PrinFlex Life(R)
Flexible Premium Variable Universal Life Insurance Policy
The PrinFlex Life(R) Flexible Variable Universal Life Insurance Policy (the
"Policy") is issued by Principal Life Insurance Company (the "Company"). The
Policy provides:
o a death benefit payable on the death of the insured;
o policy loans; and
o a net surrender value which may be accessed by a partial or total surrender
of the Policy.
This prospectus provides information that you should know before buying a
Policy. It is accompanied by a current prospectus for the underlying mutual
funds that are available under the Policy. Please read these prospectuses
carefully and keep them for future reference.
The investment options available under the Policy are:
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
Stock Index 500 Account
Utilities Account
Fidelity Variable Insurance Products Fund II
Contrafund Portfolio
Fidelity Variable Insurance Products Fund:
Equity-Income Portfolio
High Income Portfolio
Putnam Variable Trust
Global Asset Allocation Fund
Vista Fund
Voyager Fund
As in the case of other life insurance policies, it may not be in your best
interest to buy this Policy as a replacement for, or in addition to, existing
insurance coverage.
This Policy is NOT:
o a bank deposit
o endorsed by a bank or government agency
o federally insured
The Policy involves investment risk, including possible loss of principal.
You should be aware that the Securities and Exchange Commission ("SEC") has not
reviewed the Policy for its investment merit, and does not guarantee that the
information in this prospectus is accurate or complete. It is a criminal offense
to say otherwise.
This prospectus is dated May 1, 1999.
TABLE OF CONTENTS
GLOSSARY ............................................................... 4
SUMMARY ................................................................. 6
The Policy.......................................................... 6
Premiums............................................................ 7
Policy Value........................................................ 7
Investment Account.................................................. 7
Fixed Account....................................................... 7
Transfers........................................................... 7
Policy Loans........................................................ 8
Loan Account........................................................ 8
Surrenders.......................................................... 8
Charges and Deductions ............................................. 8
Death Benefits and Proceeds......................................... 10
Maturity Proceeds................................................... 10
Adjustment Options.................................................. 10
Termination and Reinstatement....................................... 10
Ten Day Examination Offer........................................... 10
CONDENSED FINANCIAL INFORMATION ......................................... 12
THE COMPANY ............................................................. 14
PRINCIPAL LIFE INSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT.......... 15
THE FUNDS................................................................ 12
THE POLICY............................................................... 17
To Buy a Policy..................................................... 17
Payment of Premiums................................................. 18
Premium Limitations................................................. 18
Allocation of Premiums.............................................. 19
Ten Day Examination Offer........................................... 19
Policy Values....................................................... 20
Investment Account Transfers........................................ 21
Fixed Account Transfers............................................. 22
Automatic Portfolio Balancing....................................... 23
Policy Loans........................................................ 23
Loan Account........................................................ 24
Surrenders.......................................................... 25
DEATH BENEFITS AND RIGHTS................................................ 26
Death Proceeds...................................................... 26
Death Benefit Option................................................ 26
Change in Death Benefit Option...................................... 28
Adjustment Options.................................................. 28
CHARGES AND DEDUCTIONS................................................... 29
Premium Expense Charge.............................................. 29
Monthly Policy Charge............................................... 30
Cost of Insurance Charge............................................ 30
Administration Charge............................................... 31
Mortality and Expense Risks Charge.................................. 31
Transaction Fees.................................................... 31
Surrender Charge.................................................... 32
Sales Charge Limitations............................................ 33
Other Charges....................................................... 34
Special Provisions for Group or Sponsored Arrangements.............. 34
THE FIXED ACCOUNT........................................................ 35
POLICY TERMINATION AND REINSTATEMENT..................................... 36
Policy Termination.................................................. 36
Reinstatement....................................................... 37
OTHER MATTERS............................................................ 38
Voting Rights....................................................... 38
Statement of Values................................................. 38
Services Available by Telephone..................................... 39
GENERAL PROVISIONS....................................................... 40
The Contract........................................................ 40
Optional Insurance Benefits......................................... 40
Misstatement of Age or Gender....................................... 41
Assignment.......................................................... 41
Ownership........................................................... 41
Beneficiary......................................................... 42
Benefit Instructions................................................ 42
Benefit Payment Options............................................. 42
Right to Exchange Policy............................................ 43
Participating Policy................................................ 44
Incontestability.................................................... 44
Suicide............................................................. 44
Delay of Payments................................................... 44
Addition, Deletion or Substitution of Investments................... 45
DISTRIBUTION OF THE POLICY............................................... 45
OFFICERS AND DIRECTORS OF PRINCIPAL MANAGEMENT CORPORATION............... 46
OFFICERS AND DIRECTORS OF PRINCIPAL LIFE INSURANCE COMPANY............... 46
Executive Officers (Other Than Directors)........................... 46
Directors........................................................... 46
STATE REGULATION......................................................... 48
FEDERAL TAX MATTERS...................................................... 48
Tax Status of the Company and the Separate Account.................. 48
Charges for Taxes................................................... 48
Diversification Standards........................................... 48
IRS Definition of Life Insurance.................................... 49
Modified Endowment Contract Status.................................. 49
Policy Surrenders and Partial Surrenders............................ 49
Policy Loans and Loan Interest...................................... 50
Corporate Alternative Minimum Tax................................... 50
Exchange or Assignment of Policies.................................. 50
Withholding......................................................... 50
Taxation of Accelerated Death Benefits.............................. 50
Other Tax Issues.................................................... 50
EMPLOYEE BENEFIT PLANS................................................... 51
LEGAL OPINIONS........................................................... 51
LEGAL PROCEEDINGS........................................................ 51
REGISTRATION STATEMENT...................................................51
OTHER VARIABLE INSURANCE CONTRACTS.......................................51
RESERVATION OF RIGHTS....................................................51
YEAR 2000 READINESS DISCLOSURE...........................................52
INDEPENDENT AUDITORS.....................................................53
FINANCIAL STATEMENTS.....................................................53
CUSTOMER INQUIRIES.......................................................53
Appendix A...............................................................53
Appendix B...............................................................53
The Policy offered by this prospectus may not be available in all states. This
prospectus is not an offer to sell, or solicitation of an offer to buy, the
Policy in states in which the offer or solicitation may not be lawfully made. No
person is authorized to give any information or to make any representation in
connection with this Policy other than those contained in this prospectus.
GLOSSARY
adjustment date - the monthly date on or next following the Company's approval
of a requested adjustment.
attained age - the insured's age on the birthday on or preceding the last policy
anniversary.
business day - any date that the New York Stock Exchange is open for trading and
trading is not restricted.
division - a part of the Separate Account which invests in shares of a mutual
fund.
effective date - the date on which all requirements for issuance of a Policy
have been satisfied.
Fixed Account - that part of the policy value that reflects value in the General
Account of the Company.
General Account - assets of the Company other than those allocated to any of our
Separate Accounts.
insured - the person named as the "insured" on the application for the Policy.
The insured may or may not be the owner.
Investment Account - that part of the policy value that reflects your investment
in one of the divisions of the Separate Account.
Loan Account - that part of the policy value that reflects the value transferred
from the Investment Account(s) and/or Fixed 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 day as the policy date.
Example: If the policy date is June 5, 1999, the first monthly date is July 5,
1999.
monthly policy charge - the amount subtracted from the policy value on each
monthly date equal to the sum of the cost of insurance and of 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 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 Investment Accounts and/or
Fixed Account.
net surrender value - policy value minus any surrender charge minus any policy
loans and unpaid loan interest.
notice - any form of communication received in our home office which provides
the information we need which may be in writing or another manner which we
approve in advance.
owner - the person, including joint owner, who owns all the rights and
privileges of this contract.
policy date - the date from which monthly dates, policy years and policy
anniversaries are determined.
policy value - an amount equal to the Fixed Account value plus the Investment
Account value(s) plus the Loan Account value.
policy year - the one-year period beginning on the policy date and ending one
day before the policy anniversary and any subsequent one year period beginning
on a policy anniversary.
Example: If the policy date is June 5, 1999, the first policy year ends on
June 4, 2000. The first policy anniversary falls on June 5, 2000.
premium expense charge - the charge deducted from premium payments to cover a
sales charge, state and local premium taxes and federal taxes.
prorated basis - in the proportion that the value of a particular Investment
Account or the Fixed Account bears to the total value of all Investment Accounts
and the Fixed Account.
related policies - policies which have a common effective date pursuant to a
written request from the applicant(s).
surrender value - policy value minus any surrender charge.
target premium - a premium amount which is 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 provided in
Appendix B.
unit - the accounting measure used to calculate the value of the Separate
Account divisions.
valuation date - the date as of which the net asset value of a mutual fund is
determined.
valuation period - the period of time between determination of net asset value
on one valuation date and the next valuation date.
written request - actual delivery to the Company at our home office of a written
notice or request, signed and dated, on a form we supply or approve.
Your notices may be mailed to us at:
Principal Life Insurance Company
P O Box 9296
Des Moines, Iowa 50306-9296
<PAGE>
SUMMARY
This prospectus describes a flexible variable universal life policy offered by
the Company. This is a brief summary of the Policy's features. More detailed
information follows later in this prospectus.
The Policy
The Policy is designed to provide you with:
o lifetime protection, and
o flexibility in:
o the amount and frequency of premium payments (subject to certain
limitations), and
o the amount of life insurance proceeds payable under the Policy.
You may allocate your net premium payments to divisions of the Separate Account
and/or the Fixed Account. Currently there are twenty-five divisions available to
you. Not all divisions are available in all states. A current list of divisions
available in your state may be obtained from a sales representative or our home
office.
Each division invests in shares of an underlying mutual fund. More detailed
information about the underlying mutual funds may be found in the current
prospectus for each underlying mutual fund.
The underlying mutual funds are NOT available to the general public directly.
The underlying mutual funds are available only as investment options in variable
life insurance policies or variable annuity contracts issued by life insurance
companies. Some of the underlying mutual funds have been established by
investment advisers that manage publicly traded mutual funds having similar
names and investment objectives. While some of the underlying mutual funds may
be similar to, and may in fact be modeled after publicly traded mutual funds,
you should understand that the underlying mutual funds are not otherwise
directly related to any publicly traded mutual fund. Consequently, the
investment performance of publicly traded mutual funds and of any underlying
mutual fund may differ substantially.
Division: the division invests in:
Principal Variable Contracts Fund, Inc.
Aggressive Growth Aggressive Growth Account
Asset Allocation Asset Allocation Account
Balanced Balanced Account
Bond Bond Account
Capital Value Capital Value Account
Government Securities Government Securities Account
Growth Growth Account
International International Account
International SmallCap International SmallCap Account
MicroCap MicroCap Account
MidCap MidCap Account
MidCap Growth MidCap Growth Account
Money Market Money Market Account
Real Estate Real Estate Account
SmallCap SmallCap Account
SmallCap Growth SmallCap Growth Account
SmallCap Value SmallCap Value Account
Stock Index 500 Stock Index 500 Account
Utilities Utilities Account
Fidelity Contrafund Fidelity VIP II Contrafund Portfolio
Fidelity Equity-Income Fidelity VIP Equity-Income Portfolio
Fidelity High Income Fidelity VIP High Income Portfolio
Putnam Global Asset Allocation Putnam VT Global Asset Allocation Fund
Putnam Vista Putnam VT Vista Fund
Putnam Voyager Putnam VT Voyager Fund
Premiums
The Company guarantees that the Policy will stay in force if you have paid
enough premium to meet the grace period provision (see THE POLICY - Payment of
Premiums). Your initial premium payment must be at least as much as the minimum
monthly premium shown on your illustration for the Policy. Minimum monthly
premium payments must be made for the first 24 policy months (except where
prohibited by state law). Increases in the face amount of the Policy cause
increases in the minimum monthly premium.
Your net premiums are allocated to divisions of the Separate Account and/or the
Fixed Account. Your initial net premium is allocated to the Money Market
division at the end of the valuation date we receive the premium. Twenty-one
days after the effective date of the Policy, the money is reallocated using your
allocation instructions (see THE POLICY - Allocation of Premiums).
Policy Value
Your Policy value is:
o the value(s) of your Investment Account(s)
o plus the value of your Fixed Account
o plus the value of your Loan Account.
Investment Account
An Investment Account is set up for each division to which you make an
allocation. The value of an Investment Account reflects the investment
experience of the division.
Fixed Account
The Company guarantees that net premiums allocated to the Fixed Account earn
interest at a guaranteed rate. In no event will the guaranteed interest rate be
less than 3% compounded annually.
Transfers
You may transfer amounts between the Investment Accounts and/or the Fixed
Account subject to certain limitations. Transfers in and out of the Fixed
Account are subject to specific limitations described in THE POLICY - Fixed
Account Transfers.
We reserve the right to charge a transfer fee on each unscheduled transfer after
the 12th such transfer in a policy year. The fee will not be more than $25 per
unscheduled transfer.
Policy Loans
You may borrow against your policy value any time the Policy has a net surrender
value. The minimum amount of a loan is $500.
Loan Account
When you take a policy loan, we establish a Loan Account. An amount equal to the
amount of the policy loan is transferred to the Loan Account from your
Investment Accounts and/or Fixed Account. Interest is paid on the amount in the
Loan Account.
Surrenders (total and partial)
Total Surrender
o You may surrender your Policy and receive the net surrender value.
o We calculate the net surrender value as of the date we receive your written
request.
o A surrender charge is imposed on total surrenders within ten years of the
policy date (another date may apply if the Policy has been reinstated or
the face amount increased).
Partial Surrender
o After the second policy year, you may request a partial
surrender of the net surrender value.
o The minimum amount of partial surrender is $500.
o The total of your partial surrenders during a policy year may not be
greater than 75% of the net surrender value (as of the date of the request
for the first partial surrender in that policy year).
o Surrenders are taken from premiums paid into the Policy on a last-in,
first-out basis.
o Partial surrenders are limited to no more than two in each policy year.
Charges and Deductions Deductions from Premiums
o Sales load of 2.75% of premiums less than or equal to target premiums
(0.75% of premiums in excess of target premiums) made:
o during each of the first ten years, and
o with respect to premiums made because of a face amount increase, during
the first ten years after the increase.
o 2.20% for state and local taxes.
o 1.25% for federal taxes.
Surrender Charges
A surrender charge is imposed on Policy termination or total surrender during
the first ten policy years (and ten years after an increase in the face amount).
The charge is:
o deferred administrative charge of $3 per $1,000 of face amount (but no more
than $1,500 per Policy), plus
o deferred sales charge of 47.25% times premiums paid (up to a maximum of two
target premiums) (see CHARGES AND DEDUCTIONS - Surrender Charge),
multiplied by
o the applicable surrender charge percentage shown below:
Surrender Charge Percentage Table
Number of years since policy The following percentage of
date and/or the adjustment date surrender charge is payable
1 through 5 100.00%
6 95.24
7 85.71
8 71.43
9 52.38
10 28.57
11 and later 00.00
Monthly Policy Charges
o Administration charge:
o During first policy year: 1/12 x ($.40 for each $1,000 of face
amount) but not less than $6.00/month and not more than $16.67/month.
o During every policy year after the first, the monthly administration
charge is $6.00.
o Cost of insurance charge.
o Mortality and expense risks charge of 0.90% of your Investment Accounts per
year. (After the 9th policy year, the mortality and expense risks charge
will not be more than 0.27% per year.)
o Supplemental benefit rider(s) charge(s).
Other Charges
o Transaction charge of the lesser of $25 or 2% of the amount surrendered for
each partial surrender.
o Investment management fees and other operating expenses for the fund
underlying the Investment Accounts.
Death Benefits and Proceeds
The death proceeds are paid to the beneficiary(ies) when the insured dies. Death
proceeds are calculated as of the insured's date of death. The amount of the
death proceeds are:
o the death benefit plus interest (as explained in DEATH BENEFITS AND RIGHTS
- Death Proceeds)
o plus proceeds from any benefit riders
o minus policy loans and unpaid loan interest
o minus any overdue monthly policy charges.
The Policy provides for two death benefit options - a level amount and a
variable amount. You choose an option on your application. Subject to certain
conditions, you may change your option after the Policy has been issued.
Death proceeds are paid in cash or applied under a benefit payment option. We
pay interest on the death proceeds from the date of death of the insured until
the date of payment or application under a benefit payment option.
Maturity Proceeds
If the insured is living on the maturity date, we will pay you (the owner) an
amount equal to the death proceeds as described above. The Policy then
terminates. Maturity proceeds are paid in cash lump sum or applied under a
benefit payment option.
Adjustment Options
You may send us a written request to increase or decrease the face amount of the
Policy. No request is approved if the Policy is in a grace period or if monthly
policy charges are being waived under a rider.
The minimum amount of a face amount increase is $50,000 and is subject to our
underwriting guidelines in effect at the time you request the increase.
You may only request a decrease in face amount:
o after the second policy anniversary, and
o if the request does not decrease the face amount below $50,000.
Termination and Reinstatement
The Policy terminates when:
o you make a total policy surrender;
o death proceeds are paid;
o maturity proceeds are paid; or
o you do not make additional premium payments (after the expiration of a
61-day grace period).
Subject to certain conditions, you may reinstate a Policy that terminated
because of failure to pay minimum monthly premiums or insufficient values.
Ten Day Examination Offer (Free-look Provision)
o You may return the Policy during the free-look period that is generally 10
days from when the Policy is delivered to you. The free-look period may be
longer in certain states.
o We return either all premiums paid or the policy value, whichever is
required by applicable state law.
CONDENSED FINANCIAL INFORMATION
Following are unit values for the policy for the periods ended December 31.
<TABLE>
<CAPTION>
Number of
Accumulation Unit Value Accumulation Units
Outstanding
Beginning End Percentage of Change End of Period
of Period of Period from Prior Period (in thousands)
Aggressive Growth Division
<S> <C> <C> <C> <C>
1998 $12.388 $14.744 19.02% 966,076
1997* 10.000 12.388 23.88 316,073
Asset Allocation Division
1998 11.509 12.566 9.18 126,757
1997* 10.000 11.509 15.09 48,811
Balanced Division
1998 11.555 12.932 11.92 470,384
1997* 10.000 11.555 15.55 117,668
Bond Division
1998 10.973 11.816 7.68 169,676
1997* 10.000 10.973 9.73 44,349
Capital Value Division
1998 12.519 14.219 13.58 1,001,214
1997* 10.000 12.519 25.19 251,678
Government Securities Division
1998 10.927 11.830 8.26 276,130
1997* 10.000 10.927 9.27 9,538
Growth Division
1998 12.133 14.724 21.35 323,329
1997* 10.000 12.133 21.33 75,951
International Division
1998 10.959 12.053 9.98 647,156
1997* 10.000 10.959 9.59 247,757
International SmallCap Division
1998** 10.000 9.053 (9.47) 34,925
MicroCap Division
1998** 10.000 8.175 (18.25) 18,274
MidCap Division
1998 12.027 12.470 3.68 1,122,974
1997* 10.000 12.027 20.27 408,693
MidCap Growth Division
1998** 10.000 9.708 (2.92) 32,540
Money Market Division
1998 10.469 11.021 5.27 723,761
1997* 10.000 10.469 4.69 365,753
Real Estate Division
1998** 10.000 9.353 (6.47) 3,390
SmallCap Division
1998** 10.000 7.995 (20.05) 31,352
SmallCap Growth Division
1998** 10.000 10.264 2.64 20,430
SmallCap Value Division
1998** 10.000 8.511 (14.89) 16,935
Utilities Division
1998** 10.00 11.560 15.60 3,944
Fidelity Contrafund Division
1998 12.114 15.746 29.98 509,526
1997* 10.000 12.114 21.14 172,484
Fidelity Equity-Income Division
1998 12.263 13.688 11.62 358,372
1997* 10.000 12.263 22.63 83,042
Fidelity High Income Division
1998 11.518 11.020 (4.32) 96,628
1997* 10.000 11.518 15.18 28,608
Putnam Global Asset Allocation Division
1998** 10.000 10.299 2.99 7,305
Putnam Vista Division
1998** 10.000 10.506 5.06 11,712
Putnam Voyager Division
1998** 10.000 10.843 8.43 82,965
<FN>
* For the period from February 7, 1997 date Policy first available through
December 31, 1997.
** For the period from May 1, 1998 (date Division first offered in the Policy)
through December 31, 1998.
</FN>
</TABLE>
THE COMPANY
The Company is a stock life insurance company with its home office at: Principal
Financial Group, Des Moines, Iowa 50306. It is authorized to transact life and
annuity business in all of the United States and the District of Columbia. The
Company is a wholly owned subsidiary of a mutual insurance holding company named
"Principal Mutual Holding Company."
The Company was incorporated on June 24, 1879 under Iowa law as a mutual life
insurance company named Bankers Life Association. It changed its name to Bankers
Life Company in 1911 and then to Principal Mutual Life Insurance Company in
1986. The name change to Principal Life Insurance Company and reorganization
into a mutual holding company structure took place in 1998.
PRINCIPAL LIFE INSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT
The Separate Account was established under Iowa law on November 2, 1987. It was
then registered as a unit investment trust with the Securities and Exchange
Commission ("SEC"). This registration does not involve SEC supervision of the
investments or investment policies of the Separate Account.
The income, gains, and losses, whether or not realized, of the Separate Account
are credited to or charged against the Separate Account without regard to other
income, gains, or losses of the Company. Obligations arising from the Policy,
including the promise to make benefit option payments, are our general corporate
obligations. However, the Policy provides that the portion of the Separate
Account's assets equal to the reserves and other liabilities under the Policy
are not charged with any liabilities arising out of any other business of the
Company.
There currently are twenty-five divisions in the Separate Account available to
you. The assets of each division invest in a corresponding account of a mutual
fund. New accounts may be added and made available. Accounts may also be
eliminated from the Separate Account.
THE FUNDS
The funds are mutual funds registered under the Investment Company Act of 1940
as open-end diversified management investment companies. The funds provide the
investment vehicle for the Separate Account. A full description of the funds,
their investment objectives, policies and restrictions, charges and expenses and
other operational information is contained in the attached prospectuses (which
should be read carefully before investing). Additional copies of these documents
are available from a sales representative or our home office.
The following is a brief summary of the investment objectives of each division:
<TABLE>
<CAPTION>
Division Division Invests In Investment Advisor Investment Objective
<S> <C> <C> <C>
Aggressive Growth Aggressive Growth Account Morgan Stanley through a sub- to provide long-term capital appreciation
advisory agreement by investing primarily in growth-oriented
common stocks of medium and large
capitalization U.S. corporations and, to a
limited extent, foreign corporations.
Asset Allocation Asset Allocation Account Morgan Stanley through a sub- to generate a total investment return
advisory agreement consistent with the preservation of capital.
The Account intends to pursue a flexible
investment policy in seeking to achieve
this investment objective.
Balanced Balanced Account Invista Capital Management, LLC to generate a total return consisting of
through a sub-advisory agreement current income and capital appreciation
while assuming reasonable risks in
furtherance of this objective.
Bond Bond Account Principal Management Corporation to provide as high a level of income as is
consistent with preservation of capital and
prudent investment risk.
Capital Value Capital Value Account Invista Capital Management, LLC to provide long-term capital
through a sub-advisory agreement appreciation and secondarily is growth of
investment income. The Account seeks to
achieve its investment objectives through
the purchase primarily of common stocks,
but the Account may invest in other
securities.
Government Securities Government Securities Invista Capital Management, LLC to seek a high level of current income,
Account through a sub-advisory agreement liquidity and safety of principal. The
Account seeks to achieve its objective
through the purchase of obligations
issued or guaranteed by the United States
Government or its agencies, with
emphasis on Government National
Mortgage Association Certificates
("GNMA Certificates"). Account shares
are not guaranteed by the United States
Government.
Growth Growth Account Invista Capital Management, LLC to seek growth of capital. The Account
through a sub-advisory agreement seeks to achieve
its objective through the
purchase primarily of common stocks, but
the Account may invest in other
securities.
International International Account Invista Capital Management, LLC to seek long-term growth of capital by
through a sub-advisory agreement investing in a portfolio of equity
securities domiciled in any of the nations
of the world.
International SmallCap International SmallCap Invista Capital Management, LLC to seek long-term growth of capital. The
Account through a sub-advisory agreement Account will attempt to achieve its
objective by investing primarily in equity
securities of non-United States companies
with comparatively smaller market
capitalizations.
MicroCap MicroCap Account Goldman Sachs Asset Management to seek long-term growth of capital. The
through a sub-advisory agreement Account will attempt to achieve its
objective by investing primarily in value
and growth oriented companies with
small market capitalizations, generally
less than $700 million.
MidCap MidCap Account Invista Capital Management, LLC to achieve capital appreciation by
through a sub-advisory agreement investing primarily in securities of
emerging and other growth-oriented
companies.
MidCap Growth MidCap Growth Account Dreyfus Corporation through to seek long-term growth of capital. The
a sub-advisory agreement Account will attempt to achieve its
objective by investing primarily in growth
stocks of companies with market
capitalizations in the $1 billion to $10
billion range.
Money Market Money Market Account Principal Management Corporation to seek as high a level of current income
available from 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 Real Estate Account Principal Management Corporation to seek to
generate a high total return. The
Account will attempt to achieve its
objective by investing primarily in equity
securities of companies principally
engaged in the real estate industry.
SmallCap SmallCap Account Invista Capital Management, LLC to seek long-term growth of capital. The
through a sub-advisory agreement Account will attempt to achieve its
objective by investing primarily in equity
securities of both growth and value
oriented companies with comparatively
smaller market capitalizations.
SmallCap Growth SmallCap Growth Account Berger Associates through a to seek long-term growth of capital. The
sub-advisory agreement Account will attempt to achieve its
objective by investing primarily in equity
securities of small growth companies with
market capitalization of less than $1
billion.
SmallCap Value SmallCap Value Account J.P. Morgan Investment to seek long-term growth of capital by
Management investing primarily in equity securities of
small companies through a sub-advisory
agreement with value characteristics and
market capitalizations of less than
$1 billion.
Stock Index 500 Stock Index 500 Account Invista Capital Management, LLC to seek long-term growth of capital. The
through a sub-advisory agreement Account attempts to mirror the investment
results of the Standard & Poor's Stock Index.
Utilities Utilities Account Invista Capital Management, LLC to seek to provide current income and long-
through a sub-advisory agreement term growth of income and capital by
investing primarily through a sub-advisory
agreement in equity and fixed-income
securities of companies in the public
utilities industry.
Fidelity Contrafund Fidelity VIP II FidelityManagement and to seek long-term capital appreciation.
Contrafund Portfolio Research Company
Fidelity Equity-Income Fidelity VIP Equity-Income Fidelity Management and to seek reasonable income by investing
Portfolio Research Company primarily in income-producing equity
securities.
Fidelity High Income Fidelity VIP High Income Fidelity Management and to seek a high level of current income by
Research Company investing primarily in high yielding, lower
quality, fixed income securities, while also
considering growth of capital.
Putnam Global Asset Putnam VT Global Asset Putnam Investment to seek a high level of long-term total
Allocation Allocation Fund Management, Inc. return consistent with preservation of
capital.
Putnam Vista Putnam VT Vista Fund Putnam Investment to seek capital appreciation.
Management, Inc.
Putnam Voyager Putnam VT Voyager Fund Putnam Investment to seek capital appreciation.
Management, Inc.
</TABLE>
Principal Management Corporation (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.
Account: Balanced, Capital Value, Government Securities, Growth, International,
International SmallCap, MidCap, SmallCap, Stock Index 500 and Utilities
Sub-Advisor: Invista Capital Management, LLC. Invista is a subsidiary of
Principal Life Insurance Company and an affiliate of the Manager. Invista
has managed investments for institutional investors, including Principal
Life, since 1985. As of December 31, 1998, it managed assets of
approximately $31 billion. Invista's address is 1800 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
Account: 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, 1998, MSAM managed investments totaling approximately $163.4
billion. On December 1, 1998 Morgan Stanley Asset Management Inc. changed
its name to Morgan Stanley Dean Witter Investment Management Inc. but
continues to do business in certain instances using the name Morgan Stanley
Asset Management.
Account: MicroCap
Sub-Advisor: Goldman Sachs Asset Management. Goldman Sach's address is 1 New
York Plaza, 42nd Floor, New York, NY 10004. It 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 active managed U.S. and international equity
portfolios, U.S. and global fixed income portfolios, commodity and currency
products, and money market mutual funds. As of December 31, 1998, GSAM,
together with its affiliates, managed assets in excess of $195 billion.
