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PACIFIC SELECT CHOICE
PROSPECTUS
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[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 APRIL 1, 1996
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PACIFIC SELECT FUND
DATED APRIL 1, 1996
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PROSPECTUS
PACIFIC SELECT CHOICE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
ISSUED BY PACIFIC MUTUAL LIFE INSURANCE
COMPANY
700 NEWPORT CENTER DRIVE
[LOGO of PACIFIC SELECT CHOICE] NEWPORT BEACH, CALIFORNIA 92660
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," "we," "us," "you," or "our"). 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 ("Owner," "you," or "your"), 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 your discretion to one or more of
the Investment Options available to you. Each of the twelve Variable
Investment Options ("Variable Accounts") is a subaccount of our separate
account called the Pacific Select Exec Separate Account (the "Separate
Account"). 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"): the Money Market Portfolio, the High Yield Bond
Portfolio, the Managed Bond Portfolio, the Government Securities Portfolio,
the Growth Portfolio, the Aggressive Equity Portfolio, the Growth LT
Portfolio, the Equity Income Portfolio, the Multi-Strategy Portfolio, the
Equity Index Portfolio, the International Portfolio and the Emerging Markets
Portfolio. A fixed option called the Fixed Account is also available. Your
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 you to have one or two elections in determining the
death benefit under a Policy. First, you will choose from two death benefit
qualification tests--the cash value accumulation test or the guideline
premium test. If you choose the guideline premium test, the Policy also
permits you to choose from two death benefit options: under one option, the
death benefit remains fixed at the Face Amount you choose (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 33.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCU-
RACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE PACIFIC
SELECT FUND. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
DATE: APRIL 1, 1996
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TABLE OF CONTENTS
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IMPORTANT TERMS............................................................ 4
SUMMARY OF THE POLICY...................................................... 6
Purpose Of The Policy.................................................... 6
Policy Values............................................................ 6
The Death Benefit........................................................ 6
Premium Features......................................................... 7
Investment Options....................................................... 7
Transfer Of Accumulated Value............................................ 7
Policy Loans............................................................. 7
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
Portfolio Rebalancing.................................................... 15
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................................................................ 21
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
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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.................................................... 31
Disregard Of Voting Instructions......................................... 32
Confirmation Statements and Other Reports To Owners...................... 32
Substitution Of Investments.............................................. 32
Changes To Comply With Law............................................... 33
THE FIXED ACCOUNT.......................................................... 33
General Description...................................................... 33
Death Benefit............................................................ 34
Policy Charges........................................................... 34
Transfers, Surrenders, Withdrawals, And Policy Loans..................... 34
MORE ABOUT THE POLICY...................................................... 35
Ownership................................................................ 35
Beneficiary.............................................................. 35
The Contract............................................................. 35
Payments................................................................. 35
Assignment............................................................... 35
Errors On The Application................................................ 36
Incontestability......................................................... 36
Payment In Case Of Suicide............................................... 36
Participating............................................................ 36
Policy Illustrations..................................................... 36
Payment Plan............................................................. 36
Optional Insurance Benefits.............................................. 37
Life Insurance Retirement Plans.......................................... 37
Risks of Life Insurance Retirement Plans................................. 37
Distribution Of The Policy............................................... 38
MORE ABOUT PACIFIC MUTUAL.................................................. 40
Management............................................................... 40
State Regulation......................................................... 42
Telephone Transfer and Loan Privileges................................... 42
Legal Proceedings........................................................ 43
Legal Matters............................................................ 43
Registration Statement................................................... 43
Independent Accountants.................................................. 43
Financial Statements..................................................... 43
APPENDIX A................................................................. 66
APPENDIX B................................................................. 67
ILLUSTRATIONS.............................................................. 68
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THE POLICY IS NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN AS CONTAINED IN THIS PROSPECTUS, THE
FUND'S PROSPECTUS OR THE STATEMENT OF ADDITIONAL INFORMATION OF THE FUND OR
ANY SUPPLEMENT THERETO.
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IMPORTANT TERMS
Accumulated Value--The total value of the amounts in the Investment Option 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 you name in the application or by proper
later designation to receive the death benefit proceeds upon the death of the
Insured.
Cash Surrender Value--The Accumulated Value less 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 our 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 us.
General Account--All of our assets other than those allocated to the Separate
Account or to any of our other segregated separate accounts.
Guideline 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 our main office at
700 Newport Center Drive, Newport Beach, California 92660.
Investment Option--A Variable Account or the Fixed Account.
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 Investment
Options 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 your written request, 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 you 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 our
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.
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Policy Debt--The unpaid loan balance including accrued loan interest charged.
Policy Owner, Owner, You or Your--The person who owns the Policy. The Policy
Owner will be the Insured unless otherwise stated in the application. If your
Policy has been absolutely assigned, the assignee becomes the Owner. A
collateral assignee is not the Owner.
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 our administrative offices are open. The New York Stock
Exchange is closed on weekends and on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, July Fourth, Labor Day,
Thanksgiving Day, and Christmas Day. Our administrative offices are normally
not open on the following: the Monday before New Year's Day, July Fourth, or
Christmas Day if any of those holidays falls on a Tuesday; the Tuesday before
Christmas Day if that holiday falls on a Wednesday; the Friday after New
Year's Day, July Fourth or Christmas Day if any of these holidays falls on a
Thursday; and the Friday after Thanksgiving. If any transaction or event
called for under a Policy is scheduled to occur on a day that is not a
Valuation Day, such transaction or event will be deemed to occur on the next
following Valuation Day unless otherwise specified.
Valuation Period--The period that starts at the close of a Valuation Date and
ends at the close of the next succeeding Valuation Date.
Variable Account--A separate account of ours or a subaccount of such a
separate account, which is used only to support the variable death benefits
and policy values of variable life insurance policies, and the assets of which
are segregated from our General Account and our other separate accounts. The
Pacific Select Exec Separate Account serves as the funding vehicle for the
Policies. The Money Market Variable Account, High Yield Bond Variable Account,
Managed Bond Variable Account, Government Securities Variable Account, Growth
Variable Account, Aggressive Equity Variable Account, Growth LT Variable
Account, Equity Income Variable Account, Multi-Strategy Variable Account,
Equity Index Variable Account, and International Variable Account and Emerging
Markets Variable Account are all subaccounts of the Pacific Select Exec
Separate Account.
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SUMMARY OF THE POLICY
This summary is intended to provide a brief overview of the more significant
aspects of the Policy. Further detail is provided in this prospectus and in the
Policy. Unless the context indicates otherwise, the discussion in this summary
and the remainder of the prospectus relates to the portion of the Policy
involving the Separate Account. The Fixed Account is briefly described under
"The Fixed Account," on page 33 and in the Policy.
PURPOSE OF THE POLICY
The Policy offers you insurance protection on the life of the Insured through
the Maturity Date for so long as your Policy is in force. Like traditional
fixed life insurance, the Policy provides for a death benefit equal to its Face
Amount, accumulation of cash value, and surrender and loan privileges. Unlike
traditional fixed life insurance, the Policy offers a choice of investment
alternatives and an opportunity for your Policy's Accumulated Value and, if
elected by you 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, you may
choose the amount and frequency of premium payments.
POLICY VALUES
You may allocate net premium payments among the various Variable Accounts
that are available to you and that invest in corresponding Portfolios of the
Pacific Select Fund. You 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 you select, although the death benefit will
never decrease below the Face Amount provided your Policy is in force. There is
no guarantee that your Policy's Accumulated Value and death benefit will
increase. You bear the investment risk on that portion of your net premiums and
Accumulated Value allocated to the Separate Account.
Your Policy will remain in force until the earliest of the Maturity Date, the
death of the Insured, or a full surrender of your 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 you.
THE DEATH BENEFIT
You will have one or two elections in determining the death benefit under the
Policy. First, you 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 your Policy. If you choose the guideline
premium test, the Policy also permits you to choose from two death benefit
options. Under Option A, the death benefit will be equal to the Face Amount of
your 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 your 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. If you choose the guideline premium
test you 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.
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PREMIUM FEATURES
We require an initial premium equal to at least 25% of an annual premium that
will be estimated by us. Thereafter, subject to certain limitations, you may
choose the amount and frequency of premium payments. The Policy, therefore,
provides you with the flexibility to vary premium payments to reflect varying
financial conditions.
When applying for a Policy, you will determine a Planned Periodic Premium
that provides for the payment of level premiums over a specified period of
time. You 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 your option; however, you are not required to pay Planned
Periodic Premiums. Premiums may be paid monthly under the Uni-check electronic
funds transfer plan where you authorize us to withdraw premiums from your
checking account each month.
The amount, frequency, and period of time over which you pay premiums may
affect whether or not your 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 your Policy
will remain in force. Instead, the duration of your Policy depends upon your
Policy's Accumulated Value. Even if Planned Periodic Premiums are paid, your
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. We 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.
INVESTMENT OPTIONS
The Variable Accounts invest in portfolios of a mutual fund which offers you
the opportunity to direct us to invest in diversified portfolios of stocks,
bonds, money market instruments, or a combination of these securities, or in
securities of foreign issuers. The Variable Accounts available to you invest
exclusively in shares of corresponding Portfolios of the Pacific Select Fund
(the "Fund"), which are: the Money Market Portfolio, the High Yield Bond
Portfolio, the Managed Bond Portfolio, the Government Securities Portfolio, the
Growth Portfolio, the Aggressive Equity Portfolio, the Growth LT Portfolio, the
Equity Income Portfolio, the Multi-Strategy Portfolio, the Equity Index
Portfolio, the International Portfolio, and the Emerging Markets Portfolio. See
"The Pacific Select Fund," page 11.
You may choose to allocate net premium payments among the twelve Variable
Accounts and the Fixed Account.
TRANSFER OF ACCUMULATED VALUE
You 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 a properly completed
Authorization For Telephone Requests has been filed at our Home Office. See
"Transfer of Accumulated Value," page 16.
POLICY LOANS
You may borrow from us an amount up to the greater of (1) 90% of your
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
your Policy's
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Accumulated Value less any surrender charge that would be imposed if your
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. Your 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
your Cash Surrender Value upon surrender. See "Policy Loans," page 20. Your
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
You may return the Policy within the Free-Look Period, which is 10 days after
you receive it (30 days if you reside in California and are age 60 or older),
10 days after we mail or deliver a notice of the right of withdrawal, or 45
days after the application for the Policy is signed, whichever is latest. In
the event you return your Policy within the Free-Look Period, except as
indicated below, we will refund any charges deducted from premiums received,
any net premiums received allocated to the Fixed Account, plus the sum of your
Policy's Accumulated Value allocated to the Variable Accounts as of the end of
the Valuation Period in which we receive your Policy, plus any Policy charges
and fees deducted from your Policy's Accumulated Value in the Variable
Accounts. We will allocate any net premiums received according to your
allocation instructions contained in the application, or more recent written
instructions, if any, when the application is approved and your Policy is
issued.
If you reside in a state where applicable law so requires, we will refund
premiums received to you if you choose to exercise the Free-Look Right. We 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
You can surrender your Policy during the life of the Insured and receive its
Net Cash Surrender Value, which is equal to your Accumulated Value less the
underwriting surrender charge and less any outstanding Policy Debt. If your
Policy is surrendered during the first two years following its issuance, a
portion of the sales load paid under your Policy may be refunded to you. See
"Sales Load Refund," page 25.
PARTIAL WITHDRAWAL BENEFIT
A partial surrender benefit is available under your Policy on and after the
First Policy Anniversary. Under this Benefit, you may make "Partial
Withdrawals" of Net Cash Surrender Value. A Partial Withdrawal may decrease the
Face Amount on a Policy on which you have 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. You may elect to receive systematic Partial Withdrawals
after the first Policy Year while the Policy is in force as described under
"Systematic Withdrawals," page 22.
Among other restrictions, Partial Withdrawals must be for at least $500, and
your 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 your Policy's
Accumulated Value for each Partial Withdrawal. The Withdrawal Fee is currently
waived on each systematic withdrawal following the first systematic withdrawal.
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CHARGES AND DEDUCTIONS
Premium Load
A premium load is deducted from each premium payment under your Policy prior
to allocation of the net premium to your 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 your 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:
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SALES LOAD UNDER OPTION A
AND CASH VALUE SALES LOAD UNDER
TARGET PREMIUMS ACCUMULATION TEST OPTION B
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1 through 3.......................... 25% 30%
4 through 10......................... 4% 4%
11 and thereafter.................... 2% 2%
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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.
We 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 your Policy's
Accumulated Value on each Monthly Payment Date. The monthly deduction consists
of the following items:
--Cost of Insurance: This monthly charge compensates us 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
your 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.
--Mortality and Expense Risk Charge: A monthly charge is deducted for
mortality and expense risks we assume. During the first ten Policy Years,
this charge is equal to .000625 multiplied by a Policy's Accumulated Value
in the Investment Options, 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.
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Underwriting Surrender Charge
We will assess an underwriting surrender charge against Accumulated Value
upon surrender of your 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
We will assess a $25 Withdrawal Fee against your 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 us. Investment
advisory fees and operating expenses of the Fund are paid by the Fund. For a
description of these charges, see "Charges and Deductions," page 25.
TAX TREATMENT OF INCREASES IN ACCUMULATED VALUE
The Accumulated Value under your Policy is currently subject to the same
federal income tax treatment as the cash value under fixed life insurance.
Therefore, generally you will not be deemed to be in constructive receipt of
the Accumulated Value unless and until you are deemed to be in receipt of a
distribution from your 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
You 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 our General Account. We guarantee that the Accumulated Value
allocated to the Fixed Account will be credited interest monthly at a rate
equivalent to an effective annual rate of 4%. In addition, we may at our sole
discretion pay interest in excess of the guaranteed amount. See "The Fixed
Account," page 33.
CONTACTING PACIFIC MUTUAL
All written requests, notices, and forms required by the Policies, and any
questions or inquiries should be directed to Pacific Mutual Policy Benefits and
Services Department at 700 Newport Center Drive, P.O. Box 7500, Newport Beach,
CA 92658-7500.
The effective date of certain notices or of instructions is determined by the
date and time on which Pacific Mutual "receives" the notice or instructions.
Unless otherwise stated, we "receive" this information only when it arrives
"properly completed" at our Home Office. Premium payments after your initial
premium payment, loan requests, loan repayments, transfer requests, and
withdrawal requests we receive before 4:00 p.m. Eastern time (or the close of
the New York Stock Exchange, if earlier) will normally be effective as of the
end of the Valuation Day that we receive them "properly completed," unless the
transaction or event is scheduled to occur on another day. Transactions are
effected as of the end of the Valuation Date on which they are effective.
