<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 CHOICE]
Flexible Premium
Variable Universal Life
PROSPECTUSES FOR
PACIFIC SELECT CHOICE
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 CHOICE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY PACIFIC MUTUAL LIFE INSURANCE COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
[LOGO OF PACIFIC SELECT CHOICE] 1-800-800-7681
This prospectus describes Pacific Select Choice--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 permits the Policy Owner, subject to
certain restrictions, to vary the frequency and amount of premium payments
and to decrease the death benefit payable under the 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 permits the Policy Owner to have one or two elections in
determining the death benefit under a Policy. First, the Policy Owner will
choose from two death benefit qualification tests--the cash value
accumulation test or the guideline premium test. If the Policy Owner chooses
the guideline premium test, 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 any election or 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 23), during which
time net premium payments will be allocated to 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 34.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCU-
RACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE PACIFIC
SELECT FUND. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
DATE: MAY 1, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
IMPORTANT TERMS............................................................ 4
SUMMARY OF THE POLICY...................................................... 6
Purpose Of The Policy.................................................... 6
Policy Values............................................................ 6
The Death Benefit........................................................ 6
Premium Features......................................................... 7
Allocation Options....................................................... 7
Transfer Of Accumulated Value............................................ 8
Policy Loans............................................................. 8
Free-Look Right.......................................................... 8
Surrender Right.......................................................... 8
Partial Withdrawal Benefit............................................... 8
Charges and Deductions................................................... 9
Tax Treatment Of Increases In Accumulated Value.......................... 10
Tax Treatment Of Death Benefit........................................... 10
The Fixed Account........................................................ 10
Contacting Pacific Mutual................................................ 10
INFORMATION ABOUT PACIFIC MUTUAL, THE SEPARATE ACCOUNT
AND THE FUND.............................................................. 11
Pacific Mutual Life Insurance Company.................................... 11
Pacific Select Exec Separate Account..................................... 11
The Pacific Select Fund.................................................. 11
The Investment Adviser................................................... 12
THE POLICY................................................................. 13
Application For A Policy................................................. 13
Premiums................................................................. 13
Allocation Of Net Premiums............................................... 14
Dollar Cost Averaging Option............................................. 15
Transfer Of Accumulated Value............................................ 16
Death Benefit............................................................ 16
Changes In Guideline Premium Test Death Benefit Option................... 18
Change in Death Benefit by Pacific Mutual................................ 19
Decrease In Face Amount.................................................. 19
Policy Values............................................................ 19
Determination Of Accumulated Value....................................... 20
Policy Loans............................................................. 20
Benefits At Maturity..................................................... 21
Surrender................................................................ 22
Partial Withdrawal Benefit............................................... 22
Right To Examine A Policy--Free-Look Right............................... 23
Lapse.................................................................... 23
Reinstatement............................................................ 24
Right to Convert Policy.................................................. 24
CHARGES AND DEDUCTIONS..................................................... 25
Premium Load............................................................. 25
Sales Load Refund........................................................ 25
Deductions From Accumulated Value........................................ 25
Underwriting Surrender Charge............................................ 27
Withdrawal Fee........................................................... 27
Corporate and Other Purchasers........................................... 27
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Other Charges............................................................ 27
Guarantee Of Certain Charges............................................. 28
OTHER INFORMATION.......................................................... 28
Federal Income Tax Considerations........................................ 28
Charge For Pacific Mutual Income Taxes................................... 31
Voting On Fund Shares.................................................... 32
Disregard Of Voting Instructions......................................... 32
Report To Owners......................................................... 32
Substitution Of Investments.............................................. 33
Changes To Comply With Law............................................... 33
THE FIXED ACCOUNT.......................................................... 34
General Description...................................................... 34
Death Benefit............................................................ 34
Policy Charges........................................................... 34
Transfers, Surrenders, Withdrawals, And Policy Loans..................... 35
MORE ABOUT THE POLICY...................................................... 35
Ownership................................................................ 35
Beneficiary.............................................................. 35
The Contract............................................................. 36
Payments................................................................. 36
Assignment............................................................... 36
Errors On The Application................................................ 36
Incontestability......................................................... 36
Payment In Case Of Suicide............................................... 37
Participating............................................................ 37
Policy Illustrations..................................................... 37
Payment Plan............................................................. 37
Optional Insurance Benefits.............................................. 37
Private Retirement Plans................................................. 38
Risks of Private Retirement Plans........................................ 38
Distribution Of The Policy............................................... 39
MORE ABOUT PACIFIC MUTUAL.................................................. 39
Management............................................................... 39
State Regulation......................................................... 42
Telephone Transfer and Loan Privileges................................... 42
Legal Proceedings........................................................ 42
Legal Matters............................................................ 42
Registration Statement................................................... 42
Independent Accountants.................................................. 43
Financial Statements..................................................... 43
APPENDIX A................................................................. 64
APPENDIX B................................................................. 65
ILLUSTRATIONS.............................................................. 66
</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 underwriting surrender
charge.
Face Amount--The minimum death benefit for so long as the Policy remains in
force. The Face Amount may be 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.
Guideline Annual Premium--A hypothetical premium that is used in the
measurement of any sales load refund upon surrender or lapse of the Policy
during the first two years after issuance. The Guideline Annual Premium is
equal to the premium that would be payable under a Policy for one year if the
Policy Owner were to pay level annual premiums for the life of the Policy,
taking into account fees and charges under the Policy (including charges, if
any, for substandard risks and optional insurance benefits) and assuming net
investment earnings at an annual rate of 5% or, if greater, the rate or rates
guaranteed in the Policy at issuance.
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 100. The
Maturity Date may be extended beyond Age 100 at the written request of the
Policy Owner, in which case reserves, cost of insurance rates, and any other
calculations depending on the Insured's Age will be based on Age 99.
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.
4
<PAGE>
Policy Debt--The unpaid loan balance including accrued loan interest charged.
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.
Target Premium--A hypothetical premium that is used in the measurement of sales
load under the Policy. The Target Premium varies with the death benefit
election, the Age of the Insured at issue, and the sex of the Insured (unless
unisex rates are required by law). The Target Premium will be equal to or less
than the Guideline Annual Premium. The Target Premium is shown in the Policy.
Valuation Date--Each date on which the Separate Account is valued, which
currently includes each day that the New York Stock Exchange is open for
trading and on which Pacific Mutual's administrative offices are open. The New
York Stock Exchange is closed on weekends and on the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, July Fourth, Labor Day,
Thanksgiving 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.
5
<PAGE>
SUMMARY OF THE POLICY
This summary is intended to provide a brief overview of the more significant
aspects of the Policy. Further detail is provided in this prospectus and in the
Policy. Unless the context indicates otherwise, the discussion in this summary
and the remainder of the prospectus relates to the portion of the Policy
involving the Separate Account. The Fixed Account is briefly described under
"The Fixed Account," on page 34 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 allocation 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 election or 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 will have one or two elections in determining the death
benefit under the Policy. First, the Policy Owner will choose from two death
benefit qualification tests--the cash value accumulation test or the guideline
premium test. Under the cash value accumulation test, the death benefit will be
equal to the Face Amount or, if greater, Accumulated Value divided by the "net
single premium" that would purchase $1 of future benefits under the Policy. If
the Policy Owner chooses the guideline premium test, the Policy also permits
the Policy Owner to choose from two death benefit options. 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 end of the Valuation Period during
which the Insured dies) or, if greater, Accumulated Value multiplied by a death
benefit percentage. For a discussion of these elections see "Death Benefit,"
page 16. Policy Owners choosing the guideline premium test may change the death
benefit option among Option A and Option B subject to certain conditions. See
"Death Benefit" and "Changes in Guideline Premium Test Death Benefit Option,"
pages 16 and 18, respectively.
6
<PAGE>
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.
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 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 28.
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. 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 11.
Pacific Mutual is the Investment Adviser of each of the Portfolios. For eight
of the Portfolios, the Adviser and the Fund have engaged other firms to serve
as Portfolio Managers under the supervision of Pacific Mutual. Pacific
Investment Management Company, a subsidiary partnership of PIMCO Advisors L.P.,
each 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.
7
<PAGE>
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 16.
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
underwriting surrender charge, 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 20.
The amount of any Policy Debt is subtracted from the death benefit or from
the Cash Surrender Value upon surrender. See "Policy Loans," page 20. 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
An Owner may return the Policy within the Free-Look Period, which is 10 days
after the Owner receives it (30 days if the Owner resides in California and is
age 60 or older), 10 days after Pacific Mutual mails or delivers a notice of
the right of withdrawal, or 45 days after the application for the Policy is
signed, whichever is latest. In the event an Owner returns a Policy within the
Free-Look Period, except as indicated below, Pacific Mutual will refund any
charges deducted from premiums received, any net premiums received allocated to
the Fixed Account, plus the sum of the Policy's Accumulated Value allocated to
the Variable Accounts as of the end of the Valuation Period in which Pacific
Mutual receives the Policy plus any Policy charges and fees deducted from the
Policy's Accumulated Value in the Variable Accounts. Pacific Mutual will
allocate any net premiums received according to the Owner's allocation
instructions contained in the application, or more recent written instructions,
if any, when the application is approved and the Policy is issued.
If an Owner resides in a state where applicable law so requires, Pacific
Mutual will refund premiums received to an Owner who exercises the Free-Look
Right. Pacific Mutual will allocate any net premiums received before the Free-
Look Transfer Date to the Money Market Variable Account. See "Allocation of Net
Premiums," page 14.
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
underwriting surrender charge and less any outstanding Policy Debt. If a Policy
is surrendered during the first two years following its issuance, a portion of
the sales load paid under the Policy may be refunded to the Owner. See "Sales
Load Refund," page 25.
PARTIAL WITHDRAWAL BENEFIT
A partial surrender benefit is available under the Policy on and after the
First Policy Anniversary. Under this Benefit, a Policy Owner may make "Partial
Withdrawals" of Net Cash Surrender Value. A Partial
8
<PAGE>
Withdrawal may decrease the Face Amount on a Policy on which the Owner has
elected the cash value accumulation test or the guideline premium test death
benefit Option A, and will decrease the death benefit if the death benefit is
greater than the Face Amount under any of the death benefit options or
elections. See "Partial Withdrawal Benefit," page 22. A Policy Owner may elect
to receive systematic Partial Withdrawals after the first Policy Year while the
Policy is in force as described under "Systematic Withdrawals," page 23.
Among other restrictions, Partial Withdrawals must be for at least $500, and
the Policy's Net Cash Surrender Value after the withdrawal must be at least
$500. No underwriting surrender charge will be assessed upon a Partial
Withdrawal. A $25 withdrawal fee will be deducted from the Policy's Accumulated
Value for each Partial Withdrawal. The Withdrawal Fee is currently waived on
each systematic withdrawal following the first systematic 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 a sales load and a charge for state and local premium
tax.
For purposes of assessing the sales load, premiums are measured in terms of
Target Premiums. The Target premium is set forth in the Policy. The sales load
is based on Target Premiums and varies with the death benefit election. The
maximum sales load assessed upon the Target Premiums received under a Policy
are shown in the chart below:
<TABLE>
<CAPTION>
SALES LOAD UNDER OPTION A
AND CASH VALUE SALES LOAD UNDER
TARGET PREMIUMS ACCUMULATION TEST OPTION B
- --------------- ------------------------- ----------------
<S> <C> <C>
1 through 3.......................... 25% 30%
4 through 10......................... 4% 4%
11 and thereafter.................... 2% 2%
</TABLE>
The state and local premium tax charge currently is equal to 2.35% of each
premium.
Sales Load Refund
If a Policy is surrendered for its Net Cash Surrender Value or the Policy
lapses at any time during the first two years following its issuance, a portion
of the sales load paid under a Policy may be refunded. This refund will be paid
only for premiums paid in the first two years following issuance of the Policy.
Pacific Mutual will refund the excess of the sales load charged over the sum of
(1) 30% of the premiums paid during the first years from issuance up to one
Guideline Annual Premium, plus (2) 10% of the premiums paid during the first
years from issuance that exceed one Guideline Annual Premium by up to one
Guideline Annual Premium, plus (3) 9% of actual premium payments paid during
the first two years from issuance in excess of two times the Guideline Annual
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, $8.00 per month for Face Amounts of less than $100,000, and $5.00
per month for Face Amounts of $100,000 and less than $500,000. There is no
charge for Face Amounts of $500,000 or more. This charge is guaranteed not
to exceed $25 in each of the first 12 Policy Months and $10.00 per month
thereafter.
9
<PAGE>
--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 in the Variable and Fixed Accounts, which is equivalent
to an annual rate of .75% of such amount. During the 11th through 20th
Policy Years, the charge is equal to .000208333 multiplied by a Policy's
Accumulated Value in the Variable and Fixed Accounts, which is equivalent
to an annual rate of .25% of such amount. After the 20th Policy Year the
charge reduces to 0%.
