AS FILED WITH THE SEC ON _____________. REGISTRATION NO. 33-25372
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-6
POST-EFFECTIVE AMENDMENT NO. 13
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED
ON FORM N-8B-2
-------------------
THE PRUDENTIAL VARIABLE
APPRECIABLE ACCOUNT
(Exact Name of Trust)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
PRUDENTIAL PLAZA
NEWARK, NEW JERSEY 07102-3777
(800) 437-4016, EXT. 46
(Address and telephone number of principal executive offices)
-------------------
THOMAS C. CASTANO
ASSISTANT SECRETARY
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRUDENTIAL PLAZA
NEWARK, NEW JERSEY 07102-3777
(Name and address of agent for service)
Copy to:
JEFFREY C. MARTIN
SHEA & GARDNER
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036
-------------------
Custom VAL Life Insurance Contracts--The Registrant has registered an indefinite
amount of securities pursuant to Rule 24f-2 under the Investment Company Act of
1940. The Rule 24f-2 notice for fiscal year 1995 was filed on February 29, 1996.
It is proposed that this filing will become effective (check appropriate space):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1996 pursuant to paragraph (b) of Rule 485
(date)
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485
[ ] on __________________ pursuant to paragraph (a) of Rule 485
(date)
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY FORM N-8B-2)
N-8B-2 ITEM NUMBER LOCATION
------------------ --------
1. Cover Page
2. Cover Page
3. Not Applicable
4. Sale of the Contract and Sales Commissions
5. The Prudential Variable Appreciable Account
6. The Prudential Variable Appreciable Account
7. Not Applicable
8. Not Applicable
9. Litigation
10. Brief Description of the Contract;
Short-Term Cancellation Right, or "Free
Look"; Contract Forms; Premiums; Contract
Date; Allocation of Premiums; Transfers;
Charges and Expenses; How a Contract's Cash
Surrender Value Will Vary; How a Form A
Contract's Death Benefit Will Vary; How a
Form B Contract's Death Benefit Will Vary;
Surrender of a Contract; Withdrawal of
Excess Cash Surrender Value; Increases in
Face Amount; Decreases in Face Amount; Lapse
and Reinstatement; When Proceeds are Paid;
Options on Lapse; Riders; Other General
Contract Provisions; Voting Rights;
Substitution of Series Fund Shares
11. Brief Description of the Contract; The
Prudential Variable Appreciable Account
12. Cover Page; Brief Description of the
Contract; The Prudential Series Fund, Inc.;
Sale of the Contract and Sales Commissions
13. Brief Description of the Contract; The
Prudential Series Fund, Inc.; Charges and
Expenses; Sale of the Contract and Sales
Commissions; Reduction of Charges for
Concurrent Sales to Several Individuals
14. Brief Description of the Contract;
Requirements for Issuance of a Contract
15. Brief Description of the Contract;
Allocation of Premiums; Transfers; The
Fixed-Rate Option
16. Brief Description of the Contract; Detailed
Information for Prospective Contract Owners
17. When Proceeds are Paid
18. The Prudential Variable Appreciable Account
19. Reports to Contract Owners
20. Not Applicable
21. Contract Loans
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
------------------ --------
22. Not Applicable
23. Not Applicable
24. Other General Contract Provisions
25. The Prudential Insurance Company of America
26. Brief Description of the Contract; The
Prudential Series Fund, Inc.; Charges and
Expenses
27. The Prudential Insurance Company of America;
The Prudential Series Fund, Inc.
28. The Prudential Insurance Company of America;
Directors and Officers
29. The Prudential Insurance Company of America
30. Not Applicable
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. The Prudential Insurance Company of America
36. Not Applicable
37. Not Applicable
38. Sale of the Contract and Sales Commissions
39. Sale of the Contract and Sales Commissions
40. Not Applicable
41. Sale of the Contract and Sales Commissions
42. Not Applicable
43. Not Applicable
44. Brief Description of the Contract; The
Prudential Series Fund, Inc.; How a
Contract's Cash Surrender Value Will Vary;
How a Form A Contract's Death Benefit Will
Vary; How a Form B Contract's Death Benefit
Will Vary
45. Not Applicable
46. Brief Description of the Contract; The
Prudential Variable Appreciable Account; The
Prudential Series Fund, Inc.
47. The Prudential Variable Appreciable Account;
The Prudential Series Fund, Inc.
48. Not Applicable
49. Not Applicable
50. Not Applicable
51. Not Applicable
52. Substitution of Series Fund Shares
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
------------------ --------
53. Tax Treatment of Contract Benefits
54. Not Applicable
55. Not Applicable
56. Not Applicable
57. Not Applicable
58. Not Applicable
59. Financial Statements; Financial Statements
of The Prudential Variable Appreciable
Account; Consolidated Financial Statements
of The Prudential Insurance Company of
America and Subsidiaries
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
<PAGE>
PROSPECTUS
MAY 1, 1996
THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
CUSTOM VAL(SM)
LIFE_______________
INSURANCE CONTRACTS
This prospectus describes two forms of a variable life insurance contract
offered by The Prudential Insurance Company of America ("The Prudential") under
the name Custom VAL(SM) (the "Contract").* As of December 14, 1992, these
Contracts are no longer available for sale. These Contracts provide lifetime
insurance protection as long as certain minimum scheduled premiums are paid or
are provided for by favorable investment experience. Purchasers have
considerable flexibility as to when and in what amount they pay premiums.
One form of the Contract provides a death benefit that generally remains fixed
in the amount initially selected. A second form provides a death benefit that
may vary daily with the investment performance of one or more of several
investment options selected by the Contract owner. Under both forms, the death
benefit will not be less than a guaranteed minimum amount (generally the face
amount stated in the Contract). Both forms of the Contract have cash surrender
values which increase with the payment of each premium and which vary in amount
to reflect the investment results of the investment options selected by the
owner. The cash surrender value also decreases to reflect charges made by The
Prudential. There is no guaranteed minimum cash surrender value.
A portion of the Contract's premiums and the earnings on those premiums will be
held in one or more of the following ways. They can be invested in one or more
of fifteen current subaccounts of The Prudential Variable Appreciable Account
(the "Account"). They can be allocated to a FIXED-RATE OPTION. Or, they can be
invested in The Prudential Variable Contract Real Property Account (the "REAL
PROPERTY ACCOUNT") which is described in a prospectus that is attached to this
one. If one or more of the subaccounts is chosen, the assets of each subaccount
will be invested in a corresponding portfolio of The Prudential Series Fund,
Inc. (the "Series Fund"). The attached prospectus for the Series Fund, and the
Series Fund's statement of additional information describe the investment
objectives of and the risks of investing in the fifteen portfolios of the Series
Fund currently available to Contract owners: the MONEY MARKET PORTFOLIO, the
DIVERSIFIED BOND PORTFOLIO, the GOVERNMENT INCOME PORTFOLIO, two ZERO COUPON
BOND PORTFOLIOS with different liquidation dates-- 2000 and 2005, the
CONSERVATIVE BALANCED PORTFOLIO, the FLEXIBLE MANAGED PORTFOLIO, the HIGH YIELD
BOND PORTFOLIO, the STOCK INDEX PORTFOLIO, the EQUITY INCOME PORTFOLIO, the
EQUITY PORTFOLIO, the PRUDENTIAL JENNISON PORTFOLIO, the SMALL CAPITALIZATION
STOCK PORTFOLIO, the GLOBAL PORTFOLIO, and the NATURAL RESOURCES PORTFOLIO.
Other subaccounts and portfolios may be added in the future. Interest is
credited daily upon any portion of the premium payment allocated to the
fixed-rate option at rates periodically declared by The Prudential in its sole
discretion but never less than 4%. This prospectus describes the Contracts
generally and The Prudential Variable Appreciable Account.
REPLACING EXISTING INSURANCE WITH A CONTRACT DESCRIBED IN THIS PROSPECTUS MAY
NOT BE TO YOUR ADVANTAGE. IF YOU CURRENTLY OWN A LIFE INSURANCE CONTRACT, THE
BENEFITS AND COSTS OF PURCHASING ADDITIONAL INSURANCE UNDER THE EXISTING POLICY
SHOULD BE COMPARED WITH THE BENEFITS AND COSTS OF PURCHASING THE CONTRACT
DESCRIBED IN THIS PROSPECTUS. IN MAKING THIS COMPARISON, YOU SHOULD CONSULT WITH
A QUALIFIED TAX ADVISOR.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS ATTACHED TO
A CURRENT PROSPECTUS FOR THE PRUDENTIAL SERIES FUND, INC. IT IS ALSO ATTACHED TO
A CURRENT PROSPECTUS FOR THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 437-4016, Ext. 46
*VAL is a service mark of The Prudential.
PCVAL-1 Ed 5-96
Catalog #646677J
<PAGE>
PROSPECTUS CONTENTS
PAGE
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS ....................... 1
BRIEF DESCRIPTION OF THE CONTRACT .......................................... 2
GENERAL INFORMATION ABOUT THE PRUDENTIAL, THE PRUDENTIAL VARIABLE
APPRECIABLE ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS AVAILABLE
UNDER THE CONTRACT ................................................... 4
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA .......................... 4
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT .......................... 4
THE PRUDENTIAL SERIES FUND, INC ...................................... 5
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT ............... 6
DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS ....................... 6
REQUIREMENTS FOR ISSUANCE OF A CONTRACT .............................. 6
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK" ......................... 6
CONTRACT FORMS ....................................................... 6
PREMIUMS ............................................................. 7
CONTRACT DATE ........................................................ 8
ALLOCATION OF PREMIUMS ............................................... 8
TRANSFERS ............................................................ 9
CHARGES AND EXPENSES ................................................. 10
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS ..... 12
HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY ...................... 13
HOW A FORM A CONTRACT'S DEATH BENEFIT WILL VARY ...................... 13
HOW A FORM B CONTRACT'S DEATH BENEFIT WILL VARY ...................... 14
FLEXIBILITY AS TO PAYMENT OF PREMIUMS ................................ 14
PARTICIPATION IN DIVISIBLE SURPLUS ................................... 14
SURRENDER OF A CONTRACT .............................................. 15
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE ............................ 15
INCREASES IN FACE AMOUNT ............................................. 15
DECREASES IN FACE AMOUNT ............................................. 17
WHEN PROCEEDS ARE PAID ............................................... 17
LIVING NEEDS BENEFIT ................................................. 17
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND
ACCUMULATED PREMIUMS ............................................... 18
CONTRACT LOANS ....................................................... 20
SALE OF THE CONTRACT AND SALES COMMISSIONS ........................... 21
TAX TREATMENT OF CONTRACT BENEFITS ................................... 21
WITHHOLDING .......................................................... 22
LAPSE AND REINSTATEMENT .............................................. 23
OPTIONS ON LAPSE ..................................................... 23
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS .. 24
OTHER GENERAL CONTRACT PROVISIONS .................................... 24
RIDERS ............................................................... 24
THE FIXED-RATE OPTION ................................................ 25
VOTING RIGHTS ........................................................ 25
SUBSTITUTION OF SERIES FUND SHARES ................................... 26
REPORTS TO CONTRACT OWNERS ........................................... 26
STATE REGULATION ..................................................... 26
EXPERTS .............................................................. 26
LITIGATION ........................................................... 27
ADDITIONAL INFORMATION ............................................... 27
FINANCIAL STATEMENTS ................................................. 27
DIRECTORS AND OFFICERS OF THE PRUDENTIAL ................................... 28
<PAGE>
PAGE
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT......... A1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA AND SUBSIDIARIES........................................... B1
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FOR THE
SERIES FUND, AND THE PROSPECTUS FOR THE REAL PROPERTY ACCOUNT.
<PAGE>
DEFINITIONS OF SPECIAL TERMS USED IN THIS
PROSPECTUS
ATTAINED AGE--The insured's age on the Contract date plus the number of years
since then.
CASH SURRENDER VALUE--The amount payable to the Contract owner upon surrender of
the Contract. It is equal to the Contract fund minus any applicable contingent
deferred sales and administrative charges and any Contract debt.
CONTRACT ANNIVERSARY--The same date as the Contract date in each later year.
CONTRACT DATE--The date the Contract is issued, as specified in the Contract.
CONTRACT DEBT--The principal amount of all outstanding loans plus any interest
accrued thereon.
CONTRACT FUND--The total amount credited to a specific Contract. On any date it
is equal to the sum of the amounts in all the subaccounts or other variable
investment options, the amount invested under the fixed-rate option, and the
principal amount of any Contract loan plus interest credited on that amount.
CONTRACT OWNER--The person who purchases the Contract and is entitled to
exercise the rights described therein.
CONTRACT YEAR--A year that starts on the Contract date or on a Contract
anniversary.
DEATH BENEFIT--The amount payable to the beneficiary upon the death of the
insured before the deduction of any outstanding Contract debt.
FACE AMOUNT--The initial amount of life insurance as shown on the cover page of
the Contract, or as shown in revised cover pages of the Contract following an
increase or decrease in face amount.
FIXED-RATE OPTION--An investment option under which The Prudential guarantees
that interest will be added to the amount deposited at a rate declared
periodically in advance.
GUARANTEED MINIMUM DEATH BENEFIT--The guaranteed minimum amount (generally the
face amount) payable to the beneficiary upon the death of the insured, before
the deduction of any outstanding Contract debt, if scheduled premiums are paid
on or before the due date or during the grace period. Withdrawals of excess cash
surrender value may reduce the guaranteed minimum death benefit.
GUIDELINE ANNUAL PREMIUM ("GAP")--The level annual premium payment necessary to
provide the future benefits under the Contract through maturity, based on
certain assumptions specified in an SEC rule. These assumptions include
mortality charges based on the 1980 CSO Table, an assumed annual net rate of
return of 5% per year, and deduction of the fees and charges specified in the
Contract. For purposes of this Contract, the guideline annual premium is used
only in limiting sales charges.
ISSUE AGE--The insured's age as of the Contract date.
LOAN VALUE--The maximum amount that a Contract owner may borrow.
MONTHLY DATE--The Contract date and the same date in each subsequent month.
PRIMARY PREMIUM--The scheduled premium that a Contract owner would pay if
premiums were paid annually minus the charge for taxes attributable to premiums,
$38 and any extra premiums for riders or substandard risks.
SUBACCOUNT--An investment division of the Account, the assets of which are
invested in the shares of the corresponding portfolio of the Series Fund.
TABULAR CONTRACT FUND VALUE--The tabular Contract fund value for each Contract
year is an amount that is slightly less than the Contract fund value that would
result as of the end of such year if only scheduled premiums were paid when due,
the selected investment options earned a net return at a uniform rate of 4% per
year, full mortality charges based upon the 1980 CSO Table were deducted,
maximum sales load and expense charges were deducted, and there was no Contract
debt.
THE PRUDENTIAL SERIES FUND, INC. (THE "SERIES FUND")--A mutual fund with
separate portfolios, one or more of which may be chosen as an underlying
investment for the Contract.
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT (THE "ACCOUNT")--A separate account
of The Prudential registered as a unit investment trust under the
Investment Company Act of 1940.
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT (THE "REAL PROPERTY
ACCOUNT")--A separate account of The Prudential which invests, through a
partnership, primarily in income-producing real property.
VALUATION PERIOD--The period of time from one determination of the value of the
amount invested in a subaccount to the next. Such determinations are made when
the net asset values of the portfolios of the Series Fund are calculated, which
is generally at 4:15 p.m. New York City time on each day during which the New
York Stock Exchange is open.
1
<PAGE>
BRIEF DESCRIPTION OF THE CONTRACT
This variable life insurance contract (the "Contract") provides features that
differ from those of other life insurance contracts offered by The Prudential
Insurance Company of America ("The Prudential") that may make it attractive to
and suitable for certain purchasers. It is a variable contract, which means that
the cash surrender value it provides and, in some cases, the amount payable upon
the death of the insured, will depend upon the investment performance of the
variable investment options selected by the Contract owner in which the amounts
credited under the Contract are invested. The Contract sets forth an initial
face amount of insurance and a schedule of premiums which, if paid when due or
in advance, guarantees that at least that amount of insurance will be payable
upon the death of the insured. As of December 14, 1992, these Contracts are no
longer available for sale.
The Contract is available only to persons who choose an initial face amount of
insurance of $200,000 or more and who wish to provide for a schedule of
increasing premiums instead of a schedule of premiums that stays at the same or
"level" amount, as they do under most "whole life" insurance Contracts. For
Contracts that provide an initial face-amount of insurance of over $200,000, a
purchaser has a choice, within specified limits, of what that increasing
schedule of premiums will be. This choice should be made only after careful
discussion with a Prudential representative. There are advantages to fixing the
first year's premium at the low end of the permissible range, with succeeding
premiums increasing more rapidly, over a choice of a higher initial premium with
succeeding premiums still increasing, but more slowly. There are also
disadvantages and both are discussed more fully in the body of this prospectus.
At the time the Contract is purchased, the Contract owner decides in which of
the many available investment options the amounts held under the
Contract--derived from the payment of premiums and the earnings thereon--will be
invested. The cash surrender value of the Contract will increase with favorable
investment experience and decrease with unfavorable investment experience. The
cash surrender value of a Contract also reflects the imposition of the various
Contract charges. The Contract owner may, from time to time, change the way in
which future premiums will be allocated and transfer amounts already invested
under the Contract among the various investment options.
The owner may choose either of the two Contract Forms. Under Contract Form A,
the cash surrender value will vary with investment experience but the death
benefit generally will not change, except under certain circumstances described
later. Under Contract Form B, both the death benefit and the cash surrender
value will vary with investment experience, but the death benefit will never be
less than the face amount regardless of investment experience. See HOW A FORM A
CONTRACT'S DEATH BENEFIT WILL VARY, page 13 and HOW A FORM B CONTRACT'S DEATH
BENEFIT WILL VARY, page 14. There is no minimum cash surrender value under
either form of the Contract. Throughout this prospectus, unless specifically
stated otherwise, all descriptions of and references to the "Contract" apply to
both Form A and Form B Contracts. The owner of a Contract has the right under
certain conditions to increase or decrease the face amount of insurance. In the
case of an increase in face amount, one of the conditions is the provision of
evidence of insurability satisfactory to The Prudential. See INCREASES IN FACE
AMOUNT, page 15 and DECREASES IN FACE AMOUNT, page 17.
If the scheduled premiums are paid by their due dates or within a 61-day grace
period the Contract will not lapse, even if investment experience is
unfavorable. Thus, the payment of scheduled premiums guarantees insurance
protection at least equal to the face amount of the Contract. A Contract owner,
however, is not required to adhere precisely to the schedule. The owner may,
within very broad limits, pay greater than scheduled premiums and the net
portion of such payments will promptly be invested in the manner previously
selected by the owner. Cash surrender values will increase whenever premiums are
paid. The failure to pay a scheduled premium, on the other hand, will not
necessarily result in lapse of the Contract. If the net investment experience
has been sufficiently favorable, with a consequent increase in the amount
credited under the Contract, and the Contract owner then fails to pay a premium
when due, The Prudential will use the "excess" amount to pay the charges due
under the Contract and thus keep the Contract in force. So long as the excess
amount is sufficient, the Contract will not lapse despite the owner's failure to
pay scheduled premiums. See LAPSE AND REINSTATEMENT, page 23.
The premium schedule, which will be set forth in the Contract, depends on the
Contract's face amount, the insured's sex (except where unisex rates apply) and
age at issue, the insured's risk classification, the rate for taxes attributable
to premiums, the frequency with which premium payments are made and, for
Contracts providing more than $200,000 of insurance, the initial premium
selected by the purchaser. That initial premium, however, may not, in any event,
be less than a minimum amount fixed by The Prudential. The scheduled premiums
will increase in each year until the Contract anniversary after the insured's
65th birthday, or, if later, 7 years from the date the Contract is issued, at
which time the scheduled premium will increase more significantly and then will
not change for the remainder of the insured's life. The actual amount that will
be payable after that Contract anniversary may and often will, however, be lower
than that maximum amount. See PREMIUMS, page 7.
2
<PAGE>
There are circumstances, such as the payment of premiums substantially in excess
of scheduled premiums, under which the Contract may become a Modified Endowment
Contract under federal tax law. If it does, loans and other pre-death
distributions are includible in gross income on an income-first basis. A 10%
penalty tax may be imposed on income distributed before the insured attains age
59 1/2. Prospective purchasers and Contract owners are advised to consult a
qualified tax advisor before taking steps that may affect whether the Contract
becomes a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS,
page 21.
The owner of a Contract may choose to have the premiums (after deduction of an
amount needed to pay taxes attributable to premiums, and a $2 administrative
charge) invested in one or more of fifteen subaccounts of The Prudential
Variable Appreciable Account (the "Account"). Each subaccount is invested in a
corresponding portfolio of The Prudential Series Fund, Inc. (the "Series Fund"),
a series mutual fund for which The Prudential is the investment advisor. The
MONEY MARKET PORTFOLIO is invested in short-term debt obligations similar to
those purchased by money market funds; the DIVERSIFIED BOND PORTFOLIO (formerly
the Bond Portfolio) is invested primarily in high quality medium-term corporate
and government debt securities; the GOVERNMENT INCOME PORTFOLIO (formerly the
Government Securities Portfolio) is invested primarily in U.S. Government
Securities including intermediate and long-term U.S. Treasury securities and
debt obligations issued by agencies of or instrumentalities established,
sponsored or guaranteed by the U.S. Government; the ZERO COUPON BOND
PORTFOLIOS-- 2000 and 2005 are invested primarily in debt obligations of the
United States Treasury and investment grade corporations that have been issued
without interest coupons or stripped of their unmatured interest coupons,
interest coupons that have been stripped from such debt obligations, and
receipts and certificates for such stripped debt obligations and stripped
coupons; the CONSERVATIVE BALANCED PORTFOLIO (formerly the Conservatively
Managed Flexible Portfolio) is invested in a mix of money market instruments,
fixed income securities, and common stocks, in proportions believed by the
investment manager to be appropriate for an investor who desires diversification
of investment who prefers a relatively lower risk of loss and a correspondingly
reduced chance of high appreciation; the FLEXIBLE MANAGED PORTFOLIO (formerly
the Aggressively Managed Flexible Portfolio) is invested in a mix of money
market instruments, fixed income securities, and common stocks, in proportions
believed by the investment manager to be appropriate for an investor desiring
diversification of investment who is willing to accept a relatively high level
of loss in an effort to achieve greater appreciation; the HIGH YIELD BOND
PORTFOLIO is invested primarily in high yield fixed income securities of medium
to lower quality, also known as high risk bonds; the STOCK INDEX PORTFOLIO is
invested in common stocks selected to duplicate the price and yield performance
of the Standard & Poor's 500 Composite Stock Price Index; the EQUITY INCOME
PORTFOLIO (formerly the High Dividend Stock Portfolio) is invested primarily in
common stocks and convertible securities that provide favorable prospects for
investment income returns above those of the Standard & Poor's 500 Stock Index
or the NYSE Composite Index; the EQUITY PORTFOLIO (formerly the Common Stock
Portfolio) is invested primarily in common stocks; the PRUDENTIAL JENNISON
PORTFOLIO (formerly the Growth Stock Portfolio) is invested primarily in equity
securities of established companies with above-average growth prospects; the
SMALL CAPITALIZATION STOCK PORTFOLIO is invested primarily in equity securities
of publicly-traded companies with small market capitalization; the GLOBAL
PORTFOLIO (formerly the Global Equity Portfolio) is invested in common stocks
and common stock equivalents (such as convertible debt securities) of foreign
and domestic insurers; and the NATURAL RESOURCES PORTFOLIO is invested primarily
in common stocks and convertible securities of natural resource companies, and
in securities (typically debt securities or preferred stock) the terms of which
are related to the market value of a natural resource. Further information about
the Series Fund portfolios can be found under THE PRUDENTIAL SERIES FUND, INC.
on page 5.
The Contract owner may also choose to invest part of his or her net premiums in
The Prudential Variable Contract Real Property Account ("Real Property
Account"), which through a partnership invests primarily in income-producing
real property. The investment objectives of the Real Property Account and the
partnership are described briefly under THE PRUDENTIAL VARIABLE CONTRACT REAL
PROPERTY ACCOUNT on page 6.
Because the assets that relate to the Contract may be invested in these various
investment options, the Contract offers an opportunity for the cash surrender
value to appreciate more rapidly than it would under comparable fixed-benefit
insurance. The owner, however, must accept the risk that if investment
performance is unfavorable the cash surrender value may not appreciate as
rapidly and, indeed, may decrease in value. Contract owners who prefer to avoid
this risk may elect to allocate part or all of the net premiums in a fixed-rate
option under which a stated interest rate is credited to the amount invested
under that option. See THE FIXED-RATE OPTION, page 25.
The Prudential deducts certain charges from each premium payment and from the
amounts held in the designated investment options. In addition, The Prudential
makes certain additional charges if a Contract lapses or is surrendered during
the first 10 Contract years. All these charges, which are largely designed to
cover insurance costs and risks as well as sales and administrative expenses,
are fully described under CHARGES AND EXPENSES on page 10. In brief, and subject
to that fuller description, the following charges may be made: (1) $2 is
deducted from each premium payment to cover premium collection and processing
costs; (2) a charge for taxes attributable to premiums is deducted from each
premium payment; (3) each month, the Contract fund is reduced by an
administrative charge of $6 per Contract plus $0.01 per $1,000 for face amounts
exceeding $100,000; (4) each month, a sales charge is deducted from the Contract
fund in the amount of 1/2 of 1% of the primary annual
3
<PAGE>
premium; The Prudential now intends to make this charge only for the first 5
Contract years; in addition, a contingent deferred sales charge is assessed if
the Contract lapses or is surrendered during the first 10 years; the charge is
25% of the primary premium for Contracts that terminate in the first year and it
increases by 5% each year for 5 years after which it decreases uniformly until
it becomes zero after the tenth year; (5) each month, the Contract fund is
reduced by a guaranteed minimum death benefit risk charge of not more than $0.01
per $1,000 of the face amount of insurance; (6) each month, a charge for
anticipated mortality is deducted, with the maximum charge based on the
non-smoker/smoker 1980 CSO Tables; (7) a daily charge equivalent to an annual
rate of up to 0.6% is deducted from the assets of the subaccounts for mortality
and expense risks; (8) if the Contract lapses or is surrendered during the first
10 years, a contingent deferred administrative charge is assessed; during the
first 5 years, this charge equals $5 per $1,000 of face amount and it begins to
decline uniformly after the fifth Contract year so that it disappears on the
tenth Contract anniversary; (9) an administrative processing charge equal to the
lesser of $15 or 2% of the amount withdrawn will be made in connection with each
withdrawal of excess cash surrender value; (10) an administrative processing
charge of $15 may be made in connection with each decrease in face amount; (11)
if the Contract includes riders, a monthly deduction from the Contract fund will
be made for charges applicable to those riders; and (12) certain fees and
expenses are deducted from the assets of the Series Fund and Real Property
Account. Because of these charges, and in particular because of the significant
charges deducted upon early surrender or lapse, prospective purchasers should
purchase a Contract only if they intend and have the financial capability to
keep it in force for a substantial period.
For a limited time, a Contract may be returned for a refund in accordance with
the terms of its "free look" provision. See SHORT-TERM CANCELLATION RIGHT OR
"FREE LOOK," page 6.
This Summary provides only a brief overview of the more significant aspects of
the Contract. Further detail is provided in the subsequent sections of this
prospectus and in the Contract document. That document, together with the
application attached to it, constitutes the entire agreement between the owner
and The Prudential and should be retained.
For the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1.
GENERAL INFORMATION ABOUT THE PRUDENTIAL,
THE PRUDENTIAL VARIABLE APPRECIABLE
ACCOUNT, AND THE VARIABLE INVESTMENT
OPTIONS AVAILABLE UNDER THE CONTRACT
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
The Prudential Insurance Company of America ("The Prudential") is a mutual
insurance company, founded in 1875 under the laws of the State of New Jersey. It
is licensed to sell life insurance and annuities in the District of Columbia,
Guam, and in all states.
The Prudential's consolidated financial statements begin on page B1 and should
be considered only as bearing upon The Prudential's ability to meet its
obligations under the Contracts.
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
The Prudential Variable Appreciable Account (the "Account") was established on
August 11, 1987 under New Jersey law as a separate investment account. The
Account meets the definition of a "separate account" under the federal
securities laws. The Account holds assets that are segregated from all of The
Prudential's other assets.
The obligations to Contract owners and beneficiaries arising under the Contract
are general corporate obligations of The Prudential. The Prudential is also the
legal owner of the assets in the Account. The Prudential will at all times
maintain assets in the Account with a total market value at least equal to the
reserve and other liabilities relating to the variable benefits attributable to
the Account. These assets may not be charged with liabilities which arise from
any other business The Prudential conducts. In addition to these assets, the
Account's assets may include funds contributed by The Prudential to commence
operation of the Account and may include accumulations of the charges The
Prudential makes against the Account. From time to time these additional assets
will be transferred to The Prudential's general account. Before making any such
transfer, The Prudential will consider any possible adverse impact the transfer
might have on the Account.
The Account is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 ("1940 Act") as a unit investment
trust, which is a type of investment company. This does not involve any
supervision by the SEC of the management or investment policies or practices of
the Account. For state law purposes, the Account is treated as a part or
division of The Prudential. There are currently fifteen subaccounts within the
Account, each of which invests in a single corresponding portfolio of The
Prudential Series
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Fund, Inc. Additional subaccounts may be added in the future. The Account's
financial statements begin on page A1.
THE PRUDENTIAL SERIES FUND, INC.
The Prudential Series Fund, Inc. (the "Series Fund") is registered under the
1940 Act as an open-end diversified management investment company. Its shares
are currently sold only to separate accounts of The Prudential and certain other
insurers that offer variable life insurance and variable annuity contracts. The
Account will purchase and redeem shares from the Series Fund at net asset value.
Shares will be redeemed to the extent necessary for The Prudential to provide
benefits under the Contract and to transfer assets from one subaccount to
another, as requested by Contract owners. Any dividend or capital gain
distribution received from a portfolio of the Series Fund will be reinvested
immediately at net asset value in shares of that portfolio and retained as
assets of the corresponding subaccount.
The Prudential is the investment advisor for the assets of each of the
portfolios of the Series Fund. The Prudential's principal business address is
Prudential Plaza, Newark, New Jersey 07102-3777. The Prudential has a Service
Agreement with its wholly-owned subsidiary The Prudential Investment Corporation
("PIC"), which provides that, subject to The Prudential's supervision, PIC will
furnish investment advisory services in connection with the management of the
Series Fund. In addition, The Prudential has entered into a Subadvisory
Agreement with its wholly-owned subsidiary Jennison Associates Capital
Corporation ("Jennison"), under which Jennison furnishes investment advisory
services in connection with the management of the Prudential Jennison Portfolio.
Further detail is provided in the prospectus and statement of additional
information for the Series Fund. The Prudential, PIC, and Jennison are
registered as investment advisors under the Investment Advisers Act of 1940.
As an investment advisor, The Prudential charges the Series Fund a daily
investment management fee as compensation for its services. The following table
shows the investment management fee charged for each portfolio of the Series
Fund available for investment by Contract owners.
- --------------------------------------------------------------------------------
ANNUAL INVESTMENT
PORTFOLIO MANAGEMENT FEE AS
A PERCENTAGE OF AVERAGE
DAILY NET ASSETS
- --------------------------------------------------------------------------------
Money Market Portfolio 0.40%
Diversified Bond Portfolio 0.40%
Government Income Portfolio 0.40%
Zero Coupon Bond Portfolios 0.40%
Conservative Balanced Portfolio 0.55%
Flexible Managed Portfolio 0.60%
High Yield Bond Portfolio 0.55%
Stock Index Portfolio 0.35%
Equity Income Portfolio 0.40%
Equity Portfolio 0.45%
Prudential Jennison Portfolio 0.60%
Small Capitalization Stock Portfolio 0.40%
Global Portfolio 0.75%
Natural Resources Portfolio 0.45%
- --------------------------------------------------------------------------------
In addition to the investment management fee, each portfolio incurs certain
expenses, such as accounting and custodian fees. The Prudential, on a
non-guaranteed basis, makes daily adjustments that will offset the effect on
Contract owners of some of these expenses incurred by certain portfolios. The
Prudential currently makes such adjustments to ensure that the portfolio
expenses indirectly borne by a Contract owner investing in: (1) the Zero Coupon
Bond Portfolios will not exceed the investment management fee; and: (2) the High
Yield Bond, Stock Index, Equity Income, and Natural Resources Portfolios will
not exceed the investment management fee plus 0.1% of the average daily net
assets of the portfolio.
Without such adjustments the portfolio expenses indirectly borne by a Contract
owner, expressed as a percentage of the average daily net assets by portfolio,
would have been 0.48% for the Zero Coupon Bond Portfolio 2000, 0.49% for the
Zero Coupon Bond Portfolio 2005 during 1995. The Prudential does not intend to
discontinue these adjustments in the future, although it retains the right to do
so. No such adjustments were necessary for the High Yield Bond, Stock Index,
Equity Income and Natural Resources Portfolios in 1995.
It is conceivable that in the future it may become disadvantageous for both
variable life insurance and variable annuity contract separate accounts to
invest in the same underlying mutual fund. Although neither the companies which
invest in the Series Fund, nor the Series Fund currently foresees any such
disadvantage, the Series Fund's
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Board of Directors intends to monitor events in order to identify any material
conflict between variable life insurance and variable annuity contract owners
and to determine what action, if any, should be taken in response thereto.
Material conflicts could result from such things as: (1) changes in state
insurance law; (2) changes in federal income tax law; (3) changes in the
investment management of any portfolio of the Series Fund; or (4) differences
between voting instructions given by variable life insurance and variable
annuity contract owners.
