium payments is established for a Policy in accordance
with policyowner preference. A minimum premium is required during the first
twelve policy months. At other times, failure to pay premiums will not cause a
Policy to terminate so long as its accumulated value, less the surrender charge
and unpaid policy loans and loan interest, is sufficient on a Policy processing
day to allow deduction of the cost of insurance and other charges.
Premium payments, less a 2% premium tax charge and a 5% sales load, are
allocated according to policyowner direction to one or more Divisions of the
Principal Mutual Life Insurance Company Variable Life Separate Account
("Separate Account"), except for premiums received during the first 45 days from
the policy date, which are allocated for that period to the Money Market
Division of the Separate Account. Each Division invests exclusively in shares
representing an interest in a corresponding mutual fund organized by the
Company. The accompanying prospectus describes the investment objectives and the
attendant risks of the mutual funds currently offered as investment choices
under the Policy: Principal Balanced Fund, Inc. Principal Bond Fund, Inc.,
Principal Capital Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc.,
Principal High Yield Fund, Inc., and Principal Money Market Fund, Inc.
Accumulated value and duration of coverage under the Policy will, and the
death benefit may, increase or decrease based upon the investment experience of
the Divisions of the Separate Account. The accumulated value will also reflect
the amount and frequency of premium payments, surrenders of accumulated value,
policy loans and loan interest, interest earned on loaned amounts, and the
charges and deductions connected with the Policy. The policyowner bears the
entire investment risk as to the Policy's accumulated value, which is not
guaranteed.
The Policy provides a death benefit upon the insured's death. The
policyowner chooses one of two death benefit options. Under Option 1, the death
benefit is the greater of the face amount of the Policy or the accumulated value
on the date of death multiplied by an applicable percentage based upon the
insured's attained age. Under Option 2, the death benefit is the greater of the
face amount of the Policy plus the accumulated value on the date of the
insured's death or the Policy's accumulated value multiplied by the applicable
percentage. The policyowner may, under certain conditions, change from one death
benefit option to the other.
The policyowner generally may obtain policy loans at any time the Policy
has loan value prior to the Policy's maturity date. In addition, subject to
certain restrictions, the Policy's accumulated value may be partially or totally
surrendered. Surrender charges consisting of a contingent deferred sales load
and a contingent deferred administration charge may be imposed upon total
surrender of a Policy. The amount of surrender charge assessed per $1,000 of
face amount is based upon the issue age and sex (where allowed by law) of the
insured and the policy year at the time of surrender.
Prospective purchasers of this Policy are advised that replacement of
existing insurance coverage may not be financially advantageous. It may also be
disadvantageous to purchase a Policy as a means to obtain additional insurance
protection if the purchaser already owns a flexible premium variable life
insurance policy.
This Prospectus is valid only if accompanied or preceded by the current
prospectus for Principal Balanced Fund, Inc., Principal Bond Fund, Inc.,
Principal Capital Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc.,
Principal High Yield Fund, Inc., and Principal Money Market Fund, Inc.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Please Read This Prospectus Carefully And Retain It For Future Reference.
TABLE OF CONTENTS
GLOSSARY OF SPECIAL TERMS .................................................... 4
SUMMARY ...................................................................... 5
The Policy............................................................... 5
Principal Mutual Life Insurance Company
Variable Life Separate Account .......................................... 5
Premiums................................................................. 5
Charges and Deductions .................................................. 6
Maturity Proceeds........................................................ 6
Death Benefit and Proceeds............................................... 6
Adjustment Options....................................................... 7
Policy Values............................................................ 7
Transfers................................................................ 7
Policy Loans............................................................. 7
Surrender, Termination and Reinstatement................................. 8
Policy Cancellation...................................................... 9
Distribution of the Policy............................................... 9
Tax Consequences of the Policy........................................... 9
DESCRIPTION OF PRINCIPAL MUTUAL
LIFE INSURANCE COMPANY .......................................................10
PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY VARIABLE LIFE SEPARATE
ACCOUNT...................................................................... 10
Principal Balanced Fund, Inc.............................................10
Principal Bond Fund, Inc.................................................11
Principal Capital Accumulation Fund, Inc.................................11
Principal Emerging Growth Fund, Inc......................................11
Principal High Yield Fund, Inc...........................................11
Principal Money Market Fund, Inc.........................................11
PREMIUMS......................................................................12
Purchase Procedures......................................................12
Payment of Premiums......................................................12
Premium Limitations......................................................13
Allocation of Premiums...................................................13
Policy "Free Look".......................................................13
Policy Termination.......................................................14
Reinstatement............................................................15
DEATH BENEFITS AND RIGHTS.....................................................15
Death Proceeds...........................................................15
Death Benefit............................................................15
Applicable Percentage....................................................16
Change in Death Benefit Option...........................................16
Adjustment Options.......................................................17
POLICY VALUES.................................................................18
Calculation of Accumulated Value.........................................18
Units....................................................................18
Unit Values..............................................................18
Net Investment Factor....................................................18
Valuations in Connection with a Policy...................................19
Transfers................................................................19
Policy Loans.............................................................19
Surrender................................................................20
CHARGES AND DEDUCTIONS........................................................20
Premium Expense Charge...................................................20
Monthly Deduction........................................................21
Mortality and Expense Risks Charge.......................................22
Transaction Charge.......................................................22
Surrender Charge.........................................................22
Other Charges............................................................26
Special Plans............................................................26
OTHER MATTERS.................................................................26
Voting Rights............................................................26
Statement of Value.......................................................27
Service Available by Telephone...........................................27
GENERAL PROVISIONS............................................................28
Addition, Deletion, or Substitution of
Investments..............................................................28
Optional Insurance Benefits..............................................28
Death Benefit Guarantee Rider............................................28
The Contract.............................................................29
Incontestability.........................................................29
Misstatements............................................................29
Suicide..................................................................29
Ownership................................................................29
Beneficiaries............................................................29
Benefit Instructions.....................................................30
Postponement of Payments.................................................30
Assignment...............................................................30
Policy Proceeds..........................................................30
Participating Policy.....................................................31
Right to Exchange Policy.................................................31
DISTRIBUTION OF THE POLICY....................................................31
OFFICERS AND DIRECTORS OF
PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY.......................................................................32
STATE REGULATION OF PRINCIPAL
MUTUAL LIFE INSURANCE COMPANY.................................................33
FEDERAL TAX MATTERS...........................................................33
The Status of the Company and the
Separate Account........................................................34
Charges for Taxes........................................................34
Diversification Standards................................................34
Life Insurance Status of Policy..........................................34
Modified Endowment Contract Status.......................................34
Policy Surrenders and Partial Surrenders.................................35
Policy Loans and Interest Deductions.....................................35
Corporate Alternative Minimum Tax........................................36
Exchange or Assignment of Policies.......................................36
Withholding..............................................................36
Taxation of Accelerated Death Benefits...................................36
Other Tax Issues.........................................................36
EMPLOYEE BENEFIT PLANS........................................................36
LEGAL PROCEEDINGS.............................................................36
LEGAL OPINION.................................................................37
INDEPENDENT AUDITORS..........................................................37
REGISTRATION STATEMENT........................................................37
FINANCIAL STATEMENTS..........................................................37
Report of Independent Auditors...........................................38
Variable Life Separate Account
Financial Statements.....................................................39
Report of Independent Auditors...........................................51
Principal Mutual Life Insurance
Company Financial Statements.............................................52
APPENDIX - ILLUSTRATIONS OF POLICY
VALUES AND DEATH BENEFITS.....................................................73
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY DOES NOT AUTHORIZE ANY INFORMATION OR REPRESENTATIONS REGARDING THE
OFFERING DESCRIBED IN THIS PROSPECTUS OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, THE PROSPECTUS OF PRINCIPAL BALANCED FUND, INC., PRINCIPAL BOND
FUND, INC., PRINCIPAL CAPITAL ACCUMULATION FUND, INC., PRINCIPAL EMERGING GROWTH
FUND, INC., PRINCIPAL HIGH YIELD FUND, INC., AND PRINCIPAL MONEY MARKET FUND,
INC. OR THE STATEMENTS OF ADDITIONAL INFORMATION OF THESE FUNDS.
GLOSSARY OF SPECIAL TERMS
Attained Age - The age last birthday on the prior policy anniversary.
Division - A part of the Principal Mutual Life Insurance Company Variable
Life Separate Account which is invested in shares of a single mutual fund.
Face Amount - The minimum death benefit of a Policy so long as the Policy
remains in force.
General Account - The assets of Principal Mutual Life Insurance Company
other than those allocated to any of the separate accounts of Principal Mutual
Life Insurance Company.
Guideline Annual Premium - The level annual payment necessary to provide
the future benefit under a Policy, through maturity, based on the 1980
Commissioners Standard Ordinary Mortality Table, a 5% assumed interest rate, and
the fees and charges specified for a Policy.
Internal Revenue Code - The Internal Revenue Code of 1954, as amended, and
regulations promulgated thereunder. Reference to the Internal Revenue Code means
such Internal Revenue Code or the corresponding provisions of any subsequent
revenue code and any regulations thereunder.
Investment Account - An account established under a Policy for a
policyowner with respect to a Division of the Principal Mutual Life Insurance
Company Variable Life Separate Account.
Maturity Date - The policy anniversary following the insured's 95th
birthday.
Monthly Date - The day of the month which is the same as the policy date.
For example, if the policy date is June 10, 1996, the first monthly date is July
10, 1996.
Mutual Fund - Principal Balanced Fund, Inc., Principal Bond Fund, Inc.,
Principal Capital Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc.,
Principal High Yield Fund, Inc., Principal Money Market Fund, Inc., or other
registered open-end investment companies substituted therefor or added for
investment by a Division of the Principal Mutual Life Insurance Company Variable
Life Separate Account.
Policy date - The policy date is the date by which both the application and
a premium payment in an amount at least equal to the required minimum initial
premium for the Policy have been received in the home office of the Company.
Policy Years and Anniversaries - The policy years and anniversaries
computed from the policy date. Example: If the policy date is May 5, 1996, the
first policy year ends on May 4, 1997 and the first policy anniversary falls on
May 5, 1997.
Principal Mutual Life Insurance Company Variable Life Separate Account - A
separate account established by Principal Mutual Life Insurance Company under
Iowa law to receive premiums under the Policies offered by this Prospectus and
other variable life insurance contracts issued by Principal Mutual Life
Insurance Company. It is divided into a Balanced Division, (invested in
Principal Balanced Fund, Inc.), a Bond Division (invested in Principal Bond
Fund, Inc.), a Capital Accumulation Division, formerly known as the Common Stock
Division, (invested in Principal Capital Accumulation Fund, Inc.), an Emerging
Growth Division (invested in Principal Emerging Growth Fund, Inc.), a High Yield
Division (invested in Principal High Yield Fund, Inc.), and a Money Market
Division (invested in Principal Money Market Fund, Inc.).
Prorated Basis - In the same proportion as the value of a particular
investment account for a Policy bears to the total value of all investment
accounts for that Policy.
Valuation Date - The date as of which the net asset value of a mutual fund
is determined.
Valuation Period - The period between the time as of which the net asset
value of a mutual fund is determined on one valuation date and the time as of
which such value is determined on the next following valuation date.
Written Request - Actual delivery to Principal Mutual Life Insurance
Company at its home office in Des Moines, Iowa, of a written notice or request
on a form supplied or approved by Principal Mutual Life Insurance Company.
SUMMARY
THE FOLLOWING SUMMARY INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS.
The Policy
The Policy is designed to provide a policyowner with lifetime insurance
protection and flexibility in connection with the amount and frequency of
premium payments and the amount of life insurance proceeds payable under the
Policy. A policyowner may, subject to certain limitations, vary the frequency
and amount of premium payments. The Policy allows a policyowner to adjust the
amount of life insurance payable, without having to purchase a new Policy, by
increasing or decreasing the face amount. Thus, as insurance needs or financial
conditions change, a policyowner has the flexibility to adjust life insurance
proceeds and vary the premium payments. The Policy is a life insurance contract
with a death benefit, accumulated value, and other features traditionally
associated with whole life insurance. It is called "flexible premium" because
unlike traditional insurance contracts, there is no fixed schedule of premium
payments, although a minimum premium is required during the first twelve policy
months. Each policyowner establishes a preferred schedule of premium payments
(planned periodic premiums).
The Policy is called "variable" because the accumulated value, duration of
coverage and, under certain circumstances, the death benefit may increase or
decrease depending upon the investment experience of the Division or Divisions
of the Separate Account to which premium payments, less a premium tax charge of
2% and a 5% sales load, have been allocated. Generally, favorable investment
experience will increase a Policy's accumulated value and unfavorable investment
experience will reduce its accumulated value. Prospective purchasers of a Policy
should be aware that there is no guarantee of accumulated value in a Policy.
Principal Mutual Life Insurance Company Variable Life Separate Account
The Separate Account is a separate account established by the Company
pursuant to the insurance laws of the State of Iowa and is organized as a unit
investment trust under the Investment Company Act of 1940. The Separate Account
is presently comprised of six Divisions, each of which invests exclusively in
shares representing interests in a corresponding Mutual Fund organized by the
Company. (The Company may form other Divisions of the Separate Account or other
separate accounts in the future, thereby creating additional investment choices
under a Policy.) Each mutual fund has a different investment objective. The
Separate Account is administered and accounted for as part of the general
business of the Company, but the income, gains, or losses of the Separate
Account are credited to or charged against the assets held in the Separate
Account in accordance with the terms of the Policy, without regard to other
income or gains or losses arising out of any other business that the Company
conducts. The assets of the Separate Account will be available to cover the
liabilities of the Company's general account only to the extent that the assets
of the Separate Account exceed the liabilities of the Separate Account arising
under the Policies.
Premiums
An initial payment is required as the first premium. This required initial
premium payment is three times the minimum monthly premium shown on the Policy's
data pages. The minimum monthly premium is the amount that, if paid, will keep
the Policy in force for one month, taking into account the current monthly
deduction and surrender charge. Payment of a minimum premium is required during
the first twelve policy months (the "Minimum Required Premium"). The Company
allows payments in accordance with the planned periodic premium schedule
established by the policyowner in the application (annual, semi-annual,
quarterly, or pre-authorized withdrawal payments of premium on a monthly basis).
However, if the minimum monthly premium is less than $30 ($15 if the insured is
ages 0-14), only a planned periodic premium schedule that would result in a
payment of $30 or more ($15 or more if the insured is ages 0-14) will be made
available to the policyowner. The Company also allows unscheduled premium
payments of $30 or more. The planned periodic premium schedule indicates the
preference of the policyowner only, and other than payment of the Minimum
Required Premium, payment of premiums is not required. (However, the death
benefit guarantee premium must be paid to maintain the death benefit guarantee
rider. See "Death Benefit Guarantee Rider," page 28.) Changes in frequency, as
well as increases or decreases in the amount of planned periodic premiums, may
be made. However, the total of all premiums, planned and otherwise, cannot
exceed the current maximum premium limitations set forth in the Internal Revenue
Code to qualify a Policy as a life insurance contract. At any time there is an
outstanding policy loan, if a payment cannot be identified as a premium payment,
it will be considered a loan repayment.
The initial premium payment and all other premium payments received during
the first 45 days from the policy date, after deduction of the premium tax
charge of 2% and the 5% sales load, are allocated to the Money Market Division
of the Separate Account. On the 46th day from the policy date, the accumulated
value held in the Money Market Division is transferred to the Divisions in
accordance with the policyowner's direction for allocation of premium payments.
Premium payments received after the first 45 days from the policy date are
allocated among the Divisions in accordance with the directions in the
application for the Policy.
Charges and Deductions
There is a premium expense charge deducted from each premium payment. The
amount remaining after deduction of the premium expense charge is the "net
premium." The premium expense charge includes a sales load of 5% to partially
compensate the Company for sales expenses incurred with respect to the Policy.
In addition, a sales load of up to a maximum of 25% of the minimum first year
premium may be imposed as a part of a surrender charge upon total surrender or
termination of a Policy for insufficient value. Also included in the premium
expense charge is a charge of 2% for premium taxes. The premium tax charge,
which cannot be changed, is not expected to exceed the premium taxes charged to
the Company.
There is a monthly deduction from the Policy's accumulated value in the
Divisions equal to the cost of insurance, the cost of additional benefits
provided by riders attached to the Policy and a monthly administration charge
which is guaranteed never to exceed $5.00 per month. The current monthly
administration charge for a Policy is $4.75 per month.
The cost of insurance charge is calculated on each monthly date. The cost
of insurance rate is based on the sex (where allowed by law), attained age, and
risk classification of the insured. Current monthly cost of insurance rates will
be determined by the Company based upon its expectations as to future mortality
experience. Cost of insurance rates are guaranteed not to exceed the maximum
rates based upon the 1980 Smoker and Nonsmoker Commissioners Standard Ordinary
Mortality Tables, age last birthday. Where allowed by law, the table used will
be male or female according to the sex of the insured. Additionally, the
guaranteed maximum cost of insurance rates will reflect the insured's risk
classification.
A mortality and expense risks charge will be imposed on a daily basis on
the assets of each Division. The current mortality and expense risks charge is
.0020548% on a daily basis (.75% on an annual basis) and is guaranteed to not
exceed .0024658% on a daily basis (.90% on an annual basis).
A charge consisting of a contingent deferred sales load and a contingent
deferred administration charge may be imposed for total surrender of a Policy or
termination of a Policy for insufficient value. The amount of surrender charge
assessed per $1,000 of face amount is based upon the issue age and sex (where
allowed by law) of the insured and the policy year at the time of surrender.
There is no surrender charge imposed upon partial surrenders of accumulated
value.
A transaction charge of $25 is imposed on transfers of accumulated value
between Divisions exceeding four per policy year. A transaction charge of the
lesser of $25 or two percent of the amount surrendered is imposed upon partial
surrenders of accumulated value.
An investment advisory fee is charged against the assets of each mutual
fund to compensate the Fund's investment advisor. In addition, each mutual fund
incurs other normal expenses of corporate operation.
Maturity Proceeds
If the insured under a Policy is living on the Policy's maturity date,
which is the Policy anniversary following the birthday on which the insured
reaches age 95, the Company will pay the Policy's maturity proceeds to the
policyowner. A Policy's maturity proceeds are the Policy's accumulated value
less any Policy loans and unpaid loan interest on the maturity date. If maturity
proceeds are paid under a Policy, the Policy terminates with no further benefits
payable. On the Policy's maturity date, the Company will pay the excess of the
Policy's face amount over the maturity proceeds, provided certain conditions are
met. (See "Death Benefit Guarantee Rider," page 28.)
Death Benefit and Proceeds
The death proceeds under a Policy are payable to the beneficiary when the
insured dies, subject to all provisions and conditions of the Policy. The death
proceeds, determined as of the date of the insured's death, are: the death
benefit described below, plus proceeds from any benefit riders on the insured's
life, less any Policy loans and loan interest, and less any overdue monthly
deductions if the insured dies during a grace period. All or part of the death
proceeds may be paid in cash or applied under one or more of the benefit options
available under the Policy, subject to certain restrictions. The Company pays
interest on the death proceeds from the date of death until the date of payment
or until applied under a benefit option. Interest is at a rate the Company
determines, but not less than required by state law.
There are two options available for the death benefit under a Policy. If a
policyowner selects Option 1, the death benefit will be equal to the greater of
the face amount of the Policy or the accumulated value on the date of death
multiplied by an applicable percentage specified in the Internal Revenue Code.
If a policyowner selects Option 2, the death benefit will be the greater of the
face amount of the Policy plus the accumulated value on the date of death or the
accumulated value on the date of death multiplied by the applicable percentage.
A policyowner may make a written request to change the death benefit option
on or after the first Policy anniversary. Any change must be approved by the
Company before it takes effect. Changes in death benefit option are limited to
two per policy year. If the request is to change from Option 1 to Option 2, the
face amount will be reduced by the amount of the accumulated value of the Policy
on the effective date of the change. A request to change from Option 1 to Option
2 will not be approved if the face amount in effect after the change would be
less than $25,000. Evidence of insurability satisfactory to the Company under
its underwriting rules then in effect may be required on a change from Option 1
to Option 2. If the request is to change from Option 2 to Option 1, the face
amount will be increased by the amount of the accumulated value of the Policy on
the effective date of the change. No evidence of insurability is required for a
change from Option 2 to Option 1. The effective date of any change will be the
monthly date that coincides with or next follows the day the request for change
is approved by the Company.
Adjustment Options
Subject to certain conditions, the face amount of a Policy may be adjusted
upon the written request of the policyowner. Any written request to adjust the
face amount of a Policy must be approved by the Company. No request to adjust
the face amount of a Policy will be approved if a Policy is in a grace period or
if monthly deductions are being waived under a rider. In addition, a decrease in
face amount may be requested only after the first Policy anniversary and may not
reduce the face amount of a Policy below $25,000. A requested face amount
increase must be at least $5,000 and is subject to evidence of insurability
satisfactory to the Company under its underwriting rules then in effect. Any
adjustment in face amount of a Policy will be effective on the monthly date that
coincides with or next follows the date the Company approves the request,
subject to a payment by the policyowner in an amount not less than the new
minimum monthly premium for the Policy after any such increase in face amount.
The new minimum monthly premium will take into account the Policy's surrender
value. There are no charges assessed in connection with adjustments of a Policy,
although an increase in face amount will result in surrender charges applicable
to the increase.
Policy Values
The Policy provides for accumulated value. The Policy's accumulated value
will reflect the amount and frequency of premium payments, the investment
experience of the chosen Division or Divisions, surrenders of accumulated value,
Policy loans and loan interest, interest earned on amounts in the loan account,
transaction charges, and other charges and deductions imposed in connection with
the Policy and the Separate Account. A Policy has no minimum guaranteed
accumulated value. A Policy's "surrender value" is its accumulated value less
the amount of the surrender charge, if any. A Policy's "net surrender value" is
its surrender value less Policy loans and loan interest. The net surrender value
of a Policy is the amount available to a policyowner upon total surrender.
An investment account is established for each Division of the Separate
Account, representing the interest of the Policy for such Division. When amounts
are allocated or transferred to a Division, units are credited to the applicable
investment account. When amounts are deducted or transferred from a Division,
units of the applicable investment account are cancelled. The number of units
credited or cancelled is equal to the dollar amount of the transaction divided
by the unit value of the Division for the valuation period when the transaction
occurs.
The unit value of a Division is determined on each valuation date. The unit
value of each Division was established at $10.00 at the time the Division was
formed. Thereafter, the unit value of a Division on any valuation date is
calculated by multiplying the unit value on the previous valuation date by the
net investment factor for the current valuation period. The net investment
factor of a Division measures the investment performance of the Division and
determines changes in unit value from one valuation period to the next valuation
period. The investment account value for each Division of the Separate Account
is equal to the number of units in that investment account multiplied by that
Division's unit value. A Policy's accumulated value is equal to the total of the
Policy's investment account values and any amounts in the Policy's loan account.
Transfers
Transfers of accumulated value between Divisions may be made by a
policyowner four times per policy year without charge. All transfers with the
same effective date count as one transfer. Transfers in excess of four per
policy year are subject to a transaction charge of $25. The Company has reserved
the right to revoke or modify transfer privileges and charges.
Policy Loans
A policyowner may borrow against the accumulated value of the Policy at any
time the Policy has loan value. A Policy's loan value, which is the maximum
amount that may be borrowed, is (1) minus (2) where: (1) is 90% of the Policy's
surrender value and (2) is any outstanding policy loans and unpaid loan
interest. A Policy's loan value is determined as of the loan date. The loan date
is the date a written request for a policy loan is processed by the Company. Any
loan must be in at least the minimum amount of $500. At the time the policy loan
is made, a portion of the Policy's accumulated value equal to the loan amount is
transferred from the Separate Account to the loan account maintained for the
Policy in the Company's general account. Loan interest is payable at the end of
each policy year. All policy loans and loan interest will be deducted from
proceeds payable at the insured's death, upon maturity, or upon total surrender.
A policyowner may choose how much of the loan amount is withdrawn from each
of the Divisions. If no choice is made, the amount will be withdrawn from the
Divisions in the same proportion as the most recent monthly deduction.
Accumulated value held in the loan account earns interest daily at an
effective annual rate of six percent. Interest earned on the loaned portion of
the accumulated value is allocated on the Policy anniversary to the Divisions in
the proportion currently designated by a policyowner for the allocation of
premium payments.
Interest is charged on policy loans at an effective annual rate of eight
percent during any period the loan is outstanding. Interest accrues on a daily
basis from the date of the loan and is compounded annually. If loan interest is
not paid when due, it becomes loan principal. An amount equal to the unpaid loan
interest will be transferred from the Divisions to the loan account in the
proportion directed by the policyowner. If no direction is made by the
policyowner, the amount will be withdrawn from the Divisions in the same
proportion as the most recent monthly deduction.
A Policy loan and unpaid loan interest may be repaid in whole or in part at
any time while the Policy is in force. The minimum loan repayment amount is
$30.00 or the outstanding loan amount, if less. When a loan repayment is made,
accumulated value in the loan account equal to the loan repayment will be
allocated among the Divisions in the proportion currently designated by a
policyowner for allocation of premium payments.
Surrender, Termination and Reinstatement
A policyowner may elect to make a total surrender of the Policy and receive
its net surrender value determined as of the date the Company receives the
policyowner's written request. A surrender charge is imposed upon total
surrender of a Policy at any time within the first ten years after the policy
date. In addition, any increase in face amount is subject to a surrender charge
at any time within ten years after the effective date of the adjustment. After
the first policy year, the policyowner may request a partial surrender of the
accumulated value of the Policy, but no more than two times per policy year. A
partial surrender must be in at least the minimum amount of $500 and cannot
exceed 50% of the Policy's net surrender value at the time partial surrender is
requested. A transaction charge of the lesser of $25 or two percent of the
amount of the partial surrender is imposed on each partial surrender. The
Policy's accumulated value is reduced by the amount of any partial surrender
plus the transaction charge. If the Option 1 death benefit is in effect at the
time of a partial surrender, then the Policy's face amount is also reduced by
the amount of the partial surrender plus the transaction charge.
Failure to make a planned periodic premium or additional premium payments
may cause termination of a Policy. A notice of impending termination of a policy
will be sent if:
1. The net surrender value of a Policy on any monthly date is less than
the monthly deduction and the death benefit guarantee premium
requirement has not been satisfied; or
2. During the 12 months following the policy date, the sum of the premiums
paid is less than the Minimum Required Premium on a monthly date.