Account: MidCap Growth
Sub-Advisor: The Dreyfus Corporation, located at 200 Park Avenue, New York, NY
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. As of December 31, 1998, the Dreyfus Corporation
managed or administered approximately $118.5 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. Berger is a wholly owned subsidiary of Kansas City Southern
Industries, Inc. ("KCSI"). 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. Assets under management for Berger as of December 31, 1998 were
approximately $3.4 billion.
Account: SmallCap Value
Sub-Advisor: J.P. Morgan Investment 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 advisory to individual and institutional customers.
As of December 31, 1998, J.P. Morgan and its subsidiaries had total
combined assets under management of approximately $300 billion.
The Company purchases and sells fund shares for the Separate Account at their
net asset value without any sales or redemption charge. The Separate Account has
divisions that correspond to interests in the Investment Accounts. The assets of
each Investment Account are separate from the others. An Investment Account's
performance has no effect on the investment performance of any other Investment
Account.
The annual expenses of Investment Accounts (as a percentage of average net
assets) as of December 31, 1998 were:
<TABLE>
<CAPTION>
Management 12b-1 Other Total Account
Account Fees Fees Expenses Annual Expenses
<S> <C> <C> <C> <C>
Principal Variable Contracts Fund
Aggressive Growth 0.77% N/A 0.01% 0.78%
Asset Allocation 0.80 N/A 0.09 0.89
Balanced 0.57 N/A 0.02 0.59
Bond 0.49 N/A 0.02 0.51
Capital Value 0.43 N/A 0.01 0.44
Government Securities 0.49 N/A 0.01 0.50
Growth 0.47 N/A 0.01 0.48
International 0.73 N/A 0.04 0.77
International SmallCap 1.21 N/A 0.13 1.34
MicroCap 1.00 N/A 0.38 1.38
MidCap 0.61 N/A 0.01 0.62
MidCap Growth 0.90 N/A 0.37 1.27
Money Market 0.50 N/A 0.02 0.52
Real Estate 0.90 N/A 0.10 1.00
SmallCap 0.85 N/A 0.13 0.98
SmallCap Growth 1.00 N/A 0.31 1.31
SmallCap Value 1.10 N/A 0.46 1.56
Utilities 0.60 N/A 0.09 0.69
Fidelity
Fidelity Contrafund 0.59 N/A 0.11 0.70
Fidelity Equity-Income 0.49 N/A 0.09 0.58
Fidelity High Income 0.58 N/A 0.12 0.70
Putnam Class IB Shares
Putnam Global Asset Allocation 0.44 0.10% 0.09 0.63*(1)
Putnam Vista 0.44 0.10 0.08 0.62*(2)
Putnam Voyager 0.36 0.10 0.03 0.49*(3)
<FN>
* Actual expenses for Class IB shares for the period from May 1, 1998
through December 31, 1998. (1) Based on performance of Class IA shares,
estimated annualized expenses are 0.93% (2) Based on performance of Class
IA shares, estimated annualized expenses are 0.92% (3) Based on performance
of Class IA shares, estimated annualized expenses are 0.73%
</FN>
</TABLE>
THE POLICY
The descriptions that follow are based on provisions of the Policy offered by
this prospectus.
To Buy a Policy
A completed application and required supplements must be submitted to us through
an agent or broker selling the Policy.
The minimum face amount of a Policy is:
o $50,000 for regular underwriting, or
o $25,000 for guaranteed issue, expanded nonmedical and batch underwriting.
We reserve the right to increase or decrease the minimum face amount.
Generally, we do not issue policies for insureds who are:
o over age 85 for regular underwriting, or
o over age 70 for guaranteed issue, expanded nonmedical and batch underwriting.*
* Expanded non-medical and batch underwriting are special programs
offered to certain cases involving an employer. Batch underwriting may
be available on cases involving at least 5 lives in which there is a
possible substandard risk and a need to improve that rating is
essential to placing the case. Expanded non-medical underwriting may be
available on cases involving at least 25 lives in which ease of
enrollment and underwriting requirements are determining factors.
Applicants for the Policy must:
o furnish satisfactory evidence of insurability for the insured, and
o meet our insurance underwriting guidelines and suitability rules.
We reserve the right to reject any application or related premium if we
determine that our underwriting guidelines, suitability rules or procedures have
not been met.
If you want insurance coverage to start at the time the application is
submitted, you must send a payment of at least the required minimum initial
premium amount with your completed application. The required minimum initial
premium amount is shown on the policy illustration. If this amount is submitted
with the application, a conditional receipt is given to you. The receipt
acknowledges the initial payment and details any interim conditional insurance
coverage.
Policy Date
If we issue a Policy, a policy date is determined. Policies will not be dated on
the 29th, 30th or 31st of any month. Policies that would otherwise be dated on
these dates are dated on the 28th of the same month. Effective October 1, 1999,
policies that are issued on a COD basis and that would otherwise be dated on the
29th, 30th or 31st of a month will be dated on the first day of the following
month. Your policy date is shown on the current data pages.
Upon specific request and our approval,
o your Policy may be backdated, however:
o the policy date may not be more than three months prior to the date of
application (or shorter period if required by state law);
o payment of minimum required premium is required for the backdated
period; and
o monthly policy charges are deducted from the policy value for the
backdated period and
o your written request (as defined in the glossary) specifying the
backdated policy date must accompany the application.
o in the case of related policies:
o issuance of policies may be delayed to provide a common policy date;
o we will set the common policy date following the last underwriting
decision on all applications; and
o your written request regarding the policy dates must accompany the
applications.
Effective Date
The policy date and the effective date are the same unless:
o a backdated policy date is requested, or
o a Policy is applied for on a COD basis (the effective date is the date we
received at least the minimum monthly premium), or
o the application was not accompanied by a payment of at least the minimum
monthly premium (the effective date is the date we receive at least the
difference between the amount received and the minimum monthly premium), or
o additional premiums are required (the effective date is the date we
receive, review and accept the required premium), or
o application amendments are required (the effective date is the date we
receive, review and accept amendments).
If the insured was to die before the owner actually receives the Policy,
coverage is determined solely under the terms of the conditional receipt, if
any. The insurance coverage under the Policy does not take effect until the
owner actually receives the Policy.
Payment of Premiums
The amount and frequency of your premium payments affects the policy value, the
net surrender value and how long the Policy remains in force. After the initial
premium, you may determine the amount and timing of subsequent premium payments
within certain restrictions. You must pay premiums to us at our home office.
Where permitted by state law, you must pay a minimum premium during the first 24
policy months ("minimum required premium"). Within certain limits you can set
your premium schedule. We send premium reminder notices to you if you establish
an annual, semiannual or quarterly premium payment schedule. Preauthorized
withdrawals may be set up on a monthly basis (to allow us to automatically
deduct premium payments from your checking or other financial institution
account). You may also make unscheduled payments to us at our home office.
During the first 24 policy months, failure to make premium payments does not
cause the Policy to terminate if:
o any minimum required premium is paid, and
o no policy loan is taken.
After the first 24 policy months (or any time a policy loan is taken), making
premium payments under your planned periodic premium schedule does not guarantee
that your Policy will stay in force unless:
o your Policy's net surrender value is at least equal to the monthly
policy charge on the current monthly date, or
o the death benefit guarantee rider is in effect.
During the twelve month period ended December 31, 1998, we received premium
payments totaling $75,322,153 for these Policies.
Premium Limitations
In no event may the total of all premiums paid, both scheduled and unscheduled,
be more than the current maximum premium payments allowed for life insurance
under the Internal Revenue Code (the "Code"). If you make a premium payment that
would result in total premiums exceeding the current maximum limitation, we only
accept that portion of the payment that makes total premiums equal the maximum.
Any excess will be returned and no further premiums are accepted until allowed
by the current maximum premium limitations.
Allocation of Premiums
Your initial net premium (and other net premiums we receive prior to the
effective date and twenty days after the effective date) are allocated to the
Money Market division at the end of the valuation period we receive the premium.
Twenty-one days after the effective date, the money is reallocated to the
divisions of the Separate Account and/or to the Fixed Account according to your
instructions. If the twenty-first day is not a business day, the transfer will
occur on the first business day following the twenty-first day from the
effective date.
Example: The effective date of your policy is February 1st. Your net
premium is allocated to the Money Market division at the end of
the valuation period we receive the premium. At the close of
business on February 21st, the net premium is reallocated to
the Investment Account and/or Fixed Account that you selected.
Net premium payments received after the twenty-day period are allocated to the
Investment Accounts or to the Fixed Account according to your instructions. For
each division and the Fixed Account, the allocation percentage must be zero or a
whole number not less than 10. The total of all the percentages for the
divisions and the Fixed Account must equal 100. The percentage allocation for
future premium payments may be changed, without charge, at any time by sending a
written request to us or, if telephone privileges apply, calling us at
1-800-247-9988. The allocation changes are effective at the end of the valuation
period in which your new instructions are received.
Ten Day Examination Offer (Free-Look Provision)
Under state law, you have the right to return the Policy for any reason during
the free-look period and receive your premiums paid. (If you apply for your
Policy in California, the amount refunded is described below). Your request to
return the Policy must be in writing. The request and the Policy must be mailed
to us or returned to the agent (as determined by the postmark) no later than the
last day of the free-look period as shown below.
The free-look period is the later of:
o 10 days* after the Policy is delivered to you,
o 10 days* after a written notice is delivered or mailed to you which
tells about the cancellation right, or
o 45 days after you complete the application.
*Different free-look periods apply if your Policy is issued in:
o California and you are age 60 and over (30 day free-look period);
o Colorado (15 day free-look period); or
o Idaho or North Dakota (20 day free-look period).
If you applied for your Policy in California, the amount refunded is:
o the policy value as of the date we receive your written request for
cancellation
o plus the premium expense charge(s) deducted from the premium
o plus the monthly policy charge(s) deducted from the policy value.
NOTE:
o If the purchase of this Policy is a replacement for another life insurance
policy or an annuity contract, different free-look periods may apply. We
reserve the right to keep the initial premium payment in the Money Market
division longer than 20 days to correspond to the free-look periods of a
particular state's replacement requirements.
o See GENERAL PROVISIONS - Delay of Payments.
Policy Values
Your policy value is equal to the sum of the values in your Investment Accounts,
Fixed Account and Loan Account (see THE FIXED ACCOUNT and THE POLICY - Loan
Account). The policy value reflects your premium payments, partial surrenders,
policy loans and the Policy expenses.
There is no guaranteed minimum Investment Account value. Its value reflects the
investment experience of the Investment Accounts. It is possible that the
investment performance could cause a loss of the entire amount allocated to the
Investment Accounts. Without additional premium payments or investments in the
Fixed Account or a death benefit guarantee rider, this could result in no death
benefit upon the insured's death.
At the end of any valuation period, your value in an Investment Account is:
o the number of units you have in a division
o multiplied by the value of a unit in the division.
The number of units is the total of units purchased by allocations
to the division from:
o your initial premium payment (less premium expense charges)
o plus subsequent premium payments (less premium expense charges);
o plus transfers from another division or the Fixed Account minus units
sold:
o for partial surrenders from the division;
o as part of a transfer to another division, the Fixed Account or the
Loan Account; and
o to pay monthly policy charges and fees.
Unit values are calculated each valuation date. To calculate the unit value of a
division, the unit value from the previous valuation date is multiplied by the
division's net investment factor for the current valuation period. The number of
units does not change due to a change in unit value.
The net investment factor measures the performance of each division. The net
investment factor for a valuation period is calculated as follows:
[{the share price of the underlying mutual fund account at the end of the
valuation period before that day's transactions
plus
the per share amount of the dividend (or other distribution) made by the
mutual fund account during the valuation period}
divided by
the share price of the underlying mutual fund account at the end of the
previous valuation period after that day's transactions].
When an investment owned by an Account pays a dividend, the dividend increases
the net asset value of a share of the Account as of the date the dividend is
recorded. As the net asset value of a share of an Account increases, the unit
value of the corresponding division also reflects an increase. Payment of a
dividend under these circumstances does not increase the number of units you own
in the Account.
Investment Account Transfers
You may request an unscheduled transfer or set up a periodic transfer by sending
us a written request or calling us if telephone privileges apply
(1-800-247-9988) (see OTHER MATTERS - Services Available by Telephone). You must
specify the dollar amount or percentage to transfer from each Investment
Account. In states where allowed, we reserve the right to reject transfer
instructions from someone providing them for multiple Policies for which he or
she is not the owner.
You may not make a transfer to the Fixed Account if:
o a transfer has been made from the Fixed Account to an Investment
Account within six months, or
o immediately after the transfer, the Fixed Account value would be more
than $1,000,000 (without our prior approval).
Unscheduled Transfers You may make unscheduled transfers from an Investment
Account to another Investment Account or to the Fixed Account. The transfer is
made, and values determined, as of the end of the valuation period in which we
receive your request.
o The transfer amount must be equal to or greater than the lesser of
$100 or the value of your Investment Account.
o We reserve the right to charge a transfer fee on each unscheduled transfer
after the 12th such transfer in a policy year. The fee will not be more
than $25 per unscheduled transfer. Unscheduled transfers from the Fixed
Account to an Investment Account would count in determining any transfer
fee.
Scheduled Transfers (dollar cost averaging (DCA)) You may elect to have
automatic transfers made on a periodic basis.
o The amount of the transfer is:
o the dollar amount you select (the minimum is the lesser of $100 or the
value of the Investment Account), or
o a percentage of the Investment Account value as of the date you specify
(other than the 29th, 30th or 31st).
o You select the transfer date (other than the 29th, 30th or 31st) and the
transfer frequency (annually, semi-annually, quarterly or monthly).
o If the selected date is not a valuation date, the transfer is
completed on the next valuation date.
o The value of the Investment Account must be equal to or more than
$2,500 when your scheduled transfers begin.
o Transfers continue until your interest in the Investment Account has a
zero balance or we receive notice to stop them.
o We reserve the right to limit the number of Separate Account divisions from
which simultaneous transfers are made. In no event will it ever be less
than two.
o Scheduled transfers will not start until the end of your free-look period.
Fixed Account Transfers
Transfers from your investment in the Fixed Account to your Investment
Account(s) are subject to certain limitations. You may transfer amounts by
making either a scheduled or unscheduled Fixed Account transfer. You may not
make both a scheduled and unscheduled Fixed Account transfer in the same policy
year. In states where allowed, we reserve the right to reject transfer
instructions from someone providing them for multiple Policies for which he or
she is not the owner.
Unscheduled Transfers You may make one unscheduled Fixed Account transfer to an
Investment Account(s) within the 30 day period following the policy date and
each policy anniversary. The transfer is made, and values determined, as of the
end of the valuation period in which we receive your request.
o You must specify the dollar amount or percentage to be transferred
(not to exceed 25% of the Fixed Account value as of the latter of the
policy date or the most recent policy anniversary).
o The minimum transfer amount must be equal to or greater than the
lesser of $100 or the entire value of your Fixed Account.
Scheduled Transfers (dollar cost averaging (DCA)) You may make scheduled
transfers on a monthly basis from the Fixed Account to your Investment
Account(s) as follows:
o The value of your Fixed Account must be equal to or more than $2,500
when your scheduled transfers begin. We reserve the right to change
this amount but it will never be more than $10,000.
o The amount of the transfer is:
o the dollar amount you select (minimum of $50), or
o a percentage of the Fixed Account value (the maximum amount of the
transfer is 2% of the Fixed Account value as of the specified dated) as
of the date you specify which may be:
o the later of the policy date or most recent policy anniversary
date, or
o the date the Company receives your request.
o Transfers occur on a date you specify (other than the 29th, 30th or
31st of any month).
o If the selected date is not a valuation date, the transfer is
completed on the next valuation date. o Scheduled transfers will not
start until the end of your free-look period.
Scheduled transfers continue until your value in the Fixed Account has a zero
balance or we receive your notice to stop them. You may change the amount of the
transfer once each policy year by sending us a written request or calling us if
telephone privileges apply (1-800-247-9988). If you stop the transfers, you may
not start them again until six months after the last scheduled transfer.
Automatic Portfolio Rebalancing (APR) APR allows you to maintain a specific
percentage of your policy value in your Investment Accounts over time.
EXAMPLE: You may choose to rebalance so that 50% of your policy values are
in the Bond division and 50% in the Capital Value division. At the end
of the specified period, market changes may have caused 60% of your
value to be in the Bond division and 40% in the Capital Value
division. By rebalancing, units from the Bond division are sold and
applied to purchase units in the Capital Value division so that 50% of
the policy values are once again invested in each division.
You may elect APR at the time of application or after the Policy has been
issued. The transfers are made at the end of the next valuation period after we
receive your instruction. APR transfers:
o do not begin until the expiration of the free-look period;
o are done without charge (and are not counted as unscheduled transfers
when determining any transfer fee);
o may be done on the frequency you specify:
o quarterly APR transfers may be done on a calendar year or policy year
basis,
o semiannual or annual APR transfers may only be done on a policy year
basis.
o may be done, if telephone privileges apply, by calling us at 1-800-247-9988
or mailing us your written request.
APR is not available for values in the Fixed Account. If you have scheduled
transfers from Investment Accounts, APR is not available for those Investment
Accounts.
Policy Loans
While your Policy is in effect and has a net surrender value, you may borrow
money from us with the Policy as the security for the policy loan.
o The minimum policy loan is $500.
o The maximum amount you may borrow is 90% of the net surrender value as
of the date we process the policy loan.
o If telephone privileges apply, you may request a policy loan of $5,000 or
less by calling us at 1-800-247-9988. If you do not have telephone
privileges or are requesting a policy loan of more than $5,000, your
request must be made in writing.
o Generally, policy loan proceeds are sent within five business days from the
date we receive your request (see GENERAL PROVISIONS - Delay of Payments).
o Requests for policy loans from any joint owner are binding on all
joint owners.
Loan Account
When a policy loan is taken, an amount equal to the loan is transferred from
your Investment Account(s) and Fixed Account to your Loan Account. Loan Accounts
are part of our General Account. You may instruct us on the proportions to be
taken from your accounts. If you do not provide such instruction, the loan
amount is withdrawn in the same proportion as the allocation used for the most
recent monthly policy charge. Any loan interest due and unpaid is transferred in
the same manner.
Your Loan Account earns interest from the date of transfer. During the first ten
policy years, the loan account interest rate is 6% per year. After the tenth
policy year, the loan account interest rate is 7.75% per year.
You pay interest on your policy loan at the annual rate of 8%. Interest accrues
daily and is due and payable at the end of the policy year. If interest is not
paid when due, it is added to the loan amount. Adding unpaid interest to the
policy loan amount causes additional amounts to be withdrawn from your Fixed
Account and/or Investment Account(s) and transferred to the Loan Account.
Withdrawals are made in the same proportions as described above.
Policy loans and unpaid loan interest reduce your net surrender value. If the
net surrender value is less than the monthly policy charges on a monthly date,
the 61-day grace period provision applies (see POLICY TERMINATION AND
REINSTATEMENT - Policy Termination).
While the Policy is in force and before the insured dies, policy loans and loan
interest may be repaid as follows:
o policy loans may be repaid totally or in part;
o repayments are allocated to the Investment Account(s) and Fixed
Account in the proportions used for allocation of premium payments;
and
o payments that we receive that are not designated as premium payments are
applied as loan repayments if a policy loan is outstanding.
A policy loan generally has a permanent effect on policy values. If a policy
loan had not been made, the policy value would reflect the investment experience
of the Investment Account(s) and the interest credited to the Fixed Account. In
addition, policy loans and unpaid loan interest are subtracted from:
o death proceeds at the insured's death;
o surrender value upon total surrender or termination of a Policy; and
o maturity proceeds payable at maturity.
Surrenders
You must send us a written request for any surrender. The request must be signed
by all owners, irrevocable beneficiary(ies), if any, and any assignees.
Total surrender You may surrender the Policy on or before the maturity date
while the Policy is in effect. You receive the net surrender value at the end of
the valuation period during which we receive your surrender request. The net
surrender value is the total of the values of your Investment Accounts plus your
Fixed Account plus your Loan Account minus any applicable surrender charge,
policy loans and unpaid loan interest (see CHARGE AND DEDUCTIONS - Surrender
Charge).
o If the total surrender is within ten years of the policy date or a
face amount increase a surrender charge is imposed.
o The written consent of all collateral assignees and irrevocable
beneficiaries must be obtained prior to surrender.
o We reserve the right to require you to return the Policy to us prior to
making any payment though this does not affect the amount of the cash
surrender value.
Partial surrender After the second policy anniversary and prior to the maturity
date, you may surrender a part of the Fixed Account and/or Investment Account
value by sending us a written request. The surrender is effective at the end of
the valuation period during which we receive your written request for surrender.
You may not request more than two partial surrenders in each policy year.
The minimum amount of a partial surrender is $500. The total of your two partial
surrenders during a policy year may not be greater than 75% of the net surrender
value (as of the date of the request for the first partial surrender in that
policy year).
You pay a transaction fee on each partial surrender. The fee is the lesser of
$25 or 2% of the amount surrendered. It is withdrawn in the same proportion as
your monthly policy charge allocation.
Your policy value is reduced by the amount of the surrender and the transaction
fee. We surrender units from the Investment Account divisions and/or values from
the Fixed Account to equal the dollar amount of the surrender request and
transaction fee. The surrender is deducted from your Fixed Account value and/or
your Investment Account(s) according to the surrender allocation percentages you
specify. If surrender allocation percentages are not specified, we use your
monthly policy charge allocation percentages. The amount surrendered is taken
from the premiums paid on a last-in, first-out basis. No surrender charge is
imposed on a partial surrender.
If the Option 1 death benefit is in effect and a partial surrender is made, the
face amount of the policy is also reduced by the amount of the surrender and the
transaction fee. Total and partial surrenders from the Policy are generally paid
within five business days of our receipt of your request for surrender. Certain
delays in payment are permitted (see GENERAL PROVISIONS - Delay of Payments).
DEATH BENEFITS AND RIGHTS
Death Proceeds
While the Policy remains in force and before the maturity date, we pay death
proceeds upon the insured's death.
o We must receive proof of the insured's death and all other required
documents.
o Payments are made to your named beneficiary(ies) under your designated
death benefit option (see GENERAL PROVISIONS - Beneficiary).
The payments are made in cash lump sum or under a benefit payment option
selected by the beneficiary(ies). Death proceeds are calculated as of the date
of the insured's death and include:
o the death benefit described below;
o plus proceeds from any benefit rider on the insured's life;
o minus policy loans and unpaid loan interest;
o minus any overdue monthly policy charges if the insured died during a
grace period;
o plus interest on the death proceeds from date of death until date of
payment or application under a benefit payment option. (We determine the
interest rate which will not be not less than the rate required by state
law.)
Death Benefit Option
You choose death benefit Option 1 or Option 2 at the time of application.
Option 1 (level amount option) The death benefit is the greater of 1) the
Policy's current face amount, or 2) the policy value on the date of death
multiplied by the applicable percentage. The applicable percentage is 250% for
an insured age 40 or below and the percentage declines with increasing ages. The
death benefit remains level unless the applicable percentage of policy value
exceeds the current face amount (in which case the death benefit varies as the
policy value varies).
Illustration of Option 1 Assume that the insured is under age 40 and that there
is no loan amount and that the policy face amount is $500,000.
Under Option 1, the death benefit must be equal or greater than 250% of the
policy value. If the policy value is more than $200,000, the death benefit is
greater than $500,000. Each additional dollar added to the policy value above
$200,000 increases the death benefit by $2.50. If the policy value exceeds
$200,000 and increases by $100 because of investment performance or premium
payments, the death benefit increases by $250.
Similarly, if the policy value exceeds $200,000, each dollar taken out of the
policy value reduces the death benefit by $2.50. For example, if the policy
value is reduced from $500,000 to $450,000 because of partial surrenders,
charges or negative investment performance, the death benefit is reduced from
$1,250,000 to $1,125,000. However, if at any time the policy value multiplied by
the applicable percentage is less than the face amount, the death benefit equals
the current face amount of the Policy.
The applicable percentage lowers as the insured's age increases. If the current
age of the insured in the illustration is 50 (rather than age 40), the
applicable percentage would be 185%. The death benefit would not be greater than
the $500,000 face amount unless the policy value exceeded $270,270 rather than
$200,000. Each dollar added to or taken from the policy value changes the death
benefit by $1.85 (rather than $2.50).
Option 2 (variable amount option) The death benefit is equal to the greater of
1) the current face amount plus the policy value on the date of death, or 2) the
policy value on the date of death multiplied by the applicable percentage.
Illustration of Option 2 Assume that the insured is under age 40 and that there
is no loan amount and that the policy face amount is $500,000.
A policy with a policy value of $100,000 has a death benefit of $600,000
($500,000 plus $100,000); a policy value of $300,000 has a death benefit of
$800,000 ($500,000 plus $300,000). The death benefit however must be at least
250% of the policy value. As a result, if the policy value exceeds $333,334, the
death benefit is greater than the face amount plus policy value. Each additional
dollar of policy value above $333,334 increases the death benefit by $2.50. If
the policy value exceeds $333,334 and increases by $100 because of investment
performance or premium payments, the death benefit increases by $250.
If the policy value exceeds $333,334, each dollar taken out of the policy value
reduces the death benefit by $2.50. For example, the policy value is reduced
from $400,000 to $340,000 because of partial surrenders, charges or negative
investment performance, the death benefit is reduced from $1,000,000 to
$850,000. However, if the policy value multiplied by the applicable percentage
is less than the policy face amount plus the policy value, then the death
benefit is the current face amount plus the policy value.
The applicable percentage lowers as the insured's age increases. If the current
age of the insured in the illustration is 50 (rather than age 40), the
applicable percentage would be 185%. The death benefit would be the sum of the
policy value plus $500,000 unless the policy value exceeded $588,237 rather than
$333,334. Each dollar added to or taken from the policy value changes the death
benefit by $1.85 (rather than $2.50).
APPLICABLE PERCENTAGES* (For ages not shown, the applicable percentages decrease
by a pro rata portion for each full year.)
Insured's attained age percentage
40 and under 250
45 215
50 185
55 150
60 130
65 120
70 115
75 through 90 105
95 100
*We reserve the right, where allowed by law, to change or delete the
percentages as required by changes to the Code.
Change in Death Benefit Option
You may change the death benefit option on or after the second policy
anniversary. Up to two changes are allowed per policy year. Your request must be
made in writing and approved by us. The effective date of the change will be the
monthly date that coincides with or next follows our approval. Changing the
death benefit option changes the future cost of insurance.
If you change from Option 1 to Option 2, the new face amount is the old face
amount decreased by the policy value (as of the effective date of the change).
The change is not allowed if it would result in a face amount of less than
$50,000. A change from Option 1 to Option 2 may require evidence of insurability
for the new death benefit if required by our underwriting guidelines in place at
the time of your request.
If you change from Option 2 to Option 1, the new face amount is the old face
amount increased by the policy value (as of the effective date of the change). A
change from Option 2 to Option 1 does not require evidence of insurability.
Adjustment Options
Increase in policy face amount You may request an increase at any time provided
that the policy is not in a grace period, and monthly policy charges are not
being waived under a rider. The minimum increase in face amount is $50,000. A
face amount increase request made in the first 24 policy months will increase
the minimum monthly required premium for the remainder of the 24 months. If your
request is not approved, no changes are made to your Policy.
The request must be made on an adjustment application. The application must be
signed by the owner(s) and the insured.
We will approve your request if at the time of your request:
o the insured is age 85 or less; and
o we receive evidence satisfactory to us that the insured is insurable under
our underwriting guidelines then in place.
The increase in face amount is in a risk classification determined by us. The
adjustment is effective on the monthly date on or next following our approval of
your request. No free-look period applies to an increase in face amount.
We calculate an adjustment conditional receipt premium deposit based on your
request for an increase. If you make a payment with your adjustment application
of at least as much as the adjustment conditional receipt premium deposit, we
issue a conditional receipt. The conditional receipt shows receipt of the
payment and outlines any interim insurance coverage.
Any payment made with the adjustment application is held in our General Account
without interest. If we approve the adjustment, the amount of the premium
payment being held minus the premium expense charge is allocated to the
Investment Accounts and/or Fixed Account on the effective date of the
adjustment. Your current premium allocation percentages are used to make this
allocation.
