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PACIFIC SELECT
PROSPECTUS
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[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 APRIL 1, 1996
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PACIFIC SELECT FUND
DATED APRIL 1, 1996
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[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," "we," "us," or "our"). 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 Investment Options currently available. Each of the twelve
Variable Investment Options ("Variable Account") is a subaccount of our
separate account called the Pacific Select Separate Account (the "Separate
Account"). 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 are: the Money Market Portfolio, the
High Yield Bond Portfolio, the Managed Bond Portfolio, the Government
Securities Portfolio, the Growth Portfolio, the Aggressive Equity Portfolio,
the Growth LT Portfolio, the Equity Income Portfolio, the Multi-Strategy
Portfolio, the Equity Index Portfolio, the International Portfolio, and the
Emerging Markets Portfolio. A fixed option (the "Fixed Account") is also
available to you. 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.
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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.
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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: APRIL 1, 1996
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TABLE OF CONTENTS
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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
Policy Loans............................................................. 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
Portfolio Rebalancing.................................................... 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........................................ 21
Deductions from the Variable Accounts.................................... 22
Other Charges............................................................ 22
Guarantee of Certain Charges............................................. 23
Other Information.......................................................... 23
Federal Income Tax Considerations........................................ 23
Charge for Pacific Mutual Income Taxes................................... 26
Voting of Fund Shares.................................................... 26
Disregard of Voting Instructions......................................... 26
Confirmation Statements and Other Reports to Owners...................... 27
Substitution of Investments.............................................. 27
Changes to Comply with Law............................................... 27
Performance Information.................................................... 28
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The Fixed Account........................................................... 29
General Description....................................................... 29
Death Benefit............................................................. 29
Policy Charges............................................................ 29
Transfers, Surrenders, Withdrawals, and Policy Loans...................... 29
More About the Policy....................................................... 30
Ownership................................................................. 30
Beneficiary............................................................... 30
Exchange of Insured....................................................... 30
The Contract.............................................................. 31
Payments.................................................................. 31
Assignment................................................................ 31
Errors on the Application................................................. 31
Incontestability.......................................................... 32
Payment in Case of Suicide................................................ 32
Participating............................................................. 32
Policy Illustrations...................................................... 32
Payment Plan.............................................................. 32
Distribution of the Policy................................................ 32
More About Pacific Mutual................................................... 33
Management................................................................ 33
State Regulation.......................................................... 35
Telephone Transfer and Loan Privileges.................................... 35
Legal Proceedings......................................................... 36
Legal Matters............................................................. 36
Registration Statement.................................................... 36
Independent Accountants................................................... 36
Financial Statements...................................................... 36
Appendix.................................................................... 59
Illustrations............................................................... 60
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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.
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IMPORTANT TERMS
Accumulated Value--The total value of the amounts in the Investment Options
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 you name 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 our 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 periodically by
us.
General Account--All of our assets other than those allocated to the Separate
Account or to any of our other segregated separate accounts.
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.
Investment Option--A Variable Account or the Fixed Account.
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, Owner, you, or your--The person who owns the Policy. The Policy
Owner will be the Insured unless otherwise stated in the application. If your
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 our Home Office. The
term "Issue Date" is substituted for Policy Date with respect to Policies
issued to residents of the Commonwealth of Massachusetts.
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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 our 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. Our administrative offices are normally not open
on the following: the Monday before New Year's Day, July Fourth, or Christmas
Day if any of those holidays falls on a Tuesday; the Tuesday before Christmas
Day if that holiday falls on a Wednesday; the Friday after New Year's Day,
July Fourth or Christmas Day if any of these holidays falls on a Thursday; and
the Friday after Thanksgiving. If any transaction or event called for under a
Policy is scheduled to occur on a day that is not a Valuation Day, such
transaction or event will be deemed to occur on the next following Valuation
Day unless otherwise specified.
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 our General Account and its other separate accounts. The
Pacific Select Separate Account 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, Aggressive Equity Variable Account, Growth LT Variable
Account, Equity Income Variable Account, Multi-Strategy Variable Account,
Equity Index Variable Account, International Variable Account, and Emerging
Markets Variable Account are all subaccounts of the Pacific Select Separate
Account.
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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 you insurance protection on the life of the Insured through
the Maturity Date so long as your 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
You 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 your Policy is in
force. There is no guarantee that your Policy's Accumulated Value and death
benefit will increase. You bear the investment risk on that portion of the
Accumulated Value allocated to the Variable Accounts.
Your 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 you.
THE DEATH BENEFIT
Upon the death of the Insured, we will pay to the named Beneficiary death
benefit proceeds, which will be the death benefit under your Policy reduced by
any Policy Indebtedness. The death benefit will be the greater of the Face
Amount under your 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 your discretion, so you have some
flexibility to vary premium payments to reflect changing financial conditions.
Your Policy may provide insurance protection through the Maturity Date for only
the initial premium, or alternatively, additional premium payments may be
required to keep your Policy in force, depending upon the Face Amount you
choose, 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.
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ALLOCATION OPTIONS
The Variable Accounts invest in portfolios of a mutual fund, which offers you
the opportunity to direct us to invest in diversified portfolios of stocks,
bonds, money market instruments, or a combination of these securities, or in
securities of foreign issuers. The Variable Accounts invest exclusively in
shares of corresponding Portfolios of the Pacific Select Fund (the "Fund"),
which are: the Money Market Portfolio, the High Yield Bond Portfolio, the
Managed Bond Portfolio, the Government Securities Portfolio, the Growth
Portfolio, the Aggressive Equity Portfolio, the Growth LT Portfolio, the Equity
Income Portfolio, the Multi-Strategy Portfolio, the Equity Index Portfolio, the
International Portfolio, and the Emerging Markets Portfolio (see "The Pacific
Select Fund," page 10).
You may choose to allocate premium payments to any of the twelve Variable
Accounts and the Fixed Account. You may transfer Accumulated Value among the
Variable Accounts, and, subject to certain 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 our Home
Office. (See "Transfer of Accumulated Value," page 14.)
FREE-LOOK RIGHT
You may obtain a full refund of the premium paid if your Policy is returned
within 10 days after you receive it (30 days if you reside in California and
are age 60 or older) or 45 days after the application for your Policy is
completed, whichever is later. In Pennsylvania, you may obtain a full refund of
the premium paid only if your Policy is returned within 10 days after you
receive 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
You 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 your premium payments without a surrender charge and without
reducing the death benefit under your 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 you to make Partial Withdrawals of Net Cash
Surrender Value within certain limits.
POLICY LOANS
You may borrow from us up to 90% of your Cash Surrender Value, less any
Policy Indebtedness. The minimum loan that can be taken at any time is $1,000;
if you reside in Indiana the minimum is $500. The Policy will be the only
security required for the loan. See "Policy Loans," page 17. The amount of any
Policy Indebtedness will be subtracted from Death Benefit or your Cash
Surrender Value, if your Policy matures or is surrendered.
A Policy loan is treated as a distribution from a Policy that is a modified
endowment contract and therefore may result in taxable income. See "Federal
Income Tax Considerations," page 23.
CHARGES AND DEDUCTIONS
Premium Load from the Initial Premium
We do not make any deductions from the initial premium payment before
allocating it to your Accumulated Value.
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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 you surrender your 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 you the investment
experience on the portion of the Premium Load that remains in the Accumulated
Value. If you surrender your 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 us for the cost of providing life
insurance coverage for the Insured;
--Administrative Charge: We charge 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 you request an increase in Face Amount
that is accepted by us, 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: We make a daily charge against the
Variable Accounts to compensate us 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 us. 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.
We sometimes use the simplified method of underwriting, which involves no
medical or paramedical examination of the Insured. Because this method presents
additional mortality risks for us in determining rates for the cost of
insurance, we have assumed less favorable mortality experience than that
provided in the 1980 Commissioners Standard Ordinary ("CSO") Mortality Table B,
and have 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, we currently use 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).
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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, you 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 you and may, under certain
circumstances, subject you 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
You 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 our General Account. We guarantee 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, we may in our 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, Policy Benefits
and Services Department, at 700 Newport Center Drive, P.O. Box 7500, Newport
Beach, California 92658-7500.
The effective date of certain notices or of instructions is determined by the
date and time on which Pacific Mutual "receives" the notice or instructions.
Unless otherwise stated, we "receive" this information only when it arrives
"properly completed" at our Home Office. Premium payments after your initial
premium payment, loan requests, loan repayments, transfer requests, and
withdrawal requests we receive before 4:00 p.m. Eastern time (or the close of
the New York Stock Exchange, if earlier) will normally be effective as of the
end of Valuation Day that we receive them "properly completed," unless the
transaction or event is scheduled to occur on another day. Transactions are
effected as of the end of the Valuation Date on which they are effective.
"Properly completed" may require, among other things, a signature guarantee or
other verification of authenticity. We do not generally require a signature
guarantee unless it appears that your signature may have changed over time or
due to other circumstances. Requests regarding death benefits must be
accompanied by both proof of death and instructions regarding payment
satisfactory to us. You should call your registered representative or Pacific
Mutual if you have questions regarding the required form of a request.
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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. We were authorized to conduct business as a life
insurance company on January 2, 1868, as Pacific Mutual Life Insurance Company
of California, and were reincorporated under our present name on July 22,
1936.
We offer a complete line of life insurance policies and annuity contracts,
as well as financial and retirement services. We are admitted to do business
in the District of Columbia, and in all states except New York. As of the end
of 1995, we had $44.2 billion of life insurance in force and total assets of
$17.6 billion. Together with our subsidiaries and affiliated enterprises, we
had total assets and funds under management of over $116.6 billion. We have
been ranked according to assets as the 24th largest life insurance carrier in
the nation for 1994.