A FULL DESCRIPTION OF THE SERIES FUND, ITS INVESTMENT OBJECTIVES, MANAGEMENT,
POLICIES, AND RESTRICTIONS, ITS EXPENSES, THE RISKS ATTENDANT TO INVESTMENT
THEREIN--INCLUDING ANY RISKS ASSOCIATED WITH INVESTMENT IN THE HIGH YIELD BOND
PORTFOLIO, AND ALL OTHER ASPECTS OF ITS OPERATION IS CONTAINED IN THE ATTACHED
PROSPECTUS FOR THE SERIES FUND AND IN ITS STATEMENT OF ADDITIONAL INFORMATION,
WHICH SHOULD BE READ IN CONJUNCTION WITH THIS PROSPECTUS. THERE IS NO ASSURANCE
THAT THE INVESTMENT OBJECTIVES WILL BE MET.
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
The Prudential Variable Contract Real Property Account (the "Real Property
Account") is a separate account of The Prudential that, through a general
partnership formed by The Prudential and two of its subsidiaries, invests
primarily in income-producing real property such as office buildings, shopping
centers, agricultural land, hotels, apartments or industrial properties. It also
invests in mortgage loans and other real estate-related investments, including
sale-leaseback transactions. The objectives of the Real Property Account and the
partnership are to preserve and protect capital, provide for compounding of
income as a result of reinvestment of cash flow from investments, and provide
for increases over time in the amount of such income through appreciation in the
value of assets.
The partnership has entered into an investment management agreement with The
Prudential, under which The Prudential selects the properties and other
investments held by the partnership. The Prudential charges the partnership a
daily fee for investment management which amounts to 1.25% per year of the
average daily gross assets of the partnership.
A FULL DESCRIPTION OF THE REAL PROPERTY ACCOUNT, ITS MANAGEMENT, POLICIES, AND
RESTRICTIONS, ITS CHARGES AND EXPENSES, THE RISKS ATTENDANT TO INVESTMENT
THEREIN, THE PARTNERSHIP'S INVESTMENT OBJECTIVES, AND ALL OTHER ASPECTS OF THE
REAL PROPERTY ACCOUNT'S AND THE PARTNERSHIP'S OPERATIONS IS CONTAINED IN THE
ATTACHED PROSPECTUS FOR THE REAL PROPERTY ACCOUNT, WHICH SHOULD BE READ TOGETHER
WITH THIS PROSPECTUS BY ANY CONTRACT OWNER CONSIDERING THE REAL ESTATE
INVESTMENT OPTION. THERE IS NO ASSURANCE THAT THE INVESTMENT OBJECTIVES WILL BE
MET.
DETAILED INFORMATION FOR PROSPECTIVE CONTRACT
OWNERS
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
As of December 14, 1992, these Contracts are no longer available for sale. The
minimum initial guaranteed death benefit that can be applied for is $200,000.
The Contract may generally be issued on insureds between the ages of 20 and 79.
Before issuing any Contract, The Prudential requires evidence of insurability
which will include a medical examination. Non-smokers who meet preferred
underwriting requirements are offered the most favorable premium rate. A higher
premium is charged if an extra mortality risk is involved. These are the current
underwriting requirements. The Company reserves the right to change them on a
non-discriminatory basis.
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
Generally, a Contract may be returned for a refund within 10 days after it is
received by the Contract owner, within 45 days after Part I of the application
for insurance is signed or within 10 days after The Prudential mails or delivers
a Notice of Withdrawal Right, whichever is latest. Some states allow a longer
period of time during which a Contract may be returned for a refund. A refund
can be requested by mailing or delivering the Contract to the representative who
sold it or to The Prudential Home Office specified in the Contract. A Contract
returned according to this provision shall be deemed void from the beginning.
The Contract owner will then receive a refund of all premium payments made, plus
or minus any change due to investment experience in the value of the invested
portion of the premiums, calculated as if no charges had been made against the
Account or the Series Fund. However, if applicable law so requires, the Contract
owner who exercises his or her short-term cancellation right will receive a
refund of all premium payments made, with no adjustment for investment
experience.
CONTRACT FORMS
A purchaser may select either of two forms of the Contract. Contract Form A has
a death benefit equal to the initial face amount of insurance. The death benefit
of a Form A Contract does not vary with the investment performance of the
investment options selected by the owner, except in certain circumstances. See
HOW A FORM A CONTRACT'S DEATH BENEFIT WILL VARY, page 13. Favorable investment
results of the variable investment options
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to which the assets related to the Contract are allocated and payment of greater
than scheduled premiums will generally result in increases in the cash surrender
value. See HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY, page 13.
Contract Form B also has an initial face amount of insurance but favorable
investment performance and payment of greater than scheduled premiums generally
result in an increase in the death benefit as well as in the cash surrender
value. Over time, however, the increase in the cash surrender value will be less
than under the Form A Contract. See HOW A CONTRACT'S CASH SURRENDER VALUE WILL
VARY, page 13 and HOW A FORM B CONTRACT'S DEATH BENEFIT WILL VARY, page 14.
Unfavorable investment performance will result in decreases in the death benefit
(but never below the face amount stated in the Contract) and in the cash
surrender value.
Purchasers should select the Form that best meets their needs and objectives.
Purchasers who prefer to have favorable investment results and the payment of
greater than scheduled premiums emerge partly in the form of an increased death
benefit and partly in the form of increased cash surrender values should choose
Contract Form B. Purchasers who are satisfied with the amount of their insurance
coverage and wish to have favorable investment results and additional premiums
reflected to the maximum extent in increasing cash surrender values should
choose Contract Form A. See HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY,
page 13.
In choosing a Contract Form, purchasers should also consider whether they intend
to use the withdrawal feature. Purchasers of Form A Contracts should note that
an early withdrawal may result in a portion of the surrender charge being
deducted from the Contract fund. Furthermore, a purchaser of a minimum face
amount Form A Contract cannot make withdrawals unless the Contract's death
benefit has been increased to an amount in excess of the initial face amount.
Purchasers of Form B Contracts will not incur a surrender charge for a
withdrawal and are not precluded from making withdrawals if they purchase a
minimum size Contract. See WITHDRAWAL OF EXCESS CASH SURRENDER VALUE, page 15.
PREMIUMS
Although Contract owners have the right to decide when to make premium payments
and in what amounts (see FLEXIBILITY AS TO PAYMENT OF PREMIUMS, page 14), each
Contract sets forth a premium schedule which, if paid, ensures that the Contract
will not lapse.
The initial scheduled premium amount is payable on the Contract date (the date
the Contract is issued, as noted in each individual Contract) and subsequent
premiums, which will be in increasing amounts, are payable on each subsequent
due date. These due dates will be annual, semi-annual, quarterly or monthly, as
selected by the purchaser. Contract owners who pay premiums other than on a
monthly basis will receive notice that a premium is due about 3 weeks before
each due date. Contract owners who pay premiums monthly will receive each year a
book with twelve coupons that will serve as a reminder. With The Prudential's
consent, an owner may change the frequency of premium payments.
As stated in the Summary, for Contracts with an initial face-amount of insurance
of exactly $200,000, the Contract will set forth a schedule of premiums
determined by The Prudential. For Contracts with higher initial face amounts,
each Contract owner may choose what the initial premium will be, as long as it
is greater than a minimum amount that depends upon the Contract's face amount,
the insured's sex (except where unisex rates apply) and age at issue, the
insured's risk classification, the rate for taxes attributable to premiums, and
the selected frequency of premium payments. Your Prudential representative will
inform you what that minimum amount is for any specified insured person.
Subsequent scheduled premiums will be in increasing amounts (with the rate of
increase dependent upon the amount of the initial premium--a lower initial
premium results in a higher rate of increase in the amounts of subsequent
premiums) until the Contract anniversary following the insured's 65th birthday,
or the seventh anniversary if later, after which the amount of the scheduled
premium will not change. The Contract will set forth the schedule of premiums
chosen by the purchaser as well as the maximum scheduled premium amount
(excluding the charge for taxes attributable to premiums) that will be due on
and after that anniversary. This maximum amount will generally be significantly
higher than the premium for the preceding year. However, if the amount invested
under the Contract, net of any excess premiums, is higher than it would have
been if only scheduled premiums had been paid, if maximum mortality and expense
charges had been deducted, and if a uniform net rate of return of 4% had been
earned by the selected investment options, The Prudential will recompute the
premium amount payable after that anniversary and the new premium can be
expected to be less than the maximum premium amount stated in the Contract. The
tables at pages T1 through T8 show what the maximum premium will be after age 65
and what the actual premium would be for certain hypothetical investment results
and if lower than maximum charges are made, as is currently contemplated.
To illustrate the range of premium schedules available, the following table
shows what the scheduled premiums might be for a 40 year old male in the
preferred rating class. One column shows the result of choosing the lowest
permissible initial premium; the second column shows what premium schedule would
result if a relatively high initial premium were to be chosen.
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- --------------------------------------------------------------------------------
FACE AMOUNT OF INSURANCE--$300,000
ILLUSTRATIVE PREMIUMS
- --------------------------------------------------------------------------------
MALE AGE EXAMPLE NO. 1 EXAMPLE NO. 2
- --------------------------------------------------------------------------------
40 $ 1,713.27 $ 2,472.45
45 $ 1,941.84 $ 2,586.73
50 $ 2,301.02 $ 2,766.33
55 $ 2,962.24 $ 3,096.94
60 $ 4,052.04 $ 3,641.84
64 $ 5,515.31 $ 4,373.47
65 and over $16,980.61 $15,411.22
- --------------------------------------------------------------------------------
The Prudential designed this Contract in order to accommodate the needs of a
class of persons who wish and are able to purchase a substantial amount of life
insurance but whose current financial situations may vary considerably.
Establishing a premium schedule with the lowest permissible initial premium is
suitable only for those persons who can confidently predict that their incomes
will increase as they grow older and that they will be able to pay the
significantly larger scheduled premiums that result from the choice of a low
initial premium. Although failure to pay scheduled premiums when due does not
mean that the Contract will necessarily lapse, (see LAPSE AND REINSTATEMENT,
page 23), The Prudential does guarantee that the Contract will not lapse if the
scheduled premiums are paid when due. The payment of lower premiums during the
early years of a Contract means that there will be a smaller Contract fund
credited to the Contract so that there is a reduced possibility that there will
be an "excess amount" available to prevent the lapse of the Contract if a
scheduled premium is not paid. The purchase of a Contract and payment of
premiums for several years followed by the lapse of the Contract because of the
inability to pay the increased premiums would be imprudent and wasteful. A high
price would have been paid and the purchaser would have received only a small
part of the benefits available under the Contract.
If a Contract owner wishes, he or she may select a higher contemplated premium
schedule than the premium schedule set forth in the Contract. The Prudential
will bill the owner for the chosen higher premiums. In general, the regular
payment of higher premiums will result in higher cash surrender values and, at
least under Form B, in higher death benefits.
The payment of premiums substantially in excess of scheduled premiums may cause
the Contract to be classified as a Modified Endowment Contract for federal
income tax purposes. See TAX TREATMENT OF CONTRACT BENEFITS, page 21.
Certain term riders on term policies issued by The Prudential may provide for a
conversion premium credit if the rider or policy is converted to a Prudential
whole-life policy, including the Contracts described in this prospectus. If a
Contract is purchased through exercise of such a conversion privilege, the first
year's scheduled premium will be reduced by the amount of the premium credit.
The Prudential will add to first year scheduled premiums paid by the Contract
owner the pro rata portion of the premium credit.
CONTRACT DATE
When the first premium payment is paid with the application for a Contract, the
Contract date will ordinarily be the later of the date of the application or the
date of the medical examination. If the first premium is not paid with the
application, the Contract date will ordinarily be 2 or 3 days after the
application is approved by The Prudential so that it will coincide with or be
shortly prior to the date on which the first premium is paid. Under certain
circumstances, The Prudential will permit a Contract to be back-dated but only
to a date not earlier than 6 months prior to the date of the application. It may
be advantageous for a Contract owner to have an earlier Contract date since that
may result in the use by The Prudential of a lower issue age in determining the
amount of the scheduled premium. The Prudential will require the payment of all
premiums that would have been due had the application date coincided with the
back-dated Contract date. The death benefit and cash surrender value under the
Contract will be equal to what they would have been had the Contract been issued
on the Contract date, all scheduled premiums been received on their due dates,
and all Contract charges been made. See CHARGES AND EXPENSES, page 10.
ALLOCATION OF PREMIUMS
On the Contract date, a $2 processing charge and the charge for taxes
attributable to premiums are deducted from the initial premium, and the first
monthly deductions are made. See CHARGES AND EXPENSES, page 10. The remainder of
the initial scheduled premium will be allocated on the Contract date among the
subaccounts, the fixed-rate option or the Real Property Account according to the
desired allocation specified in the application form. The invested portion of
any part of the first premium in excess of the scheduled initial premium, as
well as the
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invested portion of all subsequent premiums, are placed in the selected
investment option[s] on the date of receipt, but not earlier than the Contract
date. Thus, to the extent that the receipt of the first premium precedes the
Contract date, there will be a period during which the Contract owner's initial
premium will not be invested. The $2 per payment charge and the charge for taxes
attributable to premiums also apply to all subsequent premium payments; the
remainder will be placed when received by The Prudential in the subaccount[s],
the fixed-rate option or the Real Property Account in accordance with the
allocation previously designated by the Contract owner. Provided the Contract is
not in default, Contract owners may change the way in which subsequent premiums
are allocated by giving written notice to The Prudential Home Office stated in
the Contract or by telephoning their Prudential Home Office, provided the
Contract owner is enrolled to use the Telephone Transfer System. There is no
charge for reallocating future premiums. If any part of the invested portion of
a premium is allocated to a particular investment option, that portion must be
at least 10% on the date the allocation takes effect. All percentage allocations
must be in whole numbers. For example, 33% can be selected but 33 1/3% cannot.
Of course, the total allocation of all selected investment options must equal
100%.
Additionally, a feature called Dollar Cost Averaging ("DCA") is available to
Contract owners. Under this feature, premiums may be allocated to the portion of
the Money Market subaccount used for this feature (the "DCA account"), and
designated dollar amounts will be transferred monthly from the DCA account to
other investment options available under the Contract, excluding the Money
Market subaccount and the fixed-rate option, but including the Real Property
Account. Automatic monthly transfers must be at least 3% of the amount allocated
to the DCA account (that is, if $5,000 is designated, the minimum monthly
transfer is $150), with a minimum of $20 transferred into any one investment
option. These amounts are subject to change at The Prudential's discretion. The
minimum transfer amount will only be recalculated if the amount designated for
transfer is increased.
Currently, the amount initially designated to DCA must be at least $2,000. This
minimum is subject to change at The Prudential's discretion. After DCA has been
established and as long as the DCA account has a positive balance, Contract
owners may allocate or transfer amounts to the DCA account, subject to the
limitations on premium payments and transfers generally. In addition, if
premiums are paid on an annual or semi-annual basis, and the Contract owner has
already established DCA, the premium allocation instructions may include an
allocation of all or a portion of all your premium payments to the DCA account.
Each automatic monthly transfer will take effect as of the end of the valuation
period on the Monthly Date, provided the New York Stock Exchange ("NYSE") is
open on that date. If the NYSE is not open on the Monthly Date, the transfer
will take effect as of the end of the valuation period on the next day that the
NYSE is open. If the Monthly Date does not occur in a particular month (e.g.,
February 30), the transfer will take effect as of the end of the valuation
period on the last day of the month that the NYSE is open. Automatic monthly
transfers will continue until the balance in the DCA account reaches zero, or
until the Contract owner gives notification of a change in allocation or
cancellation of the feature. If the Contract has outstanding premium allocation
to the DCA account, but the DCA option has previously been canceled, premiums
allocated to the DCA account will be allocated to the Money Market subaccount.
Currently, there is no charge for using the DCA feature.
TRANSFERS
If the Contract is not in default, or if the Contract is in force as variable
reduced paid-up insurance (see OPTIONS ON LAPSE, page 23), the owner may, up to
four times in each Contract year, transfer amounts from one subaccount to
another subaccount, to the fixed-rate option or to the Real Property Account.
All or a portion of the amount credited to a subaccount may be transferred. A
Contract owner who wishes to convert his or her variable Contract to a
fixed-benefit Contract may do so by requesting a transfer of the entire amount
held under the Contract to the fixed-rate option and by changing his or her
allocation instructions regarding future premiums.
Transfers among subaccounts will take effect as of the end of the valuation
period in which a proper transfer request is received at a Prudential Home
Office. The request may be in terms of dollars, such as a request to transfer
$10,000 from one subaccount to another, or may be in terms of a percentage
reallocation among subaccounts. In the latter case, as with premium
reallocations, the percentages must be in whole numbers. The Contract owner may
transfer amounts by proper written notice to a Prudential Home Office, or by
telephone, provided the Contract owner is enrolled to use the Telephone Transfer
System. A Contract owner will automatically be enrolled to use the Telephone
Transfer System unless the Contract owner elects not to have this privilege. The
Prudential has adopted procedures designed to ensure that requests by telephone
are genuine. The Prudential will not be held liable for following telephone
instructions that it reasonably believes to be genuine. The Prudential cannot
guarantee that owners will be able to get through to complete a telephone
transfer during peak periods such as periods of drastic economic or market
change.
On the liquidation date of a Zero Coupon Bond Subaccount, all the shares held by
it in the corresponding portfolio of the Series Fund will be redeemed and the
proceeds of the redemption applicable to each Contract will be
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transferred to the Money Market Subaccount unless the Contract owner directs
that it be transferred to another subaccount. Affected Contract owners will be
notified in writing and given the opportunity to transfer their proceeds to
another subaccount prior to the liquidation date. A transfer that occurs upon
the liquidation date of a Zero Coupon Bond Subaccount will not be counted as one
of the four permissible transfers in a Contract year.
Transfers from the fixed-rate option to the subaccounts or the Real Property
Account are currently permitted once each Contract year and only during the
30-day period beginning on the Contract anniversary. The maximum amount which
may be transferred out of the fixed-rate option each year is currently the
greater of: (a) 25% of the amount in the fixed-rate option, or (b) $2,000. Such
transfer requests prior to the Contract anniversary will be effected on the
Contract anniversary. Transfer requests received within the 30-day period
beginning on the Contract anniversary will be effected as of the end of the
valuation period in which a proper transfer request is received at a Prudential
Home Office. These limits are subject to change in the future. Transfers from
the Real Property Account are also subject to restrictions, and these
restrictions are described in the attached prospectus for that investment
option.
The Prudential may, on a non-discriminatory basis, permit the owner of a Custom
APPRECIABLE LIFE insurance policy issued by The Prudential (a Custom APPRECIABLE
LIFE policy is a general account, universal life type policy with guaranteed
minimum values) to exchange his or her policy for a comparable Custom VAL
Contract with the same Contract date, scheduled premiums, and Contract fund. No
charge will be made for the exchange. There is no new "free look" right when a
Custom APPRECIABLE LIFE contract owner elects to exchange his or her policy for
a comparable Custom VAL Contract.
Although The Prudential does not give tax advice, The Prudential does believe,
based on its understanding of federal income tax laws as currently interpreted,
that the original date exchange of a Custom APPRECIABLE LIFE contract for a
Custom VAL Contract should be considered to be a tax-free exchange under the
Internal Revenue Code of 1986 as amended. It should be noted, however, that the
exchange of a Custom APPRECIABLE LIFE contract for a Custom VAL Contract may
impact the status of the Contract as a Modified Endowment Contract. See TAX
TREATMENT OF CONTRACT BENEFITS, page 21. A contract owner should consult with
his or her tax advisor and Prudential representative before making an exchange.
CHARGES AND EXPENSES
The total amount invested at any time under the Contract (the "Contract fund")
consists of the sum of the amount credited to the subaccounts, the amount held
in the Real Property Account, the amount allocated to the fixed-rate option, and
the principal amount of any Contract loan plus the amount of interest credited
to the Contract upon that loan. See CONTRACT LOANS, page 20. Most charges,
although not all, are made by reducing the Contract fund.
Every charge made by The Prudential under the Contract is described below.
1. A charge is deducted from each premium payment for taxes attributable to
premiums. For these purposes, "taxes attributable to premiums" shall
include any federal, state or local income, premium, excise, business or
any other type of tax (or component thereof) measured by or based upon the
amount of premium received by The Prudential. The state premium tax rates
generally range from 0.75% to 5%(but in some instances may exceed 5%). A
charge, currently in the amount of 1.25% of premiums is deducted for the
purpose of recovering a portion of The Prudential's federal income tax
burden that is determined solely by the amount of premiums received; this
charge is not imposed on Contracts issued in connection with tax-qualified
pension plans. The Prudential believes that this charge is a reasonable
estimate of an increase in its federal income taxes resulting from a 1990
change in the Internal Revenue Code. It is intended to recover this
increased tax. The charge for taxes attributable to premiums in the first
Contract year is determined by the residence of the insured which is the
state and locality shown as the insured's address in the application.
Thereafter, in preparing the billing notice sent out before each Contract
anniversary, The Prudential will determine the applicable charge for taxes
attributable to premiums based on The Prudential's records of the
insured's address. That charge will apply to all premium payments for the
following Contract year. During 1995 and 1994, The Prudential received a
total of approximately $131,000 and $116,000, respectively, in charges for
payment of premium taxes.
2. There is an administrative charge of $2 deducted from each premium payment
to cover the cost of collecting and processing premiums. Thus, Contract
owners who pay premiums annually will incur lower aggregate processing
charges than those who pay premiums more frequently. During 1995 and 1994,
The Prudential received a total of approximately $29,000 and $31,000,
respectively, in processing charges.
3. On each Monthly date, the Contract fund is reduced by $6 per Contract plus
$0.01 per $1,000 for face amounts exceeding $100,000, to compensate The
Prudential for administrative expenses incurred, among other things, in
processing claims, paying cash surrender values and death benefits, making
Contract changes, keeping records, and communicating with Contract owners.
The Prudential currently intends to cap this
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charge at $15. The Prudential does not expect to make a profit from this
administrative charge or from the $2 premium processing charge mentioned
in item 2 above. This monthly administrative charge will not be made if
the Contract has been continued in force pursuant to an option on lapse.
During 1995 and 1994, The Prudential received a total of approximately
$72,000 and $67,000, respectively, in monthly administrative charges. The
Prudential reserves the right to increase this charge to no greater than
$3 plus $0.03 per $1,000 of face amount of insurance, but it will not be
increased to any amount greater than actually needed to recover the
expenses described above.
4. There is a charge to compensate The Prudential for the cost of selling the
Contract. This cost includes sales commissions, advertising, and the
printing of prospectuses and sales literature. This charge is called the
"sales load" and consists of two parts: (1) a charge deducted monthly from
the Contract fund, which The Prudential currently intends to make only
during the first 5 Contract years; and (2) a charge assessed upon lapse or
surrender if that occurs during the first 10 Contract years.
Subject to the limitations discussed below, on each Monthly date, The
Prudential reduces the Contract fund by an amount equal to 0.5% of the
Contract's "primary annual premium," which is the gross annual scheduled
premium that would be payable if the Contract owner had elected to pay
premiums annually, reduced by the sum of the charges for taxes
attributable to premiums and $38 as well as by any extra premiums for
riders or because the insured is classified as high-risk. This deduction
is made without regard to whether the Contract owner is paying premiums
annually or more frequently. The deduction is lower for Contracts issued
on insureds over 60 years of age. The Prudential does not intend to make
this monthly charge after the Contract has been in force for 5 years, but
it reserves the right to do so.
The second part of the sales load is made only if the Contract lapses or
is surrendered during the first 10 Contract years, or if a withdrawal is
made under a Form A Contract during that 10-year period. Moreover, this
charge will be reduced in the manner described below for Contracts that
are in force for more than 5 years. For this reason this charge is
sometimes described as a "contingent deferred sales load" and its amount
is determined as follows. Every Contract has associated with it a
Guideline Annual Premium ("GAP"). That is an amount, generally
significantly larger than the initial annual scheduled premium for the
Contract, which is determined actuarially in accordance with a definition
set forth in a regulation of the Securities and Exchange Commission
("SEC"). The maximum aggregate sales load that The Prudential will charge
(that is, the sum of the first part of the charge, the monthly sales load
deduction, and the second part, the sales charge payable upon surrender or
lapse) will not be more than 30% of the premiums actually paid until those
premiums total one guideline annual premium, plus no more than 9% of the
next premiums paid until total premiums are equal to five guideline annual
premiums. During 1995 and 1994, The Prudential received a total of
approximately $564,000 and $504,000, respectively, in sales load charges.
5. On each Monthly date, the Contract fund is reduced by a charge of not more
than $0.01 per $1,000 of face amount of insurance to compensate The
Prudential for the risk it assumes by guaranteeing that, no matter how
unfavorable investment experience may be, the death benefit will never be
less than the guaranteed minimum death benefit so long as scheduled
premiums are paid on or before the due date or during the grace period.
This charge will not be made if the Contract has been continued in force
pursuant to an option on lapse. During 1995 and 1994, The Prudential
received a total of approximately $40,000 and $56,000, respectively, for
this risk charge.
6. The Prudential deducts a mortality charge from the Contract fund on each
Monthly date. When an insured dies, the amount paid to the beneficiary is
larger than the Contract fund, significantly larger if the insured dies in
the early years of a Contract. The mortality charges are designed to
enable The Prudential to pay this larger death benefit. The charge is
determined by multiplying the "net amount at risk" under a Contract (the
amount by which the Contract's death benefit, computed as if there were
neither riders nor Contract debt, exceeds the Contract fund) by a rate
based upon the insured's sex (except where unisex rates apply) and current
attained age, and the anticipated mortality for that class of persons. The
maximum rate that The Prudential may charge is based upon the
non-smoker/smoker 1980 CSO Tables. However, The Prudential has determined
that a lesser amount than that called for by these mortality tables will
be adequate to defray anticipated death benefits for insureds of
particular ages and is now making a lower mortality charge for such
persons. The Prudential reserves the right to charge full mortality
charges that are no higher than those based on the 1980 CSO Tables
described above. Persons who are in a substandard risk classification will
be assessed an additional charge. The current lower mortality charges are
not applicable to Contracts in force pursuant to an option on lapse. See
OPTIONS ON LAPSE, page 23.
7. A charge is made to compensate The Prudential for assuming mortality and
expense risks. This is done by deducting daily, from the assets of each of
the subaccounts and/or the Real Property Account (the "variable investment
options"), a percentage of those assets equivalent to an effective annual
rate of up to 0.6%. The Prudential has reserved the right, however, to
increase this charge to 0.9%. The mortality risk assumed is
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<PAGE>
that insureds may live for a shorter period of time than The Prudential
estimated when it determined what mortality charge to make. The expense
risk assumed is that expenses incurred in issuing and administering the
Contract will be greater than The Prudential estimated in fixing its
administrative charges. Should either of these developments occur, The
Prudential has guaranteed that the death benefits and cash surrender
values promised by the Contract will not be reduced. The Prudential will
realize a gain from this risk charge to the extent it is not needed to
provide benefits and pay expenses under the Contracts. During 1995 and
1994, The Prudential received a total of approximately $155,000 and
$126,000, respectively, in mortality and expense risk charges. This charge
is not assessed against amounts allocated to the fixed-rate option.
8. There is an administrative charge to compensate The Prudential for
expenses incurred in connection with the issuance of the Contract, other
than sales expenses. This charge is equal to $5 for each $1,000 of face
amount of insurance. This charge is made to cover the costs of processing
applications, conducting medical examinations, determining insurability
and the insured's risk class, and establishing records relating to the
Contract. However, this charge will not be made unless the Contract lapses
or is surrendered within the first 10 Contract years. In addition, the
charge will be reduced for Contracts that lapse or are surrendered before
the Contract's tenth anniversary but after the fifth anniversary,
declining daily at a constant rate so that the charge disappears on the
tenth anniversary. During 1995 and 1994, The Prudential received a total
of approximately $35,000 and $47,000, respectively, from surrendered or
lapsed Contracts. The Prudential does not expect to make a profit on this
charge.
The charge made upon lapse or surrender during the first 10 Contract years
may, under certain circumstances, be less than the sum of the charge
described above and the second part of the sales load described in item 4.
The Contract sets forth the maximum surrender charges that will be made
during the first 10 Contract years and that maximum will control if it is
less than the sum of those two charges.
9. An administrative processing charge equal to the lesser of $15 or 2% of
the amount withdrawn will be made in connection with each withdrawal of
excess cash surrender value of a Contract. See WITHDRAWAL OF EXCESS CASH
SURRENDER VALUE, page 15. The Prudential currently waives this charge if
the withdrawal is used to pay premiums on an automatic basis but reserves
the right to make this charge even in that situation.
10. An administrative processing charge of $15 may be made in connection with
each decrease in face amount. See DECREASES IN FACE AMOUNT, page 17. This
charge and the charge in item 9 are intended to recover only the actual
cost of processing these transactions.
11. If the Contract includes riders, The Prudential deducts any charges
applicable to those riders from the Contract fund on each Monthly date. In
addition, The Prudential will deduct on each Monthly date any extra charge
incurred because of the rating class of the insured.
12. A charge is deducted for federal, state or local taxes attributable to
the Account (other than "taxes attributable to premiums" previously
deducted from the premium payment). Currently, there is no charge against
the Contract for these taxes. A change in the applicable federal, state or
local tax laws that impose tax upon The Prudential (other than "taxes
attributable to premiums") may result in a charge against the Contract.
13. The Account purchases shares of the Series Fund at net asset value. The
net asset value of those shares reflects management fees and expenses
already deducted from the assets of the Series Fund. The fees and expenses
for the Series Fund are briefly described under THE PRUDENTIAL SERIES
FUND, INC. on page 5 in connection with the general description of the
Series Fund. More detailed information is contained in the attached Series
Fund prospectus. The investment management fee and other expenses charged
against the Real Property Account are described in the attached prospectus
for that investment option.
In several instances The Prudential uses the terms "maximum charge" and "current
charge." The "maximum charge," in each instance, is the highest charge that The
Prudential is entitled to make under the Contract. The "current charge" is the
lower amount that The Prudential is now charging. However, if circumstances
change, The Prudential reserves the right to increase each current charge, up to
but to no more than the maximum charge, without giving any advance notice.
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS
The Prudential may reduce the sales charges and/or other charges on individual
Contracts sold to members of a class of associated individuals, or to a trustee,
employer or other entity representing such a class, where it is expected that
such multiple sales will result in savings of sales or administrative expenses.
The Prudential determines both the eligibility for such reduced charges, as well
as the amount of such reductions, by considering the following factors: (1) the
number of individuals; (2) the total amount of premium payments expected to be
received from these Contracts; (3) the nature of the association between these
individuals, and the expected persistency of the individual Contracts; (4) the
purpose for which the individual Contracts are purchased and
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<PAGE>
whether that purpose makes it likely that expenses will be reduced; and (5) any
other circumstances which The Prudential believes to be relevant in determining
whether reduced sales or administrative expenses may be expected. Some of the
reductions in charges for these sales may be contractually guaranteed; other
reductions may be withdrawn or modified by The Prudential on a uniform basis.
The Prudential's reductions in charges for these sales will not be unfairly
discriminatory to the interests of any individual Contract owners.
HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY
The Contract's cash surrender value on any date will be the Contract fund,
defined under CHARGES AND EXPENSES on page 10, reduced by the deferred sales and
administrative charges, if any, and by any Contract debt. The Contract fund
value changes daily, reflecting increases or decreases in the value of the
Series Fund portfolios in which the assets of the subaccount[s] have been
invested, the performance of the Real Property Account if that option has been
selected, interest credited on any amounts allocated to the fixed-rate option,
and by the daily asset charge for mortality and expense risks assessed against
the variable investment options. The Contract fund value also changes to reflect
the receipt of additional premium payments and the monthly deductions described
in the preceding section. Upon request, The Prudential will tell a Contract
owner the cash surrender value of his or her Contract. It is possible for the
cash surrender value of a Contract to decline to zero because of unfavorable
investment performance, even if a Contract owner continues to pay scheduled
premiums when due.
The tables on pages T1 through T8 of this prospectus illustrate approximately
what the cash surrender values would be for representative Contracts with
typical premium schedules, assuming uniform hypothetical investment results in
the selected Series Fund portfolio[s]. The tables also show the maximum
scheduled premium for the period following the anniversary after the insured's
65th birthday, for each illustrated Contract under each of the assumed
investment returns.
HOW A FORM A CONTRACT'S DEATH BENEFIT WILL VARY
As noted above, there are two Forms of the Contract, Form A and Form B. The
death benefit under a Form B Contract varies with investment performance while
the death benefit under a Form A Contract does not, unless it must be increased
to comply with the Internal Revenue Code.
Under a Form A Contract, the guaranteed minimum death benefit is equal to the
face amount of insurance, reduced by any Contract debt. See CONTRACT LOANS, page
20. If the Contract is kept in force for several years and if investment
performance is reasonably favorable, the Contract fund value may grow to the
point where The Prudential will increase the death benefit in order to ensure
that the Contract will satisfy the Internal Revenue Code's definition of life
insurance. Thus, the death benefit under a Form A Contract will always be the
greater of (1) the guaranteed minimum death benefit; and (2) the Contract fund
divided by the "net single premium" per $1 of death benefit at the insured's
attained age on that date. The latter provision ensures that the Contract will
always have a death benefit large enough to be treated as life insurance for tax
purposes under current law. The following table of illustrative net single
premiums for $1 of death benefit under Contracts issued on insureds in the
preferred rating class shows, for insureds of several ages, how much the death
benefit will be affected by a $1 change in the value of the Contract fund, at a
time when the death benefit becomes greater than the guaranteed minimum.
