<PAGE>
SUPPLEMENT DATED DECEMBER 1, 1995 TO THE
PROSPECTUSES FOR PACIFIC SELECT, PACIFIC SELECT EXEC, AND
PACIFIC SELECT CHOICE DATED MAY 1, 1995 (EACH A "PROSPECTUS")
Each Prospectus is amended by removing the five account limitation after
any allocation of premium (or net premium) and/or transfers.
Each Prospectus is amended by adding the following:
PORTFOLIO REBALANCING
A Policy Owner may automatically re-set the percentage of Accumulated Value
allocated to each Variable Account at a predetermined level. This process
is called portfolio rebalancing. (The Fixed Account Option is not available
for portfolio rebalancing.) Over time, the variations in each Variable
Account's investment results will shift the percentage allocations of the
Policy's Accumulated Value. The portfolio rebalancing feature will
automatically transfer a Policy's Accumulated Value among the Variable
Accounts back to the pre-set percentages. Rebalancing can be made
quarterly, semi-annually or annually, measured from the Policy Date
("frequency period"). Rebalancing may result in transferring amounts from a
Variable Account earning a relatively higher return to a Variable Account
earning a relatively lower return.
A Policy Owner may initiate portfolio rebalancing by sending Pacific
Mutual's Home Office a signed, written request in good form or a properly
completed Automatic Portfolio Rebalancing form. Policy Owners must specify
the frequency for rebalancing and a beginning date. The first rebalancing
will usually occur on the Monthly Payment Date that starts the frequency
period elected by the Owner and that occurs on or follows the beginning
date selected by the Owner. Policy Owners that stop portfolio rebalancing
must wait 30 days to begin again. Portfolio rebalancing can not be used
with the Dollar Cost Averaging Option.
Pacific Mutual may modify, terminate or suspend the portfolio rebalancing
feature at any time.
The Pacific Select Exec Prospectus and Pacific Select Choice Prospectus are
amended by adding the following as the fourth paragraph of the "Premiums"
section:
If Pacific Mutual receives any premium payment that will cause a Policy to
become a modified endowment contract, the portion of the payment that will
cause a Policy to become a modified endowment contract will not be applied
to the Policy, unless the Policy Owner has previously notified Pacific
Mutual that payments that cause a Policy to become a modified endowment
contract may be accepted by Pacific Mutual and applied to the Policy. The
portion of the premium payment that will cause a Policy to become a
modified endowment contract will be returned to the Policy Owner. However,
for premium payments received by Pacific Mutual's Home Office within 20
days before the upcoming Annual Anniversary of the Policy, all or a portion
of the payment
<PAGE>
may be applied to the Policy immediately or applied on the upcoming Annual
Anniversary, if it is determined that the total premium payment would
affect whether the Policy is classified as a modified endowment contract.
The Pacific Select Exec Prospectus is amended by replacing the first
sentence of the third paragraph in the "Policy Loans" section with the
following:
The Policy loan annual effective interest rate is 4.75% per year for the
first 10 years and 4.25% thereafter.
<PAGE>
LOGO
OF PACIFIC SELECT
Variable Universal Life
PROSPECTUSES FOR
PACIFIC SELECT
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
PACIFIC MUTUAL LIFE INSURANCE COMPANY
DATED MAY 1, 1995
--------------
PACIFIC SELECT FUND
DATED MAY 1, 1995
<PAGE>
LOGO
OF PACIFIC SELECT
PACIFIC SELECT
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY PACIFIC MUTUAL LIFE INSURANCE COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
1-800-800-7681
This prospectus describes Pacific Select--a Flexible Premium Variable Life
Insurance Policy (individually, the "Policy," and collectively, the "Policies")
offered by Pacific Mutual Life Insurance Company ("Pacific Mutual"). The Policy
provides lifetime insurance protection on the Insured named in the Policy
through the Maturity Date so long as the Policy is not surrendered or in
default beyond the Grace Period. The Policy also provides for a Net Cash
Surrender Value if it is surrendered during the lifetime of the Insured. The
Policy can be purchased for a minimum initial premium of $10,000. The Policy
provides considerable flexibility to pay additional premiums, although it may
under certain circumstances provide insurance protection through the Maturity
Date for only the initial premium.
Premium payments may be allocated at the Policy Owner's discretion to one or
more of the Variable Accounts that comprise a separate account of Pacific
Mutual called the Pacific Select Separate Account (the "Separate Account"), or
to the Fixed Account of Pacific Mutual. Any portion of the premium payments
allocated to the Variable Accounts is invested in one or more of the
corresponding Portfolios of the Pacific Select Fund (the "Fund"), which
currently consists of ten Portfolios: the Money Market Portfolio, the High
Yield Bond Portfolio, the Managed Bond Portfolio, the Government Securities
Portfolio, the Growth Portfolio, the Growth LT Portfolio, the Equity Income
Portfolio, the Multi-Strategy Portfolio, the Equity Index Portfolio, and the
International Portfolio. The Accumulated Value in the Fixed Account will accrue
interest at an interest rate that is guaranteed by Pacific Mutual.
To the extent that all or a portion of the premium payments are allocated to
the Separate Account, the Accumulated Value under the Policy will vary based
upon the investment performance of the Variable Accounts to which the
Accumulated Value is allocated. No minimum amount of Accumulated Value is
guaranteed.
The death benefit will be the Face Amount of insurance stated in the Policy
or, under certain circumstances, a higher amount. Although the Accumulated
Value allocated to the Variable Accounts will vary, the amount and duration of
the death benefit may or may not vary with the investment performance of the
Variable Accounts depending upon several factors. At the death of the Insured,
Pacific Mutual will pay the Beneficiary the death benefit minus any
Indebtedness under the Policy.
The Policy is a type of life insurance policy classified as a modified
endowment contract (other than certain Policies entered into before June 21,
1988). For information on the tax treatment of modified endowment contracts,
see "Federal Income Tax Considerations," on page 23. A Policy may be returned
according to the terms of its Free-Look Right (see "Right to Examine a Policy--
Free-Look Right," page 19), during which time premium payments allocated to the
Separate Account will be invested in the Money Market Variable Account.
It may not be advantageous to replace existing insurance with the Policy.
This prospectus generally describes only the portion of the Policy involving
the Separate Account. For a brief summary of the Fixed Account, see "The Fixed
Account," page 29.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCU-
RACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE PACIFIC
SELECT FUND.
BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
DATE: MAY 1, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Important Terms............................................................ 4
Summary of the Policy...................................................... 6
Purpose of the Policy.................................................... 6
Policy Values............................................................ 6
The Death Benefit........................................................ 6
Premium Features......................................................... 6
Allocation Options....................................................... 7
Free-Look Right.......................................................... 7
Surrender Right.......................................................... 7
Preferred and Partial Withdrawal Benefits................................ 7
Charges and Deductions................................................... 7
Tax Treatment of Increases in Accumulated Value.......................... 9
Tax Treatment of Death Benefit........................................... 9
The Fixed Account........................................................ 9
Contacting Pacific Mutual................................................ 9
INFORMATION ABOUT PACIFIC MUTUAL, THE SEPARATE ACCOUNT
AND THE FUND.............................................................. 10
Pacific Mutual Life Insurance Company.................................... 10
Pacific Select Separate Account.......................................... 10
The Pacific Select Fund.................................................. 10
The Investment Adviser................................................... 11
The Policy................................................................. 12
Application for a Policy................................................. 12
Premiums................................................................. 12
Additional Premium Payments.............................................. 12
Allocation of Premiums................................................... 13
Dollar Cost Averaging Option............................................. 13
Transfer of Accumulated Value............................................ 14
Death Benefit............................................................ 14
Changes in Face Amount................................................... 15
Policy Values............................................................ 16
Determination of Accumulated Value....................................... 16
Policy Loans............................................................. 17
Benefits at Maturity..................................................... 18
Surrender................................................................ 18
Preferred and Partial Withdrawal Benefits................................ 18
Right to Examine a Policy--Free-Look Right............................... 19
Lapse.................................................................... 19
Reinstatement............................................................ 20
Charges and Deductions..................................................... 20
Premium Load from the Initial Premium.................................... 20
Premium Load from Additional Premiums.................................... 21
Variations in Premium Load............................................... 21
Deductions from Accumulated Value........................................ 22
Deductions from the Variable Accounts.................................... 22
Other Charges............................................................ 23
Guarantee of Certain Charges............................................. 23
Other Information.......................................................... 23
Federal Income Tax Considerations........................................ 23
Charge for Pacific Mutual Income Taxes................................... 26
Voting of Fund Shares.................................................... 27
Disregard of Voting Instructions......................................... 27
Reports to Owners........................................................ 27
Substitution of Investments.............................................. 28
Changes to Comply with Law............................................... 28
Performance Information.................................................... 28
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
The Fixed Account........................................................... 29
General Description....................................................... 29
Death Benefit............................................................. 30
Policy Charges............................................................ 30
Transfers, Surrenders, Withdrawals, and Policy Loans...................... 30
More About the Policy....................................................... 30
Ownership................................................................. 30
Beneficiary............................................................... 31
Exchange of Insured....................................................... 31
The Contract.............................................................. 31
Payments.................................................................. 31
Assignment................................................................ 32
Errors on the Application................................................. 32
Incontestability.......................................................... 32
Payment in Case of Suicide................................................ 32
Participating............................................................. 32
Policy Illustrations...................................................... 32
Payment Plan.............................................................. 33
Distribution of the Policy................................................ 33
More About Pacific Mutual................................................... 33
Management................................................................ 33
State Regulation.......................................................... 36
Telephone Transfer and Loan Privileges.................................... 36
Legal Proceedings......................................................... 36
Legal Matters............................................................. 36
Registration Statement.................................................... 36
Independent Accountants................................................... 37
Financial Statements...................................................... 37
Appendix.................................................................... 58
Illustrations............................................................... 59
</TABLE>
----------------
THE POLICY IS NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN AS CONTAINED IN THIS PROSPECTUS, THE
FUND'S PROSPECTUS OR THE STATEMENT OF ADDITIONAL INFORMATION OF THE FUND OR ANY
SUPPLEMENT THERETO.
3
<PAGE>
IMPORTANT TERMS
Accumulated Value--The total value of the amounts in the Variable Accounts of
the Separate Account and the Fixed Account for the Policy as well as any amount
set aside in the Loan Account to secure Policy Indebtedness as of any Valuation
Date.
Age--The Insured's age as of his or her nearest birthday as of the Policy Date,
increased by the number of complete policy years elapsed. With respect to any
increases in Face Amount, riders, or other policy benefits which have an
effective date not falling on a Policy Anniversary, Age means age nearest
birthday as of the effective date increased by the number of complete years
elapsed since the effective date.
Beneficiary--The person or persons named by the Policy Owner in the application
or by proper later designation to receive the death benefit proceeds upon the
death of the Insured.
Cash Surrender Value--The Accumulated Value less any applicable unrecovered
deferred load.
Face Amount--The minimum death benefit for so long as the Policy remains in
force. The Face Amount may be increased or decreased under certain
circumstances.
Fixed Account--An account that is part of Pacific Mutual's General Account to
which all or a portion of premium payments may be allocated for accumulation at
a fixed rate of interest (which may not be less than 4.0%) declared by Pacific
Mutual.
General Account--All assets of Pacific Mutual other than those allocated to the
Separate Account or to any other segregated separate account of Pacific Mutual.
Guideline Single Premium or Guideline Level Premiums--The maximum amount of
premium or premiums that can be paid to qualify a Policy as life insurance for
tax purposes as specified in Section 7702 of the Internal Revenue Code.
Home Office--The Policy Benefits and Services Department at Pacific Mutual's
main office at 700 Newport Center Drive, Newport Beach, California 92660.
Indebtedness--The unpaid loan balance including accrued loan interest.
Insured--The person upon whose life the Policy is issued and whose death is the
contingency upon which the death benefit proceeds are payable.
Loan Account--An account to which amounts are transferred from the Variable
Accounts and the Fixed Account as collateral for policy loans.
Maturity Date--The Policy Anniversary on which the Insured is Age 95.
Monthly Payment Date--The day each month on which certain deductions and
charges are assessed against the Accumulated Value. The first Monthly Payment
Date is the Policy Date.
Net Cash Surrender Value--The Cash Surrender Value less Policy Indebtedness.
Policy Owner or Owner--The person who owns the Policy. The Policy Owner will be
the Insured unless otherwise stated in the application. If the Policy has been
absolutely assigned, the assignee becomes the Owner. A collateral assignee is
not the Owner.
Policy Date--The date used to determine the Monthly Payment Date, Policy Years,
and Policy Monthly, Quarterly, Semi-Annual, and Annual Anniversaries. It is
usually the date the initial premium is received at Pacific Mutual's Home
Office. The term "Issue Date" is substituted for Policy Date with respect to
Policies issued to residents of the Commonwealth of Massachusetts.
4
<PAGE>
Premium Load--A charge assessed in connection with each premium payment
consisting of a sales load, an administrative load, and a state and local
premium tax charge. The Premium Load assessed against the first premium is
deferred and deducted monthly starting on the first and continuing to the
eleventh Policy Anniversary.
Valuation Date--Each date on which the Separate Account is valued, which
currently includes each day that the New York Stock Exchange is open for
trading and on which Pacific Mutual's administrative offices are open. The New
York Stock Exchange is closed on weekends and on the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, July Fourth, Labor Day,
Thanksgiving, and Christmas.
Valuation Period--The period that starts at the close of a Valuation Date and
ends at the close of the next succeeding Valuation Date.
Variable Account--A separate account of Pacific Mutual or a subaccount of such
a separate account, which is used only to support the variable death benefits
and policy values of variable life insurance policies, and the assets of which
are segregated from Pacific Mutual's General Account and its other separate
accounts. The Pacific Select Separate Account of Pacific Mutual serves as the
funding vehicle for the Policies. The Money Market Variable Account, High-Yield
Bond Variable Account, Managed Bond Variable Account, Government Securities
Variable Account, Growth Variable Account, Growth LT Variable Account, Equity
Income Variable Account, Multi-Strategy Variable Account, Equity Index Variable
Account and International Variable Account are all subaccounts of the Pacific
Select Separate Account.
5
<PAGE>
SUMMARY OF THE POLICY
This summary is intended to provide a brief overview of the more significant
aspects of the Policy. Further detail is provided in this prospectus and in the
Policy. Unless the context indicates otherwise, the discussion in this summary
and the remainder of the prospectus relates to the portion of the Policy
involving the Separate Account. The Fixed Account is briefly described under
"The Fixed Account," on page 29 and in the Policy.
PURPOSE OF THE POLICY
The Policy offers a Policy Owner insurance protection on the life of the
Insured through the Maturity Date so long as the Policy is not surrendered or
in default beyond the Grace Period. Like traditional fixed life insurance, the
Policy provides for a death benefit equal to its Face Amount, accumulation of
cash values, and surrender and loan privileges. Unlike traditional fixed life
insurance, the Policy offers a choice of investment alternatives and an
opportunity for the Policy's Accumulated Value and, under certain
circumstances, its death benefit to grow based on investment results.
POLICY VALUES
A Policy Owner may allocate premium payments among the various Variable
Accounts that comprise the Separate Account and which invest in corresponding
Portfolios of the Pacific Select Fund (and to the Fixed Account).
Depending on the investment experience of the selected Variable Accounts, the
Accumulated Value may increase or decrease on any day. The death benefit may or
may not increase or decrease depending upon several factors, although the death
benefit will never decrease below the Face Amount provided the Policy is in
force. There is no guarantee that the Policy's Accumulated Value and death
benefit will increase. The Policy Owner bears the investment risk on that
portion of the Accumulated Value allocated to the Separate Account.
The Policy will remain in force unless Indebtedness equals or exceeds Cash
Surrender Value or unless Cash Surrender Value less Indebtedness is
insufficient to pay certain charges deducted on each Monthly Payment Date, and
a Grace Period expires without sufficient additional premium payments or loan
repayments by the Policy Owner.
THE DEATH BENEFIT
Upon the death of the Insured, Pacific Mutual will pay to the named
Beneficiary death benefit proceeds, which will be the death benefit under the
Policy reduced by any Policy Indebtedness. The death benefit will be the
greater of the Face Amount under the Policy or the Accumulated Value multiplied
by a specified percentage (see "Death Benefit," page 14).
PREMIUM FEATURES
The Policy can be purchased for a minimum initial premium payment of the
greater of $10,000 or 50% of the Guideline Single Premium. The Guideline Single
Premium is the maximum premium that can be paid for any given Face Amount in
order for an insurance policy to qualify as a life insurance contract for tax
purposes. As a flexible premium Policy, the Policy provides considerable
flexibility to pay additional premiums at the Policy Owner's discretion, so
Policy Owners have some flexibility to vary premium payments to reflect
changing financial conditions. The Policy may provide insurance protection
through the Maturity Date for only the initial premium, or alternatively,
additional premium payments may be required to keep the Policy in force,
depending upon the Face Amount chosen by the Policy Owner, the investment
performance of the Variable Accounts selected, and other factors.
The Policy is not available to insure residents of certain municipalities in
Kentucky where premium taxes in excess of 4.0% are imposed.
6
<PAGE>
ALLOCATION OPTIONS
The Variable Accounts invest in portfolios of a mutual fund, which offers the
Policy Owner the opportunity to direct Pacific Mutual to invest in diversified
portfolios of stocks, bonds, money market instruments, or a combination of
these securities, or in securities of foreign issuers. Each of the Variable
Accounts invests exclusively in shares of a designated Portfolio of the Pacific
Select Fund (the "Fund"). The Portfolios of the Fund, each of which has a
different investment objective, are the Money Market Portfolio, the High Yield
Bond Portfolio, the Managed Bond Portfolio, the Government Securities
Portfolio, the Growth Portfolio, the Growth LT Portfolio, the Equity Income
Portfolio, the Multi-Strategy Portfolio, the Equity Index Portfolio, and the
International Portfolio (see "The Pacific Select Fund," page 10).
Pacific Mutual is the Investment Adviser of each of the Portfolios. For eight
of the Portfolios, the Adviser and the Fund have engaged other firms to serve
as Portfolio Managers under the supervision of Pacific Mutual. Pacific
Investment Management Company, a subsidiary partnership of PIMCO Advisors,
L.P., each an affiliated enterprise of Pacific Mutual, is the Portfolio Manager
of the Managed Bond Portfolio and the Government Securities Portfolio. Capital
Guardian Trust Company, a subsidiary of The Capital Group, Inc., is the
Portfolio Manager of the Growth Portfolio. Janus Capital Corporation is the
Portfolio Manager of the Growth LT Portfolio. J.P. Morgan Investment Management
Inc., a subsidiary of J.P. Morgan & Co. Inc., is the Portfolio Manager of the
Equity Income Portfolio and the Multi-Strategy Portfolio. Bankers Trust
Company, a subsidiary of Bankers Trust New York Corporation, is the Portfolio
Manager of the Equity Index Portfolio. Templeton Investment Counsel, Inc., a
subsidiary of Franklin Resources, Inc., is the Portfolio Manager of the
International Portfolio.
The Policy Owner may choose to allocate premium payments to any five
allocation alternatives among the ten Variable Accounts constituting the
Separate Account and the Fixed Account. Subject to the limitation of five
allocation alternatives, the Policy Owner may transfer Accumulated Value among
the Variable Accounts, and, subject to certain other limitations, between the
Variable Accounts and the Fixed Account. Transfer may be made by telephone if
an Authorization for Telephone Requests has been signed and filed at Pacific
Mutual's Home Office. (See "Transfer of Accumulated Value," page 14.)
FREE-LOOK RIGHT
A Policy Owner may obtain a full refund of the premium paid if the Policy is
returned within 10 days after the Owner receives it (30 days if the Owner
resides in California and is age 60 or older) or 45 days after the application
for the Policy is completed, whichever is later. In Pennsylvania, a Policy
Owner may obtain a full refund of the premium paid only if the Policy is
returned within 10 days after the Owner receives it. During the Free-Look
Period, premiums will be allocated to the Money Market Variable Account which
invests in the Money Market Portfolio of the Fund. See "Allocation of
Premiums," page 13.
SURRENDER RIGHT
The Owner can surrender the Policy during the life of the Insured and receive
its Net Cash Surrender Value, which is equal to the Accumulated Value less
unrecovered deferred load and less any outstanding Policy Indebtedness.
PREFERRED AND PARTIAL WITHDRAWAL BENEFITS
Two partial surrender benefits are available under the Policy. The first, the
Preferred Withdrawal Benefit, permits one withdrawal per year of up to 10% of
the sum of the Policy Owner's premium payments without a surrender charge and
without reducing the death benefit under the Policy. However, a preferred
withdrawal may increase the Face Amount. This benefit is available on the first
Policy Anniversary until the 15th Policy Anniversary. On the 15th Policy
Anniversary and thereafter, the second surrender benefit, the Partial
Withdrawal Benefit, is available, which permits the Policy Owner to make
Partial Withdrawals of Net Cash Surrender Value within certain limits.
CHARGES AND DEDUCTIONS
Premium Load from the Initial Premium
Pacific Mutual does not make any deductions from the initial premium payment
before allocating it to the Policy Owner's Accumulated Value.
7
<PAGE>
A Premium Load that consists of certain charges is assessed in connection
with each premium payment. The Premium Load assessed in connection with the
initial premium, referred to as "deferred load," is deferred and deducted from
Accumulated Value in equal monthly deductions starting on the first Policy
Anniversary to the eleventh. Deferred load is not deducted during the first
Policy Year unless the Policy Owner surrenders the Policy, in which case the
deferred load will be deducted in full. The Premium Load consists of the
following items:
--A sales load equal to 4.15% of the premium;
--A charge to pay applicable state and local premium taxes equal to 2.35%;
and
--An administrative load, the amount of which varies with the size of the
premium payment as follows: 3.0% of the premium if it is less than
$50,000, 1.50% of the premium if it is at least $50,000 but less than
$100,000, and 0.50% of the premium if it is $100,000 and over.
Deferring Premium Load on the initial premium payment as opposed to charging
it at the Policy Date has the effect of transferring to the Policy Owner the
investment experience on the portion of the Premium Load that remains in the
Accumulated Value. If the Policy Owner surrenders the Policy, the unrecovered
deferred load will be deducted from the Accumulated Value.
Premium Load from Additional Premiums
Additional premium payments after the initial premium payment are subject to
Premium Load to the same extent as described above under "Premium Load from the
Initial Premium." The Premium Load on an additional premium will be assessed
upon acceptance of the additional premium and will not be deferred.
Deductions from Accumulated Value
--Cost of Insurance Charge: A cost of insurance charge is deducted on each
Monthly Payment Date to compensate Pacific Mutual for the cost of
providing life insurance coverage for the Insured;
--Administrative Charge: Pacific Mutual charges an administrative charge
equal to $5 on each Monthly Payment Date. This charge is waived on
Policies with initial premium payments of $20,000 or more; and
--Face Amount Increase Charge: If a Policy Owner requests an increase in
Face Amount that is accepted by Pacific Mutual, a charge of $100 will be
deducted on the effective date of the increase to cover processing costs.
Deductions from the Variable Accounts
--Mortality and Expense Risk Charge: Pacific Mutual makes a daily charge
against the Variable Accounts to compensate Pacific Mutual for mortality
and expense risks assumed. This charge is equal to an annual rate of 0.70%
of the average daily net assets.
