<PAGE>
SUPPLEMENT DATED DECEMBER 1, 1995 TO THE
PROSPECTUSES FOR PACIFIC SELECT, PACIFIC SELECT EXEC, AND
PACIFIC SELECT CHOICE DATED MAY 1, 1995 (EACH A "PROSPECTUS")
Each Prospectus is amended by removing the five account limitation after
any allocation of premium (or net premium) and/or transfers.
Each Prospectus is amended by adding the following:
PORTFOLIO REBALANCING
A Policy Owner may automatically re-set the percentage of Accumulated Value
allocated to each Variable Account at a predetermined level. This process
is called portfolio rebalancing. (The Fixed Account Option is not available
for portfolio rebalancing.) Over time, the variations in each Variable
Account's investment results will shift the percentage allocations of the
Policy's Accumulated Value. The portfolio rebalancing feature will
automatically transfer a Policy's Accumulated Value among the Variable
Accounts back to the pre-set percentages. Rebalancing can be made
quarterly, semi-annually or annually, measured from the Policy Date
("frequency period"). Rebalancing may result in transferring amounts from a
Variable Account earning a relatively higher return to a Variable Account
earning a relatively lower return.
A Policy Owner may initiate portfolio rebalancing by sending Pacific
Mutual's Home Office a signed, written request in good form or a properly
completed Automatic Portfolio Rebalancing form. Policy Owners must specify
the frequency for rebalancing and a beginning date. The first rebalancing
will usually occur on the Monthly Payment Date that starts the frequency
period elected by the Owner and that occurs on or follows the beginning
date selected by the Owner. Policy Owners that stop portfolio rebalancing
must wait 30 days to begin again. Portfolio rebalancing can not be used
with the Dollar Cost Averaging Option.
Pacific Mutual may modify, terminate or suspend the portfolio rebalancing
feature at any time.
The Pacific Select Exec Prospectus and Pacific Select Choice Prospectus are
amended by adding the following as the fourth paragraph of the "Premiums"
section:
If Pacific Mutual receives any premium payment that will cause a Policy to
become a modified endowment contract, the portion of the payment that will
cause a Policy to become a modified endowment contract will not be applied
to the Policy, unless the Policy Owner has previously notified Pacific
Mutual that payments that cause a Policy to become a modified endowment
contract may be accepted by Pacific Mutual and applied to the Policy. The
portion of the premium payment that will cause a Policy to become a
modified endowment contract will be returned to the Policy Owner. However,
for premium payments received by Pacific Mutual's Home Office within 20
days before the upcoming Annual Anniversary of the Policy, all or a portion
of the payment
<PAGE>
may be applied to the Policy immediately or applied on the upcoming Annual
Anniversary, if it is determined that the total premium payment would
affect whether the Policy is classified as a modified endowment contract.
The Pacific Select Exec Prospectus is amended by replacing the first
sentence of the third paragraph in the "Policy Loans" section with the
following:
The Policy loan annual effective interest rate is 4.75% per year for the
first 10 years and 4.25% thereafter.
<PAGE>
[LOGO OF PACIFIC SELECT EXEC]
Flexible Premium
Variable Universal Life
PROSPECTUSES FOR
PACIFIC SELECT EXEC
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
PACIFIC MUTUAL LIFE INSURANCE COMPANY
DATED MAY 1, 1995
--------------
PACIFIC SELECT FUND
DATED MAY 1, 1995
<PAGE>
PROSPECTUS
PACIFIC SELECT EXEC
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
ISSUED BY PACIFIC MUTUAL LIFE INSURANCE
COMPANY
[LOGO OF PACIFIC SELECT EXEC] 700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
1-800-800-7681
This prospectus describes Pacific Select Exec--a Flexible Premium Variable
Life Insurance Policy (individually, the "Policy," and collectively, the
"Policies") offered by Pacific Mutual Life Insurance Company ("Pacific
Mutual"). The Policy, for so long as it remains in force, provides lifetime
insurance protection on the Insured named in the Policy through the Maturity
Date. The Policy is designed to provide maximum flexibility in connection with
premium payments and death benefits by permitting the Policy Owner, subject to
certain restrictions, to vary the frequency and amount of premium payments and
to increase or decrease the death benefit payable under the Policy. This
flexibility allows a Policy Owner to provide for changing insurance needs under
a single insurance policy. A Policy may also be surrendered for its Cash
Surrender Value less outstanding Policy Debt.
Net premium payments may be allocated at the Policy Owner's discretion to one
or more of the Variable Accounts that comprise a separate account of Pacific
Mutual called the Pacific Select Exec Separate Account (the "Separate
Account"), or to the Fixed Account of Pacific Mutual. Any portion of a net
premium allocated to one or more of the Variable Accounts is invested in the
corresponding portfolios of the Pacific Select Fund (the "Fund"), which
currently consists of ten Portfolios: the Money Market Portfolio, the High
Yield Bond Portfolio, the Managed Bond Portfolio, the Government Securities
Portfolio, the Growth Portfolio, the Growth LT Portfolio, the Equity Income
Portfolio, the Multi-Strategy Portfolio, the Equity Index Portfolio, and the
International Portfolio. The Accumulated Value in the Fixed Account will accrue
interest at an interest rate that is guaranteed by Pacific Mutual.
To the extent that all or a portion of net premium payments are allocated to
the Separate Account, the Accumulated Value under the Policy will vary based
upon the investment performance of the Variable Accounts to which the
Accumulated Value is allocated. No minimum amount of Accumulated Value is
guaranteed.
The Policy also permits the Policy Owner to choose from two death benefit
options: under one option, the death benefit remains fixed at the Face Amount
chosen by the Policy Owner (or, if greater, it equals Accumulated Value
multiplied by a certain percentage) (Option A); under the other option, the
death benefit equals the Face Amount plus Accumulated Value (or, if greater,
Accumulated Value multiplied by a certain percentage) (Option B). Under the
latter option, the death benefit will vary daily with the investment
performance of the Variable Accounts for any Policy Owner who has allocated
Accumulated Value to the Variable Accounts. Under either option, for so long as
the Policy remains in force, the death benefit will never be less than the
current Face Amount.
A Policy may be returned according to the terms of its Free-Look Right (see
"Right to Examine a Policy--Free-Look Right," page 21), during which time net
premium payments allocated to the Separate Account will be invested in the
Money Market Variable Account.
It may not be advantageous to replace existing insurance with the Policy.
This prospectus generally describes only the portion of the Policy involving
the Separate Account. For a brief summary of the Fixed Account, see "The Fixed
Account," page 32.
----------------
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.
----------------
THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE PACIFIC
SELECT FUND. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE
REFERENCE.
DATE: MAY 1, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
IMPORTANT TERMS............................................................ 4
SUMMARY OF THE POLICY...................................................... 5
Purpose Of The Policy.................................................... 5
Policy Values............................................................ 5
The Death Benefit........................................................ 5
Premium Features......................................................... 5
Allocation Options....................................................... 6
Transfer Of Accumulated Value............................................ 6
Policy Loans............................................................. 7
Free-Look Right.......................................................... 7
Surrender Right.......................................................... 7
Preferred And Partial Withdrawal Benefits................................ 7
Charges and Deductions................................................... 7
Tax Treatment of Increases In Accumulated Value.......................... 9
Tax Treatment Of Death Benefit........................................... 9
The Fixed Account........................................................ 9
Contacting Pacific Mutual................................................ 9
INFORMATION ABOUT PACIFIC MUTUAL, THE SEPARATE ACCOUNT
AND THE FUND.............................................................. 10
Pacific Mutual Life Insurance Company.................................... 10
Pacific Select Exec Separate Account..................................... 10
The Pacific Select Fund.................................................. 10
The Investment Adviser................................................... 11
THE POLICY................................................................. 12
Application For A Policy................................................. 12
Premiums................................................................. 12
Allocation Of Net Premiums............................................... 13
Dollar Cost Averaging Option............................................. 14
Transfer Of Accumulated Value............................................ 15
Death Benefit............................................................ 15
Changes in Death Benefit Option.......................................... 16
Changes In Face Amount................................................... 17
Policy Values............................................................ 18
Determination Of Accumulated Value....................................... 18
Policy Loans............................................................. 19
Benefits At Maturity..................................................... 20
Surrender................................................................ 20
Preferred And Partial Withdrawal Benefits................................ 20
Right To Examine A Policy--Free-Look Right............................... 21
Lapse.................................................................... 21
Reinstatement............................................................ 22
CHARGES AND DEDUCTIONS..................................................... 23
Premium Load............................................................. 23
Deductions From Accumulated Value........................................ 23
Surrender Charge......................................................... 24
Corporate Purchasers..................................................... 25
Other Charges............................................................ 26
Guarantee Of Certain Charges............................................. 26
OTHER INFORMATION.......................................................... 26
Federal Income Tax Considerations........................................ 26
Charge For Pacific Mutual Income Taxes................................... 29
Voting Of Fund Shares.................................................... 29
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Disregard Of Voting Instructions......................................... 30
Report To Owners......................................................... 30
Substitution Of Investments.............................................. 31
Changes To Comply With Law............................................... 31
PERFORMANCE INFORMATION.................................................... 32
THE FIXED ACCOUNT.......................................................... 32
General Description...................................................... 32
Death Benefit............................................................ 33
Policy Charges........................................................... 33
Transfers, Surrenders, Withdrawals, And Policy Loans..................... 33
MORE ABOUT THE POLICY...................................................... 34
Ownership................................................................ 34
Beneficiary.............................................................. 34
Exchange Of Insured...................................................... 34
The Contract............................................................. 35
Payments................................................................. 35
Assignment............................................................... 35
Errors On The Application................................................ 35
Incontestability......................................................... 35
Payment In Case Of Suicide............................................... 36
Participating............................................................ 36
Policy Illustrations..................................................... 36
Payment Plan............................................................. 36
Optional Insurance Benefits.............................................. 36
Private Retirement Plans................................................. 37
Risks of Private Retirement Plans........................................ 37
Distribution Of The Policy............................................... 38
MORE ABOUT PACIFIC MUTUAL.................................................. 39
Management............................................................... 39
State Regulation......................................................... 41
Telephone Transfer and Loan Privileges................................... 41
Legal Proceedings........................................................ 41
Legal Matters............................................................ 41
Registration Statement................................................... 42
Independent Accountants.................................................. 42
Financial Statements..................................................... 42
APPENDIX................................................................... 63
ILLUSTRATIONS.............................................................. 64
</TABLE>
----------------
THE POLICY IS NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN AS CONTAINED IN THIS PROSPECTUS, THE
FUND'S PROSPECTUS OR THE STATEMENT OF ADDITIONAL INFORMATION OF THE FUND OR ANY
SUPPLEMENT THERETO.
3
<PAGE>
IMPORTANT TERMS
Accumulated Value--The total value of the amounts in the Variable Accounts of
the Separate Account and the Fixed Account for the Policy as well as any amount
set aside in the Loan Account to secure Policy Debt as of any Valuation Date.
Age--The Insured's age as of his or her nearest birthday as of the Policy Date,
increased by the number of complete Policy Years elapsed.
Beneficiary--The person or persons named by the Policy Owner in the application
or by proper later designation to receive the death benefit proceeds upon the
death of the Insured.
Cash Surrender Value--The Accumulated Value less the surrender charge.
Face Amount--The minimum death benefit for so long as the Policy remains in
force. The Face Amount may be increased or decreased under certain
circumstances.
Fixed Account--An account that is part of Pacific Mutual's General Account to
which all or a portion of net premium payments may be allocated for
accumulation at a fixed rate of interest (which may not be less than 4.0%)
declared by Pacific Mutual.
General Account--All assets of Pacific Mutual other than those allocated to the
Separate Account or to any other segregated separate account of Pacific Mutual.
Home Office--The Policy Benefits and Services Department at Pacific Mutual's
main office at 700 Newport Center Drive, Newport Beach, California 92660.
Insured--The person upon whose life the Policy is issued and whose death is the
contingency upon which the death benefit proceeds are payable.
Loan Account--An account to which amounts are transferred from the Variable
Accounts and the Fixed Account as collateral for policy loans.
Maturity Date--The Policy Anniversary on which the Insured is Age 95.
Monthly Payment Date--The day each month on which the monthly deduction is due
against the Accumulated Value. The first Monthly Payment Date is the Policy
Date.
Net Cash Surrender Value--The Cash Surrender Value less Policy Debt.
Planned Periodic Premium--The premium determined by the Policy Owner as a level
amount planned to be paid at fixed intervals over a specified period of time.
Policy Date--The date used to determine the Monthly Payment Date, Policy
Months, Policy Years, and Policy Monthly, Quarterly, Semi-annual and Annual
Anniversaries. It is usually the date the initial premium is received at
Pacific Mutual's Home Office, although it will never be the 29th, 30th, or 31st
of any month. The term "Issue Date" is substituted for Policy Date with respect
to Policies issued to residents of the Commonwealth of Massachusetts.
Policy Debt--The unpaid loan balance including accrued loan interest.
Policy Owner or Owner--The person who owns the Policy. The Policy Owner will be
the Insured unless otherwise stated in the application. If the Policy has been
absolutely assigned, the assignee becomes the Owner. A collateral assignee is
not the Owner.
Sales Surrender Target--The maximum amount of premiums paid against which the
sales surrender charge may be applied. The Sales Surrender Target is equal to
the premium that would be payable under a Policy for one year if a Policy Owner
were to pay level annual premiums for the life of the Policy, taking into
account certain Policy charges including the premium load, the guaranteed cost
of insurance rates, and the mortality and expense risk charge, and assuming net
investment earnings at an annual rate of 5%.
Valuation Date--Each date on which the Separate Account is valued, which
currently includes each day that the New York Stock Exchange is open for
trading and on which Pacific Mutual's administrative offices are open. The New
York Stock Exchange is closed on weekends and on: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, July Fourth, Labor Day, Thanksgiving Day, and
Christmas Day.
Valuation Period--The period that starts at the close of a Valuation Date and
ends at the close of the next succeeding Valuation Date.
Variable Account--A separate account of Pacific Mutual or a subaccount of such
a separate account, which is used only to support the variable death benefits
and policy values of variable life insurance policies, and the assets of which
are segregated from Pacific Mutual's General Account and its other separate
accounts. The Pacific Select Exec Separate Account of Pacific Mutual serves as
the funding vehicle for the Policies. The Money Market Variable Account, High
Yield Bond Variable Account, Managed Bond Variable Account, Government
Securities Variable Account, Growth Variable Account, Growth LT Variable
Account, Equity Income Variable Account, Multi-Strategy Variable Account,
Equity Index Variable Account, and International Variable Account are all
subaccounts of the Pacific Select Exec Separate Account.
4
<PAGE>
SUMMARY OF THE POLICY
This summary is intended to provide a brief overview of the more significant
aspects of the Policy. Further detail is provided in this prospectus and in the
Policy. Unless the context indicates otherwise, the discussion in this summary
and the remainder of the prospectus relates to the portion of the Policy
involving the Separate Account. The Fixed Account is briefly described under
"The Fixed Account," on page 32 and in the Policy.
PURPOSE OF THE POLICY
The Policy offers a Policy Owner insurance protection on the life of the
Insured through the Maturity Date for so long as the Policy is in force. Like
traditional fixed life insurance, the Policy provides for a death benefit equal
to its Face Amount, accumulation of cash value, and surrender and loan
privileges. Unlike traditional fixed life insurance, the Policy offers a choice
of investment alternatives and an opportunity for the Policy's Accumulated
Value and, if elected by the Policy Owner and under certain circumstances, its
death benefit to grow based on investment results. The Policy is a flexible
premium policy, so that, unlike many other insurance policies and subject to
certain limitations, a Policy Owner may choose the amount and frequency of
premium payments.
POLICY VALUES
A Policy Owner may allocate net premium payments among the various Variable
Accounts that comprise the Separate Account and that invest in corresponding
Portfolios of the Pacific Select Fund. A Policy Owner may also allocate net
premium payments to the Fixed Account.
Depending on the investment experience of the selected Variable Accounts, the
Accumulated Value may increase or decrease on any day. The death benefit may or
may not increase or decrease depending upon several factors, including the
death benefit option selected by the Policy Owner, although the death benefit
will never decrease below the Face Amount provided the Policy is in force.
There is no guarantee that the Policy's Accumulated Value and death benefit
will increase. The Policy Owner bears the investment risk on that portion of
the net premiums and Accumulated Value allocated to the Separate Account.
The Policy will remain in force until the earliest of the Maturity Date, the
death of the Insured, or a full surrender of the Policy, unless, before any of
these events, Accumulated Value less Policy Debt is insufficient to pay the
current monthly deduction on a Monthly Payment Date and a Grace Period expires
without sufficient additional premium payment or loan repayment by the Policy
Owner.
THE DEATH BENEFIT
A Policy Owner may elect one of two Options to calculate the amount of death
benefit payable under the Policy. Under Option A, the death benefit will be
equal to the Face Amount of the Policy or, if greater, Accumulated Value
multiplied by a death benefit percentage. Under Option B, the death benefit
will be equal to the Face Amount of the Policy plus the Accumulated Value
(determined as of the date of the Insured's death) or, if greater, Accumulated
Value multiplied by a death benefit percentage. Policy Owners seeking to have
favorable investment performance reflected in increasing Accumulated Value
should choose Option A; Policy Owners seeking to have favorable investment
performance reflected in increasing insurance coverage should choose Option B.
A Policy Owner may change the death benefit option subject to certain
conditions. See "Death Benefit" and "Changes in Death Benefit Option," pages 15
and 16, respectively.
PREMIUM FEATURES
Pacific Mutual requires a Policy Owner to pay an initial premium equal to at
least 25% of an annual premium that will be estimated by Pacific Mutual.
Thereafter, subject to certain limitations, a Policy Owner may choose the
amount and frequency of premium payments. The Policy, therefore, provides the
Policy Owner with the flexibility to vary premium payments to reflect varying
financial conditions.
5
<PAGE>
When applying for a Policy, a Policy Owner will determine a Planned Periodic
Premium that provides for the payment of level premiums over a specified period
of time. Each Policy Owner will receive a premium reminder notice or listbill
for multiple policies on an annual, semi-annual, or quarterly basis, or if a
listbill, a monthly basis, at the option of the Policy Owner; however, the
Policy Owner is not required to pay Planned Periodic Premiums. Premiums may be
paid monthly under the Uni-check electronic funds transfer plan where the Owner
authorizes Pacific Mutual to withdraw premiums from the Owner's checking
account each month. The minimum initial premium required must be paid before
the Uni-check plan will be accepted by Pacific Mutual.
The amount, frequency, and period of time over which a Policy Owner pays
premiums may affect whether or not the Policy will be classified as a modified
endowment contract, which is a type of life insurance contract subject to
different tax treatment for certain pre-death distributions. For more
information on the tax treatment of life insurance contracts, including those
classified as modified endowment contracts, see "Federal Income Tax
Considerations," page 26.
Payment of the Planned Periodic Premiums will not guarantee that a Policy
will remain in force. Instead, the duration of the Policy depends upon the
Policy's Accumulated Value. Even if Planned Periodic Premiums are paid, the
Policy will lapse any time Accumulated Value less Policy Debt is insufficient
to pay the current monthly deduction and a Grace Period expires without
sufficient payment. Any premium payment must be for at least $50.00. Pacific
Mutual also may reject or limit any premium payment that would result in an
immediate increase in the net amount at risk under the Policy, although such a
premium may be accepted with satisfactory evidence of insurability.
ALLOCATION OPTIONS
The Variable Accounts invest in portfolios of a mutual fund which offers the
Policy Owner the opportunity to direct Pacific Mutual to invest in diversified
portfolios of stocks, bonds, money market instruments, or a combination of
these securities, or in securities of foreign issuers. Each of the Variable
Accounts invests exclusively in shares of a designated Portfolio of the Pacific
Select Fund (the "Fund"). The Portfolios of the Fund, each of which has a
different investment objective, are the Money Market Portfolio, the High Yield
Bond Portfolio, the Managed Bond Portfolio, the Government Securities
Portfolio, the Growth Portfolio, the Growth LT Portfolio, the Equity Income
Portfolio, the Multi-Strategy Portfolio, the Equity Index Portfolio, and the
International Portfolio. See "The Pacific Select Fund," page 10.
Pacific Mutual is the Investment Adviser of each of the Series. For eight of
the Portfolios, the Adviser and the Fund have engaged other firms to serve as
Portfolio Managers under the supervision of Pacific Mutual. Pacific Investment
Management Company, a subsidiary partnership of PIMCO Advisors, L.P., each an
affiliated enterprise of Pacific Mutual, is the Portfolio Manager of the
Managed Bond Portfolio and the Government Securities Portfolio. Capital
Guardian Trust Company, a subsidiary of The Capital Group, Inc., is the
Portfolio Manager of the Growth Portfolio, Janus Capital Corporation is the
Portfolio Manager of the Growth LT Portfolio. J.P. Morgan Investment Management
Inc., a subsidiary of J.P. Morgan & Co. Inc., is the Portfolio Manager of the
Equity Income Portfolio and the Multi-Strategy Portfolio. Bankers Trust
Company, a subsidiary of Bankers Trust New York Corporation, is the Portfolio
Manager of the Equity Index Portfolio. Templeton Investment Counsel, Inc., a
subsidiary of Franklin Resources, Inc., is the Portfolio Manager of the
International Portfolio.
The Policy Owner may choose to allocate net premium payments to any five
allocation alternatives among the ten Variable Accounts constituting the
Separate Account and the Fixed Account.
TRANSFER OF ACCUMULATED VALUE
Subject to the limitation of five allocation alternatives, the Policy Owner
may transfer Accumulated Value among the Variable Accounts, and, subject to
certain other limitations, between the Variable Accounts and the Fixed Account.
Transfers may be made by telephone if an Authorization For Telephone Requests
has been properly completed, signed and filed at Pacific Mutual's Home Office.
See "Transfer of Accumulated Value," page 15.
6
<PAGE>
POLICY LOANS
The Policy Owner may borrow from Pacific Mutual an amount up to the greater
of (1) 90% of the Policy's Accumulated Value allocated to the Variable Accounts
and 100% of Accumulated Value allocated to the Fixed Account, less any
surrender charges that would have been imposed if the Policy were surrendered
on the date the loan is taken, or (2) 100% of the product of (a X b/c - d)
where (a) equals the Policy's Accumulated Value less any surrender charge that
would be imposed if the Policy were surrendered on the date the loan is taken
and less 12 times the current monthly deduction; (b) equals 1 plus the annual
loan interest rate credited; (c) equals 1 plus the annual loan interest rate
currently charged; and (d) equals any existing Policy Debt. The minimum loan is
$500. The Policy will be the only security required for a loan. See "Policy
Loans," page 19.
The amount of any Policy Debt is subtracted from the death benefit or from
the Cash Surrender Value upon surrender. See "Policy Loans," page 19. The
Policy will lapse when Accumulated Value less Policy Debt is insufficient to
cover the current monthly deduction on a Monthly Payment Date, and a Grace
Period expires without a sufficient premium or repayment of Policy Debt.
FREE-LOOK RIGHT
A Policy Owner may obtain a full refund of the premium paid if the Policy is
returned within 10 days after the Owner receives it (30 days if the Owner is a
resident of California and is age 60 or older), within 10 days after Pacific
Mutual mails or delivers the notice of the right of withdrawal, or 45 days
after the application for the Policy is completed, whichever is later. During
the Free-Look Period, net premiums will be allocated to the Money Market
Variable Account, which invests in the Money Market Portfolio of the Fund. See
"Allocation of Net Premiums," page 13.
SURRENDER RIGHT
The Owner can surrender the Policy during the life of the Insured and receive
its Net Cash Surrender Value, which is equal to the Accumulated Value less the
surrender charge and less any outstanding Policy Debt.
PREFERRED AND PARTIAL WITHDRAWAL BENEFITS
Two partial surrender benefits are available under the Policy. The first, the
Preferred Withdrawal Benefit, permits one withdrawal of Net Cash Surrender
Value per year. The portion of a Preferred Withdrawal of up to 10% of the sum
of the Policy Owner's total premium payments will not reduce the Face Amount
under the Policy. Any excess withdrawal amount will affect the Face Amount
under a Policy in the same manner as a Partial Withdrawal. This benefit is
available on the first Policy Anniversary until the 15th Policy Anniversary.
The second partial surrender benefit, the Partial Withdrawal Benefit, is
available on and after the 15th Policy Anniversary. Under this Benefit, a
Policy Owner may make "Partial Withdrawals" of Net Cash Surrender Value. A
Partial Withdrawal may decrease the Face Amount on a Policy on which the Owner
has elected death benefit Option A, and will decrease the death benefit if the
death benefit is greater than the Face Amount under either Option A or B. See
"Preferred and Partial Withdrawal Benefits," page 20.
Among other restrictions, both Preferred and Partial Withdrawals must be for
a least $500, and the Policy's Net Cash Surrender Value after the withdrawal
must be at least $500. No surrender charge will be assessed upon a Preferred or
Partial Withdrawal.
CHARGES AND DEDUCTIONS
Premium Load
A premium load is deducted from each premium payment under a Policy prior to
allocation of the net premium to the Policy Owner's Accumulated Value. The
premium load consists of the following items:
--A sales load equal to 4% of each premium paid during the first ten Policy
Years and 2% of each premium paid thereafter. (For information on the
sales surrender charge, see page 25.)
7
<PAGE>
--A state and local premium tax charge equal to 2.35% of each premium.
Deductions from Accumulated Value
A charge called the monthly deduction is deducted from a Policy's Accumulated
Value on each Monthly Payment Date. The monthly deduction consists of the
following items:
--Cost of Insurance: This monthly charge compensates Pacific Mutual for
providing life insurance coverage for the Insured. The amount of the charge
is equal to a current cost of insurance rate multiplied by the net amount at
risk under a Policy at the beginning of the Policy Month.