- --------------------------------------------------------------------------------
Increase in Increase in
Insurance Insurance
MALE Net Amount Per Female Net Amount Per
ATTAINED Single $1 Increase Attained Single $1 Increase
AGE Premium in Contract Age Premium in Contract
Fund Fund
- --------------------------------------------------------------------------------
25 .17000 $ 5.88 25 .15112 $ 6.62
35 .23700 $ 4.22 35 .21127 $ 4.73
55 .45209 $ 2.21 55 .40090 $ 2.49
65 .59468 $ 1.68 65 .53639 $ 1.86
- --------------------------------------------------------------------------------
This means, for example, that if the Contract of a man who has reached the age
of 55 has a Contract fund of $100,000, the death benefit will be $221,000, even
though the original face amount was $200,000. Whenever the death benefit is
determined in this way, The Prudential reserves the right to refuse to accept
further premium payments, although in practice the payment of the lesser of 2
years' scheduled premiums or the average of all premiums paid over the last 5
years will generally be allowed.
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HOW A FORM B CONTRACT'S DEATH BENEFIT WILL VARY
Under a Form B Contract, the death benefit, if premiums are paid when due or in
advance, will never be less than the initial face amount but will also vary,
immediately after it is issued, with the investment results of the selected
investment options. Generally speaking, a net investment return of 4% or more
will cause the death benefit to increase and a lower return will cause it to
decrease, but not lower than the guaranteed minimum. More specifically, each
Contract contains a table that sets forth a "tabular Contract fund value" as of
the end of each of the first 20 years of the Contract. Tabular Contract fund
values between Contract anniversaries are determined by interpolation. The
"tabular Contract fund value" for each Contract year is an amount that is
slightly less than the Contract fund value that would result as of the end of
such year if only scheduled premiums were paid, they were paid when due, the
selected investment options earned a net return at a uniform rate of 4% per
year, full mortality charges based upon the 1980 CSO Table were deducted,
maximum sales load and expense charges were deducted, and there were no Contract
debt. The death benefit under a Form B Contract with no withdrawals will be
equal to the face amount whenever the Contract fund is equal to or less than the
tabular Contract fund value.
If, because investment results are greater than a net return of 4%, or greater
than scheduled premiums are paid, or smaller than maximum charges are made
(reflecting The Prudential's current practice), the Contract fund value is
greater than the tabular Contract fund value, then the death benefit will be the
face amount plus the amount of the difference. If, because investment results
are less favorable than a net return of 4%, the Contract fund value is less than
the tabular Contract fund value, the death benefit will not fall below the
initial face amount stated in the Contract; however, this unfavorable investment
experience must first be offset by favorable performance or by lower charges or
additional payments that bring the Contract fund up to the tabular Contract fund
level before subsequent favorable investment results or additional payments will
increase the death benefit. The death benefit does reflect a deduction for the
amount of any Contract debt. See CONTRACT LOANS, page 20.
As is the case under a Form A Contract, the Contract fund of a Form B Contract
could grow to the point where it is necessary to increase the death benefit by
an even greater amount in order to ensure that the Contract will satisfy the
Internal Revenue Code's definition of life insurance. Thus, the death benefit
under a Form B Contract will always be the greatest of (1) the face amount plus
the Contract fund minus the tabular Contract fund value; (2) the guaranteed
minimum death benefit; and (3) the Contract fund divided by the net single
premium per $1 of death benefit at the insured's attained age on that date.
If the net investment return in the selected investment option[s] is greater
than 4%, the Contract fund and cash surrender value for a Form B Contract can be
expected to be less than the Contract fund and cash surrender value for a Form A
Contract with identical premiums and investment experience. This is because the
monthly mortality charges under the Form B Contract will be higher to compensate
for the higher amount of insurance.
FLEXIBILITY AS TO PAYMENT OF PREMIUMS
In addition to being able to establish the premium schedule under the Contract,
the Contract owner enjoys considerable flexibility with respect to the payment
of premiums. The owner may, if desired, pay greater than scheduled premiums.
Conversely, payment of a scheduled premium need not be made if the Contract fund
is sufficiently large to enable the charges due under the Contract to be made
without causing the Contract to lapse. See LAPSE AND REINSTATEMENT, page 23. In
general, The Prudential will accept any premium payment if the payment is at
least $25. The Prudential does reserve the right, however, to limit unscheduled
premiums to a total of $10,000 in any Contract year, and to refuse to accept
premiums that would immediately result in more than a dollar-for-dollar increase
in the death benefit. The privilege of making large or additional premium
payments offers a way of investing amounts which accumulate without current
income taxation. There may, however, be a disadvantage if substantial premium
payments are made. The federal income tax laws, discussed more fully under TAX
TREATMENT OF CONTRACT BENEFITS on page 21, may impose an income tax, as well as
a penalty tax, upon distributions to contract owners under life insurance
contracts that are classified as Modified Endowment Contracts. This Contract
will not be so classified if scheduled premiums are paid or, generally, even if
additional premiums are paid that are not substantially higher. It is possible,
however, to make premium payments that are high enough to cause the Contract to
fall into that classification. A Contract owner should consult with his or her
Prudential representative before making a large premium payment.
PARTICIPATION IN DIVISIBLE SURPLUS
The Contract is eligible to be credited with part of The Prudential's divisible
surplus attributable to the Contracts ("dividends"), as determined annually by
The Prudential's Board of Directors. However, The Prudential does not expect to
pay any dividends to Contract owners of the Contracts while they remain in force
because it intends instead, if experience indicates that charges actually made
are greater than needed to cover expenses, or if mortality experience turns out
to be more favorable than expected, to distribute the portion of the divisible
surplus attributable to the Contract by reducing the charges. No dividends will
be paid, as such, but the Contract fund and
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<PAGE>
cash surrender values will be increased. If a Contract is kept in force for a
number of years, there may be a termination dividend added to the proceeds
payable upon death or surrender.
SURRENDER OF A CONTRACT
A Contract may be surrendered for its cash surrender value while the insured is
living. In addition, a partial surrender may also be available. The Contract
will set forth, in addition to the initial face amount of insurance, a minimum
face amount to which the face amount may be reduced. That minimum face amount
will depend upon the premium schedule selected initially by the Contract owner,
but it will never be less than $200,000.
A partial surrender involves splitting the Contract into two Contracts. One
Contract is surrendered for its cash surrender value; the other is continued in
force on the same terms as in the original Contract, except that the premium
schedule, the cash surrender value and the guaranteed minimum death benefit will
all be proportionately reduced based upon the reduction in the face amount of
insurance. The Contract continued in force will be amended to show the new
face-amount, premium schedule, tabular values, monthly charges and, if
applicable, the new deferred sales and administrative charges.
To surrender a Contract in whole or in part, the owner must deliver or mail it,
together with a written request, to a Prudential Home Office. The cash surrender
value of a surrendered or partially surrendered Contract (which will take into
account the deferred sales and administrative charges, if any) will be
determined as of the end of the valuation period in which such a request is
received in the Home Office. Surrender of all or part of a Contract may have tax
consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 21.
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE
Under certain circumstances, a Contract owner may withdraw a portion of the
Contract's cash surrender value without surrendering the Contract in whole or in
part. The amount that a Contract owner may withdraw is limited by the
requirement that the Contract fund after withdrawal must not be less than the
tabular Contract fund value and, if there is any Contract debt outstanding, the
requested withdrawal must not reduce the cash surrender value to zero. The
amount withdrawn must be at least $2,000 under a Form A Contract and at least
$500 under a Form B Contract. An owner may make no more than four such
withdrawals in each Contract year, and there is an administrative processing fee
for each withdrawal equal to the lesser of $15 or 2% of the amount withdrawn. An
amount withdrawn may not be repaid except as a scheduled or unscheduled premium
subject to the applicable charges. Upon request, The Prudential will tell a
Contract owner how much he or she may withdraw. Withdrawal of part of the cash
surrender value may have tax consequences. See TAX TREATMENT OF CONTRACT
BENEFITS, page 21.
Under a Form A Contract, the face amount of insurance will be reduced, but not
by more than the amount of the withdrawal. No partial withdrawal will be
permitted under a Form A Contract if it would result in a new face amount of
less than a minimum amount, which will be set forth in the Contract. It is
important to note, however, that if the face amount is decreased at any time
during the first 7 Contract years, there is danger that the Contract might be
classified as a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT
BENEFITS, page 21. Before making any withdrawal which causes a decrease in face
amount, a Contract owner should consult with his or her Prudential
representative. Also, if a withdrawal under a Form A Contract is made before the
end of the tenth year, the Contract fund may be reduced not only by the amount
withdrawn but also by a proportionate amount of any surrender charges that would
be made if the Contract were surrendered. The proportion is based on the
percentage reduction in face amount. Form A Contract owners who make a partial
withdrawal will be sent replacement Contract pages showing the new face amount,
new premium schedule, maximum surrender charges, tabular values, and monthly
deductions.
Under a Form B Contract, the cash surrender value and Contract fund value are
reduced by the amount of the withdrawal, and the death benefit is, accordingly,
also reduced. Neither the guaranteed face amount of insurance nor the amount of
scheduled premiums will be changed due to a withdrawal of excess cash surrender
value under a Form B Contract. No surrender charges will be assessed upon a
withdrawal under a Form B Contract.
Withdrawal of part of the cash surrender value increases the risk that the
Contract fund may be insufficient to provide for benefits under the Contract. If
such a withdrawal is followed by unfavorable investment experience, the Contract
may lapse even if scheduled premiums continue to be paid when due. This is
because, for purposes of determining whether a lapse has occurred, The
Prudential treats withdrawals as a return of premium.
INCREASES IN FACE AMOUNT
Another attractive feature of this Contract is that an owner who wishes to
increase the amount of his or her insurance may do so by increasing the face
amount of the Contract (which is also the guaranteed minimum death benefit),
subject to state approval and underwriting requirements determined by The
Prudential. An increase in face
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<PAGE>
amount is in many ways similar to the purchase of a second Contract, but it
differs in the following respects: the minimum permissible increase is $100,000,
while the minimum for a new Contract is $200,000; monthly fees are lower because
only a single $6 per month administrative charge is made rather than two; a
combined premium payment results in deduction of a single $2 per premium
processing charge while separate premium payments for separate Contracts would
involve two charges; and the Contract will lapse as a unit, unlike the case if
two separate Contracts are purchased. These differences aside, the decision to
increase face amount is comparable to the purchase of a second Contract in that
it involves a commitment to higher scheduled premiums in exchange for greater
insurance benefits.
A Contract owner may elect to increase the face amount of his or her Contract no
earlier than the first anniversary of the Contract. The following conditions
must be met: (1) the owner must ask for the increase in writing on an
appropriate form; (2) the amount of the increase in face amount must be at least
$100,000; (3) the insured must supply evidence of insurability for the increase
satisfactory to The Prudential; (4) if The Prudential requests, the owner must
send in the Contract to be suitably endorsed; (5) the Contract must not be in
default on the date the increase takes effect; (6) the owner must pay an
appropriate premium at the time of the increase; (7) The Prudential has the
right to deny more than one increase in a Contract year; and (8) if The
Prudential has, between the Contract date and the date that any requested
increase in face amount will take effect, changed any of the bases on which
benefits and charges are calculated under newly issued Contracts, The Prudential
has the right to deny the increase.
Upon an increase in face amount, The Prudential will, after consulting with the
Contract owner, establish a new premium schedule, and new tabular values.
Subsequent monthly deductions from the Contract fund will reflect the fact that
the face amount has been increased. The Contract owner has a choice, limited
only by applicable state law, as to whether these changes will be made as of the
prior or next Contract anniversary. There will be a payment required on the date
of increase; the amount of the payment will depend, in part, on which Contract
anniversary the Contract owner selects for the recomputation. The Prudential
will tell the owner the amount of the required payment. It should also be noted
that an increase in face amount may impact the status of the Contract as a
Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 21.
Therefore, before increasing the face amount, a Contract owner should consult
with his or her Prudential representative.
The effective date of the increase in the amount of insurance will be determined
by the same rules that apply when a new Contract is purchased. Generally
speaking, an increase will take effect on the latest of the date the owner
applies for it, the date satisfactory evidence of insurability is provided to
The Prudential, or the date designated by the Contract owner, provided the
necessary payment is made on or before that date.
For the purpose of determining the sales load that will be charged after the
increase and upon any subsequent lapse or surrender, the Contract is treated as
if there were two separate Contracts, a "base Contract" representing the
Contract before the increase and an "incremental Contract" representing the
increase viewed as a separate Contract. At the time of the increase, a certain
portion of the Contract fund is allocated to the incremental Contract as a
prepayment of premiums for purposes of the sales load limit. That portion is
equal to the Guideline Annual Premium ("GAP") of the incremental Contract
divided by the GAP of the entire Contract after the increase. Premium payments
made after the increase are also allocated between the base Contract and the
incremental Contract for purposes of the sales load limit. A portion of each
premium payment after the increase is allocated to the increase based on the GAP
for the incremental Contract divided by the GAP for the entire Contract. A
monthly deduction equal to 0.5% of the primary annual premium for each part of
the Contract (i.e., the base and incremental Contracts, respectively) will be
made until each part of the Contract has been in force for 5 years, although The
Prudential reserves the right to continue to make this deduction thereafter.
Similarly, the amount, if any, of sales charges upon lapse or surrender and the
application of the overall limitation upon sales load, described under CHARGES
AND EXPENSES on page 10, will be determined as explained in that section as if
there were two Contracts rather than one. Moreover, the contingent deferred
administrative charge is also determined as if there were two separate
Contracts. Thus, an owner considering an increase in face amount should be aware
that such an increase will entail charges, including periodic sales load
deductions and possible sales and administrative charges on a subsequent
surrender or lapse, comparable to the purchase of a new Contract.
Each Contract owner who elects to increase the face amount of his or her
Contract will be granted a "free-look" right which will apply only to the
increase in face amount, not the entire Contract. The right is comparable to the
right afforded to a purchaser of a new Contract. See SHORT-TERM CANCELLATION
RIGHT OR "FREE LOOK," page 6. The "free-look" right has to be exercised no later
than 45 days after execution of the application for the increase or, if later,
within 10 days after either receipt of the Contract as increased, or receipt of
the withdrawal right notice by the owner. Upon exercise of the "free-look"
right, the owner will receive a refund in the amount of the aggregate premiums
paid since the increase was requested and attributable to the increase, not the
base Contract, as determined pursuant to the proportional premium allocation
rule described above. There will be no adjustment for investment experience. All
charges deducted after the increase will be reduced to what they would have been
had no increase been effected. A Contract owner may transfer the total amount
attributable to the increase in face amount from the subaccounts or the Real
Property Account to the fixed-rate option.
16
<PAGE>
The Prudential will supply the Contract owner with pages which show the
increased face amount, the effective date of the increase, and the items
described two paragraphs above that have changed. The pages will also describe
how the increase in face amount affects the various provisions of the Contract,
including a statement that, for the amount of the increase in face amount, the
period stated in the Incontestability and Suicide provisions (see OTHER GENERAL
CONTRACT PROVISIONS, page 24) will run from the effective date of the increase.
DECREASES IN FACE AMOUNT
As explained earlier, a Contract owner may effect a partial surrender of a
Contract, (see SURRENDER OF A CONTRACT, page 15), or a partial withdrawal of
excess cash surrender value, (see WITHDRAWAL OF EXCESS CASH SURRENDER VALUE,
page 15). A Contract owner also has the additional option of decreasing the face
amount (which is also the guaranteed minimum death benefit) of his or her
Contract without withdrawing any cash surrender value. Contract owners who
conclude that, because of changed circumstances, the amount of insurance is
greater than needed will thus be able to decrease their amount of insurance
protection, and the monthly deductions for the cost of insurance, without
decreasing their current cash surrender value. The cash surrender value of the
Contract on the date of the decrease will not change, except that an
administrative processing fee of $15 may be deducted from that value (unless
that fee is separately paid at the time the decrease in face amount is
requested). The Contract's Contract fund value, however, will be reduced by a
proportionate part of any sales and administrative charges that would be payable
if the Contract had been surrendered, that is, if this withdrawal is made before
the Contract's tenth anniversary or, if the face amount had previously been
increased, before the tenth anniversary after that increase. The premium
schedule for the Contract will also be revised and reduced. The Contracts of
owners who exercise the right to reduce the face amount will be amended to show
the new face amount, tabular values, scheduled premiums, monthly charges and, if
applicable, the remaining deferred sales and administrative charges.
No decreases in face amount will be permitted in the first Contract year. The
minimum permissible decrease is $10,000. The minimum amount to which the face
amount may be decreased is set forth in the Contract and it may be possible in
some cases, after discussion with The Prudential Home Office, to reduce the face
amount even further. If such a decrease is made, the new premium schedule and
tabular values will not be reduced in the same proportion as that the reduced
face amount bears to the initial face amount. No reduction will be permitted if
it would cause the Contract to fail to qualify as "life insurance" for purposes
of Section 7702 of the Internal Revenue Code. A decrease in face amount will be
effected as of the Monthly date immediately preceding receipt of a proper
request to decrease face amount. Monthly charges previously deducted on that
date and attributed to the decreased portion of the face amount will be credited
to the Contract fund as of that date.
It is important to note, however, that if the face amount is decreased at any
time during the first 7 Contract years, there is a danger that the Contract
might be classified as a Modified Endowment Contract. See TAX TREATMENT OF
CONTRACT BENEFITS, page 21. Before requesting any decrease in face amount, a
Contract owner should consult with his or her Prudential representative.
WHEN PROCEEDS ARE PAID
The Prudential will generally pay any death benefit, cash surrender value, loan
proceeds or withdrawal within 7 days after receipt at a Prudential Home Office
of all the documents required for such a payment. Other than the death benefit,
which is determined as of the date of death, the amount will be determined as of
the end of the valuation period in which the necessary documents are received.
However, The Prudential may delay payment of proceeds from the subaccount[s] and
the variable portion of the death benefit due under the Contract if the disposal
or valuation of the Account's assets is not reasonably practicable because the
New York Stock Exchange is closed for other than a regular holiday or weekend,
trading is restricted by the SEC or the SEC declares that an emergency exists.
With respect to the amount of any cash surrender value allocated to the
fixed-rate option, and with respect to a Contract in force as fixed reduced
paid-up insurance or as extended term insurance, The Prudential expects to pay
the cash surrender value promptly upon request. However, The Prudential has the
right to delay payment of such cash surrender value for up to 6 months (or a
shorter period if required by applicable law). The Prudential will pay interest
of at least 3% a year if it delays such a payment for more than 30 days (or a
shorter period if required by applicable law).
LIVING NEEDS BENEFIT
Contract applicants may elect to add the LIVING NEEDS BENEFIT(SM) to their
Contracts at issue, subject to The Prudential's receipt of satisfactory evidence
of insurability. The benefit may vary state-by-state, and a Prudential
representative should be consulted as to what extent the benefit is available in
a particular state and on any particular Contract.
17
<PAGE>
The LIVING NEEDS BENEFIT allows the Contract owner to elect to receive an
accelerated payment of all or part of the Contract's death benefit, adjusted to
reflect current value, at a time when certain special needs exist. The adjusted
death benefit will always be less than the death benefit, but will generally be
greater than the Contract's cash surrender value. Depending upon state
regulatory approval, one or both of the following options may be available. A
Prudential representative should be consulted as to whether additional options
may be available.
TERMINAL ILLNESS OPTION. This option is available if the insured is diagnosed as
terminally ill with a life expectancy of 6 months or less. When satisfactory
evidence is provided, The Prudential will provide an accelerated payment of the
portion of the death benefit selected by the Contract owner as a LIVING NEEDS
BENEFIT. The Contract owner may (1) elect to receive the benefit in a single sum
or (2) receive equal monthly payments for 6 months. If the insured dies before
all of the payments have been made, the present value of the remaining payments
will be paid to the beneficiary designated in the LIVING NEEDS BENEFIT claim
form in a single sum.
NURSING HOME OPTION. This option is available after the insured has been
confined to an eligible nursing home for 6 months or more. When satisfactory
evidence is provided, including certification by a licensed physician, that the
insured is expected to remain in the nursing home until death, The Prudential
will provide an accelerated payment of the portion of the death benefit selected
by the Contract owner as a LIVING NEEDS BENEFIT. The Contract owner may (1)
elect to receive the benefit in a single sum or (2) receive equal monthly
payments for a specified number of years (not more than 10 nor less than 2),
depending upon the age of the insured. If the insured dies before all of the
payments have been made, the present value of the remaining payments will be
paid to the beneficiary designated in the LIVING NEEDS BENEFIT claim form in a
single sum.
All or part of the Contract's death benefit may be accelerated under the LIVING
NEEDS BENEFIT. If the benefit is only partially accelerated, a death benefit of
at least $25,000 must remain under the Contract. The Prudential reserves the
right to determine the minimum amount that may be accelerated.
The LIVING NEEDS BENEFIT is available only to the extent regulatory approval has
been obtained. If desired by a Contract owner, the benefit must be requested on
the Contract's application. There is no charge for adding the benefit to the
Contract. However, an administrative charge (not to exceed $150) will be made at
the time the LIVING NEEDS BENEFIT is paid.
No benefit will be payable if the Contract owner is required to elect it in
order to meet the claims of creditors or to obtain a government benefit. The
Prudential can furnish details about the amount of LIVING NEEDS BENEFIT that is
available to an eligible Contract owner under a particular Contract, and the
adjusted premium payments that would be in effect if less than the entire death
benefit is accelerated.
The Contract owner should consider whether adding this settlement option is
appropriate in his or her given situation. Adding the LIVING NEEDS BENEFIT to
the Contract has no adverse consequences; however, electing to use it could.
Contract owners should consult a qualified tax advisor before electing to
receive this benefit. Unlike a death benefit received by a beneficiary after the
death of an insured, receipt of a LIVING NEEDS BENEFIT payment may give rise to
a federal or state income tax. Receipt of a LIVING NEEDS BENEFIT payment may
also affect a Contract owner's eligibility for certain government benefits or
entitlements.
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND ACCUMULATED
PREMIUMS
The following tables have been prepared to help show how values under the
Contract change with investment performance of the Account. It is assumed that
no portion of the Contract fund is allocated to the fixed-rate option or the
Real Property Account. The tables illustrate how cash surrender values
(reflecting the deduction of deferred sales load and administrative charges, if
any) and death benefits of Contracts issued on an insured of a given age would
vary over time if the gross investment return on the assets held in the Series
Fund portfolios were at uniform, after tax, annual rates of 0%, 6%, and 12% and
if exactly the premiums under differing premium schedules were paid. The death
benefits and cash surrender values would be different from those shown if the
returns averaged 0%, 6%, and 12% but fluctuated over and under those averages
throughout the years. The tables also provide information about premiums payable
on and after the anniversary following the insured's 65th birthday.
The death benefits and cash surrender values shown in the first four tables on
pages T1 through T4 are approximately those likely to be provided under the
Contract for the uniform hypothetical rates of return shown in these tables upon
the assumption that The Prudential continues to make the insurance and
administrative charges that it is currently making. They also assume that
termination dividends will be paid and that the Contract fund will reflect a
reduction of charges in accordance with The Prudential's dividend scale that The
Prudential currently applies to existing contracts and expects to apply to this
Contract. See PARTICIPATION IN DIVISIBLE SURPLUS, page 14. However, there is no
guarantee as to the amount, if any, of termination dividends that will be paid
under a Contract. The death benefits and cash surrender values shown in the next
four tables on pages T5 through T8 are calculated upon the assumption that the
maximum mortality charges specified by the 1980 CSO Table and
18
<PAGE>
maximum expense charges will be made throughout the life of the Contract, and
that no termination dividends are paid and no reduction of charges will be made.
The amounts shown for the death benefit and cash surrender value as of each
Contract year reflect the fact that the net investment return of the assets held
in the subaccounts is lower than the gross, after-tax return of the Series
Fund's portfolios. Rather than including a separate table for each portfolio, it
is assumed that the investment management fee and other estimated Series Fund
expenses total 0.55%. The 0.55% figure is based on an average of the current
management fees of the fifteen available portfolios and an analysis of
historical operating expenses other than management fees, taking into account
applicable expense offsets described earlier in this prospectus. Actual fees and
expenses of the portfolios associated with a Contract may be more or less than
0.55%, will vary from year to year, and, for any particular Contract owner, will
depend on how the Contract fund is allocated. In addition, the tables reflect
the daily charge to the Account for assuming mortality and expense risks, which,
is equivalent to an effective annual charge of 0.6% and on a maximum basis is
0.9%. The tables show in the headings both the gross and the corresponding net
return. It is assumed that no charges for federal or state income taxes are made
against the Account (other than "taxes attributable to premiums"). The tables
assume that the insured is in the preferred rating class, and the charge for
federal, state and local taxes attributable to premiums is 3.25%.
Upon request, The Prudential will furnish a comparable hypothetical illustration
based on the proposed insured's age and sex (except where unisex rates apply),
and on the requested face amount and selected premium schedules. The
illustrations can be prepared upon the assumptions that the insured is in the
preferred or standard rating class or in a different risk classification, and
can assume that annual, semi-annual, quarterly or monthly premiums are paid.
19
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
-------------
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH HIGH INITIAL ANNUAL
PREMIUM OF $1,987.60 RISING TO
$3,983.46 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $15,664.08(1)
USING CURRENT CONTRACTUAL CHARGES
DEATH BENEFIT (2) CASH SURRENDER VALUE (2)
--------------------------------------- ---------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED AT --------------------------------------- ---------------------------------------
POLICY ANNUAL 4% INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YEAR PREMIUM PER YEAR (1) (-1.15% NET) (4.85% NET) (10.85% NET) (-1.15% NET) (4.85% NET) (10.85% NET)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,988 $ 2,067 $300,000 $300,000 $ 300,000 $ 0 $ 0 $ 0
2 $ 1,997 $ 4,227 $300,000 $300,000 $ 300,000 $ 0 $ 257 $ 530
3 $ 2,010 $ 6,486 $300,000 $300,000 $ 300,000 $ 1,065 $ 1,573 $ 2,127
4 $ 2,025 $ 8,852 $300,000 $300,000 $ 300,000 $ 2,100 $ 2,937 $ 3,885
5 $ 2,039 $ 11,327 $300,000 $300,000 $ 300,000 $ 3,100 $ 4,347 $ 5,819
6 $ 2,058 $ 13,920 $300,000 $300,000 $ 300,000 $ 4,585 $ 6,329 $ 8,475
7 $ 2,078 $ 16,637 $300,000 $300,000 $ 300,000 $ 6,199 $ 8,533 $ 11,523
8 $ 2,098 $ 19,485 $300,000 $300,000 $ 300,000 $ 7,769 $ 10,786 $ 14,814
9 $ 2,121 $ 22,470 $300,000 $300,000 $ 300,000 $ 9,296 $ 13,095 $ 18,379
10 $ 2,146 $ 25,600 $300,000 $300,000 $ 300,000 $ 10,776 $ 15,454 $ 22,243
15 $ 2,311 $ 43,745 $300,000 $300,000 $ 300,000 $ 14,619 $ 25,289 $ 44,556
20 $ 2,607 $ 67,124 $303,230 $303,230 $ 303,230 $ 20,456 $ 40,449 $ 86,056
25 $ 3,107 $ 97,892 $306,458 $306,458 $ 306,458 $ 27,008 $ 60,492 $ 157,877
30 (AGE 65) $ 3,983 $139,242 $306,450 $306,450 $ 461,916 $ 29,419 $ 82,863 $ 277,307
35 $15,664 $257,645 $307,180 $307,180 $ 685,728 $ 83,982 $151,388 $ 460,206
40 $15,664 $401,699 $307,870 $323,654 $1,017,885 $131,668 $240,574 $ 752,160
45 $15,664 $576,964 $308,476 $437,704 $1,519,456 $171,582 $350,773 $1,213,437
</TABLE>
(1) FOR A HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%, THE PREMIUM AFTER AGE 65
WILL BE $15,664.08. FOR A GROSS RETURN OF 6%, THE PREMIUM AFTER AGE 65 WILL
BE $11,111.92. FOR A GROSS RETURN OF 12%, THE PREMIUM AFTER AGE 65 WILL BE
$1,987.60. THE PREMIUMS ACCUMULATED IN COLUMN 3 ARE THOSE PAYABLE IF THE
GROSS INVESTMENT RETURN IS 0%. FOR AN EXPLANATION OF WHY THE SCHEDULED
PREMIUM MAY SIGNIFICANTLY INCREASE AFTER AGE 65, SEE PREMIUMS.
(2) ASSUMES NO CONTRACT LOAN HAS BEEN MADE.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND
12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL OR
THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T1
<PAGE>
<TABLE>
<CAPTION>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH HIGH INITIAL ANNUAL
PREMIUM OF $1,987.60 RISING TO
$3,983.46 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $15,664.08(1)
USING CURRENT CONTRACTUAL CHARGES
DEATH BENEFIT (2) CASH SURRENDER VALUE (2)
--------------------------------------- ---------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED AT --------------------------------------- ---------------------------------------
POLICY ANNUAL 4% INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YEAR PREMIUM PER YEAR (1) (-1.15% NET) (4.85% NET) (10.85% NET) (-1.15% NET) (4.85% NET) (10.85% NET)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,988 $ 2,067 $300,027 $300,119 $ 300,212 $ 0 $ 0 $ 0
2 $ 1,997 $ 4,227 $300,000 $300,257 $ 300,530 $ 0 $ 155 $ 427
3 $ 2,010 $ 6,486 $300,000 $300,411 $ 300,963 $ 861 $ 1,368 $ 1,919
4 $ 2,025 $ 8,852 $300,000 $300,588 $ 301,532 $ 1,895 $ 2,727 $ 3,671
5 $ 2,039 $ 11,327 $300,000 $300,788 $ 302,252 $ 2,921 $ 4,162 $ 5,626
6 $ 2,058 $ 13,920 $300,000 $301,090 $ 303,221 $ 4,575 $ 6,309 $ 8,440
7 $ 2,078 $ 16,637 $300,000 $301,421 $ 304,387 $ 6,188 $ 8,505 $ 11,471
8 $ 2,098 $ 19,485 $300,000 $301,786 $ 305,776 $ 7,757 $ 10,750 $ 14,740
9 $ 2,121 $ 22,470 $300,000 $302,184 $ 307,411 $ 9,284 $ 13,047 $ 18,274
10 $ 2,146 $ 25,600 $300,000 $302,618 $ 309,319 $ 10,764 $ 15,394 $ 22,095
15 $ 2,311 $ 43,745 $300,000 $305,420 $ 324,201 $ 14,607 $ 25,098 $ 43,879
20 $ 2,607 $ 67,124 $303,230 $314,100 $ 358,026 $ 20,599 $ 40,228 $ 84,154
25 $ 3,107 $ 97,892 $306,458 $329,470 $ 421,749 $ 27,333 $ 60,010 $ 152,289
30 (AGE 65) $ 3,983 $139,242 $306,450 $350,940 $ 533,411 $ 29,966 $ 80,940 $ 263,411
35 $15,664 $257,645 $307,180 $378,301 $ 668,293 $ 84,655 $156,904 $ 446,896
40 $15,664 $401,699 $307,870 $424,648 $1,011,620 $132,394 $249,393 $ 747,543
45 $15,664 $576,964 $308,476 $496,982 $1,536,650 $172,217 $362,068 $1,227,149
</TABLE>
(1) FOR A HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%, THE PREMIUM AFTER AGE 65
WILL BE $15,664.08. FOR A GROSS RETURN OF 6%, THE PREMIUM AFTER AGE 65 WILL
BE $13,295.12. FOR A GROSS RETURN OF 12%, THE PREMIUM AFTER AGE 65 WILL BE
$3,579.08. THE PREMIUMS ACCUMULATED IN COLUMN 3 ARE THOSE PAYABLE IF THE
GROSS INVESTMENT RETURN IS 0%. FOR AN EXPLANATION OF WHY THE SCHEDULED
PREMIUM MAY SIGNIFICANTLY INCREASE AFTER AGE 65, SEE PREMIUMS.
(2) ASSUMES NO CONTRACT LOAN HAS BEEN MADE.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND
12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL OR
THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T2
<PAGE>
<TABLE>
<CAPTION>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH LOW INITIAL ANNUAL
PREMIUM OF $1,371.58 RISING TO
$5,363.31 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $17,226.87(1)
USING CURRENT CONTRACTUAL CHARGES
DEATH BENEFIT (2) CASH SURRENDER VALUE (2)
--------------------------------------- ---------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED AT --------------------------------------- ---------------------------------------
POLICY ANNUAL 4% INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YEAR PREMIUM PER YEAR (1) (-1.15% NET) (4.85% NET) (10.85% NET) (-1.15% NET) (4.85% NET) (10.85% NET)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,372 $ 1,426 $300,000 $300,000 $ 300,000 $ 0 $ 0 $ 0
2 $ 1,390 $ 2,929 $300,000 $300,000 $ 300,000 $ 0 $ 0 $ 0
3 $ 1,417 $ 4,520 $300,000 $300,000 $ 300,000 $ 0 $ 0 $ 182
4 $ 1,446 $ 6,205 $300,000 $300,000 $ 300,000 $ 109 $ 604 $ 1,167
5 $ 1,475 $ 7,987 $300,000 $300,000 $ 300,000 $ 655 $ 1,387 $ 2,255
6 $ 1,512 $ 9,879 $300,000 $300,000 $ 300,000 $ 1,543 $ 2,562 $ 3,821
7 $ 1,551 $ 11,888 $300,000 $300,000 $ 300,000 $ 2,680 $ 4,038 $ 5,785
8 $ 1,593 $ 14,020 $300,000 $300,000 $ 300,000 $ 3,796 $ 5,546 $ 7,893
9 $ 1,638 $ 16,284 $300,000 $300,000 $ 300,000 $ 4,894 $ 7,093 $ 10,165
10 $ 1,688 $ 18,691 $300,000 $300,000 $ 300,000 $ 5,972 $ 8,676 $ 12,617
15 $ 2,019 $ 33,270 $300,000 $300,000 $ 300,000 $ 8,270 $ 14,444 $ 25,617
20 $ 2,610 $ 53,615 $303,115 $303,115 $ 303,115 $ 13,434 $ 25,143 $ 51,742
25 $ 3,610 $ 83,017 $306,229 $306,229 $ 306,229 $ 21,298 $ 41,588 $ 99,231
30 (AGE 65) $ 5,363 $126,619 $306,225 $306,225 $ 306,225 $ 28,488 $ 63,000 $183,617
35 $16,515 $247,078 $306,995 $306,995 $ 451,938 $ 87,335 $135,821 $304,057
40 $16,515 $393,634 $307,724 $310,363 $ 670,551 $139,806 $230,741 $496,168
45 $16,515 $571,942 $308,363 $436,725 $1,000,428 $185,909 $349,969 $799,505
</TABLE>
(1) FOR A HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%, THE PREMIUM AFTER AGE 65
WILL BE $16,514.56. FOR A GROSS RETURN OF 6%, THE PREMIUM AFTER AGE 65 WILL
BE $13,129.60. FOR A GROSS RETURN OF 12%, THE PREMIUM AFTER AGE 65 WILL BE
$1,371.58. THE PREMIUMS ACCUMULATED IN COLUMN 3 ARE THOSE PAYABLE IF THE
GROSS INVESTMENT RETURN IS 0%. FOR AN EXPLANATION OF WHY THE SCHEDULED
PREMIUM MAY SIGNIFICANTLY INCREASE AFTER AGE 65, SEE PREMIUMS.