The Principal Underwriter for the Policies is Pacific Mutual Distributors,
Inc. ("PMD") (formerly known as Pacific Equities Network). PMD is registered
as a broker-dealer with the Securities and Exchange Commission ("SEC") and is
a wholly-owned subsidiary of Pacific Mutual.
PACIFIC SELECT SEPARATE ACCOUNT
The Pacific Select Separate Account is one of our separate investment
accounts 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 assets of our General Account and our other separate
accounts.
We own the assets in the Separate Account and are 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 our other income, gains,
or losses. 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 we conduct. However, we may transfer to
our General Account assets which exceed anticipated obligations of the
Account. All obligations arising under the Policy are general corporate
obligations of Pacific Mutual. We 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
our Board of Directors 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. We 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 twelve separate Portfolios to the
Separate Account. Each Portfolio pursues different investment objectives and
policies. We purchase the shares of each Portfolio 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 we, on behalf of the
Separate Account, elect otherwise. Fund shares will be redeemed by us at their
net asset value to the extent necessary to make payments under the Policies.
Shares of the Fund currently are offered only for purchase by our Separate
Accounts to serve as an investment medium for variable life insurance policies
and for variable annuity contracts issued by us and to a separate account of
Pacific Corinthian Life Insurance Company, a subsidiary of Pacific Mutual, to
serve as an
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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
us. 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 data about each Portfolio of the Fund
offered to the Separate Account. There can be no assurance that any Portfolio
will achieve its objective. This chart is only a summary. You should read the
more detailed information which 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 Portfolios.
THE FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING.
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS
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 Investment
consistent with prudent marketable debt Management Company
investment management securities. Will normally
maintain an average
portfolio duration of 3-7
years
- --------------------------------------------------------------------------------------------
Government Maximize total return U.S. Government securities Pacific Investment
Securities consistent with prudent including futures and Management Company
investment management options thereon and high-
grade corporate debt
securities. Will normally
maintain an average
portfolio duration of 3-7
years
- --------------------------------------------------------------------------------------------
Growth Growth of capital Common stock Capital Guardian
Trust Company
- --------------------------------------------------------------------------------------------
Aggressive Capital appreciation Stocks of small- and Columbus Circle
Equity medium-sized companies Investors
- --------------------------------------------------------------------------------------------
Growth LT Long-term growth of Common stock Janus Capital
capital consistent with Corporation
the preservation of
capital
- --------------------------------------------------------------------------------------------
Equity Income Long-term growth of Dividend paying common J.P. Morgan
capital and income stock Investment Management
Inc.
- --------------------------------------------------------------------------------------------
Multi-Strat- High total return Equity and fixed income J.P. Morgan
egy securities Investment Management
Inc.
- --------------------------------------------------------------------------------------------
Equity Index Provide investment Stocks included in the S&P Bankers Trust Company
results that correspond 500
to the total return
performance of common
stocks publicly traded
in the U.S.
- --------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Templeton Investment
appreciation corporations domiciled Counsel, Inc.
outside the United States
- --------------------------------------------------------------------------------------------
Emerging Mar- Long-term growth of Common stocks of companies Blairlogie Capital
kets capital domiciled in emerging Management
market countries
- --------------------------------------------------------------------------------------------
</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.
We are registered with the SEC as an Investment Adviser. For ten of the
Portfolios, the Investment Adviser and the Fund have engaged other firms to
serve as Portfolio Managers which are shown in the chart above.
11
<PAGE>
THE POLICY
The variable life insurance benefits provided by your Policy are funded
through your Accumulated Value in the Pacific Select Separate Account and the
Fixed Account. The information included below describes the benefits,
features, charges, and other major provisions of the Policy.
APPLICATION FOR A POLICY
Any person wishing to purchase the Policy may submit an application to us. 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 us. The Insured's age is
calculated as of the Insured's nearest birthday. Acceptance is subject to our
underwriting rules, and we reserve the right to request additional information
and to reject an application.
After your Policy is issued, insurance coverage under the Policy will be
deemed to have begun as of the Policy Date. Your Policy Date is usually the
date the initial premium is received at our Home Office. Your 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, we
will usually use either simplified or medical underwriting, although other
forms of underwriting may be used when deemed appropriate by us.
PREMIUMS
The minimum initial premium to purchase the Policy is $10,000. You 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. We 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 your discretion. Depending upon the Face Amount you choose and the
investment performance of the Variable Accounts among other factors, your
Policy may provide insurance protection through the Maturity Date for only the
initial premium, or alternatively, additional premium payments may be required
to keep your Policy in force.
The minimum additional premium payment amount is $5,000, except smaller
amounts may be paid during the Grace Period. We 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 to you 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 to you if it would result in an
immediate increase in the difference between the death benefit and the
Accumulated Value and we have not received satisfactory evidence of
insurability.
Additional payments will first be treated as repayments of Policy
Indebtedness unless you request 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 your Policy, you select the Investment Options 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).
Your Accumulated Value will be automatically allocated according to your
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"). Currently, twelve Variable
Accounts and the Fixed Account are available to you.
Additional premium payments less the premium load will be allocated among
the Variable Accounts and the Fixed Account according to your most recent
instructions. You may change the allocation of payments by submitting a proper
written request to our Home Office, or by telephone if an Authorization for
Telephone Requests for changes in premium allocation instruction has been
completed, signed and filed at our Home Office.
PORTFOLIO REBALANCING
You may direct us to automatically re-set the percentage of your Accumulated
Value allocated to each Variable Account at a predetermined level. This
process is called portfolio rebalancing. (The Fixed Account is not available
for portfolio rebalancing.) Over time, the variations in each Variable
Account's investment results will shift the percentage allocations of your
Accumulated Value. The portfolio rebalancing feature will automatically
transfer your Accumulated Value among the Variable Accounts back to the preset
percentages. Rebalancing can be made quarterly, semi-annually or annually,
measured from your Policy Date ("frequency period"). Rebalancing may result in
transferring amounts from a Variable Account with relatively higher investment
performance to a Variable Account with relatively lower investment
performance.
You may initiate portfolio rebalancing by sending our Home Office a signed,
written request in good form or a properly completed Automatic Portfolio
Rebalancing form. You must specify the frequency for rebalancing and a
beginning date. The first rebalancing will usually occur on your Monthly
Payment Date that starts the frequency period you elected and that occurs on
or follows the beginning date you elected. If you stop portfolio rebalancing,
you must wait 30 days to begin again. Portfolio rebalancing cannot be used
with the Dollar Cost Averaging Option.
We may modify, terminate or suspend the portfolio rebalancing feature at any
time.
DOLLAR COST AVERAGING OPTION
We currently offer an option under which you may dollar cost average your
allocations in the Variable Accounts under your Policy by authorizing us to
make periodic allocations of Accumulated Value from any one Variable Account
to one or more of the other Variable Accounts. 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 you will not have losses.
A Dollar Cost Averaging Request form is available upon request. On the form,
you 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, semi-annual, or annual basis, and the length of time during which
the transfers shall continue or the total amount to be transferred over time.
13
<PAGE>
To elect the Dollar Cost Averaging Option, your 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 this requirement is met. After we have received a
Dollar Cost Averaging Request in proper form at our Home Office, we will
transfer Accumulated Value in amounts you designate from the Variable Account
from which transfers are to be made to the Variable Account or Accounts you
choose. The minimum amount that may be transferred to any one Variable Account
is $50. After the Free-Look Period, the first transfer will be effected on
your Policy's Monthly, Quarterly, Semi-Annual, or Annual Anniversary,
whichever corresponds to the period selected by you, coincident with or next
following receipt at our 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 you
designate 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 your Policy enters the Grace Period. Amounts
periodically transferred under this option will not be subject to any transfer
charges that may be imposed by us in the future, except as may be required by
applicable law.
You may instruct us at any time to terminate the option by written request
to our 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
you instruct otherwise or until your Policy enters the Grace Period. If you
wish 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 our Home Office. The Variable Account from which
transfers are to be made must meet the $5,000 minimum amount of the
Accumulated Value. We may discontinue, modify, or suspend the Dollar Cost
Averaging Option at any time.
TRANSFER OF ACCUMULATED VALUE
You may transfer Accumulated Value among the Variable Accounts after the
Free-Look Period upon proper written request to our Home Office. Transfers
(other than transfers in connection with the Dollar Cost Averaging Option) may
be made by telephone if a properly completed, Authorization for Telephone
Requests is on file at our 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). No transfers are allowed during the Grace Period if the
required premium has not been paid. No charges are currently imposed upon such
transfers. We reserve 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 modify, suspend and/or 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 your Policy is issued, we will determine the initial amount of
insurance for the initial premium payment based on the instructions provided
in your application. That amount will be shown on the specifications page of
the Policy and is called the "Face Amount."
Upon the death of the Insured, we will pay to your named Beneficiary death
benefit proceeds, which will be the death benefit under your Policy reduced by
adjustments for any outstanding Policy Indebtedness. The death benefit will be
the greater of the Face Amount under your 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
14
<PAGE>
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 your Accumulated Value, an
increase in Accumulated Value may increase the death benefit. However, 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 your Beneficiary in a lump sum or
under the payment plan offered by us 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, you may request an increase or decrease in the
Face Amount under your Policy subject to our approval. Increasing or
decreasing the Face Amount could increase or decrease the death benefit under
your 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
your Policy exceeds the Face Amount prior to the change. Changing the Face
Amount could affect the subsequent level of the death benefit while your
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 your Policy, which may
affect your cost of insurance charge. For these purposes, the net amount at
risk is equal to the death benefit less your Accumulated Value.