The operating expenses of the Separate Account are paid by Pacific Mutual.
Investment advisory fees and operating expenses of the Fund are paid by the
Fund. For a description of these charges, see "Charges and Deductions," page
20.
Pacific Mutual sometimes uses the simplified method of underwriting, which
involves no medical or paramedical examination of the Insured. Because this
method presents additional mortality risks for Pacific Mutual in determining
rates for the cost of insurance, Pacific Mutual has assumed less favorable
mortality experience than that provided in the 1980 Commissioners Standard
Ordinary ("CSO") Mortality Table B, and has established guaranteed rates that
are 137.5% of the 1980 CSO Mortality Table B. If the guaranteed rates are in
effect, Insureds in a standard underwriting classification will pay a higher
cost of insurance than
8
<PAGE>
if they had been medically underwritten in an otherwise identical policy, which
may be viewed as charging substandard rates for Insureds in a standard
underwriting classification. However, Pacific Mutual currently uses cost of
insurance rates that are lower (i.e., less expensive) than the guaranteed
rates. These current rates are less than or equal to 100% of the 1980 CSO
Mortality Table B at all ages (except for smokers of certain ages on Policies
entered into before October 21, 1988).
TAX TREATMENT OF INCREASES IN ACCUMULATED VALUE
The Accumulated Value under the Policy is currently subject to the same
federal income tax treatment as the cash value under fixed life insurance.
Therefore, generally, the Owner will not be deemed to be in constructive
receipt of the Accumulated Value unless and until actual surrender of a Policy
or upon making a Preferred or Partial Withdrawal or a Policy Loan. Any such
distribution may give rise to taxable income to the Policy Owner and may, under
certain circumstances, subject the Policy Owner to an additional income tax of
10% of the amount includable in taxable income. For more information on the tax
treatment of the Policy and the tax treatment of distributions see "Federal
Income Tax Considerations," page 23.
TAX TREATMENT OF DEATH BENEFIT
The death benefit under the Policy is currently subject to federal income tax
treatment consistent with that of fixed life insurance. Therefore, generally
the death benefit will be fully excludable from the gross income of the
Beneficiary under the Internal Revenue Code (see "Federal Income Tax
Considerations," page 23).
THE FIXED ACCOUNT
The Policy Owner may allocate all or a portion of premium payments and
transfer Accumulated Value to the Fixed Account. Amounts allocated to the Fixed
Account are held in Pacific Mutual's General Account. Pacific Mutual guarantees
that the Accumulated Value allocated to the Fixed Account will be credited
interest monthly at a rate equivalent to an effective annual rate of 4%. In
addition, Pacific Mutual may in its sole discretion pay interest in excess of
the guaranteed amount at a rate that will be effected thereafter on each Policy
Anniversary and guaranteed until the next Policy Anniversary (see "The Fixed
Account," page 29).
CONTACTING PACIFIC MUTUAL
All written requests, notices, and forms required by the Policies, and any
questions or inquiries should be directed to Pacific Mutual's, Policy Benefits
and Services Department, at 700 Newport Center Drive, P.O. Box 7500, Newport
Beach, California 92658-7500.
9
<PAGE>
INFORMATION ABOUT PACIFIC MUTUAL, THE SEPARATE ACCOUNT, AND THE FUND
PACIFIC MUTUAL LIFE INSURANCE COMPANY
Pacific Mutual is a mutual life insurance company organized under the laws of
the State of California. It was authorized to conduct business as a life
insurance company on January 2, 1868, as Pacific Mutual Life Insurance Company
of California, and was reincorporated under its present name on July 22, 1936.
Pacific Mutual offers a complete line of life insurance policies and annuity
contracts, as well as financial and retirement services. It is admitted to do
business in the District of Columbia, and in all states except New York. As of
the end of 1994, Pacific Mutual had over $38.3 billion of life insurance in
force and total assets of $14.7 billion. Together with its subsidiaries and
affiliated enterprises, Pacific Mutual had total assets and funds under
management of over $91.1 billion. It has been ranked according to assets as the
25th largest insurance carrier in the nation for 1993.
The Principal Underwriter for the Policies is Pacific Equities Network
("PEN"). PEN is registered as a broker-dealer with the Securities and Exchange
Commission ("SEC") and is a wholly-owned subsidiary of Pacific Financial
Holding Company, which is a wholly-owned subsidiary of Pacific Mutual.
PACIFIC SELECT SEPARATE ACCOUNT
The Pacific Select Separate Account is a separate investment account of
Pacific Mutual used only to support the variable death benefits and policy
values of variable life insurance policies. The assets in the Separate Account
are kept separate from the General Account assets and other separate accounts
of Pacific Mutual.
Pacific Mutual owns the assets in the Separate Account and is required to
maintain sufficient assets in the Separate Account to meet anticipated
obligations of the Policies funded by the Account. The Separate Account is
divided into subaccounts called Variable Accounts. The income, gains, or
losses, realized or unrealized, of each Variable Account are credited to or
charged against the assets held in the Variable Account without regard to the
other income, gains, or losses of Pacific Mutual. Assets in the Separate
Account attributable to the reserves and other liabilities under the Policies
are not chargeable with liabilities arising from any other business that
Pacific Mutual conducts. However, Pacific Mutual may transfer to its General
Account assets which exceed anticipated obligations of the Account. All
obligations arising under the Policy are general corporate obligations of
Pacific Mutual. Pacific Mutual may accumulate in the Account proceeds from
recovered deferred charges and other charges and investment results applicable
to those assets.
The Separate Account was established under California law by a resolution of
the Board of Directors of Pacific Mutual adopted on November 20, 1986. The
Separate Account is registered as a unit investment trust with the SEC. Such
registration does not involve any supervision by the SEC of the administration
or investment practices or policies of the Account.
Each Variable Account invests exclusively in shares of designated Portfolios
of the Fund. Pacific Mutual may in the future establish additional Variable
Accounts within the Separate Account, which may invest in other Portfolios of
the Fund or in other securities.
THE PACIFIC SELECT FUND
The Fund is a diversified, open-end management investment company of the
series type. The Fund is registered with the SEC under the Investment Company
Act of 1940. The Fund currently offers ten separate Portfolios to the Separate
Account. Each Portfolio pursues different investment objectives and policies.
The shares of each Portfolio are purchased by Pacific Mutual for the
corresponding Variable Account at net asset value, i.e., without sales load.
All dividends and capital gains distributions received from a Portfolio are
automatically reinvested in such Portfolio at net asset value, unless Pacific
Mutual, on behalf of the Separate Account, elects otherwise. Fund shares will
be redeemed by Pacific Mutual at their net asset value to the extent necessary
to make payments under the Policies.
10
<PAGE>
Shares of the Fund currently are offered only for purchase by Separate
Accounts of Pacific Mutual to serve as an investment medium for variable life
insurance policies and for variable annuity contracts issued by Pacific Mutual
and to a separate account of Pacific Corinthian Life Insurance Company, a
subsidiary of Pacific Mutual, to serve as an investment medium for variable
annuity contracts administered by Pacific Corinthian. Shares of the Fund may
also be sold in the future to separate accounts of other insurance companies,
both affiliated and not affiliated with Pacific Mutual. Investment in the Fund
by other separate accounts in connection with variable annuity and variable
life insurance contracts may create conflicts. See "MORE ON THE FUND'S SHARES"
in the accompanying prospectus of the Fund.
The chart below summarizes some basic date about each Portfolio of the Fund
offered to the Separate Account. There can be no assurance that any Portfolio
will achieve its objective. More detailed information is contained in the
accompanying prospectus of the Fund, including information on the risks
associated with the investments and investment techniques of each of the
Portfolio.
THE FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING.
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS INVESTMENT ADVISER/
PORTFOLIO OBJECTIVE (UNDER NORMAL CIRCUMSTANCES) PORTFOLIO MANAGER
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Current income Highest quality money Pacific Mutual
consistent with market instruments
preservation of capital
- --------------------------------------------------------------------------------------------
High-Yield High level of current Intermediate and long- Pacific Mutual
Bond income term, high-yielding, lower
and medium quality (high
risk) fixed-income
securities
- --------------------------------------------------------------------------------------------
Managed Bond Maximize total return Investment grade Pacific
consistent with prudent marketable debt Mutual/Pacific
investment management securities. Will normally Investment Management
maintain an average Company
portfolio duration of 3-6
years.
- --------------------------------------------------------------------------------------------
Government Maximize total return U.S. Government securities Pacific
Securities consistent with prudent including futures and Mutual/Pacific
investment management options thereon and high- Investment Management
grade corporate debt Company
securities. Will normally
maintain an average
portfolio duration of 3-6
years.
- --------------------------------------------------------------------------------------------
Growth Growth of capital Common stock Pacific
Mutual/Capital
Guardian Trust
Company
- --------------------------------------------------------------------------------------------
Growth LT Long-term growth of Common stock Pacific Mutual/Janus
capital consistent with Capital Corporation
the preservation of
capital
- --------------------------------------------------------------------------------------------
Equity Income Long-term growth of Dividend paying common Pacific Mutual/J.P.
capital and income stock Morgan Investment
Management Inc.
- --------------------------------------------------------------------------------------------
Multi-Strat- High total return Equity and fixed income Pacific Mutual/J.P.
egy securities Morgan Investment
Management Inc.
- --------------------------------------------------------------------------------------------
Equity Index Provide investment Stocks included in the S&P Pacific
results that correspond 500 Mutual/Bankers Trust
to the total return Company
performance of common
stocks publicly traded
in the U.S.
- --------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Pacific
appreciation corporations domiciled Mutual/Templeton
outside the United States Investment Counsel,
Inc.
- --------------------------------------------------------------------------------------------
</TABLE>
THE INVESTMENT ADVISER
Pacific Mutual, located at 700 Newport Center Drive, Newport Beach,
California 92660, serves as Investment Adviser to each Portfolio of the Fund.
Pacific Mutual is registered with the SEC as an Investment Adviser. For eight
of the Portfolios, the Investment Adviser and the Fund have engaged other firms
to serve as Portfolio Managers under the supervision of Pacific Mutual.
11
<PAGE>
THE POLICY
The variable life insurance benefits provided by the Policies are funded
through the Policy Owner's Accumulated Value in the Pacific Select Separate
Account. The information included below describes the benefits, features,
charges, and other major provisions of the Policies.
APPLICATION FOR A POLICY
Any person wishing to purchase the Policy may submit an application to
Pacific Mutual. A Policy can be issued on the life of an Insured for ages up to
and including age 80 with evidence of insurability satisfactory to Pacific
Mutual. The Insured's age is calculated as of the Insured's nearest birthday.
Acceptance is subject to Pacific Mutual's underwriting rules, and Pacific
Mutual reserves the right to request additional information and to reject an
application.
After the Policy is issued, insurance coverage under the Policy will be
deemed to have begun as of the Policy Date. The Policy Date is usually the date
the initial premium is received at Pacific Mutual's Home Office. The Policy
Date is the date used to determine Policy Years, Policy Months, and Policy
Monthly, Quarterly, Semi-Annual and Annual Anniversaries. For purposes of
determining the Monthly Payment Date for all Policies issued, the Policy Date
will never be the 29th, 30th, or 31st of any month.
Insureds are assigned to underwriting classes which are used in calculating
the cost of insurance rates. In assigning Insureds to underwriting classes,
Pacific Mutual will usually use either simplified or medical underwriting,
although other forms of underwriting may be used when deemed appropriate by
Pacific Mutual.
PREMIUMS
The minimum initial premium to purchase the Policy is $10,000. The Policy
Owner may choose a minimum initial premium payment that constitutes at least
50% and up to 100% of the Guideline Single Premium for the initial Face Amount.
The Guideline Single Premium is the maximum premium that can be paid for a
given Face Amount in order for an insurance policy to qualify as a life
insurance contract for tax purposes. Pacific Mutual may reduce the minimum
initial premium required under certain circumstances, such as for group or
sponsored arrangements. The maximum initial premium that will be routinely
accepted is $1,000,000. Larger premiums may be accepted on a case-by-case basis
subject to prior approval.
ADDITIONAL PREMIUM PAYMENTS
The Policy is a flexible-premium policy, and it provides considerable
flexibility, subject to the limitations described below, to pay additional
premiums at the Policy Owner's discretion. Depending upon the Face Amount
chosen by the Policy Owner and the investment performance of the Variable
Accounts among other factors, the Policy may provide insurance protection
through the Maturity Date for only the initial premium, or alternatively,
additional premium payments may be required to keep the Policy in force.
The minimum additional premium payment amount is $5,000, except smaller
amounts may be paid during the Grace Period. Pacific Mutual may require
evidence of insurability for any payment that would result in an immediate
increase in the difference between the death benefit and Accumulated Value. Any
portion of a premium payment will be returned if it would exceed the
limitations based on the Guideline Single Premium or Guideline Level Premiums.
A premium or a portion thereof may also be returned if it would result in an
immediate increase in the difference between the death benefit and the
Accumulated Value and Pacific Mutual has not received satisfactory evidence of
insurability.
Additional payments will first be treated as repayments of Policy
Indebtedness unless a Policy Owner requests otherwise. Any portion of a payment
that exceeds the amount of Indebtedness will be applied as an additional
premium payment. For Policies entered into before June 21, 1988, making an
additional premium payment may result in the Policy becoming a modified
endowment contract. For more information, see "Federal Income Tax
Considerations," page 23.
12
<PAGE>
ALLOCATION OF PREMIUMS
In the application for the Policy, the Policy Owner selects the Variable
Accounts or the Fixed Account to which premium payments will be allocated after
the Free-Look Period. During the Free-Look Period, premium payments will be
allocated to the Money Market Variable Account, which invests in the Money
Market Portfolio of the Fund (except for amounts allocated to the Loan Account
to secure a Policy loan). The Accumulated Value will be automatically allocated
according to the Policy Owner's instructions contained in the application (or
if received more recently, in written instructions) the later of 15 days after
the Policy is issued or 45 days after the application is completed, or, if
longer, upon receipt of the minimum initial premium (the "Free-Look Period").
The Accumulated Value may be allocated to no more than five allocation
alternatives at any time. Available allocation alternatives include the ten
Variable Accounts and the Fixed Account. Therefore, if the Policy Owner
allocates a portion of Accumulated Value to the Fixed Account, the Policy Owner
may allocate the remaining portion of the Accumulated Value among four of the
ten Variable Accounts. If the Policy Owner allocates all of the Accumulated
Value to the Variable Accounts, it may be allocated among five of the ten
Variable Accounts.
Additional premium payments less the premium load will be allocated among the
Variable Accounts and the Fixed Account according to the Policy Owner's
instructions. If the current instructions would cause the Accumulated Value to
be allocated to more than five allocation alternatives, the premium payment
less the premium load will be allocated to the Variable Accounts and Fixed
Account in the same proportion as the Accumulated Value in those Accounts. A
Policy Owner may change the allocation of payments by submitting a proper
written request to Pacific Mutual's Home Office, or by telephone if an
Authorization for Telephone Requests for changes in premium allocation
instruction has been completed, signed and filed at Pacific Mutual's Home
Office.
DOLLAR COST AVERAGING OPTION
Pacific Mutual currently offers an option under which Policy Owners may
dollar cost average their allocations in the Variable Accounts under the Policy
by authorizing Pacific Mutual to make periodic allocations of Accumulated Value
from any one Variable Account to one or more of the other Variable Accounts,
subject to the five allocation alternative limitation. Dollar cost averaging is
a systematic method of investing in which securities are purchased at regular
intervals in fixed dollar amounts so that the cost of the securities gets
averaged over time and possibly over various market cycles. The option will
result in the allocation of Accumulated Value to one or more Variable Accounts,
and these amounts will be credited at the Accumulation Unit values as of the
end of the Valuation Dates on which the transfers are processed. Since the
value of Accumulation Units will vary, the amounts allocated to a Variable
Account will result in the crediting of a greater number of units when the
Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Similarly, the amounts transferred from a
Variable Account will result in a debiting of a greater number of units when
the Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Dollar cost averaging does not guarantee
profits, nor does it assure that a Policy Owner will not have losses.
A Dollar Cost Averaging Request Form is available upon request. On the form,
the Policy Owner must designate the specific dollar amounts or percentage to be
transferred, the Variable Account or Accounts to which the transfer will be
made, the desired frequency of the transfer, which may be on a monthly,
quarterly, annual, or annual basis, and the length of time during which the
transfers shall continue or the total amount to be transferred over time.
However, after any transfer, a Policy Owner's Accumulated Value may be
allocated to no more than five allocation alternatives.
To elect the Dollar Cost Averaging Option, the Accumulated Value in the
Variable Account from which the Dollar Cost Averaging transfers will be made
must be at least $5,000. The Dollar Cost Averaging Request Form will not be
considered complete until the Policy Owner's Accumulated Value in the Variable
Account from which the transfers will be made is at least $5,000. After Pacific
Mutual has received a Dollar Cost Averaging Request in proper form at its Home
Office, Pacific Mutual will transfer Accumulated Value in amounts designated by
the Policy Owner from the Variable Account from which transfers are to be made
to the Variable Account or Accounts chosen by the Policy Owner. The minimum
amount that may be
13
<PAGE>
transferred to any one Variable Account is $50. After the Free-Look Period, the
first transfer will be effected on the Policy's Monthly, Quarterly, Semi-
Annual, or Annual Anniversary, whichever corresponds to the period selected by
the Policy Owner, coincident with or next following receipt at Pacific Mutual's
Home Office of a Dollar Cost Averaging Request in proper form, and subsequent
transfers will be processed on the following Monthly, Quarterly, Semi-Annual,
or Annual Anniversary for so long as designated by the Policy Owner until the
total amount elected has been transferred, until Accumulated Value in the
Variable Account from which transfers are made has been depleted, or until the
Policy enters the Grace Period. Amounts periodically transferred under this
option will not be subject to any transfer charges that may be imposed by
Pacific Mutual in the future, except as may be required by applicable law.
A Policy Owner may instruct Pacific Mutual at any time to terminate the
option by written request to Pacific Mutual's Home Office. In that event, the
Accumulated Value in the Variable Account from which transfers were being made
that has not been transferred will remain in that Variable Account, subject to
monthly deductions, unless the Policy Owner instructs otherwise or until the
Policy enters the Grace Period. If a Policy Owner wishes to continue
transferring on a dollar cost averaging basis after the expiration of the
applicable period, the total amount elected has been transferred, or the
Variable Account has been depleted, or after the Dollar Cost Averaging Option
has been cancelled, a new Dollar Cost Averaging Request must be completed and
sent to Pacific Mutual's Home Office. The Variable Account from which transfers
are to be made must meet the $5,000 minimum amount of the Accumulated Value.
Pacific Mutual may discontinue, modify, or suspend the Dollar Cost Averaging
Option at any time.
TRANSFER OF ACCUMULATED VALUE
Accumulated Value may be transferred among the Variable Accounts by the
Policy Owner upon proper written request to Pacific Mutual's Home Office.
Transfers (other than transfers in connection with the Dollar Cost Averaging
Option) may be made by telephone if an Authorization for Telephone Requests
has been properly completed, signed and filed at Pacific Mutual's Home Office.
Currently, there are no limitations on the number of transfers between Variable
Accounts, no minimum amount required for a transfer, nor any minimum amount
required to be remaining in a given Variable Account after a transfer (except
as required under the Dollar Cost Averaging Option). However, after the
transfer, the Accumulated Value may be allocated to no more than five
allocation alternatives. No transfers are allowed during the Grace Period if
the required premium has not been paid. No charges are currently imposed upon
such transfers. Pacific Mutual reserves the right, however, at a future date to
limit the size of transfers and remaining balances, to assess transfer charges,
to limit the number and frequency of transfers, and to discontinue telephone
transfers.
Accumulated Value may also be transferred from the Variable Accounts to the
Fixed Account, however, such a transfer will only be permitted in the Policy
Month preceding a Policy Anniversary, except that Policy Owners residing in
Maryland, Connecticut, and Pennsylvania may make such a transfer at any time
during the first 18 Policy Months. Transfers from the Fixed Account to the
Variable Accounts are restricted as described in "The Fixed Account" on page
29.
DEATH BENEFIT
When the Policy is issued, Pacific Mutual will determine the initial amount
of insurance for the initial premium payment based on the instructions provided
in the application. That amount will be shown on the specifications page of the
Policy and is called the "Face Amount."
Upon the death of an Insured, Pacific Mutual will pay to a named Beneficiary
death benefit proceeds, which will be the death benefit under the Policy
reduced by adjustments for any outstanding Policy Indebtedness. The death
benefit will be the greater of the Face Amount under the Policy or Accumulated
Value multiplied by a specified percentage. The specified percentages vary
according to the Age of the Insured, and will be at least equal to the cash
value corridor in Section 7702 of the Internal Revenue Code, which addresses
the definition of a life insurance policy for tax purposes. A table showing the
specified percentages is in the Appendix and in the Policy. Because the
specified percentage is applied to a Policy Owner's Accumulated Value, an
increase in Accumulated Value may increase the death benefit. However,
14
<PAGE>
because the death benefit will never be less than the Face Amount, a decrease
in Accumulated Value may decrease the death benefit but never below the Face
Amount. The following examples illustrate how the death benefit will be
determined:
EXAMPLES
<TABLE>
<CAPTION>
POLICY A POLICY B
-------- --------
<S> <C> <C>
Face Amount........................................... $100,000 $100,000
Insured's Age......................................... 40 40
Accumulated Value on Date of Death.................... $ 46,500 $ 34,000
Specified Percentage.................................. 250% 250%
</TABLE>
- --------
In Policy A, the death benefit equals $116,250, i.e., the greater of $100,000
(the Face Amount) or $116,250 (the Accumulated Value at the date of death of
$46,500 multiplied by the specified percentage of 250%). Assuming that there is
no outstanding Policy Indebtedness, this amount constitutes the death benefit
proceeds that would be paid to the Beneficiary.
In Policy B, the death benefit is $100,000, i.e., the greater of $100,000 (the
Face Amount) or $85,000 (the Accumulated Value of $34,000 multiplied by the
specified percentage of 250%).
The death benefit will be reduced by the amount of any outstanding
Indebtedness (and, if in the Grace Period, any overdue charges). All
calculations of death benefit will be made as of the end of the Valuation
Period during which the Insured dies.
Death benefit proceeds may be paid to a Beneficiary in a lump sum or under
the payment plan offered by Pacific Mutual under the Policy. The plan offers
monthly income for the lifetime of the Beneficiary with a minimum period of ten
years. The Policy should be consulted for details.
CHANGES IN FACE AMOUNT
After the first Policy Year, the Policy Owner may request an increase or
decrease in the Face Amount under a Policy subject to approval from Pacific
Mutual. Increasing or decreasing the Face Amount could increase or decrease the
death benefit under a Policy, and the amount of change in the death benefit
will depend, among other things, upon whether, and the degree to which, the
death benefit under a Policy exceeds the Face Amount prior to the change.
Changing the Face Amount could affect the subsequent level of the death benefit
while the Policy is in force and the subsequent level of Policy values. A
change in the Face Amount may affect the net amount at risk under a Policy,
which may affect a Policy Owner's cost of insurance charge. For these purposes,
the net amount at risk is equal to the death benefit less a Policy Owner's
Accumulated Value.