--Optional Insurance Benefits Charges: Charges for any optional insurance
benefits added to the Policy by rider will be included in the monthly
deduction or as otherwise specified in the rider and/or the Policy.
Underwriting Surrender Charge
Pacific Mutual will assess an underwriting surrender charge against
Accumulated Value upon surrender of a Policy until the tenth Policy
Anniversary. 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 Face
Amount in accordance with a schedule shown on page 27. 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.
Withdrawal Fee
Pacific Mutual will assess a $25 Withdrawal Fee against the Policy's
Accumulated Value when a Partial Withdrawal is made. The Withdrawal Fee is
currently waived on each systematic withdrawal following the first systematic
withdrawal.
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
25.
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 Partial
Withdrawal, or a Policy Loan, see "Federal Income Tax Considerations," page 28.
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, the death
benefit generally will be fully excludable from the gross income of the
Beneficiary under the Internal Revenue Code. See "Federal Income Tax
Considerations," page 28.
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 34.
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, CA 92658-7500.
10
<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 Separate
Account supports the Policies as well as other variable life insurance policies
issued by Pacific Mutual. 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 variable life insurance 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
variable life insurance policies funded by the Separate Account 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 Portfolio 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. Such registration does not involve supervision by the SEC of the
investments or investment policies of the Fund. The Fund currently offers ten
separate Portfolios to the Separate Account. Each Portfolio pursues different
investment objectives and policies. The shares of each Portfolio are purchased
by Pacific Mutual for the corresponding Variable Account at net asset value,
i.e., without sales load. All dividends and capital gains distributions
received from a Portfolio are automatically reinvested in such Portfolio at net
asset value, unless Pacific Mutual, on behalf of the Separate Account, elects
otherwise. Fund shares will be redeemed by Pacific Mutual at their net asset
value to the extent necessary to make payments under the Policies.
11
<PAGE>
Shares of the Fund currently are offered only for purchase by Separate
Accounts of Pacific Mutual to serve as an investment medium for variable life
insurance policies and for variable annuity contracts issued by Pacific Mutual
and to a separate account of Pacific Corinthian Life Insurance Company, a
subsidiary of Pacific Mutual, to serve as an investment medium for variable
annuity contracts administered by Pacific Corinthian. Shares of the Fund may
also be sold in the future to separate accounts of other insurance companies
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
Portfolio.
THE FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING.
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS INVESTMENT ADVISER/
PORTFOLIO OBJECTIVE (UNDER NORMAL CIRCUMSTANCES) PORTFOLIO MANAGER
<C> <C> <S> <C>
Money Market Current income consistent Highest quality money Pacific Mutual
with preservation of capital market instruments
- -----------------------------------------------------------------------------------------------------------
High-Yield Bond High level of current income Intermediate and long- Pacific Mutual
term, high-yielding,
lower and medium quality
(high risk) fixed-income
securities
- -----------------------------------------------------------------------------------------------------------
Managed Bond Maximize total return Investment grade Pacific Mutual/
consistent with prudent marketable debt Pacific Investment
investment management securities. Will Management Company
normally maintain an
average portfolio
duration of 3-6 years.
- -----------------------------------------------------------------------------------------------------------
Government Maximize total return U.S. Government Pacific Mutual/
Securities consistent with prudent securities including Pacific Investment
investment management futures and options Management Company
thereon and high-grade
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 capital Common stock Pacific Mutual/
consistent with the Janus Capital Corporation
preservation of capital
- -----------------------------------------------------------------------------------------------------------
Equity Income Long-term growth of capital Dividend paying common Pacific Mutual/
and income stock J.P. Morgan Investment
Management Inc.
- -----------------------------------------------------------------------------------------------------------
Multi-Strategy High total return Equity and fixed income Pacific Mutual/
securities J.P. Morgan Investment
Management Inc.
- -----------------------------------------------------------------------------------------------------------
Equity Index Provide investment results Stocks included in the Pacific Mutual/Bankers Trust
that correspond to the total S&P 500 Company
return performance of
common stocks publicly traded
in the U.S.
- -----------------------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Pacific Mutual/Templeton
appreciation corporations domiciled Investment Counsel, Inc.
outside the United
States
</TABLE>
THE INVESTMENT ADVISER
Pacific Mutual, located at 700 Newport Center Drive, Newport Beach,
California 92660, serves as Investment Adviser to each Portfolio of the Fund.
Pacific Mutual is registered with the SEC as an Investment Adviser. For eight
of the Portfolios, the Investment Adviser and the Fund have engaged other firms
to serve as Portfolio Managers under the supervision of Pacific Mutual.
12
<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 of corporations
that 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 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 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 26)), 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.
13
<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 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 Periodic Premiums. Premiums may
be paid monthly under the Uni-check plan electronic funds transfer 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 23.
Any premium payment must be for at least $50. 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 26.
If satisfactory evidence of insurability is not received, the payment, or a
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 for Policy Owners electing
the guideline premium test.
Certain charges will be deducted from each premium payment. See "Charges and
Deductions," page 25. The remainder of the premium, known as the net premium,
will be allocated as described below under "Allocation of Net Premiums." Except
in Texas, 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 Accounts to which net premium payments will be allocated.
When the application is approved and the Policy is issued, the Accumulated
Value will be automatically allocated according to the Policy Owner's
instructions contained in the application, or more recent written instructions,
if any (except for amounts allocated to the Loan Account to secure any Policy
loan). For residents of states that require a refund of premium to an Owner who
returns the Policy during the Free-Look Period, net premiums received by
Pacific Mutual before the Free-Look Transfer Date will be allocated to the
Money Market Variable Account (except for amounts allocated to the Loan Account
to secure any Policy loan). The Free-Look Transfer Date is the later of 15 days
after the Policy is issued or 45 days after the application is signed, or, if
longer, upon receipt of the minimum initial premium. After the Free-Look
Transfer Date, net premiums will be allocated according to the Owner's most
recent instructions as of the end of the Valuation Period in which the premiums
are received by Pacific Mutual at its Home Office. 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.
14
<PAGE>
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 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 Transfer Date, 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 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
15
<PAGE>
elected has been transferred, or the Variable Account has been depleted, or
after the Dollar Cost Averaging Option has been cancelled, a new Dollar Cost
Averaging Request must be completed and sent to Pacific Mutual's Home Office.
The Variable Account from which transfers are to be made must meet the $5,000
minimum amount of the Accumulated Value. Pacific Mutual may discontinue,
modify, or suspend the Dollar Cost Averaging Option at any time.
TRANSFER OF ACCUMULATED VALUE
During the Accumulation Period, Accumulated Value may be transferred among
the Variable Accounts by the Policy Owner upon proper written request to
Pacific Mutual's Home Office. Transfers may not be made until after the Free-
Look Transfer Date by Policy Owners residing in states that require Pacific
Mutual to refund premiums to Policy Owners that return their Policies during
the Free-Look Period. 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 23. 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 Transfer Date
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 34.
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 or if the Policy
Owner acquires multiple Policies on the life of the same Insured.
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 death benefit proceeds on the life of the Insured provided by rider,
reduced by any outstanding Policy Debt (and, if in the Grace Period, any
overdue charges).
Each Policy Owner will have one or two elections in determining the death
benefit under a Policy. First, the Policy Owner will choose the death benefit
qualification test, which is the method for qualifying the Policy as a life
insurance contract for purposes of federal tax law. Two tests are available
under the Policy. Once elected, the death benefit qualification test cannot be
changed for the duration of the Policy. As described below, the available death
benefit qualification tests are the cash value accumulation test and the
guideline premium test. Generally, an applicant designates the death benefit
election or option in the application. If no option is designated, the
guideline premium test Option A will be assumed by Pacific Mutual to have been
selected.
Cash Value Accumulation Test. The death benefit will be determined with
reference to the requirements for the cash value accumulation test for
qualifying a Policy as a life insurance contract under Section 7702 of the
Internal Revenue Code. For Policy Owners choosing the cash value accumulation
test, the death benefit
16
<PAGE>
will be equal to the Face Amount or, if greater, Accumulated Value (determined
as of the end of the Valuation Period during which the Insured dies) divided by
the "net single premium" that would purchase $1 of future benefits under the
Policy. Generally, the cash value accumulation test requires that under the
terms of a life insurance policy, the death benefit must be sufficient so that
the cash surrender value, as defined in Section 7702, does not at any time
exceed the net single premium required to fund the future benefits under the
policy. The net single premiums under the Policy vary according to the Age,
sex, and underwriting classification of the Insured, and the resulting death
benefit determined by using the net single premium will be at least equal to
the amount required for the Policy to be deemed life insurance under Section
7702 of the Internal Revenue Code. The net single premium is calculated using a
four percent interest rate or, if higher, the contractually guaranteed interest
rate and using mortality charges specified in the prevailing commissioners
standard tables as of the time the Policy is issued. The net single premium
that would purchase $1 of future benefits under the Policy for a male Insured,
Age 40, is 0.2966. A table showing net single premiums that would purchase $1
of future benefits under the Policy for Insureds in a standard underwriting
classification is in Appendix A to this Prospectus.
Guideline Premium Test. The death benefit will be determined with reference
to the requirements for the guideline premium test for qualifying a Policy as a
life insurance contract under the Internal Revenue Code. A Policy Owner who
chooses this test is given another election under the Policy--to select one of
two death benefit options: Option A or Option B. 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. 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 Appendix B to this Prospectus.
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 Appendix B. The
death benefit under Option B will always vary as Accumulated Value varies.
Comparison of Death Benefit Elections. There are two main differences between
the cash value accumulation test and the guideline premium test. First, the
guideline premium test limits the amount of premium that may be paid into a
Policy. No such limits apply under the cash value accumulation test. (However,
any premium that would increase the net amount at risk is subject to evidence
of insurability satisfactory to Pacific Mutual.) Second, the factors that
determine the minimum death benefit relative to the Policy's Accumulated Value
are different. Required increases in the minimum death benefit due to growth in
Accumulated Value will generally be greater under the cash value accumulation
test than under the guideline premium test.
Policy Owners who desire to pay premiums in excess of the guideline premium
test limitations should elect the cash value accumulation test. Policy Owners
who do not desire to pay premiums in excess of the guideline premium test
limitations should consider the guideline premium test. Favorable investment
performance will be reflected in increasing Accumulated Value to the greatest
degree under the guideline premium test Option A. At times, favorable
investment performance will be reflected in increasing insurance coverage to
the greatest degree under the guideline premium test Option B; at other times,
insurance coverage will be greater under the cash value accumulation test.
APPLICANTS FOR A POLICY SHOULD CONSULT A QUALIFIED TAX ADVISER IN CHOOSING A
DEATH BENEFIT ELECTION.
The following examples demonstrate the determination of death benefits under
Options A and B of the guideline premium test and under the cash value
accumulation test. The examples show three Policies--
17
<PAGE>
Policies I, II, and III--with the same Face Amount, but Accumulated Values that
vary as shown, and which assume a male Insured, Age 40, at the time of
calculation of the death benefit 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........................... $ 25,000 $ 50,000 $ 75,000
Death Benefit Percentage.................... 250% 250% 250%
Net Single Premium Factor................... 0.2966 0.2966 0.2966
Death Benefit Under Option A................ $100,000 $125,000 $187,500
Death Benefit Under Option B................ $125,000 $150,000 $187,500
Death Benefit Under Cash Value
Accumulation Test.......................... $100,000 $168,577 $252,866
</TABLE>
Payment of Death Benefit Proceeds. 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 GUIDELINE PREMIUM TEST DEATH BENEFIT OPTION
A Policy Owner who has elected the guideline premium test (and not the cash
value accumulation test) 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 after the fifth
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 in the Variable Accounts and Fixed Account on a
prorata basis on the effective date of the change to cover the cost of
processing the request.
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 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 greater, 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 26. 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 result in a
decreasing net amount at risk, and therefore will decrease the cost of
18
<PAGE>
insurance charges relatively. 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.
CHANGE IN DEATH BENEFIT BY PACIFIC MUTUAL
Pacific Mutual reserves the right to reduce the death benefit under a Policy
by requiring Partial Withdrawals in order to maintain the net amount at risk at
an amount that will not exceed three times the death benefit on the Policy
Date. The net amount at risk is the difference between the death benefit and
the Accumulated Value. Similarly, Pacific Mutual reserves the right to require
Partial Withdrawals or otherwise to distribute amounts under a Policy in order
to comply with tax-related requirements. Such withdrawals or other
distributions may be taxable to Policy Owners in whole or in part. See "Federal
Income Tax Considerations," page 28. The $25 withdrawal fee will not be
assessed on Partial Withdrawals required by Pacific Mutual.
