SUPPLEMENT DATED OCTOBER 30, 1998
TO THE
PRINFLEX LIFE(R) VARIABLE LIFE INSURANCE PROSPECTUS
DATED MAY 1, 1998
Effective November 1, 1998:
o The Exchange Offer described in Appendix C (pages 92-97) is no longer being
offered by the Company. This program covered the conversion of certain
Flexible Variable Life Insurance policies for PrinFlex Life policies; and
o Certain states require that the Company reinstate Contracts which have been
surrendered (within 60 days of the surrender). The state may also require
that we reimburse you for the surrender charge, if any, imposed at the time
of the surrender. A current list of reinstatement requirements is available
from the Company.
Prospectus Dated May 1, 1998
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. As policyowner you 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
you 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 an investment portfolio of an open-end,
management investment company ("Mutual Fund"). The accompanying prospectuses
describe the investment objectives and risks of the Mutual Funds currently
offered as investment choices under the Policy: Principal Variable Contracts
Fund, Inc. - Aggressive Growth Account, Asset Allocation Account, Balanced
Account, Bond Account, Capital Value Account, Government Securities Account,
Growth Account, International Account, International SmallCap Account, MicroCap
Account, MidCap Account, MidCap Growth Account, Money Market Account, Real
Estate Account, SmallCap Account, SmallCap Growth Account, SmallCap Value
Account and Utilities Account; Fidelity Variable Insurance Products Fund II:
Contrafund Portfolio ("Fidelity VIP Contrafund Portfolio"); Fidelity Variable
Insurance Products Fund: Equity-Income Portfolio ("Fidelity VIP Equity-Income
Portfolio") ; Fidelity Variable Insurance Products Fund: High Income Portfolio
("Fidelity VIP High Income Portfolio); Putnam Variable Trust Global Asset
Allocation Fund ("Putnam VT Global Asset Allocation Fund"); Putnam Variable
Trust Vista Fund ("Putnam VT Vista Fund") and Putnam Variable Trust Voyager Fund
("Putnam VT Voyager Fund").
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, Principal Variable Contracts Fund, Inc. and
Putnam Variable Trust.
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.............................................. 5
Policy Value.......................................... 5
Transfers............................................. 6
Policy Loans.......................................... 6
Total and Partial Surrenders...........................6
Charges and Deductions ............................... 6
Maturity Proceeds..................................... 6
Death Benefit and Proceeds............................ 6
Adjustment Options.................................... 7
Termination and Reinstatement......................... 7
Policy "Free Look".................................... 8
Distribution of the Policy............................ 8
Tax Consequences of the Policy........................ 8
DESCRIPTION OF PRINCIPAL MUTUAL
LIFE INSURANCE COMPANY .....................................8
PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY VARIABLE LIFE SEPARATE
ACCOUNT.....................................................9
Separate Account Divisions............................10
PURCHASING A POLICY........................................13
Purchase Procedures...................................13
Payment of Premiums...................................13
Premium Limitations...................................13
Allocation of Premiums................................14
Policy "Free Look"....................................14
VALUES AND POLICY FEATURES WHILE
THE POLICY IS IN FORCE.....................................14
Policy Values.........................................14
Transfers.............................................15
Automatic Portfolio Balancing.........................16
Policy Loans..........................................16
Total and Partial Surrenders..........................17
DEATH BENEFITS AND RIGHTS..................................17
Death Proceeds........................................17
Death Benefit.........................................17
Applicable Percentage.................................17
Change in Death Benefit Option........................18
Adjustment Options....................................18
CHARGES AND DEDUCTIONS.....................................19
Premium Expense Charge................................19
Monthly Policy Charge.................................19
Cost of Insurance Charge..............................20
Administration Charge.................................20
Mortality and Expense Risks Charge....................20
Transaction Charge....................................20
Surrender Charge......................................20
Contingent Deferred Sales Charge......................21
Contingent Deferred Administration Charge.............21
Surrender Charge Percentage...........................21
Sales Charge Limitations..............................21
Other Charges.........................................21
Special Provisions for Group or Sponsored
Arrangements..........................................21
THE FIXED ACCOUNT..........................................22
POLICY TERMINATION AND REINSTATEMENT.......................22
Policy Termination....................................22
Reinstatement.........................................23
OTHER MATTERS..............................................23
Voting Rights.........................................23
Statement of Values...................................23
Service Available by Telephone........................24
GENERAL PROVISIONS.........................................24
Addition, Deletion, or Substitution of
Investments...........................................24
Optional Insurance Benefits...........................24
The Contract..........................................25
Incontestability......................................25
Misstatements.........................................25
Suicide...............................................25
Ownership.............................................25
Beneficiaries.........................................26
Benefit Instructions..................................26
Postponement of Payments..............................26
Assignment............................................26
Policy Proceeds.......................................26
Participating Policy..................................26
Right to Exchange Policy..............................27
Term Conversion Bonus Program.........................27
DISTRIBUTION OF THE POLICY.................................27
OFFICERS AND DIRECTORS OF PRINCIPAL
MANAGEMENT CORPORATION.....................................28
OFFICERS AND DIRECTORS OF
PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY....................................................28
STATE REGULATION OF PRINCIPAL
MUTUAL LIFE INSURANCE COMPANY..............................30
FEDERAL TAX MATTERS........................................30
Tax Status of the Company and the Separate
Account...............................................30
Charges for Taxes.....................................30
Diversification Standards.............................30
Life Insurance Status of Policy.......................30
Modified Endowment Contract Status....................30
Policy Surrenders and Partial Surrenders..............31
Policy Loans and Interest Deductions..................31
Corporate Alternative Minimum Tax.....................31
Exchange or Assignments of Policies...................32
Withholding...........................................32
Taxation of Accelerated Death Benefits................32
Other Tax Issues......................................32
EMPLOYEE BENEFIT PLANS.....................................32
LEGAL PROCEEDINGS..........................................32
LEGAL OPINION..............................................32
INDEPENDENT AUDITORS.......................................32
REGISTRATION STATEMENT.....................................32
FINANCIAL STATEMENTS.......................................32
Report of Independent Auditors........................33
Variable Life Separate Account
Financial Statements..................................34
Report of Independent Auditors........................52
The Principal Financial Group
Financial Statements..................................53
APPENDIX A - SAMPLE ILLUSTRATIONS OF
POLICY VALUES, SURRENDER VALUES AND
DEATH BENEFITS.............................................84
APPENDIX B - TARGET PREMIUM................................91
APPENDIX C - EXCHANGE OFFER ...............................92
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
DOES NOT AUTHORIZE ANY INFORMATION OR REPRESENTATIONS REGARDING THE OFFERING
DESCRIBED IN THIS PROSPECTUS OTHER THAN AS CONTAINED IN THIS PROSPECTUS, THE
PROSPECTUS FOR THE UNDERLYING MUTUAL FUND OR THE STATEMENT OF ADDITIONAL
INFORMATION OF THIS FUND.
GLOSSARY OF SPECIAL TERMS
Account - Series or portfolio of a Mutual Fund in which a Separate Account
Division invests.
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 an Account or Portfolio of a 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 account or 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.
Related Policies - Policies which have a common Effective Date pursuant to a
Written Request from applicant(s).
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 you 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. You 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.
You may allocate Net Premium Payments to the Fixed Account and/or 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 Account. Allocation instructions may be changed at any time and
transfers may be made subject to certain conditions.
The Accounts in which the Divisions currently invest are as follows:
Account in which
Division the Division Invests
--------------------------------------------------
Aggressive Growth Division Aggressive Growth Account
Asset Allocation Division Asset Allocation Account
Balanced Division Balanced Account
Bond Division Bond Account
Capital Value Division Capital Value Account
Government Securities Division Government Securities Account
Growth Division Growth Account
International Division International Account
International SmallCap Division International SmallCap Account
MicroCap Division MicroCap Account
MidCap Division MidCap Account
MidCap Growth Division MidCap Growth Account
Money Market Division Money Market Account
Real Estate Division Real Estate Account
SmallCap Division SmallCap Account
SmallCap Growth Division SmallCap Growth Account
SmallCap Value Division SmallCap Value Account
Utilities Division Utilities Account
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
Putnam Global Asset Putnam VT Global Asset
Allocation Division Allocation Fund
Putnam Vista Division Putnam VT Vista Fund
Putnam Voyager Division Putnam VT Voyager Fund
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 (except where prohibited by
state law) (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
Account 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 $1,500 per Policy), and o
deferred sales charge of 47.25% of premiums paid up to a maximum of two
Target Premiums. (See "Contingent Deferred Sales
Charge")
Surrender Surrender Charge
Year Percentage
1- 5 100.00%
6 95.24%
7 85.71%
8 71.43%
9 52.38%
10 28.57%
11+ 0.00%
(3) Monthly Policy Charges
o administration charge:
During the first Policy Year: 1/12 x ($.40 for each $1,000 of
face amount), but no less than $6.00/month and no
greater than $16.67/month;
During each Policy Year thereafter: 1/12 x ($.60 for each
$1,000 of face amount)
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 Accounts
o transfer fee of $25 will 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 1. 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). The Written Request for
cancellation, along with the return of the Policy, must be made within: 10 days
after the Policy or written notice of this right is received by the policyowner
(30 days if the Policy is applied for in California by a policyowner age 60 or
over; 15 days if the Policy is applied for in Colorado; or 20 days if the Policy
is applied for in Idaho or North Dakota) or 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.
The Board of Directors of the Company has approved a Plan of Reorganization (the
"Plan") pursuant to which the Company will adopt a mutual insurance holding
company structure. The Plan was approved by the owners of annuity contracts and
life insurance policies issued by the Company and has been submitted to the
Commissioner of Insurance of the State of Iowa (the "Iowa Commissioner") for
approval.
Under the Plan, the Company will form a mutual insurance holding company named
"Principal Mutual Holding Company" and will convert to a stock life insurance
company. As part of such conversion, the Company will change its name to
"Principal Life Insurance Company" ("Principal Life"). Principal Mutual Holding
Company will be the ultimate parent company in the family of companies known as
the Principal Financial Group(R).
Because the Company currently is a mutual life insurance company, policyowners
have, in addition to contract rights related to the Policy, certain membership
interests in the Company, consisting principally of the right to vote on the
election of directors of the Company and on other matters and the right to
receive distributions of the Company's surplus upon liquidation or dissolution
of the Company. The Plan will preserve but separate these contract rights and
membership interests. Contract rights will remain with Principal Life, and
policyowners on the date the Plan becomes effective (the "Effective Date") will
automatically become members of Principal Mutual Holding Company and such
policyowner's membership interests in the Company will be extinguished. Under
the terms of the Plan, the membership interests of members of Principal Mutual
Holding Company will consist principally of the right to vote on the election of
directors of Principal Mutual Holding Company and on other matters and to
receive distributions of Principal Mutual Holding Company's assets upon
liquidation or dissolution of Principal Mutual Holding Company. Owners of
Policies issued by Principal Life after the Effective Date also will
automatically become members of Principal Mutual Holding Company. The Plan will
not, in any way, increase premium payments or reduce Policy benefits, values,
guarantees or other Policy obligations owed to policyowners. Policy obligations
will be the responsibility of Principal Life.
The Company believes that adoption of the Plan will result in a corporate
structure that, among other things, will provide the Company with flexibility in
raising capital through various means that are not currently available to it,
including stock offerings. Any initial offering of voting stock to third parties
will be subject to the approval of the Iowa Commissioner. Although there are no
current plans to offer voting stock, in the event voting stock was sold to third
parties, it is possible that the interests of such third party shareholders and
policyowners could diverge on certain issues. The Company, however, believes
that such shareholders and policyowners will generally have a greater
commonality of interests than the potential for conflict and will endeavor to
minimize the occurrence of such conflicts and to operate the companies in the
best interests of all constituencies.
The Effective Date is scheduled to be July 1, 1998, but the Iowa Commissioner
must first approve the Plan. In addition, insurance regulatory authorities in
each state must issue an amendment to the Company's Certificate of Authority (to
reflect the name change from Principal Mutual Life Insurance Company to
Principal Life Insurance Company) and must approve the forms which support the
Policy. Should the Effective Date be other than July 1, 1998 or if states other
than Iowa have not completed action by that date, the Company will notify
existing policyowners and others by supplementing this prospectus. Policies
issued on or after the Effective Date will be issued by Principal Life, will not
be participating and will not be eligible to participate in any distribution of
divisible surplus (see "Surplus Distribution at Sole Discretion of the
Company"). As a policyowner of a Policy issued after the Effective Date, you
will be a member of Principal Mutual Holding Company as described above.
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, 1997, 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,
1997, the Company had $63.2 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 Account. Some of
these Accounts 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 Accounts in which the Divisions invest, and the
investment adviser of each Account, are provided in the following table.
<TABLE>
<CAPTION>
ACCOUNT IN WHICH
DIVISION INVESTS AND ACCOUNT
DIVISION INVESTMENT ADVISER INVESTMENT OBJECTIVE
<S> <C> <C>
Aggressive Growth Division Aggressive Growth Account; 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 Asset Allocation Account; Seeks a total investment return consistent with
Morgan Stanley Asset Management, Inc. the preservation of capital.
through a sub-advisory agreement
Balanced Division Balanced Account; 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 Bond Account; Seeks to provide as high a level of income as is
Principal Management Corporation consistent with preservation of capital and prudent
investment risk.