Any request for an increase or decrease must be in writing and received at
our Home Office. It will become effective on the Monthly Payment Date on or
next following our acceptance of the request. You may make only one request
for a change per Policy Year. If you are not the Insured, we 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 us 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 Investment
Options in the proportion that each bears to your Accumulated Value less
Indebtedness.
15
<PAGE>
Decreases
A written application must be submitted to us 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 your Policy as a life insurance contract, we will pay you the
amount of such excess above the premium limitations.
We reserve 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 your Policy or likely result in its
termination before its Maturity Date, or (2) if, to effect the requested
decrease, payments to you 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 your Policy.
POLICY VALUES
Accumulated Value
Your Accumulated Value is the sum of the amounts under your Policy held in
each Investment Option, as well as the amount set aside in the Loan Account to
secure any Policy Indebtedness.
On each Valuation Date, the portion of your 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
Your Cash Surrender Value of your Policy equals your Accumulated Value less
any unrecovered deferred load. Thus, your Accumulated Value will exceed your
Policy's Cash Surrender Value by the amount of unrecovered deferred load. Once
all deferred load has been recovered, your Accumulated Value will equal your
Cash Surrender Value. Your Policy's Cash Surrender Value increases or
decreases daily to reflect the investment experience of the selected Variable
Accounts. No minimum amount of Cash Surrender Value is guaranteed. You bear
the risk for the investment experience of such amounts.
Net Cash Surrender Value
Your Net Cash Surrender Value is the Cash Surrender Value minus any
outstanding Policy Indebtedness. You can surrender your Policy at any time
while the Insured is living and receive your Net Cash Surrender Value (see
"Surrender," page 18).
DETERMINATION OF ACCUMULATED VALUE
Although your Policy's death benefit can never be less than the Face Amount
for as long as your 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 your Policy. There is no guaranteed
minimum Accumulated Value and you bear 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 Portfolios of the Fund. The investment performance of each
Variable Account 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 we, on behalf of the Separate Account, elect otherwise.
16
<PAGE>
Since your Accumulated Value during the first 11 Policy Years will exceed
your Cash Surrender Value by the amount of unrecovered deferred load, the
effect of the addition of the deferred load to your 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 you 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
your 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 you allocate
premiums to a Variable Account, your Policy is credited with accumulation
units. In addition, other transactions including loans, surrender, Preferred
or Partial Withdrawals, transfers, and assessment of charges against your
Policy affect the number of accumulation units credited to your 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 at or about 4:00 p.m. Eastern time. 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 us for income
taxes attributable to the operation of the Variable Account.
POLICY LOANS
You may borrow money from us using your Policy as the only security for the
loan by submitting a proper written request to our Home Office. We may in our
discretion permit loans to be made by telephone if an Authorization for
Telephone Requests has been completed, signed and filed at our Home Office. A
loan may be taken any time your Policy is in force. The minimum loan that can
be taken at any time is $1,000, except that the minimum for 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 you take a loan, an amount equal to the loan is transferred out of your
Accumulated Value in the Investment Options into the Loan Account to secure
the loan. Unless you request otherwise, loan amounts will be deducted from the
Investment Options in the proportion that each bears to the Accumulated Value
less Indebtedness.
The interest rate on loans is 4.75% a year. We will credit interest monthly
on amounts held in the Loan Account to secure the loan at an annual rate of
4.0%.
You may repay all or part of the loan at any time while your 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 you request otherwise, any loan repayment will be transferred into
the Investment Options in accordance with your current premium allocation
instructions. In addition, any interest earned on the loan balance held in the
Loan Account will be transferred to each of the Investment Options in
accordance with your current premium allocation instructions.
While the amount to secure the loan is held in the Loan Account, you forgo
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, your
Policy Indebtedness
17
<PAGE>
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 your Policy remains in force. Your
Policy will lapse when Indebtedness equals or exceeds your Cash Surrender
Value and the minimum payment required is not made during the Grace Period.
Moreover, your 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 you. For
information on the tax treatment of loans, see "Federal Income Tax
Considerations," page 23.
BENEFITS AT MATURITY
If the Insured is living on your Policy Anniversary nearest the Insured's
Age 95, we will pay to you your Accumulated Value, reduced by any Policy
Indebtedness. Payment ordinarily will be made within seven days of your Policy
Anniversary, although payments may be postponed in certain circumstances (see
"Payments," page 31).
SURRENDER
You may fully surrender your Policy at any time during the life of the
Insured. The amount received in the event of a full surrender is your Policy's
Net Cash Surrender Value, which is equal to your Accumulated Value less
unrecovered deferred load and less any outstanding Policy Indebtedness.
PREFERRED AND PARTIAL WITHDRAWAL BENEFITS
We offer two partial surrender benefits by which you can obtain a portion of
your Net Cash Surrender Value: the Preferred Withdrawal Benefit and the
Partial Withdrawal Benefit. The Preferred Withdrawal Benefit is available on
your first Policy Anniversary until your 15th Policy Anniversary. Under this
Benefit, you may make one "Preferred Withdrawal" per year of up to 10% of the
amount of your 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 your
15th Policy Anniversary.
The Partial Withdrawal Benefit is available on your 15th Policy Anniversary
and thereafter. Under this Benefit, you may make "Partial Withdrawals" of your
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 your
Cash Surrender Value. In addition, the amount that can be withdrawn is limited
so that after the withdrawal, (1) your Accumulated Value is at least $5000 and
(2) any Policy Indebtedness is no greater than 90% of your new Cash Surrender
Value. If you do not exercise the Preferred Withdrawal Benefit during one of
your first 15 Policy Years, the amount that you could have withdrawn does not
carry over to the following year.
You may make a Preferred or Partial Withdrawal by submitting a proper
written request to us. As of the effective date of any withdrawal, your
Accumulated Value and Cash Surrender Value will be reduced by the amount of
the withdrawal. The amount of the withdrawal will be allocated proportionately
to your Accumulated Value in the Investment Options unless you request
otherwise. If the Insured dies after the request for a withdrawal is sent to
us 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.
18
<PAGE>
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
your initial premium payment remains the same. No surrender or withdrawal fee
will be charged for a Partial Withdrawal.
A Preferred Withdrawal will not affect your 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 your 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 you. 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
You have a Free-Look Right, under which your Policy may be returned within
10 days after you receive it (30 days if you are a resident of California and
age 60 or older), or within 45 days after you complete the application for
insurance, whichever is later. However, in Pennsylvania, you have a different
Free-Look Right, under which your Policy may be returned only within 10 days
after you receive it. It can be mailed or delivered to us or our agent. The
returned Policy will be treated as if we never issued it and we will promptly
refund the full amount of the premium paid. If you have taken a loan during
the Free-Look Period, your 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
Your Policy will lapse only when your Net Cash Surrender Value is
insufficient to cover deductions and your charges on a Monthly Payment Date,
and a Grace Period expires without you making a sufficient payment. If your
Net Cash Surrender Value is insufficient to cover deductions and charges on a
Monthly Payment Date, you must pay during the Grace Period an amount equal to
the amount by which your 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. We will not
accept such payment if it would cause your total premium payment to exceed the
maximum permissible premium under the Internal Revenue Code. This will
probably not be a problem unless you have outstanding Policy Indebtedness, in
which case you could repay a sufficient portion of the Indebtedness to avoid
termination.
To avoid recurrence of the potential lapse, you may wish to repay a portion
of any Indebtedness. If premium payments have not exceeded the maximum
permissible premium, you may wish to make a larger payment.
If your Net Cash Surrender Value is insufficient to cover the deductions and
charges on a Monthly Payment Date, we 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 your Accumulated Value exceeds your
Cash Surrender Value. Any remaining Accumulated Value in the Variable Accounts
will be transferred to the Money Market Variable Account. We will notify you
(and any assignee of record) of the payment required to keep the Policy in
force. You will then have a "Grace Period" of 61 days, measured from the date
the notice is sent, to make the
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required payment. Your 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 your Policy, and your 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 Investment Options in accordance with your current premium
allocation instructions. Any monthly deductions and charges due will be
charged to the Investment Options 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
We 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 we
receive the following: (1) your written application; (2) evidence of
insurability satisfactory to us; 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 your Policy is reinstated, your Accumulated Value will be equal to your
Accumulated Value on the date of the lapse subject to the following: If your
Policy is reinstated after your first Monthly Payment Date following lapse,
your 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 your Policy is reinstated on your Monthly Payment Date next
following lapse, any Policy Indebtedness on the date of lapse will also be
reinstated. No interest on amounts held in the Loan Account to secure Policy
Indebtedness will be paid or credited between lapse and reinstatement.
Reinstatement will be effective as of your Monthly Payment Date on or next
following the date of our approval, and your Accumulated Value minus Policy
Indebtedness will be allocated among the Investment Options in accordance with
your current premium allocation instructions.
CHARGES AND DEDUCTIONS
PREMIUM LOAD FROM THE INITIAL PREMIUM
We do not make any deductions from the initial premium payment before
allocating it to your 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 your first Policy
Anniversary and continuing to your eleventh Policy Anniversary. Deferred load
is not deducted during your first Policy Year unless you surrender 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 us for sales and other expenses of distributing the Policies.
The amount we derive 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. We assess an administrative load for administrative
expenses, the amount of which varies with the size of your premium payment
as follows: 3.0% of your premium if it is less than $50,000; 1.50% of your
premium if it is at least $50,000 but less than $100,000; and .50% of your
premium if it is $100,000 or greater.