The Minimum Required Premium on a monthly date is equal to (1) times (2)
where:
1. Is the minimum monthly premium shown on the data page; and
2. Is one plus the number of complete months since the policy date.
The notice of impending termination will show the 61-day grace period
during which the Company will accept payment required to keep the Policy in
force. If a grace period begins because the net surrender value is less than the
current monthly deduction, the minimum payment is three times the monthly
deduction which was due and unpaid. If a grace period begins because the sum of
the premiums paid is less than the Minimum Required Premium, the minimum payment
is the past due Minimum Required Premium, which is:
1. The Minimum Required Premium due on the next following monthly date;
LESS
2. The sum of the premiums paid since the policy date.
If the grace period ends before the Company receives the past due Minimum
Required Premium, the Company will pay to the policyowner any remaining value in
the Policy, which would be the excess of (1) over (2) where:
1. Is the net surrender value on the monthly date at the start of the
grace period; and
2. Is the two monthly deductions applicable during the grace period.
In the event the 61-day grace period expires without a payment by the
policyowner at least equal to the minimum payment, the Policy will terminate.
Once a Policy has terminated as a result of insufficient value, the
policyowner may make a written request to reinstate the Policy at any time
within three years after the date of termination, so long as the insured is
alive and it is prior to the Policy's maturity date. Satisfactory proof of
insurability and payment of a reinstatement premium of at least the greater of
(1) an amount that, after deduction of premium expense charges, is sufficient to
allow at least three monthly deductions or (2) the past due Minimum Required
Premium are required for reinstatement. Repayment or reinstatement of policy
loans and loan interest which remained unpaid on the date the Policy terminated
is also required.
Policy Cancellation
A policyowner has the limited right to return a Policy for cancellation and
receive a refund of all premiums paid. The written request for cancellation,
along with return of the Policy, must be made within 10 days after the Policy is
received by the policyowner, within 10 days after written notice of this right
is provided to the policyowner, or within 45 days after the policyowner
completes the Policy application, whichever is later.
Distribution of the Policy
The Company may offer the Policy in states and jurisdictions where it is
licensed to sell this type of insurance product. The Policy will be sold by
agents and brokers who represent the Company and are registered representatives
of Princor Financial Services Corporation, the principal underwriter of the
Policies, or registered representatives of other broker-dealers which Princor
Financial Services Corporation selects and the Company approves.
Tax Consequences of the Policy
The Policies will be treated as life insurance contracts under provisions
of the Internal Revenue Code so long as certain definitional tests of Section
7702 of the Internal Revenue Code are met and so long as the investments of the
Separate Account meet the diversification requirements of Section 817(h) of the
Internal Revenue Code. The Company has designed the Policy to meet these
criteria. Thus, the death benefit under a Policy should be fully excludable from
the gross income of the beneficiary. In addition, the policyowner should not be
taxed on any part of the accumulated value, unless in the first 15 years of a
Policy a cash distribution is made as a result of a change in the benefits under
(or in other terms of) the Policy, such as a partial or total surrender of
accumulated value which causes a reduction in the face amount. Such a
distribution will be taxable to the extent of income in the Policy, as limited
by the applicable recapture ceiling as set out in Section 7702(f)(7)(C) or (D)
of the Internal Revenue Code. Also, partial surrender may result in taxable
income to the policyowner to the extent distributions (or deemed distributions)
exceed total investments (generally premiums paid) in the Policy to the date of
surrender. If, however, the Policy is considered a modified endowment contract
under the terms of the Technical and Miscellaneous Revenue Act of 1988, all
distributions under the Policy would be taxed on an "income first" basis. Most
distributions received by a policyowner directly or indirectly (including policy
loans, total or partial surrenders or the assignment or pledge of any portion of
the accumulated value of the Policy) would be includable in gross income to the
extent that the accumulated value of the Policy exceeds the policyowner's
investment in the contract. (See "Tax Status of the Company and the Separate
Account," page 34.) Policyowners are advised to consult with their own tax
advisors regarding tax treatment of the Policies.
DESCRIPTION OF PRINCIPAL MUTUAL LIFE INSURANCE COMPANY (The "Company")
Principal Mutual Life Insurance Company is a mutual life insurance company
with its home office at The Principal Financial Group, Des Moines, Iowa 50392,
telephone number 515-247-5111. It was originally incorporated under the laws of
the State of Iowa in 1879 as Bankers Life Association, changed its name to
Bankers Life Company in 1911 and changed its name to Principal Mutual Life
Insurance Company in 1986. It is a member of The Principal Financial Group, a
diversified family of insurance and financial services corporations.
Principal Mutual Life Insurance Company is authorized to do business in the
50 states of the United States, the District of Columbia, the Commonwealth of
Puerto Rico, and the Canadian Provinces of Alberta, British Columbia, Manitoba,
Ontario and Quebec. The Company offers a full range of products and services for
businesses, groups and individuals including individual insurance, pension plans
and group/employee benefits. The Company has ranked in the upper one percent of
life insurers in assets and premium income and has consistently received
excellent ratings from the major rating firms based upon the Company's claims
paying ability. The Company has $51.3 billion in assets under management and
serves more than 9.3 million individuals and their families.
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT
The Separate Account was established on November 2, 1987, pursuant to a
resolution of the Executive Committee of the Board of Directors of the Company.
Under Iowa insurance law and regulation the income, gains or losses of the
Separate Account are credited to or charged against the assets of the Separate
Account without regard to the other income, gains or losses of the Company. The
assets of the Separate Account, equal to the reserves and other liabilities
arising under the Policies, are not chargeable with liabilities arising out of
any other business conducted by the Company. In addition, all income, gains or
losses, whether or not realized, and expenses with respect to a Division shall
be credited to or charged against such Division without regard to income, gains
or losses, or expenses of any other Division. The assets of the Separate Account
are held with relation to the Policies described in this Prospectus. The assets
of the Separate Account may also, in the future, be derived from other flexible
premium and scheduled premium variable life insurance contracts. Also, although
the assets maintained in the Separate Account attributable to the Policies will
not be charged with any liabilities arising out of any other business conducted
by the Company, the reverse is not true. Hence, all obligations arising under
Policies, including the promise to make benefit payments, are general corporate
obligations of the Company. The Separate Account is organized as a unit
investment trust under the Investment Company Act of 1940.
The Company is taxed as a life insurance company under the Tax Reform Act
of 1984, as amended. The operations of the Separate Account are part of the
total operations of the Company, but are treated separately for accounting and
financial statement purposes and are considered separately in computing the
Company's tax liability.
The Separate Account is not affected by federal income taxes paid by the
Company with respect to its other operations and, under existing federal income
tax law, investment income and capital gains attributable to the Separate
Account are not taxed. The Company reserves the right to charge the Separate
Account with, and create a reserve for, any tax liability which the Company
determines may result from maintenance of the Separate Account. To the best of
the Company's knowledge there is no current prospect of such liability.
A policyowner directs the Company to allocate premium payments, less
premium expense charges, among the Divisions which invest exclusively in shares
of corresponding mutual funds organized by the Company. These mutual funds also
offer their shares to separate accounts of the Company to fund variable annuity
contracts. See "Eligible Purchasers and Purchase of Shares" in the Funds'
Prospectus for a discussion of the potential risks associated with "mixed
funding." The Balanced Division invests only in shares of Principal Balanced
Fund, Inc., the Bond Division only in shares of Principal Bond Fund, Inc., the
Capital Accumulation Division only in shares of Principal Capital Accumulation
Fund, Inc., the Emerging Growth Division only in shares of Principal Emerging
Growth Fund, Inc., the High Yield Division only in shares of Principal High
Yield Fund, Inc., and the Money Market Division only in shares of Principal
Money Market Fund, Inc.
Principal Balanced Fund, Inc. -- The investment objective of Principal
Balanced Fund, Inc. is to generate a total return consisting of current income
and capital appreciation while assuming reasonable risks in furtherance of the
investment objective. The term "reasonable risks" refers to investment decisions
that in the investment advisor's judgment do not present a greater than normal
risk of loss in light of current or anticipated future market and economic
conditions, trends in yields and interest rates, and fiscal and monetary
policies. In seeking to achieve the investment objective, this Mutual Fund
invests primarily in growth and income-oriented common stocks (including
securities convertible into common stocks), corporate bonds and debentures and
short-term money market instruments. This Mutual Fund may also invest in other
equity securities and debt securities issued or guaranteed by the United States
government and its agencies or instrumentalities. This Mutual Fund seeks to
generate real (inflation plus) growth during favorable investment periods and
may emphasize income and capital preservation strategies during uncertain
investment periods. The Manager will seek to minimize declines in the net asset
value per share. However, there is no guarantee that the Manager will be
successful in achieving this goal. The portions of the Fund's total assets
invested in equity securities, debt securities and short-term money market
instruments are not fixed, although ordinarily 40% to 70% of the Fund's
portfolio will be invested in equity securities with the balance of the
portfolio invested in debt securities. The investment mix will vary from time to
time depending upon the judgment of the Manager as to general market and
economic conditions, trends in investment yields and interest rates and changes
in fiscal or monetary policies.
Principal Bond Fund, Inc. -- The investment objective of Principal Bond
Fund, Inc. is to provide as high a level of income as is consistent with
preservation of capital and prudent investment risk. In seeking to achieve the
investment objective, this Mutual Fund will predominantly invest in marketable
fixed-income debt securities. Investments will be made generally on a long-term
basis, but this Mutual Fund may make short-term investments from time to time as
deemed prudent by the investment advisor. Longer maturities typically provide
better yields but will subject this Mutual Fund to a greater possibility of
substantial changes in the values of its portfolio securities as interest rates
change. The market price of fixed-income securities such as those purchased by
this Mutual Fund is affected by changes in interest rates generally. As interest
rates rise, the market value of fixed-income securities will fall, adversely
affecting the net asset value of this Mutual Fund. The value of fixed-income
securities may also be affected by changes in the credit rating or financial
condition of the issuer.
Principal Capital Accumulation Fund, Inc. -- The principal objective of
Principal Capital Accumulation Fund, Inc. is long-term capital appreciation and
growth of future investment income. The assets of this Mutual Fund consist
principally of a portfolio of common stocks. The value of the investments held
by this Mutual Fund fluctuates daily and is subject to the risks of changing
economic conditions as well as the risks inherent in the ability of this Mutual
Fund's management to anticipate changes in such investments necessary to meet
changes in economic conditions. Historically, the value of a diversified
portfolio of common stocks such as invested in by Principal Capital Accumulation
Fund, Inc., held for an extended period of time, has tended to rise during
periods of inflation. There has, however, been no exact correlation, and for
some periods the values of such common stocks have declined while the cost of
living was rising.
Principal Emerging Growth Fund, Inc. -- The objective of Principal Emerging
Growth Fund, Inc. is to achieve capital appreciation by investing primarily in
the common stocks and securities convertible into common stocks of emerging and
other growth-oriented companies that, in the judgment of the investment advisor,
are responsive to changes within the marketplace and have the fundamental
characteristics to support growth. This Mutual Fund will seek to be relatively
fully invested at all times in equity securities. From time to time, this Mutual
Fund may, for defensive purposes and without limit as to the proportion of
assets invested, hold varying proportions of cash, United States government
securities, nonconvertible securities and straight debt securities.
Principal High Yield Fund, Inc. -- The primary investment objective of
Principal High Yield Fund, Inc. is high current income. Capital growth is a
secondary objective when consistent with the objective of high current income.
This Mutual Fund invests primarily in high yielding (high risk), lower or
non-rated fixed-income securities, commonly known as junk bonds, constituting a
diversified portfolio which the investment advisor believes does not involve
undue risk to income or principal. The market value of this Mutual Fund's
investments will change in response to changes in interest rates and other
factors. Changes by recognized rating agencies in their ratings of any
fixed-income security and in the ability of an issuer to make payments of
interest and principal may also affect the value of these investments. The
Fund's prospectus provides a thorough description of the risks associated with
junk bonds which should be read before allocating premium contributions to the
High Yield Division.
Principal Money Market Fund, Inc. -- Principal Money Market Fund, Inc. has
an investment objective of obtaining maximum current income available from
short-term securities consistent with preservation of principal and maintenance
of liquidity by investing all of its assets in a portfolio of money market
instruments. This Mutual Fund invests in United States dollar denominated
instruments having a maturity of 397 days or less that the Fund's Manager,
subject to the oversight of the Fund's board of directors, determines present
minimal credit risks and which at the time of acquisition are "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. See the Fund's prospectus for details. The value of the
investments held by this Mutual Fund may fluctuate, although the net asset value
per share is normally expected to remain at $1. However, its yield will vary
with changes in short-term interest rates. Over the last two decades there has
been a general correlation between short-term interest rates and the cost of
living, but there has been no exact correlation and for some periods such rates
have declined while the cost of living was rising.
Policyowners make their own decisions on the allocations to and between the
Divisions, based upon their unique circumstances and perceptions of economic
conditions. Additional information concerning these mutual funds, including
their investment policies and restrictions, investment management fees and
expenses, is given in the prospectuses which accompany this Prospectus. They
should be read in conjunction with this Prospectus.
The investment advisor to the mutual funds is Princor Management
Corporation, which is a wholly-owned subsidiary of Princor Financial Services
Corporation, which is a wholly-owned subsidiary of Principal Financial Group,
Inc., which is a wholly-owned subsidiary of the Company. The current investment
management fee at an annual rate of .50% of the first $100 million of each
fund's average daily net assets and .45% of the next $100 million of each fund's
daily average net assets is charged monthly against Principal Capital
Accumulation Fund, Inc., Principal Money Market Fund, Inc., and Principal Bond
Fund, Inc. The current investment management fee at an annual rate of .60% of
the average daily net asset value is charged monthly against Principal Balanced
Fund, Inc. and Principal High Yield Fund, Inc. The current investment management
fee at an annual rate of .65% of the average daily net asset value is charged
monthly against Principal Emerging Growth Fund, Inc.
PREMIUMS
Purchase Procedures
To apply for a Policy, a completed application, including any required
supplements, must be submitted to the Company through the agent or broker
selling the Policy. If interim coverage is desired, a payment in at least the
required minimum initial premium amount must be submitted with the completed
application. The required minimum initial premium amount for any Policy
(including a Policy issued on an application submitted without an accompanying
payment) is three times the minimum monthly premium shown on the Policy's data
pages. The minimum monthly premium is the amount that, if paid, will keep the
Policy in force for one month, taking into account the Policy's current monthly
deduction and surrender charges. The Company will not issue policies to insure
persons over age 75. Applicants for insurance must furnish satisfactory evidence
of insurability. Acceptance is subject to the Company's insurance underwriting
guidelines and suitability rules and procedures. The Company reserves the right
to reject any application or related premium if in the view of the Company, the
Company's insurance underwriting guidelines and suitability and procedures are
not satisfied. The minimum face amount for a Policy at issue is $25,000. The
Company reserves the right to revise its rules from time to time to specify
either a higher or a lower minimum face amount.
If a payment in at least the required minimum initial premium amount is
submitted with the completed application, then a conditional receipt is given to
the applicant, reflecting receipt of the initial payment and outlining any
interim coverage in effect until the Company either issues or declines to issue
a Policy. Subject to variations by state based on differing state requirements,
the terms of the conditional receipt are described in this paragraph. If all of
the conditions precedent set forth in the conditional receipt are fulfilled
exactly, interim coverage under the conditional receipt will take effect on the
date upon which all initial application requirements have been completed. The
initial application requirements consist of full completion and signing of the
application and all necessary supplements, and any medical exams and tests
required by the Company's published rules. The amount of the interim coverage
is: the lesser of $1,000,000 or the amount applied for, if the proposed insured
is insurable on a standard or more favorable basis; or, the lesser of $100,000
or the amount applied for, if the proposed insured is insurable only on a basis
less favorable than standard. Interim coverage provided under the conditional
receipt ends on the earliest of: (1) 75 days after the date coverage commenced
under the conditional receipt, (2) the date the Company mails the proposed owner
a premium refund and notice that the Company will not consider the application
on a prepaid basis, (3) the date the Company mails the proposed owner a premium
refund and a notice that no Policy will be issued on the application, or (4) the
date a Policy is presented to the proposed owner (whether or not accepted by the
proposed owner).
Pending receipt of approval by the states of California and New York of the
conditional receipt described above, a different conditional receipt will
continue to be used in those states. Under the conditional receipt in use in
those states, interim coverage starts on the later of: (1) the date of
completion of the application and supplements thereto or (2) the date any
required medical exam or other medical tests are completed. However, if all the
conditions of the receipt are met except any required medical exam or test,
insurance is provided under the conditional receipt not to exceed the maximum
amount available based on the Company's underwriting rules without the medical
exam or test. The amount of the interim coverage is: the lesser of $1,000,000 or
the amount applied for, if the proposed insured is insurable at the Company's
Standard rate or at the rate applied for or at a better rate; or, the lesser of
$100,000 or the amount applied for, if the proposed insured is insurable only at
a higher premium rate than the Company's standard premium rate and the premium
rate applied for. Interim coverage provided under the conditional receipt ends
on the earlier of: (1) five days after a nonacceptance notice is mailed by the
Company to the applicant, (2) the day before the policy date when the Policy is
issued as applied for, (3) the date a Policy issued other than as applied for is
presented to the applicant for acceptance, or (4) 75 days after the date
coverage commenced under the conditional receipt.
If the Company determines to issue a Policy and has received the required
minimum initial premium, the Policy will be given a policy date. The policy date
is the date by which both the application and a premium payment in an amount at
least equal to the required minimum initial premium for the Policy have been
received in the home office of the Company. The Company does not date Policies
on the 29th, 30th or 31st day of any month of the year. Policies which would
otherwise be dated on these days except for this rule will be dated on the 28th
day of the month. The policy date is shown on the Policy's data pages.
Payment Of Premiums
Premiums must be paid to the Company at its home office. There is no fixed
schedule of premium payments on a Policy, either as to the amount or timing of
the payments, although a minimum premium is required during the first twelve
policy months (the "Minimum Required Premium"). A policyowner may determine,
within specified limits, the planned periodic premium schedule for the Policy.
These limits will be set forth by the Company and will include a minimum initial
premium payment. Planned periodic premium schedules may provide for annual,
semi-annual, quarterly or monthly withdrawal payments. A "pre-authorized
withdrawal" allows the Company to deduct premiums, on a monthly basis, from the
policyowner's checking or other financial institution account. The policyowner
is not required to pay planned periodic premiums. Failure to make any premium
payment will not necessarily result in termination of a Policy provided that (1)
any Minimum Required Premium is paid and the Policy's net surrender value equals
or exceeds the monthly deduction on the current monthly date or (2) the death
benefit guarantee rider is in effect. Likewise, payment of premiums in
accordance with the planned periodic premium schedule does not guarantee that
the Policy will stay in force if the Policy's net surrender value is not at
least equal to the current monthly deduction on the monthly date, unless such
premiums meet the death benefit guarantee premium requirement.
The Company will send premium reminder notices in accordance with planned
periodic premium schedules. Premium payments may also be made by unscheduled
premium payment made to the Company at its home office or by payroll deduction
where allowed by law and approved by the Company. During the fiscal year ended
December 31, 1995 the Company received premium payments totaling $7,349,359.
Premium Limitations
In no event can the total of all premiums paid exceed the current maximum
premium limitations required by the Internal Revenue Code in order to qualify a
Policy as a life insurance contract. The premium limitations are imposed in
order to assure favorable federal income tax treatment of the Policy and its
death benefit. If at any time a premium is paid which would result in total
premiums exceeding the current maximum premium limitation, the Company will only
accept that portion of the premium which will make total premiums equal the
maximum. Any part of the premium in excess of that amount will be returned and
no further premiums will be accepted until allowed by the maximum premium
limitations specified in the Internal Revenue Code. No premium payment may be
less than $30, except the minimum monthly premium for Policies issued to insure
persons ages 0 to 14 may be no less than $15. Premium payments less than the
minimum amount will be returned to the policyowner.
It is possible a premium payment could increase a Policy's death benefit by
more than it increases the Policy's accumulated value because of the manner in
which the Policy's death benefit is calculated. In order to qualify a Policy as
a life insurance contract under provisions of the Internal Revenue Code, the
death benefit must be at least equal to an applicable percentage of the
accumulated value. This percentage starts at 250% for insureds age 40 and under
and grades down to 100% for insureds age 95. For example, a hypothetical Policy
insuring the life of a 35-year old with an accumulated value of $20,000 must
have a death benefit in at least the amount of $50,000 ($20,000 x 250%, the
applicable percentage). Suppose a premium is paid that, after deduction of the
premium expense charge, increases this hypothetical Policy's accumulated value
by $1,000. The Internal Revenue Code test requires that the death benefit for
the hypothetical Policy be at least $52,500 ($21,000 x 250%). Hence, if the
death benefit before the premium were $50,000, the $1,000 increase in
accumulated value would produce a $2,500 increase in the death benefit of this
hypothetical Policy. In such a situation where a premium payment increases a
Policy's death benefit by more than it increases the Policy's accumulated value,
the Company reserves the right to refund the premium payment. Evidence of
insurability under the Company's current underwriting rules then in effect may
be required before acceptance of any such premium.
Allocation Of Premiums
The initial premium payment, less the premium expense charge, is allocated
to the Money Market Division of the Separate Account on the later of the policy
date or the end of the valuation period during which the first premium is
received. Any additional premiums received at the home office of the Company
during the first 45 days from the policy date, less premium expense charges,
will be allocated to the Money Market Division. On the 46th day from the policy
date, accumulated value held in the Money Market Division is automatically
transferred to the Divisions of the Separate Account in accordance with the
policyowner's direction for allocation of premium payments.
Premium payments received after expiration of the initial 45-day period
described above are allocated among the Divisions in accordance with the
directions in the application for the Policy. For each Division, the allocation
percentage must be zero or a whole number not less than ten. The sum of the
percentages for all the Divisions must equal 100. The policyowner may change the
allocation of future premium payments among the Divisions without payment of any
fee or penalty, at any time, by written request to the Company. Allocation
percentages must be approved by the Company. New allocation percentages, once
approved by the Company, will be effective as of the date written request was
received at the home office of the Company.
Policy "Free Look"
The policyowner has a limited right to return the Policy for cancellation
and receive a refund in an amount equal to the premiums paid. The request to
cancel a Policy must be in writing. The written request and the Policy must be
personally delivered or mailed to the home office of the Company or to the agent
or broker who sold the Policy before the later of:
* 10 days after the Policy is received by the policyowner;
* 10 days after a written notice is delivered to the policyowner which
tells about the cancellation right; or
* 45 days after the policyowner completes the application.
Any increase in face amount will carry its own free look period. If a face
amount increase is cancelled pursuant to this right or if the Company does not
approve a requested face amount increase, the Company will refund to the
policyowner the portion of any premiums paid with the adjustment application and
during this free look for face amount increase period which are attributable to
the increase, unless directed otherwise by the policyowner. The portion of the
premiums paid attributable to the face amount increase is determined by use of
the ratio guideline annual premiums for the increase to guideline annual
premiums for the Policy. The Company will also reverse the amount of any monthly
deduction attributable to the face amount increase and return it to the Policy's
accumulated value, unless the policyowner and the Company agree on another
method of refund.
The refunded amount will ordinarily be disbursed by the Company to the
policyowner within seven days after the request for cancellation is received in
the Company's home office. (See "Postponement of Payments," page 30.)
Policy Termination
An initial minimum premium payment is required to commence coverage under a
Policy. A minimum premium is required during the first twelve policy months (the
"Minimum Required Premium"). A notice of impending termination of a Policy will
be sent if, during the 12 months following the policy date, the sum of the
premiums paid is less than the Minimum Required Premium on a monthly date. The
Minimum Required Premium on a monthly date is equal to (1) times (2) where:
1. Is the minimum monthly premium shown on the data page; and
2. Is one plus the number of completed months since the policy date.
Further, a notice of impending termination of a Policy will be sent if the
net surrender value of the Policy is not at least equal to the monthly deduction
on the current monthly date, and the death benefit guarantee premium requirement
has not been satisfied. (See "Death Benefit Guarantee Rider" page 28.)
The grace period begins when a notice of impending termination is mailed to
a policyowner. The notice will be sent to the last post office address of the
policyowner known to the Company. It will show the minimum payment required to
keep the Policy in force. The notice will also show the 61-day period during
which the Company will accept the required payment.
If the grace period begins because the sum of the premiums paid is less
than the Minimum Required Premium, the minimum payment is the past due Minimum
Required Premium, which is:
1. The Minimum Required Premium due on the next following monthly date.
LESS
2. The sum of the premiums paid since the policy date.
If the grace period ends before receipt by the Company of the past due
Minimum Required Premium, the Company will pay to the policyowner any remaining
value in the Policy which would be the excess of (1) over (2) where:
1. Is the net surrender value on the monthly date at the start of the
grace period; and
2. Is the two monthly deductions applicable during the grace period.
The refunded amount will ordinarily be disbursed by the Company to the
policyowner within seven days after the request for cancellation is received in
the Company's home office. (See "Postponement of Payments," page 30.)
If the grace period begins because the net surrender value is less than the
current monthly deduction, the minimum payment is three times the monthly
deduction which was due and unpaid. This payment is intended to reimburse the
Company for the monthly deductions during the 61-day grace period and provide
sufficient accumulated value to pay the monthly deduction for the first monthly
date following the grace period. There is no guarantee the amount requested at
the beginning of the grace period will be sufficient to actually meet the three
monthly deductions as they are processed. Should the Policy's net surrender
value not at least equal the monthly deduction on any monthly date, a new 61-day
grace period will commence.
The Policy will continue in force through a grace period; but, if the
required payment is not received by the Company during the 61-day period, the
Policy will terminate as of the monthly date on or immediately preceding the
start of the grace period. If the insured dies during a grace period, the policy
proceeds will be reduced by the amount of the monthly deduction or deductions
due and unpaid at the insured's death, as well as by loans and unpaid loan
interest.
A Policy will also terminate if the policyowner makes a total surrender of
the Policy, the death proceeds under the Policy are paid or the maturity
proceeds under the Policy are paid. When a Policy terminates for any reason, all
policy privileges and rights of the policyowner under the Policy end.
Reinstatement
A policyowner may, however, reinstate a Policy which terminated as a result
of insufficient premium payment, subject to certain conditions. A Policy may be
reinstated only prior to the maturity date and while the insured is alive. The
application for reinstatement must be personally delivered or mailed to the
Company at its home office within three years of a Policy's termination. (In
some states, the Company is required by law to provide a longer period of time
within which a Policy may be reinstated.) Satisfactory proof of insurability
based upon the Company's underwriting rules then in effect and payment of a
reinstatement premium of at least the greater of (1) an amount that, after
deduction of premium expense charges, is sufficient to allow at least three
monthly deductions or (2) the past due Minimum Required Premium are required.
Payment of monthly deductions for the period of termination is not required. If
a policy loan or loan interest was unpaid at the time of termination, the
Company will require repayment or reinstatement of the loan and any loan
interest before permitting reinstatement of the Policy. Loan interest will not
be charged for the period the Policy was terminated. Reinstatement will be
effective on the next monthly date following the Company's approval of the
reinstatement application. The policy date of the Policy will remain the
original policy date and will not be changed at reinstatement, although
surrender charges for total surrender following reinstatement will resume at the
rate charged at the time of the Policy's termination, as adjusted for the
payment of past due premiums, if any. Upon reinstatement of a Policy, all the
rights and privileges of the owner are restored.