"Properly completed" may require, among other things, a signature guarantee or
other verification of authenticity. We do not generally require a signature
guarantee unless it appears that your signature may have changed over time or
due to other circumstances. Requests regarding death benefits must be
accompanied by both proof of death and instructions regarding payment
satisfactory to us. You should call your registered representative or Pacific
Mutual if you have questions regarding the required form of a request.
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. We were authorized to conduct business as a life
insurance company on January 2, 1868, as Pacific Mutual Life Insurance Company
of California, and were reincorporated under our present name on July 22,
1936.
We offer a complete line of life insurance policies and annuity contracts,
as well as financial and retirement services. We are admitted to do business
in the District of Columbia, and in all states except New York. As of the end
of 1995, we had over $44.2 billion of life insurance in force and total assets
of $17.6 billion. Together with our subsidiaries and affiliated enterprises,
we had total assets and funds under management of over $116.6 billion. We have
been ranked according to assets as the 24th largest insurance carrier in the
nation for 1994.
The Principal Underwriter for the Policies is Pacific Mutual Distributors,
Inc. ("PMD") (formerly known as Pacific Equities Network). PMD is registered
as a broker-dealer with the Securities and Exchange Commission ("SEC") and is
a wholly-owned subsidiary of Pacific Mutual.
PACIFIC SELECT EXEC SEPARATE ACCOUNT
The Pacific Select Exec Separate Account ("Separate Account") is one of our
separate investment accounts used only to support the variable death benefits
and policy values of variable life insurance policies. The 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 assets of our General Account and our other separate accounts.
We own the assets in the Separate Account and are required to maintain
sufficient assets in the Separate Account to meet anticipated obligations of
the 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 our other income, gains, or losses. 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 we conduct. However, we may
transfer to our 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. We 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 our Board of Directors. 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. We may in the future establish additional Variable
Accounts within the Separate Account, which may invest in other Portfolios of
the Fund or in other securities.
THE PACIFIC SELECT FUND
The Fund is a diversified, open-end management investment company of the
series type. The Fund is registered with the SEC under the Investment Company
Act of 1940. Such registration does not involve supervision by the SEC of the
investments or investment policies of the Fund. The Fund currently offers
twelve separate Portfolios to the Separate Account. Each Portfolio pursues
different investment objectives and policies. We purchase shares of each
Portfolio for the corresponding Variable Account at net asset value, i.e.,
without sales load. All dividends and capital gains distributions received
from a Portfolio are automatically reinvested in such Portfolio at net asset
value, unless we, on behalf of the Separate Account, elect otherwise. Fund
shares will be redeemed by us at their net asset value to the extent necessary
to make payments under the Policies.
11
<PAGE>
Shares of the Fund currently are offered only for purchase by our Separate
Accounts to serve as an investment medium for variable life insurance policies
and for variable annuity contracts issued by us and to a separate account of
Pacific Corinthian Life Insurance Company, a subsidiary of Pacific Mutual, to
serve as an 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 us. Investment in the Fund by other separate accounts in
connection with variable annuity and variable life insurance contracts may
create conflicts. See "MORE ON THE FUND'S SHARES" in the accompanying
prospectus of the Fund.
The chart below summarizes some basic data about each Portfolio of the Fund
offered to the Separate Account. There can be no assurance that any Portfolio
will achieve its objective. This chart is only a summary. You should read the
more detailed information which is contained in the accompanying prospectus of
the Fund, including information on the risks associated with the investments
and investment techniques of each of the Portfolios.
THE FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING.
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS
PORTFOLIO OBJECTIVE (UNDER NORMAL CIRCUMSTANCES) PORTFOLIO MANAGER
- -------------------------------------------------------------------------------------------------------------------
<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 Investment
consistent with prudent marketable debt Management Company
investment management securities. Will
normally maintain an
average portfolio
duration of 3-7 years
- -------------------------------------------------------------------------------------------------------------------
Government Maximize total return U.S. Government Pacific Investment
Securities consistent with prudent securities including Management Company
investment management futures and options
thereon and high-grade
corporate debt
securities. Will
normally maintain an
average portfolio
duration of 3-7 years
- -------------------------------------------------------------------------------------------------------------------
Growth Growth of capital Common stock Capital Guardian Trust Company
- -------------------------------------------------------------------------------------------------------------------
Aggressive Equity Capital appreciation Stock of small- and Columbus Circle Investors
medium-sized companies
- -------------------------------------------------------------------------------------------------------------------
Growth LT Long-term growth of capital Common stock Janus Capital Corporation
consistent with the
preservation of capital
- -------------------------------------------------------------------------------------------------------------------
Equity Income Long-term growth of capital Dividend paying common J.P. Morgan Investment
and income stock Management Inc.
- -------------------------------------------------------------------------------------------------------------------
Multi-Strategy High total return Equity and fixed income J.P. Morgan Investment
securities Management Inc.
- -------------------------------------------------------------------------------------------------------------------
Equity Index Provide investment results Stocks included in the Bankers Trust Company
that correspond to the total S&P 500
return performance of
common stocks publicly traded
in the U.S.
- -------------------------------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Templeton Investment Counsel, Inc.
appreciation corporations domiciled
outside the United
States
- -------------------------------------------------------------------------------------------------------------------
Emerging Markets Long-term growth of capital Common stocks of Blairlogie Capital Management
companies domiciled in
emerging market
countries
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
THE INVESTMENT ADVISER
Pacific Mutual, located at 700 Newport Center Drive, Newport Beach,
California 92660, serves as Investment Adviser to each Portfolio of the Fund.
We are registered with the SEC as an Investment Adviser. For ten of the
Portfolios, the Investment Adviser and the Fund have engaged other firms to
serve as Portfolio Managers which are shown in the chart above.
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 us. A Policy can be issued
on the life of an Insured for Ages up to and including Age 80 with evidence of
insurability satisfactory to us. The Insured's Age is calculated as of the
Insured's birthday nearest the Policy Date. Acceptance is subject to our
underwriting rules, and we reserve 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
us, the Policy Date is the date the application and premium payment were
received at our 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 us. We first become 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 we become obligated.
The initial premium must be received within 20 days after the Policy is
issued, although we may waive the 20 day requirement at our discretion. If the
initial premium is not received or the application is rejected by us, the
Policy will be cancelled and any partial premium received will be refunded.
Subject to our 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, we 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 us.
PREMIUMS
The Policy is a flexible-premium policy, and it provides considerable
flexibility, subject to the limitations described below, to pay premiums at
your discretion. We usually require you 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 your 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, you may
choose the amount and frequency of premium payments. The Policy, therefore,
provides you with the flexibility to vary premium payments to reflect varying
financial conditions.
When applying for a Policy, you will determine a Planned Periodic Premium
that provides for the payment of level premiums over a specified period of
time. You 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 your option; however, you are not required to pay Planned
Periodic Premiums. Premiums may be paid monthly under the Uni-check plan
electronic funds transfer where you authorize us to withdraw premiums from
your checking account each month. The minimum initial premium required must be
paid before the Uni-check plan will be
13
<PAGE>
accepted by Pacific Mutual. You 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 you do not elect a payment day, the day on
which premiums are paid will be the Monthly Anniversary.
The amount, frequency and period of time over which you pay 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.
In order for your Policy to avoid being treated as a modified endowment
contract, the sum of the premiums paid less a portion of any Partial
Withdrawals may not exceed the "seven pay premium" limit as defined in the
Internal Revenue Code. (See "Federal Income Tax Considerations"). If we
receive any premium payment that we believe, if applied to your Policy in that
Policy year, would cause your Policy to become a modified endowment contract,
the portion of the payment that we believe would cause your Policy to become a
modified endowment contract will not be applied to your Policy but will be
returned to you, unless you had previously notified us that payments that
cause your Policy to become a modified endowment contract may be accepted by
us and applied to your Policy. However, for premium payments received by us at
our Home Office within 20 days before the upcoming Annual Anniversary of your
Policy, we may apply the portion of the premium payment that we believe would
cause your Policy to become a modified endowment contract to your Policy on
the upcoming Annual Anniversary.
Payment of the Planned Periodic Premium will not guarantee that your Policy
will remain in force. Instead, the duration of your Policy depends upon your
Policy's Accumulated Value. Even if Planned Periodic Premiums are paid, your
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. We 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 you 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 you request 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 your Policy, you select the Investment Options 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 your 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 us 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 your most recent instructions as of the end of the Valuation
Period in which the premiums are received at our Home Office. Available
Investment Options include the twelve Variable Accounts and the Fixed Account.
You may change the allocation of net premiums by submitting a proper written
request to our Home Office. Changes in net premium allocation instructions may
be made by telephone if a properly completed Authorization
14
<PAGE>
for Telephone Requests has been filed at our Home Office. We reserve the right
to discontinue telephone net premium allocation instructions.
PORTFOLIO REBALANCING
You may direct us to automatically re-set the percentage of your Accumulated
Value allocated to each Variable Account at a predetermined level. This
process is called portfolio rebalancing. (The Fixed Account is not available
for portfolio rebalancing.) Over time, the variations in each Variable
Account's investment results will shift the percentage allocations of your
Accumulated Value. The portfolio rebalancing feature will automatically
transfer your Accumulated Value among the Variable Accounts back to the preset
percentages. Rebalancing can be made quarterly, semi-annually or annually,
measured from your Policy Date ("frequency period"). Rebalancing may result in
transferring amounts from a Variable Account with relatively higher investment
performance to a Variable Account with relatively lower investment
performance.
You may initiate portfolio rebalancing by sending our Home Office a signed,
written request in good form or a properly completed Automatic Portfolio
Rebalancing form. You must specify the frequency for rebalancing and a
beginning date. The first rebalancing will usually occur on your Monthly
Payment Date that starts the frequency period you elected and that occurs on
or follows the beginning date you elected. If you stop portfolio rebalancing,
you must wait 30 days to begin again. Portfolio rebalancing cannot be used
with the Dollar Cost Averaging Option.
We may modify, terminate or suspend the portfolio rebalancing feature at any
time.
DOLLAR COST AVERAGING OPTION
We currently offer an option under which you may dollar cost average your
allocations in the Variable Accounts under your Policy by authorizing us to
make periodic allocations of Accumulated Value from any one Variable Account
to one or more of the other Variable Accounts. Dollar cost averaging is a
systematic method of investing in which securities are purchased at regular
intervals in fixed dollar amounts so that the cost of the securities gets
averaged over time and possibly over various market 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 you will not have losses.
A Dollar Cost Averaging Request form is available upon request. On the form,
you must designate the specific dollar amounts or percentage to be
transferred, the Variable Account or Accounts to which the transfer will be
made, the desired frequency of the transfer, which may be on a monthly,
quarterly, semi-annual, or annual basis and the length of time during which
the transfers shall continue or the total amount to be transferred over time.
To elect the Dollar Cost Averaging Option, your Accumulated Value in the
Variable Account from which the Dollar Cost averaging transfers will be made
must be at least $5,000. The Dollar Cost Averaging Request form will not be
considered complete until your Accumulated Value in the Variable Account from
which the transfers will be made is at least $5,000. After we have received a
Dollar Cost Averaging Request in proper form at our Home Office, we will
transfer Accumulated Value in amounts designated by you from the Variable
Account from which transfers are to be made to the Variable Account or
Accounts chosen by you. 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 you, coincident
with or next following receipt at our Home Office of a Dollar Cost Averaging
Request in proper form, and subsequent transfers will be effected on the
following Monthly, Quarterly, Semi-Annual, or Annual Anniversary for so long
as designated by you, until the total amount elected has been transferred,
until Accumulated Value in the Variable Account from which transfers are
15
<PAGE>
made has been depleted, or until your Policy enters the Grace Period. Amounts
periodically transferred under this option will not be subject to any transfer
charges that may be imposed by us in the future, except as may be required by
applicable law.
You may instruct us at any time to terminate the option by written request
to our Home Office. In that event, the Accumulated Value in the Variable
Account from which transfers were being made that has not been transferred
will remain in that Variable Account unless you instruct otherwise or until
your Policy enters the Grace Period. If you wish to continue transferring on a
dollar cost averaging basis after the expiration of the applicable period, the
total amount elected has been transferred, or the Variable Account has been
depleted, or after the Dollar Cost Averaging Option has been cancelled, a new
Dollar Cost Averaging Request must be completed and sent to our Home Office.
The Variable Account from which transfers are to be made must meet the $5,000
minimum amount of the Accumulated Value. We may discontinue, modify, or
suspend the Dollar Cost Averaging Option at any time.
TRANSFER OF ACCUMULATED VALUE
During the Accumulation Period, you may transfer Accumulated Value among the
Variable Accounts upon proper written request to our Home Office. Transfers
may not be made until after the Free-Look Transfer Date if you reside in a
state that requires us to refund premiums to 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 a properly
completed Authorization For Telephone Requests form is on file at our Home
Office. Currently, there are no limitations on the number of transfers between
Variable Accounts, no minimum amount required for a transfer, nor any minimum
amount required to be remaining in a given Variable Account after a transfer
(except as required under the Dollar Cost Averaging Option). No 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. We reserve the right, however, at a future date to limit the
size of transfers and remaining balances, to assess transfer charges, to limit
the number and frequency of transfers, and to suspend and 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 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 33.
DEATH BENEFIT
When your Policy is issued, we will determine the initial amount of
insurance based on the instructions provided in your application. That amount
will be shown on the specifications page of your Policy and is called the
"Face Amount." The minimum Face Amount at issuance of a Policy is $50,000. We
may reduce the minimum Face Amount required at issuance under certain
circumstances, such as for group or sponsored arrangements or if you acquire
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).
You will have one or two elections in determining the death benefit under a
Policy. First, you 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
your 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, we will assume the guideline premium
test Option A has 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. If you choose this
test you will be given another election under the Policy--to select one of two
death benefit options: Option A or Option B. Subject to certain restrictions,
you can change the death benefit option selected. So long as your Policy
remains in force, the death benefit under either option will never be less
than the Face Amount of your Policy.
Option A. Under Option A, the death benefit will be equal to the Face Amount
of your 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 your Policy plus your 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 us.) 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.
If you desire to pay premiums in excess of the guideline premium test
limitations you should elect the cash value accumulation test. If you do not
desire to pay premiums in excess of the guideline premium test limitations you
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 POLICY
POLICY I II 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
If you elect the guideline premium test (and not the cash value accumulation
test), you 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 our 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 us. 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 your Policy by the amount of your 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
we reserve the right to waive this minimum under certain circumstances, such
as for group or sponsored arrangements. A charge of $100 will be deducted from
your Accumulated Value in the Investment Options 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 your Policy by the amount of your 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 your 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
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<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
We reserve 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, we reserve 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 you in whole or in part. See "Federal Income Tax Considerations," page 28.
The $25 withdrawal fee will not be assessed on Partial Withdrawals we require.