Pacific Mutual reserves the right to increase the death benefit if required
for a Policy to be deemed a life insurance contract under the Internal Revenue
Code.
DECREASE IN FACE AMOUNT
A Policy Owner may request a decrease in the Face Amount under a Policy
subject to approval from Pacific Mutual. A decrease in Face Amount may only be
made once per year, and only after the fifth Policy Year. 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 election 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 decrease. Decreasing the Face
Amount could affect the subsequent level of the death benefit while the Policy
is in force and the subsequent level of Policy values. A 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 a 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.
A decrease in Face Amount 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 or if the Policy Owner has multiple Policies on the life of the
same Insured. 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. These refunds may be taxable in
whole or in part. See "Federal Income Tax Considerations," page 28.
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. Increases in Face Amount are not available
under the Policy unless state law requires otherwise.
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.
19
<PAGE>
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 20. 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 underwriting surrender charge. Thus, the Accumulated
Value will exceed the Policy's Cash Surrender Value by the amount of the
underwriting 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 22.
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, 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.
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, 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, 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
20
<PAGE>
borrowed at any time is 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 underwriting surrender charges that
would be 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 annual effective interest rate is 4.75% per year for the
first 10 years and 4.25% thereafter. Pacific Mutual will credit interest
monthly on any Policy Debt to secure the loan at an annual effective 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 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 23.
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, or unless the Policy is surrendered or upon maturity or
lapse of the Policy, 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 28.
BENEFITS AT MATURITY
If the Insured is living on the Maturity Date, 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
21
<PAGE>
will be made within seven days of the Policy Anniversary, although payments may
be postponed in certain circumstances. See "Payments," page 36.
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 underwriting surrender charge and less any outstanding Policy
Debt. If a Policy is surrendered during the first two years following its
issuance, a portion of the sales load paid under the Policy may be refunded to
the Owner. See "Sales Load Refund," page 25.
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 37. For information on the tax effects of a surrender of a Policy,
see "Federal Income Tax Considerations," page 28.
PARTIAL WITHDRAWAL BENEFIT
Pacific Mutual offers a partial surrender benefit by which the Policy Owner
can obtain a portion of the Net Cash Surrender Value called the Partial
Withdrawal Benefit. The Partial Withdrawal Benefit is available on and after
the first Policy Year. Under this Benefit, a Policy Owner may make "Partial
Withdrawals" of Net Cash Surrender Value. There is no limit on the number of
Partial Withdrawals that may be taken after the first Policy Anniversary. There
is a $25 withdrawal fee for Partial Withdrawals. The fee will be deducted from
the Policy's Accumulated Value in the Variable Accounts and the Fixed Account
in the same proportion as the withdrawal amount. For Policy Owners who have
elected to receive systematic withdrawals as described below, the withdrawal
fee is currently waived on each systematic withdrawal following the first
systematic withdrawal.
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 Withdrawal is limited to the excess, if any,
of the Cash Surrender Value immediately prior to the withdrawal over the result
of the Debt divided by 90%.
The Policy Owner may make a 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, after a withdrawal is effected, Pacific
Mutual is notified that the Insured died after the request for the withdrawal
was sent to Pacific Mutual and prior to the withdrawal being effected, the
amount of the withdrawal will be deducted from the death benefit. Under these
circumstances, the death benefit will be determined without taking into account
the withdrawal.
When a Partial Withdrawal is made on a Policy on which the Owner has selected
the cash value accumulation test or guideline premium test 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 guideline premium test 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 16.
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<PAGE>
Systematic Withdrawals. A Policy Owner may elect to receive systematic
Partial Withdrawals after the first Policy Year while the Policy is in force
by sending a Preauthorized Scheduled Withdrawal Request form to Pacific Mutual
at its Home Office. A Policy Owner will be requested to designate the
systematic withdrawal amount as a specified dollar amount, and the desired
frequency of the systematic withdrawals, which may be monthly, quarterly,
semi-annually, or annually. The day of the month that the Owner wishes each
systematic Partial Withdrawal to be effected may also be elected provided the
scheduled day elected is not later than the 28th of a month. Systematic
Partial Withdrawals may be stopped or modified upon proper written request by
the Policy Owner received by Pacific Mutual at least 30 days in advance. A
proper request must include the written consent of any effective assignee or
irrevocable Beneficiary, if applicable.
Each systematic withdrawal must be at least $100. Each systematic withdrawal
will be effected as of the end of the Valuation Period during which the
withdrawal is scheduled. The deduction caused by the systematic Partial
Withdrawal will be allocated proportionately from the Policy Owner's
Accumulated Value in the Variable Accounts and the Fixed Account. If a
systematic Partial Withdrawal would cause the Net Cash Surrender Value to fall
below $500, the amount withdrawn will be reduced to the amount available and
systematic Partial Withdrawals will automatically terminate. Pacific Mutual
will notify the Owner of the termination.
Pacific Mutual may, at any time, change the minimum amount for any
systematic withdrawals, impose or increase remaining minimum balances, and
limit the number or frequency of requests for modifying systematic Partial
Withdrawals.
Tax Treatment. Receipt of proceeds from a Partial Withdrawal may result in
taxable income to the Policy Owner in the year in which the withdrawal is
made, and, if the Policy is classified as a modified endowment contract, may
result in a 10% additional tax for Policy Owners who are under 59 1/2 years
old. For more information on the tax treatment of Partial Withdrawals, see
"Federal Income Tax Considerations," page 28.
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 age 60 or older), within 10 days after
Pacific Mutual mails or delivers the notice of the right of withdrawal, or
within 45 days after the Owner signs the application for insurance, whichever
is latest. 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,
except as indicated below, Pacific Mutual will refund any charges deducted
from premiums received, any net premium allocated to the Fixed Account, plus
the sum of the Policy's Accumulated Value allocated to the Variable Accounts
as of the end of the Valuation Period in which the Policy is received plus any
Policy Charges and Fees deducted from the Policy's Accumulated Value in the
Variable Accounts. If the Owner has taken a loan during the Free-Look Period,
the Policy Debt will be deducted from the amount refunded. Pacific Mutual will
allocate any net premiums received according to the Owner's instructions
contained in the application, or more recent written instructions, if any,
when the application is approved and the Policy is issued. If an Owner resides
in a state that requires Pacific Mutual to return premium payments to Policy
Owners who exercise the Free-Look Right, Pacific Mutual will refund the full
amount of the premium paid. Any Policy Debt will be deducted from the amount
refunded. Until the Free-Look Transfer Date, 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 14.
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
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<PAGE>
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 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. However, if the Policy lapses during the first 2 years
from issuance, Pacific Mutual will pay the Owner any sales load refund to which
the Owner is entitled. 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, any sales load refund already
paid, 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) a premium equal to all monthly deductions that were due and unpaid during
the Grace Period, payment of a premium at least sufficient to keep the Policy
in force for three months after the date of reinstatement, and payment of any
excess sales load refunded to the Owner at the time the Policy lapsed.
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.
RIGHT TO CONVERT POLICY
The Policy Owner may convert a Policy at any time during the first two years
after issue, as long as the Policy is in force, to a universal life insurance
policy on the life of the Insured under a plan of insurance with fixed benefits
then offered by Pacific Mutual. The Owner may elect the same death benefit or
the same Net Amount at Risk as under the Policy at the time of the conversion.
Cost of Insurance charges will be based on the same issue Age and risk
classification of the Insured as under the Policy. The conversion is subject to
an adjustment in premium payment limitations to reflect variances in the fees
and charges under the new policy, which would result in a refund of premium and
a corresponding reduction in accumulated value.
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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. For purposes of assessing the sales load, premiums are measured
in terms of Target Premiums. The Target Premium is set forth in the Policy. The
sales load is based on Target Premiums and varies with the death benefit
election. The maximum sales load assessed upon Target Premiums received under a
Policy are shown in the chart below.
<TABLE>
<CAPTION>
SALES LOAD UNDER OPTION A
AND CASH VALUE SALES LOAD UNDER
TARGET PREMIUMS ACCUMULATION TEST OPTION B
--------------- ------------------------- ----------------
<S> <C> <C>
1 through 3.................... 25% 30%
4 through 10................... 4% 4%
11 and thereafter.............. 2% 2%
</TABLE>
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. To the extent that sales and
distribution expenses exceed sales loads, 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. Pacific Mutual reserves the right to change the
premium tax charge to conform with changes in the law.
SALES LOAD REFUND
If a Policy is surrendered for its Net Cash Surrender Value or the Policy
lapses at any time during the first two years following its issuance, a portion
of the sales load paid under a Policy may be refunded. This refund will be paid
only for premiums paid in the first two years following issuance of the Policy.
Pacific Mutual will refund the excess of the sales load charged over the sum of
(1) 30% of the premiums paid during the first two years of issuance up to one
Guideline Annual Premium, plus (2) 10% of the premiums paid during the first
two years of issuance that exceed one Guideline Annual Premium by up to one
Guideline Annual Premium, plus (3) 9% of actual premium payments paid during
the first two years from issuance in excess of two times the Guideline Annual
Premium.
The operation of the sales load refund is illustrated by the following
example. Assume the Policy Owner has paid $5,000 in premiums under a Policy
which has a Guideline Annual Premium of $3,000 and a Target Premium of $2,500,
and has elected Death Benefit Option B under the Guideline Annual Premium Test,
and assume that the Policy Owner decides to surrender his or her Policy during
the second year from issuance. Under the formula described above, the maximum
sales load allowable is the sum of $900 (30% of $3,000) and $200 (10% of
$2,000), or $1,100. Since a sales load of $1,500 (30% of $5,000) was deducted
from premiums when received, a refund of $400 ($1,500 - $1,100) will be payable
to the Policy Owner.
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:
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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 and the policy duration. The
cost of insurance rate generally increases with the Age of the Insured.
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 $8 per month; for Face Amounts of $100,000 and less than
$500,000, the charge is equal to $5 per month. There is no charge for Face
Amounts of $500,000 or more. 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.
The administrative charge will be waived on the second or subsequent Policies
acquired by the Owner on the life of the Insured who is the same Insured as on
the initial Policy. However, a one-time charge of $100 will be assessed upon
issuance to cover processing costs on the second and subsequent Policies.
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 in
the Variable and Fixed Accounts, which is equivalent to an annual rate of .75%
of such amount. During the 11th through 20th Policy Years, the charge is equal
to .000208333 multiplied by a Policy's Accumulated Value in the Variable and
Fixed Accounts, which is equivalent to an annual rate of .25% of such amount.
After the 20th Policy Year the charge reduces to 0%. 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.
Optional Insurance Benefits Charges. Charges for any optional insurance
benefits added to the Policy by rider will be included in the monthly deduction
or as otherwise specified in the rider and/or the Policy. See "Optional
Insurance Benefits," page 37.
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UNDERWRITING SURRENDER CHARGE
Pacific Mutual will assess an underwriting surrender charge against
Accumulated Value upon surrender of a Policy within ten years after its
issuance. 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>
ISSUE AGE CHARGE PER $1,000
--------- -----------------
<S> <C>
0-30 $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 Year, 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 a
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.
WITHDRAWAL FEE
Pacific Mutual will assess a $25 withdrawal fee against the Policy's
Accumulated Value when a Partial Withdrawal is made. The fee will be deducted
from Accumulated Value in the Fixed and Variable Accounts in the same
proportion as the withdrawal amount. For Policy Owners who have elected to
receive systematic withdrawals, the withdrawal fee is currently waived on each
systematic withdrawal following the first systematic withdrawal. Pacific Mutual
reserves the right to reinstate this fee.
CORPORATE AND OTHER PURCHASERS
The Policy is available for individuals and for corporations and other
institutions. For certain individuals and certain corporate or other group or
sponsored arrangements purchasing one or more Policies, Pacific Mutual may
reduce the amount of the sales load, underwriting surrender charge,
administrative 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 purchase of multiple Policies on the life of the same
Insured, from the amount of the initial premium payment or payments, or the
amount of projected premium payments.
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 or to the operations of Pacific Mutual with respect to
the Policies. No such charge is currently assessed. See "Charge for Pacific
Mutual Income Taxes," page 31.
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 Portfolios incur certain
charges including the investment advisory fee and certain operating expenses.
The Fund is governed by its Board of Trustees. The Fund's expenses are not
fixed or specified under the terms of the Policy. The advisory fees and other
expenses are more fully described in the prospectus of the Fund.
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<PAGE>
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 sales load, the
guaranteed cost of insurance rates, the withdrawal fee, and the underwriting
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 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 Partial Withdrawal. In addition, certain Policy loans and
Partial Withdrawals 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 advisers
about the treatment of life insurance in their particular circumstances for
purposes of the alternative minimum tax applicable to corporations and the
environmental tax under Code 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
possessed 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
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<PAGE>
separate account assets would be includable in the variable policy owner's
gross income. The Treasury Department also announced, in connection with the
issuance of regulations concerning diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor [i.e., the
Policy Owner], rather than the insurance company, to be treated as the owner of
the assets in the account." This announcement also stated that guidance would
be issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular subaccounts without
being treated as owners of the underlying assets." As of the date of this
prospectus, no such guidance has been issued.
