Prospectus Dated May 1, 2000
PRINCIPAL LIFE INSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT
FLEX VARIABLE LIFE -- FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
"Flex Variable Life," the flexible premium variable life insurance policy (the
"Policy" or the "Policies") offered by Principal Life Insurance Company
("Company") and described in this Prospectus is designed to provide lifetime
insurance protection and maximum flexibility in connection with premium payments
and death benefits. A policyowner may, within limits, vary the frequency and
amount of premium payments and increase or decrease the face amount of the life
insurance benefit under the Policy. This flexibility allows a policyowner to
provide for changing life insurance needs within a single insurance policy.
Neither premium payments nor death benefits are deposits or obligations of, or
guaranteed by or endorsed by any bank. Premium payments and death benefits are
not federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other government agency.
A schedule of premium payments is established for a Policy in accordance with
policyowner preference. A minimum premium is required during the first twelve
policy months. At other times, failure to pay premiums will not cause a Policy
to terminate so long as its accumulated value, less the surrender charge and
unpaid policy loans and loan interest, is sufficient on a Policy processing day
to allow deduction of the cost of insurance and other charges.
Premium payments, less a 2% premium tax charge and a 5% sales load, are
allocated according to policyowner direction to one or more Divisions of the
Principal Life Insurance Company Variable Life Separate Account ("Separate
Account"), except for premiums received during the first 45 days from the policy
date, which are allocated for that period to the Money Market Division of the
Separate Account. Each Division invests exclusively in shares representing an
interest in a corresponding account of the Principal Variable Contracts Fund,
Inc. organized by the Company. The accompanying prospectus describes the
investment objectives and the attendant risks of the accounts currently offered
as investment choices under the Policy: the Balanced, Bond, Capital Value, High
Yield, MidCap and Money Market Accounts of the Principal Variable Contracts
Fund, Inc.
Accumulated value and duration of coverage under the Policy will, and the death
benefit may, increase or decrease based upon the investment experience of the
Divisions of the Separate Account. The accumulated value will also reflect the
amount and frequency of premium payments, surrenders of accumulated value,
policy loans and loan interest, interest earned on loaned amounts, and the
charges and deductions connected with the Policy. The policyowner bears the
entire investment risk as to the Policy's accumulated value, which is not
guaranteed.
The Policy provides a death benefit upon the insured's death. The policyowner
chooses one of two death benefit options. Under Option 1, the death benefit is
the greater of the face amount of the Policy or the accumulated value on the
date of death multiplied by an applicable percentage based upon the insured's
attained age. Under Option 2, the death benefit is the greater of the face
amount of the Policy plus the accumulated value on the date of the insured's
death or the Policy's accumulated value multiplied by the applicable percentage.
The policyowner may, under certain conditions, change from one death benefit
option to the other.
The policyowner generally may obtain policy loans at any time the Policy has
loan value prior to the Policy's maturity date. In addition, subject to certain
restrictions, the Policy's accumulated value may be partially or totally
surrendered. Surrender charges consisting of a contingent deferred sales load
and a contingent deferred administration charge may be imposed upon total
surrender of a Policy. The amount of surrender charge assessed per $1,000 of
face amount is based upon the issue age and sex (where allowed by law) of the
insured and the policy year at the time of surrender.
Prospective purchasers of this Policy are advised that replacement of existing
insurance coverage may not be financially advantageous. It may also be
disadvantageous to purchase a Policy as a means to obtain additional insurance
protection if the purchaser already owns a flexible premium variable life
insurance policy.
This Prospectus is valid only if accompanied or preceded by the current
prospectus for Principal Variable Contracts Fund, Inc.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Please Read This Prospectus Carefully And Retain It For Future Reference.
<PAGE>
TABLE OF CONTENTS
GLOSSARY OF SPECIAL TERMS ................................. 4
SUMMARY ................................................... 5
The Policy............................................ 5
Premiums.............................................. 6
Charges and Deductions ............................... 6
Maturity Proceeds..................................... 7
Death Benefit and Proceeds............................ 7
Adjustment Options.................................... 8
Policy Values......................................... 8
Transfers............................................. 8
Policy Loans.......................................... 8
Surrender, Termination and Reinstatement.............. 9
Policy "Free Look"................................... 10
CONDENSED FINANCIAL INFORMATION............................ 12
DESCRIPTION OF PRINCIPAL
LIFE INSURANCE COMPANY.................................... 12
PRINCIPAL LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT............................. 13
PREMIUMS................................................... 15
Purchase Procedures................................... 15
Payment of Premiums................................... 16
Premium Limitations................................... 16
Allocation of Premiums................................ 17
Examination Offer ("Free Look" Provision)............. 17
Policy Termination.................................... 18
Reinstatement......................................... 19
DEATH BENEFITS AND RIGHTS.................................. 19
Death Proceeds........................................ 19
Death Benefit......................................... 20
Applicable Percentage................................. 20
Change in Death Benefit Option........................ 21
Adjustment Options.................................... 21
POLICY VALUES.............................................. 23
Calculation of Accumulated Value...................... 23
Units................................................. 23
Unit Values........................................... 24
Net Investment Factor................................. 24
Valuations in Connection with a Policy................ 24
Transfers............................................. 24
Policy Loans.......................................... 25
Surrender............................................. 25
CHARGES AND DEDUCTIONS..................................... 26
Premium Expense Charge................................ 26
Monthly Deduction..................................... 27
Mortality and Expense Risks Charge.................... 28
Transaction Charge.................................... 28
Surrender Charge...................................... 28
Other Charges......................................... 32
Special Plans......................................... 32
OTHER MATTERS.............................................. 33
Voting Rights......................................... 33
Statement of Value.................................... 33
Service Available by Telephone........................ 34
GENERAL PROVISIONS......................................... 34
Addition, Deletion, or Substitution of
Investments........................................... 34
Optional Insurance Benefits........................... 35
Death Benefit Guarantee Rider......................... 35
The Contract.......................................... 35
Incontestability...................................... 36
Misstatements......................................... 36
Suicide............................................... 36
Ownership............................................. 36
Beneficiaries......................................... 36
Benefit Instructions.................................. 36
Postponement of Payments.............................. 37
Assignment............................................ 37
Policy Proceeds....................................... 37
Participating Policy.................................. 38
Right to Exchange Policy.............................. 38
DISTRIBUTION OF THE POLICY................................. 39
OFFICERS AND DIRECTORS OF PRINCIPAL
MANAGEMENT CORPORATION..................................... 39
EXECUTIVE OFFICERS OF PRINCIPAL
LIFE INSURANCE COMPANY..................................... 40
DIRECTORS OF PRINCIPAL
LIFE INSURANCE COMPANY..................................... 40
STATE REGULATION OF PRINCIPAL
LIFE INSURANCE COMPANY..................................... 41
FEDERAL TAX MATTERS........................................ 41
Tax Status of the Company
and the Separate Account............................ 42
Charges for Taxes..................................... 42
Diversification Standards............................. 42
Life Insurance Status of Policy....................... 42
Modified Endowment Contract Status.................... 43
Policy Surrenders and Partial Surrenders.............. 43
Policy Loans and Interest Deductions.................. 44
Corporate Alternative Minimum Tax..................... 44
Exchange or Assignment of Policies.................... 44
Withholding........................................... 45
Taxation of Accelerated Death Benefits................ 45
Other Tax Issues...................................... 45
EMPLOYEE BENEFIT PLANS..................................... 45
LEGAL PROCEEDINGS.......................................... 45
LEGAL OPINION.............................................. 45
INDEPENDENT AUDITORS....................................... 45
REGISTRATION STATEMENT..................................... 46
FINANCIAL STATEMENTS....................................... 46
Report of Independent Auditors........................ 47
Variable Life Separate Account
Financial Statements................................ 48
Report of Independent Auditors........................ 76
Principal Life Insurance Company
Financial Statements................................ 77
APPENDIX - ILLUSTRATIONS OF POLICY
VALUES AND DEATH BENEFITS..................................117
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. PRINCIPAL LIFE INSURANCE COMPANY DOES
NOT AUTHORIZE ANY INFORMATION OR REPRESENTATIONS REGARDING THE OFFERING
DESCRIBED IN THIS PROSPECTUS OTHER THAN AS CONTAINED IN THIS PROSPECTUS, THE
PROSPECTUS OF PRINCIPAL VARIABLE CONTRACTS FUND, INC. OR THE STATEMENT OF
ADDITIONAL INFORMATION OF THAT FUND.
GLOSSARY OF SPECIAL TERMS
Attained Age - The insured's age on the birthday on or preceding the last policy
anniversary.
Division - A part of the Separate Account which invests in shares of a mutual
fund.
Face Amount - The minimum death benefit of a Policy so long as the Policy
remains in force.
General Account - The assets of the Company other than those allocated to any of
the separate accounts of the Company.
Guideline Annual Premium - The level annual payment necessary to provide the
future benefit under a Policy, through maturity, based on the 1980 Commissioners
Standard Ordinary Mortality Table, a 5% assumed interest rate, and the fees and
charges specified for a Policy.
Internal Revenue Code ("Code") - The Internal Revenue Code of 1986, as amended,
and the regulations thereunder.
Investment Account - That part of the Policy value that reflects the
policyowner's investment in a Division of the Separate Account.
Maturity Date - The policy anniversary following the insured's 95th birthday.
Monthly Date - The day of the month which is the same as the policy date. For
example, if the policy date is June 10, 2000, the first monthly date is July 10,
2000.
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.
Policy Date - The policy date is the date by which both the application and a
premium payment in an amount at least equal to the required minimum initial
premium for the Policy have been received in the home office of the Company.
Policy Years and Anniversaries - The policy years and anniversaries computed
from the policy date. Example: If the policy date is May 5, 1999, the first
policy year ends on May 4, 2000 and the first policy anniversary falls on May 5,
2000.
Prorated Basis - In the same proportion as the value of a particular investment
account for a Policy bears to the total value of all investment accounts for
that Policy.
Valuation Date - The date as of which the net asset value of an account of a
mutual fund is determined.
Valuation Period - The period between the time as of which the net asset value
of an account of a mutual fund is determined on one valuation date and the time
as of which such value is determined on the next following valuation date.
Written Request - Actual delivery to the Company at its home office in Des
Moines, Iowa, of a written notice or request on a form supplied or approved by
the Company.
SUMMARY
THE FOLLOWING SUMMARY INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS.
The Policy
The Policy is designed to provide a policyowner with lifetime insurance
protection and flexibility in connection with the amount and frequency of
premium payments and the amount of life insurance proceeds payable under the
Policy. A policyowner may, subject to certain limitations, vary the frequency
and amount of premium payments. The Policy allows a policyowner to adjust the
amount of life insurance payable, without having to purchase a new Policy, by
increasing or decreasing the face amount. Thus, as insurance needs or financial
conditions change, a policyowner has the flexibility to adjust life insurance
proceeds and vary the premium payments. The Policy is a life insurance contract
with a death benefit, accumulated value, and other features traditionally
associated with whole life insurance. It is called "flexible premium" because
unlike traditional insurance contracts, there is no fixed schedule of premium
payments, although a minimum premium is required during the first twelve policy
months. Each policyowner establishes a preferred schedule of premium payments
(planned periodic premiums).
The Policy is called "variable" because the accumulated value, duration of
coverage and, under certain circumstances, the death benefit may increase or
decrease depending upon the investment experience of the Division or Divisions
of the Separate Account to which premium payments, less a premium tax charge of
2% and a 5% sales load, have been allocated. Generally, favorable investment
experience will increase a Policy's accumulated value and unfavorable investment
experience will reduce its accumulated value. Prospective purchasers of a Policy
should be aware that there is no guarantee of accumulated value in a Policy.
You may allocate your net premium payments to divisions of the Separate Account.
Currently there are six divisions available to you. 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.
Premiums
An initial payment is required as the first premium. This required initial
premium payment is three times the minimum monthly premium shown on the Policy's
data pages. The minimum monthly premium is the amount that, if paid, will keep
the Policy in force for one month, taking into account the current monthly
deduction and surrender charge. Payment of a minimum premium is required during
the first twelve policy months (the "Minimum Required Premium"). The Company
allows payments in accordance with the planned periodic premium schedule
established by the policyowner in the application (annual, semi-annual,
quarterly, or pre-authorized withdrawal payments of premium on a monthly basis).
However, if the minimum monthly premium is less than $30 ($15 if the insured is
ages 0-14), only a planned periodic premium schedule that would result in a
payment of $30 or more ($15 or more if the insured is ages 0-14) will be made
available to the policyowner. The Company also allows unscheduled premium
payments of $30 or more. The planned periodic premium schedule indicates the
preference of the policyowner only, and other than payment of the Minimum
Required Premium, payment of premiums is not required. (However, the death
benefit guarantee premium must be paid to maintain the death benefit guarantee
rider. See "Death Benefit Guarantee Rider.") Changes in frequency, as well as
increases or decreases in the amount of planned periodic premiums, may be made.
However, the total of all premiums, planned and otherwise, cannot exceed the
current maximum premium limitations set forth in the Internal Revenue Code to
qualify a Policy as a life insurance contract. At any time there is an
outstanding policy loan, if a payment cannot be identified as a premium payment,
it will be considered a loan repayment.
The initial premium payment and all other premium payments received during the
first 45 days from the policy date, after deduction of the premium tax charge of
2% and the 5% sales load, are allocated to the Money Market Division of the
Separate Account. On the 46th day from the policy date, the accumulated value
held in the Money Market Division is transferred to the Divisions in accordance
with the policyowner's direction for allocation of premium payments. Premium
payments received after the first 45 days from the policy date are allocated
among the Divisions in accordance with the directions in the application for the
Policy.
Charges and Deductions
There is a premium expense charge deducted from each premium payment. The amount
remaining after deduction of the premium expense charge is the "net premium."
The premium expense charge includes a sales load of 5% to partially compensate
the Company for sales expenses incurred with respect to the Policy. In addition,
a sales load of up to a maximum of 25% of the minimum first year premium may be
imposed as a part of a surrender charge upon total surrender or termination of a
Policy for insufficient value. Also included in the premium expense charge is a
charge of 2% for premium taxes. The premium tax charge, which cannot be changed,
is not expected to exceed the premium taxes charged to the Company.
There is a monthly deduction from the Policy's accumulated value in the
Divisions equal to the cost of insurance, the cost of additional benefits
provided by riders attached to the Policy and a monthly administration charge
which is guaranteed never to exceed $5.00 per month. The current monthly
administration charge for a Policy is $4.75 per month.
A mortality and expense risks charge will be imposed on a daily basis on the
assets of each Division. The current mortality and expense risks charge is
.0020548% on a daily basis (.75% on an annual basis) and is guaranteed to not
exceed .0024658% on a daily basis (.90% on an annual basis).
A charge consisting of a contingent deferred sales load and a contingent
deferred administration charge may be imposed for total surrender of a Policy or
termination of a Policy for insufficient value. The amount of surrender charge
assessed per $1,000 of face amount is based upon the issue age and sex (where
allowed by law) of the insured and the policy year at the time of surrender.
There is no surrender charge imposed upon partial surrenders of accumulated
value.
A transaction charge of $25 is imposed on transfers of accumulated value between
Divisions exceeding four per policy year. A transaction charge of the lesser of
$25 or two percent of the amount surrendered is imposed upon partial surrenders
of accumulated value.
An investment advisory fee is charged against the assets of each mutual fund
underlying the Investment Accounts. In addition, each Account incurs other
normal expenses of corporate operation.
Maturity Proceeds
If the insured under a Policy is living on the Policy's maturity date, the
Company will pay the Policy's maturity proceeds to the policyowner. A Policy's
maturity proceeds are the Policy's accumulated value less any Policy loans and
unpaid loan interest on the maturity date. If maturity proceeds are paid under a
Policy, the Policy terminates with no further benefits payable. On the Policy's
maturity date, the Company will pay the excess of the Policy's face amount over
the maturity proceeds, provided certain conditions are met. (See "Death Benefit
Guarantee Rider.")
Death Benefit and Proceeds
The death proceeds under a Policy are payable to the beneficiary when the
insured dies, subject to all provisions and conditions of the Policy. The death
proceeds, determined as of the date of the insured's death, are: the death
benefit described below, plus proceeds from any benefit riders on the insured's
life, less any Policy loans and loan interest, and less any overdue monthly
deductions if the insured dies during a grace period.
There are two options available for the death benefit under a Policy. If a
policyowner selects Option 1, the death benefit will be equal to the greater of
the face amount of the Policy or the accumulated value on the date of death
multiplied by an applicable percentage specified in the Internal Revenue Code.
If a policyowner selects Option 2, the death benefit will be the greater of the
face amount of the Policy plus the accumulated value on the date of death or the
accumulated value on the date of death multiplied by the applicable percentage.
A policyowner may make a written request to change the death benefit option on
or after the first Policy anniversary.
Adjustment Options
Subject to certain conditions, the face amount of a Policy may be adjusted upon
the written request of the policyowner. Any written request to adjust the face
amount of a Policy must be approved by the Company. No request to adjust the
face amount of a Policy will be approved if a Policy is in a grace period or if
monthly deductions are being waived under a rider. In addition, a decrease in
face amount may be requested only after the first Policy anniversary and may not
reduce the face amount of a Policy below $25,000. A requested face amount
increase must be at least $5,000 and is subject to evidence of insurability
satisfactory to the Company under its underwriting rules then in effect. Any
adjustment in face amount of a Policy will be effective on the monthly date that
coincides with or next follows the date the Company approves the request,
subject to a payment by the policyowner in an amount not less than the new
minimum monthly premium for the Policy after any such increase in face amount.
The new minimum monthly premium will take into account the Policy's surrender
value. There are no charges assessed in connection with adjustments of a Policy,
although an increase in face amount will result in surrender charges applicable
to the increase.
Policy Values
The Policy provides for accumulated value. The Policy's accumulated value will
reflect the amount and frequency of premium payments, the investment experience
of the chosen Division or Divisions, surrenders of accumulated value, Policy
loans and loan interest, interest earned on amounts in the loan account,
transaction charges, and other charges and deductions imposed in connection with
the Policy and the Separate Account. A Policy has no minimum guaranteed
accumulated value. A Policy's "surrender value" is its accumulated value less
the amount of the surrender charge, if any. A Policy's "net surrender value" is
its surrender value less Policy loans and loan interest. The net surrender value
of a Policy is the amount available to a policyowner upon total surrender.
Transfers
Transfers of accumulated value between Divisions may be made by a policyowner
four times per policy year without charge. All transfers with the same effective
date count as one transfer. Transfers in excess of four per policy year are
subject to a transaction charge of $25. The Company has reserved the right to
revoke or modify transfer privileges and charges.
Policy Loans
A policyowner may borrow against the accumulated value of the Policy at any time
the Policy has loan value. A Policy's loan value, which is the maximum amount
that may be borrowed, is (1) minus (2) where: (1) is 90% of the Policy's
surrender value and (2) is any outstanding policy loans and unpaid loan
interest.
Surrender, Termination and Reinstatement
A policyowner may elect to make a total surrender of the Policy and receive its
net surrender value determined as of the date the Company receives the
policyowner's written request. A surrender charge is imposed upon total
surrender of a Policy at any time within the first ten years after the policy
date. The surrender charge will be waived if the Policy is surrendered in
connection with an exchange offer for another policy issued by the Company. In
addition, any increase in face amount is subject to a surrender charge at any
time within ten years after the effective date of the adjustment.
After the first policy year, the policyowner may request a partial surrender of
the accumulated value of the Policy, but no more than two times per policy year.
A partial surrender must be in at least the minimum amount of $500 and cannot
exceed 50% of the Policy's net surrender value at the time partial surrender is
requested. A transaction charge of the lesser of $25 or two percent of the
amount of the partial surrender is imposed on each partial surrender. The
Policy's accumulated value is reduced by the amount of any partial surrender
plus the transaction charge.
Failure to make a planned periodic premium or additional premium payments may
cause termination of a Policy (See "Policy Termination"). A notice of impending
termination of a policy will be sent if:
1. The net surrender value of a Policy on any monthly date is less than the
monthly deduction and the death benefit guarantee premium requirement has
not been satisfied; or
2. During the 12 months following the policy date, the sum of the premiums
paid is less than the Minimum Required Premium on a monthly date.
Once a Policy has terminated as a result of insufficient value, the policyowner
may make a written request to reinstate the Policy at any time within three
years after the date of termination, so long as the insured is alive and it is
prior to the Policy's maturity date (See "Reinstatement").
Policy "Free Look"
A policyowner has the limited right to return a Policy for cancellation and
receive a refund of all premiums paid. The amount returned for policies applied
for in California is also described in "Examination Offer".
CONDENSED FINANCIAL INFORMATION
Financial statements are included in the Statement of Additional Information.
Following are Unit Values for the Flexible Variable Life Contract 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)
--------- --------- -------------------- -------------------
<S> <C> <C> <C> <C>
Balanced Division
Year Ended December 31
1999 $29.657 $30.140 1.63% 128,714
1998 26.698 29.657 11.08 128,004
1997 22.809 26.698 17.05 162,831
1996 20.314 22.809 12.28 190,477
1995 16.427 20.314 23.66 137,574
1994 16.904 16.427 (2.82) 109,889
Bond Division
Year Ended December 31
1999 23.907 23.114 (3.32) 78,892
1998 22.367 23.907 6.89 81,499
1997 20.375 22.367 9.78 79,771
1996 20.055 20.375 1.60 80,628
1995 16.539 20.055 21.26 45,999
1994 17.160 16.539 (3.62) 30,842
Capital Value Division
Year Ended December 31
1999 37.917 36.021 (5.00) 244,078
1998 33.633 37.917 12.74 230,405
1997 26.364 33.633 27.57 257,844
1996 21.508 26.364 22.58 266,347
1995 16.427 21.508 30.93 184,750
1994 16.470 16.427 (0.26) 138,140
High Yield Division
Year Ended December 31
1999 21.399 21.613 1.00 78,154
1998 21.682 21.399 (1.31) 106,040
1997 19.725 21.682 9.92 96,497
1996 17.567 19.725 12.28 67,188
1995 15.246 17.567 15.22 48,615
1994 15.266 15.246 (0.13) 16,059
MidCap Division
Year Ended December 31
1999 41.050 46.057 12.20 270,266
1998 39.887 41.050 2.92 279,181
1997 32.738 39.887 21.84 358,540
1996 27.234 32.738 20.21 418,635
1995 21.268 27.234 28.05 283,791
1994 21.262 21.268 0.03 178,701
Money Market Division
Year Ended December 31
1999 16.404 17.038 3.86 36,477
1998 15.706 16.404 4.44 22,133
1997 15.035 15.706 4.46 31,890
1996 14.417 15.035 4.29 86,858
1995 13.760 14.417 4.77 27,948
1994 13.359 13.760 3.00 45,319
</TABLE>
DESCRIPTION OF PRINCIPAL LIFE INSURANCE COMPANY (The "Company")
The Company is a stock life insurance company with its home office at: Principal
Financial Group, Des Moines, Iowa 50306-9382. 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 Principal Financial Services, Inc.
In 1879, Principal Life Insurance Company was incorporated 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 on November 2, 1987, pursuant to a
resolution of the Executive Committee of the Board of Directors of the Company.
Under Iowa insurance law and regulation the income, gains or losses of the
Separate Account are credited to or charged against the assets of the Separate
Account without regard to the other income, gains or losses of the Company. The
assets of the Separate Account, equal to the reserves and other liabilities
arising under the Policies, are not chargeable with liabilities arising out of
any other business conducted by the Company. In addition, all income, gains or
losses, whether or not realized, and expenses with respect to a Division shall
be credited to or charged against such Division without regard to income, gains
or losses, or expenses of any other Division. The assets of the Separate Account
are held with relation to the Policies described in this Prospectus. The assets
of the Separate Account may also, in the future, be derived from other flexible
premium and scheduled premium variable life insurance contracts. Also, although
the assets maintained in the Separate Account attributable to the Policies will
not be charged with any liabilities arising out of any other business conducted
by the Company, the reverse is not true. Hence, all obligations arising under
Policies, including the promise to make benefit payments, are general corporate
obligations of the Company. The Separate Account is organized as a unit
investment trust under the Investment Company Act of 1940.
The Company is taxed as a life insurance company under the Tax Reform Act of
1984, as amended. The operations of the Separate Account are part of the total
operations of the Company, but are treated separately for accounting and
financial statement purposes and are considered separately in computing the
Company's tax liability.
The Separate Account is not affected by federal income taxes paid by the Company
with respect to its other operations and, under existing federal income tax law,
investment income and capital gains attributable to the Separate Account are not
taxed. The Company reserves the right to charge the Separate Account with, and
create a reserve for, any tax liability which the Company determines may result
from maintenance of the Separate Account. To the best of the Company's knowledge
there is no current prospect of such liability.
A policyowner directs the Company to allocate premium payments, less premium
expense charges, among the Divisions which invest exclusively in shares of
corresponding Accounts ("Account" or "Accounts") of the Fund. These Accounts
also offer their shares to separate accounts of the Company to fund variable
annuity contracts. See "Eligible Purchasers" in the Fund's Prospectus for a
discussion of the potential risks associated with "mixed funding."
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>
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.
High Yield High Yield Account Principal Management Corporation to seek high current income primarily by
purchasing high yielding, lower or non-rated
fixed income securities which are believed to
not involve undue risk to income or principal.
Capital growth is a secondary objective when
consistent with the objective of high current
income.
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.
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.
</TABLE>
PREMIUMS
Purchase Procedures
To apply for a Policy, a completed application, including any required
supplements, must be submitted to the Company through the agent or broker
selling the Policy. If interim coverage is desired, a payment in at least the
required minimum initial premium amount must be submitted with the completed
application. The required minimum initial premium amount for any Policy
(including a Policy issued on an application submitted without an accompanying
payment) is three times the minimum monthly premium shown on the Policy's data
pages. The minimum monthly premium is the amount that, if paid, will keep the
Policy in force for one month, taking into account the Policy's current monthly
deduction and surrender charges. The Company will not issue policies to insure
persons over age 75. Applicants for insurance must furnish satisfactory evidence
of insurability. Acceptance is subject to the Company's insurance underwriting
guidelines and suitability rules and procedures. The Company reserves the right
to reject any application or related premium if in the view of the Company, the
Company's insurance underwriting guidelines and suitability and procedures are
not satisfied. The minimum face amount for a Policy at issue is $25,000. The
Company reserves the right to revise its rules from time to time to specify
either a higher or a lower minimum face amount.
If a payment in at least the required minimum initial premium amount is
submitted with the completed application, then a conditional receipt is given to
the applicant, reflecting receipt of the initial payment and outlining any
interim coverage in effect until the Company either issues or declines to issue
a Policy. Subject to variations by state based on differing state requirements,
the terms of the conditional receipt are described in this paragraph. If all of
the conditions precedent set forth in the conditional receipt are fulfilled
exactly, interim coverage under the conditional receipt will take effect on the
date upon which all initial application requirements have been completed. The
initial application requirements consist of full completion and signing of the
application and all necessary supplements, and any medical exams and tests
required by the Company's published rules. The amount of the interim coverage
is: the lesser of $1,000,000 or the amount applied for, if the proposed insured
is insurable on a standard or more favorable basis; or, the lesser of $100,000
or the amount applied for, if the proposed insured is insurable only on a basis
less favorable than standard. Interim coverage provided under the conditional
receipt ends on the earliest of: (1) 75 days after the date coverage commenced
under the conditional receipt, (2) the date the Company mails the proposed owner
a premium refund and notice that the Company will not consider the application
on a prepaid basis, (3) the date the Company mails the proposed owner a premium
refund and a notice that no Policy will be issued on the application, or (4) the
date a Policy is presented to the proposed owner (whether or not accepted by the
proposed owner).