DEATH BENEFITS AND RIGHTS
Death Proceeds
As long as a Policy remains in force, the Company will, upon proof of the
insured's death, pay the death proceeds under the Policy to the named
beneficiary in accordance with the designated death benefit option. The death
proceeds, determined as of the date of the insured's death, are: the death
benefit described below, plus the proceeds from any benefit rider on the
insured's life, less any loan and loan interest on the Policy, and less any
overdue monthly deductions if the insured died during a grace period. All or
part of the death proceeds may be paid in cash or applied under one or more of
the benefit options available under the Policy. The Company pays interest on the
death proceeds from the date of death until date of payment or until applied
under a benefit option. Interest on death proceeds is at a rate the Company
determines, but not less than required by state law.
Death Benefit
The Policy provides two death benefit options: Option 1 and Option 2. The
policyowner designates the death benefit option in the application. Both Option
1 and Option 2 provide insurance protection combined with the opportunity for
increasing accumulated value. Under Option 1, the amount of death benefit
remains level (until the accumulated value exceeds certain limits). Under Option
2, the total death benefit increases as the accumulated value increases. Thus,
Option 1 emphasizes the growth of accumulated value while Option 2 emphasizes
the total available death benefit.
Option 1
The death benefit is the greater of the Policy's current face amount or
the Policy's accumulated value on the date of death multiplied by the
applicable percentage.
Option 2
The death benefit is the greater of the Policy's current face amount
plus its accumulated value on the date of death or the Policy's
accumulated value on that date multiplied by the applicable percentage.
Applicable Percentage
The Policy provides that the death benefit is at least equal to the amount
of insurance proceeds required by the Internal Revenue Code to qualify the
Policy as a life insurance contract. That death benefit amount is calculated by
multiplying the Policy's accumulated value by an applicable percentage set forth
in the Internal Revenue Code based on the insured's age. The applicable
percentages are:
TABLE OF APPLICABLE PERCENTAGES*
(For ages not shown, the applicable percentages
shall decrease by a pro rata portion for each full year.)
Insured's Attained Age %
---------------------- ---
40 and under 250
45 215
50 185
55 150
60 130
65 120
70 115
75 through 90 105
95 100
*The Company has reserved the right, where allowed by law, to change or delete
the applicable percentages as required by amendments to the Internal Revenue
Code.
Illustration of Option 1. Assume that the insured's attained age at the
time of death is between 20 and 40, that there are no policy loans or loan
interest unpaid at the time of death, and that the face amount of the Policy is
$25,000.
Under Option 1, because the death benefit will be equal to or greater than
250% of the accumulated value under this illustrative Policy, any time the
accumulated value of the Policy exceeds $10,000, the death benefit will exceed
the Policy's $25,000 face amount. Each additional dollar added to accumulated
value above $10,000 will increase the death benefit by $2.50. Similarly, any
time accumulated value exceeds $10,000, each dollar taken out of accumulated
value will reduce the death benefit by $2.50. If, for example, the accumulated
value is reduced from $12,000 to $10,000 because of charges or negative
investment performance, the death benefit will be reduced from $30,000 to
$25,000. If, however, at any time in this illustration 250% of the accumulated
value is less than $25,000 and no partial surrenders have been made, the death
benefit will equal $25,000. A partial surrender causes the face amount to
decrease by the amount of the partial surrender and the transaction charge.
Illustration of Option 2. Assume that the insured's attained age at the
time of death is between 20 and 40, that there are no policy loans or loan
interest unpaid at the time of death, and that the face amount of the Policy is
$25,000.
Under Option 2, a Policy with an accumulated value of $5,000 will have a
death benefit of $30,000 ($25,000 + $5,000); an accumulated value of $15,000
will yield a death benefit of $40,000 ($25,000 + $15,000). The death benefit
under this illustrative Policy, however, must be at least equal to 250% of
accumulated value (accumulated value plus 150% of accumulated value). As a
result, if the accumulated value of the Policy exceeds $16,667, the death
benefit will be greater than the face amount plus accumulated value. Each
additional dollar of accumulated value above $16,667 will increase the death
benefit by $2.50. A contract on a 40-year old insured that has an accumulated
value of $20,000 will provide a death benefit of $50,000 (250% x $20,000).
Similarly, any time accumulated value exceeds $16,667, each dollar taken out of
accumulated value reduces the death benefit by $2.50. If, for example, the
accumulated value is reduced from $20,000 to $17,000 because of partial
surrenders, charges, or negative investment performance, the death benefit will
be reduced from $50,000 to $42,500. If, however, at any time in this
illustration 250% of the accumulated value were less than $25,000 plus
accumulated value, the death benefit would be $25,000 plus the accumulated value
of the Policy.
The Company guarantees that, so long as the Policy remains in force, the
death benefit under either death benefit option will never be less than the
current face amount of the Policy. However, the death proceeds payable may be
less than the death benefit in the event of policy loans, unpaid loan interest
or overdue monthly deductions.
Change in Death Benefit Option
A policyowner may make a written request to change the death benefit option
on or after the first anniversary of a Policy. Only two changes in death benefit
option are allowed per policy year. There are no charges or fees for changing
the death benefit option. Any written request for change in death benefit option
must be approved by the Company. The effective date of any change will be the
monthly date that coincides with or next follows the day the request for change
is approved by the Company. A change in death benefit option will affect future
cost of insurance charges.
If the death benefit option is changed from Option 1 to Option 2, the new
face amount will be the old face amount decreased by the Policy's accumulated
value as determined on the effective date of the change. This change will not be
allowed if it will result in a face amount less than the minimum face amount of
$25,000. Changing from Option 1 to Option 2 may require evidence of insurability
satisfactory to the Company that the insured is insurable for the new death
benefit under its underwriting rules then in effect.
If the death benefit option is changed from Option 2 to Option 1, the new
face amount will be the old face amount increased by the Policy's accumulated
value as determined on the effective date of the change. Changing from Option 2
to Option 1 does not require evidence of insurability.
Adjustment Options
A policyowner may make a written request to increase the face amount of a
Policy at any time, so long as the Policy is not in a grace period or monthly
deductions are not being waived under a rider. A policyowner may make a written
request to decrease the face amount at any time on or after the first Policy
anniversary so long as the Policy is not in a grace period or monthly deductions
are not being waived under a rider. Any written request for adjustment of face
amount must be approved by the Company and is subject to these additional
conditions:
1. Any request for an increase in face amount must be applied for by a
supplemental application, signed by the insured, and shall be subject
to evidence of insurability satisfactory to the Company under its
insurance underwriting guidelines and suitability rules and procedures
then in effect. The minimum increase in face amount is $5,000. The age
of the insured must be 75 or less at the time of the request.
2. A request for a decrease in face amount must be applied for by a
supplemental application, signed by the insured, and may not reduce the
face amount of the Policy below $25,000.
3. Any increase in face amount will be in a risk classification the
Company determines.
4. Any adjustment approved by the Company will become effective on the
monthly date that coincides with or next follows the Company's approval
of the request.
Any increase in face amount will carry its own free look period and
exchange right, which apply only to the increase in face amount, not the entire
Policy. The policyowner has a limited right to cancel the face amount increase.
The request to cancel a face amount increase must be in writing. The written
request and the Policy data pages reflecting the increase must be personally
delivered or mailed to the home office of the Company or to the agent or broker
who sold the face amount increase before the later of:
* 10 days after Policy data pages reflecting the increase are received by
the policyowner;
* 10 days after a written notice is delivered to the policyowner which
tells about the cancellation of face amount increase right; or
* 45 days after the policyowner completes the application for the face
amount increase.
If a face amount increase is cancelled pursuant to this right or if the
Company does not approve a requested face amount increase, the Company will
refund to the policyowner only that portion of premiums paid with the adjustment
application and during the free look period attributable to the face amount
increase, unless directed otherwise by the policyowner. The refundable portion
of premiums paid is determined in the same manner as described in the paragraph
below for determining the portion of the Policy's accumulated value attributable
to the face amount increase. Any amount to be refunded will ordinarily be
disbursed by the Company to the policyowner within seven days after the request
for cancellation of the face amount increase is received in the Company's home
office or the request for face amount is disapproved by the Company. (See
"Postponement of Payments," page 30.) The Company will also reverse the amount
of any monthly deduction attributable to the face amount increase and return it
to the Policy's accumulated value unless the policyowner and the Company agree
on another method of refund.
During the first 24 policy months following issuance of Policy data pages
reflecting an increased face amount, but not while the Policy is in a grace
period, the policyowner may exchange the increased face amount for any other
form of fixed benefit individual life insurance policy (other than term
insurance) currently made available by the Company for this purpose on the
insured's life. On the date of exchange, a portion of the Policy's accumulated
value attributable to the increase will be transferred to the fixed benefit
policy. The portion of the Policy's accumulated value attributable to the
increase in face amount is determined by use of the ratio of guideline annual
premiums for the increase to guideline annual premiums for the Policy,
determined at the adjustment date for the face amount increase.
Premium payments made under the Policy after exercise of this exchange
right will be credited only to the Policy. A new Policy will be issued upon
exercise of the exchange right which will require payment of its own premiums. A
portion of any policy loan and loan interest may be required to be repaid prior
to the exchange or transferred to the new Policy. In all other respects, this
exchange right for face amount increases is the same as that available for the
purchase of the Policy (See "Right to Exchange Policy," page 31.)
POLICY VALUES
Calculation of Accumulated Value
The Policy's accumulated value is equal to the total of its investment
account values and any amounts in the Policy's loan account. An investment
account is established for each Division of the Separate Account, representing
the interest of the Policy for such Division. A Policy's investment account
value for each Division is equal to the number of units in that investment
account multiplied by the Division's unit value.
When an amount is allocated or transferred to a Division, units are
credited to the appropriate investment account. When an amount is deducted or
transferred from a Division, units of the appropriate investment account are
cancelled. The number of units and fractional units credited or cancelled is
equal to the dollar amount of the transaction divided by the unit value of the
Division for the valuation period when the transaction occurs. The unit value of
each Division is determined on each valuation date. The number of units credited
or cancelled will not change because of subsequent changes in unit value. The
dollar value of each Division's units will vary depending upon the investment
performance of the corresponding mutual fund.
Units
On the later of the policy date or the end of the valuation period during
which the first premium is received, the number of units in an investment
account equals: (1) the first net premium allocated to that Division; less (2)
the monthly deduction withdrawn from that Division for the first policy month;
divided by (3) the unit value for that Division on that valuation date. At the
end of each valuation period thereafter, the number of units in an investment
account equals (1) plus (2) plus (3) less (4) less (5) less (6) where:
(1) is units in the investment account on the previous valuation date;
(2) is units credited to the investment account when any additional net
premium is allocated to the Division during the current valuation
period;
(3) is units credited for transfers from another Division or from the loan
account during the current valuation period;
(4) is units cancelled for transfers to another Division, transaction
charges, or transfers to the loan account to secure a policy loan
during the current valuation period;
(5) is units cancelled for partial surrenders and transaction charges
during the current valuation period; and
(6) is units cancelled to pay the monthly deduction from the Division
whenever a valuation period includes a monthly date.
Unit Values
The unit value of each Division's units was initially established at
$10.00. Thereafter, the unit value of a Division on any valuation date is
calculated by multiplying (1) by (2) where:
(1) is the Division's unit value on the previous valuation date; and
(2) is the net investment factor for the current valuation period.
The unit value of each Division's units on any day other than a valuation
date is the unit value as of the next valuation date.
Net Investment Factor
The net investment factor measures the investment performance of each
Division and is used to determine changes in unit value from one valuation
period to the next valuation period. The net investment factor for a valuation
period is equal to:
1. The quotient obtained by dividing:
a. the net asset value of a share of the underlying mutual fund as
of the end of such valuation period, plus the per share amount of
any dividend or other distribution made by that mutual fund
during such valuation period (less any amount charged against the
Division for taxes or any amount set aside during the valuation
period by the Company to provide for taxes attributable to the
operation or maintenance of that Division); by
b. the net asset value of a share of that mutual fund as of the end
of the immediately preceding valuation period;
LESS
2. a current mortality and expense risks charge of .0020548% on a daily
basis (.75% on an annual basis) for the number of days within such
valuation period. The mortality and expense risks charge is guaranteed
not to exceed .0024658% on a daily basis (.90% on an annual basis).
The amount of any taxes charged against a Division or set aside and the
amount derived from the mortality and expense risks charge will be accrued daily
and will be transferred from the Separate Account to the general account of the
Company at the discretion of the Company.
Valuations in Connection with a Policy
All valuations in connection with a Policy, i.e., determining units to be
credited or cancelled with respect to investment accounts, determining net
surrender value, and calculation of the death benefit on the insured's death,
will be made on the date of the transaction or on the date of the insured's
death, if applicable, if such date is a valuation date. Otherwise, such
determination will be made on the next succeeding day which is a valuation date
for the Policy.
Transfers
Accumulated value may be transferred among the Divisions. The total amount
transferred each time must be at least $250 unless a lesser amount constitutes
the Policy's entire accumulated value in a Division. The effective date of a
transfer is the date the request is received at the home office of the Company.
All transfers with the same effective date count as one transfer. Four transfers
may be made in any one year without charge to the policyowner. Thereafter, a
transaction charge of $25 is imposed to cover administrative costs for each
transfer. The transaction charge is deducted on a prorated basis from the
Divisions from which accumulated value is transferred, unless the policyowner
directs the Company to deduct the transaction charge from only one Division. The
transaction charge is deducted from the affected Divisions before accumulated
value held in those Divisions is transferred. If the transfer of a Policy's
entire accumulated value in a Division is requested, the amount transferred will
be the Policy's accumulated value in the Division, less any transaction charge.
Policy Loans
So long as a Policy remains in effect and the Policy has loan value, a
policyowner may borrow money from the Company using the Policy as the only
security for the loan. A Policy's loan value, which is the maximum amount that
may be borrowed, is (1) minus (2) where: (1) is 90% of the Policy's surrender
value and (2) is any outstanding policy loans and unpaid loan interest. The loan
value is determined as of the loan date. The loan date is the date a loan
request is processed at the home office of the Company.
The minimum amount of any policy loan is $500. Proceeds of policy loans
ordinarily will be disbursed within seven days from the date of receipt of a
written request at the Company's home office. (See "Postponement of Payments,"
page 30.)
When a policy loan is made, a portion of the Policy's accumulated value
equal to the amount of the loan is transferred to the loan account from the
Divisions in the proportion requested by the policyowner. If no request for
allocation of the loaned amount is made by the policyowner, the loan amount will
be withdrawn from the Divisions in the same proportion as was the most recent
monthly deduction. Any loan interest that is due and unpaid will be transferred
in the same manner. Accumulated value in the loan account will accrue interest
daily at an effective annual rate of six percent. Such interest will be
transferred to the Separate Account and allocated on the policy anniversary to
the Divisions in the proportion currently designated by a policyowner for the
allocation of premium payments. A Policy's loan account is part of the Company's
general account.
The Company charges interest on policy loans. Interest accrues daily at an
effective annual rate of eight percent. Interest is due and payable at the end
of the policy year. Any interest not paid when due is added to the loan
principal and bears interest at the rate of eight percent. Adding unpaid
interest to the loan principal will cause additional amounts to be withdrawn
from the Divisions in the same manner as described above for loans. Amounts
withdrawn from the Divisions for unpaid loan interest will be transferred to the
loan account.
Unpaid policy loans and loan interest reduce the Policy's net surrender
value and may cause it to be less than the monthly deduction on a monthly date.
If on any monthly date the net surrender value is not sufficient to pay the
monthly deduction, the 61-day grace period provision will apply. (See "Policy
Termination," page 14.)
So long as a Policy remains in force, policy loans and loan interest may be
repaid in whole or in part at any time during the insured's life. The minimum
loan repayment amount is $30. If the policyowner does not designate a payment as
a premium payment or if the Company cannot identify it as a premium payment, the
Company will apply the payment received as a loan repayment. Accumulated value
in the loan account equal to the loan repayment will be transferred to the
Divisions in the proportion currently designated by a policyowner for the
allocation of premium payments. Any policy loan, whether repaid or not, is
likely to have a permanent effect on the Policy's accumulated value. Accumulated
value held in the Policy's loan account will earn interest at an effective
annual fixed rate of six percent. If the policy loan had not been made, that
accumulated value would have reflected the investment experience of the chosen
Division or Divisions. Any policy loans and loan interest are subtracted from
life insurance proceeds payable at the insured's death, from surrender value
upon total surrender or termination of a Policy when a grace period expires
without sufficient premium payment, and from accumulated value payable at
maturity.
Surrender
A Policy has a surrender value and a net surrender value. The surrender
value of a Policy is its accumulated value less the surrender charge. The net
surrender value of a Policy is its surrender value less any loans and loan
interest.
So long as the Policy is in effect, a policyowner may elect to surrender
the Policy and receive its net surrender value as of the date the Company
receives the policyowner's written request at its home office. After the first
policy anniversary and so long as a Policy is in effect, a policyowner may
request a partial surrender of the accumulated value of the Policy, but no more
than two times per policy year. The minimum amount of a partial surrender is
$500 and the maximum amount of any one partial surrender is 50% of the Policy's
net surrender value at the time written request for partial surrender is
received at the Company's home office. A transaction charge of the lesser of $25
or two percent of the amount surrendered is imposed on each partial surrender,
which is intended to cover the administrative costs of processing the partial
surrender. There is no surrender charge assessed upon a partial surrender. The
Policy's accumulated value reduces by the amount of the partial surrender plus
the amount of the transaction charge. If the Option 1 death benefit is in effect
at the time of a partial surrender, then the Policy's face amount also reduces
by the amount of the partial surrender and the transaction charge.
A policyowner may designate the amount of the partial surrender to be
withdrawn from each of the Divisions. If no designation is made, the amount of
the partial surrender will be withdrawn from the Divisions in the same
proportion as the most recent monthly deduction. The transaction charge is
deducted on a prorated basis from the Divisions from which accumulated value is
surrendered unless the policyowner directs the Company to deduct the transaction
charge from only one Division.
A surrender charge is imposed upon total surrender of a Policy which occurs
at any time within the first ten years after the policy date. In addition, if
total surrender of a Policy occurs at any time within the first ten years after
the adjustment date of a face amount increase, a surrender charge attributable
to the face amount increase will be imposed. (See "Surrender Charge," page 22.)
Proceeds from partial or total surrender of a Policy will ordinarily be
disbursed within seven days from the date of receipt of a written request at the
Company's home office. (See "Postponement of Payments," page 30.)
CHARGES AND DEDUCTIONS
The Company will make certain charges and deductions to support the
operation of the Policy and the Separate Account. Some charges will be deducted
from premium payments as received, some charges will be deducted from the
Policy's accumulated value on a monthly basis, some charges will be deducted on
a daily basis from the value of the Separate Account, and other charges will be
deducted from the Policy's accumulated value upon total surrender or termination
of a Policy. In addition, there are fees for the administrative costs involved
in processing certain transfers and all partial surrenders of accumulated value.
Premium Expense Charge
Upon receipt of each premium payment, the Company deducts a premium expense
charge. The premium expense charge includes a 5% of premium sales load and a
premium tax charge of 2%. For the period ended December 31, 1995, the Company
collected $367,468 in premium expense charges and $146,987 in premium tax
charges. In addition, a sales load of up to a maximum of 25% of the minimum
first year premium may be imposed as a part of a surrender charge upon total
surrender or termination of a Policy for insufficient value. Sales loads,
including the sales load portion of the surrender charge more fully described
below, are intended to compensate the Company for distribution expenses
including registered representatives' commissions, the printing of prospectuses
and sales literature, and advertising. The sales loads imposed in any policy
year are not necessarily related to actual distribution expenses incurred in
that year. Instead, the Company expects to incur the majority of distribution
expenses in the early years of a Policy and to recover any deficiency over the
life of a Policy. To the extent distribution expenses exceed sales loads
(including the sales load portion of surrender charges, if any) in any year, the
Company will pay them from its other assets or surplus in its general account,
which includes amounts derived from mortality and expense risks charges and from
mortality gains.
The premium tax charge portion of the premium expense charge is deducted to
cover premium taxes imposed against the Company by governmental entities. The
premium tax charge, which cannot be changed, is not expected to exceed the
premium taxes charged to the Company.
No reduction in the charge is made to reflect the fact that in some states
the Company may pay state income taxes in lieu of a portion of the premium tax
liability for that state.
Monthly Deduction
On each monthly date, the Company will deduct from the accumulated value of
a Policy an amount to cover certain charges and expenses incurred in connection
with the Policy. The monthly deduction consists of a monthly administration
charge, a charge for the cost of insurance and a charge for any optional
benefits added by rider. During the period ended December 31, 1995
administrative and cost of insurance charges totaled $1,539,242.
The current monthly administration charge for a Policy is $4.75 per month
and is guaranteed never to exceed $5.00 per month. The Policy also provides for
a contingent deferred administration charge which is a part of the surrender
charge imposed upon total surrender or termination of a Policy when a grace
period expires without sufficient premium payment. The monthly administration
charge and the deferred administration charge reimburse the Company for the
recurring administrative expenses related to the Policy and the Separate
Account. These expenses are expenses other than sales expenses and include, for
example, the cost of processing applications, conducting medical examinations,
determining insurability, establishing policy records, premium reminders and
collection, record keeping, processing death benefit claims and policy changes,
reporting, and overhead costs. The Company does not expect to recover from the
administration charges any amount above its accumulated expenses associated with
the Policies and the Separate Account.
The monthly cost of insurance charge is calculated as (1) multiplied by the
result of (2) minus (3) where:
(1) is the cost of insurance rate as described below divided by 1,000;
(2) is the death benefit at the beginning of the policy month; and
(3) is the accumulated value at the beginning of the policy month.
The cost of insurance rate is based on the sex, attained age and risk
classification of the insured under the Policy. (For Policies issued in states
which require unisex pricing or in connection with employment related insurance
and benefit plans, the cost of insurance is not based on the sex of the
insured.) The rate will be determined by the Company based upon its expectations
as to future mortality experience, but the rate will never exceed the rate shown
in the Table of Monthly Guaranteed Cost of Insurance Rates set forth in the
Policy. These guaranteed maximum rates are based on the 1980 Smoker and
Nonsmoker Commissioners Standard Ordinary Mortality Tables. The table used will
be male or female according to the sex of the insured (where allowed by law).
Any change in current cost of insurance rates will apply to all individuals of
the same age, sex and risk classification of the insured. However, different
maximum cost of insurance rates may apply to any face amount increases under a
Policy.
The monthly deduction is made only from the Policy's accumulated value held
in the Divisions of the Separate Account. No deduction is made from any
accumulated value of the Policy held in the Company's general account for the
purpose of securing policy loans. The amount deducted from each Division will be
in accordance with policyowner instruction on the application for the Policy.
The policyowner's choice of monthly deduction allocation percentages may be: (1)
the same as the allocation percentages for premiums, (2) on a prorated basis or
(3) any other method of allocation agreed upon by the policyowner and the
Company. For each Division, the allocation percentages must be zero or a whole
number not less than ten nor greater than 100. The allocation percentages chosen
by the policyowner must total 100. Requests for changes in allocation
percentages are effective on the next monthly date following approval by the
Company. If following the policyowner's instruction as to allocation of monthly
deductions would not be possible on any monthly date due to insufficient
accumulated value of the Policy in an affected Division, deductions will be
allocated on a prorated basis.
Mortality and Expense Risks Charge
The Company will assess a charge on a daily basis against each Division
equal to .75% (on an annual basis) of the value of the Division to compensate
the Company for its assumption of certain mortality and expense risks in
connection with the Policy. Specifically, the Company bears the risk that the
costs of death benefits under the Policies will be greater than anticipated. The
Company also assumes the risk that the actual cost incurred by it to administer
the Policies will not be covered by charges assessed under the Policies. This
charge is guaranteed never to exceed .90% on an annual basis of the assets of
each Division. During the period ended December 31, 1995 mortality and expense
risk charges totaled $95,590.
Transaction Charge
A transaction charge of the lesser of $25 or 2% of the amount being
surrendered is imposed on each partial surrender of accumulated value. A
transaction charge of $25 is imposed on each transfer of accumulated value among
Divisions exceeding four per policy year. All transfers with the same effective
date count as one transfer.
Surrender Charge
During the first ten policy years, the Company will assess a surrender
charge upon total surrender of a Policy or termination of a Policy when a grace
period expires without sufficient premium payment. The amount of the charge
assessed per $1,000 of face amount depends upon the sex (where allowed by law)
and attained age of the insured on the policy date and how long the Policy has
been in force. In addition, the Company will assess a surrender charge upon
surrender or termination of a Policy for insufficient premium payment which
occurs during the first ten policy years after the adjustment date for a face
amount increase. The amount of the surrender charge assessed per $1,000 of net
increase in face amount depends upon the sex (where allowed by law) and attained
age of the insured on the adjustment date and how long the increase has been in
force. (For Policies issued in states requiring unisex pricing or in connection
with employment related insurance and benefit plans, the surrender charge is not
based on the sex of the insured.) Thus, surrender of a Policy or termination of
a Policy for insufficient value within the first ten policy years and within ten
years after the adjustment date of a face amount increase will result in
assessment of a composite surrender charge representing the charge imposed on
the initial face amount and the charge imposed on the face amount increase. The
surrender charge builds up on a monthly basis during the first policy year (and
during the first year after a face amount increase), remains level to the end of
the third policy year (and to the end of the third year after a face amount
increase) and grades down gradually each year thereafter to zero in the tenth
policy year (and in the tenth year after a face amount increase). Surrender
charges do not decrease when the face amount of a Policy is decreased. No
additional surrender charges apply when the death benefit under a Policy is
changed from Option 2 to Option 1.
The surrender charge is comprised of two parts: A contingent deferred sales
charge and a contingent deferred administration charge. The contingent deferred
sales charge portion of the surrender charge is assessed to recover sales
expenses and is in addition to the 5% sales charge which is deducted when
premium payments are made. The contingent deferred sales charge will not exceed
25% of this minimum first year premium.
The contingent deferred administration charge portion of the surrender
charge is intended to reimburse the Company for administrative expenses
associated with the Policy and the Separate Account and is in addition to the
monthly administration charge for a Policy. The surrender charge is a contingent
charge and will never be assessed if total surrender of a Policy or termination
of a Policy for insufficient value does not occur within the first ten policy
years or within ten years of the adjustment date for a face amount increase.
During the period ended December 31, 1995 the Company received surrender
charges totaling $66,485.
