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. 14
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED
ON FORM N-8B-2
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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 1996 was filed on February 28, 1997.
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, 1997 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>
<TABLE>
CROSS REFERENCE SHEET
(AS REQUIRED BY FORM N-8B-2)
<CAPTION>
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
<S> <C>
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
<S> <C>
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
<S> <C>
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; Statutory Financial
Statements of The Prudential Insurance Company of America
</TABLE>
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
<PAGE>
PROSPECTUS
MAY 1, 1997
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 ("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
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 Prudential in its sole
discretion but never less than 4%. This prospectus describes the Contracts
generally and The Prudential Variable Appreciable Account.
THE REPLACEMENT OF LIFE INSURANCE IS GENERALLY NOT IN THE INTEREST OF THE
CUSTOMER. IN MOST CASES, WHEN A CUSTOMER REQUIRES ADDITIONAL COVERAGE, A NEW
POLICY SUPPLEMENTING THE EXISTING POLICY SHOULD BE REQUESTED, THEREBY PROTECTING
THE BENEFITS OF THE ORIGINAL POLICY. IF YOU ARE CONSIDERING REPLACING A POLICY,
YOU SHOULD COMPARE THE BENEFITS AND COSTS OF SUPPLEMENTING YOUR EXISTING POLICY
WITH THE BENEFITS AND COSTS OF PURCHASING THE CONTRACT DESCRIBED IN THIS
PROSPECTUS AND 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 Prudential.
PCVAL-1 Ed 5-97
Catalog #646677J
<PAGE>
PROSPECTUS CONTENTS
PAGE
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS ..................... 1
BRIEF DESCRIPTION OF THE CONTRACT ........................................ 2
GENERAL INFORMATION ABOUT 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 ................ 5
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 .............................................................. 6
CONTRACT DATE ......................................................... 8
ALLOCATION OF PREMIUMS ................................................ 8
TRANSFERS ............................................................. 9
CHARGES AND EXPENSES .................................................. 10
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS ...... 13
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 .................................... 15
SURRENDER OF A CONTRACT ............................................... 15
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE ............................. 15
INCREASES IN FACE AMOUNT .............................................. 16
DECREASES IN FACE AMOUNT .............................................. 17
WHEN PROCEEDS ARE PAID ................................................ 17
LIVING NEEDS BENEFIT .................................................. 18
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 ................................................................ 25
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 PRUDENTIAL ..................................... 28
<PAGE>
PAGE
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT ...... A1
STATUTORY FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA .................................................... 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 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 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 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 ("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 Prudential. See INCREASES IN FACE
AMOUNT, page 16 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, 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 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 6.
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 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 is invested
primarily in high quality medium-term corporate and government debt securities;
the GOVERNMENT INCOME 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 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 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 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 is invested primarily in
common stocks; the PRUDENTIAL JENNISON 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 is invested in common stocks and common stock equivalents (such as
convertible debt securities) of foreign and domestic issuers; 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 5.
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.
Prudential deducts certain charges from each premium payment and from the
amounts held in the designated investment options. In addition, 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 premium; 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
3
<PAGE>
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 Prudential and should be retained.
For the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1.
GENERAL INFORMATION ABOUT 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 ("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.
Prudential's statutory financial statements begin on page B1 and should be
considered only as bearing upon 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
Prudential's other assets.
The obligations to Contract owners and beneficiaries arising under the Contract
are general corporate obligations of Prudential. Prudential is also the legal
owner of the assets in the Account. Prudential will 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
Prudential conducts. In addition to these assets, the Account's assets may
include funds contributed by Prudential to commence operation of the Account and
may include accumulations of the charges Prudential makes against the Account.
From time to time these additional assets will be transferred to Prudential's
general account. Before making any such transfer, 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 Prudential. There are currently fifteen subaccounts within the
Account, each of which invests in a single corresponding portfolio of The
Prudential Series Fund, Inc. Additional subaccounts may be added in the future.
The Account's financial statements begin on page A1.
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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 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 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.
Prudential is the investment advisor for the assets of each of the portfolios of
the Series Fund. Prudential's principal business address is Prudential Plaza,
Newark, New Jersey 07102-3777. Prudential has a Service Agreement with its
wholly-owned subsidiary The Prudential Investment Corporation ("PIC"), which
provides that, subject to Prudential's supervision, PIC will furnish investment
advisory services in connection with the management of the Series Fund. In
addition, 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.
Prudential, PIC, and Jennison are registered as investment advisors under the
Investment Advisers Act of 1940.
As an investment advisor, Prudential charges the Series Fund a daily investment
management fee as compensation for its services. In addition to the investment
management fee, each portfolio incurs certain expenses, such as accounting and
custodian fees. See CHARGES AND EXPENSES, page 10.
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 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 Prudential that, through a general
partnership formed by 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
Prudential, under which Prudential selects the properties and other investments
held by the partnership. 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.
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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, 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 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 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. 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 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
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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 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 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, 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.
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
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), 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. Prudential will
bill the owner for the chosen higher premiums. In general, the
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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 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.
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 Prudential so that it will coincide with or be
shortly prior to the date on which the first premium is paid. Under certain
circumstances, 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 Prudential of a lower issue age in determining the
amount of the scheduled premium. 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 invested portion of all subsequent premiums, are placed in the
selected investment option[s] on the date of receipt at a Home Office, 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 invested as of the end of the
valuation period when received at a Home Office 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 a Home Office or by telephoning that
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 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 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
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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.
Currently, you may make additional transfers with our consent. There is no
charge. 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 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 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 is jointly owned or the Contract owner elects not to have this
privilege. Telephone transfers may not be available on policies that are
assigned, see ASSIGNMENT, page 24, depending on the terms of the assignment.
Prudential has adopted procedures designed to ensure that requests by telephone
are genuine. Prudential will not be held liable for following telephone
instructions that it reasonably believes to be genuine. 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 transferred to
the Money Market Subaccount unless the Contract owner directs that it be
transferred to another subaccount. 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 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.
Prudential may, on a non-discriminatory basis, permit the owner of a Custom
APPRECIABLE LIFE insurance policy issued by 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 Prudential does not give tax advice, 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.
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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 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 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 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. 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, Prudential will determine
the applicable charge for taxes attributable to premiums based on
Prudential's records of the insured's address. That charge will apply to all
premium payments for the following Contract year. During 1996, 1995 and
1994, Prudential received a total of approximately $134,000, $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 1996, 1995 and
1994, Prudential received a total of approximately $38,000, $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
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.
Prudential currently intends to cap this charge at $15. This monthly
administrative charge will not be made if the Contract has been continued in
force pursuant to an option on lapse. During 1996, 1995 and 1994, Prudential
received a total of approximately $74,000, $72,000 and $67,000,
respectively, in monthly administrative charges. 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 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 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, 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.
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 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 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
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<PAGE>
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 1996, 1995 and 1994, Prudential received a total of
approximately $560,000, $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 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 1996, 1995 and 1994, Prudential received a total of
approximately $66,000, $40,000 and $56,000, respectively, for this risk
charge.
6. 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
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
Prudential may charge is based upon the non-smoker/smoker 1980 CSO Tables.
However, 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. 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 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%. Prudential has reserved the right, however, to increase
this charge to 0.9%. The mortality risk assumed is that insureds may live
for a shorter period of time than 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
Prudential estimated in fixing its administrative charges. Should either of
these developments occur, Prudential has guaranteed that the death benefits
and cash surrender values promised by the Contract will not be reduced.
During 1996, 1995 and 1994, Prudential received a total of approximately
$209,000, $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 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
1996, 1995 and 1994, Prudential received a total of approximately $47,000,
$35,000 and $47,000, respectively, from surrendered or lapsed Contracts.
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. 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.
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<PAGE>
11. If the Contract includes riders, Prudential deducts any charges applicable
to those riders from the Contract fund on each Monthly date. In addition,
Prudential will deduct on each Monthly date any extra charge incurred
because of the rating class of the insured.
12. An investment advisory fee is deducted daily from each portfolio at a rate,
on an annualized basis, from 0.35% for the Stock Index Portfolio to 0.75%
for the Global Portfolio. The expenses incurred in conducting the investment
operations of the portfolios (such as custodian fees and preparation and
distribution of annual reports) are paid out of the portfolio's income.
These expenses also vary from portfolio to portfolio.
The total expenses of each portfolio for the year 1996 expressed as a
percentage of the average assets during the year are shown below:
- --------------------------------------------------------------------------------
INVESTMENT OTHER EXPENSES TOTAL EXPENSES
ADVISORY (AFTER EXPENSE (AFTER EXPENSE
PORTFOLIO FEE REIMBURSEMENT)* REIMBURSEMENT)*
- --------------------------------------------------------------------------------
MONEY MARKET 0.40% 0.04% 0.44%
DIVERSIFIED BOND 0.40% 0.05% 0.45%
GOVERNMENT INCOME 0.40% 0.06% 0.46%
ZERO COUPON BOND 2000 0.40% 0.00%* 0.40%*
ZERO COUPON BOND 2005 0.40% 0.00%* 0.40%*
CONSERVATIVE BALANCED 0.55% 0.04% 0.59%
FLEXIBLE MANAGED 0.60% 0.04% 0.64%
HIGH YIELD BOND 0.55% 0.08% 0.63%
STOCK INDEX 0.35% 0.05% 0.40%
EQUITY INCOME 0.40% 0.05% 0.45%
EQUITY 0.45% 0.05% 0.50%
PRUDENTIAL JENNISON 0.60% 0.06% 0.66%
SMALL CAPITALIZATION STOCK 0.40% 0.16% 0.56%
GLOBAL 0.75% 0.17% 0.92%
NATURAL RESOURCES 0.45% 0.07% 0.52%
- --------------------------------------------------------------------------------
* In addition to the investment management fee, each portfolio incurs
certain expenses, such as accounting and custodian fees. 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. 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 0.52% for the Zero Coupon Bond Portfolio 2000 and 0.53% for the
Zero Coupon Bond Portfolio 2005 during 1996. No such adjustments were
necessary for the High Yield Bond, Stock Index, Equity Income and
Natural Resources Portfolios in 1996. Prudential intends to continue
making these adjustments in the future, although it retains the right
to stop doing so.
13. Although the Account is registered as a unit investment trust, it is not
a separate taxpayer for purposes of the Code. The earnings of the Account
are taxed as part of the operations of Prudential. No charge is currently
being made to the Account for company federal income taxes. Prudential will
review the question of a charge to the Account for company federal income
taxes periodically. Such a charge may be made in future years for any
Company federal income taxes that would be attributable to the Account.
Under current law, Prudential may incur state and local taxes (in addition
to premium taxes) in several states. At present, these taxes are not
significant and they are not charged against the Account. If there is a
material change in the applicable state or local tax laws, the imposition of
any such taxes upon Prudential that are attributable to the Account may
result in a corresponding charge against the Account.
14. 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 Prudential uses the terms "maximum charge" and "current
charge." The "maximum charge," in each instance, is the highest charge that
Prudential is entitled to make under the Contract. The "current charge" is the
lower amount that Prudential is now charging. However, if circumstances change,
Prudential reserves the
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<PAGE>
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
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.
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 whether that
purpose makes it likely that expenses will be reduced; and (5) any other
circumstances which 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 Prudential on a uniform basis. 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, 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 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.
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<PAGE>
<TABLE>
<CAPTION>
- ----------------- ----------------- ------------------------- --------------- ---------------- -------------------------
MALE NET SINGLE INCREASE IN INSURANCE FEMALE NET SINGLE INCREASE IN INSURANCE
ATTAINED AGE PREMIUM AMOUNT PER $1 INCREASE ATTAINED AGE PREMIUM AMOUNT PER $1 INCREASE
IN CONTRACT FUND IN CONTRACT FUND
- ----------------- ----------------- ------------------------- --------------- ---------------- -------------------------
<S> <C> <C> <C> <C> <C>
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
- ----------------- ----------------- ------------------------- --------------- ---------------- -------------------------
</TABLE>
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, 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.
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 more than 4%
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 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, Prudential will accept any premium payment if the payment is at least
$25. 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
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<PAGE>
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 Prudential's divisible
surplus attributable to the Contracts ("dividends"), as determined annually by
Prudential's Board of Directors. However, 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 will be 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 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 in a form that meets Prudential's needs, to a
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 a 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, 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
15
<PAGE>
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, 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
Prudential. An increase in face 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 Prudential; (4) if 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) Prudential has the right to deny more
than one increase in a Contract year; and (8) if 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, Prudential has the right to deny the increase.
Upon an increase in face amount, 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. 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.
Provided the increase is approved, the new insurance will take effect once the
proper forms, any medical evidence necessary to underwrite the additional
insurance and any amount needed by the company have been received.
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 may be 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
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
16
<PAGE>
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.
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 a 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.
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
Prudential will generally pay any death benefit, cash surrender value, loan
proceeds or withdrawal within 7 days after receipt at a 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 at a Home
Office. However, 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, Prudential expects to pay the
17
<PAGE>
cash surrender value promptly upon request. However, 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). 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_ to their
Contracts at issue. 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.
Subject to state regulatory approval, 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. 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, 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, 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. 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.
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.
With the exception of certain business-related policies, the recently enacted
Health Insurance Portability and Accountability Act of 1996 excludes from income
the LIVING NEEDS BENEFIT if the insured is terminally ill or chronically ill as
defined by the tax law (although the exclusion in the latter case may be
limited). Contract owners should consult a qualified tax advisor before electing
to receive this benefit. 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
18
<PAGE>
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 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 Prudential currently applies to existing contracts and
expects to apply to this Contract. See PARTICIPATION IN DIVISIBLE SURPLUS, page
15. 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 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 0.53%. The 0.53% figure is based on an average of the current
investment management fees of the fifteen available portfolios and an analysis
of historical operating expenses other than investment 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 0.53%, 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, 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>
ILLUSTRATIONS
-------------
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE SELECT 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
<TABLE>
<CAPTION>
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) (-1.13% NET) (4.87% NET) (10.87% NET) (-1.13% NET) (4.87% NET) (10.87% 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 $ 258 $ 531
3 $ 2,010 $ 6,486 $300,000 $300,000 $ 300,000 $ 1,066 $ 1,575 $ 2,129
4 $ 2,025 $ 8,852 $300,000 $300,000 $ 300,000 $ 2,103 $ 2,940 $ 3,888
5 $ 2,039 $ 11,327 $300,000 $300,000 $ 300,000 $ 3,104 $ 4,352 $ 5,825
6 $ 2,058 $ 13,920 $300,000 $300,000 $ 300,000 $ 4,590 $ 6,336 $ 8,483
7 $ 2,078 $ 16,637 $300,000 $300,000 $ 300,000 $ 6,206 $ 8,542 $ 11,534
8 $ 2,098 $ 19,485 $300,000 $300,000 $ 300,000 $ 7,777 $ 10,798 $ 14,830
9 $ 2,121 $ 22,470 $300,000 $300,000 $ 300,000 $ 9,307 $ 13,109 $ 18,400
10 $ 2,146 $ 25,600 $300,000 $300,000 $ 300,000 $ 10,789 $ 15,473 $ 22,270
15 $ 2,311 $ 43,745 $300,000 $300,000 $ 300,000 $ 14,645 $ 25,336 $ 44,641
20 $ 2,607 $ 67,124 $303,230 $303,230 $ 303,230 $ 20,499 $ 40,547 $ 86,280
25 $ 3,107 $ 97,892 $306,458 $306,458 $ 306,458 $ 27,071 $ 60,673 $ 158,408
30 (AGE 65) $ 3,983 $139,242 $306,450 $306,450 $ 463,783 $ 29,507 $ 83,182 $ 278,417
35 $15,664 $257,645 $307,180 $307,180 $ 689,040 $ 84,133 $151,775 $ 462,417
40 $15,664 $401,699 $307,870 $324,432 $1,023,642 $131,948 $241,148 $ 756,403
45 $15,664 $576,964 $308,476 $438,746 $1,529,347 $172,079 $351,603 $1,221,325
(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 $11,080.63. 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.
</TABLE>
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 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>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE SELECT 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
<TABLE>
<CAPTION>
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) (-1.13% NET) (4.87% NET) (10.87% NET) (-1.13% NET) (4.87% NET) (10.87% 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 $300,258 $ 300,531 $ 0 $ 155 $ 428
3 $ 2,010 $ 6,486 $300,000 $300,413 $ 300,965 $ 862 $ 1,369 $ 1,921
4 $ 2,025 $ 8,852 $300,000 $300,591 $ 301,535 $ 1,897 $ 2,730 $ 3,675
5 $ 2,039 $ 11,327 $300,000 $300,792 $ 302,257 $ 2,925 $ 4,166 $ 5,631
6 $ 2,058 $ 13,920 $300,000 $301,096 $ 303,229 $ 4,580 $ 6,315 $ 8,448
7 $ 2,078 $ 16,637 $300,000 $301,430 $ 304,398 $ 6,195 $ 8,514 $ 11,482
8 $ 2,098 $ 19,485 $300,000 $301,798 $ 305,791 $ 7,765 $ 10,762 $ 14,755
9 $ 2,121 $ 22,470 $300,000 $302,199 $ 307,431 $ 9,295 $ 13,062 $ 18,294
10 $ 2,146 $ 25,600 $300,000 $302,636 $ 309,346 $ 10,777 $ 15,412 $ 22,122
15 $ 2,311 $ 43,745 $300,000 $305,466 $ 324,284 $ 14,633 $ 25,144 $ 43,962
20 $ 2,607 $ 67,124 $303,230 $314,194 $ 358,240 $ 20,643 $ 40,322 $ 84,368
25 $ 3,107 $ 97,892 $306,458 $329,643 $ 422,249 $ 27,397 $ 60,183 $ 152,789
30 (AGE 65) $ 3,983 $139,242 $306,450 $351,236 $ 534,502 $ 30,055 $ 81,236 $ 264,502
35 $15,664 $257,645 $307,180 $378,723 $ 670,178 $ 84,802 $157,326 $ 448,781
40 $15,664 $401,699 $307,900 $425,326 $1,016,175 $132,645 $250,071 $ 750,900
45 $15,664 $576,964 $308,476 $498,102 $1,544,356 $172,613 $363,188 $1,233,294
(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 $13,279.34. FOR A GROSS RETURN OF 12%, THE PREMIUM AFTER AGE
65 WILL BE $3,520.96. 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.
</TABLE>
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 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>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE SELECT 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
<TABLE>
<CAPTION>
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) (-1.13% NET) (4.87% NET) (10.87% NET) (-1.13% NET) (4.87% NET) (10.87% 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 $ 184
4 $ 1,446 $ 6,205 $300,000 $300,000 $ 300,000 $ 111 $ 606 $ 1,169
5 $ 1,475 $ 7,987 $300,000 $300,000 $ 300,000 $ 657 $ 1,390 $ 2,258
6 $ 1,512 $ 9,879 $300,000 $300,000 $ 300,000 $ 1,546 $ 2,566 $ 3,826
7 $ 1,551 $ 11,888 $300,000 $300,000 $ 300,000 $ 2,684 $ 4,043 $ 5,792
8 $ 1,593 $ 14,020 $300,000 $300,000 $ 300,000 $ 3,801 $ 5,553 $ 7,902
9 $ 1,638 $ 16,284 $300,000 $300,000 $ 300,000 $ 4,900 $ 7,101 $ 10,177
10 $ 1,688 $ 18,691 $300,000 $300,000 $ 300,000 $ 5,979 $ 8,686 $ 12,632
15 $ 2,019 $ 33,270 $300,000 $300,000 $ 300,000 $ 8,285 $ 14,471 $ 25,666
20 $ 2,610 $ 53,615 $303,115 $303,115 $ 303,115 $ 13,460 $ 25,200 $ 51,872
25 $ 3,610 $ 83,017 $306,229 $306,229 $ 306,229 $ 21,337 $ 41,696 $ 99,544
30 (AGE 65) $ 5,363 $126,619 $306,225 $306,225 $ 306,225 $ 28,548 $ 63,199 $184,334
35 $16,509 $247,044 $306,995 $306,995 $ 454,084 $ 87,430 $136,092 $305,489
40 $16,509 $393,560 $307,724 $311,008 $ 674,289 $140,001 $231,217 $498,922
45 $16,509 $571,819 $308,363 $437,692 $1,006,859 $186,287 $350,740 $804,634
(1) FOR A HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%, THE PREMIUM AFTER AGE