Pending receipt of approval by New York of the conditional receipt described
above, a different conditional receipt will continue to be used in that state.
Under the conditional receipt in use in New York, interim coverage starts on the
later of: (1) the date of completion of the application and supplements thereto
or (2) the date any required medical exam or other medical tests are completed.
However, if all the conditions of the receipt are met except any required
medical exam or test, insurance is provided under the conditional receipt not to
exceed the maximum amount available based on the Company's underwriting rules
without the medical exam or test. The amount of the interim coverage is: the
lesser of $1,000,000 or the amount applied for, if the proposed insured is
insurable at the Company's Standard rate or at the rate applied for or at a
better rate; or, the lesser of $100,000 or the amount applied for, if the
proposed insured is insurable only at a higher premium rate than the Company's
standard premium rate and the premium rate applied for. Interim coverage
provided under the conditional receipt ends on the earlier of: (1) five days
after a nonacceptance notice is mailed by the Company to the applicant, (2) the
day before the policy date when the Policy is issued as applied for, (3) the
date a Policy issued other than as applied for is presented to the applicant for
acceptance, or (4) 75 days after the date coverage commenced under the
conditional receipt.
Another conditional receipt is used in the state of Kansas. It provides that
interim coverage starts on the date on which all initial application
requirements are completed. The amount of interim coverage is the lesser of
$1,000,000 or the amount applied for, if the proposed insured is insurable on a
standard or more favorable basis; or, the lesser of $100,000 or the amount
applied for, if the proposed insured is insurable only on a basis less favorable
than standard. Interim coverage provided under the conditional receipt ends on
the earliest of: (1) the date the Company mails the proposed owner a premium
refund and notice that the Company will not consider the application on a
prepaid basis, (2) the date the Company mails the proposed owner a premium
refund and notice that no policy will be issued on the application, or (3) the
date a policy is presented to the proposed owner (whether or not accepted by the
proposed owner).
If the Company determines to issue a Policy and has received the required
minimum initial premium, the Policy will be given a policy date. The policy date
is the date by which both the application and a premium payment in an amount at
least equal to the required minimum initial premium for the Policy have been
received in the home office of the Company. The Company does not date Policies
on the 29th, 30th or 31st day of any month of the year. Policies which would
otherwise be dated on these days except for this rule will be dated on the 28th
day of the month. The policy date is shown on the Policy's data pages.
Payment Of Premiums
Premiums must be paid to the Company at its home office. There is no fixed
schedule of premium payments on a Policy, either as to the amount or timing of
the payments, although a minimum premium is required during the first twelve
policy months (the "Minimum Required Premium"). A policyowner may determine,
within specified limits, the planned periodic premium schedule for the Policy.
These limits will be set forth by the Company and will include a minimum initial
premium payment. Planned periodic premium schedules may provide for annual,
semi-annual, quarterly or monthly withdrawal payments. A "pre-authorized
withdrawal" allows the Company to deduct premiums, on a monthly basis, from the
policyowner's checking or other financial institution account. The policyowner
is not required to pay planned periodic premiums. Failure to make any premium
payment will not necessarily result in termination of a Policy provided that (1)
any Minimum Required Premium is paid and the Policy's net surrender value equals
or exceeds the monthly deduction on the current monthly date or (2) the death
benefit guarantee rider is in effect. Likewise, payment of premiums in
accordance with the planned periodic premium schedule does not guarantee that
the Policy will stay in force if the Policy's net surrender value is not at
least equal to the current monthly deduction on the monthly date, unless such
premiums meet the death benefit guarantee premium requirement.
The Company will send premium reminder notices in accordance with planned
periodic premium schedules. Premium payments may also be made by unscheduled
premium payment made to the Company at its home office or by payroll deduction
where allowed by law and approved by the Company. During the year ended December
31, 1999 the Company received premium payments totaling $5,180,975.
Premium Limitations
In no event can the total of all premiums paid exceed the current maximum
premium limitations required by the Internal Revenue Code in order to qualify a
Policy as a life insurance contract. The premium limitations are imposed in
order to assure favorable federal income tax treatment of the Policy and its
death benefit. If at any time a premium is paid which would result in total
premiums exceeding the current maximum premium limitation, the Company will only
accept that portion of the premium which will make total premiums equal the
maximum. Any part of the premium in excess of that amount will be returned and
no further premiums will be accepted until allowed by the maximum premium
limitations specified in the Internal Revenue Code. No premium payment may be
less than $30, except the minimum monthly premium for Policies issued to insure
persons ages 0 to 14 may be no less than $15. Premium payments less than the
minimum amount will be returned to the policyowner.
It is possible a premium payment could increase a Policy's death benefit by more
than it increases the Policy's accumulated value because of the manner in which
the Policy's death benefit is calculated. In order to qualify a Policy as a life
insurance contract under provisions of the Internal Revenue Code, the death
benefit must be at least equal to an applicable percentage of the accumulated
value. This percentage starts at 250% for insureds age 40 and under and grades
down to 100% for insureds age 95. For example, a hypothetical Policy insuring
the life of a 35-year old with an accumulated value of $20,000 must have a death
benefit in at least the amount of $50,000 ($20,000 x 250%, the applicable
percentage). Suppose a premium is paid that, after deduction of the premium
expense charge, increases this hypothetical Policy's accumulated value by
$1,000. The Internal Revenue Code test requires that the death benefit for the
hypothetical Policy be at least $52,500 ($21,000 x 250%). Hence, if the death
benefit before the premium were $50,000, the $1,000 increase in accumulated
value would produce a $2,500 increase in the death benefit of this hypothetical
Policy. In such a situation where a premium payment increases a Policy's death
benefit by more than it increases the Policy's accumulated value, the Company
reserves the right to refund the premium payment. Evidence of insurability under
the Company's current underwriting rules then in effect may be required before
acceptance of any such premium.
Allocation of Premiums
The initial premium payment, less the premium expense charge, is allocated to
the Money Market Division of the Separate Account on the later of the policy
date or the end of the valuation period during which the first premium is
received. Any additional premiums received at the home office of the Company
during the first 45 days from the policy date, less premium expense charges,
will be allocated to the Money Market Division. On the 46th day from the policy
date, accumulated value held in the Money Market Division is automatically
transferred to the Divisions of the Separate Account in accordance with the
policyowner's direction for allocation of premium payments.
Premium payments received after expiration of the initial 45-day period
described above are allocated among the Divisions in accordance with the
directions in the application for the Policy. For each Division, the allocation
percentage must be zero or a whole number not less than ten. The sum of the
percentages for all the Divisions must equal 100. The policyowner may change the
allocation of future premium payments among the Divisions without payment of any
fee or penalty, at any time, by written request to the Company. Allocation
percentages must be approved by the Company. New allocation percentages, once
approved by the Company, will be effective as of the date written request was
received at the home office of the Company.
Examination Offer ("Free Look" Provision)
The policyowner has a limited right to return the Policy for cancellation and
receive a refund in an amount equal to the premiums paid (For policies applied
for in the state of California, the amount refunded is determined as set forth
below). The request to cancel a Policy must be in writing. The Written Request
and the Policy must be personally delivered or mailed (as determined by its
postmark) to the home office of the Company or to the agent or broker who sold
the Policy before the later of:
o 10 days (30 days for Policies applied for in the state of California by
policyowners age 60 or over) after the Policy is received by the
policyowner;
o 10 days (30 days for Policies applied for in the state of California by
policyowners age 60 or over) after a written notice is delivered or mailed
(as determined by its postmark) to the policyowner which tells about the
cancellation right; or
o 45 days after the policyowner completes the application.
For Policies applied for in the state of California by persons age 60 or over,
the amount refunded is equal to (1) plus (2) plus (3) where:
1. Is the Policy Value as of the date the Company receives the policyowner's
Written Request for cancellation; and
2. Is the Premium Expense Charge(s) deducted from gross premiums; and
3. Is the Monthly Policy Charge(s) deducted from the Policy Value.
Any increase in face amount will carry its own free look period. If the Company
does not approve a requested face amount increase or the policyowner cancels a
request for face amount increase that has not yet become effective, the Company
will refund to the policyowner any payment submitted with the proposed face
amount increase. If on or after the effective date of the increase the
policyowner exercises the limited right to cancel the face amount increase, then
the Company will refund to the policyowner only that portion of the premiums
paid with the adjustment application and during the free look period
attributable to the face amount increase, unless directed otherwise by the
policyowner. The portion of the premiums paid attributable to the face amount
increase is determined by use of the ratio guideline annual premiums for the
increase to guideline annual premiums for the Policy. The Company will also
reverse the amount of any monthly deduction attributable to the face amount
increase and return it to the Policy's accumulated value, unless the policyowner
and the Company agree on another method of refund.
The refunded amount will ordinarily be disbursed by the Company to the
policyowner within seven days after the request for cancellation is received in
the Company's home office. (See "Postponement of Payments.")
Policy Termination
A notice of impending termination of a Policy will be sent if, during the 12
months following the policy date, the sum of the premiums paid is less than the
Minimum Required Premium on a monthly date. The Minimum Required Premium on a
monthly date is equal to (1) times (2) where:
1. Is the minimum monthly premium shown on the data page; and
2. Is one plus the number of completed months since the policy date.
Further, a notice of impending termination of a Policy will be sent if the net
surrender value of the Policy is not at least equal to the monthly deduction on
the current monthly date, and the death benefit guarantee premium requirement
has not been satisfied. (See "Death Benefit Guarantee Rider.")
The grace period begins when a notice of impending termination is mailed to a
policyowner. The notice will be sent to the last post office address of the
policyowner known to the Company. It will show the minimum payment required to
keep the Policy in force. The notice will also show the 61-day period during
which the Company will accept the required payment.
If the grace period begins because the sum of the premiums paid is less than the
Minimum Required Premium, the minimum payment is the past due Minimum Required
Premium, which is:
1. The Minimum Required Premium due on the next following monthly date.
LESS
2. The sum of the premiums paid since the policy date.
If the grace period ends before receipt by the Company of the past due Minimum
Required Premium, the Company will pay to the policyowner any remaining value in
the Policy which would be the excess of (1) over (2) where:
1. Is the net surrender value on the monthly date at the start of the grace
period; and
2. Is the two monthly deductions applicable during the grace period.
The refunded amount will ordinarily be disbursed by the Company to the
policyowner within seven days after the request for cancellation is received in
the Company's home office. (See "Postponement of Payments.")
If the grace period begins because the net surrender value is less than the
current monthly deduction, the minimum payment is three times the monthly
deduction which was due and unpaid. This payment is intended to reimburse the
Company for the monthly deductions during the 61-day grace period and provide
sufficient accumulated value to pay the monthly deduction for the first monthly
date following the grace period. There is no guarantee the amount requested at
the beginning of the grace period will be sufficient to actually meet the three
monthly deductions as they are processed. Should the Policy's net surrender
value not at least equal the monthly deduction on any monthly date, a new 61-day
grace period will commence.
The Policy will continue in force through a grace period; but, if the required
payment is not received by the Company during the 61-day period, the Policy will
terminate as of the monthly date on or immediately preceding the start of the
grace period. If the insured dies during a grace period, the policy proceeds
will be reduced by the amount of the monthly deduction or deductions due and
unpaid at the insured's death, as well as by loans and unpaid loan interest.
A Policy will also terminate if the policyowner makes a total surrender of the
Policy, the death proceeds under the Policy are paid or the maturity proceeds
under the Policy are paid. When a Policy terminates for any reason, all policy
privileges and rights of the policyowner under the Policy end.
Reinstatement
A policyowner may, however, reinstate a Policy which terminated as a result of
insufficient premium payment, subject to certain conditions. A Policy may be
reinstated only prior to the maturity date and while the insured is alive. The
application for reinstatement must be personally delivered or mailed to the
Company at its home office within three years of a Policy's termination. (In
some states, the Company is required by law to provide a longer period of time
within which a Policy may be reinstated.) Satisfactory proof of insurability
based upon the Company's underwriting rules then in effect and payment of a
reinstatement premium of at least the greater of (1) an amount that, after
deduction of premium expense charges, is sufficient to allow at least three
monthly deductions or (2) the past due Minimum Required Premium are required.
Payment of monthly deductions for the period of termination is not required. If
a policy loan or loan interest was unpaid at the time of termination, the
Company will require repayment or reinstatement of the loan and any loan
interest before permitting reinstatement of the Policy. Loan interest will not
be charged for the period the Policy was terminated. Reinstatement will be
effective on the next monthly date following the Company's approval of the
reinstatement application. The policy date of the Policy will remain the
original policy date and will not be changed at reinstatement, although
surrender charges for total surrender following reinstatement will resume at the
rate charged at the time of the Policy's termination, as adjusted for the
payment of past due premiums, if any. Upon reinstatement of a Policy, all the
rights and privileges of the owner are restored.
DEATH BENEFITS AND RIGHTS
Death Proceeds
As long as a Policy remains in force, the Company will, upon proof of the
insured's death, pay the death proceeds under the Policy to the named
beneficiary in accordance with the designated death benefit option. The death
proceeds, determined as of the date of the insured's death, are: the death
benefit described below, plus the proceeds from any benefit rider on the
insured's life, less any loan and loan interest on the Policy, and less any
overdue monthly deductions if the insured died during a grace period. All or
part of the death proceeds may be paid in cash or applied under one or more of
the benefit options available under the Policy. The Company pays interest on the
death proceeds from the date of death until date of payment or until applied
under a benefit option. Interest on death proceeds is at a rate the Company
determines, but not less than required by state law.
Death Benefit
The Policy provides two death benefit options: Option 1 and Option 2. The
policyowner designates the death benefit option in the application. Both Option
1 and Option 2 provide insurance protection combined with the opportunity for
increasing accumulated value. Under Option 1, the amount of death benefit
remains level (until the accumulated value exceeds certain limits). Under Option
2, the total death benefit increases as the accumulated value increases. Thus,
Option 1 emphasizes the growth of accumulated value while Option 2 emphasizes
the total available death benefit.
Option 1
The death benefit is the greater of the Policy's current face amount or the
Policy's accumulated value on the date of death multiplied by the
applicable percentage.
Option 2
The death benefit is the greater of the Policy's current face amount plus
its accumulated value on the date of death or the Policy's accumulated
value on that date multiplied by the applicable percentage.
Applicable Percentage
The Policy provides that the death benefit is at least equal to the amount of
insurance proceeds required by the Internal Revenue Code to qualify the Policy
as a life insurance contract. That death benefit amount is calculated by
multiplying the Policy's accumulated value by an applicable percentage set forth
in the Internal Revenue Code based on the insured's age. The applicable
percentages are:
TABLE OF APPLICABLE PERCENTAGES*
(For ages not shown, the applicable percentages shall decrease by a pro rata
portion for each full year.)
Insured's Attained Age %
---------------------- ---
40 and under 250
45 215
50 185
55 150
60 130
65 120
70 115
75 through 90 105
95 100
* The Company has reserved the right, where allowed by law, to change or
delete the applicable percentages as required by amendments to the Internal
Revenue Code.
Illustration of Option 1. Assume that the insured's attained age at the time of
death is between 20 and 40, that there are no policy loans or loan interest
unpaid at the time of death, and that the face amount of the Policy is $25,000.
Under Option 1, because the death benefit will be equal to or greater than 250%
of the accumulated value under this illustrative Policy, any time the
accumulated value of the Policy exceeds $10,000, the death benefit will exceed
the Policy's $25,000 face amount. Each additional dollar added to accumulated
value above $10,000 will increase the death benefit by $2.50. Similarly, any
time accumulated value exceeds $10,000, each dollar taken out of accumulated
value will reduce the death benefit by $2.50. If, for example, the accumulated
value is reduced from $12,000 to $10,000 because of charges or negative
investment performance, the death benefit will be reduced from $30,000 to
$25,000. If, however, at any time in this illustration 250% of the accumulated
value is less than $25,000 and no partial surrenders have been made, the death
benefit will equal $25,000. A partial surrender causes the face amount to
decrease by the amount of the partial surrender and the transaction charge.
Illustration of Option 2. Assume that the insured's attained age at the time of
death is between 20 and 40, that there are no policy loans or loan interest
unpaid at the time of death, and that the face amount of the Policy is $25,000.
Under Option 2, a Policy with an accumulated value of $5,000 will have a death
benefit of $30,000 ($25,000 + $5,000); an accumulated value of $15,000 will
yield a death benefit of $40,000 ($25,000 + $15,000). The death benefit under
this illustrative Policy, however, must be at least equal to 250% of accumulated
value (accumulated value plus 150% of accumulated value). As a result, if the
accumulated value of the Policy exceeds $16,667, the death benefit will be
greater than the face amount plus accumulated value. Each additional dollar of
accumulated value above $16,667 will increase the death benefit by $2.50. A
contract on a 40-year old insured that has an accumulated value of $20,000 will
provide a death benefit of $50,000 (250% x $20,000). Similarly, any time
accumulated value exceeds $16,667, each dollar taken out of accumulated value
reduces the death benefit by $2.50. If, for example, the accumulated value is
reduced from $20,000 to $17,000 because of partial surrenders, charges, or
negative investment performance, the death benefit will be reduced from $50,000
to $42,500. If, however, at any time in this illustration 250% of the
accumulated value were less than $25,000 plus accumulated value, the death
benefit would be $25,000 plus the accumulated value of the Policy.
The Company guarantees that, so long as the Policy remains in force, the death
benefit under either death benefit option will never be less than the current
face amount of the Policy. However, the death proceeds payable may be less than
the death benefit in the event of policy loans, unpaid loan interest or overdue
monthly deductions.
Change in Death Benefit Option
A policyowner may make a written request to change the death benefit option on
or after the first anniversary of a Policy. Only two changes in death benefit
option are allowed per policy year. There are no charges or fees for changing
the death benefit option. Any written request for change in death benefit option
must be approved by the Company. The effective date of any change will be the
monthly date that coincides with or next follows the day the request for change
is approved by the Company. A change in death benefit option will affect future
cost of insurance charges.
If the death benefit option is changed from Option 1 to Option 2, the new face
amount will be the old face amount decreased by the Policy's accumulated value
as determined on the effective date of the change. This change will not be
allowed if it will result in a face amount less than the minimum face amount of
$25,000. Changing from Option 1 to Option 2 may require evidence of insurability
satisfactory to the Company that the insured is insurable for the new death
benefit under its underwriting rules then in effect.
If the death benefit option is changed from Option 2 to Option 1, the new face
amount will be the old face amount increased by the Policy's accumulated value
as determined on the effective date of the change. Changing from Option 2 to
Option 1 does not require evidence of insurability.
Adjustment Options
A policyowner may make a written request to increase the face amount of a Policy
at any time, so long as the Policy is not in a grace period or monthly
deductions are not being waived under a rider. A policyowner may make a written
request to decrease the face amount at any time on or after the first Policy
anniversary so long as the Policy is not in a grace period or monthly deductions
are not being waived under a rider. Any written request for adjustment of face
amount must be approved by the Company and is subject to these additional
conditions:
1. Any request for an increase in face amount must be applied for by a
supplemental application, signed by the insured, and shall be subject to
evidence of insurability satisfactory to the Company under its insurance
underwriting guidelines and suitability rules and procedures then in
effect. The minimum increase in face amount is $5,000. The age of the
insured must be 75 or less at the time of the request.
2. A request for a decrease in face amount must be applied for by a
supplemental application, signed by the insured, and may not reduce the
face amount of the Policy below $25,000.
3. Any increase in face amount will be in a risk classification the Company
determines.
4. Any adjustment approved by the Company will become effective on the monthly
date that coincides with or next follows the Company's approval of the
request.
Any payment submitted with a proposed face amount increase is held initially in
the General Account without interest. If the Company approves the adjustment,
then on the effective date of the adjustment the amount of the premium payment
so held, less the Premium Expense Charge, is allocated among the Divisions in
accordance with the policyowner's existing directions for allocation of premium
payments. Net premiums paid after an increase in face amount also are allocated
among the Divisions in accordance with the policyowner's existing directions for
allocation of premium payments.
Any increase in face amount will carry its own free look period and exchange
right, which apply only to the increase in face amount, not the entire Policy.
The policyowner has a limited right to cancel the face amount increase. The
request to cancel a face amount increase must be in writing. The written request
and the Policy data pages reflecting the increase must be personally delivered
or mailed to the home office of the Company or to the agent or broker who sold
the face amount increase before the later of:
o 10 days after Policy data pages reflecting the increase are received by the
policyowner;
o 10 days after a written notice is delivered to the policyowner which tells
about the cancellation of face amount increase right; or
o 45 days after the policyowner completes the application for the face amount
increase.
If the Company does not approve a requested face amount increase or the
policyowner cancels a request for face amount increase that has not yet become
effective, the Company will refund to the policyowner any payment submitted with
the proposed face amount increase. If on or after the effective date of the
increase the policyowner exercises the limited right to cancel the face amount
increase, then the Company will refund to the policyowner only that portion of
the premiums paid with the adjustment application and during the free look
period attributable to the face amount increase, unless directed otherwise by
the policyowner. Any amount to be refunded will ordinarily be disbursed by the
Company to the policyowner within seven days after the request for cancellation
of the face amount increase is received in the Company's home office or the
request for face amount is disapproved by the Company. (See "Postponement of
Payments.") The Company will also reverse the amount of any monthly deduction
attributable to the face amount increase and return it to the Policy's
accumulated value unless the policyowner and the Company agree on another method
of refund.
POLICY VALUES
Calculation of Accumulated Value
The Policy's accumulated value is equal to the total of its investment account
values and any amounts in the Policy's loan account. An investment account is
established for each Division of the Separate Account, representing the interest
of the Policy for such Division. A Policy's investment account value for each
Division is equal to the number of units in that investment account multiplied
by the Division's unit value.
When an amount is allocated or transferred to a Division, units are credited to
the appropriate investment account. When an amount is deducted or transferred
from a Division, units of the appropriate investment account are cancelled. The
number of units and fractional units credited or cancelled is equal to the
dollar amount of the transaction divided by the unit value of the Division for
the valuation period when the transaction occurs. The unit value of each
Division is determined on each valuation date. The number of units credited or
cancelled will not change because of subsequent changes in unit value. The
dollar value of each Division's units will vary depending upon the investment
performance of the corresponding mutual fund.
Units
On the later of the policy date or the end of the valuation period during which
the first premium is received, the number of units in an investment account
equals: (1) the first net premium allocated to that Division; less (2) the
monthly deduction withdrawn from that Division for the first policy month;
divided by (3) the unit value for that Division on that valuation date. At the
end of each valuation period thereafter, the number of units in an investment
account equals (1) plus (2) plus (3) less (4) less (5) less (6) where:
(1) is units in the investment account on the previous valuation date;
(2) is units credited to the investment account when any additional net premium
is allocated to the Division during the current valuation period;
(3) is units credited for transfers from another Division or from the loan
account during the current valuation period;
(4) is units cancelled for transfers to another Division, transaction charges,
or transfers to the loan account to secure a policy loan during the current
valuation period;
(5) is units cancelled for partial surrenders and transaction charges during
the current valuation period; and
(6) is units cancelled to pay the monthly deduction from the Division whenever
a valuation period includes a monthly date.
Unit Values
The unit value of a Division on any valuation date is calculated by multiplying
(1) by (2) where:
(1) is the Division's unit value on the previous valuation date; and
(2) is the net investment factor for the current valuation period.
The unit value of each Division's units on any day other than a valuation date
is the unit value as of the next valuation date.
Net Investment Factor
The net investment factor measures the investment performance of each Division
and is used to determine changes in unit value from one valuation period to the
next valuation period. The net investment factor for a valuation period is equal
to:
1. The quotient obtained by dividing:
a. the net asset value of a share of the underlying mutual fund as of the
end of such valuation period, plus the per share amount of any dividend
or other distribution made by that mutual fund during such valuation
period (less any amount charged against the Division for taxes or any
amount set aside during the valuation period by the Company to provide
for taxes attributable to the operation or maintenance of that
Division); by
b. the net asset value of a share of that Account as of the end of the
immediately preceding valuation period;
LESS
2. a current mortality and expense risks charge of .0020548% on a daily basis
(.75% on an annual basis) for the number of days within such valuation
period. The mortality and expense risks charge is guaranteed not to exceed
.0024658% on a daily basis (.90% on an annual basis).
The amount of any taxes charged against a Division or set aside and the amount
derived from the mortality and expense risks charge will be accrued daily and
will be transferred from the Separate Account to the general account of the
Company at the discretion of the Company.
When an investment owned by the underlying mutual fund pays a dividend, the
dividend increases the net asset value of a share of the underlying mutual fund
as of the date the dividend is recorded. As the net asset value of a share of
the underlying mutual fund 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 that a policyowner owns in
an Investment Account.
Valuations in Connection with a Policy
All valuations in connection with a Policy, i.e., determining units to be
credited or cancelled with respect to investment accounts, determining net
surrender value, and calculation of the death benefit on the insured's death,
will be made on the date of the transaction or on the date of the insured's
death, if applicable, if such date is a valuation date. Otherwise, such
determination will be made on the next succeeding day which is a valuation date
for the Policy.
Transfers
Accumulated value may be transferred among the Divisions. The total amount
transferred each time must be at least $250 unless a lesser amount constitutes
the Policy's entire accumulated value in a Division. The effective date of a
transfer is the date the request is received at the home office of the Company.
All transfers with the same effective date count as one transfer. Four transfers
may be made in any one year without charge to the policyowner. Thereafter, a
transaction charge of $25 is imposed to cover administrative costs for each
transfer. The transaction charge is deducted on a prorated basis from the
Divisions from which accumulated value is transferred, unless the policyowner
directs the Company to deduct the transaction charge from only one Division. The
transaction charge is deducted from the affected Divisions before accumulated
value held in those Divisions is transferred. If the transfer of a Policy's
entire accumulated value in a Division is requested, the amount transferred will
be the Policy's accumulated value in the Division, less any transaction charge.
Policy Loans
So long as a Policy remains in effect and the Policy has loan value, a
policyowner may borrow money from the Company using the Policy as the only
security for the loan. A Policy's loan value, which is the maximum amount that
may be borrowed, is (1) minus (2) where: (1) is 90% of the Policy's surrender
value and (2) is any outstanding policy loans and unpaid loan interest. The loan
value is determined as of the loan date. The loan date is the date a loan
request is processed at the home office of the Company.
The minimum amount of any policy loan is $500. Proceeds of policy loans
ordinarily will be disbursed within seven days from the date of receipt of a
written request at the Company's home office. (See "Postponement of Payments.")
When a policy loan is made, a portion of the Policy's accumulated value equal to
the amount of the loan is transferred to the loan account from the Divisions in
the proportion requested by the policyowner. If no request for allocation of the
loaned amount is made by the policyowner, the loan amount will be withdrawn from
the Divisions in the same proportion as was the most recent monthly deduction.
Any loan interest that is due and unpaid will be transferred in the same manner.
Accumulated value in the loan account will accrue interest daily at an effective
annual rate of six percent. Such interest will be transferred to the Separate
Account and allocated on the policy anniversary to the Divisions in the
proportion currently designated by a policyowner for the allocation of premium
payments. A Policy's loan account is part of the Company's general account.