Capital Value Division Capital Value Account; Seeks to achieve primarily long-term capital
Invista Capital Management, Inc. appreciation and secondarily growth of investment
through a sub-advisory agreement income through the purchase primarily of common
stocks, but the Account may invest in other
securities.
Government Securities Division Government Securities Account; Seeks a high level of income, liquidity and safety
Invista Capital Management, Inc. of principal through the purchase of obligations
through a sub-advisory agreement issued or guaranteed by the United States Government
or its agencies, with emphasis on Government
National Mortgage Association Certificates ("GNMA
Certificates"). Account shares are not guaranteed
by the United States Government.
Growth Division Growth Account; Seeks growth of capital through the purchase
Invista Capital Management, Inc. primarily of common stocks, but the Account may
through a sub-advisory agreement invest in other securities.
</TABLE>
<TABLE>
<CAPTION>
ACCOUNT IN WHICH
DIVISION INVESTS AND ACCOUNT
DIVISION INVESTMENT ADVISER INVESTMENT OBJECTIVE
<S> <C> <C>
International Division International Account; 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.
International SmallCap Division International SmallCap Account; Seeks long-term growth of capital. The Account will
Invista Capital Management, Inc. attempt to achieve its objective by investing
through a sub-advisory agreement primarily in equity securities of non-United States
companies with comparatively smaller market
capitalizations.
MicroCap Division MicroCap Account; Seeks long-term growth of capital. The Account will
Goldman Sachs Asset Management attempt to achieve its objective by investing
through a sub-advisory agreement primarily in value and growth oriented
companies with small market capitalizations,
generally less than $700 million.
MidCap Division MidCap Account; Seeks growth of capital through the purchase
Invista Capital Management, Inc. primarily of common stocks, but the Fund may
through a sub-advisory agreement invest in other securities.
MidCap Growth Division MidCap Growth Account; Seeks long-term growth of capital. The Account will
Dreyfus Corporation attempt to achieve its objective by
through a sub-advisory agreement investing primarily in growth stocks of companies
with market capitalization in the $1 billion to $10
billion range.
Money Market Division Money Market Account; Seeks as high a level of income available from
Principal 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.
Real Estate Division Real Estate Account; Seeks to generate a high total return. The Account
Principal Management Corporation. will attempt to achieve its objective by investing
primarily in equity securities of companies
principally engaged in the real estate industry.
SmallCap Division SmallCap Account; Seeks long-term growth of capital. The Account will
Invista Capital Management, Inc. attempt to achieve its objective by investing
through a sub-advisory agreement primarily in equity securities of growth and value
oriented companies with comparatively small market
capitalizations.
SmallCap Growth Division SmallCap Growth Account; Seeks long-term growth of capital. The Account will
Berger Associates, Inc. attempt to achieve its objective by investing
through a sub-advisory agreement primarily in equity securities of small growth
companies with market capitalization of less than
$1 billion.
SmallCap Value Division SmallCap Value Account; Seeks long-term growth of capital. The Account will
JP Morgan Asset Management, Inc. attempt to achieve its objective by investing
through a sub-advisory agreement primarily in equity securities of small growth
companies with value characteristics and market
capitalizations of less than $1 billion.
Utilities Division Utilities Account; Seeks to provide current income and long-term
Invista Capital Management, Inc. growth of income and capital. The Account will
through a sub-advisory agreement attempt to achieve its objective by investing
primarily in equity and fix-income securities of
companies in the public utilities industry.
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 in
Fidelity Management and 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 primarily in high yielding, lower quality, fixed
Research Company income securities, while also considering growth of
capital.
Putnam Global Asset Putnam VT Global Asset Seeks a high level of long-term total return
Allocation Division Allocation Fund consistent with preservation of capital.
Putnam Vista Division Putnam VT Vista Fund Seeks capital appreciation.
Putnam Voyager Division Putnam VT Voyager Fund Seeks capital appreciation.
</TABLE>
Principal Management Corportion (the "Manager") has executed agreements with
various Sub-Advisors. Under those Sub-Advisory agreements, the Sub-Advisor
agrees to assume the obligations of the Manager to provide investment advisory
services for a specific Account. For these services, each Sub-Advisor is paid a
fee by the Manager.
Accounts: Balanced, Capital Value, Government Securities, Growth,
International, International SmallCap, MidCap, SmallCap and Utilities
Sub-Advisor: Invista Capital Management, Inc. Invista, an indirectly
wholly-owned subsidiary of Principal Mutual Life Insurance Company and
an affiliate of the Manager, was founded in 1985. It manages
investments for institutional investors, including Principal Mutual
Life Insurance Company. Assets under management as of December 31,
1997 were approximately $25.8 billion. Invista's address is 1800 Hub
Tower, 699 Walnut, Des Moines, Iowa 50309.
Accounts: Aggressive Growth and Asset Allocation
Sub-Advisor: Morgan Stanley Asset Management Inc. MSAM, with principal
offices at 1221 Avenue of the Americas, New York, NY 10020, provides a
broad range of portfolio management services to customers in the U.S.
and abroad. At December 31, 1997, MSAM managed investments totaling
approximately $87.1 billion, including approximately $66.6 billion
under active management and $20.5 billion as Named Fiduciary or
Fiduciary Adviser.
Account: MicroCap
Sub-Advisor: Goldman Sachs Asset Management. Goldman Sach's address is
1 New York Plaza, 42nd Floor, New York, NY 10004, is a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"). Goldman
Sachs provides a wide range of fully discretionary investment advisory
services quantitatively driven and actively managed U.S. and
international equity portfolios, U.S. and global fixed income
portfolios, commodity and currency products, and money market mutual
funds.
Account: MidCap Growth
Sub-Advisor: The Dreyfus Corporation, located at 200 Park Avenue, New
York, New York 10166, was formed in 1947. The Dreyfus Corporation is a
wholly-owned subsidiary of Mellon Bank, N.A., which is a wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). As of September 30,
1997, The Dreyfus Corporation managed or administered approximately
$93 billion in assets for approximately 1.7 million investor accounts
nationwide.
Account: SmallCap Growth
Sub-Advisor: Berger Associates. Berger's address is 210 University
Boulevard, Suite 900, Denver, CO 80206. It serves as investment
advisor, sub-advisor, administrator or sub-administrator to mutual
funds and institutional investors. Kansas City Southern Industries,
Inc. ("KCSI") owns approximately 87% of Berger. KCSI is a publicly
traded holding company with principal operations in rail
transportation, through its subsidiary The Kansas City Southern
Railway Company, and financial asset management businesses.
Account: SmallCap Value
Sub-Advisor: J.P. Morgan Asset Management. Morgan, with principal
offices at 522 Fifth Avenue, New York, NY 10036 is a wholly-owned
subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan") a bank
holding company. J.P. Morgan, through Morgan and its other
subsidiaries, offers a wide range of services to governmental,
institutional, corporate and individual customers and acts as
investment adviser to individual and institutional clients. As of
December 31, 1997, J.P. Morgan and its subsidiaries had total combined
assets under management of approximately $250 billion.
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 Accounts, 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 Account 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 Account's investment adviser for
managing the underlying Account and selecting its portfolio of securities. Other
underlying Account 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 Account. The management fees and other expenses for
each underlying Account for its most recently completed fiscal year, expressed
as a percentage of the underlying Account's average assets, are as follows:
Total
Management Other Annual
Account Fees Expenses Expenses
Aggressive Growth Account 0.80% 0.05% 0.85%
Asset Allocation Account 0.80 0.07 0.87
Balanced Account 0.60 0.03 0.63
Bond Account 0.50 0.03 0.53
Capital Value Account 0.48 0.01 0.49
Government Securities Account 0.50 0.02 0.52
Growth Account 0.50 0.02 0.52
International Account 0.75 0.15 0.90
MidCap Account 0.64 0.02 0.66
Money Market Account 0.50 0.06 0.56
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(s) in the case of Related Policies,
subject to the Company's approval, issuance of Related Policies may be delayed
to have a common Policy Date. The Written Request must accompany the
applications. The common Policy Date will be established by the Company
following the last underwriting decision on all applications.
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) Policy
applied for on a COD basis or 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") (except where
prohibited by state law). 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.
During the twelve month period ended December 31, 1997, the Company received
premium payments totaling $25,983,907.
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, 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 after the Policy is received by the policyowner, except - 30 days
for policies applied for in California by policyowners age 60 or over - 15
days for policies applied for in Colorado - 20 days for policies applied
for in Idaho or North Dakota
o 10 days after a written notice is delivered or mailed (as determined by its
postmark) to the policyowner which tells about the cancellation right;
except - 30 days for policies applied for in California by policyowners age
60 or over - 15 days for policies applied for in Colorado - 20 days for
policies applied for in Idaho or North Dakota
o 45 days after the policyowner completes the application.
For Policies applied for in the state of California, 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 Accounts.
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 Account
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 Account or 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 Account or 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 a $25 charge for the 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.
Automatic Portfolio Rebalancing
Automatic Portfolio Rebalancing (APR) allows you to maintain a specific
percentage of your Policy Values in each account over time. You may elect APR at
the time of application or after the Policy has been issued.
For example, a customer may elect APR and choose to rebalance so 50% of Policy
Values are in the Capital Value Division and 50% are in the Money Market
Division. At the end of the specified period, 60% of the values may be invested
in the Capital Value Division, with the remaining 40% invested in the Money
Market Division. By rebalancing, units from the Capital Value Division are
redeemed and applied as purchase payments to the Money Market Division so 50% of
the Policy Values are once again invested in each division.
APR is not available for values in the Fixed Account. You may elect APR only if
you have not arranged for scheduled transfers from the same divisions.
APR transfers will not begin until the expiration of the "free look" period (see
"Policy Free Look"). There will be no charge for APR transfers. These transfers
will not be considered as unscheduled transfers in determining any transfer fee.
You may rebalance through APR quarterly, semi-annually, or annually based on a
calendar year or Policy Year. In addition, you may rebalance on a one-time basis
by completing a form and submitting it to the Company home office or by calling
1-800-247-9988 (if telephone privileges apply). The transfers will be made at
the end of the next Valuation Period after the APR instruction is received by
the Company.
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. Policy loans, whether in writing, by telephone or other
means, by any joint policyowner shall be binding on all joint policyowners.
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%. 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. For the twelve month period
ended December 31, 1997, the Company collected $714,557 in premium expense
charges and $896,445 in premium tax charges.
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. During the twelve month period
ended December 31, 1997, administrative and cost of insurance charges totaled
$1,616,662.
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 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 administration charge for a Policy during the first Policy Year is
an amount equal to $.40 for each $1,000 of Policy face amount. The monthly
charge is 1/12 x ($.40 for each $1,000 of 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 $6.00 per
month. The monthly administration charge is guaranteed not to exceed an amount
equal to the greater of 1/12 x ($.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. During the twelve month period ended December 31, 1997, mortality
and expense risk charges totaled $86,725.
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 is 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. During the twelve month
period ended December 31, 1997, the Company collected $21,590 in surrender
charges.
Contingent Deferred Sales Charge
The contingent deferred sales charge is equal to 47.25% multiplied by the number
of Target Premiums defined below:
Number of Target Premiums
Insured's Age All States
on Issue or Except Oregon
Adjustment Date and New York New York Oregon
0-45 2.00 2.00 2.00
46-50 2.00 1.90 2.00
51-55 2.00 1.75 2.00
56-60 2.00 1.65 2.00
61-65 2.00 1.55 2.00
66-70 1.50 1.50 1.45
71-75 1.08 1.10 1.05
76-80 0.80 0.80 0.80
81-85 0.48 0.50 0.50
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 may be reduced for
insureds based on age 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 Accounts are purchased by the corresponding Divisions at the
shares' net asset values. The net asset value of Account shares reflects the
investment management fees and corporate operating expenses already deducted
from the assets of the Accounts. The current investment management fee and total
operating expenses for each of the Accounts is provided under the heading
"Separate Account". These fees and expenses are fully described in the
prospectuses for the Fund.
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 (1) 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 Account shares held in the Separate Account at regular
and special meetings of shareholders of each Account, but will follow voting
instructions received from persons having the voting interest in such Account
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 Account. Voting instructions
will be solicited by written communications prior to such meetings in accordance
with procedures established by the Fund. The Company will vote other Account
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 Account 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 Account 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 Account 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
Account, or disapprove an investment advisory contract of the Fund or Account.
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 Account or 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 Account or Fund would result in the purchase of securities for the
Account 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. Telephone instructions
received from any joint policyowner will be binding on all joint policyowners.
The Company may modify or terminate telephone transfer procedures at any time.
You may obtain policy information from our Direct Dial system between 7:00 a.m.
and 9:00 p.m., Central Time, Monday through Saturday. Through this automated
telephone system, you can obtain information about unit values and policy
values, initiate certain changes to your policy, change your Personal
Identification Number (PIN), or speak directly to a customer service
representative. The telephone number is 1-800-247-9988. As with other telephone
services, instructions received via our Direct Dial system will be binding on
all policyowners.
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 Account or 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 Account 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 Accounts.
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 (also known as "no
lapse 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 (also known as "no lapse 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 (no lapse)
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 (no lapse) guarantee premiums
applicable to the number of months the Policy has been in force, less one month.
The death benefit (no lapse) 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 (no lapse) 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 (no lapse) 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 (no
lapse) guarantee premium requirement. If on any Monthly Date the death benefit
(no lapse) 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 (no lapse) 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 (no lapse)
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 death benefit (no lapse) guarantee rider as discussed on this page and on
page 95 is not available in the Commonwealth of Massachusetts. Information
concerning this and other supplementary benefits may be obtained from an
authorized agent of the Company.