Decrease in policy face amount After the first two policy years, you may request
a decrease in the policy face amount as follows:
o the request must be made on an adjustment application;
o the application must be signed by both the owner(s) and the insured;
o the policy is not in a grace period;
o monthly policy charges are not being waived under a waiver rider; and
o the decrease may not reduce the policy face amount below $50,000.
CHARGES AND DEDUCTIONS
We make certain charges and deductions to support operation of the Policy and
the Separate Account. Some charges are deducted from premium payments when they
are received. Other charges are deducted on a monthly basis while others are
deducted at the time a Policy is surrendered or terminated. Fees for
administrative expenses are also charged on certain transfers and all partial
surrenders.
Premium Expense Charge
When we receive your premium payment, we deduct a premium expense charge. This
charge includes:
o sales load of 2.75% of premiums less than or equal to target premiums
(0.75% of premiums in excess of target premiums) made:
o during each of the first ten years, and
o with respect to premiums made because of a face amount increase, during
the first ten years after the increase.
o 2.20% for state and local taxes.
o 1.25% for federal taxes.
The sales load is intended to pay us for distribution expenses. These expenses
include commissions paid to registered representatives, printing of prospectuses
and sales literature, and advertising. Sales loads charged in any policy year
are not necessarily related to actual distribution expenses incurred in that
year. We expect that the majority of these expenses are incurred in the early
years of a Policy and that any deficit is made up during the life of the Policy.
If distribution expenses are more than the sales load (including the sales load
portion of the surrender charge), the deficit is made up from our other assets
or surplus in our General Account.
For the twelve month period ending December 31, 1998, we collected $1,050,366 in
premium expense charges and $1,193,496 in premium tax charges from these
Policies.
Monthly Policy Charge
The monthly policy charge is intended to cover certain charges and expenses
incurred in connection with the Policy. Deductions are made up of:
o a charge for the cost of insurance;
o a charge for any optional benefit added by rider(s);
o a monthly administration charge; and
o a mortality and expense risks charge (applies only to Investment Accounts).
On the policy date and each monthly date thereafter, we deduct the charge from
your policy value in the Investment Accounts and/or Fixed Account (but not your
Loan Account). The deduction is made using your current monthly policy charge
allocation percentages. Your allocation percentages may be:
o the same as allocation percentages for premium payments;
o determined on a prorated basis; or
o determined by any other allocation method which we agree upon.
The allocation percentage for each Investment Account and/or the Fixed Account
must be zero or a whole number not less than 10. The total of the allocation
percentages must equal 100. Allocation percentages may be changed without
charge. A request for an allocation change is effective on the date we receive
your request. If we cannot follow your instructions because of insufficient
value in any Investment Account and/or the Fixed Account, the monthly policy
charge is deducted on a prorated basis.
For the twelve month period ending December 31, 1998, administrative and cost of
insurance charges totaled $8,373,910 for these Policies.
Cost of Insurance Charge
Your monthly cost of insurance charge is (a) multiplied by (b minus c) where:
o (a) is the cost of insurance rate described below divided by 1,000;
o (b) is the death benefit at the beginning of the policy month, divided by
1.0024663 (the sum of one plus the monthly guaranteed fixed account
interest rate); and
o (c) is the policy value at the beginning of the policy month calculated as
if the monthly policy charge was zero.
The cost of insurance rate is based on the gender*, issue age, duration since
issue, smoking status, and risk classification of the insured. We determine the
rate based on our expectation as to mortality experience. Changes in the cost of
insurance rates apply to all individuals of the same age, gender*, smoking
status and risk classification. The rate will never exceed the rate shown in the
Table of Guaranteed Maximum Cost of Insurance Rates in the Policy. The
guaranteed maximum cost of insurance rate is based on the gender*, smoking
status, attained age and risk classification of the insured.
Different cost of insurance rates may apply to face amount increases. The cost
of insurance for the increase is based on the insured's gender*, issue age,
duration since issue, smoking status, and risk classification at the time of the
increase. The guaranteed maximum cost of insurance rate for the increase is
based on the insured's gender*, smoking status, attained age and risk
classification at the time of the increase.
* The cost of insurance rate for Policies issued in states which require
unisex pricing or in connection with employment related insurance and
benefit plans is not based on the gender of the insured.
Administration Charge
Current charges
o The monthly administration charge in the first policy year is 1/12 x ($.40
per $1,000 of face amount) with a minimum monthly charge of $6.00 and a
maximum monthly charge of $16.67.
o After the first policy year, the monthly administration charge is $6.00.
Guaranteed administration charges
o The guaranteed maximum monthly administration charge in the first
policy year is 1/12 x ($.60 per $1,000 of face amount) with a minimum
monthly charge of $25.
o After the first policy year, the guaranteed maximum monthly
administration charge is $10.00.
The Policy also has a contingent deferred administration charge as part of the
surrender charge. The surrender charge applies to total surrender of the Policy
and to termination of the Policy at the end of a grace period (see CHARGES AND
DEDUCTIONS - Surrender Charge).
The monthly administration charge and the deferred administration charge
reimburse us for the administrative expenses of the Policy and the Separate
Account. Administration expenses do not include the cost of selling the Policy.
They do include the costs of: processing applications; conducting medical
examinations; determining insurability; establishing and maintaining records;
processing death benefit claims and policy changes; reporting and overhead. We
do not expect to collect more from the administration charges than our actual
accumulated expenses.
Mortality and Expense Risks Charge
The mortality risk we assume is that insureds may live for a shorter period of
time than we estimate. As a result, we would have to pay a greater amount in
death benefits than we collect in premium payments. The expense risk we assume
is that expenses incurred in issuing and administering the policy are greater
than we estimated. The Company expects to make a profit from this charge to the
extent it is not needed to provide benefits and pay expenses under the Policies.
Each month during the first nine policy years, we deduct a charge for these
risks at an annual rate of 0.90% of your Investment Account(s). Each month
thereafter, we deduct a charge at an annual rate of 0.27% of your Investment
Account(s).
We reserve the right to increase the annual rate but guarantee that the maximum
annual rate will not exceed 0.90%. If we increase the annual rate, the increase
will only apply to policies issued on or after the date of the increase.
During the twelve month period ending December 31, 1998, mortality and expense
risks charges totaled $509,501 for these Policies.
Transaction Fees
A transaction fee of the lesser of $25 or 2% of the surrender amount applies to
each partial surrender and is withdrawn in the same proportion as the allocation
used for the most recent monthly policy charge.
We reserve the right to charge a transfer fee on each unscheduled transfer after
the 12th such transfer in a policy year. The fee will not be more than $25 per
unscheduled transfer.
Surrender Charge
Surrender charges vary based on the target premium of the policy and the
premiums paid. The charge applies only during the first ten policy years unless
there is a face amount increase. A face amount increase has its own surrender
charge period that begins on the adjustment date. The total surrender charge on
the policy is the sum of the surrender charges for the face amount at issue and
each face amount increase. The surrender charge has two parts - the contingent
deferred sales charge and a contingent deferred administration charge - that are
determined separately. The surrender charge is not affected by any decrease in
face amount or any change in face amount resulting in a change of death benefit
options.
The contingent deferred administration charge reimburses us for expenses
incurred in issuing the Policy. These expenses include processing the
application (primarily underwriting) and setting up records. This charge is
intended to cover the average anticipated issue expenses for all Policies. There
may not be a direct relationship between the amount of the charge for any given
Policy and the amount of expenses attributable to that Policy.
The contingent deferred sales charge compensates us for expenses relating to the
sale of the Policy. These include commissions, advertising and printing of
prospectuses and sales literature.
The surrender charge on an early surrender or Policy lapse is significant. As a
result, you should purchase a Policy only if you have the financial capacity to
keep it in force for a substantial period of time.
All or a portion of the surrender charge is waived on Policies issued with an
accounting benefit rider. The waiver applies to total surrender of Policies in
early policy years. An accounting benefit rider is issued to a corporate owner
of a Policy. The rider is designed to permit the corporation to reflect greater
policy values on its financial statements in early policy years than would
otherwise be permitted.
During the twelve month period ended December 31, 1998, we collected $316,435 in
surrender charges from these Policies.
Contingent deferred sales charge The contingent deferred sales charge is equal
to 47.25% of premium paid up to the number of target premiums shown 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
Contingent deferred administration charge The contingent deferred administration
charge is $3 per $1,000 of face amount subject to a maximum of $1,500.
Surrender charge percentage The surrender charge during any policy year is (the
contingent deferred sales charge plus the contingent deferred administration
charge) multiplied by (the applicable surrender charge percentage shown below):
Surrender Charge Percentage Table
Number of years since policy The following percentage of
date and/or the adjustment date surrender charge is payable
1 through 5 100.00%
6 95.24
7 85.71
8 71.43
9 52.38
10 28.57
11 and later 00.00
Sales Charge Limitations
If you surrender your policy within two years of issue or of an increase in face
amount, a sales charge refund is made to the extent that the total sales charge
deducted exceeds (a) plus (b), where
o (a) is 30% of actual premium payments made up to the lesser of:
o one guideline annual premium, or
o the maximum amount of premiums subject to the deferred sales charge.
o (b) is 10% of the premiums paid in excess of one guideline annual premium,
up to the lesser of:
o two guideline annual premiums, or
o the maximum amount of premiums subject to the deferred sales charge.
Other Charges
The Investment Accounts represent shares of divisions of the Separate Account.
The assets of each division are used to purchase shares in a corresponding
mutual fund at net asset value. The net asset value of the mutual fund reflects
management fees and operating expenses already deducted from the assets of the
fund. Current management fees and operating expenses for each mutual fund are
shown in the section entitled THE FUNDS.
Special Provisions for Group or Sponsored Arrangements
Where permitted by state law, Policies may be purchased under group or sponsored
arrangements as well as on an individual basis.
o group arrangement - program under which a trustee, employer or similar
entity purchases Policies covering a group of individuals on a group
basis.
o sponsored arrangement - 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.
Charges and deductions may be reduced for Policies purchased under a group or
sponsored arrangement including waiver of premium sales load and waiver of
surrender charge. Reductions may be available to:
o employees, officers, directors, agents and immediate family members of
the group or sponsored arrangement, and
o employees of agents of the Company and its subsidiaries.
Reductions are made under our rules in effect on the date a Policy application
is approved and are based on certain criteria (size of group, expected number of
participants, anticipated premium payments).
Generally, the sales contacts and effort, administrative costs and mortality
cost per Policy vary based on the size of the arrangement, the purpose for which
the Policies are purchased and certain characteristics of the members. The
amount of the reduction and the criteria for reducing the charges and deductions
reflect: a) our reduced sales effort and administrative costs; and b) the
different mortality experience expected from sales to arrangements.
We may modify, on a uniform basis, both the amounts of reductions and the
criteria for qualification. Reductions in these charges will not discriminate
unfairly against any person, including the affected owners and all other policy
owners with policies funded with the Separate Account.
In addition, groups and persons buying Policies under a sponsored arrangement
may apply for flexible underwriting. If flexible underwriting is granted, the
cost of insurance charge may increase because of higher anticipated mortality
experience. Flexible underwriting programs currently available include: batch
underwriting, expanded non-medical underwriting and guaranteed issue
underwriting.
THE FIXED ACCOUNT
You may allocate net premiums and transfers from your Investment Account(s) to
the Fixed Account. The Fixed Account is part of our General Account. Because of
exemptions and exclusions contained in the Securities Act of 1933 and the
Investment Company Act of 1940, the Fixed Account has not been registered under
these acts. Neither the Fixed Account nor any interest in it is subject to the
provisions of these acts. As a result the SEC has not reviewed the disclosures
in this prospectus relating to the Fixed Account. However, disclosures relating
to the Fixed Account are subject to generally applicable provisions of the
federal securities laws relating to the accuracy and completeness of statements
made in prospectuses. You may obtain more information regarding the Fixed
Account from our home office or from a sales representative.
Our obligations with respect to the Fixed Account are supported by our General
Account. Subject to applicable law, we have sole discretion over the investment
of assets in the General Account.
We guarantee that net premiums allocated to the Fixed Account accrue interest
daily at an effective annual rate of 3% compounded annually. We may, in our sole
discretion, credit interest at a higher rate.
The mortality and expense risks charge is not imposed on amounts in the Fixed
Account. The value of your Fixed Account on any valuation day is:
o net premiums allocated to the Fixed Account
o plus transfers from the Investment Account(s)
o plus interest credited to the Fixed Account
o minus surrenders, surrender charges and monthly policy charges
o minus transaction fees allocated to the Fixed Account
o minus transfers to the Loan Account
o minus transfers to the Separate Account.
POLICY TERMINATION AND REINSTATEMENT
Policy Termination
You must make an initial minimum monthly premium payment to have coverage under
the Policy. A minimum premium is required during the first 24 policy months.
During the first 24 policy months:
o The sum of the premiums paid must be at least equal to the minimum
required premium on a monthly date.
o The minimum required premium on a monthly date is the sum of the
minimum monthly premium since the policy date to the most recent
monthly date. The current minimum monthly premium is shown on your
current data pages.
o We will send you a pending lapse notice if you have made insufficient
premium payments.
After the first 24 policy months or any time a policy loan is taken:
o The net surrender value of your policy must at least equal the monthly
policy charge on a current monthly date.
o If your Policy has a death benefit guarantee rider, its premium must
be paid.
o We will send you a pending lapse notice if you have made insufficient
premium payments.
o Making premium payments under your planned periodic premium schedule
does not guarantee that your Policy will stay in force.
Grace Period The grace period begins when we send you a notice of pending lapse.
The notice:
o is mailed to your last known post office address;
o shows the minimum payment required to keep the Policy in force; and
o shows the 61-day period during which we 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 (a) minus (b) where:
(a) is the minimum required premium due on the second monthly date
following the beginning of the grace period, and
(b) is the sum of the premiums paid since the policy date.
If the grace period ends before we receive the minimum payment, we will pay you
any remaining policy value which is (a) minus (b) where:
(a) is the net surrender value on the monthly date on or immediately
preceding the start of the grace period, and
(b) is the two monthly policy charges 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 (a) plus (b)
divided by (c) where:
(a) is the amount by which the surrender charge is more than the policy
value on the monthly date on or immediately preceding the start of the
grace period,
(b) is three monthly policy charges, and
(c) is one minus the maximum premium expense charge percentage.
To cover past due policy charges, if the grace period ends before we receive the
minimum payment, we keep any remaining value in the Policy. This payment is
intended to 1) reimburse us for the monthly policy charges during the grace
period, and 2) provide enough policy value to pay the monthly policy charge on
the first monthly date after the grace period.
Due to possible adverse market fluctuations, there is no guarantee that the
amount requested at the beginning of the grace period is enough to pay the
monthly policy charges as they are processed. If the net surrender value is not
at least as much as the monthly policy charge on any monthly date, a new 61-day
grace period starts.
The Policy is in force during a grace period. If we do not receive the required
payment, the Policy terminates as of the monthly date on or immediately
preceding the start of the grace period. If the insured dies during a grace
period, policy proceeds are reduced by: o all monthly policy charges due and
unpaid at the insured's death, and o any policy loans and unpaid loan interest.
The Policy also terminates when:
o you make a total policy surrender;
o death proceeds are paid; and
o maturity proceeds are paid.
When the Policy terminates, all of your policy rights and privileges end.
Reinstatement
Subject to certain conditions, you may reinstate a Policy that terminated
because of insufficient value. The Policy may only be reinstated:
o prior to the maturity date and while the insured is alive;
o upon our receipt of satisfactory evidence of insurability (according
to our underwriting guidelines then in effect);
o if you make a payment of a reinstatement premium which is equal to (a) plus
(b) divided by (c) where:
(a)is the amount by which the surrender charge is more than the policy
value on the monthly date at the start of the grace period before the
monthly policy charge is deducted,
(b)is three monthly policy charges, and
(c)is one minus the maximum premium expense charge percentage (see
CHARGES AND DEDUCTIONS - Premium Expense Charge); and
o if the application for reinstatement is mailed to us within three years of
the Policy termination (in some states, we must provide a longer period of
time for Policy reinstatement).
If a policy loan or loan interest was unpaid when the Policy terminated, the
policy loan must be reinstated or repaid (loan interest is not collected for the
period the Policy was terminated).
We do not require payment of monthly policy charges during the period the Policy
was terminated. Reinstatement is effective on the next monthly date following
our approval of the reinstatement application. Premiums received with your
reinstatement application are held without interest until the reinstatement
date. They are allocated to your selected Investment Accounts and/or Fixed
Account on the reinstatement date. We will use the premium allocation
percentages in effect at the time of termination of the Policy unless you
provide new allocation instructions. The reinstated Policy has the same policy
date as the original Policy. Your rights and privileges as owner(s) are restored
upon reinstatement.
If you reinstate your Policy and then it is totally surrendered, a surrender
charge may be imposed. The charge, if any, is calculated based on the number of
years the Policy was in force. The period of time during which the Policy was
terminated is not credited toward the number of policy years to make this
calculation.
OTHER MATTERS
Voting Rights
We vote Investment Account shares held in the Separate Account at shareholder
meetings. We follow the voting instructions received from people having the
voting interest in the Account shares.
You have a voting interest under a Policy. You have one vote for each $100 of
policy value in the Investment Accounts. Fractional votes are allocated for
amounts less than $100. The number of votes on which you have the right to
instruct us is determined as of a date established by the mutual fund for
setting the shareholders eligible to vote.
According to procedures adopted by the mutual fund, voting instructions are
solicited by a written proxy statement before a shareholder meeting. We vote
other Account shares, for which no voting instructions are received, in the same
proportion as the shares for which we receive voting instructions. Account
shares held in our General Account are voted in proportion to instructions that
are received with respect to the participating contracts.
If we determine, under applicable law, that Account shares need not be voted
according to the instructions received, we may vote Account shares held in the
Separate Account in our own right.
We may, when required by state insurance regulatory authorities, disregard
voting instructions. This may be done if the instructions would require shares
to be voted to:
o change a subclassification or investment objective of the Account, or
o disapprove an investment advisory contract of the fund or Account, or
o approve changes initiated by an owner in the investment policy or
investment advisor of the Account or mutual fund if we reasonably
disapprove of the changes.
The change would be disapproved only if:
o the proposed change is contrary to state law;
o prohibited by state regulatory authorities; or
o we determine the change is inconsistent with the investment objectives
of the mutual fund.
If we disregard voting instructions, a summary of the action and
the reason for the actions will be included in the next semiannual report from
the underlying fund to owners.
Statement of Values
You receive an annual statement at the end of each policy year. The statement
will show:
o current death benefit;
o current policy value and surrender value;
o all premiums paid since the last statement;
o all charges since the last statement;
o any policy loans and unpaid loan interest;
o any partial surrenders since the last statement;
o the number of units and unit value;
o total value of each of your Investment Accounts and the Fixed Account;
o designated beneficiary(ies); and
o all riders included in the Policy.
You will also receive a statement as of the end of each calendar quarter. At any
time, you may request a current statement by telephoning 1-800-247-9988.
We also send you the reports required by the Investment Company Act of 1940.
Services Available by Telephone
Telephone Instructions Unless you decline telephone privileges on the
supplemental application, instructions for the following transactions may be
given to us via the telephone:
o policy loans (loan proceeds are mailed only to the owner's address of
record);
o changes in allocations of future premium payments;
o changes in allocation of the monthly policy charge;
o changes to your APR instructions;
o changes to your DCA instructions; and
o provide instructions for unscheduled Investment Account and/or Fixed
Account transfers.
Telephone instructions:
o may be given by calling us at 1-800-247-9988 between 7 a.m. and 5 p.m.
Central Time on any day that the New York Stock Exchange is open;
o must be received by us before the close of the New York Stock Exchange
(generally 3:00 p.m. Central Time) to be effective the day you call;
o are effective the next valuation day if not received until after the
close of the New York Stock Exchange; and
o from one joint owner are binding on all joint owners.
Although neither the Separate Account nor the Company is responsible for the
authenticity of telephone transaction requests, the Separate Account and the
Company reserve the right to refuse telephone orders. You are liable for a loss
resulting from a fraudulent telephone order that we reasonably believe is
genuine. We use reasonable procedures to assure instructions are genuine. If the
procedures are not followed, we may be liable for loss due to unauthorized or
fraudulent transactions. The procedures include: recording all telephone
instructions, requesting personal identification information (name, phone
number, social security number, birth date, etc.) and sending written
confirmation to the owner's address of record.
Direct Dial You may receive information about your policy from our Direct Dial
system between 7:00 a.m. and 9:00 p.m. Central Time, Monday through Saturday.
The Direct Dial number is 1-800-247-9988. Through this automated system, you
can:
o obtain information about unit values and policy values,
o initiate certain changes to your policy, and
o change your personal identification number.
Instructions from one joint owner are binding on all joint owners.
GENERAL PROVISIONS
The Contract
The entire contract is made up of: applications, amendments, riders and
endorsements attached to the Policy, current data pages, copies of any
supplemental applications, amendments, endorsements and revised Policy or data
pages which are mailed to you. No statement, unless made in an application, is
used to void a Policy (or void an adjustment in the case of an adjustment
application). Only our corporate officers can agree to change or waive any
provisions of a Policy. Any change or waiver must be in writing and signed by an
officer of the Company.
Optional Insurance Benefits
Subject to certain conditions, you may add one or more supplemental benefits to
your Policy. These include:
o term insurance options
o accidental death coverage
o waiver of monthly policy charges
o waiver of premium payments upon disability
o accelerated benefits in the event o extended coverage of terminal illness
o death benefit guarantees
o cost of living increases
o riders that apply only to business owned Policies
Detailed information concerning supplemental benefits may be obtained from an
authorized agent or our home office. Not all supplemental benefits are available
in all states. The cost, if any, of an optional insurance benefit is deducted as
part of your monthly policy charge.
Death Benefit Guarantee Rider (also known as the "no lapse guarantee") This
rider provides that if the rider premium is paid, the Policy does not lapse even
if the net surrender value is not enough to pay the monthly policy charges on a
monthly date. This rider is automatically made a part of the policy if the
planned periodic premium is equal to or greater than the death benefit guarantee
premium.
The death benefit (no lapse) guarantee premium requirement is met if:
o the sum of all premiums paid
o minus any partial surrenders
o minus any policy loans and unpaid loan interest
is at least as much as the sum of death benefit guarantee monthly premiums from
the policy date to the most recent monthly date. Your most recent death benefit
(no lapse) guarantee premium is shown on your current data page.
The death benefit (no lapse) guarantee premium is based on the issue age, gender
(where permitted by law) and risk classification of the insured. The monthly
death benefit (no lapse) guarantee premium is considered to be zero for any
month that deductions are being waived. This premium may change if:
o the Policy face amount is changed,
o the death benefit option is changed,
o a rider is added or deleted, or
o an adjustment is made to your Policy.
As a result of a change, an additional premium may be required to satisfy the
new death benefit (no lapse) guarantee premium.
If on any monthly date, the death benefit (no lapse) guarantee premium
requirement is not met, we send you a notice stating the premium required to
reinstate the rider. If the premium required to maintain the guarantee is not
received in our home office before the expiration of the 61-day grace period
(which begins when the notice is mailed), the death benefit (no lapse) guarantee
is no longer in effect and the rider is terminated. If the rider terminates, it
may not be reinstated.
If the rider is in effect on the policy maturity date, we pay you the excess, if
any, of the face amount over the maturity proceeds.
This rider is not available in Massachusetts.
Extended Coverage Rider This rider allows, under certain conditions, the Policy
to remain in force until the insured's death. This rider is not available in
Massachusetts.
Misstatement of Age or Gender
If the age or, where applicable, gender of the insured has been misstated, we
adjust the death benefit payable under your Policy to reflect the amount that
would have been payable at the correct age and gender.
Assignment
You may assign your Policy. Each assignment is subject to any payments made or
action taken by the Company prior to our notification of the assignment. We
assume no responsibility for the validity of any assignment.
An assignment must be made in writing and filed with us at our home office. The
irrevocable beneficiary(ies), if any, must authorize any assignment in writing.
Your rights, as well as those of the beneficiary(ies), are subject to any
assignment on file with us.
Ownership
You may change your ownership designation at any time. Your request must be in
writing and approved by us. After approval, the change is effective as of the
date you signed the request for change. We reserve the right to require that you
send us the Policy so that we can record the change.
Unless changed, the owner(s) is as named in the application. The owner(s) may
exercise every right and privilege of the Policy, subject to the rights of any
irrevocable beneficiary(ies) and any assignee(s).
All rights and privileges of ownership of a Policy end if the Policy is
surrendered, death or maturity proceeds are paid, or if the grace period ends
without our receiving the payment required to keep the Policy in force. The
rights and privileges end as of the monthly date on or immediately preceding the
start of the grace period.
If an owner dies before the Policy terminates, the surviving owner(s), if any,
succeed to that person's ownership interest, unless otherwise specified. If all
owners die before the policy terminates, ownership of the Policy passes to the
insured. With our consent, you may specify a different arrangement for
contingent ownership.
Beneficiary
You have the right to name a beneficiary(ies) and contingent beneficiary(ies).
This may be done as part of the application process or by sending us a written
request. Unless you have named an irrevocable beneficiary, you may change your
beneficiary designation by sending us a written request. After approval, the
change is effective as of the date you signed the request for change. We reserve
the right to require that you send us the Policy so that we can record the
change.
If no beneficiary(ies) survives the death of the surviving insured, the death
proceeds are paid to the owner(s) or the estate of the owner(s) in equal
percentages unless otherwise specified.
Benefit Instructions
While the insured is alive, you may give us instructions for payment of death
proceeds under one of the benefit options of the Policy. The instructions or
changes to the instructions must be in writing. If you change the
beneficiary(ies), prior benefit instructions are revoked.
Benefit Payment Options
While the insured is alive, you may arrange for death proceeds to be paid in a
lump sum or under one of several fixed benefit payment options. These choices
are also available if the Policy is surrendered or matures.
o Option A - Special Benefit Arrangement
A specially designed benefit option may be arranged with our approval.
o Option B - Proceeds left at interest
We hold the amount of the benefit on deposit. Interest payments are made
annually, semiannually, quarterly or monthly as selected.
o Option C - Fixed Income
We pay income of a fixed amount for a fixed period(not exceeding 30 years).
o Option D - Life Income
We pay income during a person's lifetime. A minimum guaranteed period may
be used.
o Option E - Joint and Survivor Life Income
We pay income during the lifetime of two people and continue until the
death of the survivor. This option includes a minimum guaranteed period of
10 years.
o Option F - Joint and Two-thirds Survivor Life Income
We pay an income during the lifetime of two people and two-thirds of the
original amount during the remaining lifetime of the survivor.
Interest will be applied to calculate the above benefit payment options. We
determine the interest rate which will not be less than the rate required by
state law.
Right to Exchange Policy
During the first 24 months after the policy date (except during a grace period),
you have the right to exchange your Policy for any other form of fixed benefit
individual life insurance policy (other than term insurance) that we make
available for this purpose. No charge is imposed on this exchange. Your exchange
request must be postmarked or delivered to our home office before the end of the
24-month period. The exchange is effective when we receive 1) your written
request, 2) any amount required as an adjustment, and 3) surrender of the
Policy.
You may also exchange the Policy for a fixed-benefit, flexible premium policy we
make available for this purpose if there is a material change in the investment
policy of a division (see GENERAL PROVISIONS - Addition, Deletion or
Substitution of Investments). In addition, you have the right to exchange a face
amount increase for a fixed-benefit, flexible premium policy we make available
for this purpose at any time during the first 24 months after the increase (but
not during a grace period) (see DEATH BENEFITS AND RIGHTS - Adjustment Options).
The new policy:
o at your option, provides either the same death benefit or the same amount
at risk as the Policy did at the time of your request;
o has the same insured as the original Policy;
o premiums are based on the same gender, issue age and risk classification;
o payments and cash values or policy values may be adjusted to reflect
variances, if any, in the payments and policy values under the Policy and
the new policy;
o minimum benefits are fixed and guaranteed;
o does not participate in the investment experience of the Separate
Account; and
o does not require evidence of insurability.
Any policy loan and loan interest must be:
o repaid before the exchange, or
o transferred to the new policy.