The Company charges interest on policy loans. Interest accrues daily at an
effective annual rate of eight percent. Interest is due and payable at the end
of the policy year. Any interest not paid when due is added to the loan
principal and bears interest at the rate of eight percent. Adding unpaid
interest to the loan principal will cause additional amounts to be withdrawn
from the Divisions in the same manner as described above for loans. Amounts
withdrawn from the Divisions for unpaid loan interest will be transferred to the
loan account.
Unpaid policy loans and loan interest reduce the Policy's net surrender value
and may cause it to be less than the monthly deduction on a monthly date. If on
any monthly date the net surrender value is not sufficient to pay the monthly
deduction, the 61-day grace period provision will apply. (See "Policy
Termination.")
So long as a Policy remains in force, policy loans and loan interest may be
repaid in whole or in part at any time during the insured's life. The minimum
loan repayment amount is $30. If the policyowner does not designate a payment as
a premium payment or if the Company cannot identify it as a premium payment, the
Company will apply the payment received as a loan repayment. Accumulated value
in the loan account equal to the loan repayment will be transferred to the
Divisions in the proportion currently designated by a policyowner for the
allocation of premium payments. Any policy loan, whether repaid or not, is
likely to have a permanent effect on the Policy's accumulated value. Accumulated
value held in the Policy's loan account will earn interest at an effective
annual fixed rate of six percent. If the policy loan had not been made, that
accumulated value would have reflected the investment experience of the chosen
Division or Divisions. Any policy loans and loan interest are subtracted from
life insurance proceeds payable at the insured's death, from surrender value
upon total surrender or termination of a Policy when a grace period expires
without sufficient premium payment, and from accumulated value payable at
maturity.
Surrender
A Policy has a surrender value and a net surrender value. The surrender value of
a Policy is its accumulated value less the surrender charge. The net surrender
value of a Policy is its surrender value less any loans and loan interest.
So long as the Policy is in effect, a policyowner may elect to surrender the
Policy and receive its net surrender value as of the date the Company receives
the policyowner's written request at its home office. After the first policy
anniversary and so long as a Policy is in effect, a policyowner may request a
partial surrender of the accumulated value of the Policy, but no more than two
times per policy year. The minimum amount of a partial surrender is $500 and the
maximum amount of any one partial surrender is 50% of the Policy's net surrender
value at the time written request for partial surrender is received at the
Company's home office. A transaction charge of the lesser of $25 or two percent
of the amount surrendered is imposed on each partial surrender, which is
intended to cover the administrative costs of processing the partial surrender.
There is no surrender charge assessed upon a partial surrender. The Policy's
accumulated value reduces by the amount of the partial surrender plus the amount
of the transaction charge. If the Option 1 death benefit is in effect at the
time of a partial surrender, then the Policy's face amount also reduces by the
amount of the partial surrender and the transaction charge.
A policyowner may designate the amount of the partial surrender to be withdrawn
from each of the Divisions. If no designation is made, the amount of the partial
surrender will be withdrawn from the Divisions in the same proportion as the
most recent monthly deduction. The transaction charge is deducted on a prorated
basis from the Divisions from which accumulated value is surrendered unless the
policyowner directs the Company to deduct the transaction charge from only one
Division.
A surrender charge is imposed upon total surrender of a Policy which occurs at
any time within the first ten years after the policy date. In addition, if total
surrender of a Policy occurs at any time within the first ten years after the
adjustment date of a face amount increase, a surrender charge attributable to
the face amount increase will be imposed. (See "Surrender Charge.") The
surrender charge will be waived if the Policy is surrendered in connection with
an exchange offer for another policy issued by the Company. Proceeds from
partial or total surrender of a Policy will ordinarily be disbursed within seven
days from the date of receipt of a written request at the Company's home office.
(See "Postponement of Payments.")
CHARGES AND DEDUCTIONS
The Company will make certain charges and deductions to support the operation of
the Policy and the Separate Account. Some charges will be deducted from premium
payments as received, some charges will be deducted from the Policy's
accumulated value on a monthly basis, some charges will be deducted on a daily
basis from the value of the Separate Account, and other charges will be deducted
from the Policy's accumulated value upon total surrender or termination of a
Policy. In addition, there are fees for the administrative costs involved in
processing certain transfers and all partial surrenders of accumulated value.
Premium Expense Charge
Upon receipt of each premium payment, the Company deducts a premium expense
charge. The premium expense charge includes a 5% of premium sales load and a
premium tax charge of 2%. For the year ended December 31, 1999, the Company
collected $263,420 in premium expense charges and $105,368 in premium tax
charges. In addition, a sales load of up to a maximum of 25% of the minimum
first year premium may be imposed as a part of a surrender charge upon total
surrender or termination of a Policy for insufficient value. Sales loads,
including the sales load portion of the surrender charge more fully described
below, are intended to compensate the Company for distribution expenses
including registered representatives' commissions, the printing of prospectuses
and sales literature, and advertising. The sales loads imposed in any policy
year are not necessarily related to actual distribution expenses incurred in
that year. Instead, the Company expects to incur the majority of distribution
expenses in the early years of a Policy and to recover any deficiency over the
life of a Policy. To the extent distribution expenses exceed sales loads
(including the sales load portion of surrender charges, if any) in any year, the
Company will pay them from its other assets or surplus in its general account,
which includes amounts derived from mortality and expense risks charges and from
mortality gains.
The premium tax charge portion of the premium expense charge is deducted to
cover premium taxes imposed against the Company by governmental entities. The
premium tax charge, which cannot be changed, is not expected to exceed the
premium taxes charged to the Company.
No reduction in the charge is made to reflect the fact that in some states the
Company may pay state income taxes in lieu of a portion of the premium tax
liability for that state.
Monthly Deduction
On each monthly date, the Company will deduct from the accumulated value of a
Policy an amount to cover certain charges and expenses incurred in connection
with the Policy. The monthly deduction consists of a monthly administration
charge, a charge for the cost of insurance and a charge for any optional
benefits added by rider. During the year ended December 31, 1999 administrative
and cost of insurance charges totaled $2,169,005.
The current monthly administration charge for a Policy is $4.75 per month and is
guaranteed never to exceed $5.00 per month. The Policy also provides for a
contingent deferred administration charge which is a part of the surrender
charge imposed upon total surrender or termination of a Policy when a grace
period expires without sufficient premium payment. The monthly administration
charge and the deferred administration charge reimburse the Company for the
recurring administrative expenses related to the Policy and the Separate
Account. These expenses are expenses other than sales expenses and include, for
example, the cost of processing applications, conducting medical examinations,
determining insurability, establishing policy records, premium reminders and
collection, record keeping, processing death benefit claims and policy changes,
reporting, and overhead costs. The Company does not expect to recover from the
administration charges any amount above its accumulated expenses associated with
the Policies and the Separate Account.
The monthly cost of insurance charge is calculated as (1) multiplied by the
result of (2) minus (3) where:
(1) is the cost of insurance rate as described below divided by 1,000;
(2) is the death benefit at the beginning of the policy month; and
(3) is the accumulated value at the beginning of the policy month.
The cost of insurance rate is based on the sex, attained age and risk
classification of the insured under the Policy. (For Policies issued in states
which require unisex pricing or in connection with employment related insurance
and benefit plans, the cost of insurance is not based on the sex of the
insured.) The rate will be determined by the Company based upon its expectations
as to future mortality experience, but the rate will never exceed the rate shown
in the Table of Monthly Guaranteed Cost of Insurance Rates set forth in the
Policy. These guaranteed maximum rates are based on the 1980 Smoker and
Nonsmoker Commissioners Standard Ordinary Mortality Tables. The table used will
be male or female according to the sex of the insured (where allowed by law).
Any change in current cost of insurance rates will apply to all individuals of
the same age, sex and risk classification of the insured. However, different
maximum cost of insurance rates may apply to any face amount increases under a
Policy.
The monthly deduction is made only from the Policy's accumulated value held in
the Divisions of the Separate Account. No deduction is made from any accumulated
value of the Policy held in the Company's general account for the purpose of
securing policy loans. The amount deducted from each Division will be in
accordance with policyowner instruction on the application for the Policy. The
policyowner's choice of monthly deduction allocation percentages may be: (1) the
same as the allocation percentages for premiums, (2) on a prorated basis or (3)
any other method of allocation agreed upon by the policyowner and the Company.
For each Division, the allocation percentages must be zero or a whole number not
less than ten nor greater than 100. The allocation percentages chosen by the
policyowner must total 100. Requests for changes in allocation percentages are
effective on the next monthly date following approval by the Company. If
following the policyowner's instruction as to allocation of monthly deductions
would not be possible on any monthly date due to insufficient accumulated value
of the Policy in an affected Division, deductions will be allocated on a
prorated basis.
Mortality and Expense Risks Charge
The Company will assess a charge on a daily basis against each Division equal to
.75% (on an annual basis) of the value of the Division to compensate the Company
for its assumption of certain mortality and expense risks in connection with the
Policy. Specifically, the Company bears the risk that the costs of death
benefits under the Policies will be greater than anticipated. The Company also
assumes the risk that the actual cost incurred by it to administer the Policies
will not be covered by charges assessed under the Policies. This charge is
guaranteed never to exceed .90% on an annual basis of the assets of each
Division. During the year ended December 31, 1999 mortality and expense risk
charges totaled $214,381.
Transaction Charge
A transaction charge of the lesser of $25 or 2% of the amount being surrendered
is imposed on each partial surrender of accumulated value. A transaction charge
of $25 is imposed on each transfer of accumulated value among Divisions
exceeding four per policy year. All transfers with the same effective date count
as one transfer.
Surrender Charge
During the first ten policy years, the Company will assess a surrender charge
upon total surrender of a Policy or termination of a Policy when a grace period
expires without sufficient premium payment. The amount of the charge assessed
per $1,000 of face amount depends upon the sex (where allowed by law) and
attained age of the insured on the policy date and how long the Policy has been
in force. In addition, the Company will assess a surrender charge upon surrender
or termination of a Policy for insufficient premium payment which occurs during
the first ten policy years after the adjustment date for a face amount increase.
The amount of the surrender charge assessed per $1,000 of net increase in face
amount depends upon the sex (where allowed by law) and attained age of the
insured on the adjustment date and how long the increase has been in force. (For
Policies issued in states requiring unisex pricing or in connection with
employment related insurance and benefit plans, the surrender charge is not
based on the sex of the insured.) Thus, surrender of a Policy or termination of
a Policy for insufficient value within the first ten policy years and within ten
years after the adjustment date of a face amount increase will result in
assessment of a composite surrender charge representing the charge imposed on
the initial face amount and the charge imposed on the face amount increase. The
surrender charge builds up on a monthly basis during the first policy year (and
during the first year after a face amount increase), remains level to the end of
the third policy year (and to the end of the third year after a face amount
increase) and grades down gradually each year thereafter to zero in the tenth
policy year (and in the tenth year after a face amount increase). Surrender
charges do not decrease when the face amount of a Policy is decreased. No
additional surrender charges apply when the death benefit under a Policy is
changed from Option 2 to Option 1.
The surrender charge is comprised of two parts: A contingent deferred sales
charge and a contingent deferred administration charge. The contingent deferred
sales charge portion of the surrender charge is assessed to recover sales
expenses and is in addition to the 5% sales charge which is deducted when
premium payments are made. The contingent deferred sales charge will not exceed
25% of this minimum first year premium.
The contingent deferred administration charge portion of the surrender charge is
intended to reimburse the Company for administrative expenses associated with
the Policy and the Separate Account and is in addition to the monthly
administration charge for a Policy. The surrender charge is a contingent charge
and will never be assessed if total surrender of a Policy or termination of a
Policy for insufficient value does not occur within the first ten policy years
or within ten years of the adjustment date for a face amount increase.
During the year ended December 31, 1999 the Company received surrender charges
totaling $149,159.
<TABLE>
FIRST YEAR CONTINGENT DEFERRED SURRENDER CHARGES
per $1000 of Face Amount
Male Lives
<CAPTION>
Issue Adm. Sales Total Issue Adm. Sales Total
Age Charge Load Charge Age Charge Load Charge
----- ------ ---- ------ ---- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
0 0.43 0.89 1.32 40 2.31 1.71 4.02
1 0.69 0.63 1.32 41 2.38 1.81 4.19
2 0.72 0.62 1.34 42 2.47 1.91 4.38
3 0.74 0.62 1.36 43 2.56 2.02 4.58
4 0.77 0.62 1.39 44 2.65 2.14 4.79
5 0.80 0.61 1.41 45 2.74 2.27 5.01
6 0.84 0.60 1.44 46 2.86 2.39 5.25
7 0.87 0.60 1.47 47 3.00 2.50 5.50
8 0.91 0.60 1.51 48 3.14 2.63 5.77
9 0.93 0.61 1.54 49 3.30 2.76 6.06
10 0.96 0.62 1.58 50 3.46 2.90 6.36
11 0.97 0.65 1.62 51 3.63 3.06 6.69
12 0.97 0.69 1.66 52 3.81 3.23 7.04
13 0.96 0.74 1.70 53 4.01 3.40 7.41
14 0.95 0.80 1.75 54 4.22 3.58 7.80
15 0.93 0.86 1.79 55 4.44 3.78 8.22
16 0.92 0.91 1.83 56 4.69 3.98 8.67
17 0.91 0.96 1.87 57 4.97 4.18 9.15
18 0.92 1.00 1.92 58 5.26 4.40 9.66
19 0.93 1.03 1.96 59 5.55 4.66 10.21
20 1.02 0.99 2.01 60 5.82 4.98 10.80
21 1.07 0.99 2.06 61 6.05 5.37 11.42
22 1.11 1.00 2.11 62 6.27 5.83 12.10
23 1.16 1.01 2.17 63 6.48 6.34 12.82
24 1.22 1.01 2.23 64 6.70 6.89 13.59
25 1.28 1.02 2.30 65 6.95 7.47 14.42
26 1.34 1.03 2.37 66 7.24 8.07 15.31
27 1.41 1.04 2.45 67 7.55 8.71 16.26
28 1.47 1.06 2.53 68 7.88 9.40 17.28
29 1.53 1.09 2.62 69 8.22 10.16 18.38
30 1.60 1.11 2.71 70 8.59 10.98 19.57
31 1.66 1.15 2.81 71 8.98 11.87 20.85
32 1.73 1.19 2.92 72 9.41 12.83 22.24
33 1.80 1.23 3.03 73 9.83 13.88 23.71
34 1.87 1.28 3.15 74 10.23 15.06 25.29
35 1.93 1.34 3.27 75 10.58 16.38 26.96
36 2.01 1.40 3.41
37 2.08 1.47 3.55
38 2.15 1.54 3.69
39 2.23 1.62 3.85
</TABLE>
<TABLE>
FIRST YEAR CONTINGENT DEFERRED SURRENDER CHARGES
per $1000 of Face Amount
Female Lives
<CAPTION>
Issue Adm. Sales Total Issue Adm. Sales Total
Age Charge Load Charge Age Charge Load Charge
----- ------ ---- ------ ---- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
0 0.44 0.76 1.20 40 1.97 1.52 3.49
1 0.66 0.54 1.20 41 2.03 1.60 3.63
2 0.68 0.54 1.22 42 2.09 1.69 3.78
3 0.70 0.54 1.24 43 2.15 1.78 3.93
4 0.72 0.54 1.26 44 2.23 1.87 4.10
5 0.74 0.54 1.28 45 2.30 1.98 4.28
6 0.77 0.54 1.31 46 2.40 2.06 4.46
7 0.79 0.54 1.33 47 2.51 2.15 4.66
8 0.82 0.54 1.36 48 2.63 2.23 4.86
9 0.84 0.54 1.38 49 2.74 2.34 5.08
10 0.85 0.56 1.41 50 2.87 2.44 5.31
11 0.88 0.57 1.45 51 3.00 2.56 5.56
12 0.89 0.59 1.48 52 3.15 2.67 5.82
13 0.90 0.61 1.51 53 3.32 2.78 6.10
14 0.92 0.63 1.55 54 3.50 2.90 6.40
15 0.93 0.66 1.59 55 3.67 3.04 6.71
16 0.94 0.68 1.62 56 3.88 3.17 7.05
17 0.96 0.70 1.66 57 4.10 3.30 7.40
18 0.99 0.72 1.71 58 4.33 3.46 7.79
19 1.01 0.74 1.75 59 4.62 3.58 8.20
20 1.05 0.75 1.80 60 4.90 3.74 8.64
21 1.07 0.77 1.84 61 5.16 3.97 9.13
22 1.11 0.78 1.89 62 5.41 4.23 9.64
23 1.15 0.80 1.95 63 5.64 4.56 10.20
24 1.18 0.82 2.00 64 5.86 4.94 10.80
25 1.22 0.84 2.06 65 6.11 5.32 11.43
26 1.26 0.87 2.13 66 6.39 5.73 12.12
27 1.30 0.90 2.20 67 6.70 6.16 12.86
28 1.35 0.92 2.27 68 7.06 6.61 13.67
29 1.39 0.95 2.34 69 7.47 7.07 14.54
30 1.44 0.98 2.42 70 7.97 7.53 15.50
31 1.49 1.01 2.50 71 8.45 8.10 16.55
32 1.54 1.05 2.59 72 8.93 8.77 17.70
33 1.59 1.09 2.68 73 9.44 9.50 18.94
34 1.65 1.13 2.78 74 9.94 10.35 20.29
35 1.71 1.17 2.88 75 10.33 11.42 21.75
36 1.76 1.23 2.99
37 1.81 1.30 3.11
38 1.87 1.36 3.23
39 1.92 1.44 3.36
</TABLE>
<TABLE>
FIRST YEAR CONTINGENT DEFERRED SURRENDER CHARGES
per $1000 of Face Amount
Unisex Lives
<CAPTION>
Issue Adm. Sales Total Issue Adm. Sales Total
Age Charge Load Charge Age Charge Load Charge
----- ------ ---- ------ ---- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
0 0.43 0.87 1.30 40 2.26 1.69 3.95
1 0.69 0.61 1.30 41 2.34 1.78 4.12
2 0.72 0.60 1.32 42 2.42 1.88 4.30
3 0.74 0.60 1.34 43 2.51 1.99 4.50
4 0.77 0.60 1.37 44 2.60 2.10 4.70
5 0.79 0.60 1.39 45 2.69 2.23 4.92
6 0.83 0.59 1.42 46 2.80 2.35 5.15
7 0.86 0.59 1.45 47 2.93 2.46 5.39
8 0.90 0.59 1.49 48 3.07 2.58 5.65
9 0.92 0.60 1.52 49 3.22 2.71 5.93
10 0.95 0.61 1.56 50 3.38 2.84 6.22
11 0.96 0.64 1.60 51 3.55 2.99 6.54
12 0.97 0.67 1.64 52 3.73 3.15 6.88
13 0.96 0.72 1.68 53 3.92 3.32 7.24
14 0.95 0.77 1.72 54 4.12 3.50 7.62
15 0.94 0.82 1.76 55 4.33 3.69 8.02
16 0.93 0.87 1.80 56 4.58 3.88 8.46
17 0.93 0.91 1.84 57 4.85 4.07 8.92
18 0.94 0.95 1.89 58 5.14 4.28 9.42
19 0.96 0.97 1.93 59 5.43 4.52 9.95
20 1.04 0.94 1.98 60 5.70 4.82 10.52
21 1.08 0.95 2.03 61 5.93 5.19 11.12
22 1.12 0.96 2.08 62 6.16 5.62 11.78
23 1.17 0.97 2.14 63 6.37 6.11 12.48
24 1.22 0.98 2.20 64 6.59 6.64 13.23
25 1.28 0.99 2.27 65 6.84 7.19 14.03
26 1.34 1.00 2.34 66 7.13 7.77 14.90
27 1.40 1.02 2.42 67 7.44 8.38 15.82
28 1.46 1.04 2.50 68 7.77 9.04 16.81
29 1.52 1.06 2.58 69 8.13 9.75 17.88
30 1.58 1.09 2.67 70 8.51 10.53 19.04
31 1.64 1.13 2.77 71 8.91 11.38 20.29
32 1.71 1.17 2.88 72 9.34 12.31 21.65
33 1.77 1.21 2.98 73 9.78 13.31 23.09
34 1.84 1.26 3.10 74 10.20 14.44 24.64
35 1.91 1.31 3.22 75 10.55 15.73 26.28
36 1.98 1.38 3.36
37 2.05 1.44 3.49
38 2.11 1.52 3.63
39 2.19 1.60 3.79
</TABLE>
The percentage of the first year surrender charges shown above remaining in each
policy year thereafter is:
Percentage of First Year
Policy Year Surrender Charges Remaining
----------- ------------------------------
2 100.0%
3 100.0%
4 87.5%
5 75.0%
6 62.5%
7 50.0%
8 37.5%
9 25.0%
10 12.5%
11+ 0.0%
If the face amount of a Policy is increased, surrender charges apply to the net
increase in face amount as though a new Policy had been issued for an amount
equal to net increase, based on the tables set out above. The net increase in
face amount is equal to the increase in face amount less earlier decreases in
face amount not offset against an earlier increase in face amount. The Minimum
Required Premium following a requested face amount increase will be shown on the
Policy data pages issued to reflect the adjustment.
Surrender charges following a Policy's reinstatement commence at the rate in
effect at the time of the Policy's termination.
Other Charges
Shares of the underlying mutual funds are purchased by the corresponding
Divisions at net asset value. The net asset value reflects the investment
management fees and corporate operating expenses already deducted from the
assets of the underlying mutual fund.
The Company reserves the right to charge the assets of each Division of the
Separate Account to provide for any income taxes payable by the Company on the
assets of such Divisions.
Special Plans
Where allowed by law, the Company may reduce or eliminate certain charges for
Policies issued under special circumstances that result in lower expenses to the
Company. For example, special circumstances may exist in connection with group
arrangements, including employer or employee organization sponsored plans, and
with regard to Policies issued to persons owning other policies issued by the
Company or its subsidiaries. The amount of any reduction, the charges to be
reduced, and the criteria for applying a reduction will reflect the reduced
sales effort, costs and differing mortality experience appropriate to the
circumstances giving rise to the reduction. The charges will be reduced in
accordance with the Company's practice in effect when the Policy is issued.
Reductions will not be unfairly discriminatory against any person, including the
purchasers to whom the reduction applies and all other owners of the Policies.
OTHER MATTERS
Voting Rights
The Company shall vote mutual fund shares held in the Separate Account at
regular and special meetings of shareholders, but will follow voting
instructions received from persons having the voting interest in such mutual
fund shares.
The policyowner has the voting interest under a Policy. The policyowner shall
have one vote for each $100 of accumulated value in the Divisions, with
fractional votes allocated for amounts less than $100. The number of votes on
which the policyowner has the right to instruct will be determined as of the
date established by the underlying mutual fund for determining shareholders
eligible to vote at the meeting of the mutual fund. Voting instructions will be
solicited by written communications prior to such meetings in accordance with
procedures established by the mutual fund. The Company will vote other mutual
fund shares held by the Separate Account, including those for which no
instructions are received in the same proportion as it votes shares for which it
has received instructions. All mutual fund shares held in the general account of
the Company will be voted in proportion to instructions that are received with
respect to participating contracts.
If the Company determines pursuant to applicable law that mutual fund shares
held in the Separate Account need not be voted pursuant to instructions received
from persons otherwise having the voting interest as provided above, then the
Company may vote mutual fund shares held in the Separate Account in its own
right.
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that shares be voted
so as to cause a change in subclassification or investment objective of the
mutual fund, or disapprove an investment advisory contract of the mutual fund.
In addition, the Company may disregard voting instructions in favor of changes
initiated by a policyowner in the investment policy or the investment advisor of
the mutual fund if the Company reasonably disapproves of such changes. A change
would be disapproved only if the proposed change is contrary to state law or
prohibited by state regulatory authorities or the Company determines that the
change would be inconsistent with the investment objectives of the mutual fund
or would result in the purchase of securities for the mutual fund which vary
from the general quality and nature of investments and investment techniques
utilized by other separate accounts created by the Company or any affiliates of
the Company which have similar investment objectives. In the event that the
Company does disregard voting instructions, a summary of that action and the
reason for such actions will be included in the next semi-annual report to
policyowners.
Statement of Value
The Company will mail an annual statement to the policyowner after the end of
each policy year until the policy terminates. The statement will show:
1. the current death benefit;
2. the current accumulated and surrender values;
3. all premiums paid since the last statement;
4. all charges since the last statement;
5. any policy loans and loan interest;
6. any partial surrenders since the last statement;
7. the number of units and unit value;
8. the total value of each of the policyowner's investment accounts; and
9. any investment gain or loss since the last statement.
Any policyowner may request at any time a current statement of account values,
transactions and activities by telephoning 1-800-247-9988.
The Company will also send to the policyowner the reports required by the
Investment Company Act of 1940.
Service Available by Telephone
Policyowners may preauthorize the following telephone transactions: 1) transfers
between divisions; 2) change in premium allocation percentages; 3) change in
monthly deduction percentages; and 4) policy loans (Policy loan proceeds will be
mailed only to the policyowner's address of record.) The policyowner may
preauthorize the above transactions by submitting a form provided by the
Company. Policyowners may exercise the telephone transactions privilege by
telephoning 1-800-247-9988. Telephone transfer requests must be received by the
close of normal trading of the New York Stock Exchange to be effective that day.
Requests made after that time or on a day when the Company is not open for
business will be effective the next business day.
Although neither the Separate Account nor the Company is responsible for the
authenticity of telephone transaction requests, the right is reserved to refuse
to accept telephone requests when in the opinion of the Company it seems prudent
to do so. The policyowner bears the risk of loss caused by fraudulent telephone
instructions the Company reasonably believes to be genuine. The Company will
employ reasonable procedures to assure telephone instructions are genuine and if
such procedures are not followed, the Company may be liable for losses due to
unauthorized or fraudulent transactions. Such identification information
includes recording all telephone instructions, requesting personal information
such as the caller's name, daytime telephone number, social security number
and/or birthdate and sending a written confirmation of the transaction to the
policyowner's address of record. Policyowners may obtain additional information
and assistance by telephoning the toll free number. The Company may modify or
terminate telephone transfer procedures at any time.
You may obtain contract information from our Direct Dial system between 7:00
a.m. and 9:00 p.m., Central Time, Monday through Saturday. Through this
automated telephone system, you can obtain information about unit values and
contract values, initiate certain changes to your contract, change your Personal
Identification Number (PIN), or speak directly to a customer service
representative. The telephone number is 1-800-247-9988. As with other telephone
services, instructions received via our Direct Dial system will be binding on
all contractowners.
GENERAL PROVISIONS
Addition, Deletion or Substitution of Investments
The Company reserves the right, subject to compliance with applicable law, to
make additions to, deletions from, or substitutions for the shares held by any
Division or which any Division may purchase. If shares of any mutual fund should
no longer be available for investment or if, in the judgment of the Company's
management, further investment in shares of any mutual fund should become
inappropriate in view of the purposes of the Policy, the Company may substitute
shares of any other investment company for shares already purchased, or to be
purchased in the near future under the Policies. No substitution of securities
will take place without notice to policyowners and without prior approval of the
Securities and Exchange Commission, to the extent required by the Investment
Company Act of 1940.