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Policy Owner has additional flexibility in allocating premium
payments and Policy Values. These differences could result in a Policy Owner
being treated as the owner of the Policy's pro rata portion of the assets of
the Separate Account. In addition, Pacific Mutual does not know what standards
will be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. Pacific Mutual therefore reserves
the right to modify the Policy, as deemed appropriate by Pacific Mutual, to
attempt to prevent a Policy Owner from being considered the owner of the
Policy's pro rata share of the assets of the Separate Account. Moreover, in the
event that regulations are adopted or rulings are issued, there can be no
assurance that the Portfolio will be able to operate as currently described in
the Prospectus, or that the Fund will not have to change any Portfolio's
investment objective or investment policies.
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 are treated for tax purposes in one of two ways. Policies that are not
classified as modified endowment contracts will be taxed 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 that would be paid for each of the first seven
years if a Policy Owner were to fully pay for the Policy in 7 years. 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
Pacific Select Choice 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 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
Partial Withdrawals. Under Section 7702 of the IRC, if a Partial 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
29
<PAGE>
constitute income to the Owner unless the Policy is surrendered or upon
maturity or lapse of the Policy. However, if a loan is still outstanding when
a Policy is surrendered or allowed to lapse, the borrowed amount becomes
taxable at that time to the extent the Accumulated Value exceeds the Policy
Owner's basis in the Policy, as if the borrowed amount was actually received
at the time of surrender or lapse and used to pay off the loan.
Interest paid (or accrued by an accrual basis taxpayer) on 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 pre-death distributions that were taxable less any
premiums previously recovered that were excludable from gross income). Upon
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 beneficiaries.
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.
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. 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
30
<PAGE>
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 Policy loans and on
loans 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 and other
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.
Accelerated Living Benefits. An Accelerated Living Benefits Rider is
available in connection with the Policy. Benefits under the Accelerated Living
Benefits Rider may be taxable. The Internal Revenue Service has issued proposed
regulations and is expected to issue final regulations in the near future under
which accelerated living benefits that meet the requirements set forth in the
regulations can be received without incurring a Federal income tax. The precise
requirements which will be incorporated in the final regulations are not known.
In some cases, there may be a question as to whether a life insurance policy
that has an accelerated living benefits rider can meet certain technical
aspects of the definition of "life insurance contract" under the Code. The IRS
regulations mentioned above are expected to set forth the requirements under
which a policy with an accelerated living benefits rider will be deemed to meet
the definitional requirements of a life insurance contract. Pacific Mutual
reserves the right to (but is not obligated to) modify the Rider to conform
with requirements under the final regulations. Owners considering adding an
Accelerated Living Benefits Rider or exercising rights under that rider should
first consult a qualified tax advisor.
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
A charge may be made for any federal income taxes incurred by Pacific Mutual
that are attributable to the Separate Account or to the operations of Pacific
Mutual with respect to the Policies. Pacific Mutual will review the question of
a charge to the Separate Account or the Policies for Pacific Mutual's federal
income taxes periodically. Charges may 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.
31
<PAGE>
VOTING ON FUND SHARES
In accordance with its view of present applicable law, Pacific Mutual will
exercise voting rights attributable to the shares of each Portfolio of the Fund
held in the Variable Accounts at any regular and special meetings of the
shareholders of the Fund on matters requiring shareholder voting under the
Investment Company Act of 1940. Pacific Mutual will exercise these voting
rights based on instructions received from persons having the voting interest
in corresponding Variable Accounts of the Separate Account. However, if the
Investment Company Act of 1940 or any regulations thereunder should be amended,
or if the present interpretation thereof should change, and as a result Pacific
Mutual determines that it is permitted to vote the shares of the Fund in its
own right, it may elect to do so.
The person having the voting interest under a Policy is the Policy Owner.
Unless otherwise required by applicable law, the number of votes as to which a
Policy Owner will have the right to instruct will be determined by dividing a
Policy Owner's Accumulated Value in a Variable Account by the net asset value
per share of the corresponding Portfolio of the Fund. Fractional votes will be
counted. The number of votes as to which a Policy Owner will have the right to
instruct will be determined as of the date coincident with the date established
by the Fund for determining shareholders eligible to vote at the meeting of the
Fund. If required by the Securities and Exchange Commission, Pacific Mutual
reserves the right to determine in a different fashion the voting rights
attributable to the shares of the Fund based upon 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.
32
<PAGE>
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, which may include additional subaccounts of the Separate Account to
serve as allocation options under the Policies, which may be managed separate
accounts or may 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. Pacific Mutual
may also terminate and liquidate any Variable Account.
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 or any Variable Account may be
operated as a management investment company under the Investment Company Act of
1940 or any other form permitted by law, may be deregistered under that Act in
the event such registration is no longer required, or 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 transfer the assets of any such entity to another
Variable Account of Pacific Mutual or any affiliate thereof and may establish a
committee, board, or other group to manage one or more aspects of the operation
of any such entity.
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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<PAGE>
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.
The Policy Owner may elect to allocate net premium payments to the Fixed
Account, the Separate Account, or both. If the Owner resides in a state that
requires Pacific Mutual to refund premiums to Policy Owners who return their
Policies, net premiums will not be applied to the Fixed Account until after the
Free-Look Transfer Date. Any net premium received during the Free-Look Period
will be allocated to the Money Market Account until the Free-Look Transfer
Date. 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. See "Death Benefit,"
page 16.
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, and the underwriting
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 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.
34
<PAGE>
TRANSFERS, SURRENDERS, WITHDRAWALS, AND POLICY LOANS
Amounts may be transferred from the Variable Accounts to the Fixed Account
and from the Fixed Account to the Variable Accounts, subject to the following
limitations. Policy Owners residing in states that require Pacific Mutual to
refund premiums to Policy Owners who return their Policies during the Free-Look
Period may not make transfers until after the Free-Look Period. 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 and Partial Withdrawals to the
same extent as a Policy Owner who has invested in the Variable Accounts. See
"Surrender," page 22, and "Partial Withdrawal Benefit," page 22. Policy Owners
may borrow up to the greater of (1) 100% of Accumulated Value in the Fixed
Account and 90% of Accumulated Value in the Variable Accounts less any
underwriting surrender charge that would be imposed if the Policy were
surrendered at the time of the loan, 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.
35
<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, 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 28.)
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 26.
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 Face Amount cannot be
contested after the Policy has been in force during the Insured's lifetime for
two years from the Policy Date; and 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.
36
<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, any Policy Debt and any dividends
paid in cash by Pacific Mutual. 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 by Pacific Mutual since the exchange date.
PARTICIPATING
The Policy is participating and may 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, the
right to exchange the Insured's term insurance on the Insured's children,
annual renewable term insurance on any member of the Insured's immediate
family, added protection benefit on the Insured, the right to purchase
additional insurance on the Insured's life on certain specified dates without
proof of insurability, the right to a monthly benefit deposited to the Policy
in the event of the Insured's total disability, and the right to receive
accelerated living benefits in the event the Insured is diagnosed with a
terminal illness. The cost of any additional insurance benefits will be
deducted as part of the monthly deduction against Accumulated Value or as
otherwise specified in the rider and/or Policy. See "Charges and Deductions,"
page 25. 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 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 sales load and underwriting
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.
37
<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 24. 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.
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<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 50% of the first Target
Premium paid, 10% of the second and third Target Premiums paid, 4% of premiums
paid on the fourth through tenth Target Premiums, and 2% thereafter. There is a
40% bonus on the third Target Premium paid, first payable at the beginning of
the third Policy Year. In addition, Pacific Mutual may also pay override
payments, expense allowances, bonuses, wholesaler fees, and training
allowances.
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
39
<PAGE>
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, Di-
Director rector 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 Ange-
les, California 90067.
Donald E. Guinn Director of Pacific Mutual, 1984 to present; Chairman
Director Emeritus and Director of Pacific Telesis Group; Director
of: Pacific Bell; The Dial Corp.; Bank of America NT&SA;
BankAmerica Corporation; Pyramid Technology Group. Address:
Pacific Telesis Center, 130 Kearny Street, Room 3719, San
Francisco, California 94108-4818.
Ignacio E. Lozano, Jr. Director of Pacific Mutual, 1988 to present; Chairman and
Director Editor-in-Chief of La Opinion; Director of: BankAmerica
Corporation; Bank of America NT&SA; Pacific Enterprises;
The Walt Disney Company. 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.
Charles D. Miller Director of Pacific Mutual, 1986 to present; Director,
Director Chairman and Chief Executive Officer of Avery Dennison Cor-
poration; Director of: Great Western Financial Corporation;
Nationwide Health Properties, Inc.; Southern California Ed-
ison Company. Address: 150 N. Orange Grove Boulevard, Pasa-
dena, California 91103.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Donn B. Miller Director of Pacific Mutual, 1977 to present; President and
Director Chief Executive Officer and Director of Pearson-Sibert Oil
Co. of Texas; Director of: the Irvine Company; Automobile
Club of Southern California; St. John's Hospital & 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; Former Chairman and
Chief Executive Officer of Pacific Enterprises; Director of
Lockheed Corporation; Trustee of Stanford University.
Address: 400 S. Hope Street, 16th Floor, Los Angeles,
California 90071-2899.
Raymond L. Watson Director of Pacific Mutual, 1975 to present; Vice Chairman
Director and Director of The Irvine Company; Director of: The Walt
Disney Company; The Mitchell Energy and Development
Company. Address: 550 Newport Center Drive, 9th Floor,
Newport Beach, California 92660.
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.
David R. Carmichael Senior Vice President and General Counsel of Pacific Mutual,
Senior Vice President April 1992 to present; Vice President and Investment Coun-
and General Counsel sel of Pacific Mutual, April 1989 to April 1992; Director
of: Pacific Corinthian Life Insurance Company; PM Group
Life Insurance Company; Association of California Life In-
surance Companies.
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.
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 R. 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>
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.
41
<PAGE>
STATE REGULATION
Pacific Mutual is subject to the laws of the state of California governing
insurance companies and to regulation by the Commissioner of Insurance of
California. In addition, it is subject to the insurance laws and regulations of
the other states and jurisdictions in which it is licensed or may become
licensed to operate. An annual statement in a prescribed form must be filed
with the Commissioner of Insurance of California and with regulatory
authorities of other states on or before March 1st in each year. This statement
covers the operations of Pacific Mutual for the preceding year and its
financial condition as of December 31st of that year. Pacific Mutual's affairs
are subject to review and examination at any time by the Commissioner of
Insurance or his agents, and subject to full examination of Pacific Mutual's
operations at periodic intervals.
TELEPHONE TRANSFER AND LOAN PRIVILEGES
A Policy Owner may request a transfer of Accumulated Value or a Policy loan
by telephone if an Authorization for Telephone Requests ("Telephone
Authorization") has been properly completed, signed, and filed at Pacific
Mutual's Home Office. All or part of any telephone conversation with respect to
transfer or loan instructions may be recorded by Pacific Mutual. Telephone
instructions received by Pacific Mutual by 1:00 P.M. Pacific time, or the close
of the New York Stock Exchange, if earlier, on any Valuation Date will be
effected as of the end of that Valuation Date in accordance with the Policy
Owner's instructions, subject to the limitation on five allocation alternatives
and the limitation of transfers before the Free-Look Transfer Date. 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.
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.
42
<PAGE>
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 44. The audited financial statements of Pacific Mutual as of
and for the years ended December 1994 and 1993 are set forth herein starting
on page 51.
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.
43
<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 31, 1994 and the related statements of operations for the year then
ended and statements of changes in net assets for each of the two years ended
December 31, 1994 and 1993. These financial statements are the responsibility of
the Separate Account's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of each of the respective
Variable Accounts constituting the Pacific Select 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
44
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENTS OF ASSETS & LIABILITIES
DECEMBER 31, 1994
(In thousands)
<TABLE>
<CAPTION>
High
Money Managed Government Yield
Market Bond Securities Bond Growth
Variable Variable Variable Variable Variable
Account Account Account Account Account
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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).......................
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
Fund shares redeemed.................................................... 90
-------- -------- -------- -------- --------
TOTAL ASSETS.............................................................. 34,686 24,589 3,951 7,393 47,521
-------- -------- -------- -------- --------
LIABILITIES
Payables:
Due to Pacific Mutual Life Insurance Company............................ 90
Fund shares purchased................................................... 24 42 14 104
-------- -------- -------- -------- --------
TOTAL LIABILITIES......................................................... 90 24 42 14 104
-------- -------- -------- -------- --------
NET ASSETS................................................................ $ 34,596 $ 24,565 $ 3,909 $ 7,379 $ 47,417
======== ======== ======== ======== ========
</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>
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)....................... $ 20,222
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.......................... 31 134 94 36 129
Fund shares redeemed....................................................