--Administrative Charge. A monthly administrative charge is deducted equal
to $25 in each of the first 12 Policy Months and, after the first Policy
Year, is equal to $7.50 per month for Face Amounts of less than $100,000,
and $5.00 per month for Face Amounts of $100,000 or more. This charge is
guaranteed not to exceed $25 in each of the first 12 Policy Months and
$10.00 per month thereafter.
--Mortality and Expense Risk Charge: A monthly charge is deducted for
mortality and expense risks assumed by Pacific Mutual. During the first ten
Policy Years, this charge is equal to .000625 multiplied by a Policy's
Accumulated Value less any amount in the Loan Account, which is equivalent
to an annual rate of .75% of Accumulated Value less any amount in the Loan
Account. After the tenth Policy Year, the charge is equal to .000208333
multiplied by a Policy's Accumulated Value less any amount in the Loan
Account, which is equivalent to an annual rate of .25% of Accumulated Value
less any amount in the Loan Account.
--Optional Insurance Benefits Charges: The monthly deduction will include
charges for any optional insurance benefits added to the Policy by Rider.
A death benefit change charge, if applicable, will also be deducted from a
Policy Owner's Accumulated Value. If a Policy Owner requests and Pacific Mutual
accepts an increase in Face Amount or a change in death benefit option from
Option A to Option B, a charge of $100 will be deducted from Accumulated Value
on the effective date of the increase or option change to cover processing
costs.
Surrender Charge
Pacific Mutual will assess a surrender charge against Accumulated Value upon
surrender of a Policy until the tenth Policy Anniversary. The surrender charge
consists of two charges: an underwriting surrender charge and a sales surrender
charge.
--Underwriting Surrender Charge: The underwriting surrender charge is equal
to a specified amount that varies with the Age of the Insured for each
$1,000 of a Policy's initial Face Amount in accordance with a schedule shown
on page 25. The amount of the charge remains level for five Policy Years.
After the fifth Policy Year, the charge decreases by 1.666% per month until
it reaches zero at the end of the 120th Policy Month.
--Sales Surrender Charge: The sales surrender charge is equal to 26% of the
lesser of the premiums paid under the Policy or a maximum amount that is
called the Sales Surrender Target. The Sales Surrender Target is an
estimation of an annual premium that would be paid by a Policy Owner based
upon the Age of the Insured and the Face Amount on the Policy Date. After
the fifth Policy Year, the charge decreases from its maximum by 1.666% per
month until it reaches zero at the end of the 120th Policy Month.
The operating expenses of the Separate Account are paid by Pacific Mutual.
Investment advisory fees and operating expenses of the Fund are paid by the
Fund. For a description of these charges, see "Charges and Deductions," page
23.
8
<PAGE>
TAX TREATMENT OF INCREASES IN ACCUMULATED VALUE
The Accumulated Value under the Policy is currently subject to the same
federal income tax treatment as the cash value under fixed life insurance.
Therefore, generally the Policy Owner will not be deemed to be in constructive
receipt of the Accumulated Value unless and until the Policy Owner is deemed to
be in receipt of a distribution from the Policy. For information on the tax
treatment of the Policy and on the tax treatment of a surrender, a Preferred or
Partial Withdrawal, or a Policy loan, see "Federal Income Tax Considerations,"
page 26.
TAX TREATMENT OF DEATH BENEFIT
The death benefit under the Policy is currently subject to federal income tax
treatment consistent with that of fixed life insurance. Therefore, generally
the death benefit will be fully excludable from the gross income of the
Beneficiary under the Internal Revenue Code. See "Federal Income Tax
Considerations," page 26.
THE FIXED ACCOUNT
The Policy Owner may allocate all or a portion of net premium payments and
transfer Accumulated Value to the Fixed Account. Amounts allocated to the Fixed
Account are held in Pacific Mutual's General Account. Pacific Mutual guarantees
that the Accumulated Value allocated to the Fixed Account will be credited
interest monthly at a rate equivalent to an effective annual rate of 4%. In
addition, Pacific Mutual may in its sole discretion pay interest in excess of
the guaranteed amount. See "The Fixed Account," page 32.
CONTACTING PACIFIC MUTUAL
All written requests, notices, and forms required by the Policies, and any
questions or inquiries should be directed to Pacific Mutual's Policy Benefits
and Services Department at 700 Newport Center Drive, P.O. Box 7500, Newport
Beach, California 92658-7500.
9
<PAGE>
INFORMATION ABOUT PACIFIC MUTUAL, THE SEPARATE ACCOUNT, AND THE FUND
PACIFIC MUTUAL LIFE INSURANCE COMPANY
Pacific Mutual is a mutual life insurance company organized under the laws of
the State of California. It was authorized to conduct business as a life
insurance company on January 2, 1868, as Pacific Mutual Life Insurance Company
of California, and was reincorporated under its present name on July 22, 1936.
Pacific Mutual offers a complete line of life insurance policies and annuity
contracts, as well as financial and retirement services. It is admitted to do
business in the District of Columbia, and in all states except New York. As of
the end of 1994, Pacific Mutual had over $38.3 billion of life insurance in
force and total assets of $14.7 billion. Together with its subsidiaries and
affiliated enterprises, Pacific Mutual had total assets and funds under
management of over $91.1 billion. It has been ranked according to assets as the
25th largest insurance carrier in the nation for 1993.
The Principal Underwriter for the Policies is Pacific Equities Network
("PEN"). PEN is registered as a broker-dealer with the Securities and Exchange
Commission ("SEC") and is a wholly-owned subsidiary of Pacific Financial
Holding Company, which is a wholly-owned subsidiary of Pacific Mutual.
PACIFIC SELECT EXEC SEPARATE ACCOUNT
The Pacific Select Exec Separate Account ("Separate Account") is a separate
investment account of Pacific Mutual used only to support the variable death
benefits and policy values of variable life insurance policies. The assets in
the Separate Account are kept separate from the General Account assets and
other separate accounts of Pacific Mutual.
Pacific Mutual owns the assets in the Separate Account and is required to
maintain sufficient assets in the Separate Account to meet anticipated
obligations of the Policies funded by the Account. The Separate Account is
divided into subaccounts called Variable Accounts. The income, gains, or
losses, realized or unrealized, of each Variable Account are credited to or
charged against the assets held in the Variable Account without regard to the
other income, gains, or losses of Pacific Mutual. Assets in the Separate
Account attributable to the reserves and other liabilities under the Policies
are not chargeable with liabilities arising from any other business that
Pacific Mutual conducts. However, Pacific Mutual may transfer to its General
Account any assets which exceed anticipated obligations of the Separate
Account. All obligations arising under the Policy are general corporate
obligations of Pacific Mutual. Pacific Mutual may accumulate in the Separate
Account proceeds from various Policy charges and investment results applicable
to those assets.
The Separate Account was established on May 12, 1988 under California law
under the authority of the Board of Directors of Pacific Mutual. The Separate
Account is registered as a unit investment trust with the SEC. Such
registration does not involve any supervision by the SEC of the administration
or investment practices or policies of the Account.
Each Variable Account invests exclusively in shares of a designated Portfolio
of the Fund. Pacific Mutual may in the future establish additional Variable
Accounts within the Separate Account, which may invest in other Portfolios of
the Fund or in other securities.
THE PACIFIC SELECT FUND
The Fund is a diversified, open-end management investment company of the
series type. The Fund is registered with the SEC under the Investment Company
Act of 1940. The Fund currently offers ten separate Portfolios. Each Portfolio
pursues different investment objectives and policies. The shares of each
Portfolio are purchased by Pacific Mutual for the corresponding Variable
Account at net asset value, i.e., without sales load. All dividends and capital
gains distributions received from a Portfolio are automatically reinvested in
such Portfolio at net asset value, unless Pacific Mutual, on behalf of the
Separate Account, elects otherwise. Fund shares will be redeemed by Pacific
Mutual at their net asset value to the extent necessary to make payments under
the Policies.
10
<PAGE>
Shares of the Fund currently are offered only for purchase by Separate
Accounts of Pacific Mutual to serve as an investment medium for variable life
insurance policies and for variable annuity contracts issued by Pacific Mutual
and to a separate account of Pacific Corinthian Life Insurance Company to serve
as an investment medium for variable annuity contracts administered by Pacific
Corinthian. Shares of the Fund may also be sold in the future to separate
accounts of other insurance companies, either affiliated or not affiliated with
Pacific Mutual. Investment in the Fund by other separate accounts in connection
with variable annuity and variable life insurance contracts may create
conflicts. See "MORE ON THE FUND'S SHARES" in the accompanying prospectus of
the Fund.
The chart below summarizes some basic data about each Portfolio of the Fund
offered to the Separate Account. There can be no assurance that any Portfolio
will achieve its objective. More detailed information is contained in the
accompanying prospectus of the Fund, including information on the risks
associated with the investments and investment techniques of each of the
Portfolios.
THE FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING.
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS INVESTMENT ADVISER/
PORTFOLIO OBJECTIVE (UNDER NORMAL CIRCUMSTANCES) PORTFOLIO MANAGER
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Current income Highest quality money Pacific Mutual
consistent with market instruments
preservation of capital
- --------------------------------------------------------------------------------------------
High-Yield High level of current Intermediate and long- Pacific Mutual
Bond income term, high-yielding,
lower and medium quality
(high risk) fixed-income
securities
- --------------------------------------------------------------------------------------------
Managed Bond Maximize total return Investment grade Pacific
consistent with prudent marketable debt Mutual/Pacific
investment management securities. Will Investment Management
normally maintain an Company
average portfolio
duration of 3-6 years.
- --------------------------------------------------------------------------------------------
Government Maximize total return U.S. Government Pacific
Securities consistent with prudent securities including Mutual/Pacific
investment management futures and options Investment Management
thereon and high-grade Company
corporate debt
securities. Will
normally maintain an
average portfolio
duration of 3-6 years.
- --------------------------------------------------------------------------------------------
Growth Growth of capital Common stock Pacific
Mutual/Capital
Guardian Trust
Company
- --------------------------------------------------------------------------------------------
Growth LT Long-term growth of Common stock Pacific Mutual/Janus
capital consistent with Capital Corporation
the preservation of
capital
- --------------------------------------------------------------------------------------------
Equity Income Long-term growth of Dividend paying common Pacific Mutual/J.P.
capital and income stock Morgan Investment
Management Inc.
- --------------------------------------------------------------------------------------------
Multi-Strategy High total return Equity and fixed income Pacific Mutual/J.P.
securities Morgan Investment
Management Inc.
- --------------------------------------------------------------------------------------------
Equity Index Provide investment Stocks included in the Pacific
results that correspond S&P 500 Mutual/Bankers Trust
to the total return Company
performance of common
stocks publicly traded
in the U.S.
- --------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Pacific Mutual/
appreciation corporations domiciled Templeton Investment
outside the United Counsel, Inc.
States
</TABLE>
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISER AND PORTFOLIO MANAGERS
Pacific Mutual, located at 700 Newport Center Drive, Newport Beach,
California 92660, serves as Investment Adviser to each Portfolio of the Fund.
Pacific Mutual is registered with the SEC as an Investment Adviser. For eight
of the Portfolios, the Investment Adviser and the Fund have engaged other firms
to serve as Portfolio Managers under the supervision of Pacific Mutual.
11
<PAGE>
THE POLICY
The variable life insurance benefits provided by the Policies are funded
through the Policy Owner's Accumulated Value in the Separate Account and the
Fixed Account. The information included below describes the benefits, features,
charges, and other major provisions of the Policies.
APPLICATION FOR A POLICY
The Policy is designed to meet the needs of individuals and for corporations
who wish to provide coverage and benefits for key employees. Anyone wishing to
purchase the Policy may submit an application to Pacific Mutual. A Policy can
be issued on the life of an Insured for Ages up to and including Age 80 with
evidence of insurability satisfactory to Pacific Mutual. The Insured's Age is
calculated as of the Insured's birthday nearest the Policy Date. Acceptance is
subject to Pacific Mutual's underwriting rules, and Pacific Mutual reserves the
right to request additional information and to reject an application.
Each Policy is issued with a Policy Date, which is the date used to determine
the Monthly Payment Date, Policy Months, Policy Years, and Policy Monthly,
Quarterly, Semi-annual and Annual Anniversaries. If the application is
accompanied by all or a portion of the initial premium and is accepted by
Pacific Mutual, the Policy Date is usually the date the application and premium
payment were received at Pacific Mutual's Home Office, although the Policy Date
will never be the 29th, 30th, or 31st of any month. If an application is not
accompanied by all or a portion of the initial premium payment, the Policy Date
is usually the date the application is accepted by Pacific Mutual. Pacific
Mutual first becomes obligated under the Policy on the date the total initial
premium is received or on the date the application is accepted, whichever is
later. Any monthly deductions due will be taken on the Monthly Payment Date on
or next following the date Pacific Mutual becomes obligated. The initial
premium must be received within 20 days after the Policy is issued, although
Pacific Mutual may waive the 20 day requirement at its discretion. If the
initial premium is not received or the application is rejected by Pacific
Mutual, the Policy will be cancelled and any partial premium received will be
refunded.
Subject to Pacific Mutual's approval, a Policy may be backdated, but the
Policy Date may not be more than six months prior to the date of the
application. Backdating can be advantageous if the Insured's lower issue Age
results in lower cost of insurance rates. If the Policy is backdated, the
minimum initial premium required will include sufficient premium to cover the
backdating period. Monthly deductions will be made for the period the Policy
Date is backdated.
Insureds are assigned to underwriting (risk) classes which are used in
calculating the cost of insurance charges. In assigning Insureds to
underwriting classes, Pacific Mutual will normally use the medical or
paramedical underwriting method, which may require a medical examination of a
proposed Insured, although other forms of underwriting may be used when deemed
appropriate by Pacific Mutual.
PREMIUMS
The Policy is a flexible-premium policy, and it provides considerable
flexibility, subject to the limitations described below, to pay premiums at the
Policy Owner's discretion. Pacific Mutual usually requires a Policy Owner to
pay a minimum initial premium equal to at least 25% of the sum of the Policy's
monthly deductions plus premium load for the first year, which will be based
upon the Policy's Face Amount and the Age, smoking status, gender (unless
unisex cost of insurance rates apply, see "Cost of Insurance," page 24), and
underwriting class of the Insured. Thereafter, subject to the limitations
described below, a Policy Owner may choose the amount and frequency of premium
payments. The Policy, therefore, provides the Policy Owner with the flexibility
to vary premium payments to reflect varying financial conditions.
When applying for a Policy, a Policy Owner will determine a Planned Periodic
Premium that provides for the payment of level premiums over a specified period
of time. Each Policy Owner will receive a premium reminder notice, or a
listbill for multiple policies, on an annual, semiannual, or quarterly basis,
or, if a listbill, a monthly basis, at the option of the Policy Owner; however,
the Policy Owner is not required to pay Planned
12
<PAGE>
Periodic Premiums. Premiums may be paid monthly under the Uni-check electronic
funds transfer plan where the Owner authorizes Pacific Mutual to withdraw
premiums from the Owner's checking account each month. The minimum initial
premium required must be paid before the Uni-check plan will be accepted by
Pacific Mutual. The Policy Owner may elect the day each month on which premiums
are paid under the Uni-check plan, provided the day elected is between the 4th
and the 28th day of the month. If no day is elected by the Policy Owner, the
day on which premiums are paid will be the monthly Anniversary.
The amount, frequency and period of time over which a Policy Owner pays
premiums may affect whether the Policy will be classified as a modified
endowment contract, which is a type of life insurance contract subject to
different tax treatment for certain pre-death distributions than conventional
life insurance contracts. Accordingly, variations from the Planned Periodic
Premiums on a Policy that is not otherwise a modified endowment contract may
result in the Policy becoming a modified endowment contract for tax purposes.
Payment of the Planned Periodic Premium will not guarantee that a Policy will
remain in force. Instead, the duration of the Policy depends upon the Policy's
Accumulated Value. Even if Planned Periodic Premiums are paid, the Policy will
lapse any time Accumulated Value less Policy Debt is insufficient to pay the
current monthly deduction and a Grace Period expires without sufficient
payment. See "Lapse," page 21.
Any premium payment must be for at least $50.00. Pacific Mutual also may
reject or limit any premium payment that would result in an immediate increase
in the net amount at risk under the Policy, although such a premium may be
accepted with satisfactory evidence of insurability. See "Cost of Insurance,"
page 23. A premium payment would result in an immediate increase in the net
amount at risk if the death benefit under a Policy is, or upon acceptance of
the premium would be, equal to a Policy Owner's Accumulated Value multiplied by
a death benefit percentage. See "Death Benefit," page 15. If satisfactory
evidence of insurability is not received, the payment, or portion thereof may
be returned. All or a portion of a premium payment will be rejected and
returned to the Policy Owner if it would exceed the maximum premium limitations
prescribed by federal tax law.
Certain charges will be deducted from each premium payment. See "Charges and
Deductions," page 23. The remainder of the premium, known as the net premium,
will be allocated as described below under "Allocation of Net Premiums."
Additional payments will first be treated as repayments of Policy Debt unless a
Policy Owner requests otherwise. Any portion of a payment that exceeds the
amount of Policy Debt will be applied as an additional premium payment.
ALLOCATION OF NET PREMIUMS
In the application for the Policy, the Policy Owner selects the Variable
Accounts or the Fixed Account to which net premium payments will be allocated.
During the Free-Look Period, net premiums will be allocated to the Money Market
Variable Account, which invests in the Money Market Portfolio of the Fund
(except for amounts allocated to the Loan Account to secure a Policy loan). The
Accumulated Value will be automatically allocated according to the Policy
Owner's instructions contained in the application the later of 15 days after
the Policy is issued or 45 days after the application is completed, or, if
longer, upon receipt of the minimum initial premium (the "Free-Look Period").
Net premiums received after the Free-Look Period will be allocated upon receipt
among the Variable Accounts and the Fixed Account according to the Policy
Owner's most recent instructions. Net premiums may be allocated to no more than
five allocation alternatives at any time. Available allocation alternatives
include the ten Variable Accounts and the Fixed Account. Therefore, if the
Policy Owner allocates a portion of net premiums to the Fixed Account, the
Policy Owner may allocate the remaining portion of the net premiums among four
of the ten Variable Accounts. If the Policy Owner allocates all of the net
premiums to the Variable Accounts, they may be allocated among five of the ten
Variable Accounts.
A Policy Owner may change the allocation of net premiums by submitting a
proper written request to Pacific Mutual's Home Office, although a Policy Owner
may not allocate net premiums or Accumulated Value to more than five allocation
alternatives at any one time. Changes in net premium allocation instructions
may be made by telephone if an Authorization for Telephone Requests has been
properly
13
<PAGE>
completed, signed and filed at Pacific Mutual's Home Office. Pacific Mutual
reserves the right to discontinue telephone net premium allocation
instructions. If the current instructions would cause an allocation to more
than five allocation alternatives, net premiums will be allocated to the
Variable Accounts and Fixed Account in the same proportion as the Accumulated
Value in those Accounts.
DOLLAR COST AVERAGING OPTION
Pacific Mutual currently offers an option under which Policy Owners may
dollar cost average their allocations in the Variable Accounts under the Policy
by authorizing Pacific Mutual to make periodic allocations of Accumulated Value
from any one Variable Account to one or more of the other Variable Accounts,
subject to the five allocation alternative limitation. Dollar cost averaging is
a systematic method of investing in which securities are purchased at regular
intervals in fixed dollar amounts so that the cost of the securities gets
averaged over time and possibly over various market values. The option will
result in the allocation of Accumulated Value to one or more Variable Accounts,
and these amounts will be credited at the Accumulation Unit values as of the
end of the Valuation Dates on which the transfers are processed. Since the
value of Accumulation Units will vary, the amounts allocated to a Variable
Account will result in the crediting of a greater number of units when the
Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Similarly, the amounts transferred from a
Variable Account will result in a debiting of a greater number of units when
the Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Dollar cost averaging does not guarantee
profits, nor does it assure that a Policy Owner will not have losses.
A Dollar Cost Averaging Request Form is available upon request. On the form,
the Policy Owner must designate the specific dollar amounts or percentage to be
transferred, the Variable Account or Accounts to which the transfer will be
made, the desired frequency of the transfer, which may be on a monthly,
quarterly, semi-annual, or annual basis and the length of time during which the
transfers shall continue or the total amount to be transferred over time.
However, after any transfer, a Policy Owner's Accumulated Value may be
allocated to no more than five allocation alternatives.
To elect the Dollar Cost Averaging Option, the Accumulated Value in the
Variable Account from which the Dollar Cost averaging transfers will be made
must be at least $5,000. The Dollar Cost Averaging Request Form will not be
considered complete until the Policy Owner's Accumulated Value in the Variable
Account from which the transfers will be made is at least $5,000. After Pacific
Mutual has received a Dollar Cost Averaging Request in proper form at its Home
Office, Pacific Mutual will transfer Accumulated Value in amounts designated by
the Policy Owner from the Variable Account from which transfers are to be made
to the Variable Account or Accounts chosen by the Policy Owner. The minimum
amount that may be transferred to any one Variable Account is $50. After the
Free-Look Period, the first transfer will be effected on the Policy's Monthly,
Quarterly, Semi-Annual, or Annual Anniversary, whichever corresponds to the
period selected by the Policy Owner, coincident with or next following receipt
at Pacific Mutual's Home Office of a Dollar Cost Averaging Request in proper
form, and subsequent transfers will be effected on the following Monthly,
Quarterly, Semi-Annual, or Annual Anniversary for so long as designated by the
Policy Owner, until the total amount elected has been transferred, until
Accumulated Value in the Variable Account from which transfers are made has
been depleted, or until the Policy enters the Grace Period. Amounts
periodically transferred under this option will not be subject to any transfer
charges that may be imposed by Pacific Mutual in the future, except as may be
required by applicable law.
A Policy Owner may instruct Pacific Mutual at any time to terminate the
option by written request to Pacific Mutual's Home Office. In that event, the
Accumulated Value in the Variable Account from which transfers were being made
that has not been transferred will remain in that Variable Account, subject to
monthly deductions, unless the Policy Owner instructs otherwise or until the
Policy enters the Grace Period. If a Policy Owner wishes to continue
transferring on a dollar cost averaging basis after the expiration of the
applicable period, the total amount elected has been transferred, or the
Variable Account has been depleted, or after the Dollar Cost Averaging Option
has been cancelled, a new Dollar Cost Averaging Request must be completed and
sent to Pacific Mutual's Home Office. The Variable Account from which transfers
are to be made must meet the $5,000 minimum amount of the Accumulated Value.
Pacific Mutual may discontinue, modify, or suspend the Dollar Cost Averaging
Option at any time.
14
<PAGE>
TRANSFER OF ACCUMULATED VALUE
Accumulated Value may be transferred after the Free-Look Period among the
Variable Accounts by the Policy Owner upon proper written request to Pacific
Mutual's Home Office. Transfers (other than transfers in connection with the
Dollar Cost Averaging Option) may be made by telephone if an Authorization For
Telephone Requests has been properly completed, signed and filed at Pacific
Mutual's Home Office. Currently, there are no limitations on the number of
transfers between Variable Accounts, no minimum amount required for a transfer,
nor any minimum amount required to be remaining in a given Variable Account
after a transfer (except as required under the Dollar Cost Averaging Option).
However, after the transfer, the Accumulated Value may be allocated to no more
than five allocation alternatives. Further, no transfer may be made if a Policy
is in the Grace Period and a payment required to avoid lapse is not paid. See
"Lapse," page 21. No charges are currently imposed upon such transfers. Pacific
Mutual reserves the right, however, at a future date to limit the size of
transfers and remaining balances, to assess transfer charges, to limit the
number and frequency of transfers, and to discontinue telephone transfers.
Accumulated Value may also be transferred after the Free-Look Period from the
Variable Accounts to the Fixed Account; however, such a transfer will only be
permitted in the Policy Month preceding a Policy Anniversary, except that
Policy Owners residing in Maryland, Connecticut, and Pennsylvania may make such
a transfer at any time during the first 18 Policy Months. Transfers from the
Fixed Account to the Variable Accounts are restricted as described in "The
Fixed Account," page 32.
DEATH BENEFIT
When the Policy is issued, Pacific Mutual will determine the initial amount
of insurance based on the instructions provided in the application. That amount
will be shown on the specifications page of the Policy and is called the "Face
Amount." The minimum Face Amount at issuance of a Policy is $50,000. Pacific
Mutual may reduce the minimum Face Amount required at issuance under certain
circumstances, such as for group or sponsored arrangements.
For so long as the Policy remains in force, Pacific Mutual will, upon proof
of the death of an Insured, pay death benefit proceeds to a named Beneficiary.
Death benefit proceeds will consist of the death benefit under the Policy, plus
any insurance proceeds provided by rider, reduced by any outstanding Policy
Debt (and, if in the Grace Period, any overdue charges).
Each Policy Owner may select one of two death benefit options: Option A or
Option B. Generally, an applicant designates the death benefit option in the
application. If no option is designated, Option A will be assumed by Pacific
Mutual to have been selected. Subject to certain restrictions, the Policy Owner
can change the death benefit option selected. So long as the Policy remains in
force, the death benefit under either option will never be less than the Face
Amount of the Policy.