We reserve 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
You may request a decrease in the Face Amount under a Policy subject to our
approval. 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 you choose and whether and the
degree to which the death benefit under your Policy exceeds the Face Amount
prior to the decrease. Decreasing the Face Amount could affect the subsequent
level of the death benefit while your Policy is in force and the subsequent
level of Policy values. A decrease in Face Amount may decrease the net amount
at risk, which will decrease your cost of insurance charge.
Any request for a decrease in Face Amount must be made by written
application to our Home Office. It will become effective on the Monthly
Payment Date on or next following our acceptance of the request. If you are
not the Insured, we 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 we reserve the right to waive the minimum Face
Amount under certain circumstances, such as for group or sponsored
arrangements or if you have 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, we will refund to you 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.
We reserve the right to disallow a requested decrease, and will not permit a
requested decrease, among other reasons, (1) if compliance with the guideline
premium limitations under tax law resulting from the requested decrease would
result in immediate termination of the Policy, or (2) if, to effect the
requested decrease, payments to you would have to be made from Accumulated
Value for compliance with the guideline premium limitations, and the amount of
such payments would exceed the Net Cash Surrender Value under your Policy.
Increases in Face Amount are not available under your Policy unless state law
requires otherwise.
POLICY VALUES
Accumulated Value. Your Accumulated Value is the sum of the amounts under
the Policy held in the Investment Options, as well as the amount set aside in
the Loan Account to secure any Policy Debt.
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On each Valuation Date, the portion of your Accumulated Value allocated to
any particular Variable Account will be adjusted to reflect the investment
experience of that Variable Account. On each Monthly Payment Date, the portion
of your 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. You bear the risk for the investment
experience of Accumulated Value allocated to the Variable Accounts.
Cash Surrender Value. The Cash Surrender Value of your Policy equals your
Accumulated Value less the underwriting surrender charge. Thus, your
Accumulated Value will exceed your Policy's Cash Surrender Value by the amount
of the underwriting surrender charge. Once the surrender charge has expired,
your Accumulated Value will equal the Cash Surrender Value.
Net Cash Surrender Value. The Net Cash Surrender Value of your Policy equals
your Cash Surrender Value less any outstanding Policy Debt. You can surrender
your Policy at any time while the Insured is living and receive your Net Cash
Surrender Value. See "Surrender," page 21.
DETERMINATION OF ACCUMULATED VALUE
Although the death benefit under your Policy can never be less than your
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 your Accumulated Value has been allocated, payment of
premiums, the amount of any outstanding Policy Debt, Partial Withdrawals, and
the charges assessed in connection with your Policy. There is no guaranteed
minimum Accumulated Value and you bear the entire investment risk relating to
the investment performance of Accumulated Value allocated to the Variable
Accounts.
The amounts allocated to the Variable Accounts available to you will be
invested in shares of the corresponding Portfolios of the Fund. The investment
performance of each Variable Account will reflect increases or decreases in
the net asset value per share of the corresponding Portfolio and any dividends
or distributions declared by a Portfolio. Any dividends or distributions from
any Portfolio of the Fund will be automatically reinvested in shares of the
same Portfolio, unless we, on behalf of the Separate Account, elect otherwise.
Assets in the Variable Accounts are divided into accumulation units, which
are a measure of value used for bookkeeping purposes. When you allocate 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 your Policy affect
the number of accumulation units credited to your Policy. The number of units
credited or debited in connection with any such transaction is determined by
dividing the dollar amount of such transaction by the unit value of the
affected Variable Account. The unit value of each Variable Account is
determined on each Valuation Date at or about 4:00 p.m. Eastern time. The
number of units credited will not change because of subsequent changes in unit
value.
The accumulation unit value of each Variable Account's unit initially was
$10. The unit value of a Variable Account on any Valuation Date is calculated
by adjusting the unit value from the previous Valuation Date for (1) the
investment performance of the Variable Account, which is based upon the
investment performance of the corresponding Portfolio of the Fund, (2) any
dividends or distributions paid by the corresponding Portfolio, and (3) the
charges, if any, we may assess for income taxes attributable to the operation
of the Variable Account.
POLICY LOANS
You may borrow money from us using your Policy as the only security for the
loan by submitting a proper written request to our Home Office. We may in our
discretion permit loans to be made by telephone if an Authorization For
Telephone Requests has been properly completed and filed at our Home Office. A
loan may be taken any time your Policy is in force. The minimum loan that can
be taken at any time is $500. The maximum amount that can be borrowed at any
time is the greater of (1) 90% of your Policy's Accumulated Value allocated to
the Variable Accounts and 100% of Accumulated Value allocated to the Fixed
Account, less
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any underwriting surrender charges that would be imposed if your 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 your Policy's Accumulated Value less any
surrender charge that would be imposed if your 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 you take a loan, an amount equal to the loan is transferred out of your
Accumulated Value in the Investment Options into the Loan Account to secure
the loan. Unless you request otherwise, loan amounts will be deducted from the
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. We will credit interest monthly on any
Policy Debt to secure the loan at an annual effective rate of 4.0%.
You may repay all or part of the loan at any time while your Policy is in
force. Interest on a loan is accrued daily and is due 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 Investment Options on a proportional basis.
Unless you request otherwise, any loan repayment will be transferred into
the Investment Options in accordance with your most recent premium allocation
instructions. In addition, any interest earned on the loan balance held in the
Loan Account will be transferred to each of the Investment Options in
accordance with your most recent premium allocation instructions.
While the amount to secure the loan is held in the Loan Account, you forgo
the investment experience of the Variable Accounts and the current interest
rate of the Fixed Account on the loaned amount. Thus your loan, whether or not
repaid, will have a permanent effect on your 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 your Policy remains in force. Your
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, your 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 you 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, we will pay you, as an
endowment benefit, your Accumulated Value, reduced by any Policy Debt. Payment
ordinarily will be made within seven days of your Policy Anniversary, although
payments may be postponed in certain circumstances. See "Payments," page 35.
SURRENDER
You may fully surrender your Policy at any time during the life of the
Insured. The amount received in the event of a full surrender is your Policy's
Net Cash Surrender Value, which is equal to your Accumulated Value less any
applicable underwriting surrender charge and less any outstanding Policy Debt.
If your 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
you. See "Sales Load Refund," page 25.
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You may surrender your Policy by sending a written request together with the
Policy to our Home Office. The proceeds will be determined as of the end of
the Valuation Period during which the request for a surrender is received. You
may elect to have the proceeds paid in cash or applied under a payment plan
offered under the Policy. See "Payment Plan," page 36. For information on the
tax effects of a surrender of a Policy, see "Federal Income Tax
Considerations," page 28.
PARTIAL WITHDRAWAL BENEFIT
We offer a partial surrender benefit by which you can obtain a portion of
your 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, you may make "Partial Withdrawals" of your 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 your Policy's
Accumulated Value in the Investment Options in the same proportion as the
withdrawal amount. If you 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 your 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%.
You may make a Partial Withdrawal by submitting a proper written request to
our Home Office. As of the effective date of any withdrawal, your 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 your Value in the Investment Options unless you request
otherwise. If, after a withdrawal is effected, we are notified that the
Insured died after the request for the withdrawal was sent to us 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 you have 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 you have 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.
Systematic Withdrawals. You 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 us at our Home
Office. You 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 you wish 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 your proper written request, received by us 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 your Accumulated Value in
the Investment Options. If a
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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. We will notify
you of the termination.
We 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 you 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 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
You have a Free-Look Right, under which your Policy may be returned within
10 days after you receive it (30 days if you are a resident of California and
age 60 or older), within 10 days after we mail or deliver the notice of the
right of withdrawal, or within 45 days after you sign the application for
insurance, whichever is latest. It can be mailed or delivered to us or our
agent. The returned Policy will be treated as if we never issued it and,
except as indicated below, we will refund any charges deducted from premiums
received, any net premium allocated to the Fixed Account, plus the sum of your
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 you have taken a loan during the Free-Look Period, your Policy
Debt will be deducted from the amount refunded. We will allocate any net
premiums received according to your instructions contained in your
application, or more recent written instructions, if any, when the application
is approved and the Policy is issued. If you reside in a state that requires
us to return premium payments to Policy Owners who exercise the Free-Look
Right, we 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
Your Policy will lapse only when your Accumulated Value less Policy Debt is
insufficient to cover the current monthly deduction against your Policy's
Accumulated Value on any Monthly Payment Date, and a Grace Period expires
without you making a sufficient payment. If your Accumulated Value less Policy
Debt is insufficient to cover the current monthly deduction on a Monthly
Payment Date, you must pay during the Grace Period a minimum of three times
the full monthly deduction due on the Monthly Payment Date when the
insufficiency occurred to avoid termination of your Policy. We will not accept
any payment if it would cause your total premium payments to exceed the
maximum permissible premium for your Policy's Face Amount under the Internal
Revenue Code. This is unlikely to occur unless you have outstanding Policy
Debt, in which case you could repay a sufficient portion of the Policy Debt to
avoid termination. In this instance, you 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, you
may wish to make larger or more frequent premium payments to avoid recurrence
of the potential lapse.
If your Accumulated Value less Policy Debt is insufficient to cover the
monthly deduction on a Monthly Payment Date, we will deduct the amount that is
available. We will notify you (and any assignee of record) of the payment
required to keep the Policy in force. You will then have a "Grace Period" of
61 days, measured from the date the notice is sent, to make the required
payment. Your Policy will remain in force through the Grace Period. Failure to
make the required payment within the Grace Period will result in termination
of coverage under your Policy, and your Policy will lapse with no value.
However, if your Policy lapses during the
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first 2 years from issuance, we will pay you any sales load refund to which
you are entitled. If the required payment is made during the Grace Period, any
premium paid will be allocated among the Investment Options in accordance with
your current premium allocation instructions. Any monthly deduction due will
be charged to the Investment Options on a proportionate basis. If the Insured
dies during the Grace Period, the death benefit proceeds will equal the amount
of the death benefit immediately prior to the commencement of the Grace
Period, reduced by any unpaid monthly deductions, any sales load refund
already paid, and any Policy Debt.
REINSTATEMENT
We will reinstate a lapsed Policy (but not a Policy which has been
surrendered for its Net Cash Surrender Value) at any time within five years
after the end of the Grace Period but before the Maturity Date provided we
receive the following: (1) your written application; (2) evidence of
insurability satisfactory to us; and (3) 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
you at the time the Policy lapsed.
When your Policy is reinstated, your Accumulated Value will be equal to your
Accumulated Value on the date of the lapse subject to the following: If 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 your
Policy is reinstated on your Monthly Payment Date next following lapse, any
Policy Debt on the date of lapse will also be reinstated. No interest on
amounts held in the 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 our approval, and
Accumulated Value minus, if applicable, Policy Debt will be allocated among
the Investment Options in accordance with your most recent premium allocation
instructions.
RIGHT TO CONVERT POLICY
You may convert your Policy at any time during the first two years after
issue, as long as your 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 us. You 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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CHARGES AND DEDUCTIONS
PREMIUM LOAD
A premium load is deducted from each premium payment under your Policy prior
to allocation of the net premium to your 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 your 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 us for the cost of distributing the
Policies. The amount derived by us 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.
We 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 reflect changes in the law.
SALES LOAD REFUND
If a Policy is surrendered for its Net Cash Surrender Value or your Policy
lapses at any time during the first two years following its issuance, a
portion of the sales load paid under your Policy may be refunded. This refund
will be paid only for premiums paid in the first two years following issuance
of the Policy. We 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 your Policy's
Accumulated Value in the Investment Options beginning on the Monthly Payment
Date on or next following the date we first become 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 us for the anticipated
cost of paying death benefits in excess of Accumulated Value to Beneficiaries
of Insureds who die. We may use any profit derived from this charge for any
lawful purpose, including the cost of claims processing and investigation. The
amount of the charge is equal to a current cost of insurance rate multiplied
by the net amount at risk under your 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, we charge "current rates" that are lower (i.e., less expensive)
than the guaranteed rates, and we 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
us 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. We do not expect to
profit from this charge.
The administrative charge will be waived on the second or subsequent
Policies you acquire 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 that we assume. During the first ten Policy Years,
this charge is equal to .000625 multiplied by a Policy's Accumulated Value in
the Investment Options, 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 Investment
Options, 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 us for
assuming certain mortality and expense risks under the Policies. The mortality
risk assumed is that Insureds, as a group, may live for a shorter period of
time than estimated and, therefore, the cost of insurance charges specified in
the Policy will be insufficient to meet actual claims. The expense risk
assumed is that other expenses incurred in issuing and administering the
Policies and operating the Separate Account will be greater than the charges
assessed for such expenses. We will realize a gain from this charge to the
extent it is not needed to provide the mortality benefits and expenses under
the Policies, and will realize a loss to the extent the charge is not
sufficient. We may use any profit derived from this charge for any lawful
purpose, including any distribution expenses not covered by the sales load.
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
We will assess an underwriting surrender charge against Accumulated Value
upon surrender of your 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 your 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. We do 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 Investment Options in the same proportion as the
withdrawal amount. If you have elected to receive systematic withdrawals, the
withdrawal fee is currently waived on each systematic withdrawal following the
first systematic withdrawal. We reserve 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, we 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
We may charge the Variable Accounts for federal income taxes we incur that
are attributable to the Separate Account and its Variable Accounts or to our
operations with respect to the Policies. No such charge is currently assessed.
See "Charge for Pacific Mutual Income Taxes," page 31.
We will bear the direct operating expenses of the Separate Account. Each
Variable Account available to you 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, and these expenses
may vary from year to year. The advisory fees and other expenses are more
fully described in the prospectus of the Fund.
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GUARANTEE OF CERTAIN CHARGES
We guarantee that certain charges will not increase. 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 our understanding of the present federal income tax laws as they are
currently interpreted by the Internal Revenue Service ("IRS"). This discussion
is not intended as tax advice. Because of the inherent complexity of such laws
and the fact that tax results will vary according to the particular
circumstances of the individual involved, tax advice may be needed by a person
contemplating the purchase of the Policy. It should, therefore, be understood
that these comments concerning federal income tax consequences are not an
exhaustive discussion of all tax questions that might arise 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 we believe that the Policy meets the statutory definition of life
insurance and hence will receive federal income tax treatment consistent with
that of fixed life insurance, the area of the tax law relating to the
definition of life insurance does not explicitly address all relevant issues
(including, for example, the treatment of substandard risk Policies and
Policies with term insurance on the Insured). We reserve the right to make
changes to the Policy if changes are deemed appropriate by us to attempt to
assure qualification of the Policy as a life insurance contract. If a Policy
were determined not to qualify as life insurance, the Policy would not provide
the tax advantages normally provided by life insurance. The discussion below
summarizes the tax treatment of life insurance contracts.
The death benefit under a Policy should be excludable from the gross income
of the Beneficiary (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 you 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 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 separate
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<PAGE>
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 your Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, you have additional flexibility in allocating premium payments and
Policy values. These differences could result in your being treated as the
owner of your Policy's pro rata portion of the assets of the Separate Account.