<PAGE>
<TABLE>
<CAPTION>
FIRST YEAR CONTINGENT DEFERRED SURRENDER CHARGES
per $1000 of Face Amount
Male Lives
Issue Adm. Sales Total Issue Adm. Sales Total
Age Charge Load Charge Age Charge Load Charge
<S> <C> <C> <C> <C> <C> <C> <C>
0 0.43 0.89 1.32 40 2.31 1.71 4.02
1 0.69 0.63 1.32 41 2.38 1.81 4.19
2 0.72 0.62 1.34 42 2.47 1.91 4.38
3 0.74 0.62 1.36 43 2.56 2.02 4.58
4 0.77 0.62 1.39 44 2.65 2.14 4.79
5 0.80 0.61 1.41 45 2.74 2.27 5.01
6 0.84 0.60 1.44 46 2.86 2.39 5.25
7 0.87 0.60 1.47 47 3.00 2.50 5.50
8 0.91 0.60 1.51 48 3.14 2.63 5.77
9 0.93 0.61 1.54 49 3.30 2.76 6.06
10 0.96 0.62 1.58 50 3.46 2.90 6.36
11 0.97 0.65 1.62 51 3.63 3.06 6.69
12 0.97 0.69 1.66 52 3.81 3.23 7.04
13 0.96 0.74 1.70 53 4.01 3.40 7.41
14 0.95 0.80 1.75 54 4.22 3.58 7.80
15 0.93 0.86 1.79 55 4.44 3.78 8.22
16 0.92 0.91 1.83 56 4.69 3.98 8.67
17 0.91 0.96 1.87 57 4.97 4.18 9.15
18 0.92 1.00 1.92 58 5.26 4.40 9.66
19 0.93 1.03 1.96 59 5.55 4.66 10.21
20 1.02 0.99 2.01 60 5.82 4.98 10.80
21 1.07 0.99 2.06 61 6.05 5.37 11.42
22 1.11 1.00 2.11 62 6.27 5.83 12.10
23 1.16 1.01 2.17 63 6.48 6.34 12.82
24 1.22 1.01 2.23 64 6.70 6.89 13.59
25 1.28 1.02 2.30 65 6.95 7.47 14.42
26 1.34 1.03 2.37 66 7.24 8.07 15.31
27 1.41 1.04 2.45 67 7.55 8.71 16.26
28 1.47 1.06 2.53 68 7.88 9.40 17.28
29 1.53 1.09 2.62 69 8.22 10.16 18.38
30 1.60 1.11 2.71 70 8.59 10.98 19.57
31 1.66 1.15 2.81 71 8.98 11.87 20.85
32 1.73 1.19 2.92 72 9.41 12.83 22.24
33 1.80 1.23 3.03 73 9.83 13.88 23.71
34 1.87 1.28 3.15 74 10.23 15.06 25.29
35 1.93 1.34 3.27 75 10.58 16.38 26.96
36 2.01 1.40 3.41
37 2.08 1.47 3.55
38 2.15 1.54 3.69
39 2.23 1.62 3.85
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST YEAR CONTINGENT DEFERRED SURRENDER CHARGES
per $1000 of Face Amount
Female Lives
Issue Adm. Sales Total Issue Adm. Sales Total
Age Charge Load Charge Age Charge Load Charge
<S> <C> <C> <C> <C> <C> <C> <C>
0 0.44 0.76 1.20 40 1.97 1.52 3.49
1 0.66 0.54 1.20 41 2.03 1.60 3.63
2 0.68 0.54 1.22 42 2.09 1.69 3.78
3 0.70 0.54 1.24 43 2.15 1.78 3.93
4 0.72 0.54 1.26 44 2.23 1.87 4.10
5 0.74 0.54 1.28 45 2.30 1.98 4.28
6 0.77 0.54 1.31 46 2.40 2.06 4.46
7 0.79 0.54 1.33 47 2.51 2.15 4.66
8 0.82 0.54 1.36 48 2.63 2.23 4.86
9 0.84 0.54 1.38 49 2.74 2.34 5.08
10 0.85 0.56 1.41 50 2.87 2.44 5.31
11 0.88 0.57 1.45 51 3.00 2.56 5.56
12 0.89 0.59 1.48 52 3.15 2.67 5.82
13 0.90 0.61 1.51 53 3.32 2.78 6.10
14 0.92 0.63 1.55 54 3.50 2.90 6.40
15 0.93 0.66 1.59 55 3.67 3.04 6.71
16 0.94 0.68 1.62 56 3.88 3.17 7.05
17 0.96 0.70 1.66 57 4.10 3.30 7.40
18 0.99 0.72 1.71 58 4.33 3.46 7.79
19 1.01 0.74 1.75 59 4.62 3.58 8.20
20 1.05 0.75 1.80 60 4.90 3.74 8.64
21 1.07 0.77 1.84 61 5.16 3.97 9.13
22 1.11 0.78 1.89 62 5.41 4.23 9.64
23 1.15 0.80 1.95 63 5.64 4.56 10.20
24 1.18 0.82 2.00 64 5.86 4.94 10.80
25 1.22 0.84 2.06 65 6.11 5.32 11.43
26 1.26 0.87 2.13 66 6.39 5.73 12.12
27 1.30 0.90 2.20 67 6.70 6.16 12.86
28 1.35 0.92 2.27 68 7.06 6.61 13.67
29 1.39 0.95 2.34 69 7.47 7.07 14.54
30 1.44 0.98 2.42 70 7.97 7.53 15.50
31 1.49 1.01 2.50 71 8.45 8.10 16.55
32 1.54 1.05 2.59 72 8.93 8.77 17.70
33 1.59 1.09 2.68 73 9.44 9.50 18.94
34 1.65 1.13 2.78 74 9.94 10.35 20.29
35 1.71 1.17 2.88 75 10.33 11.42 21.75
36 1.76 1.23 2.99
37 1.81 1.30 3.11
38 1.87 1.36 3.23
39 1.92 1.44 3.36
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST YEAR CONTINGENT DEFERRED SURRENDER CHARGES
per $1000 of Face Amount
Unisex Lives
Issue Adm. Sales Total Issue Adm. Sales Total
Age Charge Load Charge Age Charge Load Charge
<S> <C> <C> <C> <C> <C> <C> <C>
0 0.43 0.87 1.30 40 2.26 1.69 3.95
1 0.69 0.61 1.30 41 2.34 1.78 4.12
2 0.72 0.60 1.32 42 2.42 1.88 4.30
3 0.74 0.60 1.34 43 2.51 1.99 4.50
4 0.77 0.60 1.37 44 2.60 2.10 4.70
5 0.79 0.60 1.39 45 2.69 2.23 4.92
6 0.83 0.59 1.42 46 2.80 2.35 5.15
7 0.86 0.59 1.45 47 2.93 2.46 5.39
8 0.90 0.59 1.49 48 3.07 2.58 5.65
9 0.92 0.60 1.52 49 3.22 2.71 5.93
10 0.95 0.61 1.56 50 3.38 2.84 6.22
11 0.96 0.64 1.60 51 3.55 2.99 6.54
12 0.97 0.67 1.64 52 3.73 3.15 6.88
13 0.96 0.72 1.68 53 3.92 3.32 7.24
14 0.95 0.77 1.72 54 4.12 3.50 7.62
15 0.94 0.82 1.76 55 4.33 3.69 8.02
16 0.93 0.87 1.80 56 4.58 3.88 8.46
17 0.93 0.91 1.84 57 4.85 4.07 8.92
18 0.94 0.95 1.89 58 5.14 4.28 9.42
19 0.96 0.97 1.93 59 5.43 4.52 9.95
20 1.04 0.94 1.98 60 5.70 4.82 10.52
21 1.08 0.95 2.03 61 5.93 5.19 11.12
22 1.12 0.96 2.08 62 6.16 5.62 11.78
23 1.17 0.97 2.14 63 6.37 6.11 12.48
24 1.22 0.98 2.20 64 6.59 6.64 13.23
25 1.28 0.99 2.27 65 6.84 7.19 14.03
26 1.34 1.00 2.34 66 7.13 7.77 14.90
27 1.40 1.02 2.42 67 7.44 8.38 15.82
28 1.46 1.04 2.50 68 7.77 9.04 16.81
29 1.52 1.06 2.58 69 8.13 9.75 17.88
30 1.58 1.09 2.67 70 8.51 10.53 19.04
31 1.64 1.13 2.77 71 8.91 11.38 20.29
32 1.71 1.17 2.88 72 9.34 12.31 21.65
33 1.77 1.21 2.98 73 9.78 13.31 23.09
34 1.84 1.26 3.10 74 10.20 14.44 24.64
35 1.91 1.31 3.22 75 10.55 15.73 26.28
36 1.98 1.38 3.36
37 2.05 1.44 3.49
38 2.11 1.52 3.63
39 2.19 1.60 3.79
</TABLE>
<PAGE>
The percentage of the first year surrender charges shown above remaining in
each policy year thereafter is:
Policy Year Percentage of First Year
Surrender Charges Remaining
2 100.0%
3 100.0%
4 87.5%
5 75.0%
6 62.5%
7 50.0%
8 37.5%
9 25.0%
10 12.5%
11+ 0.0%
If the face amount of a Policy is increased, surrender charges apply to the
net increase in face amount as though a new Policy had been issued for an amount
equal to net increase, based on the tables set out above. The net increase in
face amount is equal to the increase in face amount less earlier decreases in
face amount not offset against an earlier increase in face amount. The Minimum
Required Premium following a requested face amount increase will be shown on the
Policy data pages issued to reflect the adjustment.
Surrender charges following a Policy's reinstatement commence at the rate
in effect at the time of the Policy's termination.
Other Charges
Shares of the mutual funds are purchased by the corresponding Divisions at
the shares' net asset values. The net asset value of mutual fund shares reflects
the investment management fees and corporate operating expenses already deducted
from the assets of the mutual funds. The current investment management fee at an
annual rate of .50% of the first $100 million of each fund's average daily net
assets and .45% of the next $100 million of each fund's daily average net assets
is charged monthly against Principal Capital Accumulation Fund, Inc., Principal
Money Market Fund, Inc., and Principal Bond Fund, Inc. The current investment
management fee at an annual rate of .60% of the average daily net asset value is
charged monthly against Principal Balanced Fund, Inc. and Principal High Yield
Fund, Inc. The current investment management fee at an annual rate of .65% of
the average daily net asset value is charged monthly against Principal Emerging
Growth Fund, Inc.
The Company reserves the right to charge the assets of each Division of the
Separate Account to provide for any income taxes payable by the Company on the
assets of such Divisions.
Special Plans
Where allowed by law, the Company may reduce or eliminate certain charges
for Policies issued under special circumstances that result in lower expenses to
the Company. For example, special circumstances may exist in connection with
group arrangements, including employer or employee organization sponsored plans,
and with regard to Policies issued to persons owning other policies issued by
the Company or its subsidiaries. The amount of any reduction, the charges to be
reduced, and the criteria for applying a reduction will reflect the reduced
sales effort, costs and differing mortality experience appropriate to the
circumstances giving rise to the reduction. The charges will be reduced in
accordance with the Company's practice in effect when the Policy is issued.
Reductions will not be unfairly discriminatory against any person, including the
purchasers to whom the reduction applies and all other owners of the Policies.
OTHER MATTERS
Voting Rights
The Company shall vote mutual fund shares held in the Separate Account at
regular and special meetings of shareholders of each mutual fund, but will
follow voting instructions received from persons having the voting interest in
such mutual fund shares.
The policyowner has the voting interest under a Policy. The policyowner
shall have one vote for each $100 of accumulated value in the Divisions, with
fractional votes allocated for amounts less than $100. The number of votes on
which the policyowner has the right to instruct will be determined as of the
date coincident with the date established by the mutual fund for determining
shareholders eligible to vote at the meeting of the mutual fund. Voting
instructions will be solicited by written communications prior to such meetings
in accordance with procedures established by the mutual fund. The Company will
vote other mutual fund shares held in the Separate Account, including those for
which no instructions are received in the same proportion as it votes shares for
which it has received instructions. All mutual fund shares held in the general
account of the Company will be voted in proportion to instructions that are
received with respect to participating contracts.
If the Company determines pursuant to applicable law that mutual fund
shares held in the Separate Account need not be voted pursuant to instructions
received from persons otherwise having the voting interest as provided above,
then the Company may vote mutual fund shares held in the Separate Account in its
own right.
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that shares be voted
so as to cause a change in subclassification or investment objective of the
mutual fund, or disapprove an investment advisory contract of the mutual fund.
In addition, the Company may disregard voting instructions in favor of changes
initiated by a policyowner in the investment policy or the investment advisor of
the mutual fund if the Company reasonably disapproves of such changes. A change
would be disapproved only if the proposed change is contrary to state law or
prohibited by state regulatory authorities or the Company determines that the
change would be inconsistent with the investment objectives of the mutual fund
or would result in the purchase of securities for the mutual fund which vary
from the general quality and nature of investments and investment techniques
utilized by other separate accounts created by the Company or any affiliates of
the Company which have similar investment objectives. In the event that the
Company does disregard voting instructions, a summary of that action and the
reason for such actions will be included in the next semi-annual report to
policyowners.
Statement of Value
The Company will mail an annual statement to the policyowner after the end
of each policy year until the policy terminates. The statement will show:
1. the current death benefit;
2. the current accumulated and surrender values;
3. all premiums paid since the last statement;
4. all charges since the last statement;
5. any policy loans and loan interest;
6. any partial surrenders since the last statement;
7. the number of units and unit value;
8. the total value of each of the policyowner's investment accounts; and
9. any investment gain or loss since the last statement.
Any policyowner may request at any time a current statement of account
values, transactions and activities by telephoning 1-800-852-4450.
The Company will also send to the policyowner the reports required by the
Investment Company Act of 1940.
Service Available by Telephone
Policyowners may preauthorize the following telephone transactions: 1)
transfers between divisions; 2) change in premium allocation percentages; 3)
change in monthly deduction percentages; and 4) policy loans (Policy loan
proceeds will be mailed only to the policyowner's address of record.) The
policyowner may preauthorize the above transactions by submitting a form
provided by the Company. Policyowners may exercise the telephone transactions
privilege by telephoning 1-800-852-4450. Telephone transfer requests must be
received by the close of the New York Stock Exchange on a day when the Separate
Account is open for business to be effective that day. Requests made after that
time or on a day when the Separate Account is not open for business will be
effective the next business day.
Although neither the Separate Account nor the Company is responsible for
the authenticity of telephone transaction requests, the right is reserved to
refuse to accept telephone requests when in the opinion of the Company it seems
prudent to do so. The policyowner bears the risk of loss caused by fraudulent
telephone instructions the Company reasonably believes to be genuine. The
Company will employ reasonable procedures to assure telephone instructions are
genuine and if such procedures are not followed, the Company may be liable for
losses due to unauthorized or fraudulent transactions. Such identification
information such as the caller's name, daytime telephone number, social security
number and/or birthdate and sending a written confirmation of the transaction to
the policyowner's address of record. Policyowners may obtain additional
information and assistance by telephoning the toll free number.The Company may
modify or terminate telephone transfer procedures at any time.
GENERAL PROVISIONS
Addition, Deletion or Substitution of Investments
The Company reserves the right, subject to compliance with applicable law,
to make additions to, deletions from, or substitutions for the shares held by
any Division or which any Division may purchase. If shares of any mutual fund
should no longer be available for investment or if, in the judgment of the
Company's management, further investment in shares of any mutual fund should
become inappropriate in view of the purposes of the Policy, the Company may
substitute shares of any other investment company for shares already purchased,
or to be purchased in the near future under the Policies. No substitution of
securities will take place without notice to policyowners and without prior
approval of the Securities and Exchange Commission, to the extent required by
the Investment Company Act of 1940.
The investment policy of the Separate Account will not be materially
changed unless a statement of the change is filed with and not disapproved by
the Insurance Commissioner of the State of Iowa and the Superintendent of
Insurance of the State of New York, if required. Whether a change in investment
policy is material will be determined in conjunction with the appropriate state
insurance commissioner(s). The policyowner will be notified of any material
investment policy change. The policyowner may then change allocation percentages
and transfer any value in an affected Division to another Division without
charge. In the alternative, the policyowner may exchange the Policy for a
fixed-benefit, flexible premium life insurance policy offered by the Company for
this purpose. The policyowner may exercise this exchange privilege until the
later of 60 days after (i) the effective date of such change, or (ii) the
receipt of a notice of the options available. The face amount of the new policy
will be the death benefit of the Policy on the date of exchange.
Each mutual fund is subject to certain investment restrictions which may
not be changed without the approval of the majority of the outstanding voting
securities of such fund. See the accompanying prospectuses for the mutual funds.
Optional Insurance Benefits
Subject to certain requirements and approval by state insurance
departments, one or more supplementary benefits may be added to a Policy,
including those providing term insurance options, providing accidental death
coverage, waiving monthly deductions upon disability, accelerating benefits in
the event of terminal illness, providing cost of living increases in benefits,
providing a death benefit guarantee described below, providing a guaranteed
increase option and, in the case of business-owned Policies, permitting a change
of the life insured and providing enhanced policy values in the early years of a
Policy. More detailed information concerning supplementary benefits may be
obtained from an authorized agent of the Company. The cost, if any, of any
optional insurance benefits will be deducted as part of the monthly deduction.
Death Benefit Guarantee Rider
The death benefit guarantee rider provides that if the death benefit
guarantee premium requirement is satisfied the Policy will not enter its grace
period even if the net surrender value is insufficient to cover the monthly
deduction on a monthly date. This rider is automatically made a part of all
Policies at no premium. The death benefit guarantee premium requirement is
satisfied if the sum of all premiums paid less any partial surrenders and any
policy loans and unpaid loan interest equals or exceeds the sum of the monthly
death benefit guarantee premiums applicable to date plus the next monthly death
benefit guarantee premium. The death benefit guarantee premium is based on the
issue age, sex (where permitted by law), death benefit option, and risk class of
the insured. The monthly death benefit guarantee premium will be considered to
be zero for any month that deductions are being paid by the Waiver of Monthly
Deductions Rider. The death benefit guarantee premium may change if the Policy
face amount is changed, the death benefit option is changed, or a rider is added
or deleted. As a result of a change, an additional premium may be required on
the date of the change in order to satisfy the new death benefit guarantee
premium requirement. If on any monthly date the death benefit guarantee premium
requirement is not met, the policyowner will be sent a notice of the premium
required to maintain the guarantee. If the premium is not received at the
Company's home office prior to the expiration of 61 days after the date the
notice is mailed, the death benefit guarantee will no longer be in effect and
the rider will terminate. If the rider terminates, it may not be reinstated.
If this rider is in force, the death benefit guarantee premium requirement
is satisfied and the insured is alive on the policy maturity date, the Company
will pay the policyowner the excess, if any, of the face amount over the
maturity proceeds.
This rider is available only in those states where it has been approved.
The Contract
The Policy, the application attached to it, any adjustment applications,
any amendments to the application, the current data pages, and any written
notification showing change make up the entire contract between the Company and
the policyowner. Any statements made in the application or an adjustment
application will be considered representations and not warranties. No statement,
unless made in an application, will be used to void a Policy (or void an
adjustment in case of an adjustment application) or to defend against a claim. A
Policy may be modified by mutual agreement between the policyowner and the
Company. Any alteration of the Policy must be in writing and signed by one of
the Company's corporate officers. No one else, including the agent, may change
the contract or waive any provisions.
Incontestability
The Company will not contest the insurance coverage provided under a
Policy, except for any subsequent increase in face amount, after the Policy has
been in force during the lifetime of the insured for a period of two years from
the policy date. This provision does not apply to claims for total disability or
to accidental death benefits which may be provided by a rider to a Policy. Any
face amount increase made under the adjustment options has its own two-year
contestable period which begins on the effective date of the adjustment.
Misstatements
If the age or sex of the insured has been misstated in an application,
including a reinstatement application, the death benefit under the Policy will
be the Policy's accumulated value plus the amount which would be purchased by
the most recent mortality charge at the correct age and sex.
Suicide
A Policy does not cover the risk of suicide within two years from the
policy date or two years from the date of any increase in face amount with
respect to such increase, whether the insured is sane or insane. In the event of
suicide within two years of the policy date, the only liability of the Company
will be a refund of premiums paid, without interest, less any policy loans and
loan interest and any partial surrenders. In the event of suicide within two
years of an increase in face amount, the only liability of the Company in
respect to that increase in face amount will be a refund of the cost of
insurance for such increase.
Ownership
The owner of the Policy is as named in the application. The owner may
exercise every right and enjoy every privilege provided by the Policy, subject
to the rights of any irrevocable beneficiary. All privileges and rights of the
owner under a Policy end when the owner surrenders the Policy for cash, the
death proceeds of the Policy are paid, or the maturity proceeds of the Policy
are paid. Also, if the grace period ends without receipt by the Company at its
home office of the payment required to keep the Policy in force, the privileges
and rights of the owner terminate as of the monthly date on or immediately
preceding the start of the grace period. If the owner is not the insured and
dies before the insured, the insured becomes the owner unless the owner has
provided for a successor owner. The owner may be changed by filing a written
request with the Company. The Company's approval is needed and no change is
effective until the Company approves the written request for change of owner.
Once approved, the change is effective as of the date the owner signed the
written request. The Company reserves the right to require that the Policy be
sent to the Company so that the change may be recorded.
Beneficiaries
The original beneficiaries and contingent beneficiaries are designated by
the policyowner on the application. A primary and/or contingent beneficiary or
beneficiaries may be changed by written request to the Company. The Company's
approval is needed and no change is effective until the Company approves the
written request for change of beneficiary. Once approved, the change is
effective as of the date the owner signed the written request. If changed, the
primary beneficiary or contingent beneficiary is as shown in the latest written
change filed with the Company. One or more primary or contingent beneficiaries
may be named in the application or a later change request.
Benefit Instructions
While the insured is alive, the owner may file instructions for the payment
of death proceeds under one of the benefit options under the Policy. Such
instructions, or a change of instructions, must be made by written request to
the Company. If the owner changes the beneficiary, that change will revoke any
prior benefit instructions.
Postponement of Payments
Payment of any amount upon total or partial surrender, policy loan, or
proceeds payable at death or maturity and the right to transfer accumulated
value between Divisions may be postponed or suspended whenever: (1) the New York
Stock Exchange is closed other than customary weekend and holiday closings, or
trading on the New York Stock Exchange is restricted as determined by the
Securities and Exchange Commission; (2) the Securities and Exchange Commission
by order permits postponement for the protection of policyowners; or (3) the
Securities and Exchange Commission requires that trading be restricted or
declares an emergency, as a result of which disposal of securities is not
reasonably practicable or it is not reasonably practicable to determine the net
asset value of the mutual funds.
Assignment
The Policy can be assigned as collateral for a loan. The Company must be
notified in writing if the Policy has been assigned. Each assignment will be
subject to any payments made or action taken by the Company prior to its
notification of such assignment. The Company is not responsible for the validity
of an assignment. An assignment as collateral does not change the owner but the
rights of beneficiaries, whenever named, become subordinate to those of the
assignee.
Policy Proceeds
Death proceeds under a Policy will ordinarily be paid within seven days
after the Company receives due proof of death. Payments may be postponed in
certain circumstances. (See "Postponement of Payments," page 30.) During the
insured's lifetime, the policyowner may arrange for the death proceeds to be
paid in a lump sum or under one or more of the settlement options described
below. These choices are also available if the Policy is surrendered or matures.
When death proceeds are payable in a lump sum, the beneficiary may select
one or more of the settlement options.
The following options are available:
Option A
Special Benefit Arrangement - A specially designed benefit option may be
arranged with the Company's approval.
Option B
Proceeds Left at Interest - The Company will hold the amount applied on
deposit. Interest payments will be made annually, semi-annually, quarterly or
monthly, as elected.
Option C
Fixed Income - The Company will pay an income of a fixed amount or an
income for a fixed period not exceeding 30 years.
Option D
Life Income - The Company will pay an income during a person's lifetime. A
minimum guaranteed period may be used.
Option E
Joint and Survivor Life Income - The Company will pay an income during the
lifetime of two persons, and continuing until the death of the survivor. This
option includes a minimum guaranteed period of 10 years.
Option F
Joint and Two-Thirds Survivor Life Income - The Company will pay an income
during the time two persons both remain alive, and two-thirds of the original
amount during the remaining lifetime of the survivor.
Interest at a rate set by the Company, but never less than required by
state law, will be applied to determine the payment under Option B, and any such
interest in excess of the guaranteed minimum will be added to payments under
Option C.
Participating Policy
The Policies share in any divisible surplus of the Company. The Company
will determine each Policy's share of the surplus and will credit it as a
dividend at the end of each contract year. The Company does not expect to pay
any dividends under the Policy. Dividends, if any, will be paid in cash.
Right To Exchange Policy
During the first 24 policy months following issuance of a Policy, except
during a grace period, the policyowner may exchange the Policy for any other
form of fixed benefit individual life insurance policy (other than term
insurance) currently made available by the Company for this purpose on the
insured's life. At present, the Company makes a universal life insurance policy
available for exercise of this exchange right. Such request must be postmarked
or delivered to the home office of the Company before the expiration of 24
months after the policy date. At the option of the policyowner, the new policy
will provide either the same death benefit or the same amount at risk as the
Policy did at the time of the exchange request. Premiums for the new policy will
be based on the same issue age, sex and risk classification of the insured under
the Policy. An equitable adjustment in the new policy's payments and cash or
accumulated values will be made to reflect variances, if any, in the payments
and accumulated values under the Policy and the new policy. Minimum benefits of
the new policy will be fixed and guaranteed and the new policy will not
participate in the experience of the Separate Account. Policy values will be
determined as of the date the written request for exchange is received at the
Company's home office. Evidence of insurability will not be required for the
exchange. No charge will be imposed on the exercise of this exchange privilege.
Any policy loan and loan interest must be repaid prior to the exchange or
transferred to the new policy. Any benefit riders included as a part of a Policy
may be exchanged, without evidence of insurability, for similar benefit riders
on the new policy if both these conditions are met:
1. The policyowner, in the written request for exchange, indicates that
the rider or riders should be a part of the new policy; and
2. The similar benefit rider or riders were available for the new policy
on the effective date of the benefit rider for the Policy based on the
same issue age, sex and risk classification of the insured under the
Policy.
The exchange will be effective upon proper receipt by the Company of the
written request, any amount required as an adjustment and surrender of the
Policy.
The policyowner may also exchange the Policy for a fixed-benefit, flexible
premium policy in the event of a material change in investment policy of a
Division (see "Addition, Deletion or Substitution of Investments," page 28).
In addition, the policyowner has the right to exchange a face amount
increase for a fixed-benefit, flexible premium policy at any time during the
first 24 months following issuance of Policy data pages reflecting a face amount
increase, but not while the policy is in a grace period (see "Adjustment
Options," page 17).
