Prospectus Dated May 1, 1997
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT
PrinFlex LIFE(R) -- FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICY
"PrinFlex Life(R) ," the flexible premium variable universal 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.
Neither premium payments nor death benefits are deposits or obligations of,
or guaranteed by or endorsed by any bank. Premium payments and death benefits
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
The Policy provides : (1) a death benefit upon the insured's death; (2)
policy loans; and (3) a net surrender value accessible by a partial or total
surrender of the Policy.
Policy values may be accumulated on a fixed basis or vary with the
investment performance of the division of the Principal Mutual Life Insurance
Company Variable Life Separate Account to which the policyowner allocates policy
values. Each division invests in a corresponding open-end, management investment
company, or a separate investment portfolio thereof ("Mutual Fund"). The
accompanying prospectuses describe the investment objectives and the attendant
risks of the Mutual Funds currently offered as investment choices under the
Policy: Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund,
Inc., Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal
Capital Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal Money
Market Fund, Inc., and Principal World Fund, Inc. ("Principal Mutual Funds"),
Fidelity Variable Insurance Products Fund II: Contrafund Portfolio ("Fidelity
VIP II Contrafund Portfolio"), Fidelity Variable Insurance Products Fund:
Equity-Income Portfolio ("Fidelity VIP Equity-Income Portfolio") and Fidelity
Variable Insurance Products Fund: High Income Portfolio ("Fidelity VIP High
Income Portfolio").
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 universal variable
life insurance policy.
Please read this prospectus carefully and retain it for future reference.
This Prospectus is valid only if accompanied or preceded by the current
prospectuses for the Fidelity Variable Insurance Products Fund, Fidelity
Variable Insurance Products Fund II and Principal Mutual Funds.
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.
TABLE OF CONTENTS
GLOSSARY OF SPECIAL TERMS ................................. 4
SUMMARY ................................................... 5
The Policy............................................ 5
Premiums.............................................. 6
Policy Value.......................................... 6
Transfers............................................. 6
Policy Loans.......................................... 6
Total and Partial Surrenders...........................7
Charges and Deductions ............................... 7
Maturity Proceeds..................................... 8
Death Benefit and Proceeds............................ 8
Adjustment Options.................................... 8
Termination and Reinstatement......................... 8
Policy "Free Look".................................... 10
Distribution of the Policy............................ 10
Tax Consequences of the Policy........................ 10
DESCRIPTION OF PRINCIPAL MUTUAL
LIFE INSURANCE COMPANY ....................................10
PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY VARIABLE LIFE SEPARATE
ACCOUNT....................................................10
Separate Account Divisions............................11
PURCHASING A POLICY........................................13
Purchase Procedures...................................13
Payment of Premiums...................................13
Premium Limitations...................................14
Allocation of Premiums................................14
Policy "Free Look"....................................14
VALUES AND POLICY FEATURES WHILE
THE POLICY IS IN FORCE.....................................15
Policy Values.........................................15
Transfers.............................................15
Policy Loans..........................................16
Total and Partial Surrenders.........................17
DEATH BENEFITS AND RIGHTS..................................17
Death Proceeds........................................17
Death Benefit.........................................18
Applicable Percentage.................................18
Change in Death Benefit Option........................19
Adjustment Options....................................19
CHARGES AND DEDUCTIONS.....................................20
Premium Expense Charge................................20
Monthly Policy Charge.................................20
Cost of Insurance Charge..............................20
Administration Charge.................................21
Mortality and Expense Risks Charge....................21
Transaction Charge....................................21
Surrender Charge......................................21
Contingent Deferred Sales Charge......................22
Contingent Deferred Administration Charge.............22
Surrender Charge Percentage...........................22
Sales Charge Limitations..............................22
Other Charges.........................................23
Special Provisions for Group or Sponsored
Arrangements..........................................23
THE FIXED ACCOUNT..........................................23
POLICY TERMINATION AND REINSTATEMENT.......................24
Policy Termination....................................24
Reinstatement.........................................25
OTHER MATTERS..............................................25
Voting Rights.........................................25
Statement of Values....................................26
Service Available by Telephone........................26
GENERAL PROVISIONS.........................................26
Addition, Deletion, or Substitution of
Investments...........................................26
Optional Insurance Benefits...........................27
The Contract..........................................27
Incontestability......................................27
Misstatements.........................................28
Suicide...............................................28
Ownership.............................................28
Beneficiaries.........................................28
Benefit Instructions..................................28
Postponement of Payments..............................28
Assignment............................................28
Policy Proceeds.......................................29
Participating Policy..................................29
Right to Exchange Policy..............................29
DISTRIBUTION OF THE POLICY.................................30
OFFICERS AND DIRECTORS OF
PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY....................................................31
STATE REGULATION OF PRINCIPAL
MUTUAL LIFE INSURANCE COMPANY..............................32
FEDERAL TAX MATTERS........................................32
Tax Status of the Company and the Separate
Account...............................................33
Charges for Taxes.....................................33
Diversification Standards.............................33
Life Insurance Status of Policy.......................33
Modified Endowment Contract Status....................33
Policy Surrenders and Partial Surrenders..............34
Policy Loans and Interest Deductions..................34
Corporate Alternative Minimum Tax.....................35
Exchange or Assignments of Policies...................35
Withholding...........................................35
Taxation of Accelerated Death Benefits................35
Other Tax Issues......................................35
EMPLOYEE BENEFIT PLANS.....................................35
LEGAL PROCEEDINGS..........................................35
LEGAL OPINION..............................................35
INDEPENDENT AUDITORS.......................................36
REGISTRATION STATEMENT.....................................36
FINANCIAL STATEMENTS.......................................36
Report of Independent Auditors........................38
Variable Life Separate Account
Financial Statements..................................39
Report of Independent Auditors........................51
The Principal Financial Group
Financial Statements..................................52
APPENDIX A - SAMPLE ILLUSTRATIONS OF
POLICY VALUES, SURRENDER VALUES AND
DEATH BENEFITS.............................................85
APPENDIX B - TARGET PREMIUM................................90
APPENDIX C - EXCHANGE OFFER ...............................91
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
PROSPECTUSES FOR THE UNDERLYING MUTUAL FUNDS OR THE STATEMENTS OF ADDITIONAL
INFORMATION OF THESE FUNDS.
GLOSSARY OF SPECIAL TERMS
Attained Age - The insured's age on the birthday preceding the last Policy
Anniversary.
Business Day - Any day that the New York Stock Exchange is open for
trading, and trading is not restricted.
Division - A part of the Separate Account to which Net Premiums may be
allocated which invests in shares of a single Mutual Fund. The value of an
investment in a Division is variable and is not guaranteed.
Effective Date - The date on which all requirements for issuance of a
Policy have been satisfied.
Face Amount - The minimum death benefit of a Policy so long as the Policy
remains in force.
Fixed Account - That part of Policy Value that reflects the value in the
general account of the Company.
General Account - The assets of the Company other than those allocated to
any of the Separate Accounts of the Company.
Guideline Annual Premium - The level annual payment necessary to provide
the death 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 1986, 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 - That part of the Policy Value that reflects the value
in one of the Divisions of the Separate Account.
Loan Account - That part of the Policy Value that reflects the value
transferred from the Fixed Account or Separate Account as collateral for a
policy loan.
Maturity Date - The Policy Anniversary following the insured's 95th
birthday.
Monthly Date - The day of the month which is the same as the day of the
Policy Date. For example, if the Policy Date is June 10, 1997, the first Monthly
Date is July 10, 1997.
Monthly Policy Charge - The amount subtracted from the Policy Value on each
Monthly Date equal to the sum of the cost of insurance and additional benefits
provided by any rider plus the monthly administration charge and mortality and
expense risks charge in effect on the Monthly Date.
Mutual Fund - A registered, open-end, management investment company, or a
separate investment portfolio thereof, in which a Division of the Separate
Account invests.
Net Premium - The gross premium less the deductions for the Premium Expense
Charge. It is the amount of premium allocated to the Fixed Account or Investment
Accounts.
Net Surrender Value - The Surrender Value of the Policy reduced by any
unpaid loans and loan interest.
Notice - Any form of communication received in the Company's home office
providing the information needed by the Company, either in writing or another
manner approved in advance by the Company.
Policy Date - The Policy Date is the date from which Monthly Dates and
Policy Years and Anniversaries are determined.
Policy Value - The sum of the values in the Loan Account, Fixed Account and
Investment Accounts.
Policy Years and Anniversaries - The Policy Years and Anniversaries
computed from the Policy Date. Example: If the Policy Date is May 5, 1997, the
first Policy Year ends on May 4, 1998 and the first Policy Anniversary falls on
May 5, 1998.
Premium Expense Charge - The charge deducted from premium payments to cover
a sales charge, state and local premium taxes and federal taxes.
Prorated Basis - The proportion that the value of a particular Investment
Account or Fixed Account for a Policy bears to the total value of all Investment
Accounts and the Fixed Account for that Policy.
Separate Account - Principal Mutual Life Insurance Company Variable Life
Separate Account, a registered unit investment trust with Divisions and
segregated assets, to which Net Premiums may be allocated.
Surrender Charge - A charge assessed upon total surrender of a Policy or
termination of a Policy when a grace period expires without sufficient premium
payment.
Surrender Value - The Policy Value reduced by the Surrender Charge.
Target Premium - A premium amount used to determine the maximum sales
charge that is included as part of the Premium Expense Charge and any applicable
contingent deferred sales charge under a Policy. Target Premiums are set forth
in Appendix B. The policyowner will be advised of the Target Premium for any
increase in face amount.
Unit - The accounting measure used to calculate Division values.
Valuation Period - The period between the time as of which the net asset
value of a Mutual Fund is determined on one business day and the time as of
which that value is determined on the next following business day.
Written Request - Actual delivery to the Company at its home office in Des
Moines, Iowa, of a written notice or request, signed and dated, on a form
supplied or approved by the Company.
SUMMARY
THE FOLLOWING SUMMARY IS INTENDED TO PROVIDE A GENERAL DESCRIPTION OF THE
MOST IMPORTANT POLICY FEATURES. IT IS NOT COMPREHENSIVE AND 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 is a life insurance contract with a
death benefit, Policy Value, and other features traditionally associated with
life insurance.
The policyowner allocates Net Premium Payments to one or more of the Fixed
Account and the Divisions of the Principal Mutual Life Insurance Company
Variable Life Separate Account. Allocations to the Divisions of the Separate
Account are invested in shares of a particular Mutual Fund. Allocation
instructions may be changed at any time and transfers may be made subject to
certain conditions.
The Mutual Funds in which the Divisions currently invest are as follows:
Mutual Fund in
Division which the Division Invests
-----------------------------------------------------------
Aggressive Growth Division Principal Aggressive Growth Fund
Asset Allocation Division Principal Asset Allocation Fund
Balanced Division Principal Balanced Fund
Bond Division Principal Bond Fund
Capital Accumulation Division Principal Capital Accumulation Fund
Emerging Growth Division Principal Emerging Growth Fund
Government Securities Division Principal Government Securities Fund
Growth Division Principal Growth Fund
Money Market Division Principal Money Market Fund
World Division Principal World Fund
Fidelity Contrafund Division Fidelity VIP II Contrafund Portfolio
Fidelity Equity-Income Division Fidelity VIP Equity-Income Portfolio
Fidelity High Income Division Fidelity VIP High Income Portfolio
Premiums
The required initial premium payment is equal to the minimum monthly
premium shown on the Policy's current data pages. Payment of a minimum premium
is required during the first twenty-four policy months (the "Minimum Required
Premium"). If the face amount of the Policy is increased during the first
twenty-four policy months, the Minimum Required Premium will increase for the
remainder of the twenty-four month period following the date of the face amount
increase. Payment of the Minimum Required Premium ensures that the Policy will
not enter a grace period during the first twenty-four Policy months, unless a
policy loan is taken. See "Policy Termination and Reinstatement" and "Policy
Loans". The Company allows payments in accordance with the planned periodic
premium schedule established by the policyowner in the application (annual,
semiannual, quarterly, or preauthorized withdrawal payments of premium on a
monthly basis). However, if the minimum monthly premium is less than $30, only a
planned periodic premium schedule that would result in a payment of $30 or more
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 "Optional Insurance Benefits.") 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.
All Net Premium payments received prior to the Effective Date and during
the first 20 days from the Effective Date are allocated to the Money Market
Division of the Separate Account. On the 21st day from the Effective Date, the
Policy Value held in the Money Market Division is transferred to the Divisions
and the Fixed Account in accordance with the policyowner's direction for
allocation of premium payments. (If the 21st day from the Effective Date is not
a Business Day, the transfer will occur on the first Business Day thereafter).
Net Premium payments received after the Policy Value in the Money Market
Division is transferred to the Divisions and the Fixed Account are allocated
among the Divisions and the Fixed Account in accordance with the directions in
the application for the Policy.
Policy Value
The Policy Value reflects the following: premium payments made; investment
performance of the Divisions to which amounts have been allocated; interest
credited by the Company to amounts allocated to the Fixed Account; partial
withdrawals; loans taken; repayment of loans; and deduction of charges described
below under "Charges And Deductions." The Policy Value is the sum of the values
in the Investment Accounts, the Fixed Account and the Loan Account.
Investment Account. An Investment Account is established under the Policy
for each Division of the Separate Account to which Net Premiums or transfer
amounts have been allocated. An Investment Account measures the interest of the
Policy in the corresponding Division. The value of each Investment Account under
the Policy varies each Business Day and reflects the investment performance of
the Mutual Fund shares held in the corresponding Division. See "Policy Value".
Fixed Account. The Fixed Account consists of that portion of the Policy
Value based on Net Premiums allocated to, and amounts transferred to, the
general account of the Company. The Company credits interest on amounts in the
Fixed Account at an effective annual rate guaranteed to be at least 3%. See
"Fixed Account."
Loan Account. When a policy loan is taken, the Company will establish a
Loan Account under the Policy and will transfer an amount equal to the amount of
the loan from the Investment Accounts and/or the Fixed Account to the Loan
Account. The Company will credit interest to amounts in the Loan Account at an
effective annual rate of at least 6% through Policy Year ten at which point
interest is credited at 7.75%. See "Policy Loans."
Transfers
Scheduled and unscheduled transfers of Policy Value among Divisions and the
Fixed Account may be made by a policyowner, subject to certain conditions and
charges. The Company has reserved the right to revoke or modify transfer
privileges and charges, except where prohibited by state law. See "Transfers."
Policy Loans
A policyowner may borrow against the Policy Value at any time the Policy
has Net Surrender Value. The minimum amount for a loan is $500. Interest is
charged on policy loans at an annual rate of eight percent during any period the
loan is outstanding. 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. See "Policy Loans."
Total and Partial Surrenders
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
upon total surrender of the Policy at any time within ten years after the
effective date of the adjustment. After the second Policy Year, the policyowner
may request a partial surrender of the Policy Value, but no more than two times
per Policy Year. The minimum amount for a partial surrender is $500 and
aggregate partial surrenders during a Policy Year cannot exceed 75% of the
Policy's Net Surrender Value at the time the first 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
Value is reduced by the amount of any partial surrender plus the transaction
charge. The amount surrendered will be withdrawn from the Policy on a last-in
first-out basis. 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.
Charges and Deductions
Charges under the Policy are assessed as:
(1) deductions from premiums
o sales load of 2.75% of premiums less than or equal to Target
Premium and .75% of premiums in excess of Target Premium, made
during each of the first ten Policy Years and, with respect to
premiums attributable to any face amount increase, made during
each of the first ten years following the increase
o 2.20% state and local taxes
o 1.25% federal taxes
(2) Surrender Charges upon termination or total surrender made during
the first ten Policy Years (and ten years after an increase in the Policy face
amount) equal to a percentage (described in the table below) of the sum of the
following:
o deferred administrative charge of $3 for each $1,000 of face
amount (but no greater than $1,500 per Policy), and o deferred
sales charge of 47.25% of premiums paid up to a maximum of two
Target Premiums (or less for persons age 66
and older. See "Contingent Deferred Sales Charge")
Surrender Surrender Charge
Year Percentage
1-5 100.0%
6 95.24%
7 85.71%
8 71.43%
9 52.38%
10 28.57%
11+ 0.0%
(3) Monthly Policy Charges
o administration charge:
During the first Policy Year: $.40 for each $1,000 of face
amount, but no less than $6.00/month and no greater
than $16.67/month;
During each Policy Year thereafter: $6.00/month
o cost of insurance charge
o mortality and expense risks charge of .90% per annum against the
value of the policyowner's Investment Accounts (After the ninth
Policy Year the mortality and expense risks charge will not
exceed .27% per annum)
o supplemental benefit(s) charge(s)
(4) Other Charges
o investment management fees and other operating expenses for the
underlying Mutual Funds
o transfer fee of $25 may be imposed on each unscheduled transfer
of Policy Value among the Investment Accounts in excess of
twelve during a Policy Year
o transaction charge of the lesser of $25 or 2% of the amount
surrendered on each partial surrender of Policy Value
For complete discussion of charges and deductions see "Charges and
Deductions".
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 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.
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
Policy Charges 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 Policy 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 Policy Value on the date of death or the
Policy 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 second 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 Policy Value on the effective
date of the change. The Company reserves the right to disapprove a request to
change from Option 1 to Option 2 if the face amount in effect after the change
would be less than $50,000. Evidence of insurability satisfactory to the Company
under its underwriting guidelines 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 Policy Value 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 Written Request to the Company. If a payment in an amount greater than or
equal to the adjustment conditional receipt premium deposit is submitted with
the adjustment application, then a conditional receipt is given to the
policyowner reflecting receipt of the payment and outlining any interim
insurance coverage provided by the conditional receipt. The adjustment
conditional receipt premium deposit is that amount calculated by the Company and
provided to the policyowner in connection with the policyowner's request for a
face amount increase. No request to adjust the face amount of a Policy will be
approved if a Policy is in a grace period or if Monthly Policy Charges are being
waived under a rider. In addition, a decrease in face amount may be requested
only after the second Policy Anniversary and may not reduce the face amount of a
Policy below $50,000. A requested face amount increase must be at least $50,000
and is subject to evidence of insurability satisfactory to the Company under its
underwriting guidelines then in effect. Any adjustment in face amount of a
Policy approved by the Company will be effective on the Monthly Date that
coincides with or next follows the Company's approval of the request. No
processing charges are assessed in connection with adjustments of a Policy,
although an increase in face amount will result in Premium Expense Charges and
Surrender Charges applicable to the increase. Additionally, if the face amount
of the Policy is increased during the first twenty-four policy months, the
Minimum Required Premium will increase for the remainder of the twenty-four
month period following the date of the face amount increase. Increases in face
amount made pursuant to a Cost of Living Rider, Salary Increase Rider or Extra
Protection Increase Rider are not subject to the minimum increase amount or to
evidence of insurability. More information regarding these supplementary
benefits may be obtained from an authorized agent of the Company.
Termination and Reinstatement
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. Twenty-four months or later following the Policy Date, or at any time
after a policy loan is taken, the Net Surrender Value of a Policy on
any Monthly Date is less than the Monthly Policy Charge and, if the
Policy has a death benefit guarantee rider, the death benefit guarantee
premium requirement has not been satisfied; or
2. During the 24 months following the Policy Date, the sum of the premiums
paid is less than the Minimum Required Premium on a Monthly Date (this
provision does not apply where prohibited by state laws; a notice of
impending termination will be sent as permitted therein).
The Minimum Required Premium on a Monthly Date is equal to (1) times (2)
where:
1. Is the minimum monthly premium shown on the current data pages; and
2. Is the number of completed months since the Policy Date.
The notice of impending termination will show the 61-day grace period
during which the Company will accept a payment required to keep the Policy in
force.
If a grace period begins 24 months or more after the Policy Date because
the Net Surrender Value is less than the current Monthly Policy Charge, the
minimum payment is equal to (1) plus (2) divided by (3) where:
1. Is the amount by which the Surrender Charge exceeds the Accumulated
Value on the Monthly Date on or immediately preceding the start of the
grace period;
2. Is three Monthly Policy Charges; and
3. Is 1 minus the maximum Premium Expense Charge.
If the grace period ends before we receive the minimum payment, the Company
will keep any remaining value in the Policy.
If a grace period begins because the sum of the premiums paid is less than
the Minimum Required Premium, the minimum payment is (1) minus (2) where:
1. Is the Minimum Required Premium due on the second Monthly Date
following the beginning of the grace period; and;
2. Is 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 difference of (1) minus (2) where:
1. Is the Net Surrender Value on the Monthly Date on or immediately
preceding the start of the grace period; and
2. Is the two Monthly Policy Charges 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,
and the Company will retain the remaining value in the policy.