In addition, we do not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has stated it expects to
issue. We therefore reserve the right to modify the Policy, as deemed
appropriate by us, to attempt to prevent you from being considered the owner
of your Policy's pro rata share of the assets of the Separate Account.
Moreover, in the event that regulations are adopted or rulings are issued,
there can be no assurance that the Portfolio will be able to operate as
currently described in the Prospectus, or that the Fund will not have to
change any Portfolio's investment objective or investment policies.
Tax Treatment of Policies. IRC Section 7702A defines a class of life
insurance contracts referred to as "modified endowment contracts". Under this
provision, 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 the Policy, including 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.
We also believe that loans received under Policies that are not modified
endowment contracts will be treated as indebtedness of the Owner for Federal
income tax purposes, and that no part of any loan under the Policy will
constitute income to the Owner unless the Policy is surrendered or upon
maturity or lapse. 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.
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<PAGE>
Consult with your tax advisor on whether interest paid (or accrued by an
accrual basis taxpayer) on a Policy that is not a modified endowment contract
may be deductible. Tax law provisions may limit the deduction of interest
payable on loan proceeds that are used to purchase or carry certain life
insurance policies.
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. Consult your tax
advisor. 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.
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<PAGE>
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 has issued proposed regulations and is
expected to promulgate temporary or final regulations governing reasonableness
standards for mortality charges. While we believe under IRS pronouncements
currently in effect that the mortality costs and other expenses used in making
calculations to determine whether the Policy qualifies as life insurance meet
the current requirements, complete assurance cannot be given that the IRS
would necessarily agree. It is possible that future regulations will contain
standards that would require us to modify our mortality 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 we reserve
the right to make any such modifications.
Accelerated Living Benefits. An Accelerated Living Benefit Rider is
available in connection with the Policy. Benefits under the Accelerated Living
Benefit 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 benefit 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 benefit rider will be deemed to meet
the definitional requirements of a life insurance contract. We reserve the
right to (but are not obligated to) modify the Rider to conform with
requirements under the final regulations. Owners considering adding an
Accelerated Living Benefit 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 us that are
attributable to the Separate Account or to our operations with respect to the
Policy. We will review the question of a charge to the Separate Account or the
Policy for our federal income taxes periodically. Charges may become necessary
if the tax treatment is ultimately determined to be other than what we
currently believe it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the insurance company level, or if
there is a change in our tax status.
Under current laws, we may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant.
If there is a material change in applicable state or local tax laws, we
reserve the right to charge the Account for such taxes, if any, attributable
to the Account.
VOTING OF FUND SHARES
In accordance with its view of present applicable law, we will exercise
voting rights attributable to the shares of each Portfolio of the Fund held in
the Variable Accounts at any regular and special meetings of the shareholders
of the Fund on matters requiring shareholder voting under the Investment
Company Act of 1940. We will exercise these voting rights based on
instructions received from persons having the voting interest in
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<PAGE>
corresponding Variable Accounts of the Separate Account. However, if the
Investment Company Act of 1940 or any regulations thereunder should be
amended, or if the present interpretation thereof should change, and as a
result we determine that it is permitted to vote the shares of the Fund in its
own right, we may elect to do so.
You are the person having the voting interest under a Policy. Unless
otherwise required by applicable law, the number of votes as to which you will
have the right to instruct will be determined by dividing your Accumulated
Value in a Variable Account by the net asset value per share of the
corresponding Portfolio of the Fund. Fractional votes will be counted. The
number of votes as to which you will have the right to instruct will be
determined as of the date coincident with the date established by the Fund for
determining shareholders eligible to vote at the meeting of the Fund. If
required by the Securities and Exchange Commission, we reserve the right to
determine in a different fashion the voting rights attributable to the shares
of the Fund based upon the instructions received from Policy Owners. Voting
instructions may be cast in person or by proxy.
Voting rights attributable to your Accumulated Value held in each Variable
Account for which no timely voting instructions are received will be voted by
us in the same proportion as the voting instructions which are received in a
timely manner for all policies participating in that Variable Account. We will
also exercise the voting rights from assets in each Variable Account which are
not otherwise attributable to policy owners, if any, in the same proportion as
the voting instructions which are received in a timely manner for all policies
participating in that Variable Account. If we hold shares of a Portfolio in
our General Account and/or if any of our non-insurance subsidiaries holds
shares of a Portfolio, such shares will be voted in the same proportion as
votes cast by the Separate Account and our other separate accounts, in the
aggregate.
DISREGARD OF VOTING INSTRUCTIONS
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that voting rights be
exercised so as to cause a change in the subclassification or investment
objective of a Portfolio or to approve or disapprove an investment advisory
contract. In addition, we may disregard voting instructions of changes
initiated by Policy Owners in the investment policy or the investment adviser
(or portfolio manager) of a Portfolio, provided that our disapproval of the
change is reasonable and is based on a good faith determination that the
change would be contrary to state law or otherwise inappropriate, considering
the Portfolio's objectives and purpose, and considering the effect the change
would have on Pacific Mutual. In the event we do disregard voting
instructions, a summary of that action and the reasons for such action will be
included in the next report to Policy Owners.
CONFIRMATION STATEMENTS AND REPORTS TO OWNERS
A statement will be sent quarterly to you 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 Investment Options and any other information required by law.
Confirmations will be sent out upon premium payments, transfers, loans, loan
repayments, withdrawals, and surrenders. Confirmations of scheduled
transactions under systematic withdrawals, dollar cost averaging, portfolio
rebalancing, and monthly deductions will appear on your quarterly statements.
You will also be sent an annual and a semiannual report containing financial
statements for the Separate Account and the Fund, the latter of which will
include a list of the portfolio securities of the Fund, as required by the
Investment Company Act of 1940, and/or such other reports as may be required
by federal securities laws.
SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to compliance with the 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 our management, further investment in shares of any or all
Portfolios of the Fund should become inappropriate in view of the purposes of
the Policies, we may substitute shares of another Portfolio of the Fund or of
a different fund for shares already purchased, or to be purchased in the
future under the Policies.
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Where required, we will not substitute any shares attributable to your
interest in a Variable Account or the Separate Account without notice, your
approval, or prior approval of the Securities and Exchange Commission and
without following the filing or other procedures established by applicable
state insurance regulators.
We also reserve the right to establish additional Variable Accounts, 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, at our sole discretion, marketing needs or investment conditions
warrant, and any new Variable Accounts will be made available to existing
Policy Owners on a basis to be determined by us. We may also eliminate one or
more Variable Accounts if, in our sole discretion, marketing, tax, or
investment conditions so warrant. We may also terminate and liquidate any
Variable Account.
In the event of any such substitution or change, we may, by appropriate
endorsement, make such changes in this and other policies as may be necessary
or appropriate to reflect such substitution or change. If deemed by us to be
in the best interests of persons having voting rights under the Policies, the
Separate Account 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, we 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
We reserve the right to make any change without your consent to the
provisions of the Policy to comply with, or give you the benefit of, any
Federal or State statute, rule, or regulation, including but not limited to
requirements for life insurance contracts under the Internal Revenue Code,
under regulations of the United States Treasury Department or any state.
THE FIXED ACCOUNT
You may allocate all or a portion of your net premium payments and transfer
Accumulated Value to the Fixed Account. Amounts allocated to the Fixed Account
become part of our General Account, which supports insurance and annuity
obligations. Because of exemptive and exclusionary provisions, interests in
the Fixed Account have not been registered under the Securities Act of 1933
and the Fixed Account has not been registered as an investment company under
the Investment Company Act of 1940. Accordingly, neither the Fixed Account nor
any interest therein is generally subject to the provisions of these Acts and,
as a result, the staff of the Securities and Exchange Commission has not
reviewed the disclosure in this prospectus relating to the Fixed Account.
Disclosures regarding the Fixed Account may, however, be subject to certain
generally applicable provisions of the federal securities laws relating to the
accuracy and completeness of statements made in the prospectus. For more
details regarding the Fixed Account, see the Policy itself.
GENERAL DESCRIPTION
Amounts allocated to the Fixed Account become part of our General Account
which consists of all assets owned by us other than those in the Separate
Account and our other separate accounts. Subject to applicable law, we have
sole discretion over the investment of the assets of our General Account.
You may elect to allocate net premium payments to the Fixed Account, the
Separate Account, or both. If you reside in a state that requires us 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
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Transfer Date. You 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.
We guarantee 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, we may at
our sole discretion declare current interest in excess of the 4%, which will
be guaranteed for one year. (The portion of your 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%.)
We bear the full investment risk for the Accumulated Value allocated to the
Fixed Account.
DEATH BENEFIT
The death benefit under the Policy will be determined in the same fashion
for an Owner who has Accumulated Value in the Fixed Account as for an Owner
who has Accumulated Value in the Variable Accounts. See "Death Benefit," page
16.
POLICY CHARGES
Policy charges will be the same whether you allocate net premiums or
transfer Accumulated Value to the Fixed Account or 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 we pay 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 you to the extent the Accumulated Value is allocated to the
Fixed Account; however, to such extent, you will not participate in the
investment experience of the Variable Accounts.
TRANSFERS, SURRENDERS, WITHDRAWALS, AND POLICY LOANS
Amounts may be transferred from the Variable Accounts to the Fixed Account
and from the Fixed Account to the Variable Accounts, subject to the following
limitations. If you reside in a state that requires us to refund premiums to
Policy Owners who return their Policies during the Free-Look Period, you may
not make transfers until after the Free-Look Period. You may not make more
than one transfer from the Fixed Account to the Variable Accounts in any 12-
month period. Further, effective June 1, 1996, you may not transfer more than
the greater of 25% of your Accumulated Value in the Fixed Account or $5,000 in
any year. Until June 1, 1996, if you have $1,000 or more in the Fixed Account,
you may not transfer more than 20% of such amount to the Variable Accounts in
any year. Currently there is no charge imposed upon transfers; however, we
reserve the right to assess such a charge in the future and to impose other
limitations on the number of transfers, the amount of transfers, and the
amount remaining in the Fixed Account or Variable Accounts after a transfer.
Transfers from the Variable Accounts to the Fixed Account may be made in the
Policy Month preceding a Policy Anniversary, except that Policy Owners
residing in Maryland, Connecticut, and Pennsylvania may make such a transfer
at any time during the first 18 Policy Months.
You may also make full surrenders and Partial Withdrawals to the same extent
as an Owner who has invested in the Variable Accounts. See "Surrender," page
21, and "Partial Withdrawal Benefit," page 22. You 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.
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<PAGE>
MORE ABOUT THE POLICY
OWNERSHIP
The Policy Owner is the individual named as such in the application or in
any later change shown in our records. While the Insured is living, the Policy
Owner alone has the right to receive all benefits and exercise all rights that
the Policy grants or we allow.
Joint Owners. If more than one person is named as Policy Owner, they are
joint owners. Any Policy transaction requires the signature of all persons
named jointly. Unless otherwise provided, if a joint owner dies, ownership
passes to the surviving joint owner(s). When the last joint owner dies,
ownership passes through that person's estate, unless otherwise provided.
BENEFICIARY
The Beneficiary is the individual named as such in the application or any
later change shown in our records. You may change the Beneficiary at any time
during the life of the Insured by written request on forms provided by us,
which must be received by us at our Home Office. The change will be effective
as of the date this form is signed. Contingent and/or concurrent Beneficiaries
may be designated. You may designate a permanent Beneficiary, whose rights
under the Policy cannot be changed without his or her consent. Unless
otherwise provided, if no designated Beneficiary is living upon the death of
the Insured, you are or your estate is the Beneficiary.
We will pay the death benefit proceeds to the Beneficiary. Unless otherwise
provided, in order to receive proceeds at the Insured's death, the Beneficiary
must be living at the time of the Insured's death.
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
We 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 we
receive all the information needed to process a payment or, if sooner, other
period required by law.
However, we can postpone the calculation or payment of such a payment or
transfer of amounts based on investment performance of the Variable Accounts
if:
. The New York Stock Exchange is closed on other than customary weekend and
holiday 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
You may assign a Policy as collateral security for a loan or other
obligation. No assignment will bind us unless the original, or a copy, is
received at our Home Office, and will be effective only when recorded by us.
An assignment does not change the ownership of the Policy. However, after an
assignment, the rights of any Owner or Beneficiary will be subject to the
assignment. The entire Policy, including any attached payment option or Rider,
will be subject to the assignment. We will rely solely on the assignee's
statement as to the amount of
35
<PAGE>
the assignee's interest. We will not be responsible for the validity of any
assignment. Unless otherwise provided, the assignee may exercise all rights
this Policy grants except (a) the right to change the 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
your 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
We may contest the validity of your Policy if any material misstatements are
made in the application. However, your Policy will be incontestable after the
expiration of the following: the Face Amount cannot be contested after your
Policy has been in force during the Insured's lifetime for two years from the
Policy Date; and if the Insured is changed, your 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.
PAYMENT IN CASE OF SUICIDE
If the Insured dies by suicide, while sane or insane, within two years from
the Policy Date, we will limit the death benefit proceeds to the premium
payments less any 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 our surplus earnings. However,
the current dividend scale is zero and we do not anticipate that dividends
will be paid. Any dividends that do become payable will be paid in cash.
POLICY ILLUSTRATIONS
Upon request, we will send you an illustration of future benefits under the
Policy based on both guaranteed and current cost factor assumptions. However,
we reserve the right to charge a fee for requests for illustrations in excess
of one per Policy Year.
PAYMENT PLAN
Maturity, surrender, or withdrawal benefits may be used to purchase a
payment plan providing monthly income for the lifetime of the Insured, and
death benefit proceeds may be used to purchase a payment plan providing
monthly income for the lifetime of the Beneficiary. The monthly payments
consisting of proceeds plus interest will be paid in equal installments for at
least ten years. The purchase rates for the payment plan are guaranteed not to
exceed those shown in the Policy, but current rates that are lower (i.e.,
providing greater income) may be established by us from time to time. This
benefit is not available if the income would be less than $25 a month.
Maturity, surrender, or withdrawal benefits or death benefit proceeds may be
used to purchase any other payment plan that we make available at that time.
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<PAGE>
OPTIONAL INSURANCE BENEFITS
At the time you complete the application for a Policy and subject to certain
requirements, you may elect to add one or more Riders to the Policy as
optional insurance benefits (subject to approval of state insurance
authorities). These optional benefits are: additional insurance coverage for
the accidental death of the Insured (Accidental Death Rider); term insurance
on the Insured's children (Children's Term Rider); annual renewal term
insurance on the Insured or any member of his or her immediate family (Annual
Renewable Term Rider); added protection benefit on the Insured (Added
Protection Benefit Rider); the right to purchase additional insurance on the
Insured's life on certain specified dates without proof of insurability
(Guaranteed Insurability Rider); additional protection in the event of a
disability (Waiver of Charges Rider); or early payment of coverage if the
Insured is diagnosed with a terminal illness (Accelerated Living Benefit
Rider). 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.