-------- -------- -------- -------- --------
TOTAL ASSETS.............................................................. 20,253 32,305 31,248 30,429 11,537
-------- -------- -------- -------- --------
LIABILITIES
Payables:
Due to Pacific Mutual Life Insurance Company............................
Fund shares purchased................................................... 31 134 94 36 129
-------- -------- -------- -------- --------
TOTAL LIABILITIES......................................................... 31 134 94 36 129
-------- -------- -------- -------- --------
NET ASSETS................................................................ $ 20,222 $ 32,171 $ 31,154 $ 30,393 $ 11,408
======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
45
<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
Market Bond Securities Bond Growth
Variable Variable Variable Variable Variable
Account Account Account Account Account
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends............................................................... $ 812 $ 1,143 $ 170 $ 472 $ 4,039
-------- -------- -------- -------- --------
NET INVESTMENT INCOME..................................................... 812 1,143 170 472 4,039
-------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) from security transactions...................... 131 (14) (172) (101) 1,075
Net unrealized appreciation (depreciation)
on investments.......................................................... (68) (2,086) (160) (330) (10,371)
-------- -------- -------- -------- --------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS.................................................... 63 (2,100) (332) (431) (9,296)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................................................ $ 875 $ (957) $ (162) $ 41 $ (5,257)
======== ======== ======== ======== ========
</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>
INVESTMENT INCOME
Dividends............................................................... $ 1,838 $ 1,767 $ 1,290 $ 718 $ 174
-------- -------- -------- -------- --------
NET INVESTMENT INCOME..................................................... 1,838 1,767 1,290 718 174
-------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) from security transactions...................... 207 218 831 342 56
Net unrealized appreciation (depreciation)
on investments.......................................................... (2,115) (2,374) (2,049) (841) 369
-------- -------- -------- -------- --------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS.................................................... (1,908) (2,156) (1,218) (499) 425
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................................................ $ (70) $ (389) $ 72 $ 219 $ 599
======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
46
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1994
(In thousands)
<TABLE>
<CAPTION>
High
Money Managed Government Yield
Market Bond Securities Bond Growth
Variable Variable Variable Variable Variable
Account Account Account Account Account
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income.................................................... $ 812 $ 1,143 $ 170 $ 472 $ 4,039
Net realized gain (loss) from security transactions...................... 131 (14) (172) (101) 1,075
Net unrealized appreciation (depreciation)
on investments.......................................................... (68) (2,086) (160) (330) (10,371)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................................................ 875 (957) (162) 41 (5,257)
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums................................................. 53,082 6,795 2,740 2,716 21,157
Transfers--policy charges and deductions................................. (3,578) (1,634) (1,212) (748) (5,776)
Transfers in (from other variable accounts).............................. 47,668 5,550 1,200 4,398 31,248
Transfers out (to other variable accounts)............................... (81,555) (1,862) (1,816) (2,395) (28,528)
Transfers--other......................................................... (189) 5 (6) (13) 79
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS......................................... 15,428 8,854 906 3,958 18,180
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS................................................ 16,303 7,897 744 3,999 12,923
NET ASSETS
Beginning of year........................................................ 18,293 16,668 3,165 3,380 34,494
-------- -------- -------- -------- --------
End of year.............................................................. $ 34,596 $ 24,565 $ 3,909 $ 7,379 $ 47,417
======== ======== ======== ======== ========
</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>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income.................................................... $ 1,838 $ 1,767 $ 1,290 $ 718 $ 174
Net realized gain (loss) from security transactions...................... 207 218 831 342 56
Net unrealized appreciation (depreciation)
on investments.......................................................... (2,115) (2,374) (2,049) (841) 369
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................................................ (70) (389) 72 219 599
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums................................................. 6,781 12,158 11,673 10,776 3,920
Transfers--policy charges and deductions................................. (2,110) (2,364) (2,878) (2,180) (684)
Transfers in (from other variable accounts).............................. 6,482 2,983 19,282 4,498 8,962
Transfers out (to other variable accounts)............................... (2,573) (1,864) (8,521) (2,407) (1,436)
Transfers--other......................................................... 46 32 23 44 47
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS......................................... 8,626 10,945 19,579 10,731 10,809
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS................................................ 8,556 10,556 19,651 10,950 11,408
NET ASSETS
Beginning of year........................................................ 11,666 21,615 11,503 19,443 0
-------- -------- -------- -------- --------
End of year.............................................................. $ 20,222 $ 32,171 $ 31,154 $ 30,393 $ 11,408
======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
47
<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 transactions...................... (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
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<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 transactions...................... 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.
48
<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 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 and 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.
49
<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.
50
<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
51
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
1994 1993
- --------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Bonds $ 6,669,853 $ 5,899,646
Preferred stocks 132,604 143,016
Common stocks 57,874 71,086
Unconsolidated subsidiaries 196,401 141,611
Mortgage loans 1,421,182 1,611,400
Real estate 157,507 134,257
Home office properties 51,419 52,115
Policy loans 2,312,455 1,960,162
Cash and short-term investments 97,745 342,401
Investment income due and accrued 125,534 125,783
Premiums due and uncollected, and other assets 245,243 143,669
Separate account assets 3,260,374 2,720,997
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 14,728,191 $ 13,346,143
================================================================================
LIABILITIES AND SURPLUS
Liabilities
Policy reserves $ 6,476,634 $ 5,807,708
Deposit funds 3,298,915 3,485,440
Other liabilities 885,638 583,989
Asset valuation reserve 179,006 165,251
Separate account liabilities 3,260,374 2,720,979
- --------------------------------------------------------------------------------
Total Liabilities 14,100,567 12,763,367
Surplus 627,624 582,776
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SURPLUS $ 14,728,191 $ 13,346,143
================================================================================
</TABLE>
See Notes to Financial Statements
52
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF OPERATIONS AND SURPLUS
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
- --------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
REVENUES
Premiums, annuity considerations and deposit funds $ 2,180,409 $ 2,325,160
Net investment income 879,116 879,931
Other income 5,073 4,959
- --------------------------------------------------------------------------------
TOTAL REVENUES 3,064,598 3,210,050
- --------------------------------------------------------------------------------
BENEFIT 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 GAIN FROM OPERATIONS 68,602 107,286
NET REALIZED CAPITAL GAINS 12,424 11,226
- --------------------------------------------------------------------------------
NET INCOME $ 81,026 $ 118,512
================================================================================
SURPLUS
Net income $ 81,206 $ 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
53
<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.
54
<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 for
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 (Note 2) which is carried at
cost.
Mortgage loans and policy loans are stated at unpaid principle 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
55
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
other liabilities on the accompanying statements of financial position,
results in the deferral of after-tax realized capital gains and losses
attributable to interest rate fluctuations on fixed income investments and
these capital gains and losses are amortized into investment income over
the remaining life of the investment sold. The IMR was $13.1 million and
$22.4 million as of December 31, 1994 and 1993, respectively.
Net realized capital gains and losses are determined on the specific
identification method and are presented net of federal capital gains tax of
$2.2 million and $16.9 million and transfers to the IMR of $(.4) million
and $22.4 million for the years ended December 31, 1994 and 1993,
respectively.
Derivatives which qualify for hedge accounting are valued consistently with
the hedged items. Realized gains and losses on fixed income contracts are
deferred and amortized over the average life of the related hedged assets
or insurance liabilities. Realized gains and losses on equity securities,
which are marked to market, are recognized immediately. Derivatives which
do not qualify for hedge accounting are valued at market value through
surplus while still held and through income when realized.
On November 15, 1994, Pacific Financial Asset Management Corporation, a
wholly-owned, second-tier subsidiary of Pacific Mutual and five of its
subsidiaries (Pacific Investment Management Company and subsidiaries,
Parametric Portfolio Associates Inc., Cadence Capital Management
Corporation, NFJ Investment Group, Inc. and Blairlogie Capital Management
Limited) entered into an agreement and plan of consolidation with Thomson
Advisory Group L.P., a Delaware limited partnership with publicly traded
units, to merge into a newly capitalized partnership named PIMCO Advisors
L.P. Substantially all operations of these entities and net assets of $20.9
million were contributed in exchange for approximately 42% of the newly
issued partnership units.
POLICY RESERVES AND DEPOSIT FUNDS
Life insurance reserves are valued using the net level premium method, the
Commissioners' Reserve Valuation Method, or other modified reserve methods.
Reserves for individual annuities are maintained principally on the
Commissioners' Annuity Reserve Valuation Method. Group annuity contract
reserves are valued using the net single premium method.
The liability for deposit funds, including guaranteed interest contracts,
is based primarily upon, and is not less than, the policyowners' equity in
their deposit accounts, including credited interest.
REVENUES AND EXPENSES
Premiums are recognized as income over the premium paying period. Deposits
made in connection with annuity contracts are recognized as revenue when
received. Investment income is recorded as earned.
Expenses, including policy acquisition costs such as commissions, are
charged to operations as incurred.
DIVIDENDS
Dividends are provided based on dividend formulas approved by the Board of
Directors and reviewed for reasonableness and equitable treatment of
policyowners by an independent consulting actuary.
FEDERAL INCOME TAXES
Pacific Mutual is taxed as a life insurance company for Federal income tax
purposes. Pacific Mutual's income tax return is consolidated with all its
domestic subsidiaries except PCL. The amount of federal income tax expense
includes an equity tax calculated by a prescribed formula that incorporates
a differential earnings rate between stock and mutual life insurance
companies. The difference between the effective tax rate and the statutory
tax rate of 35% for 1994 and 1993 is primarily due to certain policy
acquisition costs being deferred and amortized over a ten-year period for
tax purposes, reserve differences, non-taxable investment income and the
equity tax for 1994.
OTHER SURPLUS TRANSACTIONS
Other surplus transactions consist primarily of unrealized gains and
losses, changes in nonadmitted assets, and changes in the AVR.
56
<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 estimate fair values of financial instruments disclosed in Notes 3 and
4 have been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is required to
interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented may not be indicative of the amounts Pacific Mutual
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies could have a significant effect
on the estimated fair value amounts.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1994
financial statement presentation.
2. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
Pursuant to a five-year rehabilitation agreement approved by a California
Superior Court and the Insurance Department of the State of California in
July 1992, Pacific Mutual, through its wholly-owned subsidiary, Pacific
Corinthian Life Insurance Company ("PCL"), will facilitate the
rehabilitation of First Capital Life Insurance Company ("FCL"). In
accordance with the rehabilitation agreement, insurance policies of FCL
were restructured and assumed by PCL on December 31, 1992.
The rehabilitation agreement provides for the holders of restructured
policies to share in a substantial percentage of the unallocated surplus of
PCL at the end of the rehabilitation period. Policyholders have the option
to surrender their restructured policies with reduced benefits during this
five-year period. During the rehabilitation plan period, PCL is prohibited
from issuing new insurance policies. At the end of the rehabilitation
period, PCL will merge into Pacific Mutual, with Pacific Mutual as the
surviving entity. Substantially all of the assets and certain of the
liabilities of FCL were assumed by PCL on December 31, 1992 pursuant to an
assumption reinsurance agreement and asset purchase agreement.
In accordance with the rehabilitation agreement, PCL was capitalized by a
cash contribution of $8.3 million from Pacific Mutual and a $45 million
certificate of contribution provided by Pacific Financial Holding Company,
a wholly-owned subsidiary of Pacific Mutual, for a total of $53.3 million
initial capitalization.
In the event PCL is unable to pay contract benefits, Pacific Mutual is
obligated to contribute funds to pay those benefits in accordance with the
rehabilitation agreement.
3. 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.