We will, however, subject to state availability, offer an Extended Maturity
Rider to the policyowner six months prior to the Policy's maturity date. This
rider will allow, under certain conditions, the contract to remain in force
until the insured's death with a death benefit being paid rather than maturing
the contract. The Extended Maturity Rider is not available in the Commonwealth
of Massachusetts.
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.")
Term Conversion Bonus Program
Owners of a One Year Term Policy, Renewable 7 Times (hereafter referred to as
Convertible Bonus Term or CBT) issued by the Company may convert the CBT policy
to the Policy described in this Prospectus subject to certain conditions. If
those conditions are met and if the conversion occurs within policy years 3-5 of
the CBT policy, the Company will reduce the total annual first year premium of
the Policy by 20% of the lesser of the target premium or the planned periodic
premium as shown on the Policy data pages. The Company accomplishes this premium
reduction by paying into the Policy a single bonus payment equal to 20% of the
lesser of target premium or planned periodic premium as shown on the Policy data
pages. As a part of the conversion process, the Owner of the CBT policy must
satisfy certain suitability requirements for the PrinFlex Policy.
The 20% bonus will be allocated among the divisions of the Separate Account or
to the Fixed Account, or both, in the same ratio as the Net Premiums. The
policyowner will not receive a cost basis in the Policy for the amount of the
bonus. If the Owner exercises the right to return the Contract during the "free
look" period, the amount returned is reduced by any conversion credit applied.
See "Policy Free Look."
In making the decision as to whether to convert the CBT policy to a PrinFlex
policy, the Owner should carefully review the CBT contract and this Prospectus
as the charges and provisions of the contracts differ. Time elapsed under the
CBT policy will not be credited to the Policy for calculation of any duration
based charge or feature, including but not limited to: Surrender Charges;
Premium expense charges; monthly administration charges; minimum required
premium; Mortality and Expense Risks charges; or net loan rates.
To initiate a conversion, the Company must receive: 1) a life conversion
application; 2) a supplemental application; and 3) any required premiums. The
conversion will become effective upon receipt of the completed items listed
above and acceptance of the application. The transaction will be valued at the
end of the Valuation Period in which the Company receives all the necessary
documentation at its home office.
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.
For the twelve month period ended December 31, 1997, the Company paid Princor
Financial Services Corporation $4,955,109 to compensate registered
representatives of the principal underwriter.
The Company has entered into a distribution agreement with Princor Financial
Services Corporation. Princor Financial Services Corporation is 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 MANAGEMENT CORPORATION
A complete list of the officers and directors of the investment adviser,
Principal Management Corporation, is provided below. This list includes some of
the same people (designated by an *), who are serving in the same capacities as
officers and directors of the underwriter, Princor Financial Services
Corporation. The principal business address for each officer and director is The
Principal Financial Group, Des Moines, Iowa 50392.
*JOHN E. ASCHENBRENNER Director
CRAIG R. BARNES Vice President
*CRAIG L. BASSETT Treasurer
*MICHAEL J. BEER Senior Vice President and
Chief Operating Officer
*MARY L. BRICKER Assistant Corporate Secretary
*DAVID J. DRURY Director
*ARTHUR S. FILEAN Vice President
*PAUL N. GERMAIN Vice President -
Mutual Fund Operations
*ERNEST H. GILLUM Assistant Vice President -
Registered Products
*THOMAS J. GRAF Director
*J. BARRY GRISWELL Chairman of the Board
and Director
*JOYCE N. HOFFMAN Vice President and Corporate
Secretary
*STEPHAN L. JONES Director and President
*RONALD E. KELLER Director
*ELLEN Z. LAMALE Director
*GREGG R. NARBER Director
*RICHARD L. PREY Director
*LAYNE A. RASMUSSEN Controller - Mutual Funds
*ELIZABETH R. RING Controller
*MICHAEL J. ROUGHTON Counsel
*JEAN B. SCHUSTEK Product Compliance Officer -
Registered Products
DEWAIN A. SPARRGROVE Vice President
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:
EXECUTIVE OFFICERS (OTHER THAN DIRECTORS):
JOHN EDWARD ASCHENBRENNER Senior Vice President
DENNIS PAUL FRANCIS Senior Vice President
THOMAS JEFFERSON GAARD Senior Vice President
MICHAEL HARRY GERSIE Senior Vice President
THOMAS JOHN GRAF Senior Vice President
RONALD EUGENE KELLER Executive Vice President
GREGG ROSS NARBER Senior Vice President and General Counsel
MARY AGNES O'KEEFE Senior Vice President
RICHARD LEO PREY Senior Vice President
CARL CHANSON WILLIAMS Senior Vice President
and Chief Information Officer
DIRECTORS:
<TABLE>
<CAPTION>
Name, Positions and Offices Principal Occupation 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 Insurance Company since
Director January 1995. President and Chief Executive Officer from 1994 - 1995; President
Chairman of the Board from 1993-1994; Executive Vice President from 1992 - 1993.
Chair, Executive Committee
CHARLES DANIEL GELATT, JR. President, NMT Corporation.
Director
Member, Executive Committee
Chair, Human Resources Committee
JOHN BARRY GRISWELL President, Principal Mutual Life Insurance Company since March 1998. Executive Vice
Director President 1996 - 1998. Senior Vice President 1988 - 1996.
GERALD DAVID HURD Retired. Chairman and Chief Executive Officer, Principal Mutual Life Insurance
Director Company 1989 - 1994.
Member, Executive and
Nominating Committees
THEODORE MURTAGH HUTCHISON Retired. Vice Chairman, Principal Mutual Life Insurance Company 1994 - 1997. Prior
Director thereto, Executive Vice President.
Member, Audit Committee
CHARLES SAMUEL JOHNSON Chairman, President and Chief Executive Officer, Pioneer Hi-Bred International, Inc.
Director since December 1996. President and Chief Executive Officer 1995 - 1996. President
Member, Audit Committee and Chief Operating Officer 1995. Executive Vice President 1993 - 1995.
WILLIAM TURNBALL KERR Chairman, President & Chief Executive Officer, Meredith Corporation since January
Director 1998. President and Chief Executive Officer, 1997-1998. President and Chief
Member, Executive Committee and Operating Officer 1994 -1997. Prior thereto, Executive Vice President.
Chair, Nominating Committee
LEE LIU Chairman and Chief Executive Officer, IES Industries, Inc., since November 1996.
Director Prior 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.
Member, Nominating Committee
DONALD MITCHELL STEWART President, The College Board.
Director
Member, Human Resources Committee
ELIZABETH EDITH TALLETT President & CEO of Dioscor, Inc. & Serex, Inc. since 1996. President and Chief
Director Executive Officer, Transcell Technologies, Inc. 1992 - 1996.
Chair, Audit Committee
DEAN DICKSON THORNTON Retired since 1993. Prior thereto President, Boeing Commercial Airplane Group.
Director
Member, Audit 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, Human Resources Committee Officer, The Weitz Corporation and its subsidiaries.
</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 [formerly Common Stock], Emerging
Growth, High Yield and Money Market Divisions and, beginning in 1997, the
Aggressive Growth, Asset Allocation, Fidelity Contrafund, Fidelity Equity
Income, Fidelity High Income, Government Securities, Growth and World Divisions)
as of December 31, 1997, 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, 1997, 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, 1997, 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 LLP
Des Moines, Iowa
February 6, 1998
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Assets
Investments:
Aggressive Growth Division:
<S> <C>
Principal Aggressive Growth Fund, Inc. - 240,359 shares at net asset value of
$16.29 per share (cost - $3,970,708) $ 3,915,455
Asset Allocation Division:
Principal Asset Allocation Fund, Inc. - 47,050 shares at net asset value of
$11.94 per share (cost - $585,657) 561,781
Balanced Division:
Principal Balanced Fund, Inc. - 367,958 shares at net asset value
of $15.51 per share (cost - $5,287,634) 5,707,028
Bond Division:
Principal Bond Fund, Inc. - 192,771 shares at net asset value of $11.78 per
share (cost - $2,224,667) 2,270,847
Capital Accumulation Division:
Principal Capital Accumulation Fund, Inc. - 341,605 shares at net asset value of
$34.61 per share (cost - $10,361,384) 11,822,941
Emerging Growth Division:
Principal Emerging Growth Fund, Inc. - 541,771 shares at net asset value of
$35.47 per share (cost - $15,188,481) 19,216,629
Fidelity Contrafund Division:
Fidelity Variable Insurance Products Fund II: Contrafund
Portfolio. - 104,790 shares at net asset value of $19.94 per share
(cost - $1,974,469) 2,089,509
Fidelity Equity Income Division:
Fidelity Variable Insurance Products Fund: Equity Income Portfolio - 41,940
shares at net asset value of $24.28 per share (cost - $945,776) 1,018,314
Fidelity High Income Division:
Fidelity Variable Insurance Products Fund: High Income Portfolio - 24,264 shares
at net asset value of $13.58 per share (cost - $308,579) 329,510
Government Securities Division:
Principal Government Securities Fund, Inc. - 9,722 shares at net asset value of
$10.72 per share (cost - $107,383) 104,221
Growth Division:
Principal Growth Fund, Inc. - 53,546 shares at net asset value of $17.21 per
share (cost - $890,537) 921,533
High Yield Division:
Principal High Yield Fund, Inc. - 235,077 shares at net asset value of $8.90 per
share (cost - $2,113,910) 2,092,182
Money Market Division:
Principal Money Market Fund, Inc. - 4,328,456 shares at net asset value (cost)
of $1.00 per share 4,328,456
World Division:
Principal World Fund, Inc. - 195,415 shares at net asset value of $13.90 per
share (cost - $2,881,930) 2,716,270
----------------
Net assets $57,094,676
================
</TABLE>
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
Unit
Units Value
-------------------------
-------------------------
Net assets are represented by:
<S> <C> <C> <C>
Aggressive Growth Division - PrinFlex Life 316,073 $12.39 $ 3,915,455
Asset Allocation Division - PrinFlex Life 48,811 11.51 561,781
Balanced Division:
Flex Variable Life 162,831 26.70 4,347,323
PrinFlex Life 117,668 11.56 1,359,705
----------------
5,707,028
Bond Division:
Flex Variable Life 79,771 22.37 1,784,224
PrinFlex Life 44,349 10.97 486,623
----------------
2,270,847
Capital Accumulation Division:
Flex Variable Life 257,844 33.63 8,672,300
PrinFlex Life 251,678 12.52 3,150,641
----------------
11,822,941
Emerging Growth Division:
Flex Variable Life 358,540 39.89 14,301,443
PrinFlex Life 408,693 12.03 4,915,186
----------------
19,216,629
Fidelity Contrafund Division - PrinFlex Life 172,484 12.11 2,089,509
Fidelity Equity Income Division - PrinFlex Life 83,042 12.26 1,018,314
Fidelity High Income Division - PrinFlex Life 28,608 11.52 329,510
Government Securities Division - PrinFlex Life 9,538 10.93 104,221
Growth Division - PrinFlex Life 75,951 12.13 921,533
High Yield Division - Flex Variable Life 96,497 21.68 2,092,182
Money Market Division:
Flex Variable Life 31,890 15.71 500,843
PrinFlex Life 365,753 10.47 3,827,613
----------------
4,328,456
World Division - PrinFlex Life 247,757 10.96 2,716,270
----------------
Net assets $57,094,676
================
See accompanying notes.