(2) ASSUMES NO CONTRACT LOAN HAS BEEN MADE.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND
12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL OR
THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T3
<PAGE>
<TABLE>
<CAPTION>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH LOW INITIAL ANNUAL
PREMIUM OF $1,371.58 RISING TO
$5,363.31 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $17,226.87(1)
USING CURRENT CONTRACTUAL CHARGES
DEATH BENEFIT (2) CASH SURRENDER VALUE (2)
--------------------------------------- ---------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED AT --------------------------------------- ---------------------------------------
POLICY ANNUAL 4% INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YEAR PREMIUM PER YEAR (1) (-1.15% NET) (4.85% NET) (10.85% NET) (-1.15% NET) (4.85% NET) (10.85% NET)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,372 $ 1,426 $300,070 $300,128 $ 300,187 $ 0 $ 0 $ 0
2 $ 1,390 $ 2,929 $300,112 $300,271 $ 300,437 $ 0 $ 0 $ 0
3 $ 1,417 $ 4,520 $300,124 $300,427 $ 300,758 $ 0 $ 0 $ 36
4 $ 1,446 $ 6,205 $300,109 $300,601 $ 301,162 $ 0 $ 360 $ 920
5 $ 1,475 $ 7,987 $300,065 $300,793 $ 301,656 $ 411 $ 1,139 $ 2,002
6 $ 1,512 $ 9,879 $300,021 $301,033 $ 302,283 $ 1,534 $ 2,546 $ 3,796
7 $ 1,551 $ 11,888 $300,000 $301,296 $ 303,028 $ 2,669 $ 4,016 $ 5,748
8 $ 1,593 $ 14,020 $300,000 $301,584 $ 303,907 $ 3,783 $ 5,517 $ 7,840
9 $ 1,638 $ 16,284 $300,000 $301,897 $ 304,933 $ 4,879 $ 7,054 $ 10,090
10 $ 1,688 $ 18,691 $300,000 $302,238 $ 306,125 $ 5,955 $ 8,626 $ 12,513
15 $ 2,019 $ 33,270 $300,000 $304,447 $ 315,322 $ 8,249 $ 14,286 $ 25,161
20 $ 2,610 $ 53,615 $303,115 $311,818 $ 337,383 $ 13,507 $ 24,882 $ 50,447
25 $ 3,610 $ 83,017 $306,229 $325,709 $ 380,198 $ 21,482 $ 40,979 $ 95,468
30 (AGE 65) $ 5,363 $126,619 $313,575 $345,910 $ 456,347 $ 28,575 $ 60,910 $171,347
35 $16,836 $248,886 $321,584 $373,774 $ 559,432 $ 87,887 $140,077 $325,735
40 $16,836 $397,642 $324,804 $421,392 $ 787,996 $139,813 $236,401 $582,714
45 $16,836 $578,626 $325,770 $496,072 $1,248,958 $183,361 $353,663 $997,700
</TABLE>
(1) FOR A HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%, THE PREMIUM AFTER AGE 65
WILL BE $16,835.51. FOR A GROSS RETURN OF 6%, THE PREMIUM AFTER AGE 65 WILL
BE $15,113.77. FOR A GROSS RETURN OF 12%, THE PREMIUM AFTER AGE 65 WILL BE
$9,233.29. THE PREMIUMS ACCUMULATED IN COLUMN 3 ARE THOSE PAYABLE IF THE
GROSS INVESTMENT RETURN IS 0%. FOR AN EXPLANATION OF WHY THE SCHEDULED
PREMIUM MAY SIGNIFICANTLY INCREASE AFTER AGE 65, SEE PREMIUMS.
(2) ASSUMES NO CONTRACT LOAN HAS BEEN MADE.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND
12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL OR
THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T4
<PAGE>
<TABLE>
<CAPTION>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH HIGH INITIAL ANNUAL
PREMIUM OF $1,987.60 RISING TO
$3,983.46 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $15,664.08(1)
USING MAXIMUM CONTRACTUAL CHARGES
DEATH BENEFIT (2) CASH SURRENDER VALUE (2)
--------------------------------------- ---------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED AT --------------------------------------- ---------------------------------------
POLICY ANNUAL 4% INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YEAR PREMIUM PER YEAR (1) (-1.45% NET) (4.55% NET) (10.55% NET) (-1.45% NET) (4.55% NET) (10.55% NET)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,988 $ 2,067 $300,000 $300,000 $300,000 $ 0 $ 0 $ 0
2 $ 1,997 $ 4,227 $300,000 $300,000 $300,000 $ 0 $ 30 $ 289
3 $ 2,010 $ 6,486 $300,000 $300,000 $300,000 $ 738 $ 1,216 $ 1,737
4 $ 2,025 $ 8,852 $300,000 $300,000 $300,000 $ 1,657 $ 2,436 $ 3,322
5 $ 2,039 $ 11,327 $300,000 $300,000 $300,000 $ 2,535 $ 3,689 $ 5,055
6 $ 2,058 $ 13,920 $300,000 $300,000 $300,000 $ 3,814 $ 5,418 $ 7,396
7 $ 2,078 $ 16,637 $300,000 $300,000 $300,000 $ 5,218 $ 7,347 $ 10,084
8 $ 2,098 $ 19,485 $300,000 $300,000 $300,000 $ 6,573 $ 9,304 $ 12,965
9 $ 2,121 $ 22,470 $300,000 $300,000 $300,000 $ 7,881 $ 11,291 $ 16,062
10 $ 2,146 $ 25,600 $300,000 $300,000 $300,000 $ 9,137 $ 13,305 $ 19,393
15 $ 2,311 $ 43,745 $300,000 $300,000 $300,000 $11,745 $ 20,921 $ 37,700
20 $ 2,607 $ 67,124 $300,000 $300,000 $300,000 $12,236 $ 28,542 $ 66,549
25 $ 3,107 $ 97,892 $300,000 $300,000 $300,000 $ 9,153 $ 34,784 $113,014
30 (AGE 65) $ 3,983 $139,242 $300,000 $300,000 $321,978 $ 0 $ 37,102 $191,474
35 $15,664 $257,645 $300,000 $300,000 $451,132 $31,623 $ 89,007 $301,194
40 $15,664 $401,699 $300,000 $300,000 $628,801 $41,884 $144,593 $463,370
45 $15,664 $576,964 $300,000 $300,000 $870,771 $11,751 $209,605 $694,414
</TABLE>
(1) FOR A HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%, THE PREMIUM AFTER AGE 65
WILL BE $15,664.08. FOR A GROSS RETURN OF 6%, THE PREMIUM AFTER AGE 65 WILL
BE $14,967.54. FOR A GROSS RETURN OF 12%, THE PREMIUM AFTER AGE 65 WILL BE
$1,987.60. THE PREMIUMS ACCUMULATED IN COLUMN 3 ARE THOSE PAYABLE IF THE
GROSS INVESTMENT RETURN IS 0%. FOR AN EXPLANATION OF WHY THE SCHEDULED
PREMIUM MAY SIGNIFICANTLY INCREASE AFTER AGE 65, SEE PREMIUMS.
(2) ASSUMES NO CONTRACT LOAN HAS BEEN MADE.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND
12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL OR
THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T5
<PAGE>
<TABLE>
<CAPTION>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH HIGH INITIAL ANNUAL
PREMIUM OF $1,987.60 RISING TO
$3,983.46 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $15,664.08(1)
USING MAXIMUM CONTRACTUAL CHARGES
DEATH BENEFIT (2) CASH SURRENDER VALUE (2)
--------------------------------------- ---------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED AT --------------------------------------- ---------------------------------------
POLICY ANNUAL 4% INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YEAR PREMIUM PER YEAR (1) (-1.45% NET) (4.55% NET) (10.55% NET) (-1.45% NET) (4.55% NET) (10.55% NET)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,988 $ 2,067 $300,000 $300,011 $300,101 $ 0 $ 0 $ 0
2 $ 1,997 $ 4,227 $300,000 $300,030 $300,289 $ 0 $ 0 $ 186
3 $ 2,010 $ 6,486 $300,000 $300,055 $300,574 $ 535 $ 1,011 $ 1,530
4 $ 2,025 $ 8,852 $300,000 $300,089 $300,970 $ 1,452 $ 2,229 $ 3,110
5 $ 2,039 $ 11,327 $300,000 $300,132 $301,491 $ 2,357 $ 3,506 $ 4,865
6 $ 2,058 $ 13,920 $300,000 $300,183 $302,147 $ 3,807 $ 5,402 $ 7,366
7 $ 2,078 $ 16,637 $300,000 $300,243 $302,958 $ 5,211 $ 7,327 $ 10,042
8 $ 2,098 $ 19,485 $300,000 $300,315 $303,941 $ 6,566 $ 9,279 $ 12,905
9 $ 2,121 $ 22,470 $300,000 $300,397 $305,115 $ 7,874 $ 11,260 $ 15,978
10 $ 2,146 $ 25,600 $300,000 $300,491 $306,501 $ 9,130 $ 13,267 $ 19,277
15 $ 2,311 $ 43,745 $300,000 $301,150 $317,501 $11,738 $ 20,828 $ 37,179
20 $ 2,607 $ 67,124 $300,000 $302,191 $338,408 $12,230 $ 28,319 $ 64,536
25 $ 3,107 $ 97,892 $300,000 $303,696 $375,279 $ 9,147 $ 34,236 $105,819
30 (AGE 65) $ 3,983 $139,242 $300,000 $305,730 $437,338 $ 0 $ 35,730 $167,338
35 $15,664 $257,645 $300,000 $308,362 $503,647 $31,616 $ 86,965 $282,250
40 $15,664 $401,699 $300,000 $313,780 $635,257 $41,876 $138,525 $460,002
45 $15,664 $576,964 $300,000 $323,004 $910,143 $11,740 $188,090 $725,812
</TABLE>
(1) FOR A HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%, THE PREMIUM AFTER AGE 65
WILL BE $15,664.08. FOR A GROSS RETURN OF 6%, THE PREMIUM AFTER AGE 65 WILL
BE $15,359.01. FOR A GROSS RETURN OF 12%, THE PREMIUM AFTER AGE 65 WILL BE
$8,351.21. THE PREMIUMS ACCUMULATED IN COLUMN 3 ARE THOSE PAYABLE IF THE
GROSS INVESTMENT RETURN IS 0%. FOR AN EXPLANATION OF WHY THE SCHEDULED
PREMIUM MAY SIGNIFICANTLY INCREASE AFTER AGE 65, SEE PREMIUMS.
(2) ASSUMES NO CONTRACT LOAN HAS BEEN MADE.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND
12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL OR
THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T6
<PAGE>
<TABLE>
<CAPTION>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH LOW INITIAL ANNUAL
PREMIUM OF $1,371.58 RISING TO
$5,363.31 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $17,226.87(1)
USING MAXIMUM CONTRACTUAL CHARGES
DEATH BENEFIT (2) CASH SURRENDER VALUE (2)
--------------------------------------- ---------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED AT --------------------------------------- ---------------------------------------
POLICY ANNUAL 4% INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YEAR PREMIUM PER YEAR (1) (-1.45% NET) (4.55% NET) (10.55% NET) (-1.45% NET) (4.55% NET) (10.55% NET)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,372 $ 1,426 $300,000 $300,000 $300,000 $ 0 $ 0 $ 0
2 $ 1,390 $ 2,929 $300,000 $300,000 $300,000 $ 0 $ 0 $ 0
3 $ 1,417 $ 4,520 $300,000 $300,000 $300,000 $ 0 $ 0 $ 0
4 $ 1,446 $ 6,205 $300,000 $300,000 $300,000 $ 0 $ 56 $ 550
5 $ 1,475 $ 7,987 $300,000 $300,000 $300,000 $ 38 $ 670 $ 1,423
6 $ 1,512 $ 9,879 $300,000 $300,000 $300,000 $ 762 $ 1,632 $ 2,713
7 $ 1,551 $ 11,888 $300,000 $300,000 $300,000 $ 1,730 $ 2,876 $ 4,361
8 $ 1,593 $ 14,020 $300,000 $300,000 $300,000 $ 2,671 $ 4,133 $ 6,109
9 $ 1,638 $ 16,284 $300,000 $300,000 $300,000 $ 3,590 $ 5,408 $ 7,971
10 $ 1,688 $ 18,691 $300,000 $300,000 $300,000 $ 4,482 $ 6,696 $ 9,957
15 $ 2,019 $ 33,270 $300,000 $300,000 $300,000 $ 5,722 $ 10,549 $ 19,450
20 $ 2,610 $ 53,615 $300,000 $300,000 $300,000 $ 5,882 $ 14,444 $ 34,546
25 $ 3,610 $ 83,017 $300,000 $300,000 $300,000 $ 4,232 $ 17,746 $ 59,148
30 (AGE 65) $ 5,363 $126,619 $300,000 $300,000 $300,000 $ 0 $ 19,340 $101,420
35 $17,227 $251,090 $300,000 $300,000 $300,000 $38,685 $ 74,231 $192,478
40 $17,227 $402,528 $300,000 $300,000 $461,017 $58,124 $132,813 $339,728
45 $17,227 $586,776 $300,000 $300,000 $691,230 $42,567 $200,824 $551,235
</TABLE>
(1) FOR A HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%, THE PREMIUM AFTER AGE 65
WILL BE $17,226.87. FOR A GROSS RETURN OF 6%, THE PREMIUM AFTER AGE 65 WILL
BE $16,801.22. FOR A GROSS RETURN OF 12%, THE PREMIUM AFTER AGE 65 WILL BE
$8,750.84. THE PREMIUMS ACCUMULATED IN COLUMN 3 ARE THOSE PAYABLE IF THE
GROSS INVESTMENT RETURN IS 0%. FOR AN EXPLANATION OF WHY THE SCHEDULED
PREMIUM MAY SIGNIFICANTLY INCREASE AFTER AGE 65, SEE PREMIUMS.
(2) ASSUMES NO CONTRACT LOAN HAS BEEN MADE.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND
12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL OR
THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T7
<PAGE>
<TABLE>
<CAPTION>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH LOW INITIAL ANNUAL
PREMIUM OF $1,371.58 RISING TO
$5,363.31 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $17,226.87(1)
USING MAXIMUM CONTRACTUAL CHARGES
DEATH BENEFIT (2) CASH SURRENDER VALUE (2)
--------------------------------------- ---------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED AT --------------------------------------- ---------------------------------------
POLICY ANNUAL 4% INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YEAR PREMIUM PER YEAR (1) (-1.45% NET) (4.55% NET) (10.55% NET) (-1.45% NET) (4.55% NET) (10.55% NET)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,372 $ 1,426 $300,000 $300,008 $300,063 $ 0 $ 0 $ 0
2 $ 1,390 $ 2,929 $300,000 $300,019 $300,170 $ 0 $ 0 $ 0
3 $ 1,417 $ 4,520 $300,000 $300,034 $300,329 $ 0 $ 0 $ 0
4 $ 1,446 $ 6,205 $300,000 $300,055 $300,547 $ 0 $ 0 $ 306
5 $ 1,475 $ 7,987 $300,000 $300,079 $300,828 $ 0 $ 426 $ 1,174
6 $ 1,512 $ 9,879 $300,000 $300,108 $301,181 $ 757 $ 1,621 $ 2,694
7 $ 1,551 $ 11,888 $300,000 $300,142 $301,614 $ 1,724 $ 2,862 $ 4,334
8 $ 1,593 $ 14,020 $300,000 $300,182 $302,138 $ 2,665 $ 4,115 $ 6,071
9 $ 1,638 $ 16,284 $300,000 $300,229 $302,762 $ 3,584 $ 5,386 $ 7,919
10 $ 1,688 $ 18,691 $300,000 $300,281 $303,497 $ 4,476 $ 6,669 $ 9,885
15 $ 2,019 $ 33,270 $300,000 $300,643 $309,308 $ 5,716 $ 10,482 $ 19,147
20 $ 2,610 $ 53,615 $300,000 $301,218 $320,345 $ 5,877 $ 14,282 $ 33,409
25 $ 3,610 $ 83,017 $300,000 $302,073 $339,887 $ 4,226 $ 17,343 $ 55,157
30 (AGE 65) $ 5,363 $126,619 $300,000 $303,306 $373,010 $ 0 $ 18,306 $ 88,010
35 $17,227 $251,090 $300,000 $305,774 $414,800 $38,677 $ 72,077 $181,103
40 $17,227 $402,528 $300,000 $311,136 $504,782 $58,114 $126,145 $319,791
45 $17,227 $586,776 $300,000 $320,482 $674,158 $42,554 $178,073 $531,749
</TABLE>
(1) FOR A HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%, THE PREMIUM AFTER AGE 65
WILL BE $17,226.87. FOR A GROSS RETURN OF 6%, THE PREMIUM AFTER AGE 65 WILL
BE $17,050.86. FOR A GROSS RETURN OF 12%, THE PREMIUM AFTER AGE 65 WILL BE
$13,339.28. THE PREMIUMS ACCUMULATED IN COLUMN 3 ARE THOSE PAYABLE IF THE
GROSS INVESTMENT RETURN IS 0%. FOR AN EXPLANATION OF WHY THE SCHEDULED
PREMIUM MAY SIGNIFICANTLY INCREASE AFTER AGE 65, SEE PREMIUMS.
(2) ASSUMES NO CONTRACT LOAN HAS BEEN MADE.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND
12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL OR
THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T8
<PAGE>
CONTRACT LOANS
The owner may borrow from The Prudential up to the "loan value" of the Contract,
using the Contract as the only security for the loan. The loan value is equal to
the sum of (1) 90% of an amount equal to the portion of the Contract fund value
attributable to the variable investment options and to any prior loan[s]
supported by the variable investment options, minus the portion of any charges
attributable to variable investment options that would be payable upon an
immediate surrender; plus (2) 100% of an amount equal to the portion of the
Contract fund value attributable to the fixed-rate option and to any prior
loan[s] supported by the fixed-rate option, minus the portion of any charges
attributable to the fixed-rate option that would be payable upon an immediate
surrender. The minimum amount that may be borrowed at any one time is $200
unless the proceeds are used to pay premiums on the Contract.
Under one of the loan provisions available under this Contract, interest charged
on a loan accrues daily at a fixed effective annual rate of 5.5%. Alternatively,
the Contract owner may elect a different loan provision available under the
Contract under which the interest rate will vary from time to time. The Contract
owner may switch from the fixed to variable interest loan provision, or
vice-versa, with The Prudential's consent.
If an owner elects the variable loan interest rate provision, interest charged
on any loan will accrue daily at an annual rate The Prudential determines at the
start of each Contract year (instead of at the fixed 5.5% rate). This interest
rate will not exceed the greater of (1) the "Published Monthly Average" for the
calendar month ending 2 months before the calendar month of the Contract
anniversary; or (2) 5%. And, it will never be greater than is permitted by law
in the state of issue of the Contract. The "Published Monthly Average" means
Moody's Corporate Bond Yield Average--Monthly Average Corporates, as published
by Moody's Investors Service, Inc. or any successor to that service, or if that
average is no longer published, a substantially similar average established by
the insurance regulator where the Contract is issued. The Published Monthly
Average in 1995 ranged from 7.11% to 8.71%.
Interest payments on any loan are due at the end of each Contract year. If
interest is not paid when due, it is added to the principal amount of the loan.
The term "Contract debt" means the amount of all outstanding loans plus any
interest accrued but not yet due. If at any time the Contract debt exceeds what
the cash surrender value would be if there were no Contract debt, The Prudential
will notify the Contract owner of its intent to terminate the Contract in 61
days, within which time the owner may repay all or enough of the loan to obtain
a positive cash surrender value and thus keep the Contract in force for a
limited time. If the Contract owner fails to keep the Contract in force, the
amount of unpaid Contract debt will be treated as a distribution which may be
taxable. See TAX TREATMENT OF CONTRACT BENEFITS - PRE-DEATH DISTRIBUTIONS, page
21 and LAPSE AND REINSTATEMENT, page 23.
When a loan is made, an amount equal to the loan proceeds will be transferred
out of the Account, the fixed-rate option and/or the Real Property Account, as
applicable. The reduction will normally be made in the same proportions as the
value in each subaccount, the fixed-rate option, and the Real Property Account
bears to the total value of the Contract. While a loan is outstanding, the
amount that was so transferred will continue to be treated as part of the
Contract fund. It will be credited with a rate of return of 4% if the loan is a
fixed-rate loan (5.5%) and with a rate of return of 1% lower than the interest
rate if it is a variable rate loan, rather than with the actual rate of return
of the subaccount[s], fixed-rate option or Real Property Account.
A loan will not affect the amount of the premiums due. Should the death benefit
become payable while a loan is outstanding, or should the Contract be
surrendered, any Contract debt will be deducted from the death benefit or the
cash surrender value. Loans from Modified Endowment Contracts may be treated for
tax purposes as distributions of income. See TAX TREATMENT OF CONTRACT BENEFITS,
page 21.
A loan will have an effect on a Contract's cash surrender value and may have an
effect on the death benefit, even if the loan is fully repaid, because the
investment results of the selected investment options will apply only to the
amount remaining invested under those options. The longer the loan is
outstanding, the greater the effect is likely to be. The effect could be
favorable or unfavorable. If investment results are greater than the rate being
credited upon the amount of the loan while the loan is outstanding, values under
the Contract will not increase as rapidly as they would have if no loan had been
made. If investment results are below that rate, Contract values will be higher
than they would have been had no loan been made. A loan that is repaid will not
have any effect upon the guaranteed minimum death benefit.
Consider the Contract issued on a 35 year old male insured illustrated in the
table on page T3 with a 12% gross investment return. Assume a $5,000 fixed-rate
(5.5%) loan was made under this Contract at the end of Contract year 8 and
repaid at the end of Contract year 10 and loan interest was paid when due. Upon
repayment, the cash surrender value would be $11,905.05. This amount is lower
than the cash surrender value shown on that page for the end of Contract year 10
because the loan amount was credited with the 4% assumed rate of return rather
than the 10.85% net return for the designated subaccount[s] resulting from the
12% gross return in the underlying Series Fund. If a variable interest rate
option had been chosen, the cash surrender value would have been higher.
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SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
The Prudential, acts as the principal underwriter of the Contract. Prusec,
organized in 1971 under New Jersey law, is registered as a broker and dealer
under the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. Prusec's principal business address is
1111 Durham Avenue, South Plainfield, New Jersey 07080. The Contract is sold by
registered representatives of Prusec who are also authorized by state insurance
departments to do so. The Contract may also be sold through other broker-dealers
authorized by Prusec and applicable law to do so. Registered representatives of
such other broker-dealers may be paid on a different basis than described below.
Where the insured is less than 60 years of age, the representative will
generally receive a commission of no more than 50% of the scheduled premiums for
the first year, no more than 12% of the scheduled premiums for the second,
third, and fourth years, no more than 3% of the scheduled premiums for the fifth
through tenth years, and no more than 2% of the scheduled premiums thereafter.
For insureds over 59 years of age, the commission will be lower. The
representative may be required to return all or part of the first year
commission if the Contract is not continued through the second year.
Representatives with less than 3 years of service may be paid on a different
basis. Representatives who meet certain productivity, profitability, and
persistency standards with regard to the sale of the Contract will be eligible
for additional compensation.
Sales expenses in any year are not equal to the deduction for sales load in that
year. The Prudential expects to recover its total sales expenses over the
periods the Contracts are in effect. To the extent that the sales charges are
insufficient to cover total sales expenses, the sales expenses will be recovered
from The Prudential's surplus, which may include amounts derived from the
mortality and expense risk charge and the guaranteed minimum death benefit risk
charge described in items 5 and 7 under CHARGES AND EXPENSES, page 10.
TAX TREATMENT OF CONTRACT BENEFITS
Each prospective purchaser is urged to consult a qualified tax advisor. The
following discussion is not intended as tax advice, and it is not a complete
statement of what the effect of federal income taxes will be under all
circumstances. Rather, it provides information about how The Prudential believes
the tax laws apply in the most commonly occurring circumstances. There is no
guarantee, however, that the current federal income tax laws and regulations or
interpretations will not change.
TREATMENT AS LIFE INSURANCE. The Contract will be treated as "life insurance,"
as long as it satisfies certain definitional tests set forth in Sections 7702 of
the Internal Revenue Code (the "Code") and as long as the underlying investments
for the Contract satisfy diversification requirements under Section 817(h) of
the Code. (For further detail on diversification requirements, see DIVIDENDS,
DISTRIBUTIONS, AND TAXES in the attached prospectus for the Series Fund.)
The Prudential believes that it has taken adequate steps to cause the Contract
to be treated as life insurance for tax purposes. This means that (1) except as
noted below, the Contract owner should not be taxed on any part of the Contract
fund, including additions attributable to interest, dividends or appreciation;
and (2) the death benefit should be excludible from the gross income of the
beneficiary under Section 101(a) of the Code.
However, Section 7702 of the Code which defines life insurance for tax purposes
gives the Secretary of the Treasury authority to prescribe regulations to carry
out the purposes of the Section. In this regard, proposed regulations governing
mortality charges were issued in 1991 and proposed regulations under Sections
101, 7702 and 7702A governing the treatment of life insurance policies that
provide accelerated death benefits were issued in 1992. None of these proposed
regulations has yet been finalized. Additional regulations under Section 7702
may also be promulgated in the future. Moreover, in connection with the issuance
of temporary regulations under Section 817(h), the Treasury Department announced
that such regulations do not provide guidance concerning the extent to which
Contract owners may direct their investments to particular divisions of a
separate account. Such guidance will be included in regulations or rulings under
Section 817(d) relating to the definition of a variable contract.
The Prudential intends to comply with final regulations issued under sections
7702 and 817. Therefore, it reserves the right to make such changes as it deems
necessary to assure that the Contract continues to qualify as life insurance for
tax purposes. Any such changes will apply uniformly to affected Contract owners
and will be made only after advance written notice to affected Contract owners.
PRE-DEATH DISTRIBUTIONS. The taxation of pre-death distributions depends on
whether the Contract is classified as a Modified Endowment Contract. The
following discussion first deals with distributions under Contracts not so
classified, and then with Modified Endowment Contracts.
1. A surrender or lapse of the Contract may have tax consequences. Upon
surrender, the owner will not be taxed on the cash surrender value except
for the amount, if any, that exceeds the gross premiums paid less the
untaxed portion of any prior withdrawals. The amount of any unpaid
Contract debt will, upon surrender
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or lapse, be added to the cash surrender value and treated, for this
purpose, as if it had been received. Any loss incurred upon surrender is
generally not deductible. The tax consequences of a surrender may differ
if the proceeds are received under any income payment settlement option.
A withdrawal generally is not taxable unless it exceeds total premiums
paid to the date of withdrawal less the untaxed portion of any prior
withdrawals. However, under certain limited circumstances, in the first 15
Contract years all or a portion of a withdrawal may be taxable if the
Contract fund exceeds the total premiums paid less the untaxed portions of
any prior withdrawals, even if total withdrawals do not exceed total
premiums paid to date.
Extra premiums for optional benefits and riders generally do not count in
computing gross premiums paid, which in turn determines the extent to
which a withdrawal might be taxed.
Loans received under the Contract will ordinarily be treated as
indebtedness of the owner and will not be considered to be distributions
subject to tax.
2. Some of the above rules are changed if the Contract is classified as a
Modified Endowment Contract under Section 7702A of the Code. It is
possible for this Contract to be classified as a Modified Endowment
Contract under at least two circumstances: premiums substantially in
excess of scheduled premiums are paid or a decrease in the face amount of
insurance is made (or a rider removed) during the first 7 Contract years.
Moreover, the addition of a rider or the increase in the face amount of
insurance after the Contract date may have an impact on the Contract's
status as a Modified Endowment Contract. Contract owners contemplating any
of these steps should first consult a qualified tax advisor and their
Prudential representative.
If the Contract is classified as a Modified Endowment Contract, then
pre-death distributions, including loans and withdrawals, are includible
in income to the extent that the Contract fund prior to surrender charges
exceeds the gross premiums paid for the Contract increased by the amount
of any loans previously includible in income and reduced by any untaxed
amounts previously received other than the amount of any loans excludible
from income. These rules may also apply to pre-death distributions,
including loans, made during the 2 year period prior to the Contract
becoming a Modified Endowment Contract.
In addition, pre-death distributions from such Contracts (including full
surrenders) will be subject to a penalty of 10 per cent of the amount
includible in income unless the amount is distributed on or after age 59
1/2, on account of the taxpayer's disability or as a life annuity. It is
presently unclear how the penalty tax provisions apply to Contracts owned
by nonnatural persons such as corporations.
Under certain circumstances, Modified Endowment Contracts issued during
any calendar year will be treated as a single contract for purposes of
applying the above rules.
WITHHOLDING
The taxable portion of any amounts received under the Contract will be subject
to withholding to meet federal income tax obligations if the Contract owner
fails to elect that no taxes be withheld or in certain other circumstances.
Contract owners who do not provide a social security number or other taxpayer
identification number will not be permitted to elect out of withholding. All
recipients of such amounts may be subject to penalties under the estimated tax
payment rules if withholding and estimated tax payments are not sufficient.
OTHER TAX CONSIDERATIONS. Transfer of the Contract to a new owner or assignment
of the Contract may have tax consequences depending on the circumstances. In the
case of a transfer of the Contract for a valuable consideration, the death
benefit may be subject to federal income taxes under section 101(a)(2) of the
Code. In addition, a transfer of the Contract to or the designation of a
beneficiary who is either 37 1/2 years younger than the Contract owner or a
grandchild of the Contract owner may have Generation Skipping Transfer tax
consequences under Section 2601 of the Code.
In certain circumstances, deductions for interest paid or accrued on Contract
debt or on other loans that are incurred or continued to purchase or carry the
Contract may be denied under sections 163 of the Code as personal interest or
under section 264 of the Code. Contract owners should consult a tax advisor
regarding the application of these provisions to their circumstances.
Business-owned life insurance is subject to additional rules. Section 264(a)(1)
of the Code generally precludes business Contract owners from deducting premium
payments. Under section 264(a)(4) of the Code, a deduction is not allowed for
any interest paid or accrued on any Contract debt on an insurance policy to the
extent the indebtedness exceeds $50,000 per officer, employee or financially
interested person. The Congress is also considering legislation to deny interest
deductions generally for loans on business-owned policies. The Code also imposes
an indirect tax upon additions to the Contract fund or the receipt of death
benefits under business-owned life insurance policies under certain
circumstances by way of the corporate alternative minimum tax.
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The individual situation of each Contract owner or beneficiary will determine
the federal estate taxes and the state and local estate, inheritance and other
taxes due if the owner or insured dies.
LAPSE AND REINSTATEMENT
The Contract has an advantageous feature that is not typically found in similar
types of life insurance contracts. If scheduled premiums are paid on or before
each due date, or within the grace period after each due date, and there are no
withdrawals, a Contract will remain in force even if the investment results of
that Contract's variable investment option[s] have been so unfavorable that the
Contract fund has decreased to zero or less. Therefore, unlike most similar
types of life insurance contracts that lapse when the cash surrender value
decreases to zero even if premiums are paid, this Contract ensures that as long
as scheduled premiums are paid, insurance protection remains in effect.
In fact, even if a scheduled premium is not paid, the Contract will remain in
force as long as the Contract fund on any Monthly date is equal to or greater
than the tabular Contract fund value on the next Monthly date. This could occur
because of such factors as favorable investment experience, deduction of less
than the maximum permissible charges, or the previous payment of greater than
scheduled premiums.
However, if a scheduled premium is not paid, and the Contract fund is
insufficient to keep the Contract in force, the Contract will go into default.
Should this happen, The Prudential will send the Contract owner a notice of
default setting forth the payment necessary to keep the Contract in force on a
premium paying basis. This payment must be received at The Prudential Home
Office within the 61 day grace period after the notice of default is mailed or
the Contract will lapse. A Contract that lapses with an outstanding Contract
loan may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS on page
21.
A Contract that has lapsed may be reinstated within 5 years after the date of
default unless the Contract has been surrendered for its cash surrender value.
To reinstate a lapsed Contract, The Prudential requires renewed evidence of
insurability, and submission of certain payments due under the Contract.
If a Contract does lapse, it may still provide some benefits. Those benefits are
described below under OPTIONS ON LAPSE.
OPTIONS ON LAPSE
If a Contract lapses, some life insurance coverage may continue in effect, or
the owner may choose to surrender the Contract for its cash surrender value.
1. FIXED EXTENDED TERM INSURANCE. With one exception, explained below, if the
owner does not communicate at all with The Prudential, life insurance coverage
will continue for a length of time that depends on the cash surrender value on
the date of default, the amount of insurance, the rating classification, and the
age and sex (except where unisex rates apply) of the insured. The insurance
amount will be what it would have been on the date of default, taking into
account any Contract debt on that date. The amount will not change while the
insurance stays in force. This benefit is known as fixed extended term
insurance. The owner will be told in writing how long the insurance will be in
effect. Fixed extended term insurance has a cash surrender value, but no loan
value.