Any request for an increase or decrease must be in writing and received at
Pacific Mutual's Home Office. It will become effective on the Monthly Payment
Date on or next following Pacific Mutual's acceptance of the request. A Policy
Owner may make only one request for a change per Policy Year. If the Policy
Owner is not the Insured, Pacific Mutual will also require the consent of the
Insured before accepting a request. For Policies entered into before June 21,
1988, changing the Face Amount may result in the Policy becoming a modified
endowment contract. For more information see "Federal Income Tax
Considerations," on page 23.
Increases
A written application must be submitted to Pacific Mutual for an increase in
Face Amount. Additional evidence of insurability satisfactory to Pacific Mutual
will also be required. An increase in Face Amount will not be given for amounts
less than $10,000. An increase need not be accompanied by an additional
premium. A charge of $100 will be deducted from the Accumulated Value on the
effective date of the increase in Face Amount to cover the costs of processing
the request. This fee will be deducted from the Variable Accounts and the Fixed
Account in the proportion that each bears to a Policy Owner's Accumulated Value
less Indebtedness.
15
<PAGE>
Decreases
A written application must be submitted to Pacific Mutual for a decrease in
Face Amount. Any decrease in Face Amount will first be applied to the most
recent increases, then the next most recent increases successively, and finally
to the original Face Amount. If a decrease in the Face Amount would result in
total premiums paid exceeding the premium limitations prescribed under tax law
to qualify the Policy as a life insurance contract, Pacific Mutual will pay the
Policy Owner the amount of such excess above the premium limitations.
Pacific Mutual reserves the right to disallow a requested decrease, and will
not permit a requested decrease, among other reasons, (1) if compliance with
the guideline premium limitations under tax law resulting from the requested
decrease would result in immediate termination of the Policy or likely result
in its termination before its Maturity Date, or (2) if, to effect the requested
decrease, payments to the Policy Owner would have to be made from Accumulated
Value for compliance with the guideline premium limitations, and the amount of
such payments would exceed the Net Cash Surrender Value under the Policy.
POLICY VALUES
Accumulated Value
The Accumulated Value is the sum of the amounts under the Policy held in each
Variable Account of the Separate Account and the Fixed Account, as well as the
amount set aside in Pacific Mutual's Loan Account to secure any Policy
Indebtedness.
On each Valuation Date, the portion of the Accumulated Value allocated to any
particular Variable Account will be adjusted to reflect the investment
experience of that Variable Account (see "Determination of Accumulated Value,"
described below) and to collect any applicable charges.
Cash Surrender Value
The Cash Surrender Value of the Policy equals the Accumulated Value less any
unrecovered deferred load. Thus, the Accumulated Value will exceed the Policy's
Cash Surrender Value by the amount of unrecovered deferred load. Once all
deferred load has been recovered, the Accumulated Value will equal the Cash
Surrender Value. The Cash Surrender Value of the Policy increases or decreases
daily to reflect the investment experience of the selected Variable Accounts.
No minimum amount of Cash Surrender Value is guaranteed. A Policy Owner bears
the risk for the investment experience of such amounts.
Net Cash Surrender Value
The Net Cash Surrender Value is the Cash Surrender Value minus any
outstanding Policy Indebtedness. The Owner can surrender a Policy at any time
while the Insured is living and receive its Net Cash Surrender Value (see
"Surrender," page 18).
DETERMINATION OF ACCUMULATED VALUE
Although the Policy's death benefit can never be less than the Face Amount
for as long as the Policy is in force, the Policy's Accumulated Value in the
Separate Account will vary to a degree that depends upon several factors,
including investment performance of the Variable Accounts to which Accumulated
Value has been allocated, payment of additional premiums, the amount of any
outstanding Policy Indebtedness, any Preferred or Partial Withdrawals, and the
charges assessed in connection with the Policy. There is no guaranteed minimum
Accumulated Value and the Policy Owner bears the entire investment risk
relating to the investment performance of the Variable Accounts.
The amounts allocated to the Variable Accounts will be invested in shares of
the corresponding Portfolio of the Fund. The investment performance of the
Variable Accounts will reflect increases or decreases in the net asset value
per share of the corresponding Portfolio and any dividends or distributions
declared by a Portfolio. Any dividends or distributions from any Portfolio of
the Fund will be automatically reinvested in shares of the same Portfolio,
unless Pacific Mutual, on behalf of the Separate Account, elects otherwise.
16
<PAGE>
Since the Accumulated Value during the first 11 Policy Years will exceed the
Cash Surrender Value by the amount of unrecovered deferred load, the effect of
the addition of the deferred load to the Accumulated Value during this period
provides a larger amount for allocation to the Variable Accounts than if the
amount of the deferred load had been taken from premiums when paid. This has
the effect of transferring to the Policy Owner the investment experience on the
portion of deferred load that remains in Accumulated Value. However, the full
amount of the deferred load for the initial payment will be deducted from the
Accumulated Value over a 10-year period according to the terms described in
this prospectus.
Assets in the Variable Accounts are divided into accumulation units, which
are a measure of value used for bookkeeping purposes. When a Policy Owner
allocates premiums to a Variable Account, the Policy is credited with
accumulation units. In addition, other transactions including loans, surrender,
Preferred or Partial Withdrawals, transfers, and assessment of charges against
the Policy affect the number of accumulation units credited to a Policy. The
number of units credited or debited in connection with any such transaction is
determined by dividing the dollar amount of such transaction by the unit value
of the affected Variable Account. The unit value of each Variable Account is
determined on each Valuation Date. The number of units credited will not change
because of subsequent changes in unit value.
The accumulation unit value of each Variable Account's unit initially was
$10. The unit value of a Variable Account on any Valuation Date is calculated
by adjusting the unit value from the previous Valuation Date for (1) the
investment performance of the Variable Account, which is based upon the
investment performance of the corresponding Portfolio of the Fund, (2) any
dividends or distributions paid by the corresponding Portfolio, and (3) the
charge assessed on each Valuation Period for assumption of mortality and
expense risks as well as any charges that may be assessed by Pacific Mutual for
income taxes attributable to the operation of the Variable Account.
POLICY LOANS
The Policy Owner may borrow money from Pacific Mutual using the Policy as the
only security for the loan by submitting a proper written request to Pacific
Mutual's Home Office. Pacific Mutual may in its discretion permit loans to be
made by telephone if an Authorization for Telephone Requests has been
completed, signed and filed at Pacific Mutual's Home Office. A loan may be
taken any time a Policy is in force. The minimum loan that can be taken at any
time is $1,000, except that the minimum for Policy Owners residing in Indiana
is $500. The maximum amount that can be borrowed at any time is 90% of the
Policy's Cash Surrender Value, less any Policy Indebtedness.
When a Policy Owner takes a loan, an amount equal to the loan is transferred
out of the Policy Owner's Accumulated Value in the Variable Accounts and the
Fixed Account into the Loan Account to secure the loan. Unless otherwise
requested by the Policy Owner, loan amounts will be deducted from the Variable
Accounts and the Fixed Account in the proportion that each bears to the
Accumulated Value less Indebtedness.
The interest rate on loans is 4.75% a year. Pacific Mutual will credit
interest monthly on amounts held in the Loan Account to secure the loan at an
annual rate of 4.0%.
The Owner may repay all or part of the loan at any time while the Policy is
in force. Interest on a loan is accrued daily and is due on each Policy
Anniversary for the prior year. If interest is not paid when due, it will be
added to the amount of the loan principal and interest will begin accruing
thereon from that date. An amount equal to the loan interest charged will be
transferred to the Loan Account from the Variable Accounts and Fixed Account on
a proportional basis.
Unless otherwise requested by a Policy Owner, any loan repayment will be
transferred into the Variable Accounts and Fixed Account in accordance with the
current premium allocation instructions, subject to the limitation of
maintaining Accumulated Value in only five allocation alternatives. In
addition, any interest earned on the loan balance held in the Loan Account will
be transferred to each of the Variable Accounts and Fixed Account in accordance
with the Policy Owner's current premium allocation instructions, subject to the
limitation of five allocation alternatives.
17
<PAGE>
While the amount to secure the loan is held in the Loan Account, the Policy
Owner forgoes the investment experience of the Variable Accounts. Thus, a loan,
whether or not repaid, will have a permanent effect on the Policy's values and
may have an effect on the amount and duration of the death benefit. If not
repaid, the Policy Indebtedness will be deducted from the amount of death
proceeds paid upon the death of the Insured, the Cash Surrender Value paid upon
surrender or maturity, or the refund of premium upon exercise of the Free-Look
Right.
A loan may affect the length of time the Policy remains in force. The Policy
will lapse when Indebtedness equals or exceeds the Cash Surrender Value and the
minimum payment required is not made during the Grace Period. Moreover, the
Policy may enter the Grace Period more quickly when a loan is outstanding,
because the loaned amount is not available to cover monthly deductions and
charges. Additional payments or repayment of a portion of Indebtedness may be
required to keep the Policy in force (see "Lapse," page 19).
A loan is treated as a distribution from a Policy that is a modified
endowment contract, and therefore may give rise to taxable income to the Policy
Owner. For information on the tax treatment of loans, see "Federal Income Tax
Considerations," page 23.
BENEFITS AT MATURITY
If the Insured is living on the Policy Anniversary nearest the Insured's Age
95, Pacific Mutual will pay to the Policy Owner the Accumulated Value of the
Policy, reduced by any Policy Indebtedness. Payment ordinarily will be made
within seven days of the Policy Anniversary, although payments may be postponed
in certain circumstances (see "Payments," page 31).
SURRENDER
A Policy Owner may fully surrender a Policy at any time during the life of
the Insured. The amount received in the event of a full surrender is the
Policy's Net Cash Surrender Value, which is equal to the Accumulated Value less
unrecovered deferred load and less any outstanding Policy Indebtedness.
PREFERRED AND PARTIAL WITHDRAWAL BENEFITS
Pacific Mutual offers two partial surrender benefits by which the Policy
Owner can obtain a portion of the Net Cash Surrender Value: the Preferred
Withdrawal Benefit and the Partial Withdrawal Benefit. The Preferred Withdrawal
Benefit is available on the first Policy Anniversary until the 15th Policy
Anniversary. Under this Benefit, the Policy Owner may make one "Preferred
Withdrawal" per year of up to 10% of the amount of the Policy Owner's initial
premium payment and any additional payments received and accepted prior to the
withdrawal. Preferred Withdrawals do not result in the assessment of any charge
and do not reduce the death benefit under the Policy. No withdrawals other than
Preferred Withdrawals may be made until the Policy Owner's 15th Policy
Anniversary.
The Partial Withdrawal Benefit is available on the 15th Policy Anniversary
and thereafter. Under this Benefit, a Policy Owner may make "Partial
Withdrawals" of Net Cash Surrender Value. The limit of one withdrawal per year
and the limit on the amount that can be withdrawn of 10% of premiums paid do
not apply to Partial Withdrawals.
Both Preferred Withdrawals and Partial Withdrawals must be for at least
$1000. The amount of any withdrawal, Preferred or Partial, may not exceed Cash
Surrender Value. In addition, the amount that can be withdrawn is limited so
that after the withdrawal, (1) Accumulated Value is at least $5000 and (2) any
Policy Indebtedness is no greater than 90% of the new Cash Surrender Value. If
the Policy Owner does not exercise the Preferred Withdrawal Benefit during one
of the first 15 Policy Years, the amount that the Policy Owner could have
withdrawn does not carry over to the following year.
The Policy Owner may make a Preferred or Partial Withdrawal by submitting a
proper written request to Pacific Mutual. As of the effective date of any
withdrawal, the Policy Owner's Accumulated Value and Cash Surrender Value will
be reduced by the amount of the withdrawal. The amount of the withdrawal will
18
<PAGE>
be allocated proportionately to the Policy Owner's Accumulated Value in the
Variable Accounts and the Fixed Account unless otherwise requested by the
Policy Owner. If the Insured dies after the request for a withdrawal is sent to
Pacific Mutual and prior to the withdrawal being effected, the amount of the
withdrawal will be deducted from the death benefit proceeds, which will be
determined without taking into account the withdrawal.
No surrender charge or withdrawal fee will be charged for a Preferred
Withdrawal. However, the amount of the deferred load determined at the time of
an initial premium payment remains the same. No surrender or withdrawal fee
will be charged for a Partial Withdrawal.
A Preferred Withdrawal will not affect the Policy's death benefit. If the
death benefit is greater than the Face Amount at the time of the Preferred
Withdrawal, the Face Amount will be increased to the level of the death benefit
as of the Valuation Date immediately preceding the Preferred Withdrawal. This
adjustment is necessary to ensure the death benefit will not decrease as a
result of the Preferred Withdrawal (see "Death Benefit," page 14).
When a Partial Withdrawal is made, the Face Amount under the Policy is
decreased by the lesser of (1) the amount of the Partial Withdrawal or (2) if
the death benefit prior to the withdrawal is greater than the Face Amount, the
amount, if any, by which the Face Amount exceeds the difference between the
death benefit and the amount of the Partial Withdrawal. A Partial Withdrawal
may cause the death benefit under the Policy to decrease by an amount other
than the amount of the Partial Withdrawal to the extent the death benefit is
based upon the Accumulated Value times the specified percentage applicable to
the Insured (see "Death Benefit," page 14).
A Preferred or Partial Withdrawal is treated as a distribution from the
Policy that may give rise to taxable income to the Policy Owner. For
information on the tax treatment of Preferred and Partial Withdrawals, see
"Federal Income Tax Considerations," page 23.
RIGHT TO EXAMINE A POLICY--FREE-LOOK RIGHT
The Policy Owner has a Free-Look Right, under which the Policy may be
returned within 10 days after the Policy Owner receives it (30 days if the
Owner is a resident of California and is age 60 or older), or within 45 days
after the Owner completes the application for insurance, whichever is later.
However, in Pennsylvania, a Policy Owner has a different Free-Look Right, under
which the Policy may be returned only within 10 days after the Policy Owner
receives it. It can be mailed or delivered to Pacific Mutual or its agent. The
returned Policy will be treated as if Pacific Mutual never issued it and
Pacific Mutual will promptly refund the full amount of the premium paid. If the
Owner has taken a loan during the Free-Look Period, the Policy Indebtedness
will be deducted from the amount refunded. During the Free-Look Period,
premiums will be allocated to the Money Market Variable Account which invests
in the Money Market Portfolio of the Fund (except for amounts allocated to the
Loan Account to secure a Policy loan). See "Allocation of Premiums," page 13.
LAPSE
The Policy will lapse only when Policy Net Cash Surrender Value is
insufficient to cover deductions and charges on a Monthly Payment Date, and a
Grace Period expires without the Policy Owner making a sufficient payment. If
Net Cash Surrender Value is insufficient to cover deductions and charges on a
Monthly Payment Date, the Owner must pay during the Grace Period an amount
equal to the amount by which Net Cash Surrender Value is less than zero plus a
minimum of three times the full charges and deductions due on the Monthly
Payment Date when the insufficiency occurred to avoid termination. Pacific
Mutual will not accept such payment if it would cause the Policy Owner's total
premium payment to exceed the maximum permissible premium under the Internal
Revenue Code. This will probably not be a problem unless the Policy Owner has
outstanding Policy Indebtedness, in which case he or she could repay a
sufficient portion of the Indebtedness to avoid termination.
To avoid recurrence of the potential lapse, the Policy Owner may wish to
repay a portion of any Indebtedness. If premium payments have not exceeded the
maximum permissible premium, the Policy Owner may wish to make a larger
payment.
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If Net Cash Surrender Value is insufficient to cover the deductions and
charges on a Monthly Payment Date, Pacific Mutual will deduct the amount
available to pay for any portion of the monthly deductions and charges due. The
amount available is equal to the amount by which the Accumulated Value exceeds
the Cash Surrender Value. Any remaining Accumulated Value in the Variable
Accounts will be transferred to the Money Market Variable Account. Pacific
Mutual will notify the Policy Owner (and any assignee of record) of the payment
required to keep the Policy in force. The Policy Owner will then have a "Grace
Period" of 61 days, measured from the date the notice is sent, to make the
required payment. The Policy will remain in force through the Grace Period.
Failure to make the required payment within the Grace Period will result in
termination of coverage under the Policy, and the Policy will lapse with no
value. If the required payment is made during the Grace Period, any premium
paid and any Accumulated Value in the Money Market Variable Account will be
allocated among the Variable Accounts of the Separate Account and the Fixed
Account in accordance with the Policy Owner's current premium allocation
instructions. Any monthly deductions and charges due will be charged to the
Variable Accounts and the Fixed Account on a proportionate basis. If the
Insured dies during the Grace Period, the death benefit proceeds will equal the
amount of the death benefit immediately prior to the commencement of the Grace
Period, reduced by any unpaid monthly deductions and charges due and any Policy
Indebtedness.
REINSTATEMENT
Pacific Mutual will reinstate a lapsed Policy (but not a Policy which has
been surrendered for its Net Cash Surrender Value) at any time within five
years after the end of the Grace Period but before the Maturity Date provided
Pacific Mutual receives the following: (1) a written application of the Policy
Owner; (2) evidence of insurability satisfactory to Pacific Mutual; and (3)
payment of all monthly charges and deductions that were due and unpaid during
the Grace Period, payment of the amount by which Net Cash Surrender Value was
less than zero at the beginning of the Grace Period, and payment of a premium
at least equal to three times the most recent monthly deduction.
When the Policy is reinstated, the Accumulated Value will be equal to the
Accumulated Value on the date of the lapse subject to the following: If the
Policy is reinstated after the first Monthly Payment Date following lapse, the
Accumulated Value will be reduced by the amount of Policy Indebtedness on the
date of lapse and no Policy Indebtedness will exist on the date of the
reinstatement. If the Policy is reinstated on the Monthly Payment Date next
following lapse, any Policy Indebtedness on the date of lapse will also be
reinstated. No interest on amounts held in Pacific Mutual's Loan Account to
secure Policy Indebtedness will be paid or credited between lapse and
reinstatement. Reinstatement will be effective as of the Monthly Payment Date
on or next following the date of approval by Pacific Mutual, and Accumulated
Value minus Policy Indebtedness will be allocated among the Variable Accounts
and the Fixed Account in accordance with the Policy Owner's current premium
allocation instructions.
CHARGES AND DEDUCTIONS
PREMIUM LOAD FROM THE INITIAL PREMIUM
Pacific Mutual does not make any deductions from the initial premium payment
before allocating it to the Policy Owner's Accumulated Value.
A Premium Load that consists of certain charges is assessed in connection
with each premium payment. The Premium Load assessed in connection with the
initial premium, referred to as "deferred load," is deferred and deducted from
Accumulated Value in monthly deductions starting on the first Policy
Anniversary and continuing to the eleventh Policy Anniversary. Deferred load is
not deducted during the first Policy Year unless the Policy Owner surrenders
the Policy, in which case the deferred load will be deducted in full. The
Premium Load consists of the following items:
Sales Load. A sales load equal to 4.15% of the premium is assessed to
compensate Pacific Mutual for sales and other expenses of distributing the
Policies.
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The amount derived by Pacific Mutual from the sales load is not expected
to be sufficient to cover the sales expenses in connection with a Policy.
To the extent that all sales expenses are not recovered from the sales
load, such expenses may be recovered from other charges, including amounts
derived indirectly from the charge for mortality and expense risks and from
mortality gains.
Administrative Load. Pacific Mutual assesses an administrative load for
administrative expenses, the amount of which varies with the size of the
premium payment as follows: 3.0% of the premium if it is less than $50,000;
1.50% of the premium if it is at least $50,000 but less than $100,000; and
.50% of the premium if it is $100,000 or greater.
The administrative load is to cover administrative expenses in connection
with the Policies including expenses of underwriting and issuing the
Policy, recordkeeping, determining Policy values and benefits, processing
death benefit claims, processing withdrawals and transfers, preparing
reports to Policy Owners, and overhead costs. Pacific Mutual does not
expect to profit from this charge.
State and Local Premium Tax Charge. A charge equal to 2.35% is assessed
to pay applicable state and local premium taxes. Premium taxes vary from
state to state, and in some instances, among municipalities. The 2.35% rate
approximates the average tax rate expected to be paid on premiums from all
states. The Policy is not available to insure residents of certain
municipalities in Kentucky where premium taxes in excess of 4.0% are
imposed.
As long as the Policy remains in force, the deferred load attributable to the
initial premium payment is not collected until after the end of the first
Policy Year (unless the Policy is surrendered in full during the first year).
It is then deducted from the Accumulated Value in equal monthly installments
during the second through the eleventh Policy Years. Any unrecovered portion of
the deferred load is deducted from the Accumulated Value in the event of a full
cash surrender, or lapse (see "Surrender," page 18 and "Lapse," page 19).
The monthly deduction for deferred load is collected on Monthly Payment
Dates. The amount of this monthly charge is calculated by taking the total
amount of the deferred load and dividing it by 120. Each time this expense
charge is collected, the unrecovered deferred load is reduced by the same
amount. Thus, the unrecovered deferred load decreases each month until it is
reduced to zero following the last monthly deduction made in the eleventh
Policy year. Due to the effects of rounding, the last deduction may differ
slightly from that of other months.
PREMIUM LOAD FROM ADDITIONAL PREMIUMS
Additional premium payments after the initial premium payment are subject to
the Premium Load to the same extent as described above under "Premium Load from
the Initial Premium." Premium Load on additional premium payments will not be
deferred, but will be assessed upon acceptance of an additional premium.
The total amount of the Premium Load will range from 7.0% to 9.5% of the
additional premium payments depending upon the amount of the premium payment.
The Premium Load will consist of the sales load of 4.15%; an administrative
load of 3.0% of the additional premium if it is less than $50,000, 1.5% if it
is at least $50,000 but less than $100,000, and .50% if it is $100,000 or
greater, and the state and local premium tax charge of 2.35%.
VARIATIONS IN PREMIUM LOAD
Pacific Mutual may reduce or waive the amount of the administrative load,
sales load or other charges for Policies where the expenses associated with the
sale of the Policy or the administrative costs associated with the Policy are
reduced for reasons such as the amount of the initial premium payment, the
amounts of projected premium payments, or that the Policy is sold in connection
with a group or sponsored arrangement. Pacific Mutual may also reduce or waive
the sales load on Policies sold to the directors or employees of Pacific Mutual
or any of its affiliates or to trustees or any employees of the Fund.
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DEDUCTIONS FROM ACCUMULATED VALUE
Cost of Insurance. A charge for the cost of insurance is deducted from the
Accumulated Value on each Monthly Payment Date. This monthly charge compensates
Pacific Mutual for the anticipated cost of paying death benefits in excess of
Accumulated Value to Beneficiaries of Insureds who die. The amount of the
charge is equal to the net amount at risk under the Policy at the beginning of
the month multiplied by the current cost of insurance rate. The net amount at
risk for this purpose is equal to the amount of death benefit payable at the
beginning of the Policy Month divided by 1.004074 (a discount factor to account
for return deemed to be earned during the month) less the Accumulated Value at
the beginning of the Policy Month. The cost of insurance rate is calculated
based on the Age and underwriting classification of the Insured. The Policy
contains guaranteed rates, but, as of the date of this prospectus, Pacific
Mutual charges "current rates" that are lower (i.e., less expensive) than the
guaranteed rates. Pacific Mutual may also charge current rates in the future.