DISTRIBUTION OF THE POLICY
The Policy will be sold by individuals who, in addition to being licensed
and appointed as life insurance agents or brokers for the Company, are also
registered representatives of the principal underwriter of the Policies, Princor
Financial Services Corporation, or of other broker-dealers which Princor
Financial Services Corporation selects and the Company approves. Princor
Financial Services Corporation is registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934 as a broker-dealer and is a
member of the National Association of Securities Dealers, Inc. For contracts
distributed by the principal underwriter commissions will range between 0% and
50% of premium received in the first year of a Policy (and between 0% and 50% of
premium received in the first year following an adjustment date), up to a target
premium determined by a rate per $1,000 of face amount which varies by the age
and sex of the insured. In addition, commissions will include 0% to 4% of
premium received in the first year of the Policy, above the target premium. For
years two and later of a Policy, commissions will range from 0% to 2% of
premiums received. A service fee of 0% to 2% is paid on all premiums received
after the first policy year. In addition, a persistency renewal commission may
be paid which ranges from 1.25% to 5.25% of premiums received in the first three
policy years, depending upon the agent's or broker's total life insurance sales
for the Company. Expense allowances may also be payable to agents and brokers
based upon premiums received. Commission amounts for contracts distributed by
broker-dealers other than the principal underwriter will vary.
For the period ended December 31, 1995, the Company paid Princor Financial
Services Corporation $1,086,240 to compensate registered representatives of the
principal underwriter.
The Company has entered into a distribution agreement with Princor
Financial Services Corporation. Princor Financial Services Corporation is the
principal underwriter for Princor Balanced Fund, Inc., Princor Blue Chip Fund,
Inc., Princor Bond Fund, Inc., Princor Capital Accumulation Fund, Inc., Princor
Cash Management Fund, Inc., Princor Emerging Growth Fund, Inc., Princor
Government Securities Income Fund, Inc., Princor Growth Fund, Inc., Princor High
Yield Fund, Inc., Princor Limited Term Bond Fund, Inc., Princor Tax-Exempt Cash
Management Fund, Inc., Princor Tax-Exempt Bond Fund, Inc., Princor Utilities
Fund, Inc. and Princor World Fund, Inc., registered investment companies
organized by the Company. Princor Financial Services Corporation is a
wholly-owned subsidiary of Principal Holding Company. Principal Holding Company
is a holding company and a wholly-owned subsidiary of the Company.
OFFICERS AND DIRECTORS OF PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
Principal Mutual Life Insurance Company is managed by a Board of Directors
which is elected by its policyowners. The directors and executive officers of
the Company, their positions with the Company, including Board Committee
memberships, and their principal occupation during the last five years, are as
follows:
DIRECTORS:
EXECUTIVE OFFICERS (OTHER THAN DIRECTORS):
J. E. ASCHENBRENNER Senior Vice President
R. S. CRABTREE Executive Vice President
T. J. GAARD Senior Vice President
M. H. GERSIE Senior Vice President
T. J. GRAF Senior Vice President
J. B. GRISWELL Executive Vice President
R. E. KELLER Executive Vice President
G. R. NARBER Senior Vice President and General Counsel
C. E. ROHM Executive Vice President
<TABLE>
<CAPTION>
Principal Occupation
Name, Positions and Offices During Last 5 Years
- --------------------------- -------------------
<S> <C>
M. VERMEER ANDRINGA President and Chief Operating Officer, Vermeer Manufacturing Company.
Director
Member, Nominating Committee
R. M. DAVIS President and Chief Executive Officer, The Pymatuning Group, Inc.
Director
Member, Nominating Committee
D. J. DRURY Chairman and Chief Executive Officer, Principal Mutual Life Insurance Company since
Director January 1995. President and Chief Executive Officer from 1994 - 1995; President from
Chairman of the Board 1993-1994; Executive Vice President from 1992 - 1993; Executive Vice President and Chair,
Executive Committee Chief Actuary 1992; prior thereto, Senior Vice President and Chief Actuary.
C. D. GELATT, JR. President, NMT Corporation.
Director
Member, Executive and
Human Resources Committees
G. D. HURD Retired. Chairman and Chief Executive Officer, Principal Mutual Life Insurance Company
Director 1989 - 1994.
Member, Executive and
Human Resources Committee
T. M. HUTCHISON Vice Chairman, Principal Mutual Life Insurance Company since August 1994. Prior
Director thereto, Executive Vice President.
C. S. JOHNSON President and Chief Executive Officer of Pioneer Hi-Bred International, Inc. since
Director September, 1995. President and Chief Operating Officer March 1995-September 1995.
Executive Vice President 1993-March 1995. Prior thereto Senior Vice President.
W. T. KERR President & Chief Operating Officer since 1994 Meredith Corporation.
Director Executive Vice President 1991-1994. Prior thereto President, New York Times.
Member, Nominating Committee
L. LIU President, Chairman and Chief Executive Officer, IES Industries, Inc.
Director
Member, Executive and Human
Resources Committees
V. H. LOEWENSTEIN Managing Partner, Egon Zehnder International
Director
Member, Audit Committee
J. R. PRICE Managing Director, Chemical Banking Corporation.
Director
Chair, Audit Committee
B. A. RICE Principal, Rice & Associates since 1994. Prior thereto, Vice President-Human Resources,
Director Scott Paper Company.
Member, Human Resources Committee
J-P. C. ROSSO President and Chief Executive Officer, Case Corporation, since April 1994. President,
Director Honeywell, Inc., 1991-1994; Prior thereto President, Honeywell Europe.
Member, Audit Committee
D. M. STEWART President, The College Board.
Director
Chair, Nominating Committee
E. E. TALLETT President and Chief Executive Officer, Transcell Technologies, Inc. since 1992. Prior
Director thereto, President - Pharmaceutical Division, Centocor, Inc., 1989-1992.
Member, Audit Committee
D. D. THORNTON Retired since 1993. Prior thereto President, Boeing Commercial Airplane Group.
Director
Chair, Human Resources Committee
F. W. WEITZ President, Chairman of the Board and Chief Executive Officer, Essex Meadows, Inc. since
Director 1995. Prior thereto, President, Chairman of the Board, and Chief Executive Officer, The
Member, Executive and Nominating Weitz Corporation and its subsidiaries.
Committees
</TABLE>
STATE REGULATION OF PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
The Company is organized under the laws of the State of Iowa and is subject
to regulation by the Commissioner of Insurance of Iowa. An annual statement is
filed with the Iowa Division of Insurance on or before March 1 of each year
covering the operations and reporting on the financial condition of the Company
as of December 31 of the preceding year. Periodically, the Commissioner examines
the assets
and liabilities of the Company and the Separate Account and verifies their
adequacy. A full examination of the Company's operations is conducted by the
National Association of Insurance Commissioners at least every five years.
FEDERAL TAX MATTERS
The discussion contained herein is general in nature, is not an exhaustive
discussion of all tax questions that might arise under the policies, and is not
intended as tax advice. No attempt is made to consider any applicable state or
other tax laws and no representation is made as to the likelihood of
continuation of current federal income tax laws and treasury regulations or of
current interpretations of the Internal Revenue Service.
While the Company reserves the right to make changes in the Policy to
assure that it continues to qualify as life insurance for tax purposes, the
Company cannot make any guarantee regarding the future tax treatment of any
Policy. For complete information on the impact of changes with respect to the
Policy and federal and state considerations, a qualified tax advisor should be
consulted.
The ultimate effect of federal income taxes on values under the Policy and
on the economic benefit to the policyowner or beneficiary depends upon the
Company's tax status, upon the terms of the Policy and upon the tax status of
the individual concerned.
Tax Status of the Company and the Separate Account
The Company is taxed as an insurance Company under Subchapter L of the Internal
Revenue Code of 1986 (the "Code"). The Separate Account is not a separate
taxable entity and its operations are taken into account by the Company in
determining its income tax liability. All investment income and realized net
capital gains on the assets of the separate account are reinvested and taken
into account in determining Policy Values and are automatically applied to
increase the book reserves associated with the policies. Under existing federal
income tax law, neither the investment income nor any net capital gains of the
Separate Account, are taxed to the Company to the extent those items are applied
to increase reserves associated with the policies.
Charges for Taxes
The Company imposes a federal tax charge equal to 1.25% of premiums received
under the Policy to compensate for the federal income tax liability it incurs
under Section 848 of the Code by reason of its receipt of premiums under the
Policy. The Company believes that this charge is reasonable in relation to the
increased tax burden it incurs as a result of Section 848. No other charge is
currently made on the Separate Account for federal income taxes of the Company
that may be attributable to the Separate Account. Periodically, the Company
reviews the appropriateness of charges to the Separate Account for the Company's
federal income taxes, and in the future, a charge may be made for federal income
taxes incurred by the Company that are attributable to the Separate Account. In
addition, depending on the method of calculating interest on Policy Values
allocated to the Fixed Account, a charge may also be imposed for the Policy's
share of the Company's federal income taxes attributable to the Fixed Account.
Under current laws, the Company may incur state or 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, the Company
reserves the right to charge the Separate Account for the portion of such taxes,
if any, attributable to the Separate Account.
Diversification Standards
In addition to other requirements imposed by the Code, a Policy will qualify as
life insurance under the Code only if the diversification requirements of Code
Section 817(h) are satisfied by each Separate Account in which any of the Policy
Values are held. To assure that each Policy continues to qualify as life
insurance for federal income tax purposes, the Company intends to comply with
Code Section 817(h) and the regulations thereunder.
Life Insurance Status of Policy
The Company believes that the Policy meets the statutory definition of life
insurance under Code Section 7702 and that the policyowner and beneficiary of
any Policy will receive the same federal income tax treatment as that accorded
to owners and beneficiaries of fixed benefit life insurance policies.
Specifically, the death benefit under the Policy will be excludable from the
gross income of the beneficiary subject to the terms and conditions of Section
101(a)(1) of the Code. (Death benefits under a "modified endowment contract" as
discussed below are treated in the same manner as death benefits under life
insurance contracts that are not so classified.)
In addition, unless the Policy is a "modified endowment contract," in which case
the receipt of any loan under the Policy may result in recognition of income to
the policyowner, the policyowner will not be deemed to be in constructive
receipt of the Policy Values, including increments thereon, under the Policy
until proceeds of the Policy are received upon a total or partial surrender of
the Policy.
Modified Endowment Contract Status
A Policy will be a modified endowment contract if it satisfies the definition of
life insurance set out in the Internal Revenue Code, but it either fails the
additional "7-pay test" set forth in Code Section 7702A or was received in
exchange for a modified endowment contract. A Policy will fail the 7-pay test if
the accumulated amount paid under the contract at any time during the first
seven contract years exceeds the total premiums that would have been payable
under a Policy providing for guaranteed benefits upon the payment of seven level
annual premiums. A Policy received in exchange for a modified endowment contract
will be taxed as a modified endowment contract even if it would otherwise
satisfy the 7-pay test.
While the 7-pay test is generally applied as of the time the Policy is issued,
certain changes in the contractual terms of a Policy will require a Policy to be
retested to determine whether the change has caused the Policy to become a
modified endowment contract. For example, a reduction in death benefits during
the first seven contract years will cause the Policy to be retested as if it had
originally been issued with the reduced death benefit.
In addition, if a "material change" occurs at any time while the Policy is in
force, a new 7-pay test period will start and the Policy will need to be
retested to determine whether it continues to meet the 7-pay test. The term"
material change" generally includes increases in death benefits, but does not
include an increase in death benefits which is attributable to the payment of
premiums necessary to fund the lowest level of death benefits payable during the
first seven contract years, or which is attributable to the crediting of
interest with respect to such premiums.
Because the Policy provides for flexible premium payments, the Company has
instituted procedures to monitor whether increases in death benefits or
additional premium payments cause either the start of a new seven-year test
period or the taxation of distributions and loans. All additional premium
payments will be considered in these determinations.
If a Policy fails the 7-pay test, all distributions (including loans) occurring
in the year of failure and thereafter will be subject to the rules for modified
endowment contracts. A recapture provision also applies to loans and
distributions that are received in anticipation of failing the 7-pay test. Under
the Code, any distribution or loan made within two years prior to the date that
a Policy fails the 7-pay test is considered to have been made in anticipation of
the failure.
Policy Surrenders and Partial Surrenders
Upon a total surrender of a Policy, the policyowner will recognize ordinary
income for federal tax purposes to the extent that the net surrender value
exceeds the investment in the contract (the total of all premiums paid but not
previously recovered plus any other consideration paid for the Policy). The tax
consequences of a partial surrender from a Policy will depend upon whether
thepartial surrender results in a reduction of future benefits under the Policy
and whether the Policy is a modified endowment contract.
If the Policy is not a modified endowment contract, the general rule is that a
partial surrender from a Policy is taxable only to the extent that it exceeds
the total investment in the contract. An exception to this general rule applies,
however, if a reduction of future benefits occurs during the first 15 years
after a Policy is issued and there is a cash distribution associated with that
reduction. In such a case, the Code prescribes a formula under which the
policyowner may be taxed on all or a part of the amount distributed. After 15
years, cash distributions from a Policy that is not a modified endowment
contract will not be subject to federal income tax, except to the extent they
exceed the total investment in the contract. The Company suggests that a
policyowner consult with a tax advisor in advance of a proposed decrease in face
amount or a partial surrender. In addition, any amounts distributed under a
"modified endowment contract" (including proceeds of any loan) are taxable to
the extent of any accumulated income in the Policy. In general, the amount which
may be subject to tax is the excess of the Policy Value (both loaned and
unloaned) over the previously unrecovered premiums paid.
Under certain circumstances, a distribution under a modified endowment contract
(including a loan) may be taxable even though it exceeds the amount of
accumulated income in the Policy. This can occur because for purposes of
determining the amount of income received upon a distribution (or loan) from a
modified endowment contract, the Code requires the aggregation of all modified
endowment contracts issued to the same policyowner by an insurer and its
affiliates within the same calendar year. Therefore, loans and distributions
from any one such Policy are taxable to the extent of the income accumulated in
all the modified endowment contracts required to be so aggregated.
If any amount is taxable as a distribution of income under a modified endowment
contract (as a result of a total surrender, a partial surrender or a loan), it
may also be subject to a 10% penalty tax under Code Section 72(v). Limited
exceptions from the additional penalty tax are available for certain
distributions to individual policyowners. The penalty tax will not apply to
distributions: (i) that are made on or after the date the taxpayer attains age
59 1/2; or (ii) that are attributable to the taxpayer's becoming disabled; or
(iii) that are part of a series of substantial equal periodic payments (made not
less frequently than annually) made for the life or life expectancy of the
taxpayer.
Policy Loans and Interest Deductions
The Company also believes that under current law any loan received under the
Policy will be treated as a Policy debt of a policyowner and that, unless the
Policy is a modified endowment contract, no part of any loan under a Policy will
constitute income to the policyowner. If the Policy is a modified endowment
contract (see discussion above) loans will be fully taxable to the extent of the
income in the Policy (and in any other contracts with which it must be
aggregated) and could be subject to the additional 10 percent tax.
Code Section 264 imposes stringent limitations on the deduction of interest paid
or accrued on loans in connection with a Policy. In addition, under the
"personal" interest limitation provisions of Code Section 163, no deduction is
allowed for interest on any Policy loan if the proceeds are used for personal
purposes, even if the Policy and loan otherwise meet the requirements of Code
Section 264. The limitations on deductibility of personal interest may not apply
to disallow all or part of the interest expense as a deduction if the loan
proceeds are used for "trade or business" or "investment" purposes. The Company
suggests consultation with a tax advisor for further guidance.
Corporate Alternative Minimum Tax
Ownership of a Policy by a corporation may affect the policyowner's exposure to
the corporate alternative maximum tax. In determining whether it is subject to
alternative minimum tax a corporate policyowner must make two computations.
First, the corporation must take into account a portion of the current year's
increase in the built-in gain in its corporate-owned policies. Second, the
corporation must take into account a portion of the amount by which the death
benefits received under any Policy exceed the sum of (i) the premiums paid on
that Policy in the year of death, and (ii) the corporation's basis in the Policy
(as measured for alternative minimum tax purposes) as of the end of the
corporation's tax year immediately preceding the year of death.
Exchange or Assignment of Policies
A change of the policyowner or the insured or an exchange or assignment of a
Policy may have significant tax consequences depending on the circumstances. For
example, an assignment or exchange of a Policy may result in taxable income to
the transferring policyowner. Further, Code Section 101(a) provides, subject to
certain exceptions, that where a Policy has been transferred for value, only the
portion of the death benefit which is equal to the total consideration paid for
the Policy may be excluded from gross income. For complete information with
respect to Policy assignments and exchanges, a qualified tax advisor should be
consulted.
Withholding
Under Section 3405 of the Code, withholding is generally required with respect
to certain taxable distributions under insurance contracts. In the case of
periodic payments (payments made as an annuity or on a similar basis), the
withholding is at graduated rates (as though the payments were employee wages).
With respect to non-periodic distributions, the withholding is at a flat rate of
10%. A Policyholder can elect to have either non-periodic or periodic payments
made without withholding except where the policyowner's tax identification
number has not been furnished to the Company or the Internal Revenue Service has
notified the Company that the tax identification number furnished by the
policyowner is incorrect.
Taxation of Accelerated Death Benefits
The Company provides accelerated death benefits based upon a lien method. It is
unclear whether benefits paid under this rider are taxable. For information
regarding taxation of accelerated death benefits, a qualified tax advisor should
be consulted.
Other Tax Issues
Federal estate and state and local estate, inheritance, and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each policyowner or beneficiary.
EMPLOYEE BENEFIT PLANS
Employers and employee organizations should consider, in consultation with
counsel, the impact of Title VII of the Civil Rights Act of 1964 on the purchase
of a Policy in connection with an employment-related insurance or benefit plan.
The United States Supreme Court held, in the 1983 decision of Arizona Governing
Committee v. Norris, that, under Title VII, optional annuity benefits under a
deferred compensation plan could not vary on the basis of sex. Policies are
available for use in connection with such employment-related insurance and
benefit plans which do not vary in any respect between male and female insureds
of a particular age and underwriting classification.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or
to which the assets of any of the Divisions thereof are subject. The Company is
not involved in any litigation that is of material importance in relation to its
total assets or that relate to the Separate Account.
LEGAL OPINION
Legal matters applicable to the issue and sale of the Policies, including
the right of the Company to issue Policies under Iowa insurance law, have been
passed upon by T. M. Hutchison, Executive Vice President of the Company.
INDEPENDENT AUDITORS
The financial statements of Principal Mutual Life Insurance Company
Variable Life Separate Account and Principal Mutual Life Insurance Company which
are included in this registration statement have been audited by Ernst & Young
LLP, independent auditors, for the periods indicated in their reports thereon
which appear elsewhere in the registration statement.
REGISTRATION STATEMENT
A registration statement has been filed with the Commission under the
Securities Act of 1933, as amended, with respect to the Policies offered hereby.
This Prospectus does not contain all the information set forth in the
registration statement and the amendments and exhibits to the registration
statement to all of which reference is made for further information concerning
the Separate Account, the Company and the Policy offered hereby. Statements
contained in this Prospectus as to the contents of the Policy and other legal
instruments are summaries. For a complete statement of the terms thereof,
reference is made to such instruments as filed.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this
Prospectus should be considered only as bearing on the ability of the Company to
meet its obligations under the Policy. They should not be considered as bearing
on the investment performance of the assets held in the Separate Account.
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Report of Independent Auditors
Board of Directors and Participants
Principal Mutual Life Insurance Company
We have audited the accompanying statement of net assets of Principal Mutual
Life Insurance Company Variable Life Separate Account (comprising, respectively,
the Balanced, Bond, Capital Accumulation, Emerging Growth, High Yield, and Money
Market Divisions) as of December 31, 1995, and the related statements of
operations and changes in net assets for each of the three years in the period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1995, by correspondence with
the transfer agent. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Principal Mutual Life Insurance
Company Variable Life Separate Account at December 31, 1995, and the results of
its operations and the changes in its net assets for each of the three years in
the period then ended, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Des Moines, Iowa
February 7, 1996
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Statement of Net Assets
December 31, 1995
Assets
Investments (Note 1):
Balanced Division:
Principal Balanced Fund, Inc. - 200,063 shares at net
asset value of $13.97 per share (cost - $2,557,217) $ 2,794,881
Bond Division:
Principal Bond Fund, Inc. - 78,645 shares at net asset
value of $11.73 per share (cost - $878,731) 922,511
Capital Accumulation Division:
Principal Capital Accumulation Fund, Inc. - 142,987 shares
at net asset value of $27.80 per share (cost - $3,656,186) 3,975,025
Emerging Growth Division:
Principal Emerging Growth Fund, Inc. - 305,125 shares at
net asset value of $25.33 per share (cost - $6,575,712) 7,728,821
High Yield Division:
Principal High Yield Fund, Inc. - 101,791 shares at net asset
value of $8.39 per share (cost - $882,335) 854,028
Money Market Division:
Principal Money Market Fund, Inc. - 402,869 shares at net
asset value of $1.00 per share (cost - $402,869) 402,869
-----------
Net assets $16,678,135
===========
Unit
Units Value
-----------------------
Net assets are represented by:
Balanced Division 137,574 $20.31 $ 2,794,881
Bond Division 45,999 20.05 922,511
Capital Accumulation Division 184,750 21.51 3,975,025
Emerging Growth Division 283,791 27.23 7,728,821
High Yield Division 48,615 17.57 854,028
Money Market Division 27,948 14.42 402,869
-----------
Net assets $16,678,135
===========
See accompanying notes.
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Statements of Operations
<TABLE>
<CAPTION>
Combined
----------------------------------------------
Year ended December 31
1995 1994 1993
----------------------------------------------
Investment income
Income:
<S> <C> <C> <C>
Dividends (Note 1) $ 376,014 $205,850 $148,055
Capital gains distributions 429,058 211,019 318,056
----------------------------------------------
805,072 416,869 466,111
Expenses (Note 2):
Mortality and expense risks 95,590 55,513 35,413
----------------------------------------------
Net investment income 709,482 361,356 430,698
Realized and unrealized gains (losses) on investments (Note 4)
Net realized gains (losses) on investments 254,585 31,582 153,033
Change in net unrealized appreciation/depreciation of
investments 1,956,773 (442,230) (62,738)
----------------------------------------------
Net increase (decrease) in net assets resulting from operations $2,920,840 $(49,292) $520,993
==============================================
</TABLE>
<TABLE>
<CAPTION>
Balanced Division
Year ended December 31
-----------------------------------------
1995 1994 1993
------------------------------------------
Investment income
Income:
<S> <C> <C> <C>
Dividends (Note 1) $ 85,937 $ 53,356 $ 45,460
Capital gains distributions 72,211 25,558 76,753
------------------------------------------
158,148 78,914 122,213
Expenses (Note 2):
Mortality and expense risks 17,258 12,058 9,014
------------------------------------------
Net investment income 140,890 66,856 113,199
Realized and unrealized gains (losses) on investments (Note 4)
Net realized gains (losses) on investments 28,104 6,900 21,878
Change in net unrealized appreciation/depreciation of
investments 316,677 (120,904) (16,979)
------------------------------------------
Net increase (decrease) in net assets resulting from operations $485,671 $ 47,148) $118,098
==========================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Bond Division
Year ended December 31
--------------------------------------
1995 1994 1993
Investment income --------------------------------------
Income:
<S> <C> <C> <C>
Dividends (Note 1) $ 47,997 $ 33,025 $28,730
Capital gains distributions - - -
--------------------------------------
47,997 33,025 28,730
Expenses (Note 2):
Mortality and expense risks 5,384 3,207 3,166
--------------------------------------
Net investment income 42,613 29,818 25,564
Realized and unrealized gains (losses) on investments (Note 4)
Net realized gains (losses) on investments 4,064 (2,792) 13,739
Change in net unrealized appreciation/depreciation of
investments 85,230 (40,136) 304
--------------------------------------
Net increase (decrease) in net assets resulting from operations $131,907 $(13,110) $39,607
======================================
</TABLE>
<TABLE>
<CAPTION>
Capital Accumulation Division
Year ended December 31
------------------------------------------
1995 1994 1993
------------------------------------------
Investment income
Income:
<S> <C> <C> <C>
Dividends (Note 1) $ 79,394 $ 56,729 $ 37,967
Capital gains distributions 293,683 54,291 110,884
------------------------------------------
373,077 111,020 148,851
Expenses (Note 2):
Mortality and expense risks 22,976 14,428 10,069
------------------------------------------
Net investment income 350,101 96,592 138,782
Realized and unrealized gains (losses) on investments (Note 4)
Net realized gains (losses) on investments 49,320 (13,565) 15,162
Change in net unrealized appreciation/depreciation of
investments 433,439 (87,735) (62,178)
------------------------------------------
Net increase (decrease) in net assets resulting from operations $832,860 $ (4,708) $ 91,766
==========================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Emerging Growth Division
Year ended December 31
---------------------------------------------
1995 1994 1993
---------------------------------------------
Investment income
Income:
<S> <C> <C> <C>
Dividends (Note 1) $ 65,593 $ 26,319 $ 14,369
Capital gains distributions 63,164 131,170 130,419
---------------------------------------------
128,757 157,489 144,788
Expenses (Note 2):
Mortality and expense risks 43,103 21,185 10,184
---------------------------------------------
Net investment income 85,654 136,304 134,604
Realized and unrealized gains (losses) on investments (Note 4)
Net realized gains (losses) on investments 172,414 42,332 98,424
Change in net unrealized appreciation/depreciation of
investments 1,127,081 (174,867) 18,087
---------------------------------------------
Net increase in net assets resulting from operations $1,385,149 $ 3,769 $251,115
=============================================
</TABLE>
<TABLE>
<CAPTION>
High Yield Division
Year ended December 31
-----------------------------------------------------
1995 1994 1993
-----------------------------------------------------
Investment income
Income:
<S> <C> <C> <C>
Dividends (Note 1) $72,460 $21,527 $15,343
Capital gains distributions - - -
-----------------------------------------------------
72,460` 21,527 15,343
Expenses (Note 2):
Mortality and expense risks 3,702 1,585 1,251
-----------------------------------------------------
Net investment income 68,758 19,942 14,092
Realized and unrealized gains (losses) on investments (Note 4)
Net realized gains (losses) on investments 683 (1,293) 3,830
Change in net unrealized appreciation/depreciation of
investments (5,654) (18,588) (1,972)
-----------------------------------------------------
Net increase in net assets resulting from operations $63,787 $ 61 $15,950
=====================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Money Market Division
Year ended December 31
1995 1994 1993
-----------------------------------------------------
Investment income
Income:
<S> <C> <C> <C>
Dividends (Note 1) $24,633 $14,894 $6,186
Capital gains distributions - - -
-----------------------------------------------------
24,633 14,894 6,186
Expenses (Note 2):
Mortality and expense risks 3,167 3,050 1,729
-----------------------------------------------------
Net investment income 21,466 11,844 4,457
Realized and unrealized gains (losses) on investments (Note 4)
Net realized gains (losses) on investments - - -
Change in net unrealized appreciation/depreciation of
investments - - -
----------------------------------------------------
Net increase in net assets resulting from operations $21,466 $11,844 $4,457
====================================================
</TABLE>
See accompanying notes.