Option A. Under Option A, the death benefit will be equal to the Face Amount
of the Policy or, if greater, Accumulated Value (determined as of the end of
the Valuation Period during which the Insured dies) multiplied by a death
benefit percentage. The death benefit percentages vary according to the Age of
the Insured and will be at least equal to the cash value corridor in Section
7702 of the Internal Revenue Code, which addresses the definition of a life
insurance policy for tax purposes. The death benefit percentage is 250% for an
Insured at Age 40 or under, and it declines for older Insureds. A table showing
the death benefit percentages is in the Appendix to this Prospectus and in the
Policy. Policy Owners who are seeking to have favorable investment performance
reflected in increasing Accumulated Value, and not in increasing insurance
coverage, should choose Option A.
Option B. Under Option B, the death benefit will be equal to the Face Amount
of the Policy plus the Accumulated Value (determined as of the end of the
Valuation Period during which the Insured dies) or, if greater, Accumulated
Value multiplied by a death benefit percentage. The specified percentage is the
same as that used in connection with Option A and as stated in the Appendix.
The death benefit under Option B will always vary as Accumulated Value varies.
Therefore, Policy Owners who seek to have favorable investment performance
reflected in increased insurance coverage should choose Option B.
15
<PAGE>
Examples of Options A and B. The following examples demonstrate the
determination of death benefits under Options A and B. The examples show three
Policies--Policies I, II, and III--with the same Face Amount, but Accumulated
Values that vary as shown, and which assume an Insured is Age 40 at the time of
death and that there is no outstanding Policy Debt.
<TABLE>
<CAPTION>
POLICY I POLICY II POLICY III
-------- --------- ----------
<S> <C> <C> <C>
Face Amount.......................... $100,000 $100,000 $100,000
Accumulated Value on Date of Death... $ 25,000 $ 50,000 $ 75,000
Death Benefit Percentage............. 250% 250% 250%
Death Benefit Under Option A......... $100,000 $125,000 $187,500
Death Benefit Under Option B......... $125,000 $150,000 $187,500
</TABLE>
Under Option A, the death benefit for Policy I is equal to $100,000 since the
death benefit is the greater of the Face Amount ($100,000) or the Accumulated
Value at the date of death multiplied by the death benefit percentage ($25,000
x 250% = $62,500). In contrast, for both Policies II and III under Option A,
the Accumulated Value multiplied by the death benefit percentage ($50,000 x
250% = $125,000 for Policy II; $75,000 x 250% =$187,500 for Policy III) is
greater than the Face Amount ($100,000), so the death benefit is equal to the
higher value. Under Option B, the death benefit for Policy I is equal to
$125,000 since the death benefit is the greater of Face Amount plus Accumulated
Value ($100,000 + $25,000 = $125,000) or the Accumulated Value multiplied by
the death benefit percentage ($25,000 x 250% = $62,500). Similarly, in Policy
II, Face Amount plus Accumulated Value ($100,000 + $50,000 = $150,000) is
greater than Accumulated Value multiplied by the death benefit percentage
($50,000 x 250% = $125,000). In contrast, in Policy III, the Accumulated Value
multiplied by the death benefit percentage ($75,000 x 250% = $187,500) is
greater than the Face Amount plus Accumulated Value ($100,000 + $75,000 =
$175,000), so the death benefit is equal to the higher value.
All calculations of death benefit will be made as of the end of the Valuation
Period during which the Insured dies. Death benefit proceeds may be paid to a
Beneficiary in a lump sum or under a payment plan offered under the Policy. The
Policy should be consulted for details.
CHANGES IN DEATH BENEFIT OPTION
A Policy Owner may request that the death benefit under the Policy be changed
from Option A to Option B, or from Option B to Option A. Changes in the death
benefit option may be made only once per Policy Year and should be made in
writing to Pacific Mutual's Home Office. A change from Option B to Option A may
be made without evidence of insurability; a change from Option A to Option B
will require evidence of insurability satisfactory to Pacific Mutual. The
effective date of any such change shall be the next Monthly Payment Date after
the change is accepted.
A change in the death benefit from Option A to Option B will result in a
reduction in the Face Amount of the Policy by the amount of the Policy's
Accumulated Value, with the result that the death benefit payable under Option
B at the time of the change will equal that which would have been payable under
Option A immediately prior to the change. The change in option will affect the
determination of the death benefit from that point on since Accumulated Value
will then be added to the new Face Amount, and the death benefit will then vary
with Accumulated Value. This change will not be permitted if it would result in
a Face Amount of less than $50,000, although Pacific Mutual reserves the right
to waive this minimum under certain circumstances, such as for group or
sponsored arrangements. A charge of $100 will be deducted from the Policy
Owner's Accumulated Value on the effective date of the change from Option A to
Option B to cover the costs of processing the request. This fee will be
deducted from the Variable Accounts and the Fixed Account in the proportion
that each bears to a Policy Owner's Accumulated Value less Debt.
A change in the death benefit from Option B to Option A will result in an
increase in the Face Amount of the Policy by the amount of the Policy's
Accumulated Value, with the result that the death benefit payable under Option
A at the time of the change will equal that which would have been payable under
Option B immediately prior to the change. However, the change in option will
affect the determination of the death
16
<PAGE>
benefit from that point on since the Accumulated Value will no longer be added
to the Face Amount in determining the death benefit. From that point on, the
death benefit will equal the new Face Amount (or, if higher, the Accumulated
Value times the applicable specified percentage). No charge will be made on a
change from Option B to Option A.
A change in death benefit option may affect the monthly cost of insurance
charge since this charge varies with the net amount at risk, which generally is
the amount by which the death benefit exceeds Accumulated Value. See "Cost of
Insurance," page 23. Assuming that the Policy's death benefit would not be
equal to Accumulated Value times a death benefit percentage under either Option
A or B, changing from Option B to Option A will generally decrease the net
amount at risk, and therefore decrease the cost of insurance charges. Changing
from Option A to Option B will generally result in a net amount at risk that
remains level. Such a change, however, will result in an increase in the cost
of insurance charges over time, since the cost of insurance rates increase with
the Insured's Age.
CHANGES IN FACE AMOUNT
A Policy Owner may request an increase or decrease in the Face Amount under a
Policy subject to approval from Pacific Mutual. A change in Face Amount may
only be made once per year, and a decrease in Face Amount may only be made
after the fifth Policy Year, or after the fifth Policy Year following the last
increase in Face Amount. Increasing the Face Amount could increase the death
benefit under a Policy, and decreasing the Face Amount could decrease the death
benefit. The amount of change in the death benefit will depend, among other
things, upon the death benefit option chosen by the Policy Owner and whether,
and the degree to which, the death benefit under a Policy exceeds the Face
Amount prior to the change. Changing the Face Amount could affect the
subsequent level of the death benefit while the Policy is in force and the
subsequent level of Policy values. An increase in Face Amount may increase the
net amount at risk under a Policy, which will increase a Policy Owner's cost of
insurance charge. Conversely, a decrease in Face Amount may decrease the net
amount at risk, which will decrease a Policy Owner's cost of insurance charge.
Any request for an increase or decrease in Face Amount must be made by
written application to Pacific Mutual's Home Office. It will become effective
on the Monthly Payment Date on or next following Pacific Mutual's acceptance of
the request. If the Policy Owner is not the Insured, Pacific Mutual will also
require the consent of the Insured before accepting a request.
Increases. Additional evidence of insurability satisfactory to Pacific Mutual
will be required for an increase in Face Amount. An increase will not be given
for increments of Face Amount less than that indicated in the table below. A
charge of $100 will be deducted from the Accumulated Value on the effective
date of the increase in Face Amount to cover the costs of processing the
request. This fee will be deducted from the Variable Accounts and the Fixed
Account in the proportion that each bears to a Policy Owner's Accumulated Value
less Debt.
<TABLE>
<CAPTION>
AGE AT TIME MINIMUM
OF INCREASE INCREASE
----------- --------
<S> <C>
0-19 $17,000
20-24 13,000
25-29 12,000
30-33 11,000
34-74 10,000
75 11,000
76 13,000
77 16,000
78 20,000
79 31,000
80 50,000
</TABLE>
17
<PAGE>
Decreases. Any decrease in Face Amount will first be applied to the most
recent increases, then the next most recent increases successively, and finally
to the original Face Amount. A decrease will not be permitted if the Face
Amount would fall below $50,000, although Pacific Mutual reserves the right to
waive the minimum Face Amount under certain circumstances, such as for group or
sponsored arrangements. No charge will be deducted in connection with a
decrease. If a decrease in the Face Amount would result in total premiums paid
exceeding the premium limitations prescribed under tax law to qualify the
Policy as a life insurance contract, Pacific Mutual will refund the Policy
Owner the amount of such excess above the premium limitations.
Pacific Mutual reserves the right to disallow a requested decrease, and will
not permit a requested decrease, among other reasons, (1) if compliance with
the guideline premium limitations under tax law resulting from the requested
decrease would result in immediate termination of the Policy, or (2) if, to
effect the requested decrease, payments to the Policy Owner would have to be
made from Accumulated Value for compliance with the guideline premium
limitations, and the amount of such payments would exceed the Net Cash
Surrender Value under the Policy.
POLICY VALUES
Accumulated Value. The Accumulated Value is the sum of the amounts under the
Policy held in each Variable Account of the Separate Account and the Fixed
Account, as well as the amount set aside in Pacific Mutual's Loan Account to
secure any Policy Debt.
On each Valuation Date, the portion of the Accumulated Value allocated to any
particular Variable Account will be adjusted to reflect the investment
experience of that Variable Account. On each Monthly Payment Date, the portion
of the Accumulated Value allocated to a particular Variable Account also will
be adjusted to reflect the assessment of the monthly deduction. See
"Determination of Accumulated Value," page 18. No minimum amount of Accumulated
Value is guaranteed. A Policy Owner bears the risk for the investment
experience of Accumulated Value allocated to the Variable Accounts.
Cash Surrender Value. The Cash Surrender Value of the Policy equals the
Accumulated Value less the surrender charge. Thus, the Accumulated Value will
exceed the Policy's Cash Surrender Value by the amount of the surrender charge.
Once the surrender charge has expired, the Accumulated Value will equal the
Cash Surrender Value.
Net Cash Surrender Value. The Net Cash Surrender Value of the Policy equals
the Cash Surrender Value less any outstanding Policy Debt. The Owner can
surrender a Policy at any time while the Insured is living and receive its Net
Cash Surrender Value. See "Surrender," page 20.
DETERMINATION OF ACCUMULATED VALUE
Although the death benefit under a Policy can never be less than the Policy's
Face Amount, the Accumulated Value will vary to a degree that depends upon
several factors, including investment performance of the Variable Accounts to
which Accumulated Value has been allocated, payment of premiums, the amount of
any outstanding Policy Debt, Preferred or Partial Withdrawals, and the charges
assessed in connection with the Policy. There is no guaranteed minimum
Accumulated Value and the Policy Owner bears the entire investment risk
relating to the investment performance of Accumulated Value allocated to the
Variable Accounts.
The amounts allocated to the Variable Accounts will be invested in shares of
the corresponding Portfolio of the Fund. The investment performance of the
Variable Accounts will reflect increases or decreases in the net asset value
per share of the corresponding Portfolio and any dividends or distributions
declared by a Portfolio. Any dividends or distributions from any Portfolio of
the Fund will be automatically reinvested in shares of the same Portfolio,
unless Pacific Mutual, on behalf of the Separate Account, elects otherwise.
18
<PAGE>
Assets in the Variable Accounts are divided into accumulation units, which
are a measure of value used for bookkeeping purposes. When a Policy Owner
allocates net premiums to a Variable Account, the Policy is credited with
accumulation units. In addition, other transactions including loans, a
surrender, Preferred and Partial Withdrawals, transfers, and assessment of
charges against the Policy affect the number of accumulation units credited to
a Policy. The number of units credited or debited in connection with any such
transaction is determined by dividing the dollar amount of such transaction by
the unit value of the affected Variable Account. The unit value of each
Variable Account is determined on each Valuation Date. The number of units
credited will not change because of subsequent changes in unit value.
The accumulation unit value of each Variable Account's unit initially was
$10. The unit value of a Variable Account on any Valuation Date is calculated
by adjusting the unit value from the previous Valuation Date for (1) the
investment performance of the Variable Account, which is based upon the
investment performance of the corresponding Portfolio of the Fund, (2) any
dividends or distributions paid by the corresponding Portfolio, and (3) the
charges, if any, that may be assessed by Pacific Mutual for income taxes
attributable to the operation of the Variable Account.
POLICY LOANS
The Policy Owner may borrow money from Pacific Mutual using the Policy as the
only security for the loan by submitting a proper written request to Pacific
Mutual's Home Office. Pacific Mutual may in its discretion permit loans to be
made by telephone if an Authorization For Telephone Requests has been properly
completed and signed and filed at Pacific Mutual's Home Office. A loan may be
taken any time a Policy is in force. The minimum loan that can be taken at any
time is $500. The maximum amount that can be borrowed at any time is the
greater of (1) 100% of the Accumulated Value in the Fixed Account plus 90% of
the Accumulated Value in the Variable Accounts, and less any surrender charges
that would have been imposed if the Policy were surrendered on the date the
loan is taken or (2) 100% of the product of (a X b/c - d) where (a) equals the
Policy's Accumulated Value less any surrender charge that would be imposed if
the Policy were surrendered on the date the loan is taken and less 12 times the
current monthly deduction; (b) equals 1 plus the annual loan interest rate
credited; (c) equals 1 plus the annual loan interest rate currently charged;
and (d) equals any existing Policy Debt.
When a Policy Owner takes a loan, an amount equal to the loan is transferred
out of the Policy Owner's Accumulated Value in the Variable Accounts and the
Fixed Account into the Loan Account to secure the loan. Unless otherwise
requested by the Policy Owner, loan amounts will be deducted from the Variable
Accounts and the Fixed Account in the proportion that each bears to the
Accumulated Value less Debt.
The Policy loan interest rate maximum is 4.75% per year, which is equivalent
to an annual effective rate of 4.75%. Pacific Mutual will credit interest
monthly on amounts held in the Loan Account to secure the loan at an annual
rate of 4.0%.
The Owner may repay all or part of the loan at any time while the Policy is
in force. Interest on a loan is accrued daily and is due for the prior year on
each Policy Anniversary. If interest is not paid when due, it will be added to
the amount of the loan principal and interest will begin accruing thereon from
that date. An amount equal to the loan interest charged will be transferred to
the Loan Account from the Variable Accounts and Fixed Account on a proportional
basis.
Unless otherwise requested by a Policy Owner, any loan repayment will be
transferred into the Variable Accounts and Fixed Account in accordance with the
most recent premium allocation instructions, subject to the limitation of
maintaining Accumulated Value in only five allocation alternatives. In
addition, any interest earned on the loan balance held in the Loan Account will
be transferred to each of the Variable Accounts and Fixed Account in accordance
with the Policy Owner's most recent premium allocation instructions, subject to
the limitation of five allocation alternatives.
While the amount to secure the loan is held in the Loan Account, the Policy
Owner forgoes the investment experience of the Variable Accounts and the
current interest rate of the Fixed Account on the
19
<PAGE>
loaned amount. Thus a loan, whether or not repaid, will have a permanent effect
on the Policy's values and may have an effect on the amount and duration of the
death benefit. If not repaid, the Policy Debt will be deducted from the amount
of death benefit paid upon the death of the Insured, the Cash Surrender Value
paid upon surrender or maturity, or the refund of premium upon exercise of the
Free-Look Right.
A loan may affect the length of time the Policy remains in force. The Policy
will lapse when Accumulated Value minus Policy Debt is insufficient to cover
the monthly deduction against the Policy's Accumulated Value on any Monthly
Payment Date and the minimum payment required is not made during the Grace
Period. Moreover, the Policy may enter the Grace Period more quickly when a
loan is outstanding, because the loaned amount is not available to cover the
monthly deduction. Additional payments or repayment of a portion of Policy Debt
may be required to keep the Policy in force. See "Lapse," page 21.
A loan will not be treated as a distribution from the Policy and will not
result in taxable income to the Policy Owner unless the Policy is a modified
endowment contract, in which case a loan will be treated as a distribution that
may give rise to taxable income.
For information on the tax treatment of loans, see "Federal Income Tax
Considerations," page 26.
BENEFITS AT MATURITY
If the insured is living on the Policy Anniversary nearest the Insured's Age
95, Pacific Mutual will pay to the Policy Owner, as an endowment benefit, the
Accumulated Value of the Policy, reduced by any Policy Debt. Payment ordinarily
will be made within seven days of the Policy Anniversary, although payments may
be postponed in certain circumstances. See "Payments," page 35.
SURRENDER
A Policy Owner may fully surrender a Policy at any time during the life of
the Insured. The amount received in the event of a full surrender is the
Policy's Net Cash Surrender Value, which is equal to its Accumulated Value less
any applicable surrender charge and less any outstanding Policy Debt.
A Policy Owner may surrender a Policy by sending a written request together
with the Policy to Pacific Mutual's Home Office. The proceeds will be
determined as of the end of the Valuation Period during which the request for a
surrender is received. A Policy Owner may elect to have the proceeds paid in
cash or applied under a payment plan offered under the Policy. See "Payment
Plan," page 36. For information on the tax effects of a surrender of a Policy,
see "Federal Income Tax Considerations," page 26.
PREFERRED AND PARTIAL WITHDRAWAL BENEFITS
Pacific Mutual offers two partial surrender benefits by which the Policy
Owner can obtain a portion of the Net Cash Surrender Value: the Preferred
Withdrawal Benefit and the Partial Withdrawal Benefit. The Preferred Withdrawal
Benefit is available starting on the first Policy Anniversary and before the
15th Policy Anniversary. Under this Benefit, the Policy Owner may make one
"Preferred Withdrawal" of the Net Cash Surrender Value per year. The portion of
a Preferred Withdrawal of up to 10% of the amount of the Policy Owner's total
premium payments received and accepted prior to the withdrawal will not reduce
the Face Amount under the Policy. The excess of any Preferred Withdrawal over
10% of total premiums received and accepted prior to the withdrawal will be
treated in the same manner as a "Partial Withdrawal" and therefore may cause a
reduction in Face Amount if the death benefit option is Option A, as described
below.
The Partial Withdrawal Benefit is available on and after the 15th Policy
Anniversary. Under this Benefit, a Policy Owner may make "Partial Withdrawals"
of Net Cash Surrender Value. The limit of one withdrawal per year does not
apply to Partial Withdrawals.
Both Preferred and Partial Withdrawals must be for at least $500, and the
Policy's Net Cash Surrender Value after the withdrawal must be at least $500.
If there is any Policy Debt, the maximum Partial
20
<PAGE>
Withdrawal is limited to the excess, if any, of the Cash Surrender Value
immediately prior to the withdrawal over the result of the Policy Debt divided
by 90%. In addition, the amount of a Partial Withdrawal is further limited on
Policies on which the Owner has chosen death benefit Option A so that the
withdrawal will not cause the Face Amount to be less than $50,000, although
Pacific Mutual reserves the right to waive the minimum Face Amount under
certain circumstances, such as for group or sponsored arrangements. If the
Policy Owner does not exercise the Preferred Withdrawal Benefit during one of
the first 15 Policy Years, the amount that the Policy Owner could have
withdrawn without affecting Face Amount does not carry over in the following
year.
The Policy Owner may make a Preferred or Partial Withdrawal by submitting a
proper written request to Pacific Mutual's Home Office. As of the effective
date of any withdrawal, the Policy Owner's Accumulated Value, Cash Surrender
Value, and Net Cash Surrender Value will be reduced by the amount of the
withdrawal. The amount of the withdrawal will be allocated proportionately to
the Policy Owner's Value in the Variable Accounts and the Fixed Account unless
otherwise requested by the Policy Owner. If the Insured dies after the request
for a withdrawal is sent to Pacific Mutual and prior to the withdrawal being
effected, the amount of the withdrawal will be deducted from the death benefit
proceeds, which will be determined without taking into account the withdrawal.
No surrender charge or withdrawal fee will be charged for a Preferred or
Partial Withdrawal.
When a Partial Withdrawal is made on a Policy on which the Owner has selected
death benefit Option A, the Face Amount under the Policy is decreased by the
lesser of (1) the amount of the Partial Withdrawal or (2) if the death benefit
prior to the withdrawal is greater than the Face Amount, the amount, if any, by
which the Face Amount exceeds the difference between the death benefit and the
amount of the Partial Withdrawal. A Partial Withdrawal will not change the Face
Amount of a Policy on which the Owner has selected death benefit Option B.
However, assuming that the death benefit is not equal to Accumulated Value
times a death benefit percentage, the Partial Withdrawal will reduce the death
benefit by the amount of the Partial Withdrawal. To the extent the death
benefit is based upon the Accumulated Value times the death benefit percentage
applicable to the Insured, a Partial Withdrawal may cause the death benefit to
decrease by an amount greater than the amount of the Partial Withdrawal. See
"Death Benefit," page 15.
For information on the tax treatment of Preferred and Partial Withdrawals,
see "Federal Income Tax Considerations," page 26.
RIGHT TO EXAMINE A POLICY--FREE-LOOK RIGHT
The Policy Owner has a Free-Look Right, under which the Policy may be
returned within 10 days after the Policy Owner receives it (30 days if the
Owner is a resident of California and is age 60 or older), within 10 days after
Pacific Mutual mails or delivers a notice of the right of withdrawal, or within
45 days after the Owner completes the application for insurance, whichever is
later. It can be mailed or delivered to Pacific Mutual or its agent. The
returned Policy will be treated as if Pacific Mutual never issued it and
Pacific Mutual will promptly refund the full amount of the premium paid. If the
Owner has taken a loan during the Free-Look Period, the Policy Debt will be
deducted from the amount refunded. During the Free-Look Period, net premiums
will be allocated to the Money Market Variable Account, which invests in the
Money Market Portfolio of the Fund (except for amounts allocated to the Loan
Account to secure a Policy loan). See "Allocation of Net Premiums," page 13.
LAPSE
The Policy will lapse only when the Accumulated Value less Policy Debt is
insufficient to cover the current monthly deduction against the Policy's
Accumulated Value on any Monthly Payment Date, and a Grace Period expires
without the Policy Owner making a sufficient payment. If Accumulated Value less
Policy Debt is insufficient to cover the current monthly deduction on a Monthly
Payment Date, the Owner must pay during the Grace Period a minimum of three
times the full monthly deduction due on the Monthly Payment Date when the
insufficiency occurred to avoid termination of the Policy. Pacific Mutual will
not accept any payment if it would cause the Policy Owner's total premium
payments to exceed the maximum
21
<PAGE>
permissible premium for the Policy's Face Amount under the Internal Revenue
Code. This is unlikely to occur unless the Policy Owner has outstanding Policy
Debt, in which case he or she could repay a sufficient portion of the Policy
Debt to avoid termination. In this instance, the Policy Owner may wish to repay
a portion of Policy Debt to avoid recurrence of the potential lapse. If premium
payments have not exceeded the maximum permissible premiums for the Policy's
Face Amount, the Policy Owner may wish to make larger or more frequent premium
payments to avoid recurrence of the potential lapse.
If Accumulated Value less Policy Debt is insufficient to cover the monthly
deduction on a Monthly Payment Date, Pacific Mutual will deduct the amount that
is available. Pacific Mutual will notify the Policy Owner (and any assignee of
record) of the payment required to keep the Policy in force. The Policy Owner
will then have a "Grace Period" of 61 days, measured from the date the notice
is sent, to make the required payment. The Policy will remain in force through
the Grace Period. Failure to make the required payment within the Grace Period
will result in termination of coverage under the Policy, and the Policy will
lapse with no value. If the required payment is made during the Grace Period,
any premium paid will be allocated among the Variable Accounts of the Separate
Account and the Fixed Account in accordance with the Policy Owner's current
premium allocation instructions. Any monthly deduction due will be charged to
the Variable Accounts and the Fixed Account on a proportionate basis. If the
Insured dies during the Grace Period, the death benefit proceeds will equal the
amount of the death benefit immediately prior to the commencement of the Grace
Period, reduced by any unpaid monthly deductions and any Policy Debt.
REINSTATEMENT
Pacific Mutual will reinstate a lapsed Policy (but not a Policy which has
been surrendered for its Net Cash Surrender Value) at any time within five
years after the end of the Grace Period but before the Maturity Date provided
Pacific Mutual receives the following: (1) a written application from the
Policy Owner; (2) evidence of insurability satisfactory to Pacific Mutual; and
(3) payment of all monthly deductions that were due and unpaid during the Grace
Period, and payment of a premium at least sufficient to keep the Policy in
force for three months after the date of reinstatement.
When the Policy is reinstated, the Accumulated Value will be equal to the
Accumulated Value on the date of the lapse subject to the following: If the
Policy is reinstated after the first Monthly Payment Date following lapse, the
Accumulated Value will be reduced by the amount of Policy Debt on the date of
lapse and no Policy Debt will exist on the date of the reinstatement. If the
Policy is reinstated on the Monthly Payment Date next following lapse, any
Policy Debt on the date of lapse will also be reinstated. No interest on
amounts held in Pacific Mutual's Loan Account to secure Policy Debt will be
paid or credited between lapse and reinstatement. Reinstatement will be
effective as of the Monthly Payment Date on or next following the date of
approval by Pacific Mutual, and Accumulated Value minus, if applicable, Policy
Debt will be allocated among the Variable Accounts and the Fixed Account in
accordance with the Policy Owner's most recent premium allocation instructions.
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<PAGE>
CHARGES AND DEDUCTIONS
PREMIUM LOAD
A premium load is deducted from each premium payment under a Policy prior to
allocation of the net premium to the Policy Owner's Accumulated Value. The
premium load consists of the following items:
Sales Load. The sales load is equal to 4% of each premium paid during the
first ten Policy Years and 2% of each premium paid thereafter.