The investment policy of the Separate Account will not be materially changed
unless a statement of the change is filed with and not disapproved by the
Insurance Commissioner of the State of Iowa and the Superintendent of Insurance
of the State of New York, if required. Whether a change in investment policy is
material will be determined in conjunction with the appropriate state insurance
commissioner(s). The policyowner will be notified of any material investment
policy change. The policyowner may then change allocation percentages and
transfer any value in an affected Division to another Division without charge.
In the alternative, the policyowner may exchange the Policy for a fixed-benefit,
flexible premium life insurance policy offered by the Company for this purpose.
The policyowner may exercise this exchange privilege until the later of 60 days
after (i) the effective date of such change, or (ii) the receipt of a notice of
the options available. The face amount of the new policy will be the death
benefit of the Policy on the date of exchange.
Each mutual fund is subject to certain investment restrictions which may not be
changed without the approval of the majority of the outstanding voting
securities of such fund. See the accompanying prospectuses for the mutual funds.
Optional Insurance Benefits
Subject to certain requirements and approval by state insurance departments, one
or more supplementary benefits may be added to a Policy, including those
providing term insurance options, providing accidental death coverage, waiving
monthly deductions upon disability, accelerating benefits in the event of
terminal illness, providing cost of living increases in benefits, providing a
death benefit guarantee described below, providing a guaranteed increase option
and, in the case of business-owned Policies, permitting a change of the life
insured and providing enhanced policy values in the early years of a Policy.
More detailed information concerning supplementary benefits may be obtained from
an authorized agent of the Company. The cost, if any, of any optional insurance
benefits will be deducted as part of the monthly deduction.
Death Benefit Guarantee Rider
The death benefit guarantee rider provides that if the death benefit guarantee
premium requirement is satisfied the Policy will not enter its grace period even
if the net surrender value is insufficient to cover the monthly deduction on a
monthly date. This rider is automatically made a part of all Policies at no
premium. The death benefit guarantee premium requirement is satisfied if the sum
of all premiums paid less any partial surrenders and any policy loans and unpaid
loan interest equals or exceeds the sum of the monthly death benefit guarantee
premiums applicable to date plus the next monthly death benefit guarantee
premium. The death benefit guarantee premium is based on the issue age, sex
(where permitted by law), death benefit option, and risk class of the insured.
The monthly death benefit guarantee premium will be considered to be zero for
any month that deductions are being paid by the Waiver of Monthly Deductions
Rider. The death benefit guarantee premium may change if the Policy face amount
is changed, the death benefit option is changed, or a rider is added or deleted.
As a result of a change, an additional premium may be required on the date of
the change in order to satisfy the new death benefit guarantee premium
requirement. If on any monthly date the death benefit guarantee premium
requirement is not met, the policyowner will be sent a notice of the premium
required to maintain the guarantee. If the premium is not received at the
Company's home office prior to the expiration of 61 days after the date the
notice is mailed, the death benefit guarantee will no longer be in effect and
the rider will terminate. If the rider terminates, it may not be reinstated.
If this rider is in force, the death benefit guarantee premium requirement is
satisfied and the insured is alive on the policy maturity date, the Company will
pay the policyowner the excess, if any, of the face amount over the maturity
proceeds.
This rider is available only in those states where it has been approved.
The Contract
The Policy, the application attached to it, any adjustment applications, any
amendments to the application, the current data pages, and any written
notification showing change make up the entire contract between the Company and
the policyowner. Any statements made in the application or an adjustment
application will be considered representations and not warranties. No statement,
unless made in an application, will be used to void a Policy (or void an
adjustment in case of an adjustment application) or to defend against a claim. A
Policy may be modified by mutual agreement between the policyowner and the
Company. Any alteration of the Policy must be in writing and signed by one of
the Company's corporate officers. No one else, including the agent, may change
the contract or waive any provisions.
Incontestability
The Company will not contest the insurance coverage provided under a Policy,
except for any subsequent increase in face amount, after the Policy has been in
force during the lifetime of the insured for a period of two years from the
policy date. This provision does not apply to claims for total disability or to
accidental death benefits which may be provided by a rider to a Policy. Any face
amount increase made under the adjustment options has its own two-year
contestable period which begins on the effective date of the adjustment.
Misstatements
If the age or sex of the insured has been misstated in an application, including
a reinstatement application, the death benefit under the Policy will be the
Policy's accumulated value plus the amount which would be purchased by the most
recent mortality charge at the correct age and sex.
Suicide
A Policy does not cover the risk of suicide within two years from the policy
date or two years from the date of any increase in face amount with respect to
such increase, whether the insured is sane or insane. In the event of suicide
within two years of the policy date, the only liability of the Company will be a
refund of premiums paid, without interest, less any policy loans and loan
interest and any partial surrenders. In the event of suicide within two years of
an increase in face amount, the only liability of the Company in respect to that
increase in face amount will be a refund of the cost of insurance for such
increase.
Ownership
The owner of the Policy is as named in the application. The owner may exercise
every right and enjoy every privilege provided by the Policy, subject to the
rights of any irrevocable beneficiary. All privileges and rights of the owner
under a Policy end when the owner surrenders the Policy for cash, the death
proceeds of the Policy are paid, or the maturity proceeds of the Policy are
paid. Also, if the grace period ends without receipt by the Company at its home
office of the payment required to keep the Policy in force, the privileges and
rights of the owner terminate as of the monthly date on or immediately preceding
the start of the grace period. If the owner is not the insured and dies before
the insured, the insured becomes the owner unless the owner has provided for a
successor owner. The owner may be changed by filing a written request with the
Company. The Company's approval is needed and no change is effective until the
Company approves the written request for change of owner. Once approved, the
change is effective as of the date the owner signed the written request. The
Company reserves the right to require that the Policy be sent to the Company so
that the change may be recorded.
Beneficiaries
The original beneficiaries and contingent beneficiaries are designated by the
policyowner on the application. A primary and/or contingent beneficiary or
beneficiaries may be changed by written request to the Company. The Company's
approval is needed and no change is effective until the Company approves the
written request for change of beneficiary. Once approved, the change is
effective as of the date the owner signed the written request. If changed, the
primary beneficiary or contingent beneficiary is as shown in the latest written
change filed with the Company. One or more primary or contingent beneficiaries
may be named in the application or a later change request.
Benefit Instructions
While the insured is alive, the owner may file instructions for the payment of
death proceeds under one of the benefit options under the Policy. Such
instructions, or a change of instructions, must be made by written request to
the Company. If the owner changes the beneficiary, that change will revoke any
prior benefit instructions.
Postponement of Payments
Payment of any amount upon total or partial surrender, policy loan, or proceeds
payable at death or maturity and the right to transfer accumulated value between
Divisions may be postponed or suspended whenever: (1) the New York Stock
Exchange is closed other than customary weekend and holiday closings, or trading
on the New York Stock Exchange is restricted as determined by the Securities and
Exchange Commission; (2) the Securities and Exchange Commission by order permits
postponement for the protection of policyowners; or (3) the Securities and
Exchange Commission requires that trading be restricted or declares an
emergency, as a result of which disposal of securities is not reasonably
practicable or it is not reasonably practicable to determine the net asset value
of the Accounts.
Assignment
The Policy can be assigned as collateral for a loan. The Company must be
notified in writing if the Policy has been assigned. Each assignment will be
subject to any payments made or action taken by the Company prior to its
notification of such assignment. The Company is not responsible for the validity
of an assignment. An assignment as collateral does not change the owner but the
rights of beneficiaries, whenever named, become subordinate to those of the
assignee.
Policy Proceeds
Death proceeds under a Policy will ordinarily be paid within seven days after
the Company receives due proof of death. Payments may be postponed in certain
circumstances. (See "Postponement of Payments.) During the insured's lifetime,
the policyowner may arrange for the death proceeds to be paid in a lump sum or
under one or more of the settlement options described below. These choices are
also available if the Policy is surrendered or matures.
When death proceeds are payable in a lump sum, the beneficiary may select one or
more of the settlement options.
The following options are available:
Option A
Special Benefit Arrangement - A specially designed benefit option may be
arranged with the Company's approval.
Option B
Proceeds Left at Interest - The Company will hold the amount applied on
deposit. Interest payments will be made annually, semi-annually, quarterly
or monthly, as elected.
Option C
Fixed Income - The Company will pay an income of a fixed amount or an
income for a fixed period not exceeding 30 years.
Option D
Life Income - The Company will pay an income during a person's lifetime. A
minimum guaranteed period may be used.
Option E
Joint and Survivor Life Income - The Company will pay an income during the
lifetime of two persons, and continuing until the death of the survivor.
This option includes a minimum guaranteed period of 10 years.
Option F
Joint and Two-Thirds Survivor Life Income - The Company will pay an income
during the time two persons both remain alive, and two-thirds of the
original amount during the remaining lifetime of the survivor.
Interest at a rate set by the Company, but never less than required by state
law, will be applied to determine the payment under Option B, and any such
interest in excess of the guaranteed minimum will be added to payments under
Option C.
Participating Policy
The Policies share in any divisible surplus of the Company. The Company will
determine each Policy's share of the surplus and will credit it as a dividend at
the end of each contract year. The Company does not expect to pay any dividends
under the Policy. Dividends, if any, will be paid in cash.
Right To Exchange Policy
During the first 24 policy months following issuance of a Policy, except during
a grace period, the policyowner may exchange the Policy for any other form of
fixed benefit individual life insurance policy (other than term insurance)
currently made available by the Company for this purpose on the insured's life.
At present, the Company makes a universal life insurance policy available for
exercise of this exchange right. Such request must be postmarked or delivered to
the home office of the Company before the expiration of 24 months after the
policy date. At the option of the policyowner, the new policy will provide
either the same death benefit or the same amount at risk as the Policy did at
the time of the exchange request. Premiums for the new policy will be based on
the same issue age, sex and risk classification of the insured under the Policy.
An equitable adjustment in the new policy's payments and cash or accumulated
values will be made to reflect variances, if any, in the payments and
accumulated values under the Policy and the new policy. Minimum benefits of the
new policy will be fixed and guaranteed and the new policy will not participate
in the experience of the Separate Account. Policy values will be determined as
of the date the written request for exchange is received at the Company's home
office. Evidence of insurability will not be required for the exchange. No
charge will be imposed on the exercise of this exchange privilege. Any policy
loan and loan interest must be repaid prior to the exchange or transferred to
the new policy. Any benefit riders included as a part of a Policy may be
exchanged, without evidence of insurability, for similar benefit riders on the
new policy if both these conditions are met:
1. The policyowner, in the written request for exchange, indicates that the
rider or riders should be a part of the new policy; and
2. The similar benefit rider or riders were available for the new policy on
the effective date of the benefit rider for the Policy based on the same
issue age, sex and risk classification of the insured under the Policy.
The exchange will be effective upon proper receipt by the Company of the written
request, any amount required as an adjustment and surrender of the Policy.
The policyowner may also exchange the Policy for a fixed-benefit, flexible
premium policy in the event of a material change in investment policy of a
Division (see "Addition, Deletion or Substitution of Investments.")
In addition, the policyowner has the right to exchange a face amount increase
for a fixed-benefit, flexible premium policy at any time during the first 24
months following issuance of Policy data pages reflecting a face amount
increase, but not while the policy is in a grace period (see "Adjustment
Options.")
DISTRIBUTION OF THE POLICY
The Policy will be sold by individuals who, in addition to being licensed and
appointed as life insurance agents or brokers for the Company, are also
registered representatives of the principal underwriter of the Policies, Princor
Financial Services Corporation, or of other broker-dealers which Princor
Financial Services Corporation selects and the Company approves. Princor
Financial Services Corporation is registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934 as a broker-dealer and is a
member of the National Association of Securities Dealers, Inc. For contracts
distributed by the principal underwriter commissions will range between 0% and
50% of premium received in the first year of a Policy (and between 0% and 50% of
premium received in the first year following an adjustment date), up to a target
premium determined by a rate per $1,000 of face amount which varies by the age
and sex of the insured. In addition, commissions will include 0% to 4% of
premium received in the first year of the Policy, above the target premium. For
years two and later of a Policy, commissions will range from 0% to 2% of
premiums received. A service fee of 0% to 2% is paid on all premiums received
after the first policy year. In addition, a persistency renewal commission may
be paid which ranges from 1.25% to 5.25% of premiums received in the first three
policy years, depending upon the agent's or broker's total life insurance sales
for the Company. Expense allowances may also be payable to agents and brokers
based upon premiums received. Commission amounts for contracts distributed by
broker-dealers other than the principal underwriter will vary.
For the year ended December 31, 1999, the Company paid Princor Financial
Services Corporation $173,998 to compensate registered representatives of the
principal underwriter.
The Company has entered into a distribution agreement with Princor Financial
Services Corporation. Princor Financial Services Corporation is the principal
underwriter for Principal Variable Contracts Fund, Inc., a registered investment
company organized by the Company. Princor Financial Services Corporation is a
wholly-owned subsidiary of Principal Holding Company. Principal Holding Company
is a holding company and a wholly-owned subsidiary of the Company.
OFFICERS AND DIRECTORS OF PRINCIPAL MANAGEMENT CORPORATION
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
*DAVID J. DRURY Director
*RALPH C. EUCHER Director and President
*ARTHUR S. FILEAN Senior Vice President
*DENNIS P. FRANCIS Director
*PAUL N. GERMAIN Vice President - Mutual Fund Operations
*ERNEST H. GILLUM Vice President - 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
*RICHARD L. PREY Director
*LAYNE A. RASMUSSEN Controller - Mutual Funds
*ELIZABETH R. RING Controller
*MICHAEL J. ROUGHTON Counsel
*JEAN B. SCHUSTEK Assistant Vice President - Registered Products
EXECUTIVE OFFICERS OF PRINCIPAL LIFE INSURANCE COMPANY (OTHER THAN DIRECTORS):
JOHN EDWARD ASCHENBRENNER Executive Vice President
PAUL FRANCIS BOGNANNO Senior Vice President
GARY MERLYN CAIN Senior Vice President
CHARLES ROBERT DUNCAN Senior Vice President
DENNIS PAUL FRANCIS Senior Vice President
MICHAEL HARRY GERSIE Executive Vice President and Chief Financial Officer
THOMAS JOHN GRAF Senior Vice President
ROBB BRYAN HILL Senior Vice President
DANIEL JOSEPH HOUSTON Senior Vice President
ELLEN ZISLIN LAMALE Senior Vice President and Chief Actuary
MARY AGNES O'KEEFE Senior Vice President
RICHARD LEO PREY Senior Vice President
KAREN ELIZABETH SHAFF Senior Vice President and General Counsel
ROBERT ALLEN SLEPICKA Senior Vice President
NORMAN RAUL SORENSEN Senior Vice President
CARL CHANSON WILLIAMS Senior Vice President and Chief Information Officer
LARRY DONALD ZIMPLEMAN Senior Vice President
DIRECTORS OF PRINCIPAL LIFE INSURANCE COMPANY
Principal Life Insurance Company is managed by a Board of Directors. The
directors of the Company, their positions with the Company, including Board
Committee memberships, and their principal occupation during the last five
years, are as follows:
<TABLE>
<CAPTION>
Name, Positions and Offices Principal Occupation During Last 5 Years
- --------------------------- ----------------------------------------
<S> <C>
BETSY JANE BERNARD Executive Vice President, U.S. West since 1998. President and Chief Executive Officer, since 1998.
Director President and Chief Executive Officer, AVIRNEX Communications Group since 1997. President
Member, Nominating Committee and Chief Executive Officer, Pacific Bell Communications since 1995.
JOCELYN CARTER-MILLER Corporate Vice President and Chief Marketing Officer, Motorola, Inc. since 1999. Vice President,
Director 1998-1999; Vice President and General Manager, since 1997. Prior thereto, Vice President of Latin
Member, Audit Committee American and Caribbean Operations of Motorola.
DAVID JAMES DRURY Chairman, Principal Life Insurance Company since 2000. Chairman and Chief Executive Officer
Director 1995-2000.
Chairman of the Board
Chair, Executive Committee
CHARLES DANIEL GELATT, JR. President, NMT Corporation.
Director
Member, Executive Committee
Chair, Human Resources Committee
JOHN BARRY GRISWELL President and Chief Executive Officer Principal Life Insurance Company since 2000. President
Director 1998-2000; Executive Vice President 1996-1998; Senior Vice President 1991-1996.
GERALD DAVID HURD Retired. Chairman and Chief Executive Officer, Principal Life Insurance Company 1989-1994.
Director
Member, Executive and
Nominating Committees
CHARLES SAMUEL JOHNSON Retired. Executive Vice President of DuPont 1999-2000. Chairman, President and Chief
Director Executive Officer, Pioneer Hi-Bred International, Inc.1996-1999; President and Chief
Member, Audit Committee Executive Officer 1995-1996; President and Chief Operating Officer 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 since 1979.
Director
Member, Nominating Committee
RONALD DALE PEARSON Chairman, President and Chief Executive Officer, Hy-Vee, Inc. since 1989.
Director
Member, Human Resources Committee
FEDERICO FABIAN PENA Senior Advisor of Vestar Capital Partners since 1998. Secretary, U.S. Department of Energy
Director 1996-1998; Secretary, U.S. Department of Transportation 1993-1996.
Member, Audit 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 Senior Program Officer and Special Advisor to the President at the Carnegie Corporation of
Director New York since 1999. President, The College Board, 1986-1999.
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
FRED WILLIAM WEITZ President and Chief Executive Officer, Essex Meadows, Inc. since 1995.
Director
Member, Human Resources Committee
</TABLE>
STATE REGULATION OF PRINCIPAL LIFE INSURANCE COMPANY
The Company is organized under the laws of the State of Iowa and is subject to
regulation by the Commissioner of Insurance of Iowa. An annual statement is
filed with the Iowa Division of Insurance on or before March 1 of each year
covering the operations and reporting on the financial condition of the Company
as of December 31 of the preceding year. Periodically, the Commissioner examines
the assets and liabilities of the Company and the Separate Account and verifies
their adequacy. A full examination of the Company's operations is conducted by
the National Association of Insurance Commissioners at least every five years.
FEDERAL TAX MATTERS
The discussion contained herein is general in nature, is not an exhaustive
discussion of all tax questions that might arise under the policies, and is not
intended as tax advice. No attempt is made to consider any applicable state or
other tax laws and no representation is made as to the likelihood of
continuation of current federal income tax laws and treasury regulations or of
current interpretations of the Internal Revenue Service.
While the Company reserves the right to make changes in the Policy to assure
that it continues to qualify as life insurance for tax purposes, the Company
cannot make any guarantee regarding the future tax treatment of any Policy. For
complete information on the impact of changes with respect to the Policy and
federal and state considerations, a qualified tax advisor should be consulted.
The ultimate effect of federal income taxes on values under the Policy and on
the economic benefit to the policyowner or beneficiary depends upon the
Company's tax status, upon the terms of the Policy and upon the tax status of
the individual concerned.
Tax Status of the Company and the Separate Account
The Company is taxed as an insurance Company under Subchapter L of the Internal
Revenue Code of 1986 (the "Code"). The Separate Account is not a separate
taxable entity and its operations are taken into account by the Company in
determining its income tax liability. All investment income and realized net
capital gains on the assets of the separate account are reinvested and taken
into account in determining Policy Values and are automatically applied to
increase the book reserves associated with the policies. Under existing federal
income tax law, neither the investment income nor any net capital gains of the
Separate Account, are taxed to the Company to the extent those items are applied
to increase reserves associated with the policies.
Charges for Taxes
The Company imposes a federal tax charge equal to 1.25% of premiums received
under the Policy to compensate for the federal income tax liability it incurs
under Section 848 of the Code by reason of its receipt of premiums under the
Policy. The Company believes that this charge is reasonable in relation to the
increased tax burden it incurs as a result of Section 848. No other charge is
currently made on the Separate Account for federal income taxes of the Company
that may be attributable to the Separate Account. Periodically, the Company
reviews the appropriateness of charges to the Separate Account for the Company's
federal income taxes, and in the future, a charge may be made for federal income
taxes incurred by the Company that are attributable to the Separate Account. In
addition, depending on the method of calculating interest on Policy Values
allocated to the Fixed Account, a charge may also be imposed for the Policy's
share of the Company's federal income taxes attributable to the Fixed Account.
Under current laws, the Company may incur state or local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant.
If there is a material change in applicable state or local tax laws, the Company
reserves the right to charge the Separate Account for the portion of such taxes,
if any, attributable to the Separate Account.
Diversification Standards
In addition to other requirements imposed by the Code, a Policy will qualify as
life insurance under the Code only if the diversification requirements of Code
Section 817(h) are satisfied by each Separate Account in which any of the Policy
Values are held. To assure that each Policy continues to qualify as life
insurance for federal income tax purposes, the Company intends to comply with
Code Section 817(h) and the regulations thereunder.
Life Insurance Status of Policy
The Company believes that the Policy meets the statutory definition of life
insurance under Code Section 7702 and that the policyowner and beneficiary of
any Policy will receive the same federal income tax treatment as that accorded
to owners and beneficiaries of fixed benefit life insurance policies.
Specifically, the death benefit under the Policy will be excludable from the
gross income of the beneficiary subject to the terms and conditions of Section
101(a)(1) of the Code. (Death benefits under a "modified endowment contract" as
discussed below are treated in the same manner as death benefits under life
insurance contracts that are not so classified.)
In addition, unless the Policy is a "modified endowment contract," in which case
the receipt of any loan under the Policy may result in recognition of income to
the policyowner, the policyowner will not be deemed to be in constructive
receipt of the Policy Values, including increments thereon, under the Policy
until proceeds of the Policy are received upon a total or partial surrender of
the Policy.
Modified Endowment Contract Status
A Policy will be a modified endowment contract if it satisfies the definition of
life insurance set out in the Internal Revenue Code, but it either fails the
additional "7-pay test" set forth in Code Section 7702A or was received in
exchange for a modified endowment contract. A Policy will fail the 7-pay test if
the accumulated amount paid under the contract at any time during the first
seven contract years exceeds the total premiums that would have been payable
under a Policy providing for guaranteed benefits upon the payment of seven level
annual premiums. A Policy received in exchange for a modified endowment contract
will be taxed as a modified endowment contract even if it would otherwise
satisfy the 7-pay test.
While the 7-pay test is generally applied as of the time the Policy is issued,
certain changes in the contractual terms of a Policy will require a Policy to be
retested to determine whether the change has caused the Policy to become a
modified endowment contract. For example, a reduction in death benefits during
the first seven contract years will cause the Policy to be retested as if it had
originally been issued with the reduced death benefit.
In addition, if a "material change" occurs at any time while the Policy is in
force, a new 7-pay test period will start and the Policy will need to be
retested to determine whether it continues to meet the 7-pay test. The term"
material change" generally includes increases in death benefits, but does not
include an increase in death benefits which is attributable to the payment of
premiums necessary to fund the lowest level of death benefits payable during the
first seven contract years, or which is attributable to the crediting of
interest with respect to such premiums.
Because the Policy provides for flexible premium payments, the Company has
instituted procedures to monitor whether increases in death benefits or
additional premium payments cause either the start of a new seven-year test
period or the taxation of distributions and loans. All additional premium
payments will be considered in these determinations.
If a Policy fails the 7-pay test, all distributions (including loans) occurring
in the year of failure and thereafter will be subject to the rules for modified
endowment contracts. A recapture provision also applies to loans and
distributions that are received in anticipation of failing the 7-pay test. Under
the Code, any distribution or loan made within two years prior to the date that
a Policy fails the 7-pay test is considered to have been made in anticipation of
the failure.
Policy Surrenders and Partial Surrenders
Upon a total surrender of a Policy, the policyowner will recognize ordinary
income for federal tax purposes to the extent that the net surrender value
exceeds the investment in the contract (the total of all premiums paid but not
previously recovered plus any other consideration paid for the Policy). The tax
consequences of a partial surrender from a Policy will depend upon whether the
partial surrender results in a reduction of future benefits under the Policy and
whether the Policy is a modified endowment contract.
If the Policy is not a modified endowment contract, the general rule is that a
partial surrender from a Policy is taxable only to the extent that it exceeds
the total investment in the contract. An exception to this general rule applies,
however, if a reduction of future benefits occurs during the first 15 years
after a Policy is issued and there is a cash distribution associated with that
reduction. In such a case, the Code prescribes a formula under which the
policyowner may be taxed on all or a part of the amount distributed. After 15
years, cash distributions from a Policy that is not a modified endowment
contract will not be subject to federal income tax, except to the extent they
exceed the total investment in the contract. The Company suggests that a
policyowner consult with a tax advisor in advance of a proposed decrease in face
amount or a partial surrender. In addition, any amounts distributed under a
"modified endowment contract" (including proceeds of any loan) are taxable to
the extent of any accumulated income in the Policy. In general, the amount which
may be subject to tax is the excess of the Policy Value (both loaned and
unloaned) over the previously unrecovered premiums paid.
Under certain circumstances, a distribution under a modified endowment contract
(including a loan) may be taxable even though it exceeds the amount of
accumulated income in the Policy. This can occur because for purposes of
determining the amount of income received upon a distribution (or loan) from a
modified endowment contract, the Code requires the aggregation of all modified
endowment contracts issued to the same policyowner by an insurer and its
affiliates within the same calendar year. Therefore, loans and distributions
from any one such Policy are taxable to the extent of the income accumulated in
all the modified endowment contracts required to be so aggregated.
If any amount is taxable as a distribution of income under a modified endowment
contract (as a result of a total surrender, a partial surrender or a loan), it
may also be subject to a 10% penalty tax under Code Section 72(v). Limited
exceptions from the additional penalty tax are available for certain
distributions to individual policyowners. The penalty tax will not apply to
distributions: (i) that are made on or after the date the taxpayer attains age
59 1/2; or (ii) that are attributable to the taxpayer's becoming disabled; or
(iii) that are part of a series of substantial equal periodic payments (made not
less frequently than annually) made for the life or life expectancy of the
taxpayer.
Policy Loans and Interest Deductions
The Company also believes that under current law any loan received under the
Policy will be treated as a Policy debt of a policyowner and that, unless the
Policy is a modified endowment contract, no part of any loan under a Policy will
constitute income to the policyowner. If the Policy is a modified endowment
contract (see discussion above) loans will be fully taxable to the extent of the
income in the Policy (and in any other contracts with which it must be
aggregated) and could be subject to the additional 10 percent tax.
Code Section 264 imposes stringent limitations on the deduction of interest paid
or accrued on loans in connection with a Policy. In addition, under the
"personal" interest limitation provisions of Code Section 163, no deduction is
allowed for interest on any Policy loan if the proceeds are used for personal
purposes, even if the Policy and loan otherwise meet the requirements of Code
Section 264. The limitations on deductibility of personal interest may not apply
to disallow all or part of the interest expense as a deduction if the loan
proceeds are used for "trade or business" or "investment" purposes. The Company
suggests consultation with a tax advisor for further guidance.
Corporate Alternative Minimum Tax
Ownership of a Policy by a corporation may affect the policyowner's exposure to
the corporate alternative maximum tax. In determining whether it is subject to
alternative minimum tax a corporate policyowner must make two computations.
First, the corporation must take into account a portion of the current year's
increase in the built-in gain in its corporate-owned policies. Second, the
corporation must take into account a portion of the amount by which the death
benefits received under any Policy exceed the sum of (i) the premiums paid on
that Policy in the year of death, and (ii) the corporation's basis in the Policy
(as measured for alternative minimum tax purposes) as of the end of the
corporation's tax year immediately preceding the year of death.