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Balanced
Combined Division
----------------- ------------------
<S> <C> <C> <C>
Net assets at January 1, 1993 $3,571,056 $ 912,717
Increase (decrease) in net assets Operations:
Net investment income 430,698 113,199
Net realized gains on investments 153,033 21,878
Change in net unrealized appreciation/depreciation of investments (62,738) (16,979)
----------------- ------------------
Net increase in net assets resulting from operations 520,993 118,098
Policy related transactions (Note 2):
Net premium payments, less sales charges and applicable premium
taxes 4,243,839 722,419
Contract terminations and surrenders (302,559) (41,473)
Death benefit payments (1,961) (627)
Policy loan transfers (162,427) (29,608)
Transfers to other contracts (1,444,635) (70,023)
Cost of insurance and administration charges (591,394) (126,288)
Surrender charges (30,418) (4,170)
----------------- ------------------
Increase (decrease) in net assets from policy related transactions 1,710,445 450,230
----------------- ------------------
Total increase (decrease) 2,231,438 568,328
----------------- ------------------
Net assets at December 31, 1993 5,802,494 1,481,045
<PAGE>
Net assets at January 1, 1994
Increase (decrease) in net assets Operations:
Net investment income 361,356 66,856
Net realized gains (losses) on investments 31,582 6,900
Change in net unrealized appreciation/depreciation of investments (442,230) (120,904)
----------------- ------------------
Net increase (decrease) in net assets resulting from operations (49,292) (47,148)
Policy related transactions (Note 2):
Net premium payments, less sales charges and applicable premium
taxes 7,030,808 805,108
Contract terminations and surrenders (200,983) (61,360)
Death benefit payments (4,614) -
Policy loan transfers (131,130) (25,740)
Transfers to other contracts (2,149,666) (155,607)
Cost of insurance and administration charges (1,002,937) (178,431)
Surrender charges (41,439) (12,651)
----------------- ------------------
Increase in net assets from policy related transactions 3,500,039 371,319
----------------- ------------------
Total increase 3,450,747 324,171
----------------- ------------------
Net assets at December 31, 1994 9,253,241 1,805,216
Net assets at January 1, 1995 9,253,241 $1,805,216
Increase (decrease) in net assets Operations:
Net investment income 709,482 140,890
Net realized gains on investments 254,585 28,104
Change in net unrealized appreciation/depreciation of investments 1,956,773 316,677
----------------- ------------------
Net increase in net assets resulting from operations 2,920,840 485,671
Policy related transactions (Note 2):
Net premium payments, less sales charges and applicable premium
taxes 9,511,939 1,036,158
Contract terminations and surrenders (514,344) (89,520)
Death benefit payments (9,358) -
Policy loan transfers (275,660) (52,264)
Transfers to other contracts (2,602,796) (145,034)
Cost of insurance and administration charges (1,539,242) (233,775)
Surrender charges (66,485) (11,571)
----------------- ------------------
Increase (decrease) in net assets from policy related transactions 4,504,054 503,994
----------------- ------------------
Total increase (decrease) 7,424,894 989,665
----------------- ------------------
Net assets at December 31, 1995 $16,678,135 $2,794,881
================= ==================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Bond Stock
Division Division
------------------ ------------------
<S> <C> <C>
Net assets at January 1, 1993 $256,631 $1,005,168
Increase (decrease) in net assets Operations:
Net investment income 25,564 138,782
Net realized gains on investments 13,739 15,162
Change in net unrealized appreciation/depreciation of investments 304 (62,178)
------------------ ------------------
Net increase in net assets resulting from operations 39,607 91,766
Policy related transactions (Note 2):
Net premium payments, less sales charges and applicable premium
taxes 344,656 939,904
Contract terminations and surrenders (107,373) (53,383)
Death benefit payments - (642)
Policy loan transfers (5,743) (40,134)
Transfers to other contracts (77,910) (123,748)
Cost of insurance and administration charges (43,267) (149,902)
Surrender charges (10,795) (5,367)
------------------ ------------------
Increase (decrease) in net assets from policy related transactions 99,568 566,728
------------------ ------------------
Total increase (decrease) 139,175 658,494
------------------ ------------------
Net assets at December 31, 1993 395,806 1,663,662
Net assets at January 1, 1994
Increase (decrease) in net assets Operations:
Net investment income 29,818 96,592
Net realized gains (losses) on investments (2,792) (13,565)
Change in net unrealized appreciation/depreciation of investments (40,136) (87,735)
------------------ ------------------
Net increase (decrease) in net assets resulting from operations (13,110) (4,708)
Policy related transactions (Note 2):
Net premium payments, less sales charges and applicable premium
taxes 288,736 1,149,226
Contract terminations and surrenders (4,871) (39,008)
Death benefit payments - (3,319)
Policy loan transfers (3,819) (42,994)
Transfers to other contracts (92,188) (226,938)
Cost of insurance and administration charges (59,452) (218,560)
Surrender charges (1,004) (8,043)
------------------ ------------------
Increase in net assets from policy related transactions 127,402 610,364
------------------ ------------------
Total increase 114,292 605,656
------------------ ------------------
Net assets at December 31, 1994 510,098 2,269,318
<PAGE>
Net assets at January 1, 1995 510,098 2,269,318
Increase (decrease) in net assets Operations:
Net investment income 42,613 350,101
Net realized gains on investments 4,064 49,320
Change in net unrealized appreciation/depreciation of investment 85,230 433,439
------------------- -----------------
Net increase in net assets resulting from operations 131,907 832,860
Policy related transactions (Note 2):
Net premium payments, less sales charges and applicable premium
taxes 444,236 1,633,021
Contract terminations and surrenders (24,317) (149,990)
Death benefit payments - (2,336)
Policy loan transfers (4,770) (56,174)
Transfers to other contracts (52,638) (218,351)
Cost of insurance and administration charges (78,861) (313,935)
Surrender charges (3,144) (19,388)
------------------- -----------------
Increase (decrease) in net assets from policy related transactions 280,506 872,847
------------------- -----------------
Total increase (decrease) 412,413 1,705,707
------------------- -----------------
Net assets at December 31, 1995 $922,511 $3,975,025
=================== =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Emerging High
Growth Yield
Division Division
----------------- -----------------
<S> <C> <C>
Net assets at January 1, 1993 $1,033,749 $ 71,862
Increase (decrease) in net assets Operations:
Net investment income 134,604 14,092
Net realized gains on investments 98,424 3,830
Change in net unrealized appreciation/depreciation of investments 18,087 (1,972)
----------------- -----------------
Net increase in net assets resulting from operations 251,115 15,950
Policy related transactions (Note 2):
Net premium payments, less sales charges and applicable premium
taxes 1,179,248 196,359
Contract terminations and surrenders (94,725) (2,641)
Death benefit payments (692) -
Policy loan transfers (60,229) (5,136)
Transfers to other contracts (236,343) (74,398)
Cost of insurance and administration charges (188,113) (22,433)
Surrender charges (9,523) (265)
------------------ ----------------
Increase (decrease) in net assets from policy related transactions 589,623 91,486
------------------ ----------------
Total increase (decrease) 840,738 107,436
------------------ ----------------
Net assets at December 31, 1993 1,874,487 179,298
Net assets at January 1, 1994
Increase (decrease) in net assets Operations:
Net investment income 136,304 19,942
Net realized gains (losses) on investments 42,332 (1,293)
Change in net unrealized appreciation/depreciation of investments (174,867) (18,588)
------------------ ----------------
Net increase (decrease) in net assets resulting from operations 3,769 61
Policy related transactions (Note 2):
Net premium payments, less sales charges and applicable premium
taxes
Contract terminations and surrenders 2,765,121 120,265
Death benefit payments (83,480) (9,690)
Policy loan transfers (1,295) -
Transfers to other contracts (59,784) (3,260)
Cost of insurance and administration charges (284,168) (7,501)
Surrender charges (396,646) (32,323)
(17,212) (1,998)
------------------ ----------------
Increase in net assets from policy related transactions 1,922,536 65,493
------------------ ----------------
Total increase 1,926,305 65,554
------------------ ----------------
Net assets at December 31, 1994 3,800,792 244,852
<PAGE>
Net assets at January 1, 1995 3,800,792 244,852
Increase (decrease) in net assets Operations:
Net investment income 85,654 68,758
Net realized gains on investments 172,414 683
Change in net unrealized appreciation/depreciation of investmen 1,127,081 (5,654)
------------------ ----------------
Net increase in net assets resulting from operations 1,385,149 63,787
Policy related transactions (Note 2):
Net premium payments, less sales charges and applicable premium
taxes 4,022,336 673,413
Contract terminations and surrenders (238,336) (10,016)
Death benefit payments (4,755) -
Policy loan transfers (159,532) (3,158)
Transfers to other contracts (338,865) (52,617)
Cost of insurance and administration charges (707,162) (60,938)
Surrender charges (30,806) (1,295)
------------------ ----------------
Increase (decrease) in net assets from policy related transactions 2,542,880 545,389
------------------ ----------------
Total increase (decrease) 3,928,029 609,176
------------------ ----------------
Net assets at December 31, 1995 $7,728,821 $854,028
================== ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Money
Market
Division
------------------
<S> <C>
Net assets at January 1, 1993 $ 290,929
Increase (decrease) in net assets Operations:
Net investment income 4,457
Net realized gains on investments -
Change in net unrealized appreciation/depreciation of investments -
------------------
Net increase in net assets resulting from operations 4,457
Policy related transactions (Note 2):
Net premium payments, less sales charges and applicable premium
taxes 861,253
Contract terminations and surrenders (2,964)
Death benefit payments -
Policy loan transfers (21,577)
Transfers to other contracts (862,213)
Cost of insurance and administration charges (61,391)
Surrender charges (298)
------------------
Increase (decrease) in net assets from policy related transactions (87,190)
------------------
Total increase (decrease) (82,733)
------------------
Net assets at December 31, 1993 208,196
Net assets at January 1, 1994
Increase (decrease) in net assets Operations:
Net investment income 11,844
Net realized gains (losses) on investments -
Change in net unrealized appreciation/depreciation of investments -
------------------
Net increase (decrease) in net assets resulting from operations 11,844
Policy related transactions (Note 2):
Net premium payments, less sales charges and applicable premium
taxes 1,902,352
Contract terminations and surrenders (2,574)
Death benefit payments -
Policy loan transfers 4,467
Transfers to other contracts (1,383,264)
Cost of insurance and administration charges (117,525)
Surrender charges (531)
------------------
Increase in net assets from policy related transactions 402,925
------------------
Total increase 414,769
------------------
Net assets at December 31, 1994 622,965
<PAGE>
Net assets at January 1, 1995 622,965
Increase (decrease) in net assets Operations:
Net investment income 21,466
Net realized gains on investments -
Change in net unrealized appreciation/depreciation of investmen -
------------------
Net increase in net assets resulting from operations 21,466
Policy related transactions (Note 2):
Net premium payments, less sales charges and applicable premium
taxes 1,702,775
Contract terminations and surrenders (2,165)
Death benefit payments (2,267)
Policy loan transfers 238
Transfers to other contracts (1,795,291)
Cost of insurance and administration charges (144,571)
Surrender charges (281)
------------------
Increase (decrease) in net assets from policy related transactions (241,562)
------------------
Total increase (decrease) (220,096)
------------------
Net assets at December 31, 1995 $ 402,869
==================
See accompanying notes.
</TABLE>
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements
December 31, 1995
1. Investment and Accounting Policies
Principal Mutual Life Insurance Company Variable Life Separate Account is a
segregated investment account of Principal Mutual Life Insurance Company
(Principal Mutual) and is registered under the Investment Company Act of 1940 as
a unit investment trust, with no stated limitations on the number of authorized
units. As directed by eligible policyowners, the Separate Account invests solely
in shares of Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal
Capital Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
High Yield Fund, Inc., and Principal Money Market Fund, Inc., diversified
open-end management investment companies organized by Principal Mutual.
Investments are stated at the closing net asset values per share on December 31,
1995.
The average cost method is used to determine realized gains and losses on
investments. Dividends are taken into income on an accrual basis as of the
ex-dividend date.
2. Expenses and Policy Charges
Principal Mutual is compensated for the following expenses and charges:
Mortality and expense risks assumed by Principal Mutual are compensated for by a
charge equivalent to an annual rate of .75% of the asset value of each policy.
An annual administration charge of $57 for each policy and a cost of insurance
charge, which is based on the Company's expected future mortality experience, is
deducted as compensation for administrative and insurance expenses,
respectively. The mortality and expense risk, annual administration, and
insurance charges amounted to $95,590, $166,464, and $1,372,778, respectively,
in 1995; $55,513, $119,268, and $883,669, respectively, in 1994; and $35,413,
$72,362, and $519,032, respectively, in 1993. A sales charge of 5.0% is deducted
from each payment made on behalf of each participant. The sales charge is
deducted from the payments by Principal Mutual prior to their transfer to the
Variable Life Separate Account. In addition, a surrender charge up to a maximum
of 25% of the minimum first year premium may be imposed upon total surrender or
termination of a policy for insufficient value.
3. Federal Income Taxes
Operations of the Separate Account are a part of the operations of Principal
Mutual. Under current practice, no federal income taxes are allocated by
Principal Mutual to the operations of Principal Mutual Life Insurance Company
Variable Life Separate Account.
<PAGE>
4. Purchases and Sales of Investment Securities
The aggregate units and cost of purchases and proceeds from sales of investments
were as follows:
<TABLE>
<CAPTION>
Capital Accumulation
Balanced Division Bond Division Division
-----------------------------------------------------------------------
Units Amount Units Amount Units Amount
-----------------------------------------------------------------------
Year ended December 31, 1995
Units purchased and reinvested
<S> <C> <C> <C> <C> <C> <C>
dividends and capital gains 56,758 $1,194,305 24,137 $492,234 87,030 $2,006,098
Units redeemed 29,073 549,421 8,980 169,115 40,420 783,150
-----------------------------------------------------------------------
Net increase 27,685 $ 644,884 15,157 $323,119 46,610 $1,222,948
=======================================================================
Year ended December 31, 1994
Units purchased and reinvested
dividends and capital gains 48,225 $884,022 17,428 $321,761 69,938 $1,260,246
Units redeemed (25,949) (445,847) (9,652) (164,541) (32,805) (553,290)
-----------------------------------------------------------------------
Net increase 22,276 $438,175 7,776 $157,220 37,133 $ 706,956
=======================================================================
Year ended December 31, 1993
Units purchased and reinvested
dividends and capital gains 45,069 $844,632 21,131 $373,386 59,306 $1,088,755
Units redeemed (16,973) (281,203) (14,639) (248,254) (23,597) (383,245)
-----------------------------------------------------------------------
Net increase 28,096 $563,429 6,492 $125,132 35,709 $ 705,510
=======================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Emerging Growth Money Market Division
Division High Yield Division
-------------------------------------------------------------------------
Units Amount Units Amount Units Amount
-------------------------------------------------------------------------
Year ended December 31, 1995
Units purchased and reinvested
<S> <C> <C> <C> <C> <C> <C>
dividends and capital gains 165,606 $4,151,094 40,295 $745,873 120,838 $1,727,408
Units redeemed 60,516 1,522,560 7,739 131,726 138,209 1,947,504
-------------------------------------------------------------------------
Net increase (decrease) 105,090 $2,628,534 32,556 $614,147 (17,371) $ (220,096)
=========================================================================
Year ended December 31, 1994
Units purchased and reinvested
dividends and capital gains 129,908 $2,922,610 7,938 $141,792 140,805 $1,917,246
Units redeemed (39,368) (863,770) (3,624) (56,357) (111,080) (1,502,477)
-------------------------------------------------------------------------
Net increase 90,540 $2,058,840 4,314 $ 85,435 29,725 $ 414,769
=========================================================================
Year ended December 31, 1993
Units purchased and reinvested
dividends and capital gains 61,758 $1,324,037 13,653 $211,702 65,053 $ 867,441
Units redeemed (31,157) (599,810) (7,155) (106,124) (71,680) (950,174)
-------------------------------------------------------------------------
Net increase (decrease) 30,601 $ 724,227 6,498 $105,578 (6,627) $ (82,733)
=========================================================================
</TABLE>
<PAGE>
5. Net Assets
Net assets at December 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
Net Unrealized
Accumulated Net Appreciation
Unit Transactions Investment Income (Depreciation) of
Combined Investments
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Division $ 2,794,881 $ 2,273,642 $ 283,575 $ 237,664
Bond Division 922,511 805,743 72,988 43,780
Capital Accumulation Division 3,975,025 3,166,851 489,335 318,839
Emerging Growth Division 7,728,821 6,330,029 245,683 1,153,109
High Yield Division 854,028 797,025 85,310 (28,307)
Money Market Division 402,869 398,502 4,367 -
------------------------------------------------------------------------------
$16,678,135 $13,771,792 $1,181,258 $1,725,085
==============================================================================
</TABLE>
<PAGE>
Principal Mutual Life Insurance Company
Report of Independent Auditors
The Board of Directors
Principal Mutual Life Insurance Company
We have audited the accompanying statements of financial position of Principal
Mutual Life Insurance Company (the Company) as of December 31, 1995 and 1994,
and the related statements of operations and surplus and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Principal Mutual Life Insurance
Company at December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles and with reporting
practices prescribed or permitted by the Insurance Division of the Department of
Commerce of the State of Iowa.
ERNST & YOUNG LLP
Des Moines, Iowa
January 31, 1996
<PAGE>
Principal Mutual Life Insurance Company
Statements of Financial Position
December 31
1995 1994
---------------------------
(In Millions)
Assets
Bonds $21,798 $20,626
Preferred stocks 93 69
Common stocks 1,330 914
Investment in subsidiaries 546 501
Commercial mortgage loans 9,794 8,901
Residential mortgage loans 234 287
Investment real estate 1,313 1,155
Properties held for Company use 204 159
Policy loans 711 683
Cash and short-term investments 913 485
Accrued investment income 467 468
Separate account assets 12,957 9,197
Other assets 908 672
---------------------------
Total assets $51,268 $44,117
===========================
Liabilities
Insurance reserves $ 6,297 $ 6,007
Annuity reserves 25,770 24,311
Reserves for policy dividends 578 583
Other policy liabilities 748 618
Investment valuation reserves 1,041 792
Tax liabilities 241 189
Separate account liabilities 12,891 9,099
Other liabilities 1,494 591
---------------------------
Total liabilities 49,060 42,190
Surplus
Surplus notes 298 298
Unassigned and other surplus funds 1,910 1,629
---------------------------
Total surplus 2,208 1,927
---------------------------
Total liabilities and surplus $51,268 $44,117
===========================
See accompanying notes.
<PAGE>
Principal Mutual Life Insurance Company
Statements of Operations and Surplus
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
------------------------------------------
(In Millions)
Income
<S> <C> <C> <C>
Premiums and annuity and other considerations $11,940 $10,718 $ 9,983
Net income from investments 2,651 2,520 2,369
Other income 25 505 18
------------------------------------------
Total income 14,616 13,743 12,370
Benefits and expenses
Benefit payments other than dividends 9,268 8,211 6,729
Dividends to policyowners 309 317 410
Additions to policyowner reserves 3,439 3,756 3,890
Insurance expenses and taxes 1,199 1,145 1,029
------------------------------------------
Total benefits and expenses 14,215 13,429 12,058
------------------------------------------
Income before federal income taxes and realized
capital gains (losses) 401 314 312
Federal income taxes 140 130 48
------------------------------------------
Net gain from operations before realized capital gains (losses)
261 184 264
Realized capital gains (losses) 2 (32) (52)
------------------------------------------
Net income $ 263 $ 152 $ 212
==========================================
Surplus
Surplus at beginning of year $ 1,927 $ 1,641 $ 1,440
Net income 263 152 212
Issuance of surplus notes - 298 -
Increase in investment valuation reserves (249) (131) (43)
Increase in non-admitted assets and related items (45) (51) (59)
Net unrealized capital gains 326 47 57
Adjustment for prior years' federal income taxes - (63) -
Net policyowner reserve adjustments 1 31 18
Other adjustments - net (15) 3 16
------------------------------------------
Surplus at end of year $ 2,208 $ 1,927 $ 1,641
==========================================
</TABLE>
See accompanying notes.
<PAGE>
Principal Mutual Life Insurance Company
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
------------------------------------------
(In Millions)
CASH PROVIDED
Proceeds from operating activities
Premiums and annuity and other considerations
<S> <C> <C> <C>
received $11,923 $10,711 $ 9,967
Net investment income received 2,723 2,509 2,421
Benefit payments other than dividends (9,277) (8,186) (6,700)
Dividends paid to policyowners (317) (293) (396)
Insurance expenses and taxes paid (1,198) (1,159) (1,007)
Federal income taxes paid (125) (67) (119)
Transfers for separate account operations (1,549) (1,396) (1,120)
Other (3) 7 (5)
------------------------------------------
Net cash provided from operations 2,177 2,126 3,041
Proceeds from investments sold, matured or repaid
Bonds and stocks 12,028 10,951 20,072
Mortgage loans 1,276 2,043 6,852
Real estate and other invested assets 70 168 37
Tax on capital gains (22) (25) (29)
------------------------------------------
Total cash provided from investments 13,352 13,137 26,932
Issuance of surplus notes - 298 -
Other cash provided 793 - 85
------------------------------------------
Total cash provided 16,322 15,561 30,058
CASH APPLIED
Cost of investments acquired
Bonds and stocks acquired (13,234) (13,709) (22,434)
Mortgage loans acquired or originated (2,265) (1,611) (7,253)
Real estate and other invested assets acquired (195) (91) (132)
------------------------------------------
Total cash applied to investments (15,694) (15,411) (29,819)
Other cash applied (200) (135) (72)
------------------------------------------
Total cash applied (15,894) (15,546) (29,891)
SHORT-TERM BORROWINGS
Proceeds of short-term borrowings 990 3,152 1,743
Repayment of short-term borrowings (990) (3,152) (1,743)
------------------------------------------
Net cash provided by short-term borrowings - - -
------------------------------------------
Net increase in cash and short-term investments 428 15 167
Cash and short-term investments at beginning of year 485 470 303
------------------------------------------
Cash and short-term investments at end of year $ 913 $ 485 $ 470
==========================================
</TABLE>
See accompanying notes.
<PAGE>
Principal Mutual Life Insurance Company
Notes to Financial Statements
December 31, 1995
1. Nature of Operations and Significant Accounting Policies
Description of Business
Principal Mutual Life Insurance Company (the Company) is primarily engaged in
the marketing and management of life insurance, annuity, health and pension
products. In addition, the Company provides various other financial services
through its subsidiaries.
Use of Estimates in the Preparation of Financial Statements
The preparation of the Company's financial statements and accompanying notes
requires management to make estimates and assumptions that affect the amounts
reported and disclosed. These estimates and assumptions could change in the
future as more information becomes known, which could impact the amounts
reported and disclosed in the financial statements and accompanying notes.
Basis of Presentation
The Company's financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the Insurance Division of the Department of
Commerce of the State of Iowa (statutory accounting practices), which practices
are currently regarded as generally accepted accounting principles (GAAP) for
mutual life insurance companies.
Beginning in 1996, however, under the requirements of Financial Accounting
Standards Board (FASB) Interpretation No. 40, "Applicability of Generally
Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises,"
as amended, financial statements prepared on the basis of statutory accounting
practices will no longer be described as prepared "in conformity with GAAP." The
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants and the FASB issued authoritative accounting and reporting
pronouncements in January 1995, effective for calendar year 1996, addressing how
mutual life insurance companies should account for certain insurance activities.
Applying the provisions of these authoritative accounting and reporting
pronouncements may result in surplus and net income that differ from the amounts
reported under existing statutory accounting practices. The Company has not yet
determined the impact of these pronouncements on its financial statements. The
Company plans to issue general-purpose financial statements for calendar year
1996 that follow these authoritative pronouncements and will be described as
prepared in conformity with GAAP. These statutory-basis financial statements,
however, will continue to be required by insurance regulatory authorities.
The National Association of Insurance Commissioners (NAIC) currently is in the
process of recodifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is not expected to be completed
before 1997, will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the Company
uses to prepare its statutory-basis financial statements.
Subsidiaries
Investment in subsidiaries is reported at equity in net assets determined on a
statutory basis for insurance subsidiaries and on the basis of prescribed
valuation alternatives for non-insurance subsidiaries, resulting in carrying
values periodically approved by the Securities Valuation Office of the NAIC.
Total assets of these unconsolidated subsidiaries amounted to $2.6 billion at
December 31, 1995 and $2.1 billion at December 31, 1994, and total revenues were
$1,190 million in 1995, $911 million in 1994 and $669 million in 1993. During
1995, 1994 and 1993, the Company included $(48) million, $(2) million and $(37)
million, respectively, in net income from investments representing the current
year net losses of its subsidiaries.
Investments
Investments in bonds, short-term investments, and commercial and residential
mortgage loans are reported principally at cost (unpaid principal balance),
adjusted for amortization of premiums and accrual of discounts, both computed
using the interest method; policy loans and investments in preferred stocks
primarily at cost; common stocks at market value based on the latest quoted
market prices; and investments in real estate and properties held for Company
use generally at cost less encumbrances and accumulated depreciation. For the
loan-backed and structured securities included in the bond portfolio, the
Company recognizes income using the prospective method which results in a new
constant effective yield based on currently anticipated prepayments as
determined by broker-dealer surveys or internal estimates. Properties acquired
through loan foreclosures with cumulative carrying values of $946 million at
December 31, 1995, and $830 million at December 31, 1994, are recorded at the
lower of cost (principal balance of the former mortgage loan) or fair market
value at the time of foreclosure or receipt of deed in lieu of foreclosure. This
becomes the new cost basis of the real estate and is subject to further
potential carrying value reductions as a result of depreciation and quarterly
valuation determinations. Depreciation expense is computed primarily on the
basis of accelerated and straight-line methods over the estimated useful lives
of the assets. Other admitted assets are valued as prescribed by the Iowa
Insurance laws. Net realized capital gains and losses on investments are
determined using the specific identification basis.
The Asset Valuation Reserve (AVR) provides a reserve for losses from investments
in bonds, preferred and common stocks, mortgage loans, real estate, and other
invested assets, with related increases or decreases being recorded directly to
surplus. At December 31, 1995 and 1994, the AVR was $1,041 million and $792
million, respectively. At both December 31, 1995 and 1994, other liabilities
include additional investment reserves of $36 million and $51 million,
respectively, of which $9 million is required by statutory accounting practices
as a provision for potential losses on specific mortgages in default. Unrealized
capital gains and losses on investments, including changes in mortgage and
security reserves, are recorded directly in surplus. Comparable adjustments are
also made to the AVR.
The Interest Maintenance Reserve (IMR) primarily defers certain interest-related
gains and losses (net of tax) on fixed income securities which are amortized
into net income from investments over the estimated remaining lives of the
investments sold. At December 31, 1995 and 1994, the IMR, which is included in
other liabilities, was $109 million and $52 million, respectively.