The sales load is deducted to compensate Pacific Mutual for the cost of
distributing the Policies. The amount derived by Pacific Mutual from the
sales load is not expected to be sufficient to cover the sales and
distribution expenses in connection with the Policies. If surrendered
within 10 years after issuance, the Policy will also be subject to a sales
surrender charge, which is described on page 25. To the extent that sales
and distribution expenses exceed sales loads and any amounts derived from
the sales surrender charge, such expenses may be recovered from other
charges, including amounts derived indirectly from the charge for mortality
and expense risks and from mortality gains.
Pacific Mutual may reduce or waive the sales load on Policies sold to the
directors or employees of Pacific Mutual or any of its affiliates or to
trustees or any employees of the Fund.
State and Local Premium Tax Charge. A charge equal to 2.35% is assessed
against each premium to pay applicable state and local premium taxes.
Premium taxes vary from state to state, and in some instances, among
municipalities. The 2.35% rate approximates the average tax rate expected
to be paid on premiums from all states.
DEDUCTIONS FROM ACCUMULATED VALUE
A charge called the monthly deduction is deducted from a Policy's Accumulated
Value in the Variable Accounts and Fixed Account beginning on the Monthly
Payment Date on or next following the date Pacific Mutual first becomes
obligated under the Policy and on each Monthly Payment Date thereafter. The
monthly deduction consists of the following items:
Cost of Insurance. This monthly charge compensates Pacific Mutual for the
anticipated cost of paying death benefits in excess of Accumulated Value to
Beneficiaries of Insureds who die. The amount of the charge is equal to a
current cost of insurance rate multiplied by the net amount at risk under a
Policy at the beginning of the Policy Month. The net amount at risk for these
purposes is equal to the amount of death benefit payable at the beginning of
the Policy Month divided by 1.004074 (a discount factor to account for return
deemed to be earned during the month) less the Accumulated Value at the
beginning of the Policy Month.
The Policy contains guaranteed cost of insurance rates that may not be
increased. The guaranteed rates are no greater than certain of the 1980
Commissioners Standard Ordinary Mortality Tables (and where unisex cost of
insurance rates apply, the 1980 Commissioners Ordinary Mortality Table B).
These rates are based on the Age and underwriting class of the Insured. They
are also based on the sex of the Insured, except that unisex rates are used
where appropriate under applicable law, including in the state of Montana and
in Policies purchased by employers and employee organizations in connection
with employment-related insurance or benefit programs. As of the date of this
prospectus, Pacific Mutual charges "current rates" that are lower (i.e., less
expensive) than the guaranteed rates, and Pacific Mutual may also charge
current rates in the future. Like the guaranteed rates, the current rates also
vary with the Age, gender, and underwriting class of the Insured. In addition,
they also vary with the Insured's smoking status, size of the Face Amount, and
the policy duration. Policies with Face Amounts of $500,000 or more receive
more favorable rates than Policies with smaller Face Amounts. The cost of
insurance rate generally increases with the Age of the Insured.
23
<PAGE>
If there have been increases in the Face Amount, then for purposes of
calculating the cost of insurance charge, the Accumulated Value will first be
applied to the initial Face Amount. If the Accumulated Value exceeds the
initial Face Amount divided by 1.004074, the excess will then be applied to any
increase in Face Amount in the order of the increases. If the death benefit
equals Accumulated Value multiplied by the applicable death benefit percentage,
any increase in Accumulated Value will cause an automatic increase in the death
benefit. The underwriting class and duration for such increase will be the same
as that used for the most recent increase in Face Amount (that has not been
eliminated through a subsequent decrease in Face Amount).
Administrative Charge. A monthly administrative charge is deducted equal to
$25 in each of the first 12 Policy Months and which varies with the size of a
Policy's Face Amount thereafter. For Face Amounts of less than $100,000, the
charge is equal to $7.50 per month; for Face Amounts of $100,000 or more, the
charge is equal to $5.00 per month. For purposes of this charge, only the
initial Face Amount is considered. The administrative charge is assessed to
reimburse Pacific Mutual for the expenses associated with administration and
maintenance of the Policies. The administrative charge is guaranteed never to
exceed $25 during the first 12 Policy Months and $10 per month thereafter.
Pacific Mutual does not expect to profit from this charge.
Mortality and Expense Risk Charge. A monthly charge is deducted for mortality
and expense risks assumed by Pacific Mutual. During the first ten Policy Years,
this charge is equal to .000625 multiplied by a Policy's Accumulated Value less
any amount in the Loan Account, which is equivalent to an annual rate of .75%
of Accumulated Value less any amount in the Loan Account. After the tenth
Policy Year, the charge is equal to .000208333 multiplied by a Policy's
Accumulated Value less any amount in the Loan Account, which is equivalent to
an annual rate of .25% of Accumulated Value less any amount in the Loan
Account. For purposes of this charge, the Accumulated Value is based upon its
value on the Monthly Payment Date after the deduction of the charge for the
cost of insurance and any optional insurance benefits added by rider.
The mortality and expense risk charge is assessed to compensate Pacific
Mutual for assuming certain mortality and expense risks under the Policies. The
mortality risk assumed is that Insureds, as a group, may live for a shorter
period of time than estimated and, therefore, the cost of insurance charges
specified in the Policy will be insufficient to meet actual claims. The expense
risk assumed is that other expenses incurred in issuing and administering the
Policies and operating the Separate Account will be greater than the charges
assessed for such expenses. Pacific Mutual will realize a gain from this charge
to the extent it is not needed to provide the mortality benefits and expenses
under the Policies, and will realize a loss to the extent the charge is not
sufficient. Pacific Mutual may use any profit derived from this charge for any
lawful purpose, including any distribution expenses not covered by the sales
load or sales surrender charge. See "Surrender Charge," below.
Optional Insurance Benefits Charges. The monthly deduction will include
charges for any optional insurance benefits added to the Policy by Rider. See
"Optional Insurance Benefits," page 36.
A death benefit change charge, if applicable, will also be deducted from a
Policy's Owner's Accumulated Value. If a Policy Owner requests and Pacific
Mutual accepts an increase in Face Amount or a change in death benefit option
from Option A to Option B, a charge of $100 will be deducted from Accumulated
Value on the effective date of the increase or option change to cover
processing costs. The charge will be deducted from the Variable Accounts and
the Fixed Account in the proportion each bears to the Accumulated Value of the
Policy less Policy Debt.
SURRENDER CHARGE
Pacific Mutual will assess a surrender charge against Accumulated Value upon
surrender of a Policy within ten years after its issuance. The surrender charge
consists of two charges: an underwriting surrender charge and a sales surrender
charge.
24
<PAGE>
Underwriting Surrender Charge. The underwriting surrender charge is equal to
a specified amount that varies with the Age of the Insured for each $1,000 of a
Policy's initial Face Amount in accordance with the following schedule:
<TABLE>
<CAPTION>
AGE OF INSURED AT
ISSUANCE OF POLICY CHARGE PER $1,000
------------------ -----------------
<S> <C>
0-20 $2.50
21-30 2.50
31-40 3.50
41-50 4.50
51-60 5.50
61-80 6.50
</TABLE>
The amount of the charge remains level for five Policy Years. After the fifth
Policy Anniversary, the charge decreases by 1.666% per month until it reaches
zero at the end of the 120th Policy Month.
The charge is based upon the Age of the Insured and the Face Amount on the
Policy Date, and it does not increase as the Insured gets older or with changes
in the Face Amount. For example, if an Insured Age 25 purchases a Policy with
an initial Face Amount of $50,000 and surrenders the Policy in the third Policy
Year, the underwriting surrender charge would be $125.
The underwriting surrender charge is designed to cover the administrative
expenses associated with underwriting and issuing a Policy, including the costs
of processing applications, conducting medical examinations, determining
insurability and the Insured's underwriting class, and establishing policy
records. Pacific Mutual does not expect to profit from the underwriting
surrender charge.
Sales Surrender Charge. The sales surrender charge is equal to 26% of the
lesser of the premiums paid under the Policy or a maximum amount that is called
the Sales Surrender Target. The Sales Surrender Target is equal to the premium
that would be payable under a Policy for one year if a Policy Owner were to pay
level annual premiums for the life of the Policy, and taking into account
certain Policy charges including the premium load, the guaranteed cost of
insurance, and the mortality and expense risk charge, and assuming net
investment earnings at an annual rate of 5%. The Sales Surrender Target does
not increase as the Insured gets older or with changes in the Face Amount.
Generally, if a Policy Owner pays Planned Periodic Premiums, the sales
surrender charge will be 26% of premium payments until the first Policy
Anniversary, and will be 26% of the Sales Surrender Target thereafter. The
sales surrender charge will not exceed 26% of the Sales Surrender Target for
five Policy Years. After the fifth Policy Year, the charge decreases from its
maximum by 1.666% per month until it reaches zero at the end of the 120th
Policy Month.
For example, if a Male Insured Age 25 purchases a Policy with a Face Amount
of $50,000, the sales surrender target, based upon the assumptions described
above, would be $387.50. The maximum sales surrender charge during the first
five Policy Years would be 26% of this amount, or $100.75.
The purpose of the sales surrender charge is to reimburse Pacific Mutual for
some of the expenses of distributing the Policies.
Pacific Mutual may reduce or waive the sales surrender charge on Policies
sold to the directors or employees of Pacific Mutual or any of its affiliates
or to trustees or any employees of the Fund.
CORPORATE PURCHASERS
The Policy is available for individuals and for corporations and other
institutions. For corporate or other group or sponsored arrangements purchasing
one or more Policies, Pacific Mutual may reduce the amount of the sales
surrender charge, underwriting surrender charge, or other charges where the
expenses associated with the sale of the Policy or Policies or the underwriting
or other administrative costs associated with the Policy or Policies are
reduced. Sales, underwriting or other administrative expenses may be reduced
for reasons such as expected economies resulting from a corporate purchase or a
group or sponsored arrangement, from the amount of the initial premium payment
or payments, or the amount of projected premium payments.
25
<PAGE>
OTHER CHARGES
Pacific Mutual may charge the Variable Accounts for federal income taxes
incurred by Pacific Mutual that are attributable to the Separate Account and
its Variable Accounts. No such charge is currently assessed. See "Charge for
Pacific Mutual Income Taxes," page 29.
Pacific Mutual will bear the direct operating expenses of the Separate
Account. Each Variable Account purchases shares of the corresponding Portfolio
of the underlying Fund. The Fund and each of its Portfolio incur certain
charges including the investment advisory fee and certain operating expenses.
The Fund is governed by its Board of Trustees. The Fund's expenses are not
fixed or specified under the terms of the Policy. The advisory fees and other
expenses are more fully described in the prospectus of the Fund.
GUARANTEE OF CERTAIN CHARGES
Pacific Mutual guarantees that certain charges will not increase. This
includes the charge for mortality and expense risks, the administrative charge
with respect to the guaranteed rates described above, the premium load, the
guaranteed cost of insurance rates, and the surrender charge.
OTHER INFORMATION
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion provides a general description of the federal income
tax considerations relating to the Policy. This discussion is based upon
Pacific Mutual's understanding of the present federal income tax laws as they
are currently interpreted by the Internal Revenue Service ("IRS"). This
discussion is not intended as tax advice. Because of the inherent complexity of
such laws and the fact that tax results will vary according to the particular
circumstances of the individual involved, tax advice may be needed by a person
contemplating the purchase of the Policy. It should, therefore, be understood
that these comments concerning federal income tax consequences are not an
exhaustive discussion of all tax questions that might arise under the Policy
and that special rules which are not discussed herein may apply in certain
situations. Moreover, no representation is made as to the likelihood of
continuation of federal income tax or estate or gift tax laws or of the current
interpretations by the IRS or the courts. Future legislation may adversely
affect the tax treatment of life insurance policies or other tax rules
described in this discussion or that relate directly or indirectly to life
insurance policies. Finally, these comments do not take into account any state
or local income tax considerations which may be involved in the purchase of the
Policy.
While Pacific Mutual believes that the Policy meets the statutory definition
of life insurance and hence will receive federal income tax treatment
consistent with that of fixed life insurance, the area of the tax law relating
to the definition of life insurance does not explicitly address all relevant
issues (including, for example, the treatment of substandard risk Policies and
Policies with term insurance on the Insured). Pacific Mutual reserves the right
to make changes to the Policy if changes are deemed appropriate by Pacific
Mutual to attempt to assure qualification of the Policy as a life insurance
contract. If a Policy were determined not to qualify as life insurance, the
Policy would not provide the tax advantages normally provided by life
insurance. The discussion below summarizes the tax treatment of life insurance
contracts.
The death benefit under a Policy should be excludable from the gross income
of the Beneficiary (whether the Beneficiary is a corporation, individual or
other entity) under Section 101(a)(1) of the Internal Revenue Code ("IRC") for
purposes of the regular federal income tax and the Owner generally should not
be deemed to be in constructive receipt of the cash values, including
increments thereof, under the Policy until a full surrender thereof, maturity
of the Policy, or a Preferred or Partial Withdrawal. In addition, certain
Policy loans may be taxable in the case of Policies that are modified endowment
contracts. Prospective Policy Owners that intend to use Policies to fund
deferred compensation arrangements for their employees are urged to consult
their tax advisors with respect to the tax consequences of such arrangements.
Prospective corporate Owners should consult their tax advisors about the
treatment of life insurance in their particular circumstances for purposes of
the alternative minimum tax applicable to corporations and the environmental
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tax under IRC section 59A. Changing the Policy Owner may also have tax
consequences. Exchanging a Policy for another involving the same Insured
generally will not result in the recognition of gain or loss according to
Section 1035(a) of the IRC. Changing the Insured under a Policy will, however,
not be treated as a tax-free exchange under Section 1035, but rather as a
taxable exchange.
Diversification Requirements. To comply with regulations under Section 817(h)
of the IRC, each Portfolio of the Fund is required to diversify its
investments. For details on these diversification requirements, see "What is
the Federal Income Tax Status of the Fund" in the Fund's prospectus.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In those circumstances, income and
gains from the separate account assets would be includable in the variable
policy owner's gross income. The Treasury Department also announced, in
connection with the issuance of regulations concerning diversification, that
those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor [i.e. the Policy Owner], rather than the insurance company,
to be treated as the owner of the assets in the account." This announcement
also stated the guidance would be issued by way of regulations or rulings on
the "extent to which policyholders may direct their investments to particular
subaccounts without being treated as owners of the underlying assets." As of
the date of this prospectus, no such guidance has been issued.
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Policy Owner has additional flexibility in allocating premium
payments and Policy Values. These differences could result in a Policy Owner
being treated as the owner of the Policy's pro rata portion of the assets of
the Separate Account. In addition, Pacific Mutual does not know what standards
will be set forth, if any, in the regulations or ruling which the Treasury
Department has stated it expects to issue. Pacific Mutual therefore reserves
the right to modify the Policy, as deemed appropriate by Pacific Mutual, to
attempt to prevent a Policy Owner from being considered the owner of the
Policy's pro rata share of the assets of the Separate Account. Moreover, in the
event that regulations are adopted or ruling are issued, there can be no
asssurance that the Portfolio will be able to operate as currently described in
the Prospectus, or that the Fund will not have to change any Portfolio's
investment objective or investment policies.
Tax Treatment of Policies. The Technical and Miscellaneous Revenue Act of
1988 established a new class of life insurance contracts referred to as
modified endowment contracts. With the enactment of this legislation, the
Policies will be treated for tax purposes in one of two ways. Policies that are
not classified as modified endowment contracts will be taxed as conventional
life insurance contracts, as described below. Taxation of pre-death
distributions from Policies that are classified as modified endowment contracts
and that are entered into on or after June 21, 1988 is somewhat different, as
described below.
A life insurance contract becomes a "modified endowment contract" if, at any
time during the first seven contract years, the sum of actual premiums paid
exceeds the sum of the "seven-pay premium." Generally, the "seven-pay premium"
is the level annual premium, such that if paid for each of the first seven
years, will fully pay for all future death and endowment benefits under a
contract. For example, if the "seven-pay premiums" were $1,000, the maximum
premiums that could be paid during the first seven years to avoid "modified
endowment" treatment would be $1,000 in the first year; $2,000 through the
first two years and $3,000 through the first three years, etc. Under this test,
a Select Exec Policy may or may not be a modified endowment contract, depending
on the amount of premiums paid during each of the Policy's first seven contract
years. Changes in death benefits may require "retesting" of a Policy to
determine if it is to be classified as a modified endowment contract.
Conventional Life Insurance Policies. If a Policy is not a modified endowment
contract, upon full surrender or maturity of a Policy for its Net Cash
Surrender Value, the excess, if any, of the Net Cash
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Surrender Value plus any outstanding Policy Debt over the cost basis under a
Policy will be treated as ordinary income for federal income tax purposes. Such
a Policy's cost basis will usually equal the premiums paid less any premiums
previously recovered in Preferred or Partial Withdrawals. Under Section 7702 of
the IRC, if a Preferred Withdrawal occurring within 15 years of the Policy Date
is accompanied by a reduction in benefits under the Policy, special rules apply
to determine whether part or all of the cash received is paid out of the income
of the Policy and is taxable. Cash distributed to a Policy Owner on Partial
Withdrawals occurring more than 15 years after the Policy Date will be taxable
as ordinary income to the Policy Owner to the extent that it exceeds the cost
basis under a Policy.
Pacific Mutual also believes that loans received under Policies that are not
modified endowment contracts will be treated as indebtedness of the Owner, and
that no part of any loan under the Policy will constitute income to the Owner
unless the Policy is surrendered or upon maturity of the Policy. Interest paid
(or accrued by an accrual basis taxpayer) on a loan under a Policy that is not
a modified endowment contract may be deductible, subject to several
limitations, depending on the use to which the proceeds are put and the tax
rules applicable to the Policy Owner. If, for example, the loan proceeds are
used by an individual for business or investment purposes, all or part of the
interest expense may be deductible. Generally, if the Policy loan is used for
personal purposes by an individual, the interest expense is not deductible. The
deductibility of loan interest (whether incurred under a Policy loan or on
other indebtedness) also may be subject to other limitations. For example,
where the interest is paid (or accrued by an accrued basis taxpayer) on a loan
under a Policy covering the life of an officer, employee, or person financially
interested in the trade or business of the Policy Owners, the interest may be
deductible to the extent that the interest is attributable to the first $50,000
of the Policy Debt. Other tax law provisions may limit the deduction of
interest payable on loan proceeds that are used to purchase or carry certain
life insurance policies.
Modified Endowment Contracts. Pre-death distributions from modified endowment
contracts may give rise to taxable income. Upon full surrender or maturity of
the Policy, the Policy Owner would recognize ordinary income for federal income
tax purposes equal to the amount by which the Net Cash Surrender Value plus
Policy Debt exceeds the investment in the Policy (usually the premiums paid
plus certain pre-death distributions that were taxable less any premiums
previously recovered that were excludable from gross income). Upon Preferred
and Partial Withdrawals and Policy loans, the Policy Owner would recognize
ordinary income to the extent allocable to income (which includes all
previously non-taxed gains) on the Policy. The amount allocated to income is
the amount by which the Accumulated Value of the Policy exceeds investment in
the Policy immediately before the distribution. Under a tax law provision, if
two or more policies which are classified as modified endowment contracts are
purchased from any one insurance company, including Pacific Mutual, during any
calendar year, all such policies will be aggregated for purposes of determining
the portion of the pre-death distributions allocable to income on the policies
and the portion allocable to investment in the policies.
Amounts received under a modified endowment contract that are included in
gross income are subject to an additional tax equal to 10% of the amount
included in gross income, unless an exception applies. The 10% additional tax
does not apply to any amount received: (i) when the taxpayer is at least 59 1/2
years old; (ii) which is attributable to the taxpayer becoming disabled; or
(iii) which is part of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of the taxpayer and
his or her beneficiary.
If a Policy was not originally a modified endowment contract but becomes one,
under Treasury Department regulations which are yet to be prescribed, pre-death
distributions received in anticipation of a failure of a Policy to meet the
seven-pay premium test are to be treated as pre-death distributions from a
modified endowment contract (and, therefore, are to be taxable as described
above) even though, at the time of the distribution(s) the Policy was not yet a
modified endowment contract. For this purpose, pursuant to the IRC, any
distribution made within two years before the Policy is classified as a
modified endowment contract shall be treated as being made in anticipation of
the Policy's failing to meet the seven-pay premium test.
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It is unclear whether interest paid (or accrued by an accrual basis taxpayer)
on Policy Debt with respect to a modified endowment contract constitutes
interest for federal income tax purposes. If it does constitute interest, it
may be deductible, subject to several limitations, depending on the use to
which the proceeds are put and the tax rules applicable to the Policy Owner.
If, for example, the loan proceeds are used by an individual for business or
investment purposes, all or part of the interest expense may be deductible.
Generally, if the Policy Loan is used for personal purposes by an individual,
the interest expense is not deductible. The deductibility of loan interest
(whether incurred under a Policy Loan or on other indebtedness) also may be
subject to other limitations. For example, where the interest is paid (or
accrued by an accrual basis taxpayer) on a loan under a Policy covering the
life of an officer, employee, or person financially interested in the trade or
business of the Policy Owners, the interest may be deductible to the extent
that the interest is attributable to the first $50,000 of the Policy Debt.
Other tax law provisions may limit the deduction of interest payable on loan
proceeds that are used to purchase or carry certain life insurance policies.
Reasonableness Requirement for Charges. Another provision of the tax law
deals with allowable charges for mortality costs and other expenses that are
used in making calculations to determine whether a contract qualifies as life
insurance for federal income tax purposes. For life insurance policies entered
into on or after October 21, 1988, these calculations must be based upon
reasonable mortality charges and other charges reasonably expected to be
actually paid. The Treasury Department is expected to promulgate regulations
governing reasonableness standards for mortality charges. Pacific Mutual
believes that the mortality costs and other expenses used in making
calculations to determine whether the Policy qualifies as life insurance meet
the current requirements. It is possible that future regulations will contain
standards that would require Pacific Mutual to modify its mortality charges
used for the purposes of the calculations in order to retain the qualification
of the Policy as life insurance for federal income tax purposes, and Pacific
Mutual reserves the right to make any such modifications.
Other. Federal estate and gift and state and local estate, inheritance, and
other tax consequences of ownership or receipt of Policy proceeds depend on the
jurisdiction and the circumstances of each Owner or Beneficiary.
For complete information on federal, state, local and other tax
considerations, a qualified tax adviser should be consulted.
PACIFIC MUTUAL DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY
POLICY.
CHARGE FOR PACIFIC MUTUAL INCOME TAXES
For federal income tax purposes, variable life insurance generally is treated
in a manner consistent with fixed life insurance. Pacific Mutual will review
the question of a charge to the Separate Account for Pacific Mutual's federal
income taxes periodically. A charge may be made for any federal income taxes
incurred by Pacific Mutual that are attributable to the Separate Account. This
might become necessary if the tax treatment of Pacific Mutual is ultimately
determined to be other than what Pacific Mutual currently believes it to be, if
there are changes made in the federal income tax treatment of variable life
insurance at the insurance company level, or if there is a change in Pacific
Mutual's tax status.
Under current laws, Pacific Mutual may incur state and local taxes (in
addition to premium taxes) in several states. At present, these taxes are not
significant. If there is a material change in applicable state or local tax
laws, Pacific Mutual reserves the right to charge the Account for such taxes,
if any, attributable to the Account.
VOTING OF FUND SHARES
In accordance with its view of present applicable law, Pacific Mutual will
exercise voting rights attributable to the shares of each Portfolio of the Fund
held in the Variable Accounts at any regular and special meetings of the
shareholders of the Fund on matters requiring shareholder voting under the
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Investment Company Act of 1940. Pacific Mutual will exercise these voting
rights based on instructions received from persons having the voting interest
in corresponding Variable Accounts of the Separate Account. However, if the
Investment Company Act of 1940 or any regulations thereunder should be amended,
or if the present interpretation thereof should change, and as a result Pacific
Mutual determines that it is permitted to vote the shares of the Fund in its
own right, it may elect to do so.
The person having the voting interest under a Policy is the Policy Owner.
Unless otherwise required by applicable law, the number of votes as to which a
Policy Owner will have the right to instruct will be determined by dividing a
Policy Owner's Accumulated Value in a Variable Account by the net asset value
per share of the corresponding Portfolio of the Fund. Fractional votes will be
counted. The number of votes as to which a Policy Owner will have the right to
instruct will be determined as of the date coincident with the date established
by the Fund for determining shareholders eligible to vote at the meeting of the
Fund. If required by the Securities and Exchange Commission, Pacific Mutual
reserves the right to determine in a different fashion the voting rights
attributable to the shares of the Fund based upon the instructions received
from Policy Owners. Voting instructions may be cast in person or by proxy.
Voting rights attributable to the Policy Owner's Accumulated Value held in
each Variable Account for which no timely voting instructions are received will
be voted by Pacific Mutual in the same proportion as the voting instructions
which are received in a timely manner for all Policies participating in that
Variable Account. Pacific Mutual will also exercise the voting rights from
assets in each Variable Account which are not otherwise attributable to Policy
Owners, if any, in the same proportion as the voting instructions which are
received in a timely manner for all Policies participating in that Variable
Account and generally will exercise voting rights attributable to shares of
Portfolios of the Fund held in its General Account, if any, in the same
proportion as votes cast with respect to shares of Portfolios of the Fund held
by the Separate Account and other separate accounts of Pacific Mutual, in the
aggregate.