Once a Policy has terminated as a result of failure to pay the Minimum
Required Premium on a Monthly Date during the 24 months following the Policy
Date, or 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 is required. The reinstatement premium must be at least the greater of
((1) plus (2) divided by (3)) or ((4) minus (5)) where:
1. Is the amount by which the Surrender Charge exceeds the Accumulated
Value on the Monthly Date on or immediately preceding the start of the
grace period;
2. Is three Monthly Policy Charges;
3. Is one minus the maximum Premium Expense Charge;
4. Is the Minimum Required Premium due on the second Monthly Date
following the beginning of the grace period; and
5. Is the sum of the premiums paid since the Policy Date.
Repayment or reinstatement of policy loans and loan interest which remained
unpaid on the date the Policy terminated is also required.
Policy "Free Look"
A policyowner has the limited right to return a Policy for cancellation and
receive a refund of all premiums paid (Accumulated Value for policies applied
for in the state of California by Policyowners over the age of 60). The Written
Request for cancellation, along with return of the Policy, must be made within
10 days (30 days if the Policy is applied for in the state of California by a
policyowner age 60 or over) after the Policy is received by the policyowner,
within 10 days (30 days if the Policy is applied for in the state of California
by a policyowner age 60 or over) 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. For Policies applied for in the state of
California by persons age 60 or over, the amount refunded is equal to (1) plus
(2) plus (3) where:
1. Is the Policy Value as of the date the Company receives the
policyowner's Written Request for cancellation; and
2. Is the Premium Expense Charge(s) deducted from gross premiums; and
3. Is the Monthly Policy Charge(s) deducted from the Policy Value.
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 Policy 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 Policy 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 surrenders 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 Policy Value) would
be includable in gross income to the extent that the Policy Value of the Policy
exceeds the policyowner's investment in the contract. (See "Federal Tax
Matters.") Death proceeds may also be subject to estate taxes. 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 companies.
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. During the year ended December 31, 1996, the
Company ranked in the upper one percent of life insurers in assets and premium
income. The Company has consistently received excellent ratings from the major
rating firms based upon the Company's claims paying ability. As of December 31,
1996, the Company had $56.8 billion in assets under management and served more
than 9.7 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 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 that 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 and other policies issued
by the Company. 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 an 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. 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.
Separate Account Divisions
A policyowner may direct the Company to allocate Net Premium Payments among
the Divisions which invest exclusively in shares of a corresponding Mutual Fund.
Some of these Mutual Funds also offer their shares to variable annuity separate
accounts of the Company ("Mixed Funding") and to variable annuity and variable
life separate accounts of unaffiliated insurance companies ("Shared Funding").
The potential risks associated with "Mixed and Shared Funding" are disclosed in
the Mutual Fund prospectuses. The Mutual Funds in which the Divisions invest,
and the investment adviser of each Mutual Fund, are provided in the following
table.
<TABLE>
<CAPTION>
MUTUAL FUND IN
WHICH DIVISION INVESTS MUTUAL FUND
DIVISION AND INVESTMENT ADVISER INVESTMENT OBJECTIVE
<S> <C> <C>
Aggressive Growth Division Principal Aggressive Growth Fund; Seeks long-term capital appreciation by
Morgan Stanley Asset Management, Inc. investing primarily in growth-oriented common
through a sub-advisory agreement. stocks of medium and large capitalization
U.S. corporations and, to a limited extent,
foreign corporations.
Asset Allocation Division Principal Asset Allocation Fund; Seeks a total investment return consistent with
Morgan Stanley Asset Management, Inc. the preservation of capital.
through a sub-advisory agreement.
Balanced Division Principal Balanced Fund; Seeks a total return consisting of current income
Invista Capital Management, Inc. and capital appreciation while assuming reasonable
through a sub-advisory agreement. risks in furtherance of the investment objective.
Bond Division Principal Bond Fund; Seeks to provide as high a level of income as is
Princor Management Corporation. consistent with preservation of capital and prudent
investment risk.
Capital Accumulation Division Principal Capital Accumulation Fund; Seeks to achieve primarily long-term capital
Princor Management Corporation. appreciation and secondarily growth of investment
income through the purchase primarily of common
stocks, but the Fund may invest in other securities.
Emerging Growth Division Principal Emerging Growth Fund; Seeks growth of capital through the purchase
Princor Management Corporation. primarily of common stocks, but the Fund may
invest in other securities.
Government Securities Division Principal Government Securities Fund; Seeks a high level of income, liquidity and safety
Princor Management Corporation. of principal through the purchase of obligations
issued or guaranteed by the United States Government
or its agencies, with emphasis on Government
National Mortgage Association Certificates ("GNMA
Certificates"). Fund shares are not guaranteed
by the United States Government.
Growth Division Principal Growth Fund; Seeks growth of capital through the purchase
Invista Capital Management, Inc. primarily of common stocks, but the Fund may invest
through a sub-advisory agreement. in other securities.
Money Market Division Principal Money Market Fund; Seeks as high a level of income available from
Princor Management Corporation. short-term securities as is considered consistent
with preservation of principal and maintenance
of liquidity by investing all of its assets in a
portfolio of money market instruments.
World Division Principal World Fund; Seeks long-term growth of capital by investing in a
Invista Capital Management, Inc. portfolio of equity securities of companies
through a sub-advisory agreement. domiciled in any of the nations of the world.
Fidelity Contrafund Division Fidelity VIP II Contrafund Portfolio; Seeks long-term capital appreciation.
Fidelity Management and
Research Company.
Fidelity Equity-Income Division Fidelity VIP Equity-Income Portfolio; Seeks reasonable income by investing primarily
Fidelity Management and in income-producing equity securities.
Research Company.
Fidelity High Income Division Fidelity VIP High Income Portfolio; Seeks a high level of current income by investing
Fidelity Management and Research Company. primarily in high yielding, lower quality, fixed
income securities, while also considering growth of
capital.
</TABLE>
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, and should be read in
conjunction with, this Prospectus.
Underlying Mutual Fund shares are purchased at net asset value, which
reflects the deduction of investment management fees and certain other expenses.
The management fees are charged by each underlying Mutual Fund's investment
adviser for managing the underlying Mutual Fund and selecting its portfolio of
securities. Other underlying Mutual Fund expenses can include such items as
interest expense on loans and contracts with transfer agents, custodians, and
other companies that provide services to the underlying Mutual Fund. The
management fees and other expenses for each underlying Mutual Fund for its most
recently completed fiscal year, expressed as a percentage of the underlying
Mutual Fund's average assets, are as follows:
Management Other Total
Mutual Fund Fees Expenses Expenses
Principal Aggressive Growth Fund 0.80 0.05 0.85
Principal Asset Allocation Fund 0.80 0.07 0.87
Principal Balanced Fund 0.60 0.03 0.63
Principal Bond Fund 0.50 0.03 0.53
Principal Capital Accumulation Fund 0.48 0.01 0.49
Principal Emerging Growth Fund 0.64 0.02 0.66
Principal Government Securities Fund 0.50 0.02 0.52
Principal Growth Fund 0.50 0.02 0.52
Principal Money Market Fund 0.50 0.06 0.56
Principal World Fund 0.75 0.15 0.90
Fidelity VIP II Contrafund Portfolio 0.61 0.11 0.72
Fidelity VIP Equity-Income Portfolio 0.51 0.10 0.61
Fidelity VIP High-Income Portfolio 0.60 0.11 0.71
PURCHASING A POLICY
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 of 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 equal to the minimum monthly premium shown on the Policy's current
data pages. The Company generally will not issue policies to insure persons over
age 85 for regularly underwritten Policies and age 70 for guaranteed issue,
expanded nonmedical and batch underwriting Policies. Applicants for insurance
must furnish satisfactory evidence of insurability. Acceptance is subject to the
Company's insurance underwriting guidelines and suitability rules. 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
rules and procedures are not satisfied. The minimum face amount for a Policy at
issue is $50,000 ($25,000 for guaranteed issue, batch underwriting and expanded
nonmedical Policies). 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 conditional insurance coverage provided by the conditional receipt.
If the Company determines to issue a Policy then a Policy Date will be
established. Policy Years and Anniversaries will be determined from the Policy
Date regardless of when the Policy is delivered. The Company does not date
Policies on the 29th, 30th, or 31st day of any month. Policies which otherwise
would be dated on these days except for this rule will be dated on the 28th of
the month. The Policy Date is shown on the Policy's current data pages.
Upon specific Written Request of the applicant in the application and
subject to the Company's approval, a Policy may be issued with a backdated
Policy Date. The Policy Date may not be more than three months prior to the date
of the application or such shorter maximum backdating period as required by
state law. Payment of the Minimum Required Premium is required for the period
the Policy is backdated. Monthly Policy Charges are deducted from the Policy
Value for the period the Policy is backdated.
Each Policy also has an Effective Date. The Policy Date and the Effective
Date will be the same unless (i) a backdated Policy Date is requested, (ii) the
application was not accompanied by a payment in an amount equal to or greater
than the minimum monthly premium, or (iii) additional premiums or application
amendments are required. In such cases, the Effective Date will be the date on
which the required premiums have been received at the Company's home office and
any application amendments have been received, reviewed, and accepted in the
Company's home office.
No insurance under a Policy will take effect until actual physical delivery
to and acceptance of a Policy by the applicant. If the proposed insured dies
before actual physical delivery to and acceptance of a Policy by the applicant,
there will be no coverage under the Policy and coverage will be determined
solely under the terms of the conditional receipt, if any, given to the
applicant.
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
twenty-four 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, semiannual, quarterly or monthly payments. A "preauthorized
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 result in termination of a Policy during the first twenty-four
Policy months provided that any Minimum Required Premium is paid and no policy
loan is taken. Likewise, payment of premiums in accordance with the planned
periodic premium schedule does not guarantee that the Policy will stay in force
twenty-four months or later following the Policy Date or any time after a policy
loan is taken, if the Policy's Net Surrender Value is not at least equal to the
Monthly Policy Charge on the current Monthly Date, unless the death benefit
guarantee rider is in effect.
The Company will send premium reminder notices in accordance with planned
periodic premium schedules to policyowners who are on annual, semi-annual or
quarterly premium payment 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.
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. 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 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 Policy Value.
This percentage is 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 a Policy 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 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 Policy 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 Value,
the Company reserves the right to refund the premium payment. Evidence of
insurability under the Company's current underwriting guidelines then in effect
may be required before acceptance of any such premium.
Allocation Of Premiums
The initial Net Premium Payment and any additional premiums received at the
home office of the Company prior to the Effective Date and during the first 20
days from the Effective Date are allocated to the Money Market Division of the
Separate Account at the end of the Valuation Period during which such premiums
are received. On the 21st day from the Effective Date, Policy Value held in the
Money Market Division is automatically transferred to the Divisions of the
Separate Account or to the Fixed Account, or both, in accordance with the
policyowner's direction for allocation of premium payments. If the 21st day from
the Effective Date is not a Business Day, then the transfer will occur on the
first Business Day after the 21st day from the Effective Date.
Premium payments received after expiration of the initial 20-day period
described above are allocated among the Divisions, the Fixed Account, or both in
accordance with the directions in the application for the Policy. For each
Division and the Fixed Account, the allocation percentage must be zero or a
whole number not less than ten. The sum of the percentages for all the Divisions
and the Fixed Account must equal 100. The policyowner may change the allocation
of future premium payments among the Divisions and the Fixed Account without
payment of any fee or penalty, at any time, by Written Request to the Company or
by telephone as described below. Changes in allocation percentages will be
effective at the end of the Valuation Period in which the Company receives the
policyowner's request.
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 (For policies
applied for in the state of California by policyowners age 60 or over, the
amount refunded is determined as set forth below). The request to cancel a
Policy must be in writing. The Written Request and the Policy must be personally
delivered or mailed (as determined by its postmark) to the home office of the
Company or to the agent or broker who sold the Policy before the later of:
o 10 days (30 days for Policies applied for in the state of California by
policyowners age 60 or over) after the Policy is received by the policyowner;
o 10 days (30 days for Policies applied for in the state of California by
policyowners age 60 or over) after a written notice is delivered or mailed (as
determined by its postmark) to the policyowner which tells about the
cancellation right; or
o 45 days after the policyowner completes the application.
For Policies applied for in the state of California by persons age 60 or
over, the amount refunded is equal to (1) plus (2) plus (3) where:
1. Is the Policy Value as of the date the Company receives the
policyowner's Written Request for cancellation; and
2. Is the Premium Expense Charge(s) deducted from gross premiums; and
3. Is the Monthly Policy Charge(s) deducted from the Policy Value.
The refunded amount will ordinarily be disbursed by the Company to the
policyowner within five Business Days after the Written Request for cancellation
and the Policy are received in the Company's home office. (See "Postponement of
Payments." )
VALUES AND POLICY FEATURES WHILE THE POLICY IS IN FORCE
Policy Values
A Policy has a Policy Value, a portion of which is available to the
policyowner by taking a policy loan or upon total or partial surrender of the
Policy. See "Policy Loans" and "Total and Partial Surrenders" below. The Policy
Value may also affect the amount of the death benefit. See DEATH BENEFITS AND
RIGHTS - "Death Benefit." This Policy Value at any time is equal to the sum of
the Values in the Investment Accounts, the Fixed Account and the Loan Account.
The following discussion relates only to the Investment Accounts. Policy loans
are discussed under "Policy Loans" and the Fixed Account is discussed under "The
Fixed Account." The portion of the Policy Value based on the Investment Accounts
is not guaranteed and will vary each Business Day with the investment
performance of the underlying Mutual Funds.
It is possible that the investment performance would cause the loss of the
entire amount allocated to the Investment Accounts. Absent additional payments,
investment in the Fixed Account or a death benefit guarantee rider, this could
result in no death benefit upon the insured's death.
An Investment Account is established under each Policy for each Division of
the Separate Account to which Net Premiums or transfer amounts have been
allocated. Each Investment Account under a Policy measures the interest of the
Policy in the corresponding Division. The value of the Investment Account
established for a particular Division is equal to the number of Units of that
Division credited to the Policy times the value of those Units.
Units of a particular Division are credited to a Policy when Net Premiums
are allocated to that Division or amounts are transferred to that Division.
Units of a Division are cancelled when amounts are deducted, transferred or
withdrawn from the Division. The number of Units credited or cancelled for a
specific transaction is based on the dollar amount of the transaction divided by
the value of the Unit at the end of the Business Day on which the transaction
occurs. The number of Units credited with respect to a premium payment will be
based on the applicable Unit values at the end of the Business Day on which the
premium is received at the Company's home office.
Units are valued at the end of each Business Day. A Business Day is deemed
to end at the time of the determination of the net asset value of the Mutual
Fund shares. When an order involving the crediting or cancelling of Units is
received at the Company's home office after the end of a Business Day or on a
day which is not a Business Day, the order will be processed on the basis of
Unit values determined at the end of the next Business Day. Similarly, any
determination of Policy Value, Investment Account value or death benefit to be
made on a day which is not a Business Day will be made at the end of the next
Business Day.
The value of a Unit of each Division was initially fixed at $10. For each
subsequent Business Day the Unit value is determined by multiplying the Unit
value for the preceding Business Day by the "net investment factor" for the
particular Division for such subsequent Business Day. The net investment factor
for a Division for any Business Day is equal to (a) divided by (b), where:
(a) is the net asset value of the underlying Mutual Fund shares held by
that Division at the end of such Business Day before any policy
transactions are made that day; and
(b) is the net asset value of the underlying Mutual Fund shares held by
that Division at the end of the immediately preceding Business Day
after all policy transactions have been made for that day.
The Company reserves the right to adjust the above formula for any taxes
determined by it to be attributable to the operations of the Division.
Transfers
The policyowner may transfer amounts among the Investment Accounts and the
Fixed Account on either an unscheduled or a scheduled basis.
Transfers From an Investment Account
Unscheduled Transfers. Transfers of amounts from one Investment Account
to another or to the Fixed Account can be made by the policyowner. A
transfer from an Investment Account to the Fixed Account may not be
made if a transfer from the Fixed Account to an Investment Account has
been made within the six-month period prior to the date of the
requested transfer or if immediately after the transfer to the Fixed
Account the policyowner's Fixed Account Value exceeds $1 million. The
amount to be transferred may be stated as a dollar amount or as a
percentage of the value of the Investment Account from which the
transfer is to be made. The amount transferred from each Investment
Account must equal or exceed the lesser of $100 or 100% of the
policyowner's interest in the Investment Account. Transfers may be
completed by sending a Written Request to the Company at its home
office, or by telephone as described below. (See "Service Available by
Telephone.")
All or part of the values in one or more Investment Accounts may be
transferred at one time. Transfers from an Investment Account will be
executed and values will be determined in connection with the transfers
at the next computed Unit value after the Company receives the transfer
request. There is currently no charge for the transfer but the Company
reserves the right to impose charges (not to exceed $25 per transfer)
on unscheduled transfers after the twelfth such transfer during a
Policy Year. For this purpose, all transfers between and among the
Investment Accounts and the Fixed Account will be treated as one
transfer, if all the transfer requests are made at the same time as
part of one request. The Company also reserves the right to reject
transfer instructions submitted for multiple contracts if the
instructions are provided by a person other than the policyowner.
Scheduled Transfers. The policyowner may elect to have automatic
transfers completed on a periodic basis from any Investment Account.
Scheduled transfers may be initiated from an Investment Account only if
the value of the Investment Account equals or exceeds $2,500 when
scheduled transfers begin. A policyowner may establish scheduled
transfers by sending a Written Request to the Company at its home
office or by telephone. (See "Service Available by Telephone.")
Scheduled transfers will be completed on a monthly, quarterly,
semiannual or annual basis on the date (other than the 29th, 30th or
31st) specified by the policyowner. The amount of the scheduled
transfers (minimum of $100) will be the dollar amount or percentage of
the value of the Investment Account as of the later of the Policy Date
or most recent Anniversary Date, as specified by the policyowner.
Scheduled transfers will continue until the Policy Value in the
Investment Account from which such transfers are made is exhausted or
until the policyowner notifies the Company to discontinue such
transfers. The Company reserves the right to limit the number of
Investment Accounts from which transfers will be made simultaneously,
but in no event will such limitation be less than two Investment
Accounts.
Transfer From The Fixed Account
Transfers from the Fixed Account have special limitations which are
described below. A policyowner may not make both an unscheduled transfer and
scheduled transfers from the Fixed Account during the same Policy Year.
Unscheduled Transfer. An unscheduled transfer in an amount not to
exceed 25% of the policyowner's Fixed Account value as of the later of
the Policy Date or the last Anniversary, may be made each Policy Year
during the 30-day period following the Policy Date or Anniversary. A
transfer request must be made by the policyowner within such 30-day
period. The minimum transfer amount is $100 (or, if less, the entire
amount of the Fixed Account value).
Scheduled Transfers. The policyowner may elect to have automatic
transfers completed on a monthly basis from the Fixed Account to one or
more Investment Accounts. Scheduled transfers are available from the
Fixed Account only if the policyowner's Fixed Account value equals or
exceeds $2,500 at the time scheduled transfers begin. (The Company
reserves the right to change that amount but it will never exceed
$10,000.) A policyowner may establish scheduled transfers by sending a
Written Request to the Company at its home office or by telephone (See
"Service Available by Telephone"). Scheduled transfers will be
completed on a monthly basis on the date (other than the 29th, 30th or
31st) specified by the policyowner. The amount of the monthly transfers
(minimum $50) will be the dollar amount specified by the policyowner
or, if elected by the policyowner, a percentage of the Fixed Account
Value as of the later of the Policy Date or the most recent Anniversary
Date, or if requested by the policyowner, the date the Company receives
the request. In no event shall the monthly amount be more than 2% of
the Fixed Account value as of the applicable date, as specified by the
policyowner. Scheduled monthly transfers will continue until the Fixed
Account value is exhausted or until the policyowner notifies the
Company to discontinue the scheduled transfers. The amount of these
scheduled transfers can be changed by the policyowner once each Policy
Year, by Written Request or by telephone. If the policyowner
discontinues the scheduled transfers, these transfers may not begin
again until six months after the date of the last scheduled transfer.
Policy Loans
So long as a Policy remains in effect and the Policy has Net Surrender
Value, a policyowner may borrow money from the Company using the Policy as the
only security for the loan. The maximum amount that may be borrowed is 90% of
the Net Surrender Value of the Policy as of the date a loan request is processed
at the Company's home office.