Contracts issued on the lives of certain insureds in high risk rating classes
will include a statement that fixed extended term insurance will not be
provided. Under those Contracts, fixed reduced paid-up insurance (as described
in item 2 below) will generally be the automatic option provided on lapse.
However, if variable reduced paid-up insurance (as described in item 3 below) is
available and the amount of that insurance is at least as great as the amount of
fixed extended term insurance, then variable reduced paid-up insurance will be
the automatic option provided on lapse.
2. FIXED REDUCED PAID-UP INSURANCE. The owner may choose to have insurance
coverage provided for the lifetime of the insured. The insurance amount will
generally be lower than what fixed extended term insurance would provide. This
is known as fixed reduced paid-up insurance. The insurance amount will depend on
the cash surrender value on the date of default, the rating classification, and
the age and sex of the insured. The amount will not be less thereafter unless a
loan is taken against the fixed reduced paid-up insurance. The amount may
increase if any dividends are paid. Apart from the case described above in which
fixed reduced paid-up insurance is the automatic benefit provided on lapse, the
owner who wants fixed reduced paid-up insurance must ask for it in writing, in a
form that meets The Prudential's needs, within three months of the date of
default. The Prudential will, if asked, tell the owner what the amount of fixed
reduced paid-up insurance will be. Fixed reduced paid-up insurance has a cash
surrender value and a loan value. Acquisition of reduced paid-up insurance
within the first 7 Contract years may result in the Contract becoming a Modified
Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 21.
3. VARIABLE REDUCED PAID-UP INSURANCE. Variable reduced paid-up insurance
provides insurance coverage for the lifetime of the insured. The initial
insurance amount will depend upon the cash surrender value on the date of
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default, the rating classification, and the age and sex (except where unisex
rates apply) of the insured. This initial insurance amount will be the same as
the amount of fixed reduced paid-up insurance that would have been provided had
that option been selected. This will be a new guaranteed minimum death benefit.
Aside from this guarantee, the cash surrender value and the amount of insurance
will vary with investment performance. Variable reduced paid-up insurance has a
loan privilege identical to that available on premium paying Contracts. See
CONTRACT LOANS, page 20. Acquisition of reduced paid-up insurance within the
first 7 Contract years may result in the Contract becoming a Modified Endowment
Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 21.
Except for the case described above in which variable reduced paid-up insurance
is the automatic option provided upon lapse, the owner who wants variable
reduced paid-up insurance must ask for it in writing, in a form that meets The
Prudential's needs, within 3 months of the date of default. Variable reduced
paid-up insurance will be available only if the initial amount of insurance
would be at least $5,000 and the insured is not in one of the high risk rating
classes for which The Prudential does not offer fixed extended term insurance.
4. PAYMENT OF CASH SURRENDER VALUE. The owner can receive the cash surrender
value by surrendering the Contract and making a proper written request. If The
Prudential receives the request after the grace period expires, the cash
surrender value will be the net value of any fixed extended term insurance then
in force, or the net value of any reduced paid-up insurance then in force
(either fixed or variable), less any Contract debt. Surrender of the Contract
may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 21.
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS
The Contract generally employs mortality tables that distinguish between males
and females. Thus, premiums and benefits under Contracts issued on males and
females of the same age will generally differ. However, in any states that have
adopted regulations prohibiting sex-distinct insurance rates, premiums and cost
of insurance charges will be based on a blended unisex rate whether the insured
is male or female. In addition, employers and employee organizations considering
purchase of a Contract should consult their legal advisors to determine whether
purchase of a Contract based on sex-distinct actuarial tables is consistent with
Title VII of the Civil Rights Act of 1964 or other applicable law. The
Prudential may offer the Contract with unisex mortality rates to such
prospective purchasers.
OTHER GENERAL CONTRACT PROVISIONS
BENEFICIARY. The beneficiary is designated and named in the application by the
Contract owner. Thereafter, the owner may change the beneficiary, provided it is
in accordance with the terms of the Contract. Should the insured die with no
surviving beneficiary, the insured's estate will become the beneficiary.
INCONTESTABILITY. After the Contract has been in force during the insured's
lifetime for 2 years from the Contract date or, with respect to any change in
the Contract that requires The Prudential's approval and could increase its
liability, after the change has been in effect during the insured's lifetime for
2 years from the effective date of the change, The Prudential will not contest
its liability under the Contract in accordance with its terms.
MISSTATEMENT OF AGE OR SEX. If the insured's stated age or sex (except where
unisex rates apply) or both are incorrect in the Contract, The Prudential will
adjust the death benefits payable, as required by law, to reflect the correct
age and sex. Any death benefit will be based on what the most recent charge for
mortality would have provided at the correct age and sex.
SUICIDE EXCLUSION. Generally, if the insured, whether sane or insane, dies by
suicide within 2 years from the Contract date, The Prudential will pay no more
under the Contract than the sum of the premiums paid.
If the insured, whether sane or insane, dies by suicide within 2 years from the
effective date of an increase in the face amount of insurance, The Prudential
will pay, with respect to the amount of the increase, no more than the sum of
the scheduled premiums attributable to the increase.
ASSIGNMENT. This Contract may not be assigned if such assignment would violate
any federal, state or local law or regulation. Generally, the Contract may not
be assigned to an employee benefit plan or program without The Prudential's
consent. The Prudential assumes no responsibility for the validity or
sufficiency of any assignment, and it will not be obligated to comply with any
assignment unless it has received a copy at one of its Home Offices.
SETTLEMENT OPTIONS. The Contract grants to most owners, or to the beneficiary, a
variety of optional ways of receiving Contract proceeds, other than in a lump
sum. Any Prudential representative authorized to sell this Contract can explain
these options upon request.
RIDERS
Contract owners may be able to obtain extra fixed benefits which may require an
additional premium. These optional insurance benefits will be described in what
is known as a "rider" to the Contract. Charges for the riders
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will be deducted from the Contract fund on each Monthly date. One rider pays an
additional amount if the insured dies in an accident. Another waives certain
premiums if the insured is disabled within the meaning of the provision. Others
pay an additional amount if the insured dies within a stated number of years
after issue; similar benefits may be available if the insured's spouse or child
should die. The amounts of these benefits are fully guaranteed at issue; they do
not depend on the performance of the Account. Certain restrictions may apply;
they are clearly described in the applicable rider. Any Prudential
representative authorized to sell the Contract can explain these extra benefits
further. Samples of the provisions are available from The Prudential upon
written request.
THE FIXED-RATE OPTION
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED-RATE
OPTION UNDER THE CONTRACT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND THE GENERAL ACCOUNT HAS NOT BEEN REGISTERED AS AN INVESTMENT COMPANY
UNDER THE INVESTMENT COMPANY ACT OF 1940. ACCORDINGLY, INTERESTS IN THE
FIXED-RATE OPTION ARE NOT SUBJECT TO THE PROVISIONS OF THESE ACTS, AND THE
PRUDENTIAL HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE
COMMISSION HAS NOT REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE
FIXED-RATE OPTION. DISCLOSURE REGARDING THE FIXED-RATE OPTION MAY, HOWEVER, BE
SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF FEDERAL SECURITIES LAWS
RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
As explained earlier, a Contract owner may elect to allocate, either initially
or by transfer, all or part of the amount credited under the Contract to a
fixed-rate option, and the amount so allocated or transferred becomes part of
The Prudential's general assets. Sometimes this is referred to as The
Prudential's general account, which consists of all assets owned by The
Prudential other than those in the Account and in other separate accounts that
have been or may be established by The Prudential. Subject to applicable law,
The Prudential has sole discretion over the investment of the assets of the
general account, and Contract owners do not share in the investment experience
of those assets. Instead, The Prudential guarantees that the part of the
Contract fund allocated to the fixed-rate option will accrue interest daily at
an effective annual rate that The Prudential declares periodically, but not less
than an effective annual rate of 4%. Currently, declared interest rates remain
in effect from the date money is allocated to the fixed-rate option until the
Monthly date in the same month in the following year. Thereafter, a new
crediting rate will be declared each year and will remain in effect for the
calendar year. The Prudential reserves the right to change this practice. The
Prudential is not obligated to credit interest at a higher rate than 4%,
although in its sole discretion it may do so. Different crediting rates may be
declared for different portions of the Contract fund allocated to the fixed-rate
option. On request, a Contract owner will be advised of the interest rates that
currently apply to his or her Contract.
Transfers from the fixed-rate option are subject to strict limits. (See
TRANSFERS, page 9). The payment of any cash surrender value attributable to the
fixed-rate option may be delayed up to 6 months (see WHEN PROCEEDS ARE PAID,
page 17).
VOTING RIGHTS
As stated above, all of the assets held in the subaccounts of the Account will
be invested in shares of the corresponding portfolios of the Series Fund. The
Prudential is the legal owner of those shares and as such has the right to vote
on any matter voted on at Series Fund shareholders meetings. However, The
Prudential will, as required by law, vote the shares of the Series Fund at any
regular and special shareholders meetings it is required to hold in accordance
with voting instructions received from Contract owners. The Series Fund will not
hold annual shareholders meetings when not required to do so under Maryland law
or the Investment Company Act of 1940. Series Fund shares for which no timely
instructions from Contract owners are received, and any shares attributable to
general account investments of The Prudential will be voted in the same
proportion as shares in the respective portfolios for which instructions are
received. Should the applicable federal securities laws or regulations, or their
current interpretation, change so as to permit The Prudential to vote shares of
the Series Fund in its own right, it may elect to do so.
Matters on which Contract owners may give voting instructions include the
following: (1) election of the Board of Directors of the Series Fund; (2)
ratification of the independent accountant of the Series Fund; (3) approval of
the investment advisory agreement for a portfolio of the Series Fund
corresponding to the Contract owner's selected subaccount[s]; (4) any change in
the fundamental investment policy of a portfolio corresponding to the Contract
owner's selected subaccount[s]; and (5) any other matter requiring a vote of the
shareholders of the Series Fund. With respect to approval of the investment
advisory agreement or any change in a portfolio's fundamental investment policy,
Contract owners participating in such portfolios will vote separately on the
matter, pursuant to the requirements of Rule 18f-2 under the 1940 Act.
The number of Series Fund shares for which instructions may be given by a
Contract owner is determined by dividing the portion of the value of the
Contract derived from participation in a subaccount, by the value of one share
in the corresponding portfolio of the Series Fund. The number of votes for which
each Contract owner may
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give The Prudential instructions will be determined as of the record date chosen
by the Board of Directors of the Series Fund. The Prudential will furnish
Contract owners with proper forms and proxies to enable them to give these
instructions. The Prudential reserves the right to modify the manner in which
the weight to be given voting instructions is calculated where such a change is
necessary to comply with current federal regulations or interpretations of those
regulations.
The Prudential may, if required by state insurance regulations, disregard voting
instructions if such instructions would require shares to be voted so as to
cause a change in the sub-classification or investment objectives of one or more
of the Series Fund's portfolios, or to approve or disapprove an investment
advisory contract for the Series Fund. In addition, The Prudential itself may
disregard voting instructions that would require changes in the investment
policy or investment advisor of one or more of the Series Fund's portfolios,
provided that The Prudential reasonably disapproves such changes in accordance
with applicable federal regulations. If The Prudential does disregard voting
instructions, it will advise Contract owners of that action and its reasons for
such action in the next annual or semi-annual report to Contract owners.
Contract owners also share with the owners of all Prudential Contracts and
policies the right to vote in elections for members of the Board of Directors of
The Prudential.
SUBSTITUTION OF SERIES FUND SHARES
Although The Prudential believes it to be unlikely, it is possible that in the
judgment of its management, one or more of the portfolios of the Series Fund may
become unsuitable for investment by Contract owners because of investment policy
changes, tax law changes, or the unavailability of shares for investment. In
that event, The Prudential may seek to substitute the shares of another
portfolio or of an entirely different mutual fund. Before this can be done, the
approval of the SEC, and possibly one or more state insurance departments, may
be required.
Contract owners will be notified of such substitution.
REPORTS TO CONTRACT OWNERS
Once each Contract year (except where the Contract is in force as fixed extended
term insurance or fixed reduced paid-up insurance), Contract owners will be sent
statements that provide certain information pertinent to their own Contract.
These statements detail values and transactions made and specific Contract data
that apply only to each particular Contract. On request, a Contract owner will
be sent a current statement in a form similar to that of the annual statement
described above, but The Prudential may limit the number of such requests or
impose a reasonable charge if such requests are made too frequently.
Each Contract owner will also be sent an annual report for the Account. Contract
owners will also be sent annual and semi-annual reports of the Series Fund
showing the financial condition of the portfolios and the investments held in
each.
STATE REGULATION
The Prudential is subject to regulation and supervision by the Department of
Insurance of the State of New Jersey, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
The Prudential is required to submit annual statements of its operations,
including financial statements, to the insurance departments of the various
jurisdictions in which it does business to determine solvency and compliance
with local insurance laws and regulations.
In addition to the annual statements referred to above, The Prudential is
required to file with New Jersey and other jurisdictions a separate statement
with respect to the operations of all its variable contract accounts, in a form
promulgated by the National Association of Insurance Commissioners.
EXPERTS
The financial statements included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein, and are included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing. Deloitte &
Touche LLP's principal business address is Two Hilton Court, Parsippany, New
Jersey 07054-0319. Actuarial matters included in this prospectus have been
examined by Nancy D. Davis, FSA, MAAA, whose opinion is filed as an exhibit to
the registration statement.
On March 12, 1996, Deloitte & Touche LLP was dismissed as the independent
accountants of The Prudential. There have been no disagreements with Deloitte &
Touche LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of the accountant, would have caused them to make a reference
to the matter in their reports.
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LITIGATION
No litigation is pending that would have a material effect upon the Account or
the Series Fund.
ADDITIONAL INFORMATION
A registration statement has been filed with the SEC under the Securities Act of
1933, relating to the offering described in this prospectus. This prospectus
does not include all of the information set forth in the registration statement.
Certain portions have been omitted pursuant to the rules and regulations of the
SEC. The omitted information may, however, be obtained from the SEC's principal
office in Washington, D.C., upon payment of a prescribed fee.
Further information may also be obtained from The Prudential's office. The
address and telephone number are set forth on the cover of this prospectus.
FINANCIAL STATEMENTS
The consolidated financial statements of The Prudential and subsidiaries
included herein should be distinguished from the financial statements of the
Account, and should be considered only as bearing upon the ability of The
Prudential to meet its obligations under the Contracts.
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DIRECTORS AND OFFICERS OF THE PRUDENTIAL
The directors and certain officers of The Prudential, listed with their
principal occupations during the past 5 years, are shown below.
DIRECTORS OF THE PRUDENTIAL
FRANKLIN E. AGNEW. Director. -- Business Consultant and former Senior Vice
President of H.J. Heinz. Address: One Mellon Bank Center, Suite 2120,
Pittsburgh, PA 15219.
FREDERIC K. BECKER, Director. -- President of Wilentz, Goldman, and Spitzer (law
firm). Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
WILLIAM W. BOESCHENSTEIN, Director.--Director, Owens-Corning Fiberglas
Corporation. Address: One Seagate, Toledo, OH 43604.
LISLE C. CARTER, JR., Director.--Former Senior Vice President and General
Counsel, United Way of America. Address: 701 North Forfeits Avenue, Alexandria,
VA 22314.
JAMES G. CULLEN, Director.--Vice Chairman, Bell Atlantic Corporation since 1995;
1993 to 1995: President, Bell Atlantic Corporation; Prior to 1993: President,
New Jersey Bell. Address: 1310 North Court House Road, 11th floor, Alexandria,
VA 22201.
CAROLYNE K. DAVIS, Director.--Health Care Advisor, Ernst & Young. Address: 5480
Cayuga Lake Road, Romulus, NY 14541.
ROGER A. ENRICO, Director.--Chairman and Chief Executive Officer, Pepsico
Worldwide Restaurants since 1994; 1993 to 1994: Vice Chairman, Pepsi Co. Inc.;
1991 to 1993: Chairman and Chief Executive Officer, Pepsi Co. Worldwide Foods.
Address: 6303 Forest Park, Dallas, TX 75235.
ALLAN D. GILMOUR, Director.--Former Vice Chairman, Ford Motor Company. Address:
Prudential Plaza, Newark, NJ 07102-3777.
WILLIAM H. GRAY, III, Director.--President and Chief Executive Officer, United
Negro College Fund, Inc. since 1991. Address: 8260 Willow Oaks Corporate Drive,
Forfeits, VA 22031.
JON F. HANSON, Director.--Chairman, Hampshire Management Co. Address: 235 Moore
Street, Suite 200, Hackensack, NJ 07601.
CONSTANCE J. HORNER, Director.--Guest Scholar, The Brookings Institution since
1993; 1991 to 1992 Assistant to the President and Director of Presidential
Personnel, U.S. Government. Address: 1775 Massachusetts Avenue, N.W.,
Washington, DC 20036-2188.
ALLEN F. JACOBSON, Director.--Former Chairman and Chief Executive Officer,
Minnesota Mining & Manufacturing Co. Address: 30 Seventh Street East, St. Paul,
MN 55101-4901.
GARNETT L. KEITH, JR., Director and Vice Chairman.--Vice Chairman of The
Prudential. Address: Prudential Plaza, Newark, NJ 07102-3777.
BURTON G. MALKIEL, Director.--Professor, Princeton University. Address:
Princeton University, 110 Fisher Hall, Prospect Avenue, Princeton, NJ
08544-1021.
JOHN R. OPEL, Director.--Prior to 1994, Chairman of the Executive Committee,
International Business Machines Corporation. Address: 590 Madison Avenue, New
York, NY 10022.
ARTHUR F. RYAN, Chairman of the Board, President, and Chief Executive Officer.
- -- Chairman of the Board, President, and Chief Executive Officer, The Prudential
since 1994; Prior to 1994, President and Chief Operating Officer, Chase
Manhattan Corporation. Address: 751 Broad Street, Newark, NJ 07102-3777.
CHARLES R. SITTER, Director.--Former President and Director, Exxon Corporation.
Address: 225 John W. Carpenter Freeway, Irving, TX 75062.
DONALD L. STAHELI, Director.--Chairman and Chief Executive Officer, Continental
Grain Company since 1994; Prior to 1994; Chairman, Continental Grain Company.
Address: 277 Park Avenue, New York, NY 10172.
RICHARD M. THOMSON, Director.--Chairman of the Board and Chief Executive
Officer, The Toronto-Dominion Bank. Address: P.O. Box 1, Toronto-Dominion
Centre, Toronto, Ontario, M5K 1A2, Canada.
P. ROY VAGELOS, M.D., Director.--Former Chairman, President and Chief Executive
Officer, Merck & Co., Inc. Address: One Crossroads Drive, Bedminster, NJ 07921.
28
<PAGE>
STANLEY C. VAN NESS, Director.--Attorney, Picco, Herbert, and Kennedy (law
firm). Address: One State Street Square, Suite 1000, Trenton, NJ 08607-1388.
PAUL A. VOLCKER, Director.--Chairman, James D. Wolfensohn, Inc. Address: 599
Lexington Avenue, New York, NY 10022.
JOSEPH H. WILLIAMS, Director.--Director, The Williams Companies since 1994;
Prior to 1994: Chairman and Chief Executive Officer, The Williams Companies.
Address: P.O. Box 2400, Tulsa, OK 74102.
OTHER EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
MARK B. GRIER, Chief Financial Officer.--Chief Financial Officer of The
Prudential since 1995; Prior to 1995: Executive Vice President and Head of
Global Markets, Chase Manhattan Corporation.
SUSAN L. BLOUNT, Vice President and Secretary.--Vice President and Secretary of
The Prudential since 1995; Prior to 1995: Assistant General Counsel for
Prudential Residential Services Company.
C. EDWARD CHAPLIN, Vice President and Treasurer.--Vice President and Treasurer
of The Prudential since 1995; 1993 to 1995: Managing Director and Assistant
Treasurer of The Prudential; 1992 to 1993: Vice President and Assistant
Treasurer, Banking and Cash Management for The Prudential; Prior to 1992:
Regional Vice President of Prudential Mortgage Capital Company.
29
<PAGE>
(This page intentionally left blank.)
30
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE
TOTAL MARKET BOND EQUITY MANAGED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $3,599,591,117 $ 91,504,205 $ 102,110,437 $ 796,560,693 $ 955,172,457
-------------- -------------- -------------- -------------- --------------
LIABILITIES
Payable to Related Separate Account............. 112,981 0 112,981 0 0
-------------- -------------- -------------- -------------- --------------
NET ASSETS........................................ $3,599,478,136 $ 91,504,205 $ 101,997,456 $ 796,560,693 $ 955,172,457
============== ============== ============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $3,588,840,453 $ 91,078,689 $ 101,673,097 $ 792,519,007 $ 953,458,614
Equity of The Prudential Insurance Company of
America....................................... 10,637,683 425,516 324,359 4,041,686 1,713,843
-------------- -------------- -------------- -------------- --------------
$3,599,478,136 $ 91,504,205 $ 101,997,456 $ 796,560,693 $ 955,172,457
============== ============== ============== ============== ==============
</TABLE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1995
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE
TOTAL MARKET BOND EQUITY MANAGED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 111,690,657 $ 4,806,197 $ 6,288,926 $ 14,649,870 $ 27,370,012
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 22,111,170 588,554 636,478 4,664,094 5,819,777
Reimbursement for excess expenses [Note 3D]..... (38,198) 0 0 0 0
-------------- -------------- -------------- -------------- --------------
NET EXPENSES...................................... 22,072,972 588,554 636,478 4,664,094 5,819,777
-------------- -------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 89,617,685 4,217,643 5,652,448 9,985,776 21,550,235
-------------- -------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 111,700,229 0 222,002 27,318,049 39,426,921
Realized gain (loss) on shares redeemed
[average cost basis].......................... 235,828 0 30,407 11,957 56,509
Net unrealized gain on investments.............. 427,073,308 0 10,042,691 129,700,617 110,261,394
-------------- -------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... 539,009,365 0 10,295,100 157,030,623 149,744,824
-------------- -------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 628,627,050 $ 4,217,643 $ 15,947,548 $ 167,016,399 $ 171,295,059
============== ============== ============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A1
<PAGE>
STATEMENTS OF NET ASSETS (CONTINUED)
December 31, 1995
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------
ZERO ZERO
COUPON COUPON HIGH
CONSERVATIVE BOND BOND YIELD STOCK
BALANCED 1995 2000 BOND INDEX
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $ 786,605,541 $ 0 $ 20,466,375 $ 68,050,361 $ 297,367,890
-------------- -------------- -------------- -------------- --------------
LIABILITIES
Payable to Related Separate Account............. 0 0 0 0 0
-------------- -------------- -------------- -------------- --------------
NET ASSETS........................................ $ 786,605,541 $ 0 $ 20,466,375 $ 68,050,361 $ 297,367,890
============== ============== ============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $ 785,777,721 $ 0 $ 20,452,359 $ 67,967,542 $ 296,625,930
Equity of The Prudential Insurance Company of
America....................................... 827,820 0 14,016 82,819 741,960
-------------- -------------- -------------- -------------- --------------
$ 786,605,541 $ 0 $ 20,466,375 $ 68,050,361 $ 297,367,890
============== ============== ============== ============== ==============
<CAPTION>
EQUITY NATURAL
INCOME RESOURCES GLOBAL
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $ 223,168,163 $ 101,098,037 $ 49,702,460
-------------- -------------- --------------
LIABILITIES
Payable to Related Separate Account............. 0 0 0
-------------- -------------- --------------
NET ASSETS........................................ $ 223,168,163 $ 101,098,037 $ 49,702,460
============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $ 222,179,341 $ 100,775,478 $ 49,235,307
Equity of The Prudential Insurance Company of
America....................................... 988,822 322,559 467,153
-------------- -------------- --------------
$ 223,168,163 $ 101,098,037 $ 49,702,460
============== ============== ==============
</TABLE>
STATEMENTS OF OPERATIONS (CONTINUED)
For the year ended December 31, 1995
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------
ZERO ZERO
COUPON COUPON HIGH
CONSERVATIVE BOND BOND YIELD STOCK
BALANCED 1995 2000 BOND INDEX
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 30,522,743 $ 313,598 $ 837,457 $ 6,585,427 $ 5,408,994
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 5,231,266 30,367 131,947 434,315 1,743,600
Reimbursement for excess expenses [Note 3D]..... 0 (6,868) (14,886) 0 0
-------------- -------------- -------------- -------------- --------------
NET EXPENSES...................................... 5,231,266 23,499 117,061 434,315 1,743,600
-------------- -------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 25,291,477 290,099 720,396 6,151,112 3,665,394
-------------- -------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 26,552,510 77,686 759,176 0 2,097,393
Realized gain (loss) on shares redeemed
[average cost basis].......................... 97,662 (324,158) 16,969 (58,578) 293,916
Net unrealized gain on investments.............. 55,648,508 231,423 1,982,145 3,163,738 66,716,563
-------------- -------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... 82,298,680 (15,049) 2,758,290 3,105,160 69,107,872
-------------- -------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 107,590,157 $ 275,050 $ 3,478,686 $ 9,256,272 $ 72,773,266
============== ============== ============== ============== ==============
<CAPTION>
EQUITY NATURAL
INCOME RESOURCES GLOBAL
-------------- -------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 7,622,371 $ 1,146,237 $ 714,936
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 1,320,659 630,840 260,887
Reimbursement for excess expenses [Note 3D]..... 0 (14) 0
-------------- -------------- --------------
NET EXPENSES...................................... 1,320,659 630,826 260,887
-------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 6,301,712 515,411 454,049
-------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 9,279,251 4,578,307 915,804
Realized gain (loss) on shares redeemed
[average cost basis].......................... 46,601 68,144 4,998
Net unrealized gain on investments.............. 18,945,636 14,973,181 4,212,026
-------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... 28,271,488 19,619,632 5,132,828
-------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 34,573,200 $ 20,135,043 $ 5,586,877
============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A2
<PAGE>
STATEMENTS OF NET ASSETS (CONTINUED)
December 31, 1995
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
ZERO
COUPON SMALL
GOVERNMENT BOND PRUDENTIAL CAPITALIZATION
INCOME 2005 JENNISON STOCK
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $ 73,135,507 $ 21,163,904 $ 7,658,781 $ 5,826,306
LIABILITIES
Payable to Related Separate Account............. 0 0 0 0
-------------- -------------- -------------- --------------
NET ASSETS........................................ $ 73,135,507 $ 21,163,904 $ 7,658,781 $ 5,826,306
============== ============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $ 73,073,051 $ 21,001,313 $ 7,426,649 $ 5,596,355
Equity of The Prudential Insurance Company of
America....................................... 62,456 162,591 232,132 229,951
-------------- -------------- -------------- --------------
$ 73,135,507 $ 21,163,904 $ 7,658,781 $ 5,826,306
============== ============== ============== ==============
</TABLE>
STATEMENTS OF OPERATIONS (CONTINUED)
For the year ended December 31, 1995
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
ZERO
COUPON SMALL
GOVERNMENT BOND PRUDENTIAL CAPITALIZATION
INCOME 2005 JENNISON* STOCK*
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 4,467,531 $ 939,899 $ 376 $ 16,083
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 478,032 118,323 12,370 9,661
Reimbursement for excess expenses [Note 3D]..... 0 (16,430) 0 0
-------------- -------------- -------------- --------------
NET EXPENSES...................................... 478,032 101,893 12,370 9,661
-------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 3,989,499 838,006 (11,994) 6,422
-------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 0 425,717 0 47,413
Realized gain (loss) on shares redeemed
[average cost basis].......................... (8,599) 0 0 0
Net unrealized gain on investments.............. 7,403,233 3,328,939 281,405 181,809
-------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... 7,394,634 3,754,656 281,405 229,222
-------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 11,384,133 $ 4,592,662 $ 269,411 $ 235,644
============== ============== ============== ==============
*Commenced
Business
on 5/1/95
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A3
<PAGE>
(This page intentionally left blank.)
A4
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
MONEY DIVERSIFIED
TOTAL MARKET BOND
------------------------------ ------------------------------ ------------------------------
1995 1994 1995 1994 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 89,617,685 $ 63,087,032 $ 4,217,643 $ 2,402,301 $ 5,652,448 $ 4,226,871
Capital gains distributions
received....................... 111,700,229 54,709,623 0 0 222,002 158,594
Realized gain (loss) on shares
redeemed
[average cost basis]........... 235,828 167,179 0 0 30,407 4,403
Net unrealized gain (loss) on
investments.................... 427,073,308 (155,373,175) 0 0 10,042,691 (7,162,380)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 628,627,050 (37,409,341) 4,217,643 2,402,301 15,947,548 (2,772,512)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 394,015,275 560,003,324 8,955,240 6,444,757 9,712,345 11,829,119
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (10,302,284) (942,487) 161,461 (213,654) 143,151 (532,267)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 1,012,340,041 521,651,496 13,334,344 8,633,404 25,803,044 8,524,340
NET ASSETS:
Beginning of year................ 2,587,138,095 2,065,486,599 78,169,861 69,536,457 76,194,412 67,670,072
-------------- -------------- -------------- -------------- -------------- --------------
End of year...................... $3,599,478,136 $2,587,138,095 $ 91,504,205 $ 78,169,861 $ 101,997,456 $ 76,194,412
============== ============== ============== ============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A5
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
FLEXIBLE
EQUITY MANAGED
------------------------------ ------------------------------
1995 1994 1995 1994
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 9,985,776 $ 7,323,925 $ 21,550,235 $ 14,060,998
Capital gains distributions
received....................... 27,318,049 19,666,506 39,426,921 18,931,168
Realized gain (loss) on shares
redeemed
[average cost basis]........... 11,957 86,672 56,509 0
Net unrealized gain (loss) on
investments.................... 129,700,617 (18,362,891) 110,261,394 (56,779,739)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 167,016,399 8,714,212 171,295,059 (23,787,573)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 130,026,767 123,951,671 86,936,282 142,298,237
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (595,673) 452,486 (2,895,506) (55,717)
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 296,447,493 133,118,369 255,335,835 118,454,947
NET ASSETS:
Beginning of year................ 500,113,200 366,994,831 699,836,622 581,381,675
-------------- -------------- -------------- --------------
End of year...................... $ 796,560,693 $ 500,113,200 $ 955,172,457 $ 699,836,622
============== ============== ============== ==============
<CAPTION>
ZERO
COUPON
CONSERVATIVE BOND
BALANCED 1995
------------------------------ ------------------------------
1995 1994 1995 1994
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 25,291,477 $ 16,966,301 $ 290,099 $ 263,254
Capital gains distributions
received....................... 26,552,510 6,635,310 77,686 1,011
Realized gain (loss) on shares
redeemed
[average cost basis]........... 97,662 31,649 (324,158) 586
Net unrealized gain (loss) on
investments.................... 55,648,508 (33,092,575) 231,423 (288,227)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 107,590,157 (9,459,315) 275,050 (23,376)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 44,932,925 127,164,401 (5,059,111) 338,277
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (3,421,660) (1,173,893) (20,536) (106,380)
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 149,101,422 116,531,193 (4,804,597) 208,521
NET ASSETS:
Beginning of year................ 637,504,119 520,972,926 4,804,597 4,596,076
-------------- -------------- -------------- --------------
End of year...................... $ 786,605,541 $ 637,504,119 $ 0 $ 4,804,597
============== ============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A6
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
ZERO
COUPON HIGH
BOND YIELD STOCK
2000 BOND INDEX
------------------------------ ------------------------------ ------------------------------
1995 1994 1995 1994 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 720,396 $ 1,032,410 $ 6,151,112 $ 4,958,854 $ 3,665,394 $ 3,181,988
Capital gains distributions
received....................... 759,176 31,655 0 38 2,097,393 267,733
Realized gain (loss) on shares
redeemed
[average cost basis]........... 16,969 1,031 (58,578) 5,625 293,916 58,302
Net unrealized gain (loss) on
investments.................... 1,982,145 (2,416,751) 3,163,738 (6,827,471) 66,716,563 (2,856,319)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 3,478,686 (1,351,655) 9,256,272 (1,862,954) 72,773,266 651,704
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 846,650 900,334 4,374,480 9,774,435 33,935,158 26,983,569
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (645,588) 409,426 (119,164) (576,511) (100,558) (298,727)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 3,679,748 (41,895) 13,511,588 7,334,970 106,607,866 27,336,546
NET ASSETS:
Beginning of year................ 16,786,627 16,828,522 54,538,773 47,203,803 190,760,024 163,423,478
-------------- -------------- -------------- -------------- -------------- --------------
End of year...................... $ 20,466,375 $ 16,786,627 $ 68,050,361 $ 54,538,773 $ 297,367,890 $ 190,760,024
============== ============== ============== ============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A7
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
----------------------------------------------------------------------------------------------
EQUITY NATURAL
INCOME RESOURCES GLOBAL**
------------------------------ ------------------------------ ------------------------------
1995 1994 1995 1994 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 6,301,712 $ 4,108,092 $ 515,411 $ 203,463 $ 454,049 $ (11,478)
Capital gains distributions
received....................... 9,279,251 7,633,088 4,578,307 1,375,424 915,804 5,622
Realized gain (loss) on shares
redeemed
[average cost basis]........... 46,601 34,607 68,144 22,045 4,998 0
Net unrealized gain (loss) on
investments.................... 18,945,636 (11,478,198) 14,973,181 (5,314,192) 4,212,026 (1,421,127)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 34,573,200 297,589 20,135,043 (3,713,260) 5,586,877 (1,426,983)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 38,554,244 51,018,498 9,214,757 22,317,372 16,098,541 29,174,840
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (646,585) (376,490) (398,931) (47,480) (1,921,654) 2,190,839
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 72,480,859 50,939,597 28,950,869 18,556,632 19,763,764 29,938,696
NET ASSETS:
Beginning of year................ 150,687,304 99,747,707 72,147,168 53,590,536 29,938,696 0
-------------- -------------- -------------- -------------- -------------- --------------
End of year...................... $ 223,168,163 $ 150,687,304 $ 101,098,037 $ 72,147,168 $ 49,702,460 $ 29,938,696
============== ============== ============== ============== ============== ==============
**Commenced
Business
on 5/1/94
<CAPTION>
GOVERNMENT
INCOME
------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 3,989,499 $ 3,587,433
Capital gains distributions
received....................... 0 0
Realized gain (loss) on shares
redeemed
[average cost basis]........... (8,599) (74,828)
Net unrealized gain (loss) on
investments.................... 7,403,233 (7,299,824)
-------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 11,384,133 (3,787,219)
-------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 481,705 4,183,444
-------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (293,673) (467,937)
-------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 11,572,165 (71,712)
NET ASSETS:
Beginning of year................ 61,563,342 61,635,054
-------------- --------------
End of year...................... $ 73,135,507 $ 61,563,342
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A8
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
ZERO
COUPON SMALL
BOND PRUDENTIAL CAPITALIZATION
2005 JENNISON* STOCK*
------------------------------ -------------- --------------
1995 1994 1995 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 838,006 $ 782,620 $ (11,994) $ 6,422
Capital gains distributions
received....................... 425,717 3,474 0 47,413
Realized gain (loss) on shares
redeemed
[average cost basis]........... 0 (2,913) 0 0
Net unrealized gain (loss) on
investments.................... 3,328,939 (2,073,481) 281,405 181,809
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 4,592,662 (1,290,300) 269,411 235,644
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 2,469,936 3,624,370 7,175,027 5,360,329
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ 7,956 (146,182) 214,343 230,333
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 7,070,554 2,187,888 7,658,781 5,826,306
NET ASSETS:
Beginning of year................ 14,093,350 11,905,462 0 0
-------------- -------------- -------------- --------------
End of year...................... $ 21,163,904 $ 14,093,350 $ 7,658,781 $ 5,826,306
============== ============== ============== ==============
*Commenced
Business
on 5/1/95
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A9
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
NOTE 1: GENERAL
The Prudential Variable Appreciable Account (the "Account") of The
Prudential Insurance Company of America ("The Prudential") was
established on August 11, 1987 by a resolution of The Prudential's
Board of Directors in conformity with insurance laws of the State of
New Jersey. The assets of the Account are segregated from The
Prudential's other assets.