Benefit riders included as a part of the Policy may be exchanged, without
evidence of insurability, for similar benefit riders on the new policy. Two
conditions must be met:
o in your written request for the exchange, you must indicate that the
rider(s) should be part of the new policy; and
o the similar benefit rider(s) is 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.
Participating Policy
Policies issued in certain states 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.
Policies issued in certain other states will not share in any divisible surplus
of the Company. A current list of which category your state falls into may be
obtained from a sales representative or our home office.
Incontestability
We will not contest the insurance coverage provided by the Policy, except for
any increases in face amount, after the Policy has been in force during the
lifetime of either insured for a period of two years from the policy date. Any
face amount increase has its own two-year contestability period that begins on
the effective date of the adjustment. The time limit in the incontestability
period does not apply to fraudulent misrepresentations.
Suicide
Death proceeds are not paid if the insured dies by suicide, while sane or
insane, within two years of the policy date (or two years from the date of face
amount increase with respect to such increase). In the event of the suicide of
the insured within two years of the policy date, our only liability is a refund
of premiums paid, without interest, minus any policy loans and unpaid loan
interest and partial surrenders. In the event of suicide within two years of a
face amount increase, our only liability with respect to that increase is a
refund of the cost of insurance for the increase. Any refund will be paid to the
beneficiary(ies).
Delay of Payments
Payment due to exercise of your rights under the free-look provision,
surrenders, policy loans, death or maturity proceeds, and transfers to or from
an Investment Account are generally made within five days after we receive your
instructions in a form acceptable to us. This period may be shorter where
required by law. However, payment of any amount upon return of the Policy, total
or partial surrender, policy loan, death, maturity or the transfer to or from a
division of the Separate Account may be deferred during any period when the
right to sell mutual fund shares is suspended as permitted under provisions of
the Investment Company Act of 1940 (as amended).
The right to sell shares may be suspended during any period when:
o trading on the New York Stock Exchange is restricted as determined by the
SEC or when the Exchange is closed for other than weekends and holidays, or
o an emergency exists, as determined by the SEC, as a result of which:
o disposal by a fund of securities owned by it is not reasonably
practicable;
o it is not reasonably practicable for a fund to fairly
determine the value of its net assets; or
o the SEC permits suspension for the protection of security holders.
If payments are delayed and your instruction is not canceled by your
written instruction, the amount of the transaction is determined the first
valuation date following the expiration of the permitted delay. The
transaction is made within five days thereafter.
In addition, payments on surrenders attributable to a premium payment made by
check may be delayed up to 15 days. This permits payment to be collected on the
check.
Addition, Deletion or Substitution of Investments
We reserve the right to make certain changes if, in our judgement, they best
serve your interests or are appropriate in carrying out the purpose of the
Policy. Any changes are made only to the extent and in the manner permitted by
applicable laws. Also, when required by law, we will obtain your approval of the
changes and approval from any appropriate regulatory authority. Approvals may
not be required in all cases. Examples of the changes we may make include:
o transfer assets in any division to another division or to the Fixed
Account;
o add, combine or eliminate divisions in the Separate Account; or
o substitute the shares of an Investment Account for the Investment
Account shares in any division:
o if shares of an Investment Account are no longer available for
investment; or
o if in our judgement, investment in an Investment Account becomes
inappropriate considering the purposes of the Separate Account.
If we eliminate or combine existing divisions or transfer assets from one
division to another, you may change allocation percentages and transfer any
value in an affected division to another Investment Account(s) and/or the Fixed
Account without charge. In the alternative, you may exchange the Policy for a
fixed-benefit, flexible premium life insurance policy we offer for this purpose.
You may exercise this exchange privilege until the latter of 60 days after: 1)
the effective date of the change; or 2) the date you receive a notice of the
options available. You may only exercise this right if you have an interest in
the affected division(s). The face amount of the new policy is the death benefit
of the Policy on the date of the exchange.
DISTRIBUTION OF THE POLICY
We intend to sell the Policies in all jurisdictions where we are licensed. The
Policies will be sold by licensed insurance agents who are also registered
representatives of broker-dealers registered with the SEC under the Securities
Exchange Act of 1934 who are members of the National Association of Securities
Dealers, Inc. (NASD).
The Policies will be distributed by the general distributor, Princor Financial
Services Corporation (Princor), which is an affiliate of ours. Princor is a
securities broker-dealer registered with the SEC and a member of the NASD. The
Policies may also be sold through other broker-dealers authorized by Princor and
applicable law to do so. Registered representatives of such broker-dealers may
be paid on a different basis than described below.
For Policies sold through Princor, commissions generally will be no more than
50% of premium received in the first policy year, or the first year following an
adjustment, up the planned periodic premium (not to exceed target premium). In
addition, a commission of up to 3% of premium above the lesser of planned
periodic or target premium received in the first policy year (or first year
following an adjustment) may be paid. In the second through tenth years
following the policy date (or adjustment date), commissions range from 0% to 2%
of premiums received. A service fee of up to 2% is paid on premiums received
after the second policy year. Expense allowances may be paid to agents and
brokers based on premiums received.
For the twelve month period ended December 31, 1998, we paid Princor $12,022,076
to compensate registered representatives of Princor for sale of these Policies.
OFFICERS AND DIRECTORS OF PRINCIPAL MANAGEMENT CORPORATION
The officers and directors of the investment advisor, Principal Management
Corporation, are shown below. This list includes some of the same people
(designated by *), 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: Principal Financial
Group, Des Moines, Iowa 50392.
*JOHN E. ASCHENBRENNER Director
CRAIG R. BARNES Vice President
*CRAIG L. BASSETT Treasurer
*MICHAEL J. BEER Executive Vice President
*MARY L. BRICKER Assistant Corporate Secretary
*DAVID J. DRURY Director
*RALPH C. EUCHER Director and President
*ARTHUR S. FILEAN Vice President
*DENNIS P. FRANCIS Director
*PAUL N. GERMAIN Vice President - Mutual Fund Operations
*ERNEST H. GILLUM Vice President - Compliance and Product Development
*THOMAS J. GRAF Director
*J. BARRY GRISWELL Chairman of the Board and Director
*JOYCE N. HOFFMAN Vice President and Corporate Secretary
*ELLEN Z. LAMALE Director
*JULIA M. LAWLER 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 LIFE INSURANCE COMPANY
Principal Life Insurance Company is managed by a Board of Directors. 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
PAUL FRANCIS BOGNANNO Senior Vice President
CHARLES ROBERT DUNCAN 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
ROBB BRYAN HILL Senior Vice President
GREGG ROSS NARBER Senior Vice President and General Counsel
MARY AGNES O'KEEFE Senior Vice President
RICHARD LEO PREY Senior Vice President
ROBERT ALLEN SLEPICKA Senior Vice President
NORMAN RAUL SORENSEN Senior Vice President
CARL CHANSON WILLIAMS Senior Vice President and Chief Information Officer
<TABLE>
DIRECTORS:
<CAPTION>
Name, Positions and Offices Principal Occupation During Last 5 Years
<S> <C>
BETSY JEAN BERNARD Executive Vice President, U.S. West since 1998. President and Chief Executive Officer, since
Director 1998. President and Chief Executive Officer, AVIRNEX Communications Group since 1997.
President and Chief Executive Officer, Pacific Bell Communications since 1995.
JOCELYN CARTER-MILLER Corporate Vice President and Chief Marketing Officer, Motorola, Inc. since 1999. Vice
Director President, 1998-1999. Vice President and General Manager, since 1997. Prior thereto, Vice
President of Latin American and Caribbean Operations of Motorola.
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 Life Insurance Company since 1995.
Director President and Chief Executive Officer from 1994-1995; President from 1993-1994;
Chairman of the Board 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 Life Insurance Company since 1998. Executive Vice President
Director 1996-1998. Senior Vice President 1988-1996.
GERALD DAVID HURD Retired. Chairman and Chief Executive Officer, Principal Life Insurance Company
Director 1989-1994.
Member, Executive and
Nominating Committees
CHARLES SAMUEL JOHNSON Chairman, President and Chief Executive Officer, Pioneer Hi-Bred International, Inc. since
Director 1996. President and Chief Executive Officer 1995-1996. President and Chief
Member, Audit Committee Operating Officer 1995. Executive Vice President 1993-1995.
WILLIAM TURNBALL KERR Chairman, President & Chief Executive Officer, Meredith Corporation since 1998.
Director President and Chief Executive Officer, 1997-1998. President and Chief Operating Officer
Member, Executive Committee and 1994-1997. Prior thereto, Executive Vice President.
Chair, Nominating Committee
LEE LIU Chairman Alliant Energy Corporation since 1998. Chairman and Chief Executive Officer, IES
Director Industries, Inc., 1996-1998. 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 1996. Prior thereto,
Director 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 Executive
Director 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. since
Director 1995. Prior thereto, President, Chairman of the Board, and Chief Executive Officer, The
Member, Human Resources Committee Weitz Corporation and its subsidiaries.
</TABLE>
STATE REGULATION
The Company is subject to the laws of the State of Iowa governing insurance
companies and to regulation by the Insurance Department of the State of Iowa. An
annual statement in a prescribed form must be filed by March 1 in each year
covering our operations for the preceding year and our financial condition on
December 31 of the prior year. Our books and assets are subject to examination
by the Commissioner of Insurance of the State of Iowa or her representatives at
all times. A full examination of our operations is conducted periodically by the
National Association of Insurance Commissioners. Iowa law and regulations also
prescribe permissible investments, but this does not involve supervision of the
investment management or policy of the Company.
In addition, we are subject to the insurance laws and regulations of other
states and jurisdictions where we are licensed to operate. Generally, the
insurance departments of these states and jurisdictions apply the laws of the
state of domicile in determining the field of permissible investments.
FEDERAL TAX MATTERS
The following description is a general summary of the tax rules, primarily
related to federal income taxes, which in our opinion are currently in effect.
These rules are based on laws, regulations and interpretations that are subject
to change at any time. This summary is not comprehensive and is not intended as
tax advice. While we reserve the right to change the Policy to assure it
continues to qualify as life insurance for tax purposes, we cannot make any
guarantee regarding the future tax treatment of any Policy. You should consult a
qualified tax adviser about the tax implications of taking action under a
Policy.
Tax Status of the Company and the Separate Account
We are taxed as an insurance company under subchapter L of the Code. The
Separate Account is not a separate taxable entity. Its operations are taken into
account by us in determining our tax liability. All Separate Account investment
income and realized net capital gains are reinvested and taken into account in
determining policy values and are automatically applied to increase the book
reserves associated with the Policies.
Charges for Taxes
We impose a federal tax charge equal to 1.25% of premiums received under the
Policy to compensate us for the federal income tax liability we incur by reason
of receiving those premiums. We believe that this charge is reasonable in
relation to the increased tax burden the Company incurs as a result of Section
848 of the Code. 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, we review the appropriateness of charges to the Separate
Account for federal income taxes. In the future, a charge may be made for
federal income taxes incurred by us and 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 be imposed for the Policy's share
of our federal income taxes attributable to the Fixed Account.
Under current law, we 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 attributable to state or local taxes, we reserve the right
to charge the Separate Account for the portion of taxes, if any, attributable to
the Separate Account.
Diversification Standards
The Policy should qualify as a life insurance contract as long as the underlying
investments for the Policy satisfy diversification requirements of Section
817(h) of the Code.
IRS Definition of Life Insurance
The Policy should qualify as a life insurance contract as long as it satisfies
certain tests under Section 7702 of the Code.
o The Policy qualifies if it satisfies a cash value accumulation test or
a guideline premium requirement and falls within a cash value
corridor.
o If at any time a premium is paid which would result in total premiums
exceeding the current maximum premium allowed, we only accept that portion
of the premium which would make the total premiums equal the maximum.
Modified Endowment Contract Status
Section 7702A of the Code sets forth a classification of life insurance policies
known as "Modified Endowment Contracts." Policy loans and partial surrenders
from a policy that is classified as a modified endowment contract are taxable as
ordinary income to the owner in an amount equal to the lesser of the amount of
the loan/partial surrender or the excess of policy value over the owner's
investment in the Policy. Additionally, taxable distributions are subject to a
federal income tax penalty of 10% unless the payment is:
o made after the owner attains age 59 1/2;
o attributable to the taxpayer becoming disabled; or
o part of a series of substantially equal periodic payments (made not less
frequently than annually) made for the life or life expectancy of the
taxpayer.
Modified endowment contract classification may be avoided by limiting the amount
of premiums paid under the Policy. If you contemplate a large premium payment
under this Policy, and you wish to avoid modified endowment contract status, you
may contact us before making the payment and we will tell you the maximum amount
which can be paid into the Policy before it would become a modified endowment
contract.
Policy Surrenders and Partial Surrenders
A surrender or lapse of the Policy may have income tax consequences. Upon
surrender, the owner(s) is not taxed on the cash surrender value except for the
amount, if any, that exceeds the gross premiums paid less the untaxed portion of
any prior surrenders. The amount of any policy loan, upon surrender or lapse, is
added to the cash surrender value and treated, for this purpose, as if it had
been received. A loss incurred upon surrender is generally not deductible. The
tax consequences of a surrender may differ if the proceeds are received under
any income payment settlement option.
A total surrender of the Policy will, and a partial surrender may, be included
in your gross income to the extent that the distribution exceeds your investment
in the Policy. Partial surrenders generally are not taxable unless the total of
such surrenders exceeds total premiums paid to the date of partial surrender
less the untaxed portion of any prior partial surrenders. During the first 15
policy years, an amount may be taxable prior to your tax-free recovery of your
investment in the Policy if the partial surrender results in or is necessitated
by a reduction in death benefits. A qualified tax advisor should be consulted
regarding the tax consequences of any partial surrender during the first 15
policy years.
The increase in policy value of the Policy is not included in gross income
unless and until there is a total surrender or partial surrender under the
Policy. A complete surrender of the Policy will, and a partial surrender may, be
included in your gross income to the extent the distribution exceeds your
investment in the Policy. Transfers between the Investment Accounts and/or the
Fixed Account are not considered as distributions from the Policy and would not
be considered taxable income.
Policy Loans and Loan Interest
Loans received under the Policy are generally recognized as loans for tax
purposes and are not considered to be distributions subject to tax. Interest
paid to us as a result of a policy loan may or may not be deductible depending
on a number of factors. Due to the complexity of these factors, you should
consult a competent tax advisor as to the deductibility of interest paid on
policy loans. If the Policy is a modified endowment contract, a policy loan is
taxable to an amount equal to the lesser of the amount of the loan or the excess
of policy value over the owner's investment in the Policy.
Corporate Alternative Minimum Tax
Ownership of a Policy by certain corporations may affect the owner's exposure to
the corporate alternative minimum tax. In determining whether it is subject to
alternative minimum tax, the corporate owner 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 1) the premiums paid on that Policy
in the year of death, and 2) 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. The corporate alternative minimum
tax does not apply to S corporations. Such tax also does not apply to "Small
Corporations" as defined by section 55(c) of the Code. Corporations with gross
receipts of $5,000,000 or less for their first taxable year after 1996 with
gross receipts not exceeding $7,500,000 after the first taxable year will meet
this definition.
Exchange or Assignment of Policies
A change of policy or insured, or an exchange or assignment of a Policy may have
tax consequences. An assignment or exchange may result in taxable income to the
transferring owner. For complete information with respect to policy assignments
and exchanges, a qualified tax advisor should be consulted.
Withholding
Withholding is generally required on certain taxable distributions under
insurance contracts. In the case of periodic payments, the withholding is at
graduated rates. With respect to non-periodic distributions, withholding is a
flat rate of 10%. You may elect to have either non-periodic or periodic payments
made without withholding except if your tax identification number has not been
furnished to us or if the IRS has notified us that the number you furnished is
incorrect.
Taxation of Accelerated Death Benefits
We provide accelerated death benefits on a lien basis. It is unclear as to
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 taxes and state and local estate, inheritance and other taxes may
become due depending on applicable law and your circumstances or the
circumstances of the policy beneficiary(ies) if you or the insured dies. Any
person concerned about the estate implications of the Policy should consult a
competent tax advisor.
EMPLOYEE BENEFIT PLANS
The United States Supreme Court has held that optional annuity benefits under a
qualified deferred compensation plan cannot vary on the basis of gender. Polices
are available for use in connection with employment related insurance or benefit
plans which do not vary between male and female insured of a particular age and
underwriting classification. A competent tax advisor should be consulted on
these matters.
LEGAL OPINIONS
Legal matters applicable to the issue and sale of the Policies, including our
right to issue Policies under Iowa Insurance Law, have been passed upon by Gregg
R. Narber, Senior Vice President and General Counsel.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a party
or which would materially affect the Separate Account.
REGISTRATION STATEMENT
This prospectus omits some information contained in the registration statement
that we have filed with the SEC. Statements contained in this prospectus are
summaries of the contents of the Policy and other legal documents.
OTHER VARIABLE INSURANCE CONTRACTS
The Company currently offers other variable life contracts that participate in
the Separate Account. In the future, we may designate additional group or
individual variable insurance contracts as participating in the Separate
Account.
RESERVATION OF RIGHTS
The Company reserves the right to amend or terminate the special plans described
in this prospectus. Such plans include preauthorized premium payments, dollar
cost averaging (DCA) and automatic portfolio rebalancing (APR).
You would be notified of any such action to the extent required by law.
YEAR 2000 READINESS DISCLOSURE
Starting in early 1995, as a corporate effort, the Company recognized the Year
2000 could have a significant impact on our operations. With the strong
commitment from the Board of Directors, Chief Executive Officer and Chief
Information Officer, we initiated a comprehensive plan to ensure our systems and
facilities would function correctly regardless of the date on the calendar.
Assessments of our computer systems were completed in 1996. We identified 35,000
programs comprising 40 million lines of mainframe code, 1,300 PC software
packages, and 400,000+ end-user PC applications that could be affected by the
Year 2000.
Our analysis didn't stop there. We requested Year 2000 compliance status
information from hardware and software vendors of over 1,000 PC systems and 450
mainframe systems. New purchase agreements, along with renewal agreements, have
included a "Year 2000" warranty clause since 1997.
In 1997, we contacted critical service and product suppliers such as banks and
utility companies regarding their Year 2000 readiness. To further assess the
stability of our external supply chain, we conducted another survey in 1998, and
a third evaluation of our most critical suppliers will take place in 1999.
As of December 31, 1998, 100 percent of our identified mission critical system
renovations were completed, tested and in production. We expect to complete the
remaining identified changes by June 30, 1999 (when we receive and install
updated software releases from our outside vendors).
Full-scale testing of our systems began in March 1998 using an in-house,
isolated testing facility. We include "system date manipulation" and "file
aging" processes to verify a wide variety of dates before, on, and after January
1, 2000, including February 29, 2000 (leap day).
Our objective is to complete full-scale testing of all identified mission
critical systems in second quarter 1999, with significant attentions to year-end
and leap-year processing. Verification will continue through 1999, and into the
early part of 2000, to ensure no new date related problems are introduced into
previously tested or newly developed systems.
We believe our thorough systems testing process should eliminate significant
date related problems that could affect our systems. We will have staff onsite
during critical times to ensure a timely and accurate response to unforeseen
issues which may arise.
Contingency plan development began July 1998. The methodology was documented in
November 1998. We expect initial plans to be completed by March 31, 1999. These
plans are being developed to address external systems and non-systems events
that could affect our operations. Many of those scenarios are beyond our
control, so we are identifying possible options, which will minimize their
impact. We are also communicating with other entities involved to encourage
their Year 2000 preparedness. We will re-evaluate our contingency plans
throughout the Year 2000 experience.
The cost associated with completing our Year 2000 readiness for the business
unit of the Company which issues the Policy is estimated to be $1.3 - $1.6
million.
Additional corporate Y2K information can be found on our website at
www.principal.com/general/faqy2k.htm
INDEPENDENT AUDITORS
The financial statements of the Principal Life Insurance Company Variable Life
Separate Account and the financial statements of Principal Life Insurance
Company are included in this prospectus. Those statements have been audited by
Ernst & Young LLP, independent auditors, 801 Grand Avenue, Des Moines, Iowa
50309, for the periods indicated in their reports.
FINANCIAL STATEMENTS
The consolidated financial statements of Principal Life Insurance Company which
are included in this prospectus should be considered only as it relates to our
ability to meet our obligations under the Policy. They do not relate to
investment performance of the assets held in the Separate Account.
CUSTOMER INQUIRIES
Your questions should be directed to: PrinFlex Life(R), Principal Financial
Group, P.O. Box 9296, Des Moines, Iowa 50306-9296, 1-800-247-9988.
Report of Independent Auditors
Board of Directors and Participants
Principal Life Insurance Company
We have audited the accompanying statement of net assets of Principal Life
Insurance Company Variable Life Separate Account (comprising, respectively, the
Balanced, Bond, Capital Value [formerly Capital Accumulation], High Yield,
MidCap [formerly Emerging Growth], and Money Market Divisions; and, beginning
February 1, 1997 [date operations commenced], the Aggressive Growth, Asset
Allocation, Fidelity Contrafund, Fidelity Equity Income, Fidelity High Income,
Government Securities, Growth and International [formerly World] Divisions; and,
beginning May 1, 1998 [date operations commenced], the International SmallCap,
MicroCap, MidCap Growth, Putnam Global Asset Allocation, Putnam Vista, Putnam
Voyager, Real Estate, SmallCap, SmallCap Growth, SmallCap Value and Utilities
Divisions) as of December 31, 1998, 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, 1998, 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 Life Insurance
Company Variable Life Separate Account at December 31, 1998, 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
January 29, 1999
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statement of Net Assets
December 31, 1998
Assets
Investments:
Aggressive Growth Division:
Aggressive Growth Account - 777,089 shares at net asset value of $18.33
per share (cost - $13,352,172)
$14,244,041
Asset Allocation Division:
Asset Allocation Account - 129,498 shares at net asset value of $12.30
per share (cost - $1,606,648)
1,592,829
Balanced Division:
Balanced Account - 607,950 shares at net asset value of $16.25 per share
(cost - $9,341,735)
9,879,189
Bond Division:
Bond Account - 328,889 shares at net asset value of $12.02 per share
(cost - $3,926,791)
3,953,245
Capital Value Division:
Capital Value Account - 617,691 shares at net asset value of $37.19 per
share (cost - $21,049,295)
22,971,942
Fidelity Contrafund Division:
Fidelity Variable Insurance Products Fund II: Contrafund Portfolio.
- 328,273 shares at net asset value of $24.44 per share
(cost - $6,667,740)
8,023,001
Fidelity Equity Income Division:
Fidelity Variable Insurance Products Fund: Equity Income Portfolio -
192,980 shares at net asset value of $25.42 per share
(cost - $4,613,703)
4,905,541
Fidelity High Income Division:
Fidelity Variable Insurance Products Fund: High Income Portfolio -
92,350 shares at net asset value of $11.53 per share
(cost - $1,125,224)
1,064,791
Government Securities Division:
Government Securities Account - 296,704 shares at net asset value
of $11.01 per share (cost - $3,276,232)
3,266,712
Growth Division:
Growth Account - 232,690 shares at net asset value of $20.46 per share
(cost - $4,292,826)
4,760,835
High Yield Division:
Principal High Yield Account - 281,526 shares at net asset value of
$8.06 per share (cost - $2,513,399)
2,269,099
International Division:
International Account - 537,577 shares at net asset value of $14.51
per share (cost - $7,973,977)
7,800,249
See accompanying notes.