65 WILL BE $16,508.62. FOR A GROSS RETURN OF 6%, THE PREMIUM AFTER AGE
65 WILL BE $13,110.04. 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.
</TABLE>
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 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>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE SELECT 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
<TABLE>
<CAPTION>
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) (-1.13% NET) (4.87% NET) (10.87% NET) (-1.13% NET) (4.87% NET) (10.87% 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 $300,113 $300,271 $ 300,438 $ 0 $ 0 $ 0
3 $ 1,417 $ 4,520 $300,125 $300,428 $ 300,759 $ 0 $ 0 $ 37
4 $ 1,446 $ 6,205 $300,110 $300,603 $ 301,164 $ 0 $ 362 $ 922
5 $ 1,475 $ 7,987 $300,067 $300,796 $ 301,659 $ 414 $ 1,142 $ 2,005
6 $ 1,512 $ 9,879 $300,024 $301,037 $ 302,287 $ 1,537 $ 2,550 $ 3,800
7 $ 1,551 $ 11,888 $300,000 $301,301 $ 303,034 $ 2,673 $ 4,021 $ 5,754
8 $ 1,593 $ 14,020 $300,000 $301,590 $ 303,915 $ 3,787 $ 5,523 $ 7,848
9 $ 1,638 $ 16,284 $300,000 $301,906 $ 304,945 $ 4,885 $ 7,063 $ 10,102
10 $ 1,688 $ 18,691 $300,000 $302,248 $ 306,140 $ 5,962 $ 8,636 $ 12,528
15 $ 2,019 $ 33,270 $300,000 $304,474 $ 315,370 $ 8,264 $ 14,313 $ 25,209
20 $ 2,610 $ 53,615 $303,115 $311,873 $ 337,508 $ 13,532 $ 24,937 $ 50,572
25 $ 3,610 $ 83,017 $306,251 $325,812 $ 380,491 $ 21,521 $ 41,082 $ 95,761
30 (AGE 65) $ 5,363 $126,619 $313,633 $346,094 $ 456,999 $ 28,633 $ 61,094 $ 171,999
35 $16,832 $248,868 $321,686 $374,066 $ 560,597 $ 87,989 $140,369 $ 326,900
40 $16,832 $397,603 $325,003 $421,918 $ 791,058 $140,012 $236,927 $ 584,971
45 $16,832 $578,561 $326,110 $497,018 $1,254,349 $183,701 $354,609 $1,001,999
(1) FOR A HYPOTHETICAL GROSS INVESTMENT RETURN OF 0%, THE PREMIUM AFTER AGE
65 WILL BE $16,832.39. FOR A GROSS RETURN OF 6%, THE PREMIUM AFTER AGE
65 WILL BE $15,103.94. FOR A GROSS RETURN OF 12%, THE PREMIUM AFTER AGE
65 WILL BE $9,198.61. 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.
</TABLE>
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 F 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 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>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE SELECT 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
<TABLE>
<CAPTION>
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) (-1.43% NET) (4.57% NET) (10.57% NET) (-1.43% NET) (4.57% NET) (10.57% 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 $ 31 $ 290
3 $ 2,010 $ 6,486 $300,000 $300,000 $300,000 $ 740 $ 1,218 $ 1,739
4 $ 2,025 $ 8,852 $300,000 $300,000 $300,000 $ 1,659 $ 2,439 $ 3,325
5 $ 2,039 $ 11,327 $300,000 $300,000 $300,000 $ 2,538 $ 3,693 $ 5,060
6 $ 2,058 $ 13,920 $300,000 $300,000 $300,000 $ 3,819 $ 5,424 $ 7,403
7 $ 2,078 $ 16,637 $300,000 $300,000 $300,000 $ 5,225 $ 7,355 $ 10,094
8 $ 2,098 $ 19,485 $300,000 $300,000 $300,000 $ 6,581 $ 9,314 $ 12,979
9 $ 2,121 $ 22,470 $300,000 $300,000 $300,000 $ 7,891 $ 11,304 $ 16,081
10 $ 2,146 $ 25,600 $300,000 $300,000 $300,000 $ 9,148 $ 13,322 $ 19,418
15 $ 2,311 $ 43,745 $300,000 $300,000 $300,000 $11,767 $ 20,962 $ 37,774
20 $ 2,607 $ 67,124 $300,000 $300,000 $300,000 $12,271 $ 28,623 $ 66,737
25 $ 3,107 $ 97,892 $300,000 $300,000 $300,000 $ 9,200 $ 34,926 $113,446
30 (AGE 65) $ 3,983 $139,242 $300,000 $300,000 $323,532 $ 0 $ 37,338 $192,398
35 $15,664 $257,645 $300,000 $300,000 $453,648 $31,706 $ 89,284 $302,874
40 $15,664 $401,699 $300,000 $300,000 $632,790 $42,031 $145,026 $466,309
45 $15,664 $576,964 $300,000 $300,000 $876,996 $11,998 $210,465 $699,378
(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 $14,944.40. 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.
</TABLE>
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 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>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE SELECT 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
<TABLE>
<CAPTION>
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) (-1.43% NET) (4.57% NET) (10.57% NET) (-1.43% NET) (4.57% NET) (10.57% NET)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,988 $ 2,067 $300,000 $300,012 $300,101 $ 0 $ 0 $ 0
2 $ 1,997 $ 4,227 $300,000 $300,031 $300,290 $ 0 $ 0 $ 187
3 $ 2,010 $ 6,486 $300,000 $300,056 $300,575 $ 537 $ 1,013 $ 1,532
4 $ 2,025 $ 8,852 $300,000 $300,092 $300,974 $ 1,455 $ 2,231 $ 3,113
5 $ 2,039 $ 11,327 $300,000 $300,136 $301,495 $ 2,361 $ 3,510 $ 4,869
6 $ 2,058 $ 13,920 $300,000 $300,189 $302,155 $ 3,812 $ 5,408 $ 7,374
7 $ 2,078 $ 16,637 $300,000 $300,251 $302,968 $ 5,217 $ 7,335 $ 10,052
8 $ 2,098 $ 19,485 $300,000 $300,325 $303,955 $ 6,574 $ 9,289 $ 12,919
9 $ 2,121 $ 22,470 $300,000 $300,411 $305,133 $ 7,884 $ 11,274 $ 15,996
10 $ 2,146 $ 25,600 $300,000 $300,508 $306,525 $ 9,141 $ 13,284 $ 19,301
15 $ 2,311 $ 43,745 $300,000 $301,190 $317,574 $11,760 $ 20,868 $ 37,252
20 $ 2,607 $ 67,124 $300,000 $302,269 $338,586 $12,264 $ 28,397 $ 64,714
25 $ 3,107 $ 97,892 $300,000 $303,828 $375,672 $ 9,193 $ 34,368 $106,212
30 (AGE 65) $ 3,983 $139,242 $300,000 $305,934 $438,145 $ 0 $ 35,934 $168,145
35 $15,664 $257,645 $300,000 $308,630 $504,967 $31,699 $ 87,233 $283,570
40 $15,664 $401,699 $300,000 $314,182 $637,596 $42,023 $138,927 $462,341
45 $15,664 $576,964 $300,000 $323,628 $915,042 $11,987 $188,714 $729,718
(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 $15,348.10. FOR A GROSS RETURN OF 12%, THE PREMIUM AFTER AGE
65 WILL BE $8,308.28. 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.
</TABLE>
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 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>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE SELECT 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
<TABLE>
<CAPTION>
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) (-1.43% NET) (4.57% NET) (10.57% NET) (-1.43% NET) (4.57% NET) (10.57% 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 $ 57 $ 552
5 $ 1,475 $ 7,987 $300,000 $300,000 $300,000 $ 40 $ 672 $ 1,426
6 $ 1,512 $ 9,879 $300,000 $300,000 $300,000 $ 765 $ 1,635 $ 2,717
7 $ 1,551 $ 11,888 $300,000 $300,000 $300,000 $ 1,734 $ 2,881 $ 4,367
8 $ 1,593 $ 14,020 $300,000 $300,000 $300,000 $ 2,676 $ 4,139 $ 6,117
9 $ 1,638 $ 16,284 $300,000 $300,000 $300,000 $ 3,595 $ 5,415 $ 7,982
10 $ 1,688 $ 18,691 $300,000 $300,000 $300,000 $ 4,488 $ 6,705 $ 9,970
15 $ 2,019 $ 33,270 $300,000 $300,000 $300,000 $ 5,734 $ 10,571 $ 19,490
20 $ 2,610 $ 53,615 $300,000 $300,000 $300,000 $ 5,901 $ 14,486 $ 34,646
25 $ 3,610 $ 83,017 $300,000 $300,000 $300,000 $ 4,256 $ 17,821 $ 59,378
30 (AGE 65) $ 5,363 $126,619 $300,000 $300,000 $300,000 $ 0 $ 19,465 $101,928
35 $17,227 $251,090 $300,000 $300,000 $300,000 $38,746 $ 74,397 $193,278
40 $17,227 $402,528 $300,000 $300,000 $462,649 $58,259 $133,127 $340,930
45 $17,227 $586,776 $300,000 $300,000 $693,699 $42,825 $201,532 $553,204
(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 $16,788.94. FOR A GROSS RETURN OF 12%, THE PREMIUM AFTER AGE
65 WILL BE $8,700.94. 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.
</TABLE>
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 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>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE SELECT 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
<TABLE>
<CAPTION>
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) (-1.43% NET) (4.57% NET) (10.57% NET) (-1.43% NET) (4.57% NET) (10.57% 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 $300,020 $300,171 $ 0 $ 0 $ 0
3 $ 1,417 $ 4,520 $300,000 $300,035 $300,330 $ 0 $ 0 $ 0
4 $ 1,446 $ 6,205 $300,000 $300,056 $300,548 $ 0 $ 0 $ 307
5 $ 1,475 $ 7,987 $300,000 $300,081 $300,830 $ 0 $ 428 $ 1,177
6 $ 1,512 $ 9,879 $300,000 $300,111 $301,184 $ 759 $ 1,624 $ 2,697
7 $ 1,551 $ 11,888 $300,000 $300,146 $301,620 $ 1,727 $ 2,866 $ 4,340
8 $ 1,593 $ 14,020 $300,000 $300,188 $302,146 $ 2,669 $ 4,121 $ 6,079
9 $ 1,638 $ 16,284 $300,000 $300,236 $302,772 $ 3,589 $ 5,393 $ 7,929
10 $ 1,688 $ 18,691 $300,000 $300,290 $303,510 $ 4,482 $ 6,678 $ 9,898
15 $ 2,019 $ 33,270 $300,000 $300,664 $309,346 $ 5,728 $ 10,503 $ 19,185
20 $ 2,610 $ 53,615 $300,000 $301,258 $320,440 $ 5,895 $ 14,322 $ 33,504
25 $ 3,610 $ 83,017 $300,000 $302,143 $340,094 $ 4,251 $ 17,413 $ 55,364
30 (AGE 65) $ 5,363 $126,619 $300,000 $303,414 $373,437 $ 0 $ 18,414 $ 88,437
35 $17,227 $251,090 $300,000 $305,933 $415,512 $38,737 $ 72,236 $181,815
40 $17,227 $402,528 $300,000 $311,417 $506,114 $58,249 $126,426 $321,123
45 $17,227 $586,776 $300,000 $320,971 $676,705 $42,811 $178,562 $534,296
(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 $17,045.09. FOR A GROSS RETURN OF 12%, THE PREMIUM AFTER AGE
65 WILL BE $13,316.54. 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.
</TABLE>
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 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 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 this 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 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 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 1996 ranged from 7.10% to 8.00%.
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, 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 $11,918.77. 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 10.87% 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
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 213 Washington
Street, Newark, New Jersey 07102-2992. 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. 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 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 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.)
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 until
amounts are distributed under the Contract; 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 relating to the
definition of life insurance 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.
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 or
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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. The recently enacted Health Insurance Portability and Accountability
Act of 1996 generally disallows tax deductions for interest on Contract debt on
a business-owned insurance policy effective (with certain transitional rules)
for interest paid or accrued after October 13, 1995. An exception permits the
deduction of interest on policy loans on Contracts for up to 20 key persons. The
interest deduction for Contract debt on such loans is limited to a prescribed
interest rate and a maximum aggregate loan amount of $50,000 per key insured
person. The Code also imposes an indirect tax upon additions to the
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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.
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, 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 a 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, 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 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 Prudential's needs, within three months of the date of default.
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
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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
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
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 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
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. 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 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, 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, 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, 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, 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 Prudential's consent.
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.
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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 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 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
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
Prudential's general assets. Sometimes this is referred to as Prudential's
general account, which consists of all assets owned by Prudential other than
those in the Account and in other separate accounts that have been or may be
established by Prudential. Subject to applicable law, 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, 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 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. Prudential reserves
the right to change this practice. 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.
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, 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 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 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.
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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 give Prudential instructions will be determined as of
the record date chosen by the Board of Directors of the Series Fund. Prudential
will furnish Contract owners with proper forms and proxies to enable them to
give these instructions. 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.
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, 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 Prudential reasonably disapproves such changes in accordance with
applicable federal regulations. If 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
Prudential.
SUBSTITUTION OF SERIES FUND SHARES
Although 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, 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 Prudential may limit the number of such requests or impose
a reasonable charge if such requests are made too frequently.
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
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.
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, 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 for the year ended December
31, 1996 have been audited by Price Waterhouse LLP, independent accountants, 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. Price Waterhouse LLP's principal business address is 1177 Avenue of
the Americas, New York, New York 10036.
The financial statements included in this prospectus for years ended December
31, 1995 and December 31, 1994, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein, and
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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.
On March 12, 1996, Deloitte & Touche LLP was dismissed as the independent
accountants of 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 reference to
the matter in their reports.
Actuarial matters included in this prospectus have been examined by Nancy D.
Davis, FSA, MAAA, Vice President and Actuary of Prudential whose opinion is
filed as an exhibit to the registration statement.
LITIGATION
On October 28, 1996, Prudential entered into a Stipulation of Settlement in a
multidistrict proceeding involving allegations of various claims relating to
Prudential's life insurance sales practices. (In re Prudential Insurance Company
of America Sales Practices Litigation, D.N.J., MDL No. 1061, Master Docket No.
95-4704 (AMW)). On March 7, 1997, the United States District Court for the
District of New Jersey approved the Stipulation of Settlement as fair,
reasonable and adequate.
Pursuant to the Settlement, Prudential has agreed to provide an alternative
dispute resolution process for class members who believe they were misled
concerning the sale or performance of their life insurance policies. The
Settlement also provides certain no-fault relief. The ultimate cost of the
Settlement will depend on a variety of factors, including the number of
policyowners who participate in the Settlement, the number of policyowners who
are afforded relief and the remediation option they select. The administrative
costs of implementing the Settlement are also subject to a number of complex
uncertainties. In light of the uncertainties attendant to these and other
factors, it is difficult at this time to estimate the ultimate cost of the
Settlement to Prudential.
In addition, a number of actions have been filed against Prudential by
policyowners who have excluded themselves from the settlement; Prudential
anticipates that additional suits may be filed by other policyowners.
Also, on July 9, 1996, a Multi-State Life Insurance Task Force comprised of
insurance regulators from 29 states and the District of Columbia, released a
report on Prudential's activities. As of February 24, 1997, Prudential had
entered into consent orders or agreements with all 50 states and the District of
Columbia to implement a remediation plan, whose terms closely parallel the
Settlement approved in the MDL proceeding, and agreed to a series of payments
allocated to all 50 states and the District of Columbia amounting to a total of
approximately $65 million.
Litigation is subject to many uncertainties, and given the complexity and scope
of these suits, their outcome cannot be predicted.
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. It is possible that the results of operations or the cash flow of
Prudential, 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 Prudential's financial position.
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 Prudential's office. The address
and telephone number are set forth on the cover of this prospectus.
FINANCIAL STATEMENTS
The statutory financial statements of Prudential included herein should be
distinguished from the financial statements of the Account, and should be
considered only as bearing upon the ability of Prudential to meet its
obligations under the Contracts.
27
<PAGE>
DIRECTORS AND OFFICERS OF PRUDENTIAL
The directors and certain officers of Prudential, listed with their principal
occupations during the past 5 years, are shown below.
DIRECTORS OF PRUDENTIAL
FRANKLIN E. AGNEW. Director. -- Business Consultant. Address: USX Tower, Suite
660, 600 Grant Street, Pittsburgh, PA 15219.
FREDERIC K. BECKER, Director. -- President, Wilentz, Goldman, and Spitzer (law
firm). Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
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.--National and International Health Care Advisor,
Ernst & Young LLP. Address: 1225 Connecticut Avenue, NW, Washington, DC 20036.
ROGER A. ENRICO, Director.--Chairman and Chief Executive Officer, Pepsico Inc.
since 1996; Vice Chairman, Pepsico, Inc., from 1993 to 1996; Chairman and Chief
Executive Officer, Pepsi Co. Worldwide Food, from 1991 to 1993. Address: 14841
North Dallas Parkway, Dallas, TX 75240.
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, The
College Fund/UNCF. Address: 8260 Willow Oaks Corporate Drive, Fairfax, VA 22031.
JON F. HANSON, Director.--Chairman, Hampshire Management Company. Address: 235
Moore Street, Suite 200, Hackensack, NJ 07601.
GLEN H. HINER, JR., Director.--Chairman and Chief Executive Officer, Owens
Corning. Address: One Owens Corning Parkway, Toledo, OH 43659.
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.
GAYNOR N. KELLEY, Director.--Retired Chairman and Chief Executive Officer, The
Perkin Elmer Corporation. Address: 751 Broad Street, Newark, NJ 07102-3777.
BURTON G. MALKIEL, Director.--Professor, Princeton University. Address:
Princeton University, 110 Fisher Hall, Prospect Avenue, Princeton, NJ
08544-1021.
ARTHUR F. RYAN, Chairman of the Board, President, and Chief Executive Officer.
- -- Chairman, President, and Chief Executive Officer, Prudential since 1994;
Prior to 1994, President and Chief Operating Officer, Chase Manhattan
Corporation. Address: 751 Broad Street, Newark, NJ 07102-3777.
IDA F. S. SCHMERTZ, Director.--Principal, Investment Strategies International
since 1994; Prior to 1994: Senior Vice President of Corporate Affairs, American
Express Company. Address: 90 Riverside Dr., New York, NY 10024.
CHARLES R. SITTER, Director.--Former President, Exxon Corporation. Address: 5959
Las Colinas Boulevard, Irving, TX 75039-2298.
DONALD L. STAHELI, Director.--Chairman and Chief Executive Officer, Continental
Grain Company since 1995; Prior to 1995: President and Chief Executive Officer,
Continental Grain Company. Address: 277 Park Avenue, New York, NY 10172.
RICHARD M. THOMSON, Director.--Chairman and Chief Executive Officer, The
Toronto-Dominion Bank. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto,
Ontario, M5K 1A2, Canada.
JAMES A. UNRUH, Director.--Chairman and Chief Executive Officer, Unisys
Corporation. Address: P.O. Box 500, Blue Bell, PA 19424-0001.
P. ROY VAGELOS, M.D., Director.--Former Chairman and Chief Executive Officer,
Merck & Co., Inc. Address: One Crossroads Drive, Bedminster, NJ 07921.
28
<PAGE>
STANLEY C. VAN NESS, Director.--Attorney, Picco Herbert Kennedy (law firm).
Address: One State Street Square, Suite 1000, Trenton, NJ 08607-1388.
PAUL A. VOLCKER, Director.--Business Consultant since 1996; Prior to 1996:
Chairman, Wolfensohn & Co., 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: One Williams Center, Tulsa, OK 74172.