The minimum amount of any policy loan is $500. Proceeds of policy loans
ordinarily will be disbursed within five Business Days from the date of receipt
of a Written Request at the Company's home office. (See "Postponement of
Payments." )
When a policy loan is taken, a portion of the Policy Value equal to the
amount of the loan is transferred from the Fixed Account and/or the Investment
Accounts to the Loan Account 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 in the same proportion as the allocation used for
the most recent Monthly Policy Charge. Any loan interest that is due and unpaid
will be transferred in the same manner. The Loan Account will be credited
interest from the date of transfer. During the first ten Policy Years, the Loan
Account will earn interest at an annual rate of six percent. After the tenth
Policy Anniversary, the Loan Account will earn interest at an annual rate of
7.75%. Loan repayments will be allocated among the Fixed Account and the
Investment Accounts 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 at an annual rate of 8.0%
percent. Interest accrues daily and 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 same rate. Adding unpaid interest to the loan principal will
cause additional amounts to be withdrawn from the Fixed Account and/or
Investment Accounts in the same manner as described above for loans. Amounts
withdrawn 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 Policy Charges on a Monthly
Date. If on any Monthly Date occurring after a policy loan is taken the Net
Surrender Value is not sufficient to pay the Monthly Policy Charges, the 61-day
grace period provision will apply. (See "Policy Termination.")
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 if a loan is
outstanding. Loan Account values equal to the loan repayment will be transferred
to the Fixed Account and/or Investment Accounts 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
Value. If the policy loan had not been made, the Policy Value would have
reflected the investment experience of the Investment Accounts and/or the
interest credited to the Fixed Account. 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 the Policy Value
payable at maturity.
Total and Partial Surrenders
A Policy has a Surrender Value and a Net Surrender Value. The Surrender
Value of a Policy is the Policy Value less the Surrender Charge. The Net
Surrender Value of a Policy is its Surrender Value less any loans and loan
interest. While 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. 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.")
After the second Policy Anniversary and so long as a Policy is in effect,
a policyowner may request a partial surrender from the Net Surrender Value, but
no more than two times per Policy Year. The minimum amount of a partial
surrender is $500 and the maximum amount that may be surrendered in a Policy
Year is 75% of the Net Surrender Value as of the date of the first partial
surrender. 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. No Surrender
Charge is assessed upon a partial surrender. The Policy Value is reduced 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 face amount also is reduced by the amount of the partial surrender
and the transaction charge.
A policyowner may designate the amount of the partial surrender and
transaction charge to be withdrawn from the Fixed Account and/or each Investment
Account. If no designation is made, the amount of the partial surrender and the
transaction charge will be withdrawn in the same proportion as the allocation
instruction in effect for the Monthly Policy Charge. The amount surrendered will
be withdrawn from the Policy on a last in, first out basis.
Proceeds from partial or total surrender of a Policy will ordinarily be
disbursed within five Business Days from the date of receipt of a Written
Request at the Company's home office. (See "Postponement of Payments.")
DEATH BENEFITS AND RIGHTS
Death Proceeds
As long as a Policy remains in force, the Company will, upon proof of the
insured's death and receipt of all additional claim requirements, 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 unpaid loans and
loan interest on the Policy, and less any overdue Monthly Policy Charges 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 credited 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 Policy Value. Under Option 1, the amount of death benefit remains
level (until the Policy Value exceeds certain limits). Under Option 2, the total
death benefit increases as the Policy Value increases. Thus, Option 1 emphasizes
the growth of Policy 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 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 Policy Value on the date of death or the Policy 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 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
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 unpaid policy loans or
loan interest at the time of death, and that the face amount of the Policy is
$50,000.
Under Option 1, because the death benefit will be equal to or greater than
250% of the Policy Value under this illustrative Policy, any time the Policy
Value of the Policy exceeds $20,000, the death benefit will exceed the Policy's
$50,000 face amount. Each additional dollar added to Policy Value above $20,000
will increase the death benefit by $2.50. Similarly, any time Policy Value
exceeds $20,000, each dollar taken out of Policy Value will reduce the death
benefit by $2.50. If, for example, the Policy Value is reduced from $24,000 to
$20,000 because of charges or negative investment performance, the death benefit
will be reduced from $60,000 to $50,000. If, however, at any time in this
illustration 250% of the Policy Value is less than $50,000 and no partial
surrenders have been made, the death benefit will equal $50,000. 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
$50,000.
Under Option 2, a Policy with an Policy Value of $10,000 will have a death
benefit of $60,000 ($50,000 + $10,000); a Policy Value of $30,000 will yield a
death benefit of $80,000 ($50,000 + $30,000). The death benefit under this
illustrative Policy, however, must be at least equal to 250% of Policy Value
(Policy Value plus 150% of Policy Value). As a result, if the Policy Value of
the Policy exceeds $33,334, the death benefit will be greater than the face
amount plus Policy Value. Each additional dollar of Policy Value above $33,334
will increase the death benefit by $2.50. A contract on a 40-year old insured
that has an Policy Value of $40,000 will provide a death benefit of $100,000
(250% x $40,000). Similarly, any time Policy Value exceeds $33,334, each dollar
taken out of Policy Value reduces the death benefit by $2.50. If, for example,
the Policy Value is reduced from $40,000 to $34,000 because of partial
surrenders, charges, or negative investment performance, the death benefit will
be reduced from $100,000 to $85,000. If, however, at any time in this
illustration 250% of the Policy Value were less than $50,000 plus Policy Value,
the death benefit would be $50,000 plus the Policy 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 Policy Charges.
Change in Death Benefit Option
A policyowner may make a Written Request to change the death benefit option
on or after the second Policy Anniversary. 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 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 $50,000.
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 guidelines 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 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 and the
policyowner is not receiving benefits under a waiver rider. If the face amount
of the Policy is increased during the first twenty-four policy months, the
Minimum Required Premium will increase for the remainder of the twenty-four
month period following the date of the face amount increase. A policyowner may
make a Written Request to decrease the face amount at any time on or after the
second Policy Anniversary so long as the Policy is not in a grace period and
Monthly Policy Charges 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 and an adjustment application, signed by the
policyowner and the insured, and shall be subject to evidence of
insurability satisfactory to the Company under its underwriting
guidelines then in effect. The minimum increase in face amount is
$50,000. The age of the insured must be 85 or less at the time of the
request.
2. A request for a decrease in face amount must be applied for by an
adjustment application, signed by the Policyowner and the insured, and
may not reduce the face amount of the Policy below $50,000.
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.
If a payment in an amount greater than or equal to the adjustment
conditional receipt premium deposit is submitted with the adjustment
application, then a conditional receipt is given to the policyowner reflecting
receipt of the payment and outlining any interim insurance coverage provided by
the conditional receipt. The adjustment conditional receipt premium deposit is
that amount calculated by the Company and provided to the policyowner in
connection with the policyowner's request for a face amount increase. 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 exiting directions for allocation of premium
payments.
There is no free look period with respect to any increase in face amount.
Any increase in face amount will, however, carry its own exchange right, which
will apply only to the increase in face amount, not the entire Policy. 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 Value attributable to the increase
will be transferred to the fixed benefit policy. The portion of the Policy Value
attributable to the increase in face amount is determined by use of the ratio of
the face amount of the increase over the face amount of 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 unpaid 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." )
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
Value on a monthly basis, and other charges will be deducted from the Policy
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 Policy Value.
Premium Expense Charge
Upon receipt of each premium payment, the Company deducts a Premium Expense
Charge. The Premium Expense Charge includes a charge of 2.20% for state and
local taxes and a charge of 1.25% for federal taxes. The charges for state,
local and federal taxes are not expected to exceed these taxes. The charge also
includes a premium sales load of 2.75% for premium payments less than or equal
to the Target Premium and .75% for premium payments in excess of Target Premium
made during each of the first ten Policy Years and, with respect to premiums
attributable to any face amount increase, made during each of the first ten
years following the increase. 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.
Monthly Policy Charge
On each Monthly Date, the Company will deduct from the Policy Value an
amount to cover certain charges and expenses incurred in connection with the
Policy. The Monthly Policy Charge deduction is made only from the Policy Value
held in the Fixed Account and/or Investment Accounts. No deduction is made from
a Loan Account . The Monthly Policy Charge will be allocated among the
Investment Accounts and the Fixed Account in accordance with policyowner
instruction on the application for the Policy. The policyowner's choice of
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 the Fixed Account or each
Investment Account, the allocation percentage 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 would not be possible on any Monthly
Date due to insufficient value in the Fixed Account and/or Investment Accounts,
Monthly Policy Charges will be deducted on a Prorated Basis. The deduction for
the Monthly Policy Charge consists of a charge for the cost of insurance and a
charge for any optional benefits added by rider, a monthly administration
charge, and a mortality and expense risks charge.
Cost of Insurance Charge
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 Policy Value at the beginning of the policy month calculated as
if the Monthly Policy Charges were zero.
The cost of insurance rate is based on the gender, issue age, duration
since issue, smoking status 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 gender 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 gender of the insured (where allowed by law). Any change
in current cost of insurance rates will apply to all individuals of the same
age, gender and risk classification of the insured. However, different maximum
cost of insurance rates may apply to any face amount increases under a Policy.
The cost of insurance rate for a face amount increase is based on the insured's
gender (where allowed by law), age at time of increase, duration since increase,
smoking status and risk classification of the insured at the time of the
increase.
Administration Charge
The current monthly administration charge for a Policy during the first
Policy Year is an amount equal to $.40 for each $1,000 of Policy face amount,
but not less than $6.00 per month and not greater than $16.67 per month. After
the first Policy Year, the monthly administration charge for a Policy is
currently set at $6.00 per month. The monthly administration charge is
guaranteed not to exceed an amount equal to the greater of $.60 for each $1,000
of Policy face amount or $10.00 per month, but no more than $25.00 per month
during the first Policy Year and no more than $10.00 per month after the first
Policy Year. 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. (See "Surrender Charge.") 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,
recordkeeping, 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.
Mortality and Expense Risks Charge
The Company deducts a monthly charge from the Policy Value for the
mortality and expense risks it assumes under the Policies. This charge is made
on each Monthly Date at an annual rate of .90% of the value of the policyowner's
Investment Accounts. The charge is currently reduced to an annual rate of .27%
after the ninth Policy Year. The Company reserves the right to increase the .27%
charge, subject to the guaranteed maximum annual rate of .90%. If the Company
increases the charge such increase will be applicable only to Policies issued on
or after the date of the increase. The mortality risk assumed is that lives
insured may live for a shorter period of time than the Company estimated. The
expense risk assumed is that expenses incurred in issuing and administering the
Policies will be greater than the Company estimated. The Company will realize a
gain from this charge to the extent it is not needed to provide benefits and pay
expenses under the Policies.
Transaction Charge
A transaction charge of the lesser of $25 or 2% of the amount being
surrendered is imposed on each partial surrender of Policy Value. A transaction
charge of $25 may be imposed on each unscheduled transfer of Policy Value among
the Investment Accounts exceeding twelve 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. 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. Thus, surrender of a
Policy or termination of a Policy for insufficient value within the first ten
Policy Years and within ten Policy 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. 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. All or a
portion of the Surrender Charge will be partially or completely waived on
Policies issued with an accounting benefit rider upon total surrender in early
Policy Years. An accounting benefit rider is a rider issued to a corporate owner
of a Policy designed to permit the corporation to include greater Policy Value
amounts on its Statement of Net Assets in early Policy Years than would
otherwise be possible.
The Surrender Charge is comprised of two parts: A contingent deferred sales
charge and a contingent deferred administration charge.
Contingent Deferred Sales Charge
The contingent deferred sales charge is equal to 47.25% of premiums paid up
to a maximum of two Target Premiums for insureds under age 66. This charge is
reduced for insureds in accordance with the following table:
Insured's Age Applicable
on Issue or Contingent Deferred
Adjustment Date Sales Charge
65 and under 47.25% on premiums paid up to 2.0 x Target Premium
66-70 47.25% on premiums paid up to 1.5 x Target Premium
71-75 47.25% on premiums paid up to 1.1 x Target Premium
76-80 47.25% on premiums paid up to 0.8 x Target Premium
81-85 47.25% on premiums paid up to 0.5 x Target Premium
The contingent deferred sales charge portion of the Surrender Charge is
assessed to recover sales expenses and is in addition to the 2.75% and .75%
premium sales load which is deducted when premium payments are made.
Contingent Deferred Administration Charge
The contingent deferred administration charge is equal to $3 per $1,000 of
Policy face amount, but no greater than $1,500 per Policy. 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.
Surrender Charge Percentage
The Surrender Charge during any Policy Year is equal to the sum of the
contingent deferred sales charge and the contingent deferred administration
charge multiplied by the applicable surrender percentage as shown below.
Policy Year of Surrender Surrender Charge Percentage
------------------------ ---------------------------
1-5 100.00%
6 95.24%
7 85.71%
8 71.43%
9 52.38%
10 28.57%
11+ 0.00%
The Surrender Charge applicable to a face amount increase will be
determined by multiplying the increase in the face amount, in thousands, by the
contingent deferred administration charge on the increase in face amount
(subject to the $1,500 limit per Policy) and adding the premium attributable to
the face amount increase (up to a maximum of two Target Premiums) multiplied by
the contingent deferred sales charge (47.25%). The premium attributable to the
increase in face amount is determined by use of the ratio of the face amount of
the increase over the face amount of the Policy determined at the adjustment
date for the face amount increase.The contingent deferred sales charge is
reduced for insureds age 66 or older at the Issue or Adjustment Date as
discussed above under the heading "Contingent Deferred Sales Charge." The sum of
these amounts is then multiplied by the Surrender Charge percentage in the above
table to determine the Surrender Charge.
Surrender Charges following a Policy's reinstatement commence at the rate
in effect at the time of the Policy's termination.
Sales Charge Limitations
If a Policy is surrendered at any time during the first two years after
issuance or after an increase in face amount, the Company will forego taking
that part of the deferred sales charge with respect to "premiums" paid for the
initial face amount or such increase, whichever is applicable, which would cause
the total sales load (premium sales load portion of the Premium Expense Charge
deducted from premium payments plus contingent deferred sales charge) to exceed
the sum of (i) 30% of the premiums paid up to the lesser of one guideline annual
premium or the maximum amount of premiums subject to the deferred sales charge
plus (ii) 10% of the premiums paid in excess of one guideline annual premium, up
to the lesser of two guideline annual premiums or the maximum amount of premiums
subject to the deferred sales charge.
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 and
total operating expenses for each of the Mutual Funds is provided under the
heading "Separate Account". These fees and expenses are fully described in the
prospectus for each of the Mutual Funds.
Special Provisions for Group or Sponsored Arrangements
Where permitted by state insurance laws, Policies may be purchased under
group or sponsored arrangements, as well as on an individual basis. A "group
arrangement" includes a program under which a trustee, employer or similar
entity purchases Policies covering a group of individuals on a group basis. A
"sponsored arrangement" includes a program under which an employer permits group
solicitation of its employees or an association permits group solicitation of
its members for the purchase of Policies on an individual basis.
The charges and deductions described above may be reduced for Policies
issued in connection with group or sponsored arrangements. Such arrangements may
include sales without premium sales loads and/or Surrender Charges to employees,
officers, directors, agents, immediate family members of the foregoing, and
employees of agents of the Company and its subsidiaries. The Company will reduce
the above charges and deductions in accordance with its rules in effect as of
the date an application for a Policy is approved. To qualify for such a
reduction, a group or sponsored arrangement must satisfy certain criteria as to,
for example, size of the group, expected number of participants and anticipated
premium payments from the group. Generally, the sales contacts and effort,
administrative costs and mortality cost per Policy vary based on such factors as
the size of the group or sponsored arrangements, the purposes for which Policies
are purchased and certain characteristics of its members. The amount of
reduction and the criteria for qualification will reflect the reduced sales
effort and administrative costs resulting from, and the different mortality
experience expected as a result of, sales to qualifying groups and sponsored
arrangements.
The Company may modify from time to time, on a uniform basis, both the
amounts of reductions and the criteria for qualification. Reductions in these
charges will not be unfairly discriminatory against any person, including the
affected policyowners and all other policyowners with policies funded by the
Separate Account.
In addition, groups and persons purchasing under a sponsored arrangement
may apply for flexible underwriting. If flexible underwriting is granted, the
cost of insurance charge may increase as a result of higher anticipated
mortality experience. Flexible underwriting programs currently available include
batch underwriting, expanded nonmedical underwriting and guaranteed issue
underwriting.
THE FIXED ACCOUNT
Policyowners may allocate Net Premiums and transfer amounts from the
Separate Account to the Fixed Account, in which case such amounts are held in
the General Account of the Company. Because of exemptive and exclusionary
provisions, interests in the Fixed Account have not been registered under the
Securities Act of 1933 and the General Account has not been registered as an
investment company under the Investment Company Act of 1940. Accordingly,
neither the Fixed Account nor any interests therein are subject to the
provisions of these Acts and, as a result, the staff of the Securities and
Exchange Commission has not reviewed the disclosures in this prospectus relating
to the Fixed Account. Disclosures regarding the Fixed Account may, however, be
subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses. This prospectus is generally intended to serve as a disclosure
document only for the aspects of the Policy involving the Separate Account and
contains only selected information regarding the Fixed Account. More information
regarding the Fixed Account may be obtained from the Company's home office or
from a sales representative.
The Company's obligations with respect to the Fixed Account are supported
by the Company's General Account. Subject to applicable law, the Company has
sole discretion over the investment of the assets in the General Account.
The Company guarantees that Net Premiums allocated to the Fixed Account
will accrue interest daily at an effective annual interest rate of not less than
3% compounded annually. In its sole discretion, the Company may credit a higher
rate of interest.
Charges under the Policy are the same as when the Separate Account is being
used, except that the mortality and expense risks charge is not imposed on
amounts of Policy Value in the Fixed Account. The value of the Fixed Account on
any Business Day is the sum of the Net Premiums allocated to the Fixed Account,
plus any transfers from the Separate Account, plus interest credited to the
Fixed Account, less surrenders, Surrender Charges, Monthly Policy Charges or
transaction fees allocated to the Fixed Account or transfers to the Separate
Account.
POLICY TERMINATION AND REINSTATEMENT
Policy Termination
An initial minimum premium payment is required to commence coverage under a
Policy. A minimum premium is required during the first twenty-four policy months
(the "Minimum Required Premium"). A notice of impending termination of a Policy
will be sent if during the 24 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 current data pages ; and
2. Is the number of completed months since the Policy Date.
Further, a notice of impending termination of a Policy will be sent if, 24
months after the Policy Date or later, or any time after a policy loan is taken,
the Net Surrender Value of the Policy is not at least equal to the Monthly
Policy Charge on the current Monthly Date and, if the Policy has a death benefit
guarantee rider, the death benefit guarantee premium requirement has not been
satisfied. Payment of a planned periodic premium does not ensure that the Policy
will not enter a grace period 24 months or later following the Policy Date.
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 (1) minus (2) where:
1. Is the Minimum Required Premium due on the second Monthly Date
following the beginning of the grace period; and
2. Is the sum of the premiums paid since the Policy Date.
If the grace period ends before receipt by the Company of the minimum
payment described above, the Company will pay to the policyowner any remaining
value in the Policy which would be (1) minus (2) where:
1. Is the Net Surrender Value on the Monthly Date on or immediately
preceding the start of the grace period; and
2. Is the two Monthly Policy Charges applicable during the grace period.
If the grace period begins because the Net Surrender Value is less than the
current Monthly Policy Charge, the minimum payment is equal to (1) plus (2)
divided by (3) where:
1. Is the amount by which the Surrender Charge exceeds the Accumulated
Value on the Monthly Date on or immediately preceding the start of the
grace period;
2. Is three Monthly Policy Charges; and
3. Is 1 minus the maximum Premium Expense Charge.
If the grace period ends before we receive the minimum payment, the Company
will keep any remaining value in the Policy.
This payment is intended to reimburse the Company for the Monthly Policy
Charges during the 61-day grace period and provide sufficient Policy Value to
pay the Monthly Policy Charge 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 Monthly Policy Charges as they
are processed. Should the Policy's Net Surrender Value not at least equal the
Monthly Policy Charges 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 all Monthly Policy Charges 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 failure to pay the Minimum Required Premium on a Monthly Date during the 24
months following the Policy Date, or as a result of insufficient value, 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
guidelines then in effect and payment of a reinstatement premium are required.
The reinstatement premium must be at least the greater of ((1) plus (2) divided
by (3)) or ((4) minus (5)) where:
1. Is the amount by which the Surrender Charge exceeds the Accumulated
Value on the Monthly Date on or immediately preceding the start of the
grace period;
2. Is three Monthly Policy Charges;
3. Is one minus the maximum Premium Expense Charge;
4. Is the Minimum Required Premium due on the second Monthly Date
following the beginning of the grace period; and
5. Is the sum of the premiums paid since the Policy Date.
Payment of Monthly Policy Charges 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 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.