<PAGE>
Assets (continued)
Investments (continued):
International SmallCap Division:
International SmallCap Account - 35,132 shares at net asset value of $9.00
per share (cost - $301,178)
$ 316,190
MicroCap Division:
MicroCap Account - 18,284 shares at net asset value of $8.17 per share
(cost - $148,285)
149,378
MidCap Division:
MidCap Account - 740,867 shares at net asset value of $34.37 per share
(cost - $23,362,591)
25,463,610
MidCap Growth Division:
MidCap Growth Account - 32,736 shares at net asset value of $9.65 per share
(cost - $287,894)
315,903
Money Market Division:
Money Market Account - 8,335,116 shares at net asset value (cost) of $1.00
per share
8,335,116
Putnam Global Asset Allocation Division:
Putnam VT Global Asset Allocation Fund - 3,968 shares at net asset value of
$18.96 per share (cost - $70,918)
75,231
Putnam Vista Division:
Putnam VT Vista Fund - 8,354 shares at net asset value of $14.73 per share
(cost - $102,314)
123,051
Putnam Voyager Division:
Putnam VT Voyager Fund - 19,636 shares at net asset value of $45.81 per
share (cost - $793,947)
899,548
Real Estate Division:
Real Estate Account - 3,496 shares at net asset value of $9.07 per share
(cost - $32,029)
31,709
SmallCap Division:
SmallCap Account - 30,528 shares at net asset value of $8.21 per share
(cost - $238,669)
250,636
SmallCap Growth Division:
SmallCap Growth Account - 20,762 shares at net asset value of $10.10 per
share (cost - $177,725)
209,695
SmallCap Value Division:
SmallCap Value Account - 17,283 shares at net asset value of $8.34 per
share (cost - $138,722)
144,138
Utilities Division:
Utilities Account - 4,172 shares at net asset value of $10.93 per share
(cost - $43,259)
45,596
-----------------
Net assets $121,091,275
=================
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statement of Net Assets (continued)
December 31, 1998
<TABLE>
<CAPTION>
Unit
Units Value
------------------------
------------------------
<S> <C> <C> <C>
Net assets are represented by:
Aggressive Growth Division - PrinFlex Life 966,076 $14.74 $14,244,041
Asset Allocation Division - PrinFlex Life 126,757 12.57 1,592,829
Balanced Division:
Flex Variable Life 128,004 29.66 3,796,104
PrinFlex Life 470,384 12.93 6,083,085
-----------
9,879,189
Bond Division:
Flex Variable Life 81,499 23.91 1,948,335
PrinFlex Life 169,676 11.82 2,004,910
-----------
3,953,245
Capital Value Division:
Flex Variable Life 230,405 37.92 8,736,005
PrinFlex Life 1,001,214 14.22 14,235,937
-----------
22,971,942
Fidelity Contrafund Division - PrinFlex Life 509,526 15.75 8,023,001
Fidelity Equity Income Division - PrinFlex Life 358,372 13.69 4,905,541
Fidelity High Income Division - PrinFlex Life 96,628 11.02 1,064,791
Government Securities Division - PrinFlex Life 276,130 11.83 3,266,712
Growth Division - PrinFlex Life 323,329 14.72 4,760,835
High Yield Division - Flex Variable Life 106,040 21.40 2,269,099
International Division - PrinFlex Life 647,156 12.05 7,800,249
International SmallCap Division - PrinFlex Life 34,925 9.05 316,190
MicroCap Division - PrinFlex Life 18,274 8.17 149,378
MidCap Division:
Flex Variable Life 279,181 41.05 11,460,175
PrinFlex Life 1,122,974 12.47 14,003,435
-----------
25,463,610
MidCap Growth Division - PrinFlex Life 32,540 9.71 315,903
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unit
Units Value
-----------------------
-----------------------
<S> <C> <C> <C>
Net assets are represented by (continued):
Money Market Division:
Flex Variable Life 22,133 $16.40 $ 362,873
PrinFlex Life 723,761 11.02 7,972,243
------------
8,335,116
Putnam Global Asset Allocation Division - PrinFlex Life
7,305 10.30 75,231
Putnam Vista Division - PrinFlex Life 11,712 10.51 123,051
Putnam Voyager Division - PrinFlex Life 82,965 10.84 899,548
Real Estate Division - PrinFlex Life 3,390 9.35 31,709
SmallCap Division - PrinFlex Life 31,352 7.99 250,636
SmallCap Growth Division - PrinFlex Life 20,430 10.26 209,695
SmallCap Value Division - PrinFlex Life 16,935 8.51 144,138
Utilities Division - PrinFlex Life 3,944 11.56 45,596
------------
Net assets $121,091,275
============
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Operations
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Aggressive
Growth
Combined Division (1)
-------------- --------------
<S> <C> <C>
Year ended December 31, 1998 Investment income (loss) Income:
Dividends $1,927,629 $ 25,269
Capital gains distributions 3,545,632 576,813
-------------- --------------
5,473,261 602,082
Expenses:
Mortality and expense risks 736,803 74,911
-------------- --------------
Net investment income (loss) 4,736,458 527,171
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments 1,677,430 11,214
Change in net unrealized appreciation/depreciation of investments 1,393,781 947,122
============== ==============
Net increase (decrease) in net assets resulting from operations $7,807,669 $1,485,507
============== ==============
Year ended December 31, 1997 Investment income (loss) Income:
Dividends $ 980,811 $ 8,174
Capital gains distributions 2,062,456 410,207
-------------- --------------
3,043,267 418,381
Expenses:
Mortality and expense risks 323,452 12,033
-------------- --------------
Net investment income (loss) 2,719,815 406,348
Realized and unrealized gains (losses) on investments
Net realized gains on investments 1,992,490 2,207
Change in net unrealized appreciation/depreciation of investments 2,414,101 (55,253)
-------------- --------------
Net increase (decrease) in net assets resulting from operations $7,126,406 $ 353,302
============== ==============
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 $ -
============== ==============
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Asset Capital
Allocation Balanced Bond Value
Division (1) Division Division Division
-------------------------------------------------------
-------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998 Investment income (loss) Income:
Dividends $37,595 $278,168 $200,418 $ 398,541
Capital gains distributions 39,061 298,323 2,083 748,100
-------------------------------------------------------
76,656 576,491 202,501 1,146,641
Expenses:
Mortality and expense risks 9,173 63,126 24,494 136,738
-------------------------------------------------------
Net investment income (loss) 67,483 513,365 178,007 1,009,903
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments (1,770) 161,523 33,503 281,655
Change in net unrealized appreciation/depreciation of investments 10,057 118,060 (19,726) 461,090
=======================================================
Net increase (decrease) in net assets resulting from operations $75,770 $792,948 $191,784 $1,752,648
=======================================================
Year ended December 31, 1997 Investment income (loss) Income:
Dividends $11,857 $150,137 $136,267 $ 211,818
Capital gains distributions 42,154 346,134 - 794,643
-------------------------------------------------------
54,011 496,271 136,267 1,006,461
Expenses:
Mortality and expense risks 1,700 38,702 14,802 69,600
-------------------------------------------------------
Net investment income (loss) 52,311 457,569 121,465 936,861
Realized and unrealized gains (losses) on investments
Net realized gains on investments 549 236,637 18,598 342,684
Change in net unrealized appreciation/depreciation of investments (23,876) 104,396 55,567 895,157
=======================================================
Net increase (decrease) in net assets resulting from operations $28,984 $798,602 $195,630 $2,174,702
=======================================================
Year ended December 31, 1996 Investment income Income:
Dividends $ - $110,439 $ 92,610 $ 118,875
Capital gains distributions - 244,144 - 745,903
-------------------------------------------------------
- 354,583 92,610 864,778
Expenses:
Mortality and expense risks - 25,360 8,256 36,169
-------------------------------------------------------
Net investment income - 329,223 84,354 828,609
Realized and unrealized gains (losses) on investments
Net realized gains on investments - 20,387 2,798 36,486
Change in net unrealized appreciation/depreciation of investments - 77,334 (53,168) 247,560
=======================================================
Net increase in net assets resulting from operations $ - $426,944 $ 33,984 $1,112,655
=======================================================
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Fidelity Fidelity Equity Fidelity High
Contrafund Income Income
Division (1) Division(1) Division (1)
------------------------------------------------------
------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1998 Investment income (loss) Income:
Dividends $ 17,790 $ 18,251 $ 31,106
Capital gains distributions 130,883 64,952 19,765
------------------------------------------------------
148,673 83,203 50,871
Expenses:
Mortality and expense risks 37,872 24,478 7,171
------------------------------------------------------
Net investment income (loss) 110,801 58,725 43,700
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments 12,594 5,628 (11,177)
Change in net unrealized appreciation/depreciation of investments 1,240,221 219,300 (81,364)
======================================================
Net increase (decrease) in net assets resulting from operations $1,363,616 $283,653 $(48,841)
======================================================
Year ended December 31, 1997 Investment income (loss) Income:
Dividends $ - $ - $ -
Capital gains distributions - - -
------------------------------------------------------
- - -
Expenses:
Mortality and expense risks 6,014 3,260 1,353
------------------------------------------------------
Net investment income (loss) (6,014) (3,260) (1,353)
Realized and unrealized gains (losses) on investments
Net realized gains on investments 850 630 3,224
Change in net unrealized appreciation/depreciation of investments 115,040 72,538 20,931
======================================================
Net increase (decrease) in net assets resulting from operations $ 109,876 $ 69,908 $ 22,802
======================================================
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 $ - $ - $ -
======================================================
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Operations (continued)
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Government
Securities Growth
Division (1) Division (1)
---------------- --------------
<S> <C> <C>
Year ended December 31, 1998 Investment income (loss) Income:
Dividends $111,671 $ 46,962
Capital gains distributions - 44,586
---------------- --------------
111,671 91,548
Expenses:
Mortality and expense risks 14,161 22,163
---------------- --------------
Net investment income (loss) 97,510 69,385
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments 1,370 8,386
Change in net unrealized appreciation/depreciation of investments (6,358) 437,013
================ ==============
Net increase (decrease) in net assets resulting from operations $ 92,522 $514,784
================ ==============
Year ended December 31, 1997 Investment income (loss) Income:
Dividends $ 5,365 $ 9,349
Capital gains distributions - 5,271
---------------- --------------
5,365 14,620
Expenses:
Mortality and expense risks 138 2,499
---------------- --------------
Net investment income (loss) 5,227 12,121
Realized and unrealized gains (losses) on investments
Net realized gains on investments 15 299
Change in net unrealized appreciation/depreciation of investments (3,162) 30,996
---------------- ----------------
Net increase (decrease) in net assets resulting from operations $ 2,080 $ 43,416
================ ==============
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 $ - $ -
================ ==============
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
High International
Yield International SmallCap
Division Division(1) Division(2)
-----------------------------------------------------
-----------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1998 Investment income (loss) Income:
Dividends $202,766 $118,274 $ 851
Capital gains distributions - 238,049 -
-----------------------------------------------------
202,766 356,323 851
Expenses:
Mortality and expense risks 16,917 47,404 732
-----------------------------------------------------
Net investment income (loss) 185,849 308,919 119
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments (1,713) 5,582 (148)
Change in net unrealized appreciation/depreciation of investments (222,572) (8,068) 15,012
=====================================================
Net increase (decrease) in net assets resulting from operations $(38,436) $306,433 $14,983
=====================================================
Year ended December 31, 1997 Investment income (loss) Income:
Dividends $162,794 $ 44,308 $ -
Capital gains distributions - 73,919 -
-----------------------------------------------------
162,794 118,227 -
Expenses:
Mortality and expense risks 11,434 9,278 -
-----------------------------------------------------
Net investment income (loss) 151,360 108,949 -
Realized and unrealized gains (losses) on investments
Net realized gains on investments 19,548 678 -
Change in net unrealized appreciation/depreciation of investments (27,928) (165,660) -
=====================================================
Net increase (decrease) in net assets resulting from operations $142,980 $(56,033) $ -
=====================================================
Year ended December 31, 1996 Investment income Income:
Dividends $107,701 $ - $ -
Capital gains distributions - - -
-----------------------------------------------------
107,701 - -
Expenses:
Mortality and expense risks 7,858 - -
-----------------------------------------------------
Net investment income 99,843 - -
Realized and unrealized gains (losses) on investments
Net realized gains on investments 70 - -
Change in net unrealized appreciation/depreciation of investments 34,507 - -
=====================================================
Net increase in net assets resulting from operations $134,420 $ - $ -
=====================================================
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
MidCap Money
MicroCap MidCap Growth Market
Division(2) Division Division(2) Division
------------------------------------------------------
------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998 Investment income (loss) Income:
Dividends $ 620 $ 146,679 $ - $290,641
Capital gains distributions - 1,383,017 - -
------------------------------------------------------
620 1,529,696 - 290,641
Expenses:
Mortality and expense risks 326 185,626 637 67,849
------------------------------------------------------
Net investment income (loss) 294 1,344,070 (637) 222,792
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments (681) 1,170,701 249 -
Change in net unrealized appreciation/depreciation of investments 1,093 (1,927,129) 28,009 -
======================================================
Net increase (decrease) in net assets resulting from operations $ 706 $ 587,642 $27,621 $222,792
======================================================
Year ended December 31, 1997 Investment income (loss) Income:
Dividends $ - $ 121,340 $ - $119,402
Capital gains distributions - 390,128 - -
------------------------------------------------------
- 511,468 - 119,402
Expenses:
Mortality and expense risks - 127,942 - 24,697
------------------------------------------------------
Net investment income (loss) - 383,526 - 94,705
Realized and unrealized gains (losses) on investments
Net realized gains on investments - 1,366,571 - -
Change in net unrealized appreciation/depreciation of investments - 1,395,355 - -
======================================================
Net increase (decrease) in net assets resulting from operations $ - $3,145,452 $ - $ 94,705
======================================================
Year ended December 31, 1996 Investment income Income:
Dividends $ - $ 99,423 $ - $ 47,021
Capital gains distributions - 250,692 - -
------------------------------------------------------
- 350,115 - 47,021
Expenses:
Mortality and expense risks - 74,424 - 8,008
------------------------------------------------------
Net investment income - 275,691 - 39,013
Realized and unrealized gains (losses) on investments
Net realized gains on investments - 136,928 - -
Change in net unrealized appreciation/depreciation of investments - 1,479,684 - -
======================================================
Net increase in net assets resulting from operations $ - $1,892,303 $ - $ 39,013
======================================================
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Operations (continued)
Year ended December 31, 1998
<TABLE>
<CAPTION>
Putnam Global Putnam
Asset Allocation Vista
Division(2) Division(2)
----------------- -----------
<S> <C> <C>
Year ended December 31, 1998 Investment income (loss) Income:
Dividends $ - $ -
Capital gains distributions - -
----------------- -----------
- -
Expenses:
Mortality and expense risks 120 174
----------------- -----------
Net investment income (loss) (120) (174)
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments 140 252
Change in net unrealized appreciation/depreciation of investments 4,313 20,737
================= ===========
Net increase (decrease) in net assets resulting from operations $4,333 $20,815
================= ===========
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Putnam
Voyager Real Estate SmallCap
Division (2) Division (2) Division (2)
--------------------------------------------------
--------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1998 Investment income (loss) Income:
Dividends $ - $867 $ 24
Capital gains distributions - - -
--------------------------------------------------
- 867 24
Expenses:
Mortality and expense risks 1,414 56 557
--------------------------------------------------
Net investment income (loss) (1,414) 811 (533)
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments 45 (64) (75)
Change in net unrealized appreciation/depreciation of investments 105,601 (320) 11,967
==================================================
Net increase (decrease) in net assets resulting from operations $104,232 $427 $11,359
==================================================
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
SmallCap SmallCap
Growth Value Utilities
Division(2) Division(2) Division(2)
---------------------------------------------
---------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1998 Investment income (loss) Income:
Dividends $ - $ 512 $ 624
Capital gains distributions - - -
---------------------------------------------
- 512 624
Expenses:
Mortality and expense risks 385 255 64
---------------------------------------------
Net investment income (loss) (385) 257 560
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments (20) (136) 372
Change in net unrealized appreciation/depreciation of investments 31,970 5,416 2,337
=============================================
Net increase (decrease) in net assets resulting from operations $31,565 $5,537 $3,269
=============================================
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets
Year ended December 31, 1998
<TABLE>
<CAPTION>
Aggressive
Growth
Combined Division (1)
---------------------------------
<S> <C> <C>
Net assets at January 1, 1998 $ 57,094,676 $ 3,915,455
Increase (decrease) in net assets
Operations:
Net investment income (loss) 4,736,458 527,171
Net realized gains (losses) on investments 1,677,430 11,214
Change in net unrealized appreciation/depreciation of investments 1,393,781 947,122
---------------------------------
Net increase (decrease) in net assets resulting from operations 7,807,669 1,485,507
Policy related transactions:
Net premium payments, less sales charges and applicable
premium taxes 120,735,689 11,625,624
Contract terminations and surrenders (9,524,969) (103,562)
Death benefit payments (30,033) (2,799)
Policy loan transfers (1,569,958) (179,094)
Transfers to other contracts (42,264,927) (1,075,297)
Cost of insurance and administration charges (10,698,734) (1,364,250)
Surrender charges (458,138) (57,543)
---------------------------------
Increase in net assets from policy related transactions 56,188,930 8,843,079
---------------------------------
Total increase 63,996,599 10,328,586
---------------------------------
Net assets at December 31, 1998 $121,091,275 $14,244,041
=================================
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Asset Capital
Allocation Balanced Bond Value
Division(1) Division Division Division
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1998 $ 561,781 $5,707,028 $2,270,847 $11,822,941
Increase (decrease) in net assets
Operations:
Net investment income (loss) 67,483 513,365 178,007 1,009,903
Net realized gains (losses) on investments (1,770) 161,523 33,503 281,655
Change in net unrealized appreciation/depreciation of investments 10,057 118,060 (19,726) 461,090
----------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 75,770 792,948 191,784 1,752,648
Policy related transactions:
Net premium payments, less sales charges and applicable
premium taxes 1,591,693 7,040,409 3,302,871 16,284,235
Contract terminations and surrenders (4,085) (1,368,274) (302,397) (2,480,693)
Death benefit payments - (517) (1,856) (6,646)
Policy loan transfers (10,991) (244,822) (81,085) (170,516)
Transfers to other contracts (480,701) (1,287,295) (1,034,053) (2,543,349)
Cost of insurance and administration charges (138,368) (718,018) (377,536) (1,611,497)
Surrender charges (2,270) (42,270) (15,330) (75,181)
----------------------------------------------------------
Increase in net assets from policy related transactions 955,278 3,379,213 1,490,614 9,396,353
----------------------------------------------------------
Total increase 1,031,048 4,172,161 1,682,398 11,149,001
----------------------------------------------------------
Net assets at December 31, 1998 $1,592,829 $9,879,189 $3,953,245 $22,971,942
==========================================================
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Fidelity Fidelity Equity Fidelity High
Contrafund Income Income
Division (1) Division(1) Division (1)
-----------------------------------------------------
<S> <C> <C> <C>
Net assets at January 1, 1998 $2,089,509 $1,018,314 $ 329,510
Increase (decrease) in net assets
Operations:
Net investment income (loss) 110,801 58,725 43,700
Net realized gains (losses) on investments 12,594 5,628 (11,177)
Change in net unrealized appreciation/depreciation of investments 1,240,221 219,300 (81,364)
--------------------------------------------------
Net increase (decrease) in net assets resulting from operations 1,363,616 283,653 (48,841)
Policy related transactions:
Net premium payments, less sales charges and applicable
premium taxes 6,142,338 4,698,442 1,259,486
Contract terminations and surrenders (74,844) (17,461) (4,697)
Death benefit payments (402) (3,431) (1,170)
Policy loan transfers (145,298) (69,698) (53,013)
Transfers to other contracts (678,221) (572,136) (318,315)
Cost of insurance and administration charges (632,111) (422,440) (95,559)
Surrender charges (41,586) (9,702) (2,610)
--------------------------------------------------
Increase in net assets from policy related transactions 4,569,876 3,603,574 784,122
--------------------------------------------------
Total increase 5,933,492 3,887,227 735,281
--------------------------------------------------
Net assets at December 31, 1998 $8,023,001 $4,905,541 $1,064,791
==================================================
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
Year ended December 31, 1998
<TABLE>
<CAPTION>
Government
Securities Growth Division
Division (1) (1)
---------------------------------
<S> <C> <C>
Net assets at January 1, 1998 $ 104,221 $ 921,533
Increase (decrease) in net assets
Operations:
Net investment income (loss) 97,510 69,385
Net realized gains (losses) on investments 1,370 8,386
Change in net unrealized appreciation/depreciation of investments (6,358) 437,013
---------------------------------
Net increase (decrease) in net assets resulting from operations 92,522 514,784
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes
3,283,931 4,050,726
Contract terminations and surrenders (1,547) (24,252)
Death benefit payments - -
Policy loan transfers (9,130) (33,585)
Transfers to other contracts (93,010) (235,746)
Cost of insurance and administration charges (109,416) (419,150)
Surrender charges (859) (13,475)
---------------------------------
Increase in net assets from policy related transactions 3,069,969 3,324,518
---------------------------------
Total increase 3,162,491 3,839,302
=================================
Net assets at December 31, 1998 $3,266,712 $4,760,835
=================================
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
International
High Yield International SmallCap
Division Division (1) Division (2)
--------------------------------------------------
<S> <C> <C> <C>
Net assets at January 1, 1998 $2,092,182 $2,716,270 $ -
Increase (decrease) in net assets
Operations:
Net investment income (loss) 185,849 308,919 119
Net realized gains (losses) on investments (1,713) 5,582 (148)
Change in net unrealized appreciation/depreciation of investments (222,572) (8,068) 15,012
--------------------------------------------------
Net increase (decrease) in net assets resulting from operations (38,436) 306,433 14,983
Policy related transactions:
Net premium payments, less sales charges and applicable
premium taxes 654,374 6,275,718 334,028
Contract terminations and surrenders (223,218) (52,096) (509)
Death benefit payments - (2,388) -
Policy loan transfers (2,756) (93,812) -
Transfers to other contracts (82,650) (623,489) (18,167)
Cost of insurance and administration charges (126,865) (697,441) (13,862)
Surrender charges (3,532) (28,946) (283)
--------------------------------------------------
Increase in net assets from policy related transactions 215,353 4,777,546 301,207
--------------------------------------------------
Total increase 176,917 5,083,979 316,190
--------------------------------------------------
Net assets at December 31, 1998 $2,269,099 $7,800,249 $316,190
==================================================
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
MidCap Growth Money Market
MicroCap MidCap Division Division (2) Division
Division (2)
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1998 $ - $19,216,629 $ - $ 4,328,456
Increase (decrease) in net assets
Operations:
Net investment income (loss) 294 1,344,070 (637) 222,792
Net realized gains (losses) on investments (681) 1,170,701 249 -
Change in net unrealized appreciation/depreciation of investments 1,093 (1,927,129) 28,009 -
-----------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 706 587,642 27,621 222,792
Policy related transactions:
Net premium payments, less sales charges and applicable
premium taxes 158,559 15,747,739 306,597 36,243,366
Contract terminations and surrenders - (4,608,554) (24) (258,565)
Death benefit payments - (9,498) - (1,326)
Policy loan transfers (2,410) (462,004) - (8,878)
Transfers to other contracts (2,484) (2,445,385) (4,378) (30,709,128)
Cost of insurance and administration charges (4,993) (2,424,710) (13,899) (1,455,420)
Surrender charges - (138,249) (14) (26,181)
-----------------------------------------------------------
Increase in net assets from policy related transactions 148,672 5,659,339 288,282 3,783,868
-----------------------------------------------------------
Total increase 149,378 6,246,981 315,903 4,006,660
-----------------------------------------------------------
Net assets at December 31, 1998 $149,378 $25,463,610 $315,903 $ 8,335,116
===========================================================
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
Year ended December 31, 1998
<TABLE>
<CAPTION>
Putnam Global Putnam Vista
Asset Allocation Division (2)
Division (2)
------------------------ ----------
<S> <C> <C>
Net assets at January 1, 1998 $ - $ -
Increase (decrease) in net assets
Operations:
Net investment income (loss) (120) (174)
Net realized gains (losses) on investments 140 252
Change in net unrealized appreciation/depreciation of investments 4,313 20,737
------------------------ ----------
Net increase (decrease) in net assets resulting from operations 4,333 20,815
Policy related transactions:
Net premium payments, less sales charges and applicable
premium taxes 76,196 114,287
Contract terminations and surrenders - -
Death benefit payments - -
Policy loan transfers - -
Transfers to other contracts (1,426) (7,306)
Cost of insurance and administration charges (3,872) (4,745)
Surrender charges - -
------------------------ ----------
Increase in net assets from policy related transactions 70,898 102,236
------------------------ ----------
Total increase 75,231 123,051
------------------------ ----------
Net assets at December 31, 1998 $75,231 $123,051
======================== ==========
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Putnam Voyager Real Estate SmallCap
Division (2) Division (2) Division (2)
--------------------------------------------------------
<S> <C> <C> <C>
Net assets at January 1, 1998 $ - $ - $ -
Increase (decrease) in net assets
Operations:
Net investment income (loss) (1,414) 811 (533)
Net realized gains (losses) on investments 45 (64) (75)
Change in net unrealized appreciation/depreciation of investments 105,601 (320) 11,967
--------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 104,232 427 11,359
Policy related transactions:
Net premium payments, less sales charges and applicable
premium taxes 868,001 33,346 251,162
Contract terminations and surrenders (93) (23) (25)
Death benefit payments - - -
Policy loan transfers (2,429) - (241)
Transfers to other contracts (32,669) (406) (3,354)
Cost of insurance and administration charges (37,442) (1,622) (8,251)
Surrender charges (52) (13) (14)
--------------------------------------------------------
Increase in net assets from policy related transactions 795,316 31,282 239,277
--------------------------------------------------------
Total increase 899,548 31,709 250,636
--------------------------------------------------------
Net assets at December 31, 1998 $899,548 $31,709 $250,636
========================================================
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
SmallCap Growth SmallCap Value Utilities
Division (2) Division (2) Division (2)
----------------------------------------------------
<S> <C> <C> <C>
Net assets at January 1, 1998 $ - $ - $ -
Increase (decrease) in net assets
Operations:
Net investment income (loss) (385) 257 560
Net realized gains (losses) on investments (20) (136) 372
Change in net unrealized appreciation/depreciation of investments 31,970 5,416 2,337
----------------------------------------------------
Net increase (decrease) in net assets resulting from operations 31,565 5,537 3,269
Policy related transactions:
Net premium payments, less sales charges and applicable
premium taxes 193,803 145,362 53,396
Contract terminations and surrenders (22) (28) -
Death benefit payments - - -
Policy loan transfers - - (196)
Transfers to other contracts (6,641) (828) (8,493)
Cost of insurance and administration charges (8,998) (5,889) (2,380)
Surrender charges (12) (16) -
----------------------------------------------------
Increase in net assets from policy related transactions 178,130 138,601 42,327
----------------------------------------------------
Total increase 209,695 144,138 45,596
----------------------------------------------------
Net assets at December 31, 1998 $209,695 $144,138 $45,596
====================================================
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Aggressive
Growth
Combined Division (1)
--------------------------------
<S> <C> <C>
Net assets at January 1, 1996 $16,678,135 $ -
Increase (decrease) in net assets
Operations:
Net investment income 1,656,733 -
Net realized gains on investments 196,669 -
Change in net unrealized appreciation/depreciation of investments 1,785,917 -
--------------------------------
Net increase in net assets resulting from operations 3,639,319 -
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes 18,395,810 -
Contract terminations and surrenders (722,867) -
Death benefit payments (37,233) -
Policy loan transfers (473,677) -
Transfers to other contracts (5,580,579) -
Cost of insurance and administration charges (2,456,536) -
Surrender charges (97,354) -
--------------------------------
Increase in net assets from policy related transactions 9,027,564 -
--------------------------------
Total increase 12,666,883 -
--------------------------------
Net assets at December 31, 1996 29,345,018 -
Increase (decrease) in net assets
Operations:
Net investment income (loss) 2,719,814 406,348
Net realized gains on investments 1,992,490 2,207
Change in net unrealized appreciation/depreciation of investments 2,414,102 (55,253)
--------------------------------
Net increase (decrease) in net assets resulting from operations 7,126,406 353,302
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes 51,193,569 3,869,959
Contract terminations and surrenders (10,340,289) (5,409)
Death benefit payments (35,772) -
Policy loan transfers (990,280) (12,314)
Transfers to other contracts (14,297,011) (56,802)
Cost of insurance and administration charges (4,726,082) (225,959)
Surrender charges (180,883) (7,322)
--------------------------------
Increase in net assets from policy related transactions 20,623,252 3,562,153
--------------------------------
Total increase 27,749,658 3,915,455
--------------------------------
Net assets at December 31, 1997 57,094,676 3,915,455
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Asset Capital
Allocation Balanced Bond Value
Division Division Division Division
(1)
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1996 $ - $ 2,794,881 $ 922,511 $3,975,025
Increase (decrease) in net assets
Operations:
Net investment income - 329,223 84,354 828,609
Net realized gains on investments - 20,387 2,798 36,486
Change in net unrealized appreciation/depreciation of investments - 77,334 (53,168) 247,560
---------------------------------------------------------
Net increase in net assets resulting from operations - 426,944 33,984 1,112,655
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes - 1,743,079 953,519 2,993,788
Contract terminations and surrenders - (98,967) (23,277) (167,257)
Death benefit payments - (11,941) (81) (17,425)
Policy loan transfers - (9,028) (21,841) (153,962)
Transfers to other contracts - (161,403) (115,001) (217,253)
Cost of insurance and administration charges - (325,580) (103,879) (481,237)
Surrender charges - (13,328) (3,135) (22,526)
---------------------------------------------------------
Increase in net assets from policy related transactions - 1,122,832 686,305 1,934,128
---------------------------------------------------------
Total increase - 1,549,776 720,289 3,046,783
---------------------------------------------------------
Net assets at December 31, 1996 - 4,344,657 1,642,800 7,021,808
Increase (decrease) in net assets
Operations:
Net investment income (loss) 52,311 457,569 121,465 936,861
Net realized gains on investments 549 236,637 18,598 342,684
Change in net unrealized appreciation/depreciation of investments (23,876) 104,396 55,567 895,157
---------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 28,984 798,602 195,630 2,174,702
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes 562,968 3,035,179 1,595,001 6,782,066
Contract terminations and surrenders (15) (1,398,821) (414,701) (2,651,564)
Death benefit payments - - - (8,829)
Policy loan transfers (6,314) (145,315) (55,770) (183,175)
Transfers to other contracts (690) (454,671) (434,583) (441,824)
Cost of insurance and administration charges (23,132) (450,585) (250,798) (827,795)
Surrender charges (20) (22,018) (6,732) (42,448)
---------------------------------------------------------
Increase in net assets from policy related transactions 532,797 563,769 432,417 2,626,431
---------------------------------------------------------
Total increase 561,781 1,362,371 628,047 4,801,133
---------------------------------------------------------
Net assets at December 31, 1997 561,781 5,707,028 2,270,847 11,822,941
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Fidelity Fidelity Equity Fidelity High
Contrafund Income Division Income
Division (1) (1) Division (1)
------------------------------------------------------
<S> <C> <C> <C>
Net assets at January 1, 1996 $ - $ - $ -
Increase (decrease) in net assets
Operations:
Net investment income - - -
Net realized gains on investments - - -
Change in net unrealized appreciation/depreciation of investments - - -
------------------------------------------------------
Net increase in net assets resulting from operations - - -
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes - - -
Contract terminations and surrenders - - -
Death benefit payments - - -
Policy loan transfers - - -
Transfers to other contracts - - -
Cost of insurance and administration charges - - -
Surrender charges - - -
------------------------------------------------------
Increase in net assets from policy related transactions - - -
------------------------------------------------------
Total increase - - -
------------------------------------------------------
Net assets at December 31, 1996 - - -
Increase (decrease) in net assets
Operations:
Net investment income (loss) (6,014) (3,260) (1,353)
Net realized gains on investments 850 630 3,224
Change in net unrealized appreciation/depreciation of investments 115,040 72,538 20,931
------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 109,876 69,908 22,802
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes 2,125,905 1,018,045 369,108
Contract terminations and surrenders (666) (740) (262)
Death benefit payments - - -
Policy loan transfers (9,953) (800) (26,280)
Transfers to other contracts (24,082) (9,962) (20,415)
Cost of insurance and administration charges (110,670) (57,135) (15,088)
Surrender charges (901) (1,002) (355)
------------------------------------------------------
Increase in net assets from policy related transactions 1,979,633 948,406 306,708
------------------------------------------------------
Total increase 2,089,509 1,018,314 329,510
------------------------------------------------------
Net assets at December 31, 1997 2,089,509 1,018,314 329,510
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Government
Securities Growth
Division (1) Division (1)
--------------------------------
<S> <C> <C>
Net assets at January 1, 1996 $ - $ -
Increase (decrease) in net assets
Operations:
Net investment income - -
Net realized gains on investments - -
Change in net unrealized appreciation/depreciation of investments - -
--------------------------------
Net increase in net assets resulting from operations - -
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes - -
Contract terminations and surrenders - -
Death benefit payments - -
Policy loan transfers - -
Transfers to other contracts - -
Cost of insurance and administration charges - -
Surrender charges - -
--------------------------------
Increase in net assets from policy related transactions - -
--------------------------------
Total increase - -
--------------------------------
Net assets at December 31, 1996 - -
Increase (decrease) in net assets
Operations:
Net investment income (loss) 5,227 12,121
Net realized gains on investments 15 299
Change in net unrealized appreciation/depreciation of investments (3,162) 30,996
--------------------------------
Net increase (decrease) in net assets resulting from operations 2,080 43,416
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes 109,941 938,351
Contract terminations and surrenders - (168)
Death benefit payments - -
Policy loan transfers - (73)
Transfers to other contracts (1,786) (1,396)
Cost of insurance and administration charges (6,014) (58,369)
Surrender charges - (228)
--------------------------------
Increase in net assets from policy related transactions 102,141 878,117
--------------------------------
Total increase 104,221 921,533
--------------------------------
Net assets at December 31, 1997 104,221 921,533
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
High International
Yield International SmallCap
Division Division (1) Division (2)
-------------------------------------------------
<S> <C> <C> <C>
Net assets at January 1, 1996 $ 854,028 $ - $-
Increase (decrease) in net assets
Operations:
Net investment income 99,843 - -
Net realized gains on investments 70 - -
Change in net unrealized appreciation/depreciation of investments 34,507 - -
-------------------------------------------------
Net increase in net assets resulting from operations 134,420 - -
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes 507,382 - -
Contract terminations and surrenders (15,620) - -
Death benefit payments - - -
Policy loan transfers 3,597 - -
Transfers to other contracts (56,488) - -
Cost of insurance and administration charges (99,942) - -
Surrender charges (2,104) - -
-------------------------------------------------
Increase in net assets from policy related transactions 336,825 - -
-------------------------------------------------
Total increase 471,245 - -
-------------------------------------------------
Net assets at December 31, 1996 1,325,273 - -
Increase (decrease) in net assets
Operations:
Net investment income (loss) 151,360 108,949 -
Net realized gains on investments 19,548 678 -
Change in net unrealized appreciation/depreciation of investments (27,928) (165,660) -
-------------------------------------------------
Net increase (decrease) in net assets resulting from operations 142,980 (56,033) -
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes 1,100,347 3,053,987 -
Contract terminations and surrenders (254,148) (1,601) -
Death benefit payments (1,913) - -
Policy loan transfers (38,855) (20,879) -
Transfers to other contracts (56,489) (102,897) -
Cost of insurance and administration charges (121,092) (154,140) -
Surrender charges (3,921) (2,167) -
-------------------------------------------------
Increase in net assets from policy related transactions 623,929 2,772,303 -
-------------------------------------------------
Total increase 766,909 2,716,270 -
-------------------------------------------------
Net assets at December 31, 1997 2,092,182 2,716,270 -
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
MidCap Money
MicroCap MidCap Growth Market
Division(2) Division Division(2) Division
---------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1996 $- $7,728,821 $- $ 402,869
Increase (decrease) in net assets
Operations:
Net investment income - 275,691 - 39,013
Net realized gains on investments - 136,928 - -
Change in net unrealized appreciation/depreciation of investments - 1,479,684 - -
---------------------------------------------------
Net increase in net assets resulting from operations - 1,892,303 - 39,013
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes - 6,727,306 - 5,470,736
Contract terminations and surrenders - (390,394) - (27,352)
Death benefit payments - (7,786) - -
Policy loan transfers - (276,069) - (16,374)
Transfers to other contracts - (785,468) - (4,244,966)
Cost of insurance and administration charges - (1,131,138) - (314,760)
Surrender charges - (52,577) - (3,684)
---------------------------------------------------
Increase in net assets from policy related transactions - 4,083,874 - 863,600
---------------------------------------------------
Total increase - 5,976,177 - 902,613
---------------------------------------------------
Net assets at December 31, 1996 - 13,704,998 - 1,305,482
Increase (decrease) in net assets
Operations:
Net investment income (loss) - 383,525 - 94,705
Net realized gains on investments - 1,366,571 - -
Change in net unrealized appreciation/depreciation of investments - 1,395,356 - -
---------------------------------------------------
Net increase (decrease) in net assets resulting from operations - 3,145,452 - 94,705
Policy related transactions:
Net premium payments, less sales charges and applicable premium taxes - 11,608,767 - 15,023,945
Contract terminations and surrenders - (5,304,517) - (307,677)
Death benefit payments - (25,030) - -
Policy loan transfers - (430,694) - (59,858)
Transfers to other contracts - (1,619,014) - (11,072,400)
Cost of insurance and administration charges - (1,777,795) - (647,510)
Surrender charges - (85,538) - (8,231)
---------------------------------------------------
Increase in net assets from policy related transactions - 2,366,179 - 2,928,269
---------------------------------------------------
Total increase - 5,511,631 - 3,022,974
---------------------------------------------------
Net assets at December 31, 1997 - 19,216,629 - 4,328,456
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
See accompanying notes.