LIFE INSURANCE 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 "life insurance 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,
or reflecting allocation of premiums to specified Variable Accounts. This
information will be portrayed at hypothetical rates of return that are
requested. Charts and graphs presenting the results of the ledger
illustrations or 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.
RISKS OF LIFE INSURANCE RETIREMENT PLANS
Using the Policy as a funding vehicle for a life insurance 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
37
<PAGE>
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 you 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 your 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, you would be required to make certain payments
as described under "Reinstatement," page 24. Thus, you 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.
Your Policy will lapse if your Accumulated Value less Policy Debt is
insufficient to cover the current monthly deduction on any Monthly Payment
Date, and a Grace Period expires without your sufficient payment. To avoid
lapse of your Policy, it is important to fashion a payment stream that does
not leave your 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 your Policy upon its
maturity. Poor investment performance can contribute to the risk that your
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 your basis in the Policy,
the amounts attributable to interest due on the loans can add to your federal
(and possibly state) income tax liability.
You should consult with your financial advisers in designing a private
retirement plan that is suitable. Further, you should continue to monitor the
Accumulated Value net of loans remaining in a Policy to assure that it is
sufficiently funded to continue to support the desired income stream and so
that it will not lapse. In this regard, you should consult your 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 your 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 life insurance 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 Mutual Distributors, Inc. ("PMD") is principal underwriter
(distributor) of the Policies. PMD is registered as a broker-dealer with the
SEC and is a member of the National Association of Securities Dealers
("NASD"). Pacific Mutual pays PMD for acting as principal underwriter under a
Distribution Agreement. PMD is a wholly-owned subsidiary of Pacific Mutual.
Pacific Mutual and PMD have sales agreements with various broker-dealers
under which the Policy will be sold by registered representatives of the
broker-dealers. The registered representatives are required to be authorized
under applicable state regulations to sell variable life insurance. The
broker-dealers are required to be registered with the SEC and members of the
NASD. We pay compensation directly to broker-dealers for promotions and sales
of the Policy. 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
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<PAGE>
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, we may also pay override payments, expense allowances,
bonuses, wholesaler fees, and training allowances. Registered representatives
earn commissions from the broker-dealers with whom they are affiliated for
selling our Policies. Compensation arrangements vary among broker-dealers. In
addition, registered representatives who meet specified production levels may
qualify, under sales incentive programs adopted by us, to receive non-cash
compensation such as expense-paid trips, expense-paid educational seminars and
merchandise. We make no separate deductions, other than as previously
described, from premiums to pay sales commissions or sales expenses.
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MORE ABOUT PACIFIC MUTUAL
MANAGEMENT
The directors and officers of Pacific Mutual are listed below together with
information as to their principal occupations during the past five years and
certain other current affiliations. Unless otherwise indicated, the business
address of each director and officer is c/o Pacific Mutual Life Insurance
Company, 700 Newport Center Drive, Newport Beach, California 92660.
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Thomas C. Sutton Director, Chairman of the Board and Chief Executive Officer
Director, Chairman of of Pacific Mutual; Equity Board Member of PIMCO Advisors
the Board and L.P.; Director of Pacific Corinthian Life Insurance
Chief Executive Officer Company; similar positions with other subsidiaries of
Pacific Mutual; Director of: Newhall Land & Farming; The
Irvine Company; The Edison Company.
Glenn S. Schafer Director and President of Pacific Mutual, January 1995 to
Director and President present; Executive Vice President and Chief Financial
Officer of Pacific Mutual, March 1991 to January 1995;
Equity Board Member of PIMCO Advisors L.P.; Director of
Pacific Corinthian Life Insurance Company; similar
positions with other subsidiaries of Pacific Mutual.
Harry G. Bubb Director and Chairman Emeritus of Pacific Mutual.
Director and
Chairman Emeritus
Richard M. Ferry Director of Pacific Mutual; President, Director and Chairman
Director of Korn/Ferry International; Director of: Avery Dennison
Corporation; ConAm Management; First Business Bank; North-
western Restaurants, Inc.; Dole Food Co. Address: 1800 Cen-
tury Park East, Suite 900, Los Angeles, California 90067.
Donald E. Guinn Director of Pacific Mutual; Chairman Emeritus and Director
Director of Pacific Telesis Group; Director of: The Dial Corp.; Bank
of America NT&SA; BankAmerica Corporation. Address: Pacific
Telesis Center, 130 Kearny Street, Room 3719, San
Francisco, California 94108-4818.
Ignacio E. Lozano, Jr. Director of Pacific Mutual; Chairman and Editor-in-Chief of
Director La Opinion; Director of: BankAmerica Corporation; Bank of
America NT&SA; Pacific Enterprises; The Walt Disney
Company. Address: 411 West Fifth Street, 12th Floor, Los
Angeles, California 90013.
Charles A. Lynch Director of Pacific Mutual; Chairman and Chief Executive
Director Officer of Fresh Choice, Inc.; Director of: Nordstrom,
Inc.; PST Vans, Inc.; SRI International, Inc; Age Wave;
Artmaster, Inc.; Bojangles Acquisition Corp.; Cucina
Holdings, Inc.; Dakin, Inc.; Greyhound Lines, Inc.; Krh'
Thermal Systems; La Salsa Restaurants; Mid Peninsula Bank;
Syntex Corporation; Former Chairman of Market Value
Partners Company. Address: 2901 Tasman Drive, Suite 109,
Santa Clara, California
95054-1169.
Dr. Allen W. Mathies, Jr. Director of Pacific Mutual; Director, President Emeritus of
Director Huntington Memorial Hospital; Director of Occidental
College; Former President and Chief Executive Officer of
Huntington Memorial Hospital. Address: 100 W. California
Blvd., Pasadena, California 91109-7013.
Charles D. Miller Director of Pacific Mutual; Director, Chairman and Chief Ex-
Director ecutive Officer of Avery Dennison Corporation; Director of:
Great Western Financial Corporation; Nationwide Health Proper-
ties, Inc.; Southern California Edison Company. Address:
150 N. Orange Grove Boulevard, Pasadena, California 91103.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Donn B. Miller Director of Pacific Mutual; President and Chief Executive
Director Officer and Director of Pearson-Sibert Oil Co. of Texas;
Director of: the Irvine Company; Automobile Club of
Southern California; St. John's Hospital & Health Center
Foundation; Former Senior Partner with the law firm of
O'Melveny & Meyers. Address: 136 El Camino, Suite 216,
Beverly Hills, California 90212.
Jacqueline C. Morby Director of Pacific Mutual, February 28, 1996 to present;
Director Managing Director, TA Associates, Inc., Director of Axent
Technologies Inc. Address: High Street Tower, Suite 2500,
125 High Street, Boston, Massachusetts 02110.
J. Fernando Niebla Director of Pacific Mutual, May 1995 to present; Director,
Director Chairman and Chief Executive Officer of Infotec
Development, Inc.; Director of: Bank of California; Defense
Policy Advisory Commission on Trade; California Commission
on Science and Technology; Center for Occupational Research
and Development. Address: 3611 South Harbor Boulevard,
Suite 260, Santa Ana, CA 92704.
Susan Westerberg Prager Director of Pacific Mutual; Dean of the UCLA School of Law
Director at the University of California at Los Angeles; Director of
Lucille Salter Packard Children's Hospital of Stanford.
Address: 405 Hilgard Avenue, Room 3374, Los Angeles,
California 90095-1476.
Richard M. Rosenberg Director of Pacific Mutual, November 1995 to present; Chair-
Director man and Chief Executive Officer of BankAmerica Corporation;
Bank of America NT&SA; Director of: Airborne Express Corpo-
ration; Northrop Grumman Corporation; Potlatch Corporation;
Pacific Telesis Group.
Address: 555 California Street, 40th Floor, San Francisco,
California 94107.
James R. Ukropina Director of Pacific Mutual; Partner with the law firm of
Director O'Melveny & 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; Vice Chairman and Director of
Director The Irvine Company; Director of: The Walt Disney Company;
The Mitchell Energy and Development Company. Address: 550
Newport Center Drive, 9th Floor, Newport Beach, California
92660.
Lynn C. Miller Executive Vice President, Individual Insurance, of Pacific
Executive Vice President Mutual, January 1995 to present; Sr. Vice President,
Individual Insurance of Pacific Mutual 1989 to 1995.
David R. Carmichael Senior Vice President and General Counsel of Pacific Mutual,
Senior Vice President April 1992 to present; Vice President and Investment 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 Insurance Companies.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Marilee Roller Senior Vice President, Corporate Finance and Administration
Senior Vice President of Pacific Mutual, January 1995 to present; President and
Chief Operating Officer of Pacific Corinthian Life
Insurance Company, 1992 to present; Vice President of
Pacific Mutual, 1994 and 1995; Vice President and
Controller of Pacific Mutual, 1990 to 1992; similar
positions with other subsidiaries of Pacific Mutual.
Audrey L. Milfs Vice President and Corporate Secretary of Pacific Mutual;
Vice President similar positions with other subsidiaries of Pacific
and Corporate Secretary 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; Treasurer
to other subsidiaries of Pacific Mutual.
</TABLE>
No officer or director listed above receives any compensation from the
Separate Account. No separately allocable compensation has been paid by
Pacific Mutual or any of its affiliates to any person listed for services
rendered to the Account.
STATE REGULATION
We are subject to the laws of the state of California governing insurance
companies and to regulation by the Commissioner of Insurance of California. In
addition, we are subject to the insurance laws and regulations of the other
states and jurisdictions in which we are licensed or may become licensed to
operate. An annual statement in a prescribed form must be filed with the
Commissioner of Insurance of California and with regulatory authorities of
other states on or before March 1st in each year. This statement covers our
operation for the preceding year and our financial condition as of December
31st of that year. Our affairs are subject to review and examination at any
time by the Commissioner of Insurance or his agents, and subject to full
examination of our operations at periodic intervals.
TELEPHONE TRANSFER AND LOAN PRIVILEGES
You may request a transfer of Accumulated Value or a Policy loan by
telephone if a properly completed Authorization for Telephone Requests
("Telephone Authorization") has been filed at our Home Office. All or part of
any telephone conversation with respect to transfer or loan instructions may
be recorded by us. Telephone instructions received by us by 1:00 P.M. Pacific
time, or the close of the New York Stock Exchange, if earlier, on any
Valuation Date will be effected as of the end of that Valuation Date in
accordance with your instructions, subject to the limitation of transfers
before the Free-Look Transfer Date. We reserve the right to deny any telephone
transfer or loan request. If all telephone lines are busy (which might occur,
for example, during periods of substantial market fluctuations), you might not
be able to request transfers and loans by telephone and would have to submit
written requests.
We have established procedures to confirm that instructions communicated by
telephone are genuine. Under the procedures, any person requesting a transfer
by telephone must provide certain personal identification as requested by us,
and we will send a written confirmation of all transfers requested by
telephone within 7 days of the transfer. Upon your submission of a Telephone
Authorization, you authorize us to accept and act upon telephonic instructions
for transfers or loans involving your Policy, and agree that neither Pacific
Mutual, any of our affiliates, Pacific Select Fund, nor any of their
directors, trustees, officers, employees or agents, will be liable for any
loss, damages, cost, or expense (including attorney's fees) arising out of any
requests effected in
42
<PAGE>
accordance with the Telephone Authorization and believed by us to be genuine,
provided that we have complied with our procedures. As a result of this policy
on telephonic requests, you will bear the risk of loss arising from the
telephone transfer and loan privileges.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the 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, our
authority to issue the Policies under California law, and the validity of the
forms of the Policies under California law have been passed on by our General
Counsel.
Legal matters relating to the federal securities and federal income tax laws
have been passed upon by Dechert Price & Rhoads.
REGISTRATION STATEMENT
A Registration Statement under the Securities Act of 1933 has been filed
with the SEC relating to the offering described in this Prospectus. This
Prospectus does not include all of the information set forth in the
Registration Statement, as portions have been omitted pursuant to the rules
and regulations of the SEC. The omitted information may be obtained at the
SEC's principal office in Washington, D.C., upon payment of the SEC's
prescribed fees.
INDEPENDENT ACCOUNTANTS
The audited financial statements for the Separate Account and for Pacific
Mutual included in this Prospectus and in the Registration Statement have been
audited by Deloitte & Touche LLP, independent certified public accountants, as
indicated in their report hereon, and are included 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,
1995 and for the years ended December 31, 1995 and 1994 are set forth herein,
starting on page 44. The audited financial statements of Pacific Mutual as of
and for the years ended December 1995 and 1994 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 our ability to meet our
obligations under the Policies.
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<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, 1995 and the related statements of operations for the year then
ended and statements of changes in net assets for each of the two years ended
December 31, 1995 and 1994. These financial statements are the responsibility
of the Separate Account's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective Variable
Accounts constituting the Pacific Select Exec Separate Account as of
December 31, 1995 and the results of their operations for the year then ended
and the changes in their net assets for each of the two years then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 16, 1996
44
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENTS OF ASSETS & LIABILITIES
DECEMBER 31, 1995
(In thousands)
<TABLE>
<CAPTION>
High
Money Managed Government Yield
Market Bond Securities Bond Growth
Variable Variable Variable Variable Variable
Account Account Account Account Account
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in Pacific Select Fund:
Money Market Portfolio (2,301 shares; cost $23,106) ...........$ 23,045
Managed Bond Portfolio (4,265 shares; cost $45,342) ........... $ 47,343
Government Securities Portfolio (581 shares; cost $5,877) ..... $ 6,299
High Yield Bond Portfolio (1,479 shares; cost $13,881) ........ $ 14,474
Growth Portfolio (4,719 shares; cost $78,927) ................. $ 87,624
Equity Income Portfolio (2,731 shares; cost $43,643) ..........
Multi-Strategy Portfolio (3,822 shares; cost $48,796) .........
International Portfolio (4,354 shares; cost $54,916) ..........
Equity Index Portfolio (3,592 shares; cost $51,564) ...........
Growth LT Portfolio (3,810 shares; cost $49,540) ..............
Receivables:
Due from Pacific Mutual Life Insurance Company ................ 223 387 144 75
-------- -------- -------- -------- --------
TOTAL ASSETS .................................................... 23,268 47,730 6,299 14,618 87,699
-------- -------- -------- -------- --------
LIABILITIES
Payables:
Due to Pacific Mutual Life Insurance Company .................. 30
Fund shares purchased ......................................... 90 40 5 27 180
-------- -------- -------- -------- --------
TOTAL LIABILITIES ............................................... 90 40 35 27 180
-------- -------- -------- -------- --------
NET ASSETS ......................................................$ 23,178 $ 47,690 $ 6,264 $ 14,591 $ 87,519
======== ======== ======== ======== ========
<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 Portfolio (2,301 shares; cost $23,106) ...........