OTHER EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
MARTIN A. BERKOWITZ, Senior Vice President and Comptroller.--Senior Vice
President and Chief Financial Officer of Prudential Investment Company.
SUSAN L. BLOUNT, Vice President and Secretary.--Vice President and Secretary of
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 Prudential since 1995; 1993 to 1995: Managing Director and Assistant
Treasurer of Prudential; 1992 to 1993: Vice President and Assistant Treasurer,
Banking and Cash Management for Prudential.
MARK B. GRIER, Chief Financial Officer.--Chief Financial Officer of Prudential
since 1995; Prior to 1995: Executive Vice President and Head of Global Markets,
Chase Manhattan Corporation.
29
<PAGE>
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<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc. Portfolios at net asset value [Note
3]............................................ $ 97,754,363 $ 116,426,677 $1,061,732,578 $1,137,587,038 $ 918,503,799
-------------- -------------- -------------- -------------- --------------
NET ASSETS, representing:
Equity of Contract owners....................... $ 95,829,772 $ 116,230,392 $1,060,371,790 $1,137,482,708 $ 918,784,473
Equity of The Prudential Insurance Company of
America....................................... 1,924,591 196,285 1,360,788 104,330 (280,674)
-------------- -------------- -------------- -------------- --------------
$ 97,754,363 $ 116,426,677 $1,061,732,578 $1,137,587,038 $ 918,503,799
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 4,689,159 $ 7,158,122 $ 23,448,572 $ 32,750,578 $ 35,574,962
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 4A]..... 630,761 769,815 6,600,231 7,402,644 6,248,856
Reimbursement for excess expenses [Note 4D]..... 0 0 0 0 0
-------------- -------------- -------------- -------------- --------------
NET EXPENSES...................................... 630,761 769,815 6,600,231 7,402,644 6,248,856
-------------- -------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 4,058,398 6,388,307 16,848,341 25,347,934 29,326,106
-------------- -------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 0 0 92,436,486 106,224,518 55,843,548
Realized gain (loss) on shares redeemed
[average cost basis].......................... 0 19,658 755,380 487,657 627,498
Net unrealized gain (loss) on investments....... 0 (2,104,541) 41,805,447 (5,082,172) 10,273,250
-------------- -------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... 0 (2,084,883) 134,997,313 101,630,003 66,744,296
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 4,058,398 $ 4,303,424 $ 151,845,654 $ 126,977,937 $ 96,070,402
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A1
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------
ZERO
COUPON HIGH
BOND YIELD STOCK EQUITY NATURAL
2000 BOND INDEX INCOME RESOURCES
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc. Portfolios at net asset value [Note
3] $ 20,072,530 $ 80,876,861 $ 422,844,131 $ 295,054,376 $ 146,011,161
-------------- -------------- -------------- -------------- --------------
NET ASSETS, representing:
Equity of Contract owners $ 20,017,682 $ 80,728,287 $ 422,066,809 $ 294,742,410 $ 145,962,740
Equity of The Prudential Insurance Company of
America 54,848 148,574 777,322 311,966 48,421
-------------- -------------- -------------- -------------- --------------
$ 20,072,530 $ 80,876,861 $ 422,844,131 $ 295,054,376 $ 146,011,161
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
<CAPTION>
ZERO
COUPON
GOVERNMENT BOND
GLOBAL INCOME 2005
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc. Portfolios at net asset value [Note
3] $ 86,164,762 $ 73,847,002 $ 22,819,931
-------------- -------------- --------------
NET ASSETS, representing:
Equity of Contract owners $ 85,828,091 $ 72,963,000 $ 22,175,214
Equity of The Prudential Insurance Company of
America 336,671 884,002 644,717
-------------- -------------- --------------
$ 86,164,762 $ 73,847,002 $ 22,819,931
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
ZERO
COUPON HIGH
BOND YIELD STOCK EQUITY
2000 BOND INDEX INCOME
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received $ 835,394 $ 7,376,933 $ 6,724,618 $ 9,118,093
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 4A] 143,233 532,324 2,544,825 1,767,583
Reimbursement for excess expenses [Note 4D] (23,005) 0 0 0
-------------- -------------- -------------- --------------
NET EXPENSES 120,228 532,324 2,544,825 1,767,583
-------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS) 715,166 6,844,609 4,179,793 7,350,510
-------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received 0 0 4,749,836 9,133,917
Realized gain (loss) on shares redeemed
[average cost basis] 27,409 20,787 263,052 171,030
Net unrealized gain (loss) on investments (556,648) 581,780 61,075,735 32,816,172
-------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS (529,239) 602,567 66,088,623 42,121,119
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 185,927 $ 7,447,176 $ 70,268,416 $ 49,471,629
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
<CAPTION>
ZERO
COUPON
NATURAL GOVERNMENT BOND
RESOURCES GLOBAL INCOME 2005
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received $ 877,698 $ 1,778,642 $ 4,676,803 $ 1,123,279
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 4A] 909,008 446,499 519,382 147,863
Reimbursement for excess expenses [Note 4D] (16,487) 0 0 (27,318)
-------------- -------------- -------------- --------------
NET EXPENSES 892,521 446,499 519,382 120,545
-------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS) (14,823) 1,332,143 4,157,421 1,002,734
-------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received 17,021,108 1,298,584 0 246,221
Realized gain (loss) on shares redeemed
[average cost basis] 341,761 16,670 22,685 290
Net unrealized gain (loss) on investments 13,941,557 9,125,406 (3,090,993) (1,505,763)
-------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS 31,304,426 10,440,660 (3,068,308) (1,259,252)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 31,289,603 $ 11,772,803 $ 1,089,113 $ (256,518)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A2
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------
SMALL
PRUDENTIAL CAPITALIZATION
JENNISON STOCK
-------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc. Portfolios at net asset value [Note
3]............................................ $ 41,246,859 $ 28,405,156
-------------- --------------
NET ASSETS, representing:
Equity of Contract owners....................... $ 40,599,027 $ 28,186,629
Equity of The Prudential Insurance Company of
America....................................... 647,832 218,527
-------------- --------------
$ 41,246,859 $ 28,405,156
-------------- --------------
-------------- --------------
</TABLE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------
SMALL
PRUDENTIAL CAPITALIZATION
JENNISON STOCK
-------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 64,455 $ 153,825
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 4A]..... 149,932 100,546
Reimbursement for excess expenses [Note 4D]..... 0 0
-------------- --------------
NET EXPENSES...................................... 149,932 100,546
-------------- --------------
NET INVESTMENT INCOME (LOSS)...................... (85,477) 53,279
-------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 0 489,855
Realized gain (loss) on shares redeemed
[average cost basis].......................... 0 (7,039)
Net unrealized gain (loss) on investments....... 3,012,624 2,049,209
-------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... 3,012,624 2,532,025
-------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 2,927,147 $ 2,585,304
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
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, 1996, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
MONEY DIVERSIFIED
MARKET BOND
---------------------------------------------- ----------------------------------------------
1996 1995 1994 1996 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)...... $ 4,058,398 $ 4,217,643 $ 2,402,301 $ 6,388,307 $ 5,652,448 $ 4,226,871
Capital gains distributions
received........................ 0 0 0 0 222,002 158,594
Realized gain (loss) on shares
redeemed
[average cost basis]............ 0 0 0 19,658 30,407 4,403
Net unrealized gain (loss) on
investments..................... 0 0 0 (2,104,541) 10,042,691 (7,162,380)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS......... 4,058,398 4,217,643 2,402,301 4,303,424 15,947,548 (2,772,512)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS..... 768,830 8,955,240 6,444,757 10,268,006 9,712,345 11,829,119
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7].......................... 1,422,930 161,461 (213,654) (142,209) 143,151 (532,267)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS............................ 6,250,158 13,334,344 8,633,404 14,429,221 25,803,044 8,524,340
NET ASSETS:
Beginning of year................. 91,504,205 78,169,861 69,536,457 101,997,456 76,194,412 67,670,072
-------------- -------------- -------------- -------------- -------------- --------------
End of year....................... $ 97,754,363 $ 91,504,205 $ 78,169,861 $ 116,426,677 $ 101,997,456 $ 76,194,412
-------------- -------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A5
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
FLEXIBLE
EQUITY MANAGED
---------------------------------------------- --------------
1996 1995 1994 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 16,848,341 $ 9,985,776 $ 7,323,925 $ 25,347,934
Capital gains distributions
received 92,436,486 27,318,049 19,666,506 106,224,518
Realized gain (loss) on shares
redeemed
[average cost basis] 755,380 11,957 86,672 487,657
Net unrealized gain (loss) on
investments 41,805,447 129,700,617 (18,362,891) (5,082,172)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS 151,845,654 167,016,399 8,714,212 126,977,937
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS 116,044,081 130,026,767 123,951,671 57,031,152
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] (2,717,850) (595,673) 452,486 (1,594,508)
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 265,171,885 296,447,493 133,118,369 182,414,581
NET ASSETS:
Beginning of year 796,560,693 500,113,200 366,994,831 955,172,457
-------------- -------------- -------------- --------------
End of year $1,061,732,578 $ 796,560,693 $ 500,113,200 $1,137,587,038
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
<CAPTION>
CONSERVATIVE
BALANCED
----------------------------------------------
1995 1994 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 21,550,235 $ 14,060,998 $ 29,326,106 $ 25,291,477 $ 16,966,301
Capital gains distributions
received 39,426,921 18,931,168 55,843,548 26,552,510 6,635,310
Realized gain (loss) on shares
redeemed
[average cost basis] 56,509 0 627,498 97,662 31,649
Net unrealized gain (loss) on
investments 110,261,394 (56,779,739) 10,273,250 55,648,508 (33,092,575)
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS 171,295,059 (23,787,573) 96,070,402 107,590,157 (9,459,315)
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS 86,936,282 142,298,237 36,970,919 44,932,925 127,164,401
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] (2,895,506) (55,717) (1,143,063) (3,421,660) (1,173,893)
-------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 255,335,835 118,454,947 131,898,258 149,101,422 116,531,193
NET ASSETS:
Beginning of year 699,836,622 581,381,675 786,605,541 637,504,119 520,972,926
-------------- -------------- -------------- -------------- --------------
End of year $ 955,172,457 $ 699,836,622 $ 918,503,799 $ 786,605,541 $ 637,504,119
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A6
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
ZERO COUPON HIGH
BOND YIELD
2000 BOND
---------------------------------------------- ----------------------------------------------
1996 1995 1994 1996 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss).....$ 715,166 $ 720,396 $ 1,032,410 $ 6,844,609 $ 6,151,112 $ 4,958,854
Capital gains distributions
received....................... 0 759,176 31,655 0 0 38
Realized gain (loss) on shares
redeemed
[average cost basis]........... 27,409 16,969 1,031 20,787 (58,578) 5,625
Net unrealized gain (loss) on
investments.................... (556,648) 1,982,145 (2,416,751) 581,780 3,163,738 (6,827,471)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 185,927 3,478,686 (1,351,655) 7,447,176 9,256,272 (1,862,954)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... (613,550) 846,650 900,334 5,326,899 4,374,480 9,774,435
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7]......................... 33,778 (645,588) 409,426 52,425 (119,164) (576,511)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS........................... (393,845) 3,679,748 (41,895) 12,826,500 13,511,588 7,334,970
NET ASSETS:
Beginning of year................ 20,466,375 16,786,627 16,828,522 68,050,361 54,538,773 47,203,803
-------------- -------------- -------------- -------------- -------------- --------------
End of year......................$ 20,072,530 $ 20,466,375 $ 16,786,627 $ 80,876,861 $ 68,050,361 $ 54,538,773
-------------- -------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A7
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
STOCK EQUITY
INDEX INCOME
---------------------------------------------- --------------
1996 1995 1994 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 4,179,793 $ 3,665,394 $ 3,181,988 $ 7,350,510
Capital gains distributions
received 4,749,836 2,097,393 267,733 9,133,917
Realized gain (loss) on shares
redeemed
[average cost basis] 263,052 293,916 58,302 171,030
Net unrealized gain (loss) on
investments 61,075,735 66,716,563 (2,856,319) 32,816,172
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS 70,268,416 72,773,266 651,704 49,471,629
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS 55,125,681 33,935,158 26,983,569 23,125,635
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] 82,144 (100,558) (298,727) (711,051)
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 125,476,241 106,607,866 27,336,546 71,886,213
NET ASSETS:
Beginning of year 297,367,890 190,760,024 163,423,478 223,168,163
-------------- -------------- -------------- --------------
End of year $ 422,844,131 $ 297,367,890 $ 190,760,024 $ 295,054,376
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
<CAPTION>
NATURAL
RESOURCES
----------------------------------------------
1995 1994 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 6,301,712 $ 4,108,092 $ (14,823) $ 515,411 $ 203,463
Capital gains distributions
received 9,279,251 7,633,088 17,021,108 4,578,307 1,375,424
Realized gain (loss) on shares
redeemed
[average cost basis] 46,601 34,607 341,761 68,144 22,045
Net unrealized gain (loss) on
investments 18,945,636 (11,478,198) 13,941,557 14,973,181 (5,314,192)
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS 34,573,200 297,589 31,289,603 20,135,043 (3,713,260)
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS 38,554,244 51,018,498 13,900,701 9,214,757 22,317,372
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] (646,585) (376,490) (277,180) (398,931) (47,480)
-------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 72,480,859 50,939,597 44,913,124 28,950,869 18,556,632
NET ASSETS:
Beginning of year 150,687,304 99,747,707 101,098,037 72,147,168 53,590,536
-------------- -------------- -------------- -------------- --------------
End of year $ 223,168,163 $ 150,687,304 $ 146,011,161 $ 101,098,037 $ 72,147,168
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A8
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
GOVERNMENT
GLOBAL* INCOME
---------------------------------------------- ----------------------------------------------
1996 1995 1994 1996 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)....$ 1,332,143 $ 454,049 $ (11,478) $ 4,157,421 $ 3,989,499 $ 3,587,433
Capital gains distributions
received...................... 1,298,584 915,804 5,622 0 0 0
Realized gain (loss) on shares
redeemed
[average cost basis].......... 16,670 4,998 0 22,685 (8,599) (74,828)
Net unrealized gain (loss) on
investments................... 9,125,406 4,212,026 (1,421,127) (3,090,993) 7,403,233 (7,299,824)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS....... 11,772,803 5,586,877 (1,426,983) 1,089,113 11,384,133 (3,787,219)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS... 24,827,377 16,098,541 29,174,840 (1,166,024) 481,705 4,183,444
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7]........................ (137,878) (1,921,654) 2,190,839 788,406 (293,673) (467,937)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS.......................... 36,462,302 19,763,764 29,938,696 711,495 11,572,165 (71,712)
NET ASSETS:
Beginning of year............... 49,702,460 29,938,696 0 73,135,507 61,563,342 61,635,054
-------------- -------------- -------------- -------------- -------------- --------------
End of year.....................$ 86,164,762 $ 49,702,460 $ 29,938,696 $ 73,847,002 $ 73,135,507 $ 61,563,342
-------------- -------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- -------------- --------------
*Commenced
Business
on 5/1/94
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A9
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
ZERO COUPON
BOND PRUDENTIAL**
2005 JENNISON
---------------------------------------------- --------------
1996 1995 1994 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 1,002,734 $ 838,006 $ 782,620 $ (85,477)
Capital gains distributions
received 246,221 425,717 3,474 0
Realized gain (loss) on shares
redeemed
[average cost basis] 290 0 (2,913) 0
Net unrealized gain (loss) on
investments (1,505,763) 3,328,939 (2,073,481) 3,012,624
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS (256,518) 4,592,662 (1,290,300) 2,927,147
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS 1,428,479 2,469,936 3,624,370 30,275,275
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] 484,066 7,956 (146,182) 385,656
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 1,656,027 7,070,554 2,187,888 33,588,078
NET ASSETS:
Beginning of year 21,163,904 14,093,350 11,905,462 7,658,781
-------------- -------------- -------------- --------------
End of year $ 22,819,931 $ 21,163,904 $ 14,093,350 $ 41,246,859
-------------- -------------- --------------
-------------- -------------- --------------
--------------
--------------
**Commenced
Business
on 5/1/95
<CAPTION>
SMALL
CAPITALIZATION**
STOCK
------------------------------
1995 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ (11,994) $ 53,279 $ 6,422
Capital gains distributions
received 0 489,855 47,413
Realized gain (loss) on shares
redeemed
[average cost basis] 0 (7,039) 0
Net unrealized gain (loss) on
investments 281,405 2,049,209 181,809
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS 269,411 2,585,304 235,644
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS 7,175,027 20,015,548 5,360,329
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] 214,343 (22,002) 230,333
-------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 7,658,781 22,578,850 5,826,306
NET ASSETS:
Beginning of year 0 5,826,306 0
-------------- -------------- --------------
End of year $ 7,658,781 $ 28,405,156 $ 5,826,306
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A10
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
FOR THE YEAR ENDED DECEMBER 31, 1996
NOTE 1: GENERAL
The Prudential Variable Appreciable Account (the "Account") of The Prudential
Insurance Company of America ("Prudential") was established on August 11, 1987
by a resolution of Prudential's Board of Directors in conformity with insurance
laws of the State of New Jersey. The assets of the Account are segregated from
Prudential's other assets. Currently Prudential Variable Appreciable Life (PVAL)
and Prudential Survivorship Preferred (SVUL) Contracts invest in the Account.
The Account is registered under the Investment Company Act of 1940, as amended,
as a unit investment trust. There are fifteen 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 Prudential.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements are prepared in conformity with generally
accepted accounting principles (GAAP). The preparation of the financial
statements, in conformity with GAAP, requires management to make estimates and
assumptions that affect the reported amounts and disclosures. Actual results
could differ from those estimates.
Investments--The investments in shares of the Series Fund are stated at the net
asset value of the respective portfolio.
Security Transactions--Realized gains and losses on security transactions are
reported on an average cost basis. Purchase and sale transactions are recorded
as of the trade date of the security being purchased or sold.
Distributions Received--Dividend and capital gain distributions received are
reinvested in additional shares of the Series Fund and are recorded on the
ex-dividend date.
Equity of Prudential Life Insurance Company of America--Prudential maintains a
position in the Account for the purpose of administering activity in the
Account. The activity includes unit transactions, fund share transaction, and
expense processing. Prudential monitors the balance daily and transfers funds
based upon anticipated activity. At times, Prudential may owe an amount to the
Account, which is reflected in Prudential's equity as a negative balance. The
position does not have an effect on the Contract owner's account or the related
unit value.