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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. We do 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 your Policy remains in force, the deferred load attributable to
your initial premium payment is not collected until after the end of your
first Policy Year (unless your Policy is surrendered in full during the first
year). It is then deducted from your Accumulated Value in equal monthly
installments during your second through the eleventh Policy Years. Any
unrecovered portion of the deferred load is deducted from your 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 your 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 your
additional premium payments depending upon the amount of your premium payment.
The Premium Load will consist of the sales load of 4.15%; an administrative
load of 3.0% of your 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
We 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. We 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.
DEDUCTIONS FROM ACCUMULATED VALUE
Cost of Insurance. A charge for the cost of insurance is deducted from your
Accumulated Value on each Monthly Payment Date. This monthly charge
compensates us for the anticipated cost of paying death benefits in excess of
Accumulated Value to Beneficiaries of Insureds who die. We may use any profit
derived from this charge for any lawful purpose, including the cost of claims
processing and investigation. The amount of the charge is equal to the net
amount at risk under your 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
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earned during the month) less your Accumulated Value at the beginning of your
Policy Month. The cost of insurance rate is calculated based on the Age and
underwriting classification of the Insured. Your Policy contains guaranteed
rates, but, as of the date of this prospectus, we charge "current rates" that
are lower (i.e., less expensive) than the guaranteed rates. We 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, we 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 us with additional mortality
risks. As a result, in determining the guaranteed rates for the cost of
insurance, we have assumed less favorable mortality experience than that
provided in the 1980 Commissioners Standard Ordinary ("CSO") Mortality Table
B, and have 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 us for
the expenses associated with administration and maintenance of the Policies.
This charge will be waived if your initial premium payment is at least
$20,000. This charge contains no element of anticipated profit. It is first
deducted from your Accumulated Value on your Policy Date, and deducted
thereafter on each succeeding Monthly Payment Date.
Face Amount Increase Charge. If you request an increase in Face Amount that
is accepted by us, a charge of $100 will be deducted from your Accumulated
Value on the effective date of the increase to cover processing costs. The
charge will be deducted from the Investment Options in the proportion each
bears to your Accumulated Value less Indebtedness.
DEDUCTIONS FROM THE VARIABLE ACCOUNTS
Mortality and Expense Risk Charges. We make a daily charge to the Variable
Accounts for mortality and expense risks we assume which is equal to an annual
rate of 0.70% of daily net assets. This charge is made to compensate us 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. We 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. We may use any profit derived from this charge for any lawful
purpose, including any distribution expenses not covered by the sales load.
OTHER CHARGES
We may charge the Variable Accounts for the federal income taxes incurred by
us 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).
We 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.
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GUARANTEE OF CERTAIN CHARGES
We guarantee 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 our 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 we believe 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). We reserve the right to make
changes to the Policy if changes are deemed appropriate by us 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 you generally
should not be deemed to be in constructive receipt of the cash values,
including increments thereof, under your Policy until a full or partial
surrender thereof, maturity or lapse of your Policy, or until receipt of
deemed distributions (including, in the case of a modified endowment contract,
policy loans). Prospective 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. 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
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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 your 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, you have additional flexibility in allocating premium payments and
Policy Values. These differences could result in you being treated as the
owner of your Policy's pro rata portion of the assets of the Separate Account.
In addition, we do 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. We therefore reserve the right to modify the Policy, as deemed
appropriate by us, to attempt to prevent you from being considered the owner
of your 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. IRC Section 7702A defines a class of insurance
contracts referred to as modified endowment contracts. Under this provision,
the Policies will be treated for tax purposes in one of two ways. 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 your Policy, you would
recognize ordinary income for federal income tax purposes equal to the amount
by which the Net Cash Surrender Value plus Indebtedness exceeds the investment
in your 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, you
would recognize ordinary income to the extent allocable to income (which
includes all previously non-taxed gains) on your Policy. The amount allocated
to income is the amount by which the Accumulated Value of your 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 you assign or pledge (or agree 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. Tax law provisions may limit the deduction of interest payable
on loan proceeds that are used to purchase or carry certain life insurance
policies.
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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 you do 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 your 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 your 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 your Policy will be treated as ordinary income for
federal income tax purposes. Your 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 you on a Preferred Withdrawal within 15 years of the Policy Date
does not exceed investment in your Policy (generally, premiums paid less any
premiums previously recovered in Preferred Withdrawals), we believe that no
portion of such cash will be treated as paid out of the income of your Policy
and taxed to you because the death benefit under your 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 you
on a Preferred Withdrawal should be treated as being paid out of income of
your Policy and taxed to you. Cash distributed to you on Partial Withdrawals
occurring more than 15 years after the Policy Date will be taxable as ordinary
income to you to the extent that it exceeds the cost basis under your Policy.
We also believe 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 you unless your
Policy is surrendered or matures or lapses. However, interest on Policy
Indebtedness paid (or accrued by an accrual basis taxpayer) may be deductible.
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
has issued proposed regulations and is expected to promulgate temporary or
final regulations governing reasonableness standards for mortality charges.
While we believe under IRS pronouncements currently in effect, that the
mortality costs and other expenses used in making calculations to determine
whether the Policy qualifies as life insurance meet the current requirements,
complete assurance cannot be given that the IRS would necessarily agree. It is
possible that future regulations will contain standards that would require us
to modify our 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 we reserve 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.
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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. We will periodically
review the question of a charge to the Separate Account for our federal income
taxes. A charge may be made for any federal income taxes incurred by us that
are attributable to the Separate Account. This might become necessary if our
tax treatment is ultimately determined to be other than what we currently
believe 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 our tax status.
Under current laws, we 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, we
reserve 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, we 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. We 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 we determine that we are
permitted to vote the shares of the Fund in its own right, we may elect to do
so.
You are the person having the voting interest under a Policy. Unless
otherwise required by applicable law, the number of votes as to which you will
have the right to instruct will be determined by dividing your 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 you 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, we reserve 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 your Accumulated Value held in each Variable
Account for which no timely voting instructions are received will be voted by
us in the same proportion as the voting instructions which are received in a
timely manner for all policies participating in that Variable Account. We 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. If we hold shares of a Portfolio in
our General Account and/or if any of our non-insurance subsidiaries holds
shares of a Portfolio, such shares will be voted in the same proportion as
votes cast by the Separate Account and our other separate accounts, in the
aggregate.
DISREGARD OF VOTING INSTRUCTIONS
We 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, we 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 our 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 us. In the event we do disregard voting instructions, a summary
of that action and the reasons for such action will be included in the next
report to Owners.
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CONFIRMATION STATEMENTS AND OTHER REPORTS TO OWNERS
We will send you confirmations for premium payments and transfers, loans,
loan repayments, loan interest transfers, Preferred and Partial Withdrawals, a
surrender, and on payment of any death benefit proceeds. Confirmation of
scheduled transactions under dollar cost averaging, portfolio rebalancing, and
monthly deductions will appear on your quarterly statement.
A statement will be sent quarterly to you 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 Investment Options and any other information
required by law.
You will also be sent 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
We reserve 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, we 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, we will not substitute any shares attributable to your
interest in a Variable Account or the Separate Account without notice, your
approval, or prior approval of the Securities and Exchange Commission and
without following the filing or other procedures established by applicable
state insurance regulators.
We also reserve 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 our sole discretion, 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 us. We may
also eliminate one or more Variable Accounts if, in our sole discretion,
marketing, tax, or investment conditions so warrant.
In the event of any such substitution or change, we 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 us 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, we 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
We reserve the right to make any changes without your consent to the
provisions of the Policy to comply with, or give you 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.
27
<PAGE>
PERFORMANCE INFORMATION
Performance information for the Variable Accounts 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 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 our rating or a rating of our 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 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.
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<PAGE>
THE FIXED ACCOUNT
You may allocate all or a portion of your premium payments and transfer
Accumulated Value to the Fixed Account. Amounts allocated to the Fixed Account
become part of our General Account, 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 our General Account
which consists of all assets owned by us other than those in the Separate
Account and our other separate accounts. Subject to applicable law, we have
sole discretion over the investment of the assets of our General Account.
You may elect to allocate premium payments to the Fixed Account, the
Variable Account, or both. You may also transfer Accumulated Value from the
Variable Accounts to the Fixed Account, or from the Fixed Account to the
Variable Accounts, subject to the limitations described below. We guarantee
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, we may in our 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 your 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%.
We bear 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 an Owner who has Accumulated Value in the Fixed Account as for an 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 whether you allocate premium payments or
transfer Accumulated Value to the Fixed Account or 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
you to the extent the Accumulated Value is allocated to the Fixed Account;
however, to such extent, you 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. You may not make more than one transfer from
29
<PAGE>
the Fixed Account to the Variable Accounts in any 12-month period. Further,
effective June 1, 1996, you may not transfer more than the greater of 25% of
your accumulated value in the Fixed Account or $5,000 in any year. Until June
1, 1996, if you have $1000 or more in the Fixed Account, you 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, we reserve 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.
You 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, you 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 our 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 we allow.
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.
BENEFICIARY
The Beneficiary is the individual named as such in the application or any
later change shown in our records. You may change the Beneficiary at any time
during the life of the Insured by written request on forms provided by us and
received by us at our Home Office. The change will be effective as of the date
this form is signed. Contingent and/or concurrent Beneficiaries may be
designated. You 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, you or your estate is the Beneficiary.
We 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 our approval, you may exchange
the named Insured on the Policy upon written application, evidence of
insurability satisfactory to us, 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.