The cost of insurance rate generally increases with the Age of the Insured.
In reviewing applications for Policies, Pacific Mutual may use the simplified
method of underwriting, depending, among other things, upon the Insured's Age
and the amount of the initial premium payment. Simplified underwriting involves
no medical or paramedical examination of the Insured. Because the health
information obtained on many Insureds is limited when the simplified
underwriting method is used, this method presents additional mortality risks
for Pacific Mutual. As a result, in determining the guaranteed rates for the
cost of insurance, Pacific Mutual has assumed less favorable mortality
experience than that provided in the 1980 Commissioners Standard Ordinary
("CSO") Mortality Table B, and has established guaranteed rates that are 137.5%
of the 1980 CSO Mortality Table B. If the guaranteed rates are in effect,
Insureds in a standard underwriting classification will pay a higher cost of
insurance than if they had been medically underwritten in an otherwise
identical policy, which may be viewed as charging substandard rates for
Insureds in a standard underwriting classification. However, the current cost
of insurance rates are lower (i.e., less expensive) than the guaranteed rates.
These current rates are less than or equal to 100% of the 1980 CSO Mortality
Table B at all ages (except for smokers of certain ages on Policies entered
into before October 21, 1988).
Administrative Charge. A monthly charge of $5 is imposed to reimburse Pacific
Mutual for the expenses associated with administration and maintenance of the
Policies. This charge will be waived if the initial premium payment is at least
$20,000. This charge contains no element of anticipated profit. It is first
deducted from the Accumulated Value on the Policy Date, and deducted thereafter
on each succeeding Monthly Payment Date.
Face Amount Increase Charge. If a Policy Owner requests an increase in Face
Amount that is accepted by Pacific Mutual, a charge of $100 will be deducted
from Accumulated Value on the effective date of the increase to cover
processing costs. The charge will be deducted from the Variable Accounts and
the Fixed Account in the proportion each bears to the Accumulated Value less
Indebtedness.
DEDUCTIONS FROM THE VARIABLE ACCOUNTS
Mortality and Expense Risk Charges. Pacific Mutual makes a daily charge to
the Variable Accounts for mortality and expense risks assumed by Pacific Mutual
which is equal to an annual rate of 0.70% of daily net assets. This charge is
made to compensate Pacific Mutual for assuming certain mortality and expense
risks under the Policies. The mortality risk assumed is that Insureds, as a
group, may live for a shorter period of time than estimated and, therefore, the
cost of insurance charges specified in the Policy will be insufficient to meet
actual claims. The expense risk assumed is that other expenses incurred in
issuing and administering the Policies and operating the Separate Account will
be greater than the charges assessed for such expenses. Pacific Mutual will
realize a gain from this charge to the extent it is not needed to provide the
mortality benefits and expenses under the Policies, and will realize a loss to
the extent the charge is not sufficient. Pacific Mutual may use any profit
derived from this charge for any lawful purpose, including any distribution
expenses not covered by the sales load.
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OTHER CHARGES
Pacific Mutual may charge the Variable Accounts for the federal income taxes
incurred by Pacific Mutual that are attributable to the Separate Account and
its Variable Accounts. No such charge is currently assessed (see "Charge for
Pacific Mutual Income Taxes," page 26).
Pacific Mutual will bear the operating expenses of the Separate Account. Each
Variable Account purchases shares of the corresponding Portfolio of the
underlying Fund. The Fund and each of its Portfolios incur certain charges
including the investment advisory fee and certain operating expenses. The Fund
is governed by its Board of Trustees. The Fund's expenses are not fixed or
specified under the terms of the Policy. The advisory fees and other expenses
are more fully described in the prospectus of the Fund.
GUARANTEE OF CERTAIN CHARGES
Pacific Mutual guarantees that certain charges will not increase, including
the guaranteed rates for the cost of insurance, the charge for mortality and
expense risk, the administrative load, and the administrative charge.
OTHER INFORMATION
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion provides a general description of the federal income
tax considerations relating to the Policy. This discussion is based upon
Pacific Mutual's understanding of the present federal income tax laws as they
are currently interpreted by the Internal Revenue Service ("IRS"). This
discussion is not intended as tax advice. Because of the inherent complexity of
such laws and the fact that tax results will vary according to the particular
circumstances of the individual involved, tax advice may be needed by a person
contemplating the purchase of the Policy. It should therefore be understood
that these comments concerning federal income tax consequences are not an
exhaustive discussion of all tax questions that might arise with respect to the
Policy and that special rules which are not discussed herein may apply in
certain situations. Moreover, no representation is made as to the likelihood of
continuation of federal income tax or estate tax laws or of the current
interpretations by the IRS or the courts. Future legislation may adversely
affect the tax treatment of life insurance policies or other tax rules
described in this discussion or that relate directly or indirectly to life
insurance policies. Finally, these comments do not take into account any
considerations relating to state or local income or other taxes which may be
involved in the purchase or ownership of the Policy.
While Pacific Mutual believes that the Policy meets the statutory definition
of life insurance and hence will receive federal income tax treatment
consistent with that of fixed life insurance the area of the tax law relating
to the definition of life insurance does not explicitly address all relevant
issues (including, for example, the treatment of substandard risk Policies and
Policies with term insurance on the Insured). Pacific Mutual reserves the right
to make changes to the Policy if changes are deemed appropriate by Pacific
Mutual to attempt to assure qualification of the Policy as a life insurance
contract. If a Policy were determined not to qualify as life insurance, the
Policy would not provide the tax advantages normally provided by life
insurance. The discussion below summarizes the tax treatment of life insurance
contracts.
The death benefit under a Policy should be excludable from the gross income
of the Beneficiary under Section 101(a)(1) of the Internal Revenue Code ("IRC")
for purposes of the regular federal income tax and the Owner generally should
not be deemed to be in constructive receipt of the cash values, including
increments thereof, under the Policy until a full or partial surrender thereof,
maturity of the Policy, or until receipt of deemed distributions (including, in
the case of a modified endowment contract, policy loans). Prospective Policy
Owners that intend to use Policies to fund deferred compensation arrangements
for their employees are urged to consult their tax advisers with respect to the
tax consequences of such arrangements. Prospective corporate Owners should
consult their tax advisers about the treatment of life insurance in their
particular circumstances for purposes of the alternative minimum tax applicable
to corporations and the environmental tax under IRC section 59A. Changing the
Policy Owner may also have tax consequences.
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Exchanging a Policy for another involving the same Insured generally will not
result in the recognition of gain or loss according to Section 1035(a) of the
IRC. Changing the Insured under a Policy will, however, not be treated as a
tax-free exchange under Section 1035, but rather as a taxable exchange.
Diversification Requirements. To comply with regulations under Section 817(h)
of the IRC, each Portfolio of the Fund will be required to diversify its
investments. For details on these diversification requirements, see "What is
the Federal Income Tax Status of the Fund" in the Fund's prospectus.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In those circumstances, income and
gains from the separate account assets would be includable in the variable
policy owner's gross income. The Treasury Department also announced, in
connection with the issuance of regulations concerning diversification, that
those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor [i.e., the Policy Owner], rather than the insurance company,
to be treated as the owner of the assets in the account." This announcement
also stated that guidance would be issued by way of regulations or rulings on
the "extent to which policyholders may direct their investments to particular
subaccounts without being treated as owners of the underlying assets." As of
the date of this prospectus, no such guidance has been issued.
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Policy Owner has additional flexibility in allocating premium
payments and Policy Values. These differences could result in a Policy Owner
being treated as the owner of the Policy's pro rata portion of the assets of
the Separate Account. In addition, Pacific Mutual does not know what standards
will be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. Pacific Mutual therefore reserves
the right to modify the Policy, as deemed appropriate by Pacific Mutual, to
attempt to prevent a Policy Owner from being considered the owner of the
Policy's pro rata share of the assets of the Separate Account. Moreover, in the
event that regulations are adopted or rulings are issued, there can be no
assurance that the Portfolio will be able to operate as currently described in
the Prospectus, or that the Fund will not have to change any Portfolio's
investment objective or investment policies.
Modified Endowment Contracts. The Technical and Miscellaneous Revenue Act of
1988 modified the tax treatment of certain pre-death distributions from life
insurance contracts that are entered into on or after June 21, 1988 and that
satisfy the definition of a newly created class of life insurance contracts
called "modified endowment contracts." Pacific Select Policies entered into on
or after June 21, 1988 will be modified endowment contracts.
A life insurance contract becomes a "modified endowment contract" if, at any
time during the first seven contract years, the sum of actual premiums paid
exceeds the sum of the "seven pay premium." Generally, the "seven-pay premium"
is the level annual premium, such that if paid for each of the first seven
years, will fully pay for all future death and endowment benefits under a
contract. For example, if the "seven-pay premium" were $1,000, the maximum
premiums that could be paid during the first seven years to avoid "modified
endowment" treatment would be $1,000 in the first year; $2,000 through the
first two years; and $3,000 through the first three years, etc.
Pre-death distributions from modified endowment contracts may give rise to
taxable income. Upon full surrender or maturity of the Policy, the Policy Owner
would recognize ordinary income for federal income tax purposes equal to the
amount by which the Net Cash Surrender Value plus Indebtedness exceeds the
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investment in the Policy (usually the premiums paid plus pre-death
distributions that were taxable less any premiums previously recovered that
were excludable from gross income). Upon Preferred and Partial Withdrawals and
Policy loans, the Policy Owner would recognize ordinary income to the extent
allocable to income (which includes all previously non-taxed gains) on the
Policy. The amount allocated to income is the amount by which the Accumulated
Value of the Policy exceeds investment in the Policy immediately before the
distribution. Under a tax law provision, if two or more policies which are
classified as modified endowment contracts are purchased from any one insurance
company, including Pacific Mutual, during any calendar year, all such policies
will be aggregated for purposes of determining the portion of the pre-death
distributions allocable to income on the policies and the portion allocable to
investment in the policies.
If a Policy Owner assigns or pledges (or agrees to assign or pledge) any
portion of the value of a modified endowment contract, such amount or portion
generally will be treated as a pre-death distribution.
The portion of pre-death distributions that are treated as taxable income
will also be subject to an additional income tax of 10%, except where the
distribution (1) occurs on or after the date on which the taxpayer attains age
59 1/2, (2) is attributable to the taxpayer becoming disabled, or (3) occurs as
part of a series of substantially equal (annual or more frequent) periodic
payments made for the life (or life expectancy) of the taxpayer or the joint
lives (or joint life expectancies) of the taxpayer and his or her beneficiary.
With respect to Policy loans, it is unclear whether interest paid (or accrued
by an accrual basis taxpayer) constitutes interest for federal income tax
purposes. If it does constitute interest, it may be deductible, subject to
several limitations, depending on the use to which the proceeds are put and the
tax rules applicable to the Policy Owner. If, for example, the loan proceeds
are used by an individual for business or investment purposes, all or part of
the interest expense may be deductible. Generally, if the Policy loan is used
for personal purposes by an individual, the interest expense is not deductible.
The deductibility of loan interest (whether incurred under a Policy loan or on
other indebtedness) also may be subject to other limitations. For example,
where the interest is paid (or accrued by an accrual basis taxpayer) on a loan
under a Policy covering the life of an officer, employee, or person financially
interested in the trade or business of the Policy Owners, the interest may be
deductible to the extent that the interest is attributable to the first $50,000
of the Policy Indebtedness. Other tax law provisions may limit the deduction of
interest payable on loan proceeds that are used to purchase or carry certain
life insurance policies.
Policies that are Not Modified Endowment Contracts. Policies entered into
before June 21, 1988, may not be subject to treatment as modified endowment
contracts even though they fail to meet the seven-pay premium test provided
that such Policies do not experience a "material change." The definition of
"material change" is complex, but, in general, if the Policy Owner does not pay
any further premium or institute any changes to the death benefits, there will
be no material change. In this connection, an additional premium payment
necessary to keep the Policy in force should not constitute a material change
so long as the death benefit under the Policy does not increase. If a Policy
that was not a modified endowment contract becomes one, under Treasury
Department regulations which may be prescribed, pre-death distributions
received in anticipation of a failure of a Policy to meet the seven-pay premium
test will be treated as pre-death distributions from a modified endowment
contract (and, therefore, will be taxable as described above) even though, at
the time of the distribution(s), the Policy was not yet a modified endowment
contract. For this purpose, pursuant to the IRC, any distribution made within
two years before the Policy is classified as a modified endowment contract
shall be treated as being made in anticipation of the Policy's failing to meet
the seven-pay premium test.
Pre-death distributions from Policies that are not modified endowment
contracts may also give rise to taxable income. Upon full surrender or maturity
of a Policy for its Net Cash Surrender Value, the excess, if any, of the Net
Cash Surrender Value plus any outstanding Policy Indebtedness over the cost
basis under a Policy will be treated as ordinary income for federal income tax
purposes. A Policy's cost basis will usually equal the premiums paid less any
premiums previously recovered in Preferred or Partial Withdrawals. Under
Section 7702 of the IRC, if a partial withdrawal is accompanied by a reduction
in benefits under a life insurance contract, special rules apply to determine
whether part or all of the cash received is paid out of the income of the
contract and is taxable. Provided that the cash received by a Policy Owner on a
Preferred Withdrawal within 15 years of the Policy Date does not exceed
investment in the Policy (generally, premiums
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paid less any premiums previously recovered in Preferred Withdrawals), Pacific
Mutual believes that no portion of such cash will be treated as paid out of the
income of the Policy and taxed to the Policy Owner because the death benefit
under the Policy is not reduced. The absence of regulations or other authority
interpreting Section 7702, however, creates some uncertainty and thus there can
be no assurance that the IRS might not take the position that a portion of the
cash distributed to the Policy Owner on a Preferred Withdrawal should be
treated as being paid out of income of the Policy and taxed to the Policy
Owner. Cash distributed to a Policy Owner on Partial Withdrawals occurring more
than 15 years after the Policy Date will be taxable as ordinary income to the
Policy Owner to the extent that it exceeds the cost basis under a Policy.
Pacific Mutual also believes that loans received under Policies that are not
modified endowment contracts will be treated as Indebtedness of the Owner, and
that no part of any loan under the Policy will constitute income to the Owner
unless the Policy is surrendered. However, interest on Policy Indebtedness paid
(or accrued by an accrual basis taxpayer) may be deductible, subject to several
limitations, depending on the use to which the proceeds are put and the tax
rules applicable to the Policy Owner. If, for example, the loan proceeds are
used by an individual for business or investment purposes, all or part of the
interest expense may be deductible. Generally, if the Policy loan is used for
personal purposes by an individual, the interest expense is not deductible. The
deductibility of loan interest (whether incurred under a Policy Loan or on
other indebtedness) also may be subject to other limitations. For example,
where the interest is paid (or accrued by an accrued basis taxpayer) on a loan
under a Policy covering the life of an officer, employee, or person financially
interested in the trade or business of the Policy Owners, the interest may be
deductible to the extent that the interest is attributable to the first $50,000
of the Policy Indebtedness. Other tax law provisions may limit the deduction of
interest payable on loan proceeds that are used to purchase or carry certain
life insurance policies.
Other. Another provision of the tax law deals with allowable charges for
mortality costs and other expenses that are used in making calculations to
determine whether a contract qualifies as life insurance for federal income tax
purposes. For life insurance policies entered into on or after October 21,
1988, these calculations must be based upon reasonable mortality charges and
other charges reasonably expected to be actually paid. The Treasury Department
is expected to promulgate regulations governing reasonableness standards for
mortality charges. Pacific Mutual believes that the mortality costs and other
expenses used in making calculations to determine whether the Policy qualifies
as life insurance meet the current requirements. It is possible that future
regulations will contain standards that would require Pacific Mutual to modify
its mortality charges used for the purpose of the calculations in order to
retain the qualification of the Policy as life insurance for federal income tax
purposes, and Pacific Mutual reserves the right to make any such modifications.
Federal estate and gift and state and local estate, inheritance, and other
tax consequences of ownership or receipt of Policy proceeds depend on the
jurisdiction and the circumstances of each Owner or Beneficiary.
For complete information on federal, state, local and other tax
considerations, a qualified tax adviser should be consulted.
PACIFIC MUTUAL DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY
POLICY.
CHARGE FOR PACIFIC MUTUAL INCOME TAXES
In the provisions of the IRC on life insurance, variable life insurance is
treated in a manner consistent with fixed life insurance. Pacific Mutual will
periodically review the question of a charge to the Separate Account for
Pacific Mutual federal income taxes. A charge may be made for any federal
income taxes incurred by Pacific Mutual that are attributable to the Separate
Account. This might become necessary if the tax treatment of Pacific Mutual is
ultimately determined to be other than what Pacific Mutual currently believes
it to be, if there are changes made in the federal income tax treatment of
variable life insurance at the insurance company level, or if there is a change
in Pacific Mutual's tax status.
26
<PAGE>
Under current laws, Pacific Mutual may incur state and 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, Pacific Mutual reserves the right to charge the Account for such taxes,
if any, attributable to the Account.
VOTING OF FUND SHARES
In accordance with its view of present applicable law, Pacific Mutual will
exercise voting rights attributable to the shares of each Portfolio of the Fund
held in the Variable Accounts at any regular and special meetings of the
shareholders of the Fund on matters requiring shareholder voting under the
Investment Company Act of 1940. Pacific Mutual will exercise these voting
rights based on instructions received from persons having the voting interest
in corresponding Variable Accounts of the Separate Account. However, if the
Investment Company Act of 1940 or any regulations thereunder should be amended,
or if the present interpretation thereof should change, and as a result Pacific
Mutual determines that it is permitted to vote the shares of the Fund in its
own right, it may elect to do so.
The person having the voting interest under a Policy is the Policy Owner.
Unless otherwise required by applicable law, the number of votes as to which a
Policy Owner will have the right to instruct will be determined by dividing a
Policy Owner's Accumulated Value in a Variable Account by the net asset value
per share of the corresponding Portfolio of the Fund. Fractional votes will be
counted. The number of votes as to which a Policy Owner will have the right to
instruct will be determined as of the date coincident with the date established
by the Fund for determining shareholders eligible to vote at the meeting of the
Fund. If required by the Securities and Exchange Commission, Pacific Mutual
reserves the right to determine in a different fashion the voting rights
attributable to the shares of the Fund based upon instructions received from
Policy Owners. Voting instructions may be cast in person or by proxy.
Voting rights attributable to the Policy Owner's Accumulated Value held in
each Variable Account for which no timely voting instructions are received will
be voted by Pacific Mutual in the same proportion as the voting instructions
which are received in a timely manner for all Policies participating in that
Variable Account. Pacific Mutual will also exercise the voting rights from
assets in each Variable Account which are not otherwise attributable to Policy
Owners, if any, in the same proportion as the voting instructions which are
received in a timely manner for all Policies participating in that Variable
Account and generally will exercise voting rights attributable to shares of
Portfolios of the Fund held in its General Account, if any, in the same
proportion as votes cast with respect to shares of Portfolios of the Fund held
by the Separate Account and other separate accounts of Pacific Mutual, in the
aggregate.
DISREGARD OF VOTING INSTRUCTIONS
Pacific Mutual may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that voting rights be
exercised so as to cause a change in the subclassification or investment
objective of a Portfolio or to approve or disapprove an investment advisory
contract. In addition, Pacific Mutual itself may disregard voting instructions
of changes initiated by Policy Owners in the investment policy or the
investment adviser (or portfolio manager) of a Portfolio, provided that Pacific
Mutual's disapproval of the change is reasonable and is based on a good faith
determination that the change would be contrary to state law or otherwise
inappropriate, considering the Portfolio's objectives and purpose, and
considering the effect the change would have on Pacific Mutual. In the event
Pacific Mutual does disregard voting instructions, a summary of that action and
the reasons for such action will be included in the next report to Policy
Owners.
REPORTS TO OWNERS
A statement will be sent quarterly to each Policy Owner setting forth a
summary of the transactions which occurred during the quarter, indicating the
death benefit, Accumulated Value, Cash Surrender Value, and any Policy
Indebtedness as of the end of each quarter. In addition, the statement will
indicate the allocation of Accumulated Value among the Fixed Account, the
Variable Accounts, Policy Indebtedness, and any other information required by
law. Confirmations will be sent out upon premium payments, transfers, loans,
loan repayments, withdrawals, and surrenders.
27
<PAGE>
Each Policy Owner will also receive an annual and a semiannual report
containing financial statements for the Separate Account and the Fund, the
latter of which will include a list of the portfolio securities of the Fund, as
required by the Investment Company Act of 1940, and/or such other reports as
may be required by federal securities laws.
SUBSTITUTION OF INVESTMENTS
Pacific Mutual reserves the right, subject to compliance with the laws as
then in effect, to make additions to, deletions from, or substitutions for the
securities that are held by the Separate Account or any Variable Account or
that the Separate Account or any Variable Account may purchase. If shares of
any or all of the Portfolios of the Fund should no longer be available for
investment, or if, in the judgment of Pacific Mutual's management, further
investment in shares of any or all Portfolios of the Fund should become
inappropriate in view of the purposes of the Policies, Pacific Mutual may
substitute shares of another Portfolio of the Fund or of a different fund for
shares already purchased, or to be purchased in the future, under the Policies.
Where required, Pacific Mutual will not substitute any shares attributable to
a Policy Owner's interest in a Variable Account or the Separate Account without
notice, Policy Owner approval, or prior approval of the Securities and Exchange
Commission and without following the filing or other procedures established by
applicable state insurance regulators.
Pacific Mutual also reserves the right to establish additional Variable
Accounts of the Separate Account, each of which would invest in a new Portfolio
of the Fund, or in shares of another investment company, a portfolio thereof,
or suitable investment vehicle, with a specified investment objective. New
Variable Accounts may be established when, in the sole discretion of Pacific
Mutual, marketing needs or investment conditions warrant, and any new Variable
Accounts will be made available to existing Policy Owners on a basis to be
determined by Pacific Mutual. Pacific Mutual may also eliminate one or more
Variable Accounts if, in its sole discretion, marketing, tax, or investment
conditions so warrant.
In the event of any such substitution or change, Pacific Mutual may, by
appropriate endorsement, make such changes in this and other policies as may be
necessary or appropriate to reflect such substitution or change. If deemed by
Pacific Mutual to be in the best interests of persons having voting rights
under the Policies, the Separate Account may be operated as a management
investment company under the Investment Company Act of 1940 or any other form
permitted by law, it may be deregistered under that Act in the event such
registration is no longer required, or it may be combined with other separate
accounts of Pacific Mutual or an affiliate thereof. Subject to compliance with
applicable law, Pacific Mutual also may combine one or more Variable Accounts
and may establish a committee, board, or other group to manage one or more
aspects of the operation of the Separate Account.
CHANGES TO COMPLY WITH LAW
Pacific Mutual reserves the right to make any changes without consent of
Policy Owners to the provisions of the Policy to comply with, or give Policy
Owners the benefit of, any Federal or State statute, rule, or regulation,
including but not limited to requirements for life insurance contracts under
the Internal Revenue Code of the United States or regulations thereunder, or
any state statute or regulation.