A11
<PAGE>
NOTE 3: 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, 1996 were as
follows:
<TABLE>
<CAPTION>
PORTFOLIOS
-------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Number of shares: 9,775,436 10,521,659 39,374,630 63,953,829 59,193,160
Net asset value
per share: $ 10.0000 $ 11.06543 $ 26.96489 $ 17.78763 $ 15.51706
Cost: $ 97,754,363 $ 114,592,428 $ 869,667,765 $ 1,051,479,910 $ 867,829,661
<CAPTION>
PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------------
ZERO
COUPON HIGH
BOND YIELD STOCK EQUITY NATURAL
2000 BOND INDEX INCOME RESOURCES
------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Number of shares: 1,553,971 10,279,881 17,807,930 15,940,424 7,387,206
Net asset value
per share: $ 12.91693 $ 7.86749 $ 23.74471 $ 18.50982 $ 19.76541
Cost: $ 19,568,381 $ 81,489,704 $ 276,796,836 $ 245,473,957 $ 114,441,743
<CAPTION>
PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------------
ZERO
COUPON SMALL
GOVERNMENT BOND PRUDENTIAL CAPITALIZATION
GLOBAL INCOME 2005 JENNISON STOCK
------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Number of shares: 4,825,875 6,581,090 1,862,198 2,879,726 2,059,558
Net asset value
per share: $ 17.85474 $ 11.22109 $ 12.25430 $ 14.32319 $ 13.79187
Cost: $ 74,248,457 $ 74,192,758 $ 22,039,796 $ 37,952,830 $ 26,174,138
</TABLE>
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding Contract owner units, unit values and total Contract owner equity
for the year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Contract Owner
Units Outstanding
(PVAL):.......... 20,056,038.673 22,704,270.329 125,708,228.822 170,578,041.832 191,537,546.348
Unit value
(PVAL):......... $ 1.48140 $ 1.96816 $ 3.38380 $ 2.56528 $ 2.20934
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity
(PVAL):......... $ 29,711,016 $ 44,685,637 $ 425,371,505 $ 437,580,439 $ 423,171,563
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Units
Outstanding
(PVAL $100,000+
face):.......... 43,335,963.712 35,477,635.783 183,134,501.442 266,455,295.837 219,052,666.063
Unit value (PVAL
$100,000+
face):.......... $ 1.51614 $ 2.01468 $ 3.46333 $ 2.62570 $ 2.26154
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity (PVAL
$100,000+
face):.......... $ 65,703,388 $ 71,476,083 $ 634,255,213 $ 699,631,670 $ 495,396,366
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Units
Outstanding
(SVUL):......... 398,970.245 66,018.689 621,738.271 236,429.835 192,082.432
Unit value
(SVUL):......... $ 1.04110 $ 1.04019 $ 1.19837 $ 1.14452 $ 1.12735
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity
(SVUL):......... $ 415,368 $ 68,672 $ 745,072 $ 270,599 $ 216,544
----------------- ----------------- ----------------- ----------------- -----------------
TOTAL CONTRACT
OWNER EQUITY:... $ 95,829,772 $ 116,230,392 $ 1,060,371,790 $ 1,137,482,708 $ 918,784,473
----------------- ----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
A12
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------------------------------------------
ZERO HIGH
COUPON BOND YIELD STOCK EQUITY NATURAL
2000 BOND INDEX INCOME RESOURCES
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Contract Owner
Units Outstanding
(PVAL):.......... 3,660,585.720 15,387,903.704 51,026,977.087 32,505,484.983 19,894,002.086
Unit value
(PVAL):......... $ 2.21829 $ 2.05571 $ 3.26565 $ 3.00354 $ 2.94988
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity
(PVAL):......... $ 8,120,240 $ 31,633,068 $ 166,636,248 $ 97,631,524 $ 58,684,918
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Units
Outstanding
(PVAL $100,000+
face):.......... 5,239,201.945 23,074,678.840 76,187,047.686 64,028,857.775 28,893,658.632
Unit value (PVAL
$100,000+
face):.......... $ 2.27085 $ 2.10376 $ 3.34316 $ 3.07507 $ 3.01942
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity (PVAL
$100,000+
face):.......... $ 11,897,442 $ 48,543,586 $ 254,705,490 $ 196,893,220 $ 87,242,091
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Units
Outstanding
(SVUL):......... N/A 505,102.997 581,484.963 176,423.502 27,944.197
Unit value
(SVUL):......... N/A $ 1.09212 $ 1.24693 $ 1.23377 $ 1.27865
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity
(SVUL):......... N/A $ 551,633 $ 725,071 $ 217,666 $ 35,731
----------------- ----------------- ----------------- ----------------- -----------------
TOTAL CONTRACT
OWNER EQUITY:... $ 20,017,682 $ 80,728,287 $ 422,066,809 $ 294,742,410 $ 145,962,740
----------------- ----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- ----------------- -----------------
<CAPTION>
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------------------------------------------
ZERO SMALL
GOVERNMENT COUPON BOND PRUDENTIAL CAPITALIZATION
GLOBAL INCOME 2005 JENNISON STOCK
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Contract Owner
Units Outstanding
(PVAL):.......... 14,777,544.603 16,407,557.842 3,427,063.251 6,773,439.848 3,759,138.927
Unit value
(PVAL):......... $ 1.31795 $ 1.77603 $ 2.08804 $ 1.41447 $ 1.41503
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity
(PVAL):......... $ 19,476,065 $ 29,140,315 $ 7,155,845 $ 9,580,827 $ 5,319,294
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Units
Outstanding
(PVAL $100,000+
face):.......... 49,638,503.339 24,092,277.326 7,027,780.240 21,504,423.254 15,751,841.033
Unit value (PVAL
$100,000+
face):.......... $ 1.32837 $ 1.81715 $ 2.13621 $ 1.42160 $ 1.42227
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity (PVAL
$100,000+
face):.......... $ 65,938,299 $ 43,779,282 $ 15,012,815 $ 30,570,688 $ 22,403,371
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Units
Outstanding
(SVUL):......... 349,659.305 42,594.932 6,571.354 363,119.018 372,329.523
Unit value
(SVUL):......... $ 1.18323 $ 1.01897 $ 0.99738 $ 1.23241 $ 1.24611
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity
(SVUL):......... $ 413,727 $ 43,403 $ 6,554 $ 447,512 $ 463,964
----------------- ----------------- ----------------- ----------------- -----------------
TOTAL CONTRACT
OWNER EQUITY:... $ 85,828,091 $ 72,963,000 $ 22,175,214 $ 40,599,027 $ 28,186,629
----------------- ----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
A13
<PAGE>
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges at an effective annual rate of
0.90% may be applied daily against the net assets representing equity of
PVAL Contract owners held in each subaccount. For Contract owners investing
in PVAL with face amounts of $100,000 or more the annual rate is 0.60%. For
Contract owners investing in SVUL the annual rate is 0.90%.
Mortality risk is that Contract holders may not live as long as estimated
and expense risk is that the cost of issuing and administering the policies
may exceed the estimated expenses. For 1996, the amount of these charges
paid to Prudential was $14,434,420 for PVAL Contracts, $14,467,520 for PVAL
Contracts with face amounts of $100,000 or more and $11,561 for SVUL
Contracts.
B. Deferred Sales Charge
Subsequent to Contract owner redemption, a deferred sales charge is imposed
upon surrenders of certain variable life insurance Contracts to compensate
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. For 1996,
the amount of these charges was $9,647,647.
C. Partial Withdrawal Charge
A charge is imposed by Prudential on partial withdrawals of the cash
surrender value. For 1996, the amount of these charges was $3,327,939.
D. Expense Reimbursement
PVAL Contracts are reimbursed by 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. For 1996, the amount of these
reimbursements totaled $66,808.
SVUL Contracts are reimbursed by Prudential, on a non-guaranteed basis, for
expenses incurred by the Series Fund in excess of the effective rate of
0.40% of the average daily net assets of these portfolio of each of the Zero
Coupon Bond Portfolios. For 1996, the amount of these reimbursements totaled
$1.
E. Cost of Insurance Charges
Contract holders contributions are applied to the account net of the
following charges: transaction costs, premium taxes, and sales charges,
monthly administration charges, and death benefit risk charges prior to the
investment in the Account. During 1996, Prudential received a total of
$31,272,838, $25,108,207, $104,984,845, $60,980,190, and $13,514,144,
respectively, for these charges.
NOTE 6: TAXES
Prudential is taxed as a "life insurance company" under the Internal Revenue
Code and the operations of the Account form a part of and are taxed with those
of Prudential. Under current federal law, no federal income taxes are payable by
the Account. As such, no provision for tax liability has been recorded.
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS
The increase (decrease) in net assets resulting from equity transfers represents
the net contributions (withdrawals) of Prudential to (from) the Account.
A14
<PAGE>
NOTE 8: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments in the
Series Fund, Inc. were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
--------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
-------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
For the year
ended December
31, 1996
Purchases..... $ 23,234,000 $ 10,499,000 $ 110,220,000 $ 51,960,000 $ 36,639,000
Sales......... $ (21,673,000) $ (1,256,000) $ (3,494,000) $ (3,926,000) $ (7,060,000)
<CAPTION>
PORTFOLIOS (CONTINUED)
--------------------------------------------------------------------------------
ZERO
COUPON HIGH
BOND YIELD STOCK EQUITY NATURAL
2000 BOND INDEX INCOME RESOURCES
-------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
For the year
ended December
31, 1996
Purchases..... $ 144,000 $ 6,063,000 $ 53,532,000 $ 22,154,000 $ 14,071,000
Sales......... $ (844,000) $ (1,216,000) $ (869,000) $ (1,507,000) $ (1,340,000)
<CAPTION>
PORTFOLIOS (CONTINUED)
--------------------------------------------------------------------------------
ZERO
COUPON SMALL
GOVERNMENT BOND PRUDENTIAL CAPITALIZATION
GLOBAL INCOME 2005 JENNISON STOCK
-------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
For the year
ended December
31, 1996
Purchases..... $ 24,498,000 $ 1,525,000 $ 1,827,000 $ 30,511,000 $ 20,824,000
Sales......... $ (255,000) $ (2,422,000) $ (35,000) $ 0 $ (931,000)
</TABLE>
NOTE 9: RELATED PARTY TRANSACTIONS
The Prudential has purchased multiple Variable Appreciable Life insurance
contracts insuring the lives of certain employees. The Prudential is the owner
and beneficiary of the Contracts. There were no net premium payments for the
year ended December 31, 1996. Equity of Contract owners in that subaccount at
December 31, 1996 includes approximately $210.2 million owned by the Prudential.
A15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
Prudential Variable Appreciable Account
and the Board of Directors of
The Prudential Insurance Company of America
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of Money Market Subaccount,
Diversified Bond Subaccount, Equity Subaccount, Flexible Managed Subaccount,
Conservative Balanced Subaccount, Zero Coupon Bond 2000 Subaccount, High Yield
Bond Subaccount, Stock Index Subaccount, Equity Income Subaccount, Natural
Resources Subaccount, Global Subaccount, Government Income Subaccount, Zero
Coupon Bond 2005 Subaccount, Prudential Jennison Subaccount and Small
Capitalization Stock Subaccount of Prudential Variable Appreciable Account at
December 31, 1996, and the results of each of their operations and the changes
in each of their net assets for the year then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of The Prudential Insurance Company of America's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of shares owned in The
Prudential Series Fund, Inc. at December 31, 1996, provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
New York, New York
March 31, 1997
A16
<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 changes in 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 2000, High Yield Bond,
Stock Index, Equity Income, Natural Resources, Global, Government Income, Zero
Coupon Bond 2005, Prudential Jennison, and Small Capitalization Stock
subaccounts) for the periods presented for each of the two years 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 financial statements present fairly, in all material
respects, the changes in net assets of each of the respective subaccounts
constituting The Prudential Variable Appreciable Account for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 15, 1996
A17
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND SURPLUS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
1996 1995
-------- --------
(In Millions)
<S> <C> <C>
ASSETS
Bonds ............................................................................ $ 75,006 $ 77,494
Preferred stock .................................................................. 239 396
Common stock ..................................................................... 7,076 6,133
Mortgage loans on real estate .................................................... 17,039 20,280
Real estate ...................................................................... 2,094 2,488
Policy loans and premium notes ................................................... 6,023 6,208
Cash and short-term investments .................................................. 5,982 4,803
Other invested assets ............................................................ 2,591 3,304
-------- --------
TOTAL CASH AND INVESTED ASSETS ................................................... 116,050 121,106
Premiums due and deferred ........................................................ 1,925 1,917
Accrued investment income ........................................................ 1,640 1,688
Other assets ..................................................................... 1,208 1,120
Assets held in separate accounts ................................................. 57,797 53,903
-------- --------
TOTAL ASSETS ..................................................................... $178,620 $179,734
======== ========
LIABILITIES AND SURPLUS
LIABILITIES
Policy liabilities and insurance reserves:
Future policy benefits and claims ............................................ $ 87,582 $ 93,346
Unearned premiums ............................................................ 619 624
Policy dividends ............................................................. 1,878 1,893
Policyholder account balances ................................................ 7,968 7,966
Notes payable and other borrowings ............................................... 763 807
Asset valuation reserve .......................................................... 2,682 2,705
Federal income tax payable ....................................................... 729 1,278
Other liabilities ................................................................ 9,588 9,191
Liabilities related to separate accounts ......................................... 57,436 53,256
-------- --------
TOTAL LIABILITIES ................................................................ 169,245 171,066
-------- --------
CONTINGENCIES (NOTE 11)
SURPLUS
Capital notes .................................................................... 985 984
Special surplus fund ............................................................. 1,268 1,274
Unassigned surplus ............................................................... 7,122 6,410
-------- --------
TOTAL SURPLUS .................................................................... 9,375 8,668
-------- --------
TOTAL LIABILITIES AND SURPLUS .................................................... $178,620 $179,734
======== ========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF OPERATIONS AND CHANGES IN SURPLUS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
(In Millions)
<S> <C> <C> <C>
REVENUE
Premiums and annuity considerations .................................... $ 20,674 $ 21,088 $ 23,612
Net investment income .................................................. 8,677 8,637 7,387
Other income ........................................................... 571 363 367
-------- -------- --------
TOTAL REVENUE .......................................................... 29,922 30,088 31,366
-------- -------- --------
BENEFITS AND EXPENSES
Death benefits ......................................................... 2,943 2,858 2,798
Annuity benefits ....................................................... 3,582 3,495 3,354
Disability benefits .................................................... 5,630 5,765 5,201
Other benefits ......................................................... 806 853 845
Surrender benefits and fund withdrawals ................................ 11,844 12,538 11,714
Net (decrease) increase in reserves .................................... (1,572) (2,178) 1,251
Commissions ............................................................ 477 535 610
Other expenses ......................................................... 2,690 2,650 3,727
-------- -------- --------
TOTAL BENEFITS AND EXPENSES ............................................ 26,400 26,516 29,500
-------- -------- --------
Operating income before dividends and income taxes ..................... 3,522 3,572 1,866
Dividends to policyholders ............................................. 2,526 2,464 2,290
-------- -------- --------
Operating income (loss) before income taxes ............................ 996 1,108 (424)
Income tax provision ................................................... 51 590 453
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS .......................................... 945 518 (877)
NET REALIZED CAPITAL GAINS (LOSSES) .................................... 457 (183) (24)
-------- -------- --------
NET INCOME (LOSS) ..................................................... $ 1,402 $ 335 $ (901)
======== ======== ========
SURPLUS
SURPLUS, BEGINNING OF YEAR ............................................. 8,668 7,449 8,004
Net income (loss) ...................................................... 1,402 335 (901)
Change in net unrealized capital gains (losses) ........................ 191 661 (51)
Change in non-admitted assets .......................................... (206) 717 82
Change in asset valuation reserve ...................................... 11 (694) 653
Other changes, net ..................................................... (691) 200 (338)
-------- -------- --------
SURPLUS, END OF YEAR ................................................... $ 9,375 $ 8,668 $ 7,449
======== ======== ========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
- 1 -
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
--------- --------- ---------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums and annuity considerations ...................................... $ 20,669 $ 21,030 $ 23,635
Net investment income .................................................... 8,629 8,511 7,261
Other income received .................................................... 599 479 502
Separate account transfers ............................................... 1,183 1,002 (494)
Benefits and claims paid ................................................. (24,952) (25,524) (24,403)
Policyholders' dividends paid ............................................ (2,453) (2,393) (2,594)
Federal income taxes (paid) received ..................................... (230) (847) 179
Other operating expenses ................................................. (4,224) (3,738) (3,636)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ...................... (779) (1,480) 450
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold, matured, or repaid
Bonds ............................................................... 119,195 93,178 80,668
Stocks .............................................................. 4,328 2,985 4,263
Mortgage loans on real estate ....................................... 3,140 4,997 4,205
Real estate ......................................................... 537 573 935
Net gains (losses) on cash and short-term investments ............... 13 (9) (5)
Miscellaneous proceeds .............................................. 2,128 3,707 2,671
Payments for investments acquired
Bonds ............................................................... (118,009) (101,018) (81,677)
Stocks .............................................................. (6,029) (2,199) (2,312)
Mortgage loans on real estate ....................................... (1,841) (2,810) (3,282)
Real estate ......................................................... (120) (425) (194)
Miscellaneous applications .......................................... (718) (1,213) (1,275)
Net (tax) benefit on capital gains and losses ............................ (622) 107 (275)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ...................... 2,002 (2,127) 3,722
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments of) proceeds from borrowed money ......................... (44) 123 1
Net proceeds from the issuance of capital notes .......................... 0 686 0
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ..................... (44) 809 1
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS ............... 1,179 (2,798) 4,173
Cash and short-term investments, beginning of year ....................... 4,803 7,601 3,428
--------- --------- ---------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR ............................. $ 5,982 $ 4,803 $ 7,601
========= ========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest payments of $253 million, $144 million and $85 million were made during
1996, 1995 and 1994, respectively.
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
- 2 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ACCOUNTING POLICIES AND PRINCIPLES
A. Business and basis of presentation - The statutory financial
statements include the accounts of The Prudential Insurance Company of
America ("the Company"), a mutual life insurance company. The
activities of the Company include a broad range of financial services,
including life and health insurance, asset management, and investment
advisory services.
These financial statements were prepared on an unconsolidated
statutory basis of accounting, which differs from the 1995 and 1994
financial statements prepared for general distribution on a
consolidated statutory basis of accounting, both of which differ from
generally accepted accounting principles ("GAAP"). The financial
statements for 1995 and 1994 have been restated on an unconsolidated
statutory basis of accounting adopted in 1996 for purposes of general
distribution. Certain reclassifications have been made to the 1995 and
1994 financial statement amounts to conform to the 1996 presentation.
The Company, domiciled in the State of New Jersey, prepares its
statutory financial statements in accordance with accounting practices
prescribed or permitted by the New Jersey Department of Banking and
Insurance ("the Department"). Prescribed statutory accounting
practices include publications of the National Association of
Insurance Commissioners ("NAIC"), state laws, regulations, and general
administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The financial
statements are substantially the same as those included in the
Statutory Annual Statement except for certain reclassifications and
adjustments. These financial statements differ from those filed with
the Department in that changes to estimated income and premium taxes
applicable to prior periods, which are recorded as direct charges or
credits to surplus in the Annual Statement, have been included in the
"Income tax provision" and "Other expenses" in the Statements of
Operations and Changes in Surplus. This item has the net effect of
increasing (decreasing) net income by $396 million, ($143) million and
$6 million in 1996, 1995 and 1994, respectively.
Pursuant to the Financial Accounting Standards Board Interpretation
No. 40 "Applicability of Generally Accepted Accounting Principles to
Mutual Life Insurance and Other Enterprises," as amended, which is
effective for 1996 financial statements, statutory accounting
practices ("SAP") are no longer considered GAAP for mutual life
insurance companies. SAP differs from GAAP primarily as follows:
(a) the Commissioner's Reserve Valuation Method ("CRVM") is used for the
majority of individual insurance reserves under SAP, whereas for
individual insurance, policyholder liabilities are generally
established using the net level premium method under GAAP. Policy
assumptions used in the estimation of policyholder liabilities are
generally prescribed under SAP, but are based upon actual company
experience under GAAP;
(b) for investment-type contracts that do not contain mortality or
morbidity risk and universal life-type contracts, cash receipts are
recorded as premiums and reserves are established using prescribed
reserving methods under SAP. Under GAAP, premium from investment-type
and universal life-type contracts are generally recognized as
deposits. Revenues from these contracts represent amounts assessed
against policyholders and are reported in the period of assessment;
(c) policy acquisition costs are expensed when incurred under SAP rather
than being deferred and charged against earnings over the periods
covered by the related policies;
(d) deferred income taxes are not recorded for the tax effect of temporary
differences between book and tax basis of assets and liabilities under
SAP;
(e) certain "non-admitted assets" must be excluded under SAP through a
charge against surplus, e.g. fixed assets, prepaid pensions and
impaired investments;
(f) investments in the common stock of the Company's wholly-owned
subsidiaries are accounted for using the equity method under SAP
rather than consolidated;
(g) bonds are carried at amortized cost under SAP rather than categorized
as "held to maturity", "available for sale", or "trading". Under GAAP,
bonds classified as "available for sale" and "trading" are carried at
market value;
(h) certain reclassifications would be required with respect to the
balance sheet and statement of cash flows under SAP;
(i) the Asset Valuation Reserve ("AVR") and Interest Maintenance Reserve
("IMR") are required for life insurance companies under SAP.