Managed Bond Portfolio (4,265 shares; cost $45,342) ...........
Government Securities Portfolio (581 shares; cost $5,877) .....
High Yield Bond Portfolio (1,479 shares; cost $13,881) ........
Growth Portfolio (4,719 shares; cost $78,927) .................
Equity Income Portfolio (2,731 shares; cost $43,643) ..........$ 49,717
Multi-Strategy Portfolio (3,822 shares; cost $48,796) ......... $ 54,269
International Portfolio (4,354 shares; cost $54,916) .......... $ 56,325
Equity Index Portfolio (3,592 shares; cost $51,564) ........... $ 62,687
Growth LT Portfolio (3,810 shares; cost $49,540) .............. $ 53,801
Receivables:
Due from Pacific Mutual Life Insurance Company ................ 117 696 196 166 198
-------- -------- -------- -------- --------
TOTAL ASSETS .................................................... 49,834 54,965 56,521 62,853 53,999
-------- -------- -------- -------- --------
LIABILITIES
Payables:
Due to Pacific Mutual Life Insurance Company ..................
Fund shares purchased ......................................... 118 659 94 178 240
-------- -------- -------- -------- --------
TOTAL LIABILITIES ............................................... 118 659 94 178 240
-------- -------- -------- -------- --------
NET ASSETS $ 49,716 $ 54,306 $ 56,427 $ 62,675 $ 53,759
======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
45
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(In thousands)
<TABLE>
<CAPTION>
High
Money Managed Government Yield
Market Bond Securities Bond Growth
Variable Variable Variable Variable Variable
Account Account Account Account Account
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends................................................ $ 1,418 $ 2,208 $ 294 $ 944 $ 656
------- ------- ------- ------- -------
NET INVESTMENT INCOME..................................... 1,418 2,208 294 944 656
------- ------- ------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) from security transactions...... 31 (141) (41) (92) (1,046)
Net unrealized appreciation on investments............... 65 4,063 624 1,042 16,423
------- ------- ------- ------- -------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS........................................... 96 3,922 583 950 15,377
------- ------- ------- ------- -------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................................ $ 1,514 $ 6,130 $ 877 $ 1,894 $16,033
======= ======= ======= ======= =======
<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................................................ $ 577 $ 1,401 $ 1,070 $ 1,015 $ 3,592
------- ------- ------- ------- -------
NET INVESTMENT INCOME..................................... 577 1,401 1,070 1,015 3,592
------- ------- ------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) from security transactions...... 785 71 574 2,069 1,225
Net unrealized appreciation on investments............... 7,737 7,406 2,646 10,698 3,892
------- ------- ------- ------- -------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS........................................... 8,522 7,477 3,220 12,767 5,117
------- ------- ------- ------- -------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................................ $ 9,099 $ 8,878 $ 4,290 $13,782 $ 8,709
======= ======= ======= ======= =======
</TABLE>
See Notes to Financial Statements.
46
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
(In thousands)
<TABLE>
<CAPTION>
High
Money Managed Government Yield
Market Bond Securities Bond Growth
Variable Variable Variable Variable Variable
Account Account Account Account Account
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income........................................ $ 1,418 $ 2,208 $ 294 $ 944 $ 656
Net realized gain (loss) from security transactions.......... 31 (141) (41) (92) (1,046)
Net unrealized appreciation on investments................... 65 4,063 624 1,042 16,423
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................................... 1,514 6,130 877 1,894 16,033
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums..................................... 72,942 7,113 1,962 5,029 25,318
Transfers--policy charges and deductions..................... (4,297) (2,830) (908) (1,423) (9,201)
Transfers in (from other variable accounts).................. 29,120 15,186 2,845 7,781 30,352
Transfers out (to other variable accounts)................... (110,816) (2,813) (2,390) (6,185) (22,297)
Transfers--other............................................. 119 339 (31) 116 (103)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS............................. (12,932) 16,995 1,478 5,318 24,069
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS.......................... (11,418) 23,125 2,355 7,212 40,102
NET ASSETS
Beginning of year............................................ 34,596 24,565 3,909 7,379 47,417
-------- -------- -------- -------- --------
End of year.................................................. $ 23,178 $ 47,690 $ 6,264 $ 14,591 $ 87,519
======== ======== ======== ======== ========
<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........................................ $ 577 $ 1,401 $ 1,070 $ 1,015 $ 3,592
Net realized gain (loss) from security transactions.......... 785 71 574 2,069 1,225
Net unrealized appreciation on investments................... 7,737 7,406 2,646 10,698 3,892
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................................... 9,099 8,878 4,290 13,782 8,709
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums..................................... 13,169 14,278 16,778 11,713 12,930
Transfers--policy charges and deductions..................... (4,072) (3,990) (5,319) (4,228) (3,931)
Transfers in (from other variable accounts).................. 16,222 5,601 25,476 17,636 32,699
Transfers out (to other variable accounts)................... (4,940) (2,670) (16,093) (6,615) (8,074)
Transfers--other............................................. 16 38 141 (6) 18
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS............................. 20,395 13,257 20,983 18,500 33,642
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS.......................... 29,494 22,135 25,273 32,282 42,351
NET ASSETS
Beginning of year............................................ 20,222 32,171 31,154 30,393 11,408
-------- -------- -------- -------- --------
End of year.................................................. $ 49,716 $ 54,306 $ 56,427 $ 62,675 $ 53,759
======== ======== ======== ======== ========
</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, 1994
(In thousands)
<TABLE>
<CAPTION>
High
Money Managed Government Yield Equity
Market Bond Securities Bond Growth Income
Variable Variable Variable Variable Variable Variable
Account Account Account Account Account Account
--------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income.................................... $ 812 $ 1,143 $ 170 $ 472 $ 4,039 $ 1,838
Net realized gain (loss) from security transactions...... 131 (14) (172) (101) 1,075 207
Net unrealized appreciation (depreciation)
on investments........................................... (68) (2,086) (160) (330) (10,371) (2,115)
--------- --------- ----------- --------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................................ 875 (957) (162) 41 (5,257) (70)
--------- --------- ----------- --------- --------- ---------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums................................. 53,082 6,795 2,740 2,716 21,157 6,781
Transfers--policy charges and deductions................. (3,578) (1,634) (1,212) (748) (5,776) (2,110)
Transfers in (from other variable accounts).............. 47,668 5,550 1,200 4,398 31,248 6,482
Transfers out (to other variable accounts)............... (81,555) (1,862) (1,816) (2,395) (28,528) (2,573)
Transfers--other.......................................... (189) 5 (6) (13) 79 46
--------- --------- ----------- --------- --------- ---------
NET INCREASE IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS......................... 15,428 8,854 906 3,958 18,180 8,626
--------- --------- ----------- --------- --------- ---------
NET INCREASE IN NET ASSETS................................ 16,303 7,897 744 3,999 12,923 8,556
NET ASSETS
Beginning of year........................................ 18,293 16,668 3,165 3,380 34,494 11,666
--------- --------- ----------- --------- --------- ---------
End of year.............................................. $ 34,596 $ 24,565 $ 3,909 $ 7,379 $ 47,417 $ 20,222
========= ========= =========== ========= ========= =========
<CAPTION>
Multi- Inter- Equity Growth
Strategy national Index LT
Variable Variable Variable Variable
Account Account Account Account
--------- --------- --------- ---------
<C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income.................................... $ 1,767 $ 1,290 $ 718 $ 174
Net realized gain (loss) from security transactions...... 218 831 342 56
Net unrealized appreciation (depreciation)
on investments........................................... (2,374) (2,049) (841) 369
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................................ (389) 72 219 599
--------- --------- --------- ---------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums................................. 12,158 11,673 10,776 3,920
Transfers--policy charges and deductions................. (2,364) (2,878) (2,180) (684)
Transfers in (from other variable accounts).............. 2,983 19,282 4,498 8,962
Transfers out (to other variable accounts)............... (1,864) (8,521) (2,407) (1,436)
Transfers--other......................................... 32 23 44 47
--------- --------- --------- ---------
NET INCREASE IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS......................... 10,945 19,579 10,731 10,809
--------- --------- --------- ---------
NET INCREASE IN NET ASSETS................................ 10,556 19,651 10,950 11,408
NET ASSETS
Beginning of year........................................ 21,615 11,503 19,443 0
--------- --------- --------- ---------
End of year.............................................. $ 32,171 $ 31,154 $ 30,393 $ 11,408
========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
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 portfolios of
Pacific Select Fund (the "Fund"), each of which pursues different investment
objectives and policies.
The Separate Account was established by Pacific Mutual Life Insurance
Company ("Pacific Mutual") on 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.
The Separate Account held by Pacific Mutual represents funds from
individual flexible premium variable life policies. The assets of these accounts
are carried at market value.
The preparation of the accompanying financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results could
differ from those estimates.
A. Valuation of Investments
Investments in shares of the Fund are valued at the reported net asset
values of the respective portfolios.
B. Security Transactions
Transactions are recorded on the trade date. Realized gains and losses on
sales of investments are determined on the 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 1995, the Fund has declared dividends for each portfolio. The
amounts accrued by the Separate Account for its share of the dividends were
reinvested in additional full and fractional shares of the related portfolio.
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, a wholly-owned subsidiary of Pacific Mutual, is
the principal underwriter of variable life insurance policies funded by
interests in the Separate Account, and is compensated by Pacific Mutual.
49
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (Continued)
5. SELECTED ACCUMULATION UNIT** INFORMATION
Selected accumulation unit information for the year ended December 31, 1995
were as follows:
<TABLE>
<CAPTION>
High
Money Managed Government Yield
Market Bond Securities Bond Growth
Variable Variable Variable Variable Variable
Account Account Account Account Account
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ACCUMULATION UNIT
VALUE:
Beginning $ 13.76 $ 16.68 $ 16.23 $ 18.29 $ 19.00
======== ======== ======== ======== ========
Ending $ 14.52 $ 19.86 $ 19.28 $ 21.74 $ 23.89
======== ======== ======== ======== ========
Number of Units Outstanding at
End of Period 1,596,322 2,401,282 324,905 671,116 3,663,739
<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 $ 18.01 $ 17.24 $ 14.07 $ 14.76 $ 11.32
======== ======== ======== ======== ========
Ending $ 23.72 $ 21.60 $ 15.55 $ 20.21 $ 15.49
======== ======== ======== ======== ========
Number of Units Outstanding at
End of Period 2,096,246 2,514,394 3,628,251 3,101,024 3,471,271
</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, 1995 and 1994,
and the related statements of operations and surplus, and of cash flow
for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Pacific Mutual Life
Insurance Company as of December 31, 1995 and 1994, and the results of
its operations and its cash flow for the years then ended, in
conformity with accounting practices prescribed or permitted by the
Insurance Department of the State of California and with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 23, 1996
51
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
1995 1994
- ------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Bonds $ 6,699,489 $ 6,669,853
Preferred stocks 156,097 132,604
Common stocks 54,504 57,874
Unconsolidated subsidiaries 182,040 196,401
Mortgage loans 1,388,743 1,421,182
Real estate 145,178 157,507
Home office properties 48,446 51,419
Policy loans 2,700,544 2,312,455
Cash and short-term investments 262,527 97,745
Investment income due and accrued 135,607 125,534
Premiums due and uncollected, and other assets 295,159 245,243
Separate account assets 5,520,478 3,260,374
- ------------------------------------------------------------------------
TOTAL ASSETS $17,588,812 $14,728,191
- ------------------------------------------------------------------------
LIABILITIES AND SURPLUS
Liabilities
Policy reserves $ 7,204,362 $ 6,476,634
Deposit funds 3,262,340 3,298,915
Other liabilities 686,989 885,638
Asset valuation reserve 191,392 179,006
Separate account liabilities 5,520,478 3,260,374
- ------------------------------------------------------------------------
Total Liabilities 16,865,561 14,100,567
Surplus 723,251 627,624
- ------------------------------------------------------------------------
TOTAL LIABILITIES AND SURPLUS $17,588,812 $14,728,191
- ------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
52
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF OPERATIONS AND SURPLUS
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
- ------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
REVENUES
Premiums, annuity considerations and deposit funds $ 2,919,920 $ 2,180,409
Net investment income 945,546 879,116
Other income 5,685 5,073
- ------------------------------------------------------------------------------
TOTAL REVENUES 3,871,151 3,064,598
- ------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future policy benefits 3,371,448 2,659,601
Operating expenses 309,588 249,018
Premium and other taxes (excluding tax on capital
gains) 35,168 28,705
Dividends to policyowners 16,639 17,162
- ------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 3,732,843 2,954,486
- ------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAXES 138,308 110,112
Federal income taxes 59,470 41,510
- ------------------------------------------------------------------------------
NET GAIN FROM OPERATIONS 78,838 68,602
NET REALIZED CAPITAL GAINS 6,311 12,424
- ------------------------------------------------------------------------------
NET INCOME $ 85,149 $ 81,026
- ------------------------------------------------------------------------------
SURPLUS
Net income $ 85,149 $ 81,026
Other surplus transactions, net 10,478 (36,178)
- ------------------------------------------------------------------------------
Increase in surplus 95,627 44,848
Surplus, beginning of year 627,624 582,776
- ------------------------------------------------------------------------------
SURPLUS, END OF YEAR $ 723,251 $ 627,624
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
53
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
- -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Receipts
Premiums, annuity considerations and deposit
funds $ 2,687,698 $ 1,687,583
Net investment income 927,918 809,791
Allowances and reserve adjustments on reinsurance
ceded 187,380 491,363
Other 13,885 23,862
Payments
Policy benefit payments (1,677,788) (1,408,650)
Net policy loans (388,320) (352,358)
Operating expenses (278,138) (247,437)
Net transfer to separate accounts (1,178,622) (594,284)
Premium and other taxes (41,116) (34,795)
Dividends to policyowners (16,715) (17,319)
Federal income taxes (35,779) (23,995)
- -------------------------------------------------------------------------------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES 200,403 333,761
- -------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds
Bonds 2,496,486 2,937,210
Stocks 208,235 139,785
Mortgage loans 261,514 390,642
Real estate 21,419 20,163
Other investments 49,089 47,132
Payments for the purchase of
Bonds (2,431,687) (3,673,859)
Stocks (222,678) (126,823)
Mortgage loans (239,355) (230,859)
Real estate (4,716) (17,466)
Other investments (124,164) (114,106)
- -------------------------------------------------------------------------------
NET CASH FLOW PROVIDED BY (USED IN)
INVESTING ACTIVITIES 14,143 (628,181)
- -------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Financial Statements
54
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1995 1994
- ------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Issuance (repayment) of short-term borrowings $ (49,764) $ 49,764
- ------------------------------------------------------------------------------
NET CASH FLOW PROVIDED BY (USED IN) FINANCING
ACTIVITIES (49,764) 49,764
- ------------------------------------------------------------------------------
Increase (decrease) in cash and short-term
investments 164,782 (244,656)
Cash and short-term investments, beginning of year 97,745 342,401
- ------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 262,527 $ 97,745
- ------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 18,376 $ 22,120
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
55
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pacific Mutual Life Insurance Company ("Pacific Mutual") was established
in 1868 and is organized under the laws of the State of California as a
mutual life insurance company. Pacific Mutual conducts business in every
state except New York.