PERFORMANCE INFORMATION
Performance information for the Variable Accounts of the Separate Account may
appear in advertisements, sales literature, or reports to Policy Owners or
prospective purchasers. Performance information in advertisements or sales
literature may be expressed in any fashion permitted under applicable law,
which may include presentation of a change in a Policy Owner's Accumulated
Value attributable to the performance of one or more Variable Accounts, or as a
change in a Policy Owner's death benefit. Performance quotations of a change in
a Policy Owner's Accumulated Value may be expressed in terms of a change in
Accumulated Value over time or the average annual compounded rate of return on
the Policy Owner's Accumulated Value. Performance quotations may be based upon
a hypothetical Policy in which premiums have been allocated to a particular
Variable Account over certain periods of time that will include one,
28
<PAGE>
year, or from the commencement of operation of the Variable Account. Any such
quotation may reflect the deduction of all applicable charges to the Policy
including premium load, the cost of insurance, and the mortality and expense
risk charge that is assessed against each Variable Account. The quotation may
also reflect the deduction of the unrecovered deferred load, if applicable, by
assuming a surrender at the end of the particular period, although other
quotations may simultaneously be given that do not assume a surrender and do
not take into account deduction of unrecovered deferred load.
Performance information for a Variable Account may be compared, in
advertisements, sales literature, and reports to Policy Owners to: (i) other
variable life separate accounts or investment products tracked by research
firms, ratings services, companies, publications, or persons who rank separate
accounts or investment products on overall performance or other criteria; and
(ii) the Consumer Price Index (measure for inflation) to assess the real rate
of return from the purchase of a Policy. Reports and promotional literature may
also contain Pacific Mutual's rating or a rating of Pacific Mutual's claim-
paying ability as determined by firms that analyze and rate insurance companies
and by nationally recognized statistical rating organizations.
Performance information for any Variable Account of the Separate Account
reflects only the performance of a hypothetical Policy whose Accumulated Value
is allocated to the Variable Account during a particular time period on which
the calculations are based. Performance information should be considered in
light of the investment objectives and policies, characteristics and quality of
the Portfolio of the Fund in which the Variable Account invests, and the market
conditions during the given period of time, and should not be considered as a
representation of what may be achieved in the future.
THE FIXED ACCOUNT
Policy Owners may allocate all or a portion of their premium payments and
transfer Accumulated Value to the Fixed Account of Pacific Mutual. Amounts
allocated to the Fixed Account become part of the "General Account" of Pacific
Mutual, which supports insurance and annuity obligations. Because of exemptive
and exclusionary provisions, interests in the Fixed Account have not been
registered under the Securities Act of 1933 and the Fixed Account has not been
registered as an investment company under the Investment Company Act of 1940.
Accordingly, neither the Fixed Account nor any interest therein is generally
subject to the provisions of these Acts and, as a result, the staff of the
Securities and Exchange Commission has not reviewed the disclosure in this
prospectus relating to the Fixed Account. Disclosures regarding the Fixed
Account may, however, be subject to certain generally applicable provisions of
the federal securities laws relating to the accuracy and completeness of
statements made in the prospectus. For more details regarding the Fixed
Account, see the Policy itself.
GENERAL DESCRIPTION
Amounts allocated to the Fixed Account become part of the General Account of
Pacific Mutual which consists of all assets owned by Pacific Mutual other than
those in the Separate Account and other separate accounts of Pacific Mutual.
Subject to applicable law, Pacific Mutual has sole discretion over the
investment of the assets of its General Account.
The Policy Owner may elect to allocate premium payments to the Fixed Account,
the Separate Account, or both. The Policy Owner may also transfer Accumulated
Value from the Variable Accounts of the Separate Account to the Fixed Account,
or from the Fixed Account to the Variable Accounts, subject to the limitations
described below. Pacific Mutual guarantees that the Accumulated Value in the
Fixed Account will be credited with interest at a rate of 0.327374% per month,
compounded monthly, for an effective annual rate of 4%. Such interest will be
paid regardless of the actual investment experience of the Fixed Account. In
addition, Pacific Mutual may in its sole discretion pay current interest in
excess of the 4% guarantee. The current interest rate will be that rate in
effect on the Policy Date and as effected thereafter for each Policy
Anniversary. Once declared for a Policy on its anniversary, the current rates
are guaranteed for one year until the next Policy Anniversary. The portion of a
Policy Owner's Accumulated Value that has been used to secure Policy
Indebtedness will accrue interest at a rate of 0.327374% per month, compounded
monthly, for an effective annual rate of 4%.
29
<PAGE>
Pacific Mutual bears the full investment risk for the Accumulated Value
allocated to the Fixed Account.
DEATH BENEFIT
The death benefit under the Policy will be determined in the same fashion for
a Policy Owner who has Accumulated Value in the Fixed Account as for a Policy
Owner who has Accumulated Value in the Variable Accounts. The death benefit
will be the greater of the Face Amount or Accumulated Value multiplied by a
specified percentage (see "Death Benefit," page 14).
POLICY CHARGES
Premium load and the Policy charges for the administrative charge and the
cost of insurance will be the same for Policy Owners who allocate premium
payments or transfer Accumulated Value to the Fixed Account as for Policy
Owners who allocate premium payments to the Variable Accounts. The charge for
mortality and expense risks will not be assessed against the Fixed Account, and
any amounts that Pacific Mutual pays for income taxes allocable to the Variable
Accounts will not be charged against the Fixed Account. In addition, the
investment advisory fees and operating expenses paid by the Fund will not be
paid directly or indirectly by Policy Owners to the extent the Accumulated
Value is allocated to the Fixed Account; however, such Policy Owners will not
participate in the investment experience of the Variable Accounts.
TRANSFERS, SURRENDERS, WITHDRAWALS, AND POLICY LOANS
Amounts may be transferred from the Variable Accounts to the Fixed Account
and from the Fixed Account to the Variable Accounts, subject to the following
limitations. The Policy Owner may not make more than one transfer from the
Fixed Account to the Variable Accounts in any 12-month period. Further, if a
Policy Owner has $1000 or more in the Fixed Account, the Policy Owner may not
transfer more than 20% of such amount to the Variable Accounts in any year.
Currently there is no charge imposed upon transfers; however, Pacific Mutual
reserves the right to assess such a charge in the future and to impose other
limitations on the number of transfers, the amount of transfers, and the amount
remaining in the Fixed Account or Variable Accounts after a transfer. Transfers
from the Variable Accounts to the Fixed Account may only be made in the Policy
Month preceding a Policy Anniversary, except that Policy Owners residing in
Maryland, Connecticut and Pennsylvania may make such a transfer at any time
during the first 18 Policy Months.
The Policy Owner may also make full surrenders, Preferred Withdrawals, and
Partial Withdrawals to the same extent as a Policy Owner who has allocated
Accumulated Value to the Variable Accounts. See "Surrender," page 18, and
"Preferred and Partial Withdrawal Benefits," page 18. In addition, to the same
extent as Policy Owners with Accumulated Value in the Variable Accounts, the
Policy Owner may obtain a Policy Loan and borrow up to 90% of Cash Surrender
Value attributable to the Fixed Account less Policy Indebtedness. See "Policy
Loans," page 17. Transfers, surrenders, and withdrawals payable from the Fixed
Account, and the payment of Policy loans allocated to the Fixed Account may be
delayed for up to six months.
MORE ABOUT THE POLICY
OWNERSHIP
The Policy Owner is the individual named as such in the application or in any
later change shown in Pacific Mutual's records. While the Insured is living,
the Policy Owner alone has the right to receive all benefits and exercise all
rights that the Policy grants or Pacific Mutual allows.
Joint Owners. If more than one person is named as Policy Owner, they are
joint owners. Any Policy transaction requires the signature of all persons
named jointly. Unless otherwise provided, if a joint owner dies, ownership
passes to the surviving joint owner(s). When the last joint owner dies,
ownership passes through that person's estate, unless otherwise provided.
30
<PAGE>
BENEFICIARY
The Beneficiary is the individual named as such in the application or any
later change shown in Pacific Mutual's records. The Policy Owner may change the
Beneficiary at any time during the life of the Insured by written request on
forms provided by Pacific Mutual and received by Pacific Mutual at its Home
Office. The change will be effective as of the date this form is signed.
Contingent and/or concurrent Beneficiaries may be designated. The Policy Owner
may designate a permanent Beneficiary, whose rights under the Policy cannot be
changed without his or her consent. Unless otherwise provided, if no designated
Beneficiary is living upon the death of the Insured, the Policy Owner or the
Policy Owner's estate is the Beneficiary.
Pacific Mutual will pay the death benefit proceeds to the Beneficiary. Unless
otherwise provided, in order to receive proceeds at the Insured's death, the
Beneficiary must be living at the time of the Insured's death.
EXCHANGE OF INSURED
After the first Policy year and subject to approval from Pacific Mutual, the
Policy Owner may exchange the named Insured on the Policy upon written
application, evidence of insurability satisfactory to Pacific Mutual, and
payment of a charge of $100. The exchange is effective the first Monthly
Payment Date on or after the date the exchange is approved. Coverage on the new
Insured will become effective on the exchange date. Coverage on the current
Insured will terminate on the day preceding the exchange date. The Policy Date
will not be changed unless the new Insured was born after the Policy Date. In
such case, the Policy Date will be changed to the Policy anniversary on or next
following the birth date of the new Insured. The cost of insurance charge will
be based on the new Insured's Age and risk classification.
Pacific Mutual reserves the right to disallow a requested exchange of the
named Insured, and will not permit a requested exchange, among other reasons,
(1) if compliance with the guideline premium limitations under tax laws
resulting from the exchange of Insured would result in the immediate
termination of the Policy or likely result in its termination before the
Policy's Maturity Date, or (2) if, to effect the requested exchange of Insured,
payments to the Policy Owner would have to be made from Accumulated Value for
compliance with the guideline premium limitations, and the amount of such
payments would exceed the Net Cash Surrender Value under the Policy.
The charge of $100 will be imposed to cover the costs of processing an
exchange of Insured. This amount will not be credited to or deducted from
Accumulated Value, but must be paid directly to Pacific Mutual by the Policy
Owner before the request for an exchange of Insured will be processed.
THE CONTRACT
The Policy is a contract between the Owner and Pacific Mutual. The entire
contract consists of the Policy, a copy of the initial application, all
subsequent applications to change the Policy, any endorsements, and all
additional Policy information sections (specification pages) added to the
Policy.
PAYMENTS
Pacific Mutual ordinarily will pay death benefit proceeds, Net Cash Surrender
Value on surrender, Preferred Withdrawals, Partial Withdrawals, and loan
proceeds based on allocations made to the Variable Accounts, and will effect a
transfer between Variable Accounts or from a Variable Account to the Fixed
Account within seven days after Pacific Mutual receives all the information
needed to process a payment or transfer or, if sooner, other period required by
law.
However, Pacific Mutual can postpone the calculation or payment of such a
payment or transfer of amounts based on investment performance of the Variable
Accounts if:
. The New York Stock Exchange is closed on other than customary weekend
and holiday closings or trading on the New York Stock Exchange is
restricted as determined by the SEC; or
. An emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of the Account's net
assets; or
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<PAGE>
. The SEC by order permits postponement for the protection of Policy
Owners.
ASSIGNMENT
The Policy Owner may assign a Policy as collateral security for a loan or
other obligation. No assignment will bind Pacific Mutual unless the original,
or a copy, is received at its Home Office, and will be effective only when
recorded by Pacific Mutual. An assignment does not change the ownership of the
Policy. However, after an assignment, the rights of any Policy Owner or
Beneficiary will be subject to the assignment. The entire Policy, including any
attached option or rider, will be subject to the assignment. Pacific Mutual
will rely solely on the assignee's statement as to the amount of the assignee's
interest. Pacific Mutual will not be responsible for the validity of any
assignment. Unless otherwise provided, the assignee may exercise all rights
this Policy grants except (a) the right to change the Policy Owner or
Beneficiary; and (b) the right to elect a payment option. Assignment of a
Policy that is a modified endowment contract may generate taxable income. (See
"Federal Income Tax Considerations," page 23.)
ERRORS ON THE APPLICATION
If the Age of the Insured has been misstated, the death benefit under this
Policy will be the greater of that which would be purchased by the most recent
cost of insurance charge at the correct Age, or the death benefit derived by
multiplying Accumulated Value by the specified percentage for the correct Age.
INCONTESTABILITY
Pacific Mutual may contest the validity of this Policy if any material
misstatements are made in the application. However, this Policy will be
incontestable after the expiration of the following: the initial Face Amount
cannot be contested after the Policy has been in force during the Insured's
lifetime for two years from the Policy Date; if the Insured is changed, the
Policy cannot be contested after it has been in force during the new Insured's
lifetime for two years from the effective date of the exchange; and an increase
in the Face Amount cannot be contested after the increase has been in force
during an Insured's lifetime for two years from its effective date.
PAYMENT IN CASE OF SUICIDE
If the Insured dies by suicide, while sane or insane, within two years from
the Policy Date, Pacific Mutual will limit the death benefit proceeds to the
premium payments less any Policy Indebtedness and less the amount of any
Preferred Withdrawals. If the Insured has been changed and the new Insured dies
by suicide, while sane or insane, within two years of the exchange date, we
will limit the death benefit proceeds to the Net Cash Surrender Value as of the
exchange date, plus the premiums paid since the exchange date, less the sum of
any Indebtedness, withdrawal amounts, and any dividends paid in cash since the
exchange date. If an Insured dies by suicide, while sane or insane, within two
years of the effective date of any increase in the Face Amount, we will refund
the cost of insurance charges made with respect to such increase.
PARTICIPATING
The Policy is participating and will share in the surplus earnings of Pacific
Mutual. However, the current dividend scale is zero and Pacific Mutual does not
anticipate that dividends will be paid. Any dividends that do become payable
will be paid in cash.
POLICY ILLUSTRATIONS
Upon request, Pacific Mutual will send the Policy Owner an illustration of
estimated future benefits under the Policy based on both guaranteed and current
cost factor assumptions. However, Pacific Mutual reserves the right to charge a
fee for requests for illustrations in excess of one per policy year.
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<PAGE>
PAYMENT PLAN
Maturity, surrender, or withdrawal benefits may be used to purchase a payment
plan providing monthly income for the lifetime of the Insured, and death
benefit proceeds may be used to purchase a payment plan providing monthly
income for the lifetime of the Beneficiary. The monthly payments consisting of
proceeds plus interest will be paid in equal installments for at least ten
years. The purchase rates for the payment plan are guaranteed not to exceed
those shown in the Policy, but current rates that are lower (i.e., providing
greater income) may be established by Pacific Mutual from time to time. This
benefit is not available if the income would be less than $25 a month.
Maturity, surrender, withdrawal, or death benefits may be used to purchase any
other Payment Plan that Pacific Mutual makes available at that time.
DISTRIBUTION OF THE POLICY
Pacific Equities Network ("PEN") is Principal Underwriter of the Policies.
PEN is registered as a broker-dealer with the SEC and is a member of the
National Association of Securities Dealers ("NASD"). Pacific Mutual pays PEN
for acting as Principal Underwriter under a Distribution Agreement.
Pacific Mutual and PEN have sales agreements with various broker-dealers
under which the Policy will be sold by registered representatives of the
broker-dealers. The registered representatives are required to be authorized
under applicable state regulations to sell variable life insurance. The broker-
dealers are required to be registered with the SEC and members of the NASD. The
compensation payable to a broker-dealer by PM and PEN for sales of the product
may vary with the Sales Agreement, but is not expected to exceed 5% of premium
payments. Broker-dealers may also receive an annual renewal compensation of no
more than .20% of the excess of Accumulated Value less Policy Indebtedness over
$50,000, computed monthly and payable at the end of each Policy Year. In
addition, Pacific Mutual may also pay override payments, expense allowances,
bonuses, wholesaler fees and training allowances. Registered representatives
earn commissions from the broker-dealers with whom they are affiliated for
selling Pacific Mutual's Policies. Compensation arrangements vary among broker-
dealers. In addition, registered representatives who meet specified production
levels may qualify, under sales incentive programs adopted by Pacific Mutual,
to receive non-cash compensation such as expense-paid trips, expense-paid
educational seminars and merchandise. Pacific Mutual makes no separate
deductions, other than as previously described, from premiums to pay sales
commissions or sales expenses.
MORE ABOUT PACIFIC MUTUAL
MANAGEMENT
The directors and officers of Pacific Mutual are listed below together with
information as to their principal occupations during the past five years and
certain other current affiliations. Unless otherwise indicated, the business
address of each director and officer is c/o Pacific Mutual Life Insurance
Company, 700 Newport Center Drive, Newport Beach, California 92660.
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Thomas C. Sutton Director, Chairman of the Board and Chief Executive Officer
Director, Chairman of of Pacific Mutual, January 1990 to present; Equity Board
the Board and Chief Member of PIMCO Advisors L.P.; Director of Pacific
Executive Officer Corinthian Life Insurance Company; similar positions with
other subsidiaries of Pacific Mutual; Director of Newhall
Land & Farming; Director of Health Insurance Association of
America.
Glenn S. Schafer Director and President of Pacific Mutual, January 1995 to
Director and President present; Executive Vice President and Chief Financial
Officer of Pacific Mutual, March 1991 to January 1995;
Senior Vice President, Corporate Finance and Treasurer of
Pacific Mutual, September 1987 to March 1991; Equity Board
Member of PIMCO Advisors L.P.; Director of Pacific
Corinthian Life Insurance Company; similar positions with
other subsidiaries of Pacific Mutual.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Harry G. Bubb Director and Chairman Emeritus of Pacific Mutual, January
Director and 1990 to present.
Chairman Emeritus
Richard M. Ferry Director of Pacific Mutual, 1986 to present; President,
Director Director and Chairman of Korn/Ferry International; Director
of: Avery Dennison Corporation; ConAm Management; First
Business Bank; Northwestern Restaurants, Inc.; Dole Food
Co. Address: 1800 Century Park East, Suite 900, Los
Angeles, California 90067.
Donald E. Guinn Director of Pacific Mutual, 1984 to present; Chairman
Director Emeritus and Director of Pacific Telesis Group; Director
of: Pacific Bell; The Dial Corp.; Bank of America NT & SA;
BankAmerica Corporation; Pyramid Technology Group. Address:
Pacific Telesis Center, 130 Kearny Street, Room 3719, San
Francisco, California 94108-4818.
Ignacio E. Lozano, Jr. Director of Pacific Mutual, 1988 to present; Chairman and
Director Editor-in-Chief of La Opinion; Director of: BankAmerica
Corporation; Bank of America NT&SA; Pacific Enterprises;
The Walt Disney Company; Hexel Corp.; Former President and
Chief Executive Officer of Levelor Corporation. Address:
411 West Fifth Street, 12th Floor, Los Angeles, California
90015.
Charles A. Lynch Director of Pacific Mutual, 1985 to present; Chairman of
Director Market Value Partners Company, Director of: Nordstrom,
Inc.; Mid-Peninsula Bank; Greyhound Lines Inc.; Syntex
Corporation; Fresh Choice, Inc. Address: 3000 Sand Hill
Road, #1-125, Menlo Park, California 94025.
Dr. Allen W. Mathies, Jr. Director of Pacific Mutual, 1985 to present; Director,
Director President and Chief Executive Officer of: Huntington
Memorial Hospital; Southern California Health Care Systems;
Director of Occidental College. Address: 100 W. California
Blvd., Pasadena, California 91109-7103.
Charles D. Miller Director of Pacific Mutual, 1986 to present; Director,
Director Chairman, and Chief Executive Officer of Avery Dennison
Corporation; Director of: Great Western Financial
Corporation; Nationwide Health Properties, Inc.; Southern
California Edison Company. Address: 150 N. Orange Grove
Boulevard, Pasadena, California 91103.
Donn B. Miller Director of Pacific Mutual, 1977 to present; President,
Director Chief Executive Officer and Director of Pearson-Sibert Oil
Co. of Texas; Director of: The Irvine Company; Automobile
Club of Southern California; St. John's Hospital and Health
Center Foundation; Former Senior Partner with the law firm
of O'Melveny & Meyers. Address: 136 El Camino, Suite 216,
Beverly Hills, California 90212.
Susan Westerberg Prager Director of Pacific Mutual, 1979 to present; Dean of the
Director UCLA School of Law at the University of California at Los
Angeles; Director of Lucille Salter Packard Children's
Hospital of Stanford. Address: 405 Hilgard Avenue, Room
3374, Los Angeles, California 90024-1476.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
James R. Ukropina Director of Pacific Mutual, 1989 to present; Partner with
Director the law firm of O'Melveny & Myers; Former Chairman and
Chief Executive Officer of Pacific Enterprises; Director of
Lockheed Corporation; Trustee of Stanford University.
Address: 400 S. Hope Street, 16th Floor, Los Angeles,
California 90071-2899.
Raymond L. Watson Director of Pacific Mutual, 1975 to present; Vice Chairman
Director and Director of The Irvine Company; Director of: The Walt
Disney Company; The Mitchell Energy and Development
Company. Address: 550 Newport Center Drive, Ninth Floor
Newport Beach, California 92660.
Lynn C. Miller Executive Vice President, Individual Insurance, of Pacific
Executive Vice President Mutual, January 1995 to present; Sr. Vice President,
Individual Insurance of Pacific Mutual 1989 to 1995.
David R. Carmichael Senior Vice President and General Counsel of Pacific Mutual,
Senior Vice President April 1992 to present; Vice President and Investment
and General Counsel Counsel of Pacific Mutual, April 1989 to April 1992;
Director of: Pacific Corinthian Life Insurance Company; PM
Group Life Insurance Company; Director of Association of
California Life Insurance Companies.
Marilee Roller Senior Vice President, Corporate Finance and Administration,
Senior Vice President of Pacific Mutual, January 1995 to present; President and
COO of Pacific Corinthian Life Insurance Company, 1992 to
present; Vice President of Pacific Mutual, 1994 and 1995;
Vice President and Controller of Pacific Mutual, 1990 to
1992, similar positions with other subsidiaries of Pacific
Mutual.
Audrey L. Milfs Vice President and Corporate Secretary of Pacific Mutual,
Vice President and March 1991 to present; Second Vice President and Corporate
Corporate Secretary Secretary of Pacific Mutual, April 1989 to March 1991;
Similar positions with other subsidiaries of Pacific
Mutual.
Edward Byrd Vice President and Controller of Pacific Mutual, June 1992
Vice President and to present; Vice President, Corporate Audit and Financial
Controller Planning of Pacific Mutual, November 1991 to June 1992;
Assistant Vice President, Corporate Audit of Pacific
Mutual, May 1990 to November 1991.
Khanh T. Tran Vice President and Treasurer of Pacific Mutual, November
Treasurer 1991 to present; Assistant Vice President and Treasurer of
Pacific Mutual, September 1990 to November 1991; Assistant
Treasurer of The Vons Companies, February 1988 to September
1990; Treasurer to other subsidiaries of Pacific Mutual.
</TABLE>
No officer or director listed above receives any compensation from the
Separate Account. No separately allocable compensation has been paid by Pacific
Mutual or any of its affiliates to any person listed for services rendered to
the Account.