The following is a summary of accounting practices permitted by the
state of New Jersey and reflected in these financial statements:
o Prescribed statutory accounting practices require Department
approval of each and every interest payment at the time of
payment in order to classify the Company's Capital Notes as a
component of surplus. Otherwise, such notes are required to be
classified as a liability. Interest payments on $300 million in
Capital Notes issued in 1993 are pre-approved by the Department,
and permitted to be classified in surplus.
o The Company sells synthetic guaranteed interest contracts
("GICs") containing minimum investment related guarantees on
qualified pension plan assets. The assets are owned by the
trustees of such plans, who invest the assets
- 3 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
under the terms of investment guidelines agreed to with the
Company. The investment related guarantees may include a minimum
rate of return on the underlying assets and/or a guarantee of
liquidity to meet plan cash flow requirements. The Company, with
the approval of the Department, reports both the plan liabilities
associated with the synthetic GICs and the trust assets
supporting this potential liability. In addition, the Company
files detailed schedules of trust assets and related statements
with the Department. Currently, prescribed statutory accounting
practices do not address accounting for synthetic GICs.
o The Company establishes guaranty fund liabilities for the
insolvencies of certain life insurance companies. The liabilities
are established net of estimated premium tax credits and federal
income tax. Prescribed statutory accounting practices do not
address the establishment of liabilities for guaranty fund
assessments.
B. Divestiture - On July 31, 1996, Prudential sold a substantial portion
of its Canadian Branch business to the London Life Insurance Company
("London Life"). The transaction was structured as an assumption
reinsurance transaction, whereby London Life assumed total liabilities
of the Canadian Branch equal to $3,146 million as well as a related
amount of total assets equal to $3,040 million. A net gain of $138
million was recorded for this transaction.
C. Use of estimates - The preparation of financial statements in
conformity with SAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reported period. Actual results could differ from those
estimates.
D. Investments - Bonds, which consist of long-term bonds, are stated
primarily at amortized cost.
Preferred stock is generally valued at amortized cost.
Common Stock is carried at fair value. Investments in subsidiaries,
which are included in "Common stock", are accounted for using the
equity method. The subsidiaries' change in net assets, excluding
capital contributions and distributions, is included in "Net
investment income." The subsidiaries are engaged principally in the
businesses of life and health insurance, property and casualty
insurance, group health care, securities brokerage, asset management,
investment advisory services, retail banking and real estate and
brokerage.
Mortgage loans on real estate are stated primarily at unpaid principal
balances.
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. Properties acquired
in satisfaction of debt are valued at lower of depreciated cost or
fair value less disposition costs.
Policy loans and premium notes are stated at unpaid principal
balances.
Cash includes cash on hand, amounts due from banks and money market
instruments. Short term investments, including highly liquid debt
instruments purchased with an original maturity of twelve months or
less, are stated at amortized cost, which approximates fair value.
Other invested assets primarily include the Company's investment in
joint ventures and other forms of partnerships. These investments are
accounted for using the equity method where the Company has the
ability to exercise significant influence over the operating and
financial policies of the entity. The cost method is used for all
other assets.
Derivatives used in asset/liability risk management activities, which
support life and health insurance and annuity contracts, are recorded
at either fair value or statement value, depending upon the underlying
instrument, with unrealized gains and losses recorded in "Change in
net unrealized capital gains (losses)." Upon termination of
derivatives, the interest-related gains and losses are amortized
through the IMR.
E. Separate accounts - These assets and liabilities, reported at
estimated fair value, represent segregated funds invested for pension
and other clients. Investment risks associated with fair value changes
are generally borne by the clients, except to the extent of minimum
guarantees made by the Company with respect to certain accounts.
F. Revenue recognition of insurance income and related expenses - Life
premiums are recognized as income over the premium paying period of
the related policies. Annuity considerations are recognized as revenue
when received. Health 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.
- 4 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
G. Policyholder dividends - Substantially all of the policies issued by
the Company are participating. The amount of dividends to be paid to
policyholders is determined annually by the Company's Board of
Directors. The aggregate amount of policyholders' dividends is related
to actual interest, mortality, morbidity, and expense experience for
the year and judgment as to the appropriate level of statutory surplus
to be retained by the Company. Dividends declared by the Board of
Directors which have not been paid are included in "Policy dividends".
2. POLICY LIABILITIES AND INSURANCE RESERVES
A. For life insurance and annuities, future policy benefits and claims
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 for accident and health business, which is included in
"Future policy benefits and claims", is as follows:
1996 1995 1994
------- ------- -------
(In Millions)
Balance at January 1 $ 2,636 $ 2,440 $ 2,416
Less reinsurance recoverables 15 23 15
------- ------- -------
Net balance at January 1 2,621 2,417 2,401
------- ------- -------
Incurred related to:
Current year 5,734 5,759 5,398
Prior years (87) 42 (87)
------- ------- -------
Total incurred 5,647 5,801 5,311
------- ------- -------
Paid related to:
Current year 4,135 4,028 3,856
Prior years 1,467 1,569 1,439
------- ------- -------
Total paid 5,602 5,597 5,295
------- ------- -------
Net balance at December 31 2,666 2,621 2,417
Plus reinsurance recoverables 10 15 23
------- ------- -------
Balance at December 31 $ 2,676 $ 2,636 $ 2,440
======= ======= =======
As a result of changes in reserve estimates for insured events of
prior years, the provision for claims and claim adjustment expenses
changed by ($87) million and $42 million in 1996 and 1995,
respectively, due to changes in claim cost trends and changed by ($87)
million in 1994 because of faster-than-expected shrinkage in the
indemnity health business.
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 52% of
individual life insurance reserves are calculated according to 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.
Accident and health reserves represent the present value of the future
potential payments, adjusted 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.
- 5 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
Policyholders, at their discretion, may withdraw funds from their
annuity policies. At December 31, 1996 and 1995, approximately 55% of
total annuity actuarial reserves and deposit liabilities of $92,536
million and $95,092 million, respectively, were not subject to
discretionary withdrawal.
3. INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") taxes the Company on its
operating income 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
which, in effect, imposes an additional amount of taxable income to the
Company. "Income tax provision" includes an estimate for the total equity tax
to be paid with respect to the year. Income from sources outside the United
States is taxed under applicable foreign statutes.
The Internal Revenue Service (the "Service") has completed an examination of
the consolidated federal income tax return through 1989. The Service is
examining the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments. However, management believes
there are adequate defenses against, or sufficient reserves to provide for,
such adjustments.
4. INVESTED ASSETS
A. Bonds and stocks - The Company invests in both investment grade and
non-investment grade public and private bonds. The Securities
Valuation Office of the NAIC rates the bonds held by insurers for
regulatory purposes and classifies 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. Securities in these
lowest three categories approximated 2.8% and 1.0%, of the Company's
bonds at December 31, 1996, 1995, respectively.
The following tables provide additional information relating to bonds
and preferred stock as of December 31:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE
------- ------- ------ -------
Bonds (In Millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 9,504 $ 353 $ 74 $ 9,783
Obligations of U.S. states and their
political subdivisions 206 7 6 207
Foreign government bonds 2,420 133 11 2,542
Corporate securities 57,282 2,625 323 59,584
Mortgage-backed securities 5,594 131 15 5,710
------- ------- ------- -------
Total $75,006 $ 3,249 $ 429 $77,826
======= ======= ======= =======
Preferred Stock
Redeemable $ 142 $ 3 $ 6 $ 139
Non-redeemable 97 23 0 120
------- ------- ------- -------
Total $ 239 $ 26 $ 6 $ 259
======= ======= ======= =======
</TABLE>
- 6 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1995
--------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE
------- ------- ------- -------
Bonds (In Millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $15,715 $ 1,392 $ 1 $17,106
Obligations of U.S. states and their
political subdivisions 214 22 1 235
Foreign government bonds 3,196 260 1 3,455
Corporate securities 54,411 4,609 97 58,923
Mortgage-backed securities 3,958 241 8 4,191
------- ------- ------- -------
Total $77,494 $ 6,524 $ 108 $83,910
======= ======= ======= =======
Preferred Stock
Redeemable $ 304 $ 16 $ 4 $ 316
Non-redeemable 92 2 0 94
------- ------- ------- -------
Total $ 396 $ 18 $ 4 $ 410
======= ======= ======= =======
</TABLE>
The carrying amount and estimated fair value of bonds at December 31,
1996, 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.
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(In Millions)
Due in one year or less $ 1,999 $ 2,012
Due after one year through five years 19,125 19,445
Due after five years through ten years 19,406 20,081
Due after ten years 28,882 30,578
------- -------
69,412 72,116
------- -------
Mortgage-backed securities 5,594 5,710
------- -------
Total $75,006 $77,826
======= =======
Proceeds from the sale and maturity of bonds during 1996, 1995 and
1994 were $119,195 million, $93,178 million and $80,668 million,
respectively. Gross gains of $1,516 million, $1,913 million and $618
million and gross losses of $988 million, $782 million and $1,841
million were realized on such sales during 1996, 1995 and 1994,
respectively. Realized gains and losses are determined using the
specific identification method.
B. Mortgage loans on real estate - Mortgage loans on real estate at
December 31 are as follows:
1996 1995
------------------ ------------------
CARRYING PERCENT CARRYING PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
(In Millions)
Commercial and agricultural loans:
In good standing $15,546 91.3% $17,649 87.0%
In good standing
with structured terms 809 4.7% 966 4.8%
Past due 90 days or more 229 1.3% 144 0.7%
In process of foreclosure 68 0.4% 157 0.8%
Residential loans 387 2.3% 1,364 6.7%
------- ----- ------- -----
Total $17,039 100.0% $20,280 100.0%
======= ===== ======= =====
At December 31, 1996, the Company's mortgage loans on real estate were
collateralized by the following property types: office buildings
(34%), retail stores (22%), residential properties (2%), apartment
complexes (18%), industrial buildings (11%), agricultural properties
(9%) and other commercial properties (4%). The maximum percentage of
any one loan to the value of collateral at the time of the loan,
exclusive of insured, guaranteed, purchase money mortgages or
mortgages supported by high credit leases is 80%. The mortgage loans
are geographically dispersed throughout the United States and
- 7 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Canada with the largest concentrations in California (26%) and New
York (8%). Included in these balances are mortgage loans with
affiliated joint ventures of $560 million and $653 million at December
31, 1996 and 1995, respectively.
C. Real estate - Real estate at December 31 was as follows:
1996 1995
------ ------
(In Millions)
Investment real estate $1,201 $1,484
Properties occupied by the Company 525 533
Properties acquired in
satisfaction of debt 368 471
------ ------
Total $2,094 $2,488
====== ======
Accumulated depreciation on real estate was $808 million and $853
million at December 31, 1996 and 1995, respectively.
D. Other invested assets - Other invested assets of $2,591 million and
and $3,304 million as of December 31, 1996 and 1995, respectively,
principally include the Company's net equity in joint ventures and
other forms of partnerships. The Company's share of net income from
other invested assets was $283 million, $240 million and $348 million
for 1996, 1995 and 1994, respectively.
E. Investment in subsidiaries - Included in "Common stock" is the
Company's investment in subsidiaries of $4,610 million and $4,328
million at December 31, 1996 and 1995, respectively. Included in "Net
investment income" for 1996, 1995 and 1994 is $370 million, $143
million and $(936) million, respectively, attributable to
undistributed income (loss) of subsidiaries.
In October 1995, the Company completed the sale of Prudential
Reinsurance Holdings, Inc., 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 unit. On January 26, 1996, the Company entered into a
definitive agreement to sell substantially all the assets of
Prudential Home Mortgage Company, Inc. ("PHMC") and it also
liquidated certain mortgage-backed securities and extended warehouse
loans. In 1995, PHMC recorded an after-tax loss of $98 million which
includes operating gains and losses, asset write downs, and other
costs directly related to the sale. The Company continues to have
discussions with prospective buyers for the sale of the remaining
assets.
F. Net unrealized capital gains (losses) - Changes in net unrealized
capital gains (losses), which result principally from changes in the
differences between cost and carrying amounts of invested assets, were
$191 million and $661 million for the years ended December 31, 1996
and 1995, respectively, and are reflected in "Unassigned surplus."
G. Asset valuation reserve and interest maintenance reserve - These
reserves are required for life insurance companies under NAIC
requirements. 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 realized capital gains
and losses, net of tax, resulting from changes in the general level of
interest rates. These gains and losses are amortized into net
investment income utilizing grouped amortization schedules over the
expected remaining life of the investments sold. At December 31, 1996,
AVR is comprised of 68% for bonds, stocks, and short-term investments;
17% for mortgage loans on real estate; and 15% for real estate and
other invested assets. The IMR balance at December 31, 1996 and 1995
was $1,365 million and $1,163 million, respectively, and is recorded
in "Other liabilities". During 1996, 1995 and 1994, $327 million, $766
million and ($910) million, respectively, of net realized capital
gains (losses) were deferred and $126 million, $82 million and $102
million, respectively, was amortized and included in income.
H. Restricted assets and special deposits - Assets in the amounts of $941
million and $5,072 million at December 31, 1996 and 1995,
respectively, were on deposit with governmental authorities or
trustees as required by law. Assets valued at $2,994 million and
$3,121 million at December 31, 1996 and 1995, respectively, were
maintained as compensating balances or pledged as collateral for bank
loans and other financing agreements. Letter stock or other securities
restricted as to sale amounted to $720 million in 1996 and $354
million in 1995.
I. Loan backed and structured securities - A retrospective method is
employed to recalculate the values of the loan backed and structured
securities holdings with the exception of interest only bonds. Each
acquisition lot was reviewed to recalculate the effective yield. The
recalculated effective yield was used to derive a book value as if the
new yield were applied at the time of acquisition. Outstanding
principal
- 8 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
factors from the time of acquisition to adjustment date were used to
calculate the prepayment history for all applicable securities.
Conditional prepayment rates, computed with life to date factor
histories and weighted average maturities, were used to affect the
calculation of projected payments for pass through, interest only and
principal only security types. Interest only bond adjustments are
developed on a prospective basis with adjustments made for permanent
impairments if needed.
J. Securities lending is a program whereby the Company loans securities
to third parties, primarily major brokerage firms. As of December 31,
1996 and 1995, the estimated fair values of loaned securities were
$6,362 million and $5,939 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, 1996 and 1995 is $4,813 million and
$3,625 million, respectively. Non-cash collateral is not reflected in
the Statements of Admitted Assets, Liabilities and Surplus.
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:
1996 1995
------- -------
(In Millions)
Actuarial present value of benefit obligation:
Vested benefit obligation $(3,878) $(3,270)
======= =======
Accumulated benefit obligation $(4,174) $(3,572)
======= =======
Projected benefit obligation $(4,989) $(4,330)
Plan assets at fair value 7,326 6,688
------- -------
Plan assets in excess of projected
benefit obligation 2,337 2,358
Unrecognized transition amount (769) (904)
Unrecognized prior service cost 356 199
Unrecognized net gain (916) (753)
------- -------
Prepaid pension cost $ 1,008 $ 900
======= =======
Plan assets consist primarily of equity securities, bonds, real estate
and short-term investments, of which $5,668 million and $4,788 million
are included in separate account assets and liabilities at December
31, 1996 and 1995, respectively.
The components of the net periodic pension benefit for 1996, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Millions)
<S> <C> <C> <C>
Service cost $ 119 $ 110 $ 141
Interest cost 336 371 293
Actual return on assets (720) (1,249) 62
Net amortization and deferral 57 604 (633)
Net curtailment gains and special termination benefits 63 0 156
------ ------ ------
Net periodic pension benefit $ (145) $ (164) $ 19
====== ====== ======
</TABLE>
The net increase to surplus relating to the Company's pension plans is
$37 million, $30 million and $0 million in 1996, 1995 and 1994,
respectively, which considers the changes in the non-admitted prepaid
pension asset of $108 million, $134 million and ($19) million,
respectively.
The accounting assumptions used by the Company were:
AS OF SEPTEMBER 30,
------------------------
1996 1995 1994
------ ------ ------
Discount rate 7.75% 7.50% 8.50%
Rate of increase in compensation levels 4.50% 4.50% 5.50%
Expected long-term rate of return on assets 9.50% 9.00% 9.00%
The Company maintains non-qualified supplemental retirement plans
providing benefits that may not be paid from the Company's two
qualified plans since qualified plans have limits imposed by Section
415 and 401(a)(17) of the Code. One of these plans also provides
certain participants with a subsidized early retirement benefit.
- 9 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 these
benefits if they retire after age 55 with at least 10 years of
service.
Postretirement benefits are accounted for in accordance with
prescribed NAIC policy. The Company has elected to amortize its
transition obligation over 20 years. During 1996, 1995 and 1994,
funding of its postretirement benefit obligations totaled $35 million,
$47 million and $31 million, respectively.
The postretirement benefit plan status is as follows:
SEPTEMBER 30,
------------------
1996 1995
---- ----
(In Millions)
Accumulated postretirement benefit obligation for:
Retirees $(1,418) $(1,465)
Fully eligible active plan participants (35) (103)
Plan assets at fair value 1,341 1,309
------- -------
Funded status (112) (259)
Unrecognized transition amount 355 378
Unrecognized net gain (177) (19)
------- -------
Prepaid postretirement benefit cost $ 66 $ 100
======= =======
Plan assets consist of group and individual variable life insurance
policies, group life and health contracts and short-term investments,
of which $1,003 million and $990 million are included in the separate
account assets and liabilities at December 31, 1996 and 1995,
respectively.
Net periodic postretirement benefit cost for 1996, 1995 and 1994
includes the following components:
1996 1995 1994
----- ----- -----
(In Millions)
Service cost $ 24 $ 30 $ 36
Interest cost 115 117 107
Actual return on plan assets (104) (144) (98)
Amortization of transition obligation 22 22 23
Other 12 49 52
----- ----- -----
Net periodic postretirement benefit cost $ 69 $ 74 $ 120
===== ===== =====
The net reduction to surplus relating to the Company's postretirement
benefit plans is $35 million, $46 million, and $30 million in 1996,
1995 and 1994, respectively, which considers the changes in the
prepaid postretirement benefit cost of $34 million, $28 million and
$90 million in 1996 , 1995 and 1994, respectively.
The assumptions used for the postretirement benefit plan were:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.75% 7.50% 8.50%
Expected long-term rate of return on plan assets 9.00% 8.00% 9.00%
Rate of increase in compensation levels 4.50% 4.50% 5.50%
Health care cost trend rates 8.50-12.50% 8.90-13.30% 9.10-13.90%
Ultimate health care cost trend rate at 2006 5.00% 5.00% 6.00%
</TABLE>
A 1% increase in health care cost trend rates would increase the
September 30, 1996 accumulated postretirement benefit obligation and
service/interest costs by $115 million and $12 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, 1996 and 1995 was $99 million and
$96 million, respectively.
- 10 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings consisted of the following at December
31:
Short-term: 1996 1995
---- ----
(In Millions)
Notes payable to affiliate $ 99 $ 0
Current portion of long term
notes payable 11 128
---- ----
$110 $128
Long-Term: 1996 1995
---- ----
8.173% note due 2002 $249 $249
7.501% note due 1999 248 248
5.0819% note due 2004 56 66
12.00% note due 1999 0 16
Secured demand note
due 1998 100 100
---- ----
653 679
---- ----
Total principal repayments and accrued interest $763 $807
==== ====
Scheduled principal repayments as of December 31, 1996, are as
follows: $110 million in 1997, $100 million in 1998, $239 million in
1999, $0 in 2000, $0 in 2001 and $294 million thereafter.
7. SURPLUS
A. Capital notes - The Company issues Capital Notes that are subordinate
in right of payment to policy claims, prior claims and senior
indebtedness. A summary of the outstanding Capital Notes as of
December 31, 1996 is as follows:
PRINCIPAL CARRYING INTEREST MATURITY
ISSUE DATE (PAR) AMOUNT RATE DATE
- ---------- --------- -------- -------- --------
(In Millions)
April 28, 1993 $ 300 $ 299 6.875% April 15, 2003
July 1, 1995 350 340 8.300% July 1, 2025
July 1, 1995 250 246 7.650% July 1, 2007
July 15, 1995 100 100 8.100% July 15, 2015
------- -----
Total $ 1,000 $ 985
======= =====
B. Special surplus fund - In accordance with the requirements of various
states, a special surplus fund has been established for contingency
reserves of $1,268 million and $1,274 million as of December 31, 1996
and 1995, respectively.