Pacific Mutual, including its subsidiaries and affiliates, has primary
business segments which consist of life insurance, annuities, pension
products, group employee benefits and investment management and advisory
services. These primary business segments provide products for
individuals and corporations and offer a range of investment products to
institutions and pension plans.
BASIS OF PRESENTATION
Pacific Mutual's financial statements are prepared in accordance with
accounting practices prescribed or permitted by the Insurance Department
of the State of California, which are currently considered generally
accepted accounting principles ("GAAP") for mutual life insurance
companies. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations, and general administrative
rules. Permitted statutory accounting practices encompass all accounting
practices not so prescribed. The financial statements of Pacific Mutual
are not consolidated with those of its subsidiaries.
The Financial Accounting Standards Board ("FASB") has issued certain
pronouncements effective for 1996 financial statements and thereafter
that will no longer allow statutory financial statements of mutual life
insurance companies to be described as being prepared in conformity with
GAAP.
Upon the effective date of these pronouncements, in order for their
financial statements to be described as being prepared in accordance with
GAAP, mutual life insurance companies and their insurance subsidiaries
will be required to adopt all applicable authoritative GAAP
pronouncements in any general purpose financial statements that they may
issue. Pacific Mutual intends to issue 1996 general purpose financial
statements reflecting the adoption of all applicable GAAP pronouncements.
INVESTMENTS
Bonds qualifying for amortization are carried at amortized cost; all
other bonds are carried at prescribed values. Preferred stocks are
principally stated at amortized cost. Unaffiliated common stocks are
carried at market value. Investments in unconsolidated subsidiaries are
reported on the equity method of accounting, except for Pacific
Corinthian Life Insurance Company ("PCL") (Note 2) which is carried at
cost.
Mortgage loans and policy loans are stated at unpaid principal balances.
Real estate is valued at the lower of depreciated cost or market, less
related mortgage debt. Real estate is depreciated using the straight-line
method over 30 years.
Short-term investments generally mature within a year and are carried at
amortized cost which approximates estimated fair value.
The Asset Valuation Reserve ("AVR") is computed in accordance with a
prescribed formula and is designed to stabilize surplus against valuation
and credit-related losses for certain invested assets. Changes to the AVR
are reported as direct additions or deductions from surplus. The Interest
Maintenance Reserve ("IMR"), included in other liabilities on the
accompanying statements of financial position, results in the deferral of
after-tax realized capital gains and losses attributable to interest rate
fluctuations on fixed income investments. These capital gains and losses
are amortized into investment income over the remaining life of the
investment sold. The IMR was $25.3 million and $13.1 million as of
December 31, 1995 and 1994, respectively.
56
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net realized capital gains and losses are determined on the specific
identification method and are presented net of federal capital gains tax
of $18.5 million and $(2.3) million and transfers to the IMR of $22.6
million and $(.4) million for the years ended December 31, 1995 and 1994,
respectively.
Derivatives which qualify for hedge accounting are valued consistently
with the hedged items. Realized hedged gains and losses on fixed income
contracts are deferred and amortized over the average life of the related
hedged assets or insurance liabilities. Realized gains and losses on
equity securities, which are marked to market, are recognized
immediately. Derivatives which do not qualify for hedge accounting are
valued at market value through surplus while still held and when realized
through income.
On November 15, 1994, Pacific Financial Asset Management Corporation
("PFAMCo"), a wholly-owned, subsidiary of Pacific Mutual, and five of its
subsidiaries (Pacific Investment Management Company and subsidiaries,
Parametric Portfolio Associates, Inc., Cadence Capital Management
Corporation, NFJ Investment Group, Inc. and Blairlogie Capital Management
Limited) entered into an agreement and plan of consolidation with Thomson
Advisory Group L.P., a Delaware limited partnership with publicly traded
units, to merge into a newly capitalized partnership named PIMCO Advisors
L.P. Collectively, PFAMCo and various of its subsidiaries beneficially
own approximately 42% of the outstanding general and limited partner
units of PIMCO Advisors L.P. as of December 31, 1995 and 1994. Net cash
distributions received on these units are recorded as income as permitted
by the Insurance Department of the State of California.
On December 21, 1995, Pacific Mutual completed a subsidiary
reorganization in which PFAMCo became a direct, wholly-owned subsidiary
of Pacific Mutual. Prior to that PFAMCo was a wholly-owned second-tier
subsidiary of Pacific Mutual. The intermediate company, Pacific Financial
Holding Company ("PFHC") and certain of its assets and liabilities were
merged into PFAMCo in connection with this reorganization. The remaining
assets were merged into Pacific Mutual which consisted of investments in
subsidiaries as follows: Pacific Equities Network, PM Group Life
Insurance Company and PFAMCo.
POLICY RESERVES AND DEPOSIT FUNDS
Life insurance reserves are valued using the net level premium method,
the Commissioners' Reserve Valuation Method, or other modified reserve
methods.
Reserves for individual annuities are maintained principally on the
Commissioners' Annuity Reserve Valuation Method. Group annuity contract
reserves are valued using the net single premium method.
The liability for deposit funds, including guaranteed interest contracts,
is based primarily upon and is not less than the policyowners' equity in
their deposit accounts, including credited interest.
REVENUES AND EXPENSES
Premiums are recognized as income over the premium paying period.
Deposits made in connection with annuity contracts are recognized as
revenue when received. Investment income is recorded as earned.
Expenses, including policy acquisition costs, such as commissions, and
Federal income taxes are charged to operations as incurred.
DIVIDENDS
Dividends are provided based on dividend formulas approved by the Board
of Directors and reviewed for reasonableness and equitable treatment of
policyowners by an independent consulting actuary.
57
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
Pacific Mutual is taxed as a life insurance company for Federal income
tax purposes. Pacific Mutual's income tax return is consolidated with all
its includable domestic subsidiaries except PCL. The amount of Federal
income tax expense includes an equity tax calculated by a prescribed
formula that incorporates a differential earnings rate between stock and
mutual life insurance companies. Under prescribed statutory accounting
practices, deferred tax assets and liabilities are not recorded. The
difference between the effective tax rate and the statutory tax rate of
35% for 1995 and 1994 is primarily due to certain policy acquisition
costs being deferred and amortized over a ten-year period for tax
purposes, reserve differences, non-taxable investment income and the
equity tax.
OTHER SURPLUS TRANSACTIONS
Other surplus transactions consist primarily of unrealized capital gains
and losses, changes in nonadmitted assets, and changes in the AVR.
SEPARATE ACCOUNTS
Separate account assets are recorded at market value and the related
liabilities represent segregated contract owner funds maintained in
accounts with individual investment objectives. The investment results of
separate account assets generally pass through to separate account policy
owners and contract owners.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 3
and 4 have been determined using available market information and
appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented may not be indicative of the amounts
Pacific Mutual could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
significant effect on the estimated fair value amounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
practices prescribed or permitted by regulatory authorities and generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1995
financial statement presentation.
2. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
Pursuant to a five-year rehabilitation agreement approved by a California
Superior Court and the Insurance Department of the State of California in
July 1992, Pacific Mutual, through its wholly-owned subsidiary, PCL, will
facilitate the rehabilitation of First Capital Life Insurance Company
("FCL"). In accordance with the rehabilitation agreement, insurance
policies of FCL were restructured and assumed by PCL on December 31,
1992.
The rehabilitation agreement provides for the holders of restructured
policies to share in a substantial percentage of the unallocated surplus
of PCL at the end of the rehabilitation period. Policyholders have the
option to surrender their restructured policies with reduced benefits
during this five-year period. During the rehabilitation
58
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
2. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY (CONTINUED)
plan period, PCL is prohibited from issuing new insurance policies. At
the end of the rehabilitation period, PCL will merge into Pacific Mutual,
with Pacific Mutual as the surviving entity. Substantially all of the
assets and certain of the liabilities of FCL were assumed by PCL on
December 31, 1992, pursuant to an assumption reinsurance agreement and
asset purchase agreement.
In accordance with the rehabilitation agreement, PCL was capitalized by a
cash contribution of $8.3 million from Pacific Mutual and a $45 million
certificate of contribution provided by a wholly-owned subsidiary of
Pacific Mutual for a total of $53.3 million initial capitalization.
In the event PCL is unable to pay contract benefits, Pacific Mutual is
obligated to contribute funds to pay those benefits in accordance with
the rehabilitation agreement.
3. INVESTMENTS IN DEBT SECURITIES
The statement value, gross unrealized gains and losses and estimated fair
value of bonds and redeemable preferred stocks ("debt securities"),
including short-term investments, are shown below. The estimated fair
value of publicly traded securities was based on quoted market prices.
For securities not actively traded, estimated fair values were provided
by independent pricing services specializing in "matrix pricing" and
modeling techniques. Pacific Mutual also estimates certain fair values
based on interest rates, credit quality and average maturity or from
securities with comparable trading characteristics.
<TABLE>
<CAPTION>
Gross Unrealized Estimated
Statement ----------------- Fair
Value Gains Losses Value
----------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1995:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 147,436 $ 28,214 $ 175,650
Obligations of states, political
subdivisions and foreign
governments 452,273 66,960 $ 3,064 516,169
Corporate securities 3,901,979 442,497 46,539 4,297,937
Mortgage-backed securities 2,438,052 116,650 10,106 2,544,596
Redeemable preferred stock 89,191 2,840 2,472 89,559
----------------------------------------
Total $7,028,931 $657,161 $ 62,181 $ 7,623,911
----------------------------------------
December 31, 1994:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 216,201 $ 1,064 $ 37,113 $ 180,152
Obligations of states, political
subdivisions and foreign
governments 321,798 5,371 16,309 310,860
Corporate securities 3,771,271 104,311 160,712 3,714,870
Mortgage-backed securities 2,475,472 28,472 81,111 2,422,833
Redeemable preferred stock 81,026 343 5,031 76,338
----------------------------------------
Total $6,865,768 $139,561 $300,276 $6,705,053
----------------------------------------
</TABLE>
59
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENTS IN DEBT SECURITIES (CONTINUED)
The statement value and estimated fair value of debt securities as of
December 31, 1995 by contractual repayment date of principal are shown
below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Statement Fair
Value Value
----------- -----------
(In Thousands)
<S> <C> <C>
Due in one year or less $ 445,645 $ 449,283
Due after one year through five years 1,319,487 1,426,373
Due after five years through ten years 1,409,209 1,542,228
Due after ten years 1,416,538 1,661,431
----------- -----------
4,590,879 5,079,315
Mortgage-backed securities 2,438,052 2,544,596
----------- -----------
Total $ 7,028,931 $ 7,623,911
----------- -----------
</TABLE>
Proceeds from sales of investments in debt securities were $1.4 billion
and $1.5 billion for the years ended December 31, 1995 and 1994,
respectively. In 1995 and 1994, gross gains of $36 million and $30
million and gross losses of $14 million and $43 million, respectively,
were realized on those sales.
4. FINANCIAL INSTRUMENTS
The estimated fair values of Pacific Mutual's financial instruments,
including debt securities, are as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
Statement Estimated Statement Estimated
Value Fair Value Value Fair Value
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Debt securities
(Note 3) $ 7,028,931 $ 7,623,911 $ 6,865,768 $ 6,705,053
Preferred and common
stocks 121,420 139,613 109,458 116,993
Mortgage loans 1,388,743 1,500,000 1,421,182 1,452,596
Policy loans 2,700,544 2,700,544 2,312,455 2,312,455
Derivative financial
instruments:
Interest rate swaps 1,068 3,379 121 (24,809)
Other 18,008 30,649 2,672 (2,822)
Liabilities:
Guaranteed interest
contracts 2,375,898 2,459,323 2,635,356 2,614,961
Deposit liabilities 876,276 899,393 897,743 859,469
Annuity liabilities 308,742 311,441 220,026 223,423
Other derivative fi-
nancial instruments 2,373 1,490 2,270 2,128
Surplus:
Contribution certifi-
cates 149,596 157,688 149,593 124,313
</TABLE>
60
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair
values of these financial instruments as of December 31, 1995 and 1994:
PREFERRED AND COMMON STOCKS
The estimated fair values are based on quoted market prices or dealer
quotes.
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flows, using a year-end market rate
which is applicable to the yield, credit quality and average maturity of
the composite portfolio.
POLICY LOANS
The statement value of policy loans is a reasonable estimate of their
fair value.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
The estimated fair values of fixed-maturity guaranteed interest contracts
are estimated using the rates currently offered for deposits of similar
remaining maturities. The estimated fair values of deposit liabilities
with no defined maturities are the amounts payable on demand.
Pacific Mutual has issued PRO GIC and Diversifier GIC contracts to plan
sponsors totaling $914 million as of December 31, 1995, pursuant to the
terms of which the plan sponsor retains direct ownership and control of
the assets related to these contracts. Pacific Mutual agrees to provide
benefit responsiveness in the event that plan benefit requests exceed
plan cash flows. In return for this guarantee, Pacific Mutual receives a
fee which varies by contract. Pacific Mutual sets the investment
guidelines to provide for appropriate credit quality and cash flow
matching.
ANNUITY LIABILITIES
The fair value of annuity liabilities approximates statement value and
primarily includes policyholder deposits and accumulated credited
interest.
DERIVATIVE FINANCIAL INSTRUMENTS
Pacific Mutual utilizes certain derivative financial instruments to
diversify its business risk and to minimize its exposure to fluctuations
in market prices, interest rates, or basis risk. Pacific Mutual has also
set aside a corporate total return portfolio utilizing derivative
financial instruments. These instruments include interest rate and
currency swaps, asset swaps, credit derivatives, forwards, options held,
options written, and futures contracts, and involve elements of credit
risk and market risk in excess of amounts recognized in the accompanying
financial statements. The notional amounts of those instruments reflect
the extent of involvement in those various types of financial
instruments. The estimated fair values of these instruments are based on
market or dealer quotes. Pacific Mutual determines, on an individual
counterparty basis, the need for collateral or other security to support
financial instruments with off-balance sheet credit risks.