The Account is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. There are sixteen subaccounts
within the Account, each of which invests only in a corresponding
portfolio of The Prudential Series Fund, Inc. (the "Series Fund"). The
Series Fund is a diversified open-end management investment company,
and is managed by The Prudential.
The Zero Coupon Bond 1995 subaccount was liquidated on November 15,
1995. On that date, all shares held in the corresponding portfolio of
the Series Fund were redeemed and the redemption proceeds were
transferred to the Money Market subaccount, unless otherwise directed,
in accordance with the prospectus.
NOTE 2: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS
The net asset value per share for each portfolio of the Series Fund,
the number of shares of each portfolio held by the subaccounts of the
Account and the aggregate cost of investments in such shares at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
-----------------------------------------------------------------------------
PORTFOLIO MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
INFORMATION MARKET BOND EQUITY MANAGED BALANCED
- ------------------------- ------------- ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Number of shares: 9,150,420 9,025,842 31,067,291 53,483,137 51,382,708
Net asset value per
share: $ 10.0000 $ 11.3131 $ 25.6399 $ 17.8593 $ 15.3088
Cost: $ 91,504,205 $ 98,171,648 $ 646,301,327 $ 863,983,157 $ 746,204,653
<CAPTION>
PORTFOLIOS (CONTINUED)
-----------------------------------------------------------------------------
ZERO ZERO
COUPON COUPON HIGH
PORTFOLIO BOND BOND YIELD STOCK EQUITY
INFORMATION 1995 2000 BOND INDEX INCOME
- ------------------------- ------------- ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Number of shares: 0 1,541,954 8,723,958 14,901,125 13,715,785
Net asset value per
share: $ 0.0000 $ 13.2730 $ 7.8004 $ 19.9561 $ 16.2709
Cost: $ 0 $ 19,405,578 $ 69,244,984 $ 212,396,329 $ 206,403,917
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIOS (CONTINUED)
--------------------------------------------------------------------------------------------
ZERO SMALL
PORTFOLIO NATURAL GOVERNMENT COUPON PRUDENTIAL CAPITALIZATION
INFORMATION RESOURCES GLOBAL INCOME BOND 2005 JENNISON STOCK
- ------------------------- ------------- ------------- -------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Number of shares: 5,853,358 3,199,757 6,240,811 1,604,549 610,418 492,362
Net asset value per
share: $ 17.2718 $ 15.5332 $ 11.7189 $ 13.1899 $ 12.5468 $ 11.8334
Cost: $ 83,470,176 $ 46,911,561 $ 70,390,270 $ 18,878,006 $ 7,377,376 $ 5,644,497
</TABLE>
NOTE 3: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges at an effective annual rate of
up to 0.90% may be applied daily against the net assets representing equity
of the Contract owners held in each subaccount. For contracts with face
amounts of $100,000 or more, the annual rate is 0.60%.
A10
<PAGE>
B. Deferred Sales Charge
A deferred sales charge is imposed upon the surrender of certain variable
life insurance contracts to compensate The Prudential for sales and other
marketing expenses. The amount of any sales charge will depend on the number
of years that have elapsed since the Contract was issued. No sales charge
will be imposed after the tenth year of the Contract. No sales charge will
be imposed on death benefits.
C. Partial Withdrawal Charge
The partial withdrawal of the cash surrender value from certain variable
life insurance contracts invokes a charge equal to the lesser of $15 or 2%
of the amount withdrawn.
D. Expense Reimbursement
The Account is reimbursed by The Prudential, on a non-guaranteed basis, for
expenses incurred by the Series Fund in excess of the effective rate of
0.40% for all Zero Coupon Bond Portfolios, 0.45% for the Stock Index
Portfolio, 0.50% for the Equity Income Portfolio, 0.55% for the Natural
Resources Portfolio, and 0.65% for the High Yield Bond Portfolio of the
average daily net assets of these portfolios.
NOTE 4: TAXES
The operations of the subaccounts form a part of, and are taxed with,
the operations of The Prudential. Under the Internal Revenue Code, all
ordinary income and capital gains allocated to the Contract owners are
not taxed to The Prudential. As a result, the net asset values of the
subaccounts are not affected by federal income taxes on distributions
received by the subaccounts.
NOTE 5: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS
The increase (decrease) in net assets resulting from surplus transfers
represents the net contributions (withdrawals) of The Prudential to the
Account.
NOTE 6: RELATED PARTY TRANSACTIONS
The Prudential has purchased multiple individual contracts of the
Account insuring the lives of certain employees. The Prudential is the
owner and beneficiary of the contracts. Net premium payments of
approximately $22.9 million and $23.0 million for the years ended
December 31, 1995 and December 31, 1994, respectively, were directed to
the Flexible Managed subaccount. Equity of Contract owners in that
subaccount at December 31, 1995 and December 31, 1994 includes
approximately $190.4 million and $136.7 million, respectively, owned by
The Prudential.
A11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Contract Owners of
The Prudential Variable Appreciable
Account and the Board of Directors
of The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying statements of net assets of The Prudential
Variable Appreciable Account of The Prudential Insurance Company of America
(comprising, respectively, the Money Market, Diversified Bond, Equity, Flexible
Managed, Conservative Balanced, Zero Coupon Bond 1995, Zero Coupon Bond 2000,
High Yield Bond, Stock Index, Equity Income, Natural Resources, Global,
Government Income, Zero Coupon Bond 2005, Prudential Jennison, and Small
Capitalization Stock subaccounts) as of December 31, 1995, the related
statements of operations for the periods presented in the year then ended, and
the statements of changes in net assets for each of the periods presented in the
two 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. Our procedures included
confirmation of securities owned as of December 31, 1995. 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 each of the respective subaccounts
constituting The Prudential Variable Appreciable Account as of December 31,
1995, the results of their operations, and the changes in their net assets for
the respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 15, 1996
A12
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS
OF FINANCIAL POSITION
December 31,
1995 1994
-------- --------
(In Millions)
ASSETS
Fixed maturities .............................. $ 85,585 $ 78,620
Equity securities ............................. 1,937 2,327
Mortgage loans ................................ 23,680 26,199
Investment real estate ........................ 1,568 1,600
Policy loans .................................. 6,800 6,631
Other invested assets ......................... 4,019 5,147
Short-term investments ........................ 7,874 10,630
Securities purchased under
agreements to resell ......................... 5,130 5,591
Trading account securities .................... 3,658 6,341
Cash .......................................... 1,633 1,109
Accrued investment income ..................... 1,915 1,932
Premiums due and deferred ..................... 2,402 2,712
Broker-dealer receivables ..................... 8,136 8,164
Other assets .................................. 6,608 6,266
Assets held in Separate Accounts .............. 58,435 48,633
-------- --------
TOTAL ASSETS ................................... $219,380 $211,902
======== ========
LIABILITIES, AVR AND SURPLUS
Liabilities:
Policy liabilities and insurance reserves:
Future policy benefits and claims ............ $ 94,973 $ 98,354
Unearned premiums ............................ 836 1,144
Other policy claims and
benefits payable ............................ 1,932 1,848
Policy dividends ............................. 1,894 1,822
Policyholder account balances ................ 12,540 12,195
Securities sold under agreements
to repurchase ................................ 7,993 8,919
Notes payable and other borrowings ............ 9,157 12,009
Broker-dealer payables ........................ 6,083 6,198
Other liabilities ............................. 14,976 11,983
Liabilities related to Separate Accounts ...... 57,586 47,946
-------- --------
Total Liabilities .............................. 207,970 202,418
-------- --------
Asset Valuation Reserve (AVR) .................. 2,742 2,035
-------- --------
Surplus:
Capital Notes ................................. 984 298
Special surplus fund .......................... 1,274 1,097
Unassigned surplus ............................ 6,410 6,054
-------- --------
Total Surplus .................................. 8,668 7,449
-------- --------
TOTAL LIABILITIES, AVR
AND SURPLUS ................................... $219,380 $211,902
======== ========
CONSOLIDATED STATEMENTS OF
OPERATIONS AND CHANGES IN SURPLUS AND ASSET VALUATION RESERVE (AVR)
Years Ended December 31,
1995 1994 1993
------- ------- -------
(In Millions)
REVENUE
Premiums and annuity
considerations ........................... $27,413 $29,698 $29,982
Net investment income ..................... 9,844 9,595 10,090
Broker-dealer revenue ..................... 3,800 3,677 4,025
Realized investment
gains/(losses) ........................... 882 (450) 953
Other income .............................. 972 1,037 924
------- ------- -------
Total Revenue .............................. 42,911 43,557 45,974
------- ------- -------
BENEFITS AND EXPENSES
Current and future benefits
and claims ............................... 27,854 30,788 30,573
Insurance and underwriting
expenses ................................. 4,577 4,830 4,982
Limited partnership matters ............... 0 1,422 390
General, administrative and
other expenses ........................... 6,034 5,794 5,575
------- ------- -------
Total Benefits and Expenses ................ 38,465 42,834 41,520
------- ------- -------
Income from operations
before dividends
and income taxes .......................... 4,446 723 4,454
Dividends to policyholders ................. 2,519 2,290 2,339
------- ------- -------
Income/(loss) before
income taxes .............................. 1,927 (1,567) 2,115
Income tax provision/(benefit) ............. 1,348 (392) 1,236
------- ------- -------
NET INCOME/(LOSS) .......................... 579 (1,175) 879
Surplus, beginning of year ................. 7,449 8,004 7,365
Issuance of Capital Notes
(after net charge-off of
non-admitted prepaid
postretirement benefit
cost of $113 in 1993) ..................... 686 0 185
Net unrealized investment
gains/(losses) and change
in AVR .................................... (46) 620 (425)
------- ------- -------
SURPLUS, END OF YEAR ....................... 8,668 7,449 8,004
------- ------- -------
AVR, beginning of year ..................... 2,035 2,687 2,457
Increase/(decrease) in AVR ................. 707 (652) 230
------- ------- -------
AVR, END OF YEAR ........................... 2,742 2,035 2,687
------- ------- -------
TOTAL SURPLUS AND AVR ...................... $11,410 $ 9,484 $10,691
======= ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1995 1994 1993
-------- -------- --------
(In Millions)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income/(loss) ..................... $ 579 $(1,175) $ 879
Adjustments to reconcile net
income/(loss) to cash flows from
operating activities:
(Decrease)/increase in policy
liabilities and insurance
reserves ........................... (1,691) 1,289 2,747
Net increase in Separate
Accounts ........................... (162) (52) (59)
Realized investment
(gains)/losses ..................... (882) 450 (953)
Depreciation, amortization and
other non-cash items ............... 217 379 261
Gain on sale and results of
operations from reinsurance
segment ............................ (72) 0 0
Decrease/(increase) in
operating assets:
Mortgage loans ...................... (305) (226) (226)
Policy loans ........................ (169) (175) (174)
Securities purchased
under agreements to
resell ............................. 139 2,979 (2,049)
Trading account
securities ......................... 2,707 2,324 (2,087)
Broker-dealer
receivables ....................... 28 969 (1,803)
Other assets ........................ 205 3,254 (2,172)
(Decrease)/increase in
operating liabilities:
Securities sold under
agreements to repurchase ........... (475) (3,247) 1,134
Broker-dealer payables .............. (115) 788 1,280
Other liabilities ................... 501 (3,170) 1,794
-------- -------- --------
Cash Flows from Operating
Activities ........................... 505 4,387 (1,428)
-------- -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities ..................... 100,317 90,914 100,023
Equity securities .................... 2,302 1,426 1,725
Mortgage loans ....................... 5,567 4,154 4,789
Investment real estate ............... 291 407 336
Other invested assets ................ 1,943 1,022 1,352
Property and equipment ............... 3 637 6
Sale of reinsurance segment .......... 790 0 0
Payments for the purchase of:
Fixed maturities ..................... (107,192) (91,032) (101,217)
Equity securities .................... (1,450) (1,535) (1,085)
Mortgage loans ....................... (3,002) (3,446) (3,530)
Investment real estate ............... (387) (161) (196)
Other invested assets ................ (515) (1,687) (531)
Property and equipment ............... (238) (392) (640)
Short-term investments (net) .......... 2,756 (4,281) (2,150)
Net change in cash placed as
collateral for securities loaned ..... 1,379 2,011 (589)
-------- -------- --------
Cash Flows from Investing
Activities ........................... $ 2,564 $ (1,963) $ (1,707)
-------- -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net (payments)/proceeds of
short-term debt ...................... $ (2,489) $ (1,115) $ 1,106
Proceeds from the issuance of
long-term debt ....................... 763 345 1,228
Payments for the settlement of
long-term debt ....................... (1,376) (760) (721)
Proceeds/(payments) from
unmatched securities purchased
under agreements to resell ........... 322 1,086 (47)
(Payments)/proceeds for
unmatched securities sold under
agreements to repurchase ............. (451) (2,537) 1,707
Proceeds from the issuance of
Capital Notes ........................ 686 0 298
-------- -------- --------
Cash Flows from
Financing Activities ................. (2,545) (2,981) 3,571
-------- -------- --------
Net increase/(decrease)
in cash .............................. 524 (557) 436
Cash, beginning of year ............... 1,109 1,666 1,230
-------- -------- --------
CASH, END OF YEAR ..................... $ 1,633 $ 1,109 $ 1,666
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax payments, net of refunds, made during 1995, 1994 and 1993 were $430
million, $64 million and $933 million, respectively. Interest payments made
during 1995, 1994 and 1993 were $1,413 million, $1,429 million and $1,171
million, respectively.
The 1995 amounts are presented net of the cash flow activities of the
reinsurance segment.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-2
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
1. ACCOUNTING POLICIES AND PRINCIPLES
A. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
The Prudential Insurance Company of America ("Prudential"), a mutual life
insurance company, and its subsidiaries (collectively, "the Company"). The
activities of the Company cover a broad range of financial services,
including life and health care insurance, property and casualty insurance,
securities brokerage, asset management, investment advisory services, and
real estate development and brokerage. All significant intercompany
balances and transactions have been eliminated in consolidation.
B. BASIS OF PRESENTATION
The consolidated financial statements are presented in conformity with
generally accepted accounting principles ("GAAP"), which for mutual life
insurance companies and their insurance subsidiaries are statutory
accounting practices prescribed or permitted by the National Association of
Insurance Commissioners ("NAIC") and their respective domiciliary state
insurance departments. Prescribed statutory accounting practices include
publications of the NAIC, state laws, regulations and general
administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed.
The Company, with permission from the New Jersey Department of Insurance
("the Department"), prepares an Annual Report that differs from the Annual
Statement filed with the Department in that subsidiaries are consolidated
and certain financial statement captions are presented differently.
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the 1995 presentation.
Management has used estimates and assumptions in the preparation of the
financial statements that affect the reported amounts of assets,
liabilities, revenue and expenses. Actual results could differ from those
estimates.
Life and General Insurance Operations--Life premiums are recognized as
income over the premium paying period of the related policies. Annuity
considerations are recognized as revenue when received. Health and property
and casualty premiums are earned ratably over the terms of the related
insurance and reinsurance contracts or policies. Expenses incurred in
connection with acquiring new insurance business, including such
acquisition costs as sales commissions, are charged to operations as
incurred.
Broker-Dealer Operations--The Company is engaged in the securities industry
in the United States, with operations in various foreign countries. Client
transactions are recorded on a settlement date basis. Securities and
commodities commission revenues and related expenses are accrued for client
transactions on a trade date basis. Investment banking revenue includes
advisory fees, selling concessions, management and underwriting fees, and
is recorded, net of related expenses, when the services are substantially
completed. Asset management and portfolio service fees are fees earned on
total assets under management and mutual funds sponsored by the Company and
third parties. Certain costs that are directly related to the sales of
mutual funds are deferred.
C. INVESTED ASSETS
Fixed maturities, which include long-term bonds and redeemable preferred
stock, are stated primarily at amortized cost.
Equity securities, which consist primarily of common stocks, are carried at
fair value.
Mortgage loans are stated primarily at unpaid principal balances. Mortgage
loans for non-life subsidiaries are recorded net of valuation reserves.
Investment real estate, except for real estate acquired in satisfaction of
debt, is carried at cost less accumulated straight-line depreciation,
encumbrances and permanent impairments in value. Real estate acquired in
satisfaction of debt, included in "Other assets," is carried at the lower
of cost or fair value less disposition costs.
Policy loans are stated at unpaid principal balances.
Other invested assets primarily represent the Company's investment in joint
ventures and other forms of partnerships. These investments are carried
primarily on the equity method where the Company has the ability to
exercise significant influence over the operating and financial policies of
the entity.
Short-term investments are stated at amortized cost, which approximates
fair value.
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are collateralized financing transactions and are
carried at their contract amounts plus accrued interest. These agreements
are generally
F-3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
collateralized by cash or securities with market values in excess of the
obligations under the contract. It is the Company's policy to take
possession of securities purchased under resale agreements, to value the
securities daily, and to require adjustment of the underlying collateral
when deemed necessary.
Trading account securities from broker-dealer operations are reported based
upon quoted market prices.
Securities lending is a program whereby securities are loaned to third
parties, primarily major brokerage firms. As of December 31, 1995 and 1994,
the estimated fair values of loaned securities were $7,982 million and
$8,506 million, respectively. Company and NAIC policies require a minimum
of 102% and 105% of the fair value of the domestic and foreign loaned
securities, respectively, to be separately maintained as collateral for the
loans. Cash collateral received is invested in short-term investments. The
offsetting collateral liability as of December 31, 1995 and 1994 is $5,690
million and $4,252 million, respectively. Non-cash collateral is recorded
in memorandum records and is not reflected in the consolidated financial
statements.
Derivative financial instruments--For the Company's non-insurance
subsidiaries, derivatives used for trading purposes are recorded at fair
value as of the reporting date. Realized and unrealized changes in fair
values are recognized in "Broker-dealer revenue" and "Other income" in the
period in which the changes occur. Gains and losses on hedges of existing
assets or liabilities are included in the carrying amount of those assets
or liabilities and are deferred and recognized in earnings in the same
period as the underlying hedged item. For interest rate swaps that qualify
for settlement accounting, the interest differential to be paid or received
under the swap agreements is accrued over the life of the agreements as a
yield adjustment. Gains and losses on early termination of derivatives that
modify the characteristics of designated assets and liabilities are
deferred and are amortized as an adjustment to the yield of the related
assets or liabilities over their remaining lives
Derivatives used in asset/liability risk management activities, which
support life and health insurance and annuity contracts, are recorded at
fair value with unrealized gains and losses recorded in "Net unrealized
investment gains/(losses) and change in AVR." Upon termination of
derivatives supporting life and health insurance and annuity contracts, the
interest-related gains and losses are amortized through the Interest
Maintenance Reserve (IMR).
D. SEPARATE ACCOUNTS
These assets and liabilities, reported at estimated market value, represent
segregated funds invested for pension and other clients. Investment risks
associated with market value changes are generally borne by the clients,
except to the extent of minimum guarantees made by the Company with respect
to certain accounts.
E. CAPITAL NOTES
Interest payments on the 1993 Capital Notes are preapproved by the
Department. This practice differs from that prescribed by the NAIC. The
NAIC practices provide for Insurance Commissioner approval of every
interest payment before the payment is made. The interest payments on the
Capital Notes issued in 1995 comply with prescribed NAIC practices.
Prudential has included all notes as a component of surplus (Note 7).
F. FUTURE APPLICATION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board (the "FASB") issued Interpretation
No. 40, "Applicability of Generally Accepted Accounting Principles to
Mutual Life Insurance and Other Enterprises," which, as amended, is
effective for fiscal years beginning after December 15, 1995.
Interpretation No. 40 changes the current practice of mutual life insurance
companies, with respect to utilizing statutory basis financial statements
for general purposes, in not allowing such financial statements to be
referred to as having been prepared in accordance with GAAP. Interpretation
No. 40 requires GAAP financial statements of mutual life insurance
companies to apply all GAAP pronouncements, unless specifically exempted.
Implementation of Interpretation No. 40 will require significant effort and
judgment. The Company is assessing the impact of Interpretation No. 40 on
its consolidated financial statements. Such effort has not been completed
and management currently believes surplus will increase significantly.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
2. FUTURE POLICY BENEFITS, RESERVE FOR LOSSES AND LOSS EXPENSES
A. For life insurance, general insurance and annuities, unpaid claims and
claim adjustment expenses include estimates of benefits and associated
settlement expenses on reported claims and those which are incurred but not
reported.
Activity in the liability for unpaid claims and claim adjustment expenses
is:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------- --------------------- -----------------------
Accident Property Accident Property Accident Property
and and and and and and
Health Casualty Health Casualty Health Casualty
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(In Millions)
Balance at January 1 ........................ $2,738 $5,116 $2,654 $4,869 $2,623 $4,712
Less reinsurance recoverables .............. 23 1,018 15 1,070 22 1,107
------ ------ ------ ------ ------ ------
Net balance at January 1 .................... 2,715 4,098 2,639 3,799 2,601 3,605
------ ------ ------ ------ ------ ------
Incurred related to:
Current year ............................... 8,062 2,387 7,398 2,541 7,146 2,364
Prior years ................................ (48) 95 (105) 158 (167) 109
------ ------ ------ ------ ------ ------
Total incurred .............................. 8,014 2,482 7,293 2,699 6,979 2,473
------ ------ ------ ------ ------ ------
Paid related to:
Current year ............................... 5,972 1,010 5,568 1,237 5,336 1,119
Prior years ................................ 1,807 959 1,649 1,163 1,605 1,160
------ ------ ------ ------ ------ ------
Total paid .................................. 7,779 1,969 7,217 2,400 6,941 2,279
------ ------ ------ ------ ------ ------
Less reinsurance
segment (Note 10) .......................... 0 2,326 0 0 0 0
------ ------ ------ ------ ------ ------
Net balance at December 31 .................. 2,950 2,285 2,715 4,098 2,639 3,799
Plus reinsurance recoverables .............. 15 819 23 1,018 15 1,070
------ ------ ------ ------ ------ ------
Balance at December 31 ...................... $2,965 $3,104 $2,738 $5,116 $2,654 $4,869
====== ====== ====== ====== ====== ======
</TABLE>
As a result of changes in estimates of insured events in prior years, the
declines of $48 million, $105 million and $167 million in the provision for
claims and claim adjustment expenses for accident and health business in
1995, 1994 and 1993, respectively, were due to lower-than-expected trends
in claim costs and an accelerated decline in indemnity health business.
As a result of changes in estimates of insured events in prior years, the
provision for claims and claim adjustment expenses for property and
casualty business (net of reinsurance recoveries of $88 million, $47
million and $120 million in 1995, 1994 and 1993, respectively) increased by
$95 million, $158 million and $109 million in 1995, 1994 and 1993,
respectively, due to increased loss development and reserve strengthening
for asbestos and environmental claims.
B. Reserves for individual life insurance are calculated using various
methods, interest rates and mortality tables, which produce reserves that
meet the aggregate requirements of state laws and regulations.
Approximately 39% of individual life insurance reserves are determined
using the net level premium method, or by using the greater of the net
level premium reserve or the policy cash value. About 54% of individual
life insurance reserves are calculated according to the Commissioner's
Reserve Valuation Method ("CRVM"), or methods which compare CRVM to policy
cash values. The remaining reserves include universal life reserves which
are equal to the greater of the policyholder account value less the
unamortized expense allowance and the policy cash value, or are for
supplementary benefits whose reserves are calculated using methods,
interest rates and tables appropriate for the benefit provided.
For group life insurance, about 56% of the reserves are associated with
extended death benefits. These reserves are primarily calculated using
modified group tables at various interest rates. The remainder are unearned
premium reserves (calculated using the 1960 Commissioner's Standard Group
Table), reserves for group life fund accumulations and other miscellaneous
reserves.
Reserves for deferred individual annuity contracts are determined using the
Commissioner's Annuity Reserve Valuation Method. These account for 72% of
the individual annuity reserves. The remaining reserves are equal to the
present value of future payments with the annuity mortality table and
interest rates based on the date of issue or maturity as appropriate.
Reserves for other deposit funds or other liabilities with life
contingencies reflect the contract deposit account or experience
accumulation for the contract and any purchased annuity reserves. For money
purchase annuities issued in Canada, the reserve equals the present value
of each deposit accumulated to the end of its guarantee period at its
guaranteed interest rate, discounted at the valuation interest rate.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Accident and health reserves represent the present value of the future
potential payments, discounted for contingencies and interest. The
remaining material reserves for active life reserves and unearned premiums
are valued using the preliminary term method, gross premium valuation
method, or a pro-rata portion of gross premiums. Reserves are also held for
amounts not yet due on hospital benefits and other coverages.
The reserve for guaranteed interest contracts, deposit funds and other
liabilities without life contingencies equal either the present value of
future payments discounted at the guaranteed rate or the fund value.
3. INCOME TAXES
Under the Internal Revenue Code ("the Code"), Prudential and its life
insurance subsidiaries are taxed on their gain from operations after
dividends to policyholders. In calculating this tax, the Code requires the
capitalization and amortization of policy acquisition expenses.
The Code also imposes an "equity tax" on mutual life insurance companies
based on an imputed surplus which, in effect, reduces the deduction for
policyholder dividends. The amount of the equity tax is estimated in the
current year based on the anticipated equity tax rate, and is adjusted in
subsequent years as the rate is finalized.
Prudential files a consolidated federal income tax return with all of its
domestic subsidiaries. Net operating losses of the non-life subsidiaries may
be used in this consolidated return, but are limited each year to the lesser
of 35% of cumulative eligible non-life subsidiary losses or 35% of life
company taxable income. The provision reported in the consolidated financial
statements also includes tax liabilities for foreign subsidiaries.
The non-insurance subsidiaries of the Company recognize deferred tax assets
and liabilities for the expected future tax consequences of events that have
been recognized in their financial statements. Included in "Income tax
provision/(benefit)" are deferred taxes of $109 million, $(477) million and
$21 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
At December 31, 1995, the Company had consolidated non-life tax loss
carryforwards of $595 million which will expire between 1998 and 2010, if not
utilized.
4. INVESTED ASSETS
A. FIXED MATURITIES
The Company invests in both investment grade and non-investment grade
public and private fixed maturities. The Securities Valuation Office of the
NAIC rates the fixed maturities held by insurers for regulatory purposes
and groups investments into six categories ranging from highest quality
bonds to those in or near default. The lowest three NAIC categories
represent primarily high-yield securities and are defined by the NAIC as
including any security with a public agency rating equivalent to B+ or B1
or less. These securities approximate 0.9% and 1.6% of the Company's
consolidated assets at December 31, 1995 and 1994, respectively.
The carrying value and estimated fair value of fixed maturities at December
31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995
-------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies ..................................................... $16,494 $1,409 $ 1 $17,902
Obligations of U.S. states and their
political subdivisions ....................................... 1,365 70 2 1,433
Fixed maturities issued by foreign governments
and their agencies and political subdivisions ................ 3,641 275 4 3,912
Corporate securities .......................................... 58,998 4,792 108 63,682
Mortgage-backed securities .................................... 5,048 276 10 5,314
Other fixed maturities ........................................ 39 0 0 39
------- ------ ---- -------
Total ......................................................... $85,585 $6,822 $125 $92,282
======= ====== ==== =======
</TABLE>
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1994
------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies .................. $13,576 $ 122 $ 646 $13,052
Obligations of U.S. states and their
political subdivisions ..................................... 2,776 32 165 2,643
Fixed maturities issued by foreign governments
and their agencies and political subdivisions .............. 3,093 37 153 2,977
Corporate securities ........................................ 54,076 1,191 1,772 53,495
Mortgage-backed securities .................................. 4,889 82 148 4,823
Other fixed maturities ...................................... 210 0 0 210
------- ------ ------ -------
Total ....................................................... $78,620 $1,464 $2,884 $77,200
======= ====== ====== ========
</TABLE>
The carrying value and estimated fair value of fixed maturities at December
31, 1995, categorized by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because borrowers may
prepay obligations with or without call or prepayment penalties.
Estimated
Carrying Fair
Value Value
-------- ---------
(In Millions)
Due in one year or less .................... $ 398 $ 402
Due after one year through five years ...... 26,936 27,748
Due after five years through ten years ..... 23,124 24,637
Due after ten years ........................ 30,079 34,181
------- -------
80,537 86,968
Mortgage-backed securities ................. 5,048 5,314
------- -------
Total ...................................... $85,585 $92,282
======= =======
Proceeds from the sale and maturity of fixed maturities during 1995, 1994
and 1993 were $100,317 million, $90,914 million and $100,023 million,
respectively. Gross gains of $2,083 million, $693 million and $2,473
million and gross losses of $943 million, $2,009 million and $698 million
were realized on such sales during 1995, 1994 and 1993, respectively.
B. MORTGAGE LOANS
Mortgage loans at December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
(In Millions)
Commercial and agricultural loans:
In good standing ...................................... $17,792 75.1% $19,752 75.4%
In good standing
with restructured terms .............................. 976 4.1% 1,412 5.4%
Past due 90 days or more .............................. 145 0.6% 339 1.3%
In process of foreclosure ............................. 158 0.7% 387 1.5%
Residential loans ...................................... 4,609 19.5% 4,309 16.4%
------- ----- ------- -----
Total mortgage loans ................................... $23,680 100.0% $26,199 100.0%
======= ===== ======= =====
</TABLE>
At December 31, 1995, the Company's mortgage loans were collateralized by
the following property types: office buildings (29%), retail stores (20%),
residential properties (19%), apartment complexes (13%), industrial
buildings (10%), agricultural properties (7%) and other commercial
properties (2%). The mortgage loans are geographically dispersed throughout
the United States and Canada with the largest concentrations in California
(23%) and New York (9%). Included in these balances
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
are mortgage loans with affiliated joint ventures of $653 million and $684
million at December 31, 1995 and 1994, respectively.
C. INVESTMENT REAL ESTATE
Accumulated depreciation on investment real estate was $643 million and
$748 million at December 31, 1995 and 1994, respectively.
D. OTHER INVESTED ASSETS
The Company's net equity in joint ventures and other forms of partnerships
amounted to $2,612 million and $3,357 million as of December 31, 1995 and
1994, respectively. The Company's share of net income from such entities
was $326 million, $354 million and $375 million for 1995, 1994 and 1993,
respectively.
E. NET UNREALIZED INVESTMENT GAINS/(LOSSES)
Net unrealized investment gains/(losses), which result principally from
changes in the carrying values of invested assets, were $661 million, $(32)
million and $(195) million for the years ended December 31, 1995, 1994 and
1993, respectively.
F. ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE
These reserves are required for life insurance companies under NAIC
regulations. The AVR is calculated based on a statutory formula and is
designed to mitigate the effect of valuation and credit-related losses on
unassigned surplus. The IMR captures net realized capital gains and losses
resulting from changes in the general level of interest rates. These gains
and losses are amortized into investment income over the expected remaining
life of the investments sold. At December 31, 1995, the components of AVR
are 67% for fixed maturities, equity securities and short-term investments;
21% for mortgage loans; and 12% for investment real estate and other
invested assets. The IMR balance at December 31, 1995 and 1994 was $1,191
million and $502 million, respectively. During 1995, 1994 and 1993, $775
million, $(929) million and $1,082 million of net realized investment
gains/(losses) were deferred, respectively.
G. RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets in the amounts of $6,271 million and $5,901 million at December 31,
1995 and 1994, respectively, were on deposit with governmental authorities
or trustees as required by law. Assets valued at $3,558 million and $5,855
million at December 31, 1995 and 1994, respectively, were maintained as
compensating balances or pledged as collateral for bank loans and other
financing agreements. Restricted cash and securities of $1,137 million and
$897 million at December 31, 1995 and 1994, respectively, were included in
the consolidated financial statements. The restricted cash represents funds
deposited by clients and funds accruing to clients as a result of trades or
contracts.