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 Policy 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 adviser 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 semiannual report to
policyowners.
Statement of Values
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 Policy Value and Surrender Value;
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;
9. any investment gain or loss since the last statement;
10. the designated beneficiary or beneficiaries;
11. all riders included with the Policy; and
12. a detailed summary of activity which occurred during the Policy Year.
Any policyowner may request at any time a current statement of account
values, transactions and activities by telephoning 1-800-247-9988.
The Company will also send to the policyowner the reports required by the
Investment Company Act of 1940.
Service Available by Telephone
Unless telephone transaction services are declined on the supplemental
application for a Policy, or at any subsequent time the policyowner notifies the
Company in writing to remove telephone transaction services, certain
transactions, including transfers permitted by the Policy, Policy loans (Policy
loan proceeds will be mailed only to the policyowner's address of record),
changes in the allocation of future premium payments and changes in allocation
of the Monthly Policy Charge, may be made pursuant to telephone instructions.
The telephone transactions may be exercised by telephoning 1-800-247-9988.
Telephone transfer requests must be received by the close of the New York Stock
Exchange on a day when the Company is open for business to be effective that
day. Requests made after that time or on a day when the Company 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 procedures include recording all
telephone instructions, requesting personal 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. If the Company eliminates or combines existing
Divisions or transfers assets in one Division to another, 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. 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 Policy Charges or waiving of premium payments upon
disability, accelerating benefits in the event of terminal illness, providing
cost of living increases in benefits, providing a death benefit guarantee,
providing extended coverage beyond the Maturity Date, and, in the case of
business-owned Policies, permitting a change of the life insured, providing face
amount increases that reflect salary increases, providing extra protection
increases 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 Policy Charge.
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
Policy Charges on a Monthly Date. This rider is automatically made a part of a
Policy if the issue age of the insured is under age 65 and (where permitted by
law) the planned periodic premium is equal to or greater than the death benefit
guarantee premium. The rider terminates on the later of the Policy Anniversary
following the insured's 65th birthday or five years after the effective date of
the rider. 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 the number of months the Policy has been in
force, less one month. The death benefit guarantee premium is based on the issue
age, gender (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 a
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.
The Contract
The Policy, the application attached to it, any supplemental application,
any adjustment applications, any amendments to the application and the current
data pages 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 gender of the insured has been misstated in an application,
including a reinstatement application, the death benefit under the Policy will
be that which would be purchased by the most recent mortality charge at the
correct age and gender.
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 that 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 to or from an
Investment Account 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 five Business
Days after the Company receives due proof of death. Payments may be postponed in
certain circumstances. (See "Postponement of Payments.") 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, semiannually, 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 Policy 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 several insurance policies
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 Effective 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 gender, issue age, and risk classification of the
insured under the Policy. An equitable adjustment in the new policy's payments
and cash or Policy Values will be made to reflect variances, if any, in the
payments and Policy 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, gender 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.")
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.")
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 Policies
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 gender of the insured. In addition, commissions will include 0% to 3% 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 Policies distributed by
broker-dealers other than the principal underwriter will vary.
The Company has entered into a distribution agreement with Princor
Financial Services Corporation. Princor Financial Services Corporation is also
the principal underwriter for various 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):
JOHN EDWARD ASCHENBRENNER Senior Vice President
RAY STEPHENS CRABTREE Executive Vice President
THOMAS JEFFERSON GAARD Senior Vice President
MICHAEL HARRY GERSIE Senior Vice President
THOMAS JOHN GRAF Senior Vice President
JOHN BARRY GRISWELL Executive Vice President
RONALD EUGENE KELLER Executive Vice President
GREGG ROSS NARBER Senior Vice President and General Counsel
CHARLES EDWARD ROHM Executive Vice President
<TABLE>
<CAPTION>
Principal Occupation
Name, Positions and Offices During Last 5 Years
- --------------------------- -------------------
<S> <C>
MARY VERMEER ANDRINGA President and Chief Operating Officer, Vermeer Manufacturing Company.
Director
Member, Nominating Committee
RUTH MARGARET DAVIS President and Chief Executive Officer, The Pymatuning Group, Inc.
Director
Member, Nominating Committee
DAVID JAMES DRURY Chairman and Chief Executive Officer, Principal Mutual Life
Director Insurance Company since January 1995. President and Chief Executive
Chairman of the Board Officer from 1994 - 1995; President from 1993-1994;
Chair, Executive Committee Executive Vice President from 1992 - 1993; Executive Vice President and
Chief Actuary 1992; prior thereto, Senior Vice President and
Chief Actuary.
CHARLES DANIEL GELATT, JR. President, NMT Corporation.
Director
Member, Executive and
Human Resources Committees
GERALD DAVID HURD Retired. Chairman and Chief Executive Officer, Principal Mutual Life Insurance
Director Company 1989 - 1994.
Member, Executive and
Human Resources Committee
THEODORE MURTAGH HUTCHISON Vice Chairman, Principal Mutual Life Insurance Company since August 1994. Prior
Director thereto, Executive Vice President.
CHARLES SAMUEL JOHNSON Chairman, President and Chief Executive Officer, Pioneer Hi-Bred International, Inc.
Director since December 1996. President and Chief Executive Officer September 1995 -
Member, Audit Committee December 1996. President and Chief Operating Officer March 1995 - September 1995. Executive Vice
President 1993 - March 1995. Prior thereto, Senior Vice President.
WILLIAM TURNBALL KERR President & Chief Executive Officer, Meredith Corporation since 1997. President and
Director Chief Operating Officer 1994 - 1997. Prior thereto, Executive Vice President.
Member, Nominating Committee
LEE LIU Chairman and Chief Executive Officer, IES Industries, Inc., since November 1996. Prior
Director thereto, Chairman, President and Chief Executive Officer.
Member, Executive and Human
Resources Committees
VICTOR HENDRIK LOEWENSTEIN Managing Partner, Egon Zehnder International
Director
Member, Audit Committee
RONALD DALE PEARSON Chairman, President and Chief Executive Officer, Hy-Vee, Inc.
Director
Member, Human Resources Committee
JOHN ROY PRICE Managing Director, The Chase Manhattan Corporation since April, 1996. Prior
Director thereto, Managing Director, Chemical Banking Corporation.
Chair, Audit Committee
BARBARA ANN RICE Principal, The Alliance for Effective Organizations, Inc., since 1994. Prior thereto, Vice
Director President - Human Resources, Scott Paper Company.
Member, Human Resources Committee
JEAN-PIERRE CHARLES ROSSO Chairman, President and Chief Executive Officer, Case Corporation since March
Director 1996. President and Chief Executive Officer April 1994-March 1996. Prior thereto,
Member, Audit Committee President, Honeywell, Inc.
DONALD MITCHELL STEWART President, The College Board.
Director
Chair, Nominating Committee
ELIZABETH EDITH TALLETT President & CEO of Dioscor, Inc. & Serex, Inc. since 1996. President and Chief
Director Executive Officer, Transcell Technologies, Inc. 1992 - 1996.
Member, Audit Committee
DEAN DICKSON THORNTON Retired since 1993. Prior thereto President, Boeing Commercial Airplane Group.
Director
Chair, Human Resources Committee
FRED WILLIAM WEITZ President, Chairman of the Board and Chief Executive Officer, Essex Meadows, Inc.
Director since 1995. Prior thereto, President, Chairman of the Board, and Chief Executive
Member, Executive and Nominating Officer, The 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 to 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 Policy (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 the
partial 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 Assignments 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 policyowner 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 gender. 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 Gregg R. Narber, Senior Vice President and General Counsel of the
Company.
INDEPENDENT AUDITORS
The financial statements of Principal Mutual Life Insurance Company
Variable Life Separate Account and the consolidated financial statements of The
Principal Financial Group(R) (comprised of Principal Mutual Life Insurance
Company and its subsidiaries) 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.
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, 1996, 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, 1996, 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, 1996, 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.
/s/ Ernst & Young
Des Moines, Iowa
February 7, 1997
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Statement of Net Assets
December 31, 1996
Assets
Investments:
Balanced Division:
Principal Balanced Fund, Inc. - 300,877 shares at net asset value
<S> <C>
of $14.44 per share (cost - $4,029,659) $ 4,344,657
Bond Division:
Principal Bond Fund, Inc. - 144,996 shares at net asset value of $11.33 per share (cost -
$1,652,187) 1,642,800
Capital Accumulation Division:
Principal Capital Accumulation Fund, Inc. - 235,315 shares at net asset value of $29.84 per
share (cost - $6,455,408) 7,021,808
Emerging Growth Division:
Principal Emerging Growth Fund, Inc. - 460,827 shares at net asset value of $29.74 per share
(cost - $11,072,205) 13,704,998
High Yield Division:
Principal High Yield Fund, Inc. - 151,981 shares at net asset value of $8.72 per share (cost -
$1,319,073) 1,325,273
Money Market Division:
Principal Money Market Fund, Inc. - 1,305,482 shares at net asset value of $1.00 per share
(cost - $1,305,482) 1,305,482
--------------------
====================
Net assets $29,345,018
====================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unit
Units Value
------------- ------------
------------- ------------
Net assets are represented by:
<S> <C> <C> <C>
Balanced Division 190,477 $22.81 $ 4,344,657
Bond Division 80,628 20.38 1,642,800
Capital Accumulation Division 266,347 26.36 7,021,808
Emerging Growth Division 418,635 32.74 13,704,998
High Yield Division 67,188 19.72 1,325,273
Money Market Division 86,858 15.03 1,305,482
--------------------
====================
Net assets $29,345,018
====================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Statements of Operations
Combined
--------------------------------------------------------
Year ended December 31
1996 1995 1994
------------------- -------------------- ---------------
------------------- -------------------- ---------------
Investment income
Income:
<S> <C> <C> <C>
Dividends $ 576,069 $ 376,014 $205,850
Capital gains distributions 1,240,739 429,058 211,019
------------------- -------------------- ---------------
------------------- -------------------- ---------------
1,816,808 805,072 416,869
Expenses:
Mortality and expense risks 160,075 95,590 55,513
------------------- -------------------- ---------------
------------------- -------------------- ---------------
Net investment income 1,656,733 709,482 361,356
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments 196,669 254,585 31,582
Change in net unrealized appreciation/
depreciation of investments 1,785,917 1,956,773 (442,230)
------------------- -------------------- ---------------
=================== ==================== ===============
Net increase (decrease) in net assets resulting from operations
$3,639,319 $2,920,840 $ (49,292)
=================== ==================== ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Balanced Division Bond Division Capital Accumulation Division
- ---------------------------------------- ------------------------------------------- ---------------------------------------------
Year ended December 31 Year ended December 31 Year ended December 31
1996 1995 1994 1996 1995 1994 1996 1995 1994
- -------- ---------------- -------------- ---------- --------------- ---------------- ------------- --------------- ---------------
- -------- ---------------- -------------- ---------- --------------- ---------------- ------------- --------------- ---------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$110,439 $ 85,937 $ 53,356 $92,610 $ 47,997 $ 33,025 $ 118,875 $ 79,394 $ 56,729
244,144 72,211 25,558 - - - 745,903 293,683 54,291
- -------- ---------------- -------------- ---------- --------------- ---------------- ------------- --------------- ---------------
- -------- ---------------- -------------- ---------- --------------- ---------------- ------------- --------------- ---------------
354,583 158,148 78,914 92,610 47,997 33,025 864,778 373,077 111,020
25,360 17,258 12,058 8,256 5,384 3,207 36,169 22,976 14,428
- -------- ---------------- -------------- ---------- --------------- ---------------- ------------- --------------- ---------------
- -------- ---------------- -------------- ---------- --------------- ---------------- ------------- --------------- ---------------
329,223 140,890 66,856 84,354 42,613 29,818 828,609 350,101 96,592
20,387 28,104 6,900 2,798 4,064 (2,792) 36,486 49,320 (13,565)
77,334 316,677 (120,904) (53,168) 85,230 (40,136) 247,560 433,439 (87,735)
- -------- ---------------- -------------- ---------- --------------- ---------------- ------------- --------------- ---------------
$426,944 $485,671 $ (47,148) $33,984 $131,907 $(13,110) $1,112,655 $832,860 $ (4,708)
======== ================ ============== ========== =============== ================ ============= =============== ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Statements of Operations (continued)
Emerging Growth Division
Year ended December 31
--------------------------------------------------------
1996 1995 1994
-------------------- ------------------ ----------------
-------------------- ------------------ ----------------
Investment income
Income:
<S> <C> <C> <C>
Dividends $ 99,423 $ 65,593 $ 26,319
Capital gains distributions 250,692 63,164 131,170
-------------------- ------------------ ----------------
-------------------- ------------------ ----------------
350,115 128,757 157,489
Expenses:
Mortality and expense risks 74,424 43,103 21,185
-------------------- ------------------ ----------------
-------------------- ------------------ ----------------
Net investment income 275,691 85,654 136,304
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments 136,928 172,414 42,332
Change in net unrealized appreciation/
depreciation of investments 1,479,684 1,127,081 (174,867)
-------------------- ------------------ ----------------
==================== ================== ================
Net increase in net assets resulting from operations
$1,892,303 $1,385,149 $ 3,769
==================== ================== ================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
High Yield Division Money Market Division
- -------------------------------------------------------------- ------------------------------------------------------------
Year ended December 31 Year ended December 31
1996 1995 1994 1996 1995 1994
- --------------------- ------------------- -------------------- ------------------- -------------------- -------------------
- --------------------- ------------------- -------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C>
$107,701 $72,460 $21,527 $47,021 $24,633 $14,894
- - - - - -
- --------------------- ------------------- -------------------- ------------------- -------------------- -------------------
- --------------------- ------------------- -------------------- ------------------- -------------------- -------------------
107,701 72,460 21,527 47,021 24,633 14,894
7,858 3,702 1,585 8,008 3,167 3,050
- --------------------- ------------------- -------------------- ------------------- -------------------- -------------------
- --------------------- ------------------- -------------------- ------------------- -------------------- -------------------
99,843 68,758 19,942 39,013 21,466 11,844
70 683 (1,293) - - -
34,507 (5,654) (18,588) - - -
- --------------------- ------------------- -------------------- ------------------- -------------------- -------------------
$134,420 $63,787 $ 61 $39,013 $21,466 $11,844
===================== =================== ==================== =================== ==================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets
Years ended December 31, 1996, 1995 and 1994
Combined
-------------------
-------------------
<S> <C>
Net assets at January 1, 1994 $ 5,802,494
Increase (decrease) in net assets
Operations:
Net investment income 361,356
Net realized gains (losses) on investments 31,582
Change in net unrealized appreciation/depreciation of investments (442,230)
-------------------
-------------------
Net increase (decrease) in net assets resulting from operations (49,292)
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes 7,030,808
Contract terminations and surrenders (200,983)
Death benefit payments (4,614)
Policy loan transfers (131,130)
Transfers to other contracts (2,149,666)
Cost of insurance and administration charges (1,002,937)
Surrender charges (41,439)
-------------------
-------------------
Increase in net assets from policy related transactions 3,500,039
-------------------
-------------------
Total increase 3,450,747
-------------------
-------------------
Net assets at December 31, 1994 9,253,241
Increase (decrease) in net assets
Operations:
Net investment income 709,482
Net realized gains on investments 254,585
Change in net unrealized appreciation/depreciation of investments 1,956,773
-------------------
Net increase in net assets resulting from operations 2,920,840
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes 9,511,939
Contract terminations and surrenders (514,344)
Death benefit payments (9,358)
Policy loan transfers (275,660)
Transfers to other contracts (2,602,796)
Cost of insurance and administration charges (1,539,242)
Surrender charges (66,485)
-------------------
Increase (decrease) in net assets from policy related transactions 4,504,054
-------------------
Total increase (decrease) 7,424,894
-------------------
Net assets at December 31, 1995 16,678,135
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Capital Emerging High Money
Balanced Bond Accumulation Growth Yield Market
Division Division Division Division Division Division
- --------------------- ----------------- ---------------------- -------------------- ------------------- --------------------
- --------------------- ----------------- ---------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
$1,481,045 $395,806 $1,663,662 $1,874,487 $179,298 $208,196
66,856 29,818 96,592 136,304 19,942 11,844
6,900 (2,792) (13,565) 42,332 (1,293) -
(120,904) (40,136) (87,735) (174,867) (18,588) -
- --------------------- ----------------- ---------------------- -------------------- ------------------- --------------------
- --------------------- ----------------- ---------------------- -------------------- ------------------- --------------------
(47,148) (13,110) (4,708) 3,769 61 11,844
805,108 288,736 1,149,226 2,765,121 120,265 1,902,352
(61,360) (4,871) (39,008) (83,480) (9,690) (2,574)
- - (3,319) (1,295) - -
(25,740) (3,819) (42,994) (59,784) (3,260) 4,467
(155,607) (92,188) (226,938) (284,168) (7,501) (1,383,264)
(178,431) (59,452) (218,560) (396,646) (32,323) (117,525)
(12,651) (1,004) (8,043) (17,212) (1,998) (531)
- --------------------- ----------------- ---------------------- -------------------- ------------------- --------------------
371,319 127,402 610,364 1,922,536 65,493 402,925
- --------------------- ----------------- ---------------------- -------------------- ------------------- --------------------
324,171 114,292 605,656 1,926,305 65,554 414,769
- --------------------- ----------------- ---------------------- -------------------- ------------------- --------------------
1,805,216 510,098 2,269,318 3,800,792 244,852 622,965
140,890 42,613 350,101 85,654 68,758 21,466
28,104 4,064 49,320 172,414 683 -
316,677 85,230 433,439 1,127,081 (5,654) -
- --------------------- ----------------- ---------------------- -------------------- ------------------- --------------------
- --------------------- ----------------- ---------------------- -------------------- ------------------- --------------------
485,671 131,907 832,860 1,385,149 63,787 21,466
1,036,158 444,236 1,633,021 4,022,336 673,413 1,702,775
(89,520) (24,317) (149,990) (238,336) (10,016) (2,165)
- - (2,336) (4,755) - (2,267)
(52,264) (4,770) (56,174) (159,532) (3,158) 238
(145,034) (52,638) (218,351) (338,865) (52,617) (1,795,291)
(233,775) (78,861) (313,935) (707,162) (60,938) (144,571)
(11,571) (3,144) (19,388) (30,806) (1,295) (281)
- --------------------- ----------------- ---------------------- -------------------- ------------------- --------------------
- --------------------- ----------------- ---------------------- -------------------- ------------------- --------------------
503,994 280,506 872,847 2,542,880 545,389 (241,562)
- --------------------- ----------------- ---------------------- -------------------- ------------------- --------------------
989,665 412,413 1,705,707 3,928,029 609,176 (220,096)
- --------------------- ----------------- ---------------------- -------------------- ------------------- --------------------
2,794,881 922,511 3,975,025 7,728,821 854,028 402,869
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
Combined
-------------------
<S> <C>
Net assets at January 1, 1996 $16,678,135
Increase (decrease) in net assets
Operations:
Net investment income 1,656,733
Net realized gains on investments 196,669
Change in net unrealized appreciation/depreciation of investments 1,785,917
-------------------
-------------------
Net increase in net assets resulting from operations 3,639,319
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes
18,395,810
Contract terminations and surrenders (722,867)
Death benefit payments (37,233)
Policy loan transfers (473,677)
Transfers to other contracts (5,580,579)
Cost of insurance and administration charges (2,456,536)
Surrender charges (97,354)
-------------------
-------------------
Increase in net assets from policy related transactions 9,027,564
-------------------
-------------------
Total increase 12,666,883
-------------------
===================
Net assets at December 31, 1996 $29,345,018
===================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Capital Emerging High Money
Balanced Bond Accumulation Growth Yield Market
Division Division Division Division Division Division
- ------------------- ------------------- ---------------------- -------------------- ------------------- --------------------
- ------------------- ------------------- ---------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
$2,794,881 $ 922,511 $3,975,025 $ 7,728,821 $ 854,028 $ 402,869
329,223 84,354 828,609 275,691 99,843 39,013
20,387 2,798 36,486 136,928 70 -
77,334 (53,168) 247,560 1,479,684 34,507 -
- ------------------- ------------------- ---------------------- -------------------- ------------------- --------------------
- ------------------- ------------------- ---------------------- -------------------- ------------------- --------------------
426,944 33,984 1,112,655 1,892,303 134,420 39,013
1,743,079 953,519 2,993,788 6,727,306 507,382 5,470,736
(98,967) (23,277) (167,257) (390,394) (15,620) (27,352)
(11,941) (81) (17,425) (7,786) - -
(9,028) (21,841) (153,962) (276,069) 3,597 (16,374)
(161,403) (115,001) (217,253) (785,468) (56,488) (4,244,966)
(325,580) (103,879) (481,237) (1,131,138) (99,942) (314,760)
(13,328) (3,135) (22,526) (52,577) (2,104) (3,684)
- ------------------- ------------------- ---------------------- -------------------- ------------------- --------------------
- ------------------- ------------------- ---------------------- -------------------- ------------------- --------------------
1,122,832 686,305 1,934,128 4,083,874 336,825 863,600
- ------------------- ------------------- ---------------------- -------------------- ------------------- --------------------
- ------------------- ------------------- ---------------------- -------------------- ------------------- --------------------
1,549,776 720,289 3,046,783 5,976,177 471,245 902,613
- ------------------- ------------------- ---------------------- -------------------- ------------------- --------------------
=================== =================== ====================== ==================== =================== ====================
$4,344,657 $1,642,800 $7,021,808 $13,704,998 $1,325,273 $1,305,482
=================== =================== ====================== ==================== =================== ====================
</TABLE>
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements
December 31, 1996
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,
1996.