Exchange or Assignment of Policies
A change of the policyowner or the insured or an exchange or assignment of a
Policy may have significant tax consequences depending on the circumstances. For
example, an assignment or exchange of a Policy may result in taxable income to
the transferring policyowner. Further, Code Section 101(a) provides, subject to
certain exceptions, that where a Policy has been transferred for value, only the
portion of the death benefit which is equal to the total consideration paid for
the Policy may be excluded from gross income. For complete information with
respect to Policy assignments and exchanges, a qualified tax advisor should be
consulted.
Withholding
Under Section 3405 of the Code, withholding is generally required with respect
to certain taxable distributions under insurance contracts. In the case of
periodic payments (payments made as an annuity or on a similar basis), the
withholding is at graduated rates (as though the payments were employee wages).
With respect to non-periodic distributions, the withholding is at a flat rate of
10%. A Policyholder can elect to have either non-periodic or periodic payments
made without withholding except where the policyowner's tax identification
number has not been furnished to the Company or the Internal Revenue Service has
notified the Company that the tax identification number furnished by the
policyowner is incorrect.
Taxation of Accelerated Death Benefits
The Company provides accelerated death benefits based upon a lien method. It is
unclear whether benefits paid under this rider are taxable. For information
regarding taxation of accelerated death benefits, a qualified tax advisor should
be consulted.
Other Tax Issues
Federal estate and state and local estate, inheritance, and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each policyowner or beneficiary.
EMPLOYEE BENEFIT PLANS
The United States Supreme Court has held, that, optional annuity benefits under
a deferred compensation plan may not vary on the basis of sex. Policies are
available for use in connection with such employment-related insurance and
benefit plans which do not vary in any respect between male and female insureds
of a particular age and underwriting classification.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of any of the Divisions thereof are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relate to the Separate Account.
LEGAL OPINION
Legal matters applicable to the issue and sale of the Policies, including the
right of the Company to issue Policies under Iowa insurance law, have been
passed upon by Karen E. Shaff, Senior Vice President and General Counsel of the
Company.
INDEPENDENT AUDITORS
The financial statements of Principal Life Insurance Company Variable Life
Separate Account and the consolidated financial statements of Principal Life
Insurance Company which are included in this registration statement have been
audited by Ernst & Young LLP, independent auditors, for the periods indicated in
their reports thereon which appear elsewhere in the registration statement.
REGISTRATION STATEMENT
A registration statement has been filed with the Commission under the Securities
Act of 1933, as amended, with respect to the Policies offered hereby. This
Prospectus does not contain all the information set forth in the registration
statement and the amendments and exhibits to the registration statement to all
of which reference is made for further information concerning the Separate
Account, the Company and the Policy offered hereby. Statements contained in this
Prospectus as to the contents of the Policy and other legal instruments are
summaries. For a complete statement of the terms thereof, reference is made to
such instruments as filed.
FINANCIAL STATEMENTS
The consolidated financial statements of Principal Life Insurance Company which
are included in this Prospectus should be considered only as bearing on the
ability of the Company to meet its obligations under the Policy. They should not
be considered as bearing on the investment performance of the assets held in the
Separate Account.
Report of Independent Auditors
Board of Directors and Participants
Principal Life Insurance Company
We have audited the accompanying individual and combined statements of net
assets of Principal Life Insurance Company Variable Life Separate Account
(comprised of the Aggressive Growth, Asset Allocation, Balanced, Bond, Capital
Value, Fidelity Contrafund, Fidelity Equity Income, Fidelity High Income,
Government Securities, Growth, High Yield, International, International
SmallCap, MicroCap, MidCap, MidCap Growth, Money Market, Putnam Global Asst
Allocation, Putnam Vista, Putnam Voyager, Real Estate, SmallCap, SmallCap
Growth, SmallCap Value, Stock Index 500, and Utilities Divisions) as of December
31, 1999, and the related statements of operations and changes in net assets for
each of the three years in the period then ended, except for those divisions
operating for portions of such periods as disclosed in the financial statements.
These financial statements are the responsibility of the management of Principal
Life Insurance Company. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999, by
correspondence with the transfer agents. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the individual and combined financial position of the
respective divisions of Principal Life Insurance Company Variable Life Separate
Account at December 31, 1999, and the individual and combined results of their
operations and the changes in their net assets for the periods described above,
in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Des Moines, Iowa
January 31, 2000
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Net Assets
December 31, 1999
<TABLE>
<S> <C>
Assets
Investments:
Aggressive Growth Division:
Aggressive Growth Account - 1,385,242 shares at net asset value of $23.89 per
share (cost - $26,190,593) $ 33,093,420
Asset Allocation Division:
Asset Allocation Account - 236,770 shares at net asset value of $13.23 per share
(cost - $3,009,639) 3,132,463
Balanced Division:
Balanced Account - 798,006 shares at net asset value of $15.41 per share
(cost - $12,455,324) 12,297,279
Bond Division:
Bond Account - 610,444 shares at net asset value of $10.89 per share
(cost - $7,173,434) 6,647,735
Capital Value Division:
Capital Value Account - 925,617 shares at net asset value of $30.74 per share (cost
- $31,698,075) 28,453,464
Fidelity Contrafund Division:
Fidelity Variable Insurance Products Fund II: Contrafund Portfolio - 743,845
shares at net asset value of $29.15 per share (cost - $17,327,632) 21,683,086
Fidelity Equity Income Division:
Fidelity Variable Insurance Products Fund: Equity Income Portfolio - 364,586
shares at net asset value of $25.71 per share (cost - $9,030,110) 9,373,498
Fidelity High Income Division:
Fidelity Variable Insurance Products Fund: High Income Portfolio - 137,990 shares
at net asset value of $11.31 per share (cost - $1,611,305) 1,560,663
Government Securities Division:
Government Securities Account - 303,850 shares at net asset value
of $10.26 per share (cost - $3,306,124) 3,117,503
Growth Division:
Growth Account - 455,791 shares at net asset value of $23.56 per share
(cost - $9,133,648) 10,738,427
High Yield Division:
High Yield Account - 227,025 shares at net asset value of $7.44 per share
(cost - $1,968,898) 1,689,069
International Division:
International Account - 827,049 shares at net asset value of $15.95
per share (cost - $12,422,326) 13,191,433
See accompanying notes.
Assets (continued)
Investments (continued):
International SmallCap Division:
International SmallCap Account - 117,676 shares at net asset value of $16.66 per
share (cost - $1,374,646) $ 1,960,477
MicroCap Division:
MicroCap Account - 56,101 shares at net asset value of $8.07 per share
(cost - $456,520) 452,739
MidCap Division:
MidCap Account - 833,798 shares at net asset value of $36.90 per share
(cost - $26,646,772) 30,767,163
MidCap Growth Division:
MidCap Growth Account - 91,749 shares at net asset value of $10.66 per share
(cost - $867,453) 978,046
Money Market Division:
Money Market Account - 14,455,480 shares at net asset value of $1.00 per share
(cost - $14,455,480) 14,455,480
Putnam Global Asset Allocation Division:
Putnam Variable Trust Global Asset Allocation Fund - 21,555 shares at
net asset value of $19.60 per share (cost - $394,980) 422,470
Putnam Vista Division:
Putnam Variable Trust Vista Fund - 43,349 shares at net asset value of
$20.65 per share (cost - $692,872) 895,165
Putnam Voyager Division:
Putnam Variable Trust Voyager Fund - 132,239 shares at net asset value
of $66.11 per share (cost - $692,872) 8,742,337
Real Estate Division:
Real Estate Account - 8,978 shares at net asset value of $8.20 per share
(cost - $78,960) 73,623
SmallCap Division:
SmallCap Account - 102,338 shares at net asset value of $10.74 per share
(cost - $942,023) 1,099,108
SmallCap Growth Division:
SmallCap Growth Account - 110,493 shares at net asset value of $19.56 per share
(cost - $1,423,453) 2,161,250
SmallCap Value Division:
SmallCap Value Account - 61,984 shares at net asset value of $10.06 per share
(cost - $539,668) 623,561
Stock Index 500 Division:
Stock Index 500 Account - 626,024 shares at net asset value of $10.71 per share
(cost - $6,383,685) 6,704,714
Utilities Division:
Utilities Account - 40,118 shares at net asset value of $10.90 per share
(cost - $438,345) 437,284
Combined net assets $214,751,457
</TABLE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Net Assets (continued)
<TABLE>
December 31, 1999
<CAPTION>
Units Unit
Value
<S> <C> <C> <C>
Net assets are represented by:
Aggressive Growth Division:
PrinFlex Life 1,604,692 $20.47 $33,005,183
Survivorship Variable Universal Life 7,135 12.37 88,237
33,093,420
Asset Allocation Division:
PrinFlex Life 197,598 15.02 2,966,990
Survivorship Variable Universal Life 14,900 11.11 165,473
3,132,463
Balanced Division:
Flex Variable Life 128,714 30.14 3,879,380
PrinFlex Life 629,662 13.24 8,337,935
Survivorship Variable Universal Life 8,042 9.94 79,964
12,297,279
Bond Division:
Flex Variable Life: 78,892 23.11 1,823,458
PrinFlex Life 415,598 11.51 4,783,580
Survivorship Variable Universal Life 4,061 10.02 40,697
6,647,735
Capital Value Division:
Flex Variable Life 244,078 36.02 8,791,449
PrinFlex Life 1,441,876 13.61 19,622,569
Survivorship Variable Universal Life 4,293 9.19 39,446
28,453,464
Fidelity Contrafund Division:
PrinFlex Life 1,100,301 19.56 21,527,307
Survivorship Variable Universal Life 13,718 11.36 155,779
21,683,086
Fidelity Equity Income Division:
PrinFlex Life 639,599 14.55 9,309,245
Survivorship Variable Universal Life 6,608 9.72 64,253
9,373,498
Fidelity High Income Division - PrinFlex Life 130,948 11.92 1,560,663
Government Securities Division:
PrinFlex Life 261,482 11.80 3,084,559
Survivorship Variable Universal Life 3,244 10.16 32,944
3,117,503
See accompanying notes.
<CAPTION>
Units Unit
Value
<S> <C> <C> <C>
Net assets are represented by (continued):
Growth Division:
PrinFlex Life 623,469 $17.14 $10,688,949
Survivorship Variable Universal Life 4,532 10.92 49,478
10,738,427
High Yield Division - Flex Variable Life 78,154 21.65 1,689,069
International Division:
PrinFlex Life 866,405 15.18 13,150,716
Survivorship Variable Universal Life 3,520 11.57 40,717
13,191,433
International SmallCap Division:
PrinFlex Life 110,487 17.55 1,938,585
Survivorship Variable Universal Life 1,467 14.92 21,892
1,960,477
MicroCap Division:
PrinFlex Life 53,079 8.09 429,246
Survivorship Variable Universal Life 2,578 9.11 23,493
452,739
MidCap Division:
Flex Variable Life 270,266 46.06 12,447,196
PrinFlex Life 1,299,467 14.10 18,317,426
Survivorship Variable Universal Life 228 11.14 2,541
30,767,163
MidCap Growth Division:
PrinFlex Life 90,805 10.74 975,645
Survivorship Variable Universal Life 221 10.86 2,401
978,046
Money Market Division:
Flex Variable Life 36,477 17.04 621,512
PrinFlex Life 1,036,582 11.54 11,963,764
Survivorship Variable Universal Life 183,318 10.20 1,870,204
14,455,480
Putnam Global Asset Allocation Division:
PrinFlex Life 33,053 11.50 380,256
Survivorship Variable Universal Life 3,887 10.86 42,214
422,470
Putnam Vista Division:
PrinFlex Life 55,171 16.03 884,360
Survivorship Variable Universal Life 776 13.92 10,805
895,165
Principal Life Insurance Company
Variable Life Separate Account
Statements of Net Assets (continued)
December 31, 1999
<CAPTION>
Units Unit
Value
<S> <C> <C> <C>
Net assets are represented by (continued):
Putnam Voyager Division:
PrinFlex Life 501,679 $17.13 $ 8,595,141
Survivorship Variable Universal Life 10,333 14.25 147,196
8,742,337
Real Estate Division - PrinFlex Life 8,240 8.93 73,623
SmallCap Division:
PrinFlex Life 94,724 11.48 1,087,335
Survivorship Variable Universal Life 986 11.94 11,773
1,099,108
SmallCap Growth Division:
PrinFlex Life 106,489 20.09 2,138,929
Survivorship Variable Universal Life 1,404 15.90 22,321
2,161,250
SmallCap Value Division:
PrinFlex Life 56,377 10.34 582,707
Survivorship Variable Universal Life 3,687 11.08 40,854
623,561
Stock Index 500 Division:
PrinFlex Life 604,329 11.05 6,676,666
Survivorship Variable Universal Life 2,528 11.09 28,048
6,704,714
Utilities Division:
PrinFlex Life 35,670 11.83 421,894
Survivorship Variable Universal Life 1,566 9.83 15,390
437,284
Combined net assets $214,751,457
</TABLE>
See accompanying notes.
Principal Life Insurance Company
Variable Life Separate Account
Statements of Operations
<TABLE>
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
Aggressive
Growth
Combined Division (1)
<S> <C> <C>
Year ended December 31, 1999 Investment income (loss) Income:
Dividends $ 3,065,326 $ -
Capital gains distributions 9,306,861 2,005,405
12,372,187 2,005,405
Expenses:
Mortality and expense risks 1,367,910 182,021
Net investment income (loss) 11,004,277 1,823,384
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments 646,392 88,148
Change in net unrealized appreciation or depreciation of investments 11,074,319 6,010,958
Net increase (decrease) in net assets resulting from operations $22,724,988 $7,922,490
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 or 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 or depreciation of investments 2,414,101 (55,253)
Net increase (decrease) in net assets resulting from operations $ 7,126,406 $ 353,302
<FN>
(1) Commenced operations February 1, 1997.
</FN>
</TABLE>
See accompanying notes
<TABLE>
<CAPTION>
Asset Capital Fidelity Fidelity Equity Fidelity High
Allocation Balanced Bond Valule Contrafund Income Income
Division (1) Division Division Division Division (1) Division (1) Division (1)
<S> <C> <C> <C> <C> <C> <C>
$ 72,994 $421,363 $ 423,106 $ 631,298 $ 45,256 $ 81,671 $107,614
220,018 458,007 - 3,121,167 331,881 180,535 4,023
293,012 879,370 423,106 3,752,465 377,137 262,206 111,637
20,257 93,638 47,388 227,884 115,541 66,774 12,593
272,755 785,732 375,718 3,524,581 261,596 195,432 99,044
18,368 77,332 (8,182) 207,213 36,522 26,811 (18,366)
136,643 (695,498) (552,153) (5,167,258) 3,000,192 51,551 9,792
$427,766 $167,566 $(184,617) $(1,435,464) $3,298,310 $273,794 $ 90,470
$ 37,595 $278,168 $ 200,418 $ 398,541 $ 17,790 $ 18,251 $ 31,106
39,061 298,323 2,083 748,100 130,883 64,952 19,765
76,656 576,491 202,501 1,146,641 148,673 83,203 50,871
9,173 63,126 24,494 136,738 37,872 24,478 7,171
67,483 513,365 178,007 1,009,903 110,801 58,725 43,700
(1,770) 161,523 33,503 281,655 12,594 5,628 (11,177)
10,057 118,060 (19,726) 461,090 1,240,221 219,300 (81,364)
$ 75,770 $792,948 $ 191,784 $ 1,752,648 $1,363,616 $283,653 $(48,841)
$ 11,857 $150,137 $ 136,267 $ 211,818 $ - $ - $ -
42,154 346,134 - 794,643 - - -
54,011 496,271 136,267 1,006,461 - - -
1,700 38,702 14,802 69,600 6,014 3,260 1,353
52,311 457,569 121,465 936,861 (6,014) (3,260) (1,353)
549 236,637 18,598 342,684 850 630 3,224
(23,876) 104,396 55,567 895,157 115,040 72,538 20,931
$ 28,984 $798,602 $ 195,630 $ 2,174,702 $ 109,876 $ 69,908 $ 22,802
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Operations (continued)
<TABLE>
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
Government
Securities Growth
Division (1) Division (1)
<S> <C> <C>
Year ended December 31, 1999 Investment income (loss) Income:
Dividends $181,309 $ 61,438
Capital gains distributions - 26,610
181,309 88,048
Expenses:
Mortality and expense risks 29,098 65,974
Net investment income (loss) 152,211 22,074
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments (23,023) 35,999
Change in net unrealized appreciation or depreciation of investments (179,101) 1,136,770
Net increase (decrease) in net assets resulting from operations $ (49,913) $1,194,843
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 or 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 or depreciation of investments (3,162) 30,996
Net increase (decrease) in net assets resulting from operations $ 2,080 $ 43,416
<FN>
(1) Commenced operations February 1, 1997.
(2) Commenced operations May 1, 1998.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
High International MidCap Money
Yield International SmallCap MicroCap MidCap Growth Market
Division Division (1) Division (2) Division (2) Division Division (2) Division
<S> <C> <C> <C> <C> <C> <C>
$ 156,525 $ 331,297 $ - $ 614 $ 93,198 $ 1,567 $407,602
- 1,187,285 77,693 - 1,313,207 - -
156,525 1,518,582 77,693 614 1,406,405 1,567 407,602
15,977 88,959 6,069 2,622 228,629 5,079 93,734
140,548 1,429,623 71,624 (2,008) 1,177,776 (3,512) 313,868
(83,063) 34,900 29,313 539 142,810 9,001 -
(35,529) 942,834 570,819 (4,874) 2,019,372 82,583 -
$ 21,956 $2,407,357 $671,756 $(6,343) $3,339,958 $88,072 $313,868
$202,766 $ 118,274 $ 851 $ 620 $ 146,679 $ - $290,641
- 238,049 - - 1,383,017 - -
202,766 356,323 851 620 1,529,696 - 290,641
16,917 47,404 732 326 185,626 637 67,849
185,849 308,919 119 294 1,344,070 (637) 222,792
(1,713) 5,582 (148) (681) 1,170,701 249 -
(222,572) (8,068) 15,012 1,093 (1,927,129) 28,009 -
$ (38,436) $ 306,433 $ 14,983 $ 706 $ 587,642 $27,621 $222,792
$ 162,794 $ 44,308 $ - $ - $ 121,340 $ - $119,402
- 73,919 - - 390,128 - -
162,794 118,227 - - 511,468 - 119,402
11,434 9,278 - - 127,942 - 24,697
151,360 108,949 - - 383,526 - 94,705
19,548 678 - - 1,366,571 - -
(27,928) (165,660) - - 1,395,355 - -
$142,980 $ (56,033) $ - $ - $3,145,452 $ - $ 94,705
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Operations (continued)
<TABLE>
Years ended December 31, 1999 and 1998
<CAPTION>
Putnam Global Putnam
Asset Allocation Vista
Division (2) Division (2)
<S> <C> <C>
Year ended December 31, 1999 Investment income (loss) Income:
Dividends $ 3,412 $ -
Capital gains distributions 9,719 62,859
13,131 62,859
Expenses:
Mortality and expense risks 2,385 2,960
Net investment income (loss) 10,746 59,899
Realized and unrealized gains (losses) on investments
Net realized gains (losses) on investments 4,668 5,780
Change in net unrealized appreciation or depreciation of investments 23,177 181,556
Net increase (decrease) in net assets resulting from operations $38,591 $247,235
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 or depreciation of investments 4,313 20,737
Net increase (decrease) in net assets resulting from operations $ 4,333 $ 20,815
<FN>
(2) Commenced operations May 1, 1998.
(3) Commenced operations May 1, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Putnam SmallCap SmallCap Stock
Voyager Real Estate SmallCap Growth Value Index 500 Utilities
Division (2) Division (2) Division (2) Division (2) Division (2) Division (3) Division (2)
<S> <C> <C> <C> <C> <C> <C>
$ 1,764 $ 3,569 $ 331 $ - $ 3,592 $ 27,669 $8,137
163,482 - 88,145 19,242 - 35,810 1,773
165,246 3,569 88,476 19,242 3,592 63,479 9,910
29,437 376 4,836 5,327 2,821 15,615 1,916
135,809 3,193 83,640 13,915 771 47,864 7,994
16,417 (785) 10,826 30,664 2,968 377 1,155
2,300,449 (5,017) 145,118 705,827 78,477 321,029 (3,398)
$2,452,675 $(2,609) $239,584 $750,406 $82,216 $369,270 $5,751
$ - $ 867 $ 24 $ - $ 512 - $ 624
- - - - - - -
- 867 24 - 512 - 624
1,414 56 557 385 255 - 64
(1,414) 811 (533) (385) 257 - 560
45 (64) (75) (20) (136) - 372
105,601 (320) 11,967 31,970 5,416 - 2,337
$ 104,232 $ 427 $ 11,359 $ 31,565 $ 5,537 - $3,269
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets
<TABLE>
Year ended December 31, 1999
<CAPTION>
Aggressive
Growth
Combined Division
<S> <C> <C>
Net assets at January 1, 1999 $121,091,275 $14,244,041
Increase (decrease) in net assets
Operations:
Net investment income (loss) 11,004,277 1,823,384
Net realized gains (losses) on investments 646,392 88,148
Change in net unrealized appreciation or depreciation of investments 11,074,319 6,010,958
Net increase (decrease) in net assets resulting from operations 22,724,988 7,922,490
Policy related transactions:
Net premium payments, less sales charges and applicable premium
taxes 152,891,171 16,297,188
Contract terminations and surrenders (5,315,548) (453,060)
Death benefit payments (63,672) (7,313)
Policy loan transfers (2,471,181) (393,765)
Transfers to other contracts (54,484,314) (1,675,940)
Cost of insurance and administration charges (18,231,821) (2,653,004)
Surrender charges (1,389,441) (187,217)
Increase in net assets from policy related transactions 70,935,194 10,926,889
Total increase 93,660,182 18,849,379
Net assets at December 31, 1999 $214,751,457 $33,093,420
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Asset Capital Fidelity Fidelity Fidelity High
Allocation Balanced Bond Valule Contrafund Equity Income Income
Division Division Division Division Division Division Division
<S> <C> <C> <C> <C> <C> <C>
$1,592,829 $9,879,189 $3,953,245 $22,971,942 $8,023,001 $4,905,541 $1,064,791
272,755 785,732 375,718 3,524,581 261,596 195,432 99,044
18,368 77,332 (8,182) 207,213 36,522 26,811 (18,366)
136,643 (695,498) (552,153) (5,167,258) 3,000,192 51,551 9,792
427,766 167,566 (184,617) (1,435,464) 3,298,310 273,794 90,470
1,835,680 6,113,533 5,045,651 14,665,546 13,567,422 6,456,166 1,004,457
(41,872) (449,646) (341,883) (779,500) (229,535) (156,447) (70,361)
(2,944) (4,689) (1,456) (16,643) (4,835) (221) (36)
(64,353) (147,452) 69,090 (159,843) (182,637) (174,979) 8,724
(337,090) (2,132,506) (1,149,010) (4,080,476) (1,002,866) (976,597) (360,193)
(260,250) (1,020,029) (691,942) (2,533,293) (1,690,923) (889,111) (148,114)
(17,303) (108,687) (51,343) (178,805) (94,851) (64,648) (29,075)
1,111,868 2,250,524 2,879,107 6,916,986 10,361,775 4,194,163 405,402
1,539,634 2,418,090 2,694,490 5,481,522 13,660,085 4,467,957 495,872
$3,132,463 $12,297,279 $6,647,735 $28,453,464 $21,683,086 $9,373,498 $1,560,663
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
Year ended December 31, 1999
<CAPTION>
Government
Securities Growth
Division Division
<S> <C> <C>
Net assets at January 1, 1999 $3,266,712 $4,760,835
Increase (decrease) in net assets
Operations:
Net investment income (loss) 152,211 22,074
Net realized gains (losses) on investments (23,023) 35,999
Change in net unrealized appreciation or depreciation of investments (179,101) 1,136,770
Net increase (decrease) in net assets resulting from operations (49,913) 1,194,843
Policy related transactions:
Net premium payments, less sales charges and applicable premium
taxes 2,370,343 7,116,531
Contract terminations and surrenders (11,368) (174,656)
Death benefit payments (90) (80)
Policy loan transfers 3,547 (137,542)
Transfers to other contracts (2,222,249) (933,539)
Cost of insurance and administration charges (234,781) (1,015,792)
Surrender charges (4,698) (72,173)
Increase (decrease) in net assets from policy related transactions (99,296) 4,782,749
Total increase (149,209) 5,977,592
Net assets at December 31, 1999 $3,117,503 $10,738,427
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
International MidCap Money
High Yield International SmallCap MicroCap MidCap Growth Market
Division Division Division Division Division Division Division
<S> <C> <C> <C> <C> <C> <C>
$2,269,099 $ 7,800,249 $ 316,190 $149,378 $25,463,610 $315,903 $ 8,335,116
140,548 1,429,623 71,624 (2,008) 1,177,776 (3,512) 313,868
(83,063) 34,900 29,313 539 142,810 9,001 -
(35,529) 942,834 570,819 (4,874) 2,019,372 82,583 -
21,956 2,407,357 671,756 (6,343) 3,339,958 88,072 313,868
435,443 6,417,856 1,229,935 368,670 11,141,276 878,861 40,630,667
(706,562) (171,017) (11,949) (1,103) (1,108,369) (10,284) (526,416)
(1,481) (403) - - (23,450) - (31)
(19,235) (167,118) (97,474) (6,935) (579,695) (5,191) (280,402)
(136,183) (1,986,291) (49,357) (8,950) (4,628,585) (195,196) (31,813,986)
(128,426) (1,038,531) (93,687) (41,522) (2,628,217) (89,869) (1,987,469)
(45,542) (70,669) (4,937) (456) (209,365) (4,250) (215,867)
(601,986) 2,983,827 972,531 309,704 1,963,595 574,071 5,806,496
(580,030) 5,391,184 1,644,287 303,361 5,303,553 662,143 6,120,364
$1,689,069 $13,191,433 $1,960,477 $452,739 $30,767,163 $978,046 $14,455,480
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
Year ended December 31, 1999
<CAPTION>
Putnam Global Putnam
Asset Allocation Vista
Division Division
<S> <C> <C>
Net assets at January 1, 1999 $ 75,231 $123,051
Increase (decrease) in net assets
Operations:
Net investment income (loss) 10,746 59,899
Net realized gains (losses) on investments 4,668 5,780
Change in net unrealized appreciation or depreciation of investments 23,177 181,556
Net increase (decrease) in net assets resulting from operations 38,591 247,235
Policy related transactions:
Net premium payments, less sales charges and applicable premium
taxes 441,210 628,024
Contract terminations and surrenders (2,330) (6,403)
Death benefit payments - -
Policy loan transfers (601) (5,925)
Transfers to other contracts (85,053) (32,861)
Cost of insurance and administration charges (43,615) (55,310)
Surrender charges (963) (2,646)
Increase in net assets from policy related transactions 308,648 524,879
Total increase 347,239 772,114
Net assets at December 31, 1999 $422,470 $895,165
<FN>
(1) Commenced operations May 1, 1999.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Putnam SmallCap SmallCap Stock
Voyager Real Estate SmallCap Growth Value Index 500 Utilities
Division Division Division Division Division Division (1) Division
<S> <C> <C> <C> <C> <C> <C>
$ 899,548 $31,709 $ 250,636 $ 209,695 $144,138 $ - $ 45,596
135,809 3,193 83,640 13,915 771 47,864 7,994
16,417 (785) 10,826 30,664 2,968 377 1,155
2,300,449 (5,017) 145,118 705,827 78,477 321,029 (3,398)
2,452,675 (2,609) 239,584 750,406 82,216 369,270 5,751
6,453,995 62,476 782,251 1,479,309 496,663 6,494,864 477,154
(30,704) (586) (2,802) (7,272) (6,635) (13,946) (842)
- - - - - - -
(47,124) (75) 17,498 (95,917) (518) 5,779 (9,038)
(354,009) (6,771) (121,595) (79,325) (36,013) (44,128) (35,545)
(619,356) (10,279) (65,306) (92,641) (53,548) (101,362) (45,444)
(12,688) (242) (1,158) (3,005) (2,742) (5,763) (348)
5,390,114 44,523 608,888 1,201,149 397,207 6,335,444 385,937
7,842,789 41,914 848,472 1,951,555 479,423 6,704,714 391,688
$8,742,337 $73,623 $1,099,108 $2,161,250 $623,561 $6,704,714 $437,284
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
Year ended December 31, 1998
<CAPTION>
Aggressive
Growth
Combined Division
<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 or 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
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Asset Capital Fidelity Fidelity Equity Fidelity High
Allocation Balanced Bond Valule Contrafund Income Income
Division Division Division Division Division Division Division
<S> <C> <C> <C> <C> <C> <C>
$ 561,781 $5,707,028 $2,270,847 $11,822,941 $2,089,509 $1,018,314 $ 329,510
67,483 513,365 178,007 1,009,903 110,801 58,725 43,700
(1,770) 161,523 33,503 281,655 12,594 5,628 (11,177)
10,057 118,060 (19,726) 461,090 1,240,221 219,300 (81,364)
75,770 792,948 191,784 1,752,648 1,363,616 283,653 (48,841)
1,591,693 7,040,409 3,302,871 16,284,235 6,142,338 4,698,442 1,259,486
(4,085) (1,368,274) (302,397) (2,480,693) (74,844) (17,461) (4,697)
- (517) (1,856) (6,646) (402) (3,431) (1,170)
(10,991) (244,822) (81,085) (170,516) (145,298) (69,698) (53,013)
(480,701) (1,287,295) (1,034,053) (2,543,349) (678,221) (572,136) (318,315)
(138,368) (718,018) (377,536) (1,611,497) (632,111) (422,440) (95,559)
(2,270) (42,270) (15,330) (75,181) (41,586) (9,702) (2,610)
955,278 3,379,213 1,490,614 9,396,353 4,569,876 3,603,574 784,122
1,031,048 4,172,161 1,682,398 11,149,001 5,933,492 3,887,227 735,281
$1,592,829 $9,879,189 $3,953,245 $22,971,942 $8,023,001 $4,905,541 $1,064,791
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
Year ended December 31, 1998
<CAPTION>
Government
Securities Growth
Division Division
<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 or 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
<FN>
(1) Commenced operations May 1, 1998.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
High International MidCap Money
Yield International SmallCap MicroCap MidCap Growth Market
Division Division Division (1) Division (1) Division Division (1) Division
<S> <C> <C> <C> <C> <C> <C>
$2,092,182 $2,716,270 $ - $ - $19,216,629 $ - $ 4,328,456
185,849 308,919 119 294 1,344,070 (637) 222,792
(1,713) 5,582 (148) (681) 1,170,701 249 -
(222,572) (8,068) 15,012 1,093 (1,927,129) 28,009 -
(38,436) 306,433 14,983 706 587,642 27,621 222,792
654,374 6,275,718 334,028 158,559 15,747,739 306,597 36,243,366
(223,218) (52,096) (509) - (4,608,554) (24) (258,565)
- (2,388) - - (9,498) - (1,326)
(2,756) (93,812) - (2,410) (462,004) - (8,878)
(82,650) (623,489) (18,167) (2,484) (2,445,385) (4,378) (30,709,128)
(126,865) (697,441) (13,862) (4,993) (2,424,710) (13,899) (1,455,420)
(3,532) (28,946) (283) - (138,249) (14) (26,181)
215,353 4,777,546 301,207 148,672 5,659,339 288,282 3,783,868
176,917 5,083,979 316,190 149,378 6,246,981 315,903 4,006,660
$2,269,099 $7,800,249 $316,190 $149,378 $25,463,610 $315,903 $ 8,335,116
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
Year ended December 31, 1998
<CAPTION>
Putnam Global Putnam
Asset Allocation Vista
Division (1) Division (1)
<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 or depreciation of investments 4,313 20,737
Net increase 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
<FN>
(1) Commenced operations May 1, 1998.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Putnam SmallCap
Voyager Real Estate SmallCap Growth SmallCap Value Utilities
Division (1) Division (1) Division (1) Division (1) Division (1) Division (1)
<S> <C> <C> <C> <C> <C>
$ - $ - $ - $ - $ - $ -
(1,414) 811 (533) (385) 257 560
45 (64) (75) (20) (136) 372
105,601 (320) 11,967 31,970 5,416 2,337
104,232 427 11,359 31,565 5,537 3,269
868,001 33,346 251,162 193,803 145,362 53,396
(93) (23) (25) (22) (28) -
- - - - - -
(2,429) - (241) - - (196)
(32,669) (406) (3,354) (6,641) (828) (8,493)
(37,442) (1,622) (8,251) (8,998) (5,889) (2,380)
(52) (13) (14) (12) (16) -
795,316 31,282 239,277 178,130 138,601 42,327
899,548 31,709 250,636 209,695 144,138 45,596
$899,548 $31,709 $250,636 $209,695 $144,138 $45,596
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
Year ended December 31, 1997
<CAPTION>
Aggressive
Growth
Combined Division (1)
<S> <C> <C>
Net assets at January 1, 1997 $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 or depreciation of investments 2,414,102 (55,253)
Net increase 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
<FN>
(1) Commenced operations February 1, 1997.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Asset Capital Fidelity Fidelity Equity Fidelity High
Allocation Balanced Bond Valule Contrafund Income Income
Division (1) Division Division Division Division (1) Division (1) Division (1)
<S> <C> <C> <C> <C> <C> <C>
$ - $4,344,657 $1,642,800 $ 7,021,808 $ - $ - $ -
52,311 457,569 121,465 936,861 (6,014) (3,260) (1,353)
549 236,637 18,598 342,684 850 630 3,224
(23,876) 104,396 55,567 895,157 115,040 72,538 20,931
28,984 798,602 195,630 2,174,702 109,876 69,908 22,802
562,968 3,035,179 1,595,001 6,782,066 2,125,905 1,018,045 369,108
(15) (1,398,821) (414,701) (2,651,564) (666) (740) (262)
- - - (8,829) - - -
(6,314) (145,315) (55,770) (183,175) (9,953) (800) (26,280)
(690) (454,671) (434,583) (441,824) (24,082) (9,962) (20,415)
(23,132) (450,585) (250,798) (827,795) (110,670) (57,135) (15,088)
(20) (22,018) (6,732) (42,448) (901) (1,002) (355)
532,797 563,769 432,417 2,626,431 1,979,633 948,406 306,708
561,781 1,362,371 628,047 4,801,133 2,089,509 1,018,314 329,510
$561,781 $5,707,028 $2,270,847 $11,822,941 $2,089,509 $1,018,314 $329,510
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Statements of Changes in Net Assets (continued)
<TABLE>
Year ended December 31, 1997
<CAPTION>
Government
Securities Growth
Division (1) Division (1)
<S> <C> <C>
Net assets at January 1, 1997 $ - $ -
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 or 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
<FN>
(1) Commenced operations February 1, 1997.