5. EMPLOYEE BENEFIT PLANS
A. PENSION PLANS
The Company has several defined benefit pension plans, which cover
substantially all of its employees. Benefits are generally based on career
average earnings and credited length of service. The Company's funding
policy for U.S. plans is to contribute annually the amount necessary to
satisfy the Internal Revenue Service contribution guidelines.
Employee pension benefit plan status is as follows:
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
------------------------ ------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(In Millions)
Actuarial present value of benefit obligation:
Vested benefit obligation ..................................... $(3,270) $(236) $(2,749) $(207)
======= ===== ====== =====
Accumulated benefit obligation ................................ (3,572) (261) (3,025) (230)
======= ===== ====== =====
Projected benefit obligation ................................... (4,330) (297) (3,975) (272)
Plan assets at fair value ...................................... 6,688 206 5,524 180
------- ----- ------ -----
Plan assets in excess of projected benefit obligation .......... 2,358 (91) 1,549 (92)
Unrecognized transition amount ................................. (904) (4) (976) (4)
Unrecognized prior service cost ................................ 199 16 211 17
Unrecognized net (gain)/loss ................................... (753) 15 (18) 27
Additional minimum liability ................................... 0 (8) 0 (8)
------- ----- ------ -----
Prepaid/(accrued) pension cost ................................. $ 900 $ (72) $ 766 $ (60)
======= ===== ====== =====
</TABLE>
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Plan assets consist primarily of equity securities, bonds, real estate and
short-term investments, of which $4,974 million and $4,325 million are
included in Separate Account assets and liabilities at December 31, 1995
and 1994, respectively.
In compliance with statutory accounting principles, Prudential's prepaid
pension costs of $900 million and $766 million at December 31, 1995 and
1994, respectively, are considered non-admitted assets. These assets are
excluded from the consolidated assets and the changes in these non-admitted
assets were $134 million, $(19) million, and $142 million in 1995, 1994 and
1993, respectively.
The components of the net periodic pension (benefit)/expense for 1995, 1994
and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(In Millions)
Service cost--benefits earned during the year ............................. $ 133 $ 163 $ 133
Interest cost on projected benefit obligation ............................. 392 311 301
Actual return on assets ................................................... (1,288) 56 (854)
Net amortization and deferral ............................................. 629 (639) 301
Net curtailment gains and special termination benefits .................... 0 156 0
------- ----- -----
Net periodic pension (benefit)/expense .................................... $ (134) $ 47 $(119)
======= ===== =====
</TABLE>
The net reduction to surplus relating to the Company's pension plans is $0,
$28 million and $23 million in 1995, 1994 and 1993, respectively, which
considers the changes in Prudential's non-admitted prepaid pension asset of
$134 million, $(19) million and $142 million, respectively. The accounting
assumptions used by Prudential were:
As of September 30,
--------------------
1995 1994 1993
---- ---- ----
Discount rate ................................. 7.5% 8.5% 7.0%
Rate of increase in compensation levels ....... 4.5% 5.5% 5.0%
Expected long-term rate of return on assest ... 9.0% 9.0% 9.0%
The 1995 pension benefit for the Company's non-U.S. plans is $8 million.
B. POSTRETIREMENT BENEFITS
The Company provides certain life insurance and health care benefits for
its retired employees. Substantially all of the Company's employees may
become eligible to receive a benefit if they retire after age 55 with at
least 10 years of service.
Postretirement benefits, with respect to Prudential, are recognized in
accordance with prescribed NAIC policy. Prudential has elected to amortize
its transition obligation over 20 years. The Company's funding of its
postretirement benefit obligations totaled $48 million, $31 million and
$404 million in 1995, 1994 and 1993, respectively.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
The postretirement benefit plan status is as follows:
September 30,
------------------
1995 1994
-------- -------
(In Millions)
Accumulated postretirement benefit obligation (APBO):
Retirees ............................................... $(1,526) $(1,337)
Fully eligible active plan participants ................ (152) (188)
------- -------
Total APBO ............................................... (1,678) (1,525)
------- -------
Plan assets at fair value ................................ 1,309 1,232
------- -------
Funded status ............................................ (369) (293)
Unrecognized transition amount ........................... 423 448
Unrecognized net loss/(gain) ............................. 1 (41)
------- -------
Prepaid postretirement benefit cost ...................... $ 55 $ 114
======= =======
Plan assets consist of group and individual variable life insurance
policies, group life and health contracts and short-term investments, of
which $990 million and $996 million are included in the Consolidated
Statement of Financial Position at December 31, 1995 and 1994,
respectively. In compliance with statutory accounting principles,
Prudential's prepaid postretirement benefit costs of $99 million and $127
million at December 31, 1995 and 1994, respectively, are considered
non-admitted assets. These assets are excluded from the consolidated assets
and the changes in these non-admitted assets of $(28) million, $(90)
million and $217 million in 1995, 1994 and 1993, respectively, are reported
in "General, administrative and other expenses" in 1995 and 1994, and in
"Issuance of Capital Notes" in 1993.
Net periodic postretirement benefit cost for 1995, 1994 and 1993 includes
the following components:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
(In Millions)
Service cost .................................................. $ 56 $ 38 $ 41
Interest cost ................................................. 123 112 124
Actual return on plan assets .................................. (144) (98) (86)
Amortization of transition obligation ......................... 25 23 39
Other ......................................................... 47 (3) 77
Net curtailment and special termination benefits .............. 0 58 0
----- ---- ----
Net periodic postretirement benefit cost ...................... $ 107 $130 $195
===== ==== ====
</TABLE>
The net reduction to surplus relating to the Company's postretirement
benefit plans is $79 million, $40 million, and $412 million in 1995, 1994
and 1993, respectively, which considers the changes in the non-admitted
prepaid postretirement benefit cost of $(28) million, $(90) million and
$217 million in 1995, 1994 and 1993, respectively.
The accounting assumptions used by Prudential were:
<TABLE>
<CAPTION>
As of September 30,
------------------------------------------
1995 1994 1993
--------- -------- -------
<S> <C> <C> <C>
Discount rate ............................................... 7.5% 8.5% 7.0%
Expected long-term rate of return on plan assets ............ 8.0% 9.0% 9.0%
Rate of increase in compensation levels ..................... 4.5% 5.5% 5.0%
Health care cost trend rates ................................ 8.9-13.3% 9.1-13.9% 9.5-14.7%
Ultimate health care cost trend rate at 2006 ................ 5.0% 6.0% 5.0%
</TABLE>
The effect of a 1% increase in health care cost trend rates on the
September 30, 1995, accumulated postretirement benefit obligation and
service and interest costs would be $138 million and $16 million,
respectively.
C. POSTEMPLOYMENT BENEFITS
The Company accrues for postemployment benefits primarily for life and
health benefits provided to former or inactive employees who are not
retirees. The net accumulated liability for these benefits at December 31,
1995 and 1994 was $102 million and $151 million, respectively. The Company
funded $45 million of postemployment benefits during 1995.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
6. NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings consisted of the following:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------------- -------------------------
Weighted Weighted
Average Average
Balance Cost of Funds Balance Cost of Funds
-------- ------------- ------- -------------
<S> <C> <C> <C> <C>
(In Millions)
Short-term debt:
Commercial paper ........................... $3,711 5.8% $ 4,108 5.6%
Medium-term notes payable .................. 9 7.4% 204 4.8%
Other ...................................... 2,007 6.4% 4,876 5.8%
------ -------
Total Short Term ............................ 5,727 6.0% 9,188 5.7%
------ -------
Long-term debt:
Notes payable .............................. 1,309 7.2% 1,684 7.3%
Medium-term notes payable .................. 377 5.6% 535 5.9%
Euro medium-term notes payable ............. 537 6.0% 584 4.7%
Other ...................................... 1,207 6.2% 18 10.3%
------ -------
Total Long Term ............................. 3,430 6.5% 2,821 6.5%
------ -------
Total ....................................... $9,157 6.2% $12,009 5.9%
====== =======
</TABLE>
Scheduled repayments of long-term debt as of December 31, 1995, are as
follows: $321 million in 1996, $448 million in 1997, $868 million in 1998,
$667 million in 1999, $620 million in 2000, and $593 million thereafter.
As of December 31, 1995, the Company had $6,770 million in lines of credit
from numerous financial institutions of which $4,263 million were unused.
7. SURPLUS
A. Capital Notes
A summary of the outstanding Capital Notes as of December 31, 1995 is as
follows:
Principal Interest Maturity
Issue Date (Par) Rate Date
---------- --------- -------- --------
(In Millions)
April 1993 ................ $ 300 6.875% April 2003
June 1995 ................. 250 7.650% July 2007
July 1995 ................. 100 8.100% July 2015
June 1995 ................. 350 8.300% July 2025
------
Total ..................... $1,000
======
The notes are subordinate in right of payment to policyholder claims and to
senior indebtedness, and principal repayments are subject to a risk-based
capital test.
The net proceeds from the April 1993 notes, approximately $298 million,
were contributed to a voluntary employee benefit association trust to
prefund certain obligations of Prudential to provide postretirement medical
and other benefits. This resulted in a prepaid asset, which is non-admitted
for statutory purposes. The net increase to surplus from the issuance of
the notes, including a tax benefit of $104 million less the charge-off of
the non-admitted asset of $217 million, was $185 million (Note 5B).
B. SPECIAL SURPLUS FUND
In accordance with the requirements of various states, a special surplus
fund has been established for contingency reserves of $1,274 million and
$1,097 million as of December 31, 1995 and 1994, respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented on the next page have been determined using
available information and reasonable valuation methodologies. Considerable
judgment is applied in interpreting data to develop the estimates of fair
value. Accordingly, such estimates
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
presented may not be realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
material effect on the estimated fair values. The following methods and
assumptions were used in calculating the fair values. (For all other
financial instruments presented in the table, the carrying value is a
reasonable estimate of fair value.)
Fixed Maturities--Fair values for fixed maturities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities
are estimated using a discounted cash flow model which considers the
current market spreads between the U.S. Treasury yield curve and corporate
bond yield curve, adjusted for the type of issue, its current credit
quality and its remaining average life. The fair value of certain
non-performing private placement securities is based on amounts provided by
state regulatory authorities.
Equity Securities--Fair value is based on quoted market prices, where
available, or prices provided by state regulatory authorities.
Mortgage Loans--The fair value of residential mortgages is based on recent
market trades or quotes, adjusted where necessary for differences in risk
characteristics. The fair value of the commercial mortgage and agricultural
loan portfolio is primarily based upon the present value of the scheduled
cash flows discounted at the appropriate U.S. Treasury rate, adjusted for
the current market spread for a similar quality mortgage. For certain
non-performing and other loans, fair value is based upon the value of the
underlying collateral.
Policy Loans--The estimated fair value of policy loans is calculated using
a discounted cash flow model based upon current U.S. Treasury rates and
historical loan repayments.
Derivative Financial Instruments--The fair value of swap agreements is
estimated based on the present value of future cash flows under the
agreements discounted at the applicable zero coupon U.S. Treasury rate and
swap spread. The fair value of forwards and futures is estimated based on
market quotes for a transaction with similar terms, while the fair value of
options is based principally on market quotes. The fair value of loan
commitments is estimated based on fees actually charged or those currently
charged for similar arrangements, adjusted for changes in interest rates
and credit quality subsequent to origination.
Investment-Type Insurance Contract Liabilities--Fair values for the
Company's investment-type insurance contract liabilities are estimated
using a discounted cash flow model, based on interest rates currently being
offered for similar contracts.
Notes Payable and Other Borrowings--The estimated fair value of notes
payable and other borrowings is based on the borrowing rates currently
available to the Company for debt with similar terms and maturities.
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1995 and
1994.
<TABLE>
<CAPTION>
1995 1994
------------------------ -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
(In Millions)
FINANCIAL ASSETS:
Fixed maturities ........................... $ 85,585 $ 92,282 $ 78,620 $77,200
Equity securities .......................... 1,937 1,937 2,327 2,327
Mortgage loans ............................. 23,680 24,268 26,199 24,955
Policy loans ............................... 6,800 7,052 6,631 6,018
Short-term investments ..................... 7,874 7,874 10,630 10,630
Securities purchased under
agreements to resell ...................... 5,130 5,130 5,591 5,591
Trading account securities ................. 3,658 3,658 6,341 6,341
Cash ....................................... 1,633 1,633 1,109 1,109
Broker-dealer receivables .................. 8,136 8,136 8,164 8,164
Assets held in Separate Accounts ........... 58,435 58,435 48,633 48,633
Derivative financial instruments ........... 1,473 1,640 1,219 1,268
FINANCIAL LIABILITIES:
Investment-type insurance contracts ........ 35,336 36,258 39,747 38,934
Securities sold under agreements to
repurchase ................................ 7,993 7,993 8,919 8,919
Notes payable and other borrowings ......... 9,157 9,231 12,009 11,828
Broker-dealer payables ..................... 6,083 6,083 6,198 6,198
Liabilities related to Separate
Accounts .................................. 57,586 57,586 47,946 47,946
Derivative financial instruments ........... 1,704 1,781 1,611 1,665
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
9. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
A. Derivative Financial Instruments
Derivatives, including swaps, forwards, futures, options, and loan
commitments subject to market risk, are used for trading and other
than trading activities (Note 1C). The following two tables summarize
the Company's outstanding positions on a gross basis before netting
pursuant to rights of offset, qualifying master netting agreements
with counterparties or collateral arrangements as of December 31, 1995
and 1994, respectively:
DERIVATIVE FINANCIAL INSTRUMENTS
As of December 31, 1995
(In Millions)
<TABLE>
<CAPTION>
Trading Other Than Trading Total
-------------------- -------------------- -------------------------------
Estimated Estimated Carrying Estimated
Notional Fair Value Notional Fair Value Notional Amount Fair Value
-------- ---------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets ................. $12,720 $1,131 $ 114 $ 10 $12,834 $1,132 $1,141
Liabilities ............ 11,488 1,317 4,476 62 15,964 1,371 1,379
Forwards:
Assets ................. 20,351 291 2,281 33 22,632 305 324
Liabilities ............ 22,068 278 6,675 48 28,743 291 326
Futures:
Assets ................. 1,387 14 2,590 34 3,977 20 48
Liabilities ............ 3,065 18 1,821 11 4,886 24 29
Options:
Assets ................. 1,961 20 4,345 97 6,306 20 117
Liabilities ............ 1,700 17 2,724 20 4,424 18 37
Loan Commitments:
Assets ................. 0 0 123 10 123 (4) 10
Liabilities ............ 0 0 1,412 10 1,412 0 10
------- ------ ------- ---- ------- ------ ------
Total:
Assets ................. $36,419 $1,456 $ 9,453 $184 $45,872 $1,473 $1,640
======= ====== ======= ==== ======= ====== ======
Liabilities ............ $38,321 $1,630 $17,108 $151 $55,429 $1,704 $1,781
======= ====== ======= ==== ======= ====== ======
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
DERIVATIVE FINANCIAL INSTRUMENTS
As of December 31, 1994
(In Millions)
<TABLE>
<CAPTION>
Trading Other Than Trading Total
-------------------- -------------------- -------------------------------
Estimated Estimated Carrying Estimated
Notional Fair Value Notional Fair Value Notional Amount Fair Value
-------- ---------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets ................. $13,852 $ 837 $ 184 $ 9 $14,036 $ 845 $ 846
Liabilities ............ 14,825 1,216 4,993 48 19,818 1,236 1,264
Forwards:
Assets ................. 21,988 300 2,720 24 24,708 312 324
Liabilities ............ 19,898 289 3,112 19 23,010 299 308
Futures:
Assets ................. 1,520 40 4,296 17 5,816 30 57
Liabilities ............ 1,878 35 505 3 2,383 35 38
Options:
Assets ................. 2,924 31 2,407 8 5,331 34 39
Liabilities ............ 3,028 38 2,217 2 5,245 40 40
Loan Commitments:
Assets ................. 0 0 212 2 212 (2) 2
Liabilities ............ 0 0 1,543 15 1,543 1 15
------- ------ ------- --- ------- ------ ------
Total:
Assets ................. $40,284 $1,208 $ 9,819 $60 $50,103 $1,219 $1,268
======= ====== ======= === ======= ====== ======
Liabilities ............ $39,629 $1,578 $12,370 $87 $51,999 $1,611 $1,665
======= ====== ======= === ======= ====== ======
</TABLE>
Derivatives Held for Trading Purposes--The Company uses derivatives
for trading purposes in securities broker-dealer activities and in a
limited-purpose swap subsidiary to meet the financial and hedging
needs of its customers. Net trading revenues for the years ended
December 31, 1995 and 1994, relating to forwards and futures and swaps
were $110 million, $42 million and $3 million, and $42 million, $33
million and $8 million, respectively. Net trading revenues for options
were not material. Average fair values for trading derivatives in an
asset position during the years ended December 31, 1995 and 1994 were
$1,394 million and $1,526 million, respectively, and for derivatives
in a liability position were $1,582 million and $1,671 million,
respectively. Of those derivatives held for trading purposes at
December 31, 1995, 55% of the notional amount consisted of interest
rate derivatives, 40% consisted of foreign currency derivatives, and
5% consisted of equity and commodity derivatives.
Derivatives Held for Purposes Other Than Trading--The Company uses
derivatives primarily for asset/liability risk management and to
reduce exposure to interest rate, currency and other market risks. Of
the total notional amount of derivatives held for purposes other than
trading at December 31, 1995, 16% were used by the Company to hedge
its investment portfolio to reduce interest rate, currency and other
market risks, and 84% were used to hedge interest rate risk related to
the Company's mortgage banking segment activities. Of those
derivatives held for purposes other than trading at December 31, 1995,
92% of notional consisted of interest rate derivatives and 8%
consisted of foreign currency derivatives.
B. Off-Balance Sheet Credit-Related Instruments
During the normal course of its business, the Company utilizes
financial instruments with off-balance sheet credit risk such as
commitments, financial guarantees, loans sold with recourse and
letters of credit. Commitments include commitments to purchase and
sell mortgage loans, the unfunded portion of commitments to fund
investments in private placement securities, and unused credit card
and home equity lines. The Company also provides financial guarantees
incidental to other transactions and letters of credit that guarantee
the performance of customers to third parties. These credit-related
financial instruments have off-balance sheet credit risk because only
their origination fees, if any, and accruals for probable losses, if
any, are recognized until the obligation under the instrument is
fulfilled or expires. These instruments can extend for several years
and expirations are not concentrated in any period. The Company seeks
to control credit risk associated with these instruments by limiting
credit, maintaining collateral where customary and appropriate, and
performing other monitoring procedures.
The notional amount of these instruments, which represents the
Company's maximum exposure to credit loss from other parties'
non-performance, was $15,498 million and $17,389 million at December
31, 1995 and 1994, respectively. Because many of these amounts expire
without being advanced in whole or in part, the notional amounts do
not represent future cash
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
flows. The above notional amounts include $6,001 million and $4,150
million of unused available lines of credit under credit card and home
equity commitments as of December 31, 1995 and 1994, respectively. The
Company has not experienced, and does not anticipate experiencing, all
of its customers exercising their entire available lines of credit at
any given point in time. The estimated fair value of off-balance sheet
credit-related instruments was $(67) million and $(91) million at
December 31, 1995 and 1994, respectively.
10. DIVESTITURES
In October 1995, the Company completed the sale of its reinsurance segment,
Prudential Reinsurance Holdings, Inc. ("Holdings"), through an initial
public offering of common stock. As a result of the sale, an after-tax gain
of $72 million was recorded in 1995.
In March 1995, the Company announced its intention to sell its mortgage
banking segment. On January 26, 1996, the Company entered into a definitive
agreement to sell substantially all the assets of Prudential Home Mortgage
Company, Inc. and it has also liquidated certain mortgage-backed securities
and extended warehouse loans. The Company recorded an after-tax loss of $98
million, which includes operating gains and losses, asset write downs, and
other costs directly related to the planned sale. The Company continues to
have discussions with prospective buyers for the sale of the remaining
assets.
A summary of the assets and liabilities of the mortgage banking segment at
December 31 follows:
ASSETS AND LIABILITIES OF MORTGAGE BANKING SEGMENT
1995 1994
------ ------
(In Millions)
Total assets ............................ $4,293 $4,357
Total liabilities ....................... 4,215 4,199
------ ------
Net assets .............................. $ 78 $ 158
====== ======
11. CONTINGENCIES
A. Aggregate Stop Loss Retrocession Agreement
As a result of the sale of Holdings, in 1995, Prudential Reinsurance
(a Holdings subsidiary) and Gibraltar Casualty Co. (a Prudential
subsidiary) entered into an Aggregate Stop Loss Agreement. The Stop
Loss Agreement is intended to mitigate the impact on Prudential
Reinsurance of adverse development of loss reserves as of June 30,
1995, of up to $375 million of the first $400 million of adverse
development. The Company has recorded a loss reserve of $230 million
as of December 31, 1995.
B. Environmental and Asbestos-Related Claims
The Company receives claims under expired contracts which assert
alleged injuries and/or damages relating to or resulting from toxic
torts, toxic waste and other hazardous substances. The liabilities for
such claims cannot be estimated by traditional reserving techniques.
As a result of judicial decisions and legislative actions, the
coverage afforded under these contracts may be expanded beyond their
original terms. Extensive litigation between insurers and insureds
over these issues continues and the outcome is not predictable. In
establishing the unpaid claim reserves for these losses, management
considered the available information. However, given the expansion of
coverage and liability by the courts and legislatures in the past, and
potential for other unfavorable trends in the future, the ultimate
cost of these claims could increase from the levels currently
established.
C. Lawsuits
Various lawsuits against the Company have arisen in the course of the
Company's business. In certain of these matters, large and/or
indeterminate amounts are sought.
Several purported class actions and individual actions have been
brought against the Company on behalf of those persons who purchased
life insurance policies allegedly because of deceptive sales practices
engaged in by the Company and its insurance agents in violation of
state and federal laws. The sales practices alleged to have occurred
are contrary to Company policy. Some of these cases seek very
substantial damages while others seek unspecified compensatory,
punitive and treble damages. The Company intends to defend these cases
vigorously.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
In response to this litigation, several state insurance departments
have initiated market conduct examinations relating to Prudential's
sales practices. The Attorney General of one state has conducted an
investigation and made its report to the state insurance commissioner.
Another Attorney General has also made inquiries. The New Jersey
Insurance Commissioner is leading a multi-state task force of
insurance commissioners to examine life insurance industry sales and
marketing practices. There are now approximately thirty insurance
departments participating in this effort. The Company is cooperating
fully in this examination.
Litigation is subject to many uncertainties, and given the complexity
and scope of these suits, their outcome cannot be predicted. It is
also not possible to predict the likely results of any regulatory
inquiries or their effect on litigation which might be initiated in
response to widespread media coverage of these matters.
Accordingly, management is unable to make a meaningful estimate of the
amount or range of loss that could result from an unfavorable outcome
of all pending litigation and the regulatory inquiries. It is possible
that the results of operations or the cash flows of the Company in
particular quarterly or annual periods could be materially affected by
an ultimate unfavorable outcome of certain pending litigation and
regulatory matters.
Management believes, however, that the ultimate outcome of all pending
litigation and regulatory matters referred to above should not have a
material adverse effect on the Company's financial position.
In 1993, Prudential Securities Incorporated (PSI), a subsidiary of
Prudential, entered into an agreement with the Securities and Exchange
Commission, the National Association of Securities Dealers, Inc., and
state securities commissions whereby PSI agreed to pay $330 million
into a settlement fund to pay eligible claims on certain limited
partnership matters. Under this agreement, if partnership matter
claims exceed the established settlement fund, PSI is obligated to pay
such additional claims. The agreement also required PSI to take
measures to enhance the adequacy of its sales practices compliance
controls.
In October 1994, the United States Attorney for the Southern District
of New York (the "U.S. Attorney") filed a complaint against PSI in
connection with its sale of certain limited partnerships.
Simultaneously, PSI entered into an agreement to comply with certain
conditions for a period of three years, and to pay an additional $330
million into the settlement fund. At the end of the three year period,
assuming PSI has fully complied with the terms of the agreement, the
U.S. Attorney will institute no further action.
In the opinion of management, PSI is in compliance with all provisions
of the aforementioned agreements and, after consideration of
applicable accruals, the ultimate liability for litigation, including
partnership settlement matters, will not have a material adverse
effect on the Company's financial position.
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying consolidated statements of financial position
of The Prudential Insurance Company of America and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of operations and
changes in surplus and asset valuation reserve and of cash flows for each of the
three years in the period ended December 31, 1995. 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 consolidated financial statements present fairly, in all
material respects, the financial position of The Prudential Insurance Company of
America and subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Parsippany, New Jersey
March 1, 1996
F-17
<PAGE>
CUSTOM VAL(SM)
LIFE_______________
INSURANCE CONTRACTS
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 437-4016, Ext. 46
<PAGE>
PART II
OTHER INFORMATION
<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
UNDERTAKING WITH RESPECT TO INDEMNIFICATION
The Prudential Directors' and Officers' Liability and Corporation Reimbursement
Insurance Program, purchased by The Prudential from Aetna Casualty & Surety
Company, CNA Insurance Companies, Lloyds of London, Great American Insurance
Company, Reliance Insurance Company, Corporate Officers & Directors Assurance
Ltd., A.C.E. Insurance Company, Ltd., XL Insurance Company, Ltd., and
Zurich-American Insurance Company, provides reimbursement for "Loss" (as defined
in the policies) which the Company pays as indemnification to its directors or
officers resulting from any claim for any actual or alleged act, error,
misstatement, misleading statement, omission, or breach of duty by persons in
the discharge of their duties in their capacities as directors or officers of
The Prudential, any of its subsidiaries, or certain investment companies
affiliated with The Prudential. Coverage is also provided to the individual
directors or officers for such Loss, for which they shall not be indemnified.
Loss essentially is the legal liability on claims against a director or officer,
including adjudicated damages, settlements and reasonable and necessary legal
fees and expenses incurred in defense of adjudicatory proceedings and appeals
therefrom. Loss does not include punitive or exemplary damages or the multiplied
portion of any multiplied damage award, criminal or civil fines or penalties
imposed by law, taxes or wages, or matters which are uninsurable under the law
pursuant to which the policies are construed.
There are a number of exclusions from coverage. Among the matters excluded are
Losses arising as the result of (1) claims brought about or contributed to by
the criminal or fraudulent acts or omissions or the willful violation of any law
by a director or officer, (2) claims based on or attributable to directors or
officers gaining personal profit or advantage to which they were not legally
entitled, and (3) claims arising from actual or alleged performance of, or
failure to perform, services as, or in any capacity similar to, an investment
adviser, investment banker, underwriter, broker or dealer, as those terms are
defined in the Securities Act of 1933, the Securities Exchange Act of 1934, the
Investment Advisers Act of 1940, the Investment Company Act of 1940, any rules
or regulations thereunder, or any similar federal, state or local statute, rule
or regulation.
The limit of coverage under the Program for both individual and corporate
reimbursement coverage is $150,000,000. The retention for corporate
reimbursement coverage is $10,000,000 per loss.
The relevant provisions of New Jersey law permitting or requiring
indemnification, New Jersey being the state of organization of The Prudential,
can be found in Section 14A:3-5 of the New Jersey Statutes Annotated. The text
of The Prudential's by-law 26, which relates to indemnification of officers and
directors, is incorporated by reference to Exhibit 1.A.(6)(b) of Post-Effective
Amendment No. 1 to Form S-6, Registration No. 33-61079, filed April 25, 1996, on
behalf of The Prudential Variable Appreciable Account.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of 71 pages.
The undertaking to file reports.
The undertaking with respect to indemnification.
The signatures.
Written consents of the following persons:
1. Deloitte and Touche LLP, independent auditors.
2. Clifford E. Kirsch, Esq.
3. Nancy D. Davis, FSA, MAAA.
The following exhibits:
1. The following exhibits correspond to those required by paragraph A of the
instructions as to exhibits in Form N-8B-2:
A. (1) Resolution of Board of Directors of The Prudential Insurance
Company of America establishing The Prudential Variable
Appreciable Account. (Note 6)
(2) Not Applicable.
(3) Distributing Contracts:
(a) Distribution Agreement between Pruco Securities
Corporation and The Prudential
Insurance Company of America. (Note 10)
(b) Proposed form of Agreement between Pruco Securities
Corporation and independent brokers with respect to the
Sale of the Contracts. (Note 8)
(c) Schedules of Sales Commissions. (Note 8)
(4) Not Applicable.
(5) Custom VAL (previously named Adjustable Premium VAL) life
insurance contracts: (Note 2)
(a) With fixed death benefit for use in New Jersey and
domicile approval states.
(b) With variable death benefit for use in New Jersey and
domicile approval states.
(c) With fixed death benefit for use in non-domicile approval
states.
(d) With variable death benefit for use in non-domicile
approval states.
(6) (a) Charter of The Prudential Insurance Company of America,
as amended February 26, 1988. (Note 9)
(b) By-laws of The Prudential Insurance Company of America,
as amended August 8, 1995. (Note 14)
(7) Not Applicable.
(8) Not Applicable.
(9) Not Applicable.
(10) (a) Application Form for Custom VAL (previously named Adjustable
Premium VAL) life insurance contract. (Note 5)
(b) Supplement to the Application for Custom VAL (previously
named Adjustable Premium VAL) life insurance contract.
(Note 2)
(11) Form of Notice of Withdrawal Right. (Note 8)
(12) Memorandum describing The Prudential's issuance, transfer, and
redemption procedures for the Contracts pursuant to Rule
6e-3(T)(b)(12)(iii) and method of computing adjustments in
payments and cash surrender values upon conversion to
fixed-benefit policies pursuant to Rule 6e-3(T)(b)(13)(v)(B).
(Note 8)
(13) Available Contract Riders and Endorsements:
(a) Rider for Insured's Waiver of Premium Benefit. (Note 5)
(b) Rider for Applicant's Waiver of Premium Benefit. (Note 5)
(c) Rider for Insured's Accidental Death Benefit. (Note 5)
II-2
<PAGE>
(d) Rider for Level Term Insurance Benefit on Life of
Insured. (Note 5)
(e) Rider for Decreasing Term Insurance Benefit on Life of
Insured. (Note 5)
(f) Rider for Interim Term Insurance Benefit. (Note 5)
(g) Rider for Option to Purchase Additional Insurance on Life
of Insured. (Note 5)
(h) Rider for Decreasing Term Insurance Benefit on Life of
Insured Spouse. (Note 5)
(i) Rider for Level Term Insurance Benefit on Dependent
Children. (Note 5)
(j) Rider for Level Term Insurance Benefit on Dependent
Children--from Term Conversions. (Note 5)
(k) Rider for Level Term Insurance Benefit on Dependent
Children--from Term Conversions or Attained Age Change.
(Note 5)
(l) Endorsement defining Insured Spouse. (Note 5)
(m) Rider covering lack of Evidence of Insurability on a
Child. (Note 5)
(n) Rider modifying Waiver of Premium Benefit. (Note 5)
(o) Rider to terminate a Supplementary Benefit. (Note 5)
(p) Rider providing for election of Variable Reduced Paid-up
Insurance. (Note 5)
(q) Rider to provide for exclusion of Aviation Risk. (Note 5)
(r) Rider to provide for exclusion of Military Aviation Risk.
(Note 5)
(s) Rider to provide for exclusion for War Risk. (Note 5)
(t) Rider to provide for Reduced Paid-up Insurance. (Note 5)
(u) Rider providing for Option to Exchange Policy. (Note 5)
(v) Endorsement defining Ownership and Control of the
Contract. (Note 5)
(w) Rider providing for Modification of Incontestability and
Suicide Provisions. (Note 5)
(x) Endorsement issued in connection with Non-Smoker
Qualified Contracts. (Note 5)
(y) Endorsement issued in connection with Smoker Qualified
Contracts. (Note 5)
(z) Home Office Endorsement. (Note 5)
(aa) Endorsement showing Basis of Computation for Non-Smoker
Contracts. (Note 5)
(bb) Endorsement showing Basis of Computation for Smoker
Contracts. (Note 5)
(cc) Rider for Term Insurance Benefit on Life of
Insured--Decreasing Amount After Three Years. (Note 5)
(dd) Rider for Renewable Term Insurance Benefit on Life of
Insured. (Note 5)
(ee) Rider for Level Term Insurance Benefit on Life of Insured
Spouse. (Note 4)
(ff) Living Needs Benefit Rider
(i) for use in Florida. (Note 11)
(ii)for use in all approved jurisdictions except Florida
and New York. (Note 11)
(iii) for use in New York. (Note 12)
(gg) Endorsement altering the Assignment provision. (Note 13)
2. See Exhibit 1.A.(5).
3. Opinion and Consent of Clifford E. Kirsch, Esq., as to the legality of
the securities being registered. (Note 1)
4. None.
5. Not Applicable.
6. Opinion and Consent of Nancy D. Davis, FSA, MAAA, as to actuarial matters
pertaining to the securities being registered. (Note 1)
7. The Prudential's representations regarding mortality and expense risks
and sales loads. (Note 2)
8. Powers of Attorney:
(a) F. Agnew, F. Becker, W. Boeschenstein
L. Carter, Jr., J. Cullen, C. Davis, R. Enrico
A. Gilmour, W. Gray, III, J. Hanson, C. Horner
A. Jacobson, G. Keith, B. Malkiel, J. Opel
A. Ryan, C. Sitter, D. Staheli, R. Thompson
P. Vagelos, S. Van Ness, P. Volcker, J. Williams (Note 6)
(b) M. Grier (Note 9)
27.Financial Data Schedule (Note 1)
II-3
<PAGE>
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Registrant's Form S-6, filed November 4,
1988.