</TABLE>
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Statements of Operations
<TABLE>
<CAPTION>
Combined
--------------
Year ended December 31, 1997 Investment income (loss) Income:
<S> <C>
Dividends $ 980,811
Capital gains distributions 2,062,456
--------------
3,043,267
Expenses:
Mortality and expense risks 323,452
--------------
Net investment income (loss) 2,719,815
Realized and unrealized gains (losses) on investments
Net realized gains on investments 1,992,490
Change in net unrealized appreciation/depreciation of investments 2,414,101
==============
Net increase (decrease) in net assets resulting from operations $7,126,406
==============
Year ended December 31, 1996 Investment income Income:
Dividends $ 576,069
Capital gains distributions 1,240,739
--------------
1,816,808
Expenses:
Mortality and expense risks 160,075
--------------
Net investment income 1,656,733
Realized and unrealized gains (losses) on investments
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
==============
Year ended December 31, 1995 Investment income Income:
Dividends $ 376,014
Capital gains distributions 429,058
--------------
805,072
Expenses:
Mortality and expense risks 95,590
--------------
Net investment income 709,482
Realized and unrealized gains (losses) on investments
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
==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Aggressive Asset Capital Emerging Growth Fidelity
Growth Allocation Balanced Bond Division Accumulation Division Contra Fund
Division* Division* Division Division Division*
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 8,174 $11,857 $150,137 $136,267 $ 211,818 $ 121,340 $ -
410,207 42,154 346,134 - 794,643 390,128 -
--------------------------------------------------------------------------------------------------------------------
418,381 54,011 496,271 136,267 1,006,461 511,468 -
12,033 1,700 38,702 14,802 69,600 127,942 6,014
--------------------------------------------------------------------------------------------------------------------
406,348 52,311 457,569 121,465 936,861 383,526 (6,014)
2,207 549 236,637 18,598 342,684 1,366,571 850
(55,253) (23,876) 104,396 55,567 895,157 1,395,355 115,040
====================================================================================================================
$353,302 $28,984 $798,602 $195,630 $2,174,702 $3,145,452 $109,876
====================================================================================================================
$ - $ - $110,439 $ 92,610 $ 118,875 $ 99,423 $ -
- - 244,144 - 745,903 250,692 -
--------------------------------------------------------------------------------------------------------------------
- - 354,583 92,610 864,778 350,115 -
- - 25,360 8,256 36,169 74,424 -
--------------------------------------------------------------------------------------------------------------------
- - 329,223 84,354 828,609 275,691 -
- - 20,387 2,798 36,486 136,928 -
- - 77,334 (53,168) 247,560 1,479,684 -
====================================================================================================================
$ - $ - $426,944 $ 33,984 $1,112,655 $1,892,303 $ -
====================================================================================================================
$ - $ - $ 85,937 $ 47,997 $ 79,394 $ 65,593 $ -
- - 72,211 - 293,683 63,164 -
--------------------------------------------------------------------------------------------------------------------
- - 158,148 47,997 373,077 128,757 -
- - 17,258 5,384 22,976 43,103 -
--------------------------------------------------------------------------------------------------------------------
- - 140,890 42,613 350,101 85,654 -
- - 28,104 4,064 49,320 172,414 -
- - 316,677 85,230 433,439 1,127,081 -
====================================================================================================================
$ - $ - $485,671 $131,907 $ 832,860 $1,385,149 $ -
====================================================================================================================
</TABLE>
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Statements of Operations (continued)
<TABLE>
<CAPTION>
Fidelity Equity
Income Division*
----------------------
Year ended December 31, 1997 Investment income (loss) Income:
<S> <C>
Dividends $ -
Capital gains distributions -
----------------------
-
Expenses:
Mortality and expense risks 3,260
----------------------
Net investment income (loss) (3,260)
Realized and unrealized gains (losses) on investments
Net realized gains on investments 630
Change in net unrealized appreciation/depreciation of investments 72,538
======================
Net increase (decrease) in net assets resulting from operations $69,908
======================
Year ended December 31, 1996 Investment income Income:
Dividends $ -
Capital gains distributions -
----------------------
-
Expenses:
Mortality and expense risks -
----------------------
Net investment income -
Realized and unrealized gains (losses) on investments
Net realized gains on investments -
Change in net unrealized appreciation/depreciation of investments -
----------------------
Net increase in net assets resulting from operations $ -
======================
Year ended December 31, 1995 Investment income Income:
Dividends $ -
Capital gains distributions -
----------------------
-
Expenses:
Mortality and expense risks -
----------------------
Net investment income -
Realized and unrealized gains (losses) on investments
Net realized gains on investments -
Change in net unrealized appreciation/depreciation of investments -
----------------------
Net increase in net assets resulting from operations $ -
======================
See accompanying notes.
* Commenced operations in February, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fidelity High Government
Income Division* Securities Growth High Yield Money Market World Division*
Division* Division* Division Division
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ - $5,365 $ 9,349 $162,794 $119,402 $ 44,308
- - 5,271 - - 73,919
- -------------------------------------------------------------------------------------------------------------
- 5,365 14,620 162,794 119,402 118,227
1,353 138 2,499 11,434 24,697 9,278
- -------------------------------------------------------------------------------------------------------------
(1,353) 5,227 12,121 151,360 94,705 108,949
3,224 15 299 19,548 - 678
20,931 (3,162) 30,996 (27,928) - (165,660)
=============================================================================================================
$22,802 $2,080 $43,416 $142,980 $ 94,705 $ (56,033)
=============================================================================================================
$ - $ - $ - $107,701 $ 47,021 $ -
- - - - - -
- -------------------------------------------------------------------------------------------------------------
- - - 107,701 47,021 -
- - - 7,858 8,008 -
- -------------------------------------------------------------------------------------------------------------
- - - 99,843 39,013 -
- - - 70 - -
- - - 34,507 - -
=============================================================================================================
$ - $ - $ - $134,420 $ 39,013 $ -
=============================================================================================================
$ - $ - $ - $ 72,460 $ 24,633 $ -
- - - - - -
- -------------------------------------------------------------------------------------------------------------
- - - 72,460 24,633 -
- - - 3,702 3,167 -
- -------------------------------------------------------------------------------------------------------------
- - - 68,758 21,466 -
- - - 683 - -
- - - (5,654) - -
=============================================================================================================
$ - $ - $ - $ 63,787 $ 21,466 $ -
=============================================================================================================
</TABLE>
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Combined
----------------
----------------
<S> <C>
Net assets at January 1, 1995 $ 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
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
</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>
$1,805,216 $ 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
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
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
Combined
-------------------
<S> <C>
Net assets at January 1, 1997 $29,345,018
Increase (decrease) in net assets
Operations:
Net investment income (loss) 2,719,814
Net realized gains on investments 1,992,490
Change in net unrealized appreciation/depreciation of investments 2,414,102
-------------------
-------------------
Net increase (decrease) in net assets resulting from operations 7,126,406
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes
51,193,569
Contract terminations and surrenders (10,340,289)
Death benefit payments (35,772)
Policy loan transfers (990,280)
Transfers to other contracts (14,297,011)
Cost of insurance and administration charges (4,726,082)
Surrender charges (180,883)
-------------------
-------------------
Increase in net assets from policy related transactions 20,623,252
-------------------
-------------------
Total increase 27,749,658
-------------------
===================
Net assets at December 31, 1997 $57,094,676
===================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Aggressive Asset Capital Emerging Growth Fidelity Contra
Growth Division* Allocation Balanced Bond Division Accumulation Division Fund Division*
Division* Division Division
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ - $ - $4,344,657 $1,642,800 $ 7,021,808 $13,704,998 $ -
406,348 52,311 457,569 121,465 936,861 383,525 (6,014)
2,207 549 236,637 18,598 342,684 1,366,571 850
(55,253) (23,876) 104,396 55,567 895,157 1,395,356 115,040
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
353,302 28,984 798,602 195,630 2,174,702 3,145,452 109,876
3,869,959 562,968 3,035,179 1,595,001 6,782,066 11,608,767 2,125,905
(5,409) (15) (1,398,821) (414,701) (2,651,564) (5,304,517) (666)
- - - - (8,829) (25,030) -
(12,314) (6,314) (145,315) (55,770) (183,175) (430,694) (9,953)
(56,802) (690) (454,671) (434,583) (441,824) (1,619,014) (24,082)
(225,959) (23,132) (450,585) (250,798) (827,795) (1,777,795) (110,670)
(7,322) (20) (22,018) (6,732) (42,448) (85,538) (901)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
3,562,153 532,797 563,769 432,417 2,626,431 2,366,179 1,979,633
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
3,915,455 561,781 1,362,371 628,047 4,801,133 5,511,631 2,089,509
- -------------------------------------------------------------------------------------------------------------------------
=========================================================================================================================
$3,915,455 $561,781 $5,707,028 $2,270,847 $11,822,941 $19,216,629 $2,089,509
=========================================================================================================================
</TABLE>
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
Fidelity Equity
Income Division*
-----------------------
<S> <C>
Net assets at January 1, 1997 $ -
Increase (decrease) in net assets
Operations:
Net investment income (loss) (3,260)
Net realized gains on investments 630
Change in net unrealized appreciation/depreciation of investments 72,538
-----------------------
-----------------------
Net increase (decrease) in net assets resulting from operations 69,908
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes
1,018,045
Contract terminations and surrenders (740)
Death benefit payments -
Policy loan transfers (800)
Transfers to other contracts (9,962)
Cost of insurance and administration charges (57,135)
Surrender charges (1,002)
-----------------------
-----------------------
Increase in net assets from policy related transactions 948,406
-----------------------
-----------------------
Total increase 1,018,314
-----------------------
=======================
Net assets at December 31, 1997 $1,018,314
=======================
See accompanying notes.
* Commenced operations in February, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fidelity High Government Money Market
Income Division* Securities Division* Growth High Yield Division World Division*
Division* Division
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ - $ - $ - $1,325,273 $1,305,482 $ -
(1,353) 5,227 12,121 151,360 94,705 108,949
3,224 15 299 19,548 - 678
20,931 (3,162) 30,996 (27,928) - (165,660)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
22,802 2,080 43,416 142,980 94,705 (56,033)
369,108 109,941 938,351 1,100,347 15,023,945 3,053,987
(262) - (168) (254,148) (307,677) (1,601)
- - - (1,913) - -
(26,280) - (73) (38,855) (59,858) (20,879)
(20,415) (1,786) (1,396) (56,489) (11,072,400) (102,897)
(15,088) (6,014) (58,369) (121,092) (647,510) (154,140)
(355) - (228) (3,921) (8,231) (2,167)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
306,708 102,141 878,117 623,929 2,928,269 2,772,303
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
329,510 104,221 921,533 766,909 3,022,974 2,716,270
- -------------------------------------------------------------------------------------------------------------
=============================================================================================================
$329,510 $104,221 $921,533 $2,092,182 $4,328,456 $2,716,270
=============================================================================================================
</TABLE>
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements
December 31, 1997
1. Investment and Accounting Policies
Principal Mutual Life Insurance Company Variable Life Separate Account (the
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 and prior
to February, 1997, the Separate Account invested 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.
In February, 1997, Principal Mutual began offering a new product, PrinFlex Life.
This product increased the Separate Account investment options to include
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund, Inc.,
Principal Government Securities Fund, Inc., Principal Growth Fund, Inc. and
Principal World Fund, Inc., also diversified open-end management investment
companies organized by Principal Mutual. Other options of this product are
Fidelity Variable Insurance Products Fund II: Contrafund Portfolio, Fidelity
Variable Insurance Products Fund: Equity-Income Portfolio, and Fidelity Variable
Insurance Products Fund: High Income Portfolio.
Investments are stated at the closing net asset values per share on December 31,
1997. 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.
Use of Estimates in the Preparation of Financial Statements
The preparation of the Separate Account's financial statements and accompanying
notes requires management to make estimates and assumptions that affect the
amounts reported and disclosed. These estimates and assumptions could change in
the future as more information becomes known, which could impact the amounts
reported and disclosed in the financial statements and accompanying notes.
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
2. Expenses and Policy Charges
Principal Mutual is compensated for the following expenses and charges:
Flex Variable Life Contracts - 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
$236,727, $277,142, and $2,832,278, respectively, in 1997; $160,075,
$231,648, and $2,224,888, respectively, in 1996; and $95,590, $166,464, and
$1,372,778, respectively, in 1995. 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 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.
PrinFlex Life Contracts - Mortality and expense risks assumed by Principal
Mutual are compensated for by a charge equivalent to an annual rate of .90%
of the asset value of each policy. A monthly administration charge of $.40
for each $1,000 of policy face amount will be deducted from policies in their
first year. After the first policy year, the monthly administration charge is
$6.00 per month. A cost of insurance charge, which is based on the Company's
expected future mortality experience, is also deducted as compensation for
insurance charges. The mortality and expense risk, administration, and
insurance charges amounted to: $86,725, $230,502 and $1,386,160,
respectively, during the year ending December 31, 1997. A sales charge of
2.75% of premiums less than or equal to target premium and .75% of premiums
in excess of target is deducted from each payment on behalf of each
participant. The sales charge is deducted from contributions by Principal
Mutual prior to their transfer to the Separate Account.