35
<PAGE>
STATE REGULATION
Pacific Mutual is subject to the laws of the state of California governing
insurance companies and to regulation by the Commissioner of Insurance of
California. In addition, it is subject to the insurance laws and regulations of
the other states and jurisdictions in which it is licensed or may become
licensed to operate. An annual statement in a prescribed form must be filed
with the Commissioner of Insurance of California and with regulatory
authorities of other states on or before March 1st in each year. This statement
covers the operations of Pacific Mutual for the preceding year and its
financial condition as of December 31st of that year. Pacific Mutual's affairs
are subject to review and examination at any time by the Commissioner of
Insurance or his agents, and subject to full examination of Pacific Mutual's
operations at periodic intervals.
TELEPHONE TRANSFER AND LOAN PRIVILEGES
A Policy Owner may request a transfer of Accumulated Value or a Policy Loan
by telephone if an Authorization for Telephone Requests ("Telephone
Authorization") has been properly completed, signed, and filed at Pacific
Mutual's Home Office. All or part of any telephone conversation with respect to
transfer or loan instructions may be recorded by Pacific Mutual. Telephone
instructions received by Pacific Mutual by 1:00 P.M. Pacific time, or the close
of the New York Stock Exchange, if earlier, on any Valuation Date will be
effected as of the end of that Valuation Date in accordance with the Policy
Owner's instructions, subject to the limitation of five allocation alternatives
(presuming that the Free-Look Period has expired). Pacific Mutual reserves the
right to deny any telephone transfer or loan request. If all telephone lines
are busy (which might occur, for example, during periods of substantial market
fluctuations), Policy Owners might not be able to request transfers and loans
by telephone and would have to submit written requests.
Pacific Mutual has established procedures to confirm that instructions
communicated by telephone are genuine. Under the procedures, any person
requesting a transfer by telephone must provide certain personal identification
as requested by Pacific Mutual, and Pacific Mutual will send a written
confirmation of all transfers requested by telephone within 7 days of the
transfer. Upon the submission of a Telephone Authorization, a Policy Owner
authorizes Pacific Mutual to accept and act upon telephonic instructions for
transfers or loans involving the Policy Owner's Policy, and agrees that neither
Pacific Mutual, any of its affiliates, Pacific Select Fund, nor any of their
directors, trustees, officers, employees or agents, will be liable for any
loss, damages, cost, or expense (including attorneys fees) arising out of any
requests effected in accordance with the Telephone Authorization and believed
by Pacific Mutual to be genuine, provided that Pacific Mutual has complied with
its procedures. As a result of this policy on telephonic requests, the Policy
Owner will bear the risk of loss arising from the telephone transfer and loan
privileges.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Account is a party, or
which would materially affect the Account.
LEGAL MATTERS
Legal matters in connection with the issue and sale of the Policies described
in this Prospectus and the organization of Pacific Mutual, its authority to
issue the Policies under California law, and the validity of the forms of the
Policies under California law have been passed on by the General Counsel of
Pacific Mutual.
Legal matters relating to the federal securities and federal income tax laws
have been passed upon by Dechert Price & Rhoads.
REGISTRATION STATEMENT
A Registration Statement under the Securities Act of 1933 has been filed with
the SEC relating to the offering described in this Prospectus. This Prospectus
does not include all of the information set forth in the
36
<PAGE>
Registration Statement, as portions have been omitted pursuant to the rules and
regulations of the SEC. The omitted information may be obtained at the SEC's
principal office in Washington, D.C., upon payment of the SEC's prescribed
fees.
INDEPENDENT ACCOUNTANTS
The audited financial statements for the Separate Account and for Pacific
Mutual included in this Prospectus and in the Registration Statement have been
audited by Deloitte & Touche LLP, independent certified public accountants, as
indicated in their report hereon, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
FINANCIAL STATEMENTS
The audited financial statements for the Separate Account as of and for the
years ended December 31, 1994 and 1993, are set forth herein, starting on page
38. The audited financial statements of Pacific Mutual as of and for the years
ended December 31, 1994 and 1993 are set forth herein starting on page 45.
The financial statements of the Separate Account and Pacific Mutual have been
audited by Deloitte & Touche LLP. The financial statements of Pacific Mutual
should be distinguished from the financial statements of the Separate Account
and should be considered only as bearing upon the ability of Pacific Mutual to
meet its obligations under the Policies.
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Mutual Life Insurance Company
We have audited the accompanying statements of assets and liabilities of the
Pacific Select Separate Account (comprised of the Money Market, Managed Bond,
Government Securities, High Yield Bond, Growth, Equity Income, Multi-Strategy,
International, Equity Index, and Growth LT Variable Accounts) as of December 31,
1994 and the related statements of operations for the year then ended and
statements of changes in net assets for each of the two years ended December 31,
1994 and 1993. These financial statements are the responsibility of the Separate
Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective Variable
Accounts constituting the Pacific Select Separate Account as of December 31,
1994 and the results of their operations for the year then ended and the changes
in their net assets for each of the two years then ended, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 17, 1995
38
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
STATEMENTS OF ASSETS & LIABILITIES
DECEMBER 31, 1994
(In thousands)
<TABLE>
<CAPTION>
HIGH
MONEY MANAGED GOVERNMENT YIELD EQUITY
MARKET BOND SECURITIES BOND GROWTH INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ---------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Pacific Select Fund:
Money Market Series (240 shares; cost $2,413) ............ $ 2,405
Managed Bond Series (11 shares; cost $119) ............... $ 112
Government Securities Series (34 shares; cost $365) ...... $ 325
High Yield Bond Series (360 shares; cost $3,186) ......... $ 3,206
Growth Series (430 shares; cost $6,692) .................. $ 6,400
Equity Income Series ( 167 shares; cost $2,344) .......... $ 2,341
Multi-Strategy Series (60 shares; cost $661) .............
International series (96 shares; cost $1,143) ............
Equity Index Series (19 Shares; cost $226) ...............
Growth LT Series (9 shares; cost $92) ....................
--------- ------- --------- -------- ------- -------
TOTAL ASSETS ............................................... 2,405 112 325 3,206 6,400 2,341
--------- ------- --------- -------- ------- -------
LIABILITIES
Payables:
Mortality and expense risk fee ........................... 3 4 7 3
--------- ------- --------- -------- ------- -------
TOTAL LIABILITIES .......................................... 3 4 7 3
--------- ------- --------- -------- ------- -------
NET ASSETS ................................................. $ 2,402 $ 112 $ 325 $ 3,202 $ 6,393 $ 2,338
========= ======= ========= ======== ======= =======
SEE NOTES TO FINANCIAL STATEMENTS.
<CAPTION>
MULTI- INTER- EQUITY GROWTH
STRATEGY NATIONAL INDEX LT
VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- -------- -------- -------
<S> <C> <C> <C> <C>
ASSETS
Investments in Pacific Select Fund:
Money Market Series (240 shares; cost $2,413) ............
Managed Bond Series (11 shares; cost $119) ...............
Government Securities Series (34 shares; cost $365) ......
High Yield Bond Series (360 shares; cost $3,186) .........
Growth Series (430 shares; cost $2,344) ..................
Equity Income Series ( 167 shares; cost $2,344) ..........
Multi-Strategy Series (60 shares; cost $661) ............. $ 691
International series (96 shares; cost $1,143) ............ $ 1,146
Equity Index Series (19 Shares; cost $226) ............... $ 248
Growth LT Series (9 shares; cost $92) .................... $ 96
-------- -------- -------- --------
TOTAL ASSETS ............................................... 691 1,146 248 96
-------- -------- -------- --------
LIABILITIES
Payables:
Mortality and expense risk fee ........................... 1 1
-------- -------- -------- --------
TOTAL LIABILITIES .......................................... 1 1
-------- -------- -------- --------
NET ASSETS ................................................. $ 690 $ 1,145 $ 248 $ 96
======== ======== ======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
39
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY MANAGED GOVERNMENT YIELD EQUITY MULTI-
MARKET BOND SECURITIES BOND GROWTH INCOME STRATEGY
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends.................................. $ 53 $ 57 $ 16 $ 275 $ 549 $ 218 $ 42
EXPENSES
Mortality and expense risk fee............. 7 11 3 23 48 17 5
------- ------- ------- ------- ------- ------- -------
NET INVESTMENT INCOME........................ 46 46 13 252 501 201 37
------- ------- ------- ------- ------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) from security
transactions............................. 2 (50) (6) 6 118 50 24
Net unrealized appreciation (depreciation)
on investments........................... (9) (86) (30) (268) (1,427) (274) (76)
------- ------- ------- ------- ------- ------- -------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS...................... (7) (136) (36) (262) (1,309) (224) (52)
------- ------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.................. $ 39 $ (90) $ (23) $ (10) $ (808) $ (23) $ (15)
======= ======= ======= ======= ======= ======= =======
<CAPTION>
INTER- EQUITY GROWTH
NATIONAL INDEX LT
VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT
------- ------- -------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends.................................. $ 47 $ 7 $ 1
EXPENSES
Mortality and expense risk fee............. 8 2
------- ------- -------
NET INVESTMENT INCOME........................ 39 5 1
------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) from security
transactions............................. 52 9
Net unrealized appreciation (depreciation)
on investments........................... (65) (13) 4
------- ------- -------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS...................... (13) (4) 4
------- ------- -------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.................. $ 26 $ 1 $ 5
======= ======= =======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
40
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY MANAGED GOVERNMENT YIELD EQUITY
MARKET BOND SECURITIES BOND GROWTH INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income................................ $ 46 $ 46 $ 13 $ 252 $ 501 $ 201
Net realized gain (loss) from security transactions.. 2 (50) (6) 6 118 50
Net unrealized appreciation (depreciation)
on investments...................................... (9) (86) (30) (268) (1,427) (274)
------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS............................ 39 (90) (23) (10) (808) (23)
------- ------- ------- ------- ------- -------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums............................. 1
Transfers-policy charges and deductions.............. (35) (24) (66) (13) (241) (158)
Transfers in (from other variable accounts).......... 2,332 142 38 64 345 384
Transfers out (to other variable accounts)........... (460) (2,301) (38) (85) (225) (356)
Transfers-other...................................... (1) 1
------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS..................... 1,837 (2,184) (66) (34) (120) (129)
------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN NET ASSETS................. 1,876 (2,274) (89) (44) (928) (152)
NET ASSETS
Beginning of year................................... 526 2,386 414 3,246 7,321 2,490
------- ------- ------- ------- ------- -------
End of year......................................... $ 2,402 $ 112 $ 325 $ 3,202 $ 6,393 $ 2,338
======= ======= ======= ======= ======= =======
<CAPTION>
MULTI- INTER- EQUITY GROWTH
STRATEGY NATIONAL INDEX LT
VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- -------
<C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS...................................... $ 37 $ 39 $ 5 $ 1
Net investment income................................ 24 52 9
Net realized gain (loss) from security transactions
Net unrealized appreciation (depreciation)
on investments...................................... (76) (65) (13) 4
------- ------- ------- -------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS............................ (15) 26 1 5
------- ------- ------- -------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums.............................
Transfers-policy charges and deductions.............. (58) (129) (59) (1)
Transfers in (from other variable accounts).......... 32 328 8 92
Transfers out (to other variable accounts)........... (116) (179) (2)
Transfers-other...................................... (1)
------- ------- ------- -------
NET INCREASE (DECREASE IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS..................... (142) 19 (53) 91
------- ------- ------- -------
NET INCREASE (DECREASE) IN NET ASSETS................. (157) 45 (52) 96
NET ASSETS
Beginning of year................................... 847 1,100 300 0
------- ------- ------- -------
End of year......................................... $ 690 $ 1,145 $ 248 $ 96
======= ======= ======= =======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY MANAGED GOVERNMENT YIELD
MARKET BOND SECURITIES BOND GROWTH
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- -------
<C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net investment income........................... $ 11 $ 203 $ 31 $ 353 $ 340
Net realized gain from security transactions.... 64 1 9 157
Net unrealized appreciation on investments...... 2 41 5 119 800
------- ------- ------- ------- -------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... 13 308 37 481 1,297
------- ------- ------- ------- -------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums........................ 17
Transfers-policy charges and deductions......... (3) (187) (5) (74) (326)
Transfers in (from other variable accounts)..... 27 13 32 156 156
Transfers out (to other variable accounts)...... (310) (638) (22) (72) (21)
Transfers-other................................. (1) (1) (1) (9)
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS................ (270) (813) 5 9 (200)
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN NET ASSETS............ (257) (505) 42 490 1,097
NET ASSETS
Beginning of year............................... 783 2,891 372 2,756 6,224
------- ------- ------- ------- -------
End of year..................................... $ 526 $ 2,386 $ 414 $ 3,246 $ 7,321
======= ======= ======= ======= =======
<CAPTION>
EQUITY MULTI- INTER- EQUITY
INCOME STRATEGY NATIONAL INDEX
VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- -------
<C> <C> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net investment income........................... $ 112 $ 37 $ 8 $ 6
Net realized gain from security transactions.... 58 16 11 20
Net unrealized appreciation on investments...... 12 17 92 3
------- ------- ------- -------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... 182 70 111 29
------- ------- ------- -------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums........................
Transfers-policy charges and deductions......... (260) (36) (62) (83)
Transfers in (from other variable accounts)..... 113 914 17
Transfers out (to other variable accounts)...... (31) (89) (106) (16)
Transfers-other................................. (3) (1) (1)
------- ------- ------- -------
NET INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS................ (181) (125) 745 (83)
------- ------- ------- -------
NET INCREASE (DECREASE) IN NET ASSETS............ 1 (55) 856 (54)
NET ASSETS
Beginning of year............................... 2,489 902 244 354
------- ------- ------- -------
End of year..................................... $ 2,490 $ 847 $ 1,100 $ 300
======= ======= ======= =======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Pacific Select Separate Account (the "Separate Account") is registered
as a unit investment trust under the Investment Company Act of 1940, as amended,
and is currently comprised of ten subaccounts ("Variable Accounts"): the Money
Market Variable Account, the Managed Bond Variable Account, the Government
Securities Variable Account, the High Yield Bond Variable Account, the Growth
Variable Account, the Equity Index Variable Account, and the Growth LT Variable
Account. The assets in each Variable Account are invested in shares of the
corresponding series of Pacific Select Fund (the "Fund"), each of which pursues
different investment objectives and policies.
The Separate Account was established by Pacific Mutual Life Insurance
Company ("Pacific Mutual") on November 20, 1986 and commenced operations on
January 7, 1988. Under applicable insurance law, the assets and liabilities of
the Separate Account are clearly identified and distinguished from the other
assets and liabilities of Pacific Mutual. The assets of the Separate Account
will not be charged with any liabilities arising out of any other business
conducted by Pacific Mutual, but the obligations of the Separate Account,
including benefits related to variable life insurance, are obligations of
Pacific Mutual.
A. Valuation of Investments
Investments in shares of the Fund are valued at the reported net asset
values of the respective series.
B. Security Transactions
Transactions are recorded on the trade date. Realized gains and losses on
sales of investments are determined on the identified cost basis.
C. Federal Income Taxes
The operations of the Separate Account will be reported on the Federal
income tax return of Pacific Mutual, which is taxed as a life insurance company
under the provisions of the Tax Reform Act of 1986. Under current tax law, no
Federal income taxes are expected to be paid by Pacific Mutual with respect to
the operations of the Separate Account.
2. DIVIDENDS
During 1994 and 1993, the Fund declared dividends for each series. The
amounts accrued by the Separate Account for its share of the dividends were
reinvested in additional full and fractional shares of each related series.
3. CHARGES AND EXPENSES
Pacific Mutual charges the Separate Account daily for mortality and expense
risks assumed with respect to variable life insurance policies funded by the
Separate Account at an annual rate of 0.70% of the average daily net assets of
each Variable Account. Under the policies, Pacific Mutual makes certain
deductions from the net assets of each Variable Account for sales load,
administrative expenses, state premium taxes, cost of insurance and charges for
optional benefits. The operating expenses of the Separate Account are paid by
Pacific Mutual.
4. RELATED PARTY AGREEMENT
Pacific Equities Network, an indirect subsidiary of Pacific Mutual, is the
principal underwriter of variable life insurance policies funded by interests in
the Separate Account, and is compensated by Pacific Mutual.
43
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
5. SELECTED ACCUMULATED UNIT** INFORMATION
Selected accumulation unit information for the year ended December 31, 1994
were as follows:
<TABLE>
<CAPTION>
HIGH
MONEY MANAGED GOVERNMENT YIELD
MARKET BOND SECURITIES BOND GROWTH
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ACCUMULATION UNIT
VALUE:
Begining $ 13.38 $ 17.52 $ 16.98 $ 17.97 $ 24.86
======= ======= ======= ======= ========
Ending $ 13.79 $ 16.61 $ 16.00 $ 17.92 $ 22.10
======= ======= ======= ======= ========
Number of Units Outstanding at
End of Period 174,156 6,736 20,333 178,675 289,315
</TABLE>
<TABLE>
<CAPTION>
EQUITY MULTI- INTER- EQUITY GROWTH
INCOME STRATEGY NATIONAL INDEX LT
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ACCUMULATION UNIT
VALUE
Begining $ 17.88 $ 17.31 $ 15.00 $ 13.37 $ 10.00
======== ======= ======= ======= =======
Ending $ 17.71 $ 16.93 $ 15.34 $ 13.42 $ 11.25
======== ======= ======= ======= =======
Number of Units Outstanding at
End of Period 132,048 40,785 74,648 18,515 8,562
</TABLE>
__________________
**Accumulation Unit of measure used to calculate the value of a Contract
Owner's interest in a Variable Account during the Accumulation Period.
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
Pacific Mutual Life Insurance Company:
We have audited the accompanying statements of financial position of Pacific
Mutual Life Insurance Company as of December 31, 1994 and 1993, and the related
statements of operations and surplus and of cash flow for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Pacific Mutual Life Insurance Company as of
December 31, 1994 and 1993 and the results of its operations and its cash flow
for the years then ended in conformity with accounting practices prescribed or
permitted by the Insurance Department of the State of California and with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 21, 1995
45
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
1994 1993
- ---------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Bonds $ 6,669,853 $ 5,899,646
Preferred stocks 132,604 143,016
Common stocks 57,874 71,086
Unconsolidated subsidiaries 196,401 141,611
Mortgage loans 1,421,182 1,611,400
Real estate 157,507 134,257
Home office properties 51,419 52,115
Policy loans 2,312,455 1,960,162
Cash and short-term investments 97,745 342,401
Investment income due and accrued 125,534 125,783
Premiums due and uncollected, and other assets 245,243 143,669
Separate account assets 3,260,374 2,720,997
- ---------------------------------------------------------------------------------
TOTAL ASSETS $14,728,191 $13,346,143
=================================================================================
LIABILITIES AND SURPLUS
Liabilities
Policy reserves $ 6,476,634 $ 5,807,708
Deposit funds 3,298,915 3,485,440
Other liabilities 885,638 583,989
Asset valuation reserve 179,006 165,251
Separate account liabilities 3,260,374 2,720,979
- ---------------------------------------------------------------------------------
Total Liabilities 14,100,567 12,763,367
Surplus 627,624 582,776
- ---------------------------------------------------------------------------------
TOTAL LIABILITIES AND SURPLUS $14,728,191 $13,346,143
=================================================================================
</TABLE>
See Notes to Financial Statements
46
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF OPERATIONS AND SURPLUS
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
- ------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
REVENUES
Premiums, annuity considerations and deposit funds $ 2,180,409 $ 2,325,160
Net investment income 879,116 879,931
Other income 5,073 4,959
- ------------------------------------------------------------------------------------------
TOTAL REVENUES 3,064,598 3,210,050
- ------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future policy benefits 2,686,406 2,818,344
Operating expenses 222,203 218,387
Premium and other taxes (excluding tax on capital gains) 28,715 26,057
Dividend to policyowners 17,162 17,609
- ------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,954,486 3,080,397
- ------------------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAXES 110,112 129,653
Federal income taxes 41,510 22,367
- ------------------------------------------------------------------------------------------
NET GAIN FROM OPERATIONS 68,602 107,286
NER REALIZED CAPITAL GAINS 12,424 11,226
- ------------------------------------------------------------------------------------------
NET INCOME $ 81,026 $ 118,512
==========================================================================================
SURPLUS
Net income $ 81,026 $ 118,512
Comtribution certificates 149,589
Other surplus transactions, net (36,178) (57,012)
- ------------------------------------------------------------------------------------------
Increase in surplus 44,848 211,089
Surplus, beginning of year 582,776 371,687
- ------------------------------------------------------------------------------------------
SURPLUS, END OF YEAR $ 627,624 $ 582,776
==========================================================================================
</TABLE>
See Notes to Financial Statements.
47
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
- -------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Receipts
Premiums, annuity considerations and deposit funds $ 1,687,583 $ 2,065,646
Net investment income 809,791 839,682
Allowances and reserve adjustments on reinsurance ceded 491,363 230,995
Other 23,862 9,965
Payments
Policy benefit payments (1,408,650) (1,530,086)
Net policy loans (352,358) (436,216)
Operating expenses (247,437) (204,768)
Net transfer to separate accounts (594,284) (922,130)
Premium and other taxes (34,795) (24,785)
Dividends to policyowners (17,319) (17,641)
Federal income tax (23,995) (87,162)
- -------------------------------------------------------------------------------------------
NET CASH FLOW FROM OPERATIONS 333,761 (76,500)
- -------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTMENTS
Proceeds
Bonds 2,937,210 2,696,822
Stocks 139,785 346,072
Mortgage loans 390,642 408,238
Real estate 20,163 90,389
Other investments 47,132 94,874
Payments for the purchase of
Bonds (3,673,859) (3,174,986)
Stocks (126,823) (278,932)
Mortgage loans (230,859) (131,841)
Real estate (17,466) (7,087)
Other investments (114,106) (37,844)
- -------------------------------------------------------------------------------------------
NET CASH FLOW FROM INVESTMENTS (628,181) 5,705
- -------------------------------------------------------------------------------------------
CASH FLOW FROM BORROWINGS 49,764
- -------------------------------------------------------------------------------------------
CASH FLOW FROM CONTRIBUTION CERTIFICATES 149,589
- -------------------------------------------------------------------------------------------
Increase (decrease) in cash and short-term investments (244,656) 78,794
Cash and short-term investments, beginning of year 342,401 263,607
- -------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 97,745 $ 342,401
===========================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 22,120 $ 8,054
===========================================================================================
</TABLE>
See Notes to Financial Statements.
48
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pacific Mutual Life Insurance Company ("Pacific Mutual") was established in
1868. Its core business consists of life insurance, annuity and pension
products. In addition, Pacific Mutual provides other insurance, employee
benefits and investment management and advisory services through its
subsidiaries.
BASIS OF PRESENTATION
Pacific Mutual's financial statements are based on accounting practices
prescribed or permitted by the Insurance Department of the State of
California, which are currently considered generally accepted accounting
principles for mutual life insurance companies. 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 adminstrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed.
The financial statements of Pacific Mutual are not consolidated with those
of its subsidiaries.