(Note 3) Incorporated by reference to Post-Effective Amendment No. 1 to Form
S-6, Registration No. 33-20000, filed September 1, 1988, on behalf of
The Prudential Variable Appreciable Account.
(Note 4) Incorporated by reference to Pre-Effective Amendment No. 1 to Form S-6
Registration No. 33-20000, filed June 15, 1988, on behalf of The
Prudential Variable Appreciable Account.
(Note 5) Incorporated by reference to Form S-6, Registration No. 33-20000, filed
February 4, 1988, on behalf of The Prudential Variable Appreciable
Account.
(Note 6) Incorporated by reference to Post-Effective Amendment No. 15 to Form
S-6, Registration No. 33- 20000, filed May 1, 1995, on behalf of The
Prudential Variable Appreciable Account.
(Note 7) Incorporated by reference to Form N-8B-2, File Number 2-80897, filed
December 15, 1982, on behalf of The Prudential Individual Variable
Contract Account.
(Note 8) Incorporated by reference to Pre-Effective Amendment No. 1 to this
Registration Statement, filed January 18, 1989.
(Note 9) Incorporated by reference to Form S-6 Registration Statement,
Registration No. 33-61079, filed July 17, 1995 on behalf of The
Prudential Variable Appreciable Account.
(Note 10)Incorporated by reference to Post-Effective Amendment No. 4 to Form
S-6, Registration No. 33- 20000, filed March 2, 1990, on behalf of The
Prudential Variable Appreciable Account.
(Note 11)Incorporated by reference to Post-Effective Amendment No. 4 to this
Registration Statement, filed April 30, 1990.
(Note 12)Incorporated by reference to Post-Effective Amendment No. 9 to this
Registration Statement, filed April 28, 1993.
(Note 13)Incorporated by reference to Post-Effective Amendment No. 12 to this
Registration Statement, filed May 1, 1995.
(Note 14)Incorporated by reference to Post-Effective Amendment No. 1 to Form
S-6, Registration No. 33- 61079, filed April 25, 1996, on behalf of The
Prudential Variable Appreciable Account.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Prudential Variable Appreciable Account, certifies that this Amendment is filed
solely for one or more of the purposes specified in Rule 485(b)(1) under the
Securities Act of 1933 and that no material event requiring disclosure in the
prospectus, other than one listed in Rule 485(b)(1), has occurred since the
effective date of the most recent Post-Effective Amendment to the Registration
Statement which included a prospectus and has caused this Registration Statement
to be signed on its behalf by the undersigned thereunto duly authorized, and its
seal hereunto affixed and attested, all in the city of Newark and the State of
New Jersey, on this 25th day of April, 1996.
(Seal) THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
(Registrant)
By: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Depositor)
Attest: /s/ Thomas C. Castano By: /s/ Esther H. Milnes
--------------------------- ------------------------------
Thomas C. Castano Esther H. Milnes
Assistant Secretary Vice President and Actuary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 13 to the Registration Statement has been signed below by the
following persons in the capacities indicated on this 25th day of April, 1996.
SIGNATURE AND TITLE
-------------------
/s/ *
- --------------------------------
Arthur C. Ryan
Chairman of the Board, President
and Chief Executive Officer
/s/ *
- --------------------------------
Garnett L. Keith, Jr.
Vice Chairman and Director
/s/ *
- -------------------------------- *By: /s/ Thomas C. Castano
Mark B. Grier ---------------------------
Principal Financial Officer Thomas C. Castano
(Attorney-in-Fact)
/s/ *
- --------------------------------
Franklin E. Agnew
Director
/s/ *
- --------------------------------
Frederic K. Becker
Director
/s/ *
- --------------------------------
William W. Boeschenstein
Director
/s/*
- --------------------------------
Lisle C. Carter, Jr.
Director
/s/*
- --------------------------------
James G. Cullen
Director
/s/ *
- --------------------------------
Carolyne K. Davis
Director
II-5
<PAGE>
/s/ *
- --------------------------------
Allan D. Gilmour
Director
/s/ *
- --------------------------------
Roger A. Enrico
Director
/s/ *
- --------------------------------
William H. Gray, III
Director
/s/ *
- --------------------------------
Jon F. Hanson
Director *By: /s/ Thomas C. Castano
---------------------------
/s/ * Thomas C. Castano
- -------------------------------- (Attorney-in-Fact)
Constance J. Horner
Director
/s/ *
- --------------------------------
Allen F. Jacobson
Director
/s/ *
- --------------------------------
Burton G. Malkiel
Director
/s/ *
- --------------------------------
John R. Opel
Director
/s/*
- --------------------------------
Charles R. Sitter
Director
/s/*
- --------------------------------
Donald L. Staheli
Director
/s/ *
- --------------------------------
Richard M. Thomson
Director
/s/ *
- --------------------------------
P. Roy Vagelos, M.D.
Director
/s/ *
- --------------------------------
Stanley C. Van Ness
Director
/s/ *
- --------------------------------
Paul A. Volcker
Director
/s/ *
- --------------------------------
Joseph H. Williams
Director
II-6
<PAGE>
EXHIBIT INDEX
Consent of Deloitte & Touche LLP, independent auditors. Page II-7
1.A.(12) Memorandum describing The Prudential's issuance, transfer,
and redemption procedures for the Contracts pursuant to Rule
6e-3(T)(b)(12)(iii) and method of computing adjustments in
payments and cash surrender values upon conversion to
fixed-benefit policies pursuant to Rule 6e-3(T)(b)(13)(v)(B). Page II-9
3. Opinion and Consent of Clifford E. Kirsch, Esq., as to the
legality of the securities being registered. Page II-21
6. Opinion and Consent of Nancy D. Davis, FSA, MAAA as to
actuarial matters pertaining to the securities
being registered. Page II-23
27. Financial Data Schedule. Page II-24
II-8
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 13 to Registration
Statement No. 33-25372 on Form S-6 of The Prudential Variable Appreciable
Account of The Prudential Insurance Company of America of our report dated
February 15, 1996, relating to the financial statements of The Prudential
Variable Appreciable Account, and of our report dated March 1, 1996, relating to
the consolidated financial statements of The Prudential Insurance Company of
America and subsidiaries appearing in the Prospectus, which is part of such
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
April 25, 1996
II-7
Exhibit 1.A.(12)
Description of The Prudential's Issuance, Transfer
and Redemption Procedures for
Custom VAL Life Insurance Contracts
Pursuant to Rule 6e-3(T)(b)(12)(iii)
and
Method of Computing Adjustments in
Payments and Cash Surrender Values Upon
Conversion to Fixed Benefit Policies
Pursuant to Rule 6e-3(T)(b)(13)(v)(B)
This document sets forth the administrative procedures that will be followed by
The Prudential Insurance Company of America ("The Prudential") in connection
with the issuance of its Variable Appreciable Life Insurance Contract
("Contract"), the transfer of assets held thereunder, and the redemption by
contract owners of their interests in said Contracts. The document also explains
the method that The Prudential will follow in making a cash adjustment when a
Contract is exchanged for a fixed benefit insurance policy pursuant to Rule
6e-3(T)(b)(13)(v)(B).
I. Procedures Relating to Issuance and Purchase of the Contracts
A.Premiums Schedules and Underwriting Standards
Premiums for the Contract will not be the same for all owners. Insurance is
based on the principle of pooling and distribution of mortality risks, which
assumes that each owner pays a premium commensurate with the Insured's mortality
risk as actuarially determined utilizing factors such as age, sex (in most
cases), smoking status, health and occupation. A uniform premium for all
Insureds would discriminate unfairly in favor of those Insureds representing
greater risks. However, for a given face amount of insurance, Contracts issued
on insureds in a given risk classification will have the same scheduled premium.
The underwriting standards and premium processing practices followed by The
Prudential are similar to those followed in connection with the offer and sale
of fixed-benefit life insurance, modified where necessary to meet the
requirements of the federal securities laws.
B.Application and Initial Premium Processing
Upon receipt of a completed application form from a prospective owner, The
Prudential will follow certain insurance underwriting (i.e., evaluation of risk)
procedures designed to determine whether the proposed Insured is insurable. In
the majority of cases this will involve only evaluation of the answers to the
questions on the application and will
II-9
<PAGE>
not include a medical examination. In other cases, the process may involve such
verification procedures as medical examinations and may require that further
information be provided by the proposed Insured before a determination can be
made. A Contract cannot be issued, i.e., physically issued through The
Prudential's computerized issue system, until this underwriting procedure has
been completed.
These processing procedures are designed to provide immediate benefits to every
prospective owner who pays the initial scheduled premium at the time the
application is submitted, without diluting any benefit payable to any existing
owner. Although a Contract cannot be issued until after the underwriting process
has been completed, such a proposed Insured will receive immediate insurance
coverage for the face amount of the Contract, if he or she proves to be
insurable and the owner has paid the first scheduled premium.
The Contract Date marks the date on which benefits begin to vary in accordance
with the investment performance of the selected investment option(s). It is also
the date as of which the insurance age of the proposed Insured is determined. It
represents the first day of the Contract year and therefore determines the
Contract anniversary and also the Monthly Dates. It also represents the
commencement of the suicide and contestable periods for purposes of the
Contract.
If the initial scheduled premium is paid with the application and no medical
examination is required (so that Part 2 of the application is not completed) the
Contract Date will ordinarily be the date of the application. If an unusual
delay is encountered (for example, if a request for further information is not
met promptly), the Contract Date will be 21 days prior to the date on which the
Contract is physically issued. If a medical examination is required, the
Contract Date will ordinarily be the date on which Part 2 of the application
(the medical report) is completed, subject to the same qualification as that
noted above. If the initial scheduled premium is not paid with the application,
the Contract Date will be the Contract Date stated in the Contract, which will
generally be the date the initial premium is received from the owner and the
Contract is delivered.
There are two principal variations from the foregoing procedure. First, if the
owner wishes permanent insurance protection and variability of benefits to
commence at a future date, he or she can designate that date and purchase term
insurance in a fixed amount for the intervening period. The maximum length of
initial term insurance available is eleven months.
Second, if permitted by the insurance laws of the state in which the Contract is
issued, the Contract may be back
II-10
<PAGE>
dated up to six months, provided that all past due scheduled premiums are paid
with the application and that the backdating results in a lower insurance age
for the Insured. The values under the Contract and the amount(s) deposited into
the selected investment option(s) will be calculated upon the assumptions that
the Contract has been issued on the Contract Date and all scheduled premiums had
been received on their due dates. If the initial premium paid is in excess of
the aggregate of the scheduled premiums due since the Contract Date, the excess
(after the front-end deductions) will be credited to the Contract and placed in
the selected investment option(s) on the date of receipt.
In general, (1) the invested portion of the initial scheduled premium will be
placed in the Contract Fund and allocated to the selected investment options as
of the Contract Date; and (2) the invested portion of any premiums in excess of
the initial scheduled premium will be placed in the Contract Fund and allocated
to the selected investment options as of the later of the Contract Date and the
date received.
If, however, one or more premium due dates has passed before all requirements
for the issuance of the Contract have been satisfied, (1) the invested portion
of the initial scheduled premium will be placed in the Contract Fund as of the
Contract Date, (2) scheduled premiums will be placed in the Contract Fund as of
the intervening premium due dates, and (3) any premium payments in excess of the
aggregate premiums due since the Contract Date will be placed in the Contract
Fund as of the date of receipt.
C.Premium Processing
Whenever a premium after the first is received, unless the Contract is in
default past its days of grace, The Prudential will subtract the front-end
deductions. What is left will be invested in the selected investment option(s)
on the date received (or, if that is not a business day, on the next business
day). There is an exception if the Contract is in default within its days of
grace. Then, to the extent necessary to end the default, premiums will be
credited as of the date of the default or the Monthly Date after default, and
premiums greater than this amount will be credited when received. The Contract
provides a grace period of 61 days from the date The Prudential mails the
Contract owner a notice of default. As an administrative practice, The
Prudential extends the grace period by seven days to minimize manual processing
required when premium payments are processed shortly after the 61st day.
D.Reinstatement
The Contract may be reinstated within five years after default (this period will
be longer if required by state law)
II-11
<PAGE>
unless the Contract has been surrendered for its cash surrender value. A
Contract will be reinstated upon receipt by The Prudential of a written
application for reinstatement, production of evidence of insurability
satisfactory to The Prudential and payment of at least the amount required to
bring the premium account up to zero on the first monthly date on which a
scheduled premium is due after the date of reinstatement. Any contract debt
under reduced paid-up insurance must be repaid with interest or carried over to
the reinstated contract. The Prudential will treat the amount paid upon
reinstatement as a premium. It will deduct the front-end charges, plus any
charges in arrears, other than mortality charges, with interest. The contract
fund of the reinstated Contract will, immediately upon reinstatement, be equal
to this net premium payment, plus the cash surrender value of the Contract
immediately before reinstatement, plus a refund of that part of the deferred
sales and administrative charges which would be charged if the Contract were
surrendered immediately after reinstatement. An adjustment will be made for any
termination dividend paid at the time of lapse. The original Contract Date still
controls for purposes of calculating any contingent deferred sales and
administrative charges, and any termination dividends.
The reinstatement will take effect as of the date the required proof of
insurability and payment of the reinstatement amount have been received by The
Prudential at its Home Office.
The Prudential may agree to accept a lower amount than described above. This
lower amount must be at least the amount necessary to bring the contract fund
after reinstatement up to the tabular contract fund, plus the estimated monthly
charges for the next three months. The contract fund after reinstatement will be
calculated in the same way as described above. In this case, the premium account
after reinstatement will be negative, so payment of future scheduled premiums
does not guarantee that the contract will not lapse at some time in the future.
There is an alternative to this reinstatement procedure that applies only if
reinstatement is requested within three months after the contract went into
default. In such a case evidence of insurability will not be required and the
amount of the required payment will be the lesser of the unpaid scheduled
premiums and the amount necessary to make the contract fund equal to the tabular
contract fund on the third Monthly Date following the date on which the Contract
went into default.
E.Repayment of Loan
A loan made under the Contract may be repaid with an amount equal to the monies
borrowed plus interest which
II-12
<PAGE>
accrues daily, either at a fixed annual rate of 5-1/2% or, if a contract owner
has elected to have a variable loan interest rate applicable to loans made under
the Contract, at the variable loan interest rate then applicable to the loan.
When a loan is made, The Prudential will transfer an amount equal to the
contract loan from the investment option(s). Under the fixed-rate contract loan
provision, the amount of contract fund attributable to the outstanding contract
loan will be credited with interest at an annual rate of 4%, and The Prudential
thus will realize the difference between that rate and the fixed loan interest
rate, which will be used to cover the loan investment expenses, income taxes, if
any, and processing costs. If an owner so desires, the owner may elect to have a
variable loan interest rate apply to the contract loans, if any, that he or she
may make. If this election is made:
1.Interest on the loan will accrue daily at an annual rate The Prudential
determines at the start of each contract year (instead of at a fixed rate), as
described in the prospectus.
2.While a loan is outstanding, the amount of the contract fund attributable to
the outstanding contract loan will be credited with interest at a rate which is
less than the loan interest rate for the contract year by 1% (instead of 4%).
Upon repayment of Contract debt, the loan portion of the payment (i.e., not the
interest) will be added to the investment option(s). Amounts originally borrowed
from the fixed-rate option will be allocated to the fixed-rate option, and the
rest will be allocated among the variable investment option(s) in proportion to
the amounts in each variable investment option attributable to the Contract as
of the date of repayment.
II. Transfers
The Prudential Variable Appreciable Account ("Account") currently has 16
subaccounts, each of which is invested in shares of a corresponding portfolio of
The Prudential Series Fund, Inc. ("Fund"), which is registered under the 1940
Act as an open-end diversified management investment company. In addition, a
fixed-rate option and Real Property Account are available for investment by
contract owners. Provided the Contract is not in default or is in force as
variable reduced paid-up insurance, the owner may, up to four times in each
contract year, transfer amounts from one subaccount to another subaccount, to
the fixed-rate option, or to the Real Property Account without charge. All or a
portion of the amount credited to a subaccount may be transferred.
In addition, the entire amount of the contract fund may be transferred to the
fixed-rate option at any time during
II-13
<PAGE>
the first two contract years. A contract owner who wishes to convert his or her
variable contract to a fixed-benefit contract in this manner must request a
complete transfer of funds to the fixed-rate option and should also change his
or her allocation instructions regarding any future premiums.
Transfers among subaccounts will take effect at the end of the valuation period
during which a proper written request or authorized telephone request is
received at a Prudential Home Office. The request may be in terms of dollars,
such as a request to transfer $10,000 from one account to another, or may be in
terms of a percentage reallocation among subaccounts. In the latter case, as
with premium reallocations, the percentages must be in whole numbers.
Transfers from either the fixed-rate option or the Real Property Account to
other investment options are currently permitted only once each contract year
and only during the thirty-day period beginning on the contract anniversary. The
maximum amount which may currently be transferred out of the fixed-rate option
each year is the greater of: (a) 25% of the amount in the fixed-rate option, and
(b) $2,000. The maximum amount which may currently be transferred out of the
Real Property Account each year is the greater of: (a) 50% of the amount in the
Real Property Account, and (b) $10,000. Such transfer requests received prior to
the contract anniversary will be effected on the contract anniversary. Transfer
requests received within the thirty-day period beginning on the contract
anniversary will be effected as of the end of the valuation period during which
the request is received. These limits are subject to change in the future.
III. "Redemption" Procedures: Surrender and Related Transactions
A.Surrender for Cash Surrender Value
If the insured party under a Contract is alive, The Prudential will pay, within
seven days, the Contract's cash surrender value as of the date of receipt at its
Home Office of the Contract and a signed request for surrender. The Contract's
cash surrender value is computed as follows:
1.If the Contract is not in default: The cash surrender value is the contract
fund, minus any surrender charge, consisting of a deferred sales charge and a
deferred administrative charge, minus any contract debt, plus any termination
dividend.
The deferred sales charge and deferred administrative charge are described in
the prospectus. The deferred administrative charge is designed to recover the
administrative expenses, such as underwriting expenses, incurred
II-14
<PAGE>
in connection with the issuance of a Contract. As a result, in the early months
after issue, there may be no cash surrender value if only scheduled premiums are
paid.
2.If the Contract is in default during its days of grace, The Prudential will
compute the cash surrender value as of the date the Contract went into default.
It will adjust this value for any loan the owner took out or paid back or any
premium payments or withdrawals made in the days of grace.
3.If the Contract is in default beyond its days of grace, the cash surrender
value as of any date will be either the value on the date of any extended
insurance benefit then in force, or the value on that date of any fixed or
variable reduced paid-up insurance benefit then in force, less any Contract
debt.
In lieu of the payment of the cash surrender value in a single sum upon
surrender of a Contract, an election may be made by the owner to apply all or a
portion of the proceeds under one of the fixed benefit settlement options
described in the Contract or, with the approval of The Prudential, a combination
of options. An option is available only if the proceeds to be applied are $1,000
or more or would result in periodic payments of at least $20.00. The
fixed-benefit settlement options are subject to the restrictions and limitations
set forth in the Contract.
B.Partial Surrenders and Withdrawal of Excess Cash Surrender Value
An owner may surrender a Contract in part. Partial surrender involves splitting
the Contract into two Contracts. One is surrendered for its cash surrender
value; the other is continued in force on the same terms as the original
Contract except that future scheduled premiums are reduced based upon the
continued Contract's face amount and all values under the Contract are
proportionately reduced based upon the reduction in the face amount of
insurance. The Contract continued must have at least the minimum face amount of
insurance stated in the contract.
An alternative to surrender or partial surrender of a Contract is a withdrawal
of cash surrender value without splitting the Contract into two Contracts. A
withdrawal may be made only if the following conditions are satisfied. First,
the amount withdrawn, plus the cash surrender value after withdrawal, may not be
more than the cash surrender value before withdrawal. Second, the contract fund
after the withdrawal must not be less than the tabular contract fund after the
withdrawal. Third, the amount withdrawn must be at least $500 under a Form B
Contract and at least $2,000 under a Form A Contract. An owner may make no more
than four such withdrawals in a Contract year, and there is a fee of the lesser
of $15 and 2% of the amount withdrawn for each such withdrawal. An amount
withdrawn may not be repaid except as a premium subject to the Contract charges.
II-15
<PAGE>
Whenever a withdrawal is made, the death benefit payable will immediately be
reduced by at least the amount of the withdrawal. This will not change the
guaranteed minimum amount of insurance under a Form B Contract (i.e., the face
amount) nor the amount of the scheduled premium that will be payable thereafter
on such a Contract. Under a Form A Contract, however, the resulting reduction in
death benefit may require a reduction in the face amount. No withdrawal will be
permitted under a Form A Contract if it would result in a new face amount less
than the minimum face amount. Furthermore, any applicable deferred
administrative and sales charges are reduced in proportion to the reduction in
face amount. The contract fund is reduced by the sum of the cash withdrawn, the
fee for the withdrawal and the reduction in the backload. An amount equal to the
reduction in the contract fund will be withdrawn from the investment options. In
addition, the amount of the scheduled premiums due thereafter under a Form A
Contract will be reduced to reflect the lower face amount of insurance.
C. Death Claims
The Prudential will pay a death benefit to the beneficiary within seven days
after receipt at its Service Office of due proof of death of the Insured and all
other requirements necessary to make payment. State Insurance laws impose
various requirements, such as receipt of a tax waiver, before payment of the
death benefit may be made. In addition, payment of the death benefit is subject
to the provisions of the Contract regarding suicide and incontestability. In the
event The Prudential should contest the validity of a death claim, an amount up
to the portion of the Contract fund in the variable investment options will be
withdrawn, if appropriate, and held in The Prudential's general account.
The following describes the death benefit if the Contract is not in default past
its days of grace. The death benefit under a Form A Contract is the face amount
less any contract debt. The death benefit under a Form B Contract is the face
amount, plus any excess of the contract fund over the tabular contract fund,
less any contract debt. There may be an additional amount payable from an extra
benefit added to the Contract by rider. Tabular contract funds on Contract
anniversaries are shown in the contract data pages. Tabular contract funds at
intermediate times can be obtained by interpolation.
If the contract fund grows to exceed the net single premium at the insured's
attained age for the death benefit described above, the death benefit will be
the contract fund, divided by such net single premium. The death benefit will be
adjusted for any contract debt and any extra benefits in the same manner as
above.
The proceeds payable on death also will include interest (at a rate determined
by The Prudential from time to time)
II-16
<PAGE>
from the date that the death benefit is computed (the date of death) until the
date of payment.
The Prudential will make payment of the death benefit out of its general
account, and will transfer assets, if appropriate, from the Account and/or the
Real Property Account to the general account in an amount up to the contract
fund.
In lieu of payment of the death benefit in a single sum, an election may be made
to apply all or a portion of the proceeds under one of the fixed benefit
settlement options described in the Contract or, with the approval of The
Prudential, a combination of options. The election may be made by the owner
during the Insured's lifetime, or, at death, by the beneficiary. An option in
effect at death may not be changed to another form of benefit after death. An
option is available only if the proceeds to be applied are $1,000 or more or
would result in periodic payments of at least $20.00. The fixed benefit
settlement options are subject to the restrictions and limitations set forth in
the Contract.
D.Default and Options on Lapse
The Contract is in default on any Monthly Date on which the premium account is
less than zero and the contract fund is less than an amount which will grow at
the assumed net rate of return to the tabular contract fund applicable on the
next Monthly Date. Monthly Dates occur on the Contract Date and in each later
month on the same day of the month as the Contract Date. The Contract provides
for a grace period commencing on the Monthly Date on which the Contract goes
into default and extending at least 61 days after the mailing date of the notice
of default. The insurance coverage continues in force during the grace period,
but if the Insured dies during the grace period, any charges due during the
grace period are deducted from the amount payable to the beneficiary.
Except for Contracts issued on certain insureds in high risk rating classes, a
lapsed Contract will normally provide extended term insurance at expiration of
the grace period. The death benefit of the extended term insurance is equal to
the death benefit of the Contract (excluding riders) as of the date of default,
less any Contract debt. The extended term insurance will continue for a length
of time that depends on the cash benefit of the extended term insurance is equal
to the death benefit of the Contract (excluding riders) as of the due date of
the premium in default, less any Contract debt. The extended term insurance will
continue for a length of time that depends on the cash surrender value on the
due date of first unpaid premium, the amount of insurance, and the age and sex
of the insured. However, extended term insurance may be exchanged, if the
contract owner so elects, for fixed
II-17
<PAGE>
or variable reduced paid-up insurance within three months of the due date of the
premium in default. The face amount of the reduced paid-up insurance will depend
on the cash surrender value on the due date of the premium in default, and the
age and sex of the insured. Variable reduced paid-up is only available if the
amount of such insurance is at least $5,000, and if the insured is not in a high
risk rating class.
Contracts issued on the above-mentioned high risk insureds will be converted to
fixed reduced paid-up whole-life insurance at expiration of the grace period.
If the amount of variable reduced paid-up (VRPU) is at least equal to the amount
of extended term insurance, and VRPU is available, then VRPU will be the
automatic option on lapse.
E.Loans
The Contract provides that an owner, if no premium is in default beyond the
grace period, may take out a loan at any time a loan value is available. The
Contract also provides for a loan value if the Contract is in effect under the
contract value option for fixed or variable reduced paid-up insurance, but not
if it is in effect as extended term insurance. The owner may borrow money on
completion of a form satisfactory to The Prudential. The Contract is the only
security for the loan. Disbursement of the amount of the loan will be made
within seven days of receipt of the form at The Prudential's Home Office. The
investment options will be debited in the amount of the loan on the date the
form is received. The percentage of the loan withdrawn from each investment
option will normally be equal to the percentage of the value of such assets held
in the investment option. An owner may borrow up to the Contract's full loan
value. The loan provision is described in the prospectus.
A loan does not affect the amount of premiums due. When a loan is made, the
contract fund is not reduced, but the value of the assets relating to the
Contract held in the investment option(s) is reduced. Accordingly, the daily
changes in the cash surrender value will be different from what they would have
been had no loan been taken. Cash surrender values and the death benefit are
thus permanently affected by any Contract debt, whether or not repaid.
The guaranteed minimum death benefit is not affected by Contract debt if
premiums are duly paid. However, on settlement the amount of any Contract debt
is subtracted from the insurance proceeds. If Contract debt ever becomes equal
to or more than what the cash surrender value would be if there was no Contract
debt, all the Contract's benefits will end 31 days after notice is mailed to the
owner and any known assignee, unless payment of an amount sufficient to end the
default is made within that period.
II-18
<PAGE>
F.Key Employee Rider
Many life insurance companies offer fixed-benefit "key person" insurance
policies. Those policies enable an employer to purchase life insurance payable
to the employer upon the death of an important or "key" employee whose death
would constitute a financial disadvantage to the employer. Such policies often
permit the owner the right to change the person insured under the policy, a
right often exercised when the original insured terminates his or her employment
with the company and is replaced by another person.
If permitted by the insurance laws of the state in which the Contract is issued,
a rider to the Contract is available, referred to herein as the "key person"
rider, that allows the owner the option to continue the Contract in force on the
life of a different insured, subject to certain conditions. This rider is
primarily offered to corporate and non-corporate employers who own or may
purchase a Contract issued on the life of a key employee. The rider may be
included at the time the original Contract is issued or added after issue. If
the Contract includes this rider, the owner will be able to continue the
Contract in force on the life of a different key employee. Thus, the rider
provides employers with a way to purchase the Contract on the life of a key
employee that may continue in force in an appropriately modified form on the
life of a new employee when the original insured leaves the owner's employment.
The revised Contract will have a new scheduled premium and certain other revised
specifications, which will be set forth in a new Contract document.
An Owner's exercise of the option provided by the key person rider could be
viewed as an exchange of the existing Contract for a new Contract. The Contract
prior to the owner's exercise of the option to change insureds will be referred
to as the "original Contract". The Contract in force after the exchange is
effected will be referred to as the "new Contract." An Owner's exercise of the
right granted by the key person rider is subject to several conditions. These
conditions include but are not limited to the following: (i) the new insured
must have been alive as of the original Contract Date (i.e., the date the
Contract was issued) and must be less than 70 years old as of the date of the
proposed change of insureds; (ii) the new insured must satisfy The Prudential's
underwriting requirements; (iii) the owner of the new Contract must remain the
same as the owner of the original Contract and that owner must have an insurable
interest in the new insured's life; and (iv) The Prudential must not be waiving
any premiums under the Contract pursuant to a rider that waives premiums in the
event of disability.
The specifications of the new Contract will be determined as follows: The
Contract date will remain the same as that of the original Contract. The face
amount of the new Contract will generally be the amount requested by the
II-19
<PAGE>
owner in the application to effect the change of insureds, except that it cannot
be more than the face amount of the original Contract. The contract fund of the
original Contract will become the initial contract fund of the new Contract. The
premium for the new Contract will be based on The Prudential's rates in force on
the date of the change for the new insured's rating class. If the original
Contract has contract debt due to an outstanding loan, the contract debt may be
transferred to the new Contract unless that debt would exceed the new Contract's
loan value, in which case the excess contract debt must be paid off.
Upon the exchange of the original Contract for the new Contract, neither the
contingent deferred sales charge nor the contingent deferred administrative
charge is assessed. If the new Contract is subsequently surrendered, however,
the Contract's cash surrender value will be determined by using the greater of
the surrender charges that would apply under the original or the new Contract.
Thus, with respect to the contingent deferred administrative charge, the amount
of this charge upon surrender of the new Contract will be determined on the
basis of the face amount of the original Contract since the face amount cannot
be increased upon exercise of the right to change insureds. The original
Contract Date, however, will govern for purposes of determining whether this
charge will be reduced or eliminated for persistency.
With respect to the contingent deferred sales load, the amount of this charge
can be increased following exercise of the option granted by the key person
rider because the scheduled premiums on the new Contract can be higher than the
scheduled premiums on the original Contract due to the replacement of the
original insured with an insured of an older issue age. If this is so, the
contingent deferred sales load will be calculated as if the Contract had
originally been issued on the life of the new insured. The original Contract
Date will control for purposes of calculating the reduction in the contingent
deferred sales charge for persistency.
IV. Cash Adjustment Upon Exchange of Contract
As described previously, at any time during the first 24 months after a Contract
is issued, so long as the Contract is not in default, the Owner may transfer all
amounts in the variable investment options into the fixed-rate option. This
option is provided in lieu of the option to exchange to a comparable
fixed-benefit life insurance combined.
II-20
Exhibit 3
April 25, 1996
The Prudential Insurance Company
of America
Prudential Plaza
Newark, New Jersey 07102-3777
Gentlemen:
In my capacity as Chief Counsel, Variable Products, Law Department of The
Prudential Insurance Company of America, I have reviewed the establishment on
August 11, 1987 of The Prudential Variable Appreciable Account (the "Account")
by the Finance Committee of the Board of Directors of The Prudential Insurance
Company of America ("The Prudential") as a separate account for assets
applicable to certain variable life insurance contracts, pursuant to the
provisions of Section 17B:28-7 of the Revised Statutes of New Jersey. I am
responsible for oversight of the preparation and review of the Registration
Statements on Form S-6, as amended, filed by The Prudential with the Securities
and Exchange Commission (Registration No. 33-20000, Registration No. 33-25372
and Registration No. 33-61079) under the Securities Act of 1933 for the
registration of certain variable appreciable life insurance contracts issued
with respect to the Account.
I am of the following opinion:
1. The Prudential is a corporation duly organized under the laws of the
State of New Jersey and is a validly existing corporation.
2. The Account has been duly created and is validly existing as a
separate account pursuant to the aforesaid provisions of New Jersey
law.
3. The portion of the assets held in the Account equal to the reserve
and other liabilities for variable benefits under the variable
appreciable life insurance contracts is not chargeable with
liabilities arising out of any other business The Prudential may
conduct.
II-21
<PAGE>
Page Two
April 25, 1996
4. The variable appreciable life insurance contracts are legal and
binding obligations of The Prudential, in accordance with their
terms.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as I judged to be necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
Clifford E. Kirsch
II-22
Exhibit 6
April 25, 1996
The Prudential Insurance
Company of America
Prudential Plaza
Newark, New Jersey 07102-3777
To The Prudential:
This opinion is furnished in connection with the registration by The Prudential
Insurance Company of America of Custom VAL life insurance contracts (the
"Contracts") under the Securities Act of 1933. The prospectus included in
Post-Effective Amendment No. 13 to Registration Statement No. 33-25372 on Form
S-6 describes the Contracts. I have reviewed the two Contract forms and I have
participated in the preparation and review of the Registration Statement and
Exhibits thereto. In my opinion:
(1) The illustrations of cash surrender values and death benefits
included in the section of the prospectus entitled "Illustrations",
based on the assumptions stated in the illustrations, are consistent
with the provisions of the respective forms of the Contracts. The
rate structure of the Contracts has not been designed so as to make
the relationship between premiums and benefits, as shown in the
illustrations, appear more favorable to a prospective purchaser of a
Contract issued on a male age 35 than to prospective purchasers of
Contracts on males of other ages or on females.
(2) The illustration of the effect of a Contract loan on the cash
surrender value included in the section of the prospectus entitled
"Contract Loans," based on the assumption stated in the
illustration, is consistent with the provisions of the Form A
Contract.
(3) The deduction in an amount equal to 1.25% of each premium is a
reasonable charge in relation to the additional income tax burden
imposed upon The Prudential Insurance Company of America as the
result of the enactment of Section 848 of the Internal Revenue Code.
In reaching that conclusion a number of factors were taken into
account that, in my opinion, were appropriate and which resulted in
a projected after-tax rate of return that is a reasonable rate to
use in discounting the tax benefit of the deductions allowed in
Section 848 in taxable years subsequent to the year in which the
premiums are received.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to my name under the heading "Experts" in the
prospectus.
Very truly yours,
Nancy D. Davis, FSA, MAAA
Vice President and Assistant Actuary
The Prudential Insurance Company of America
II-23
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