In connection with preparation of its statement of cash flows, the Company
considers all highly liquid investments with a maturity of one year or less when
purchased to be short-term investments.
Fair Values of Financial Instruments
The Company has accumulated information to disclose the fair values of certain
financial instruments, whether or not recognized in the statement of financial
position, as required by the FASB. The FASB excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
The aggregate fair value asset amounts for investments (including cash and
short-term investments, policy loans and accrued investment income and excluding
investment in subsidiaries and investment real estate) are presented in Note 2
(carrying value: 1995 - $35.3 billion, 1994 - $32.4 billion; fair value: 1995 -
$37.5 billion, 1994 - $31.9 billion). Fair value information for derivatives
held or issued for purposes other than trading is presented in Note 3.
Information for certain of the Company's reserves and liabilities that are
investment-type contracts (insurance, annuity and other policy contracts that do
not involve significant mortality or morbidity risk) is presented in Note 4
(carrying value: 1995 - $21.4 billion, 1994 - $20.0 billion; fair value: 1995 -
$22.0 billion, 1994 - $19.5 billion). Those referenced notes also describe the
methods and assumptions utilized by the Company in estimating its fair value
disclosures for financial instruments. Those techniques utilized in estimating
the fair values of financial instruments are affected by the assumptions used,
including discount rates and estimates of the amount and timing of future cash
flows. Care should be exercised in deriving conclusions about the Company's
business, its value or financial position based on the fair value information of
certain financial instruments presented in the referenced notes.
Futures and Forward Contracts and Interest Rate and Equity Swaps
The Company uses financial futures contracts, forward purchase commitments and
interest rate swaps to hedge risks associated with interest rate fluctuations
and uses equity swaps to hedge risks associated with market fluctuations of
certain unaffiliated common stocks. Realized capital gains and losses on those
contracts which hedge risks associated with interest rate fluctuations are
amortized over the remaining lives of the underlying assets, primarily by
including them in the IMR. Realized capital gains and losses on equity swaps are
recognized in the period incurred.
Reserves for Insurance, Annuity and Accident and Health Policies
The reserves for life, health and annuity policies, all developed by actuarial
methods, are established and maintained on the basis of mortality and morbidity
tables using assumed interest rates and valuation methods that will provide, in
the aggregate, reserves that are greater than the minimum valuation required by
law or guaranteed policy cash values. The cumulative effects of changes in
valuation bases at the beginning of the year for previously established
policyowner reserves are included as adjustments to surplus. Significant
decreases in valuation bases are approved by the Insurance Division of the
Department of Commerce of the State of Iowa.
The liability for unpaid accident and health claims is determined using
statistical analyses and case basis evaluations. This liability is an estimate
of the ultimate net cost of all reported and unreported losses that are unpaid.
This liability is determined using estimates of future trends in claim severity,
frequency, and other factors that could vary as claims are ultimately settled.
Although considerable variability is inherent in such estimates, the Company
believes that the liability for unpaid claims is adequate. These estimates are
continually reviewed and, as adjustments to this liability become necessary,
such adjustments are reflected in current operations.
Recognition of Premium Revenues and Costs
For life and annuity contracts, premiums are recognized as revenues over the
premium-paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
Reinsurance
The Company reinsures certain of its risks. Reinsurance premiums, expenses, and
reserves related to reinsured business are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms of
the reinsurance contracts. Premiums ceded to other companies (1995 - $27
million, 1994 - $21 million and 1993 - $19 million) are reported as a reduction
of premium income, and insurance reserves applicable to reinsurance ceded have
also been reported as reductions of these items (1995 - $33 million and 1994 -
$24 million). The Company is contingently liable with respect to reinsurance
ceded to other companies in the event the reinsurer is unable to meet the
obligations that it has assumed.
Separate Accounts
The separate accounts presented in the financial statements represent the fair
market value of funds that are separately administered by the Company for
contracts with equity, real estate and fixed-income investments. The separate
account contract owner, rather than the Company, bears the investment risk of
these funds. The Company receives a fee for administrative and investment
advisory services.
Separate account assets and liabilities are disclosed in the aggregate in the
statements of financial position. The statements of operations include the
premiums, increases in reserves, benefits, and other items arising from the
operations of the separate accounts of the Company. The statements of surplus
reflect the gain from operations and surplus of the separate accounts. Such gain
from operations and surplus arises from the transfer by the Company of funds to
the separate accounts to facilitate their operations.
Reclassifications
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the 1995 presentation.
2. Investments
Investments in debt securities, preferred stocks, and other fixed maturity
instruments are generally held for investment purposes to maturity, and,
therefore, are carried in the financial statements at amortized cost. The
Company's liabilities, to which such fixed maturity investments are closely
matched, are long-term in nature so the Company does not expect to be required
to sell such securities prior to maturity.
The carrying values and estimated market values of investments in bonds and
preferred stocks as of December 31, 1995 and 1994, are as follows (in millions):
<TABLE>
<CAPTION>
Gross Gross Estimated
Carrying Value Unrealized Unrealized Market
Gains Losses Value
---------------------------------------------------------------
December 31, 1995 Bonds:
<S> <C> <C> <C> <C>
United States Government and agencies $ 232 $ 4 $ - $ 236
States and political subdivisions 230 21 - 251
Corporate - public 4,374 328 16 4,686
Corporate - private 13,877 1,332 15 15,194
Mortgage-backed securities 3,085 134 4 3,215
---------------------------------------------------------------
21,798 1,819 35 23,582
Preferred stocks 93 12 - 105
---------------------------------------------------------------
$21,891 $1,831 $35 $23,687
===============================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994 Bonds:
<S> <C> <C> <C> <C>
United States Government and agencies $ 111 $ 1 $ 4 $ 108
States and political subdivisions 198 2 12 188
Corporate - public 3,986 74 142 3,918
Corporate - private 13,678 365 391 13,652
Mortgage-backed securities 2,653 2 166 2,489
---------------------------------------------------------------
20,626 444 715 20,355
Preferred stocks 69 4 2 71
---------------------------------------------------------------
$20,695 $448 $717 $20,426
===============================================================
</TABLE>
Market values of public bonds and preferred stocks have been determined by the
Company from public quotations, when available, or bonds have been assigned a
market rate by the Securities Valuation Office of the NAIC. Private placement
securities are valued by discounting the expected total cash flows. Market rates
used are applicable to the yield, credit quality and average maturity of each
security.
The carrying values and estimated market values of bonds at December 31, 1995,
by expected maturity, are as follows (in millions):
<TABLE>
<CAPTION>
Carrying Value Estimated Market
Value
------------------------------------
<S> <C> <C>
Due in one year or less $ 747 $ 768
Due after one year through five years 6,878 7,271
Due after five years through ten years 6,189 6,695
Due after ten years 3,176 3,657
------------------------------------
16,990 18,391
Mortgage-backed and other securities without
a single maturity date 4,808 5,191
------------------------------------
Total $21,798 $23,582
====================================
</TABLE>
The carrying value and estimated market value of mortgage loans at December 31,
1995 and 1994, are as follows (in millions):
<TABLE>
<CAPTION>
1995 1994
----------------------------- ----------------------------------
Estimated Estimated Market
Carrying Value Market Carrying Value Value
Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial mortgage loans $9,794 $10,129 $8,901 $8,580
Residential mortgage loans 234 262 287 299
</TABLE>
Market values of commercial mortgage loans are valued by discounting the
expected total cash flows using market rates that are applicable to the yield,
credit quality, and maturity of each loan. Market values of residential mortgage
loans are valued by a pricing and servicing model using market rates that are
applicable to the yield, rate structure, credit quality, size, and maturity of
each loan. The carrying value for policy loans approximates the fair value.
Major categories of income from investments are summarized as follows (in
millions):
Year ended December 31
1995 1994 1993
------------------------------------------
Bonds $1,761 $1,622 $1,549
Preferred stocks 6 3 2
Common stocks 35 22 26
Investment in subsidiaries (48) (2) (37)
Mortgage loans 808 766 811
Investment real estate 211 179 129
Policy loans 48 44 44
Cash and short-term investments 29 20 6
Other 18 48 1
------------------------------------------
2,868 2,702 2,531
Less investment expenses 217 182 162
------------------------------------------
Net income from investments $2,651 $2,520 $2,369
==========================================
The major components of realized capital gains (losses) on investments reflected
in operations, and unrealized capital gains (losses) on investments reflected
directly in surplus, are summarized as follows (in millions):
<TABLE>
<CAPTION>
Realized Unrealized
--------------------------------- -----------------------------
1995 1994 1993 1995 1994 1993
--------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Bonds $101 $(133) $150 $ (17) $32 $(32)
Preferred stocks (1) - (11) 1 (7) 11
Common stocks 32 6 29 398 7 23
Mortgage loans (24) (34) (81) 9 3 41
Investment real estate 7 3 1 5 6 (1)
Investment in subsidiaries 1 32 - (6) 6 (5)
Other 4 45 (44) (1) - 20
------------------------------ -----------------------------
Net capital gains (losses) 120 (81) 44 389 47 57
Related federal income taxes (41) 6 (26) (63) - -
Transferred (to) from interest
maintenance reserve (77) 43 (70) - - -
------------------------------ -----------------------------
Total capital gains (losses) $ 2 $ (32) $(52) $326 $47 $57
============================== =============================
</TABLE>
Proceeds from sales of investments (excluding maturity proceeds) in debt
securities were $6.5 billion in both 1995 and 1994, and $11.9 billion in 1993.
Gross gains of $93 million, $53 million and $173 million and gross losses of $54
million, $213 million and $65 million in 1995, 1994 and 1993, respectively, were
realized on those sales. Of the 1995, 1994 and 1993 proceeds, $6.1 billion, $5.7
billion and $11.5 billion, respectively, relates to sales of mortgage-backed
securities. The Company actively manages its mortgage-backed securities
portfolio to control prepayment risk. Gross gains of $66 million, $19 million
and $152 million and gross losses of $17 million, $139 million and $29 million
in 1995, 1994 and 1993, respectively, were realized on sales of mortgage-backed
securities. At December 31, 1995, the Company had security purchases payable
totaling $426 million relating to the purchases of mortgage-backed securities at
forward dates.
The Company has a revolving credit agreement with Principal Residential
Mortgage, Inc., a wholly-owned subsidiary which conducts the Company's mortgage
banking operations, of up to $800 million, which had a balance of $458 million
outstanding at December 31, 1995.
Commercial mortgage loans and corporate private placement bonds originated or
acquired by the Company represent its primary areas of credit risk exposure. At
December 31, 1995 and 1994, the commercial mortgage portfolio is diversified by
geographic region and specific collateral property type as follows:
Geographic Distribution Property Type Distribution
- ------------------------------------------ ----------------------------------
December 31 December 31
1995 1994 1995 1994
----------------------- ---------------------------------
South Atlantic 22% 21% Industrial 43% 47%
Pacific 34 38 Office 26 24
Mid Atlantic 17 17 Retail 26 24
North Central 14 13 Other 5 5
South Central 7 6
New England 4 3
Mountain 2 2
The corporate private placement bond portfolio is diversified by issuer and
industry. Restrictive bond covenants are monitored by the Company to regulate
the activities of issuers and control their leveraging capabilities. Under the
NAIC bond classification system, 99.8% and 99.7% of the Company's bond portfolio
were carried at amortized cost at December 31, 1995 and 1994, respectively, with
the remainder carried at the lower of amortized cost or market value.
Effective December 29, 1995, the Company entered into short-term equity swap
agreements to mitigate its exposure to declines in the value of about one-half
of its marketable common stock portfolio. Under the agreements, the return on
that portion of the Company's marketable common stock portfolio was swapped for
a fixed short-term interest rate. At December 31, 1995, there was no realized or
unrealized gains or losses recorded on the equity swap agreements and,
accordingly, there was no credit exposure. The unrealized appreciation and
depreciation of marketable common stocks recognized in the Company's statement
of financial position were $814 million and $85 million, respectively, at
December 31, 1995.
Investment real estate includes properties directly owned by the Company and
investments in subsidiaries include properties owned jointly with venture
partners and operated by the partners. Joint ventures in which the Company has
an interest have mortgage loans with the Company of $2.2 billion at both
December 31, 1995 and December 31, 1994. The Company is committed to provide
additional mortgage financing for such joint ventures aggregating $304 million
at December 31, 1995.
3. Derivatives Held or Issued for Purposes Other Than Trading
The Company uses exchange-traded interest rate futures and forward contracts to
hedge against interest rate risks. The Company attempts to match the timing of
when interest rates are committed on insurance products and on new investments.
However, timing differences do occur and can expose the Company to fluctuating
interest rates. Interest rate futures and forward contracts are used to minimize
these risks. In these contracts, the Company is subject to the risk that the
counterparties will fail to perform and to the risks associated with changes in
the value of the underlying securities; however, such changes in value generally
are offset by opposite changes in the value of the hedged items. Futures
contracts are marked to market and settled daily, which minimizes the
counterparty risk. The notional amounts of futures and forward contracts ($303
million at December 31, 1995, and $80 million at December 31, 1994) represent
the extent of the Company's involvement but not the risk of loss.
The Company enters into interest rate swaps to minimize its exposure to
fluctuations in interest rates and to correct duration mismatches. The most
common use is to modify the duration of an asset or portfolio, a less common use
is to convert a floating rate asset into a fixed rate asset. The notional
principal amounts of the swaps outstanding at December 31, 1995 and 1994, were
$599 million and $586 million, respectively, and the credit exposure at December
31, 1995 and December 31, 1994 was $8 million. The Company's current credit
exposure on swaps is limited to the value of interest rate swaps that have
become favorable to the Company. The average unexpired terms of the swaps were
approximately three years at both December 31, 1995 and 1994, respectively. The
net amount payable or receivable from interest rate swaps is accrued as an
adjustment to interest income. The Company's interest rate swap agreements
include cross-default provisions when two or more swaps are transacted with a
given counterparty. Principal Mutual Life Insurance Company
3. Derivatives Held or Issued for Purposes Other Than Trading (continued)
The Company enters into currency exchange swap agreements to convert certain
foreign denominated fixed rate assets into dollar denominated fixed rate assets
and eliminate the exposure to future currency volatility on those securities. At
December 31, 1995, the Company had various foreign currency exchange agreements
with maturities ranging from 1995 to 2002, with an aggregate notional amount
involved of approximately $312 million and the credit exposure was $4 million.
The average unexpired term of the swaps was approximately five years at December
31, 1995.
4. Insurance, Annuity and Accident and Health Reserves
The carrying values and fair values of the Company's reserves and liabilities
for investment-type insurance contracts (which are only a portion of the
insurance reserves, annuity reserves, and other policy liabilities appearing in
the statement of financial position) at December 31, 1995 and 1994, are
summarized as follows (in millions):
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------------------------------
Carrying Value Fair Carrying Value Fair
Value Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Insurance reserves $ 30 $ 33 $ 30 $ 30
Annuity reserves 20,989 21,524 19,714 19,168
Other policy liabilities 398 403 270 270
----------------------------------------------------------------------
Total $21,417 $21,960 $20,014 $19,468
======================================================================
</TABLE>
The fair values for the Company's reserves and liabilities under investment-type
contracts (insurance, annuity and other policy contracts that do not involve
significant mortality or morbidity risk) are estimated using discounted cash
flow analyses (based on current interest rates being offered for similar
contracts with maturities consistent with those remaining for the
investment-type contracts being valued) or surrender values.
The fair values for the Company's insurance contracts (insurance, annuity and
other policy contracts that do involve significant mortality or morbidity risk),
other than investment-type contracts, are not required to be disclosed. The
Company does consider, however, the various insurance and investment risks in
choosing investments for both insurance and investment-type contracts.
4. Insurance, Annuity and Accident and Health Reserves (continued)
Activity in the liability for unpaid accident and health claims, which is
included with insurance reserves in the statement of financial position, is
summarized as follows (in millions):
Year ended December 31
1995 1994 1993
------------------------------------------
Balance at beginning of year $ 844 $ 723 $ 657
Incurred:
Current year 2,665 2,735 2,307
Prior years (24) (105) (37)
------------------------------------------
Total incurred 2,641 2,630 2,270
Payments:
Current year 2,196 2,065 1,814
Prior years 481 444 390
------------------------------------------
Total payments 2,677 2,509 2,204
------------------------------------------
Balance at end of year:
Current year 469 670 493
Prior years 339 174 230
------------------------------------------
Total balance at end of year $ 808 $ 844 $ 723
==========================================
5. Federal Income Taxes
The Company files a consolidated income tax return that includes all of its
qualifying subsidiaries, and has a policy of allocating income tax expenses and
benefits to companies in the group based upon pro rata contribution of taxable
income or operating losses. The Company is taxed at corporate rates on taxable
income based on existing tax laws. Due to the inherent differences between
income for financial reporting purposes and income for tax purposes, the
Company's provision for federal income taxes may not have the customary
relationship of taxes to income.
Deferred income taxes are generally not recognized for the tax effects of
temporary differences between income for financial reporting purposes and income
for tax purposes. In 1993, 1994 and 1995, however, the Company recognized a
deferred tax asset and operating benefit for the tax effect of unamortized
deferred acquisition costs required for tax purposes. This deferred tax asset
was non-admitted in accordance with statutory accounting practices. In 1995, the
Company also recognized a deferred tax liability and surplus charge for the tax
effect of unrealized gains for common stocks identified for sale in 1996.
5. Federal Income Taxes (continued)
In December 1994, a U.S. Court of Appeals with jurisdiction over the Company
ruled that federal law did not permit mutual life insurance companies to use a
negative recomputed differential earnings rate to compute their equity tax
liability for the preceding year. Accordingly, the Company increased its
liability for federal income taxes attributable to its equity for years prior to
1994 and made a corresponding adjustment to surplus in the amount of $63
million.
6. Short-Term Borrowings
The Company issues commercial paper to meet its short-term financing needs.
There were no outstanding borrowings at December 31, 1995 or 1994. The Company
also maintains credit facilities with various banks for short-term borrowing
purposes.
7. Employee and Agent Benefits
The Company has defined benefit pension plans covering substantially all of its
employees and certain agents. The employees and agents are generally first
eligible for the pension plans when they reach age 21. The pension benefits are
based on the years of service and generally the employee's or agent's average
annual compensation during the last five years of employment. Partial benefit
accrual of pension benefits is recognized from first eligibility until
retirement based on attained service divided by potential service to age 65 with
a minimum of 35 years of potential service.
During 1995, the Company adopted Statement of Financial Standards (SFAS) No. 87,
"Employers' Accounting for Pensions," and accordingly changed its method of
accounting for the costs of defined benefit pension plans to an accrual method.
Prior to this change, the cost of pension benefits was recognized as
contributions were made to the pension trusts. The Company's policy is to fund
the cost of providing pension benefits in the years that the employees and
agents are providing service to the Company. The Company's funding policy is to
deposit the actuarial normal cost and any change in unfunded accrued liability
over a 30-year period as a percentage of compensation.
The pension plans' combined funded status, reconciled to amounts recognized in
the statements of financial position and statements of operations and surplus as
of and for the years ended December 31, 1995 and 1994, is as follows (in
millions):
<TABLE>
<CAPTION>
December 31
1995 1994
------------------------------
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefit obligation $437 $324
==============================
Accumulated benefit obligation $457 $338
==============================
Plan assets at fair value, primarily affiliated mutual funds
and investment contracts of the Company $719 $581
Projected benefit obligation 661 462
------------------------------
Plan assets in excess of projected benefit obligation 58 119
Unrecognized net (gains) losses and funding different from that assumed
and from changes in assumptions 42 (23)
Unrecognized net transition asset as of January 1, 1994 (72) (83)
------------------------------
Prepaid pension asset (non-admitted) $ 28 $ 13
==============================
</TABLE>
Net periodic pension income included the following components (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1995 1994
------------------------------
<S> <C> <C>
Service cost $22 $26
Interest cost on projected benefit obligation 39 37
Actual return on plan assets (144) 6
Net amortization and deferral 79 (72)
------------------------------
Total net periodic pension income $ (4) $ (3)
==============================
</TABLE>
During 1994 and 1993, $10 million and $8 million, respectively, was charged to
expense and contributed to the trusts previously established to provide for
future costs of pension benefits. During 1995, $12 million was contributed to
these pension trusts. In addition, to adjust the pension accounting to the new
method required by SFAS No. 87 and to make the change effective as of January 1,
1994, surplus as of January 1, 1995 has been increased by $13 million. According
to the requirements of statutory accounting practices, pension expense for 1994
has not been restated and the 1994 pension amounts shown above are for
comparative purposes only. The pension asset at January 1, 1995 ($13 million)
and December 31, 1995 ($28 million) was non-admitted as prescribed by statutory
accounting practices.
The weighted-average assumed discount rate used in determining the projected
benefit obligation was 7% and 8.5% at December 31, 1995 and 1994, respectively.
Some of the trusts holding the plan assets are subject to federal income taxes
at a 35% tax rate while others are not subject to federal income taxes. For both
1995 and 1994, the expected long-term rates of return on plan assets were
approximately 6% (after estimated income taxes) for those trusts subject to
federal income taxes and approximately 10% for those trusts not subject to
federal income taxes. The assumed rate of increase in future compensation levels
varies by age for both the qualified and non-qualified pension plans.
In addition, the Company has defined contribution plans that are generally
available to all employees and agents who are age 21 or older and have completed
one year of service. Eligible participants may contribute up to 15% of their
compensation or $9,240 annually to the plans. The Company matches the
participant's contribution with a 50% contribution up to a maximum contribution
of 2% of the participant's compensation. During both 1995 and 1994, the Company
contributed $7 million to the defined contribution plans. During 1993, such
contributions totaled $6 million.
The Company also provides certain health care, life insurance, and long-term
care benefits for retired employees. Substantially all employees are first
eligible for these postretirement benefits when they reach age 57 and have
completed ten years of service with the Company. Partial benefit accrual of
these health, life, and long-term care benefits is recognized from first
eligibility until retirement based on attained service divided by potential
service to age 65 with a minimum of 35 years of potential service. The Company's
policy is to fund the cost of providing retiree benefits in the years that the
employees are providing service to the Company. The Company's funding policy is
to deposit the actuarial normal cost and an accrued liability over a 30-year
period as a percentage of compensation.
The postretirement plans' combined funded status, reconciled to amounts
recognized in the statement of financial position and statement of operations
and surplus as of and for the years ended December 31, 1995 and 1994, is as
follows (in millions):
<TABLE>
<CAPTION>
December 31
1995 1994
-------------------------------
Plan assets at fair value, primarily affiliated mutual funds and
<S> <C> <C>
investment contracts of the Company $208 $155
Accumulated postretirement benefit obligation:
Retirees (83) (71)
Eligible employees (40) (31)
-------------------------------
Total accumulated postretirement benefit obligation (123) (102)
-------------------------------
Plan assets in excess of accumulated postretirement benefit
obligation 85 53
Unrecognized net losses and funding different from that assumed and
from changes in assumptions 3 29
-------------------------------
Postretirement benefit asset (non-admitted) $ 88 $ 82
===============================
</TABLE>
The net periodic postretirement benefit cost included the following components
(in millions):
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994 1993
--------------------------------
<S> <C> <C> <C>
Service cost $ 5 $ 4 $ 3
Interest cost on accumulated postretirement benefit cost 9 7 6
Expected return on plan assets (10) (10) (6)
Net amortization of gains and losses 1 - -
================================
Total net periodic postretirement benefit cost $ 5 $ 1 $ 3
================================
</TABLE>
The weighted-average assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7% and 8.5% at December 31, 1995 and 1994,
respectively. Some of the trusts holding the plan assets are subject to federal
income taxes at a 35% tax rate while others are not subject to federal income
taxes. For both 1995 and 1994, the expected long-term rates of return on plan
assets were approximately 6% (after estimated income taxes) for those trusts
subject to federal income taxes and approximately 9% for those trusts not
subject to federal income taxes. These rates of return on plan assets vary by
benefit type and employee group.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligations starts at 11.5% in 1995, declines to 9.5% in
2001, and then declines to an ultimate rate of 6.5% in 2036. If the health care
cost trend rate assumptions were increased by 1% in each year, the accumulated
postretirement benefits obligation for health plans as of December 31, 1995
would increase by 11.8% ($10 million). The effect of this 1% increase would also
increase the aggregate of the service cost and interest cost components of the
net periodic postretirement benefit cost of health plans for the year ended
December 31, 1995 by 13.5% ($1 million).
These statutory accounting provisions are similar to Statement of Financial
Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," issued by the FASB except that SFAS No. 106
includes ineligible employees in the accumulated postretirement benefit
obligation calculations. The accumulated postretirement benefit obligation for
ineligible employees was $77 million and $48 million at December 31, 1995 and
1994, respectively.
8. Surplus Notes
On March 10, 1994, the Company issued $300 million of surplus notes, including
$200 million due March 1, 2024 at a 7.875% annual interest rate and the
remaining $100 million due March 1, 2044 at an 8% annual interest rate. No
affiliates of the Company hold any portion of the surplus notes. The discount
and direct costs associated with issuing these surplus notes is being amortized
to expense over their respective terms using the interest method. For statutory
accounting purposes, these notes are considered a part of total surplus of the
Company. Each payment of interest and principal on the surplus notes may be made
only with the prior approval of the Commissioner of Insurance of the State of
Iowa (the Commissioner) and only to the extent that the Company has sufficient
surplus earnings to make such payments. For the years ended December 31, 1995
and 1994, interest of $24 million and $11 million, respectively, was approved by
the Commissioner, paid and charged to expense. Had the accrual of interest on
surplus notes not been subject to approval of the Commissioner, accrued interest
payable on surplus notes at both December 31, 1995 and 1994 would have been $8
million.
Subject to Commissioner approval, the surplus notes due March 1, 2024 may be
redeemed at the Company's election on or after March 1, 2004 in whole or in part
at a redemption price of approximately 103.6% of par. The approximate 3.6%
premium is scheduled to gradually diminish over the following ten years. These
surplus notes may then be redeemed on or after March 1, 2014, at a redemption
price of 100% of the principal amount plus interest accrued to the date of
redemption. Non-insurance companies individually held over 10% of these surplus
notes (approximately $50 million and $73 million at December 31, 1995 and 1994,
respectively).
In addition, subject to Commissioner approval, the surplus notes due March 1,
2044 may be redeemed at the Company's election on or after March 1, 2014, in
whole or in part at a redemption price of approximately 102.3% of par. The
approximate 2.3% premium is scheduled to gradually diminish over the following
ten years. These surplus notes may be redeemed on or after March 1, 2024, at a
redemption price of 100% of the principal amount plus interest accrued to the
date of redemption. Non-insurance companies individually held over 10% of these
surplus notes (approximately $43 million and $62 million at December 31, 1995
and 1994, respectively).