In April 1993, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises" (the
"Interpretation"). The Interpretation was amended by Statement of Financial
Accounting Standards No. 120, "Accounting and Reporting by Mutual Life
Insurance Enterprises for Certain Long-Duration Participating Contracts,
"("SFAS No. 120") which was issued in January 1995, to further clarify the
accounting for mutual life insurance companies and to defer the effective
date of the general provisions of the Interpretation to fiscal years
beginning after December 15, 1995. SFAS No. 120 did not change the
disclosure of other transition provisions of the Interpretation. The
Interpretation does not prelude mutual life insurance enterprises from
issuing financial statements prepared under statutory accounting practices
but concludes that those financial statements should not be described as
being prepared in conformity with generally accepted accounting principles
("GAAP"). Upon the effective date of the Interpretation, in order for their
financial statements to be described as being prepared in accordance with
GAAP, mutual life insurance companies and their subsidiaries will be
required to adopt all applicable authoritative GAAP pronouncements in any
general purpose financial statements that they may elect to issue. Pacific
Mutual has not quantified the effects of the application of the
Interpretation on its financial statements since the company has not yet
determined whether for general purposes it will continue to issue statutory
financial statements or statements adopting all applicable authoritative
GAAP pronouncements.
CHANGE IN ACCOUNTING POLICIES
During 1993, Pacific Mutual implemented the accrual method of accounting
for the costs of its postretirement health care and life insurance plans as
prescribed by Insurance Department of the State of California. This change
is more fully described in Note 10.
INVESTMENTS
Investments in bonds are carried at amortized cost. Preferred stocks are
principally stated at amortized cost. Common stocks are carried at market
value. Investments in unconsolidated subsidiaries are reported on the
equity method of accounting, except for PCL (Note 2) which is carried at
cost.
Mortgage loans and policy loans are stated at unpaid principal balances.
Real estate is valued at the lower of depreciated cost or market, less
related mortgage debt. Real estate is depreciated using the straight-line
method over 30 years.
Short-term investments generally mature within a year and are carried at
amortized cost which approximates estimated fair value.
The Asset Valuation Reserve ("AVR") is computed in accordance with a
prescribed formula and is designed to stabilize surplus against valuation
and credit-related losses for certain invested assets. Changes to the AVR
are reported as direct additions or deductions from surplus. The Interest
Maintenance Reserve ("IMR") included in
49
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
other liabilities on the accompanying statements of financial position,
results in the deferral of after-tax realized capital gains and losses
attributable to interest rate fluctuations on fixed income investments and
these capital gains and losses are amortized into investment income over
the remaining life of the investment sold. The IMR was $13.1 million and
$22.4 million as of December 31, 1994 and 1993, respectively.
Net realized capital gains and losses are determined on the specific
identification method and are presented net of federal capital gains tax of
$2.2 million and $16.9 million and transfers to the IMR of $(.4) million
and $22.4 million for the years ended December 31, 1994 and 1993,
respectively.
Derivatives which qualify for hedge accounting are valued consistently with
the hedged items. Realized gains and losses on fixed income contracts are
deferred and amortized over the average life of the related hedged assets
or insurance liabilities. Realized gains and losses on equity securities,
which are marked to market, are recognized immediately. Derivatives which
do not qualify for hedge accounting are valued at market value through
surplus while still held and through income when realized.
On November 15, 1994, Pacific Financial Asset Management Corporation, a
wholly-owned, second-tier subsidiary of Pacific Mutual and five of its
subsidiaries (Pacific Investment Management Company and subsidiaries,
Parametric Portfolio Associates, Inc., Cadence Capital Management
Corporation, NFJ Investment Group, Inc. and Blairlogie Capital Management
Limited) entered into an agreement and plan of consolidation with Thomson
Advisory Group L.P., a Delaware limited partnership with publicly traded
units, to merge into a newly capitalized partnership named PIMCO Advisors
L.P. Substantially all operations of these entities and net assets of $20.9
million were contributed in exchange for approximately 42% of the newly
issued partnership units.
POLICY RESERVES AND DEPOSIT FUNDS
Life insurance reserves are valued using the net level premium method, the
Commissioners' Reserve Valuation Method, or other modified reserve methods.
Reserves for individual annuities are maintained principally on the
Commissioners' Annuity Reserve Valuation Method. Group annuity contract
reserves are valued using the net single premium method.
The liability for deposit funds, including guaranteed interest contracts,
is based primarily upon, and is not less than, the policyowners' equity in
their deposit accounts, including credited interest.
REVENUES AND EXPENSES
Premiums are recognized as income over the premium paying period. Deposits
made in connection with annuity contracts are recognized as revenue when
received. Investment income is recorded as earned.
Expenses, including policy acquisition costs such as commissions, are
charged to operations as incurred.
DIVIDENDS
Dividends are provided based on dividend formulas approved by the Board of
Directors and reviewed for reasonableness and equitable treatment of
policyowners by an independent consulting actuary.
FEDERAL INCOME TAXES
Pacific Mutual is taxed as a life insurance company for Federal income tax
purposes. Pacific Mutual's income tax return is consolidated with all its
domestic subsidiaries except PCL. The amount of federal income tax expense
includes an equity tax calculated by a prescribed formula that incorporates
a differential earnings rate between stock and mutual life insurance
companies. The difference between the effective tax rate and the statutory
tax rate of 35% for 1994 and 1993 is primarily due to certain policy
acquisition costs being deferred and amortized over a ten-year period for
tax purposes, reserve differences, non-taxable investment income and the
equity tax for 1994.
OTHER SURPLUS TRANSACTIONS
Other surplus transactions consist primarily of unrealized capital gains
and losses, changes in nonadmitted assets, and changes in the AVR.
50
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEPARATE ACCOUNTS
Separate account assets are recorded at market value and the related
liabilities represent segregated contract owner funds maintained in
accounts with individual investment objectives. The investment results of
separate account assets generally pass through to separate account policy
owners and contract owners.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments disclosed in Notes 3 and
4 have been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is required to
interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented may not be indicative of the amounts Pacific Mutual
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies could have a significant effect
on the estimated fair value amounts.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1994
financial statement presentation.
2. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
Pursuant to a five-year rehabilitation agreement approved by a California
Superior Court and the Insurance Department of the State of California in
July 1992, Pacific Mutual, through its wholly-owned subsidiary,Pacific
Corinthian Life Insurance Company ("PCL"), will facilitate the
rehabilitation of First Capital Life Insurance Company ("FCL"). In
accordance with the rehabilitation agreement, insurance policies of FCL
were restructured and assumed by PCL on December 31, 1992.
The rehabilitation agreement provides for the holders of restructured
policies to share in a substantial percentage of the unallocated surplus of
PCL at the end of the rehabilitation period. Policyholders have the option
to surrender their restructured policies with reduced benefits during this
five-year period. During the rehabilitation plan period, PCL is prohibited
from issuing new insurance policies. At the end of the rehabilitation
period, PCL will merge into Pacific Mutual, with Pacific Mutual as the
surviving entity. Substantially all of the assets and certain of the
liabilities of FCL were assumed by PCL on December 31, 1992 pursuant to an
assumption reinsurance agreement and asset purchase agreement.
In accordance with the rehabilitation agreement, PCL was capitalized by a
cash contribution of $8.3 million from Pacific Mutual and a $45 million
certificate of contribution provided by Pacific Financial Holding Company,
a wholly-owned subsidiary of Pacific Mutual, for a total of $53.3 million
initial capitalization.
In the event PCL is unable to pay contract benefits, Pacific Mutual is
obligated to contribute funds to pay those benefits in accordance with the
rehabilitation agreement.
3. INVESTMENT IN DEBT SECURITIES
The statement value, gross unrealized gains and losses and estimated fair
value of bonds and redeemable preferred stocks ("debt securities"),
including short-term investments, are shown below. The estimated fair value
of publicly traded securities was based on quoted market prices. For
securities not actively traded, estimated fair values were provided by
independent pricing services specializing in "matrix pricing" and modeling
techniques. Pacific Mutual also estimates certain fair values based on
interest rates, credit quality and average maturity or from securities with
comparable trading characteristics.
51
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENTS IN DEBT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Estimated
Statement Gross Unrealized Fair
----------------------------------
Value Gains Losses Value
---------------------------------------------------------------
(In Thousands)
<S> <S> <C> <C> <C>
December 31, 1994:
U.S. Treasury securities
and obligations of U.S.
government authorities
and agencies $ 216,201 $ 1,064 $ 37,113 $ 180,152
Obligations of states, political
subdivisions and foreign
governments 321,798 5,371 16,309 310,860
Corporate securities 3,771,271 104,311 160,712 3,714,870
Mortgage-backed securities 2,480,307 28,911 81,147 2,428,071
Redeemable preferred stock 81,026 343 5,031 76,338
---------------------------------------------------------------
Total $ 6,870,603 $ 140,000 $ 300,312 $ 6,710,291
===============================================================
December 31, 1993:
U.S. Treasury securities
and obligations of U.S.
government authorities
and agencies $ 482,104 $ 10,227 $ 6,788 $ 485,543
Obligations of states, political
subdivisions and foreign
governments 194,819 16,520 296 211,043
Corporate securities 3,328,988 338,039 6,114 3,660,913
Mortgage-backed securities 2,248,574 120,947 10,875 2,358,646
Redeemable preferred stock 88,456 3,314 359 91,411
---------------------------------------------------------------
Total $ 6,342,941 $ 489,047 $ 24,432 $ 6,807,556
===============================================================
</TABLE>
The statement value and estimated fair value of debt securities as of December
31, 1994 by contractual repayment date of principal are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Statement Fair
Value Value
---------------------------------------------
(In Thousands)
<S> <C> <C>
Due in one year or less $ 429,348 $ 414,074
Due after one year through five years 1,349,078 1,343,824
Due after five years through ten years 1,340,882 1,299,969
Due after ten years 1,270,988 1,224,353
---------------------------------------------
4,390,296 4,282,220
Mortgage-backed securities 2,480,307 2,428,071
---------------------------------------------
Total $ 6,870,603 $ 6,710,291
=============================================
</TABLE>
52
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENTS IN DEBT SECURITIES (CONTINUED)
Proceeds from sales of investments in debt securities were $1.5 billion and
$1.2 billion for the years ended December 31, 1994 and 1993, respectively.
In 1994 and 1993, gross gains of $30 million and $53 million and gross
losses of $43 million and $2 million, respectively, were realized on those
sales.
4. FINANCIAL INSTRUMENTS
The estimated fair values of Pacific Mutual's financial instruments,
including debt securities, are as follows:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
Statement Estimated Statement Estimated
Value Fair Value Value Fair Value
-------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Debt securities (See note 3) $ 6,870,603 $ 6,710,291 $ 6,342,941 $ 6,807,556
Preferred and common stocks 109,458 116,993 125,646 143,090
Mortgage loans 1,421,182 1,452,596 1,611,400 1,692,700
Policy loans 2,312,455 2,312,455 1,960,162 1,960,162
Derivative financial instruments:
Interest rate swaps 121 (24,809) 25,641
Other 2,672 (2,822) 10,116 47,118
Liabilities:
Guaranteed interest contracts 2,635,356 2,614,961 2,586,538 2,669,666
Deposit liabilities 871,548 833,274 929,748 977,285
Other derivative financial instruments 2,270 2,128 440
Contribution certificates 149,593 124,313 149,589 153,480
</TABLE>
The following methods and assumptions were used to estimate the fair values of
these financial instruments as of December 31, 1994 and 1993:
PREFERRED AND COMMON STOCKS
The estimated fair values are based on quoted market prices or dealer quotes.
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flows, using a year-end market rate which
is applicable to the yield, credit quality and average maturity of the composite
portfolio.
POLICY LOANS
The statement value of policy loans is a reasonable estimate of their fair
values.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
The estimated fair values of fixed-maturity guaranteed interest contracts are
estimated using the rates currently offered for deposits of similar remaining
maturities. The estimated fair values of deposit liabilities with no defined
maturities are the amounts payable on demand.
53
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (CONTINUED)
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES (Continued)
Pacific Mutual has issued PRO GIC and Diversifier GIC contracts to plan
sponsors totaling $749 million as of December 31, 1994, pursuant to the
terms of which the plan sponsor retains direct ownership and control of the
assets related to these contracts. Pacific Mutual agrees to provide benefit
responsiveness in the event that plan benefit requests exceed plan cash
flows. In return for this guarantee, Pacific Mutual receives a fee which
varies by contract. Pacific Mutual sets the investment guidelines to
provide for appropriate credit quality and cash flow matching.
DERIVATIVE FINANCIAL INSTRUMENTS
Pacific Mutual utilizes certain derivative financial instruments to
diversify its business risk and to minimize its exposure to fluctuations in
market prices and interest rates. Pacific Mutual has also set aside a
corporate total return portfolio utilizing derivative financial
instruments. These instruments include interest rate and currency swaps,
forwards, options held, options written, and futures contracts, and involve
elements of credit risk and market risk in excess of amounts recognized in
the accompanying financial statements. The notional amounts of those
instruments reflect the extent of involvement in those various types of
financial instruments. The estimated fair values of these instruments are
based on market or dealer quotes. Pacific Mutual determines, on an
individual counterparty basis, the need for collateral or other security
to support financial instruments with off-balance-sheet credit risks.
Options and Floors
Pacific Mutual uses options and floors to hedge against fluctuations in
interest rates and in its corporate total return portfolio. Cash
requirements on options held are limited to the premium paid by Pacific
Mutual at acquisition. Pacific Mutual uses written options on a limited
basis consisting primarily of covered calls. Gains and losses on covered
calls are offset by gains and losses on the underlying position. Options
and floors held are reported as assets and options written are reported as
liabilities. As of December 31, 1994, the notional amount of options held
and options written approximated $1.5 billion and $42 million,
respectively. Option contracts mature during fiscal years 1995 through
2000.
Interest Rate Swap Contracts
Pacific Mutual has entered into interest rate swap contracts to reduce the
impact of changes in interest rates on its variable short-term and long-
term investments. These contracts effectively change the interest rate
exposure on variable rate notes to fixed rates which range from 1.9% to
8.6% as of December 31, 1994, and from 1.9% to 12.2% as of December 31,
1993. Interest rate swap contracts mature during fiscal years 1996 through
2013. As of December 31, 1994 and 1993, interest rate swap contracts
outstanding with financial institutions had a total notional amount of $477
million and $770 million, respectively.
Foreign Currency Exchange Contracts
Pacific Mutual enters into foreign currency exchange contracts that are
used to hedge against fluctuations in foreign currency-denominated assets
and related income. Gains and losses on such agreements offset currency
gains and losses on the related assets. As of December 31, 1994, the
notional amount of foreign currency exchange contracts approximated $35
million. Foreign currency exchange contracts expire during fiscal years
1995 through 1999.
Future Contracts
Pacific Mutual uses exchange-traded futures contracts for asset and
liability management of fixed maturity securities and insurance liabilities
and for hedging market fluctuations on equity securities. Price changes on
futures are settled daily through the daily margin cash flows. As of
December 31, 1994 and 1993, the notional amounts of futures contracts were
$163 million and $573 million, respectively. The notional amounts of the
contracts do not represent future cash requirements, as Pacific Mutual
intends to close out open positions prior to expiration.
CONTRIBUTION CERTIFICATES
The estimated fair value of contribution certificates is based on market
quotes.
54
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
5. CONCENTRATION OF CREDIT RISK
Pacific Mutual manages its investments to limit credit risk by diversifying
its portfolio among various security types and industry sectors. The credit
risk of financial instruments is controlled through credit approvals,
limits and monitoring procedures. Real estate and mortgage loan investments
are diversified by geographic location and property type. Management
believes that significant concentrations of credit risk do not exist.
Pacific Mutual is exposed to credit loss in the event of nonperformance by
the other parties to the interest rate swaps contracts and other derivative
securities. However, Pacific Mutual does not anticipate nonperformance by
the counterparties.
6. UNCONSOLIDATED SUBSIDIARIES
Pacific Mutual's subsidiary operations primarily include other life and
health insurance and investment management and advisory services. As of
December 31, 1994 and 1993, subsidiary assets, including PCL, were $4.5
billion and $4.4 billion, respectively, and liabilities were $4.2 billion
as of December 31, 1994 and 1993.
Revenue and net income, including PCL, were $1.1 billion and $75 million
for the year ended December 31, 1994, and $1.0 billion and $57 million for
the year ended December 31, 1993. Dividends from subsidiaries totaled $2
million and $24 million for the years ended December 31, 1994 and 1993,
respectively. All earnings of the subsidiaries, excluding PCL, and
excluding capital gains, are included in net investment income.
7. BORROWINGS
Pacific Mutual borrows for short-term needs by issuing commercial paper.
Approximately $50 million was outstanding as of December 31, 1994, bearing
an interest rate of 5.86%, and was repaid in January, 1995. There were no
commercial paper borrowings outstanding as of December 31, 1993.
In addition, Pacific Mutual had available lines of credit totaling
approximately $250 million and $300 million as of December 31, 1994 and
1993, respectively. There were no borrowings outstanding as of December 31,
1994 and 1993.
8. CONTRIBUTION CERTIFICATES
On December 30, 1993, Pacific Mutual issued $150 million of Contribution
Certificates (the "Certificates"), also referred to as Surplus Notes, at an
interest rate of 7.9% maturing on December 30, 2023. Interest is payable
semiannually. The Certificates may not be redeemed at the option of Pacific
Mutual or any holder of the Certificates. The Certificates are unsecured
and subordinated to all present and future senior indebtedness and policy
claims of Pacific Mutual. Each payment of interest on and the payment of
principal of the Certificates may be made only out of Pacific Mutual's
surplus and with the prior approval of the Insurance Commissioner of the
State of California. In accordance with accounting practices prescribed or
permitted by the Insurance Department of the State of California, the
Certificates are not part of the liabilities of Pacific Mutual and are
included in surplus.
9. REINSURANCE
Pacific Mutual has reinsurance agreements with other insurance companies
for the purpose of diversifying risk and limiting exposure on larger risks.
For the years ended December 31, 1994 and 1993, individual life and annuity
premiums assumed were $20 million and $22 million and premiums ceded were
$363 million and $292 million, respectively. Amounts recoverable from
reinsurers for individual life and annuities include reinsured and paid
claims of $13 million and $21 million as of December 31, 1994 and 1993,
respectively. Policy benefits payable are net of reinsurance on unpaid
claims of $(4) million and $0 at December 31, 1994 and 1993, respectively.
Pacific Mutual also reinsures substantially all of its group life and
health business with a subsidiary insurance company. Premiums of $90
million and $122 million, and benefits of $70 million and $80 million were
ceded during the years ended December 31, 1994 and 1993, respectively.
Amounts payable to the subsidiary under this agreement were $8 million and
$4 million as of December 31, 1994 and 1993, respectively.
55
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
9. REINSURANCE (CONTINUED)
To the extent that the assuming companies become unable to meet their
obligations under these treaties, Pacific Mutual remains contingently
liable. However, Pacific Mutual does not anticipate nonperformance by these
assuming companies.
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
PENSION PLAN
Pacific Mutual maintains a defined benefit pension plan covering eligible
employees and agents. No contributions were made during 1994 or 1993
because of the funded status of the plans and related income tax
considerations. Accumulated benefits and net assets available for benefits
as of the latest valuation dates (March 31 of each year) are as follows:
<TABLE>
<CAPTION>
1994 1993
-------------------------------
(In Thousands)
<S> <C> <C>
Actuarial present value of accumulated benefits
accumulated benefits:
Vested $ 88,122 $ 83,060
Nonvested 1,115 572
-------------------------------
Total $ 89,237 $ 83,632
===============================
Net assets available for benefits $ 111,089 $ 109,194
===============================
</TABLE>
The above present values were determined using an assumed discount rate of
8.5% in 1994 and 1993.
POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE PLANS
Pacific Mutual sponsors a defined benefit health care plan and a defined
benefit life insurance plan ("The Plans") that provide postretirement
benefits for all eligible retirees and their dependents. Generally,
qualified employees may become eligible for these benefits if they reach
normal retirement age, have been covered under Pacific Mutual's policy as
an active employee for a minimum continuous period prior to the date
retired, and have an employment date before January 1, 1990. The Plans
contain cost-sharing features such as deductibles and coinsurance, and
require retirees to make contributions which can be adjusted annually.
Pacific Mutual's commitment to qualified employees who retire after April
1, 1994 is limited to specific dollar amounts. Pacific Mutual reserves the
right to modify or terminate The Plans at any time. As in the past, the
general policy is to fund these benefits on a pay-as-you-go basis. The
amount of benefits paid under The Plans for the years ended December 31,
1994 and 1993 was $1.7 million for both years.
During 1993, Pacific Mutual implemented the accrual method of accounting
for the costs of The Plans as prescribed by the Insurance Department of the
State of California, and elected to amortize its transition obligation of
$26.7 million over twenty years.
Components of net periodic postretirement benefit cost as follows (In
Thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
-------------------------------
<S> <C> <C>
Service cost $ 186 $ 89
Interest cost 1,790 1,907
Amortization (260) (260)
-------------------------------
1,716 1,736
Recognized transition obligation - net 1,337 1,336
-------------------------------
Net periodic postretirement benefit cost $ 3,053 $ 3,072
===============================
</TABLE>
56
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The following table presents The Plans' funded status reconciled with
amounts recorded in other liabilities on Pacific Mutual's statement of
financial position (In Thousands):
<TABLE>
<CAPTION>
1994 1993
-------------------------------
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $ 20,580 $ 22,844
Fully eligible active plan participants 1,346 1,044
Other active plan participants 2,455 1,972
-------------------------------
24,381 25,860
Fair value of plan assets 0 0
-------------------------------
Unfunded accumulated postretirement obligation 24,381 25,860
Unrecognized net gain/(loss) 942 (1,060)
Prior service cost 1,849 2,109
Unrecognized transition obligation-net (24,056) (25,393)
-------------------------------
Accrued postretirement benefit liability $ 3,116 $ 1,516
===============================
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 11% for 1994 and 12% for 1993, and is assumed to
decrease gradually to 6% in 2005 and remain at that level thereafter. The
amount reported is materially affected by the health care cost trend rate
assumptions. If the health care cost trend rate assumptions were increased
by 1%, the accumulated postretirement benefit obligation as of December 31,
1994 and 1993 would be increased by 11.2% and 8.8%, respectively. The
effect of this change would increase the aggregate of the service, interest
and amortization cost components of the net periodic benefit cost by 13.6%
and 8.6%, respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation was 8.0% and 7.5% for 1994 and 1993, respectively.
11. INVESTMENT COMMITMENTS
Pacific Mutual has outstanding commitments to make investments in bonds and
other invested assets as follows (In Thousands):
<TABLE>
<CAPTION>
Year Ended December 31:
-----------------------
<S> <C>
1995 $ 55,152
1996-1999 23,588
2000 and thereafter 20,669
---------------
Total $ 99,409
===============
</TABLE>
12. LITIGATION
Pacific Mutual and its subsidiaries are respondents in a number of legal
proceedings, some of which involve extra-contractual damages. In the
opinion of management, the outcome of these proceedings is not likely to
have a material adverse effect on the financial position of Pacific Mutual.