57
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENTS IN DEBT SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Unrealized Estimated
Statement -------------------------- Fair
Value Gains Losses Value
----------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1994:
U.S. Treasury securities
and obligations of U.S.
government authorities
and agencies $ 216,201 $ 1,064 $ 37,113 $ 180,152
Obligations of states, political
subdivisions and foreign
governments 321,798 5,371 16,309 310,860
Corporate securities 3,771,271 104,311 160,712 3,714,870
Mortgage-backed securities 2,480,307 28,911 81,147 2,428,071
Redeemable preferred stock 81,026 343 5,031 76,338
----------------------------------------------------------
Total $6,870,603 $ 140,000 $ 300,312 $6,710,291
==========================================================
December 31, 1993:
U.S. Treasury securities
and obligations of U.S.
government authorities
and agencies $ 482,104 $ 10,227 $ 6,788 $ 485,543
Obligations of states, political
subdivisions and foreign
governments 194,819 16,520 296 211,043
Corporate securities 3,328,988 338,039 6,114 3,660,913
Mortgage-backed securities 2,248,574 120,947 10,875 2,358,646
Redeemable preferred stock 88,456 3,314 359 91,411
----------------------------------------------------------
Total $6,342,941 $ 489,047 $ 24,432 $6,807,556
==========================================================
</TABLE>
The statement value and estimated fair value of debt securities as of December
31, 1994 by contractual repayment date of principal are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Statement Fair
Value Value
---------------------------
(In Thousands)
<S> <C> <C>
Due in one year or less $ 429,348 $ 414,074
Due after one year through five years 1,349,078 1,343,824
Due after five years through ten years 1,340,882 1,299,969
Due after ten years 1,270,988 1,224,353
---------------------------
4,390,296 4,282,220
Mortgage-backed securities 2,480,307 2,428,071
---------------------------
Total $6,870,603 $6,710,291
===========================
</TABLE>
58
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENTS IN DEBT SECURITIES (Continued)
Proceeds from sales of investments in debt securities were $1.5 billion and
$1.2 billion for the years ended December 31, 1994 and 1993, respectively.
In 1994 and 1993, gross gains of $30 million and $53 million and gross
losses of $43 million and $2 million, respectively, were realized on those
sales.
4. FINANCIAL INSTRUMENTS
The estimated fair values of Pacific Mutual's financial instruments,
including debt securities, are as follows:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
Statement Estimated Statement Estimated
Value Fair Value Value Fair Value
----------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Debt securities (See note 3) $6,870,603 $6,710,291 $6,342,941 $6,807,556
Preferred and common stocks 109,458 116,993 125,646 143,090
Mortgage loans 1,421,182 1,452,596 1,611,400 1,692,700
Policy loans 2,312,455 2,312,455 1,960,162 1,960,162
Derivative financial instruments:
Interest rate swaps 121 (24,809) 25,641
Other 2,672 (2,822) 10,116 47,118
Liabilities:
Guaranteed interest contracts 2,635,356 2,614,961 2,586,538 2,669,666
Deposit liabilities 871,548 833,274 929,748 977,285
Other derivative financial instruments 2,270 2,128 440
Contribution certificates 149,593 124,313 149,589 153,480
</TABLE>
The following methods and assumptions were used to estimate the fair values of
these financial instruments as of December 31, 1994 and 1993:
PREFERRED AND COMMON STOCKS
The estimated fair values are based on quoted market prices or dealer quotes.
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flows, using a year-end market rate which
is applicable to the yield, credit quality and average maturity of the composite
portfolio.
POLICY LOANS
The statement value of policy loans is a reasonable estimate of their fair
values.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
The estimated fair values of fixed-maturity guaranteed interest contracts are
estimated using the rates currently offered for deposits of similar remaining
maturities. The estimated fair values of deposit liabilities with no defined
maturities are the amounts payable on demand.
59
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (Continued)
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES (Continued)
Pacific Mutual has issued PRO GIC and Diversifier GIC contracts to plan
sponsors totaling $749 million as of December 31, 1994, pursuant to the
terms of which the plan sponsor retains direct ownership and control of
the assets related to these contracts. Pacific Mutual agrees to provide
benefit responsiveness in the event that plan benefit requests exceed plan
cash flows. In return for this guarantee, Pacific Mutual receives a fee
which varies by contract. Pacific Mutual sets the investment guidelines to
provide for appropriate credit quality and cash flow matching.
DERIVATIVE FINANCIAL INSTRUMENTS
Pacific Mutual utilizes certain derivative financial instruments to
diversify its business risk and to minimize its exposure to fluctuations
in market prices and interest rates. Pacific Mutual has also set aside a
corporate total return portfolio utilizing derivative financial
instruments. These instruments include interest rate and currency swaps,
forwards, options held, options written, and futures contracts, and
involve elements of credit risk and market risk in excess of amounts
recognized in the accompanying financial statements. The notional amounts
of those instruments reflect the extent of involvement in those various
types of financial instruments. The estimated gain values of these
instruments are based on market or dealer quotes. Pacific Mutual
determines, in an individual counterparty basis, the need for collateral
or other security to support financial instruments with off-balance-sheet
credit risks.
Options and Floors
Pacific Mutual uses options and floors to hedge against fluctuations in
interest rates and in its corporate total return portfolio. Cash
requirements on options held are limited to the premium paid by Pacific
Mutual at acquisition. Pacific Mutual uses written options on a limited
basis consisting primarily of covered calls. Gains and losses on covered
calls are offset by gains and losses on the underlying position. Options
and floors held are reported as assets and options written are reported as
liabilities. As of December 31, 1994, the notional amount of options held
and options written approximated $1.5 billion and $42 million,
respectively. Option contracts mature during fiscal years 1995 through
2000.
Interest Rate Swap Contracts
Pacific Mutual has entered into interest rate swap contracts to reduce the
impact of changes in interest rates on its variable short-term and long-
term investments. These contracts effectively change the interest rate
exposure on variable rate notes to fixed rates which range from 1.9% to
8.6% as of December 31, 1994, and from 1.9% to 12.2% as of December 31,
1993. Interest rate swap contracts mature during fiscal years 1996 through
2013. As of December 31, 1994 and 1993, interest rate swap contracts
outstanding with financial institutions had a total notional amount of
$477 million and $770 million, respectively.
Foreign Currency Exchange Contracts
Pacific Mutual enters into foreign currency exchange contracts that are
used to hedge against fluctuations in foreign currency-denominated assets
and related income. Gains and losses on such agreements offset currency
gains and losses on the related assets. As of December 31, 1994, the
notional amount of foreign currency exchange contracts approximated $35
million. Foreign currency exchange contracts expire during fiscal years
1995 through 1999.
Future Contracts
Pacific Mutual uses exchange-traded futures contracts for asset and
liability management of fixed maturity securities and insurance
liabilities and for hedging market fluctuations on equity securities.
Price changes on futures are settled daily through the daily margin cash
flows. As of December 31, 1994 and 1993, the notional amounts of futures
contracts were $163 million and $573 million, respectively. The notional
amounts of the contracts do not represent future cash requirements, as
Pacific Mutual intends to close out open positions prior to expiration.
CONTRIBUTION CERTIFICATES
The estimated fair value of contribution certificates is based on market
quotes.
60
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
5. CONCENTRATION OF CREDIT RISK
Pacific Mutual manages its investments to limit credit risk by diversifying
its portfolio among various security types and industry sectors. The credit
risk of financial instruments is controlled through credit approvals,
limits and monitoring procedures. Real estate and mortgage loan investments
are diversified by geographic location and property type. Management
believes that significant concentrations of credit risk do not exist.
Pacific Mutual is exposed to credit loss in the event of nonperformance by
the other parties to the interest rate swaps contracts and other derivative
securities. However, Pacific Mutual does not anticipate nonperformance by
the counterparties.
6. UNCONSOLIDATED SUBSIDIARIES
Pacific Mutual's subsidiary operations primarily include other life and
health insurance and investment management and advisory services. As of
December 31, 1994 and 1993, subsidiary assets, including PCL, were $4.5
billion and $4.4 billion, respectively, and liabilities were $4.2 billion
as of December 31, 1994 and 1993.
Revenue and net income, including PCL, were $1.1 billion and $75 million
for the year ended December 31, 1994, and $1.0 billion and $57 million for
the year ended December 31, 1993. Dividends from subsidiaries totaled $2
million and $24 million for the years ended December 31, 1994 and 1993,
respectively. All earnings of the subsidiaries, excluding PCL, and
excluding capital gains, are included in net investment income.
7. BORROWINGS
Pacific Mutual borrows for short-term needs by issuing commercial paper.
Approximately $50 million was outstanding as of December 31, 1994, bearing
an interest rate of 5.86%, and was repaid in January, 1995. There were no
commercial paper borrowings outstanding as of December 31, 1993.
In addition, Pacific Mutual had available lines of credit totaling
approximately $250 million and $300 million as of December 31, 1994 and
1993, respectively. There were no borrowings outstanding as of December 31,
1994 and 1993.
8. CONTRIBUTION CERTIFICATES
On December 30, 1993, Pacific Mutual issued $150 million of Contribution
Certificates (the "Certificates"), also referred to as Surplus Notes, at an
interest rate of 7.9% maturing on December 30, 2023. Interest is payable
semiannually. The Certificates may not be redeemed at the option of Pacific
Mutual or any holder of the Certificates. The Certificates are unsecured
and subordinated to all present and future senior indebtedness and policy
claims of Pacific Mutual. Each payment of interest on and the payment of
principal of the Certificates may be made only out of Pacific Mutual's
surplus and with the prior approval of the Insurance Commissioner of the
State of California. In accordance with accounting practices prescribed or
permitted by the Insurance Department of the State of California, the
Certificates are not part of the liabilities of Pacific Mutual and are
included in surplus.
9. REINSURANCE
Pacific Mutual has reinsurance agreements with other insurance companies
for the purpose of diversifying risk and limiting exposure on larger risks.
For the years ended December 31, 1994 and 1993, individual life and
annuity premiums assumed were $20 million and $22 million and premiums
ceded were $363 million and $292 million, respectively. Amounts recoverable
from reinsurers for individual life and annuities include reinsured and
paid claims of $13 million and $21 million as of December 31, 1994 and
1993, respectively. Policy benefits payable are net of reinsurance on
unpaid claims of $(4) million and $0 at December 31, 1994 and 1993,
respectively.
Pacific Mutual also reinsures substantially all of its group life and
health business with a subsidiary insurance company. Premiums of $90
million and $122 million, and benefits of $70 million and $80 million were
ceded during the years ended December 31, 1994 and 1993, respectively.
Amounts payable to the subsidiary under this agreement were $8 million and
$4 million as of December 31, 1994 and 1993, respectively.
61
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
9. REINSURANCE (Continued)
To the extent that the assuming companies become unable to meet their
obligations under these treaties, Pacific Mutual remains contingently
liable. However, Pacific Mutual does not anticipate nonperformance by these
assuming companies.
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
PENSION PLAN
Pacific Mutual maintains a defined benefit pension plan covering eligible
employees and agents. No contributions were made during 1994 or 1993
because of the funded status of the plans and related income tax
considerations. Accumulated benefits and net assets available for benefits
as of the latest valuation dates (March 31 of each year) are as follows:
<TABLE>
<CAPTION>
1994 1993
--------------------
(In Thousands)
<S> <C> <C>
Actuarial present value of accumulated benefits
accumulated benefits:
Vested $ 88,122 $ 83,060
Nonvested 1,115 572
--------------------
Total $ 89,237 $ 83,632
====================
Net assets available for benefits $111,089 $109,194
====================
</TABLE>
The above present values were determined using an assumed discount rate of
8.5% in 1994 and 1993.
POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE PLANS
Pacific Mutual sponsors a defined benefit health care plan and a defined
benefit life insurance plan ("The Plans") that provide postretirement
benefits for all eligible retirees and their dependents. Generally,
qualified employees may become eligible for these benefits if they reach
normal retirement age, have been covered under Pacific Mutual's policy as
an active employee for a minimum continuous period prior to the date
retired, and have an employment date before January 1, 1990. The Plans
contain cost-sharing features such as deductibles and coinsurance, and
require retirees to make contributions which can be adjusted annually.
Pacific Mutual's commitment to qualified employees who retire after April
1, 1994 is limited to specific dollar amounts. Pacific Mutual reserves the
right to modify or terminate The Plans at any time. As in the past, the
general policy is to fund these benefits on a pay-as-you-go basis. The
amount of benefits paid under The Plans for the years ended December 31,
1994 and 1993 was $1.7 million for both years.
During 1993, Pacific Mutual implemented the accrual method of accounting
for the costs of The Plans as prescribed by the Insurance Department of the
State of California, and elected to amortize its transition obligation of
$26.7 million over twenty years.
Components of net periodic postretirement benefit cost as follows (In
Thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
------------------------
<S> <C> <C>
Service cost $ 186 $ 89
Interest cost 1,790 1,907
Amortization (260) (260)
------------------------
1,716 1,736
Recognized transition obligation - net 1,337 1,336
------------------------
Net periodic postretirement benefit cost $3,053 $3,072
========================
</TABLE>
62
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS (Continued)
The following table presents The Plans' funded status reconciled with
amounts recorded in other liabilities on Pacific Mutual's statement of
financial position (In Thousands):
<TABLE>
<CAPTION>
1994 1993
---------------------
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $ 20,580 $ 22,844
Fully eligible active plan participants 1,346 1,044
Other active plan participants 2,455 1,972
---------------------
24,381 25,860
Fair value of plan assets 0 0
---------------------
Unfunded accumulated postretirement obligation 24,381 25,860
Unrecognized net gain/(loss) 942 (1,060)
Prior service cost 1,849 2,109
Unrecognized transition obligation-net (24,056) (25,393)
---------------------
Accrued postretirement benefit liability $ 3,116 $ 1,516
=====================
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 11% for 1994 and 12% for 1993, and is assumed to
decrease gradually to 6% in 2005 and remain at that level thereafter. The
amount reported is materially affected by the health care cost trend rate
assumptions. If the health care cost trend rate assumptions were increased
by 1%, the accumulated postretirement benefit obligation as of December 31,
1994 and 1993 would be increased by 11.2% and 8.8%, respectively. The
effect of this change would increase the aggregate of the service, interest
and amortization cost components of the net periodic benefit cost by 13.6%
and 8.6%, respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation was 8.0% and 7.5% for 1994 and 1993, respectively.