9. Other Commitments and Contingencies
The Company leases office space and furniture and equipment under various
operating leases. Rental expense for all operating leases totaled $48 million in
1995, $43 million in 1994 and $44 million in 1993. At December 31, 1995, future
minimum rental commitments under noncancelable operating leases for office space
and electronic data processing equipment totaled approximately $97 million.
The Company is a defendant in various legal actions arising in the normal course
of its investment and insurance operations. In the opinion of management, any
losses resulting from such actions would not have a material effect on the
financial statements.
The Company is also subject to insurance guarantee laws in the states in which
it writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. At December 31, 1995 and 1994,
approximately $18 million and $15 million, respectively, of surplus is
appropriated for possible guarantee fund assessments for which notices have not
been received.
In 1995, the Company sold its wholly-owned subsidiary, Principal National Life
Insurance Company (Principal National), at a gain of approximately $1 million.
At December 31, 1994, substantially all the assets ($513 million), liabilities
($470 million), and equity ($43 million) of Principal National were transferred
to and assumed by the Company. This resulted in increases in both other income
and additions to policyowner reserves of $470 million in 1994.
<PAGE>
APPENDIX
ILLUSTRATIONS OF POLICY VALUES AND DEATH BENEFITS
The following illustrations have been prepared to help show how values
under the Policies change with investment performance and differing death
benefit options. The illustrations show how death benefits and values would vary
over time if the return on assets held by the Mutual Funds were uniform, gross,
after tax, annual rates of 0%, 4%, 8% and 12%. The death benefits and values
would be different from those shown if the return averaged 0%, 4%, 8% and 12%,
but fluctuated above and below those averages during individual years. Both
Death Benefit Option 1 and Death Benefit Option 2 are illustrated.
The four illustrations set out show hypothetical policies issued to males
age 35 in the non-smoker rating classification. The Policies are illustrated on
the basis of $1,000 planned periodic annual premium and a face amount at issue
of $100,000. The first and third illustrations show the selection of Death
Benefit Option 1; the second and fourth, Death Benefit Option 2.
The illustrations reflect all of the contract charges. Each illustration
reflects the surrender charges and the premium expense charge which consists of
a 5% sales load and a charge for state premium taxes of 2%. The first two
illustrations reflect the Company's current administration charge of $4.75 per
month and current cost of insurance charges which are lower than the guaranteed
maximum cost of insurance charges based on the 1980 CS0 Mortality Table. The
third and fourth illustrations reflect the guaranteed maximum administration
charge of $5 per month and the guaranteed maximum cost of insurance charges.
The amounts shown for death benefits and values in all four illustrations
reflect the fact that the net investment return on the assets held by the
Divisions of the Separate Account is lower than the gross return. This is
because deductions are made from the gross return to reflect the daily charge
made to the Separate Account for assuming mortality and expense risks; the daily
investment advisory fees incurred by the Mutual Funds; and the direct operating
expenses of the Mutual Funds. The charge for mortality and expense risks
reflected in the first two illustrations is the Company's current charge which
is at an annual rate of 0.75% of the average daily assets of the Divisions. The
third and fourth illustrations reflect the guaranteed mortality and expense risk
charge which is at an annual rate of 0.90%. The investment advisory fee is
assumed to be an annual rate of .56% of the average daily net assets of the
Mutual Funds, but the maximum investment advisory fee for Principal Capital
Accumulation Fund, Inc. is 0.49%, for Principal Money Market Fund, Inc., and
Principal Bond Fund, Inc. , 0.50%, for Principal High Yield Fund, Inc., and
Principal Balanced Fund, Inc., 0.60%, and for Principal Emerging Growth Fund,
Inc., 0.65%. The charge for Mutual Fund direct operating expenses is estimated
to be an annual rate of .07% of the average daily net assets of the Mutual
Funds. This illustrated .07% charge is based on the assumption that the direct
operating expenses of the Mutual Funds will continue at levels historically
experienced. The direct operating expense of the Mutual Funds may decrease or
increase in the future making operating expenses actually incurred by the Mutual
Funds differ from the .07% assumed rate shown in the illustrations. Deducting
these charges from the gross returns of 0%, 4%, 8% and 12% results in net
investment returns in the first two illustrations of -1.37%, 2.57%, 6.52%, and
10.47% and in the third and fourth illustrations of -1.52%, 2.42%, 6.36%, and
10.30%.
The four illustrations are based on the assumption that payments are made
in accordance with a $1,000 annual planned periodic premium schedule, that no
changes in death benefit option or face amount are made, and that no policy
loans or surrenders occur. Upon request, the Company will prepare a comparable
illustration reflecting the proposed insured's actual age, sex, risk
classification and desired policy features.
<PAGE>
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
FLEX VARIABLE LIFE
PLANNED PREMIUM $1,000 MALE AGE 35 NON-SMOKER Initial Face Amount $100,000
ASSUMING CURRENT CHARGES Death Benefit Option 1
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated
Policy Premiums (1) 0% 4% 8% 12%
(-1.37% Net) (2.57% Net) (6.52% Net)(10.47% Net)
1 $1,050 $100,000 $100,000 $100,000 $100,000
2 2,153 100,000 100,000 100,000 100,000
3 3,310 100,000 100,000 100,000 100,000
4 4,526 100,000 100,000 100,000 100,000
5 5,802 100,000 100,000 100,000 100,000
6 7,142 100,000 100,000 100,000 100,000
7 8,549 100,000 100,000 100,000 100,000
8 10,027 100,000 100,000 100,000 100,000
9 11,578 100,000 100,000 100,000 100,000
10 13,207 100,000 100,000 100,000 100,000
11 14,917 100,000 100,000 100,000 100,000
12 16,713 100,000 100,000 100,000 100,000
13 18,599 100,000 100,000 100,000 100,000
14 20,579 100,000 100,000 100,000 100,000
15 22,657 100,000 100,000 100,000 100,000
16 24,840 100,000 100,000 100,000 100,000
17 27,132 100,000 100,000 100,000 100,000
18 29,539 100,000 100,000 100,000 100,000
19 32,066 100,000 100,000 100,000 100,000
20 34,719 100,000 100,000 100,000 100,000
30(Age 65) 69,761 100,000 100,000 100,000 157,251
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated
Policy Premiums (1) 0% 4% 8% 12%
(-1.37% Net) (2.57% Net) (6.52% Net)(10.47% Net)
1 $1,050 692.35$ 724.19 $ 756.17 $ 788.20
2 2,153 1,367.57 1,459.27 1,553.85 1,651.07
3 3,310 2,023.09 2,202.71 2,392.94 2,593.65
4 4,526 2,658.31 2,953.93 3,275.44 3,623.66
5 5,802 3,272.69 3,712.37 4,203.51 4,749.75
6 7,142 3,863.77 4,475.54 5,177.56 5,979.53
7 8,549 4,431.07 5,242.88 6,200.06 7,323.61
8 10,027 4,974.12 6,013.84 7,273.72 8,793.82
9 11,578 5,491.52 6,786.91 8,400.56 10,402.41
10 13,207 5,985.62 7,564.38 9,586.57 12,166.92
11 14,917 6,459.65 8,349.44 10,839.05 14,107.66
12 16,713 6,912.11 9,140.75 12,161.16 16,242.58
13 18,599 7,343.39 9,938.76 13,558.18 18,593.58
14 20,579 7,752.03 10,742.16 15,034.06 21,183.35
15 22,657 8,138.41 11,551.43 16,594.85 24,039.02
16 24,840 8,500.20 12,364.41 18,244.57 27,188.45
17 27,132 8,836.87 13,180.70 19,989.35 30,664.58
18 29,539 9,146.13 13,998.20 21,834.29 34,502.89
19 32,066 9,427.48 14,816.50 23,786.64 38,744.71
20 34,719 9,680.44 15,635.26 25,854.37 43,436.47
30(Age 65) 69,761 9,718.86 23,020.71 54,704.87 128,894.48
<PAGE>
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated
Policy Premiums (1) 0% 4% 8% 12%
(-1.37% Net) (2.57% Net) (6.52% Net)(10.47% Net)
1 $1,050 $ 365.35 $ 397.19 $ 429.17 $ 461.20
2 2,153 1,040.57 1,132.27 1,226.85 1,324.07
3 3,310 1,696.09 1,875.71 2,065.94 2,266.65
4 4,526 2,372.18 2,667.80 2,989.31 3,337.53
5 5,802 3,027.44 3,467.12 3,958.26 4,504.50
6 7,142 3,659.39 4,271.16 4,973.18 5,775.15
7 8,549 4,267.57 5,079.38 6,036.56 7,160.11
8 10,027 4,851.49 5,891.21 7,151.09 8,671.19
9 11,578 5,409.77 6,705.16 8,318.81 10,320.66
10 13,207 5,944.74 7,523.50 9,545.69 12,126.04
11 14,917 6,459.65 8,349.44 10,839.05 14,107.66
12 16,713 6,912.11 9,140.75 12,161.16 16,242.58
13 18,599 7,343.39 9,938.76 13,558.18 18,593.58
14 20,579 7,752.03 10,742.16 15,034.06 21,183.35
15 22,657 8,138.41 11,551.43 16,594.85 24,039.02
16 24,840 8,500.20 12,364.41 18,244.57 27,188.45
17 27,132 8,836.87 13,180.70 19,989.35 30,664.58
18 29,539 9,146.13 13,998.20 21,834.29 34,502.89
19 32,066 9,427.48 14,816.50 23,786.64 38,744.71
20 34,719 9,680.44 15,635.26 25,854.37 43,436.47
30(Age 65) 69,761 9,718.86 23,020.71 54,704.87 128,894.48
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefit, accumulated value and surrender value will differ if premiums
are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefit, accumulated value and
surrender value for a policy would be different from those shown if actual rates
of investment return applicable to the policy averaged 0%, 4%, 8% or 12% over a
period of years, but also fluctuated above or below that average for individual
policy years. The death benefit, accumulated value and surrender value for a
policy would also be different from those shown, depending on the investment
allocations made to the investment divisions of the separate account and the
different rates of return of the Fund portfolios, if the actual rates of
investment return applicable to the policy averaged 0%, 4%, 8% or 12%, but
varied above or below that average for individual divisions. No representations
can be made that these hypothetical rates of return can be achieved for any one
year or sustained over any period of time.
<PAGE>
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
FLEX VARIABLE LIFE
PLANNED PREMIUM $1,000 MALE AGE 35 NON-SMOKER Initial Face Amount $100,000
ASSUMING CURRENT CHARGES Death Benefit Option 2
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated
Policy Premiums (1) 0% 4% 8% 12%
(-1.37% Net) (2.57% Net) (6.52% Net)(10.47% Net)
1 $1,050 $100,691 $100,723 $100,755 $100,787
2 2,153 101,364 101,455 101,549 101,646
3 3,310 102,015 102,194 102,383 102,583
4 4,526 102,645 102,938 103,258 103,604
5 5,802 103,252 103,688 104,175 104,717
6 7,142 103,834 104,440 105,135 105,929
7 8,549 104,390 105,192 106,139 107,249
8 10,027 104,919 105,945 107,188 108,687
9 11,578 105,421 106,696 108,284 110,253
10 13,207 105,896 107,447 109,432 111,964
11 14,917 106,350 108,201 110,638 113,836
12 16,713 106,779 108,956 111,904 115,886
13 18,599 107,185 109,712 113,234 118,131
14 20,579 107,565 110,467 114,630 120,589
15 22,657 107,920 111,222 116,096 123,285
16 24,840 108,247 111,972 117,635 126,238
17 27,132 108,546 112,718 119,248 129,475
18 29,539 108,814 113,455 120,939 133,022
19 32,066 109,051 114,183 122,711 136,912
20 34,719 109,256 114,900 124,569 141,178
30(Age 65) 69,761 108,531 120,224 147,979 214,245
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated
Policy Premiums (1) 0% 4% 8% 12%
(-1.37% Net) (2.57% Net) (6.52% Net) (10.47% Net)
1 $1,050 $ 690.95 $ 722.74 $ 754.66 $ 786.64
2 2,153 1,363.51 1,454.93 1,549.21 1,646.13
3 3,310 2,014.94 2,193.77 2,383.15 2,582.95
4 4,526 2,644.54 2,938.42 3,258.00 3,604.12
5 5,802 3,251.62 3,688.01 4,175.41 4,717.43
6 7,142 3,833.52 4,439.63 5,135.03 5,929.35
7 8,549 4,389.57 5,192.31 6,138.59 7,249.15
8 10,027 4,919.14 5,945.08 7,187.92 8,687.08
9 11,578 5,420.62 6,695.90 8,283.94 10,253.39
10 13,207 5,896.37 7,446.76 9,431.74 11,963.62
11 14,917 6,349.72 8,200.69 10,637.83 13,836.03
12 16,713 6,778.99 8,955.75 11,903.92 15,885.47
13 18,599 7,184.52 9,711.96 13,233.93 18,130.48
14 20,579 7,564.63 10,467.33 14,629.96 20,589.42
15 22,657 7,919.69 11,221.83 16,096.31 23,284.70
16 24,840 8,247.06 11,972.41 17,634.46 26,237.90
17 27,132 8,546.12 12,717.94 19,248.06 29,474.95
18 29,539 8,814.28 13,455.26 20,938.93 33,022.41
19 32,066 9,050.98 14,183.14 22,711.05 36,911.73
20 34,719 9,255.65 14,900.33 24,568.71 41,177.64
30(Age 65) 69,761 8,530.55 20,223.68 47,978.52 114,245.03
<PAGE>
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated
Policy Premiums (1) 0% 4% 8% 12%
(-1.37% Net) (2.57% Net) (6.52% Net) (10.47% Net)
1 $1,050 $ 363.95 $ 395.74 $ 427.66 $ 459.64
2 2,153 1,036.51 1,127.93 1,222.21 1,319.13
3 3,310 1,687.94 1,866.77 2,056.15 2,255.95
4 4,526 2,358.41 2,652.29 2,971.87 3,317.99
5 5,802 3,006.37 3,442.76 3,930.16 4,472.18
6 7,142 3,629.14 4,235.25 4,930.65 5,724.97
7 8,549 4,226.07 5,028.81 5,975.09 7,085.65
8 10,027 4,796.51 5,822.45 7,065.29 8,564.45
9 11,578 5,338.87 6,614.15 8,202.19 10,171.64
10 13,207 5,855.49 7,405.88 9,390.86 11,922.74
11 14,917 6,349.72 8,200.69 10,637.83 13,836.03
12 16,713 6,778.99 8,955.75 11,903.92 15,885.47
13 18,599 7,184.52 9,711.96 13,233.93 18,130.48
14 20,579 7,564.63 10,467.33 14,629.96 20,589.42
15 22,657 7,919.69 11,221.83 16,096.31 23,284.70
16 24,840 8,247.06 11,972.41 17,634.46 26,237.90
17 27,132 8,546.12 12,717.94 19,248.06 29,474.95
18 29,539 8,814.28 13,455.26 20,938.93 33,022.41
19 32,066 9,050.98 14,183.14 22,711.05 36,911.73
20 34,719 9,255.65 14,900.33 24,568.71 41,177.64
30(Age 65) 69,761 8,530.55 20,223.68 47,978.52 114,245.03
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefit, accumulated value and surrender value will differ if premiums
are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefit, accumulated value and
surrender value for a policy would be different from those shown if actual rates
of investment return applicable to the policy averaged 0%, 4%, 8% or 12% over a
period of years, but also fluctuated above or below that average for individual
policy years. The death benefit, accumulated value and surrender value for a
policy would also be different from those shown, depending on the investment
allocations made to the investment divisions of the separate account and the
different rates of return of the Fund portfolios, if the actual rates of
investment return applicable to the policy averaged 0%, 4%, 8% or 12%, but
varied above or below that average for individual divisions. No representations
can be made that these hypothetical rates of return can be achieved for any one
year or sustained over any period of time.
<PAGE>
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
FLEX VARIABLE LIFE
PLANNED PREMIUM $1,000 MALE AGE 35 NON-SMOKER Initial Face Amount $100,000
ASSUMING GUARANTEED CHARGES Death Benefit Option 1
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated
Policy Premiums (1) 0% 4% 8% 12%
(-1.52% Net) (2.42% Net) (6.36% Net)(10.30% Net)
1 $ 1,050 $100,000 $100,000 $100,000 $100,000
2 2,153 100,000 100,000 100,000 100,000
3 3,310 100,000 100,000 100,000 100,000
4 4,526 100,000 100,000 100,000 100,000
5 5,802 100,000 100,000 100,000 100,000
6 7,142 100,000 100,000 100,000 100,000
7 8,549 100,000 100,000 100,000 100,000
8 10,027 100,000 100,000 100,000 100,000
9 11,578 100,000 100,000 100,000 100,000
10 13,207 100,000 100,000 100,000 100,000
11 14,917 100,000 100,000 100,000 100,000
12 16,713 100,000 100,000 100,000 100,000
13 18,599 100,000 100,000 100,000 100,000
14 20,579 100,000 100,000 100,000 100,000
15 22,657 100,000 100,000 100,000 100,000
16 24,840 100,000 100,000 100,000 100,000
17 27,132 100,000 100,000 100,000 100,000
18 29,539 100,000 100,000 100,000 100,000
19 32,066 100,000 100,000 100,000 100,000
20 34,719 100,000 100,000 100,000 100,000
30(Age 65) 69,761 100,000 100,000 100,000 144,232
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated
Policy Premiums (1) 0% 4% 8% 12%
(-1.52% Net) (2.42% Net) (6.36% Net)(10.30% Net)
1 $ 1,050 $ 686.19 $ 717.92 $ 749.72 $ 781.56
2 2,153 1,354.32 1,445.51 1,539.33 1,635.78
3 3,310 2,001.84 2,180.18 2,368.58 2,567.35
4 4,526 2,628.21 2,921.30 3,239.26 3,583.62
5 5,802 3,232.92 3,668.27 4,153.35 4,692.79
6 7,142 3,813.54 4,418.54 5,111.02 5,901.98
7 8,549 4,369.66 5,171.51 6,114.52 7,221.23
8 10,027 4,900.82 5,926.57 7,166.31 8,661.70
9 11,578 5,405.67 6,682.17 8,268.11 10,234.92
10 13,207 5,882.88 7,436.78 9,421.85 11,953.82
11 14,917 6,330.22 8,187.93 10,628.78 13,832.01
12 16,713 6,746.42 8,934.06 11,891.30 15,885.75
13 18,599 7,130.23 9,673.64 13,212.10 18,133.29
14 20,579 7,479.51 10,404.21 14,593.28 20,594.35
15 22,657 7,792.11 11,123.29 16,037.30 23,291.18
16 24,840 8,064.09 11,826.60 17,545.26 26,247.40
17 27,132 8,290.65 12,508.95 19,117.78 29,489.19
18 29,539 8,466.09 13,164.18 20,755.13 33,045.88
19 32,066 8,583.83 13,785.21 22,457.19 36,950.62
20 34,719 8,638.18 14,365.67 24,225.22 41,242.47
30(Age 65) 69,761 3,879.91 15,928.14 46,033.42 118,222.74
<PAGE>
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated
Policy Premiums (1) 0% 4% 8% 12%
(-1.52% Net) (2.42% Net) (6.36% Net)(10.30% Net)
1 $ 1,050 $ 359.19 $ 390.92 $ 422.72 $ 454.56
2 2,153 1,027.32 1,118.51 1,212.33 1,308.78
3 3,310 1,674.84 1,853.18 2,041.58 2,240.35
4 4,526 2,342.08 2,635.17 2,953.13 3,297.49
5 5,802 2,987.67 3,423.02 3,908.10 4,447.54
6 7,142 3,609.16 4,214.16 4,906.64 5,697.60
7 8,549 4,206.16 5,008.01 5,951.02 7,057.73
8 10,027 4,778.19 5,803.94 7,043.68 8,539.07
9 11,578 5,323.92 6,600.42 8,186.36 10,153.17
10 13,207 5,842.00 7,395.90 9,380.97 11,912.94
11 14,917 6,330.22 8,187.93 10,628.78 13,832.01
12 16,713 6,746.42 8,934.06 11,891.30 15,885.75
13 18,599 7,130.23 9,673.64 13,212.10 18,133.29
14 20,579 7,479.51 10,404.21 14,593.28 20,594.35
15 22,657 7,792.11 11,123.29 16,037.30 23,291.18
16 24,840 8,064.09 11,826.60 17,545.26 26,247.40
17 27,132 8,290.65 12,508.95 19,117.78 29,489.19
18 29,539 8,466.09 13,164.18 20,755.13 33,045.88
19 32,066 8,583.83 13,785.21 22,457.19 36,950.62
20 34,719 8,638.18 14,365.67 24,225.22 41,242.47
30(Age 65) 69,761 3,879.91 15,928.14 46,033.42 118,222.74
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefit, accumulated value and surrender value will differ if premiums
are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefit, accumulated value and
surrender value for a policy would be different from those shown if actual rates
of investment return applicable to the policy averaged 0%, 4%, 8% or 12% over a
period of years, but also fluctuated above or below that average for individual
policy years. The death benefit, accumulated value and surrender value for a
policy would also be different from those shown, depending on the investment
allocations made to the investment divisions of the separate account and the
different rates of return of the Fund portfolios, if the actual rates of
investment return applicable to the policy averaged 0%, 4%, 8% or 12%, but
varied above or below that average for individual divisions. No representations
can be made that these hypothetical rates of return can be achieved for any one
year or sustained over any period of time.
<PAGE>
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
FLEX VARIABLE LIFE
PLANNED PREMIUM $1,000 MALE AGE 35 NON-SMOKER Initial Face Amount $100,000
ASSUMING GUARANTEED CHARGES Death Benefit Option 2
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated
Policy Premiums (1) 0% 4% 8% 12%
(-1.52% Net) (2.42% Net) (6.36% Net)(10.30% Net)
1 1,050 $100,685 $100,717 $100,748 $100,780
2 2,153 101,350 101,441 101,535 101,631
3 3,310 101,994 102,171 102,359 102,557
4 4,526 102,614 102,906 103,222 103,564
5 5,802 103,212 103,644 104,125 104,661
6 7,142 103,783 104,383 105,069 105,852
7 8,549 104,328 105,121 106,053 107,147
8 10,027 104,846 105,858 107,081 108,556
9 11,578 105,335 106,592 108,152 110,087
10 13,207 105,794 107,320 109,268 111,752
11 14,917 106,220 108,039 110,428 113,561
12 16,713 106,612 108,748 111,633 115,527
13 18,599 106,968 109,443 112,883 117,664
14 20,579 107,287 110,121 114,178 119,985
15 22,657 107,564 110,780 115,519 122,508
16 24,840 107,797 111,413 116,903 125,248
17 27,132 107,979 112,013 118,326 128,220
18 29,539 108,105 112,574 119,783 131,442
19 32,066 108,168 113,085 121,269 134,930
20 34,719 108,161 113,539 122,779 138,704
30(Age 65) 69,761 102,559 112,436 137,137 197,824
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated
Policy Premiums (1) 0% 4% 8% 12%
(-1.52% Net) (2.42% Net) (6.36% Net)(10.30% Net)
1 1,050 $ 684.79 $ 716.46 $ 748.20 $ 779.99
2 2,153 1,350.24 1,441.15 1,534.67 1,630.81
3 3,310 1,993.68 2,171.21 2,358.76 2,556.62
4 4,526 2,614.44 2,905.77 3,221.81 3,564.07
5 5,802 3,211.88 3,643.93 4,125.28 4,660.51
6 7,142 3,783.39 4,382.73 5,068.62 5,851.96
7 8,549 4,328.35 5,121.17 6,053.35 7,147.14
8 10,027 4,846.19 5,858.23 7,081.06 8,555.67
9 11,578 5,335.33 6,591.86 8,152.42 10,087.13
10 13,207 5,794.22 7,319.94 9,268.12 11,752.07
11 14,917 6,220.36 8,039.29 10,427.90 13,561.06
12 16,713 6,612.24 8,747.70 11,632.49 15,526.85
13 18,599 6,968.42 9,442.85 12,882.66 17,663.46
14 20,579 7,286.46 10,121.39 14,178.22 19,985.32
15 22,657 7,563.96 10,779.89 15,518.95 22,508.37
16 24,840 7,796.58 11,412.79 16,902.55 25,248.03
17 27,132 7,979.05 12,013.38 18,325.54 28,220.29
18 29,539 8,105.20 12,573.81 19,783.20 31,441.73
19 32,066 8,167.94 13,084.99 21,269.44 34,929.57
20 34,719 8,161.29 13,538.64 22,778.85 38,703.87
30(Age 65) 69,761 2,558.82 12,436.06 37,136.77 97,824.21
<PAGE>
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated
Policy Premiums (1) 0% 4% 8% 12%
(-1.52% Net) (2.42% Net) (6.36% Net)(10.30% Net)
1 1,050 $ 357.79 $ 389.46 $ 421.20 $ 452.99
2 2,153 1,023.24 1,114.15 1,207.67 1,303.81
3 3,310 1,666.68 1,844.21 2,031.76 2,229.62
4 4,526 2,328.31 2,619.64 2,935.68 3,277.94
5 5,802 2,966.63 3,398.68 3,880.03 4,415.26
6 7,142 3,579.01 4,178.35 4,864.24 5,647.58
7 8,549 4,164.85 4,957.67 5,889.85 6,983.64
8 10,027 4,723.56 5,735.60 6,958.43 8,433.04
9 11,578 5,253.58 6,510.11 8,070.67 10,005.38
10 13,207 5,753.34 7,279.06 9,227.24 11,711.19
11 14,917 6,220.36 8,039.29 10,427.90 13,561.06
12 16,713 6,612.24 8,747.70 11,632.49 15,526.85
13 18,599 6,968.42 9,442.85 12,882.66 17,663.46
14 20,579 7,286.46 10,121.39 14,178.22 19,985.32
15 22,657 7,563.96 10,779.89 15,518.95 22,508.37
16 24,840 7,796.58 11,412.79 16,902.55 25,248.03
17 27,132 7,979.05 12,013.38 18,325.54 28,220.29
18 29,539 8,105.20 12,573.81 19,783.20 31,441.73
19 32,066 8,167.94 13,084.99 21,269.44 34,929.57
20 34,719 8,161.29 13,538.64 22,778.85 38,703.87
30(Age 65) 69,761 2,558.82 12,436.06 37,136.77 97,824.21
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefit, accumulated value and surrender value will differ if premiums
are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefit, accumulated value and
surrender value for a policy would be different from those shown if actual rates
of investment return applicable to the policy averaged 0%, 4%, 8% or 12% over a
period of years, but also fluctuated above or below that average for individual
policy years. The death benefit, accumulated value and surrender value for a
policy would also be different from those shown, depending on the investment
allocations made to the investment divisions of the separate account and the
different rates of return of the Fund portfolios, if the actual rates of
investment return applicable to the policy averaged 0%, 4%, 8% or 12%, but
varied above or below that average for individual divisions. No representations
can be made that these hypothetical rates of return can be achieved for any one
year or sustained over any period of time.