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 $160,075, $231,648, and
$2,224,888, respectively, in 1996; $95,590, $166,464, and $1,372,778,
respectively, in 1995; $55,513, $119,268, and $883,669, respectively, in
1994. 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>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
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, 1996
Units purchased and reinvested
<S> <C> <C> <C> <C> <C> <C>
dividends and capital gains 82,222 $2,097,662 48,357 $1,046,130 126,497 $3,858,566
Units redeemed 29,319 645,607 13,728 275,471 44,900 1,095,829
------------ --------------- ----------- -------------- ------------ ----------------
============ =============== =========== ============== ============ ================
Net increase 52,903 $1,452,055 34,629 $ 770,659 81,597 $2,762,737
============ =============== =========== ============== ============ ================
============ =============== =========== ============== ============ ================
Year ended December 31, 1995
Units purchased and reinvested
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
============ =============== =========== ============== ============ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Emerging Growth Division Money Market Division
High Yield Division
---------------------------- -------------------------- -----------------------------
Units Amount Units Amount Units Amount
------------ --------------- ----------- -------------- ------------- ---------------
------------ --------------- ----------- -------------- ------------- ---------------
Year ended December 31, 1996
Units purchased and reinvested
<S> <C> <C> <C> <C> <C> <C>
dividends and capital gains 224,022 $7,077,421 28,126 $615,083 370,523 $5,517,757
Units redeemed 89,178 2,717,856 9,553 178,415 311,613 4,615,144
------------ --------------- ----------- -------------- ------------- ---------------
============ =============== =========== ============== ============= ===============
Net increase 134,844 $4,359,565 18,573 $436,668 58,910 $ 902,613
============ =============== =========== ============== ============= ===============
============ =============== =========== ============== ============= ===============
Year ended December 31, 1995
Units purchased and reinvested
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
============ =============== =========== ============== ============= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
5. Net Assets
Net assets at December 31, 1996 consisted of the following:
Net Unrealized
Accumulated Net Appreciation
Unit Transactions Investment Income (Depreciation) of
Combined Investments
-------------------- --------------------- ----------------------- ----------------------
-------------------- --------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Balanced Division $ 4,344,657 $ 3,496,263 $ 533,396 $ 314,998
Bond Division 1,642,800 1,516,750 135,437 (9,387)
Capital Accumulation Division
7,021,808 5,317,787 1,137,621 566,400
Emerging Growth Division
13,704,998 10,647,072 425,133 2,632,793
High Yield Division 1,325,273 1,155,112 163,961 6,200
Money Market Division 1,305,482 1,295,906 9,576 -
-------------------- --------------------- ----------------------- ----------------------
==================== ===================== ======================= ======================
$29,345,018 $23,428,890 $2,405,124 $3,511,004
==================== ===================== ======================= ======================
</TABLE>
Report of Independent Auditors
The Board of Directors
Principal Mutual Life Insurance Company
We have audited the accompanying consolidated statements of financial position
of The Principal Financial Group (the Company) as of December 31, 1996 and
1995, and the related consolidated statements of operations, equity and cash
flows for the years 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. 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 consolidated financial position of The Principal
Financial Group at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1996 the
Company adopted certain accounting changes to conform with generally accepted
accounting principles for mutual life insurance enterprises, and retroactively
restated the 1995 financial statements for the change.
/s/ Ernst & Young
Des Moines, Iowa
February 7, 1997
<PAGE>
The Principal Financial Group
Consolidated Statements of Operations
Year ended December 31
1996 1995*
----------------------------
----------------------------
(In Millions)
Revenue
Premiums and annuity and other considerations $5,121 $5,243
Policy and contract charges 655 580
Net investment income 2,780 2,693
Net realized capital gains 436 122
Commissions and other income 150 143
----------------------------
Total revenue 9,142 8,781
Expenses
Benefits, claims and settlement expenses 6,087 6,142
Dividends to policyowners 299 307
Operating expenses 1,926 1,781
----------------------------
----------------------------
Total expenses 8,312 8,230
----------------------------
Income before income taxes 830 551
Income taxes 304 207
----------------------------
============================
Net income $ 526 $ 344
============================
* As restated. See Note 1.
See accompanying notes.
<PAGE>
The Principal Financial Group
Consolidated Statements of Financial Position
December 31
1996 1995*
------------------------
------------------------
(In Millions)
Assets
Debt securities, available-for-sale $21,974 $21,837
Equity securities, available-for-sale 1,023 1,446
Mortgage loans 12,409 11,380
Real estate 2,474 2,263
Policy loans 736 711
Other investments 68 79
Cash and cash equivalents 271 295
Accrued investment income 464 479
Deferred acquisition costs 1,058 938
Property held for Company use 222 210
Separate account assets 17,218 12,957
Other assets 1,225 1,369
------------------------
========================
Total assets $59,142 $53,964
========================
========================
Liabilities
Contractholder funds $23,194 $22,465
Future policy benefits and claims 10,575 10,058
Other policyowner funds 454 476
Policyowner dividends payable 447 455
Debt 399 361
Income taxes currently payable 283 214
Deferred income taxes 623 930
Separate account liabilities 17,166 12,891
Other liabilities 1,347 1,508
------------------------
------------------------
Total liabilities 54,488 49,358
Equity
Surplus 3,803 3,277
Net unrealized gains on available- securities 860 1,336
Foreign currency translation adjustment, net (9) (7)
------------------------
------------------------
Total equity 4,654 4,606
------------------------
========================
Total liabilities and equity $59,142 $53,964
========================
* As restated. See Note 1.
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
The Principal Financial Group
Consolidated Statements of Equity
Net Unrealized
Gains on Foreign Currency
Available-for-Sale Translation
Surplus Securities Adjustment, net Total Equity
---------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Balances at January 1, 1995* $2,933 $ 48 $(6) $2,975
Net income 344 - - 344
Increase in unrealized appreciation on debt
securities available-for-sale - 1,834 - 1,834
Increase in unrealized appreciation on equity
securities available-for-sale - 411 - 411
Adjustments for assumed changes in
amortization pattern:
Deferred acquisition costs - (315) - (315)
Unearned revenue reserves - 52 - 52
Provision for deferred income taxes - (694) - (694)
Change in foreign currency translation
adjustment, net - - (1) (1)
---------------------------------------------------------------
Balances at December 31, 1995 3,277 1,336 (7) 4,606
Net income 526 - - 526
Decrease in unrealized appreciation on debt
securities available-for-sale - (543) - (543)
Decrease in unrealized appreciation on equity
securities available-for-sale - (262) - (262)
Adjustments for assumed changes in
amortization pattern:
Deferred acquisition costs - 83 - 83
Unearned revenue reserves - (11) - (11)
Provision for deferred income tax benefit - 257 - 257
Change in foreign currency translation
adjustment, net - - (2) (2)
---------------------------------------------------------------
===============================================================
Balances at December 31, 1996 $3,803 $ 860 $(9) $4,654
===============================================================
* As restated. See Note 1.
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Principal Financial Group
Consolidated Statements of Cash Flows
Year ended December 31
1996 1995*
-----------------------------
-----------------------------
(In Millions)
Operating activities
<S> <C> <C>
Net income $526 $344
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of deferred acquisition costs 178 145
Additions to deferred acquisition costs (215) (206)
Accrued investment income 15 6
Contractholder and policyowner liabilities and dividends 240 523
Current and deferred income taxes 20 93
Net realized capital gains (436) (122)
Depreciation and amortization expense 112 97
Other (230) 437
-----------------------------
-----------------------------
Net adjustments (316) 973
-----------------------------
Net cash provided by operating activities 210 1,317
Investing activities
Available-for-sale securities:
Purchases (11,762) (13,195)
Sales 8,949 9,333
Maturities 2,796 2,485
Mortgage loans acquired or originated (2,955) (2,837)
Mortgage loans sold or repaid 1,619 1,702
Real estate acquired (166) (143)
Real estate sold 253 38
Net change in policy loans (25) (28)
Net change in property held for company use (18) (44)
Net change in other investments (74) (11)
-----------------------------
Net cash used in investment activities (1,383) (2,700)
Financing activities
Issuance of debt 43 21
Principal repayments of debt (29) (71)
Proceeds of short-term borrowings 1,451 990
Repayment of short-term-borrowings (1,282) (990)
Investment contract deposits 7,496 6,756
Investment contract withdrawals (6,530) (5,310)
-----------------------------
Net cash provided by financing activities 1,149 1,396
-----------------------------
Net increase (decrease) in cash and cash equivalents (24) 13
Cash and cash equivalents at beginning of year 295 282
-----------------------------
=============================
Cash and cash equivalents at end of year $ 271 $ 295
=============================
* As restated. See Note 1.
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements
December 31, 1996
1. Nature of Operations and Significant Accounting Policies
Description of Business
The Principal Financial Group (the Company), comprised of Principal Mutual
Life Insurance Company (Principal Mutual) and its subsidiaries, is a diversified
financial services organization engaged in the marketing and management of life
insurance, annuity, health, pension and other financial products and services,
primarily in the United States.
Basis of Presentation
The accompanying consolidated financial statements of the Company and its
majority-owned subsidiaries have been prepared in conformity with generally
accepted accounting principles (GAAP). Less than majority-owned entities in
which the Company has at least a 20% interest are reported on the equity basis
in the consolidated statements of financial position as other investments. All
significant intercompany accounts and transactions have been eliminated.
Total assets of the unconsolidated entities amounted to $1.5 billion at December
31, 1996 and $1.7 billion at December 31, 1995, and total revenues were $349
million in 1996 and $320 million in 1995. During 1996 and 1995, the Company
included $(3) million and $(9) million, respectively, in net investment income
representing the Company's share of current year net losses of the
unconsolidated entities.
Accounting Changes
Prior to 1996, the Company prepared its financial statements in conformity with
reporting practices prescribed or permitted by the Insurance Division of the
Department of Commerce of the State of Iowa. Such practices were considered GAAP
for mutual life insurance companies through 1995. Financial Accounting Standards
Board (FASB) Interpretation (FIN) No. 40, Applicability of Generally Accepted
Accounting Principles to Mutual Life Insurance and Other Enterprises, as
amended, which is effective for 1996 annual financial statements, no longer
permits statutory-basis financial statements to be described as being prepared
in conformity with GAAP.
Accordingly, the Company has adopted GAAP, including various accounting
pronouncements but primarily Statement of Financial Accounting Standards (SFAS)
No. 120, Accounting and Reporting by Mutual Life Insurance Enterprises and by
Insurance Enterprises for Certain Long-Duration Participating Contracts and
Statement of Position (SOP) 95-1, Accounting for Certain Insurance Activities of
Mutual Life Insurance Enterprises, which address the accounting for
long-duration and short-duration insurance and reinsurance contracts, including
all participating business.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Pursuant to the requirements of FIN No. 40, SFAS No. 120 and SOP 95-1, the
effect of the changes from the statutory basis to GAAP accounting have been
applied retroactively and the previously issued 1995 financial statements have
been restated for the change. The effect of the changes applicable to years
prior to January 1, 1995, has been presented as a restatement of equity as
follows (in millions):
Equity at January 1, 1995, as previously reported $1,927
Adjustment for the cumulative effect on prior years of
retroactively adopting GAAP 1,048
---------------
===============
Equity at January 1, 1995, as restated $2,975
===============
The adoption of GAAP had the effect of increasing net income for 1996 and 1995
by approximately $111 million and $81 million, respectively.
Future Application of Accounting Standards
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125
provides consistent accounting standards for securitizations and other transfers
of financial assets, determines when financial assets (liabilities) should be
considered sold (settled) and removed from the statement of financial position,
and determines when related revenues and expenses should be recognized. SFAS No.
125 is generally effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996.
SFAS No. 125 was subsequently amended in December 1996 by SFAS No. 127, Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125. SFAS No.
127 deferred for one year the effective date for transfers and servicing of
repurchase agreements, dollar rolls, securities lending, secured borrowings and
collateral and similar transactions. These Statements will be applicable to the
Company. Management believes that they will not have a significant impact on the
Company's consolidated financial statements.
Use of Estimates in the Preparation of Financial Statements
The preparation of the Company's consolidated 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 consolidated financial statements and
accompanying notes.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Significant Risks
The following is a description of the most significant risks facing diversified
financial service organizations and how the Company mitigates those risks:
Legal or regulatory risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will create additional expenses not
anticipated by the insurer in pricing its products. The Company mitigates this
risk by offering a wide range of products and operating throughout the United
States and the world, thus reducing its exposure to any single product or
jurisdiction, and also by employing underwriting practices which identify and
minimize the adverse impact of this risk.
Credit risk is the risk that issuers of securities owned by the Company or
borrowers on mortgage loans on real estate will default or that other parties
that owe the Company money, will not pay. The Company minimizes this risk by
adhering to a conservative investment strategy, by maintaining sound credit and
collection policies and by providing for any amounts deemed uncollectible.
Interest rate risk is the risk that interest rates will change and cause a
decrease in the value of the Company's investments. This change in rates may
cause certain interest-sensitive products to become uncompetitive or may cause
disintermediation. The Company mitigates this risk by charging fees for
policyowners' contract terminations, by offering products that transfer this
risk to the purchaser and by attempting to match the maturity schedule of its
assets with the expected payout of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would have to
borrow funds or sell assets prior to maturity and potentially recognize a gain
or loss.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity date of three months or less when purchased.
Investments
Investments in debt and equity securities are classified as available-for-sale
and, accordingly, are carried at fair value. (See Note 10 for policies related
to the determination of fair value.) The cost of debt securities is adjusted for
amortization of premiums and accrual of discounts, both computed using the
interest method. The cost of debt and equity securities is adjusted for declines
in value that are other than temporary. For the loan-backed and structured
securities included in the bond portfolio, the Company recognizes income using a
constant effective yield based on currently anticipated prepayments as
determined by broker-dealer surveys or internal estimates and the estimated
lives of the securities.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Investment real estate is reported at cost less accumulated depreciation. Such
real estate is carried net of valuation allowances when indicators of impairment
are present and the undiscounted cash flows to be generated by the real estate
exceed carrying amounts. Properties acquired through loan foreclosures are
recorded at 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 amount reductions as a result of
depreciation and quarterly valuation determinations. Changes in the valuation
allowance are charged or credited to income. Depreciation expense is computed
primarily on the basis of accelerated and straight-line methods over the
estimated useful lives of the assets. Real estate expected to be disposed is
carried at the lower of cost or fair value, less cost to sell.
Commercial and residential mortgage loans are reported at cost adjusted for
amortization of premiums and accrual of discounts, computed using the interest
method, and net of valuation allowances. Any changes in the valuation allowances
are reported as realized gains (losses) on investments. The Company measures
impairment based upon the present value of expected cash flows discounted at the
loan's effective interest rate. If foreclosure is probable, the measurement of
impairment is based upon the fair value of the collateral.
Net realized capital gains and losses on investments are determined using the
specific identification basis.
Policy loans and other investments are primarily reported at cost.
Futures and Forward Contracts and Interest Rate and Equity Swaps (Derivatives)
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 both
those contracts that hedge risks associated with interest rate fluctuations and
equity swaps are recognized in the period incurred.
Contractholder and Policyowner Liabilities
Contractholder and policyowner liabilities (contractholder funds, future policy
benefits and claims and other policyowner funds) include reserves for investment
contracts and reserves for universal life, limited payment, participating and
traditional life insurance policies. Investment contracts are contractholders'
funds left with the Company and generally include reserves for pension and
annuity contracts. Reserves on investment contracts are equal to the cumulative
deposits less any applicable charges plus credited interest.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Reserves for universal life insurance contracts are equal to cumulative premiums
less charges plus credited interest which represents the account balances that
accrue to the benefit of the policyowners, excluding surrender charges. Reserves
for non-participating term life insurance contracts are computed on a basis of
assumed investment yield, mortality, morbidity and expenses, including a
provision for adverse deviation, which generally vary by plan, year of issue and
policy duration. Investment yield is based on the Company's experience.
Mortality, morbidity and withdrawal rate assumptions are based on experience of
the Company and are periodically reviewed against both industry standards and
experience.
Reserves for participating life insurance contracts are based on the net level
premium reserve for death and endowment policy benefits. This net level premium
reserve is calculated based on dividend fund interest rate and mortality rates
guaranteed in calculating the cash surrender values described in the contract.
Some of the Company's policies and contracts require payment of fees in advance
for services that will be rendered over the estimated lives of the policies and
contracts. These payments are established as unearned revenue reserves upon
receipt and included in other policyowner funds in the consolidated statements
of financial position. These unearned revenue reserves are amortized to
operations over the estimated lives of these policies and contracts.
The liability for unpaid accident and health claims is an estimate of the
ultimate net cost of reported and unreported losses not yet settled. This
liability is estimated using actuarial analyses and case basis evaluations.
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 Premiums, Fees and Benefits
Traditional individual life and health insurance products include those products
with fixed and guaranteed premiums and benefits, and consist principally of
whole life and term life insurance policies and certain immediate annuities with
life contingencies. Life insurance premiums and immediate annuity premiums are
recognized as premium revenue when due.
Group life and health insurance premiums are generally recorded as premium
revenue over the term of the coverage. Some group contracts allow for premiums
to be adjusted to reflect emerging experience. Such adjusted premiums are
recognized in the period that the related experience emerges. Fees for contracts
providing claim processing or other administrative services are recorded over
the period the service is provided.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Related policy benefits and expenses for individual and group life and health
insurance products are associated with earned premiums and result in the
recognition of profits over the expected lives of the policies and contracts.
Universal life-type policies are insurance contracts with terms that are not
fixed and guaranteed. Amounts received as payments for such contracts are not
reported as premium revenues. Revenues for universal life-type insurance
contracts consist of policy charges for the cost of insurance, policy initiation
and administration, surrender charges and other fees that have been assessed
against policy account values. Policy benefits and claims that are charged to
expense include interest credited to contracts and benefit claims incurred in
the period in excess of related policy account balances.
Investment contracts do not subject the Company to risks arising from
policyowner mortality or morbidity, and consist primarily of Guaranteed
Investment Contracts (GICs) and certain deferred annuities. Amounts received as
payments for investment contracts are established as investment contract
liability balances and are not reported as premium revenues. Revenues for
investment contracts consist of investment income and policy administration
charges. Investment contract benefits that are charged to expense include
benefit claims incurred in the period in excess of related investment contract
liability balances and interest credited to investment contract liability
balances.
Deferred Acquisition Costs
Commissions and other costs (underwriting, issuance and agency expenses) that
vary with and are primarily related to the acquisition of new and renewal
insurance policies and investment contract business are capitalized to the
extent recoverable. Acquisition costs that are not deferrable and maintenance
costs are charged to operations as incurred.
Deferred acquisition costs for universal life-type insurance contracts and
participating life insurance policies and investment contracts are being
amortized over the lives of the policies and contracts in relation to the
emergence of estimated gross profit margins. This amortization is adjusted
retrospectively when estimates of current or future gross profits and margins to
be realized from a group of products and contracts are revised. The deferred
acquisition costs of non-participating term life insurance policies are being
amortized over the premium-paying period of the related policies using
assumptions consistent with those used in computing policyowner liabilities.
Deferred acquisition costs are subject to recoverability testing at the time of
policy issue and loss recognition testing at the end of each accounting period.
Deferred acquisition costs would be written off to the extent that it is
determined that future policy premiums and investment income or gross profit
margins would not be adequate to cover related losses and expenses.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Reinsurance
The Company enters into reinsurance agreements with other companies in the
normal course of business. The Company may assume reinsurance from or cede
reinsurance to other companies. Reinsurance premiums, expenses, recoveries 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, reported on a gross basis. The Company is
contingently liable with respect to reinsurance ceded to other companies in the
event the reinsurer is unable to meet the obligations it has assumed.