C. Non-admitted assets - Non-admitted assets were $1,367 million and
$1,167 million as of December 31, 1996 and 1995, respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented below 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 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, the carrying value is a
reasonable estimate of fair value.)
Bonds and preferred stock - Fair values for bonds and preferred stock,
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.
Common stock - Fair value of unaffiliated common stock is based on
quoted market prices, where available, or prices provided by state
regulatory authorities.
- 11 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Mortgage loans on real estate - 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 and premium notes - 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, futures and options is
estimated based on market quotes for a transaction with similar terms.
The fair value of loan commitments is derived by comparing the
contractual future stream of fees with such fee streams adjusted to
reflect current market rates that would be applicable to instruments
of similar type, maturity and credit standing.
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. Carrying amounts are included in
"Future policy benefits and claims."
Notes payable and other borrowings - The estimated fair value of notes
payable is derived using discount rates based on the borrowing rates
currently available to the Company for debt with similar terms and
remaining maturities.
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
(In Millions)
FINANCIAL ASSETS:
<S> <C> <C> <C> <C>
Bonds $75,006 $77,826 $77,494 $83,910
Preferred stock 239 259 396 410
Common stock * 2,466 2,466 1,805 1,805
Mortgage loans on real estate 17,039 17,364 20,280 20,839
Policy loans and premium notes 6,023 5,942 6,208 6,452
Short-term investments 5,817 5,817 4,633 4,633
Cash 165 165 170 170
Assets held in separate accounts 57,797 57,797 53,903 53,903
Derivative financial instruments 9 16 15 64
FINANCIAL LIABILITIES:
Investment-type insurance
contracts 30,194 30,328 34,799 35,720
Notes payable and other borrowings 763 794 807 829
Liabilities related to separate accounts 57,436 57,436 53,256 53,256
Derivative financial instruments 60 63 94 108
</TABLE>
* Excludes investments in subsidiaries of $4,610 million and $4,328 million
at December 31, 1996 and 1995, respectively.
- 12 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
A. Derivative financial instruments - Derivatives include swaps,
forwards, futures, options and fixed-rate loan commitments subject to
market risk, all of which are used by the Company in the normal course
of business in activities other than trading. The Company does not
issue or hold derivatives for trading purposes. This classification is
based on management's intent at the time of contract inception and
throughout the life of the contract. The Company uses derivatives
primarily for asset/liability risk management and to reduce exposure
to interest rate, currency and other market risks. Of those
derivatives held at December 31,1996, 35% of the notional amounts
consisted of interest rate derivatives and 65% consisted of foreign
currency derivatives.
The tables below 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 at December 31:
<TABLE>
<CAPTION>
DERIVATIVE FINANCIAL INSTRUMENTS
1996 1995
---- ----
(In Millions)
CARRYING ESTIMATED CARRYING ESTIMATED
NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
-------- ------ ---------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 159 $ 1 $ 6 $ 418 $ (1) $ 32
Liabilities 479 50 53 371 76 79
Forwards:
Assets 453 8 8 235 13 17
Liabilities 980 9 9 1,074 13 13
Futures:
Assets 0 0 0 683 5 5
Liabilities 399 1 1 864 5 7
Options:
Assets 175 0 0 195 0 0
Liabilities 0 0 0 3 0 0
Loan Commitments:
Assets 164 0 2 122 (2) 10
Liabilities 9 0 0 532 0 9
------ ------ ------ ------ ------ ------
Total:
Assets $ 951 $ 9 $ 16 $1,653 $ 15 $ 64
====== ====== ====== ====== ====== ======
Liabilities $1,867 $ 60 $ 63 $2,844 $ 94 $ 108
====== ====== ====== ====== ====== ======
</TABLE>
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 and letters of credit. Commitments include variable rate
commitments to purchase and sell mortgage loans and the unfunded
portion of commitments to fund investments in private placement
securities. 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 $785 million and $1,254 million at December 31,
1996 and 1995, respectively. Because many of these amounts expire
without being advanced in whole or in part, the notional amounts do
not represent future cash flows.
The estimated fair value of these instruments, which represents the
Company's current exposure to credit loss from other parties'
non-performance, was $8 million and $56 million at December 31, 1996
and 1995, respectively.
10. RELATED PARTY TRANSACTIONS
A. Service agreements - The Company has entered into service agreements
with various subsidiaries. Under these agreements, the Company
furnishes services of officers and employees and provides supplies,
use of equipment, office space, and makes payment to
- 13 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
third parties for general expenses, state and local taxes. The
agreements obligate the subsidiaries to reimburse the Company for the
approximate cost of providing such services. The amounts receivable
from subsidiaries, reported in "Other assets" at December 31, 1996 and
1995, were $490 million and $509 million, respectively. The
subsidiaries also furnish similar services to the Company in
connection with such agreements. The amount payable to subsidiaries,
reported in "Other liabilities" at December 31, 1996 was $87 million.
There was no outstanding balance at December 31, 1995.
Certain of the Company's group health care subsidiaries provide health
insurance to certain employees of the Company. Enrollment contract
costs reported in "Other expenses" were $126 million, $111 million and
$104 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company purchases corporate owned life insurance policies from one
of its life insurance subsidiaries for certain employees. The premium
charged for these policies reported in "Other expenses" was $3
million, $12 million and $12 million for the years ended December 31,
1996, 1995 and 1994, respectively. The cash value associated with
these policies was $118 million and $102 million at December 31,
1996 and 1995, respectively.
Certain of the Company's subsidiaries perform services for the Company
in connection with the Company's obligations under investment advisory
or subadvisory agreements. The costs incurred in connection with
performing such services, primarily reported in "Other expenses," were
$145 million, $327 million and $342 million for the years ended
December 31, 1996, 1995 and 1994, respectively. The Company also
provides these services to subsidiaries in connection with such
agreements. The investment advisory fees received from affiliates by
the Company, reported in "Other income" were $161 million, $92 million
and $110 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company borrows short-term funds from Prudential Funding
Corporation ("Funding"), a wholly owned subsidiary. The interest
expense for these borrowings was $131 million, $66 million and $21
million for the years ended December 31, 1996, 1995 and 1994,
respectively. The outstanding balance at December 31, 1996 was $99
million. There was no outstanding balance at December 31, 1995.
B. Net worth maintenance agreement - The Company has entered into a
support agreement with Funding under which it agrees to maintain
Funding's tangible net worth, including subordinated debt, at not less
than $1.00. As of December 31, 1996, the tangible net worth of Funding
was $44 million. Since the inception of the agreement, no support
payments have been required.
11. CONTINGENCIES
The Company is reviewing its obligations under certain managed care
arrangements for possible failure to comply with contractual and regulatory
requirements. It is the opinion of management that appropriate reserves
have been established in accordance with applicable accounting standards to
provide for appropriate reimbursements to customers.
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.
Twenty-six purported class actions and over 280 individual actions are
pending 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 Company anticipates additional suits may be filed by
individuals who opted out of the class action settlement described below.
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.
A Multi-State Life Insurance Task Force (the "Task Force"), comprised of
insurance regulators from 29 states and the District of Columbia, was
created to conduct a review of sales and marketing practices throughout the
life insurance industry. As the largest life insurance company in the
United States, the Company was the initial focus of the Task Force
examination. On July 9, 1996, the Task Force released its report on the
Company's activities. In it, the Task Force found that some sales of life
insurance policies made by the Company were improper. The report criticizes
the Company's training, oversight, discipline and compliance programs
related to insurance sales. Based on these findings, the Task Force
recommended, and the Company agreed to, a series of fines allocated to all
50 states and the District of Columbia amounting to a total of $35 million.
In addition, the Task Force recommended a remediation program pursuant to
which the Company would offer relief to policyowners who purchased 10.7
million whole life insurance policies in the United States from the Company
from 1982 through 1995. In subsequent negotiations with several states, the
Company agreed to pay additional amounts aggregating approximately $30
million by way of fine, reimbursement of investigation expenses and costs
associated with outreach to residents of Florida and California.
On October 28, 1996, the Company entered into a Stipulation of Settlement
with attorneys for the plaintiffs in the class actions consolidated in a
Multi-District Litigation involving alleged improprieties in connection
with the Company's sale of whole life
- 14 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
insurance policies from 1982 through 1995. Pursuant to the proposed
settlement, the Company has agreed to provide certain enhancements and
changes to the remediation program previously accepted by the Multi-State
Task Force, including some additional remedies. In addition, the Company
agreed that a minimum cost of $410 million (which was recorded in the
Statement of Operations and Changes in Surplus) would be incurred in
providing remedies to policyowners under the program, and agreed to certain
other payments and guarantees. Under the terms of the guarantees, the
Company has agreed that the average cost per remedy will not be less than
$2,364 for up to 330,000 claims remedied. For claims remedied in excess of
330,000, the Company has not guaranteed an average cost per remedy. The
Company has also agreed to provide additional compensation to be
distributed by formula that will range in an aggregate amount from $50
million to $300 million depending on the total number of claims remedied.
The Company cannot predict how many claims ultimately will be remedied. The
Company has also recorded in the Statement of Operations and Changes in
Surplus, its estimate of the minimum administrative costs related to the
remediation program. As of March 5, 1997, all 50 states and the District of
Columbia have directed the Company to offer a remediation plan based on the
program accepted by the Task Force and containing many of the enhancements
of the class action settlement.
Also on October 28, 1996, the U.S. District Court of the District of New
Jersey, in which the Multi-District Litigation is pending, conditionally
certified a class for settlement purposes and scheduled a hearing on the
fairness, reasonableness and adequacy of the proposed settlement. This
hearing was held on February 24, 1997. On March 7, 1997, the Court
rendered its decision approving the settlement. The owners of approximately
23,000 policies have taken steps to exclude themselves from the class
action and are not bound by the settlement.
To date, the Company has mailed packages to 8.5 million policyowners
eligible for the remediation program, informing policyowners in all 50
states and the District of Columbia of their rights under the program. The
deadline for electing to participate in the Alternative Dispute Resolution
Process ("ADR") or Basic Claim Relief is June 1, 1997. Policyowners who
believe that they were misled can file a claim through the ADR.
Policyowners who do not believe they were misled, or who do not wish to
file a claim under the ADR, may choose from several options available under
Basic Claim Relief, such as preferred rate premium loans, or the purchase
of enhanced annuities, mutual fund shares or life insurance policies.
It is not possible on any reliable basis to estimate how many policyowners
will participate in the settlement. The cost of the settlement is dependent
upon complex and varying factors, including the number of policyowners that
participate in the settlement, the relief options chosen and the ultimate
dollar value of the settlement. The administrative costs to the Company of
remediation of policyowner claims are also subject to a number of complex
uncertainties in addition to the unknown quantity and cost of policyowner
claims. In light of the uncertainties attendant to these and other factors,
management is unable to make a reasonable estimate of the ultimate cost of
the remediation program to the Company.
A purported class action was brought against the Company and certain
subsidiaries alleging common law fraud, negligent misrepresentation and
violations of the New Jersey RICO statute arising out of the plaintiffs'
purchase of certain subordinated mortgage pass-through securities and
seeking compensatory and punitive damages and injunctive relief. The
Company will deny the substantive allegations of the complaint in its
answer and will vigorously defend the suit. The case is at a preliminary
stage, and management is not now in a position to predict the outcome or
effect of the litigation.
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 flow
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, after consideration of applicable reserves.
In 1993, Prudential Securities, Inc. ("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.
- 15 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Company has entered into a reinsurance agreement with The Prudential
Life Insurance Company, Ltd., a wholly owned subsidiary, under which it has
agreed to reinsure certain individual life insurance policies through a
yearly renewable term contract. The reinsurance assumed premiums and
reserves for 1996 were $27 million and $17 million, respectively.
The Company as a result of the sale of Prudential Reinsurance Inc. (a PRUCO
Inc. subsidiary), agreed to guarantee up to $775 million of Gibraltar
Casualty Company (a Prudential subsidiary) obligations with respect to a
Stop Loss Agreement and PRUCO Inc.'s (a Prudential subsidiary) payment
obligations under an Indemnity Agreement, subject to maximum aggregate
payments of $400 million. The maximum aggregate payments under the
Prudential Guarantee of the Gibraltar Casualty Company obligations will be
reduced in certain circumstances to take account of payments made and
collateral provided in respect of the guaranteed obligations. The Stop Loss
Agreement is intended to mitigate the impact on Prudential Reinsurance Inc.
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 $175 million as of December 31, 1996.
Gibraltar Casualty Company and other property and casualty insurance
subsidiaries receive 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 and
established these reserves in accordance with applicable accounting
standards. 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.
The Company and a number of other insurers (the "Consortium") entered into
a Reinsurance and Participation Agreement ("the Agreement") with MBL Life
Assurance Corporation ("MBLLAC") and others, under which the Company and
the other insurers agreed to reinsure certain payments to be made to
contractholders by MBLLAC in connection with the plan of rehabilitation of
Mutual Benefit Life Insurance Company. Under the Agreement, the Consortium,
subject to certain terms and conditions, will indemnify MBLLAC for the
ultimate net loss sustained by MBLLAC on each contract subject to the
Agreement. The ultimate net loss represents the amount by which the
aggregate required payments exceed the fair market value of the assets
supporting the covered contracts at the time such payments are due. The
Company's share of any net loss is 30.55%. The Company has determined that
it does not expect to make any payments to MBLLAC under the agreement. The
Company concluded this after testing a wide range of potentially adverse
scenarios during the rehabilitation period for MBLLAC.
******
- 16 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
We have audited the accompanying statement of admitted assets, liabilities and
surplus (statutory basis) of The Prudential Insurance Company of America as of
December 31, 1996, and the related statements of operations and changes in
surplus (statutory basis), and of cash flows (statutory basis) for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
As described in Note 1, these financial statements were prepared in conformity
with accounting practices prescribed or permitted by the New Jersey Department
of Insurance, which practices differ from generally accepted accounting
principles. The effects on the financial statements of the variances between the
statutory basis of accounting and generally accepted accounting principles,
although not reasonably determinable, are presumed to be material.
In our opinion, because of the effects of the matters referred to in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of The Prudential Insurance Company of America at December
31, 1996, and the results of its operations and its cash flows for the year then
ended.
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the admitted assets, liabilities and surplus of The
Prudential Insurance Company of America at December 31, 1996, and the results of
its operations and its cash flows for the year then ended, on the basis of
accounting described in Note 1.
/s/ PRICE WATERHOUSE, LLP
New York, New York
March 10, 1997
- 17 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying statement of admitted assets, liabilities and
surplus--statutory basis of The Prudential Insurance Company of America as of
December 31, 1995, and the related statements of operations and changes in
surplus--statutory basis, and cash flows--statutory basis for each of the two
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 report dated March 1, 1996, we expressed an opinion that the 1995 and
1994 financial statements, prepared using accounting practices prescribed and
permitted by the New Jersey Department of Insurance, presented fairly, in all
material respects, the financial position of The Prudential Insurance Company of
America as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles. As described in Note 1 to these financial statements,
pursuant to the pronouncements of the Financial Accounting Standards Board, the
1995 and 1994 financial statements of The Prudential Insurance Company of
America, prepared using accounting practices prescribed or permitted by
insurance regulators (statutory financial statements) are no longer considered
presentations in conformity with generally accepted accounting principles. The
effects on the financial statements of the differences between the statutory
basis of accounting and generally accepted accounting principles are material
and are also described in Note 1. Accordingly, our present opinion on the
presentation of the 1995 and 1994 financial statements in accordance with
generally accepted accounting principles, as presented herein, is different from
that expressed in our previous report.
In our opinion, because of the effects of the matter discussed in the third
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the admitted assets,
liabilities and surplus of the Company as of December 31, 1995, and its
operations, changes in surplus and its cash flows for each of the two years in
the period ended December 31, 1995.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities and surplus
of The Prudential Insurance Company of America as of December 31, 1995, and the
results of its operations, changes in surplus and its cash flows for each of the
two years in the period then ended, on the basis of accounting described in Note
1.
Also, as described in Note 1 to the financial statements, these financial
statements were prepared on an unconsolidated statutory basis of accounting,
which differs from the 1995 and 1994 financial statements prepared for general
distribution on a consolidated statutory basis of accounting, both of which
differ from generally accepted accounting principles. The financial statements
for 1995 and 1994 have been restated on an unconsolidated statutory basis of
accounting adopted in 1996 for purposes of general distribution. Further, these
financial statements differ from the previously issued unconsolidated statutory
financial statements because certain permitted financial statement presentation
practices are no longer being used.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 1, 1996, except for Note 1A,
as to which the date is March 10, 1997
- 18 -
<PAGE>
CUSTOM VAL(SM)
LIFE ______________
INSURANCE CONTRACTS
PRUDENTIAL [LOGO]
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Prudential Plaza, Newark, NJ 07102-3777
Telephone 800 437-4016, Extension 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.
REPRESENTATION WITH RESPECT TO CHARGES
The Prudential Insurance Company of America represents that the fees and charges
deducted under the Custom VAL Contracts registered by this registration
statement, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed by
Prudential.
UNDERTAKING WITH RESPECT TO INDEMNIFICATION
Prudential Directors' and Officers' Liability and Corporation Reimbursement
Insurance program, purchased by 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 Prudential, any of
its subsidiaries, or certain investment companies affiliated with 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, dishonest 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 Prudential, can
be found in Section 14A:3-5 of the New Jersey Statutes Annotated. The text of
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 77 pages.
The undertaking to file reports.
The representation with respect to charges.
The undertaking with respect to indemnification.
The signatures.
Written consents of the following persons:
1. Deloitte & Touche LLP, independent auditors.
2. Price Waterhouse LLP, independent accountants.
3. Clifford E. Kirsch, Esq.
4. 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 9)
(b) Proposed form of Agreement between Pruco Securities
Corporation and independent brokers with respect to the Sale
of the Contracts. (Note 1)
(c) Schedules of Sales Commissions. (Note 1)
(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 November 14, 1995. (Note 8)
(b) By-laws of The Prudential Insurance Company of America, as
amended April 8, 1997. (Note 13)
(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 1)
(b) Supplement to the Application for Custom VAL (previously
named Adjustable Premium VAL) life insurance contract.
(Note 1)
(11) Form of Notice of Withdrawal Right. (Note 1)
(12) Memorandum describing 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 1)
(13) Available Contract Riders and Endorsements:
II-2
<PAGE>
(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)
(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 10)
(ii) for use in all approved jurisdictions except Florida
and New York. (Note 10)
(iii) for use in New York. (Note 11)
(gg) Endorsement altering the Assignment provision. (Note 12)
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.Powers of Attorney:
(a) F. Agnew, F. Becker, M. Berkowitz, J.Cullen
C. Davis, R. Enrico, A. Gilmour, W. Gray, III, M. Grier
J. Hanson, C. Horner, B. Malkiel, A. Ryan, C. Sitter
D. Staheli, R. Thomson, J. Unruh, P. Vagelos
S. Van Ness, P. Volcker, J. Williams (Note 14)
(b) G. Hiner, Jr. (Note 13)
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 Post-Effective Amendment No. 9 to Form
S-1, Registration No. 33-20083, filed April 9, 1997 on behalf of The
Prudential Variable Contract Real Property Account.
(Note 9) 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 10) Incorporated by reference to Post-Effective Amendment No. 4 to this
Registration Statement, filed April 30, 1990.
(Note 11) Incorporated by reference to Post-Effective Amendment No. 9 to this
Registration Statement, filed April 28, 1993.
(Note 12) Incorporated by reference to Post-Effective Amendment No. 12 to this
Registration Statement, filed May 1, 1995.