___________________________________________________________________________
57
<PAGE>
APPENDIX
SPECIFIED PERCENTAGES
<TABLE>
<CAPTION>
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
---- ---------- --- ---------- --- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
0-40 250% 50 185% 60 130% 70 115%
41 243 51 178 61 128 71 113
42 236 52 171 62 126 72 111
43 229 53 164 63 124 73 109
44 222 54 157 64 122 74 107
45 215 55 150 65 120 75-90 105
46 209 56 146 66 119 91 104
47 203 57 142 67 118 92 103
48 197 58 138 68 117 93 102
49 191 59 134 69 116 94 101
</TABLE>
58
<PAGE>
ILLUSTRATIONS
The following tables illustrate how the death benefits, Accumulated Values
and Net Cash Surrender Values of a hypothetical policy may vary over an
extended period of time assuming hypothetical rates of return equivalent to
constant gross annual rates of 0%, 6% and 12%.
The policies illustrated include the following:
1. Age 45, Single Premium of $10,000, and initial death benefit of
$36,268
2. Age 45, Single Premium of $50,000, and initial death benefit of
$198,748
3. Age 45, Single Premium of $100,000, and initial death benefit of
$400,221
4. Age 55, Single Premium of $50,000, and initial death benefit of
$134,670
5. Age 55, Single Premium of $100,000, and initial death benefit of
$271,084
The values would be different from those shown if the gross annual investment
rates of return averaged 0%, 6% or 12% over a period of years, but also
fluctuated above or below those averages for individual policy years.
It should be noted that the illustrated values are the same for both males
and females.
The second column of each table labeled "Total Premium Paid Plus Interest at
5%," shows the amount which would accumulate if an amount equal to the single
premium (after taxes) were invested to earn interest at 5% compounded annually.
All premium payments are illustrated as if they were made at the beginning of
the year. These illustrations assume that no Policy loans have been made. The
values were calculated using the guaranteed maximum Cost of Insurance Charges.
The amounts shown for the death benefits, Accumulated Values and Net Cash
Surrender Values, reflect the fact that the net investment return on the
Variable Accounts is lower than the gross investment return on the assets as a
result of charges levied against the Accounts. These values also take into
account the premium load and any administration charges. The daily investment
advisory fee is assumed to be equivalent to an annual rate of 0.60% of the
aggregate average daily net assets of the Fund. This hypothetical rate is
representative of the average maximum investment advisory fee applicable to the
ten Portfolios of the Fund. The daily charge by Pacific Mutual for assuming
mortality and expense risk is equivalent to a charge at an annual rate of 0.70%
of the average net assets of the Variable Accounts.
The tables also reflect other expenses of the Fund at the rate of 0.27% of
the average daily net assets of a Portfolio, which amounts to 0.87% of the
average daily net assets of a Portfolio including the investment advisory fee,
as adjusted to exclude costs borne by the Fund in connection with the
acquisition of assets of Pacific Corinthian Variable Fund and include any
foreign taxes. For the year ended December 31, 1994, the total expenses of each
Portfolio after the expense limitation described below, but before any
adjustment, were the following percentages of the average daily net assets of
the Portfolios: 0.64% for the Money Market Portfolio; 0.94% for the Equity
Income and Multi-Strategy Portfolios; 1.22% for the International Portfolio;
0.84% for the Managed Bond Portfolio; 0.88% for the Government Securities and
High Yield Bond Porfolios; 0.86% for the Growth Portfolio; 1.08% (annualized)
for the Growth LT Portfolio; and 0.51% for the Equity Index Portfolio. Pacific
Mutual has agreed, until at least December 31, 1995, to waive its fees or
otherwise reimburse each Portfolio for its operating expenses to the extent
that such expenses, exclusive of advisory fees, additional custodial charges
associated with holding foreign securities, foreign taxes on dividends,
interest and gains, and extraordinary expenses, exceed 0.25% of the Portfolios'
average daily net assets. Pacific Mutual began this expense reimbursement
policy in April 1989. As a result of this policy, the operating expenses of the
Portfolios for the year ending December 31, 1994 were equal to the amounts
reflected in the tables as described above. In the absence of this policy, the
Portfolios' total expenses, including advisory fees and before any adjustments,
for the Fund's fiscal year ending December 31, 1994 would have been as follows:
0.64% for the Money Market Portfolio; 0.97% for the High Yield Bond Portfolio;
0.84%
59
<PAGE>
for the Managed Bond Portfolio; 0.95% for the Government Securities Portfolio;
0.86% for the Growth Portfolio; 1.22% (annualized) for the Growth LT Portfolio;
1.00% for the Equity Income Portfolio; 0.94% for the Multi-Strategy Portfolio,
1.22% for the International Portfolio, and 0.54% for the Equity Index
Portfolio. Pacific Mutual intends to continue the above-described expense
reimbursement policy until at least December 31, 1995. There can be no
assurance that the expense reimbursement arrangement will continue after that
date, and any unreimbursed expenses would be reflected in the Policy Owner's
Accumulated Value and in some instances, the death benefit.
After deduction of the charges and Fund expenses described above, the
illustrated gross annual investment rates of return of 0%, 6%, and 12%
correspond to approximate net annual rates of return of -1.59%, 4.31%, and
10.22%.
The hypothetical values shown in the tables do not reflect any charges
against the Variable Accounts for income taxes that may be attributable to the
Variable Accounts in the future, since Pacific Mutual is not currently making
these charges. In the event that these charges are to be made, the gross annual
investment rate of return would have to exceed 0%, 6% or 12% by an amount
sufficient to cover the tax charges in order to produce the death benefits,
Accumulated Values and Net Cash Surrender Values illustrated.
Pacific Mutual will furnish upon request a comparable illustration reflecting
the proposed Insured's Age, Face Amount and premium amounts requested. In
addition, upon request, illustrations will be furnished reflecting allocation
of premiums to specified Variable Accounts. Such illustrations will reflect the
expenses of the Portfolio of the Fund in which the Variable Account invests.
Illustrations that use a hypothetical gross rate of return in excess of 12% are
available to certain large institutional investors upon request.
60
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER VALUES
BASED ON GUARANTEED COST OF INSURANCE CHARGES
ISSUE AGE: 45 SINGLE PREMIUM AMOUNT: $10,000
CLASS: MALE NONSMOKER GUIDELINE MINIMUM DEATH BENEFIT: $36,268
<TABLE>
<CAPTION>
TOTAL
PREMIUMS
END OF PAID PLUS END OF YEAR DEATH BENEFIT ASSUMING
POLICY INTEREST AT HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
------------------------------------------------
YEAR 5% 0% 6% 12%
- ---- -------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
1 $10,500 $36,268 $36,268 $ 36,268
2 $11,025 $36,268 $36,268 $ 36,268
3 $11,576 $36,268 $36,268 $ 36,268
4 $12,155 $36,268 $36,268 $ 36,268
5 $12,763 $36,268 $36,268 $ 36,268
6 $13,401 $36,268 $36,268 $ 36,268
7 $14,071 $36,268 $36,268 $ 36,268
8 $14,775 $36,268 $36,268 $ 36,268
9 $15,513 $36,268 $36,268 $ 36,268
10 $16,289 $36,268 $36,268 $ 36,268
15 $20,789 $36,268 $36,268 $ 43,785
20 $26,533 $ 0 * $36,268 $ 62,495
25 $33,864 $ 0 * $36,268 $ 93,153
30 $43,219 $ 0 * $ 0 * $135,281
35 $55,160 $ 0 * $ 0 * $210,964
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
END OF ASSUMING HYPOTHETICAL GROSS ANNUAL ASSUMING HYPOTHETICAL GROSS ANNUAL
POLICY INVESTMENT RETURN OF INVESTMENT RETURN OF
---------------------------------- -----------------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ---- --------- --------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1 $9,628 $10,213 $ 10,799 $8,678 $ 9,263 $ 9,849
2 $9,152 $10,327 $ 11,571 $8,297 $ 9,472 $ 10,716
3 $8,667 $10,432 $ 12,416 $7,907 $ 9,672 $ 11,656
4 $8,171 $10,530 $ 13,340 $7,506 $ 9,865 $ 12,675
5 $7,663 $10,616 $ 14,353 $7,093 $10,046 $ 13,783
6 $7,140 $10,690 $ 15,463 $6,665 $10,215 $ 14,988
7 $6,599 $10,748 $ 16,683 $6,219 $10,368 $ 16,303
8 $6,036 $10,787 $ 18,023 $5,751 $10,502 $ 17,738
9 $5,448 $10,804 $ 19,499 $5,258 $10,614 $ 19,309
10 $4,829 $10,794 $ 21,126 $4,734 $10,699 $ 21,031
15 $1,532 $10,640 $ 32,675 $1,532 $10,640 $ 32,675
20 $ 0 * $ 9,293 $ 51,225 $ 0 * $ 9,293 $ 51,225
25 $ 0 * $ 5,023 $ 80,304 $ 0 * $ 5,023 $ 80,304
30 $ 0 * $ 0 * $126,431 $ 0 * $ 0 * $126,431
35 $ 0 * $ 0 * $200,918 $ 0 * $ 0 * $200,918
</TABLE>
______________
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans have been made.
* Additional payment will be required to prevent policy termination.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
61
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER VALUES
BASED ON GUARANTEED COST OF INSURANCE CHARGES
ISSUE AGE: 45 SINGLE PREMIUM AMOUNT: $50,000
CLASS: MALE NONSMOKER GUIDELINE MINIMUM DEATH BENEFIT: $198,748
<TABLE>
<CAPTION>
TOTAL
PREMIUMS
END OF PAID PLUS END OF YEAR DEATH BENEFIT ASSUMING
POLICY INTEREST AT HYPOTHETICAL GROSS ANNUAL RETURN OF
------------------------------------------
YEAR 5% 0% 6% 12%
---- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
1 $ 52,500 $ 198,748 $ 198,748 $ 198,748
2 $ 55,125 $ 198,748 $ 198,748 $ 198,748
3 $ 57,881 $ 198,748 $ 198,748 $ 198,748
4 $ 60,775 $ 198,748 $ 198,748 $ 198,748
5 $ 63,814 $ 198,748 $ 198,748 $ 198,748
6 $ 67,005 $ 198,748 $ 198,748 $ 198,748
7 $ 70,355 $ 198,748 $ 198,748 $ 198,748
8 $ 73,873 $ 198,748 $ 198,748 $ 198,748
9 $ 77,566 $ 198,748 $ 198,748 $ 198,748
10 $ 81,445 $ 198,748 $ 198,748 $ 198,748
15 $ 103,946 $ 198,748 $ 198,748 $ 229,339
20 $ 132,665 $ 0 * $ 198,748 $ 329,781
25 $ 169,318 $ 0 * $ 198,748 $ 493,894
30 $ 216,097 $ 0 * $ 0 * $ 719,428
35 $ 275,801 $ 0 * $ 0 * $1,124,048
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
END OF ASSUMING HYPOTHETICAL GROSS ANNUAL ASSUMING HYPOTHETICAL GROSS ANNUAL
POLICY INVESTMENT RETURN OF INVESTMENT RETURN OF
------------------------------------------ -----------------------------------------
YEAR 0% 6% 12% 0% 6% 12%
---- ------------ ------------ ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 48,334 $ 51,267 $ 54,201 $ 44,334 $ 47,267 $ 50,201
2 $ 46,215 $ 52,115 $ 58,365 $ 42,615 $ 48,515 $ 54,765
3 $ 44,037 $ 52,928 $ 62,911 $ 40,837 $ 49,728 $ 59,711
4 $ 41,798 $ 53,705 $ 67,884 $ 38,998 $ 50,905 $ 65,084
5 $ 39,482 $ 54,432 $ 73,327 $ 37,082 $ 52,032 $ 70,927
6 $ 37,080 $ 55,101 $ 79,292 $ 35,080 $ 53,101 $ 77,292
7 $ 34,575 $ 55,696 $ 85,834 $ 32,975 $ 54,096 $ 84,234
8 $ 31,949 $ 56,201 $ 93,021 $ 30,749 $ 55,001 $ 91,821
9 $ 29,178 $ 56,595 $ 100,923 $ 28,378 $ 55,795 $ 100,123
10 $ 26,238 $ 56,855 $ 109,629 $ 25,838 $ 56,455 $ 109,229
15 $ 9,936 $ 57,302 $ 171,148 $ 9,936 $ 57,302 $ 171,148
20 $ 0 * $ 51,484 $ 270,312 $ 0 * $ 51,484 $ 270,312
25 $ 0 * $ 30,404 $ 425,771 $ 0 * $ 30,404 $ 425,771
30 $ 0 * $ 0 * $ 672,362 $ 0 * $ 0 * $ 672,362
35 $ 0 * $ 0 * $1,070,522 $ 0 * $ 0 * $1,070,522
</TABLE>
__________
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans have been made.
* Additional payment will be required to prevent policy termination.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
62
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER VALUES
BASED ON GUARANTEED COST OF INSURANCE CHARGES
ISSUE AGE: 45 SINGLE PREMIUM AMOUNT: $100,000
CLASS: MALE NONSMOKER GUIDELINE MINIMUM DEATH BENEFIT: $400,221
<TABLE>
<CAPTION>
TOTAL
PREMIUMS
END OF PAID PLUS END OF YEAR DEATH BENEFIT ASSUMING
POLICY INTEREST AT HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
------------------------------------------------
YEAR 5% 0% 6% 12%
- ---- ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
1 $105,000 $400,221 $400,221 $ 400,221
2 $110,250 $400,221 $400,221 $ 400,221
3 $115,763 $400,221 $400,221 $ 400,221
4 $121,551 $400,221 $400,221 $ 400,221
5 $127,628 $400,221 $400,221 $ 400,221
6 $134,010 $400,221 $400,221 $ 400,221
7 $140,710 $400,221 $400,221 $ 400,221
8 $147,746 $400,221 $400,221 $ 400,221
9 $155,133 $400,221 $400,221 $ 400,221
10 $162,889 $400,221 $400,221 $ 400,221
15 $207,893 $400,221 $400,221 $ 461,196
20 $265,330 $ 0 * $400,221 $ 663,182
25 $338,635 $ 0 * $400,221 $ 993,212
30 $432,194 $ 0 * $ 0 * $1,446,755
35 $551,602 $ 0 * $ 0 * $2,260,440
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
END OF ASSUMING HYPOTHETICAL GROSS ANNUAL ASSUMING HYPOTHETICAL GROSS ANNUAL
POLICY INVESTMENT RETURN OF INVESTMENT RETURN OF
---------------------------------- -----------------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ---- --------- --------- ------------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 $96,653 $102,518 $ 108,385 $89,653 $ 95,518 $ 101,385
2 $92,496 $104,297 $ 116,798 $86,196 $ 97,997 $ 110,498
3 $88,221 $106,010 $ 125,983 $82,621 $100,410 $ 120,383
4 $83,820 $107,654 $ 136,032 $78,920 $102,754 $ 131,132
5 $79,264 $109,200 $ 147,029 $75,064 $105,000 $ 142,829
6 $74,534 $110,634 $ 159,081 $71,034 $107,134 $ 155,581
7 $69,595 $111,923 $ 172,302 $66,795 $109,123 $ 169,502
8 $64,412 $113,036 $ 186,822 $62,312 $110,936 $ 184,722
9 $58,937 $113,930 $ 202,791 $57,537 $112,530 $ 201,391
10 $53,122 $114,561 $ 220,383 $52,422 $113,861 $ 219,683
15 $20,399 $115,622 $ 344,176 $20,399 $115,622 $ 344,176
20 $ 0 * $104,000 $ 543,592 $ 0 * $104,000 $ 543,592
25 $ 0 * $ 61,713 $ 856,217 $ 0 * $ 61,713 $ 856,217
30 $ 0 * $ 0 * $1,352,108 $ 0 * $ 0 * $1,352,108
35 $ 0 * $ 0 * $2,152,800 $ 0 * $ 0 * $2,152,800
</TABLE>
______________
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans have been made.
* Additional payment will be required to prevent policy termination.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
63
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER VALUES
BASED ON GUARANTEED COST OF INSURANCE CHARGES
ISSUE AGE: 55 SINGLE PREMIUM AMOUNT: $50,000
CLASS: MALE NONSMOKER GUIDELINE MINIMUM DEATH BENEFIT: $134,670
<TABLE>
<CAPTION>
TOTAL
PREMIUMS
END OF PAID PLUS END OF YEAR DEATH BENEFIT ASSUMING
POLICY INTEREST AT HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
------------------------------------------------
YEAR 5% 0% 6% 12%
---- -------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
1 $ 52,500 $134,670 $134,670 $ 134,670
2 $ 55,125 $134,670 $134,670 $ 134,670
3 $ 57,881 $134,670 $134,670 $ 134,670
4 $ 60,775 $134,670 $134,670 $ 134,670
5 $ 63,814 $134,670 $134,670 $ 134,670
6 $ 67,005 $134,670 $134,670 $ 134,670
7 $ 70,355 $134,670 $134,670 $ 134,670
8 $ 73,873 $134,670 $134,670 $ 134,670
9 $ 77,566 $134,670 $134,670 $ 134,670
10 $ 81,445 $134,670 $134,670 $ 134,670
15 $103,946 $ 0 * $134,670 $ 195,107
20 $132,665 $ 0 * $134,670 $ 284,201
25 $169,318 $ 0 * $ 0 * $ 444,041
30 $216,097 $ 0 * $ 0 * $ 697,734
35 $275,801 $ 0 * $ 0 * $1,072,992
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
END OF ASSUMING HYPOTHETICAL GROSS ANNUAL ASSUMING HYPOTHETICAL GROSS ANNUAL
POLICY INVESTMENT RETURN OF INVESTMENT RETURN OF
---------------------------------- -----------------------------------
YEAR 0% 6% 12% 0% 6% 12%
---- --------- --------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1 $48,080 $51,015 $ 53,951 $44,080 $47,015 $ 49,951
2 $45,657 $51,570 $ 57,838 $42,057 $47,970 $ 54,238
3 $43,124 $52,052 $ 62,088 $39,924 $48,852 $ 58,888
4 $40,467 $52,449 $ 66,749 $37,667 $49,649 $ 63,949
5 $37,670 $52,751 $ 71,879 $35,270 $50,351 $ 69,479
6 $34,708 $52,937 $ 77,540 $32,708 $50,937 $ 75,540
7 $31,552 $52,986 $ 83,807 $29,952 $51,386 $ 82,207
8 $28,162 $52,865 $ 90,768 $26,962 $51,665 $ 89,568
9 $24,488 $52,537 $ 98,529 $23,688 $51,737 $ 97,729
10 $20,478 $51,961 $ 107,226 $20,078 $51,561 $ 106,826
15 $ 0 * $45,636 $ 168,196 $ 0 * $45,636 $ 168,196
20 $ 0 * $23,479 $ 265,608 $ 0 * $23,479 $ 265,608
25 $ 0 * $ 0 * $ 422,897 $ 0 * $ 0 * $ 422,897
30 $ 0 * $ 0 * $ 664,509 $ 0 * $ 0 * $ 664,509
35 $ 0 * $ 0 * $1,021,898 $ 0 * $ 0 * $1,021,898
</TABLE>
______________
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans have been made.
* Additional payment will be required to prevent policy termination.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
64
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER VALUES
BASED ON GUARANTEED COST OF INSURANCE CHARGES
ISSUE AGE: 55 SINGLE PREMIUM AMOUNT: $100,000
CLASS: MALE NONSMOKER GUIDELINE MINIMUM DEATH BENEFIT: $271,084
<TABLE>
<CAPTION>
TOTAL
PREMIUMS
END OF PAID PLUS END OF YEAR DEATH BENEFIT ASSUMING
POLICY INTEREST AT HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
--------------------------------------------------
YEAR 5% 0% 6% 12%
---- ------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C>
1 $ 105,000 $ 271,084 $ 271,084 $ 271,084
2 $ 110,250 $ 271,084 $ 271,084 $ 271,084
3 $ 115,763 $ 271,084 $ 271,084 $ 271,084
4 $ 121,551 $ 271,084 $ 271,084 $ 271,084
5 $ 127,628 $ 271,084 $ 271,084 $ 271,084
6 $ 134,010 $ 271,084 $ 271,084 $ 271,084
7 $ 140,710 $ 271,084 $ 271,084 $ 271,084
8 $ 147,746 $ 271,084 $ 271,084 $ 271,084
9 $ 155,133 $ 271,084 $ 271,084 $ 271,084
10 $ 162,889 $ 271,084 $ 271,084 $ 271,084
15 $ 207,893 $ 0 * $ 271,084 $ 392,203
20 $ 265,330 $ 0 * $ 271,084 $ 571,299
25 $ 338,635 $ 0 * $ 0 * $ 892,610
30 $ 432,194 $ 0 * $ 0 * $ 1,402,582
35 $ 551,602 $ 0 * $ 0 * $ 2,156,924
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
END OF ASSUMING HYPOTHETICAL GROSS ANNUAL ASSUMING HYPOTHETICAL GROSS ANNUAL
POLICY INVESTMENT RETURN OF INVESTMENT RETURN OF
----------------------------------------- ----------------------------------------
YEAR 0% 6% 12% 0% 6% 12%
---- ---------- ---------- -------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 96,136 $ 102,005 $ 107,877 $ 89,136 $ 95,005 $ 100,877
2 $ 91,365 $ 103,192 $ 115,728 $ 85,065 $ 96,892 $ 109,428
3 $ 86,370 $ 104,232 $ 124,310 $ 80,770 $ 98,632 $ 118,710
4 $ 81,127 $ 105,107 $ 133,723 $ 76,227 $ 100,207 $ 128,823
5 $ 75,601 $ 105,793 $ 144,082 $ 71,401 $ 101,593 $ 139,882
6 $ 69,743 $ 106,251 $ 155,513 $ 66,243 $ 102,751 $ 152,013
7 $ 63,494 $ 106,437 $ 168,168 $ 60,694 $ 103,637 $ 165,368
8 $ 56,776 $ 106,288 $ 182,223 $ 54,676 $ 104,188 $ 180,123
9 $ 49,487 $ 105,728 $ 197,894 $ 48,087 $ 104,328 $ 196,494
10 $ 41,523 $ 104,675 $ 215,453 $ 40,823 $ 103,975 $ 214,753
15 $ 0 * $ 92,136 $ 338,106 $ 0 * $ 92,136 $ 338,106
20 $ 0 * $ 47,719 $ 533,925 $ 0 * $ 47,719 $ 533,925
25 $ 0 * $ 0 * $ 850,105 $ 0 * $ 0 * $ 850,105
30 $ 0 * $ 0 * $ 1,335,792 $ 0 * $ 0 * $ 1,335,792
35 $ 0 * $ 0 * $ 2,054,214 $ 0 * $ 0 * $ 2,054,214
</TABLE>
_________________________
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans have been made.
* Additional payment will be required to prevent policy termination.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE ILLUSTRATION
ARE NOT GUARANTEED.
65
<PAGE>
LOGO
OF PACIFIC SELECT
Issued By: Principal Underwriter:
Pacific Mutual Life Insurance Company Pacific Equities Network
700 Newport Center Drive Member: NASD/SIPC
P.O. Box 9000 700 Newport Center Drive
Newport Beach, California 92660 P.O. Box 9000
Newport Beach, California 92660
<PAGE>
Sponsored by:
LOGO OF PACIFIC MUTUAL
PACIFIC MUTUAL LIFE INSURANCE COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CA 92660
Distributed by:
LOGO OF PACIFIC EQUITIES NETWORK
700 NEWPORT CENTER DRIVE, NB-5
NEWPORT BEACH, CA 92660
1-800-800-7681
FORM NO. 15-15756-08