Separate Accounts
The separate account assets and liabilities presented in the consolidated
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 separate account
assets are legally segregated and are not subject to claims that arise out of
any other business of the Company. The Company receives a fee for
administrative, maintenance and investment advisory services that is included in
the consolidated statements of operations. Deposits, net investment income and
realized and unrealized capital gains and losses on the separate accounts are
not reflected in the consolidated statements of operations.
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. Current income taxes are charged or credited
to operations based upon amounts estimated to be payable or recoverable as a
result of taxable operations for the current year. Deferred income taxes are
provided for the tax effect of differences in the financial reporting and income
tax bases of assets and liabilities and net operating losses using enacted
income tax rates and laws. The effect on deferred tax assets and deferred tax
liabilities of a change in tax rates is recognized in operations in the period
in which the change is enacted.
Foreign Exchange
The Company's foreign subsidiaries' statements of financial position and
operations are translated at the current exchange rates and average exchange
rates for the year, respectively. Resulting translation adjustments are reported
as a component of equity. Other translation adjustments for foreign currency
transactions that affect cash flows are reported in current operations.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Pension and Postretirement Benefits
The Company accounts for its pension benefits and postretirement benefits other
than pension (medical, life insurance and long-term care) using the full accrual
method.
Property Held for Company Use
Property held for Company use includes home office properties and related
leasehold improvements. Property held for Company use is shown in the
consolidated statements of financial position at cost less allowances for
accumulated depreciation. Provisions for depreciation of property held for
Company use are computed principally on the straight-line method over the
estimated useful lives of the assets. Property held for Company use and related
accumulated depreciation are as follows (in millions):
December 31
1996 1995
-----------------------------
Property held for Company use $285 $266
Accumulated depreciation (63) (56)
=============================
Property held for Company use, net $222 $210
=============================
Other Assets
Intangible assets are included in other assets in the consolidated statements of
financial position. The cost of acquired subsidiaries in excess of the fair
value of the net assets (i.e., goodwill) and other intangible assets (primarily
customer lists and institutional customer relationships) have been recorded in
connection with acquisitions. These assets are amortized on a straight-line
basis primarily over 40 years with the exception of assets acquired after 1995
which are amortized over ten years. The carrying amount of goodwill and other
intangible assets is reviewed periodically for indicators of impairment in
value. Intangible assets and related accumulated amortization are as follows (in
millions):
December 31
1996 1995
-----------------------------
Goodwill $135 $113
Accumulated amortization (22) (31)
-----------------------------
Goodwill, net 113 82
Other intangible assets, net 34 56
-----------------------------
Total intangible assets $147 $138
=============================
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Mortgage servicing rights of $272 million and $176 million at December 31, 1996
and 1995, respectively, are included in other assets in the consolidated
statements of financial position and represent the cost of purchasing or
originating the right to service mortgage loans. These costs are capitalized and
amortized to operations over the estimated remaining lives of the underlying
loans using the interest method and taking into account appropriate prepayment
assumptions. Capitalized mortgage servicing rights are periodically assessed for
impairment, which is recognized in the consolidated statements of operations
during the period in which impairment occurs by establishing a corresponding
valuation allowance.
Other assets are reported primarily at cost.
Reclassifications
Certain reclassifications have been made to the 1995 financial statements to
conform to the 1996 consolidated presentation.
2. Investments
Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, securities are generally classified as available-for-sale,
held-to-maturity, or trading. The Company has classified its entire debt
securities portfolio as available-for-sale, although it is generally the
Company's intent to hold these securities to maturity. The Company has also
classified all equity securities as available-for-sale. Securities classified as
available-for-sale are reported at fair value in the consolidated statements of
financial position with the related unrealized holding gains and losses on such
available-for-sale securities reported as a separate component of equity after
adjustments for related changes in deferred acquisition costs, unearned revenue
reserves and deferred income taxes.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The cost, gross unrealized gains and losses and fair value of debt and equity
securities available-for-sale as of December 31, 1996 and 1995, are as follows
(in millions):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
---------------------------------------------------------------
December 31, 1996
Bonds:
<S> <C> <C> <C> <C>
United States Government and agencies $ 246 $ 1 $ 1 $ 246
States and political subdivisions 303 13 - 316
Corporate - public 4,487 200 15 4,672
Corporate - private 12,876 737 25 13,588
Mortgage-backed securities 3,112 60 27 3,145
---------------------------------------------------------------
---------------------------------------------------------------
21,024 1,011 68 21,967
Redeemable preferred stocks 5 2 - 7
===============================================================
Total debt securities $21,029 $1,013 $68 $21,974
===============================================================
Total equity securities $ 502 $ 536 $15 $ 1,023
===============================================================
December 31, 1995
Bonds:
United States Government and agencies $ 294 $ 4 $ - $ 298
States and political subdivisions 281 19 - 300
Corporate - public 4,467 328 16 4,779
Corporate - private 12,211 1,081 57 13,235
Mortgage-backed securities 3,085 134 4 3,215
---------------------------------------------------------------
---------------------------------------------------------------
20,338 1,566 77 21,827
Redeemable preferred stocks 11 1 2 10
===============================================================
Total debt securities $20,349 $1,567 $79 $21,837
===============================================================
Total equity securities $ 663 $ 794 $11 $ 1,446
===============================================================
</TABLE>
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The cost and fair value of debt securities available-for-sale at December 31,
1996, by expected maturity, are as follows (in millions):
Cost Fair Value
----------------------
----------------------
Due in one year or less $ 1,290 $ 1,314
Due after one year through five years 6,486 6,720
Due after five years through ten years 6,271 6,590
Due after ten years 3,865 4,198
----------------------
----------------------
17,912 18,822
Mortgage-backed and other securities without
a single maturity date 3,117 3,152
----------------------
======================
Total $21,029 $21,974
======================
The above summarized activity is based on expected maturities. Actual maturities
may differ because borrowers may have the right to call or pre-pay obligations.
Major categories of net investment income are summarized as follows (in
millions):
Year ended December 31
1996 1995
-----------------------------
Debt securities available-for-sale $1,608 $1,603
Equity securities available-for-sale 33 41
Mortgage loans 922 1,008
Real estate 338 162
Policy loans 49 48
Cash and cash equivalents 15 8
Other 60 24
-----------------------------
-----------------------------
3,025 2,894
Less investment expenses (245) (201)
-----------------------------
=============================
Net investment income $2,780 $2,693
=============================
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The major components of realized capital gains (losses) on investments are
summarized as follows (in millions):
Year ended December 31
1996 1995
-----------------------------
Debt securities, available-for-sale:
Gross gains $121 $144
Gross losses (73) (40)
Equity securities, available-for-sale:
Gross gains 451 40
Gross losses (5) (9)
Mortgage loans (4) 3
Real estate 14 6
Other (68) (22)
=============================
Net realized capital gains $436 $122
=============================
Proceeds from sales of investments (excluding maturity proceeds) in debt
securities were $7.8 billion and $6.5 billion in 1996 and 1995, respectively.
Gross gains of $76 million and $93 million and gross losses of $69 million and
$54 million in 1996 and 1995, respectively, were realized on those sales. Of the
1996 and 1995 proceeds, $7.2 billion and $6.1 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 $64 million and $66 million and gross losses of
$53 million and $17 million in 1996 and 1995, respectively, were realized on
sales of mortgage-backed securities. At December 31, 1996, the Company had
security purchases payable totaling $331 million relating to the purchases of
mortgage-backed securities at forward dates.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The unrealized appreciation on investments in debt and equity securities
available-for-sale is reported as a separate component of equity, reduced by
adjustments to deferred acquisition costs and unearned revenue reserves that
would have been required as a charge or credit to operations had such amounts
been realized and a provision for deferred income taxes. The amount of net
unrealized gains on available-for-sale securities is as follows (in millions):
<TABLE>
<CAPTION>
December 31
1996 1995
-----------------------------
<S> <C> <C>
Unrealized appreciation on debt securities, available-for-sale $945 $1,488
Unrealized appreciation on equity securities, available-for-sale 521 783
Adjustments for assumed changes in amortization pattern:
Deferred acquisition costs (160) (243)
Unearned revenue reserves 17 28
Provision for deferred income taxes (463) (720)
=============================
Net unrealized gains on available-for-sale securities $860 $1,336
=============================
</TABLE>
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, 1996 and 1995, 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
----------------------- -----------------------
1996 1995 1996 1995
----------------------- -----------------------
----------------------- -----------------------
Pacific 30% 33% Industrial 35% 38%
South Atlantic 22 21 Retail 34 30
North Central 17 16 Office 28 29
Mid Atlantic 15 16 Other 3 3
South Central 7 6
New England 5 5
Mountain 4 3
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to contractual terms of the loan agreement.
When the Company determines that a loan is impaired, a provision for loss is
established for the difference between the carrying amount of the mortgage loan
and the estimated value. Estimated value is based on either the present value of
the expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or fair value of the collateral. The
provision for losses is reported as realized gains (losses) on investments.
Mortgage loans deemed to be uncollectible are charged against the allowance for
losses and subsequent recoveries are credited to the allowance for losses. The
allowance for losses is maintained at a level believed adequate by management to
absorb estimated probable credit losses. Management's periodic evaluation of the
adequacy of the allowance for losses is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of the
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. The evaluation is inherently subjective
as it requires estimating the amounts and timing of future cash flows expected
to be received on impaired loans that may change.
A summary of the changes in the mortgage loan allowance for losses is as follows
(in millions):
December 31
1996 1995
--------------------------
Balance at beginning of year $115 $127
Provision for losses 16 16
Releases due to write-downs, sales and foreclosures (10) (28)
==========================
Balance at end of year $121 $115
=======================
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.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The Company was servicing approximately 328,000 and 286,000 loans with aggregate
principal balances of approximately $24.4 and $19.9 billion at December 31, 1996
and 1995, respectively. In connection with these mortgage servicing activities,
the Company held funds in trust for others totaling approximately $175 million
and $145 million at December 31, 1996 and 1995, respectively. In connection with
its loan administration activities, the Company advances payments of property
taxes and insurance premiums and also advances principal and interest payments
to investors in advance of collecting funds from specific mortgagors. In
addition, the Company makes certain payments of attorney fees and other costs
related to loans in foreclosure. These amounts receivable are recorded, at cost,
as advances on serviced loans. Amounts advanced are considered in management's
evaluation of the adequacy of the allowance for loan loss.
Real estate includes properties directly owned by the Company that are generally
held for investment purposes. Real estate holdings and related accumulated
depreciation are as follows (in millions):
December 31
1996 1995
-----------------------------
Real estate $2,743 $2,481
Accumulated depreciation (269) (218)
=============================
Real estate, net $2,474 $2,263
=============================
Other investments 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 $1.4 billion and $1.5 billion at
December 31, 1996 and 1995, respectively. The Company is committed to providing
additional mortgage financing for such joint ventures aggregating $146 million
at December 31, 1996.
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. The equity swaps were terminated during 1996
and a realized loss of $81 million recorded. Common stocks of $633 million
associated with these equity swaps were sold during 1996 and a gain of $402
million recorded, resulting in a net realized gain of $321 million.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
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 ($148
million at December 31, 1996, and $303 million at December 31, 1995) 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. 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, 1996 and 1995, were $970 million and $599 million, respectively,
and the credit exposure at December 31, 1996 and 1995 was $15 million and $8
million, respectively. The Company is exposed to credit loss in the event of
nonperformance of the counterparties. This credit risk is minimized by
purchasing such agreements from financial institutions with superior performance
records. 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,
1996 and 1995, 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.
The Company enters into currency exchange swap agreements to convert certain
foreign denominated fixed rate assets into U.S. dollar denominated fixed rate
assets and eliminate the exposure to future currency volatility on those
securities. At December 31, 1996, the Company had various foreign currency
exchange agreements with maturities ranging from 1997 to 2018, with an aggregate
notional amount involved of approximately $373 million and the credit exposure
was $9 million. The average unexpired term of the swaps was approximately seven
years at December 31, 1996.
The Company uses interest rate floors in hedging a portion of its portfolio of
mortgage servicing rights from prepayment risk associated with changes in
interest rates. At December 31, 1996, the Company had entered into interest rate
floors with a notional value of $1.3 billion. The floors provide for the receipt
of payments when interest rates are below predetermined interest rate levels.
The premiums paid for floors are included in other assets on the Company's
consolidated statements of financial position.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
4. Accident and Health Reserves
Activity in the liability for unpaid accident and health claims, which is
included with future policy benefits and claims in the consolidated statements
of financial position, is summarized as follows (in millions):
Year ended December 31
1996 1995
-----------------------------
Balance at beginning of year $ 810 $ 824
Incurred:
Current year 3,051 3,179
Prior years (29) (5)
-----------------------------
-----------------------------
Total incurred 3,022 3,174
Payments:
Current year 2,535 2,654
Prior years 497 534
-----------------------------
Total payments 3,032 3,188
-----------------------------
Balance at end of year:
Current year 516 525
Prior years 284 285
-----------------------------
=============================
Total balance at end of year $ 800 $ 810
=============================
The activity summary in the liability for unpaid accident and health claims
shows a decrease of $29 million and $5 million to the December 31, 1995 and 1994
liability for unpaid accident and health claims, respectively, arising in prior
years. Such liability adjustments, which affected current operations during 1996
and 1995, respectively, resulted from developed claims for prior years being
different than were anticipated when the liabilities for unpaid accident and
health claims were originally estimated. These favorable development trends have
been considered in establishing the current year liability for unpaid accident
and health claims.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
5. Debt
The components of debt as of December 31, 1996 and December 31, 1995 are as
follows (in millions):
December 31
1996 1995
------------------------------
7.875% notes payable, due 2024 $199 $199
8% notes payable, due 2044 99 99
Mortgages and other notes payable 101 63
==============================
Total debt $399 $361
==============================
On March 10, 1994, Principal Mutual 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 notes. The discount and direct
costs associated with issuing these notes are being amortized to expense over
their respective terms using the interest method. Each payment of interest and
principal on the notes, however, 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 Principal Mutual has sufficient surplus earnings to make such
payments. For both of the years ended December 31, 1996 and 1995, interest of
$24 million was approved by the Commissioner, paid and charged to expense.
Subject to Commissioner approval, the surplus notes due March 1, 2024 may be
redeemed at Principal Mutual'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.
In addition, subject to Commissioner approval, the notes due March 1, 2044 may
be redeemed at Principal Mutual'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 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.
The other mortgages and notes payable are financings for real estate
developments. The Company has obtained loans with various lenders to finance
these developments. Outstanding principal balances as of December 31, 1996 range
from $1 million to $9 million with interest rates generally ranging from 5.9% to
7.7%.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
At December 31, 1996, future annual maturities of debt are as follows (in
millions):
1997 $ 29
1998 17
1999 2
2000 2
2001 2
Thereafter 347
----------
==========
Total future maturities of debt $399
==========
Cash paid for interest for 1996 and 1995 was $52 million and $50 million,
respectively.
The Company issues commercial paper periodically to meet its short-term
financing needs and also has credit facilities with various banks. The Company
had outstanding credit borrowings of $15 million at December 31, 1996 and other
outstanding borrowings of $154 million at December 31, 1996. These outstanding
borrowings are included in other liabilities in the consolidated statements of
financial position. There were no outstanding borrowings at December 31, 1995.
6. Income Taxes
The Company's income tax expense (benefit) is as follows (in millions):
Year ended December 31
1996 1995
-----------------------------
Current income taxes:
Federal $145 $104
State and foreign (1) 5
Realized capital gains 210 41
-----------------------------
Total current income taxes 354 150
Deferred income taxes (50) 57
=============================
Total income taxes $304 $207
=============================
Due to the inherent differences between income for financial reporting purposes
and income for tax purposes, the Company's provision for income taxes does not
have the customary relationship of taxes to income. This difference between the
prevailing corporate income tax rate of 35% times the pre-tax income and the
Company's effective tax rate on pre-tax income is generally due to the Company
making adequate provisions for any challenges of the tax filings and tax
payments to the various taxing jurisdictions.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
The Internal Revenue Service (the Service) has completed examination of the
consolidated federal income tax returns of Principal Mutual and affiliated
companies through 1992. The Service has commenced its examination for the years
1993 and 1994. The Company believes that there are adequate defenses against or
sufficient provisions for any challenges.
The Company's deferred income tax liabilities and assets are as follows (in
millions):
December 31
1996 1995
-----------------------------
Deferred income tax liabilities $1,110 $1,319
Deferred income tax assets 487 389
=============================
Deferred income taxes, net $ 623 $ 930
=============================
The Company's significant deferred income tax liabilities and assets relate to
unrealized gains on available-for-sale debt and equity securities, deferred
acquisition costs, unrealized joint venture losses, policy liabilities and
accruals and contractholder funds and claims, policyowner dividend liability,
prepaid postretirement benefits other than pension, other investment related
items and premiums and fees receivable. No valuation allowances have been
recognized against deferred tax assets.
The Company has not recognized deferred taxes related to the undistributed
earnings of certain foreign subsidiaries that are considered to be indefinitely
reinvested because the Company does not expect to repatriate these earnings. A
tax liability will be recognized when the Company expects distribution of those
earnings in the form of dividends, sale of the investment or otherwise.
Cash paid for income taxes in 1996 and 1995 was $285 million and $99 million,
respectively.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
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. 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 consolidated statements of financial position and consolidated statements of
operations as of and for the years ended December 31, 1996 and 1995, is as
follows (in millions):
December 31
1996 1995
------------
------------
Actuarial present value of benefit obligations:
Vested benefit obligation $482 $439
============
============
Accumulated benefit obligation $495 $464
============
============
Plan assets at fair value, primarily affiliated mutual funds
and investment contracts of the Company $841 $723
Projected benefit obligation 732 670
------------
Plan assets in excess of projected benefit obligation 109 53
Unrecognized net (gains) losses and funding different from
that assumed and from changes in assumptions (29) 41
Unrecognized prior service cost 17 1
Unrecognized net transition asset (60) (70)
------------
============
Prepaid pension asset $ 37 $ 25
============
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
Net periodic pension expense (income) included the following components (in
millions):
Year ended
December 31
1996 1995
-------------------------
Service cost $ 38 $ 25
Interest cost on projected benefit obligation 46 39
Actual return on plan assets (118) (144)
Net amortization and deferral 42 79
-------------------------
=========================
Total net periodic pension expense (income) $ 8 $ (1)
=========================
The weighted-average assumed discount rate used in determining the projected
benefit obligation was 7.25% and 7% at December 31, 1996 and 1995, respectively.
Some of the trusts holding the plan assets are subject to income taxes at a 35%
tax rate while others are not subject to income taxes. For both 1996 and 1995,
the expected long-term rates of return on plan assets were approximately 6%
(after estimated income taxes) for those trusts subject to income taxes and
approximately 10% for those trusts not subject to 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 up to $ 9,500 in 1996 and $9,240 in 1995 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. The Company
contributed $13 million in 1996 and $11 million in 1995 to these defined
contribution plans.
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.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
The postretirement plans' combined funded status, reconciled to amounts
recognized in the consolidated statements of financial position and consolidated
statements of operations as of and for the years ended December 31, 1996 and
1995, is as follows (in millions):
<TABLE>
<CAPTION>
December 31
1996 1995
-------------------------------
Plan assets at fair value, primarily affiliated mutual funds and
<S> <C> <C>
investment contracts of the Company $247 $208
Accumulated postretirement benefit obligation:
Retirees (87) (84)
Eligible employees (38) (39)
Active employees not eligible to retire (93) (89)
-------------------------------
-------------------------------
Total accumulated postretirement benefit obligation (218) (212)
-------------------------------
-------------------------------
Excess (deficiency) of plan assets over (under) accumulated
postretirement benefit obligation 29 (4)
Unrecognized net losses and funding different from that assumed and
from changes in assumptions (10) 20
Unrecognized net transition obligation 17 21
-------------------------------
===============================
Postretirement benefit asset $ 36 $ 37
===============================
</TABLE>
The net periodic postretirement benefit cost included the following components
(in millions):
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995
-------------------------------
-------------------------------
<S> <C> <C>
Service cost $12 $ 7
Interest cost on accumulated postretirement benefit cost 15 14
Actual return on plan assets (32) (43)
Amortization of transition obligation 4 4
Net amortization of gains and losses 19 34
===============================
Total net periodic postretirement benefit cost $18 $16
===============================
</TABLE>
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
The weighted-average assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% and 7% at December 31, 1996 and
1995, respectively. Some of the trusts holding the plan assets are subject to
income taxes at a 35% tax rate while others are not subject to income taxes. For
both 1996 and 1995, the expected long-term rates of return on plan assets were
approximately 6% (after estimated income taxes) for those trusts subject to
income taxes and approximately 9% for those trusts not subject to 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 1996, declines to 9.5% in
2001 and then declines to an ultimate rate of 6.5% in 2032. 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, 1996
would increase by 19.5% ($33 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, 1996 by 24.5% ($6 million).