</FN>
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
High Money
Yield International MidCap Market
Division Division (1) Division Division
<S> <C> <C> <C>
$1,325,273 $ - $13,704,998 $ 1,305,482
151,360 108,949 383,525 94,705
19,548 678 1,366,571 -
(27,928) (165,660) 1,395,356 -
142,980 (56,033) 3,145,452 94,705
1,100,347 3,053,987 11,608,767 15,023,945
(254,148) (1,601) (5,304,517) (307,677)
(1,913) - (25,030) -
(38,855) (20,879) (430,694) (59,858)
(56,489) (102,897) (1,619,014) (11,072,400)
(121,092) (154,140) (1,777,795) (647,510)
(3,921) (2,167) (85,538) (8,231)
623,929 2,772,303 2,366,179 2,928,269
766,909 2,716,270 5,511,631 3,022,974
$2,092,182 $2,716,270 $19,216,629 $ 4,328,456
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements
December 31, 1999
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) 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, 1999, contractholder investment options
include the following diversified open-end management investment companies:
<TABLE>
<S> <C>
Principal Variable Contracts Fund, Inc. (4): Principal Variable Contracts Fund, Inc. (4)
Aggressive Growth Account (1) (continued):
Asset Allocation Account (1) Small Cap Account (2)
Balanced Account SmallCap Growth Account (2)
Bond Account SmallCap Value Account (2)
Capital Value Account Stock Index 500 Account (3)
Government Securities Account (1) Utilities Account (2)
Growth Account (1) Fidelity Variable Insurance Products Fund:
High Yield Account Equity Income Portfolio (1)
International Account (1) High Income Portfolio (1)
International SmallCap Account (2) Fidelity Variable Insurance Products Fund
MicroCap Account (2) II - Contrafund Portfolio (1)
MidCap Account Putnam Variable Trust:
MidCap Growth Account (2) Global Asset Allocation Fund (2)
Money Market Account Vista Fund (2)
Real Estate Account (2) Voyager Fund (2)
<FN>
(1) Additional investment option available to contractholders as of February 1,
1997.
(2) Additional investment option available to contractholders as of May 1,
1998.
(3) Additional investment option available to contractholders as of May 1,
1999.
(4) Organized by Principal Life Insurance Company.
</FN>
</TABLE>
Investments are stated at the closing net asset values per share on December 31,
1999. 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.
The Separate Account supports the following variable life insurance contracts of
Principal Life: Flex Variable Life Contracts and PrinFlex Life Contracts. On
July 1, 1999, Principal Life introduced a new product, Survivorship Variable
Universal Life Insurance, which invests in the Separate Account.
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
1. Investment and Accounting Policies (continued)
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
$214,984, $174,324, and $1,994,681, respectively, in 1999; $227,302,
$210,067, and $2,225,738, respectively, in 1998; and $236,727, $277,142, and
$2,832,278, respectively, in 1997. 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: $1,148,956,
$1,744,117 and $14,262,468, respectively, in 1999; $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.
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
2. Expenses and Policy Charges (continued)
Survivorship Variable Universal Life Contracts (beginning in 1999) -
Mortality and expenses risk assumed by Principal Life are compensated for
by a charge equivalent to an annual rate of .80% of the asset value of each
policy. There is a monthly administration charge of $8.00. An additional
monthly administration charge in the first ten years (and ten years after
an increase in the face amount) of $.07 per $1,000 of face amount. The
charge of $.07 is increased by $.005 per $1,000 for each insurer classified
as smoker. 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 $3,970, $30,083 and $26,149, respectively,
during the year ended December 31, 1999. A sales charge of 5.0% of premiums
less than or equal to target premium and 2.0% 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
deducted from each payment on behalf of each participant. The sale 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.
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities
The aggregate units and cost of purchases and proceeds from sales of investments
were as follows:
<TABLE>
Year ended December 31, 1999
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Aggressive Growth Division:
PrinFlex Life 970,302 $18,208,064 331,686 $5,543,887
Survivorship Variable Universal Life 7,867 94,528 732 8,432
978,169 18,302,592 332,418 5,552,319
Asset Allocation Division:
PrinFlex Life 126,145 1,964,356 55,304 741,949
Survivorship Variable Universal Life 15,103 164,337 203 2,120
141,248 2,128,693 55,507 744,069
Balanced Division:
Flex Variable Life 32,343 1,253,440 31,633 977,440
PrinFlex Life 385,145 5,654,313 225,867 2,977,675
Survivorship Variable Universal Life 8,197 85,151 155 1,532
425,685 6,992,904 257,655 3,956,647
Bond Division:
Flex Variable Life 21,722 638,489 24,329 584,331
PrinFlex Life 385,603 4,786,951 139,681 1,628,875
Survivorship Variable Universal Life 4,133 43,317 72 726
411,458 5,468,757 164,082 2,213,932
Capital Value Division:
Flex Variable Life 58,379 3,417,091 44,706 1,759,412
PrinFlex Life 865,446 14,950,191 424,784 6,209,297
Survivorship Variable Universal Life 5,115 50,729 822 7,735
928,940 18,418,011 470,312 7,976,444
Fidelity Contrafund Division:
PrinFlex Life 784,899 13,802,563 194,124 3,317,646
Survivorship Variable Universal Life 14,058 141,995 340 3,542
798,957 13,944,558 194,464 3,321,188
Fidelity Equity Income Division:
PrinFlex Life 442,641 6,654,870 161,414 2,328,152
Survivorship Variable Universal Life 6,673 63,501 65 624
449,314 6,718,371 161,479 2,328,776
Fidelity High Income Division:
PrinFlex Life 86,113 1,116,094 51,793 611,648
Government Securities Division:
PrinFlex Life 194,406 2,480,309 209,054 2,462,106
Survivorship Variable Universal Life 6,834 71,341 3,590 36,630
201,240 2,551,650 212,644 2,498,736
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1999
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Growth Division:
PrinFlex Life 454,302 $7,156,190 154,162 $2,398,898
Survivorship Variable Universal Life 4,616 48,392 84 860
458,918 7,204,582 154,246 2,399,758
High Yield Division:
Flex Variable Life 20,298 591,968 48,184 1,053,406
International Division:
PrinFlex Life 492,014 7,894,576 272,765 3,522,604
Survivorship Variable Universal Life 3,556 41,864 36 386
495,570 7,936,440 272,801 3,522,990
International SmallCap Division:
PrinFlex Life 95,274 1,287,791 19,712 263,257
Survivorship Variable Universal Life 1,484 19,838 17 217
96,758 1,307,629 19,729 263,474
MicroCap Division:
PrinFlex Life 42,361 346,589 7,556 61,540
Survivorship Variable Universal Life 2,583 22,694 5 47
44,944 369,283 7,561 61,587
MidCap Division:
Flex Variable Life 69,891 3,419,307 78,806 3,282,474
PrinFlex Life 669,400 9,125,936 492,907 6,123,791
Survivorship Variable Universal Life 232 2,437 4 44
739,523 12,547,680 571,717 9,406,309
MidCap Growth Division:
PrinFlex Life 90,323 878,244 32,058 309,719
Survivorship Variable Universal Life 236 2,184 15 150
90,559 880,428 32,073 309,869
Money Market Division:
Flex Variable Life 22,657 399,399 8,313 140,760
PrinFlex Life 3,259,754 37,186,165 2,946,933 33,194,646
Survivorship Variable Universal Life 339,308 3,452,703 155,990 1,582,499
3,621,719 41,038,267 3,111,236 34,917,905
Putnam Global Asset Allocation Division:
PrinFlex Life 37,942 413,030 12,194 134,797
Survivorship Variable Universal Life 3,901 41,312 14 151
41,843 454,342 12,208 134,948
Putnam Vista Division:
PrinFlex Life 52,210 681,239 8,751 106,029
Survivorship Variable Universal Life 782 9,644 6 76
52,992 690,883 8,757 106,105
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1999
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
Putnam Voyager Division:
PrinFlex Life 505,025 $ 6,504,503 86,311 $ 1,091,791
Survivorship Variable Universal Life 10,457 114,740 124 1,528
515,482 6,619,243 86,435 1,093,319
Real Estate Division:
PrinFlex Life 6,892 65,261 2,042 18,329
SmallCap Division:
PrinFlex Life 82,373 858,971 19,001 178,081
Survivorship Variable Universal Life 997 11,754 11 117
83,370 870,725 19,012 178,198
SmallCap Growth Division:
PrinFlex Life 105,937 1,480,349 19,878 283,342
Survivorship Variable Universal Life 1,414 18,203 10 146
107,351 1,498,552 19,888 283,488
SmallCap Value Division:
PrinFlex Life 50,737 461,462 11,295 102,194
Survivorship Variable Universal Life 3,695 38,793 8 83
54,432 500,255 11,303 102,277
Stock Index 500 Division:
PrinFlex Life 621,329 6,531,558 17,000 174,277
Survivorship Variable Universal Life 2,600 26,786 72 759
623,929 6,558,344 17,072 175,036
Utilities Division:
PrinFlex Life 39,617 471,468 7,891 93,083
Survivorship Variable Universal Life 1,571 15,596 5 50
41,188 487,064 7,896 93,133
11,516,892 $165,262,576 6,302,514 $83,323,890
</TABLE>
<PAGE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1998
<CAPTION>
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
</TABLE>
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
Year ended December 31, 1998
<CAPTION>
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
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
<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
Principal Life Insurance Company
Variable Life Separate Account
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities
(continued)
<CAPTION>
Year ended December 31, 1997
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
<S> <C> <C> <C> <C>
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>
5. Year 2000 Issues (Unaudited)
As of January 31, 2000, virtually all of the major technology systems, processes
and infrastructure, including those which rely on third party vendors used by
Principal Life and other service providers of the Separate Account appear to be
operating smoothly following the rollover to the Year 2000. Principal Life has
experienced no significant interruptions to normal business operations,
including the processing of customer account data and transactions. Principal
Life will continue its Year 2000 vigilance into early 2001.
Based on the performance of its major technology systems to date, ongoing plans
to deal with external relationships, and contingency plans, Principal Life
believes that in the worst case scenario it will experience, at most, isolated
and insignificant disruptions of business processes as a result of Year 2000
issues. Such disruptions are not expected to have a material effect on the
Separate Account's future results of operations, liquidity, or financial
condition.
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) as of December 31, 1999 and
1998, 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, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/Ernst & Young LLP
Des Moines, Iowa
January 31, 2000
Principal Life Insurance Company
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
(In Millions)
<S> <C> <C> <C>
Revenues
Premiums and other considerations $3,152 $3,409 $4,668
Fees and other revenue 1,125 992 881
Net investment income 2,777 2,806 2,937
Net realized capital gains 459 466 176
Contribution from closed block 11 13 -
------------------------------------------
Total revenues 7,524 7,686 8,662
Expenses
Policy and contract benefits 4,210 4,500 5,271
Change in future policy benefits and
contractholder funds 415 277 361
Dividends to policyholders 9 155 299
Operating expenses 1,757 2,015 2,036
------------------------------------------
------------------------------------------
Total expenses 6,391 6,947 7,967
------------------------------------------
Income before income taxes 1,133 739 695
Income taxes 323 44 241
------------------------------------------
==========================================
Net income $ 810 $ 695 $ 454
==========================================
</TABLE>
See accompanying notes.
Principal Life Insurance Company
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
December 31
1999 1998
---------------------------
---------------------------
(In Millions)
<S> <C> <C>
Assets
Fixed maturities, available-for-sale $21,660 $21,006
Equity securities, available-for-sale 864 1,102
Mortgage loans 12,296 12,091
Real estate 2,212 2,585
Policy loans 28 25
Other investments 637 349
---------------------------
Total investments 37,697 37,158
Cash and cash equivalents 362 461
Accrued investment income 408 375
Deferred policy acquisition costs 792 456
Property and equipment 458 451
Goodwill and other intangibles 152 161
Premiums due and other receivables 284 261
Mortgage loan servicing rights 1,081 778
Closed block assets 4,318 4,251
Separate account assets 33,307 29,009
Other assets 451 582
---------------------------
===========================
Total assets $79,310 $73,943
===========================
===========================
Liabilities
Contractholder funds $24,523 $23,339
Future policy benefits and claims 7,623 7,082
Other policyholder funds 271 293
Short-term debt - 200
Long-term debt 834 671
Income taxes currently payable 15 27
Deferred income taxes 159 497
Closed block liabilities 5,395 5,299
Separate account liabilities 33,307 29,009
Other liabilities 2,232 2,057
---------------------------
---------------------------
Total liabilities 74,359 68,474
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 3
Retained earnings 5,110 4,749
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on available-for-sale securities (102) 746
Net foreign currency translation adjustment (60) (29)
---------------------------
---------------------------
Total stockholder's equity 4,951 5,469
---------------------------
===========================
Total liabilities and stockholder's equity $79,310 $73,943
===========================
</TABLE>
See accompanying notes.
Principal Life Insurance Company
Consolidated Statements of Stockholder's Equity
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses) on Net Foreign
Available-for-Sale Currency Total
Common Retained Securities Translation Stockholder's
Stock Earnings Adjustment Equity
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 $- $3,803 $ 860 $ (9) $4,654
Comprehensive income:
Net income - 454 - - 454
Net change in unrealized
gains and losses on fixed
maturities, - - 197 - 197
available-for-sale
Net change in unrealized
gains and losses 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 - - - (2) (2)
adjustment
----------------
Comprehensive income 630
-------------------------------------------------------------------------------
Balances at December 31, 1997 - 4,257 1,038 (11) 5,284
Issuance of 2,500,000 shares
of common stock to parent
holding company 3 (3) - - -
Dividend to parent holding - (200) - - (200)
company
Comprehensive income:
Net income - 695 - - 695
Net change in unrealized
gains and losses on fixed
maturities, - - (203) - (203)
available-for-sale
Net change in unrealized
gains and losses on
equity securities,
available-for-sale, - - (292) - (292)
including seed money in
separate accounts
Adjustments for assumed
changes in amortization
patterns:
Deferred policy
acquisition costs - - 37 - 37
Unearned revenue reserves - - (4) - (4)
Provision for deferred
income tax benefit - - 170 - 170
Change in net foreign
currency translation - - - (18) (18)
adjustment
----------------
Comprehensive income 385
-------------------------------------------------------------------------------
Balances at December 31, 1998 3 4,749 746 (29) 5,469
</TABLE>
Principal Life Insurance Company
Consolidated Statements of Stockholder's Equity (continued)
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses) on Net Foreign
Available-for-Sale Currency Total
Common Retained Securities Translation Stockholder's
Stock Earnings Adjustment Equity
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1999 $3 $4,749 $ 746 $ (29) $5,469
Dividend to parent holding - (449) - - (449)
company
Comprehensive loss:
Net income - 810 - - 810
Net change in unrealized
gains and losses on fixed
maturities, - - (1,375) - (1,375)
available-for-sale
Net change in unrealized
gains and losses on
equity securities,
available-for-sale, - - (142) - (142)
including seed money in
separate accounts
Adjustments for assumed
changes in amortization
patterns:
Deferred policy
acquisition costs - 246 - 246
Unearned revenue reserves - (30) - (30)
Provision for deferred
income tax benefit - 453 - 453
Change in net foreign
currency translation - - (31) (31)
adjustment
----------------
Comprehensive loss (69)
===============================================================================
Balances at December 31, 1999 $3 $5,110 $ (102) $(60) $4,951
===============================================================================
</TABLE>
See accompanying notes.
Principal Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
---------------------------------------
(In Millions)
<S> <C> <C> <C>
Operating activities
Net income $ 810 $ 695 $ 454
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 76 170 170
Additions to deferred policy acquisition costs (254) (229) (213)
Gain on sales of subsidiaries (11) (6) (14)
Accrued investment income (33) 24 7
Premiums due and other receivables (21) 87 (78)
Contractholder and policyholder liabilities and dividends
1,430 1,489 1,396
Current and deferred income taxes 103 (265) 96
Net realized capital gains (459) (466) (176)
Depreciation and amortization expense 72 100 117
Change in closed block operating assets and
liabilities, net 174 230 -
Other 163 115 (185)
---------------------------------------
Net adjustments 1,240 1,249 1,120
---------------------------------------
Net cash provided by operating activities 2,050 1,944 1,574
Investing activities Available-for-sale securities:
Purchases (10,956) (7,141) (7,478)
Sales 6,852 5,684 7,475
Maturities 2,500 1,377 1,204
Mortgage loans acquired or originated (16,503) (14,162) (9,925)
Mortgage loans sold or repaid 16,242 14,414 8,977
Net change in mortgage servicing rights (307) (387) (144)
Real estate acquired (449) (436) (309)
Real estate sold 870 662 198
Net change in property and equipment (20) (20) -
Change in closed block investments, net (169) (201) -
Proceeds from sales of subsidiaries 42 96 35
Purchases of interest in subsidiaries, net of cash acquired (13) (218) (99)
Net change in other investments (260) (249) (83)
---------------------------------------
Net cash used in investing activities (2,171) (581) (149)
</TABLE>
Principal Life Insurance Company
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
---------------------------------------
(In Millions)
<S> <C> <C> <C>
Financing activities
Issuance of debt $ 203 $ 243 $ 75
Principal repayments of debt (40) (51) (28)
Proceeds of short-term borrowings 4,952 8,628 5,089
Repayment of short-term borrowings (4,896) (8,924) (4,974)
Dividend paid to parent holding company (441) (140) -
Investment contract deposits 5,325 5,854 4,134
Investment contract withdrawals (5,081) (7,058) (5,446)
---------------------------------------
Net cash provided by (used in) financing activities 22 (1,448) (1,150)
---------------------------------------
Net increase (decrease) in cash and cash equivalents (99) (85) 275
Cash and cash equivalents at beginning of year 461 546 271
=======================================
Cash and cash equivalents at end of year $ 362 $ 461 $ 546
=======================================
Schedule of noncash operating and investing activities
Dividend of net noncash assets and liabilities of Princor Financial
Services Corporation to Principal Financial Services, Inc. on
April 1, 1999 $ 12
=============
Thefollowing 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.
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1999
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 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 Principal Life
Insurance Company and its consolidated subsidiaries, as the net assets so
transferred to achieve the change in legal organization were accounted for at
historical carrying amounts in a manner similar to that in pooling-of-interests
accounting.
Description of Business
Principal Life Insurance Company and its consolidated subsidiaries ("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 accounting
principles generally accepted in the United States ("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 $2.3 billion at December
31, 1999 and $2.2 billion at December 31, 1998. Total revenues of the
unconsolidated entities were $2.0 billion in 1999, $1.8 billion in 1998 and $294
million in 1997. During 1999, 1998 and 1997, the Company included $108 million,
$18 million and $19 million, respectively, in net investment income representing
the Company's share of current year net income 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 policyholders
included therein that, after
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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 such that their cash flows
together with anticipated revenues 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 to
provide for the continuation of aggregate dividend scales in accordance with the
1997 policy dividend scales if the experience underlying such scales continued,
and to allow for appropriate adjustments in such scales if the experience
changes.
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 Company will continue to pay guaranteed benefits under all policies,
including the policies included in the Closed Block, in accordance with their
terms. If the assets allocated to the Closed Block, the investment cash flows
from those assets and the revenues from the policies included in the Closed
Block, including investment income thereon, prove to be insufficient to pay the
benefits guaranteed under the policies included in the Closed Block, the Company
will be required to make such payments from its general funds.
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), policyholder
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 operating income
or other comprehensive 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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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.
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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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 $432
million and $743 million and commercial mortgage loans held for sale in the
amount of $280 million and $22 million at December 31, 1999 and 1998,
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, excluding investments in unconsolidated
entities, 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 risk of loss is typically limited to the fair value of its
derivative instruments and not to the notional or contractual amounts of these
derivatives. Risk arises from changes in the fair value of the underlying
instruments. The Company is also exposed to credit losses in the event of
nonperformance of the counterparties. This credit risk is minimized by
purchasing such agreements from financial institutions with high credit ratings
and by establishing and monitoring exposure limits.