DISREGARD OF VOTING INSTRUCTIONS
Pacific Mutual may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that voting rights be
exercised so as to cause a change in the subclassification or investment
objective of a Portfolio or to approve or disapprove an investment advisory
contract. In addition, Pacific Mutual itself may disregard voting instructions
of changes initiated by Policy Owners in the investment policy or the
investment adviser (or portfolio manager) of a Portfolio, provided that Pacific
Mutual's disapproval of the change is reasonable and is based on a good faith
determination that the change would be contrary to state law or otherwise
inappropriate, considering the Portfolio's objectives and purpose, and
considering the effect the change would have on Pacific Mutual. In the event
Pacific Mutual does disregard voting instructions, a summary of that action and
the reasons for such action will be included in the next report to Policy
Owners.
REPORT TO OWNERS
A statement will be sent quarterly to each Policy Owner setting forth a
summary of the transactions which occurred during the quarter and indicating
the death benefit, Face Amount, Accumulated Value, Cash Surrender Value, and
any Policy Debt. In addition, the statement will indicate the allocation of
Accumulated Value among the Fixed Account and the Variable Accounts and any
other information required by law. Confirmations will be sent out upon premium
payments, transfers, loans, loan repayments, withdrawals, and surrenders.
Each Policy Owner will also receive an annual and a semiannual report
containing financial statements for the Separate Account and the Fund, the
latter of which will include a list of the portfolio securities of the Fund, as
required by the Investment Company Act of 1940, and/or such other reports as
may be required by federal securities laws.
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SUBSTITUTION OF INVESTMENTS
Pacific Mutual reserves the right, subject to compliance with the law as then
in effect, to make additions to, deletions from, or substitutions for the
securities that are held by the Separate Account or any Variable Account or
that the Separate Account or any Variable Account may purchase. If shares of
any or all of the Portfolios of the Fund should no longer be available for
investment, or if, in the judgment of Pacific Mutual's management, further
investment in shares of any or all Portfolios of the Fund should become
inappropriate in view of the purposes of the Policies, Pacific Mutual may
substitute shares of another Portfolio of the Fund or of a different fund for
shares already purchased, or to be purchased in the future under the Policies.
Where required, Pacific Mutual will not substitute any shares attributable to
a Policy Owner's interest in a Variable Account or the Separate Account without
notice, Policy Owner approval, or prior approval of the Securities and Exchange
Commission and without following the filing or other procedures established by
applicable state insurance regulators.
Pacific Mutual also reserves the right to establish additional Variable
Accounts of the Separate Account, each of which would invest in a new Portfolio
of the Fund, or in shares of another investment company, a portfolio thereof,
or suitable investment vehicle, with a specified investment objective. New
Variable Accounts may be established when, in the sole discretion of Pacific
Mutual, marketing needs or investment conditions warrant, and any new Variable
Accounts will be made available to existing Policy Owners on a basis to be
determined by Pacific Mutual. Pacific Mutual may also eliminate one or more
Variable Accounts if, in its sole discretion, marketing, tax, or investment
conditions so warrant.
In the event of any such substitution or change, Pacific Mutual may, by
appropriate endorsement, make such changes in this and other policies as may be
necessary or appropriate to reflect such substitution or change. If deemed by
Pacific Mutual to be in the best interests of persons having voting rights
under the Policies, the Separate Account may be operated as a management
investment company under the Investment Company Act of 1940 or any other form
permitted by law, it may be deregistered under that Act in the event such
registration is no longer required, or it may be combined with other separate
accounts of Pacific Mutual or an affiliate thereof. Subject to compliance with
applicable law, Pacific Mutual also may combine one or more Variable Accounts
and may establish a committee, board, or other group to manage one or more
aspects of the operation of the Separate Account.
CHANGES TO COMPLY WITH LAW
Pacific Mutual reserves the right to make any change without consent of
Policy Owners to the provisions of the Policy to comply with, or give Policy
Owners the benefit of, any Federal or State statute, rule, or regulation,
including but not limited to requirements for life insurance contracts under
the Internal Revenue Code, under regulations of the United States Treasury
Department or any state.
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PERFORMANCE INFORMATION
Performance information for the Variable Accounts of the Separate Account may
appear in advertisements, sales literature, or reports to Policy Owners or
prospective purchasers. Performance information in advertisements or sales
literature may be expressed in any fashion permitted under applicable law,
which may include presentation of a change in a Policy Owner's Accumulated
Value attributable to the performance of one or more Variable Accounts, or as a
change in Policy Owner's death benefit. Performance quotations may be expressed
as a change in a Policy Owner's Accumulated Value over time or in terms of the
average annual compounded rate of return on the Policy Owner's Accumulated
Value, based upon a hypothetical Policy in which premiums have been allocated
to a particular Variable Account over certain periods of time that will include
one year, or from the commencement of operation of the Variable Account. Any
such quotation may reflect the deduction of all applicable charges to the
Policy including premium load, the cost of insurance, the administrative
charge, and the mortality and expense risk charge. The quotation may also
reflect the deduction of the surrender charge, if applicable, by assuming a
surrender at the end of the particular period, although other quotations may
simultaneously be given that do not assume a surrender and do not take into
account deduction of the surrender charge.
Performance information for a Variable Account may be compared, in
advertisements, sales literature, and reports to Policy Owners to: (i) other
variable life separate accounts or investment products tracked by research
firms, ratings services, companies, publications, or persons who rank separate
accounts or investment products on overall performance or other criteria; and
(ii) the Consumer Price Index (measure for inflation) to assess the real rate
of return from the purchase of a Policy. Reports and promotional literature may
also contain Pacific Mutual's rating or a rating of Pacific Mutual's claim-
paying ability as determined by firms that analyze and rate insurance companies
and by nationally recognized statistical rating organizations.
Performance information for any Variable Account of the Separate Account
reflects only the performance of a hypothetical Policy whose Accumulated Value
is allocated to the Variable Account during a particular time period on which
the calculations are based. Performance information should be considered in
light of the investment objectives and policies, characteristics and quality of
the Portfolio of the Fund in which the Variable Account invests, and the market
conditions during the given period of time, and should not be considered as a
representation of what may be achieved in the future.
THE FIXED ACCOUNT
Policy Owners may allocate all or a portion of their net premium payments and
transfer Accumulated Value to the Fixed Account of Pacific Mutual. Amounts
allocated to the Fixed Account become part of the "General Account" of Pacific
Mutual, which supports insurance and annuity obligations. Because of exemptive
and exclusionary provisions, interests in the Fixed Account have not been
registered under the Securities Act of 1933 and the Fixed Account has not been
registered as an investment company under the Investment Company Act of 1940.
Accordingly, neither the Fixed Account nor any interest therein is generally
subject to the provisions of these Acts and, as a result, the staff of the
Securities and Exchange Commission has not reviewed the disclosure in this
prospectus relating to the Fixed Account. Disclosures regarding the Fixed
Account may, however, be subject to certain generally applicable provisions of
the federal securities laws relating to the accuracy and completeness of
statements made in the prospectus. For more details regarding the Fixed
Account, see the Policy itself.
GENERAL DESCRIPTION
Amounts allocated to the Fixed Account become part of the General Account of
Pacific Mutual which consists of all assets owned by Pacific Mutual other than
those in the Separate Account and other separate accounts of Pacific Mutual.
Subject to applicable law, Pacific Mutual has sole discretion over the
investment of the assets of its General Account.
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The Policy Owner may elect to allocate net premium payments to the Fixed
Account, the Separate Account, or both. The Policy Owner may also transfer
Accumulated Value from the Variable Accounts of the Separate Account to the
Fixed Account, or from the Fixed Account to the Variable Accounts, subject to
the limitations described below. Pacific Mutual guarantees that the Accumulated
Value in the Fixed Account will be credited with a minimum interest rate of
.32737% per month, compounded monthly, for a minimum effective annual rate of
4%. Such interest will be paid regardless of the actual investment experience
of the Fixed Account. In addition, Pacific Mutual may in its sole discretion
declare current interest in excess of the 4%, which will be guaranteed for one
year. (The portion of a Policy Owner's Accumulated Value that has been used to
secure Policy Debt will be credited with an interest rate of .32737% per month,
compounded monthly, for an effective annual rate of 4%.)
Pacific Mutual bears the full investment risk for the Accumulated Value
allocated to the Fixed Account.
DEATH BENEFIT
The death benefit under the Policy will be determined in the same fashion for
a Policy Owner who has Accumulated Value in the Fixed Account as for a Policy
Owner who has Accumulated Value in the Variable Accounts. The death benefit
under Option A will be equal to the Face Amount of the Policy or, if greater,
Accumulated Value multiplied by a death benefit percentage. Under Option B, the
death benefit will be equal to the Face Amount of the Policy plus the
Accumulated Value or, if greater, Accumulated Value multiplied by a death
benefit percentage. See "Death Benefit," page 15.
POLICY CHARGES
Policy charges will be the same for Policy Owners who allocate net premiums
or transfer Accumulated Value to the Fixed Account as for Policy Owners who
allocate net premiums to the Variable Accounts. These charges consist of the
premium load, including the sales load and state and local premium tax charge;
the deductions from Accumulated Value, including the charges for the cost of
insurance, administrative charge, mortality and expense risk charge, the charge
for any optional insurance benefits added by rider, any death benefit change
charge; and the surrender charge, including the underwriting surrender charge
and the sales surrender charge. Any amounts that Pacific Mutual pays for income
taxes allocable to the Variable Accounts will not be charged against the Fixed
Account. In addition, the operating expenses of the Variable Accounts, as well
as the investment advisory fee charged by the Fund, will not be paid directly
or indirectly by Policy Owners to the extent the Accumulated Value is allocated
to the Fixed Account; however, such Policy Owners will not participate in the
investment experience of the Variable Accounts.
TRANSFERS, SURRENDERS, WITHDRAWALS, AND POLICY LOANS
Amounts may be transferred after the Free-Look Period from the Variable
Accounts to the Fixed Account and from the Fixed Account to the Variable
Accounts, subject to the following limitations. The Policy Owner may not make
more than one transfer from the Fixed Account to the Variable Accounts in any
12-month period. Further, if a Policy Owner has $1,000 or more in the Fixed
Account, the Policy Owner may not transfer more than 20% of such amount to the
Variable Accounts in any year. Currently there is no charge imposed upon
transfers; however, Pacific Mutual reserves the right to assess such a charge
in the future and to impose other limitations on the number of transfers, the
amount of transfers, and the amount remaining in the Fixed Account or Variable
Accounts after a transfer. Transfers from the Variable Accounts to the Fixed
Account may be made in the Policy Month preceding a Policy Anniversary, except
that Policy Owners residing in Maryland, Connecticut, and Pennsylvania may make
such a transfer at any time during the first 18 Policy Months.
The Policy Owner may also make full surrenders, Preferred Withdrawals and
Partial Withdrawals to the same extent as a Policy Owner who has invested in
the Variable Accounts. See "Surrender," page 21, and "Preferred and Partial
Withdrawal Benefits," page 20. Policy Owners may borrow up to the greater of
(1) 90% of the Accumulated Value in the Variable Accounts and 100% of the
Accumulated Value in the Fixed Account, less any surrender charges that would
have been imposed if the Policy were surrendered on the
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date the loan is taken or (2) 100% of the product of (a X b/c - d) where (a)
equals the Policy's Accumulated Value less any surrender charge that would be
imposed if the Policy were surrendered on the date the loan is taken and less
12 times the current monthly deduction; (b) equals 1 plus the annual loan
interest rate credited; (c) equals 1 plus the annual loan interest rate
currently charged; and (d) equals any existing policy Debt. See "Policy Loans,"
page 20. Transfers, surrenders, and withdrawals payable from the Fixed Account,
and the payment of Policy loans allocated to the Fixed Account, may be delayed
for up to six months.
MORE ABOUT THE POLICY
OWNERSHIP
The Policy Owner is the individual named as such in the application or in any
later change shown in Pacific Mutual's records. While the Insured is living,
the Policy Owner alone has the right to receive all benefits and exercise all
rights that the Policy grants or Pacific Mutual allows.
Joint Owners. If more than one person is named as Policy Owner, they are
joint owners. Any Policy transaction requires the signature of all persons
named jointly. Unless otherwise provided, if a joint owner dies, ownership
passes to the surviving joint owner(s). When the last joint owner dies,
ownership passes through that person's estate, unless otherwise provided.
BENEFICIARY
The Beneficiary is the individual named as such in the application or any
later change shown in Pacific Mutual's records. The Policy Owner may change the
Beneficiary at any time during the life of the Insured by written request on
forms provided by Pacific Mutual, which must be received by Pacific Mutual at
its Home Office. The change will be effective as of the date this form is
signed. Contingent and/or concurrent Beneficiaries may be designated. The
Policy Owner may designate a permanent Beneficiary, whose rights under the
Policy cannot be changed without his or her consent. Unless otherwise provided,
if no designated Beneficiary is living upon the death of the Insured, the
Policy Owner or the Policy Owner's estate is the Beneficiary.
Pacific Mutual will pay the death benefit proceeds to the Beneficiary. Unless
otherwise provided, in order to receive proceeds at the Insured's death, the
Beneficiary must be living at the time of the Insured's death.
EXCHANGE OF INSURED
After the first Policy Year and subject to approval from Pacific Mutual, the
Policy Owner may exchange the named Insured on the Policy upon written
application, evidence of insurability satisfactory to Pacific Mutual, and
payment of a charge of $100. The exchange is effective the first Monthly
Payment Date on or after the exchange is approved. Coverage on the new Insured
will become effective on the exchange date. Coverage on the current Insured
will terminate on the day preceding the exchange date. The Policy Date will not
be changed unless the new Insured was born after the Policy Date. In such case,
the Policy Date will be changed to the Policy anniversary on or next following
the birth date of the new Insured. The cost of insurance charge will be based
on the new Insured's Age and underwriting class.
Pacific Mutual reserves the right to disallow a requested exchange of the
named Insured, and will not permit a requested exchange, among other reasons,
(1) if compliance with the guideline premium limitations under tax law
resulting from the exchange of Insured would result in the immediate
termination of the Policy, or (2) if, to effect the requested exchange of
Insured, payments to the Policy Owner would have to be made from Accumulated
Value for compliance with the guideline premium limitations, and the amount of
such payments would exceed the Net Cash Surrender Value under the Policy.
A fee of $100 will be charged to cover the costs of processing the exchange
of Insured. This amount will not be credited to or deducted from Accumulated
Value but must be paid directly to Pacific Mutual by the Policy Owner before
the request for an exchange of Insured will be processed.
34
<PAGE>
THE CONTRACT
This Policy is a contract between the Owner and Pacific Mutual. The entire
contract consists of the Policy, a copy of the initial application, all
subsequent applications to change the Policy, any endorsements, all Riders, and
all additional Policy information sections (specification pages) added to the
Policy.
PAYMENTS
Pacific Mutual ordinarily will pay death benefit proceeds, Net Cash Surrender
Value on surrender, Preferred Withdrawals, Partial Withdrawals, and loan
proceeds based on allocations made to the Variable Accounts, and will effect a
transfer between Variable Accounts or from a Variable Account to the Fixed
Account within seven days after Pacific Mutual receives all the information
needed to process a payment or, if sooner, other period required by law.
However, Pacific Mutual can postpone the calculation or payment of such a
payment or transfer of amounts based on investment performance of the Variable
Accounts if:
. The New York Stock Exchange is closed on other than customary weekend and
holiday closing or trading on the New York Stock Exchange is restricted
as determined by the SEC; or
. An emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of the Account's net
assets; or
. The SEC by order permits postponement for the protection of Policy
Owners.
ASSIGNMENT
The Policy Owner may assign a Policy as collateral security for a loan or
other obligation. No assignment will bind Pacific Mutual unless the original,
or a copy, is received at Pacific Mutual's Home Office, and will be effective
only when recorded by Pacific Mutual. An assignment does not change the
ownership of the Policy. However, after an assignment, the rights of any Policy
Owner or Beneficiary will be subject to the assignment. The entire Policy,
including any attached payment option or Rider, will be subject to the
assignment. Pacific Mutual will rely solely on the assignee's statement as to
the amount of the assignee's interest. Pacific Mutual will not be responsible
for the validity of any assignment. Unless otherwise provided, the assignee may
exercise all rights this Policy grants except (a) the right to change the
Policy Owner or Beneficiary; and (b) the right to elect a payment option.
Assignment of a Policy that is a modified endowment contract may generate
taxable income. (See "Federal Income Tax Considerations," page 26.)
ERRORS ON THE APPLICATION
If the Age or sex of the Insured has been misstated, the death benefit under
this Policy will be the greater of that which would be purchased by the most
recent cost of insurance charge at the correct Age and sex, or the death
benefit derived by multiplying Accumulated Value by the death benefit
percentage for the correct Age and sex. If the Insured's Age or sex is
misstated in the application, the Accumulated Value will be modified by
recalculating all prior cost of insurance charges and other monthly deductions
based on the correct Age and sex. If unisex cost of insurance rates apply, no
adjustment will be made for a misstatement of sex. See "Cost of Insurance,"
page 23.
INCONTESTABILITY
Pacific Mutual may contest the validity of this Policy if any material
misstatements are made in the application. However, this Policy will be
incontestable after the expiration of the following: the initial Face Amount
cannot be contested after the Policy has been in force during the Insured's
lifetime for two years from the Policy Date; if the Insured is changed, the
Policy cannot be contested after it has been in force during the new Insured's
lifetime for two years from the effective date of the exchange; and an increase
in the Face Amount cannot be contested after the increase has been in force
during an Insured's lifetime for two years from its effective date.
35
<PAGE>
PAYMENT IN CASE OF SUICIDE
If the Insured dies by suicide, while sane or insane, within two years from
the Policy Date, Pacific Mutual will limit the death benefit proceeds to the
premium payments less any withdrawal amounts and less any Policy Debt. If the
Insured has been changed and the new Insured dies by suicide, while sane or
insane, within two years of the exchange date, the death benefit proceeds will
be limited to the Net Cash Surrender Value as of the exchange date, plus the
premiums paid since the exchange date, less the sum of any increases in Debt,
withdrawal amounts, and any dividends paid in cash since the exchange date. If
an Insured dies by suicide, while sane or insane, within two years of the
effective date of any increase in the Face Amount, Pacific Mutual will refund
the cost of insurance charges made with respect to such increase.
PARTICIPATING
The Policy is participating and will share in the surplus earnings of Pacific
Mutual. However, the current dividend scale is zero and Pacific Mutual does not
anticipate that dividends will be paid. Any dividends that do become payable
will be paid in cash.
POLICY ILLUSTRATIONS
Upon request, Pacific Mutual will send the Policy Owner an illustration of
future benefits under the Policy based on both guaranteed and current cost
factor assumptions. However, Pacific Mutual reserves the right to charge a fee
for requests for illustrations in excess of one per Policy year.
PAYMENT PLAN
Maturity, surrender, or withdrawal benefits may be used to purchase a payment
plan providing monthly income for the lifetime of the Insured, and death
benefit proceeds may be used to purchase a payment plan providing monthly
income for the lifetime of the Beneficiary. The monthly payments consisting of
proceeds plus interest will be paid in equal installments for at least ten
years. The purchase rates for the payment plan are guaranteed not to exceed
those shown in the Policy, but current rates that are lower (i.e., providing
greater income) may be established by Pacific Mutual from time to time. This
benefit is not available if the income would be less than $25 a month.
Maturity, surrender, or withdrawal benefits or death benefit proceeds may be
used to purchase any other payment plan that Pacific Mutual makes available at
that time.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, a Policy Owner may elect to add one or more
of the following optional insurance benefits to the Policy by a Rider at the
time of application for a Policy. These optional benefits are: waiver of all
charges against the Policy in the event of total disability of the Insured,
additional insurance coverage for the accidental death of the Insured, term
insurance on the Insured's children, annual renewable term insurance on the
Insured or any member of his or her immediate family, subject to approval of
state insurance authorities, added protection benefit on the Insured, and a
right to purchase additional insurance on the Insured's life on certain
specified dates without proof of insurability. The cost of any additional
insurance benefits will be deducted as part of the monthly deduction against
Accumulated Value. See "Charges and Deductions," page 23. The amounts of these
benefits are fully guaranteed at issue. Certain restrictions may apply and are
described in the applicable Rider. Under certain circumstances, a Policy can be
combined with an annual renewable term insurance rider (or added protection
benefit rider) to result in a combined coverage amount (face amount) equal to
the same Face Amount that could be acquired under a single Policy. For a given
Insured, combining a Policy and a rider may result in a surrender charge for
the Policy that is lower than the single Policy providing the same Face Amount.
An insurance agent authorized to sell the Policy can describe these extra
benefits further. Samples of the provisions are available from Pacific Mutual
upon written request.
36
<PAGE>
PRIVATE RETIREMENT PLANS
Any Policy Owners or applicants who wish to consider using the Policy as a
funding vehicle for (non-qualified) retirement plans may obtain additional
information from Pacific Mutual. An Owner could pay premiums under a Policy
for a number of years, and upon retirement, could utilize a Policy's loan and
partial withdrawal features to provide retirement income for a period of time.
Ledger illustrations are available upon request that portray how the Policy
can be used as a funding mechanism for (non-qualified) retirement plans,
referred to herein as "private retirement plans," for individuals. Ledger
illustrations provided upon request show the effect on Accumulated Value, Net
Cash Surrender Value, and the net death benefit of premiums paid under a
Policy and partial withdrawals and loans taken for retirement income. This
information will be portrayed at hypothetical rates of return that are
requested. Ledger illustrations can be provided that reflect a proposed
Insured's Age; underwriting classification; Face Amount; death benefit; death
benefit option; gender; desired premium, partial withdrawal, or loan schedule;
or reflecting allocation of premiums to specified Variable Accounts. Charts
and graphs presenting a comparison of retirement strategies will also be
furnished upon request. Any graphic presentations and retirement strategy
charts must be accompanied by a corresponding ledger illustration; ledger
illustrations must always include or be accompanied by comparable information
that is based on guaranteed cost of insurance rates and that presents a
hypothetical gross rate of return of 0%. Retirement illustrations will not be
furnished with a hypothetical gross rate of return in excess of 12%.
The hypothetical rates of return in ledger illustrations are illustrative
only and should not be interpreted as a representation of past or future
investment results. Policy values and benefits shown in the ledger
illustrations would be different if the gross annual investment rates of
return were different from the hypothetical rates portrayed, if premiums were
not paid when due, and loan interest was paid when due. Withdrawals or loans
may have an adverse effect on Policy benefits.
Upon request, graphic portrayals of the results of the ledger illustrations
may also be provided, which show the net death benefit, Net Cash Surrender
Value, and cumulative outlay for the Policy (i.e., total premiums paid each
Policy Year minus any withdrawals and loans taken from Accumulated Value).
Also available upon request are charts showing a comparison of retirement
strategies. The charts can present values under various retirement strategies,
including a taxable investment, a qualified retirement plan, and a private
retirement plan that is funded with a Policy. Values can be shown during an
accumulation phase, under which an individual would invest for retirement, and
a distribution phase, under which an individual would receive retirement
income. The charts can present information on the effect of taxation on
amounts committed and paid under the various retirement strategies.
RISKS OF PRIVATE RETIREMENT PLANS
Using the Policy as a funding vehicle for a private retirement plan presents
several risks, including the risk that if the Policy is insufficiently funded
in relation to the income stream from the Policy, the Policy can lapse
prematurely and result in significant income tax liability to the Owner in the
year in which the lapse occurs. Other risks associated with borrowing from the
Policy also apply. Loans will be automatically repaid from the gross death
benefit at the death of the Insured, resulting in the estimated payment to the
Beneficiary of the net death benefit, which will be less than the gross death
benefit and may be less than the Face Amount. Upon surrender or maturity, the
loan will be automatically repaid, resulting in the payment to the Policy
Owner of the Net Surrender Value. Similarly, upon lapse, the loan will be
automatically repaid. The automatic repayment of the loan upon maturity,
lapse, or surrender will cause the recognition of taxable income to the extent
that Net Surrender Value plus the amount of the repaid loan exceeds the
Owner's basis in the Policy. Thus, under certain circumstances, maturity,
surrender, or lapse of the Policy could result in tax liability to the Owner.
In addition, to reinstate a lapsed Policy, a Policy Owner would be required to
make certain payments as described under "Reinstatement," page 22. Thus, a
Policy Owner should be careful to fashion a retirement plan so that the Policy
will not lapse prematurely under various market scenarios as a result of
withdrawals and loans taken from the Policy.
37
<PAGE>
The Policy will lapse if the Accumulated Value less Policy Debt is
insufficient to cover the current monthly deduction on any Monthly Payment
Date, and a Grace Period expires without the Policy Owner making a sufficient
payment. To avoid lapse of a policy, it is important to fashion a payment
stream that does not leave a Policy with insufficient Accumulated Value.
Determinations as to the amount to withdraw or borrow each year warrant careful
consideration. Careful consideration should also be given to any assumptions
respecting the hypothetical rate of return, to the duration of withdrawals and
loans, and to the amount of Accumulated Value that should remain in the Policy
upon its maturity. Poor investment performance can contribute to the risk that
the Policy may lapse. In addition, the cost of insurance generally increases
with the Age of the Insured, which can further erode existing Accumulated Value
and contribute to the risk of lapse.
Further, interest on a Policy loan is due to Pacific Mutual for any Policy
Year on the Policy Anniversary. If this interest is not paid when due, it is
added to the amount of the outstanding Policy Debt, and interest will begin
accruing thereon from that date. This can have a compounding effect, and to the
extent that the outstanding loan balance exceeds an Owner's basis in the
Policy, the amounts attributable to interest due on the loans can add to the
Owner's federal (and possibly state) income tax liability.