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<PAGE>
We reserve 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 you 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 us by you before the request
for an exchange of Insured will be processed.
THE CONTRACT
The Policy is a contract between you and us. 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
We 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 we receive all information needed to process a payment
or transfer or, if sooner, other period required by law.
However, we 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
. The SEC by order permits postponement for the protection of Policy
Owners.
ASSIGNMENT
You may assign a Policy as collateral security for a loan or other
obligation. No assignment will bind us unless the original, or a copy, is
received and recorded by our Home Office. An assignment does not change the
ownership of the Policy. However, after an assignment, the rights of any Owner
or Beneficiary will be subject to the assignment. The entire Policy, including
any attached option or rider, will be subject to the assignment. We will rely
solely on the assignee's statement as to the amount of the assignee's
interest. We 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 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.
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<PAGE>
INCONTESTABILITY
We 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, we 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 our surplus earnings. However,
the current dividend scale is zero and we do not anticipate that dividends
will be paid. Any dividends that do become payable will be paid in cash.
POLICY ILLUSTRATIONS
Upon request, we will send you an illustration of estimated future benefits
under the Policy based on both guaranteed and current cost factor assumptions.
However, we reserve the right to charge a fee for requests for illustrations
in excess of one per Policy Year.
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 us 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 we make available at that time.
DISTRIBUTION OF THE POLICY
Pacific Mutual Distributors, Inc. ("PMD"), a wholly-owned subsidiary of
Pacific Mutual, is Principal Underwriter of the Policies. PMD is registered as
a broker-dealer with the SEC and is a member of the National Association of
Securities Dealers ("NASD"). Pacific Mutual pays PMD for acting as Principal
Underwriter under a Distribution Agreement.
Pacific Mutual and PMD 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. We pay compensation directly to broker-dealers for promotion and sales
of the Policy. The compensation payable to a broker-dealer by Pacific Mutual
and PMD for
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<PAGE>
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, we 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 our Policies. Compensation arrangements vary among
broker-dealers. In addition, registered representatives who meet specified
production levels may qualify, under sales incentive programs adopted by us,
to receive non-cash compensation such as expense-paid trips, expense-paid
educational seminars and merchandise. We make 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; Equity Board Member of PIMCO Advisors
the Board and L.P.; Director of Pacific Corinthian Life Insurance
Chief Executive Company; similar positions with other subsidiaries of
Officer Pacific Mutual; Director of: Newhall Land & Farming; The
Irvine Company; The Edison Company.
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;
Equity Board Member of PIMCO Advisors L.P.; Director of
Pacific Corinthian Life Insurance Company; similar
positions with other subsidiaries of Pacific Mutual.
Harry G. Bubb Director and Chairman Emeritus of Pacific Mutual.
Director and
Chairman Emeritus
Richard M. Ferry Director of Pacific Mutual; President, Director and Chairman
Director 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; Chairman Emeritus and Director
Director of Pacific Telesis Group; Director of: The Dial Corp.; Bank
of America NT & SA; BankAmerica Corporation. Address:
Pacific Telesis Center, 130 Kearny Street, Room 3719, San
Francisco, California 94108-4818.
Ignacio E. Lozano, Jr. Director of Pacific Mutual; Chairman and Editor-in-Chief of
Director La Opinion; Director of: BankAmerica Corporation; Bank of
America NT&SA; Pacific Enterprises; The Walt Disney
Company. Address: 411 West Fifth Street, 12th Floor, Los
Angeles, California 90015.
Charles A. Lynch Director of Pacific Mutual; Chairman and Chief Executive
Director Officer of Fresh Choice, Inc.; Director of: Nordstrom,
Inc.; PST Vans, Inc.; SRI International, Inc.; Age Wave;
Artmaster, Inc.; Bojangles Acquisition Corp.; Cucina
Holdings, Inc.; Dakin, Inc.; Greyhound Lines, Inc.;
Krh' Thermal Systems; La Salsa Restaurants; Mid Peninsula
Bank; Syntex Corporation; Former Chairman of Market Value
Partners Company. Address: 2901 Tasman Drive, Suite 109, Santa
Clara, California 95054-1169.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Dr. Allen W. Mathies, Director of Pacific Mutual; Director and President Emeritus
Jr. of Huntington Memorial Hospital; Director of Occidental
Director College; Former President and Chief Executive Officer of
Huntington Memorial Hospital. Address: 100 W. California
Blvd., Pasadena, California 91109-7103.
Charles D. Miller Director of Pacific Mutual; Director, Chairman, and Chief
Director 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; President, Chief Executive
Director 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.
Jacqueline C. Morby Director of Pacific Mutual, February 28, 1996 to present;
Director Managing Director, TA Associates, Inc., Director of Axent
Technologies Inc. Address: High Street Tower, Suite 2500,
125 High Street, Boston, Massachusetts 02110.
J. Fernando Niebla Director of Pacific Mutual, May 1995 to present; Director,
Director Chairman and Chief Executive Officer of Infotec
Development, Inc.; Director of: Bank of California; Defense
Policy Advisory Commission on Trade; California Commission
on Science and Technology; Center for Occupational Research
and Development. Address: 3611 South Harbor Boulevard,
Suite 260, Santa Ana, CA 92704.
Susan Westerberg Prager Director of Pacific Mutual; Dean of the UCLA School of Law
Director 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 90095-1476.
Richard M. Rosenberg Director of Pacific Mutual, November 1995 to present;
Director Chairman and Chief Executive Officer of BankAmerica
Corporation; Bank of America NT&SA; Director of: Airborne
Express Corporation; Northrop Grumman Corporation; Potlatch
Corporation; Pacific Telesis Group. Address: 555 California
Street, 40th Floor, San Francisco, California 94107.
James R. Ukropina Director of Pacific Mutual; Partner with the law firm of
Director 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.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Raymond L. Watson Director of Pacific Mutual; Vice Chairman and Director of
Director 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 Counsel of Pacific Mutual, April 1989 to April 1992;
General Counsel 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
Chief Operating Officer 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 Similar positions with other subsidiaries of Pacific
Corporate Secretary 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; 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.
STATE REGULATION
We are subject to the laws of the state of California governing insurance
companies and to regulation by the Commissioner of Insurance of California. In
addition, we are subject to the insurance laws and regulations of the other
states and jurisdictions in which we are 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 our
operations for the preceding year and our financial condition as of December
31st of that year. Our affairs are subject to review and examination at any
time by the Commissioner of Insurance or his agents, and subject to full
examination of our operations at periodic intervals.
TELEPHONE TRANSFER AND LOAN PRIVILEGES
You may request a transfer of Accumulated Value or a Policy Loan by
telephone if a properly completed Authorization for Telephone Requests
("Telephone Authorization") is on file at our Home Office. All or part of
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<PAGE>
any telephone conversation with respect to transfer or loan instructions may
be recorded by us. Telephone instructions received by us 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 your instructions (presuming that the Free-Look Period has
expired). We reserve 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), you might not be able to request
transfers and loans by telephone and would have to submit written requests.
We have 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 us,
and we will send a written confirmation of all transfers requested by
telephone within 7 days of the transfer. Upon your submission of a Telephone
Authorization, you authorize us to accept and act upon telephonic instructions
for transfers or loans involving your Policy, and agree that neither Pacific
Mutual, any of our 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 us to be genuine, provided that we have complied with our procedures. As a
result of this policy on telephonic requests, you 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, our
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 our General
Counsel.
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
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, 1995 and 1994, are set forth herein, starting on page
37. The audited financial statements of Pacific Mutual as of and for the years
ended December 31, 1995 and 1994 are set forth herein starting on page 44.
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 our ability to meet our
obligations under the Policies.
36
<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,
1995 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,
1995 and 1994. 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,
1995 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 16, 1996
37
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
STATEMENTS OF ASSETS & LIABILITIES
DECEMBER 31, 1995
(In thousands)
<TABLE>
<CAPTION>
High
Money Managed Government Yield
Market Bond Securities Bond Growth
Variable Variable Variable Variable Variable
Account Account Account Account Account
ASSETS -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Investments in Pacific Select Fund:
Money Market Portfolio (139 shares; cost $1,395)....... $ 1,388
Managed Bond Portfolio (43 shares; cost $445).......... $ 474
Government Securities Portfolio (33 shares; cost $358). $ 361
High Yield Bond Portfolio (380 shares; cost $3,398).... $ 3,722
Growth Portfolio (429 shares; cost $6,741)............. $ 7,959
Equity Income Portfolio (130 shares; cost $1,915)......
Multi-Strategy Portfolio (61 shares; cost $713)........
International Portfolio (122 shares; cost $1,458)......
Equity Index Portfolio (15 shares; cost $189)..........
Growth LT Portfolio (65 shares; cost $803).............
-------- -------- -------- -------- --------
TOTAL ASSETS.............................................. 1,388 474 361 3,722 7,959
-------- -------- -------- -------- --------
LIABILITIES
Payables:
Mortality and expense risk fee.......................... 1 2 5
-------- -------- -------- -------- --------
TOTAL LIABILITIES......................................... 1 2 5
-------- -------- -------- -------- --------
NET ASSETS................................................ $ 1,387 $ 474 $ 361 $ 3,720 $ 7,954
======== ======== ======== ======== ========
<CAPTION>
Equity Multi- Inter- Equity Growth
Income Strategy national Index LT
Variable Variable Variable Variable Variable
Account Account Account Account Account
ASSETS -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Investments in Pacific Select Fund:
Money Market Portfolio (139 shares; cost $1,395).......
Managed Bond Portfolio (43 shares; cost $445)..........