3. Federal Income Taxes
The 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 the 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>
Year ended December 31, 1997
Units Amount Units Amount Redeemed
Purchased Purchased Redeemed
-------------- ---------------- -------------- -----------------
Aggressive Growth Division:
<S> <C> <C> <C> <C>
PrinFlex Life 343,834 $ 4,288,340 27,761 $ 319,839
Asset Allocation Division:
PrinFlex Life 51,667 616,979 2,856 31,871
Balanced Division:
Flex Variable Life 67,360 2,010,011 95,006 2,391,024
PrinFlex Life 128,270 1,521,439 10,602 119,088
-------------- ---------------- -------------- -----------------
195,630 3,531,450 105,608 2,510,112
Bond Division:
Flex Variable Life 51,436 1,162,750 52,293 1,098,247
PrinFlex Life 51,729 568,518 7,380 79,139
-------------- ---------------- -------------- -----------------
103,165 1,731,268 59,673 1,177,386
Capital Accumulation Division:
Flex Variable Life 119,379 4,364,014 127,882 3,865,122
PrinFlex Life 281,944 3,424,513 30,266 360,113
-------------- ---------------- -------------- -----------------
401,323 7,788,527 158,148 4,225,235
Emerging Growth Division:
Flex Variable Life 180,420 6,880,578 240,515 8,968,075
PrinFlex Life 442,300 5,239,657 33,607 402,455
-------------- ---------------- -------------- -----------------
622,720 12,120,235 274,122 9,370,530
Fidelity Contra Fund Division:
PrinFlex Life 185,497 2,125,905 13,013 152,286
Fidelity Equity Income Division:
PrinFlex Life 89,263 1,018,045 6,221 72,899
Fidelity High Income Division:
PrinFlex Life 34,237 369,108 5,629 63,753
Government Securities Division:
PrinFlex Life 10,283 115,306 745 7,938
Growth Division:
PrinFlex Life 81,327 952,971 5,376 62,733
High Yield Division:
Flex Variable Life 52,320 1,263,141 23,011 487,852
Money Market Division:
Flex Variable Life 158,768 2,472,127 213,736 3,276,766
PrinFlex Life 1,225,077 12,671,220 859,324 8,843,607
-------------- ---------------- -------------- -----------------
1,383,845 15,143,347 1,073,060 12,120,373
World Division:
PrinFlex Life 273,767 3,172,214 26,010 290,962
============== ================ ============== =================
3,828,878 $54,236,836 1,781,233 $30,893,769
============== ================ ============== =================
</TABLE>
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
<CAPTION>
Year ended December 31, 1996
Units Amount Units Amount Redeemed
Purchased Purchased Redeemed
-------------- ---------------- -------------- -----------------
Balanced Division:
<S> <C> <C> <C> <C>
Flex Variable Life 82,222 $ 2,097,662 29,319 $ 645,607
Bond Division:
Flex Variable Life 48,357 1,046,130 13,728 275,471
Capital Accumulation Division:
Flex Variable Life 126,497 3,858,566 44,900 1,095,829
Emerging Growth Division:
Flex Variable Life 224,022 7,077,421 89,178 2,717,856
High Yield Division:
Flex Variable Life 28,126 615,083 9,553 178,415
Money Market Division:
Flex Variable Life 370,523 5,517,757 311,613 4,615,144
============== ================ ============== =================
879,747 $20,212,619 498,291 $9,528,322
============== ================ ============== =================
Year ended December 31, 1995
Units Amount Units Amount Redeemed
Purchased Purchased Redeemed
-------------- ---------------- -------------- -----------------
Balanced Division:
Flex Variable Life 56,758 $ 1,194,305 29,073 $ 549,421
Bond Division:
Flex Variable Life 24,137 492,234 8,980 169,115
Capital Accumulation Division:
Flex Variable Life 87,030 2,006,098 40,420 783,150
Emerging Growth Division:
Flex Variable Life 165,606 4,151,094 60,516 1,522,560
High Yield Division:
Flex Variable Life 40,295 745,873 7,739 131,726
Money Market Division:
Flex Variable Life 120,838 1,727,408 138,209 1,947,504
============== ================ ============== =================
494,664 $10,317,012 284,937 $5,103,476
============== ================ ============== =================
</TABLE>
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
5. Net Assets
Net assets at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
Net Unrealized
Accumulated Net Appreciation
Unit Transactions Investment Income (Depreciation) of
Combined Investments
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Aggressive Growth Division:
<S> <C> <C> <C> <C>
PrinFlex Life $ 3,915,455 $ 3,593,399 $ 377,309 $ (55,253)
Asset Allocation Division:
PrinFlex Life 561,781 535,866 49,791 (23,876)
Balanced Division:
Flex Variable Life 4,347,323 3,313,616 570,678 463,029
PrinFlex Life 1,359,705 1,303,982 99,358 (43,635)
-------------------------------------------------------------------------------
5,707,028 4,617,598 670,036 419,394
Bond Division:
Flex Variable Life 1,784,224 1,591,066 142,356 50,802
PrinFlex Life 486,623 468,328 22,917 (4,622)
-------------------------------------------------------------------------------
2,270,847 2,059,394 165,273 46,180
Capital Accumulation Division:
Flex Variable Life 8,672,300 6,007,408 1,281,725 1,383,167
PrinFlex Life 3,150,641 2,910,036 162,215 78,390
-------------------------------------------------------------------------------
11,822,941 8,917,444 1,443,940 1,461,557
Emerging Growth Division:
Flex Variable Life 14,301,443 9,938,788 411,578 3,951,077
PrinFlex Life 4,915,186 4,746,894 91,221 77,071
-------------------------------------------------------------------------------
19,216,629 14,685,682 502,799 4,028,148
Fidelity Contra Fund Division:
PrinFlex Life 2,089,509 1,980,071 (5,602) 115,040
Fidelity Equity Income Division:
PrinFlex Life 1,018,314 948,814 (3,038) 72,538
Fidelity High Income Division:
PrinFlex Life 329,510 309,714 (1,135) 20,931
Government Securities Division:
PrinFlex Life 104,221 102,509 4,874 (3,162)
Growth Division:
PrinFlex Life 921,533 879,180 11,357 30,996
High Yield Division:
PrinFlex Life 2,092,182 1,854,628 259,282 (21,728)
Money Market Division:
Flex Variable Life 500,843 493,808 7,035 -
PrinFlex Life 3,827,613 3,812,109 15,504 -
-------------------------------------------------------------------------------
4,328,456 4,305,917 22,539 -
World Division:
PrinFlex Life 2,716,270 2,782,660 99,270 (165,660)
===============================================================================
$57,094,676 $47,572,876 $3,596,695 $5,925,105
===============================================================================
</TABLE>
<PAGE>
Principal Mutual Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
6. Year 2000 Issues (Unaudited)
Like other investment funds, financial and business organizations and
individuals around the world, the Separate Account could be adversely affected
if the computer systems used by Principal Mutual and other service providers do
not properly process and calculate date-related information and data from and
after January 1, 2000. In 1996, Principal Mutual completed its assessment of the
Year 2000 impact on its systems, procedures, customers and business processes.
At December 31, 1997, management estimates that approximately 95% of the
identified modifications have been completed for its Year 2000 project. System
testing, using an isolated test environment, will begin early in 1998. Ultimate
project completion is targeted for early 1999, which is prior to any anticipated
impact on Principal Mutual's operations.
The date on which Principal Mutual believes it will complete the Year 2000
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events. Principal Mutual also
recognizes there are outside influences and dependencies relative to its Year
2000 effort, over which it has little or no control. However, Principal Mutual
is putting effort into ensuring these considerations will have minimal impact.
These would include the continued availability of certain resources, third-party
modification plans and many other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ from those
anticipated.
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(R) (the Company) as of December 31, 1997 and
1996, and the related consolidated statements of operations, equity and cash
flows for each of the three years in the period ended December 31, 1997. 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(R) at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
January 30, 1998
<PAGE>
The Principal Financial Group(R)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------------------------------------------
(In Millions)
Revenue
<S> <C> <C> <C>
Premiums and annuity and other considerations $4,668 $5,121 $5,243
Policy and contract charges 658 555 491
Net investment income 2,922 2,869 2,741
Net realized capital gains 219 436 122
Commissions and other income 199 150 143
------------------------------------------
Total revenue 8,666 9,131 8,740
Expenses
Benefits, claims and settlement expenses 5,632 6,087 6,142
Dividends to policyowners 299 299 307
Operating expenses 2,040 1,915 1,740
------------------------------------------
------------------------------------------
Total expenses 7,971 8,301 8,189
------------------------------------------
Income before income taxes 695 830 551
Income taxes 241 304 207
------------------------------------------
==========================================
Net income $ 454 $ 526 $ 344
==========================================
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group(R)
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
December 31
1997 1996
---------------------------
---------------------------
(In Millions)
Assets
<S> <C> <C>
Debt securities, available-for-sale $21,546 $21,974
Equity securities, available-for-sale 1,273 1,023
Mortgage loans 13,286 12,409
Real estate 2,632 2,474
Policy loans 749 736
Other investments 130 102
Cash and cash equivalents 546 271
Accrued investment income 457 464
Deferred acquisition costs 1,057 1,058
Property held for Company use 232 222
Separate account assets 23,627 17,218
Other assets 1,519 1,191
---------------------------
===========================
Total assets $67,054 $59,142
===========================
===========================
Liabilities
Contractholder funds $23,179 $23,194
Future policy benefits and claims 11,239 10,575
Other policyowner funds 314 454
Policyowner dividends payable 444 447
Debt 459 399
Income taxes currently payable 298 283
Deferred income taxes 803 623
Separate account liabilities 23,560 17,166
Other liabilities 1,474 1,347
---------------------------
---------------------------
Total liabilities 61,770 54,488
Equity
Surplus 4,257 3,803
Net unrealized gains on available-for-sale securities 1,038 860
Foreign currency translation adjustment, net (11) (9)
---------------------------
---------------------------
Total equity 5,284 4,654
---------------------------
===========================
Total liabilities and equity $67,054 $59,142
===========================
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group(R)
Consolidated Statements of Equity
<TABLE>
<CAPTION>
Net Unrealized Foreign Currency
Gains on Translation
Available-for-Sale Adjustment, net Total Equity
Surplus Securities
---------------------------------------------------------------
(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 patterns:
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 patterns:
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
Net income 454 - - 454
Increase in unrealized appreciation on debt
securities, available-for-sale - 197 - 197
Increase in unrealized appreciation on equity
securities, available-for-sale, including
seed money in separate accounts - 118 - 118
Adjustments for assumed changes in
amortization patterns:
Deferred acquisition costs - (44) - (44)
Unearned revenue reserves - 4 - 4
Provision for deferred income taxes - (97) - (97)
Change in foreign currency translation
adjustment, net - - (2) (2)
===============================================================
Balances at December 31, 1997 $4,257 $1,038 $(11) $5,284
===============================================================
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group(R)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------------------------------------
(In Millions)
Operating activities
<S> <C> <C> <C>
Net income $ 454 $ 526 $ 344
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred acquisition costs 170 178 145
Additions to deferred acquisition costs (213) (215) (206)
Accrued investment income 7 15 6
Contractholder and policyowner liabilities and dividends 1,657 240 523
Current and deferred income taxes 96 20 93
Net realized capital gains (219) (436) (122)
Depreciation and amortization expense 117 112 74
Other (393) (230) 440
------------------------------------
------------------------------------
Net adjustments 1,222 (316) 953
------------------------------------
Net cash provided by operating activities 1,676 210 1,297
Investing activities Available-for-sale securities:
Purchases (7,827) (11,762) (13,195)
Sales 7,493 8,949 9,333
Maturities 1,204 2,796 2,485
Mortgage loans acquired or originated (9,925) (2,955) (2,837)
Mortgage loans sold or repaid 8,977 1,619 1,702
Real estate acquired (309) (166) (143)
Real estate sold 198 253 38
Net change in policy loans (13) (25) (28)
Net change in property held for Company use (11) (18) (23)
Net change in other investments (38) (74) (12)
------------------------------------
Net cash used in investment activities (251) (1,383) (2,680)
Financing activities
Issuance of debt 75 43 21
Principal repayments of debt (28) (29) (71)
Proceeds of short-term borrowings 5,089 1,451 990
Repayment of short-term borrowings (4,974) (1,282) (990)
Investment contract deposits 4,134 7,496 6,756
Investment contract withdrawals (5,446) (6,530) (5,310)
------------------------------------
Net cash provided by (used in) financing activities (1,150) 1,149 1,396
------------------------------------
Net increase (decrease) in cash and cash equivalents 275 (24) 13
Cash and cash equivalents at beginning of year 271 295 282
------------------------------------
====================================
Cash and cash equivalents at end of year $ 546 $ 271 $ 295
====================================
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements
December 31, 1997
1. Nature of Operations and Significant Accounting Policies
Description of Business
The Principal Financial Group(R) (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.
Pending Reorganization
On September 18, 1997, the board of directors adopted a Plan of Reorganization
whereby Principal Mutual will form a new mutual insurance holding company
(Principal Mutual Holding Company) and convert to a stock life insurance company
(Principal Life Insurance Company). All of the shares of Principal Life
Insurance Company will be issued initially to Principal Mutual Holding Company
through two newly formed intermediate holding companies, and there are no
current plans to offer the stock of Principal Life Insurance Company or its
parent companies to third parties. The reorganization will not become effective
unless approved by policyowners and regulatory authorities. The reorganization
itself will not have a material financial impact on the Company.
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 $1.1 billion at December
31, 1997 and $1.5 billion at December 31, 1996, and total revenues were $294
million in 1997, $349 million in 1996 and $320 million in 1995. During 1997,
1996 and 1995, the Company included $19 million, $(3) million and $(9) million,
respectively, in net investment income representing the Company's share of
current year net income (losses) of the unconsolidated entities.
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(R)
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 through 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
also 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(R)
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. Valuation allowances are
established when indicators of impairment are present and the undiscounted cash
flows to be generated by the real estate fall below 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
net investment 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 has used 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 on deposit 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(R)
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. 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. Premiums from these products 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.
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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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.
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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Guaranty-fund Assessments
Guaranty-fund assessments are accrued when the Company receives notice that an
amount is payable to a guaranty fund. The Company also accrues for possible
guaranty-fund assessments for which notices have not been received and for which
the Company does not anticipate receiving a premium tax credit.
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 for foreign
subsidiaries and certain other transactions are reported as a component of
equity. Other translation adjustments for foreign currency transactions that
affect cash flows are reported in current operations.
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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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
1997 1996
-----------------------------
Property held for Company use $302 $285
Accumulated depreciation (70) (63)
=============================
Property held for Company use, net $232 $222
=============================
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
1997 1996
----------------------------
Goodwill $165 $135
Accumulated amortization (16) (22)
----------------------------
Goodwill, net 149 113
Other intangible assets, net 74 34
----------------------------
Total intangible assets $223 $147
============================
Mortgage servicing rights of $432 million and $272 million at December 31, 1997
and 1996, 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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Reclassifications
Certain reclassifications have been made to the 1995 and 1996 consolidated
financial statements to conform to the 1997 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.