Policy Owners should consult with their financial advisers in designing a
private retirement plan that is suitable. Further, Owners should continue to
monitor the Accumulated Value net of loans remaining in a Policy to assure that
the Policy is sufficiently funded to continue to support the desired income
stream and so that it will not lapse. In this regard, Policy Owners should
consult their periodic statements to determine the amount of their remaining
Accumulated Value minus the outstanding loan balance. Illustrations showing the
effect of charges under the Policy upon existing Accumulated Value or the
effect of future withdrawals or loans upon the Policy's Accumulated Value and
death benefit are available from the Owner's agent. Consideration should be
given periodically to whether the Policy is sufficiently funded so that it will
not lapse prematurely.
Because of the potential risks associated with borrowing from a Policy, use
of the Policy in connection with a private retirement plan may not be suitable
for all Policy Owners. These risks should be carefully considered before
borrowing from the Policy to provide an income stream, such as in the case of a
private retirement plan.
DISTRIBUTION OF THE POLICY
Pacific Equities Network ("PEN") is principal underwriter (distributor) of
the Policies. PEN is registered as a broker-dealer with the SEC and is a member
of the National Association of Securities Dealers ("NASD"). Pacific Mutual pays
PEN for acting as principal underwriter under a Distribution Agreement.
Pacific Mutual and PEN have sales agreements with various broker-dealers
under which the Policy will be sold by registered representatives of the
broker-dealers. The registered representatives are required to be authorized
under applicable state regulations to sell variable life insurance. The broker-
dealers are required to be registered with the SEC and members of the NASD. The
compensation payable to a broker-dealer for sales of the Policy may vary with
the Sales Agreement, but is not expected to exceed 90% of expected first year
commissions, 4% of premiums paid through the 10th Policy Year and 2% premiums
paid thereafter. Broker-dealers may also receive annual renewal compensation of
up to .20% of Accumulated Value less Policy Debt, depending upon the
circumstances. The annual renewal compensation will be computed monthly and
payable starting on the fifth or the tenth Policy Year, depending upon the
circumstances. In addition, Pacific Mutual may also pay override payments,
expense allowances, bonuses, wholesaler fees, and training allowances.
Registered representatives earn commissions from the broker-dealers with whom
they are affiliated for selling Pacific Mutual's Policies. Compensation
arrangements vary among broker-dealers. In addition, registered representatives
who meet specified production levels may qualify, under sales incentive
programs adopted by Pacific Mutual, to receive non-cash compensation such as
expense-paid trips, expense-paid educational seminars and merchandise. Pacific
Mutual makes no separate deductions, other than as previously described, from
premiums to pay sales commissions or sales expenses.
38
<PAGE>
MORE ABOUT PACIFIC MUTUAL
MANAGEMENT
The directors and officers of Pacific Mutual are listed below together with
information as to their principal occupations during the past five years and
certain other current affiliations. Unless otherwise indicated, the business
address of each director and officer is c/o Pacific Mutual Life Insurance
Company, 700 Newport Center Drive, Newport Beach, California 92660.
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Thomas C. Sutton Director, Chairman of the Board and Chief Executive Officer
Director, Chairman of of Pacific Mutual, January 1990 to present; Equity Board
the Board and Member of PIMCO Advisors L.P.; Director of Pacific
Chief Executive Officer Corinthian Life Insurance Company; similar positions with
other subsidiaries of Pacific Mutual. Director of: Newhall
Land & Farming; Health Insurance Association of America.
Glenn S. Schafer Director and President of Pacific Mutual, January 1995 to
Director and President present; Executive Vice President and Chief Financial
Officer of Pacific Mutual, March 1991 to January 1995;
Senior Vice President, Corporate Finance and Treasurer of
Pacific Mutual, September 1987 to March 1991; Equity Board
Member of PIMCO Advisors L.P.; Director of Pacific
Corinthian Life Insurance Company; similar positions with
other subsidiaries of Pacific Mutual.
Harry G. Bubb Director and Chairman Emeritus of Pacific Mutual, January
Director and 1990 to present.
Chairman Emeritus
Richard M. Ferry Director of Pacific Mutual, 1986 to present; President,
Director Director and Chairman of Korn/Ferry International; Director
of: Avery Dennison Corporation; ConAm Management; First
Business Bank; Northwestern Restaurants, Inc.; Dole Food
Co. Address: 1800 Century Park East, Suite 900, Los
Angeles, California 90067.
Donald E. Guinn Director of Pacific Mutual, 1984 to present; Chairman
Director Emeritus and Director of Pacific Telesis Group; Director
of: Pacific Bell; The Dial Corp.; Bank of America NT & SA;
Bank America Corporation; Pyramid Technology Group.
Address: Pacific Telesis Center, 130 Kearny Street, Room
3719, San Francisco, California 94108-4818.
Ignacio E. Lozano, Jr. Director of Pacific Mutual, 1988 to present; Chairman and
Director Editor-in-Chief of La Opinion; Director of: BankAmerica
Corporation; Bank of America NT&SA; Pacific Enterprises;
The Walt Disney Company. Address: 411 West Fifth Street,
12th Floor, Los Angeles, California 90013.
Charles A. Lynch Director of Pacific Mutual, 1985 to present; Chairman of
Director Market Value Partners Company; Director of: Nordstrom,
Inc.; Mid-Peninsula Bank; Greyhound Lines Inc.; Syntex Cor-
poration; Fresh Choice, Inc.; Hexel Corp.; Former President
and Chief Executive Officer of Levelor Corporation. Ad-
dress: 3000 Sand Hill Road, #1-125, Menlo Park, California
94025.
Dr. Allen W. Mathies, Jr. Director of Pacific Mutual, 1985 to present; Director,
Director President and Chief Executive Officer of: Huntington
Memorial Hospital; Southern California Health Care Systems;
Director of Occidental College. Address: 100 W. California
Blvd., Pasadena, California 91109-7013.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Charles D. Miller Director of Pacific Mutual, 1986 to present; Director,
Director Chairman, and Chief Executive Officer of Avery Dennison
Corporation; Director of: Great Western Financial Corpora-
tion; Nationwide Health Properties, Inc.; Southern Califor-
nia Edison Company. Address: 150 N. Orange Grove Boulevard,
Pasadena, California 91103.
Donn B. Miller Director of Pacific Mutual, 1977 to present; Director,
Director, Chief Executive President, and Chief Executive Officer of Pearson-Sibert
Officer Oil Co. of Texas; Director of: The Irvine Company;
Automobile Club of Southern California; St. John's Hospital
& Health Center Foundation; Former Senior Partner with the
law firm of O'Melveny & Meyers. Address: 136 El Camino,
Suite 216, Beverly Hills, California 90212.
Susan Westerberg Prager Director of Pacific Mutual, 1979 to present; Dean of the
Director UCLA School of Law at the University of California at Los
Angeles; Director of Lucille Salter Packard Children's Hos-
pital of Stanford. Address: 405 Hilgard Avenue, Room 3374,
Los Angeles, California 90024-1476.
James R. Ukropina Director of Pacific Mutual, 1989 to present; Partner with
Director the law firm of O'Melveny & Meyers; Director, Former
Chairman and Chief Executive Officer of Pacific
Enterprises; Director of Lockheed Corporation; Trustee of
Stanford University. Address: 400 S. Hope Street, 16th
Floor, Los Angeles, California 90071-2899.
Raymond L. Watson Director of Pacific Mutual, 1975 to present; Vice Chairman
Director and Director of The Irvine Company; Director of: The Walt
Disney Company; The Mitchell Energy and Development Compa-
ny. Address: 550 Newport Center Drive, Ninth Floor, Newport
Beach, California 92660.
Lynn C. Miller Executive Vice President, Individual Insurance, of Pacific
Executive Vice President Mutual, January 1995 to present; Sr. Vice President,
Individual Insurance of Pacific Mutual 1989 to 1995.
David R. Carmichael Senior Vice President and General Counsel of Pacific Mutual,
Senior Vice President April 1992 to present; Vice President and Investment
and General Counsel Counsel of Pacific Mutual, April 1989 to April 1992;
Director of Pacific Corinthian Life Insurance Company; PM
Group Life Insurance Company; Association of California
Life Insurance Companies.
Marilee Roller Senior Vice President, Corporate Finance and Administration,
Senior Vice President of Pacific Mutual, January 1995 to present; President and
COO of Pacific Corinthian Life Insurance Company, 1992 to
present; Vice President of Pacific Mutual, 1994 and 1995;
Vice President and Controller of Pacific Mutual, 1990 to
1992; similar positions with other subsidiaries of Pacific
Mutual.
Audrey L. Milfs Vice President and Corporate Secretary of Pacific Mutual,
Vice President March 1991 to present; Second Vice President and Corporate
and Corporate Secretary Secretary of Pacific Mutual, April 1989 to March 1991;
Similar positions with other subsidiaries of Pacific
Mutual.
Edward Byrd Vice President and Controller of Pacific Mutual, June 1992
Vice President and Controller to present; Vice President, Corporate Audit and Financial
Planning of Pacific Mutual, November 1991 to June 1992;
Assistant Vice President, Corporate Audit of Pacific
Mutual, May 1990 to November 1991.
Khanh T. Tran Vice President and Treasurer of Pacific Mutual, November
Vice President and Treasurer 1991 to present; Assistant Vice President and Treasurer of
Pacific Mutual, September 1990 to November 1991; Assistant
Treasurer of The Vons Companies, February 1988 to September
1990; Treasurer to other subsidiaries of Pacific Mutual.
</TABLE>
40
<PAGE>
No officer or director listed above receives any compensation from the
Separate Account. No separately allocable compensation has been paid by Pacific
Mutual or any of its affiliates to any person listed for services rendered to
the Account.
STATE REGULATION
Pacific Mutual is subject to the laws of the state of California governing
insurance companies and to regulation by the Commissioner of Insurance of
California. In addition, it is subject to the insurance laws and regulations of
the other states and jurisdictions in which it is licensed or may become
licensed to operate. An annual statement in a prescribed form must be filed
with the Commissioner of Insurance of California and with regulatory
authorities of other states on or before March 1st in each year. This statement
covers the operations of Pacific Mutual for the preceding year and its
financial condition as of December 31st of that year. Pacific Mutual's affairs
are subject to review and examination at any time by the Commissioner of
Insurance or his agents, and subject to full examination of Pacific Mutual's
operations at periodic intervals.
TELEPHONE TRANSFER AND LOAN PRIVILEGES
A Policy Owner may request a transfer of Accumulated Value or a Policy Loan
by telephone if an Authorization for Telephone Requests ("Telephone
Authorization") has been properly completed, signed, and filed at Pacific
Mutual's Home Office. All or part of any telephone conversation with respect to
transfer or loan instructions may be recorded by Pacific Mutual. Telephone
instructions received by Pacific Mutual by 1:00 P.M. Pacific time, or the close
of the New York Stock Exchange, if earlier, on any Valuation Date will be
processed as of the end of that Valuation Date in accordance with the Policy
Owner's instructions, subject to the limitation of five allocation alternatives
(presuming that the Free-Look Period has expired). Pacific Mutual reserves the
right to deny any telephone transfer or loan request. If all telephone lines
are busy (which might occur, for example, during periods of substantial market
fluctuations), Policy Owners might not be able to request transfers and loans
by telephone and would have to submit written requests.
Pacific Mutual has established procedures to confirm that instructions
communicated by telephone are genuine. Under the procedures, any person
requesting a transfer by telephone must provide certain personal identification
as requested by Pacific Mutual, and Pacific Mutual will send a written
confirmation of all transfers requested by telephone within 7 days of the
transfer. Upon the submission of a Telephone Authorization, a Policy Owner
authorizes Pacific Mutual to accept and act upon telephonic instructions for
transfers or loans involving the Policy Owner's Policy, and agrees that neither
Pacific Mutual, any of its affiliates, Pacific Select Fund, nor any of their
directors, trustees, officers, employees or agents, will be liable for any
loss, damages, cost, or expense (including attorney's fees) arising out of any
requests effected in accordance with the Telephone Authorization and believed
by Pacific Mutual to be genuine, provided that Pacific Mutual has complied with
its procedures. As a result of this policy on telephonic requests, the Policy
Owner will bear the risk of loss arising from the telephone transfer and loan
privileges.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a
party, or which would materially affect the Separate Account.
LEGAL MATTERS
Legal matters in connection with the issue and sale of the Policies described
in this Prospectus and the organization of Pacific Mutual, its authority to
issue the Policies under California law, and the validity of the forms of the
Policies under California law have been passed on by the General Counsel of
Pacific Mutual.
Legal matters relating to the federal securities and federal income tax laws
have been passed upon by Dechert Price & Rhoads.
41
<PAGE>
REGISTRATION STATEMENT
A Registration Statement under the Securities Act of 1933 has been filed with
the SEC relating to the offering described in this Prospectus. This Prospectus
does not include all of the information set forth in the Registration
Statement, as portions have been omitted pursuant to the rules and regulations
of the SEC. The omitted information may be obtained at the SEC's principal
office in Washington, D.C., upon payment of the SEC's prescribed fees.
INDEPENDENT ACCOUNTANTS
The audited financial statements for the Separate Account and for Pacific
Mutual included in this Prospectus and in the Registration Statement have been
audited by Deloitte & Touche LLP, independent certified public accountants, as
indicated in their report hereon, and are included in reliance upon the
authority of said firm as experts in accounting and auditing.
FINANCIAL STATEMENTS
The audited financial statements for the Separate Account as of December 31,
1994 and for the years ended December 31, 1994 and 1993 are set forth herein,
starting on page 43. The audited financial statements of Pacific Mutual as of
and for the years ended December 1994 and 1993 are set forth herein startingon
page 50.
The financial statements of the Separate Account and Pacific Mutual have been
audited by Deloitte & Touche LLP. The financial statements of Pacific Mutual
should be distinguished from the financial statements of the Separate Account
and should be considered only as bearing upon the ability of Pacific Mutual to
meet its obligations under the Policies.
42
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Mutual Life Insurance Company
We have audited the accompanying statements of assets and liabilities of the
Pacific Select Exec Separate Account (comprised of the Money Market, Managed
Bond, Government Securities, High Yield Bond, Growth, Equity Income,
Multi-Strategy, International, Equity Index, and Growth LT Variable Accounts) as
of December 21, 1994 and the related statements of operations for the year then
ended and statements of changes in net assets for each of the two years ended
December 31, 1994 and 1993. These financial statements are the responsibility of
the Separate Account's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective Variable
Accounts constituting the Pacific Select Exec Separate Account as of December
31, 1994 and the results of their operations for the year then ended and the
changes in their net assets for each of the two years then ended, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 17, 1995
43
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENTS OF ASSETS & LIABILITIES
DECEMBER 31, 1994
(In thousands)
<TABLE>
<CAPTION>
HIGH
MONEY MANAGED GOVERNMENT YIELD EQUITY
MARKET BOND SECURITIES BOND GROWTH INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Pacific Select Fund:
Money Market Series (3,451 shares; cost $34,722).......... $ 34,596
Managed Bond Series (2,482 shares; cost $26,627).......... $ 24,565
Government Securities Series (406 shares; cost $4,111).... $ 3,909
High Yield Bond Series (828 shares; cost $7,828).......... $ 7,379
Growth Series (3,183 shares; cost $55,143)................ $ 47,417
Equity Income Series (1,439 shares; cost $21,886)......... $ 20,222
Multi-Strategy Series (2,742 shares; cost $34,104)........
International Series (2,610 shares; cost $32,392).........
Equity Index Series (2,334 shares; cost $29,966)..........
Growth LT Series (1,027 shares; cost $11,039).............
Receivables:
Due from Pacific Mutual Life Insurance Company............ 24 42 14 104 31
Fund shares redeemed...................................... 90
-------- -------- -------- -------- -------- --------
TOTAL ASSETS................................................. 34,686 24,589 3,951 7,393 47,521 20,253
-------- -------- -------- -------- -------- --------
LIABILITIES
Payables:
Due to Pacific Mutual Life Insurance Company.............. 90
Fund shares purchased..................................... 24 42 14 104 31
-------- -------- -------- -------- -------- --------
TOTAL LIABILITIES............................................ 90 24 42 14 104 31
-------- -------- -------- -------- -------- --------
NET ASSETS................................................... $ 34,596 $ 24,565 $ 3,909 $ 7,379 $ 47,417 $ 20,222
======== ======== ======== ======== ======== ========
<CAPTION>
MULTI- INTER- EQUITY GROWTH
STRATEGY NATIONAL INDEX LT
VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- -------
<S> <C> <C> <C> <C>
ASSETS
Investments in Pacific Select Fund:
Money Market Series (3,451 shares; cost $34,722)..........
Managed Bond Series (2,482 shares; cost $26,627)..........
Government Securities Series (406 shares; cost $4,111)....
High Yield Bond Series (828 shares; cost $7,828)..........
Growth Series (3,183 shares; cost $55,143)................
Equity Income Series (1,439 shares; cost $21,886).........
Multi-Strategy Series (2,742 shares; cost $34,104)........ $ 32,171
International Series (2,610 shares; cost $32,392)......... $ 31,154
Equity Index Series (2,334 shares; cost $29,966).......... $ 30,393
Growth LT Series (1,027 shares; cost $11,039)............. $ 11,408
Receivables:
Due from Pacific Mutual Life Insurance Company............ 134 94 36 129
Fund shares redeemed......................................
-------- -------- -------- --------
TOTAL ASSETS................................................. 32,305 31,248 30,429 11,537
-------- -------- -------- --------
LIABILITIES
Payables:
Due to Pacific Mutual Life Insurance Company..............
Fund shares purchased..................................... 134 94 36 129
-------- -------- -------- --------
TOTAL LIABILITIES............................................ 134 94 36 129
-------- -------- -------- --------
NET ASSETS................................................... $ 32,171 $ 31,154 $ 30,393 $ 11,408
======== ======== ======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
44
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(In thousands)
<TABLE>
<CAPTION>
High
Money Managed Government Yield Equity Multi-
Market Bond Securities Bond Growth Income Strategy
Variable Variable Variable Variable Variable Variable Variable
Account Account Account Account Account Account Account
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends................................. $ 812 $ 1,143 $ 170 $ 472 $ 4,039 $ 1,838 $ 1,767
------- -------- ------- ------- ------- -------- --------
NET INVESTMENT INCOME...................... 812 1,143 170 472 4,039 1,838 1,767
------- -------- ------- ------- ------- -------- --------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) from
security transactions.................... 131 (14) (172) (101) 1,075 207 218
Net unrealized appreciation
(depreciation) on investments........... (68) (2,086) (160) (330) (10,371) (2,115) (2,374)
------- -------- ------- ------- ------- -------- --------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS..................... 63 (2,100) (332) (431) (9,296) (1,908) (2,156)
------- -------- ------- ------- ------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................. $875 $ (957) $ (162) $ 41 $ (5,257) $ (70) $ (389)
======= ======== ======= ======= ======== ======== ========
<CAPTION>
Inter- Equity Growth
national Index LT
Variable Variable Variable
Account Account Account
------- ------- -------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends................................. $ 1,290 $ 718 $ 174
------- ------- -------
NET INVESTMENT INCOME...................... 1,290 718 174
------- ------- -------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS
Net realized gain (loss) from
security transactions.................... 831 342 56
Net unrealized appreciation
(depreciation)
on investments........................... (2,049) (841) 369
------- ------- -------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS..................... (1,218) (499) 425
------- ------- -------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................. $ 72 $ 219 $ 599
======= ======= =======
</TABLE>
See Notes to Financial Statements
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
(In thousands)
<TABLE>
<CAPTION>
HIGH
MONEY MANAGED GOVERNMENT YIELD EQUITY
MARKET BOND SECURITIES BOND GROWTH INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income.................................. $ 812 $ 1,143 $ 170 $ 472 $ 4,039 $ 1,838
Net realized gain (loss) from security transactions.... 131 (14) (172) (101) 1,075 207
Net unrealized appreciation (depreciation)
on investments....................................... (68) (2,086) (160) (330) (10,371) (2,115)
-------- -------- -------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.............................. 875 (957) (162) 41 (5,257) (70)
-------- -------- -------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums............................... 53,082 6,795 2,740 2,716 21,157 6,781
Transfers--policy charges and deductions............... (3,578) (1,634) (1,212) (748) (5,776) (2,110)
Transfers in (from other variable accounts)............ 47,668 5,550 1,200 4,398 31,248 6,482
Transfers out (to other variable accounts)............. (81,555) (1,862) (1,816) (2,395) (28,528) (2,573)
Transfers--other....................................... (189) 5 (6) (13) 79 46
-------- -------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS....................... 15,428 8,854 906 3,958 18,180 8,626
-------- -------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS............................... 16,303 7,897 744 3,999 12,923 8,556
NET ASSETS
Beginning of year...................................... 18,293 16,668 3,165 3,380 34,494 11,666
-------- -------- -------- -------- -------- --------
End of year............................................ $ 34,596 $ 24,565 $ 3,909 $ 7,379 $ 47,417 $ 20,222
======== ======== ======== ======== ======== ========
<CAPTION>
MULTI- INTER- EQUITY GROWTH
STRATEGY NATIONAL INDEX LT
VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- -------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income.................................. $ 1,767 $ 1,290 $ 718 $ 174
Net realized gain (loss) from security transactions.... 218 831 342 56
Net unrealized appreciation (depreciation)
on investments....................................... (2,374) (2,049) (841) 369
-------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.............................. (389) 72 219 599
-------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums............................... 12,158 11,673 10,776 3,920
Transfers--policy charges and deductions............... (2,364) (2,878) (2,180) (684)
Transfers in (from other variable accounts)............ 2,983 19,282 4,498 8,962
Transfers out (to other variable accounts)............. (1,864) (8,521) (2,407) (1,436)
Transfers--other....................................... 32 23 44 47
-------- -------- -------- --------
NET INCREASE IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS....................... 10,945 19,579 10,731 10,809
-------- -------- -------- --------
NET INCREASE IN NET ASSETS............................... 10,556 19,651 10,950 11,408
NET ASSETS
Beginning of year...................................... 21,615 11,503 19,443 0
-------- -------- -------- --------
End of year............................................ $ 32,171 $ 31,154 $ 30,393 $ 11,408
======== ======== ======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
46
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY MANAGED GOVERNMENT YIELD
MARKET BOND SECURITIES BOND GROWTH
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income........................................ $ 207 $ 1,286 $ 258 $ 359 $ 1,777
Net realized gain (loss) from security transaction........... (5) 46 37 202 1,308
Net unrealized appreciation (depreciation) on investments.... (16) 65 (31) (120) 1,385
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................................... 186 1,397 264 441 4,470
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums..................................... 35,507 5,651 1,049 1,630 10,211
Transfers--policy charges and deductions..................... (1,724) (802) (422) (380) (3,130)
Transfers in (from other variable accounts).................. 10,936 2,239 612 3,177 17,425
Transfers out (to other variable accounts)................... (37,176) (562) (561) (3,248) (8,351)
Transfers--other............................................. (142) 10 1 4 34
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS............................. 7,401 6,536 679 1,183 16,189
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS..................................... 7,587 7,933 943 1,624 20,659
NET ASSETS
Beginning of year............................................ 10,706 8,735 2,222 1,756 13,835
-------- -------- -------- -------- --------
End of year.................................................. $ 18,293 $ 16,668 $ 3,165 $ 3,380 $ 34,494
======== ======== ======== ======== ========
<CAPTION>
EQUITY MULTI- INTER- EQUITY
INCOME STRATEGY NATIONAL INDEX
VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- -------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income........................................ $ 565 $ 884 $ 104 $ 442
Net realized gain (loss) from security transaction........... 184 198 217 280
Net unrealized appreciation (depreciation) on investments.... (42) 34 1,054 616
-------- -------- -------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................................... 707 1,116 1,375 1,338
-------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums..................................... 4,307 9,790 3,354 7,264
Transfers--policy charges and deductions..................... (1,223) (1,573) (821) (1,317)
Transfers in (from other variable accounts).................. 3,012 6,621 7,614 4,321
Transfers out (to other variable accounts)................... (1,391) (598) (3,018) (1,258)
Transfers--other............................................. 9 2 20 15
-------- -------- -------- --------
NET INCREASE IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS............................. 4,714 14,242 7,149 9,025
-------- -------- -------- --------
NET INCREASE IN NET ASSETS..................................... 5,421 15,358 8,524 10,363
NET ASSETS
Beginning of year............................................ 6,245 6,257 2,979 9,080
-------- -------- -------- --------
End of year.................................................. $ 11,666 $ 21,615 $ 11,503 $ 19,443
======== ======== ======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
47
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Pacific Select Exec Separate Account (the "Separate Account") is
registered as a a unit investment trust under the Investment Company Act of
1940, as amended, and is currently comprised of ten subaccounts called Variable
Accounts: the Money Market Variable Account, the Managed Bond Variable Account,
the Government Securities Variable Account, the High Yield Bond Variable
Account, the Growth Variable Account, the Equity Income Variable Account, the
Multi-Strategy Variable Account, the International Variable Account, the Equity
Index Variable Account, and the Growth LT Variable Account. The assets in each
Variable Account are invested in shares of the corresponding series of Pacific
Select Fund (the "Fund"), each of which pursues different investment objectives
and policies.
The Separate Account was established by Pacific Mutual Life Insurance
Company ("Pacific Mutual") on May 12, 1988 and commenced operations on November
22, 1988. Under applicable insurance law, the assets and liabilities of the
Separate Account are clearly identified and distinguished from the other assets
and liabilities of Pacific Mutual. The assets of the Separate Account will not
be charged with any liabilities arising out of any other business conducted by
Pacific Mutual, but the obligations of the Separate Account, including benefits
related to variable life insurance, are obligations of Pacific Mutual.
A. Valuation of Investments
Investments in shares of the Fund are valued at the reported net asset
values of the respective series.
B. Security Transactions
Transactions are recorded on the trade date. Realized gains and losses on
sales of investments are determined on the basis of identified cost.