Government Securities Portfolio (33 shares; cost $358).
High Yield Bond Portfolio (380 shares; cost $3,398)....
Growth Portfolio (429 shares; cost $6,741).............
Equity Income Portfolio (130 shares; cost $1,915)...... $ 2,362
Multi-Strategy Portfolio (61 shares; cost $713)........ $ 858
International Portfolio (122 shares; cost $1,458)...... $ 1,572
Equity Index Portfolio (15 shares; cost $189).......... $ 264
Growth LT Portfolio (65 shares; cost $803)............. $ 919
-------- -------- -------- -------- --------
TOTAL ASSETS.............................................. 2,362 858 1,572 264 919
-------- -------- -------- -------- --------
LIABILITIES
Payables:
Mortality and expense risk fee.......................... 1 1 1
-------- -------- -------- -------- --------
TOTAL LIABILITIES......................................... 1 1 1
-------- -------- -------- -------- --------
NET ASSETS................................................ $ 2,361 $ 858 $ 1,571 $ 264 $ 918
======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
38
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(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>
INVESTMENT INCOME
Dividends................................................... $ 77 $ 26 $ 19 $ 278 $ 66 $ 36
EXPENSES
Mortality and expense risk fee.............................. 10 2 2 24 52 16
--------- --------- --------- --------- --------- ---------
NET INVESTMENT INCOME........................................ 67 24 17 254 14 20
--------- --------- --------- --------- --------- ---------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) from security transactions......... (2) 1 (3) 15 155 136
Net unrealized appreciation on investments.................. 3 36 42 304 1,508 451
--------- --------- --------- --------- --------- ---------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS.............................................. 1 37 39 319 1,663 587
--------- --------- --------- --------- --------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................................... 68 61 56 573 1,677 607
========= ========= ========= ========= ========= =========
<CAPTION>
Multi- Inter- Equity Growth
Strategy national Index LT
Variable Variable Variable Variable
Account Account Account Account
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends................................................... $ 26 $ 30 $ 6 $ 63
--------- --------- --------- ---------
EXPENSES
Mortality and expense risk fee.............................. 5 10 2 4
--------- --------- --------- ---------
NET INVESTMENT INCOME........................................ 21 20 4 59
--------- --------- --------- ---------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) from security transactions......... 32 25 24 15
Net unrealized appreciation on investments.................. 115 111 52 112
--------- --------- --------- ---------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS.............................................. 147 136 76 127
--------- --------- --------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................................... $ 168 $ 156 $ 80 $ 186
========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
39
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
(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..................................... $ 67 $ 24 $ 17 $ 254 $ 14 $ 20
Net realized gain (loss) from security transactions....... (2) 1 (3) 15 155 136
Net unrealized appreciation on investments................ 3 36 42 304 1,508 451
--------- --------- --------- --------- --------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................................. 68 61 56 573 1,677 607
--------- --------- --------- --------- --------- ---------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfers--policy charges and deductions.................. (51) (8) (29) (68) (211) (162)
Transfers in (from other variable accounts)............... 35 330 25 47 1,201 498
Transfers out (to other variable accounts)................ (1,065) (22) (16) (34) (1,098) (927)
Transfers--other.......................................... (2) 1 (8) 7
--------- --------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS.......................... (1,083) 301 (20) (55) (116) (584)
--------- --------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS...................... (1,015) 362 36 518 1,561 23
NET ASSETS
Beginning of year......................................... 2,402 112 325 3,202 6,393 2,338
--------- --------- --------- --------- --------- ---------
End of year............................................... $ 1,387 $ 474 $ 361 $ 3,720 $ 7,954 $ 2,361
========= ========= ========= ========= ========= =========
<CAPTION>
Multi- Inter- Equity Growth
Strategy national Index LT
Variable Variable Variable Variable
Account Account Account Account
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income..................................... $ 21 $ 20 $ 4 $ 59
Net realized gain (loss) from security transactions....... 32 25 24 15
Net unrealized appreciation on investments................ 115 111 52 112
--------- --------- --------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................................. 168 156 80 186
--------- --------- --------- ---------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfers--policy charges and deductions.................. (15) (131) (56) (19)
Transfers in (from other variable accounts)............... 15 473 688
Transfers out (to other variable accounts)................ (70) (9) (32)
Transfers--other.......................................... (2) 1 (1)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS.......................... 0 270 (64) 636
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS...................... 168 426 16 822
NET ASSETS
Beginning of year......................................... 690 1,145 248 96
--------- --------- --------- ---------
End of year............................................... $ 858 $ 1,571 $ 264 $ 918
========= ========= ========= =========
</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
Market Bond Securities Bond Growth
Variable Variable Variable Variable Variable
Account Account Account Account Account
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income......................................... $ 46 $ 46 $ 13 $ 252 $ 501
Net realized gain (loss) from security transactions........... 2 (50) (6) 6 118
Net unrealized appreciation (depreciation)
on investments............................................... (9) (86) (30) (268) (1,427)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS..................................... 39 (90) (23) (10) (808)
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums
Transfers--policy charges and deductions...................... (35) (24) (66) (13) (241)
Transfers in (from other variable accounts)................... 2,332 142 38 64 345
Transfers out (to other variable accounts).................... (460) (2,301) (38) (85) (225)
Transfers--other.............................................. (1) 1
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS.............................. 1,837 (2,184) (66) (34) (120)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS........................... 1,876 (2,274) (89) (44) (928)
NET ASSETS
Beginning of year............................................. 526 2,386 414 3,246 7,321
-------- -------- -------- -------- --------
End of year................................................... $ 2,402 $ 112 $ 325 $ 3,202 $ 6,393
======== ======== ======== ======== ========
<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>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income......................................... $ 201 $ 37 $ 39 $ 5 $ 1
Net realized gain (loss) from security transactions........... 50 24 52 9
Net unrealized appreciation (depreciation)
on investments............................................... (274) (76) (65) (13) 4
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS..................................... (23) (15) 26 1 5
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums...................................... 1
Transfers--policy charges and deductions...................... (158) (58) (129) (59) (1)
Transfers in (from other variable accounts)................... 384 32 328 8 92
Transfers out (to other variable accounts).................... (356) (116) (179) (2)
Transfers--other.............................................. (1)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS.............................. (129) (142) 19 (53) 91
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS........................... (152) (157) 45 (52) 96
NET ASSETS
Beginning of year............................................. 2,490 847 1,100 300
-------- -------- -------- -------- --------
End of year................................................... $ 2,338 $ 690 $ 1,145 $ 248 $ 96
======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
41
<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 Income Variable Account, the Multi-Strategy
Variable Account, the International 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 portfolios 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.
The Separate Account held by Pacific Mutual represents funds from
individual flexible premium variable life policies. The assets of these accounts
are carried at market value.
The preparation of the accompanying financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results could
differ from those estimates.
A. Valuation of Investments
Investments in shares of the Fund are valued at the reported net asset
values of the respective portfolios.
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 1995, the Fund has declared dividends for each portfolio. The
amounts accrued by the Separate Account for its share of the dividends were
reinvested in additional full and fractional shares of each related portfolio.
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, a wholly-owned 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.
42
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (Continued)
5. SELECTED ACCUMULATION UNIT** INFORMATION
Selected accumulation unit information for the year ended December 31, 1995
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:
Beginning $ 13.79 $ 16.61 $ 16.00 $ 17.92 $ 22.10
======= ======= ======= ======= =======
Ending $ 14.45 $ 19.64 $ 18.89 $ 21.16 $ 27.60
======= ======= ======= ======= =======
Number of Units Outstanding at
End of Period 95,991 24,119 19,115 175,781 288,191
<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:
Beginning $ 17.71 $ 16.93 $ 15.34 $ 13.42 $ 11.25
======= ======= ======= ======= =======
Ending $ 23.16 $ 21.06 $ 16.84 $ 18.26 $ 15.28
======= ======= ======= ======= =======
Number of Units Outstanding at
End of Period 101,952 40,731 93,332 14,450 60,068
</TABLE>
- ------------
**Accumulation Unit: unit of measure used to calculate the value of a Contract
Owner's interest in a Variable Account during the Accumulation Period.