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements
December 31, 1998
1. Investment and Accounting Policies
Principal Life Insurance Company Variable Life Separate Account (the Separate
Account) is a segregated investment account of Principal Life Insurance Company
(Principal Life, formerly Principal Mutual Life Insurance Company) 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 contractholders, each division of the Separate Account invests
exclusively in shares representing interests in a corresponding investment
option. As of December 31, 1998, contractholder investment options include the
following diversified open-end management investment companies: Principal
Variable Contracts Fund, Inc., organized by Principal Life: Aggressive Growth
Account, Asset Allocation Account, Balanced Account, Bond Account, Capital Value
Account, Government Securities Account, Growth Account, High Yield 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 Variable Insurance Products Fund: Equity Income Portfolio; Fidelity
Variable Insurance Products Fund: High Income Portfolio; Putnam Variable Trust
Global Asset Allocation Fund, Putnam Variable Trust Vista Fund and Putnam
Variable Trust Voyager Fund. Investments are stated at the closing net asset
values per share on December 31, 1998.
The Principal Variable Contracts Fund, Inc. (the Fund) was formed on January 1,
1998. Prior to that date the accounts of the Fund were reported as separate
mutual funds. This reorganization resulted in changes to the names of the
following investment options:
<TABLE>
<CAPTION>
Former Name Name Subsequent to Reorganization
------------------------------------------ ---------------------------------
<S> <C>
Principal Aggressive Growth Fund, Inc. Aggressive Growth Account
Principal Asset Allocation Fund, Inc. Asset Allocation Account
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Accumulation Account
Principal Emerging Growth Fund, Inc. Emerging Growth Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal High Yield Fund, Inc. High Yield Account
Principal Money Market Fund, Inc. Money Market Account
Principal World Fund, Inc. World Account
Effective May 1, 1998, the following names within the Principal Variable
Contracts Fund, Inc. were changed:
</TABLE>
<TABLE>
<CAPTION>
Former Name Name as Changed
------------------------------------------ ---------------------------------
<S> <C>
Capital Accumulation Account Capital Value Account
Emerging Growth Account MidCap Account
World Account International Account
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
1. Investment and Accounting Policies (continued)
On May 1, 1998, Principal Life increased contractholder investment options to
include: Principal Variable Contracts Fund, Inc.: International SmallCap
Account, MicroCap Account, MidCap Growth Account, Real Estate Account, SmallCap
Account, SmallCap Growth Account, SmallCap Value Account and Utilities Account;
Putnam Variable Trust Global Asset Allocation Fund, Putnam Variable Trust Vista
Fund and Putnam Variable Trust Voyager Fund.
On February 1, 1997, Principal Life began offering a new product, PrinFlex Life.
This product increased the contractholder investment options to include the
following accounts of the Principal Variable Contracts Fund, Inc. (as renamed
pursuant to the organization of the Fund): Aggressive Growth Account, Asset
Allocation Account, Government Securities Account, Growth Account, International
Account; Fidelity Variable Insurance Products Fund II: Contrafund Portfolio;
Fidelity Variable Insurance Products Fund: Equity Income Portfolio; and Fidelity
Insurance Products Fund: High Income Portfolio.
Effective July 1, 1998, Principal Mutual Life Insurance Company (the Company)
formed a mutual insurance holding company and converted to a stock life
insurance company. With the conversion, the Company's name was changed to
Principal Life Insurance Company.
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.
2. Expenses and Policy Charges
Principal Life is compensated for the following expenses and charges:
Flex Variable Life Contracts - Mortality and expense risks assumed by
Principal Life 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
$227,302, $210,067, and $2,225,738, respectively, in 1998; $236,727,
$277,142, and $2,832,278, respectively, in 1997; and $160,075, $231,648, and
$2,224,888, respectively, in 1996. A sales charge of 5.0% and a tax charge of
2.0% is deducted from each payment made on behalf of each participant. The
sales and tax charge is deducted from the payments by Principal Life 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 (beginning in 1997) - Mortality and expense risks
assumed by Principal Life 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: $509,501, $995,778
and $7,267,150, respectively, in 1998; and $86,725, $230,502 and $1,386,160,
respectively, in 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. A tax charge of 2.2% for state
and local taxes and 1.25% for federal taxes is also deducted from each
payment on behalf of each participant. The sales and tax charge is deducted
from contributions by Principal Life 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
Life. Under current practice, no federal income taxes are allocated by Principal
Life to the operations of the Separate Account.
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, 1998
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
-------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Aggressive Growth Division:
PrinFlex Life 861,317 $12,227,704 211,314 $ 2,857,454
Asset Allocation Division:
PrinFlex Life 131,206 1,668,350 53,260 645,589
Balanced Division:
Flex Variable Life 36,816 1,264,339 71,643 2,030,576
PrinFlex Life 490,842 6,352,561 138,126 1,693,746
-------------- ----------------- -------------- -----------------
527,658 7,616,900 209,769 3,724,322
Bond Division:
Flex Variable Life 55,198 1,406,724 53,470 1,271,250
PrinFlex Life 174,764 2,098,649 49,437 565,502
-------------- ----------------- -------------- -----------------
229,962 3,505,373 102,907 1,836,752
Capital Value Division:
Flex Variable Life 69,516 2,942,517 96,955 3,533,172
PrinFlex Life 1,007,229 14,488,359 257,693 3,491,448
-------------- ----------------- -------------- -----------------
1,076,745 17,430,876 354,648 7,024,620
Fidelity Contrafund Division:
PrinFlex Life 457,546 $ 6,291,010 120,504 $ 1,610,333
Fidelity Equity Income Division:
PrinFlex Life 361,409 4,781,646 86,079 1,119,347
Fidelity High Income Division:
PrinFlex Life 109,968 1,310,358 41,948 482,536
Government Securities Division:
PrinFlex Life 286,524 3,395,601 19,932 228,122
Growth Division:
PrinFlex Life 303,006 4,142,276 55,628 748,373
High Yield Division:
Flex Variable Life 29,675 857,141 20,132 455,939
International Division:
PrinFlex Life 530,953 6,632,041 131,554 1,545,576
International SmallCap Division:
PrinFlex Life 38,901 334,880 3,976 33,554
MicroCap Division:
PrinFlex Life 19,585 159,179 1,311 10,213
MidCap Division:
Flex Variable Life 103,942 4,846,657 183,301 7,449,571
PrinFlex Life 943,646 12,430,779 229,365 2,824,456
-------------- ----------------- -------------- ----------------
1,047,588 17,277,436 412,666 10,274,027
Mid-Cap Growth Division:
PrinFlex Life 34,735 306,597 2,195 18,952
Money Market Division:
Flex Variable Life 39,955 657,300 49,712 795,271
PrinFlex Life 3,322,020 35,876,706 2,964,012 31,732,075
-------------- ----------------- -------------- ----------------
3,361,975 36,534,006 3,013,724 32,527,346
Putnam Global Asset Allocation
Division:
PrinFlex Life 7,867 76,195 562 5,417
Putnam Vista Division;
PrinFlex Life 13,042 114,287 1,330 12,225
Putnam Voyager Division:
PrinFlex Life 90,896 868,001 7,931 74,099
Real Estate Division:
PrinFlex Life 3,623 34,212 233 2,119
SmallCap Division:
PrinFlex Life 33,031 251,186 1,679 12,442
SmallCap Growth Division:
PrinFlex Life 22,252 193,803 1,822 16,058
SmallCap Value Division:
PrinFlex Life 17,813 145,873 878 7,015
Utilities Division:
PrinFlex Life 4,976 54,019 1,032 11,132
============== ================= ============== ================
9,602,253 $126,208,950 4,857,014 $65,283,562
============== ================= ============== ================
</TABLE>
<PAGE>
Principal 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, 1997
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
-------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Aggressive Growth Division:
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 Value 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
Fidelity Contrafund 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
International Division:
PrinFlex Life 273,767 3,172,214 26,010 290,962
MidCap 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
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
============== ================ ============== =================
3,828,878 $54,236,836 1,781,233 $30,893,769
============== ================ ============== =================
</TABLE>
<PAGE>
Principal 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
Purchased Purchased Redeemed Redeemed
-------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Balanced Division:
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 Value Division:
Flex Variable Life 126,497 3,858,566 44,900 1,095,829
High Yield Division:
Flex Variable Life 28,126 615,083 9,553 178,415
MidCap Division:
Flex Variable Life 224,022 7,077,421 89,178 2,717,856
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
============== ================ ============== =================
</TABLE>
5. Net Assets
Net assets at December 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
Accumulated Net Unrealized
Net Appreciation
Unit Investment (Depreciation) of
Combined Transactions Incom Investments
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Division:
PrinFlex Life $ 14,244,041 $ 12,603,157 $ 749,015 $ 891,869
Asset Allocation Division:
PrinFlex Life 1,592,829 1,522,712 83,936 (13,819)
Balanced Division:
Flex Variable Life 3,796,104 2,805,763 510,067 480,274
PrinFlex Life 6,083,085 5,718,082 307,823 57,180
--------------------------------------------------------------------
9,879,189 8,523,845 817,890 537,454
Bond Division:
Flex Variable Life 1,948,335 1,758,798 140,086 49,451
PrinFlex Life 2,004,910 1,939,366 88,541 (22,997)
--------------------------------------------------------------------
3,953,245 3,698,164 228,627 26,454
Capital Value Division:
Flex Variable Life 8,736,005 5,950,992 1,178,313 1,606,700
PrinFlex Life 14,235,937 13,305,012 614,978 315,947
--------------------------------------------------------------------
22,971,942 19,256,004 1,793,291 1,922,647
Fidelity Contra Fund Division:
PrinFlex Life 8,023,001 6,582,486 85,254 1,355,261
Fidelity Equity Income Division:
PrinFlex Life 4,905,541 4,568,651 45,052 291,838
Fidelity High Income Division:
PrinFlex Life $ 1,064,791 $ 1,095,509 $ 29,715 $ (60,433)
Government Securities Division:
PrinFlex Life 3,266,712 3,180,086 96,146 (9,520)
Growth Division:
PrinFlex Life 4,760,835 4,223,648 69,178 468,009
High Yield Division:
Flex Variable Life 2,269,099 2,134,677 378,722 (244,300)
International Division:
PrinFlex Life 7,800,249 7,630,149 343,828 (173,728)
International SmallCap Division:
PrinFlex Life 316,190 301,071 107 15,012
MicroCap Division:
PrinFlex Life 149,378 148,011 274 1,093
Mid-Cap Division:
Flex Variable Life 11,460,175 8,300,875 599,642 2,559,658
PrinFlex Life 14,003,435 13,765,286 696,788 (458,639)
--------------------------------------------------------------------
25,463,610 22,066,161 1,296,430 2,101,019
MidCap Growth Division:
PrinFlex Life 315,903 288,492 (598) 28,009
Money Market Division:
Flex Variable Life 362,873 355,161 7,712 -
PrinFlex Life 7,972,243 7,927,870 44,373 -
--------------------------------------------------------------------
8,335,116 8,283,031 52,085 -
Putnam Global Asset Allocation
Division:
PrinFlex Life 75,231 71,030 (112) 4,313
Putnam Vista Division:
PrinFlex Life 123,051 102,469 (155) 20,737
Putnam Voyager Division:
PrinFlex Life 899,548 795,242 (1,295) 105,601
Real Estate Division:
PrinFlex Life 31,709 31,269 760 (320)
SmallCap Division:
PrinFlex Life 250,636 239,177 (508) 11,967
SmallCap Growth Division:
PrinFlex Life 209,695 178,079 (354) 31,970
SmallCap Value Division:
PrinFlex Life 144,138 138,477 245 5,416
Utilities Division:
PrinFlex Life 45,596 42,810 449 2,337
====================================================================
$121,091,275 $107,704,407 $6,067,982 $7,318,886
====================================================================
</TABLE>
<PAGE>
Principal 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 Life and other service providers do
not properly process and calculate date-related information and data from and
after January 1, 2000. In 1995, Principal Life began investigating the potential
impact of the Year 2000 on its systems, procedures, customers and business
processes. The Year 2000 assessment that was completed in 1996 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.
Principal Life will continue to use internal and external resources to modify,
replace and test its systems. Management estimates 100% of the identified
modifications to mission critical systems and 99% of the identified
modifications to other systems have been completed for its Year 2000 project.
The project completion is scheduled to occur prior to any anticipated impact on
Principal Life's operations.
Principal Life and the Separate Account face the risk that one or more of its
critical suppliers or customers (external relationships) will not be able to
interact with them due to the third party's inability to resolve its own Year
2000 issues. Principal Life has completed its inventory of external
relationships and is attempting to determine the overall Year 2000 readiness of
its external relationships. Principal Life is engaged in discussions with the
third parties and is requesting information as to those parties' Year 2000 plans
and state of readiness. Principal Life, however, does not have sufficient
information at the current time to predict whether all of its external
relationships will be Year 2000 ready.
While Principal Life believes that it has addressed its Year 2000 concerns,
Principal Life has begun to develop contingency/recovery plans aimed at ensuring
the continuity of critical business functions before, on and after December 31,
1999. Principal Life expects contingency/recovery planning to be substantially
complete by April 1, 1999. The Year 2000 contingency plans will be reviewed
periodically throughout 1999 and revised as needed. Principal Life believes its
Year 2000 contingency plans coupled with existing "disaster recovery" and
"business resumption" plans minimize the impact Year 2000 issues may have on the
organization.
Report of Independent Auditors
The Board of Directors
Principal Life Insurance Company
We have audited the accompanying consolidated statements of financial position
of Principal Life Insurance Company (the Company, an indirect wholly-owned
subsidiary of Principal Mutual Holding Company), formerly Principal Mutual Life
Insurance Company, as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended December 31, 1998. 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 Principal Life
Insurance Company at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/Ernst & Young LLP
Des Moines, Iowa
January 29, 1999
Principal Life Insurance Company
Consolidated Statements of Operations
Year ended December 31
1998 1997 1996
---------------------------------------
(In Millions)
Revenue
Premiums and annuity and other
considerations $3,409 $4,668 $5,121
Policy and contract charges 780 682 572
Net investment income 2,821 2,948 2,905
Net realized capital gains 466 176 388
Commissions and other income 208 199 150
Contribution from the closed block 13 - -
---------------------------------------
Total revenue 7,697 8,673 9,136
Expenses
Benefits, claims and settlement
expenses 4,777 5,632 6,087
Dividends to policyholders 155 299 299
Operating expenses 2,026 2,047 1,920
---------------------------------------
---------------------------------------
Total expenses 6,958 7,978 8,306
---------------------------------------
Income before income taxes 739 695 830
Income taxes 44 241 304
---------------------------------------
=======================================
Net income $ 695 $ 454 $ 526
=======================================
See accompanying notes.
<PAGE>
Principal Life Insurance Company
Consolidated Statements of Financial Position
December 31
1998 1997
---------------------------
---------------------------
(In Millions)
Assets
Fixed maturities, available-for-sale $21,006 $21,546
Equity securities, available-for-sale 1,102 1,273
Mortgage loans 12,091 13,286
Real estate 2,691 2,632
Policy loans 25 749
Other investments 349 130
Cash and cash equivalents 461 546
Accrued investment income 375 457
Deferred policy acquisition costs 456 1,057
Property held for Company use 246 232
Closed block assets 4,251 -
Separate account assets 29,009 23,627
Other assets 1,881 1,519
---------------------------
===========================
Total assets $73,943 $67,054
===========================
===========================
Liabilities
Contractholder funds $23,339 $23,179
Future policy benefits and claims 7,082 11,239
Other policyholder funds 249 314
Policyholder dividends payable 44 444
Debt 671 459
Income taxes currently payable 27 298
Deferred income taxes 497 803
Closed block liabilities 5,299 -
Separate account liabilities 29,009 23,560
Other liabilities 2,257 1,474
---------------------------
---------------------------
Total liabilities 68,474 61,770
Stockholder's equity
Common stock, par value $1 per share - authorized 5,000,000 shares, issued and
outstanding 2,500,000 shares (wholly owned indirectly by Principal Mutual
Holding Company) 3 -
Retained earnings 4,749 4,257
Accumulated other comprehensive income:
Net unrealized gains on available-for-sale securities 746 1,038
Net foreign currency translation adjustment (29) (11)
-----------------------
-----------------------
Total stockholder's equity 5,469 5,284
-----------------------
=======================
Total liabilities and stockholder's equity $73,943 $67,054
=======================
See accompanying notes.
<PAGE>
Principal Life Insurance Company
Consolidated Statements of Stockholder's Equity
<TABLE>
<CAPTION>
Net Unrealized Net Foreign
Gains on Currency Total
Common Retained Available-for-Sale Translation Stockholder's
Stock Earnings Securities Adjustment Equity
----------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996 $ - $3,277 $1,336 $ (7) $4,606
Comprehensive income:
Net income - 526 - - 526
Decrease in unrealized appreciation
on fixed maturities, - - (543) - (543)
available-for-sale
Decrease in unrealized appreciation
on equity securities, - - (262) - (262)
available-for-sale
Adjustments for assumed changes in
amortization patterns:
Deferred policy acquisition costs - - 83 - 83
Unearned revenue reserves - - (11) - (11)
Provision for deferred income tax - - 257 - 257
benefit
Change in net foreign currency
translation adjustment - - - (2) (2)
------------
Comprehensive income - 48
----------------------------------------------------------------------------
Balances at December 31, 1996 - 3,803 860 (9) 4,654
Comprehensive income:
Net income - 454 - - 454
Increase in unrealized appreciation
on fixed maturities, - - 197 - 197
available-for-sale
Increase in unrealized appreciation
on equity securities, - - 118 - 118
available-for-sale
Adjustments for assumed changes in
amortization patterns: -
Deferred policy acquisition costs - - (44) - (44)
Unearned revenue reserves - - 4 - 4
Provision for deferred income taxes - - (97) - (97)
Change in net foreign currency
translation adjustment - - - (2) (2)
------------
Comprehensive income 630
----------------------------------------------------------------------------
Balances at December 31, 1997 - 4,257 1,038 (11) 5,284
</TABLE>
<PAGE>
Principal Life Insurance Company
Consolidated Statements of Stockholder's Equity (continued)
<TABLE>
<CAPTION>
Net Unrealized Net Foreign
Gains on Currency Total
Common Retained Available-for-Sale Translation Stockholder's
Stock Earnings Securities Adjustment Equity
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1998 $ - $4,257 $1,038 $(11) $5,284
Comprehensive income:
Net income - 695 - - 695
Decrease in unrealized appreciation
on fixed maturities, - - (203) - (203)
available-for-sale
Decrease in unrealized appreciation
on equity securities,
available-for-sale, including
seed money in separate accounts - - (292) - (292)
Adjustments for assumed changes in
amortization patterns:
Deferred policy acquisition costs - - 37 - 37
Unearned revenue reserves - - (4) - (4)
Provision for deferred income tax - - 170 - 170
benefit
Change in net foreign currency
translation adjustment - - - (18) (18)
Issuance of 2,500,000 shares of
common stock to parent holding 3 (3) - - -
company
Dividend to parent holding company - (200) - - (200)
----------
Comprehensive income 185
===============================================================================
Balances at December 31, 1998 $ 3 $4,749 $746 $(29) $5,469
===============================================================================
See accompanying notes.
</TABLE>
<PAGE>
Principal Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
---------------------------------------
(In Millions)
<S> <C> <C> <C>
Operating activities
Net income $ 695 $ 454 $ 526
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 114 170 178
Additions to deferred policy acquisition costs (173) (213) (215)
Gain on sales of subsidiaries (6) (14) -
Accrued investment income 24 7 15
Contractholder and policyholder liabilities and dividends
1,538 1,401 1,667
Current and deferred income taxes (265) 96 20
Net realized capital gains (466) (176) (388)
Depreciation and amortization expense 133 117 112
Other (197) (403) (253)
Change in closed block operating assets and
liabilities, net 230 - -
---------------------------------------
---------------------------------------
Net adjustments 932 985 1,136
---------------------------------------
Net cash provided by operating activities 1,627 1,439 1,662
Investing activities Available-for-sale securities:
Purchases (7,141) (7,478) (11,876)
Sales 5,684 7,475 9,089
Maturities 1,377 1,204 2,796
Mortgage loans acquired or originated (14,162) (9,925) (2,955)
Mortgage loans sold or repaid 14,414 8,977 1,619
Real estate acquired (436) (309) (166)
Real estate sold 662 198 253
Proceeds from sales of subsidiaries 96 35 -
Purchases of interest in subsidiaries, net of cash acquired (218) (99) (51)
Net change in policy loans (12) (13) (25)
Net change in property held for Company use (57) (11) (18)
Net change in other investments (270) (68) (74)
Change in closed block investments, net (201) - -
---------------------------------------
Net cash used in investing activities (264) (14) (1,408)
</TABLE>
<PAGE>
Principal Life Insurance Company
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
---------------------------------------
(In Millions)
<S> <C> <C> <C>
Financing activities
Issuance of debt $ 243 $ 75 $ 43
Principal repayments of debt (51) (28) (29)
Proceeds of short-term borrowings 8,628 5,089 1,451
Repayment of short-term borrowings (8,924) (4,974) (1,282)
Dividend paid to parent holding company (140) - -
Investment contract deposits 5,854 4,134 4,221
Investment contract withdrawals (7,058) (5,446) (4,682)
---------------------------------------
Net cash used in financing activities (1,448) (1,150) (278)
---------------------------------------
Net increase (decrease) in cash and cash equivalents (85) 275 (24)
Cash and cash equivalents at beginning of year 546 271 295
=======================================
Cash and cash equivalents at end of year $ 461 $ 546 $ 271
=======================================
</TABLE>
Schedule of noncash operating and investing activities The following noncash
assets and liabilities were transferred to the
Closed Block as a result of the July 1, 1998 mutual holding company
formation:
Operating activities:
Accrued investment income $ 59
Deferred policy acquisition costs 697
Other assets 12
Future policy benefits and claims (4,545)
Other policyholder funds (7)
Policyholder dividends payable (388)
Other liabilities (173)
------------
Total noncash operating activities (4,345) Investing activities:
Fixed maturities, available-for-sale 1,562
Mortgage loans 1,027
Policy loans 736
Other investments 1
------------
Total noncash investing activities 3,326
============
Total noncash operating and investing activities $(1,019)
=============
Net transfer of noncash assets and liabilities of Principal Health
Care Inc. on April 1, 1998 in exchange for common shares of
Coventry Health Care, Inc. $ (160)
=============
See accompanying notes.
<PAGE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1998
1. Nature of Operations and Significant Accounting Policies
Reorganization
Effective July 1, 1998, Principal Mutual Life Insurance Company formed a mutual
insurance holding company (Principal Mutual Holding Company) and converted to a
stock life insurance company (Principal Life Insurance Company). All of the
shares of Principal Life Insurance Company (the Company) were issued to
Principal Mutual Holding Company through two newly formed intermediate holding
companies, Principal Financial Group, Inc. and Principal Financial Services,
Inc. The reorganization itself did not have a material financial impact on the
Company.
Description of Business
The Company is a diversified financial services organization engaged in the
marketing and management of life insurance, annuity, health, pension and other
financial products and services, primarily in the United States.