C. Federal Income Taxes
The operations of the Separate Account will be reported on the Federal
income tax return of Pacific Mutual, which is taxed as a life insurance company
under the provisions of the Tax Reform Act of 1986. Under current tax law, no
Federal income taxes are expected to be paid by Pacific Mutual with respect to
the operations of the Separate Account.
2. DIVIDENDS
During 1994 and 1993, the Fund declared dividends for each series. The
amounts accrued by the Separate Account for its share of the dividends were
reinvested in additional full fractional shares of the related series.
3. CHARGES AND EXPENSES
With respect to variable life insurance policies funded by the Separate
Account, Pacific Mutual makes certain deductions from premiums for sales load
and state premium taxes before amounts are allocated to the Separate Account.
Pacific Mutual also makes certain deductions from the net assets of each
Variable Account for the mortality and expense risks Pacific Mutual assumes,
administrative expenses, cost of insurance, charges for optional benefits and
any sales and underwriting surrender charges. The operating expenses of the
Separate Account are paid by Pacific Mutual.
4. RELATED PARTY AGREEMENT
Pacific Equities Network, an indirect subsidiary of Pacific Mutual, is the
principal underwriter of variable life insurance policies funded by interests in
the Separate Account, and is compensated by Pacific Mutual.
48
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
5. SELECTED ACCUMULATION UNIT**INFORMATION
Selected accumulation unit information for the year ended December 31, 1994
were as follows:
<TABLE>
<CAPTION>
High
Money Managed Government Yield
Market Bond Securities Bond Growth
Variable Variable Variable Variable Variable
Account Account Account Account Account
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ACCUMULATION UNIT
VALUE:
Beginning $ 13.26 $ 17.44 $ 17.10 $ 18.21 $ 21.22
======== ======== ======== ======== ========
Ending $ 13.76 $ 16.68 $ 16.23 $ 18.29 $ 19.00
======== ======== ======== ======== ========
Number of Units Outstanding at
End of Period 2,514,824 1,472,406 240,896 403,441 2,496,205
</TABLE>
<TABLE>
<CAPTION>
Equity Multi- Inter- Equity Growth
Income Strategy national Index LT
Variable Variable Variable Variable Variable
Account Account Account Account Account
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ACCUMULATION UNIT
VALUE:
Beginning $ 18.07 $ 17.51 $ 13.66 $ 14.61 $ 10.00
======== ======== ======== ======== ========
Ending $ 18.01 $ 17.24 $ 14.07 $ 14.76 $ 11.32
======== ======== ======== ======== ========
Number of Units Outstanding at
End of Period 1,122,604 1,865,588 2,214,443 2,058,970 1,007,334
</TABLE>
________
**Accumulation Unit: unit of measure used to calculate the value of a Contract
Owner's interest in a Variable Account during the Accumulation Period.
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Pacific Mutual Life Insurance Company:
We have audited the accompanying statements of financial position of
Pacific Mutual Life Insurance Company as of December 31,1994 and 1993,and
the related statements of operations and surplus and of cash flow for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Pacific Mutual Life Insurance Company
as of December 31,1994 and 1993 and the results of its operations and its
cash flow for the years then ended in conformity with accounting practices
prescribed or permitted by the Insurance Department of the State of
California and with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 21, 1995
50
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
1994 1993
- -----------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Bonds $ 6,669,853 $ 5,899,646
Preferred stocks 132,604 143,016
Common stocks 57,874 71,086
Unconsolidated subsidiaries 196,401 141,611
Mortgage loans 1,421,182 1,611,400
Real estate 157,507 134,257
Home office properties 51,419 52,115
Policy loans 2,312,455 1,960,162
Cash and short-term investments 97,745 342,401
Investment income due and accrued 125,534 125,783
Premiums due and uncollected, and other assets 245,243 143,669
Separate account assets 3,260,374 2,720,997
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $14,728,191 $13,346,143
===============================================================================================
LIABILITIES AND SURPLUS
Liabilities
Policy reserves $ 6,476,634 $ 5,807,708
Deposit funds 3,298,915 3,485,440
Other liabilities 885,638 583,989
Assets valuation reserve 179,006 165,251
Separate account liabilities 3,260,374 2,720,979
- -----------------------------------------------------------------------------------------------
Total Liabilities 14,100,567 12,763,367
Surplus 627,624 582,776
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SURPLUS $14,728,191 $13,346,143
===============================================================================================
</TABLE>
See Notes to Financial Statements
51
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF OPERATIONS AND SURPLUS
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
- ---------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
REVENUES
Premiums, annuity considerations and deposit funds $ 2,180,409 $ 2,325,160
Net investment income 879,116 879,031
Other income 5,073 4,959
- ---------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,064,598 3,210,050
- ---------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future policy benefits 2,686,406 2,818,344
Operating expenses 222,203 218,387
Premium and other taxes (excluding tax on capital gains) 28,715 26,057
Dividends to policyowners 17,162 17,609
- ---------------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,954,486 3,080,397
- ---------------------------------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAXES 110,112 129,653
Federal income taxes 41,510 22,367
- ---------------------------------------------------------------------------------------------------------
NET GAINS FROM OPERATIONS 68,602 107,286
NET REALIZED CAPITAL GAINS 12,424 11,226
- ---------------------------------------------------------------------------------------------------------
NET INCOME $ 81,026 $ 118,512
=========================================================================================================
SURPLUS
Net income $ 81,026 $ 118,512
Contribution certificates 149,589
Other surplus transactions, net (36,178) (57,012)
- ---------------------------------------------------------------------------------------------------------
Increase in surplus 44,848 211,089
Surplus, beginning of year 582,776 371,687
- ---------------------------------------------------------------------------------------------------------
SURPLUS, END OF YEAR $ 627,624 $ 582,776
=========================================================================================================
</TABLE>
See Notes to Financial Statements
52
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
- ------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Receipts
Premiums, annuity considerations and deposit funds $ 1,687,583 $ 2,065,646
Net investment income 809,791 839,682
Allowances and reserve adjustments on reinsurance ceded 491,363 230,995
Other 23,862 9,965
Payments
Policy benefit payments (1,408,650) (1,530,086)
Net policy loans (352,358) (436,216)
Operating expenses (247,437) (204,768)
Net transfer to separate accounts (594,284) (922,130)
Premium and other taxes (34,795) (24,785)
Dividends to policyowners (17,319) (17,641)
Federal income tax (23,995) (87,162)
- ------------------------------------------------------------------------------------------------------------------
NET CASH FLOW FROM OPERATIONS 333,761 (76,500)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTMENTS
Proceeds
Bonds 2,937,210 2,696,822
Stocks 139,785 346,072
Mortgage loans 390,642 408,238
Real estate 20,163 90,389
Other investments 47,132 94,874
Payments for the purchase of
Bonds (3,673,859) (3,174,986)
Stocks (126,823) (278,932)
Mortgage loans (230,859) (131,841)
Real estate (17,466) (7,087)
Other investments (114,106) (37,844)
- ------------------------------------------------------------------------------------------------------------------
NET CASH FLOW FROM INVESTMENTS (628,181) 5,705
- ------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM BORROWINGS 49,764
- ------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM CONTRIBUTION CERTIFICATES 149,589
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and short-term investments (244,656) 78,794
Cash and short-term investments, beginning of year 342,401 263,607
- ------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 97,745 $ 342,401
==================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 22,120 $ 8,054
==================================================================================================================
</TABLE>
See Notes to Financial Statements
53
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pacific Mutual Life Insurance Company ("Pacific Mutual") was established
in 1868. Its core business consists of life insurance, annuity and pension
products. In addition, Pacific Mutual provides other insurance, employee
benefits and investment management and advisory services through its
subsidiaries.
BASIS OF PRESENTATION
Pacific Mutual's financial statements are based on accounting practices
prescribed or permitted by the Insurance Department of the State of
California, which are currently considered generally accepted accounting
principles for mutual life insurance companies. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as state laws,
regulations, and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed.
The financial statements of Pacific Mutual are not consolidated with those
of its subsidiaries.
In April 1993, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises" (the
"Interpretation"). The Interpretation was amended by Statement of
Financial Accounting Standards No. 120, "Accounting and Reporting by
Mutual Life Insurance Enterprises for Certain Long-Duration Participating
Contracts," (SFAS No. 120") which was issued in January 1995, to further
clarify the accounting for mutual life insurance companies and to defer
the effective date of the general provisions of the Interpretation to
fiscal years beginning after December 15, 1995. SFAS No. 120 did not
change the disclosure of other transition provisions of the
Interpretation. The Interpretation does not preclude mutual life insurance
enterprises from issuing financial statements prepared under statutory
accounting practices but concludes that those financial statements should
not be described as being prepared in conformity with generally accepted
accounting principles ("GAAP"). Upon the effective date of the
Interpretation, in order for their financial statements to be described as
being prepared in accordance with GAAP, mutual life insurance companies
and their subsidiaries will be required to adopt all applicable
authoritative GAAP pronouncements in any general purpose financial
statements that they may elect to issue. Pacific Mutual has not quantified
the effects of the application of the Interpretation on its financial
statements since the company has not yet determined whether for general
purposes it will continue to issue statutory financial statements or
statements adopting all applicable authoritative GAAP pronouncements.
CHANGE IN ACCOUNTING POLICIES
During 1993, Pacific Mutual implemented the accrual method of accounting
for the costs of its postretirement health care and life insurance plans
as prescribed by the Insurance Department of the State of California. This
change is more fully described in Note 10.
INVESTMENTS
Investments in bonds are carried at amortized cost. Preferred stocks are
principally stated at amortized cost. common stocks are carried at market
value. Investments in unconsolidated subsidiaries are reported on the
equity method of accounting, except for PCL (Note2) which is carried at
cost.
Mortgage loans and policy loans are stated at unpaid principal balances.
Real estate is valued at the lower of depreciated cost or market, less
related mortgage debt. Real estate is depreciated using the straight-line
method over 30 years.
Short-term investments generally mature within a year and are carried at
amortized cost which approximates estimated fair value.
The Asset Valuation Reserve ("AVR") is computed in accordance with a
prescribed formula and is designed to stabilize surplus against valuation
and credit-related losses for certain invested assets. Changes to the AVR
are reported as direct additions or deductions from surplus. The Interest
Maintenance Reserve ("IMR") included in
54
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
other liabilities on the accompanying statements of financial position,
results in the deferral of after-tax realized capital gains and losses
attributable to interest rate fluctuations on fixed income investments and
these capital gains and losses are amortized into investment income over
the remaining life of the investment sold. The IMR was $13.1 million and
$22.4 million as of December 31, 1994 and 1993, respectively.
Net realized capital gains and losses are determined on the specific
identification method and are presented net of federal capital gains tax
of $2.2 million and $16.9 million and transfers to the IMR of $(.4)
million and $22.4 million for the years ended December 31, 1994 and 1993,
respectively.
Derivatives which qualify for hedge accounting are valued consistently
with the hedged items. Realized gains and losses on fixed income
contracts are deferred and amortized over the average life of the related
hedged assets or insurance liabilities. Realized gains and losses on
equity for hedge accounting are valued at market value through surplus
while still held and through income when realized.
On November 15, 1994, Pacific Financial Asset Management Corporation, a
wholly-owned, second-tier subsidiary of Pacific Mutual and five of its
subsidiaries (Pacific Investment Management Company and subsidiaries,
Parametric Portfolio Associates, Inc., Cadence Capital Management
Corporation, NFJ Investment Group, Inc. and Blairlogie Capital Management
Limited) entered into an agreement and plan of consolidation with Thomson
Advisory Group L.P., a Delaware limited partnership with publicly traded
units, to merge into a newly capitalized partnership named PIMCO Advisors
L.P. Substantially all operations of these entities and net assets of
$20.9 million were contributed in exchange for approximately 42% of the
newly issued partnership units.
POLICY RESERVES AND DEPOSIT FUNDS
Life insurance reserves are valued using he net level premium method, the
Commissioner's Reserve Valuation method, or other modified reserve
methods.
Reserves for individual annuities are maintained principally on the
Commissioners' Annuity Reserve Valuation Method. Group annuity contract
reserves are valued using the net single premium method.
The liability for deposit funds, including guaranteed interest contracts,
is based primarily upon, and is not less than, the policyowners' equity in
their deposit accounts, including credited interest.
REVENUES AND EXPENSES
Premiums are recognized as income over the premium paying period. Deposits
made in connection with annuity contracts are recognized as revenue when
received. Investment income is recorded as earned.
Expenses, including policy acquisition costs such as commissions, are
charged to operations as incurred.
DIVIDENDS
Dividends are provided based on dividend formulas approved by the Board of
Directors and reviewed for reasonableness and equitable treatment of
policyowners by an independent consulting actuary.
FEDERAL INCOME TAXES
Pacific Mutual is taxed as a life insurance company for Federal income
tax purposes. Pacific Mutual's income tax return is consolidated with all
its domestic subsidiaries except PCL. The amount of federal income tax
expense includes an equity tax calculated by a prescribed formula that
incorporates a differential earnings rate between stock and mutual life
insurance companies. The difference between the effective tax rate and the
statutory tax rate of 35% for 1994 and 1993 is primarily due to certain
policy acquisition costs being deferred and amortized over a ten-year
period for tax purposes, reserves differences, non-taxable investment
income and the equity tax for 1994.
OTHER SURPLUS TRANSACTIONS
Other surplus transactions consist primarily of unrealized capital gains
and losses, changes in nonadmitted assets, and changes in the AVR.
55
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEPARATE ACCOUNTS
Separate account assets are recorded at market value and the related
liabilities represent segregated contract owner funds maintained in
accounts with individual investment objectives. The investment results of
separate account assets generally pass through to separate account policy
owners and contract owners.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments disclosed in Notes 3
and 4 have been determined using available market information and
appropriate valuation methodologies. However, considerable judgement is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented may not be indicative of the amounts
Pacific Mutual could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
significant effect on the estimated fair value amounts.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1994
financial statement presentation.
2. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
Pursuant to a five-year rehabilitation agreement approved by a California
Superior Court and the Insurance Department of the State of California in
July 1992, Pacific Mutual, through its wholly-owned subsidiary, Pacific
Corinthian Life Insurance company ("PCL"), will facilitate the
rehabilitation of First Capital Life Insurance Company ("FCL"). In
accordance with the rehabilitation agreement, insurance policies of FCL
were restructured and assumed by PCL on December 31, 1992.
The rehabilitation agreement provides for the holders of restructured
policies to share in a substantial percentage of the unallocated surplus
of PCL at the end of the rehabilitation period. Policyholders have the
option to surrender their restructured policies with reduced benefits
during this five-year period. During the rehabilitation plan period, PCL
is prohibited from issuing new insurance policies. At the end of the
rehabilitation period, PCL will merge into Pacific Mutual, with Pacific
Mutual as the surviving entity. Substantially all of the assets and
certain of the liabilities of FCL were assumed by PCL on December 31, 1992
pursuant to an assumption reinsurance agreement and asset purchase
agreement.
In accordance with the rehabilitation agreement, PCL was capitalized by a
cash contribution of $8.3 million from Pacific Mutual and a $45 million
certificate of contribution provided by Pacific Financial Holding
Company, a wholly-owned subsidiary of Pacific Mutual, for a total of $53.3
million initial capitalization.
In the event PCL is unable to pay contract benefits, Pacific Mutual is
obligated to contribute funds to pay those benefits in accordance with the
rehabilitation agreement.
3. INVESTMENTS IN DEBT SECURITIES
The statement value, gross unrealized gains and losses and estimated fair
value of bonds and redeemable preferred stocks ("debt securities"),
including short-term investments, are shown below. The estimated fair
value of publicly traded securities was based on quoted market prices. For
securities not actively traded, estimated fair values were provided by
independent pricing services specializing in "matrix pricing" and modeling
techniques. Pacific Mutual also estimates certain fair values based on
interest rates, credit quality and average maturity or from securities
with comparable trading characteristics.
56
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
3. INVEST MENTS IN DEBT SECURITIES(CONTINUED)
<TABLE>
<CAPTION>
Estimated
Statement Gross Unrealized Fair
----------------------------------
Value Gains Losses Value
-------------------------------------------------------------
December 31,1994: (In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government authorities
and agencies $ 216,201 $ 1,064 $ 37,113 $ 180,152
Obligations of states,political
subdivisions and foreign
governments 321,798 5,371 16,309 310,860
Corporate securities 3,771,271 104,311 160,712 3,714,870
Mortgage-backed securities 2,480,307 28,911 81,147 2,428,071
Redeemable preferred stock 81,026 343 5,031 76,338
-------------------------------------------------------------
Total $6,870,603 $ 140,000 $ 300,312 $6,710,291
=============================================================
December 31,1993:
U.S. Treasury securities
and obligations of U.S.
government authorities
and agencies $ 482,104 $ 10,227 $ 6,788 $ 485,543
Obligations of states, political
subdivisions and foreign
governments 194,819 16,520 296 211,043
Corporate securities 3,328,988 338,039 6,114 3,660,913
Mortgage-backed securities 2,248,574 120,947 10,875 2,358,646
Redeemable preferred stock 88,456 3,314 359 91,411
-------------------------------------------------------------
Total $6,342,941 $ 489,047 $ 24,432 $6,807,556
=============================================================
</TABLE>
The statement value and estimated fair value of debt securities as of December
31,1994 by contractual repayment date of principal are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Statement Fair
Value Value
--------------------------------
(In Thousands)
<S> <C> <C>
Due in one year or less $ 429,348 $ 414,074
Due after one year through five years 1,349,078 1,343,824
Due after five years through ten years 1,340,882 1,299,969
Due after ten years 1,270,988 1,224,353
--------------------------------
4,390,296 4,282,220
Mortgage-backed securities 2,480,307 2,428,071
--------------------------------
Total $6,870,603 $6,710,291
================================
</TABLE>
57
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENTS IN DEBT SECURITIES (CONTINUED)
Proceeds from sales of investments in debt securities were $1.5 billion
and $1.2 billion for the years ended December 31, 1994 and 1993,
respectively. In 1994 and 1993, gross gains of $30 million and $53 million
and gross losses of $43 million and $2 million, respectively, were
realized on those sales.
4. FINANCIAL INSTRUMENTS
The estimated fair values of Pacific Mutual's financial instruments,
including debt securities, are as follows:
<TABLE>
<CAPTION>
December 31,1994 December 31,1993
Statement Estimated Statement Estimated
Value Fair Value Value Fair Value
-----------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Debt securities
(See note 3) $6,870,603 $6,710,291 $6,342,941 $6,807,556
Preferred and common
stocks 109,458 116,993 125,646 143,090
Mortgage loans 1,421,182 1,452,596 1,611,400 1,692,700
Policy loans 2,312,455 2,312,455 1,960,162 1,960,162
Derivative financial
instruments:
Interest rates swaps 121 (24,809) 25,641
Other 2,672 (2,822) 10,116 47,118
Liabilities:
Guaranteed interest
contracts 2,635,356 2,614,961 2,586,538 2,669,666
Deposit liabilities 871,548 833,274 929,748 977,285
Other derivative
financial instruments 2,270 2,128 440
Contribution
certificates 149,593 124,313 149,589 153,480
</TABLE>
The following methods and assumptions were used to estimate the fair
values of these financial instruments as of December 31, 1994 and 1993:
PREFERRED AND COMMON STOCKS
The estimated fair values are based on quoted market prices or dealer
quotes.
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flows, using a year-end market rate
which is applicable to the yield, credit quality and average maturity of
the composite portfolio.
POLICY LOANS
The statement value of policy loans is reasonable estimate of their fair
values.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES.
The estimated fair value of fixed-maturity guaranteed interest contracts
are estimated using the rates currently offered for deposits of similar
remaining maturities. The estimated fair values of deposit liabilities
with no defined maturities are the amounts payable on demand.
58
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (CONTINUED)
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES (Continued)
Pacific Mutual has issued PRO GIC and Diversifier GIC contracts to plan
sponsors totaling $749 million as of December 31, 1994, pursuant to the
terms of which the plan sponsor retains direct ownership and control of
the assets related to these contracts. Pacific Mutual agrees to provide
benefit responsiveness in the event that plan benefit requests exceed plan
casf flows. In return for this guarantee, Pacific Mutual receives a fee
which varies by contract. Pacific Mutual sets the investment guidelines to
provide for appropriate credit quality and cash flow matching.
DERIVATIVE FINANCIAL INSTRUMENTS
Pacific Mutual utilizes certain derivative financial instruments to
diversify its business risk and to minimize its exposure to fluctuations
in market prices and interest rates. Pacific Mutual has also set aside a
corporate total return portfolio utilizing derivative financial
instruments. These instruments include interest rate and currency swaps,
forward, options held, options written, and futures contracts, and involve
elements of credit risk and market risk in excess of amounts recognized in
the accompanying financial statements. The national amounts of those
instruments reflect the extent of involvement in those various type of
financial instruments. These estimated fair values of these instruments
are based in market or dealer collateral or other securities to support
financial instruments with off-balance-sheet credit risk.
Options and Floors
Pacific Mutual uses options and floors to hedge against fluctuations in
interest rates and in its corporate total return portfolio. Cash
requirements on options held are limited to the premium paid by Pacific
Mutual at acquisition, Pacific Mutual uses written options on a limited
basis consisting primarily of covered calls. Gains and losses on covered
calls are offset by gains and losses on the under lying position. Options
and floors held are reported as assets and options written are reported as
liabilities. As of December 31, 1994, the national amount of options
written approximated $1.5 billion and $42 million respectively. Option
contracts mature during fiscal years 1995 through 2000.
Interest Rate Swap Contracts
Pacific Mutual has entered into interest rate swap contracts to reduce the
impact of changes of interest rates on its variable short-term and long-
term investments. The contracts effectively change the interest rate
exposure in variable rate notes to fixed rates which range from 1.9% to
8,6.% as of December 31, 1994 and 1993. Interest rate swap contracts
mature during fiscal year 1996 through 2013. As of December 31, 1994 and
1993, interest rate swap contracts outstanding with financial institutions
had a total notional amount of $477 million and $770 million,
respectively.
Foreign Currency Exchange Contracts
Pacific Mutual enters into foreign currency exchange contracts that are
used to hedge against fluctuations in foreign currency-denominated assets
and related income. Gains and losses on such agreements offset currency
gains and losses on the related assets. As of December 31, 1994, the
national amount of foreign exchange contracts expire during fiscal years
1995 through 1999.
Future Contracts
Pacific Mutual uses exchange-traded futures contracts for assets and
liability management of fixed maturity securities and insurance
liabilities and for hedging market fluctuations on equity securities.
Price changes on futures are settled daily through the daily margin cash
flows. As of December 31, 1994 and 1993, the national amounts of futures
contracts were $163 million and $573 million, respectively. The national
amounts of the contracts do not represent future cash requirements, as
Pacific Mutual intends to close out open positions prior to expiration.
CONTRIBUTION CERTIFICATES
The estimate fair value of contribution certificate is based in market
quotes.
59
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
5. CONCENTRATION OF CREDIT RISK
Pacific Mutual manages its investments to limit credit risk by diversifying
its portfolio among various security types and industry sectors. The credit
risk of financial instruments is controlled through credit approvals,
limits and monitoring procedures. Real estate and mortgage loan investments
are diversified by geographic location and property type. Management
believes that significant concentrations of credit risk do not exist.
Pacific Mutual is exposed to credit loss in the event of nonperformance by
the other parties to the interest rate swaps contracts and other
derivatives securities. However, Pacific Mutual does not anticipate
nonperformance by the counterparties.
6. UNCONSOLIDATED SUBSIDIARIES
Pacific Mutual's subsidiary operations primarily include other life and
health insurance and investment management and advisory services. As of
December 31, 1994 and 1993, subsidiary assets, including PCL, were $4.5
billion and $4.4 billion, respectively, and liabilities were $4.2 billion
as of December 31, 1994 and 1993.
Revenue and net income, including PCL, were $1.1 billion and $75 million
for the year ended December 31, 1994, and $1.0 billion and $57 million for
the year ended December 31, 1993. Dividends from subsidiaries totaled $2
million and $24 million for the years ended December 31, 1994 and 1993,
respectively. All earnings of the subsidiaries, excluding PCL, and
excluding capital gains, are included in net investment income.
7. BORROWINGS
Pacific Mutual borrows for short-term needs by issuing commercial paper.
Approximately $50 million was outstanding as of December 31, 1994, bearing
an interest rate of 5.86%, and was repaid in January, 1995. There were no
commercial paper borrowings outstanding as of December 31, 1993.
In addition, Pacific Mutual had available lines of credit totaling
approximately $250 million and $300 million as of December 31, 1994 and
1993, respectively. There were no borrowings outstanding as of December 31,
1994 and 1993.
8. CONTRIBUTION CERTIFICATES
On December 30, 1993, Pacific Mutual issued $150 million of Contribution
Certificates (the "Certificates"), also referred to as Surplus Notes, at an
interest rate of 7.9% maturing on December 30, 2023. Interest is payable
semiannually. The Certificates may not be redeemed at the option of
Pacific Mutual or any holder of the Certificates. The Certificates are
unsecured and subordinated to all present and future senior indebtedness
and policy claims of Pacific Mutual. Each payment of interest on and the
payment of principal of the Certificates may be made only out of Pacific
Mutual's surplus and with the prior approval of the Insurance Commissioner
of the State of California. In accordance with accounting practices
prescribed or permitted by the Insurance Department of the State of
California, the Certificates are not part of the liabilities of Pacific
Mutual and are included in surplus.
9. REINSURANCE
Pacific Mutual has reinsurance agreements with other insurance companies
for the purpose of diversifying risk and limiting exposure on larger risks.