43
<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, 1995 and 1994,
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, 1995 and 1994, 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 23, 1996
44
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
1995 1994
- ------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Bonds $ 6,699,489 $ 6,669,853
Preferred stocks 156,097 132,604
Common stocks 54,504 57,874
Unconsolidated subsidiaries 182,040 196,401
Mortgage loans 1,388,743 1,421,182
Real estate 145,178 157,507
Home office properties 48,446 51,419
Policy loans 2,700,544 2,312,455
Cash and short-term investments 262,527 97,745
Investment income due and accrued 135,607 125,534
Premiums due and uncollected, and other assets 295,159 245,243
Separate account assets 5,520,478 3,260,374
- ------------------------------------------------------------------------
TOTAL ASSETS $17,588,812 $14,728,191
- ------------------------------------------------------------------------
LIABILITIES AND SURPLUS
Liabilities
Policy reserves $ 7,204,362 $ 6,476,634
Deposit funds 3,262,340 3,298,915
Other liabilities 686,989 885,638
Asset valuation reserve 191,392 179,006
Separate account liabilities 5,520,478 3,260,374
- ------------------------------------------------------------------------
Total Liabilities 16,865,561 14,100,567
Surplus 723,251 627,624
- ------------------------------------------------------------------------
TOTAL LIABILITIES AND SURPLUS $17,588,812 $14,728,191
- ------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
45
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF OPERATIONS AND SURPLUS
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
- ------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
REVENUES
Premiums, annuity considerations and deposit funds $ 2,919,920 $ 2,180,409
Net investment income 945,546 879,116
Other income 5,685 5,073
- ------------------------------------------------------------------------------
TOTAL REVENUES 3,871,151 3,064,598
- ------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future policy benefits 3,371,448 2,659,601
Operating expenses 309,588 249,018
Premium and other taxes (excluding tax on capital
gains) 35,168 28,705
Dividends to policyowners 16,639 17,162
- ------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 3,732,843 2,954,486
- ------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAXES 138,308 110,112
Federal income taxes 59,470 41,510
- ------------------------------------------------------------------------------
NET GAIN FROM OPERATIONS 78,838 68,602
NET REALIZED CAPITAL GAINS 6,311 12,424
- ------------------------------------------------------------------------------
NET INCOME $ 85,149 $ 81,026
- ------------------------------------------------------------------------------
SURPLUS
Net income $ 85,149 $ 81,026
Other surplus transactions, net 10,478 (36,178)
- ------------------------------------------------------------------------------
Increase in surplus 95,627 44,848
Surplus, beginning of year 627,624 582,776
- ------------------------------------------------------------------------------
SURPLUS, END OF YEAR $ 723,251 $ 627,624
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
46
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
- -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Receipts
Premiums, annuity considerations and deposit
funds $ 2,687,698 $ 1,687,583
Net investment income 927,918 809,791
Allowances and reserve adjustments on reinsurance
ceded 187,380 491,363
Other 13,885 23,862
Payments
Policy benefit payments (1,677,788) (1,408,650)
Net policy loans (388,320) (352,358)
Operating expenses (278,138) (247,437)
Net transfer to separate accounts (1,178,622) (594,284)
Premium and other taxes (41,116) (34,795)
Dividends to policyowners (16,715) (17,319)
Federal income taxes (35,779) (23,995)
- -------------------------------------------------------------------------------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES 200,403 333,761
- -------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds
Bonds 2,496,486 2,937,210
Stocks 208,235 139,785
Mortgage loans 261,514 390,642
Real estate 21,419 20,163
Other investments 49,089 47,132
Payments for the purchase of
Bonds (2,431,687) (3,673,859)
Stocks (222,678) (126,823)
Mortgage loans (239,355) (230,859)
Real estate (4,716) (17,466)
Other investments (124,164) (114,106)
- -------------------------------------------------------------------------------
NET CASH FLOW PROVIDED BY (USED IN)
INVESTING ACTIVITIES 14,143 (628,181)
- -------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Financial Statements
47
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1995 1994
- ------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Issuance (repayment) of short-term borrowings $ (49,764) $ 49,764
- ------------------------------------------------------------------------------
NET CASH FLOW PROVIDED BY (USED IN) FINANCING
ACTIVITIES (49,764) 49,764
- ------------------------------------------------------------------------------
Increase (decrease) in cash and short-term
investments 164,782 (244,656)
Cash and short-term investments, beginning of year 97,745 342,401
- ------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 262,527 $ 97,745
- ------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 18,376 $ 22,120
- ------------------------------------------------------------------------------
</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 and is organized under the laws of the State of California as a
mutual life insurance company. Pacific Mutual conducts business in every
state except New York.
Pacific Mutual, including its subsidiaries and affiliates, has primary
business segments which consist of life insurance, annuities, pension
products, group employee benefits and investment management and advisory
services. These primary business segments provide products for
individuals and corporations and offer a range of investment products to
institutions and pension plans.
BASIS OF PRESENTATION
Pacific Mutual's financial statements are prepared in accordance with
accounting practices prescribed or permitted by the Insurance Department
of the State of California, which are currently considered generally
accepted accounting principles ("GAAP") 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 administrative
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.
The Financial Accounting Standards Board ("FASB") has issued certain
pronouncements effective for 1996 financial statements and thereafter
that will no longer allow statutory financial statements of mutual life
insurance companies to be described as being prepared in conformity with
GAAP.
Upon the effective date of these pronouncements, in order for their
financial statements to be described as being prepared in accordance with
GAAP, mutual life insurance companies and their insurance subsidiaries
will be required to adopt all applicable authoritative GAAP
pronouncements in any general purpose financial statements that they may
issue. Pacific Mutual intends to issue 1996 general purpose financial
statements reflecting the adoption of all applicable GAAP pronouncements.
INVESTMENTS
Bonds qualifying for amortization are carried at amortized cost; all
other bonds are carried at prescribed values. Preferred stocks are
principally stated at amortized cost. Unaffiliated common stocks are
carried at market value. Investments in unconsolidated subsidiaries are
reported on the equity method of accounting, except for Pacific
Corinthian Life Insurance Company ("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 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. These capital gains and losses
are amortized into investment income over the remaining life of the
investment sold. The IMR was $25.3 million and $13.1 million as of
December 31, 1995 and 1994, respectively.
49
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net realized capital gains and losses are determined on the specific
identification method and are presented net of federal capital gains tax
of $18.5 million and $(2.3) million and transfers to the IMR of $22.6
million and $(.4) million for the years ended December 31, 1995 and 1994,
respectively.
Derivatives which qualify for hedge accounting are valued consistently
with the hedged items. Realized hedged 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 when realized
through income.
On November 15, 1994, Pacific Financial Asset Management Corporation
("PFAMCo"), a wholly-owned, 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. Collectively, PFAMCo and various of its subsidiaries beneficially
own approximately 42% of the outstanding general and limited partner
units of PIMCO Advisors L.P. as of December 31, 1995 and 1994. Net cash
distributions received on these units are recorded as income as permitted
by the Insurance Department of the State of California.
On December 21, 1995, Pacific Mutual completed a subsidiary
reorganization in which PFAMCo became a direct, wholly-owned subsidiary
of Pacific Mutual. Prior to that PFAMCo was a wholly-owned second-tier
subsidiary of Pacific Mutual. The intermediate company, Pacific Financial
Holding Company ("PFHC") and certain of its assets and liabilities were
merged into PFAMCo in connection with this reorganization. The remaining
assets were merged into Pacific Mutual which consisted of investments in
subsidiaries as follows: Pacific Equities Network, PM Group Life
Insurance Company and PFAMCo.
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, and
Federal income taxes 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.
50
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 includable 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. Under prescribed statutory accounting
practices, deferred tax assets and liabilities are not recorded. The
difference between the effective tax rate and the statutory tax rate of
35% for 1995 and 1994 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.
OTHER SURPLUS TRANSACTIONS
Other surplus transactions consist primarily of unrealized capital gains
and losses, changes in nonadmitted assets, and changes in the AVR.
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 value 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
practices prescribed or permitted by regulatory authorities and generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1995
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, 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
51
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
2. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY (CONTINUED)
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 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. INVESTMENTS 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.
<TABLE>
<CAPTION>
Gross Unrealized Estimated
Statement ----------------- Fair
Value Gains Losses Value
---------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1995:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 147,436 $ 28,214 $ 175,650
Obligations of states, political
subdivisions and foreign
governments 452,273 66,960 $ 3,064 516,169
Corporate securities 3,901,979 442,497 46,539 4,297,937
Mortgage-backed securities 2,438,052 116,650 10,106 2,544,596
Redeemable preferred stock 89,191 2,840 2,472 89,559
---------------------------------------
Total $7,028,931 $657,161 $ 62,181 $7,623,911
---------------------------------------
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 2,475,472 28,472 81,111 2,422,833
Redeemable preferred stock 81,026 343 5,031 76,338
---------------------------------------
Total $6,865,768 $139,561 $300,276 $6,705,053
---------------------------------------
</TABLE>
52
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENTS IN DEBT SECURITIES (CONTINUED)
The statement value and estimated fair value of debt securities as of
December 31, 1995 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 $ 445,645 $ 449,283
Due after one year through five years 1,319,487 1,426,373
Due after five years through ten years 1,409,209 1,542,228
Due after ten years 1,416,538 1,661,431
-----------------------
4,590,879 5,079,315
Mortgage-backed securities 2,438,052 2,544,596
-----------------------
Total $ 7,028,931 $ 7,623,911
-----------------------
</TABLE>
Proceeds from sales of investments in debt securities were $1.4 billion
and $1.5 billion for the years ended December 31, 1995 and 1994,
respectively. In 1995 and 1994, gross gains of $36 million and $30
million and gross losses of $14 million and $43 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, 1995 December 31, 1994
Statement Estimated Statement Estimated
Value Fair Value Value Fair Value
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Debt securities
(Note 3) $ 7,028,931 $ 7,623,911 $ 6,865,768 $ 6,705,053
Preferred and common
stocks 121,420 139,613 109,458 116,993
Mortgage loans 1,388,743 1,500,000 1,421,182 1,452,596
Policy loans 2,700,544 2,700,544 2,312,455 2,312,455
Derivative financial
instruments:
Interest rate swaps 1,068 3,379 121 (24,809)
Other 18,008 30,649 2,672 (2,822)
Liabilities:
Guaranteed interest
contracts 2,375,898 2,459,323 2,635,356 2,614,961
Deposit liabilities 876,276 899,393 897,743 859,469
Annuity liabilities 308,742 311,441 220,026 223,423
Other derivative fi-
nancial instruments 2,373 1,490 2,270 2,128
Surplus:
Contribution certifi-
cates 149,596 157,688 149,593 124,313
</TABLE>
53
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair
values of these financial instruments as of December 31, 1995 and 1994:
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 value.
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.
Pacific Mutual has issued PRO GIC and Diversifier GIC contracts to plan
sponsors totaling $914 million as of December 31, 1995, 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.