61
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (CONTINUED)
Options and Floors
Pacific Mutual uses options and floors to hedge against fluctuations in
interest rates and in its corporate total return portfolio. Cash
requirements on options held are limited to the premium paid by Pacific
Mutual at acquisition. Pacific Mutual uses written options on a limited
basis consisting primarily of covered calls. Gains and losses on covered
calls are offset by gains and losses on the underlying position. Options
and floors held are reported as assets and options written are reported
as liabilities. As of December 31, 1995, the notional amount of options
held and options written approximated $1.3 billion and $30 million,
respectively. As of December 31, 1994, the notional amount of options
held and options written approximated $1.5 billion and $42 million,
respectively. Option contracts mature during 1996 through 2007.
Interest Rate Swap Contracts
Pacific Mutual has entered into interest rate swap contracts to reduce
the impact of changes in interest rates on its variable short-term and
long-term investments. These contracts effectively change the interest
rate exposure on variable rate notes to fixed rates which range from 1.9%
to 8.9% as of December 31, 1995, and from 1.9% to 8.6% as of December 31,
1994. Interest rate swap contracts mature during 1996 through 2013. As of
December 31, 1995 and 1994, interest rate swap contracts outstanding with
financial institutions had a total notional amount of $656 million and
$411 million, respectively.
Asset Swap Contracts
Pacific Mutual has entered into an asset swap contract to reduce interest
rate risk by shortening both the duration and maturity of one of its
fixed rate investments. The asset swap contract matures during 1998. As
of December 31, 1995, the asset swap contract had a notional amount of
$10 million.
Credit Derivatives
Pacific Mutual uses credit derivatives to take advantage of market
opportunities. As of December 31, 1995 and 1994, the notional amount of
credit derivatives outstanding approximated $90 million and $66 million,
respectively. Credit derivatives mature during 1996 through 2000.
Foreign Currency Exchange Contracts
Pacific Mutual enters into foreign currency exchange contracts that are
used to hedge against fluctuations in foreign currency-denominated assets
and related income. Gains and losses on such agreements offset currency
gains and losses on the related assets. As of December 31, 1995 and 1994,
the notional amount of foreign currency exchange contracts approximated
$15 million and $35 million, respectively. Foreign currency exchange
contracts expire during 1998 and 1999.
Future Contracts
Pacific Mutual uses exchange-traded futures contracts for asset and
liability management of fixed maturity securities and insurance
liabilities and for hedging market fluctuations on equity securities.
Price changes on futures are settled daily through the daily margin cash
flows. As of December 31, 1995 and 1994, the notional amounts of futures
contracts were $340 million and $163 million, respectively. The notional
amounts of the contracts do not represent future cash requirements, as
Pacific Mutual intends to close out open positions prior to expiration.
62
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (CONTINUED)
CONTRIBUTION CERTIFICATES
The estimated fair value of contribution certificates is based on market
quotes.
5. CONCENTRATION OF CREDIT RISK
Pacific Mutual manages its investments to limit credit risk by
diversifying its portfolio among various security types and industry
sectors. The credit risk of financial instruments is controlled through
credit approvals, limits and monitoring procedures. Real estate and
mortgage loan investments are diversified by geographic location and
property type. Management believes that significant concentrations of
credit risk do not exist.
Pacific Mutual is exposed to credit loss in the event of nonperformance
by the other parties to the interest rate swaps contracts and other
derivative securities. However, Pacific Mutual does not anticipate
nonperformance by the counterparties.
6. UNCONSOLIDATED SUBSIDIARIES
Pacific Mutual's subsidiary operations primarily include other life and
health insurance and investment management and advisory services. As of
December 31, 1995 and 1994, subsidiary assets were $4.5 billion and
liabilities were $4.3 billion as of December 31, 1995 and $4.2 billion as
of December 31, 1994.
Revenue and net income, including PCL, were $908 million and $63 million
for the year ended December 31, 1995, and $1.1 billion and $75 million
for the year ended December 31, 1994. Dividends from subsidiaries totaled
$64.7 million and $2 million for the years ended December 31, 1995 and
1994, respectively. Earnings of subsidiaries, excluding PCL, and
excluding capital gains, are included in net investment income.
7. BORROWINGS
Pacific Mutual borrows for short-term needs by issuing commercial paper.
Approximately $50 million was outstanding as of December 31, 1994,
bearing an interest rate of 5.86%, and was repaid in January, 1995. There
were no borrowings outstanding as of December 31, 1995.
In addition, Pacific Mutual had available a revolving credit facility
totaling approximately $250 million as of December 31, 1995 and 1994.
There were no borrowings outstanding as of December 31, 1995 and 1994.
8. CONTRIBUTION CERTIFICATES
Pacific Mutual has $150 million of Contribution Certificates (the
"Certificates"), also referred to as Surplus Notes, outstanding at an
interest rate of 7.9% maturing on December 30, 2023. Interest is payable
semiannually on June 30 and December 30. The Certificates may not be
redeemed at the option of Pacific Mutual or any holder of the
Certificates. The Certificates are unsecured and subordinated to all
present and future senior indebtedness and policy claims of Pacific
Mutual. Each payment of interest on and the payment of principal of the
Certificates may be made only out of Pacific Mutual's surplus and with
the prior approval of the Insurance Commissioner of the State of
California. In accordance with accounting practices prescribed or
permitted by the Insurance Department of the State of California, the
Certificates are not part of the liabilities of Pacific Mutual and are
included in surplus.
63
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
9. REINSURANCE
Pacific Mutual has reinsurance agreements with other insurance companies
for the purpose of diversifying risk and limiting exposure on larger
risks. For the years ended December 31, 1995 and 1994, individual life
and annuity premiums assumed were $16 million and $20 million and
premiums ceded were $339 million and $363 million, respectively. Amounts
recoverable from reinsurers for individual life and annuities include
reinsured and paid claims of $8 million and $13 million as of December
31, 1995 and 1994, respectively. Policy benefits payable are net of
reinsurance recoveries of $8 million and $4 million at December 31, 1995
and 1994, respectively.
Pacific Mutual also reinsures substantially all of its group life and
health business with a subsidiary insurance company. Premiums of $72
million and $90 million, and benefits of $53 million and $70 million were
ceded during the years ended December 31, 1995 and 1994, respectively.
Amounts payable to the subsidiary under this agreement were $6 million
and $8 million as of December 31, 1995 and 1994, respectively.
To the extent that the assuming companies become unable to meet their
obligations under these treaties, Pacific Mutual remains contingently
liable. However, Pacific Mutual does not anticipate nonperformance by
these assuming companies.
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
PENSION PLAN
Pacific Mutual maintains a defined benefit pension plan covering eligible
employees and agents. In 1995, Pacific Mutual accrued $2.5 million in
pension expense that will be funded in 1996 based on the latest actuarial
valuation report. No expense or contributions were made during 1994
because of the funded status of the plans and related income tax
considerations. Accumulated benefits and net assets available for
benefits as of the latest valuation dates (January 1, 1995 and April 1,
1994) are as follows:
<TABLE>
<CAPTION>
1995 1994
---------------------
(In Thousands)
<S> <C> <C>
Actuarial present value of accumulated
benefits:
Vested $ 92,966 $ 88,122
Nonvested 392 1,115
---------------------
Total $ 93,358 $ 89,237
---------------------
Net assets available for benefits $ 107,530 $ 111,089
---------------------
</TABLE>
The above present values were determined using an assumed discount rate
of 8.5% in 1995 and 1994.
POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE PLANS
Pacific Mutual sponsors a defined benefit health care plan and a defined
benefit life insurance plan ("The Plans") that provide postretirement
benefits for all eligible retirees and their dependents. Generally,
qualified employees may become eligible for these benefits if they reach
normal retirement age, have been covered under Pacific Mutual's policy as
an active employee for a minimum continuous period prior to the date
retired, and have an employment date before January 1, 1990. The Plans
contain cost-sharing features such as deductibles and coinsurance and
require retirees to make contributions which can be adjusted annually.
Pacific Mutual's
64
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
commitment to qualified employees who retire after April 1, 1994 is
limited to specific dollar amounts. Pacific Mutual reserves the right to
modify or terminate The Plans at any time. As in the past, the general
policy is to fund these benefits on a pay-as-you-go basis. The amount of
benefits paid under The Plans for the years ended December 31, 1995 and
1994 was approximately $1.7 million for both years.
Pacific Mutual utilizes the accrual method of accounting for the costs of
The Plans as prescribed by the Insurance Department of the State of
California and amortizes its transition obligation of $26.7 million over
twenty years.
Components of net periodic postretirement benefit cost are as follows (In
Thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
---------------------------
<S> <C> <C>
Service cost $ 177 $ 186
Interest cost 1,921 1,790
Amortization (260) (260)
---------------------------
1,838 1,716
Recognized transition obligation-net 1,336 1,337
---------------------------
Net periodic postretirement benefit cost $ 3,174 $ 3,053
---------------------------
</TABLE>
The following table presents The Plans' funded status reconciled with
amounts recorded in other liabilities on Pacific Mutual's statement of
financial position (In Thousands):
<TABLE>
<CAPTION>
1995 1994
---------------------
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $ 20,936 $ 20,580
Fully eligible active plan participants 1,695 1,346
Other active plan participants 2,290 2,455
---------------------
24,921 24,381
Fair value of plan assets 0 0
---------------------
Unfunded accumulated postretirement obligation 24,921 24,381
Unrecognized net gain 878 942
Prior service cost 1,589 1,849
Unrecognized transition obligation-net (22,720) (24,056)
---------------------
Accrued postretirement benefit liability $ 4,668 $ 3,116
---------------------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 10% for 1995 and 11% for 1994, and is assumed to
decrease gradually to 5% in 2003 and remain at that level thereafter. The
amount reported is materially affected by the health care cost trend rate
assumptions. If the health care cost trend
65
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
rate assumptions were increased by 1%, the accumulated postretirement
benefit obligation as of December 31, 1995 and 1994 would be increased by
10.9% and 11.2%, respectively. The effect of this change would increase
the aggregate of the service, interest and amortization cost components
of the net periodic benefit cost by 11.4% and 13.6%, respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation is 7% and 8% for 1995 and 1994, respectively.
11. INVESTMENT COMMITMENTS
Pacific Mutual has outstanding commitments to make investments in bonds
and other invested assets as follows (In Thousands):
<TABLE>
<CAPTION>
Year ended December 31:
-----------------------
<S> <C>
1996 $ 179,551
1997-2000 88,698
2001 and thereafter 32,091
---------
Total $ 300,340
---------
</TABLE>
12. LITIGATION
Pacific Mutual and its subsidiaries are respondents in a number of legal
proceedings, some of which involve extra-contractual damages. In the
opinion of management, the outcome of these proceedings is not likely to
have a material adverse effect on the financial position of Pacific
Mutual.
--------------------------------------------------------------------------
66
<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>
67
<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>
68
<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> <C>
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> <C>
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 (after taxes) were invested to earn interest at 5% compounded
annually. All premium payments are illustrated as if they were made at the
beginning of the year. These illustrations assume that no Policy loans have
been made.
The amounts shown for the death benefits, Accumulated Values and Net Cash
Surrender Values reflect the fact that the net investment return on the
Variable Accounts is lower than the gross investment return on the assets as a
result of charges levied against the Variable 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 weighted rate of 0.64% of the aggregate average daily
net assets of the Fund. This hypothetical rate is representative of the
weighted average investment advisory fee applicable to the twelve Portfolios
of the Fund available as options under the Policy. The amounts shown would
differ if unisex rates were used or if the Insureds were females and female
rates were used. On those illustrations assuming current rates, the amounts
would also differ if either Insured were a smoker and smoker rates were used.
The tables also reflect other expenses of the Fund at the weighted rate of
0.23% of the average daily net assets of a Portfolio, which amounts to 0.87%
of the average daily net assets of a Portfolio including the investment
advisory fee, and any foreign taxes. For the year ended December 31, 1995, the
total expenses of each Portfolio were the following percentages of the average
daily net assets of the Portfolios: 0.53% for the Money Market Portfolio;
0.83% for the Equity Income Portfolio; 0.84% for the Multi-Strategy Portfolio;
1.42% for the International Portfolio; 0.76% for the Managed Bond Portfolio;
0.82% for the Government Securities Portfolio; 0.77% for the High Yield Bond
Portfolio; 0.79% for the Growth Portfolio; 0.94% for the Growth LT Portfolio;
and 0.42% for the Equity Index Portfolio. For Aggressive Equity and Emerging
Markets Portfolios, which had not commenced operations as of December 31,
1995, it is estimated that operating expenses, including advisory fees and
foreign taxes, after the expense limitation described below, will be 1.04% and
1.58% of average daily net assets, respectively. We have agreed, until at
least December 31, 1997, to waive our fees or otherwise reimburse each
Portfolio for its operating expenses to the extent that such expenses,
exclusive of advisory fees, additional custodial charges associated with
holding foreign securities, foreign taxes on dividends, interest and gains,
and extraordinary expenses, exceed 0.25% of any Portfolio's average daily net
assets. We
69
<PAGE>
began this expense reimbursement policy in April 1989. Such expenses of the
Portfolios for the year ending December 31, 1995 did not exceed the 0.25%
expense caps. In the absence of this policy, it is estimated that the Emerging
Markets Portfolio's total expenses, including advisory fees and foreign taxes
for the Fund's current year ending December 31, 1996 will be 1.63%. There can
be no assurance that the expense reimbursement arrangement will continue after
December 31, 1997, and any unreimbursed expenses would be reflected in the
Policy Owner's Accumulated Value and in some instances, the death benefit.
After deduction of the charges and Fund expenses described above, the
illustrated gross annual investment rates of return of 0%, 6% and 12%
correspond to approximate net annual rates of return of -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 we are not currently making these
charges.
We 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.
70
<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.
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.
71
<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.
*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.
72
<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.
73
<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 RATES, DIVIDENDS, AND VALUES SET FORTH IN THE ILLUSTRATION
ARE NOT GUARANTEED.
74
<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 RATES, DIVIDENDS, AND VALUES SET FORTH IN THE ILLUSTRATION
ARE NOT GUARANTEED.
75
<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.
76
<PAGE>
[LOGO of PACIFIC SELECT CHOICE]
Issued By: Principal Underwriter:
Pacific Mutual Life Insurance Company Pacific Mutual Distributors, Inc.
700 Newport Center Drive Member: NASD/SIPC
P.O. Box 9000 700 Newport Center Drive
Newport Beach, California 92660 P.O. Box 9000
Newport Beach, California 92660
<PAGE>
Sponsored by:
[LOGO of PACIFIC MUTUAL]
PACIFIC MUTUAL LIFE INSURANCE COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH,
CA 92660
Distributed by:
[LOGO of PACIFIC MUTUAL DISTRIBUTORS, INC.]
Pacific Mutual Distributors, Inc.
Member NASD & SIPC
700 NEWPORT CENTER DRIVE, NB-3
NEWPORT BEACH, CA 92660
1-800-800-7681
FORM NO. 15-19044-04