11. INVESTMENT COMMITMENTS
Pacific Mutual has outstanding commitments to make investments in bonds and
other invested assets as follows (In Thousands):
<TABLE>
<CAPTION>
Year Ended December 31:
-----------------------
<S> <C>
1995 $55,152
1996-1999 23,588
2000 and thereafter 20,669
-------
Total $99,409
=======
</TABLE>
12. LITIGATION
Pacific Mutual and its subsidiaries are respondents in a number of legal
proceedings, some of which involve extra-contractual damages. In the
opinion of management, the outcome of these proceedings is not likely to
have a material adverse effect on the financial position of Pacific Mutual.
63
<PAGE>
APPENDIX A
TABLE OF NET CASH VALUE ACCUMULATION TEST SINGLE PREMIUMS
(PER $1 OF FUTURE BENEFITS)
<TABLE>
<CAPTION>
AGE FEMALE MALE UNISEX AGE FEMALE MALE UNISEX
- --- ------- ------- ------- --- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
0 0.07165 0.08697 0.08395 50 0.34637 0.40440 0.39273
1 0.07178 0.08655 0.08364 51 0.35693 0.41653 0.40453
2 0.07383 0.08901 0.08601 52 0.36775 0.42888 0.41655
3 0.07602 0.09165 0.08857 53 0.37880 0.44143 0.42877
4 0.07831 0.09441 0.09124 54 0.39008 0.45416 0.44119
5 0.08072 0.09731 0.09405 55 0.40160 0.46704 0.45376
6 0.08324 0.10038 0.09701 56 0.41336 0.48007 0.46650
7 0.08589 0.10361 0.10012 57 0.42540 0.49324 0.47939
8 0.08865 0.10702 0.10340 58 0.43774 0.50655 0.49246
9 0.09155 0.11061 0.10686 59 0.45042 0.52002 0.50571
10 0.09457 0.11436 0.11047 60 0.46347 0.53364 0.51915
11 0.09773 0.11828 0.11423 61 0.47686 0.54739 0.53274
12 0.10100 0.12232 0.11813 62 0.49058 0.56124 0.54648
13 0.10438 0.12645 0.12211 63 0.50455 0.57516 0.56031
14 0.10788 0.13063 0.12615 64 0.51871 0.58909 0.57418
15 0.11146 0.13484 0.13024 65 0.53301 0.60301 0.58806
16 0.11515 0.13906 0.13435 66 0.54743 0.61689 0.60192
17 0.11895 0.14330 0.13850 67 0.56201 0.63072 0.61578
18 0.12285 0.14757 0.14269 68 0.57676 0.64453 0.62963
19 0.12689 0.15193 0.14699 69 0.59177 0.65831 0.64352
20 0.13106 0.15640 0.15140 70 0.60703 0.67206 0.65742
21 0.13538 0.16103 0.15595 71 0.62253 0.68574 0.67131
22 0.13985 0.16584 0.16069 72 0.63818 0.69929 0.68513
23 0.14449 0.17087 0.16564 73 0.65388 0.71262 0.69878
24 0.14930 0.17613 0.17081 74 0.66948 0.72564 0.71216
25 0.15429 0.18165 0.17622 75 0.68489 0.73828 0.72522
26 0.15946 0.18744 0.18188 76 0.70006 0.75052 0.73792
27 0.16482 0.19351 0.18780 77 0.71496 0.76238 0.75028
28 0.17038 0.19985 0.19398 78 0.72961 0.77391 0.76234
29 0.17613 0.20646 0.20042 79 0.74406 0.78517 0.77417
30 0.18209 0.21334 0.20711 80 0.75830 0.79621 0.78581
31 0.18825 0.22049 0.21407 81 0.77229 0.80702 0.79725
32 0.19462 0.22790 0.22127 82 0.78597 0.81756 0.80843
33 0.20122 0.23558 0.22874 83 0.79922 0.82774 0.81926
34 0.20805 0.24352 0.23646 84 0.81195 0.83745 0.82966
35 0.21510 0.25173 0.24443 85 0.82411 0.84665 0.83956
36 0.22239 0.26019 0.25266 86 0.83569 0.85536 0.84899
37 0.22990 0.26892 0.26114 87 0.84673 0.86362 0.85799
38 0.23761 0.27790 0.26987 88 0.85730 0.87153 0.86665
39 0.24554 0.28712 0.27883 89 0.86749 0.87920 0.87507
40 0.25366 0.29659 0.28802 90 0.87741 0.88679 0.88338
41 0.26197 0.30630 0.29745 91 0.88720 0.89444 0.89175
42 0.27047 0.31623 0.30709 92 0.89704 0.90237 0.90034
43 0.27917 0.32641 0.31697 93 0.90712 0.91083 0.90938
44 0.28807 0.33683 0.32707 94 0.91771 0.92013 0.91917
45 0.29719 0.34748 0.33742 95 0.92905 0.93048 0.92990
46 0.30654 0.35837 0.34800 96 0.94128 0.94201 0.94171
47 0.31613 0.36951 0.35881 97 0.95429 0.95459 0.95445
48 0.32597 0.38089 0.36986 98 0.96766 0.96774 0.96772
49 0.33604 0.39252 0.38118 99 0.98064 0.98064 0.98064
</TABLE>
64
<PAGE>
APPENDIX B
GUIDELINE PREMIUM TEST
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 or older 101
</TABLE>
65
<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:
Guideline Premium Test
<TABLE>
<C> <S>
1. Age 40, Option A, $10,000 annual premium, Current Cost of In-
surance 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 In-
surance Rates.
4. Age 40, Option B, $10,000 annual premium, Guaranteed Cost of
Insurance Rates.
</TABLE>
Cash Value Accumulation Test
<TABLE>
<C> <S>
1. Age 40, $10,000 annual premium, Current Cost of Insurance
Rates.
2. Age 40, $10,000 annual premium, Guaranteed Cost of Insurance
Rates.
</TABLE>
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 were invested to earn interest (after taxes) 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
66
<PAGE>
reflected in the tables as described above. In the absence of this policy, the
Portfolio's 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.
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.
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: $559,456
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: A
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
Total
Premiums End of Year DEATH BENEFIT Assuming
End of Paid Plus Hypothetical Gross Annual Investment Return of
Policy Interest at ----------------------------------------------
Year 5% 0% 6% 12%
------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $559,456 $559,456 $ 559,456
2 $ 21,525 $559,456 $559,456 $ 559,456
3 $ 33,101 $559,456 $559,456 $ 559,456
4 $ 45,256 $559,456 $559,456 $ 559,456
5 $ 58,019 $559,456 $559,456 $ 559,456
6 $ 71,420 $559,456 $559,456 $ 559,456
7 $ 85,491 $559,456 $559,456 $ 559,456
8 $100,266 $559,456 $559,456 $ 559,456
9 $115,779 $559,456 $559,456 $ 559,456
10 $132,068 $559,456 $559,456 $ 559,456
15 $226,575 $559,456 $559,456 $ 559,456
20 $347,193 $559,456 $559,456 $ 662,798
25 $501,135 $559,456 $559,456 $1,085,282
30 $697,608 $559,456 $571,179 $1,790,060
35 $948,363 $559,456 $723,077 $2,811,093
</TABLE>
<TABLE>
<CAPTION>
End of Year ACCUMULATED VALUE End of Year NET CASH SURRENDER VALUE
Assuming Hypothetical Gross Annual Assuming Hypothetical Gross Annual
End of Investment Return of Investment Return of
Policy ---------------------------------------------- ----------------------------------------------
Year 0% 6% 12% 0% 6% 12%
- ------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 5,271 $ 5,641 $ 6,011 $ 3,313 $ 3,683 $ 4,053
2 $ 10,742 $ 11,818 $ 12,940 $ 10,037 $ 11,113 $ 12,235
3 $ 16,848 $ 19,030 $ 21,392 $ 14,890 $ 17,072 $ 19,433
4 $ 24,196 $ 27,978 $ 32,217 $ 22,238 $ 26,020 $ 30,258
5 $ 31,428 $ 37,317 $ 44,160 $ 29,470 $ 35,359 $ 42,202
6 $ 38,498 $ 47,018 $ 57,292 $ 36,931 $ 45,452 $ 55,725
7 $ 45,401 $ 57,093 $ 71,733 $ 44,226 $ 55,918 $ 70,558
8 $ 52,155 $ 67,573 $ 87,639 $ 51,371 $ 66,790 $ 86,856
9 $ 58,783 $ 78,505 $ 105,194 $ 58,392 $ 78,113 $ 104,802
10 $ 65,432 $ 90,061 $ 124,734 $ 65,432 $ 90,061 $ 124,734
15 $ 97,852 $158,380 $ 262,927 $ 97,852 $158,380 $ 262,927
20 $124,387 $242,139 $ 494,625 $124,387 $242,139 $ 494,625
25 $145,071 $351,297 $ 889,576 $145,071 $351,297 $ 889,576
30 $150,108 $492,395 $1,543,155 $150,108 $492,395 $1,543,155
35 $125,961 $675,773 $2,627,190 $125,961 $675,773 $2,627,190
</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.