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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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 policyholders. 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 policyholder 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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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
policyholder 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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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 policyholder 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. 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 other considerations and policy and
contract benefits and changes in reserves is as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Premiums and other considerations:
Direct $3,187 $3,390 $4,601
Assumed 4 59 106
Ceded (39) (40) (39)
==========================================
Net premiums and other considerations $3,152 $3,409 $4,668
==========================================
Policy and contract benefits and changes in reserves:
Direct $4,656 $4,739 $5,596
Assumed (1) 66 102
Ceded (30) (28) (66)
------------------------------------------
Net policy and contract benefits and changes in reserves
$4,625 $4,777 $5,632
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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.
Guaranty-fund Assessments
Guaranty-fund assessments are accrued 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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Pension and Postretirement Benefits
The Company accounts for its pension benefits and postretirement benefits other
than pension (medical, life insurance and long-term care) using the full accrual
method.
Property and Equipment
Property and equipment includes home office properties, related leasehold
improvements, purchased and internally developed software and other fixed
assets. Property and equipment use is shown in the consolidated statements of
financial position at cost less allowances for accumulated depreciation.
Provisions for depreciation of property and equipment are computed principally
on the straight-line method over the estimated useful lives of the assets.
Property and equipment and related accumulated depreciation are as follows (in
millions):
December 31
1999 1998
-----------------------------
Property and equipment $777 $730
Accumulated depreciation (319) (279)
=============================
Property and equipment, net $458 $451
=============================
Goodwill and Other Intangibles
Goodwill and other intangibles include the cost of acquired subsidiaries in
excess of the fair value of the net assets (i.e., goodwill) and other intangible
assets which 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 intangibles is reviewed periodically for
indicators of impairment in value, which in the view of management are other
than temporary, including unexpected or adverse changes in the economic or
competitive environments in which the Company operates, profitability analyses
and the fair value of the relevant subsidiary. If facts and circumstances
suggest that a subsidiary's goodwill is impaired, the Company assesses the fair
value of the underlying business and reduces the goodwill to an amount that
results in the book value of the subsidiary approximating fair value.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Goodwill and other intangibles, and related accumulated amortization, are as
follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Goodwill $176 $185
Other intangibles 21 16
-----------------------------
197 201
Accumulated amortization (45) (40)
=============================
Total goodwill and other intangibles, net $152 $161
=============================
</TABLE>
Premiums Due and Other Receivables
Premiums due and other receivables include life and health insurance premiums
due, reinsurance recoveries, guaranty funds receivable or on deposit,
receivables from the sale of securities and other receivables.
Mortgage Loan Servicing Rights
Mortgage loan servicing rights 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 loan 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
Included in other assets are certain assets pending transfer or novation that
are carried at fair value (see Note 2). The remainder of other assets are
reported primarily at cost.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in stockholder's equity during
a period except those resulting from investments by shareholders and
distributions to shareholders.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
The following table sets forth the adjustments necessary to avoid duplication of
items that are included as part of net income for a year that had been part of
other comprehensive income in prior years (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses) on available-for-sale securities
arising during the year $(1,039) $(530) $106
Adjustment for realized gains on available-for-sale
securities included in net income 191 238 72
==========================================
Unrealized gains (losses) on available-for-sale securities,
as adjusted $ (848) $(292) $178
==========================================
</TABLE>
The above adjustment for net realized gains on available-for-sale securities
included in net income is presented net of tax, related changes in the
amortization patterns of deferred policy acquisition costs and unearned revenue
reserves.
Reclassifications
Certain reclassifications have been made to the 1997 and 1998 consolidated
financial statements to conform to the 1999 presentation.
Accounting Changes
In June 1998, the Financial Accounting Standards Board ("the FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"). In June 1999, Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, ("SFAS 137") was issued deferring the effective date of SFAS
133 by one year. The new effective date for the Company to adopt SFAS 133 is
January 1, 2001. SFAS 133 will require the Company to include all derivatives in
the consolidated 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 consolidated financial position.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
On January 1, 1999, the Company implemented the Statement of Position ("SOP")
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 defines internal use software and when the costs
associated with internal use should be capitalized. The implementation did not
have a material impact on the Company's consolidated financial statements.
2. Mergers, Acquisitions and Divestitures
During 1999, various acquisitions were made by the Company's subsidiaries at
purchase prices aggregating $13 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, 1999 and total 1999 revenue of $17 million and $12 million,
respectively.
Effective April 1, 1998, the Company merged substantially all of its managed
care operations with Coventry Corporation in exchange for a non-majority
ownership position in the resulting entity, 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.
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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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, 1999 and 1998, are
as follows (in millions):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
---------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999 Fixed maturities:
United States Government and agencies
$ 163 $ - $ 2 $ 161
Foreign governments 808 18 15 811
States and political subdivisions 139 1 9 131
Corporate - public 5,187 73 137 5,123
Corporate - private 10,300 95 332 10,063
Mortgage-backed and other asset-backed
securities 5,486 12 127 5,371
---------------------------------------------------------------
Total fixed maturities $22,083 $199 $622 $21,660
===============================================================
Total equity securities $ 721 $176 $ 33 $ 864
===============================================================
December 31, 1998 Fixed maturities:
United States Government and agencies
$ 615 $ - $ 10 $ 605
Foreign governments 340 29 5 364
States and political subdivisions 137 10 - 147
Corporate - public 3,841 249 84 4,006
Corporate - private 10,570 623 95 11,098
Mortgage-backed and other asset-backed
securities 4,659 138 11 4,786
---------------------------------------------------------------
===============================================================
Total fixed maturities $20,162 $1,049 $205 $21,006
===============================================================
Total equity securities $ 760 $ 395 $ 53 $ 1,102
===============================================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The cost and fair value of fixed maturities available-for-sale at December 31,
1999, by expected maturity, are as follows (in millions):
<TABLE>
<CAPTION>
Cost Fair Value
------------------------------
------------------------------
<S> <C> <C>
Due in one year or less $ 1,261 $ 1,260
Due after one year through five years 7,784 7,654
Due after five years through ten years 4,342 4,281
Due after ten years 3,210 3,094
------------------------------
------------------------------
16,597 16,289
Mortgage-backed and other asset-backed securities 5,486 5,371
------------------------------
==============================
Total $22,083 $21,660
==============================
</TABLE>
The above summarized activity is based on expected maturities. Actual maturities
may differ because borrowers may have the right to call or pre-pay obligations.
Major categories of net investment income are summarized as follows (in
millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Fixed maturities, available-for-sale $1,578 $1,525 $1,620
Equity securities, available-for-sale 46 32 39
Mortgage loans 1,025 1,100 1,084
Real estate 188 143 107
Policy loans 2 27 50
Cash and cash equivalents 19 9 9
Other 43 58 92
------------------------------------------
------------------------------------------
2,901 2,894 3,001
Less investment expenses (124) (88) (64)
------------------------------------------
==========================================
Net investment income $2,777 $2,806 $2,937
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The major components of net realized capital gains on investments are summarized
as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Fixed maturities, available-for-sale:
Gross gains $ 31 $ 67 $ 51
Gross losses (123) (31) (43)
Equity securities, available-for-sale:
Gross gains 409 329 132
Gross losses (26) (40) (26)
Mortgage loans (8) 8 (6)
Real estate 56 126 64
Other 120 7 4
===========================================
Net realized capital gains $459 $466 $176
===========================================
</TABLE>
Proceeds from sales of investments (excluding call and maturity proceeds) in
fixed maturities were $5.3 billion, $2.8 billion and $5.0 billion in 1999, 1998
and 1997 respectively. Of the 1999, 1998 and 1997 proceeds, $3.6 billion, $2.2
billion and $4.0 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 $2 million, $23 million and
$29 million and gross losses of $57 million, $7 million and $10 million in 1999,
1998 and 1997, respectively, were realized on sales of mortgage-backed
securities. At December 31, 1999, the Company had security purchases payable
totaling $910 million relating to the purchases of mortgage-backed securities at
forward dates.
The net unrealized gains and losses 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 and losses on
available-for-sale securities, including the net unrealized gains and losses on
the Closed Block available-for-sale securities, is as follows (in millions):
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Net unrealized gains and losses on fixed maturities, available-for-sale
$(436) $939
Net unrealized gains and losses on equity securities, available-for-sale,
including seed money in separate accounts 205 347
Adjustments for assumed changes in amortization patterns:
Deferred policy acquisition costs 79 (167)
Unearned revenue reserves (13) 17
Provision for deferred income (taxes) tax benefit 63 (390)
=============================
Net unrealized gains and losses on available-for-sale securities $(102) $746
=============================
</TABLE>
During 1998, the net change in unrealized gains and losses on fixed maturities,
available-for-sale, appearing in the consolidated statements of equity 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.
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.
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, 1999 and 1998, the commercial mortgage portfolio is diversified by
geographic region and specific collateral property type as follows:
<TABLE>
<CAPTION>
Geographic Distribution Property Type Distribution
- ------------------------------------------------------ --------------------------------------------------
December 31 December 31
1999 1998 1999 1998
----------------------- -----------------------
----------------------- -----------------------
<S> <C> <C> <C> <C>
New England 5% 5% Office 30% 29%
Middle Atlantic 14 14 Retail 33 33
East North Central 10 10 Hotel 1 1
West North Central 4 5 Mixed use/other 2 2
South Atlantic 25 25 Industrial 32 33
East South Central 3 3 Apartments 3 3
West South Central 7 7 Valuation allowance (1) (1)
Mountain 5 4
Pacific 28 28
Valuation allowance (1) (1)
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to contractual terms of the loan agreement.
When the Company determines that a loan is impaired, a provision for loss is
established for the difference between the carrying amount of the mortgage loan
and the estimated value. Estimated value is based on either the present value of
the expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or fair value of the collateral. The
provision for losses is reported as 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):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $104 $121 $121
Establishment of closed block (see Note 5) - (9) -
Provision for losses 5 4 8
Releases due to write-downs, sales and foreclosures (1) (12) (8)
====================================
Balance at end of year $108 $104 $121
====================================
</TABLE>
The Company was servicing approximately 555,000 and 484,000 residential mortgage
loans with aggregate principal balances of approximately $51.9 billion and $42.1
billion at December 31, 1999 and 1998, respectively. In connection with these
mortgage servicing activities, the Company held funds in trust for others
totaling approximately $334 million and $284 million at December 31, 1999 and
1998, 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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Real estate holdings and related accumulated depreciation are as follows (in
millions):
December 31
1999 1998
-----------------------------
Investment real estate $1,461 $1,890
Accumulated depreciation (161) (183)
-----------------------------
1,300 1,707
Properties held for sale 912 878
=============================
Real estate, net $2,212 $2,585
=============================
Other investments include a temporarily controlled subsidiary. Also included in
other investments are 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 $760 million and $876 million at
December 31, 1999 and 1998, respectively. The Company is committed to providing
additional mortgage financing for such joint ventures aggregating $77 million at
December 31, 1999.
4. Derivatives Held or Issued for Purposes Other Than Trading
The Company uses exchange-traded interest rate futures and mortgage-backed
securities forwards 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 mortgage-backed
securities forwards 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 ($76 million at December 31, 1999, and $855 million at December 31,
1998) represent the extent of the Company's involvement. The Company had
outstanding mortgage-backed securities forwards of $149 million and $55 million
at December 31, 1999 and 1998, respectively.
The Company uses interest rate swaps to more closely match the interest rate
characteristics of its assets with those of its liabilities. Swaps are used in
asset and liability management to modify duration and match cash flows.
Occasionally, the Company will sell a callable investment-type contract and may
use interest rate swaptions or similar instruments to transform the callable
liability into a fixed term liability. In addition, the Company may sell an
investment-type contract with attributes tied to market indices in which case
the Company uses a call option to transform the liability into a
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Derivatives Held or Issued for Purposes Other Than Trading (continued)
fixed rate liability. The notional principal amounts of the interest rate swaps
outstanding at December 31, 1999 and 1998 were $1,211 million and $1,533
million, respectively, and the credit exposure at December 31, 1999 and 1998 was
$19 million for both years. The notional principal amounts of the swaptions
outstanding at December 31, 1999 and 1998 were $470 million and $259 million,
respectively, and the credit exposure at December 31, 1999 and 1998 was $9
million and $6 million, respectively. The notional amounts of call options were
$30 million at both December 31, 1999 and 1998, and the credit exposure was $19
million and $6 million at December 31, 1999 and 1998, respectively. 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 five years at December 31, 1999 and six
years at December 31, 1998. The net amount payable or receivable from interest
rate swaps is accrued as an adjustment to interest income. The Company's
interest rate swap agreements include cross-default provisions when two or more
swaps are transacted with a given counterparty.
The Company enters into currency exchange swap agreements to convert certain
foreign denominated fixed rate assets and liabilities into U. S. dollar
denominated instruments to eliminate the exposure to future currency volatility
on those items. At December 31, 1999, the Company had various foreign currency
exchange agreements with maturities ranging from 2000 to 2018, with an aggregate
notional amount of approximately $1,571 million and a credit exposure of $69
million. At December 31, 1998, such maturities ranged from 1999 to 2018 with an
aggregate notional amount of approximately $486 million and a credit exposure of
$35 million. The average unexpired term of the swaps was approximately six years
at December 31, 1999 and seven years at December 31, 1998.
With regard to its foreign operations, the Company attempts to conduct much of
its business in the functional currency of the country of operation. At times,
the Company is unable to do so, and beginning in 1999 for these cases, it uses
foreign exchange derivatives to hedge the resulting currency risk. At December
31, 1999, the Company had foreign currency swaps with a notional amount of $5
million outstanding.
The Company manages the risk on its commercial mortgage loan pipeline by buying
and selling mortgage-backed securities in the forward markets, interest rate
swaps, and interest rate futures. The Company entered into mortgage-backed
forwards totaling $87 million and $27 million at December 31, 1999 and 1998,
respectively, and interest rate swaps with notional amounts of $88 million with
a credit exposure totaling $2 million at December 31, 1999. In addition, the
Company entered into interest rate futures contracts with notional amounts of
$211 million and $58 million at December 31, 1999 and 1998, respectively. Such
futures contracts are marked to market and settled daily.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Derivatives Held or Issued for Purposes Other Than Trading (continued)
The Company manages risk on its residential 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 $1,080 million and
$2,369 million at December 31, 1999 and 1998, 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 $372 million and $1,100
million of mortgage loans at December 31, 1999 and 1998, 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 $5,550 million
and $6,314 million at December 31, 1999 and 1998, 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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. Closed Block
Summarized financial information of the Closed Block is as follows (in
millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Assets
Fixed maturities available-for-sale $1,782 $1,722
Mortgage loans 1,036 1,063
Policy loans 752 741
Other investments 1 1
-----------------------------
Total investments 3,571 3,527
Cash and cash equivalents 24 -
Accrued investment income 63 60
Deferred policy acquisition costs 639 649
Premiums due and other receivables 21 15
=============================
$4,318 $4,251
=============================
Liabilities
Future policy benefits and claims $4,864 $4,668
Other policyholder funds 406 399
Other liabilities 125 232
-----------------------------
$5,395 $5,299
=============================
</TABLE>
<TABLE>
<CAPTION>
For the six-month
For the year ended period from formation
December 31, 1999 to December 31, 1998
----------------------------------------------
<S> <C> <C>
Revenues and expenses
Premiums and other considerations $764 $390
Net investment income 269 127
Other income (expense) (2) 1
Policy and contract benefits (438) (196)
Change in future policy benefits and contractholder funds
(176) (110)
Dividends to policyholders (296) (143)
Operating expenses (110) (56)
==============================================
Contribution from Closed Block (before income taxes)
$ 11 $ 13
==============================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Deferred Policy Acquisition Costs
Policy acquisition costs deferred and amortized in 1999, 1998 and 1997 are as
follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $456 $1,057 $1,058
Balance transferred to the Closed Block - (697) -
Cost deferred during the year 254 229 213
Amortized to expense during the year (76) (170) (170)
Effect of unrealized (gains) losses 158 37 (44)
==========================================
Balance at end of year $792 $ 456 $1,057
==========================================
</TABLE>
7. Insurance Liabilities
Major components of contractholder funds in the consolidated statements of
financial position, are summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Liabilities for investment-type contracts:
Guaranteed investment contracts $15,941 $15,211
Domestic funding agreements 743 653
International funding agreements backing
medium-term notes 1,139 -
Other investment-type contracts 3,115 3,806
-----------------------------
Total liabilities for investment-type contracts 20,938 19,670
Liabilities for individual annuities 2,522 2,685
Universal life and other reserves 1,063 984
=============================
Total contractholder funds $24,523 $23,339
=============================
</TABLE>
The Company's contractholder funds, excluding universal life reserves, include
surrender and withdrawal provisions which mitigate the risk of losses due to
early withdrawals. Approximately 90% of such contractholder funds, include
surrender or market value adjustment provisions, or are not subject to
discretionary withdrawal. The remainder is subject to discretionary withdrawal
at book value with minimal or no surrender charge.
Approximately 3.0% of the Company's investment contract portfolio includes
puttable funding agreements, representing 1.3% of general account assets.
Approximately 2.5% of the portfolio includes contracts which require the
contractholder to give the Company a minimum of 90 days notice before contract
termination payment.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Insurance Liabilities (continued)
Funding agreements are issued to non-qualified institutional investors both in
domestic and international markets. In late 1998, the Company established a $2
billion program under which an offshore special purpose entity was created to
issue nonrecourse medium-term notes. Under the program, the proceeds of each
note series issuance are used to purchase a funding agreement from the Company,
with the funding agreement so purchased then used to secure that particular
series of notes. In general, the payment terms of any particular series of notes
match the payment terms of the funding agreement that secures that series.
Claims for principal and interest under those international funding agreements
are afforded equal priority to claims of life insurance and annuity
policyholders under insolvency provisions of Iowa Insurance Laws. During 1999,
the Company began issuing international funding agreements to the offshore
special purpose vehicle under that program. The offshore special purpose vehicle
issued medium-term notes to investors in Europe, Asia and Australia. In general,
the medium-term note funding agreements do not give the contractholder the right
to terminate prior to contractually stated maturity dates, absent the existence
of certain circumstances which are largely within the Company's control. At
December 31, 1999, the contractual maturities were 2002 - $180 million; 2004 -
$358 million; 2008 - $36 million; and 2009 - $565 million.
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):
<TABLE>
<CAPTION>
December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 641 $ 770 $ 800
Incurred:
Current year 1,831 1,922 2,723
Prior years 32 (14) (21)
------------------------------------------
------------------------------------------
Total incurred 1,863 1,908 2,702
Reclassification for subsidiary merger
(see Note 2) - 155 -
Payments:
Current year 1,380 1,523 2,235
Prior years 405 359 497
------------------------------------------
Total payments 1,785 2,037 2,732
------------------------------------------
Balance at end of year:
Current year 451 349 476
Prior years 268 292 294
------------------------------------------
==========================================
Total balance at end of year $ 719 $ 641 $ 770
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Insurance Liabilities (continued)
The activity summary in the liability for unpaid accident and health claims
shows an increase of $32 million, a decrease of $14 million and a decrease of
$21 million to the December 31, 1998, 1997 and 1996 liability for unpaid
accident and health claims, respectively, arising in prior years. Such liability
adjustments, which affected current operations during 1999, 1998 and 1997,
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.
8. Debt
Short-term debt
Short-term debt consists primarily of commercial paper and outstanding balances
on credit facilities with various banks. At December 31, 1999, the Company and
certain subsidiaries had credit facilities with various banks in an aggregate
amount of $1.5 billion. The credit facilities may be used for general corporate
purposes and also to provide backup for the Company's commercial paper programs.
Long-term debt
The components of debt as of December 31, 1999 and December 31, 1998 are as
follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
------------------------------
<S> <C> <C> <C> <C>
7.875% surplus notes payable, due 2024 $199 199
8% surplus notes payable, due 2044 99 99
Non-recourse mortgages and notes payable 335 214
Other mortgages and notes payable 201 159
==============================
Total long-term debt $834 $671
==============================
</TABLE>
The amounts included above are net of the discount and direct costs associated
with issuing these notes which are being amortized to expense over their
respective terms using the interest method.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Debt (continued)
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. 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, 1999,
1998 and 1997, 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, 1999 range
from $1 million to $38 million per development with interest rates generally
ranging from 6.4% to 9.3%. Outstanding principal balances as of December 31,
1998 range from $1 million to $39 million per development with interest rates
generally ranging from 6.6% to 9.3%.
At December 31, 1999, future annual maturities of debt are as follows (in
millions):
2000 $124
2001 72
2002 19
2003 12
2004 12
Thereafter 595
----------
==========
Total future maturities of debt $834
==========
Cash paid for interest for 1999, 1998 and 1997 was $96 million, $97 million and
$67 million, respectively. These amounts include interest paid on taxes during
these years.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. Income Taxes
The Company's income tax expense (benefit) is as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Current income taxes:
Federal $ 84 $ (80) $144
State and foreign 13 10 3
Net realized capital gains 162 107 11
------------------------------------------
Total current income taxes 259 37 158
Deferred income taxes 64 7 83
==========================================
Total income taxes $323 $44 $241
==========================================
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Statutory corporate tax rate 35% 35% 35%
Dividends received deduction (3) (4) (2)
Interest exclusion from taxable income - (1) (1)
Resolution of prior year tax issues - (20) -
Other (3) (4) 3
------------------------------------------
Effective tax rate 29% 6% 35%
==========================================
</TABLE>
Significant components of the Company's net deferred income taxes are as follows
(in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Deferred income tax assets (liabilities):
Insurance liabilities $ 138 $ 117
Deferred policy acquisition costs (149) (111)
Net unrealized losses (gains) on available for sale
securities 88 (381)
Mortgage loan servicing rights (210) (111)
Other (26) (11)
=============================
$(159) $(497)
=============================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
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 $270 million in 1999, $309 million in 1998 and
$143 million in 1997.
10. 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.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. Employee and Agent Benefits (continued)
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
Pension Benefits Benefits
---------------------------------- ------------------------------
December 31 December 31
1999 1998 1997 1999 1998 1997
---------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of $ (827) $(700) $(732) $(206) $(214) $(218)
year
Service cost (42) (34) (41) (11) (12) (12)
Interest cost (55) (50) (52) (14) (15) (16)
Actuarial gain (loss) 163 (79) 101 (3) 20 19
Curtailment adjustment - - 7 - - -
Benefits paid 29 36 17 6 15 13
========== =========== =========== ========= ========== =========
Benefit obligation at end of year $ (732) $(827) $(700) $(228) $(206) $(214)
========== =========== =========== ========= ========== =========
Change in plan assets
Fair value of plan assets at
beginning of year $ 993 $ 980 $ 841 $ 326 $ 300 $ 247
Actual return on plan assets 90 23 130 5 15 41
Employer contribution 6 26 26 21 26 25
Benefits paid (29) (36) (17) (6) (15) (13)
---------- ----------- ----------- --------- ---------- ---------
Fair value of plan assets at end of $1,060 $ 993 $ 980 $ 346 $ 326 $ 300
year
========== =========== =========== ========= ========== =========
Funded status $ 328 $ 166 $ 280 $ 118 $ 120 $ 86
Unrecognized net actuarial gain (216) (38) (182) (46) (71) (53)
Unrecognized prior service cost 11 12 14 - - -
Unamortized transition obligation (26) (37) (49) 4 8 12
(asset)
========== =========== =========== ========= ========== =========
Prepaid benefit cost $ 97 $ 103 $ 63 $ 76 $ 57 $ 45
========== =========== =========== ========= ========== =========
Weighted-average assumptions as of
December 31
Discount rate 8.00% 6.75% 7.25% 8.00% 6.75% 7.25%
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. Employee and Agent Benefits (continued)
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------------------------- ------------------------------
December 31 December 31
1999 1998 1997 1999 1998 1997
---------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit
cost
Service cost $ 42 $ 34 $ 41 $ 11 $ 12 $ 12
Interest cost 55 50 52 14 15 16
Expected return on plan assets (76) (75) (80) (24) (16) (16)
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 (2) (1) -
---------- ----------- ----------- --------- ---------- ---------
Net periodic benefit cost (income) $ 11 $ (9) $ 5 $ 3 $ 14 $ 16
========== =========== =========== ========= ========== =========
</TABLE>
For 1999, 1998 and 1997, the expected long-term rates of return on plan assets
for pension benefits were approximately 5% in each of these years (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% in each of the years 1999, 1998 and 1997. The assumed
rate of increase in future compensation levels varies by age for both the
qualified and non-qualified pension plans.
For 1999, 1998 and 1997, the expected long-term rates of return on plan assets
for other post-retirement benefits were approximately 5% in each of these years
(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 8.0%, 8.1% and 8.2% for 1999, 1998 and 1997,
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 14.1% in 1999 and declines to an
ultimate rate of 6% in 2009. 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):
<TABLE>
<CAPTION>
1-Percentage-Point 1-Percentage-Point
Increase Decrease
---------------------- ---------------------
<S> <C> <C>
Effect on total of service and interest cost components
$ 8 $ (6)
Effect on accumulated postretirement benefit obligation
41 (33)
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. Employee and Agent Benefits (continued)
In addition, the Company has defined contribution plans that are generally
available to all employees and agents who are age 21 or older. Eligible
participants may contribute up to 20% of their compensation, to a maximum of
$10,000 annually, to the plans in 1999 and 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. 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 both 1999 and
1998, and $15 million in 1997 to these defined contribution plans.
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 $357 million in 1999, $362
million in 1998 and $344 million in 1997. At December 31, 1999, future minimum
annual rental commitments under these noncancelable operating leases are as
follows (in millions):
<TABLE>
<CAPTION>
Held for Sale Held for Total Rental
Investment Commitments
---------------------------------------------------
<S> <C> <C> <C>
2000 $ 96 $ 150 $ 246
2001 87 137 224
2002 67 127 194
2003 53 117 170
2004 41 105 146
Thereafter 180 796 976
===================================================
Total future minimum lease receipts $524 $1,432 $1,956
===================================================
</TABLE>
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 $73 million in 1999, $60
million in 1998 and $84 million in 1997. At December 31, 1999, future minimum
annual rental commitments under these noncancelable operating leases are as
follows (in millions):
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
11. Other Commitments and Contingencies (continued)
<TABLE>
<S> <C>
2000 $ 43
2001 32
2002 23
2003 16
2004 9
Thereafter 9
-----------
132
Less future sublease rental income on these noncancelable leases 3
===========
Total future minimum lease payments $129
===========
</TABLE>
The Company is a plaintiff or defendant in actions arising out of its insurance
business and investment operations. The Company is, from time to time, also
involved in various governmental and administrative proceedings. While the
outcome of any pending or future litigation cannot be predicted, management does
not believe that any pending litigation will have a material adverse effect on
the Company's business, financial condition or results of operations. However,
no assurances can be given that such litigation would not materially and
adversely affect the Company's business, financial condition or results of
operations.
Other companies in the life insurance industry have historically been subject to
substantial litigation resulting from claims disputes and other matters. Most
recently, such companies have faced extensive claims, including class-action
lawsuits, alleging improper life insurance sales practices. Negotiated
settlements of such class-action lawsuits have had a material adverse effect on
the business, financial condition and results of operations of certain of these
companies. The Company is currently a defendant in two purported class-action
lawsuits which allege improper life insurance sales practices. The Company
believes the claims are without merit and intends to vigorously contest such
suits. However, there can be no assurance that such sales practice litigation or
any future similar litigation will not have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company is also subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. The assessments may be partially recovered through a
reduction in future premium taxes in some states. The Company believes such
assessments in excess of amounts accrued would not materially affect its
financial condition or results of operations.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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 policyholder 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
excluding equity investments in subsidiaries, cash and cash equivalents and
accrued investment income in the accompanying consolidated statements of
financial position approximate their carrying amounts.