8. Reinsurance
Reinsurance contracts do not relieve the Company from its obligations to
policyowners. Failure of reinsurers to honor their obligations could result in
losses to the Company. The Company evaluates the financial strength of potential
reinsurers and continually monitors the financial condition of present
reinsurers. The Company also monitors concentrations of credit risk arising from
similar geographic regions, activities or economic characteristics of the
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
8. Reinsurance (continued)
The effect of reinsurance on premiums and annuity and other considerations and
benefits, claims and settlement expenses is as follows (in millions):
Year ended
December 31
1996 1995
-------------------------
-------------------------
Premiums and annuity and other considerations:
Direct $5,034 $5,171
Assumed 116 99
Ceded (29) (27)
=========================
Net premiums and annuity and other considerations $5,121 $5,243
=========================
=========================
Benefits, claims and settlement expenses:
Direct $6,003 $6,070
Assumed 109 99
Ceded (25) (27)
=========================
Net benefits, claims and settlement expenses $6,087 $6,142
=========================
9. Other Commitments and Contingencies
The Company, as a lessor, leases industrial, office, retail and other wholly
owned investment real estate properties under various operating leases. Rental
income for all operating leases totaled $310 million in 1996 and $260 million in
1995. At December 31, 1996, future minimum annual rental commitments under these
noncancelable operating leases are as follows (in millions):
1997 $ 273
1998 240
1999 200
2000 161
2001 116
Thereafter 444
-------------
=============
Total future minimum lease receipts $1,434
=============
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
9. Other Commitments and Contingencies (continued)
The Company, as a lessee, leases office space, data processing equipment and
office furniture and equipment under various operating leases. Rental expense
for all operating leases totaled $73 million in 1996 and $69 million in 1995. At
December 31, 1996, future minimum annual rental commitments under these
noncancelable operating leases are as follows (in millions):
1997 $ 58
1998 42
1999 32
2000 21
2001 14
Thereafter 28
-----------
195
Less future sublease rental income 4
-----------
Total future minimum lease payments $191
===========
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 the resolution of such actions would not have a material
effect on the Company's consolidated 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 policyowners and claimants in the event of
insolvency of other insurance companies. The assessments may be partially
recovered through a reduction in future premium taxes in some states. At both
December 31, 1996 and 1995, approximately $15 million is reserved in other
liabilities in the consolidated statements of financial position for possible
guarantee fund assessments for which notices have not been received and the
Company does not anticipate receiving a premium tax credit.
10. Fair Value of Financial Instruments
The following discussion describes the methods and assumptions utilized by the
Company in estimating its fair value disclosures for financial instruments.
Certain financial instruments, particularly policyowner liabilities other than
investment contracts, are excluded from these fair value disclosure
requirements. The 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 financial instruments
presented below. The estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market exchange of all of
the Company's financial instruments.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
10. Fair Value of Financial Instruments (continued)
The Company defines fair value as the quoted market prices for those instruments
that are actively traded in financial markets. In cases where quoted market
prices are not available, fair values are estimated using present value or other
valuation techniques. The fair value estimates are made at a specific point in
time, based on available market information and judgments about the financial
instrument, including estimates of timing, amount of expected future cash flows
and the credit standing of counterparts. Such estimates do not consider the tax
impact of the realization of unrealized gains or losses. In many cases, the fair
value estimates cannot be substantiated by comparison to independent markets. In
addition, the disclosed fair value may not be realized in the immediate
settlement of the financial instrument.
Fair values of public debt and equity securities have been determined by the
Company from public quotations, when available. Private placement securities and
other debt and equity 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.
Fair values of commercial mortgage loans are determined by discounting the
expected total cash flows using market rates that are applicable to the yield,
credit quality and maturity of each loan. Fair values of residential mortgage
loans are determined 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 fair values for assets classified as policy loans, other investments and
cash and cash equivalents in the accompanying consolidated statements of
financial position approximates their carrying amounts.
The fair values of the Company's reserves and liabilities for investment-type
insurance contracts (insurance, annuity and other policy contracts that do not
involve significant mortality or morbidity risk and that are only a portion of
the policyowner liabilities appearing in the consolidated statements of
financial position) 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).
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.
Fair values for debt issues are estimated using discounted cash flow analysis
based on the Company's incremental borrowing rate for similar borrowing
arrangements.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
10. Fair Value of Financial Instruments (continued)
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995, are as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------- ----------------------------
--------------------------- ----------------------------
Assets (liabilities)
<S> <C> <C> <C> <C>
Debt securities (see Note 2) $21,974 $21,974 $21,837 $21,837
Equity securities (see Note 2) 1,023 1,023 1,446 1,446
Mortgage loans 12,409 12,823 11,380 11,965
Policy loans 736 736 711 711
Other investments 68 68 79 79
Cash and cash equivalents 271 271 295 295
Investment-type insurance contracts (22,196) (22,158) (21,538) (21,960)
Debt (399) (427) (361) (401)
</TABLE>
11. Statutory Insurance Financial Information
Principal Mutual, the largest member of The Principal Financial Group,
prepares statutory financial statements in accordance with the accounting
practices prescribed or permitted by the Insurance Division of the Department of
Commerce of the State of Iowa. Prescribed statutory accounting practices include
a variety of publications of the National Association of Insurance Commissioners
as well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. The impact of any permitted accounting practices on statutory
surplus is not material. The accounting practices used to prepare statutory
financial statements for regulatory filings differ in certain instances from
GAAP. Prescribed or permitted statutory accounting practices are used by state
insurance departments to regulate the Company.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
11. Statutory Insurance Financial Information (continued)
The following summary reconciles the assets and equity at December 31, 1996 and
1995, and net income for the years ended December 31, 1996 and 1995, in
accordance with statutory reporting practices prescribed or permitted by the
Insurance Division of the Department of Commerce of the State of Iowa (Principal
Mutual only) with that reported in these consolidated GAAP financial statements
(in millions):
<TABLE>
<CAPTION>
Assets Equity Net Income
-----------------------------------------
-----------------------------------------
December 31, 1996
As reported in accordance with statutory accounting practices
<S> <C> <C> <C>
- unconsolidated $56,837 $2,504 $415
Additions (deductions):
Unrealized gain on debt securities available-for-sale 964 964 -
Consolidation and basis changes of certain subsidiaries (259) (10) -
Adjustment for cash and cash equivalents (152) - -
Adjustment to record statutory non-admitted assets 52 52 -
Investment adjustments other than debt securities 766 911 53
Adjustments to insurance reserves (156) (238) (40)
Deferral of policy acquisition costs 1,058 1,058 38
Adjustments for pension and postretirement accounting 78 78 (17)
Surplus note reclassification as debt - (298) -
Adjustments to dividend liabilities - 123 (1)
Provision for deferred federal income taxes (6) (493) 60
Other - net (40) 3 18
-----------------------------------------
=========================================
As reported in these consolidated GAAP financial statements $59,142 $4,654 $526
=========================================
December 31, 1995
As reported in accordance with statutory accounting practices
- unconsolidated $51,268 $2,208 $263
Additions (deductions):
Unrealized gain on debt securities available-for-sale 1,553 1,553 -
Consolidation and basis changes of certain subsidiaries (95) (10) 64
Adjustment for cash and cash equivalents (245) 4 -
Adjustment to record statutory non-admitted assets 73 73 -
Investment adjustments other than debt securities 568 917 (4)
Adjustments to insurance reserves (128) (152) (8)
Deferral of policy acquisition costs 937 937 61
Adjustments for pension and postretirement accounting 66 66 (11)
Surplus note reclassification as debt - (298) -
Adjustments to dividend liabilities - 124 1
Provision for deferred federal income taxes (9) (770) (20)
Other - net (24) (46) (2)
-----------------------------------------
=========================================
As reported in these consolidated GAAP financial statements $53,964 $4,606 $344
=========================================
</TABLE>
APPENDIX - A
SAMPLE ILLUSTRATIONS OF POLICY VALUES, SURRENDER VALUES AND DEATH BENEFITS
The following illustrations have been prepared to help show how Policy
Values and Surrender 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, annual rates of 0%, 6% and 12% (or net
rates of -.65%, 5.35% and 11.35%, respectively). The death benefits and values
would be different from those shown if the return averaged 0%, 6% 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
45-year-old male nonsmokers. Illustrations for females or for younger males
would be more favorable; illustrations for older males or for smokers would be
less favorable than those presented. The Policies are illustrated on the basis
of $4,000 Target Premium and a face amount at issue of $250,000. 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 Policy charges (including deductions from
premiums for sales loads and state and federal taxes; monthly deductions from
Policy Value of administration charges, cost of insurance charges and mortality
and expense risk charges; and the contingent deferred administration charge and
contingent deferred sales load that may be deducted upon full surrenders or
lapse of a Policy) and the average fees and expenses of the Mutual Funds. The
first two illustrations reflect current administrative and cost of insurance
charges. The third and fourth illustrations reflect the guaranteed maximum
administration and cost of insurance charges. The average fees and expenses of
the Mutual Funds may decrease or increase in the future making operating
expenses actually incurred by the Mutual Funds differ from the .69% average rate
shown in the illustrations.
The four illustrations are based on the assumption that payments are made
in accordance with a $4,000 annual Target Premium schedule, that no values are
allocated to the Fixed Account, no changes in death benefit option or face
amount are made, no policy loans or partial surrenders occur, and that no riders
are in effect. Upon request, the Company will prepare a comparable illustration
reflecting the proposed insured's actual age, gender, risk classification and
desired policy features.
From time to time, in advertisements or sales literature for the Policies
that quote performance data for one or more of the Mutual Funds, the Company may
include Policy Values, Surrender Values and death benefit figures computed using
the same methodology as that used in the following illustrations, but with the
average annual total return of the Fund for which performance data is shown in
the advertisement replacing the hypothetical rates of return shown in the
following tables. This information may be shown in the form of graphs, charts,
tables and examples and may include data for periods prior to the offering of
the Policies for which a Mutual Funds has had performance (with Policy charges
assumed to be equal to current charges for any periods prior to offering the
Policies).
<TABLE>
<CAPTION>
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
PLANNED PREMIUM $4,000 MALE AGE 45 NON-SMOKER Initial Face Amount $250,000
ASSUMING CURRENT CHARGES Death Benefit Option 1
- -----------------------------------------------------------------------------------------------------------------------------------
Death Benefit (2) Accumulated Value (2) Surrender Value (2)
Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Annual Investment Return of Annual Investment Return of Annual Investment Return of
---------------------------- ------------------------------- ---------------------------
End of Accumulated 0% 6% 12% 0% 6% 12% 0% 6% 12%
Year Premiums (1) (.65% net)(5.35% net)(11.35% net) (.65% net)(5.35% net)(11.35% net) (.65% net)(5.35% net)(11.35% net)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 250,000 250,000 250,000 2,929 3,127 3,325 1,081 1,279 1,477
2 8,610 250,000 250,000 250,000 5,791 6,368 6,970 3,437 4,014 4,616
3 13,241 250,000 250,000 250,000 8,556 9,698 10,937 4,425 5,567 6,806
4 18,103 250,000 250,000 250,000 11,251 13,149 15,288 7,121 9,018 11,157
5 23,208 250,000 250,000 250,000 13,875 16,721 20,061 9,744 12,591 15,930
6 28,568 250,000 250,000 250,000 16,423 20,419 25,299 12,489 16,485 21,364
7 34,196 250,000 250,000 250,000 18,894 24,244 31,047 15,354 20,703 27,507
8 40,106 250,000 250,000 250,000 21,271 28,186 37,347 18,321 25,236 34,396
9 46,312 250,000 250,000 250,000 23,541 32,238 44,244 21,377 30,074 42,080
10 52,827 250,000 250,000 250,000 25,863 36,631 52,130 24,682 35,451 50,950
11 59,669 250,000 250,000 250,000 28,184 41,287 60,954 28,184 41,287 60,954
12 66,852 250,000 250,000 250,000 30,449 46,155 70,756 30,449 46,155 70,756
13 74,395 250,000 250,000 250,000 32,662 51,257 81,658 32,662 51,257 81,658
14 82,314 250,000 250,000 250,000 34,848 56,628 93,812 34,848 56,628 93,812
15 90,630 250,000 250,000 250,000 36,932 62,215 107,309 36,932 62,215 107,309
16 99,361 250,000 250,000 250,000 38,892 68,014 122,302 38,892 68,014 122,302
17 108,530 250,000 250,000 250,000 40,714 74,031 138,975 40,714 74,031 138,975
18 118,156 250,000 250,000 250,000 42,384 80,270 157,542 42,384 80,270 157,542
19 128,264 250,000 250,000 250,000 43,892 86,744 178,249 43,892 86,744 178,249
20 138,877 250,000 250,000 250,000 45,243 93,481 201,390 45,243 93,481 201,390
</TABLE>
(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%, 6% 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%, 6% 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.
<TABLE>
<CAPTION>
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
PLANNED PREMIUM $4,000 MALE AGE 45 NON-SMOKER Initial Face Amount $250,000
ASSUMING GUARANTEED CHARGES Death Benefit Option 1
- -----------------------------------------------------------------------------------------------------------------------------------
Death Benefit (2) Accumulated Value (2) Surrender Value (2)
Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Annual Investment Return of Annual Investment Return of Annual Investment Return of
---------------------------- ------------------------------- ---------------------------
End of Accumulated 0% 6% 12% 0% 6% 12% 0% 6% 12%
Year Premiums (1) (.65% net)(5.35% net)(11.35% net) (.65% net)(5.35% net)(11.35% net) (.65% net)(5.35% net)(11.35% net)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 250,000 250,000 250,000 2,715 2,906 3,098 867 1,058 1,249
2 8,610 250,000 250,000 250,000 5,360 5,911 6,485 3,006 3,556 4,131
3 13,241 250,000 250,000 250,000 7,902 8,984 10,159 3,771 4,853 6,028
4 18,103 250,000 250,000 250,000 10,336 12,124 14,144 6,205 7,993 10,013
5 23,208 250,000 250,000 250,000 12,659 15,329 18,469 8,528 11,199 14,338
6 28,568 250,000 250,000 250,000 14,861 18,593 23,163 10,927 14,659 19,229
7 34,196 250,000 250,000 250,000 16,933 21,908 28,256 13,392 18,367 24,715
8 40,106 250,000 250,000 250,000 18,860 25,262 33,779 15,910 22,311 30,828
9 46,312 250,000 250,000 250,000 20,629 28,643 39,768 18,466 26,479 37,605
10 52,827 250,000 250,000 250,000 22,372 32,248 46,564 21,192 31,068 45,384
11 59,669 250,000 250,000 250,000 24,040 36,001 54,113 24,040 36,001 54,113
12 66,852 250,000 250,000 250,000 25,520 39,793 62,390 25,520 39,793 62,390
13 74,395 250,000 250,000 250,000 26,802 43,622 71,487 26,802 43,622 71,487
14 82,314 250,000 250,000 250,000 27,868 47,478 81,502 27,868 47,478 81,502
15 90,630 250,000 250,000 250,000 28,689 51,342 92,546 28,689 51,342 92,546
16 99,361 250,000 250,000 250,000 29,242 55,201 104,751 29,242 55,201 104,751
17 108,530 250,000 250,000 250,000 29,496 59,036 118,276 29,496 59,036 118,276
18 118,156 250,000 250,000 250,000 29,402 62,815 133,296 29,402 62,815 133,296
19 128,264 250,000 250,000 250,000 28,913 66,507 150,032 28,913 66,507 150,032
20 138,877 250,000 250,000 250,000 27,978 70,082 168,751 27,978 70,082 168,751
</TABLE>
(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%, 6% 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%, 6% 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.
<TABLE>
<CAPTION>
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
PLANNED PREMIUM $4,000 MALE AGE 45 NON-SMOKER Initial Face Amount $250,000
ASSUMING CURRENT CHARGES Death Benefit Option 2
- -----------------------------------------------------------------------------------------------------------------------------------
Death Benefit (2) Accumulated Value (2) Surrender Value (2)
Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Annual Investment Return of Annual Investment Return of Annual Investment Return of
---------------------------- --------------------------- ---------------------------
End of Accumulated 0% 6% 12% 0% 6% 12% 0% 6% 12%
Year Premiums (1) (.65% net)(5.35% net)(11.35% net) (.65% net)(5.35% net)(11.35% net) (.65% net)(5.35% net)(11.35% net)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 252,920 253,117 253,315 2,920 3,117 3,315 1,072 1,269 1,466
2 8,610 255,763 256,337 256,936 5,763 6,337 6,936 2,816 3,391 3,989
3 13,241 258,499 259,633 260,862 8,499 9,633 10,862 4,368 5,502 6,731
4 18,103 261,155 263,034 265,152 11,155 13,034 15,152 7,024 8,903 11,021
5 23,208 263,729 266,540 269,837 13,729 16,540 19,837 9,598 12,409 15,706
6 28,568 266,215 270,150 274,954 16,215 20,150 24,954 12,281 16,216 21,020
7 34,196 268,612 273,864 280,541 18,612 23,864 30,541 15,071 20,324 27,001
8 40,106 270,900 277,667 286,626 20,900 27,667 36,626 17,949 24,717 33,676
9 46,312 273,063 281,544 293,242 23,063 31,544 43,242 20,899 29,380 41,078
10 52,827 275,256 285,715 300,753 25,256 35,715 50,753 24,076 34,535 49,573
11 59,669 277,427 290,096 309,091 27,427 40,096 59,091 27,427 40,096 59,091
12 66,852 279,521 294,640 318,284 29,521 44,640 68,284 29,521 44,640 68,284
13 74,395 281,547 299,360 328,433 31,547 49,360 78,433 31,547 49,360 78,433
14 82,314 283,532 304,295 339,671 33,532 54,295 89,671 33,532 54,295 89,671
15 90,630 285,387 309,362 352,023 35,387 59,362 102,023 35,387 59,362 102,023
16 99,361 287,084 314,539 365,580 37,084 64,539 115,580 37,084 64,539 115,580
17 108,530 288,606 319,811 380,455 38,606 69,811 130,455 38,606 69,811 130,455
18 118,156 289,935 325,163 396,770 39,935 75,163 146,770 39,935 75,163 146,770
19 128,264 291,055 330,582 414,667 41,055 80,582 164,667 41,055 80,582 164,667
20 138,877 291,974 336,076 434,323 41,974 86,076 184,323 41,974 86,076 184,323
</TABLE>
(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%, 6% 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%, 6% 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>
<TABLE>
<CAPTION>
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
PLANNED PREMIUM $4,000 MALE AGE 45 NON-SMOKER Initial Face Amount $250,000
ASSUMING GUARANTEED CHARGES Death Benefit Option 2
- -----------------------------------------------------------------------------------------------------------------------------------
Death Benefit (2) Accumulated Value (2) Surrender Value (2)
Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Annual Investment Return of Annual Investment Return of Annual Investment Return of
---------------------------- --------------------------- ---------------------------
End of Accumulated 0% 6% 12% 0% 6% 12% 0% 6% 12%
Year Premiums (1) (.65% net)(5.35% net)(11.35% net) (.65% net)(5.35% net)(11.35% net) (.65% net)(5.35% net)(11.35% net)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 252,704 252,894 253,085 2,704 2,894 3,085 856 1,046 1,237
2 8,610 255,327 255,874 256,445 5,327 5,874 6,445 2,380 2,927 3,498
3 13,241 257,835 258,907 260,071 7,835 8,907 10,071 3,704 4,777 5,940
4 18,103 260,223 261,989 263,983 10,223 11,989 13,983 6,092 7,858 9,852
5 23,208 262,485 265,113 268,201 12,485 15,113 18,201 8,354 10,982 14,071
6 28,568 264,610 268,268 272,745 14,610 18,268 22,745 10,676 14,334 18,811
7 34,196 266,586 271,441 277,633 16,586 21,441 27,633 13,046 17,901 24,092
8 40,106 268,398 274,615 282,880 18,398 24,615 32,880 15,448 21,664 29,929
9 46,312 270,029 277,769 288,503 20,029 27,769 38,503 17,866 25,605 36,339
10 52,827 271,604 281,083 294,807 21,604 31,083 44,807 20,424 29,903 43,627
11 59,669 273,073 284,473 301,711 23,073 34,473 51,711 23,073 34,473 51,711
12 66,852 274,321 287,819 309,152 24,321 37,819 59,152 24,321 37,819 59,152
13 74,395 275,336 291,104 317,173 25,336 41,104 67,173 25,336 41,104 67,173
14 82,314 276,095 294,301 325,813 26,095 44,301 75,813 26,095 44,301 75,813
15 90,630 276,570 297,371 335,104 26,570 47,371 85,104 26,570 47,371 85,104
16 99,361 276,733 300,278 345,088 26,733 50,278 95,088 26,733 50,278 95,088
17 108,530 276,551 302,978 355,803 26,551 52,978 105,803 26,551 52,978 105,803
18 118,156 275,974 305,403 367,271 25,974 55,403 117,271 25,974 55,403 117,271
19 128,264 274,956 307,489 379,522 24,956 57,489 129,522 24,956 57,489 129,522
20 138,877 273,447 309,165 392,586 23,447 59,165 142,586 23,447 59,165 142,586
</TABLE>
(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%, 6% 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%, 6% 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>
Appendix B
Target Premiums
Annual per $1,000 Face Amount
Nonsmoker and Smoker
Age* Male Female Unisex Age* Male Female Unisex
0 3.50 2.83 3.41 43 12.91 10.82 12.64
1 3.50 2.83 3.41 44 13.59 11.36 13.30
2 3.50 2.83 3.41 45 14.31 11.93 14.00
3 3.50 2.83 3.41 46 15.09 12.53 14.76
4 3.50 2.83 3.41 47 15.90 13.16 15.54
5 3.50 2.83 3.41 48 16.77 13.83 16.39
6 3.50 2.83 3.41 49 17.70 14.54 17.29
7 3.50 2.83 3.41 50 18.68 15.30 18.24
8 3.50 2.83 3.41 51 19.74 16.10 19.27
9 3.50 2.83 3.41 52 20.86 16.94 20.35
10 3.50 2.83 3.41 53 22.05 17.85 21.50
11 3.65 2.91 3.55 54 23.32 18.80 22.73
12 3.80 3.00 3.70 55 24.67 19.82 24.04
13 3.95 3.08 3.84 56 26.11 20.90 25.43
14 4.10 3.17 3.98 57 27.65 22.05 26.92
15 4.25 3.25 4.12 58 29.30 23.29 28.52
16 4.62 3.63 4.49 59 31.05 24.62 30.21
17 4.99 4.00 4.86 60 32.93 26.06 32.04
18 5.36 4.38 5.23 61 34.94 27.60 33.99
19 5.73 4.75 5.60 62 37.10 29.26 36.08
20 6.10 5.13 5.97 63 39.40 31.06 38.32
21 6.11 5.16 5.99 64 41.86 32.97 40.70
22 6.12 5.20 6.00 65 44.48 35.02 43.25
23 6.13 5.23 6.01 66 47.29 37.21 45.98
24 6.14 5.27 6.03 67 50.30 39.58 48.91
25 6.15 5.30 6.04 68 53.52 42.14 52.04
26 6.29 5.42 6.18 69 56.98 44.93 55.41
27 6.43 5.54 6.31 70 60.71 47.98 59.06
28 6.57 5.65 6.45 71 64.73 51.30 62.98
29 6.71 5.77 6.59 72 69.02 54.93 67.19
30 6.85 5.89 6.73 73 73.62 58.86 71.70
31 7.17 6.16 7.04 74 78.48 63.12 76.48
32 7.51 6.44 7.37 75 83.65 67.71 81.58
33 7.87 6.74 7.72 76 87.41 71.10 85.29
34 8.26 7.06 8.10 77 91.34 74.66 89.17
35 8.66 7.40 8.50 78 95.45 78.39 93.23
36 9.10 7.76 8.93 79 99.75 82.31 97.48
37 9.55 8.13 9.37 80 104.24 86.43 101.92
38 10.03 8.53 9.84 81 112.06 94.21 109.74
39 10.54 8.94 10.33 82 120.46 102.69 118.15
40 11.09 9.38 10.87 83 129.49 111.93 127.21
41 11.66 9.83 11.42 84 139.20 122.00 136.96
42 12.26 10.32 12.01 85 149.64 132.98 147.47
* Last Birthday
<PAGE>
APPENDIX C EXCHANGE OFFER
The Company, the Separate Account, and Princor Financial Services
Corporation have received an order from the SEC permitting an offer to exchange
the policy described in this Prospectus (the "PrinFlex Life Policy") for certain
outstanding Flexible Variable Life Insurance policies issued by the Company (the
"FVLI Policy"). The exchange offer is extended to owners of the FVLI policies.