Basis of Presentation
The accompanying consolidated financial statements of the Company and its
majority-owned subsidiaries have been prepared in conformity with generally
accepted accounting principles (GAAP). Less than majority-owned entities in
which the Company has at least a 20% interest are reported on the equity basis
in the consolidated statements of financial position as other investments. All
significant intercompany accounts and transactions have been eliminated.
Total assets of the unconsolidated entities amounted to $2.2 billion at December
31, 1998 and $1.1 billion at December 31, 1997. Total revenues of the
unconsolidated entities were $1.8 billion in 1998, $294 million in 1997 and $349
million in 1996. During 1998, 1997 and 1996, the Company included $18 million,
$19 million and $(3) million, respectively, in net investment income
representing the Company's share of current year net income (loss) of the
unconsolidated entities.
Closed Block
In conjunction with the formation of the mutual insurance holding company, the
Company established a Closed Block for the benefit of certain classes of
individual participating and dividend-paying policies in force on that date. The
Closed Block was designed to provide reasonable assurance to owners of insurance
policies included therein that, after the reorganization, assets would be
available to maintain the aggregate dividend scales in effect for 1997 if the
experience underlying such scales continued. Assets were allocated to the Closed
Block in amounts which, together with premiums from policies included in the
Closed Block, were reasonably expected to be sufficient to support such
policies, including provisions for payment of claims, certain expenses, charges
and taxes, and for continuation of dividend scales payable in 1997 in the
aggregate, assuming the experience underlying such scales continued.
Assets allocated to the Closed Block inure to the benefits of the holders of
policies included in the Closed Block. Closed Block assets and liabilities are
carried on the same basis as similar assets and liabilities held by the Company.
The contribution to the operating income of the Company from the Closed Block is
reported as a single line item in the statement of operations. Accordingly,
premiums, net investment income, realized capital gains (losses), policyowner
benefits and dividends attributable to the Closed Block, less certain expenses
and charges and the amortization of deferred policy acquisition costs, are shown
as a net number under the caption "Contribution from the Closed Block." This
results in material reductions in the respective line items in the statement of
operations while having no effect on net income. All assets allocated to the
Closed Block are grouped together and shown as a separate item entitled "Closed
Block assets"; and all liabilities attributable to the Closed Block are combined
and disclosed as the "Closed Block liabilities." The excess of Closed Block
liabilities over Closed Block assets represents the expected future post-tax
contribution from the Closed Block which would be recognized in income over the
period the policies and contracts in the Closed Block remain in force.
The Contribution from the Closed Block does not represent the total
profitability attributable to the policies included in the Closed Block. Certain
expenses attributable to the policies included in the Closed Block and
commissions on these policies are not included in the reported Contribution from
the Closed Block, but rather are included in operating expenses consistent with
the initial regulatory funding of the Closed Block. Consequently, the assets
needed to fund the Closed Block are less than the total accumulated assets
attributable to the policies included in the Closed Block. Income on the assets
held outside of the Closed Block is included in net investment income and not
included in the Contribution from the Closed Block.
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.
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 fixed maturities and equity securities are classified as
available-for-sale and, accordingly, are carried at fair value. (See Note 12 for
policies related to the determination of fair value.) The cost of fixed
maturities is adjusted for amortization of premiums and accrual of discounts,
both computed using the interest method. The cost of fixed maturities 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.
Real estate investments are reported at cost less accumulated depreciation. The
initial cost bases of properties acquired through loan foreclosures are the
lower of the loan balances or fair market values of the properties at the time
of foreclosure. Buildings and land improvements are generally depreciated on the
straight-line method over the estimated useful life of improvements, and tenant
improvement costs are depreciated on the straight-line method over the term of
the related lease. The Company recognizes impairment losses for its properties
when indicators of impairment are present and a property's expected undiscounted
cash flows are not sufficient to recover the property's carrying value. In such
cases, the cost bases of the properties are reduced accordingly. Real estate
expected to be disposed is carried at the lower of cost or fair value, less cost
to sell, with valuation allowances established accordingly and depreciation no
longer recognized. Any impairment losses and any changes in valuation allowances
are reported as net realized capital losses.
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 net realized capital gains (losses). 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
any valuation allowance is based upon the fair value of the collateral. The
Company includes residential mortgage loans held for sale in the amount of $802
million and $512 million at December 31, 1998 and 1997, respectively, which are
carried at lower of cost or fair value and reported as mortgage loans in the
statements of financial position.
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.
Derivatives
Derivatives are generally held for purposes other than trading and are primarily
used to hedge or reduce exposure to interest rate and foreign currency risks
associated with assets held or expected to be purchased or sold, and liabilities
incurred or expected to be incurred. Additionally, derivatives are used to
change the characteristics of the Company's asset/liability mix consistent with
the Company's risk management activities.
The Company's use of derivatives is further described in Note 4. The net
interest effect of interest rate and currency swap transactions is recorded as
an adjustment to net investment income or interest expense, as appropriate, over
the periods covered by the agreements. The cost of other derivative contracts is
amortized over the life of the contracts and classified with the results of the
underlying hedged item. Certain contracts are designated as hedges of specific
assets and, to the extent those assets are marked to market, the hedge contracts
are also marked to market and included as an adjustment of the underlying asset
value. Other contracts are designated and accounted for as hedges of certain
liabilities and are not marked to market.
Hedge accounting is used for derivatives that are specifically designated in
advance as hedges and that reduce the Company's exposure to an indicated risk by
having a high correlation between changes in the value of the derivatives and
the items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items are sold,
terminated or matured, the changes in value of the derivatives are included in
net income.
Contractholder and Policyholder Liabilities
Contractholder and policyholder liabilities (contractholder funds, future policy
benefits and claims and other policyholder 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.
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.
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 Policy 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 policy 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
policy 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 policy 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 policy 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. Premiums and expenses are reported net of
reinsurance ceded. 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.
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 anticipated
assessments which are estimated using data available from various industry
sources that monitor the current status of open and closed insolvencies. The
Company has also established an other asset for assessments expected to be
recovered through future premium tax offsets.
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. Generally, 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
Principal Mutual Holding Company files a consolidated income tax return that
includes the Company and 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 temporary
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.
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
1998 1997
-----------------------------
Property held for Company use $328 $302
Accumulated depreciation (82) (70)
=============================
Property held for Company use, net $246 $232
=============================
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 have been
recorded in connection with acquisitions. These assets are amortized on a
straight-line basis generally over 10 to 15 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
1998 1997
---------------------------
Goodwill $185 $165
Accumulated amortization (40) (16)
---------------------------
Goodwill, net 145 149
Other intangible assets, net 16 74
---------------------------
Total intangible assets $161 $223
===========================
Mortgage servicing rights of $778 million and $432 million at December 31, 1998
and 1997, 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.
Pooled Investment Fund
The Company has an arrangement whereby short-term funds of Principal Financial
Services, Inc. are pooled with funds of the Company's subsidiaries and invested
by the Company. The Company credits Principal Financial Services, Inc. with
interest approximating the yield earned by the Company's Separate Account LI,
which invests in commercial paper. At December 31, 1998, the Company reported
$137 million in other liabilities in the statements of financial position
related to this arrangement with Principal Financial Services, Inc.
The Company's pooled funds are also made available to Principal Financial
Services, Inc. for short-term borrowings up to $1 million, with interest
approximating the yield earned by Separate Account LI. At December 31, 1998,
there were no such borrowings outstanding under this arrangement.
Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), and restated
prior years' financial statements to conform to the reporting standard. SFAS 130
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income includes all changes in equity during a period except those resulting
from investments by shareholders and distributions to shareholders. The adoption
of SFAS No. 130 resulted in revised and additional disclosures but had no effect
on the financial position, results of operations, or liquidity of the Company.
Other comprehensive income excludes net realized capital gains (losses) included
in net income of $344 million in 1998, $113 million in 1997 and $256 million in
1996. These amounts are net of income taxes and adjustments to deferred policy
acquisition costs and unearned revenue reserves of $122 million in 1998, $63
million in 1997 and $132 million in 1996.
Reclassifications
Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements to conform to the 1998 presentation.
Pending Accounting Change
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), which the Company is required to adopt January 1, 2000. SFAS 133
will require the Company to include all derivatives in the statement of
financial position at fair value. Changes in derivative fair values will either
be recognized in earnings as offsets to the changes in fair value of related
hedged assets, liabilities and firm commitments or, for forecasted transactions,
deferred and recorded as a component of equity until the hedged transactions
occur and are recognized in earnings. The ineffective portion of a hedging
derivative's change in fair value will be immediately recognized in earnings.
The impact of SFAS 133 on the Company's financial statements will depend on a
variety of factors, including future interpretive guidance from the FASB, the
future level of forecasted and actual foreign currency transactions, the extent
of the Company's hedging activities, the types of hedging instruments used and
the effectiveness of such instruments. However, the Company does not believe the
effect of adopting SFAS 133 will be material to its financial position.
2. Mergers, Acquisitions and Divestitures
Effective April 1, 1998, the Company merged substantially all of its managed
care operations with Coventry Corporation in exchange for a share of ownership
in the resulting entity, Coventry Health Care, Inc. At December 31, 1998, the
Company held a 42% share of Coventry Health Care, Inc. The Company's investment
in Coventry Health Care, Inc. is accounted for using the equity method. Net
equity of the transferred business on April 1, 1998 was $170 million.
Consolidated financial results for 1997 included total assets at December 31,
1997, and total revenues and pretax loss for the year then ended of
approximately $419 million, $883 million and $(26) million, respectively, for
the transferred business.
During 1998, various acquisitions were made by the Company's subsidiaries at
purchase prices aggregating $224 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 acquired companies had total assets at
December 31, 1998 and total 1998 revenue of $459 million and $58 million,
respectively.
During 1998, various divestitures were made by certain of the Company's
subsidiaries at selling prices aggregating $118 million and $15 million in net
realized capital gains were realized as a result of these divestitures. In 1997,
the financial statements included $152 million in assets, $206 million in
revenues and $20 million of pretax losses related to these subsidiaries.
Beginning in 1998, the Company did not renew medical business in 14 states where
it does not believe it can effectively compete. The Company continues to offer
non-medical coverage and administrative services only products in these states.
Annual medical premium in these states was approximately $230 million in 1997.
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 acquired companies had total
assets at December 31, 1997 and total 1997 revenue of $459 million and $86
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.
3. 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 fixed
maturities 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 policy acquisition costs, unearned
revenue reserves and deferred income taxes.
The cost, gross unrealized gains and losses and fair value of fixed maturities
and equity securities available-for-sale as of December 31, 1998 and 1997, are
as follows (in millions):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
---------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998 Fixed maturities:
United States Government and agencies
$ 611 $ - $ 10 $ 601
Foreign governments 57 21 1 77
States and political subdivisions 428 19 4 443
Corporate - public 4,470 264 88 4,646
Corporate - private 11,935 653 97 12,491
Mortgage-backed securities 2,661 92 5 2,748
---------------------------------------------------------------
Total fixed maturities $20,162 $1,049 $205 $21,006
===============================================================
Total equity securities $ 760 $ 395 $ 53 $ 1,102
===============================================================
December 31, 1997 Fixed maturities:
United States Government and agencies
$ 337 $ 1 $ - $ 338
Foreign governments 217 - - 217
States and political subdivisions 232 15 2 245
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 fixed maturities $20,404 $1,195 $ 53 $21,546
===============================================================
Total equity securities $ 639 $ 664 $ 30 $ 1,273
===============================================================
</TABLE>
The cost and fair value of fixed maturities available-for-sale at December 31,
1998, by expected maturity, are as follows (in millions):
Cost Fair Value
--------------------------
--------------------------
Due in one year or less $ 1,043 $ 1,061
Due after one year through five years 6,922 7,012
Due after five years through ten years 5,283 5,590
Due after ten years 4,234 4,577
--------------------------
--------------------------
17,482 18,240
Mortgage-backed and other securities without
a single maturity date 2,680 2,766
--------------------------
==========================
Total $20,162 $21,006
==========================
The above summarized activity is based on expected maturities. Actual maturities
may differ because borrowers may have the right to call or pre-pay obligations.
Major categories of net investment income are summarized as follows (in
millions):
Year ended December 31
1998 1997 1996
------------------------------------
Fixed maturities, available-for-sale $1,525 $1,620 $1,649
Equity securities, available-for-sale 32 39 33
Mortgage loans 1,171 1,150 1,085
Real estate 525 501 486
Policy loans 27 50 49
Cash and cash equivalents 9 9 15
Other 49 92 48
------------------------------------
------------------------------------
3,338 3,461 3,365
Less investment expenses (517) (513) (460)
------------------------------------
====================================
Net investment income $2,821 $2,948 $2,905
====================================
The major components of net realized capital gains (losses) on investments are
summarized as follows (in millions):
Year ended December 31
1998 1997 1996
----------------------------------
Fixed maturities, available-for-sale:
Gross gains $ 67 $ 51 $ 80
Gross losses (31) (43) (73)
Equity securities, available-for-sale:
Gross gains 329 132 451
Gross losses (40) (26) (5)
Mortgage loans 8 (6) (11)
Real estate 126 64 14
Other 7 4 (68)
==================================
Net realized capital gains $466 $176 $388
==================================
Proceeds from sales of investments (excluding call and maturity proceeds) in
fixed maturities were $2.8 billion, $5.0 billion and $7.8 billion in 1998, 1997
and 1996 respectively. Of the 1998, 1997 and 1996 proceeds, $2.2 billion, $4.0
billion and $7.2 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 $23 million, $29 million
and $64 million and gross losses of $7 million, $10 million and $53 million in
1998, 1997 and 1996, respectively, were realized on sales of mortgage-backed
securities. At December 31, 1998, the Company had security purchases payable
totaling $576 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.
The unrealized appreciation on investments in fixed maturities and equity
securities available-for-sale is reported as a separate component of equity,
reduced by adjustments to deferred policy 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,
including the net unrealized gains on the Closed Block available-for-sale
securities, is as follows (in millions):
<TABLE>
<CAPTION>
December 31
1998 1997
-----------------------------
<S> <C> <C>
Unrealized appreciation on fixed maturities, available-for-sale $939 $1,142
Unrealized appreciation on equity securities, available-for-sale,
including seed money in separate accounts 347 639
Adjustments for assumed changes in amortization patterns:
Deferred policy acquisition costs (167) (204)
Unearned revenue reserves 17 21
Provision for deferred income taxes (390) (560)
=============================
Net unrealized gains on available-for-sale securities $746 $1,038
=============================
</TABLE>
The 1998 decrease in unrealized appreciation on fixed maturities,
available-for-sale, includes the effect of a change in the method of estimating
the fair value of certain corporate bonds, net of related adjustments for
assumed changes in amortization patterns and deferred income taxes, of $116
million.
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, 1998 and 1997, 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
1998 1997 1998 1997
---------------------- --------------------
---------------------- --------------------
Pacific 28% 28% Industrial 33% 33%
South Atlantic 24 24 Retail 33 33
North Central 15 16 Office 29 29
Mid Atlantic 14 14 Other 5 5
South Central 9 9
New England 5 5
Mountain 5 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 a net realized capital loss.
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
1998 1997 1996
------------------------------------
Balance at beginning of year $121 $121 $115
Provision for losses 4 8 16
Releases due to write-downs,
sales and foreclosures (12) (8) (10)
====================================
Balance at end of year $113 $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 484,000 and 371,000 residential mortgage
loans with aggregate principal balances of approximately $42.1 billion and $29.1
billion at December 31, 1998 and 1997, respectively. In connection with these
mortgage servicing activities, the Company held funds in trust for others
totaling approximately $284 million and $210 million at December 31, 1998 and
1997, 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
mortgage loan allowance for losses.
Real estate holdings and related accumulated depreciation are as follows (in
millions):
December 31
1998 1997
-----------------------------
Properties held for sale $1,043 $ 360
Investment real estate 2,007 2,625
-----------------------------
3,050 2,985
Accumulated depreciation (359) (353)
=============================
Real estate, net $2,691 $2,632
=============================
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 $0.9 billion and $1.2 billion at
December 31, 1998 and 1997, respectively. The Company is committed to providing
additional mortgage financing for such joint ventures aggregating $85 million at
December 31, 1998.
4. 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 contracts ($140 million at
December 31, 1998, and $36 million at December 31, 1997) represent the extent of
the Company's involvement but not the risk of loss. The Company had no forward
contracts at December 31, 1998 and 1997.
The Company enters into interest rate swaps to minimize its exposure to
fluctuations in interest rates. Swaps are used in asset and liability management
to modify duration and match cash flows. The notional principal amounts of the
swaps outstanding at December 31, 1998 and 1997, were $1.6 billion and $1.0
billion, respectively, and the credit exposure at December 31, 1998 and 1997 was
$19 million and $21 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
at both December 31, 1998 and 1997. The net amount payable or receivable from
interest rate swaps is accrued as an adjustment to interest income. The
Company's interest rate swap agreements include cross-default provisions when
two or more swaps are transacted with a given counterparty.
The Company manages risk on its mortgage loan pipeline by buying and selling
mortgage-backed securities in the forward markets, over-the-counter options on
mortgage-backed securities, U. S. Treasury futures contracts and options on
Treasury futures contracts. The Company entered into mandatory forward, option
and futures contracts totaling approximately $2.4 billion and $1.2 billion at
December 31, 1998 and 1997, respectively, to reduce interest rate risk on
certain mortgage loans held for sale and other commitments. The forward
contracts provide for the delivery of securities at a specified future date at a
specified price or yield. In the event the counterparty is unable to meet its
contractual obligations, the Company may be exposed to the risk of selling
mortgage loans at prevailing market prices. The effect of these contracts was
considered in the lower of cost or market calculation of mortgage loans held for
sale.
The Company has committed to originate approximately $1.1 billion and $612
million of mortgage loans at December 31, 1998 and 1997, respectively, subject
to borrowers meeting the Company's underwriting guidelines. These commitments
call for the Company to fund such loans at a future date with a specified rate
at a specified price. Because the borrowers are not obligated to close the
loans, the Company is exposed to risks that it may not have sufficient mortgage
loans to deliver to its mandatory forward contracts and, thus, would be
obligated to purchase mortgage loans at prevailing market rates to meet such
commitments. Conversely, the Company is exposed to the risk that more loans than
expected will close, and the loans would then be sold at current market prices.
The Company uses interest rate floors and options on futures contracts in
hedging a portion of its portfolio of mortgage servicing rights from prepayment
risk associated with changes in interest rates. The Company had entered into
interest rate floor and option contracts with a notional value of $6.3 billion
and $3.1 billion at December 31, 1998 and 1997, respectively. The floors and
contracts 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.
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, 1998, the Company had various foreign currency
exchange agreements with maturities ranging from 1999 to 2018, with an aggregate
notional amount involved of approximately $486 million and the credit exposure
was $35 million. At December 31, 1997, such maturities ranged from 1998 to 2018
with an aggregate notional amount of approximately $410 million and a credit
exposure of $17 million. The average unexpired term of the swaps was
approximately seven years at both December 31, 1998 and 1997.
5. Closed Block
Summarized financial information of the Closed Block as of and for the six-month
period from formation to December 31, 1998, is as follows (in millions):
Assets
Fixed maturities, available-for-sale $1,722
Mortgage loans 1,063
Policy loans 741
Other investments 1
Accrued investment income 60
Deferred policy acquisition costs 649
Other assets 15
===========
$4,251
===========
Liabilities
Future policy benefits and claims $4,668
Other policyholder funds 6
Policyholder dividends payable 393
Other liabilities 232
===========
$5,299
===========
Revenues and expenses
Premiums $ 390
Net investment income 127
Other income 1
Benefits, claims and settlement expenses (306)
Dividends to policyholders (143)
Operating expenses (56)
===========
Contribution from the Closed Block (before income taxes) $ 13
===========
6. 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
1998 1997 1996
------------------------------------
Balance at beginning of year $ 770 $ 800 $ 810
Incurred:
Current year 1,922 2,723 3,051
Prior years (14) (21) (29)
------------------------------------
------------------------------------
Total incurred 1,908 2,702 3,022
Reclassification for subsidiary merger
(see Note 2) 155 - -
Payments:
Current year 1,523 2,235 2,535
Prior years 359 497 497
------------------------------------
Total payments 2,037 2,732 3,032
------------------------------------
Balance at end of year:
Current year 349 476 516
Prior years 292 294 284
------------------------------------
====================================
Total balance at end of year $ 641 $ 770 $ 800
====================================
The activity summary in the liability for unpaid accident and health claims
shows a decrease of $14 million, $21 million and $29 million to the December 31,
1997, 1996 and 1995 liability for unpaid accident and health claims,
respectively, arising in prior years. Such liability adjustments, which affected
current operations during 1998, 1997 and 1996, 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.
7. Debt
The components of debt as of December 31, 1998 and December 31, 1997 are as
follows (in millions):
December 31
1998 1997
------------------------------
7.875% notes payable, due 2024 $199 $199
8% notes payable, due 2044 99 99
Mortgages and other notes payable 373 161
==============================
Total debt $671 $459
==============================
On March 10, 1994, the Company issued $300 million of surplus notes, including
$200 million due March 1, 2024 at a 7.875% annual interest rate and the
remaining $100 million due March 1, 2044 at an 8% annual interest rate. No
affiliates of the Company hold any portion of the 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 the Company has sufficient surplus earnings to make such
payments. For each of the years ended December 31, 1998, 1997 and 1996, 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 the Company's election on or after March 1, 2004 in whole or in part
at a redemption price of approximately 103.6% of par. The approximate 3.6%
premium is scheduled to gradually diminish over the following ten years. These
surplus notes may then be redeemed on or after March 1, 2014, at a redemption
price of 100% of the principal amount plus interest accrued to the date of
redemption.
In addition, subject to Commissioner approval, the notes due March 1, 2044 may
be redeemed at the Company's election on or after March 1, 2014, in whole or in
part at a redemption price of approximately 102.3% of par. The approximate 2.3%
premium is scheduled to gradually diminish over the following ten years. These
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, 1998 range
from $1 million to $39.1 million per development with interest rates generally
ranging from 6.6% to 9.3%. 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%.
At December 31, 1998, future annual maturities of debt are as follows (in
millions):
1999 $150
2000 9
2001 8
2002 8
2003 9
Thereafter 487
----------
==========
Total future maturities of debt $671
==========
Cash paid for interest for 1998, 1997 and 1996 was $97 million, $67 million and
$79 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 $200 million and $225 million at December
31, 1998 and 1997, respectively. These outstanding borrowings are included in
other liabilities in the consolidated statements of financial position.
8. Income Taxes
The Company's income tax expense (benefit) is as follows (in millions):
Year ended December 31
1998 1997 1996
---------------------------------------
Current income taxes:
Federal $ (80) $144 $145
State and foreign 10 3 (1)
Net realized capital gains 107 11 210
---------------------------------------
Total current income taxes 37 158 354
Deferred income taxes 7 83 (50)
=======================================
Total income taxes $44 $241 $304
=======================================
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. A reconciliation between the corporate income
tax rate and the effective tax rate is as follows (in millions):
Year ended December 31
1998 1997 1996
-----------------------------------
Statutory corporate tax rate 35% 35% 35%
Dividends received deduction (4) (2) (1)
Interest exclusion from taxable income (1) (1) (1)
Resolution of prior year tax issues (20) - -
Other (4) 3 4
-----------------------------------
Effective tax rate 6% 35% 37%
===================================
Significant components of the Company's net deferred income taxes are as follows
(in millions):
December 31
1998 1997
-------------------
Deferred income tax assets (liabilities):
Insurance liabilities $ 171 $ 179
Deferred policy acquisition costs (331) (341)
Net unrealized gains on available for sale securities (390) (560)
Other 53 (81)
===================
$(497) $(803)
===================
The Internal Revenue Service (the Service) has completed examination of the
consolidated federal income tax returns of the Company and affiliated companies
through 1992. The Service is completing their examination of the Company's
returns for 1993 and 1994. The Service has also begun to examine returns for
1995 and 1996. The Company believes that there are adequate defenses against or
sufficient provisions for any challenges.
Undistributed earnings of certain foreign subsidiaries are considered
indefinitely reinvested by the Company. A tax liability will be recognized when
the Company expects distribution of earnings in the form of dividends, sale of
the investment or otherwise.
Cash paid for income taxes was $309 million in 1998, $143 million in 1997 and
$285 million in 1996.
9. Employee and Agent Benefits
The Company has defined benefit pension plans covering substantially all of its
employees and certain agents. The employees and agents are generally first
eligible for the pension plans when they reach age 21. The pension benefits are
based on the years of service and generally the employee's or agent's average
annual compensation during the last five years of employment. Partial benefit
accrual of pension benefits is recognized from first eligibility until
retirement based on attained service divided by potential service to age 65 with
a minimum of 35 years of potential service. The Company's policy is to fund the
cost of providing pension benefits in the years that the employees and agents
are providing service to the Company. The Company's funding policy is to deposit
the actuarial normal cost and any change in unfunded accrued liability over a
30-year period as a percentage of compensation.
The 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 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>
Other Postretirement Benefits
Pension Benefits
---------------------------------- -------------------------------
Year ended December 31 Year ended December 31
1998 1997 1996 1998 1997 1996
--------- ----------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning $(700) $(732) $(670) $(214) $(218) $(212)
of year
Service cost (34) (41) (38) (12) (12) (12)
Interest cost (50) (52) (46) (15) (16) (15)
Plan amendment - - (16) - - -
Actuarial gain (loss) (79) 97 19 22 22 14
Curtailment adjustment - 7 - - - -
Benefits paid 36 21 19 13 10 7
========= =========== ============ ========== ========== =========
Benefit obligation at end of year $(827) $(700) $(732) $(206) $(214) $(218)
========= =========== ============ ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Other Postretirement Benefits
Pension Benefits
-------------------------------------- ------------------------------
Year ended December 31 Year ended December 31
1998 1997 1996 1998 1997 1996
----------- ------------ ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Change in plan assets
Fair value of plan assets at
beginning of year $980 $841 $723 $300 $247 $208
Actual return on plan assets 23 130 118 15 41 32
Employer contribution 26 26 20 26 25 17
Benefits paid (36) (17) (20) (15) (13) (10)
----------- ------------ ------------- ---------- ---------- ----------
Fair value of plan assets at end of $993 $980 $841 $326 $300 $247
year
=========== ============ ============= ========== ========== ==========
Funded status $166 $280 $109 $120 $ 86 $ 29
Unrecognized net actuarial gain (38) (182) (29) (71) (53) (10)
Unrecognized prior service cost 12 14 17 - - -
Unamortized transition obligation (37) (49) (60) 8 12 17
----------- ------------ ------------- ---------- ---------- ----------
Prepaid benefit cost $103 $ 63 $ 37 $ 57 $ 45 $ 36
=========== ============ ============= ========== ========== ==========
Weighted-average assumptions as of
December 31
Discount rate 6.75% 7.25% 7.25% 6.75% 7.25% 7.25%
Components of net periodic benefit
cost
Service cost $ 34 $ 41 $ 38 $ 12 $ 12 $ 12
Interest cost 50 52 46 15 16 15
Expected return on plan assets (75) (80) (119) (16) (16) (13)
Amortization of prior service cost 1 1 1 - - -
Amortization of transition (asset)
obligation (11) (11) (11) 4 4 4
Recognized net actuarial loss (gain) (8) 2 52 (1) - -
----------- ------------ ------------- ---------- ---------- ----------
Net periodic benefit cost (income) $ (9) $ 5 $ 7 $ 14 $ 16 $ 18
=========== ============ ============= ========== ========== ==========
</TABLE>
For 1998, 1997 and 1996, the expected long-term rates of return on plan assets
for pension benefits were approximately 5%, 5% and 6.2%, respectively (after
estimated income taxes) for those trusts subject to income taxes. For trusts not
subject to income taxes, the expected long-term rates of return on plan assets
were approximately 8.1%, 8.1% and 9.6% for 1998, 1997 and 1996, respectively.
The assumed rate of increase in future compensation levels varies by age for
both the qualified and non-qualified pension plans.