(Note 13) Incorporated by reference to Post-Effective Amendment No. 12 to Form
N-4, Registration No. 33-25434, filed on or about April 25, 1997, on
behalf of The Prudential Individual Variable Contract Account.
(Note 14) Incorporated by reference to Pre-Effective Amendment No. 1 to Form
S-6, Registration No. 333-01031, filed August 22, 1996 on behalf of
The Prudential Variable Contract Account GI-2.
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, 1997.
(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. 14 to the Registration Statement has been signed below by the
following persons in the capacities indicated on this 25th day of April, 1997.
SIGNATURE AND TITLE
/s/ *
- -------------------------------------
Arthur C. Ryan
Chairman of the Board, President
and Chief Executive Officer
/s/ *
- -------------------------------------
Martin A. Berkowitz
Senior Vice President
and Comptroller
/s/ * *By: /s/ THOMAS C. CASTANO
- ------------------------------------- -------------------------------
Mark B. Grier Thomas C. Castano
Principal Financial Officer (Attorney-in-Fact)
/s/ *
- -------------------------------------
Franklin E. Agnew
Director
/s/ *
- -------------------------------------
Frederic K. Becker
Director
/s/ *
- -------------------------------------
James G. Cullen
Director
/s/ *
- -------------------------------------
Carolyne K. Davis
Director
/s/ *
- -------------------------------------
Roger A. Enrico
Director
/s/ *
- -------------------------------------
Allan D. Gilmour
Director
II-5
<PAGE>
/s/ *
- -------------------------------------
William H. Gray, III
Director
/s/ *
- -------------------------------------
Jon F. Hanson
Director
/s/ *
- -------------------------------------
Glen H. Hiner, Jr.
Director
/s/ * By: /s/ THOMAS C. CASTANO
- ------------------------------------- -------------------------------
Constance J. Horner Thomas C. Castano
Director (Attorney-in-Fact)
- -------------------------------------
Gaynor N. Kelley
Director
/s/ *
- -------------------------------------
Burton G. Malkiel
Director
- -------------------------------------
Ida F.S. Schmertz
Director
/s/ *
- -------------------------------------
Charles R. Sitter
Director
/s/*
- -------------------------------------
Donald L. Staheli
Director
/s/ *
- -------------------------------------
Richard M. Thomson
Director
/s/ *
- -------------------------------------
James A. Unruh
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-8
Consent of Price Waterhouse LLP, independent
accountants. Page II-9
1.A.(3)(b) Proposed form of Agreement between Pruco Securities
Corporation and independent brokers with respect to the
Sale of the Contracts. Page II-10
1.A.(3)(c) Schedules of Sales Commissions. Page II-19
1.A.(10)(a) Application Form for Custom VAL (previously named
Adjustable Premium VAL) life insurance contract. Page II-21
1.A.(10)(b) Supplement to the Application for Custom VAL (previously
named Adjustable Premium VAL) life insurance contract. Page II-24
1.A.(11) Form of Notice of Withdrawal Right. Page II-25
1.A.(12) Memorandum describing 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-27
3. Opinion and Consent of Clifford E. Kirsch, Esq., as to
the legality of the securities being registered. Page II-48
6. Opinion and Consent of Nancy D. Davis, FSA, MAAA, as
to actuarial matters pertaining to the securities being
registered. Page II-49
27. Financial Data Schedule. Page II-50
II-7
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 14 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, except for
Note 1A, as to which the date is March 10, 1997, relating to the statutory
financial statements of The Prudential Insurance Company of America 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, 1997
II-8
CONSENT OF INDEPEDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 14 to the registration statement on Form S-6 (the
"Registration Statement") of our report dated March 31, 1997, relating to the
financial statements of Prudential Variable Appreciable Account, which appears
in such Prospectus.
We also consent to the use in the Prospectus constituting part of this
Registration Statement of our report dated March 10, 1997, relating to the
statutory financial statements of Prudential Insurance Company of America, which
appears in such Prospectus.
We also consent to the reference to us under the heading "Experts" in the
Prospectus.
/s/ PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
April 24, 1997
II-9
Exhibit 1A(3)(b)
SELECTED BROKER AGREEMENT
AGREEMENT dated _______________, by and between Pruco Securities
Corporation (Distributor), a New Jersey corporation and
_________________________ (Broker), a __________corporation.
WITNESSETH:
In consideration of the mutual promises contained herein, the parties
hereto agree as follows:
A. Definitions
(1) Contracts -- Variable life insurance contracts and/or variable
annuity contracts described in Schedule A attached hereto and issued
by the applicable one of Pruco Life Insurance Company, Pruco Life
Insurance Company of New Jersey or The Prudential Insurance Company
of America (hereinafter collectively called the "Company") and for
which Distributor has been appointed the principal underwriter
pursuant to Distribution Agreements, copies of which have been
furnished to Broker.
(2) Accounts -- Separate accounts established and maintained by Company
pursuant to the laws of Arizona or New Jersey, as applicable, to
fund the benefits under the Contracts.
(3) The Prudential Series Fund, Inc., or the Fund -- An open-end
management investment company registered under the 1940 Act, shares
of which are sold to the Accounts in connection with the sale of the
Contracts.
(4) Registration Statement -- The registration statements and amendments
thereto relating to the Contracts, the Accounts, and the Fund,
including financial statements and all exhibits.
(5) Prospectus -- The prospectuses inc1uded within the Registration
Statements referred to herein.
(6) 1933 Act -- The Securities Act of 1933, as amended.
(7) 1934 Act -- The Securities Exchange Act of 1934, as amended.
(8) SEC -- The Securities and Exchange Commission.
B. Agreements of Distributor
Standard 8/88
II-10
<PAGE>
-2-
(1) Pursuant to the authority delegated to it by Company, Distributor
hereby authorizes Broker during the term of this Agreement to
solicit applications for Contracts from eligible persons provided
that there is an effective Registration Statement relating to such
Contracts and provided further that Broker has been notified by
Distributor that the Contracts are qualified for sale under all
applicable securities and insurance laws of the state or
jurisdiction in which the application will be solicited. In
connection with the solicitation of applications for Contracts,
Broker is hereby authorized to offer riders that are available with
the Contracts in accordance with instructions furnished by
Distributor or Company.
(2) Distributor, during the term of this Agreement, will notify Broker
of the issuance by the SEC of any stop order with respect to the
Registration Statement or any amendments thereto or the initiation
of any proceedings for that purpose or for any other purpose
relating to the registration and/or offering of the Contracts and of
any other action or circumstance that may prevent the lawful sale of
the Contracts in any state or jurisdiction.
(3) During the term of this Agreement, Distributor shall advise Broker
of any amendment to the Registration Statement or any amendment or
supplement to any Prospectus.
C. Agreements of Broker
(1) It is understood and agreed that Broker is a registered
broker/dealer under the 1934 Act and a member of the National
Association of Securities Dealers, Inc. and that the agents or
representatives of Broker who will be soliciting applications for
the Contracts and will be duly registered representatives Broker.
(2) Commencing at such time as Distributor and Broker shall agree upon,
Broker agrees to use its best efforts to find purchasers for the
contracts acceptable to Company. In meeting its obligation to use
its best efforts to solicit applications for contracts, Broker
shall, during the term of this Agreement, engage in the following
activities:
II-11
<PAGE>
-3-
(a) Continuously utilize training, sales and promotional materials
which have been approved by Company;
(b) Establish and implement reasonable procedures for periodic
inspection and supervision of sales practices of its agents or
representatives and submit periodic reports to Distributor as
may be requested on the results of such inspections and the
compliance with such procedures.
(c) Broker shall take reasonable steps to ensure that the various
representatives appointed by it shall not make recommendations
to an applicant to purchase a Contract in the absence of
reasonable grounds to believe that the purchase of the Contract
is suitable for such applicant. While not limited to the
following, a determination of suitability shall be based on
information furnished to a representative after reasonable
inquiry of such applicant concerning the applicant's insurance
and investment objectives, financial situation and needs, and
the likelihood that the applicant will continue to make the
premium payments contemplated by the Contract.
(3) All payments for Contracts collected by agents or representatives of
Broker shall be held at all times in a fiduciary capacity and shall
be remitted promptly in full together with such applications, forms
and other required documentation to an office of the Company
designated by Distributor. Checks or money orders in payment of
initial premiums shall be drawn to the order of the applicable one
of "Pruco Life Insurance Company", (for contracts issued by Pruco
Life Insurance Company and/or Pruco Life Insurance company of New
Jersey) or "The Prudential Insurance Company of America". Broker
acknowledges that the Company retains the ultimate right to control
the sale of the Contracts and that the Distributor or Company shall
have the unconditional right to reject, in whole or part, any
application for the Contract. In the event Company or Distributor
rejects an application, Company immediately will return all payments
directly to the purchaser and Broker will be notified of such
action. In the event that any purchaser of a Contract elects to
return such Contract pursuant to Rule 6e-2(b) (13) (viii) of the
1940 Act, the purchaser will receive a refund of any premium
payments, plus or minus any change due to investment performance in
the value of the invested portion of such premiums; however, if
II-12
<PAGE>
-4-
applicable state law so requires, the purchaser who exercises his
short-term cancellation right will receive a refund of all payments
made, unadjusted for investment experience prior to the
cancellation. The Broker will be notified of any such action.
(4) Broker shall act as an independent contractor, and nothing herein
contained shall constitute Broker, its agents or representatives, or
any employees thereof as employees of Company or Distributor in
connection with the solicitation of applications for Contracts.
Broker, its agents or representatives, and its employees shall not
hold themselves out to be employees of Company or Distributor in
this connection or in any dealings with the public.
(5) Broker agrees that any material it develops, approves or uses for
sales, training, explanatory or other purposes in connection with
the solicitation of applications for Contracts hereunder (other than
generic advertising materials which do not make specific reference
to the Contracts) will not be used without the prior written consent
of Distributor and, where appropriate, the endorsement of Company to
be obtained by Distributor.
(6) Solicitation and other activities by Broker shall be undertaken only
in accordance with applicable laws and regulations. No agent or
representative of Broker shall solicit applications for the
Contracts until duly licensed and appointed by Company as a life
insurance and variable contract broker or agent of Company in the
appropriate states or other jurisdictions. Broker shall ensure that
such agents or representatives fulfill any training requirements
necessary to be licensed. Broker understands and acknowledges that
neither it nor its agents or representatives is authorized by
Distributor or Company to give any information or make any
representation in connection with this Agreement or the offering of
the Contracts other than those contained in the Prospectus or other
solicitation material authorized in writing by Distributor or
Company.
(7) Broker shall not have authority on behalf of Distributor or Company
to: make, alter or discharge any Contract or other form; waive any
forfeiture, extend the time of paying any premium; receive any
monies or premiums due, or to become due, to Company, except as set
forth in Section C(3) of this Agreement. Broker shall not expend,
nor contract for the expenditure of the funds of Distributor, nor
shall Broker possess or exercise any authority on behalf of Broker
by this Agreement.
II-13
<PAGE>
-5-
(8) Broker shall have the responsibility for maintaining the records of
its representatives licensed, registered and otherwise qualified to
sell the Contracts. Broker shall maintain such other records as are
required of it by applicable laws and regulations. The books,
accounts and records of Company, the Account, Distributor and Broker
relating to the sale of the Contracts shall be maintained so as to
clearly and accurately disclose the nature and details of the
transactions. All records maintained by the Broker in connection
with this Agreement shall be the property of the Company and shall
be returned to the Company upon termination of this Agreement, free
from any claims or retention of rights by the Broker. Nothing in
this Section C(8) shall be interpreted to prevent the Broker from
retaining copies of any such records which the Broker, in its
discretion, deems necessary or desirable to keep. The Broker shall
keep confidential any information obtained pursuant to this
Agreement and shall disclose such information, only if the Company
has authorized such disclosure, or if such disclosure is expressly
required by applicable federal or state regulatory authorities.
D. Compensation
(1) Pursuant to the Distribution Agreement between Distributor and
Company, Distributor shall cause Company to arrange for the payment
of commissions to Broker as compensation for the sale of each
contract sold by an agent or representative of Broker. The amount of
such compensation shall be based on a schedule to be determined by
agreement of Company, Distributor and Broker. Company shall identify
to Broker with each such payment the name of the agent or
representative of Broker who solicited each Contract covered by the
payment.
(2) Neither Broker nor any of its agents or representatives shall have
any right to withhold or deduct any part of any premium it shall
receive for purposes of payment of commission or otherwise. Neither
Broker nor any of its agents or representatives shall have an
interest in any compensation paid by Company to Distributor, now or
hereafter, in connection with the sale of any Contracts hereunder.
E. Complaints and Investigations
(1) Broker and Distributor jointly agree to cooperate fully in any
insurance regulatory investigation or proceeding or judicial
II-14
<PAGE>
-6-
proceeding arising in connection with the Contracts marketed under
this Agreement. Broker and Distributor further agree to cooperate
fully in any securities regulatory investigation or proceeding or
judicial proceeding with respect to Broker, Distributor, their
affiliates and their agents or representatives to the extent that
such investigation or proceeding is in connection with Contracts
marketed under this Agreement. Broker shall furnish applicable
federal and state regulatory authorities with any information or
reports in connection with its services under this Agreement which
such authorities may request in order to ascertain whether the
Company's operations are being conducted in a manner consistent with
any applicable law or regulation.
F. Term of Agreement
(1) This Agreement shall continue in force for one year from its
effective date and thereafter shall automatically be renewed every
year for a further one year period; provided that either party may
unilaterally terminate this Agreement upon thirty (30) days' written
notice to the other party of its intention to do so.
(2) Upon termination of this Agreement, all authorizations, rights and
obligations shall cease except (a) the agreements contained in
Section E hereof; (b) the indemnity set forth in Section G hereof;
and (c) the obligations to settle accounts hereunder, including
commission payments on premiums subsequently received for Contracts
in effect at the time of termination or issued pursuant to
applications received by Broker prior to termination.
G. Indemnity
(1) Broker shall be held to the exercise of reasonable care in carrying
out the provisions of this Agreement.
(2) Distributor agrees to indemnify and hold harmless Broker and each
officer or director of Broker against any losses, claims, damages or
liabilities, joint or several, to which Broker or such officer or
director become subject, under the 1933 Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or
alleged
II-15
<PAGE>
-7-
untrue statement of a material fact, required to be stated therein
or necessary to make the statements therein not misleading,
contained in any Registration Statement or any post-effective
amendment thereof or in the Prospectus, or any sales literature
provided by the Company or by the Distributor.
(3) Broker agrees to indemnify and hold harmless Company and Distributor
and each of their current and former directors and officers and each
person, if any, who controls or has controlled Company or
Distributor within the meaning of the 1933 Act or the 1934 Act,
against any losses, claims, damages or liabilities to which Company
or Distributor and any such director or officer or controlling
person may become subject, under the 1933 Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon:
(a) Any unauthorized use of sales materials or any verbal or
written misrepresentations or any unlawful sales practices
concerning the Contracts by Brokers; or
(b) Claims by agents or representatives or employees of Broker for
commissions, Service fees, development allowances or other
compensation or renumeration of any type;
(c) The failure of Broker, its officers, employees, or agents to
comply with the provisions of this Agreement; and Broker will
reimburse Company and Distributor and any director or officer
or controlling person of either for any legal or other expenses
reasonably incurred by Company, Distributor, or such director,
officer of controlling person in connection with investigating
or defending any such loss, claims, damage, liability or
action. The indemnity agreement will be in addition to any
liability which Broker may otherwise have.
H. Assignability
This Agreement shall not be assigned by either party without the written
consent of the other.
II-16
<PAGE>
-8-
I. Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of New Jersey.
In Witness Whereof, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
PRUCO SECURITIES CORPORATION
(Distributor)
By:____________________________________
President
_______________________________________
(Broker)
By:____________________________________
II-17
<PAGE>
SELECTED BROKER AGREEMENT
SCHEDULE A
The following policies are the Contracts as defined in the Agreement made and
effective ________________, 19___, between Pruco Securities Corporation and
________________________.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CUSTOM VAL
(Flexible Premium Variable Life Policy)
VARIABLE APPRECIABLE LIFE
(Flexible Premium Variable Life Policy)
VARIABLE LIFE
(Scheduled Premium Variable Life Policy)
II-18
Exhibit 1A(3)(c)
Commission Schedule For
Custom VAL life insurance contracts
------------------------------------
I. District Agencies
A. First year commissions on contracts issued on the following insureds:
Commission as Percentage
Insured of Scheduled Premiums
------- ------------------------
Under Age 60 50%
Age 60-69 45%
Age 70-75 40%
B. Commissions on renewal scheduled premiums in contract years two through
four, whether paid or not, are 7%.
C. On premiums paid in excess of the first scheduled premium, a commission
of 3% will be paid until the client has paid premiums equal to ten
years of scheduled premiums, and 2% thereafter.
II. Ordinary Agencies
A. First year commissions are the same as those stated above for District
Agencies.
B. Commissions on renewal scheduled premiums on contracts sold through
Ordinary Agencies depend on the classification of the selling agent.
1. For agents in categories T (Career agent - ICP/TAP), W (Career
agent - temporary ACCUM), and Y (Career agent - temporary), the
following commission schedule on renewal scheduled premiums
applies.
Commission as Percentage
of Scheduled Premiums
------------------------
12% in contract years two
through four; 3% in contract
years five through ten
II-19
<PAGE>
2. For agents in categories A (Asst. Mgr. or Assoc. Mgr.), B
(Broker), G (Part-Time Special Agent), K (Retired Agent), M
(Manager), P (Part-Time Special Agent), S (Surplus Broker), and U
(Manager), the commission rate on renewal scheduled premiums is 5%
for contract years two through ten.
3. For agents in categories F (Asst. Mgr. or Assoc. Mgr., Special), E
(Full-Time Agents, PCAP), V (Full-Time Career Agents), and N
(Agent Emeritus), the following commission schedule on renewal
scheduled premiums applies:
Commission as Percentage
of Scheduled Premiums
------------------------
10% in contract years two
through four; 3% in contract
years five through ten
4. Agents with less than three years of service may be paid on a
different basis. Agents who meet certain productivity,
profitability, and persistency standards with regard to the sale
of the contracts will be eligible for additional compensation.
III. The registered representatives of Prudential-Bache Securities, Inc. will
be paid the following commissions on contracts they sell: the same as
stated above for District Agencies for first year scheduled premiums, and
5% of the second through tenth year scheduled premiums. They will also be
paid 3% of premiums paid in excess of scheduled premiums until the client
has paid premiums equal to ten years of scheduled premiums, and 2%
thereafter.
IV. In the event a contract lapses or is surrendered within the first two
contract years, a portion or all of the first year commission may be
subject to recapture by The Prudential. If the contract lapses at the end
of year one, .30% of the commission is subject to recapture. A higher
percentage of the first year commission may be recaptured on earlier
lapses. A lower and decreasing portion of the first year commission is
subject to recapture throughout the second contract year.
V. 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 that stated
above.
II-20
<TABLE>
<CAPTION>
EXHIBIT-1.A.(10)(a)
<S> <C>
- ----------------------------------------------------===============================================================================
Part 1 Application for Life Insurance to
[LOGO] [ ] The Prudential Insurance Company of America
[ ] Pruco Life Insurance Company
A Subsidiary of The Prudential Insurance Company of America
No.
- -----------------------------------------------------------------------------------------------------------------------------------
1a. Proposed Insured's name--first, initial, last (Print) 1b. Sex 2a. Date of birth 2b. Age 2c. Place of birth
M F Mo. Day Yr.
[ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------------
3. [ ] Single [ ] Married [ ] Widowed [ ] Separated [ ] Divorced 4. Social Security No. / /
- -----------------------------------------------------------------------------------------------------------------------------------
5a. Occupation(s) 5b. Duties
- -----------------------------------------------------------------------------------------------------------------------------------
6. Address for mail No. Street City State Zip
- -----------------------------------------------------------------------------------------------------------------------------------
7a. Kind of policy 7b. Initial amount 8. Accidental death coverage
$ initial amount
If a Variable contract is applied for complete appropriate suitability form. $
- -----------------------------------------------------------------------------------------------------------------------------------
9. Beneficiary: (Include name, age and relationship.) 10.List all life insurance on proposed Insured. Check here if None [ ]
a. Primary (Class 1): Company Initial Yr. Kind Medical
amt. issued (Indiv., Group) Yes No
______________________________________ [ ] [ ]
________________________________________________________________________
_______________________________________________________ [ ] [ ]
________________________________________________________________________
b. Contingent (Class 2) if any: [ ] [ ]
________________________________________________________________________
____________________________________________________ [ ] [ ]
________________________________________________________________________
[ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------------
11. Other person(s) proposed for coverage including the Applicant for Applicant's Waiver of Premium benefit (AWP)
Relationship to Date of birth Total life insurance
Name--first, initial, last Sex proposed Insured Mo. Day Yr. Age Place of birth in all companies
a. Spouse $
___________________________________________________________________________________________________________________________________
b. $
___________________________________________________________________________________________________________________________________
c. $
___________________________________________________________________________________________________________________________________
d. $
___________________________________________________________________________________________________________________________________
e. $
___________________________________________________________________________________________________________________________________
f. $
- -----------------------------------------------------------------------------------------------------------------------------------
12. Supplementary benefits and riders: a. For proposed Insured b. For spouse, children, Applicant for AWP
Type and duration of benefit Amount Type and duration of benefit Amount
$ $
___________________________________________________________________________________________________________________________________
$ $
___________________________________________________________________________________________________________________________________
$ $
___________________________________________________________________________________________________________________________________
$ $
___________________________________________________________________________________________________________________________________
[ ] Option to Purchase Additional Ins. $ [ ] Applicant's Waiver of Premium benefit
- -----------------------------------------------------------------------------------------------------------------------------------
13. State any special request.
- -----------------------------------------------------------------------------------------------------------------------------------
14. Has any person named in 1a or 11, within the last 12 months:
a. been treated by a doctor for or had a known heart attack, stroke or cancer (including melanoma) other Yes No
than of the skin? ............................................................................................. [ ] [ ]
b. had an electrocardiogram for any physical complaint, or taken medication for high blood pressure? ............. [ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------------
15. Premium payable [ ] Ann. [ ] Semi-Ann. [ ] Quar. [ ] Mon. [ ] Pay. Budg. [ ] Pru-Matic [ ] Gov't. Allot.
- -----------------------------------------------------------------------------------------------------------------------------------
16. Amount paid $ [ ] None (Must be "None" if either 14a or b is answered "Yes".)
- -----------------------------------------------------------------------------------------------------------------------------------
17. Is a medical examination to be made on: Yes No
a. the proposed Insured? ......................................................................................... [ ] [ ]
b. spouse (if proposed for coverage)? ............................................................................ [ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------------
18. If 17a or b is "Yes", is it agreed that no insurance will take effect on anyone proposed for coverage until Yes No
the person(s) indicated in 17 have been examined, even if 16 shows that an amount has been paid? ................. [ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------------
ORD 84376-86 Page 1 (Continued on page 2)
</TABLE>
II-21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Continuation of Part 1 of Application
- -----------------------------------------------------------------------------------------------------------------------------------
19. Will this insurance replace or change any existing insurance or annuity in any company on any person named Yes No
in 1a or 11? If "Yes", give their names, name of company, plan, amount, policy numbers and enclose any [ ] [ ]
required state replacement form(s).
- -----------------------------------------------------------------------------------------------------------------------------------
20. Is anyone applying for, or trying to reinstate, life or health insurance on any person named in 1a or 11 in Yes No
this or any company? If "Yes", give amount, details and company. [ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------------
21. Does any person named in 1a or 11 plan to live or travel outside the United States and Canada within the Yes No
next 12 months? If "Yes", give country(ies), purpose and duration of trip. [ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------------
22. Has any person named in 1a or 11 operated or had any duties aboard an aircraft, glider, balloon, or like Yes No
device, within the last 2 years, or does any such person have any plans to do so in the future? If "Yes", [ ] [ ]
complete Aviation Questionnaire.
- -----------------------------------------------------------------------------------------------------------------------------------
23. Has any person named in 1a or 11 engaged in hazardous sports such as: auto, motorcycle or power boat Yes No
sports; bobsledding, scuba or skin diving; mountain climbing; parachuting or sky diving; snowmobile [ ] [ ]
racing or any other hazardous sport or hobby within the last 2 years or does any such person plan to
do so in the future? If "Yes", complete Avocation Questionnaire.
- -----------------------------------------------------------------------------------------------------------------------------------
24. Has any person (age 15 or over) named in 1a or 11 in the last 3 years: Yes No
a. had a driver's license denied, suspended or revoked? ......................................................... [ ] [ ]
b. been convicted of three or more moving violations of any motor vehicle law or of driving while under
the influence of alcohol or drugs? ........................................................................... [ ] [ ]
c. been involved as a driver in 2 or more auto accidents? ....................................................... [ ] [ ]
If "Yes", give name, driver's license number and state of issue, type of violation and reason for license
denial, suspension or revocation.
- -----------------------------------------------------------------------------------------------------------------------------------
25. a. Has the proposed Insured smoked cigarettes within the past twelve months? .............................. Yes [ ] No [ ]
b. Has the spouse (if proposed for coverage) smoked cigarettes within the past twelve months? ............. Yes [ ] No [ ]
c. If the proposed Insured or spouse has ever smoked cigarettes, cigars or a pipe, show date(s) last smoked:
Cigarettes Cigars Pipe
Proposed Insured Mo. _______ Yr. _______ Mo. _______ Yr. _______ Mo._______ Yr. _______
Spouse Mo. _______ Yr. _______ Mo. _______ Yr. _______ Mo._______ Yr. _______
- -----------------------------------------------------------------------------------------------------------------------------------
26. Changes made by the Company. (Not applicable in West Virginia)
- -----------------------------------------------------------------------------------------------------------------------------------
To the best of the knowledge and belief of those who sign below, the statements in this application are complete and true. It
is understood that, if any of the above statements (for example, the smoking data) is a material misrepresentation, coverage
could be invalidated as a result. The beneficiary named in the application is for insurance payable upon death of (1) the Insured,
and (2) an insured child after the death of the Insured if there is no insured spouse.
When the Company gives a Limited Insurance Agreement form, ORD 84376A-86, of the same date as this Part 1, coverage will start as
shown in that form. Otherwise, no coverage will start unless: (1) a contract is issued, (2) it is accepted, and (3) the full first
premium is paid while all persons to be covered are living and their health remains as stated in Parts 1 and 2. If all these take
place, coverage will start on the contract date. If the Company makes a change as indicated in 26 it will be approved by acceptance
of the contract. But where the law requires written consent for any change in the application, such change can be made only if those
who sign this form approve the change in writing. No agent can make or change a contract, or waive any of the Company's rights or
needs.
Ownership: Unless otherwise asked for above, the owner of the contract will be (1) the applicant if other than the proposed Insured,
otherwise (2) the proposed Insured. But this is subject to any automatic transfer of ownership stated in the contract.
--------------------------------------------------------------------
Signature of Proposed Insured (If age 8 or over)
Dated at on , 19
- ----------------------------------------------------------- --------------------------------------------------------------------
(City/State) Signature of Applicant (If other than proposed Insured --
If applicant is a firm or corporation, show that company's name
Witness By
- ----------------------------------------------------------- --------------------------------------------------------------------
(Licensed agent must witness where required by law) (Signature and title of officer signing for that company)
- -----------------------------------------------------------------------------------------------------------------------------------
ORD 84376-86 Page 2
</TABLE>
II-22
<PAGE>
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Part 2 of Application - Complete on persons indicated if anyone named in 1a & 11 of Part 1 is eligible on a non-medical basis.
- -----------------------------------------------------------------------------------------------------------------------------------
Complete 1 only on Proposed Insured's family 2. Height and weight of:
1. Family Living Dead a. Proposed Insured Ht. __________ Wt. __________
Record (give age) Cause of Death Age Year b. Spouse Ht. __________ Wt. __________
c. Applicant for AWP Ht. __________ Wt. __________
Father
- --------------------------------------------------------------- Has the weight changed more than 10 pounds in the past year
Mother on any person proposed for coverage? Yes [ ] No [ ] (If "Yes",
- --------------------------------------------------------------- give name and reason for change)
Brothers -------------------------------------------------
- ---------------------------------------------------------------
Sisters -------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
3. When was a doctor last consulted by: a. Proposed Insured? b. Spouse? c. Applicant for AWP?
(Give details in 10.) Mo. _____ Yr. _____ Mo. _____ Yr. _____ Mo. _____ Yr. _____
- -----------------------------------------------------------------------------------------------------------------------------------
4. Is any person to be covered now being treated or taking medicine for any condition or disease? ............. Yes [ ] No [ ]
- -----------------------------------------------------------------------------------------------------------------------------------
5. Has any person to be covered ever: Yes No
a. had any surgery or been advised to have surgery and has not done so? ............................................ [ ] [ ]
b. been in a hospital, sanitarium or other institution for observation, rest, diagnosis or treatment? .............. [ ] [ ]
c. used or is any such person now using valium or other tranquilizers; barbiturates or other sedatives; marijuana,
cocaine, hallucinogens or other mood-altering drugs; heroin, methadone or other narcotics; amphetamines or
other stimulants; or any other narcotics or controlled substances, except as legally prescribed by a doctor? .... [ ] [ ]
d. been treated or counseled for alcoholism or other drug dependency? .............................................. [ ] [ ]
e. had life or health insurance declined, postponed, changed, rated-up or withdrawn? ............................... [ ] [ ]
f. had life or health insurance canceled, or its renewal or reinstatement refused? ................................. [ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------------
6. Has any person to be covered ever been treated by a doctor for or had any known sign of:
Yes No Yes No
a. high blood pressure? ................... [ ] [ ] d. asthma, emphysema or tuberculosis? ....................... [ ] [ ]
b. chest pain, pressure or discomfort? .... [ ] [ ] e. tumor, cancer, leukemia, diabetes or syphillis? .......... [ ] [ ]
c. heart murmur or rheumatic fever? ....... [ ] [ ] f. nervous trouble, convulsions, epilepsy or mental disorder? [ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------------
7. Other than as shown above, has any person to be covered ever been treated by a doctor for or had any known sign of a disease
or disorder of the: Yes No Yes No
a. heart, arteries or veins? .............. [ ] [ ] e. kidney, bladder, genital organs or urinary tract? ........ [ ] [ ]
b. lungs, chest or throat? ................ [ ] [ ] f. liver, gallbladder, stomach, intestines or rectum? ....... [ ] [ ]
c. brain or nervous system? ............... [ ] [ ] g. blood, glands or skin? ................................... [ ] [ ]
d. spine, joints, skull or other bones? ... [ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------------
8. Other than as shown above, in the past 5 years has any person to be covered: Yes No
a. consulted or been attended or examined by any doctor or other practitioner? ...................................... [ ] [ ]
b. had electrocardiograms, X-rays for diagnosis or treatment, or blood, urine, or other medical tests? .............. [ ] [ ]
c. made claim for or received benefits, compensation, or a pension because of sickness or injury? ................... [ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------------
9. Does any person to be covered now have a known sign of any physical disorder, disease or defect not shown above? Yes [ ] No [ ]
- -----------------------------------------------------------------------------------------------------------------------------------
10. What are the full details of the answer to 3 and to each part of 4 thru 9 which is answered "Yes"?
Name & Illness, operation or other reason. Reason for any Dates and Full names and addresses
Question No. check-up, doctor's advice, treatment and medication. duration of illness of doctors and hospitals
___________________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
To the best of my knowledge and belief the above statements are complete and true. It is understood that, if any of the above
statements is a material misrepresentation, coverage should be invalidated as a result.
19
- --------------------- ------------------------------------ -------------------------------------------------------------------
Date Witness Signature of Proposed Insured (If age 15 or over) otherwise Applicant
- -----------------------------------------------------------------------------------------------------------------------------------
ORD 84376-86 Page 3
</TABLE>
II-23
EXHIBIT 1.A.(10)(b)
The Prudential Insurance Company of America No. xx xxx xxx
A Supplement to the Life Insurance Application for a variable contract in which
John Doe is named as the proposed insured.
- -------------------------------------------------------------------------------
I BELIEVE THIS CONTRACT MEETS MY INSURANCE NEEDS AND FINANCIAL OBJECTIVES. I
ACKNOWLEDGE RECEIPT OF A CURRENT PROSPECTUS FOR THE CONTRACT. I UNDERSTAND THAT
THE CONTRACT'S VALUE AND DEATH BENEFIT MAY VARY DEPENDING ON THE CONTRACT'S
INVESTMENT EXPERIENCE ....................................... YES [X] NO [ ]
Date Signature of Applicant
Aug. 3, 1987 JOHN DOE
- -------------------------------- -----------------------------------
ORD 86218--88
II-24
Exhibit 1(A)(11)
NOTICE OF WITHDRAWAL RIGHT
In order to comply with the laws administered by the Securities and Exchange
Commission, we are sending you this notice. Please read it carefully and keep it
with your records.
You have recently purchased a Custom VAL life insurance contract from The
Prudential. The benefits of this contract depend on the investment experience
of the selected investment options (The Prudential Variable Appreciable Account,
The Prudential Variable Contract Real Property Account and The Fixed Account are
currently available). The investment options of these accounts are described in
Prospectuses that were given to you at the time of sale.
You have the right to examine and cancel this contract. Upon return, you are
entitled to a refund of all premiums paid, plus or minus any change due to
investment performance in the value of the invested portions of such premiums.
However, if applicable state law so requires, you will receive a refund of all
premiums paid, unadjusted for investment performance prior to cancellation. The
cancellation deadline is the latest of:
1. 10 days after you received the contract
2. 45 days from the date you completed PART 1 of the application
3. 10 days from the date of delivery of this notice.
In determining whether or not to cancel your contract, you should consider,
along with other factors such as the needs and other reasons which motivated you
to purchase this contract, the projected cost and your ability to make the
scheduled premium payments as stated in your contract. Please consult and review
the Prospectus you have received. The Prospectus describes the deductions from
premiums before amounts are allocated to the investment Options. These are:
A deduction of XX.XX% for premium tax
A per payment charge of $2.00
In addition, the Prospectus describes certain charges that are deducted
periodically from amounts allocated to the investment options. The Prospectus
also describes charges that may be assessed upon surrender.
If you decide to cancel your contract, complete the enclosed form and return it
along with your contract. The postmark of the returned contract must be on or
before the deadline described above.
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<PAGE>
INSTRUCTIONS
Please read carefully
If, after reading the enclosed notice, you decide to return your contract for
cancellation you must:
1. Sign and date the bottom portion of this form.
2. Mail this notice together with your contract to:
Prudential Insurance Company
Eastern Service Office
Box 388
Fort Washington, Pa. 19034
3. Make certain that the postmark on the envelope is on or before the
latest date permitted for cancellation as described in the enclosed
notice.
4. Check the box at the bottom if you not yet received your contract when
mailing this form.
To be Filled Out by Owner
To: Prudential
Pursuant to the terms of the notice previously furnished me by Prudential, I
hereby return the contract numbered below for cancellation and request a full
refund of all premiums paid by me. I release Prudential from any claims in
connection with the sale or issuance of this contract, and acknowledge that
Prudential's only liability is the refund of the premiums paid for the
contract. [Where state law permits, this paragraph will read: "Pursuant to the
terms of the notice previously furnished me by Prudential, I hereby return the
contract numbered below for cancellation and request a refund of all premiums
paid by me, plus or minus any change due to investment performance in the value
of the invested portions of such premiums. I release Prudential from any claims
in connection with the sale or issuance of this contract, and acknowledge that
Prudential's only liability is the refund of the premiums paid for the contract,
plus or minus any change due to investment performance in the value of the
invested portions of such premiums."]
___________________ ___________________________________________________
Date Signature of Contract Owner
___________________________________________________
Contract Number
___________________________________________________
Name of Insured
(if other than Owner)
_________ I have not yet received the contract and, should it
be received, I will return it to Prudential.
II-26
Exhibit 1A(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 Custom VAL 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. PREMIUM 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
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2
most cases), smoking status, health, occupation and, for this contract, whether
a relatively low initial premium or a relatively high initial premium is chosen
by the owner. A uniform premium schedule 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 provide for the same range of premium schedules.
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. This will involve evaluation of the answers to the questions on the
application and a medical or tara medical examination. The Prudential may also
require further information to 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.
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3
These processing procedures are designed to provide immediate benefits to
every prospective owner who pays the initial scheduled premium (or a greater
amount) 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 at least the initial
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, the Contract
Date will ordinarily be the date on which Part 2 of the application (the medical
report) is completed. 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.
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<PAGE>
4
If the first scheduled premium is not paid with the application, the
Contract Date will be the Contract Date stated in the Contract, which will
generally be about 3 days after the date of physical issue (to permit time for
delivery), provided the Owner pays the necessary scheduled premium.
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 backdated 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 had 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.
The Prudential will transfer the appropriate amounts to the selected
investment option(s) on the date the Contract is approved unless, as noted
above, the owner selects a period of
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5
preliminary term insurance in which case the invested portion of the first
scheduled premium will be transferred to the selected investment option(s) on
the Contract Date. The variable benefits under all Contracts will be calculated
on the assumption that the invested portion of the first scheduled premium was
transferred to the selected investment option(s) on the Contract Date. Any
portion of the first premium payment in excess of the first scheduled premium
will be credited (after the front-end deductions) as of the date of receipt. If
the first premium is received before the Contract Date, the entire invested
portion will be credited as of the Contract Date.
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.
D. REINSTATEMENT
The Contract may be reinstated within five years after default (this period
will be longer if required by state law) unless the Contract has been
surrendered for its cash surrender value. A Contract will be reinstated upon
receipt by The
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6
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 that 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
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7
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 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
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8
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
twelve 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
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9
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 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
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10
fixed-rate option each year is the greater of: (a) 25% of the amount in the
fixed-rate option, and (b) $1,000. 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. "REDEMTION" 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
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11
as underwriting expenses, incurred 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
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12
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 a minimum face amount of insurance, which will be stated in the contract
and which will depend upon the face amount and premium schedule in effect at the
time the partial surrender is requested.
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.
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
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13
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 a minimum face amount that will be stated in the contract. Any applicable
deferred administrative and sales charges will be reduced in proportion to the
reduction in face amount. The contract fund will be 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 each of the scheduled premiums
due thereafter 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.
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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, 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) 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 tartion of
the contract fund held in those accounts.
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
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15
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
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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 surrender value on the date of default, 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 or variable reduced
paid-up insurance within three months of the date of default. The face amount of
the reduced paid-up insurance will depend on the cash surrender value on the
date of 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 the Contract is not 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 option for fixed or variable
reduced paid-up insurance, but not if it is in effect as extended term
insurance. The owner may loan value if the Contract is in effect under the
contract value borrow money on completion of a form satisfactory to The
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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 scheduled 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 under
a Form B Contract) 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 61 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.
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18
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 new scheduled premiums and certain other revised
specifications, which will be set forth in a new Contract
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19
document. An Owner 5 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 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
premiums for the new Contract will be
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based on The Prudential's rates in force on the date of the change for the new
insured's rating class. The old Contract's premium account will become the
premium account of the new Contract. If the contract fund and premium account
are such that the new Contract would be in default on the date that the new
Contract is to go in effect, The Prudential will require payment of a premium
sufficient to bring the Contract out of default. 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.
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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-47
Exhibit 3
April 25, 1997
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 ("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 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. 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 Prudential may conduct.
4. The variable appreciable life insurance contracts are legal and binding
obligations of 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,
/s/
- ---------------------------------
Clifford E. Kirsch
II-48
Exhibit 6
April 25, 1997
The Prudential Insurance
Company of America
Prudential Plaza
Newark, New Jersey 07102-3777
To 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. 14 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,
/s/
- --------------------------------------------
Nancy D. Davis, FSA, MAAA
Vice President and Assistant Actuary
The Prudential Insurance Company of America
II-49
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