The exchange offer will remain open for at least one year after the date of the
order, February 13, 1997. Thereafter, the Company may withdraw the exchange
offer at any time. The exchange offer is only made in states in which the
PrinFlex Life Policy is available for sale. In considering whether to accept the
exchange offer, you should consult this Prospectus and the prospectus for the
FVLI Policy since the provisions and charges of the FVLI Policy differ from
those of the PrinFlex Life Policy. Owners of the FVLI Policy may request
personalized policy illustrations for the FVLI Policy and the PrinFlex Life
Policy from the Company. These illustrations are available at no charge.
The FVLI Policy will be exchanged at net asset value for the PrinFlex Life
Policy. Because the exchange will be at net asset value, at the time of exchange
the accumulated value of the PrinFlex Life Policy issued in the exchange will
equal the accumulated value of the FVLI Policy surrendered in the exchange.
However, because the surrender charges of the two policies are calculated
differently, the surrender value of the PrinFlex Life Policy at the time of
exchange may be lower or higher than the surrender value of the FVLI Policy.
To effect an exchange, the Company must receive from the policyowner (1) a
completed application for the PrinFlex Life Policy, (2) a request and release
for the exchange on a form supplied by the Company, and (3) the FVLI Policy to
be exchanged (or, if the FVLI Policy has been lost or destroyed, an indication
to that effect on the request and release). The policyowner and the insured must
be the same person(s) under the PrinFLex Life Policy acquired as under the
exchanged FVLI Policy. The PrinFlex Life Policy will be issued without evidence
of insurability for the same amount of insurance as the FVLI Policy. The
exchange will become effective as of the close of the Valuation Period in which
all of these three items are received by the Company at its home office. The
accumulated value of the FVLI Policy will be determined as of the time the
exchange becomes effective and will be transferred to the PrinFlex Life Policy.
No surrender charge otherwise applicable to the FVLI Policy will apply to
the surrender in connection with the exchange, and no Premium Expense Charge
will be deducted from the proceeds of that surrender when these proceeds are
applied to the purchase of a PrinFlex Life Policy as part of an exchange. If the
Policy Date of the FVLI Policy surrendered in the exchange is the same day of
the month as the Policy Date of the PrinFlex Life Policy issued in the exchange,
then surrender charges and front-end sales loads on subsequent premium payments
for the PrinFlex Life Policy will be calculated using the Policy Date of the
FVLI Policy, as if the Policy Date of the FVLI Policy were also the Policy Date
of the PrinFlex Life Policy. (Example: If the Policy Date of the FVLI Policy is
December 1, 1990 and the FVLI Policy is exchanged for a PrinFlex Life Policy
with a Policy Date of April 1, 1997, then front-end sales loads on subsequent
premium payments and surrender charges for the PrinFlex Life Policy will be
calculated as if the Policy Date of the PrinFlex Life Policy were December 1,
1990).
If the Policy Date of the FVLI Policy surrendered in the exchange is on a
day of the month different from the Policy Date of the PrinFlex Life Policy
issued in the exchange, then surrender charges and front-end loads on subsequent
premium payments for the PrinFlex Life Policy will be calculated using the
hypothetical Monthly Date of the PrinFlex Life Policy that would have
immediately preceded the Policy Date of the FVLI Policy surrendered in the
exchange, as if that hypothetical Monthly Date were the Policy Date of the
PrinFlex Life Policy. (Example: If the Policy Date of the FVLI Policy is
December 15, 1990 and the FVLI Policy is exchanged for a PrinFlex Life Policy
with a Policy Date of April 1, 1997, then front-end sales loads on subsequent
premium payments and surrender charges for the PrinFlex Life Policy will be
calculated as if the Policy Date of the PrinFlex Life Policy were December 1,
1990).
If the FVLI Policy includes one or more face amount increases, then surrender
charges and front-end sales loads for the entire face amount of the PrinFlex
Life Policy acquired in the exchange will be calculated using the same date that
would be used if no face amount increases had occurred. (Example: The FVLI
Policy was issued with a Policy Date of June 15, 1989 in an initial face amount
of $100,000. On September 15, 1994, the face amount of the FVLI Policy was
increased to $150,000. If the FVLI Policy is exchanged for a PrinFlex Life
Policy with a Policy Date of August 1, 1997, the surrender charges and front-end
sales loads for the entire $150,000 face amount of the PrinFlex Life Policy will
be calculated as if the Policy Date of the PrinFlex Life Policy were June 1
1989).
All other duration-related charges under the PrinFlex Life Policy and the
time period restrictions associated with certain policy transactions (e.g.,
death benefit option changes, face amount decreases, and partial surrenders)
will be calculated based on the actual Policy Date of the PrinFlex Life Policy.
The Policy Date of the PrinFlex Life Policy will be the date the exchange is
effected, unless that date falls on the 29th, 30th or 31st of a month. In that
event, the PrinFlex Life Policy will be dated on the 28th of the month.
Summary of Charges Under Policies
The charges under the FVLI Policy and the PrinFlex Life Policy differ
substantially, as summarized below. There may be other differences important to
you and the prospectuses for both policies should be reviewed carefully before
you decide whether to exchange your FVLI Policy for a PrinFlex Life Policy. The
table does not include management fees and other expenses of the underlying
mutual funds in which the Divisions of the Separate Account invest. Please refer
to the prospectus for both policies for information regardomg these fees and
expenses. A table summarizing charges under the respective policies follows:
FVLI POLICY PRINFLEX LIFE POLICY
FRONT-END 5% of all premiums 2.75% of all premiums
SALES LOAD up to one Target
Premium in a Policy
Year during the first
ten Policy Years;
0.75% of all premiums
in excess of Target
Premium during the
first ten Policy
Years; and 0.00% of
all premiums after
ten policy years.
(Credit is given for
time in the FVLI
Policy in calculating
front-end sales loads
on the PrinFlex Life
Policy). A new 10-
year period for
imposition of fron-
end sales loads
commences with any
face amount increase
for all premium
payments attributable
to the increase.
PREMIUM 2% of all premiums for state 2.20% of all premiums
TAX CHARGE premium taxes for state and local
premium taxes (this
charge is not
deducted from amounts
transferred from the
FVLI Policy to the
PrinFlex Life Policy)
CHARGE FOR FEDERAL None 1.25% of all premiums
TAXES (this charge is not
decucted from amounts
transferred from the
FVLI Policy to the
PrinFlex Life Policy)
MONTHLY Currently $4.75 per month During the first
ADMINISTRATIVE (guaranteed never to exceed Policy Year, an
CHARGE $5.00 per month) amount equal to $.40
for each $1,000 of
policy face amount
but not less than
$6.00 per month and
no greater than
$16.67 per month
(PrinFlex Life
Policies issued in
the exchange are
subject to first-year
administrative
charges). After the
first Policy Year,
the monthly
administrative charge
is currently $6.00
(guaranteed to be no
more than $10.00).
POLICY LOANS Interest on policy loans During the first ten
is charged at an effective years, interest on
annual rate of 8% and policy loans is
interest on amounts in the charged at an
loan account accrues at an effective annual rate
annual rate of 6% of 8% and interest on
amounts in the Loan
Account is credited
at an annual rate of
6%. After the tenth
Policy Year, interest
on amounts in the
Loan Account is
credited at an annual
rate of 7.75%. (For
PrinFlex Life
Policies issued in
the exchange,
interest crediting
rate on amounts in
the Loan Account is
based on Policy Date
of PrinFlex Life
Policy).
PARTIAL Allowed after the first policy Allowed after second
SURRENDERS anniversary, but no more than policy anniversary
two times per Policy Year. (PrinFlex Life
Minimum partial surrender is Policies issued in
$500 and maximum is 50% of the exchange are
Policy's net surrender value subject to this
at the time the written request limitation), but not
for surrender is received in more than two times
the home office. A transaction per Policy Year. The
charge of the lesser of $25.00 minimum partial
or 2% of the amount of each surrender is $500 and
partial surrender applies. the maximum in any
(The transaction charge will be Policy Year is 75% of
waived for partial surrenders the PrinFlex Life
to pay off loans in connection Policy's Net
with the exchange). Surrender Value as of
the date of the first
partial surrender
during the Policy
Year. A transaction
charge of the lesser
of $25.00 or 2% of
the amount
surrendered is
imposed on each
partial surrender.
COST OF INSURANCE COI charges each month are COI charges are
("COI") CHARGES based on attained age, sex based on the same
(except where unisex values factors as apply to
are mandated by law) determine COI charges
smoking status, and risk on the FVLI Policy
class. No "preferred" and two additional
underwriting classification factors: issue age
is available. and duration since
issue. (For PrinFlex
Life Policies issued
in the exchange,
issue age and
duration since issue
are calculated based
on the Policy Date of
the PrinFlex Life
Policy. "Preferred"
underwriting
classification is
available.
MORTALITY AND Assessed daily on the assets Deducted monthly from
EXPENSE RISKS of each division at a current the Policy Value
CHARGE annual rate of .75% allocated to the
(guaranteed not to exceed .90%). Divisions at an
annual rate of .90%
of the value of the
PrinFlex Life Policy
allocated to the
Divisions. The
charge is not
deducted from values
allocated to the
Fixed Account. After
the ninth Policy
Year, the charge is
reduced to a 0.27%
annual rate. (For
PrinFlex Life
Policies issued in
the exchange, the
charge is calculated
based on the Policy
Date of the PrinFlex
Life Policy).
SURRENDER 10-year surrender charge 10-year surrender
CHARGES period. Surrender charge charge period.
consists of contingent Surrender charge
deferred sales load that never consists of
exceeds 25% of minimum Contingent Deferred
required first year premium, Sales Charge of up
and contingent deferred to 47.25% of premium
administrative charge that payments up to a
varies with age and (where maximum of two Target
allowed by law) sex of the Premiums and a
insured from $0.43 per contingent deferred
$1,000 of face amount to administration charge
$10.58 per $1,000 of face of $3.00 per $1,000
amount. of face amount for
the first $500,000
of face amount.
(Credit is given for
time in the FVLI
Policy in calculating
surrender charges on
the PrinFlex Life
Policy). A new 10-
year surrender charge
period commences with
respect to face
amount increases to
the PrinFlex Life
Policy.
Policy Free Look and Calculation of Certain Time Periods for PrinFlex Life
Policies Acquired by Exchange
For PrinFlex Life Policies acquired by exchange, the free look,
incontestability, and suicide clause time periods shall be calculated as if the
Policy Date of the PrinFlex Life Policy were the Policy Date of the FVLI Policy.
Therefore, any of these periods that had expired under the FVLI Policy will not
start anew, and any that had not expired will continue until they originally
were to expire. For FVLI Policies with one or more face amount increases or
riders added after issue, the new suicide clause and incontestability time
periods for the increases in face amount or riders carry over to the PrinFlex
Life Policy.
Values transferred from an FVLI Policy to a PrinFlex Life Policy issued in
an exchange, and all additional net premium payments made to the PrinFlex Life
Policy, will be allocated immediately among the Divisions and the Fixed Account
in accordance with the policyowners current allocation instructions. (By
contrast, for a PrinFlex Life Policy not acquired by exchange the initial Net
Premium Payment and any additional premiums received prior to the Effective Date
and during the first 20 days from the Effective Date are allocated to the Money
Market Division until the 21st day from the Effective Date of the PrinFlex Life
Policy).
Risk Class for PrinFlex Life Policies Acquired by Exchange
The risk class for a PrinFlex Life Policy acquired by exchange will be the
one most similar to the risk class for the exchanged FVLI Policy. If an FVLI
Policy includes a face amount increase at a risk class less favorable than that
for the FVLI Policy as originally issued, then the PrinFlex Life Policy will be
issued at the risk class most similar to that for the FVLI Policy as originally
issued. New evidence of insurability will not be required as a condition of the
exchange unless (i) the owner requests one or more of certain optional insurance
riders under the PrinFlex Life Policy that were not a part of the FVLI Policy;
(ii) the owner applies to have the insureds underwriting class upgraded to the
preferred class that is offered under the PrinFlex Life Policy but not under the
FVLI Policy or (iii) the owner requests a face amount increase at the time of
the exchange. The PrinFlex Life Policys $50,000 minimum face amount increase
will be reduced to $25,000 for increases requested at the time of the exchange.
If new underwriting is required as part of the exchange because of reason number
(ii) above, a charge of $100 normally would be imposed. If the owner also
requests a face amount increase of $25,000 or more at the time of the exchange,
however, this $100 charge for the new underwriting will be waived. Any increase
in face amount, upgrade to a preferred rating or any new rider added in
connection with an exchange will take effect on the next Monthly Date following
underwriting approval.
Minimum Required Premium
Under the FVLI Policy, payment of a minimum required premium is required
during the first policy year. For a PrinFlex Life Policy not acquired by
exchange, payment of a Minimum Required Premium is required during the first two
Policy Years. For a PrinFlex Life Policy acquired by exchange of an FVLI Policy,
there will be no Minimum Required Premium even if the FVLI Policy was within the
first policy year.
A PrinFlex Life Policy (other than one acquired by exchange) will not
terminate during the first 24 months following the Policy Date even if the Net
Surrender Value of the PrinFlex Life Policy on a Monthly Date is less than the
Monthly Policy Charge, provided that no policy loans have been taken and the
policyowner has paid at least the Minimum Required Premium. Because the Minimum
Required Premium does not apply to a PrinFlex Life Policy acquired by exchange,
such a policy will enter a grace period during the first 24 Policy Months (and
thereafter) if the Net Surrender Value on a Monthly Date is less than the
Monthly Policy Charge, even if no loans have been taken. (However, if the
PrinFlex Life Policy has a death benefit guarantee rider, the Policy will not
enter a grace period if the terms of the rider are satisfied).
Policy Riders
Where permitted by law, the following riders are currently available for
issue with the FVLI Policy: Cost of Living Increase, Waiver of Monthly
Deductions, Guaranteed Increase Option, Accidental Death Benefit, Children Term
Insurance, Spouse Term Insurance, Change of Insured, Accelerated Death Benefit,
and Death Benefit Guarantee. The Guaranteed Increase Option is not available on
the PrinFlex Life Policy. With that exception, the same or corresponding riders
are available on the PrinFlex Life Policy. There are differences between the
terms of some riders available for issue with the FVLI Policy and the
corresponding riders available for issue with the PrinFlex Life Policy. Where
permitted by law, the following additional riders are available on the PrinFlex
Life Policy that are not available on the FVLI Policy: Waiver of Specified
Premium, Salary Increase, Extra Protection Increase, Extended Coverage, and
Accounting Benefit.
If an FVLI Policy with one or more policy riders is exchanged, then except
as provided below, the policyowner may elect to have the PrinFlex Life Policy
issued with the same riders (or, if the terms of the available rider differ for
the PrinFlex Life Policy, the corresponding rider) by applying for the rider on
the exchange offer application. However, if the FVLI Policy has a Cost of Living
Increase Rider, then the PrinFlex Life Policy will be issued with a Cost of
Living Increase Rider automatically. If a PrinFlex Life Policy with a Cost of
Living Increase Rider is issued in the exchange, the first cost of living
increase offer under the PrinFlex Life Policy will be three years after the
Policy Date of the PrinFlex Life Policy.
The death benefit guarantee rider is available for issue with both the FVLI
Policy and the PrinFlex Life Policy. The terms of the rider differ between the
FVLI Policy and the PrinFlex Life Policy. The death benefit guarantee rider is
included automatically on all FVLI Policies but, where permitted by law, is only
included on a PrinFlex Life Policy if the insured is under age 65 at issue and
if the planned periodic premium at issue is equal to or greater than the
guaranteed death benefit premium amount specified for the PrinFlex Life Policy.
While the death benefit guarantee rider under the FVLI Policy can apply
throughout the insureds life, the comparable rider under the PrinFlex Life
Policy terminates on the later of the age 65 policy anniversary or five years
after the effective date of the rider. If an FVLI Policy has the death benefit
guarantee rider, the PrinFlex Policy will be issued with the comparable death
benefit guarantee rider only if the insured is under age 65 on the date of
exchange and the planned periodic premium is equal to or greater than the death
benefit guarantee premium.
Certain riders available under the PrinFlex Life Policy may be applied for
in connection with the exchange offer application, subject to underwriting
approval. Additional information about riders and the differences between them
is available from the Company.