ANNUITY LIABILITIES
The fair value of annuity liabilities approximates statement value and
primarily includes policyholder deposits and accumulated credited
interest.
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, interest rates, or basis risk. Pacific Mutual has also
set aside a corporate total return portfolio utilizing derivative
financial instruments. These instruments include interest rate and
currency swaps, asset swaps, credit derivatives, 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.
54
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (CONTINUED)
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, 1995, the notional amount of options
held and options written approximated $1.3 billion and $30 million,
respectively. 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 1996 through 2007.
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 8.9% as of December 31, 1995, and from 1.9% to 8.6% as of December 31,
1994. Interest rate swap contracts mature during 1996 through 2013. As of
December 31, 1995 and 1994, interest rate swap contracts outstanding with
financial institutions had a total notional amount of $656 million and
$411 million, respectively.
Asset Swap Contracts
--------------------
Pacific Mutual has entered into an asset swap contract to reduce interest
rate risk by shortening both the duration and maturity of one of its
fixed rate investments. The asset swap contract matures during 1998. As
of December 31, 1995, the asset swap contract had a notional amount of
$10 million.
Credit Derivatives
------------------
Pacific Mutual uses credit derivatives to take advantage of market
opportunities. As of December 31, 1995 and 1994, the notional amount of
credit derivatives outstanding approximated $90 million and $66 million,
respectively. Credit derivatives mature during 1996 through 2000.
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, 1995 and 1994,
the notional amount of foreign currency exchange contracts approximated
$15 million and $35 million, respectively. Foreign currency exchange
contracts expire during 1998 and 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, 1995 and 1994, the notional amounts of futures
contracts were $340 million and $163 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.
55
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (CONTINUED)
CONTRIBUTION CERTIFICATES
The estimated fair value of contribution certificates is based on market
quotes.
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, 1995 and 1994, subsidiary assets were $4.5 billion and
liabilities were $4.3 billion as of December 31, 1995 and $4.2 billion as
of December 31, 1994.
Revenue and net income, including PCL, were $908 million and $63 million
for the year ended December 31, 1995, and $1.1 billion and $75 million
for the year ended December 31, 1994. Dividends from subsidiaries totaled
$64.7 million and $2 million for the years ended December 31, 1995 and
1994, respectively. Earnings of 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 borrowings outstanding as of December 31, 1995.
In addition, Pacific Mutual had available a revolving credit facility
totaling approximately $250 million as of December 31, 1995 and 1994.
There were no borrowings outstanding as of December 31, 1995 and 1994.
8. CONTRIBUTION CERTIFICATES
Pacific Mutual has $150 million of Contribution Certificates (the
"Certificates"), also referred to as Surplus Notes, outstanding at an
interest rate of 7.9% maturing on December 30, 2023. Interest is payable
semiannually on June 30 and December 30. 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.
56
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
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, 1995 and 1994, individual life
and annuity premiums assumed were $16 million and $20 million and
premiums ceded were $339 million and $363 million, respectively. Amounts
recoverable from reinsurers for individual life and annuities include
reinsured and paid claims of $8 million and $13 million as of December
31, 1995 and 1994, respectively. Policy benefits payable are net of
reinsurance recoveries of $8 million and $4 million at December 31, 1995
and 1994, respectively.
Pacific Mutual also reinsures substantially all of its group life and
health business with a subsidiary insurance company. Premiums of $72
million and $90 million, and benefits of $53 million and $70 million were
ceded during the years ended December 31, 1995 and 1994, respectively.
Amounts payable to the subsidiary under this agreement were $6 million
and $8 million as of December 31, 1995 and 1994, respectively.
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. In 1995, Pacific Mutual accrued $2.5 million in
pension expense that will be funded in 1996 based on the latest actuarial
valuation report. No expense or contributions were made during 1994
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 (January 1, 1995 and April 1,
1994) are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------
(In Thousands)
<S> <C> <C>
Actuarial present value of accumulated
benefits:
Vested $ 92,966 $ 88,122
Nonvested 392 1,115
-------------------
Total $ 93,358 $ 89,237
-------------------
Net assets available for benefits $ 107,530 $ 111,089
-------------------
</TABLE>
The above present values were determined using an assumed discount rate
of 8.5% in 1995 and 1994.
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
57
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
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, 1995 and
1994 was approximately $1.7 million for both years.
Pacific Mutual utilizes the accrual method of accounting for the costs of
The Plans as prescribed by the Insurance Department of the State of
California and amortizes its transition obligation of $26.7 million over
twenty years.
Components of net periodic postretirement benefit cost are as follows (In
Thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
---------------------------
<S> <C> <C>
Service cost $ 177 $ 186
Interest cost 1,921 1,790
Amortization (260) (260)
---------------------------
1,838 1,716
Recognized transition obligation-net 1,336 1,337
---------------------------
Net periodic postretirement benefit cost $ 3,174 $ 3,053
---------------------------
</TABLE>
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>
1995 1994
------------------
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $ 20,936 $ 20,580
Fully eligible active plan participants 1,695 1,346
Other active plan participants 2,290 2,455
------------------
24,921 24,381
Fair value of plan assets 0 0
------------------
Unfunded accumulated postretirement obligation 24,921 24,381
Unrecognized net gain 878 942
Prior service cost 1,589 1,849
Unrecognized transition obligation-net (22,720) (24,056)
------------------
Accrued postretirement benefit liability $ 4,668 $ 3,116
------------------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 10% for 1995 and 11% for 1994, and is assumed to
decrease gradually to 5% in 2003 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
58
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
rate assumptions were increased by 1%, the accumulated postretirement
benefit obligation as of December 31, 1995 and 1994 would be increased by
10.9% and 11.2%, 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 11.4% and 13.6%, respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation is 7% and 8% for 1995 and 1994, 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>
1996 $ 179,551
1997-2000 88,698
2001 and thereafter 32,091
---------
Total $ 300,340
---------
</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.
--------------------------------------------------------------------------
59
<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>
60
<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 Variable 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 weighted rate
of 0.64% of the aggregate average daily net assets of the Fund. This
hypothetical rate is representative of the weighted average investment
advisory fee applicable to the twelve Portfolios of the Fund available to the
Separate Account. 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 weighted rate of
0.23% 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, and any foreign taxes. For the year ended December 31, 1995, the
total expenses of each Portfolio were the following percentages of the average
daily net assets of the Portfolios: 0.53% for the Money Market Portfolio;
0.83% for the Equity Income Portfolio; 0.84% for the Multi-Strategy Portfolio;
1.42% for the International Portfolio; 0.76% for the Managed Bond Portfolio;
0.82% for the Government Securities Portfolio; 0.77% for the High Yield Bond
Portfolio; 0.79% for the Growth Portfolio; 0.94% for the Growth LT Portfolio;
and 0.42% for the Equity Index Portfolio. For Aggressive Equity and Emerging
Markets Portfolios, which had not commenced operations as of December 31,
1995, it is estimated that operating expenses, including advisory fees and
foreign taxes, after the expense limitation described below, will be 1.04% and
1.58% of average daily net assets, respectively. We have agreed, until at
least December 31, 1997, to waive our 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 any Portfolio's average daily net
assets. We began this expense reimbursement policy in April 1989. Such
expenses of the Portfolios for the year ending December 31, 1995 did not
exceed the 0.25% expense caps. In the absence of this policy, it is estimated
that the Emerging Markets Portfolio's total expenses, including advisory fees
and foreign taxes for the Fund's current
61
<PAGE>
year ending December 31, 1996 will be 1.63%. There can be no assurance that
the expense reimbursement arrangement will continue after December 31, 1997,
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 we are not currently making these
charges.
We 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.
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: $10,000
CLASS: MALE NONSMOKER GUIDELINE MINIMUM DEATH BENEFIT: $36,268
<TABLE>
<CAPTION>
TOTAL
PREMIUMS END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ----------------------------------------------
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
ASSUMING HYPOTHETICAL GROSS ANNUAL ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY ---------------------------------- ------------------------------------
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.
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: 45 SINGLE PREMIUM AMOUNT: $50,000
CLASS: MALE NONSMOKER GUIDELINE MINIMUM DEATH BENEFIT: $198,748
<TABLE>
<CAPTION>
TOTAL
PREMIUMS END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ----------------------------------------------
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
ASSUMING HYPOTHETICAL GROSS ANNUAL ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY ---------------------------------- ------------------------------------
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.
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: 45 SINGLE PREMIUM AMOUNT: $100,000
CLASS: MALE NONSMOKER GUIDELINE MINIMUM DEATH BENEFIT: $400,221
<TABLE>
<CAPTION>
TOTAL
PREMIUMS END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ----------------------------------------------
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
ASSUMING HYPOTHETICAL GROSS ANNUAL ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY ---------------------------------- ------------------------------------
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.
65
<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 YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ----------------------------------------------
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
ASSUMING HYPOTHETICAL GROSS ANNUAL ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY ---------------------------------- ------------------------------------
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.
66
<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 YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ----------------------------------------------
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
ASSUMING HYPOTHETICAL GROSS ANNUAL ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY ---------------------------------- ------------------------------------
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.
67
<PAGE>
[LOGO of PACIFIC SELECT]
Issued By: Principal Underwriter:
Pacific Mutual Life Insurance Company Pacific Mutual Distributors, Inc.
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 MUTUAL DISTRIBUTORS, INC.]
Pacific Mutual Distributors, Inc.
Member NASD & SIPC
700 NEWPORT CENTER DRIVE, NB-3
NEWPORT BEACH, CA 92660
1-800-800-7681
FORM NO. 15-15756-09