The cost, gross unrealized gains and losses and fair value of debt and equity
securities available-for-sale as of December 31, 1997 and 1996, are as follows
(in millions):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
---------------------------------------------------------------
December 31, 1997
Bonds:
<S> <C> <C> <C> <C>
United States Government and agencies $ 337 $ 1 $ - $ 338
States and political subdivisions 449 15 2 462
Corporate - public 4,014 224 18 4,220
Corporate - private 12,478 856 30 13,304
Mortgage-backed securities 3,124 99 3 3,220
---------------------------------------------------------------
---------------------------------------------------------------
20,402 1,195 53 21,544
Redeemable preferred stocks 2 - - 2
===============================================================
Total debt securities $20,404 $1,195 $53 $21,546
===============================================================
Total equity securities $ 639 $ 664 $30 $ 1,273
===============================================================
December 31, 1996
Bonds:
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
===============================================================
</TABLE>
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The cost and fair value of debt securities available-for-sale at December 31,
1997, by expected maturity, are as follows (in millions):
Cost Fair Value
--------------------------
--------------------------
Due in one year or less $ 1,433 $ 1,444
Due after one year through five years 6,286 6,522
Due after five years through ten years 5,421 5,767
Due after ten years 4,133 4,586
--------------------------
--------------------------
17,273 18,319
Mortgage-backed and other securities without
a single maturity date 3,131 3,227
--------------------------
==========================
Total $20,404 $21,546
==========================
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):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Debt securities available-for-sale $1,589 $1,608 $1,603
Equity securities available-for-sale 39 33 41
Mortgage loans 1,138 1,078 1,008
Real estate 350 356 317
Policy loans 50 49 48
Cash and cash equivalents 9 15 8
Other 109 60 24
------------------------------------------
------------------------------------------
3,284 3,199 3,049
Less investment expenses (362) (330) (308)
------------------------------------------
==========================================
Net investment income $2,922 $2,869 $2,741
==========================================
</TABLE>
<PAGE>
The Principal Financial Group(R)
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):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
-------------------------------------------
Debt securities, available-for-sale:
<S> <C> <C> <C>
Gross gains $ 82 $121 $144
Gross losses (43) (73) (40)
Equity securities, available-for-sale:
Gross gains 132 451 40
Gross losses (26) (5) (9)
Mortgage loans 6 (4) 3
Real estate 64 14 6
Other 4 (68) (22)
===========================================
Net realized capital gains $219 $436 $122
===========================================
</TABLE>
Proceeds from sales of investments (excluding call and maturity proceeds) in
debt securities were $5.0 billion, $7.8 billion and $6.5 billion in 1997, 1996
and 1995, respectively. Gross gains of $48 million, $76 million and $93 million
and gross losses of $43 million, $69 million and $35 million in 1997, 1996 and
1995, respectively, were realized on those sales.
Of the 1997, 1996 and 1995 proceeds, $4.0 billion, $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 $29 million, $64 million and $66 million and
gross losses of $10 million, $53 million and $17 million in 1997, 1996 and 1995,
respectively, were realized on sales of mortgage-backed securities. At December
31, 1997, the Company had security purchases payable totaling $266 million
relating to the purchases of mortgage-backed securities at forward dates.
Prior to 1996, 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(R)
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 cumulative amount
of net unrealized gains on available-for-sale securities is as follows (in
millions):
<TABLE>
<CAPTION>
December 31
1997 1996
-----------------------------
<S> <C> <C>
Unrealized appreciation on debt securities, available-for-sale $1,142 $945
Unrealized appreciation on equity securities, available-for-sale,
including seed money in separate accounts 639 521
Adjustments for assumed changes in amortization patterns:
Deferred acquisition costs (204) (160)
Unearned revenue reserves 21 17
Provision for deferred income taxes (560) (463)
=============================
Net unrealized gains on available-for-sale securities $1,038 $860
=============================
</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, 1997 and 1996, 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
--------------- ----------------
1997 1996 1997 1996
----------------------- -----------------------
----------------------- -----------------------
Pacific 28% 30% Industrial 33% 35%
South Atlantic 24 22 Retail 33 34
North Central 16 17 Office 29 28
Mid Atlantic 14 15 Other 5 3
South Central 9 7
New England 5 5
Mountain 4 4
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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
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
1997 1996
-------------------------
Balance at beginning of year $121 $115
Provision for losses 8 16
Releases due to write-downs, sales and foreclosures (8) (10)
=========================
Balance at end of year $121 $121
=========================
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.
The Company was servicing approximately 371,000 and 328,000 residential mortgage
loans with aggregate principal balances of approximately $29.1 billion and $24.4
billion at December 31, 1997 and 1996, respectively. In connection with these
mortgage servicing activities, the Company held funds in trust for others
totaling approximately $210 million and $175 million at December 31, 1997 and
1996, 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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
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
1997 1996
-----------------------------
Real estate $2,985 $2,743
Accumulated depreciation (353) (269)
=============================
Real estate, net $2,632 $2,474
=============================
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 $1.2 billion and $1.4 billion at
December 31, 1997 and 1996, respectively. The Company is committed to providing
additional mortgage financing for such joint ventures aggregating $120 million
at December 31, 1997.
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 ($36
million at December 31, 1997, and $148 million at December 31, 1996) 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, 1997 and 1996, were $1,037 million and $970 million,
respectively, and the credit exposure at December 31, 1997 and 1996 was $21
million and $15 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 six years and three
years at December 31, 1997 and 1996, respectively. The net amount payable or
receivable from
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
3. Derivatives Held or Issued for Purposes Other Than Trading (continued)
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, 1997, the Company had various foreign currency
exchange agreements with maturities ranging from 1998 to 2018, with an aggregate
notional amount involved of approximately $410 million and the credit exposure
was $17 million. At December 31, 1996, such maturities ranged from 1997 to 2018
with an aggregate notional amount of approximately $373 million and a credit
exposure of $9 million. The average unexpired term of the swaps was
approximately seven years at both December 31, 1997 and 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 both December 31, 1997 and 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 in the
Company's consolidated statements of financial position.
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
1997 1996 1995
-----------------------------------------
Balance at beginning of year $ 800 $ 810 $ 824
Incurred:
Current year 2,723 3,051 3,179
Prior years (21) (29) (5)
-----------------------------------------
-----------------------------------------
Total incurred 2,702 3,022 3,174
Payments:
Current year 2,235 2,535 2,654
Prior years 497 497 534
-----------------------------------------
Total payments 2,732 3,032 3,188
-----------------------------------------
Balance at end of year:
Current year 476 516 525
Prior years 294 284 285
-----------------------------------------
=========================================
Total balance at end of year $ 770 $ 800 $ 810
=========================================
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
4. Accident and Health Reserves (continued)
The activity summary in the liability for unpaid accident and health claims
shows a decrease of $21 million, $29 million and $5 million to the December 31,
1996, 1995 and 1994 liability for unpaid accident and health claims,
respectively, arising in prior years. Such liability adjustments, which affected
current operations during 1997, 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 trends have been considered in establishing the current year liability for
unpaid accident and health claims.
5. Debt
The components of debt as of December 31, 1997 and December 31, 1996 are as
follows (in millions):
December 31
1997 1996
-----------------------------
7.875% notes payable, due 2024 $199 $199
8% notes payable, due 2044 99 99
Mortgages and other notes payable 161 101
=============================
Total debt $459 $399
=============================
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 each of the years ended December 31, 1997, 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 mortgages and other 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, 1997 range
from $1 million to $10.7 million per development with interest rates generally
ranging from 6.6% to 8.0%. Outstanding principal balances as of December 31,
1996 range from $1 million to $9 million per development with interest rates
generally ranging from 5.9% to 7.7%.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
At December 31, 1997, future annual maturities of debt are as follows (in
millions):
1998 $ 79
1999 20
2000 3
2001 3
2002 3
Thereafter 351
----------
==========
Total future maturities of debt $459
==========
Cash paid for interest for 1997, 1996 and 1995 was $63 million, $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 $225 million and $15 million at December
31, 1997 and 1996, respectively, and other outstanding borrowings from certain
financing transactions of $154 million at December 31, 1996. These outstanding
borrowings are included in other liabilities in the consolidated statements of
financial position.
6. Income Taxes
The Company's income tax expense (benefit) is as follows (in millions):
Year ended December 31
1997 1996 1995
----------------------------------------
Current income taxes:
Federal $144 $145 $104
State and foreign 3 (1) 5
Realized capital gains 11 210 41
----------------------------------------
Total current income taxes 158 354 150
Deferred income taxes 83 (50) 57
========================================
Total income taxes $241 $304 $207
========================================
The Company's provision for income taxes may not have the customary relationship
of taxes to income. Differences 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 are generally due to inherent differences between income for financial
reporting purposes and income for tax purposes, and the establishment of
adequate provisions for any challenges of the tax filings and tax payments to
the various taxing jurisdictions.
<PAGE>
The Principal Financial Group(R)
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 is currently completing 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
1997 1996
-----------------------------
Deferred income tax liabilities $1,259 $1,110
Deferred income tax assets 456 487
=============================
Deferred income taxes, net $ 803 $ 623
=============================
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 1997, 1996 and 1995 was $143 million, $285 million
and $99 million, respectively.
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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
The pension plans' combined funded status, reconciled to amounts recognized in
the consolidated statements of financial position and consolidated statements of
operations, is as follows (in millions):
<TABLE>
<CAPTION>
December 31
1997 1996
------------------------------
------------------------------
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefit obligation $515 $482
==============================
==============================
Accumulated benefit obligation $525 $495
==============================
==============================
Plan assets at fair value, primarily affiliated mutual funds
and investment contracts of the Company $980 $841
Projected benefit obligation 700 732
------------------------------
Plan assets in excess of projected benefit obligation 280 109
Unrecognized net gains and funding different from that assumed and from
changes in assumptions (182) (29)
Unrecognized prior service cost 14 17
Unrecognized net transition asset (49) (60)
------------------------------
==============================
Prepaid pension asset $ 63 $ 37
==============================
</TABLE>
Net periodic pension cost (income) included the following components (in
millions):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Service cost $ 41 $ 38 $ 25
Interest cost on projected benefit obligation 52 46 39
Actual return on plan assets (128) (118) (144)
Net amortization and deferral 40 42 79
---------------------------------------------
=============================================
Total net periodic pension cost (income) $ 5 $ 8 $ (1)
=============================================
</TABLE>
The weighted-average assumed discount rate used in determining the projected
benefit obligation was 7.25% at both December 31, 1997 and 1996, and 7% at
December 31, 1995. 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
1997, 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 9.5% for those trusts not subject to income taxes
in each year. The assumed rate of increase in future compensation levels varies
by age for both the qualified and non-qualified pension plans.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
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, to a maximum of $9,500 annually to the plans in both 1997 and
1996, and $9,240 in 1995. The Company matches the participant's contribution at
a 50% contribution rate up to a maximum Company contribution of 2% of the
participant's compensation. The Company contributed $15 million in 1997, $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 the employee's date of hire until
retirement based on attained service divided by potential service to age 65 with
a minimum of 35 years of potential service. The Company's policy is to fund the
cost of providing retiree benefits in the years that the employees are providing
service to the Company. The Company's funding policy is to deposit the actuarial
normal cost and an accrued liability over a 30-year period as a percentage of
compensation.
The postretirement plans' combined funded status, reconciled to amounts
recognized in the consolidated statements of financial position and consolidated
statements of operations, is as follows (in millions):
<TABLE>
<CAPTION>
December 31
1997 1996
-------------------------------
Plan assets at fair value, primarily affiliated mutual funds and
<S> <C> <C>
investment contracts of the Company $300 $247
Accumulated postretirement benefit obligation:
Retirees (84) (87)
Eligible employees (33) (38)
Active employees not eligible to retire (97) (93)
-------------------------------
-------------------------------
Total accumulated postretirement benefit obligation (214) (218)
-------------------------------
-------------------------------
Excess of plan assets over accumulated postretirement benefit obligation
86 29
Unrecognized net gains and funding different from that assumed and from
changes in assumptions (53) (10)
Unrecognized net transition obligation 12 17
-------------------------------
===============================
Postretirement benefit asset $ 45 $ 36
===============================
</TABLE>
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
The net periodic postretirement benefit cost included the following components
(in millions):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
----------------------------------------------
----------------------------------------------
<S> <C> <C> <C>
Service cost $12 $12 $ 7
Interest cost on accumulated postretirement benefit cost
16 15 14
Actual return on plan assets (41) (32) (43)
Amortization of transition obligation 4 4 4
Net amortization of gains and losses 25 19 34
==============================================
Total net periodic postretirement benefit cost $16 $18 $16
==============================================
</TABLE>
The weighted-average assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at both December 31, 1997 and 1996,
and 7% at December 31, 1995. 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 1997, 1996 and 1995, the expected long-term rates of return on plan
assets were approximately 5% (after estimated income taxes) for those trusts
subject to income taxes and approximately 8% for those trusts not subject to
income taxes in each year. 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 9% in 1997, declines to 8.5% in
2002 and then declines to an ultimate rate of 6% in 2030. 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, 1997
would increase by 27.7% ($45 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, 1997 by 24% ($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(R)
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):
<TABLE>
<CAPTION>
Year ended
December 31
1997 1996 1995
----------------------------------------------
----------------------------------------------
Premiums and annuity and other considerations:
<S> <C> <C> <C>
Direct $4,601 $5,034 $5,171
Assumed 106 116 99
Ceded (39) (29) (27)
==============================================
Net premiums and annuity and other considerations $4,668 $5,121 $5,243
==============================================
==============================================
Benefits, claims and settlement expenses:
Direct $5,596 $6,003 $6,070
Assumed 102 109 99
Ceded (66) (25) (27)
==============================================
Net benefits, claims and settlement expenses $5,632 $6,087 $6,142
==============================================
</TABLE>
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 $344 million in 1997, $310 million in
1996 and $260 million in 1995. At December 31, 1997, future minimum annual
rental commitments under these noncancelable operating leases are as follows (in
millions):
1998 $ 274
1999 241
2000 201
2001 162
2002 117
Thereafter 448
-------------
=============
Total future minimum lease receipts $1,443
=============
<PAGE>
The Principal Financial Group(R)
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 both 1997 and 1996, and $69
million in 1995. At December 31, 1997, future minimum annual rental commitments
under these noncancelable operating leases are as follows (in millions):
1998 $ 44
1999 35
2000 26
2001 19
2002 14
Thereafter 22
-----------
Total future minimum lease payments $160
===========
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
December 31, 1997 and 1996, approximately $6 million and $15 million,
respectively, is accrued 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(R)
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 counterparties. 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, cash
and cash equivalents and accrued investment income in the accompanying
consolidated statements of financial position approximate 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(R)
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, 1997 and 1996, are as follows (in millions):
<TABLE>
<CAPTION>
1997 1996
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------- ----------------------------
--------------------------- ----------------------------
Assets (liabilities)
<S> <C> <C> <C> <C>
Debt securities (see Note 2) $21,546 $21,546 $21,974 $21,974
Equity securities (see Note 2) 1,273 1,273 1,023 1,023
Mortgage loans 13,286 14,291 12,409 12,823
Policy loans 749 749 736 736
Other investments 130 130 102 102
Cash and cash equivalents 546 546 271 271
Accrued investment income 457 457 464 464
Investment-type insurance contracts (22,115) (22,637) (22,196) (22,158)
Debt (459) (486) (399) (427)
</TABLE>
11. Statutory Insurance Financial Information
Principal Mutual, the largest member of The Principal Financial Group(R),
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. Currently "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.