For 1998, 1997 and 1996, the expected long-term rates of return on plan assets
for other post-retirement benefits were approximately 5%, 5% and 6.2%,
respectively (after estimated income taxes) for those trusts subject to income
taxes. For trusts not subject to income taxes, the expected long-term rates of
return on plan assets were approximately 8.1%, 8.2% and 9.5% for 1998, 1997 and
1996, respectively. 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 8.75% in 1998 and declines to an
ultimate rate of 6% in 2025. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects (in millions):
1-Percentage- 1-Percentage-
Point Increase Point Decrease
--------------- ---------------
Effect on total of service and
interest cost components $ 9 $ (6)
Effect on accumulated postretirement
benefit obligation $43 $(34)
In addition, the Company has defined contribution plans that are generally
available to all employees and agents who are age 21 or older. Eligible
participants may contribute up to 20% of their compensation, to a maximum of
$10,000 annually to the plans in 1998. Eligible participants were able to
contribute up to 15% of their compensation, to a maximum of $9,500 annually to
the plans in 1997 and 1996. 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 $11 million in 1998, $15
million in 1997 and $13 million in 1996 to these defined contribution plans.
10. 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. To minimize the possibility of losses, the Company
evaluates the financial condition of its reinsurers and continually monitors
concentrations of credit risk.
The effect of reinsurance on premiums and annuity and other considerations and
benefits, claims and settlement expenses is as follows (in millions):
Year ended December 31
1998 1997 1996
-----------------------------------
-----------------------------------
Premiums and annuity and other
considerations:
Direct $3,380 $4,601 $5,034
Assumed 59 106 116
Ceded (30) (39) (29)
===================================
Net premiums and annuity and other
considerations $3,409 $4,668 $5,121
===================================
===================================
Benefits, claims and settlement expenses:
Direct $4,739 $5,596 $6,003
Assumed 66 102 109
Ceded (28) (66) (25)
===================================
Net benefits, claims and
settlement expenses $4,777 $5,632 $6,087
===================================
Effective July 1, 1998, the Company no longer participates in reinsurance pools
related to the Federal Employee Group Life Insurance and Service Group Life
Insurance programs. In 1997, the premium assumed from these arrangements was
approximately $85 million.
11. 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 $362 million in 1998, $344 million in
1997 and $310 million in 1996. At December 31, 1998, future minimum annual
rental commitments under these noncancelable operating leases are as follows (in
millions):
Held for Sale Held for Total Rental
Investment Commitments
-------------------------------------------
1999 $150 $ 172 $ 322
2000 127 162 289
2001 103 140 243
2002 77 117 194
2003 49 99 148
Thereafter 152 758 910
===========================================
Total future minimum lease receipts $658 $1,448 $2,106
===========================================
The Company, as a lessee, leases office space, data processing equipment,
corporate aircraft and office furniture and equipment under various operating
leases. Rental expense for all operating leases totaled $60 million in 1998 and
$84 million in both 1997 and 1996. At December 31, 1998, future minimum annual
rental commitments under these noncancelable operating leases are as follows (in
millions):
1999 $ 44
2000 38
2001 28
2002 22
2003 14
Thereafter 17
-----------
163
Less future sublease rental income on these
noncancelable leases 6
===========
Total future minimum lease payments $157
===========
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, 1998 and 1997, approximately $9 million and $6 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.
12. 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.
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 fixed maturities 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.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1998 and 1997, are as follows (in millions):
<TABLE>
<CAPTION>
1998 1997
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------- ----------------------------
Assets (liabilities)
<S> <C> <C> <C> <C>
Fixed maturities (see Note 3) $21,006 $21,006 $21,546 $21,546
Equity securities (see Note 3) 1,102 1,102 1,273 1,273
Mortgage loans 12,091 12,711 13,286 14,010
Policy loans 25 25 749 749
Other investments 349 349 130 130
Cash and cash equivalents 461 461 546 546
Accrued investment income 375 375 457 457
Financial instruments included in Closed
Block (see Note 5) 3,587 3,652 - -
Investment-type insurance contracts (22,127) (21,606) (22,115) (22,637)
Debt (671) (708) (459) (486)
</TABLE>
13. Statutory Insurance Financial Information
The Company 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 (NAIC) 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 has adopted the Codification of Statutory Accounting Principles
(Codification), the result of which is expected to constitute the primary source
of "prescribed" statutory accounting practices assuming formal adoption by Iowa
regulatory authorities. If adopted as proposed, the codification will likely
change, to some extent, prescribed statutory accounting practices and may result
in changes to the accounting practices that the Company uses to prepare its
statutory-basis financial statements. 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 the
Company's statutory financial statements has not been determined at this time.
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,
1998, the Company meets the RBC requirements.
The following summary reconciles the assets and stockholder's equity at December
31, 1998, 1997 and 1996, and net income for the years ended December 31, 1998,
1997 and 1996, in accordance with statutory reporting practices prescribed or
permitted by the Insurance Division of the Department of Commerce of the State
of Iowa with that reported in these consolidated GAAP financial statements (in
millions):
<TABLE>
<CAPTION>
Stockholder's
Assets Equity Net Income
---------------------------------------------
---------------------------------------------
<S> <C> <C> <C>
December 31, 1998
As reported in accordance with statutory accounting
practices - unconsolidated $70,096 $3,032 $511
Additions (deductions):
Unrealized gain on fixed maturities available-for-sale 997 997 -
Other investment adjustments 1,620 1,081 176
Adjustments to insurance reserves and dividends (169) (192) (56)
Deferral of policy acquisition costs 1,105 1,105 -
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other
tax reclassifications - (475) 165
Other - net 294 219 (101)
=============================================
As reported in these consolidated GAAP financial statements
$73,943 $5,469 $695
=============================================
December 31, 1997
As reported in accordance with statutory accounting
practices - unconsolidated $63,957 $2,811 $432
Additions (deductions):
Unrealized gain on fixed maturities 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
=============================================
Stockholder's
Assets Equity Net Income
---------------------------------------------
December 31, 1996
As reported in accordance with statutory accounting
practices - unconsolidated $56,837 $2,504 $415
Additions (deductions):
Unrealized gain on fixed maturities 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>
14. Dividends
On December 1, 1998, the Company's Board of Directors declared dividends
comprising cash and other assets totaling $200 million to its sole shareholder,
Principal Financial Services, Inc. At December 31, 1998, $140 million of the
dividends have been paid and the remaining balance is reported in other
liabilities.
15. 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. 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 Company will continue to use internal and external resources to modify,
replace, and test its systems. Management estimates 100% of the identified
modifications to mission critical systems and 99% of the identified
modifications to other systems have been completed for its Year 2000 project.
The project completion is scheduled to occur prior to any anticipated impact on
the Company operations. The total cost for the project is estimated to be $20
million, with the costs being expensed as incurred until completion.
The Company faces the risk that one or more of its critical suppliers or
customers (external relationships) will not be able to interact with the Company
due to the third party's inability to resolve its own Year 2000 issues. The
Company has completed its inventory of external relationships and is attempting
to determine the overall Year 2000 readiness of its external relationships. The
Company is engaged in discussions with the third parties and is requesting
information as to those parties' Year 2000 plans and state of readiness. The
Company, however, does not have sufficient information at the current time to
predict whether all of its external relationships will be Year 2000 ready.
While the Company believes that it has addressed its Year 2000 concerns, the
Company has begun to develop contingency/recovery plans aimed at ensuring the
continuity of critical business functions before, on and after December 31,
1999. The Company expects contingency/recovery planning to be substantially
complete by April 1, 1999. The Year 2000 contingency plans will be reviewed
periodically throughout 1999 and revised as needed. The Company believes its
Year 2000 contingency plans coupled with existing "disaster recovery" and
"business resumption" plans minimize the impact Year 2000 issues may have on the
organization.
The process the Company is using encourages the developers of the contingency
plans to look beyond traditional systems problems which may include supply chain
issues, economic conditions, social changes, political aspects and other factors
which could influence the success of the business and customers.
APPENDIX - A
SAMPLE ILLUSTRATIONS OF POLICY VALUES, SURRENDER VALUES AND DEATH BENEFITS
The following tables illustrate how the policy value, surrender value and death
proceeds of the Policy may change with the investment experience of the
Investment Accounts. The tables show how these amounts in the Policy vary over
time if planned periodic premiums are paid annually and if the investment return
of the assets in the Investment Accounts were a uniform, gross, after-tax,
annual rate of 0%, 6% or 12%. The death benefits and values would be different
from those shown if the return averaged 0%, 6% or 12%, but fluctuated above and
below those averages during the year. Both death benefit option 1 and option 2
are illustrated.
The illustrations reflect a hypothetical Policy issued to a 55 year-old male
non-smoker, Preferred class. Illustrations for younger males or for females
would be more favorable than those presented. Illustrations for older males or
smokers would be less favorable.
o Illustrations 1 and 3 reflect current administrative and cost of insurance
charges.
o Illustrations 2, 4, 5 and 6 reflect the guaranteed maximum administration
and cost of insurance charges. (Illustrations 5 and 6 reflect the
guaranteed charges for Policies applied for in Texas only.)
The illustrations reflect all Policy charges including:
o deductions from premiums for sales load and state and federal taxes;
o monthly administration charges;
o cost of insurance charge;
o mortality and expense risks charge; and
o contingent deferred sales load that may be deducted if the Policy were
fully surrendered or lapsed.
In addition, the illustrations reflect the weighted average of fees and expenses
of the Investment Accounts available through the Policy during the fiscal year
ending December 31, 1998. The Manager has agreed to reimburse operating expenses
of certain Account, if necessary, to limit total operating expenses for those
Accounts during the year ending December 31, 1999. More information about the
expense reimbursements can be found in the prospectus for the Principal Variable
Contracts Fund, Inc. which accompanies this prospectus. There is no assurance
that the fee reimbursement program will continue beyond 1999. In the future,
fees and expenses of the Accounts may be more or less than those shown. Such
changes would make the operating expenses actually incurred by an Account differ
from the average rate used in the illustrations.
The illustrations are based on the assumption that:
o payments are made according to the $16,000 annual target premium schedule;
o no values are allocated to the Fixed Account;
o no changes are made to the death benefit option or face amount;
o no policy loans and/or partial surrenders are made; and
o no riders are in effect.
Upon request, we will prepare a comparable illustration based upon the proposed
insured's actual age, gender, smoking status, risk classification and desired
Policy features. For those illustrations, you have option of selecting which
Investment Accounts (and their specific fees and expenses) are used. If no
selection is made, the illustration is run using a hypothetical weighted
average.
In advertisements or sales literature for the Policies that include performance
data for one of more of the Investment Accounts, we may include policy values,
surrender values and death benefit figures computed using the same methods that
were used in creating the following illustrations. However, the actual average
total rate of return for the specific Investment Account(s) will be used instead
of the weighted average used in the following illustrations. This information
may be shown in the form of graphs, charts, tables and examples. It may include
data for periods prior to the offering of the Policy for an Account that has had
performance during such prior period (with policy charges assumed to be equal to
current charges for any period(s) prior to the offering of the Policy).
PRINCIPAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
MALE AGE 45 PREFERRED NON-SMOKER
ASSUMING CURRENT CHARGES
(All States)
Illustration 1
PLANNED PREMIUM $4,000
Initial Face Amount $250,000
Death Benefit Option 1
Death Benefit (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
-----------------------------------------------------------------------
1 $ 4,200 $250,000 $250,000 $250,000
2 8,610 250,000 250,000 250,000
3 13,241 250,000 250,000 250,000
4 18,103 250,000 250,000 250,000
5 23,208 250,000 250,000 250,000
6 28,568 250,000 250,000 250,000
7 34,196 250,000 250,000 250,000
8 40,106 250,000 250,000 250,000
9 46,312 250,000 250,000 250,000
10 52,827 250,000 250,000 250,000
11 59,669 250,000 250,000 250,000
12 66,852 250,000 250,000 250,000
13 74,395 250,000 250,000 250,000
14 82,314 250,000 250,000 250,000
15 90,630 250,000 250,000 250,000
20 138,877 250,000 250,000 250,677
25 200,454 250,000 250,000 427,315
30 279,043 250,000 250,000 684,417
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
----------------------------------------------------------------------
1 $ 4,200 $ 2,970 $ 3,169 $ 3,368
2 8,610 5,874 6,456 7,063
3 13,241 8,684 9,838 11,089
4 18,103 11,425 13,344 15,507
5 23,208 14,099 16,979 20,358
6 28,568 16,698 20,744 25,684
7 34,196 19,221 24,642 31,533
8 40,106 21,654 28,665 37,947
9 46,312 23,984 32,806 44,977
10 52,827 26,375 37,303 53,020
11 59,669 28,772 42,073 62,024
12 66,852 31,111 47,064 72,028
13 74,395 33,403 52,298 83,157
14 82,314 35,669 57,809 95,563
15 90,630 37,838 63,549 109,344
20 138,877 46,701 95,832 205,473
25 200,454 51,181 135,470 368,375
30 279,043 46,710 184,765 639,642
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
----------------------------------------------------------------------
1 $ 4,200 $ 1,121 $ 1,320 $ 1,520
2 8,610 3,598 4,181 4,788
3 13,241 4,553 5,707 6,958
4 18,103 7,295 9,213 11,376
5 23,208 9,968 12,849 16,228
6 28,568 12,763 16,810 21,750
7 34,196 15,680 21,102 27,992
8 40,106 18,704 25,714 34,997
9 46,312 21,821 30,643 42,813
10 52,827 25,195 36,123 51,840
11 59,669 28,772 42,073 62,024
12 66,852 31,111 47,064 72,028
13 74,395 33,403 52,298 83,157
14 82,314 35,669 57,809 95,563
15 90,630 37,838 63,549 109,344
20 138,877 46,701 95,832 205,473
25 200,454 51,181 135,470 368,375
30 279,043 46,710 184,765 639,642
(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
to be 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 or 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.
PRINCIPAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
MALE AGE 45 PREFERRED NON-SMOKER
ASSUMING GUARANTEED CHARGES
(All States Except Texas)
Illustration 2
PLANNED PREMIUM $4,000
Initial Face Amount $250,000
Death Benefit Option 1
Death Benefit (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
--------------------------------------------------------------------
1 $ 4,200 $250,000 $250,000 $250,000
2 8,610 250,000 250,000 250,000
3 13,241 250,000 250,000 250,000
4 18,103 250,000 250,000 250,000
5 23,208 250,000 250,000 250,000
6 28,568 250,000 250,000 250,000
7 34,196 250,000 250,000 250,000
8 40,106 250,000 250,000 250,000
9 46,312 250,000 250,000 250,000
10 52,827 250,000 250,000 250,000
11 59,669 250,000 250,000 250,000
12 66,852 250,000 250,000 250,000
13 74,395 250,000 250,000 250,000
14 82,314 250,000 250,000 250,000
15 90,630 250,000 250,000 250,000
20 138,877 250,000 250,000 250,000
25 200,454 250,000 250,000 350,708
30 279,043 - 250,000 559,445
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
-------------------------------------------------------------------
1 $ 4,200 $ 2,716 $ 2,907 $ 3,098
2 8,610 5,362 5,912 6,487
3 13,241 7,905 8,988 10,163
4 18,103 10,341 12,131 14,151
5 23,208 12,667 15,339 18,481
6 28,568 14,872 18,607 23,181
7 34,196 16,947 21,926 28,281
8 40,106 18,878 25,286 33,813
9 46,312 20,651 28,675 39,815
10 52,827 22,398 32,288 46,625
11 59,669 24,071 36,050 54,192
12 66,852 25,556 39,852 62,490
13 74,395 26,843 43,694 71,613
14 82,314 27,915 47,563 81,660
15 90,630 28,742 51,443 92,740
20 138,877 28,063 70,294 169,273
25 200,454 14,780 85,581 302,334
30 279,043 - 90,648 522,846
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
--------------------------------------------------------------------
1 $ 4,200 $ 867 $ 1,058 $ 1,250
2 8,610 3,086 3,637 4,211
3 13,241 3,774 4,857 6,032
4 18,103 6,211 8,000 10,020
5 23,208 8,536 11,208 14,350
6 28,568 10,938 14,673 19,247
7 34,196 13,406 18,386 24,740
8 40,106 15,927 22,336 30,863
9 46,312 18,487 26,511 37,651
10 52,827 21,218 31,108 45,445
11 59,669 24,071 36,050 54,192
12 66,852 25,556 39,852 62,490
13 74,395 26,843 43,694 71,613
14 82,314 27,915 47,563 81,660
15 90,630 28,742 51,443 92,740
20 138,877 28,063 70,294 169,273
25 200,454 14,780 85,581 302,334
30 279,043 - 90,648 522,846
(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
to be 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 or 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.
PRINCIPAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
MALE AGE 45 PREFERRED NON-SMOKER
ASSUMING CURRENT CHARGES
(All States)
Illustration 3
PLANNED PREMIUM $4,000
Initial Face Amount $250,000
Death Benefit Option 2
Death Benefit (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
----------------------------------------------------------------------
1 $ 4,200 $252,961 $253,159 $253,358
2 8,610 255,847 256,427 257,031
3 13,241 258,630 259,776 261,018
4 18,103 261,334 263,235 265,377
5 23,208 263,959 266,806 270,145
6 28,568 266,499 270,487 275,355
7 34,196 268,951 274,279 281,050
8 40,106 271,299 278,169 287,259
9 46,312 273,527 282,143 294,019
10 52,827 275,794 286,427 301,703
11 59,669 278,046 290,934 310,243
12 66,852 280,223 295,613 319,663
13 74,395 282,334 300,482 330,070
14 82,314 284,407 305,574 341,599
15 90,630 286,354 310,814 354,282
20 138,877 293,550 338,717 439,110
25 200,454 295,069 368,267 574,966
30 279,043 285,472 393,394 789,317
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
--------------------------------------------------------------------
1 $ 4,200 $ 2,961 $ 3,159 $ 3,358
2 8,610 5,847 6,427 7,031
3 13,241 8,630 9,776 11,018
4 18,103 11,334 13,235 15,377
5 23,208 13,959 16,806 20,145
6 28,568 16,499 20,487 25,355
7 34,196 18,951 24,279 31,050
8 40,106 21,299 28,169 37,259
9 46,312 23,527 32,143 44,019
10 52,827 25,794 36,427 51,703
11 59,669 28,046 40,934 60,243
12 66,852 30,223 45,613 69,663
13 74,395 32,334 50,482 80,070
14 82,314 34,407 55,574 91,599
15 90,630 36,354 60,814 104,282
20 138,877 43,550 88,717 189,110
25 200,454 45,069 118,267 324,966
30 279,043 35,472 143,394 539,317
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
------------------------------------------------------------------
1 $ 4,200 $ 1,112 $ 1,311 $ 1,510
2 8,610 2,901 3,480 4,084
3 13,241 4,499 5,645 6,887
4 18,103 7,203 9,104 11,246
5 23,208 9,828 12,675 16,014
6 28,568 12,565 16,553 21,421
7 34,196 15,411 20,739 27,509
8 40,106 18,348 25,218 34,309
9 46,312 21,364 29,979 41,855
10 52,827 24,614 35,246 50,523
11 59,669 28,046 40,934 60,243
12 66,852 30,223 45,613 69,663
13 74,395 32,334 50,482 80,070
14 82,314 34,407 55,574 91,599
15 90,630 36,354 60,814 104,282
20 138,877 43,550 88,717 189,110
25 200,454 45,069 118,267 324,966
30 279,043 35,472 143,394 539,317
(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
to be 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 or 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.
PRINCIPAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
MALE AGE 45 PREFERRED NON-SMOKER
ASSUMING GUARANTEED CHARGES
(All States Except Texas)
Illustration 4
PLANNED PREMIUM $4,000
Initial Face Amount $250,000
Death Benefit Option 2
Death Benefit (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
---------------------------------------------------------------------
1 $ 4,200 $252,705 $252,895 $253,086
2 8,610 255,328 255,876 256,447
3 13,241 257,838 258,911 260,075
4 18,103 260,228 261,995 263,990
5 23,208 262,492 265,122 268,213
6 28,568 264,620 268,282 272,763
7 34,196 266,600 271,459 277,657
8 40,106 268,415 274,639 282,913
9 46,312 270,050 277,799 288,547
10 52,827 271,628 281,121 294,865
11 59,669 273,102 284,520 301,786
12 66,852 274,354 287,875 309,246
13 74,395 275,374 291,172 317,291
14 82,314 276,139 294,381 325,958
15 90,630 276,619 297,464 335,282
20 138,877 273,520 309,345 393,027
25 200,454 257,169 309,146 472,628
30 279,043 - 283,320 577,509
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
-------------------------------------------------------------------
1 $ 4,200 $ 2,705 $ 2,895 $ 3,086
2 8,610 5,328 5,876 6,447
3 13,241 7,838 8,911 10,075
4 18,103 10,228 11,995 13,990
5 23,208 12,492 15,122 18,213
6 28,568 14,620 18,282 22,763
7 34,196 16,600 21,459 27,657
8 40,106 18,415 24,639 32,913
9 46,312 20,050 27,799 38,547
10 52,827 21,628 31,121 44,865
11 59,669 23,102 34,520 51,786
12 66,852 24,354 37,875 59,246
13 74,395 25,374 41,172 67,291
14 82,314 26,139 44,381 75,958
15 90,630 26,619 47,464 85,282
20 138,877 23,520 59,345 143,027
25 200,454 7,169 59,146 222,628
30 279,043 - 33,320 327,509
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
------------------------------------------------------------------
1 $ 4,200 $ 856 $ 1,046 $ 1,237
2 8,610 2,382 2,929 3,500
3 13,241 3,707 4,780 5,944
4 18,103 6,097 7,864 9,859
5 23,208 8,361 10,991 14,082
6 28,568 10,686 14,347 18,829
7 34,196 13,059 17,919 24,117
8 40,106 15,465 21,688 29,963
9 46,312 17,886 25,636 36,384
10 52,827 20,448 29,941 43,685
11 59,669 23,102 34,520 51,786
12 66,852 24,354 37,875 59,246
13 74,395 25,374 41,172 67,291
14 82,314 26,139 44,381 75,958
15 90,630 26,619 47,464 85,282
20 138,877 23,520 59,345 143,027
25 200,454 7,169 59,146 222,628
30 279,043 - 33,320 327,509
(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
to be 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 or 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.
PRINCIPAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
MALE AGE 45 PREFERRED NON-SMOKER
ASSUMING GUARANTEED CHARGES
(Texas Only)
Illustration 5
PLANNED PREMIUM $4,000
Initial Face Amount $250,000
Death Benefit Option 1
Death Benefit (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
---------------------------------------------------------------------
1 $ 4,200 $250,000 $250,000 $250,000
2 8,610 250,000 250,000 250,000
3 13,241 250,000 250,000 250,000
4 18,103 250,000 250,000 250,000
5 23,208 250,000 250,000 250,000
6 28,568 250,000 250,000 250,000
7 34,196 250,000 250,000 250,000
8 40,106 250,000 250,000 250,000
9 46,312 250,000 250,000 250,000
10 52,827 250,000 250,000 250,000
11 59,669 250,000 250,000 250,000
12 66,852 250,000 250,000 250,000
13 74,395 250,000 250,000 250,000
14 82,314 250,000 250,000 250,000
15 90,630 250,000 250,000 250,000
20 138,877 250,000 250,000 250,000
25 200,454 250,000 250,000 350,763
30 279,043 - 250,000 559,576
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
------------------------------------------------------------------
1 $ 4,200 $ 2,716 $ 2,907 $ 3,098
2 8,610 5,362 5,912 6,487
3 13,241 7,905 8,988 10,163
4 18,103 10,341 12,131 14,151
5 23,208 12,667 15,339 18,481
6 28,568 14,872 18,607 23,181
7 34,196 16,947 21,926 28,281
8 40,106 18,878 25,286 33,813
9 46,312 20,651 28,675 39,815
10 52,827 22,398 32,288 46,625
11 59,669 24,071 36,050 54,192
12 66,852 25,556 39,852 62,490
13 74,395 26,843 43,694 71,613
14 82,314 27,915 47,563 81,660
15 90,630 28,744 51,446 92,742
20 138,877 28,086 70,316 169,290
25 200,454 14,878 85,675 302,382
30 279,043 - 90,969 522,968
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
-------------------------------------------------------------------
1 $ 4,200 $ 867 $ 1,058 $ 1,250
2 8,610 3,087 3,638 4,213
3 13,241 3,774 4,857 6,032
4 18,103 6,211 8,000 10,020
5 23,208 8,536 11,208 14,350
6 28,568 10,938 14,673 19,247
7 34,196 13,406 18,386 24,740
8 40,106 15,927 22,336 30,863
9 46,312 18,487 26,511 37,651
10 52,827 21,218 31,108 45,445
11 59,669 24,071 36,050 54,192
12 66,852 25,556 39,852 62,490
13 74,395 26,843 43,694 71,613
14 82,314 27,915 47,563 81,660
15 90,630 28,744 51,446 92,742
20 138,877 28,086 70,316 169,290
25 200,454 14,878 85,675 302,382
30 279,043 - 90,969 522,968
(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
to be 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 or 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.
PRINCIPAL LIFE INSURANCE COMPANY
PRINFLEX LIFE
MALE AGE 45 PREFERRED NON-SMOKER
ASSUMING GUARANTEED CHARGES
(Texas Only)
Illustration 6
PLANNED PREMIUM $4,000
Initial Face Amount $250,000
Death Benefit Option 2
Death Benefit (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
---------------------------------------------------------------------
1 $ 4,200 $252,705 $252,895 $253,086
2 8,610 255,328 255,876 256,447
3 13,241 257,838 258,911 260,075
4 18,103 260,228 261,995 263,990
5 23,208 262,492 265,122 268,213
6 28,568 264,620 268,282 272,763
7 34,196 266,600 271,459 277,657
8 40,106 268,415 274,639 282,913
9 46,312 270,050 277,799 288,547
10 52,827 271,628 281,121 294,865
11 59,669 273,102 284,520 301,786
12 66,852 274,354 287,875 309,246
13 74,395 275,374 291,172 317,291
14 82,314 276,139 294,381 325,958
15 90,630 276,621 297,467 335,285
20 138,877 273,544 309,373 393,059
25 200,454 257,268 309,269 472,780
30 279,043 - 283,718 578,038
Accumulated Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
------------------------------------------------------------------
1 $ 4,200 $ 2,705 $ 2,895 $ 3,086
2 8,610 5,328 5,876 6,447
3 13,241 7,838 8,911 10,075
4 18,103 10,228 11,995 13,990
5 23,208 12,492 15,122 18,213
6 28,568 14,620 18,282 22,763
7 34,196 16,600 21,459 27,657
8 40,106 18,415 24,639 32,913
9 46,312 20,050 27,799 38,547
10 52,827 21,628 31,121 44,865
11 59,669 23,102 34,520 51,786
12 66,852 24,354 37,875 59,246
13 74,395 25,374 41,172 67,291
14 82,314 26,139 44,381 75,958
15 90,630 26,621 47,467 85,285
20 138,877 23,544 59,373 143,059
25 200,454 7,268 59,269 222,780
30 279,043 - 33,718 328,038
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of Accumulated 0% 6% 12%
Year Premiums (1) (-.64% Net) (5.36% Net) (11.36% Net)
-----------------------------------------------------------------
1 $ 4,200 $ 856 $ 1,046 $ 1,237
2 8,610 2,382 2,929 3,500
3 13,241 3,707 4,780 5,944
4 18,103 6,097 7,864 9,859
5 23,208 8,361 10,991 14,082
6 28,568 10,686 14,347 18,829
7 34,196 13,059 17,919 24,117
8 40,106 15,465 21,688 29,963
9 46,312 17,886 25,636 36,384
10 52,827 20,448 29,941 43,685
11 59,669 23,102 34,520 51,786
12 66,852 24,354 37,875 59,246
13 74,395 25,374 41,172 67,291
14 82,314 26,139 44,381 75,958
15 90,630 26,621 47,467 85,285
20 138,877 23,544 59,373 143,059
25 200,454 7,268 59,269 222,780
30 279,043 - 33,718 328,038
(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
to be 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 or return of the Fund portfolios, if the actual rates of
investment return applicable to the policy averaged 0%, 6% or 12%, but varied
above or below that average for individual divisions. No representations can be
made that these hypothetical rates of return can be achieved for any one year or
sustained over any period of time.
<TABLE>
APPENDIX B
TARGET PREMIUMS
ANNUAL PER $1,000 FACE AMOUNT
NONSMOKER AND SMOKER
<CAPTION>
Age* Male Female Unisex Age* Male Female Unisex
<S><C> <C> <C> <C> <C> <C> <C> <C>
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
<FN>
* Last Birthday
</FN>
</TABLE>