Mortgage servicing rights represent the present value of estimated future net
revenues from contractually specified servicing fees. The fair value was
estimated with a valuation model using current prepayment speeds and a market
discount rate.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
12. Fair Value of Financial Instruments (continued)
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 policyholder 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, 1999 and 1998, are as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Assets (liabilities)
Fixed maturities (see Note 3) $21,660 $21,660 $21,006 $21,006
Equity securities (see Note 3) 864 864 1,102 1,102
Mortgage loans 12,296 12,155 12,091 12,711
Policy loans 28 28 25 25
Other investments 465 465 198 198
Cash and cash equivalents 362 362 461 461
Accrued investment income 408 408 375 375
Financial instruments included in Closed
Block (see Note 5) 3,658 3,649 3,587 3,652
Mortgage servicing rights 1,081 1,288 778 821
Investment-type insurance contracts (23,563) (23,068) (22,127) (21,606)
Short-term debt - - (200) (200)
Long-term debt 834 790 (671) (708)
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
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 upon formal adoption by
Iowa regulatory authorities. If adopted as proposed effective January 1, 2001,
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, 1999, the Company meets the RBC requirements.
Under Iowa law, the Company may pay dividends only from the earned surplus
arising from its business and must receive the prior approval of the Iowa
Commissioner to pay a dividend if such a dividend would exceed certain statutory
limitations. The current statutory limitation is the greater of 10% of the
Company's policyholder surplus as of the preceding year end or the net gain from
operations from the previous calendar year. Based on this limitation and 1999
statutory results, the Company could pay approximately $539 million in dividends
in 2000 without exceeding the statutory limitation. In 1999, the Company
notified the Iowa Commissioner in advance of all dividend payments and received
approval for an extraordinary dividend of $250 million. Total dividends paid to
its parent company in 1999 were $509 million. Dividends were composed of cash,
other assets and the net assets of the Company's subsidiary, Princor Financial
Services Corporation. The distribution of the Company's investment in Princor
Financial Services Corporation was recorded at fair market value of $77 million
and resulted in a gain of $56 million for a subsidiary of the Company.
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
13. Statutory Insurance Financial Information (continued)
The following summary reconciles the assets and equity at December 31, 1999,
1998 and 1997, and net income for the years ended December 31, 1999, 1998 and
1997, 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 Net
Assets Equity Income
------------------------------------------
------------------------------------------
<S> <C> <C> <C>
December 31, 1999
As reported in accordance with statutory accounting practices
- unconsolidated $76,018 $3,152 $714
Additions (deductions):
Unrealized loss on fixed maturities available-for-sale (357) (357) -
Other investment adjustments 2,088 995 10
Adjustments to insurance reserves and dividends (125) (236) 15
Deferral of policy acquisition costs 1,409 1,409 68
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications - 33 18
Other - net 277 253 (15)
------------------------------------------
As reported in these consolidated GAAP financial statements $79,310 $4,951 $810
==========================================
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
==========================================
</TABLE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
14. Non-domestic Operations
The Company's non-U.S. operations offer a variety of asset management and asset
accumulation products and services for businesses, groups and individuals, with
a focus on retirement savings.
The change in net foreign currency translation reflects decreases of $31
million, $18 million and $2 million for the years ended December 31, 1999, 1998
and 1997, respectively. Aggregate foreign exchange transaction gains and losses
were not material for the years ended December 31, 1999, 1998 and 1997. Total
revenues by geographic region are as follows (in millions):
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Domestic (United States) $7,252 $7,449 $8,547
Non-domestic 272 237 115
------------------------------------------
Total revenues $7,524 $7,686 $8,662
==========================================
</TABLE>
Total assets by geographic region are as follows (in millions):
<TABLE>
<CAPTION>
December 31
1999 1998
-----------------------------
<S> <C> <C>
Domestic (United States) $77,856 $72,704
Non-domestic 1,454 1,239
=============================
Total assets $79,310 $73,943
=============================
</TABLE>
15. Year 2000 (Unaudited)
As of January 31, 2000, virtually all of the Company's major technology systems,
processes, and infrastructure, including those which rely on third party
vendors, appear to be operating smoothly following the rollover to the Year
2000. The Company has experienced no significant interruptions to normal
business operations, including the processing of customer account data and
transactions. The Company will continue its Year 2000 vigilance into early 2001.
The total cost for the project was approximately $24 million through December
31, 1999, with the costs expensed as incurred. Any additional costs to complete
activities related to internal processes, external relationships, contingency
plans and to maintain Year 2000 readiness are not expected to be material.
<PAGE>
Principal Life Insurance Company
Notes to Consolidated Financial Statements (continued)
15. Year 2000 (Unaudited) (continued)
Based on the performance of its major technology systems to date, ongoing plans
to deal with external relationships and contingency plans, the Company believes
that in the worst case scenario it will experience, at most, isolated and
insignificant disruptions of business processes as a result of Year 2000 issues.
Such disruptions are not expected to have a material effect on the Company's
future results of operations, liquidity or financial condition.
APPENDIX
ILLUSTRATIONS OF POLICY VALUES AND DEATH BENEFITS
The following illustrations have been prepared to help show how values
under the Policies change with investment performance and differing death
benefit options. The illustrations show how death benefits and values would vary
over time if the return on assets held by the Accounts were uniform, gross,
after tax, annual rates of 0%, 4%, 8% and 12%. The death benefits and values
would be different from those shown if the return averaged 0%, 4%, 8% and 12%,
but fluctuated above and below those averages during individual years. Both
Death Benefit Option 1 and Death Benefit Option 2 are illustrated.
The four illustrations set out show hypothetical policies issued to males
age 35 in the non-smoker rating classification. The Policies are illustrated on
the basis of $1,000 planned periodic annual premium and a face amount at issue
of $100,000. The first and third illustrations show the selection of Death
Benefit Option 1; the second and fourth, Death Benefit Option 2.
The illustrations reflect all of the contract charges. Each illustration
reflects the surrender charges and the premium expense charge which consists of
a 5% sales load and a charge for state premium taxes of 2%. The first two
illustrations reflect the Company's current administration charge of $4.75 per
month and current cost of insurance charges which are lower than the guaranteed
maximum cost of insurance charges based on the 1980 CS0 Mortality Table. The
third and fourth illustrations reflect the guaranteed maximum administration
charge of $5 per month and the guaranteed maximum cost of insurance charges.
The amounts shown for death benefits and values in all four illustrations
reflect the fact that the net investment return on the assets held by the
Divisions of the Separate Account is lower than the gross return. This is
because deductions are made from the gross return to reflect the daily charge
made to the Separate Account for assuming mortality and expense risks; the daily
investment advisory fees incurred by the Accounts; and the direct operating
expenses of the Accounts. The charge for mortality and expense risks reflected
in the first two illustrations is the Company's current charge which is at an
annual rate of 0.75% of the average daily assets of the Divisions. The third and
fourth illustrations reflect the guaranteed mortality and expense risk charge
which is at an annual rate of 0.90%. The investment advisory fee is assumed to
be an annual rate of .55% of the average daily net assets of the Accounts, but
the maximum investment advisory fee for the Capital Value Account is 0.48%, for
the Money Market Account, and the Bond Account, 0.50%, for the High Yield
Account, and the Balanced Account, 0.60%, and for the MidCap Account, 0.60%. The
charge for Account direct operating expenses is estimated to be an annual rate
of .04% of the average daily net assets of the Accounts. This illustrated .04%
charge is based on the assumption that the direct operating expenses of the
Accounts will continue at levels historically experienced. The direct operating
expense of the Accounts may decrease or increase in the future making operating
expenses actually incurred by the Accounts differ from the .04% assumed rate
shown in the illustrations. Deducting these charges from the gross returns of
0%, 4%, 8% and 12% results in net investment returns in the first two
illustrations of -1.35%, 2.65%, 6.65%, and 10.65% and in the third and fourth
illustrations of -1.50%, 2.50%, 6.50%, and 10.50%.
The four illustrations are based on the assumption that payments are made
in accordance with a $1,000 annual planned periodic premium schedule, that no
changes in death benefit option or face amount are made, and that no policy
loans or surrenders occur. Upon request, the Company will prepare a comparable
illustration reflecting the proposed insured's actual age, sex, risk
classification and desired policy features.
PRINCIPAL LIFE INSURANCE COMPANY
FLEX VARIABLE LIFE
MALE AGE 35 NON-SMOKER
ASSUMING CURRENT CHARGES
PLANNED PREMIUM $1,000
Initial Face Amount $100,000
Death Benefit Option 1
<TABLE>
<CAPTION>
Death Benefit (2) Accumulated Value (2)
Assuming Hypothetical Gross Assuming Hypothetical Gross
Annual Investment Return of Annual Investment Return of
End of
Year Accumulated 0% 4% 8% 12% 0% 4% 8% 12% 0%
Policy Premiums (1) (-1.35% Net) (2.65% Net) (6.65% Net)(10.65% Net) (-1.35% Net) (2.65% Net) (6.65% Net)(10.65% Net)(-1.35%Net)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,050 $100,000 $100,000 $100,000 $100,000 $ 693 $ 725 $ 756 $ 788 $ 366
2 2,153 100,000 100,000 100,000 100,000 1,368 1,460 1,555 1,652 1,041
3 3,310 100,000 100,000 100,000 100,000 2,024 2,205 2,394 2,595 1,697
4 4,526 100,000 100,000 100,000 100,000 2,660 2,957 3,278 3,626 2,374
5 5,802 100,000 100,000 100,000 100,000 3,276 3,717 4,208 4,754 3,031
6 7,142 100,000 100,000 100,000 100,000 3,868 4,482 5,183 5,986 3,664
7 8,549 100,000 100,000 100,000 100,000 4,437 5,252 6,208 7,333 4,273
8 10,027 100,000 100,000 100,000 100,000 4,981 6,025 7,284 8,807 4,859
9 11,578 100,000 100,000 100,000 100,000 5,500 6,802 8,414 10,419 5,419
10 13,207 100,000 100,000 100,000 100,000 5,996 7,582 9,604 12,189 5,955
11 14,917 100,000 100,000 100,000 100,000 6,472 8,371 10,861 14,136 6,472
12 16,713 100,000 100,000 100,000 100,000 6,927 9,167 12,188 16,279 6,927
13 18,599 100,000 100,000 100,000 100,000 7,360 9,970 13,591 18,639 7,360
14 20,579 100,000 100,000 100,000 100,000 7,771 10,778 15,073 21,239 7,771
15 22,657 100,000 100,000 100,000 100,000 8,160 11,593 16,641 24,107 8,160
16 24,840 100,000 100,000 100,000 100,000 8,524 12,412 18,299 27,272 8,524
17 27,132 100,000 100,000 100,000 100,000 8,863 13,235 20,054 30,766 8,863
18 29,539 100,000 100,000 100,000 100,000 9,175 14,060 21,910 34,625 9,175
19 32,066 100,000 100,000 100,000 100,000 9,459 14,886 23,874 38,890 9,459
20 34,719 100,000 100,000 100,000 100,000 9,715 15,713 25,955 43,610 9,715
30(Age 65) 69,761 100,000 100,000 100,000 158,252 9,783 23,223 55,067 129,714 9,783
</TABLE>
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated 4% 8% 12%
Policy Premiums (1) (2.65% Net) (6.65% Net)(10.65% Net)
1 $1,050 $ 398 $ 429 $ 461
2 2,153 1,133 1,228 1,325
3 3,310 1,878 2,067 2,268
4 4,526 2,671 2,992 3,340
5 5,802 3,472 3,962 4,509
6 7,142 4,278 4,979 5,782
7 8,549 5,088 6,045 7,169
8 10,027 5,903 7,162 8,684
9 11,578 6,720 8,333 10,338
10 13,207 7,542 9,563 12,148
11 14,917 8,371 10,861 14,136
12 16,713 9,167 12,188 16,279
13 18,599 9,970 13,591 18,639
14 20,579 10,778 15,073 21,239
15 22,657 11,593 16,641 24,107
16 24,840 12,412 18,299 27,272
17 27,132 13,235 20,054 30,766
18 29,539 14,060 21,910 34,625
19 32,066 14,886 23,874 38,890
20 34,719 15,713 25,955 43,610
30(Age 65) 69,761 23,223 55,067 129,714
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefit, accumulated value and surrender value will differ if premiums
are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefit, accumulated value and
surrender value for a policy would be different from those shown if actual rates
of investment return applicable to the policy averaged 0%, 4%, 8% or 12% over a
period of years, but also fluctuated above or below that average for individual
policy years. The death benefit, accumulated value and surrender value for a
policy would also be different from those shown, depending on the investment
allocations made to the investment divisions of the separate account and the
different rates of return of the Fund portfolios, if the actual rates of
investment return applicable to the policy averaged 0%, 4%, 8% or 12%, but
varied above or below that average for individual divisions. No representations
can be made that these hypothetical rates of return can be achieved for any one
year or sustained over any period of time.
PRINCIPAL LIFE INSURANCE COMPANY
FLEX VARIABLE LIFE
MALE AGE 35 NON-SMOKER
ASSUMING CURRENT CHARGES
PLANNED PREMIUM $1,000
Initial Face Amount $100,000
Death Benefit Option 2
<TABLE>
<CAPTION>
Death Benefit (2) Accumulated Value (2)
Assuming Hypothetical Gross Assuming Hypothetical Gross
Annual Investment Return of Annual Investment Return of
End of
Year Accumulated 0% 4% 8% 12% 0% 4% 8% 12% 0%
Policy Premiums (1) (-1.35% Net) (2.65% Net) (6.65% Net)(10.65% Net) (-1.35% Net) (2.65% Net) (6.65% Net)(10.65% Net)(-1.35%Net)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,050 $100,000 $100,000 $100,000 $100,000 $ 693 $ 725 $ 756 $ 788 $ 366
2 2,153 100,000 100,000 100,000 100,000 1,368 1,460 1,555 1,652 1,041
3 3,310 100,000 100,000 100,000 100,000 2,024 2,205 2,394 2,595 1,697
4 4,526 100,000 100,000 100,000 100,000 2,660 2,957 3,278 3,626 2,374
5 5,802 100,000 100,000 100,000 100,000 3,276 3,717 4,208 4,754 3,031
6 7,142 100,000 100,000 100,000 100,000 3,868 4,482 5,183 5,986 3,664
7 8,549 100,000 100,000 100,000 100,000 4,437 5,252 6,208 7,333 4,273
8 10,027 100,000 100,000 100,000 100,000 4,981 6,025 7,284 8,807 4,859
9 11,578 100,000 100,000 100,000 100,000 5,500 6,802 8,414 10,419 5,419
10 13,207 100,000 100,000 100,000 100,000 5,996 7,582 9,604 12,189 5,955
11 14,917 100,000 100,000 100,000 100,000 6,472 8,371 10,861 14,136 6,472
12 16,713 100,000 100,000 100,000 100,000 6,927 9,167 12,188 16,279 6,927
13 18,599 100,000 100,000 100,000 100,000 7,360 9,970 13,591 18,639 7,360
14 20,579 100,000 100,000 100,000 100,000 7,771 10,778 15,073 21,239 7,771
15 22,657 100,000 100,000 100,000 100,000 8,160 11,593 16,641 24,107 8,160
16 24,840 100,000 100,000 100,000 100,000 8,524 12,412 18,299 27,272 8,524
17 27,132 100,000 100,000 100,000 100,000 8,863 13,235 20,054 30,766 8,863
18 29,539 100,000 100,000 100,000 100,000 9,175 14,060 21,910 34,625 9,175
19 32,066 100,000 100,000 100,000 100,000 9,459 14,886 23,874 38,890 9,459
20 34,719 100,000 100,000 100,000 100,000 9,715 15,713 25,955 43,610 9,715
30(Age 65) 69,761 100,000 100,000 100,000 158,252 9,783 23,223 55,067 129,714 9,783
</TABLE>
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated 4% 8% 12%
Policy Premiums (1) (2.65% Net) (6.65% Net)(10.65% Net)
1 $1,050 $ 398 $ 429 $ 461
2 2,153 1,133 1,228 1,325
3 3,310 1,878 2,067 2,268
4 4,526 2,671 2,992 3,340
5 5,802 3,472 3,962 4,509
6 7,142 4,278 4,979 5,782
7 8,549 5,088 6,045 7,169
8 10,027 5,903 7,162 8,684
9 11,578 6,720 8,333 10,338
10 13,207 7,542 9,563 12,148
11 14,917 8,371 10,861 14,136
12 16,713 9,167 12,188 16,279
13 18,599 9,970 13,591 18,639
14 20,579 10,778 15,073 21,239
15 22,657 11,593 16,641 24,107
16 24,840 12,412 18,299 27,272
17 27,132 13,235 20,054 30,766
18 29,539 14,060 21,910 34,625
19 32,066 14,886 23,874 38,890
20 34,719 15,713 25,955 43,610
30(Age 65) 69,761 23,223 55,067 129,714
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefit, accumulated value and surrender value will differ if premiums
are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefit, accumulated value and
surrender value for a policy would be different from those shown if actual rates
of investment return applicable to the policy averaged 0%, 4%, 8% or 12% over a
period of years, but also fluctuated above or below that average for individual
policy years. The death benefit, accumulated value and surrender value for a
policy would also be different from those shown, depending on the investment
allocations made to the investment divisions of the separate account and the
different rates of return of the Fund portfolios, if the actual rates of
investment return applicable to the policy averaged 0%, 4%, 8% or 12%, but
varied above or below that average for individual divisions. No representations
can be made that these hypothetical rates of return can be achieved for any one
year or sustained over any period of time.
PRINCIPAL LIFE INSURANCE COMPANY
FLEX VARIABLE LIFE
MALE AGE 35 NON-SMOKER
ASSUMING GUARANTEED CHARGES
PLANNED PREMIUM $1,000
Initial Face Amount $100,000
Death Benefit Option 1
<TABLE>
<CAPTION>
Death Benefit (2) Accumulated Value (2)
Assuming Hypothetical Gross Assuming Hypothetical Gross
Annual Investment Return of Annual Investment Return of
End of
Year Accumulated 0% 4% 8% 12% 0% 4% 8% 12% 0%
Policy Premiums (1) (-1.50% Net) (2.50% Net) (6.50% Net)(10.50% Net) (-1.50% Net) (2.50% Net) (6.50% Net)(10.50% Net)(-1.50%Net)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,050 $100,000 $100,000 $100,000 $100,000 $ 686 $ 718 $ 750 $ 782 $ 359
2 2,153 100,000 100,000 100,000 100,000 1,355 1,446 1,540 1,637 1,028
3 3,310 100,000 100,000 100,000 100,000 2,003 2,182 2,370 2,569 1,676
4 4,526 100,000 100,000 100,000 100,000 2,630 2,924 3,242 3,586 2,344
5 5,802 100,000 100,000 100,000 100,000 3,236 3,672 4,157 4,697 2,991
6 7,142 100,000 100,000 100,000 100,000 3,818 4,423 5,117 5,908 3,613
7 8,549 100,000 100,000 100,000 100,000 4,375 5,178 6,122 7,230 4,212
8 10,027 100,000 100,000 100,000 100,000 4,908 5,935 7,177 8,674 4,785
9 11,578 100,000 100,000 100,000 100,000 5,414 6,693 8,281 10,252 5,333
10 13,207 100,000 100,000 100,000 100,000 5,893 7,450 9,439 11,976 5,852
11 14,917 100,000 100,000 100,000 100,000 6,342 8,204 10,650 13,860 6,342
12 16,713 100,000 100,000 100,000 100,000 6,761 8,953 11,917 15,921 6,761
13 18,599 100,000 100,000 100,000 100,000 7,147 9,696 13,244 18,177 7,147
14 20,579 100,000 100,000 100,000 100,000 7,498 10,431 14,631 20,649 7,498
15 22,657 100,000 100,000 100,000 100,000 7,813 11,154 16,082 23,358 7,813
16 24,840 100,000 100,000 100,000 100,000 8,087 11,862 17,599 26,329 8,087
17 27,132 100,000 100,000 100,000 100,000 8,316 12,549 19,180 29,587 8,316
18 29,539 100,000 100,000 100,000 100,000 8,494 13,209 20,828 33,164 8,494
19 32,066 100,000 100,000 100,000 100,000 8,614 13,836 22,542 37,092 8,614
20 34,719 100,000 100,000 100,000 100,000 8,671 14,422 24,323 41,411 8,671
30(Age 65) 69,761 100,000 100,000 100,000 145,191 3,935 16,069 46,382 119,009 3,935
</TABLE>
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated 4% 8% 12%
Policy Premiums (1) (2.50% Net) (6.50% Net)(10.50% Net)
1 $ 1,050 $ 391 $ 423 $ 455
2 2,153 1,119 1,213 1,310
3 3,310 1,855 2,043 2,242
4 4,526 2,637 2,956 3,300
5 5,802 3,426 3,912 4,452
6 7,142 4,219 4,912 5,704
7 8,549 5,015 5,959 7,067
8 10,027 5,812 7,054 8,552
9 11,578 6,611 8,200 10,170
10 13,207 7,409 9,398 11,935
11 14,917 8,204 10,650 13,860
12 16,713 8,953 11,917 15,921
13 18,599 9,696 13,244 18,177
14 20,579 10,431 14,631 20,649
15 22,657 11,154 16,082 23,358
16 24,840 11,862 17,599 26,329
17 27,132 12,549 19,180 29,587
18 29,539 13,209 20,828 33,164
19 32,066 13,836 22,542 37,092
20 34,719 14,422 24,323 41,411
30(Age 65) 69,761 16,069 46,382 119,009
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefit, accumulated value and surrender value will differ if premiums
are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefit, accumulated value and
surrender value for a policy would be different from those shown if actual rates
of investment return applicable to the policy averaged 0%, 4%, 8% or 12% over a
period of years, but also fluctuated above or below that average for individual
policy years. The death benefit, accumulated value and surrender value for a
policy would also be different from those shown, depending on the investment
allocations made to the investment divisions of the separate account and the
different rates of return of the Fund portfolios, if the actual rates of
investment return applicable to the policy averaged 0%, 4%, 8% or 12%, but
varied above or below that average for individual divisions. No representations
can be made that these hypothetical rates of return can be achieved for any one
year or sustained over any period of time.
PRINCIPAL LIFE INSURANCE COMPANY
FLEX VARIABLE LIFE
MALE AGE 35 NON-SMOKER
ASSUMING GUARANTEED CHARGES
PLANNED PREMIUM $1,000
Initial Face Amount $100,000
Death Benefit Option 2
<TABLE>
<CAPTION>
Death Benefit (2) Accumulated Value (2)
Assuming Hypothetical Gross Assuming Hypothetical Gross
Annual Investment Return of Annual Investment Return of
End of
Year Accumulated 0% 4% 8% 12% 0% 4% 8% 12% 0%
Policy Premiums (1) (-1.50% Net) (2.50% Net) (6.50% Net)(10.50% Net) (-1.50% Net) (2.50% Net) (6.50% Net)(10.50% Net)(-1.50%Net)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,050 $100,000 $100,000 $100,000 $100,000 $ 359 $ 391 $ 423 $ 455 $ 686
2 2,153 100,000 100,000 100,000 100,000 1,028 1,119 1,213 1,310 1,355
3 3,310 100,000 100,000 100,000 100,000 1,676 1,855 2,043 2,242 2,003
4 4,526 100,000 100,000 100,000 100,000 2,344 2,637 2,956 3,300 2,630
5 5,802 100,000 100,000 100,000 100,000 2,991 3,426 3,912 4,452 3,236
6 7,142 100,000 100,000 100,000 100,000 3,613 4,219 4,912 5,704 3,818
7 8,549 100,000 100,000 100,000 100,000 4,212 5,015 5,959 7,067 4,375
8 10,027 100,000 100,000 100,000 100,000 4,785 5,812 7,054 8,552 4,908
9 11,578 100,000 100,000 100,000 100,000 5,333 6,611 8,200 10,170 5,414
10 13,207 100,000 100,000 100,000 100,000 5,852 7,409 9,398 11,935 5,893
11 14,917 100,000 100,000 100,000 100,000 6,342 8,204 10,650 13,860 6,342
12 16,713 100,000 100,000 100,000 100,000 6,761 8,953 11,917 15,921 6,761
13 18,599 100,000 100,000 100,000 100,000 7,147 9,696 13,244 18,177 7,147
14 20,579 100,000 100,000 100,000 100,000 7,498 10,431 14,631 20,649 7,498
15 22,657 100,000 100,000 100,000 100,000 7,813 11,154 16,082 23,358 7,813
16 24,840 100,000 100,000 100,000 100,000 8,087 11,862 17,599 26,329 8,087
17 27,132 100,000 100,000 100,000 100,000 8,316 12,549 19,180 29,587 8,316
18 29,539 100,000 100,000 100,000 100,000 8,494 13,209 20,828 33,164 8,494
19 32,066 100,000 100,000 100,000 100,000 8,614 13,836 22,542 37,092 8,614
20 34,719 100,000 100,000 100,000 100,000 8,671 14,422 24,323 41,411 8,671
30(Age 65) 69,761 100,000 100,000 100,000 145,191 3,935 16,069 46,382 119,009 3,935
</TABLE>
Surrender Value (2)
Assuming Hypothetical Gross
Annual Investment Return of
End of
Year Accumulated 4% 8% 12%
Policy Premiums (1) (2.50% Net) (6.50% Net)(10.50% Net)
1 1,050 $ 718 $ 750 $ 782
2 2,153 1,446 1,540 1,637
3 3,310 2,182 2,370 2,569
4 4,526 2,924 3,242 3,586
5 5,802 3,672 4,157 4,697
6 7,142 4,423 5,117 5,908
7 8,549 5,178 6,122 7,230
8 10,027 5,935 7,177 8,674
9 11,578 6,693 8,281 10,252
10 13,207 7,450 9,439 11,976
11 14,917 8,204 10,650 13,860
12 16,713 8,953 11,917 15,921
13 18,599 9,696 13,244 18,177
14 20,579 10,431 14,631 20,649
15 22,657 11,154 16,082 23,358
16 24,840 11,862 17,599 26,329
17 27,132 12,549 19,180 29,587
18 29,539 13,209 20,828 33,164
19 32,066 13,836 22,542 37,092
20 34,719 14,422 24,323 41,411
30(Age 65) 69,761 16,069 46,382 119,009
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefit, accumulated value and surrender value will differ if premiums
are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefit, accumulated value and
surrender value for a policy would be different from those shown if actual rates
of investment return applicable to the policy averaged 0%, 4%, 8% or 12% over a
period of years, but also fluctuated above or below that average for individual
policy years. The death benefit, accumulated value and surrender value for a
policy would also be different from those shown, depending on the investment
allocations made to the investment divisions of the separate account and the
different rates of return of the Fund portfolios, if the actual rates of
investment return applicable to the policy averaged 0%, 4%, 8% or 12%, but
varied above or below that average for individual divisions. No representations
can be made that these hypothetical rates of return can be achieved for any one
year or sustained over any period of time.