The NAIC is in the process of codifying statutory accounting practices
(Codification), the result of which is expected to constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project, which is
expected to be approved by the NAIC in 1998, will likely change, to some extent,
prescribed statutory accounting practices and may result in changes to the
accounting practices that Principal Mutual uses to prepare its statutory-basis
financial statements. Codification will require adoption by the various states
before it becomes the prescribed statutory basis of accounting for insurance
companies domiciled within those states. The impact on Principal Mutual's 1997
statutory surplus has not yet been determined at this time.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
11. Statutory Insurance Financial Information (continued)
Life/Health insurance companies are subject to certain risk-based capital (RBC)
requirements as specified by the NAIC. Under those requirements, the amount of
capital and surplus maintained by a life/health insurance company is to be
determined based on the various risk factors related to it. At December 31,
1997, Principal Mutual meets the RBC requirements.
The following summary reconciles the assets and equity at December 31, 1997,
1996 and 1995, and net income for the years ended December 31, 1997, 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, 1997
As reported in accordance with statutory accounting practices
<S> <C> <C> <C>
- unconsolidated $63,957 $2,811 $432
Additions (deductions):
Unrealized gain on debt securities available-for-sale 1,176 1,176 -
Other investment adjustments 853 1,141 27
Adjustments to insurance reserves and dividends (173) (131) (41)
Deferral of policy acquisition costs 1,057 1,057 43
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications - (643) 7
Other - net 184 171 (14)
=========================================
As reported in these consolidated GAAP financial statements $67,054 $5,284 $454
=========================================
December 31, 1996
As reported in accordance with statutory accounting practices
- unconsolidated $56,837 $2,504 $415
Additions (deductions):
Unrealized gain on debt securities available-for-sale 964 964 -
Other investment adjustments 355 901 53
Adjustments to insurance reserves and dividends (156) (115) (41)
Deferral of policy acquisition costs 1,058 1,058 38
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications (6) (493) 60
Other - net 90 133 1
-----------------------------------------
=========================================
As reported in these consolidated GAAP financial statements $59,142 $4,654 $526
=========================================
</TABLE>
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
11. Statutory Insurance Financial Information (continued)
<TABLE>
<CAPTION>
Assets Equity Net Income
-----------------------------------------
December 31, 1995
As reported in accordance with statutory accounting practices
<S> <C> <C> <C>
- unconsolidated $51,268 $2,208 $263
Additions (deductions):
Unrealized gain on debt securities available-for-sale 1,553 1,553 -
Other investment adjustments 228 911 60
Adjustments to insurance reserves and dividends (128) (28) (7)
Deferral of policy acquisition costs 937 937 61
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications (9) (770) (20)
Other - net 115 93 (13)
=========================================
As reported in these consolidated GAAP financial statements $53,964 $4,606 $344
=========================================
</TABLE>
12. Business Acquisitions and Disposition
During 1997, various acquisitions were made by certain of the Company's
subsidiaries at purchase prices aggregating $101 million. The acquisitions were
all accounted for using the purchase method and the results of operations of the
acquired businesses have been included in the financial statements of the
subsidiaries from the dates of acquisition. Such acquisitions increased total
assets at December 31, 1997 and total 1997 revenue of the subsidiaries by $459
million and $88 million, respectively.
During 1997, the Company terminated a portion of its group medical business and
helped insureds find replacement coverage. The Company has retained
responsibility for the payment of claims incurred on this business prior to the
effective date of the termination and has included an estimate of the ultimate
liability for these claims in its financial statements. Annual premiums related
to this business were approximately $380 million at date of transfer.
13. Subsequent Events
On November 3, 1997, the Company entered into a definitive agreement with
Coventry Corporation to effectively merge substantially all of the Company's
managed health care operations with Coventry Corporation, a previously
unaffiliated managed care company. The closing of the definitive agreement is
subject to regulatory approvals and various other conditions. The Company will
own 40% of a resulting new company, Coventry Health Care, Inc., which will be
publicly traded, and will recognize no gain or loss on the transaction.
Subsequent to closing, which is expected in the first quarter of 1998, the
Company will account for its investment in the new entity using the equity
method and will no longer consolidate the
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
13. Subsequent Events (continued)
transferred businesses. Total assets at December 31, 1997, and total revenues
and pretax loss for the year then ended, were approximately $419 million, $883
million and $(26) million, respectively, for the transferred businesses. The
Company also intends to enter into a reinsurance agreement on January 1, 2000
whereby Coventry Health and Life Insurance Company, a subsidiary of Coventry
Corporation, will reinsure a portion of the Company's traditional group
indemnity health insurance business in overlapping markets (1997 revenue of
approximately $550 million) at that time.
In December 1997, the Company signed a definitive agreement with EVEREN Capital
Corporation to sell Principal Securities Holding Corporation and its subsidiary,
Principal Financial Securities, Inc., an investment banking and stock brokerage
firm for $75 million. The transaction, which required regulatory approval,
closed in January 1998. Total assets of Principal Securities Holding Corporation
at December 31, 1997, and total revenues and pretax loss for the year then
ended, were approximately $91 million, $144 million and $(10) million,
respectively.
14. Year 2000 Issues (Unaudited)
In 1995, the Company began investigating the potential impact of the year 2000
on its systems, procedures, customers and business processes. Some changes began
immediately, while others waited for an assessment that was completed in 1996.
The Year 2000 assessment provided information used to determine what system
components must be changed or replaced to minimize the impact of the calendar
change from 1999 to 2000. The goal of the Company is to have its systems and
procedures function correctly, regardless of the current date on the calendar.
The Company will continue to use internal and external resources to modify,
replace, and test the Year 2000 modifications. Management estimates
approximately 95% of the identified modifications have been completed for its
Year 2000 project. System testing, using an isolated test environment, will
begin early in 1998. Ultimate project completion is targeted for early 1999,
which is prior to any anticipated impact on Company operations. The total cost
for the project is estimated to be $20 million, with the costs being expensed as
incurred until completion.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events. The Company
also recognizes there are outside influences and dependencies relative to its
Year 2000 effort, over which it has little or no control. However, the Company
is putting effort into ensuring these considerations will have minimal impact.
These would include the continued availability of certain resources, third-party
modification plans and many other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ from those
anticipated.
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 Accounts were uniform, gross, annual rates of 0%, 6% and 12% (or net rates
of -.66%, 5.34% and 11.34%, 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 six 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. Illustrations
1, 2 and 5 show the selection of Death Benefit Option 1; Illustrations 3, 4 and
6, 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 Accounts.
Illustrations 1 and 3 reflect current administrative and cost of insurance
charges. Illustrations 2, 4, 5 and 6 reflect the guaranteed maximum
administration and cost of insurance charges. Illustrations 5 and 6 reflect
guaranteed administration and cost of insurance charges for policies applied for
in Texas only. The average fees and expenses of the Accounts may decrease or
increase in the future making operating expenses actually incurred by the
Accounts differ from the .69% average rate shown in the illustrations.
The six 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 Accounts, 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 Account 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 an Account has had performance (with Policy charges
assumed to be equal to current charges for any periods prior to offering the
Policies).
Illustration 1
PLANNED PREMIUM $4,000
Initial Face Amount $250,000
Death Benefit Option 1
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
MALE AGE 45 NON-SMOKER
ASSUMING CURRENT CHARGES
(All States)
<TABLE>
<CAPTION>
Death Benefit (2) Accumulated Value (2)
Assuming Hypothetical Gross Assuming Hypothetical Gross
Annual Investment Return of Annual Investment Return of
End of Accumulated 0% 6% 12% 0% 6% 12%
Year Premiums (1) (-.78% Net) (5.22% Net) (11.22% Net) (-.78% Net) (5.22% Net) (11.22% Net)
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 4,200 $250,000 $250,000 $250,000 $2,926 $ 3,123 $ 3,321
2 8,610 250,000 250,000 250,000 5,780 6,356 6,957
3 13,241 250,000 250,000 250,000 8,535 9,674 10,909
4 18,103 250,000 250,000 250,000 11,217 13,107 15,239
5 23,208 250,000 250,000 250,000 13,824 16,658 19,982
6 28,568 250,000 250,000 250,000 16,353 20,328 25,181
7 34,196 250,000 250,000 250,000 18,802 24,119 30,879
8 40,106 250,000 250,000 250,000 21,154 28,022 37,116
9 46,312 250,000 250,000 250,000 23,396 32,026 43,935
10 52,827 250,000 250,000 250,000 25,688 36,364 51,723
11 59,669 250,000 250,000 250,000 27,976 40,954 60,427
12 66,852 250,000 250,000 250,000 30,204 45,749 70,083
13 74,395 250,000 250,000 250,000 32,378 50,766 80,809
14 82,314 250,000 250,000 250,000 34,524 56,041 92,752
15 90,630 250,000 250,000 250,000 36,564 61,520 105,997
16 99,361 250,000 250,000 250,000 38,477 67,198 120,690
17 108,530 250,000 250,000 250,000 40,251 73,078 137,008
18 118,156 250,000 250,000 250,000 41,871 79,165 155,153
19 128,264 250,000 250,000 250,000 43,325 85,469 175,362
20 138,877 250,000 250,000 250,000 44,621 92,016 197,915
</TABLE>
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of 0% 6% 12%
Year (-.78% Net) (5.22% Net) (11.22% Net)
1 $ 1,077 1,275 $1,473
2 3,411 3,987 4,587
3 4,404 5,543 6,778
4 7,086 8,977 11,108
5 9,693 12,527 15,852
6 12,419 16,394 21,247
7 15,261 20,579 27,339
8 18,203 25,071 34,165
9 21,233 29,862 41,771
10 24,507 35,184 50,543
11 27,976 40,954 60,427
12 30,204 45,749 70,083
13 32,378 50,766 80,809
14 34,524 56,041 92,752
15 36,564 61,520 105,997
16 38,477 67,198 120,690
17 40,251 73,078 137,008
18 41,871 79,165 155,153
19 43,325 85,469 175,362
20 44,621 92,016 197,915
(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>
Illustration 2
PLANNED PREMIUM $4,000
Initial Face Amount $250,000
Death Benefit Option 1
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
MALE AGE 45 NON-SMOKER
ASSUMING GUARANTEED CHARGES
(All States Except Texas)
<TABLE>
<CAPTION>
Death Benefit (2) Accumulated Value (2)