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: $559,456
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: A
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
Total
Premiums End of Year DEATH BENEFIT Assuming
End of Paid Plus Hypothetical Gross Annual Investment Return of
Policy Interest at ----------------------------------------------
Year 5% 0% 6% 12%
------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $559,456 $559,456 $ 559,456
2 $ 21,525 $559,456 $559,456 $ 559,456
3 $ 33,101 $559,456 $559,456 $ 559,456
4 $ 45,256 $559,456 $559,456 $ 559,456
5 $ 58,019 $559,456 $559,456 $ 559,456
6 $ 71,420 $559,456 $559,456 $ 559,456
7 $ 85,491 $559,456 $559,456 $ 559,456
8 $100,266 $559,456 $559,456 $ 559,456
9 $115,779 $559,456 $559,456 $ 559,456
10 $132,068 $559,456 $559,456 $ 559,456
15 $226,575 $559,456 $559,456 $ 559,456
20 $347,193 $559,456 $559,456 $ 586,468
25 $501,135 $559,456 $559,456 $ 957,399
30 $697,608 $559,456 $559,456 $1,569,416
35 $948,363 $ 0* $559,456 $2,450,636
</TABLE>
<TABLE>
<CAPTION>
End of Year ACCUMULATED VALUE End of Year NET CASH SURRENDER VALUE
Assuming Hypothetical Gross Annual Assuming Hypothetical Gross Annual
End of Investment Return of Investment Return of
Policy ---------------------------------------------- ----------------------------------------------
Year 0% 6% 12% 0% 6% 12%
- ------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 5,199 $ 5,565 $ 5,933 $ 3,240 $ 3,607 $ 3,975
2 $ 10,361 $ 11,421 $ 12,527 $ 9,657 $ 10,717 $ 11,822
3 $ 16,042 $ 18,171 $ 20,479 $ 14,083 $ 16,213 $ 18,521
4 $ 22,830 $ 26,493 $ 30,606 $ 20,872 $ 24,535 $ 28,648
5 $ 29,367 $ 35,034 $ 41,633 $ 27,409 $ 33,076 $ 39,675
6 $ 35,640 $ 43,788 $ 53,644 $ 34,073 $ 42,222 $ 52,077
7 $ 41,650 $ 52,769 $ 66,746 $ 40,475 $ 51,594 $ 65,571
8 $ 47,389 $ 61,976 $ 81,052 $ 46,606 $ 61,193 $ 80,269
9 $ 52,890 $ 71,456 $ 96,732 $ 52,498 $ 71,065 $ 96,340
10 $ 58,264 $ 81,344 $ 114,070 $ 58,264 $ 81,344 $ 114,070
15 $ 81,841 $137,391 $ 234,937 $ 81,841 $137,391 $ 234,937
20 $ 94,594 $201,236 $ 437,662 $ 94,594 $201,236 $ 437,662
25 $ 92,750 $278,240 $ 784,753 $ 92,750 $278,240 $ 784,753
30 $ 62,957 $371,413 $1,352,945 $ 62,957 $371,413 $1,352,945
35 $ 0* $497,321 $2,290,314 $ 0* $497,321 $2,290,314
</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>
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: $171,518
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: B
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
Total
Premiums End of Year DEATH BENEFIT Assuming
End of Paid Plus Hypothetical Gross Annual Investment Return of
Policy Interest at ----------------------------------------------
Year 5% 0% 6% 12%
------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $177,387 $177,761 $ 178,135
2 $ 21,525 $184,780 $185,981 $ 187,228
3 $ 33,101 $193,216 $195,786 $ 198,549
4 $ 45,256 $201,509 $206,006 $ 211,017
5 $ 58,019 $209,691 $216,687 $ 224,782
6 $ 71,420 $217,887 $227,983 $ 240,116
7 $ 85,491 $225,927 $239,738 $ 256,986
8 $100,266 $233,816 $251,976 $ 275,555
9 $115,779 $241,553 $264,714 $ 295,991
10 $132,068 $249,145 $277,978 $ 318,489
15 $226,575 $287,130 $356,781 $ 479,187
20 $347,193 $321,216 $454,330 $ 758,613
25 $501,135 $352,683 $579,462 $1,230,120
30 $697,608 $376,305 $732,380 $2,018,359
35 $948,363 $387,306 $915,127 $3,160,250
</TABLE>
<TABLE>
<CAPTION>
End of Year ACCUMULATED VALUE End of Year NET CASH SURRENDER VALUE
Assuming Hypothetical Gross Annual Assuming Hypothetical Gross Annual
End of Investment Return of Investment Return of
Policy ---------------------------------------------- ----------------------------------------------
Year 0% 6% 12% 0% 6% 12%
- ------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 5,869 $ 6,243 $ 6,617 $ 5,715 $ 6,089 $ 6,464
2 $ 13,262 $ 14,463 $ 15,710 $ 13,741 $ 14,942 $ 16,188
3 $ 21,698 $ 24,268 $ 27,031 $ 21,097 $ 23,668 $ 26,430
4 $ 29,991 $ 34,488 $ 39,499 $ 29,391 $ 33,887 $ 38,899
5 $ 38,173 $ 45,169 $ 53,264 $ 37,573 $ 44,569 $ 52,664
6 $ 46,369 $ 56,465 $ 68,598 $ 45,889 $ 55,984 $ 68,117
7 $ 54,409 $ 68,220 $ 85,468 $ 54,048 $ 67,860 $ 85,108
8 $ 62,298 $ 80,458 $ 104,037 $ 62,058 $ 80,218 $ 103,797
9 $ 70,035 $ 93,196 $ 124,473 $ 69,915 $ 93,076 $ 124,353
10 $ 77,627 $106,460 $ 146,971 $ 77,627 $106,460 $ 146,971
15 $115,612 $185,263 $ 305,215 $115,612 $185,263 $ 305,215
20 $149,698 $282,812 $ 566,129 $149,698 $282,812 $ 566,129
25 $181,165 $407,944 $1,008,295 $181,165 $407,944 $1,008,295
30 $204,787 $560,862 $1,739,965 $204,787 $560,862 $1,739,965
35 $215,788 $743,609 $2,953,505 $215,788 $743,609 $2,953,505
</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.
70
<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: $171,518
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: B
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
Total
Premiums End of Year DEATH BENEFIT Assuming
End of Paid Plus Hypothetical Gross Annual Investment Return of
Policy Interest at ----------------------------------------------
Year 5% 0% 6% 12%
------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $177,364 $177,737 $ 178,111
2 $ 21,525 $184,639 $185,834 $ 187,075
3 $ 33,101 $192,919 $195,470 $ 198,213
4 $ 45,256 $201,013 $205,466 $ 210,430
5 $ 58,019 $208,952 $215,864 $ 223,867
6 $ 71,420 $216,869 $226,825 $ 238,799
7 $ 85,491 $224,597 $238,191 $ 255,186
8 $100,266 $232,132 $249,976 $ 273,172
9 $115,779 $239,474 $262,192 $ 292,917
10 $132,068 $246,619 $274,852 $ 314,590
15 $226,575 $281,473 $349,061 $ 465,909
20 $347,193 $310,655 $438,624 $ 725,525
25 $501,135 $334,389 $549,932 $1,165,747
30 $697,608 $347,552 $681,637 $1,894,734
35 $948,363 $344,883 $833,112 $2,944,337
</TABLE>
<TABLE>
<CAPTION>
End of Year ACCUMULATED VALUE End of Year NET CASH SURRENDER VALUE
Assuming Hypothetical Gross Annual Assuming Hypothetical Gross Annual
End of Investment Return of Investment Return of
Policy ---------------------------------------------- ----------------------------------------------
Year 0% 6% 12% 0% 6% 12%
- ------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 5,846 $ 6,219 $ 6,593 $ 5,693 $ 6,066 $ 6,440
2 $ 13,121 $ 14,316 $ 15,557 $ 13,600 $ 14,795 $ 16,036
3 $ 21,401 $ 23,952 $ 26,695 $ 20,801 $ 23,352 $ 26,094
4 $ 29,495 $ 33,948 $ 38,912 $ 28,895 $ 33,347 $ 38,312
5 $ 37,434 $ 44,346 $ 52,349 $ 36,833 $ 43,746 $ 51,749
6 $ 45,351 $ 55,307 $ 67,281 $ 44,871 $ 54,827 $ 66,800
7 $ 53,079 $ 66,673 $ 83,668 $ 52,719 $ 66,313 $ 83,308
8 $ 60,614 $ 78,458 $ 101,654 $ 60,374 $ 78,217 $ 101,414
9 $ 67,956 $ 90,674 $ 121,399 $ 67,836 $ 90,554 $ 121,279
10 $ 75,101 $103,334 $ 143,072 $ 75,101 $103,334 $ 143,072
15 $109,955 $177,543 $ 294,391 $109,955 $177,543 $ 294,391
20 $139,137 $267,106 $ 541,436 $139,137 $267,106 $ 541,436
25 $162,871 $378,414 $ 955,530 $162,871 $378,414 $ 955,530
30 $176,034 $510,119 $1,633,392 $176,034 $510,119 $1,633,392
35 $173,365 $661,594 $2,751,717 $173,365 $661,594 $2,751,717
</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 RATED, DIVIDENDS, AND VALUES SET FORTH IN THE ILLUSTRATION
ARE NOT GUARANTEED.
71
<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: $559,456
CLASS: MALE NONSMOKER
CASH VALUE ACCUMULATION TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
Total
Premiums End of Year DEATH BENEFIT Assuming
End of Paid Plus Hypothetical Gross Annual Investment Return of
Policy Interest at ----------------------------------------------
Year 5% 0% 6% 12%
------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $559,456 $559,456 $ 559,456
2 $ 21,525 $559,456 $559,456 $ 559,456
3 $ 33,101 $559,456 $559,456 $ 559,456
4 $ 45,256 $559,456 $559,456 $ 559,456
5 $ 58,019 $559,456 $559,456 $ 559,456
6 $ 71,420 $559,456 $559,456 $ 559,456
7 $ 85,491 $559,456 $559,456 $ 559,456
8 $100,266 $559,456 $559,456 $ 559,456
9 $115,779 $559,456 $559,456 $ 559,456
10 $132,068 $559,456 $559,456 $ 559,456
15 $226,575 $559,456 $559,456 $ 578,901
20 $347,193 $559,456 $559,456 $ 937,574
25 $501,135 $559,456 $595,792 $1,452,653
30 $697,608 $559,456 $730,565 $2,180,416
35 $948,363 $559,456 $867,516 $3,208,254
</TABLE>
<TABLE>
<CAPTION>
End of Year ACCUMULATED VALUE End of Year NET CASH SURRENDER VALUE
Assuming Hypothetical Gross Annual Assuming Hypothetical Gross Annual
End of Investment Return of Investment Return of
Policy ---------------------------------------------- ----------------------------------------------
Year 0% 6% 12% 0% 6% 12%
- ------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 5,271 $ 5,641 $ 6,011 $ 3,313 $ 3,683 $ 4,053
2 $ 10,742 $ 11,818 $ 12,940 $ 10,037 $ 11,113 $ 12,235
3 $ 16,848 $ 19,030 $ 21,392 $ 14,890 $ 17,072 $ 19,433
4 $ 24,196 $ 27,978 $ 32,217 $ 22,238 $ 26,020 $ 30,258
5 $ 31,428 $ 37,317 $ 44,160 $ 29,470 $ 35,359 $ 42,202
6 $ 38,498 $ 47,018 $ 57,292 $ 36,931 $ 45,452 $ 55,725
7 $ 45,401 $ 57,093 $ 71,733 $ 44,226 $ 55,918 $ 70,558
8 $ 52,155 $ 67,573 $ 87,639 $ 51,371 $ 66,790 $ 86,856
9 $ 58,783 $ 78,505 $ 105,194 $ 58,392 $ 78,113 $ 104,802
10 $ 65,432 $ 90,061 $ 124,734 $ 65,432 $ 90,061 $ 124,734
15 $ 97,852 $158,380 $ 262,912 $ 97,852 $158,380 $ 262,912
20 $124,387 $242,139 $ 487,560 $124,387 $242,139 $ 487,560
25 $145,071 $350,976 $ 855,746 $145,071 $350,976 $ 855,746
30 $150,108 $480,937 $1,435,386 $150,108 $480,937 $1,435,386
35 $125,961 $629,502 $2,328,030 $125,961 $629,502 $2,328,030
</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 RATED, DIVIDENDS, AND VALUES SET FORTH IN THE ILLUSTRATION
ARE NOT GUARANTEED.
72
<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: $559,456
CLASS: MALE NONSMOKER
CASH VALUE ACCUMULATION TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
Total
Premiums End of Year DEATH BENEFIT Assuming
End of Paid Plus Hypothetical Gross Annual Investment Return of
Policy Interest at ----------------------------------------------
Year 5% 0% 6% 12%
------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $559,456 $559,456 $ 559,456
2 $ 21,525 $559,456 $559,456 $ 559,456
3 $ 33,101 $559,456 $559,456 $ 559,456
4 $ 45,256 $559,456 $559,456 $ 559,456
5 $ 58,019 $559,456 $559,456 $ 559,456
6 $ 71,420 $559,456 $559,456 $ 559,456
7 $ 85,491 $559,456 $559,456 $ 559,456
8 $100,266 $559,456 $559,456 $ 559,456
9 $115,779 $559,456 $559,456 $ 559,456
10 $132,068 $559,456 $559,456 $ 559,456
15 $226,575 $559,456 $559,456 $ 559,456
20 $347,193 $559,456 $559,456 $ 825,227
25 $501,135 $559,456 $559,456 $1,245,491
30 $697,608 $559,456 $564,167 $1,813,364
35 $948,363 $ 0* $661,882 $2,585,732
</TABLE>
<TABLE>
<CAPTION>
End of Year ACCUMULATED VALUE End of Year NET CASH SURRENDER VALUE
Assuming Hypothetical Gross Annual Assuming Hypothetical Gross Annual
End of Investment Return of Investment Return of
Policy ---------------------------------------------- ----------------------------------------------
Year 0% 6% 12% 0% 6% 12%
- ------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 5,199 $ 5,565 $ 5,933 $ 3,240 $ 3,607 $ 3,975
2 $ 10,361 $ 11,421 $ 12,527 $ 9,657 $ 10,717 $ 11,822
3 $ 16,042 $ 18,171 $ 20,479 $ 14,083 $ 16,213 $ 18,521
4 $ 22,830 $ 26,493 $ 30,606 $ 20,872 $ 24,535 $ 28,648
5 $ 29,367 $ 35,034 $ 41,633 $ 27,409 $ 33,076 $ 39,675
6 $ 35,640 $ 43,788 $ 53,644 $ 34,073 $ 42,222 $ 52,077
7 $ 41,650 $ 52,769 $ 66,746 $ 40,475 $ 51,594 $ 65,571
8 $ 47,389 $ 61,976 $ 81,052 $ 46,606 $ 61,193 $ 80,269
9 $ 52,890 $ 71,456 $ 96,732 $ 52,498 $ 71,065 $ 96,340
10 $ 58,264 $ 81,344 $ 114,070 $ 58,264 $ 81,344 $ 114,070
15 $ 81,841 $137,391 $ 234,937 $ 81,841 $137,391 $ 234,937
20 $ 94,594 $201,236 $ 429,137 $ 94,594 $201,236 $ 429,137
25 $ 92,750 $278,240 $ 733,709 $ 92,750 $278,240 $ 733,709
30 $ 62,957 $371,395 $1,193,752 $ 62,957 $371,395 $1,193,752
35 $ 0* $480,287 $1,876,305 $ 0* $480,287 $1,876,305
</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.
73
<PAGE>
[LOGO OF PACIFIC SELECT CHOICE]
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. 15-19044-03