For the years ended December 31, 1994 and 1993, individual life and annuity
premiums assumed were $20 million and $22 million and premiums ceded were
$363 million and $292 million, respectively. Amounts recoverable from
reinsurers for individual life and annuities include reinsured and paid
claims of $13 million and $21 million as of December 31, 1994 and 1993,
respectively. Policy benefits payable are net of reinsurance on unpaid
claims of $(4) million and $0 at December 31, 1994 and 1993, respectively.
Pacific Mutual also reinsures substantially all of its group life and
health business with a subsidiary insurance company. Premiums of $90
million and $122 million, and benefits of $70 million and $80 million were
ceded during the years ended December 31, 1994 and 1993, respectively.
Amounts payable to the subsidiary under this agreement were $8 million and
$4 million as of December 31, 1994 and 1993, respectively.
60
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
9. REINSURANCE (CONTINUED)
To the extent that the assuming companies become unable to meet their
obligations under these treaties, Pacific Mutual remains contingently
liable. However, Pacific Mutual does not anticipate nonperformance by
these assuming companies.
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
PENSION PLAN
Pacific Mutual maintains a defined benefit pension plan covering eligible
employees and agents. No contributions were made during 1994 or 1993
because of the funded status of the plans and related income tax
considerations. Accumulated benefits and net assets available for benefits
as of the latest valuation dates (March 31 of each year) are as follows:
<TABLE>
<CAPTION>
1994 1993
--------------------
(In Thousands)
<S> <C> <C>
Actuarial present value of accumulated benefits
accumulated benefits:
Vested $ 88,122 $ 83,060
Nonvested 1,115 572
--------------------
Total $ 89,273 $ 83,632
====================
Net assets available for benefits $111,089 $109,194
====================
</TABLE>
The above present values were determined using an assumed discount rate of
8.5% in 1994 and 1993.
POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE PLANS
Pacific Mutual sponsors a defined benefit health care plan and a defined
benefit life insurance plan ("The Plans") that provide postretirement
benefits for all eligible retirees and their dependents. Generally,
qualified employees may become eligible for these benefits if they reach
normal retirement age, have been covered under Pacific Mutual's policy as
an active employee for a minimum continuous period prior to the date
retired, and have an employment date before January 1, 1990. The Plans
contain cost-sharing features such as deductibles and coinsurance, and
require retirees to make contributions which can be adjusted annually.
Pacific Mutual's commitment to qualified employees who retire after April
1, 1994 is limited to specific dollars amounts. Pacific Mutual reserves
the right to modify or terminate The Plans at any time. As in the past,
the general policy is to fund these benefits on a pay-as-you-go basis. The
amount of benefits paid under The Plans for the years ended December 31,
1994 and 1993 was $1.7 million for both years.
During 1993, Pacific Mutual implemented the accrual method of accounting
for the costs of The Plans as prescribed by the Insurance Department of
the State of California, and elected to amortize its transition obligation
of $ 26.7 million over twenty years.
Components of net periodic postretirement benefit cost as follows ( In
Thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
-------------------------
<S> <C> <C>
Service cost $ 186 $ 89
Interest cost 1,790 1,907
Amortization (260) (260)
-------------------------
1,716 1,736
Recognized transition obligation - net 1,337 1,336
-------------------------
Net periodic postretirement benefit cost $3,053 $3,072
-------------------------
</TABLE>
61
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The following table presents the Plan's funded status reconciled with
amounts recorded in other liabilities on Pacific Mutual's statement of
financial position (In Thousands):
<TABLE>
<CAPTION>
1994 1993
---------------------
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $ 20,580 $ 22,844
Fully eligible active plan participants 1,346 1,044
Other active plan participants 2,455 1,972
---------------------
24,381 25,860
Fair value of plan assets 0 0
---------------------
Unfunded accumulated postretirement
obligation 24,381 25,860
Unrecognized net gain/(loss) 942 (1,060)
Prior service cost 1,849 2,109
Unrecognized transition obligation-net (24,056) (25,393)
---------------------
Accrued postretirement benefit liability $ 3,116 $ 1,516
=====================
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 11% for 1994 and 12% for 1993 and is assumed to
decrease gradually to 6% in 2005 and remain at that level thereafter. The
amount reported is materially affected by the health care cost trend rate
assumptions. If the health care cost trend rate assumptions were increased
by 1%, the accumulated postretirement benefit obligation as of December
31, 1994 and 1993 would be increased by 11.2% and 8.8% respectively. The
effect of this change would increase the aggregate of the service,
interest and amortization cost components of the net periodic benefit cost
by 13.6% and 8.6%, respectively.
11. INVESTMENT COMMITMENTS
Pacific Mutual has outstanding commitments to make investments in bonds
and other invested assets as follows (In Thousands):
<TABLE>
<CAPTION>
Year ended December 31:
-----------------------
<S> <C>
1995 $ 55,152
1996-1999 23,588
2000 and thereafter 20,669
---------------
Total $ 99,409
===============
</TABLE>
12. LITIGATION
Pacific Mutual and its subsidiaries are respondents in a number of legal
proceedings, some of which involve extra-contractual damages. In the
opinion of management, the outcome of these proceedings is not likely to
have a material adverse effect on the financial position of Pacific
Mutual.
--------------------------------------------------------------------------
62
<PAGE>
APPENDIX
DEATH BENEFIT PERCENTAGES
<TABLE>
<CAPTION>
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
---- ---------- --- ---------- --- ---------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
0-40 250% 50 185% 60 130% 70 115%
41 243 51 178 61 128 71 113
42 236 52 171 62 126 72 111
43 229 53 164 63 124 73 109
44 222 54 157 64 122 74 107
45 215 55 150 65 120 75-90 105
46 209 56 146 66 119 91 104
47 203 57 142 67 118 92 103
48 197 58 138 68 117 93 102
49 191 59 134 69 116 94 101
</TABLE>
63
<PAGE>
ILLUSTRATIONS
The following tables illustrate how the death benefits, Accumulated Values
and Net Cash Surrender Values of a hypothetical policy may vary over an
extended period of time assuming hypothetical rates of return equivalent to
constant gross annual rates of 0%, 6% and 12%.
The policies illustrated include the following:
1. Age 40, Option A, $10,000 annual premium, Current Cost of Insurance
Rates.
2. Age 40, Option A, $10,000 annual premium, Guaranteed Cost of Insurance
Rates.
3. Age 40, Option B, $10,000 annual premium, Current Cost of Insurance
Rates.
4. Age 40, Option B, $10,000 annual premium, Guaranteed Cost of Insurance
Rates.
The values would be different from those shown if the gross annual investment
rates of return averaged 0%, 6% or 12% over a period of years, but also
fluctuated above or below those averages for individual policy years.
The second column of each table, labeled "Total Premiums Paid Plus Interest
at 5%," shows the amount which would accumulate if an amount equal to the
annual premium (after taxes) were invested to earn interest at 5% compounded
annually. All premium payments are illustrated as if they were made at the
beginning of the year. These illustrations assume that no Policy loans have
been made.
The amounts shown for the death benefits, Accumulated Values and Net Cash
Surrender Values reflect the fact that the net investment return on the
Variable Accounts is lower than the gross investment return on the assets as a
result of charges levied against the Accounts. These values also take into
account the premium loads, the administrative charges and the mortality and
expense risk charges. The daily investment advisory fee is assumed to be
equivalent to an annual rate of 0.60% of the aggregate average daily net assets
of the Fund. This hypothetical rate is representative of the average maximum
investment advisory fee applicable to the ten Portfolios of the Fund. The
amounts shown would differ if unisex rates were used or if the insured were
female and female rates were used. On those illustrations assuming current
rates, the amounts would also differ if the insured were a smoker and smoker
rates were used.
The tables also reflect other expenses of the Fund at the rate of 0.27% of
the average daily net assets of a Portfolio, which amounts to 0.87% of the
average daily net assets of a Portfolio including the investment advisory fee,
as adjusted to exclude costs borne by the Fund in connection with the
acquisition of assets of Pacific Corinthian Variable Fund and include any
foreign taxes. For the year ended December 31, 1994, the total expenses of each
Portfolio after the expense limitation described below, but before any
adjustment, were the following percentages of the average daily net assets of
the Portfolios: 0.64% for the Money Market Portfolio; 0.94% for the Equity
Income and Multi-Strategy Portfolios; 1.22% for the International Portfolio;
0.84% for the Managed Bond Portfolio; 0.88% for the Government Securities and
High Yield Bond Portfolios; 0.86% for the Growth Portfolio; 1.08% (annualized)
for the Growth LT Portfolio; and 0.51% for the Equity Index Portfolio. Pacific
Mutual has agreed, until at least December 31, 1995, to waive its fees or
otherwise reimburse each Portfolio for its operating expenses to the extent
that such expenses, exclusive of advisory fees, additional custodial charges
associated with holding foreign securities, foreign taxes on dividends,
interest and gains, and extraordinary expenses, exceed 0.25% of the Portfolio's
average daily net assets. Pacific Mutual began this expense reimbursement
policy in April 1989. As a result of this policy, the operating expenses of the
Portfolios for the year ending December 31, 1994 were equal to the amounts
reflected in the tables as described above. In the absence of this policy, the
Portfolios' total expenses, including advisory fees and before any adjustments,
for the Fund's fiscal year ending December 31, 1994 would have been as follows:
0.64% for the Money Market Portfolio; 0.97% for the High Yield Bond Portfolio;
0.84% for the Managed Bond Portfolio; 0.95% for the Government Securities
Portfolio; 0.86% for the Growth Portfolio; 1.22% (annualized) for the Growth LT
Portfolio; 1.00% for the Equity Income Portfolio; 0.94% for the Multi-Strategy
Portfolio; 1.22% for the International Portfolio; and 0.54% for the Equity
Index Portfolio. Pacific Mutual intends to continue the above-described expense
reimbursement policy until at least December 31, 1995. There can be no
assurance that the expense reimbursement arrangement will continue after that
date, and any unreimbursed expenses would be reflected in the Policy Owner's
Accumulated Value and in some instances, the death benefit.
64
<PAGE>
After deduction of the charges and Fund expenses described above, the
illustrated gross annual investment rates of return of 0%, 6%, and 12%
correspond to approximate net annual rates of return of -0.90%, 5.05%, and
10.99%. The hypothetical values shown in the tables do not reflect any charges
against the Variable Accounts for income taxes that may be attributable to the
Variable Accounts in the future, since Pacific Mutual is not currently making
these charges. In the event that these charges are to be made, the gross annual
investment rate of return would have to exceed 0%, 6% or 12% by an amount
sufficient to cover the tax charges in order to produce the death benefits,
Accumulated Values and Net Cash Surrender Values illustrated.
Pacific Mutual will furnish upon request a comparable illustration reflecting
the proposed Insured's Age, underwriting class, Face Amount, death benefit and
premium amounts requested. In addition, upon request, illustrations will be
furnished reflecting allocation of premiums to specified Variable Accounts.
Such illustrations will reflect the expenses of the Portfolio of the Fund in
which the Variable Account invests. Illustrations that use a hypothetical gross
rate of return in excess of 12% are available to certain large institutional
investors upon request.
65
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER VALUES
BASED ON CURRENT COST OF INSURANCE CHARGES
ISSUE AGE : 40 FACE AMOUNT: $560,336
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: A
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL
PREMIUMS
END OF PAID PLUS END OF YEAR DEATH BENEFIT ASSUMING
POLICY INTEREST AT HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
------------------------------------------------
YEAR 5% 0% 6% 12%
------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
1 $ 10,500 $ 560,336 $ 560,336 $ 560,336
2 $ 21,525 $ 560,336 $ 560,336 $ 560,336
3 $ 33,101 $ 560,336 $ 560,336 $ 560,336
4 $ 45,256 $ 560,336 $ 560,336 $ 560,336
5 $ 58,019 $ 560,336 $ 560,336 $ 560,336
6 $ 71,420 $ 560,336 $ 560,336 $ 560,336
7 $ 85,491 $ 560,336 $ 560,336 $ 560,336
8 $ 100,266 $ 560,336 $ 560,336 $ 560,336
9 $ 115,779 $ 560,336 $ 560,336 $ 560,336
10 $ 132,068 $ 560,336 $ 560,336 $ 560,336
15 $ 226,575 $ 560,336 $ 560,336 $ 560,336
20 $ 347,193 $ 560,336 $ 560,336 $ 725,119
25 $ 501,135 $ 560,336 $ 560,336 $1,165,835
30 $ 697,608 $ 560,336 $ 597,594 $1,894,987
35 $ 948,363 $ 560,336 $ 745,006 $2,937,403
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
END OF ASSUMING HYPOTHETICAL GROSS ANNUAL ASSUMING HYPOTHETICAL GROSS ANNUAL
POLICY INVESTMENT RETURN OF INVESTMENT RETURN OF
----------------------------------------- ------------------------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ ----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 8,014 $ 8,528 $ 9,044 $ 3,796 $ 4,310 $ 4,826
2 $ 15,927 $ 17,454 $ 19,043 $ 11,709 $ 13,236 $ 14,826
3 $ 23,240 $ 26,280 $ 29,570 $ 19,022 $ 22,062 $ 25,352
4 $ 30,400 $ 35,454 $ 41,146 $ 26,183 $ 31,236 $ 36,928
5 $ 37,413 $ 44,997 $ 53,886 $ 33,195 $ 40,779 $ 49,668
6 $ 44,284 $ 54,929 $ 67,917 $ 40,910 $ 51,555 $ 64,542
7 $ 51,017 $ 65,272 $ 83,380 $ 48,486 $ 62,742 $ 80,849
8 $ 57,617 $ 76,049 $ 100,432 $ 55,930 $ 74,362 $ 98,744
9 $ 64,088 $ 87,283 $ 119,244 $ 63,244 $ 86,439 $ 118,400
10 $ 70,434 $ 98,999 $ 140,009 $ 70,434 $ 98,999 $ 140,009
15 $ 103,634 $ 170,767 $ 289,509 $ 103,634 $ 170,767 $ 289,509
20 $ 132,814 $ 260,977 $ 541,134 $ 132,814 $ 260,977 $ 541,134
25 $ 152,515 $ 372,434 $ 955,602 $ 152,515 $ 372,434 $ 955,602
30 $ 157,500 $ 515,167 $1,633,609 $ 157,500 $ 515,167 $1,633,609
35 $ 135,623 $ 696,267 $2,745,236 $ 135,623 $ 696,267 $2,745,236
</TABLE>
______________
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans have been made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND THE CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN SHOWN AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO VARIABLE
ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE THAT
THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
THIS IS FOR AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
66
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES BASED ON GUARANTEED COST OF INSURANCE CHARGES
ISSUE AGE: 40 FACE AMOUNT: $560,336
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: A
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL
PREMIUMS
END OF PAID PLUS END OF YEAR DEATH BENEFIT ASSUMING
POLICY INTEREST AT HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
------------------------------------------------
YEAR 5% 0% 6% 12%
------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
1 $ 10,500 $ 560,336 $ 560,336 $ 560,336
2 $ 21,525 $ 560,336 $ 560,336 $ 560,336
3 $ 33,101 $ 560,336 $ 560,336 $ 560,336
4 $ 45,256 $ 560,336 $ 560,336 $ 560,336
5 $ 58,019 $ 560,336 $ 560,336 $ 560,336
6 $ 71,420 $ 560,336 $ 560,336 $ 560,336
7 $ 85,491 $ 560,336 $ 560,336 $ 560,336
8 $ 100,266 $ 560,336 $ 560,336 $ 560,336
9 $ 115,779 $ 560,336 $ 560,336 $ 560,336
10 $ 132,068 $ 560,336 $ 560,336 $ 560,336
15 $ 226,575 $ 560,336 $ 560,336 $ 560,336
20 $ 347,193 $ 560,336 $ 560,336 $ 642,127
25 $ 501,135 $ 560,336 $ 560,336 $1,028,229
30 $ 697,608 $ 560,336 $ 560,336 $1,659,472
35 $ 948,363 $ 0* $ 560,336 $2,555,468
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
END OF ASSUMING HYPOTHETICAL GROSS ANNUAL ASSUMING HYPOTHETICAL GROSS ANNUAL
POLICY INVESTMENT RETURN OF INVESTMENT RETURN OF
------------------------------------------- ---------------------------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ ---------- ---------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 7,269 $ 7,760 $ 8,252 $ 3,051 $ 3,542 $ 4,034
2 $ 14,475 $ 15,912 $ 17,409 $ 10,257 $ 11,694 $ 13,191
3 $ 21,445 $ 24,294 $ 27,381 $ 17,227 $ 20,076 $ 23,163
4 $ 28,164 $ 32,899 $ 38,237 $ 23,946 $ 28,681 $ 34,019
5 $ 34,633 $ 41,739 $ 50,074 $ 30,416 $ 37,521 $ 45,857
6 $ 40,841 $ 50,810 $ 62,984 $ 37,466 $ 47,435 $ 59,609
7 $ 46,788 $ 60,123 $ 77,084 $ 44,257 $ 57,592 $ 74,553
8 $ 52,467 $ 69,682 $ 92,500 $ 50,780 $67 ,995 $ 90,813
9 $ 57,876 $ 79,498 $ 109,376 $ 57,032 $ 78,655 $ 108,533
10 $ 62,996 $ 89,568 $ 127,863 $ 62,996 $ 89,568 $ 127,863
15 $ 86,464 $148,183 $ 258,818 $ 86,464 $148,183 $ 258,818
20 $ 99,193 $215,714 $ 479,199 $ 99,193 $215,714 $ 479,199
25 $ 96,180 $294,750 $ 842,811 $ 96,180 $294,750 $ 842,811
30 $ 65,476 $390,654 $1,430,579 $ 65,476 $390,654 $1,430,579
35 $ 0 * $521,229 $2,388,288 $ 0 * $521,229 $2,388,288
</TABLE>
__________
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans have been made.
* Additional payment will be required to prevent policy termination.
THE DEATH BENEFITS, ACCUMULATED VALUES AND THE CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE ILLUSTRATION
ARE NOT GUARANTEED.
67
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Accumulated Values and Net Cash Surrender Values
Based on Current Cost of Insurance Charges
ISSUE AGE: 40 FACE AMOUNT: $223,050
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: B
GUIDELINE PREMIUM TEST ANNUAL PREMIUM:$10,000
<TABLE>
<CAPTION>
TOTAL
PREMIUMS
END OF PAID PLUS END OF YEAR DEATH BENEFIT ASSUMING
POLICY INTEREST AT HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
1 $ 10,500 $ 231,569 $ 232,099 $ 232,630
2 $ 21,525 $ 240,089 $ 241,680 $ 243,335
3 $ 33,101 $ 248,250 $ 251,444 $ 254,895
4 $ 45,256 $ 256,262 $ 261,608 $ 267,615
5 $ 58,019 $ 264,127 $ 272,190 $ 281,613
6 $ 71,420 $ 271,848 $ 283,208 $ 297,020
7 $ 85,491 $ 279,428 $ 294,682 $ 313,980
8 $ 100,266 $ 286,869 $ 306,631 $ 332,651
9 $ 115,779 $ 294,175 $ 319,078 $ 353,211
10 $ 132,068 $ 301,348 $ 332,043 $ 375,851
15 $ 226,575 $ 338,723 $ 410,809 $ 537,851
20 $ 347,193 $ 372,668 $ 508,930 $ 804,114
25 $ 501,135 $ 400,147 $ 627,808 $ 1,244,366
30 $ 697,608 $ 418,187 $ 769,168 $ 2,017,372
35 $ 948,363 $ 421,065 $ 931,896 $ 3,140,185
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
END OF ASSUMING HYPOTHETICAL GROSS ANNUAL ASSUMING HYPOTHETICAL GROSS ANNUAL
POLICY INVESTMENT RETURN OF INVESTMENT RETURN OF
--------------------------------------------- -------------------------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ ----------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 8,519 $ 9,049 $ 9,580 $ 6,840 $ 7,370 $ 7,901
2 $ 17,039 $ 18,630 $ 20,285 $ 15,360 $ 16,951 $ 18,606
3 $ 25,200 $ 28,394 $ 31,845 $ 23,521 $ 26,715 $ 30,116
4 $ 33,212 $ 38,558 $ 44,565 $ 31,533 $ 36,879 $ 42,886
5 $ 41,077 $ 49,140 $ 58,563 $ 39,398 $ 47,461 $ 56,884
6 $ 48,798 $ 60,158 $ 73,970 $ 47,455 $ 58,815 $ 72,626
7 $ 56,378 $ 71,632 $ 90,930 $ 55,370 $ 70,624 $ 89,922
8 $ 63,819 $ 83,581 $ 109,601 $ 63,147 $ 82,910 $ 108,930
9 $ 71,125 $ 96,028 $ 130,161 $ 70,789 $ 95,692 $ 129,825
10 $ 78,298 $ 108,993 $ 152,801 $ 78,298 $ 108,993 $ 152,801
15 $ 115,673 $ 187,759 $ 314,060 $ 115,673 $ 187,759 $ 314,060
20 $ 149,618 $ 285,880 $ 581,064 $ 149,618 $ 285,880 $ 581,064
25 $ 177,097 $ 404,758 $ 1,019,972 $ 177,097 $ 404,758 $ 1,019,972
30 $ 195,137 $ 546,118 $ 1,739,114 $ 195,137 $ 546,118 $ 1,739,114
35 $ 198,015 $ 708,846 $ 2,917,135 $ 198,015 $ 708,846 $ 2,917,135
</TABLE>
_______________
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans have been made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND THE CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE ILLUSTRATION
ARE NOT GUARANTEED.
68
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Accumulated Values and Net Cash Surrender Values
Based on Guaranteed Cost of Insurance Charges
ISSUE AGE:40 FACE AMOUNT:$223,050
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION:B
GUIDELINE PREMIUM TEST ANNUAL PREMIUM:$10,000
<TABLE>
<CAPTION>
Total
Premiums
End of Paid Plus End of Year DEATH BENEFIT Assuming
Policy Interest at Hypothetical Gross Annual Investment Return of
----------------------------------------------
Year 5% 0% 6% 12%
---- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
1 $ 10,500 $231,301 $231,823 $ 232,345
2 $ 21,525 $239,538 $241,095 $ 242,715
3 $ 33,101 $247,582 $250,703 $ 254,078
4 $ 45,256 $255,429 $260,654 $ 266,528
5 $ 58,019 $263,079 $270,959 $ 280,171
6 $ 71,420 $270,526 $281,625 $ 295,122
7 $ 85,491 $277,772 $292,664 $ 311,511
8 $100,266 $284,812 $304,086 $ 329,477
9 $115,779 $291,647 $315,903 $ 349,176
10 $132,068 $298,267 $328,120 $ 370,774
15 $226,575 $331,096 $400,467 $ 522,525
20 $347,193 $357,225 $486,365 $ 768,926
25 $501,135 $374,431 $586,476 $1,169,776
30 $697,608 $378,322 $698,997 $1,853,182
35 $948,363 $362,219 $818,919 $2,878,507
</TABLE>
<TABLE>
<CAPTION>
End of Year ACCUMULATED VALUE End of Year NET CASH SURRENDER VALUE
End of Assuming Hypothetical Gross Annual Assuming Hypothetical Gross Annual
Policy Investment Return of Investment Return of
-------------------------------------------- -----------------------------------------
Year 0% 6% 12% 0% 6% 12%
- ----- ------------- -------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 8,251 $ 8,773 $ 9,295 $ 6,572 $ 7,094 $ 7,616
2 $ 16,488 $ 18,045 $ 19,665 $ 14,809 $ 16,366 $ 17,986
3 $ 24,532 $ 27,653 $ 31,028 $ 22,853 $ 25,974 $ 29,349
4 $ 32,379 $ 37,604 $ 43,478 $ 30,700 $ 35,925 $ 41,799
5 $ 40,029 $ 47,909 $ 57,121 $ 38,350 $ 46,230 $ 55,442
6 $ 47,476 $ 58,575 $ 72,072 $ 46,133 $ 57,231 $ 70,729
7 $ 54,722 $ 69,614 $ 88,461 $ 53,714 $ 68,606 $ 87,453
8 $ 61,762 $ 81,036 $ 106,427 $ 61,091 $ 80,364 $ 105,755
9 $ 68,597 $ 92,853 $ 126,126 $ 68,261 $ 92,517 $ 125,790
10 $ 75,217 $ 105,070 $ 147,724 $ 75,217 $ 105,070 $ 147,724
15 $ 108,046 $ 177,417 $ 299,475 $ 108,046 $ 177,417 $ 299,475
20 $ 134,175 $ 263,315 $ 545,876 $ 134,175 $ 263,315 $ 545,876
25 $ 151,381 $ 363,426 $ 946,726 $ 151,381 $ 363,426 $ 946,726
30 $ 155,272 $ 475,947 $1,597,571 $ 155,272 $ 475,947 $1,597,571
35 $ 139,169 $ 595,869 $2,655,457 $ 139,169 $ 595,869 $2,655,457
</TABLE>
___________
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans have been made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND THE CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
69
<PAGE>
[LOGO OF PACIFIC SELECT EXEC]
Issued By Principal Underwriter
Pacific Mutual Life Insurance Company Pacific Equities Network
700 Newport Center Drive Member: NASD & SIPC
P.O. Box 9000 700 Newport Center Drive
Newport Beach, California 92660 P.O. Box 9000
Newport Beach, California 92660
<PAGE>
Sponsored by:
[LOGO OF PACIFIC MUTUAL]
PACIFIC MUTUAL LIFE INSURANCE COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CA 92660
Distributed by:
[LOGO OF PACIFIC EQUITIES NETWORK]
700 NEWPORT CENTER DRIVE, NB-5
NEWPORT BEACH, CA 92660
1-800-800-7681
FORM NO. 15-16636-09