Assuming Hypothetical Gross Assuming Hypothetical Gross
Annual Investment Return of Annual Investment Return of
End of Accumulated 0% 6% 12% 0% 6% 12%
Year Premiums (1) (-.78% Net) (5.22% Net) (11.22% Net) (-.78% Net) (5.22% Net) (11.22% Net)
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 4,200 $250,000 $250,000 $250,000 $2,712 $ 2,902 $ 3,094
2 8,610 250,000 250,000 250,000 5,350 5,899 6,473
3 13,241 250,000 250,000 250,000 7,882 8,961 10,132
4 18,103 250,000 250,000 250,000 10,304 12,085 14,097
5 23,208 250,000 250,000 250,000 12,611 15,270 18,395
6 28,568 250,000 250,000 250,000 14,796 18,508 23,053
7 34,196 250,000 250,000 250,000 16,847 21,791 28,099
8 40,106 250,000 250,000 250,000 18,752 25,108 33,564
9 46,312 250,000 250,000 250,000 20,497 28,447 39,482
10 52,827 250,000 250,000 250,000 22,212 32,002 46,187
11 59,669 250,000 250,000 250,000 23,851 35,696 53,626
12 66,852 250,000 250,000 250,000 25,299 39,421 61,769
13 74,395 250,000 250,000 250,000 26,548 43,175 70,705
14 82,314 250,000 250,000 250,000 27,578 46,945 80,526
15 90,630 250,000 250,000 250,000 28,364 50,713 91,338
16 99,361 250,000 250,000 250,000 28,879 54,464 103,268
17 108,530 250,000 250,000 250,000 29,093 58,179 116,463
18 118,156 250,000 250,000 250,000 28,959 61,823 131,092
19 128,264 250,000 250,000 250,000 28,430 65,365 147,362
20 138,877 250,000 250,000 250,000 27,454 68,773 165,526
</TABLE>
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of 0% 6% 12%
Year (-.78% Net) (5.22% Net) (11.22% Net)
1 $ 863 $ 1,054 $1,245
2 2,980 3,530 4,103
3 3,751 4,830 6,002
4 6,173 7,955 9,966
5 8,481 11,139 14,264
6 10,862 14,574 19,119
7 13,307 18,251 24,559
8 15,802 22,158 30,613
9 18,333 26,284 37,318
10 21,032 30,821 45,007
11 23,851 35,696 53,626
12 25,299 39,421 61,769
13 26,548 43,175 70,705
14 27,578 46,945 80,526
15 28,364 50,713 91,338
16 28,879 54,464 103,268
17 29,093 58,179 116,463
18 28,959 61,823 131,092
19 28,430 65,365 147,362
20 27,454 68,773 165,526
(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>
Illustration 3
PLANNED PREMIUM $4,000
Initial Face Amount $250,000
Death Benefit Option 2
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
MALE AGE 45 NON-SMOKER
ASSUMING CURRENT CHARGES
(All States)
<TABLE>
<CAPTION>
Death Benefit (2) Accumulated Value (2)
Assuming Hypothetical Gross Assuming Hypothetical Gross
Annual Investment Return of Annual Investment Return of
End of Accumulated 0% 6% 12% 0% 6% 12%
Year Premiums (1) (-.78% Net) (5.22% Net) (11.22% Net) (-.78% Net) (5.22% Net) (11.22% Net)
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 4,200 $252,917 $253,113 $253,311 $2,917 $ 3,113 $ 3,311
2 8,610 255,752 256,326 256,923 5,752 6,326 6,923
3 13,241 258,478 259,609 260,834 8,478 9,609 10,834
4 18,103 261,121 262,993 265,103 11,121 12,993 15,103
5 23,208 263,678 266,477 269,759 13,678 16,477 19,759
6 28,568 266,146 270,060 274,838 16,146 20,060 24,838
7 34,196 268,521 273,742 280,376 18,521 23,742 30,376
8 40,106 270,785 277,506 286,401 20,785 27,506 36,401
9 46,312 272,922 281,337 292,941 22,922 31,337 42,941
10 52,827 275,086 285,455 300,358 25,086 35,455 50,358
11 59,669 277,225 289,775 308,582 27,225 39,775 58,582
12 66,852 279,285 294,249 317,638 29,285 44,249 67,638
13 74,395 281,275 298,890 327,622 31,275 48,890 77,622
14 82,314 283,222 303,736 338,663 33,222 53,736 88,663
15 90,630 285,037 308,704 350,783 35,037 58,704 100,783
16 99,361 286,692 313,770 364,066 36,692 63,770 114,066
17 108,530 288,171 318,920 378,619 38,171 68,920 128,619
18 118,156 289,456 324,137 394,559 39,456 74,137 144,559
19 128,264 290,531 329,408 412,017 40,531 79,408 162,017
20 138,877 291,404 334,740 431,164 41,404 84,740 181,164
</TABLE>
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of 0% 6% 12%
Year (-.78% Net) (5.22% Net) (11.22% Net)
1 $ 1,068 $ 1,265 $ 1,462
2 2,805 3,379 3,976
3 4,347 5,478 6,704
4 6,990 8,862 10,972
5 9,547 12,346 15,628
6 12,212 16,126 20,904
7 14,980 20,201 26,836
8 17,834 24,555 33,450
9 20,758 29,174 40,777
10 23,906 34,275 49,178
11 27,225 39,775 58,582
12 29,285 44,249 67,638
13 31,275 48,890 77,622
14 33,222 53,736 88,663
15 35,037 58,704 100,783
16 36,692 63,770 114,066
17 38,171 68,920 128,619
18 39,456 74,137 144,559
19 40,531 79,408 162,017
20 41,404 84,740 181,164
(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>
Illustration 4
PLANNED PREMIUM $4,000
Initial Face Amount $250,000
Death Benefit Option 2
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
MALE AGE 45 NON-SMOKER
ASSUMING GUARANTEED CHARGES
(All States Except Texas)
<TABLE>
<CAPTION>
Death Benefit (2) Accumulated Value (2)
Assuming Hypothetical Gross Assuming Hypothetical Gross
Annual Investment Return of Annual Investment Return of
End of Accumulated 0% 6% 12% 0% 6% 12%
Year Premiums (1) (-.78% Net) (5.22% Net) (11.22% Net) (-.78% Net) (5.22% Net) (11.22% Net)
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 4,200 $252,700 $252,890 $253,081 $2,700 $ 2,890 $ 3,081
2 8,610 255,317 255,863 256,432 5,317 5,863 6,432
3 13,241 257,815 258,885 260,045 7,815 8,885 10,045
4 18,103 260,191 261,950 263,937 10,191 11,950 13,937
5 23,208 262,438 265,054 268,128 12,438 15,054 18,128
6 28,568 264,546 268,184 272,637 14,546 18,184 22,637
7 34,196 266,503 271,328 277,480 16,503 21,328 27,480
8 40,106 268,293 274,466 282,671 18,293 24,466 32,671
9 46,312 269,901 277,580 288,226 19,901 27,580 38,226
10 52,827 271,450 280,847 294,446 21,450 30,847 44,446
11 59,669 272,892 284,183 301,248 22,892 34,183 51,248
12 66,852 274,111 287,467 308,566 24,111 37,467 58,566
13 74,395 275,097 290,685 316,442 25,097 40,685 66,442
14 82,314 275,826 293,807 324,910 25,826 43,807 74,910
15 90,630 276,270 296,794 334,000 26,270 46,794 84,000
16 99,361 276,402 299,611 343,748 26,402 49,611 93,748
17 108,530 276,190 302,212 354,188 26,190 52,212 104,188
18 118,156 275,583 304,531 365,338 25,583 54,531 115,338
19 128,264 274,536 306,503 377,221 24,536 56,503 127,221
20 138,877 273,001 308,056 389,863 23,001 58,056 139,863
</TABLE>
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of 0% 6% 12%
Year (-.78% Net) (5.22% Net) (11.22% Net)
1 $ 852 $ 1,042 $ 1,233
2 2,370 2,916 3,486
3 3,685 4,754 5,914
4 6,060 7,819 9,806
5 8,307 10,923 13,998
6 10,612 14,250 18,703
7 12,962 17,787 23,939
8 15,343 21,516 29,721
9 17,737 25,416 36,063
10 20,270 29,667 43,265
11 22,892 34,183 51,248
12 24,111 37,467 58,566
13 25,097 40,685 66,442
14 25,826 43,807 74,910
15 26,270 46,794 84,000
16 26,402 49,611 93,748
17 26,190 52,212 104,188
18 25,583 54,531 115,338
19 24,536 56,503 127,221
20 23,001 58,056 139,863
(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>
Illustration 5
PLANNED PREMIUM $4,000
Initial Face Amount $250,000
Death Benefit Option 1
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
MALE AGE 45 NON-SMOKER
ASSUMING GUARANTEED CHARGES
(Texas Only)
<TABLE>
<CAPTION>
Death Benefit (2) Accumulated Value (2)
Assuming Hypothetical Gross Assuming Hypothetical Gross
Annual Investment Return of Annual Investment Return of
End of Accumulated 0% 6% 12% 0% 6% 12%
Year Premiums (1) (-.78% Net) (5.22% Net) (11.22% Net) (-.78% Net) (5.22% Net) (11.22% Net)
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 4,200 $250,000 $250,000 $250,000 $2,712 $ 2,902 $ 3,094
2 8,610 250,000 250,000 250,000 5,350 5,899 6,473
3 13,241 250,000 250,000 250,000 7,882 8,961 10,132
4 18,103 250,000 250,000 250,000 10,304 12,085 14,097
5 23,208 250,000 250,000 250,000 12,611 15,270 18,395
6 28,568 250,000 250,000 250,000 14,796 18,508 23,053
7 34,196 250,000 250,000 250,000 16,847 21,791 28,099
8 40,106 250,000 250,000 250,000 18,752 25,108 33,564
9 46,312 250,000 250,000 250,000 20,497 28,447 39,482
10 52,827 250,000 250,000 250,000 22,212 32,002 46,187
11 59,669 250,000 250,000 250,000 23,851 35,696 53,626
12 66,852 250,000 250,000 250,000 25,299 39,421 61,769
13 74,395 250,000 250,000 250,000 26,548 43,175 70,705
14 82,314 250,000 250,000 250,000 27,578 46,945 80,526
15 90,630 250,000 250,000 250,000 28,366 50,715 91,340
16 99,361 250,000 250,000 250,000 28,883 54,468 103,271
17 108,530 250,000 250,000 250,000 29,100 58,185 116,468
18 118,156 250,000 250,000 250,000 28,970 61,833 131,101
19 128,264 250,000 250,000 250,000 28,445 65,380 147,374
20 138,877 250,000 250,000 250,000 27,476 68,795 165,542
</TABLE>
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of 0% 6% 12%
Year (-.78% Net) (5.22% Net) (11.22% Net)
1 $ 863 $ 1,054 $1,245
2 2,982 3,531 4,104
3 3,751 4,830 6,002
4 6,173 7,955 9,966
5 8,481 11,139 14,264
6 10,862 14,574 19,119
7 13,307 18,251 24,559
8 15,802 22,158 30,613
9 18,333 26,284 37,318
10 21,032 30,821 45,007
11 23,851 35,696 53,626
12 25,299 39,421 61,769
13 26,548 43,175 70,705
14 27,578 46,945 80,526
15 28,366 50,715 91,340
16 28,883 54,468 103,271
17 29,100 58,185 116,468
18 28,970 61,833 131,101
19 28,445 65,380 147,374
20 27,476 68,795 165,542
(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>
Illustration 6
PLANNED PREMIUM $4,000
Initial Face Amount $250,000
Death Benefit Option 2
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
MALE AGE 45 NON-SMOKER
ASSUMING GUARANTEED CHARGES
(Texas Only)
<TABLE>
<CAPTION>
Death Benefit (2) Accumulated Value (2)
Assuming Hypothetical Gross Assuming Hypothetical Gross
Annual Investment Return of Annual Investment Return of
End of Accumulated 0% 6% 12% 0% 6% 12%
Year Premiums (1) (-.78% Net) (5.22% Net) (11.22% Net) (-.78% Net) (5.22% Net) (11.22% Net)
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 4,200 $252,700 $252,890 $253,081 $2,700 $ 2,890 $ 3,081
2 8,610 255,317 255,863 256,432 5,317 5,863 6,432
3 13,241 257,815 258,885 260,045 7,815 8,885 10,045
4 18,103 260,191 261,950 263,937 10,191 11,950 13,937
5 23,208 262,438 265,054 268,128 12,438 15,054 18,128
6 28,568 264,546 268,184 272,637 14,546 18,184 22,637
7 34,196 266,503 271,328 277,480 16,503 21,328 27,480
8 40,106 268,293 274,466 282,671 18,293 24,466 32,671
9 46,312 269,901 277,580 288,226 19,901 27,580 38,226
10 52,827 271,450 280,847 294,446 21,450 30,847 44,446
11 59,669 272,892 284,183 301,248 22,892 34,183 51,248
12 66,852 274,111 287,467 308,566 24,111 37,467 58,566
13 74,395 275,097 290,685 316,442 25,097 40,685 66,442
14 82,314 275,826 293,807 324,910 25,826 43,807 74,910
15 90,630 276,273 296,797 334,003 26,273 46,797 84,003
16 99,361 276,407 299,616 343,753 26,407 49,616 93,753
17 108,530 276,198 302,220 354,197 26,198 52,220 104,197
18 118,156 275,596 304,544 365,353 25,596 54,544 115,353
19 128,264 274,553 306,522 377,243 24,553 56,522 127,243
20 138,877 273,026 308,084 389,895 23,026 58,084 139,895
</TABLE>
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of 0% 6% 12%
Year (-.78% Net) (5.22% Net) (11.22% Net)
1 $ 852 $ 1,042 $ 1,233
2 2,370 2,916 3,486
3 3,685 4,754 5,914
4 6,060 7,819 9,806
5 8,307 10,923 13,998
6 10,612 14,250 18,703
7 12,962 17,787 23,939
8 15,343 21,516 29,721
9 17,737 25,416 36,063
10 20,270 29,667 43,265
11 22,892 34,183 51,248
12 24,111 37,467 58,566
13 25,097 40,685 66,442
14 25,826 43,807 74,910
15 26,273 46,797 84,003
16 26,407 49,616 93,753
17 26,198 52,220 104,197
18 25,596 54,544 115,353
19 24,553 56,522 127,243
20 23,026 58,084 139,895
(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.
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
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
Accounts in which the Divisions of the Separate Account invest. Please refer to
the prospectus for both policies for information regarding 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 front-
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
deducted 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 $5.00 per month) amount equal to 1/12
x ($.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 Policy's $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 (Increase Option Rider in
Florida), 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 Death
Benefit Guarantee Rider is not available in the Commonwealth of Massachusetts.
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.
