<PAGE>
[LOGO of PACIFIC SELECT ESTATE PRESERVER]
Flexible Premium
Variable Universal Life
PROSPECTUSES FOR
PACIFIC SELECT ESTATE PRESERVER
LAST SURVIVOR FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
PACIFIC LIFE INSURANCE COMPANY
DATED MAY 1, 1997
AS SUPPLEMENTED SEPTEMBER 2, 1997
------------------
PACIFIC SELECT FUND
DATED MAY 1, 1997
AS SUPPLEMENTED SEPTEMBER 2, 1997
<PAGE>
SUPPLEMENT DATED MAY 1, 1997 TO
PROSPECTUS DATED MAY 1, 1997 FOR
PACIFIC SELECT ESTATE PRESERVER
LAST SURVIVOR FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY PACIFIC LIFE INSURANCE COMPANY
Death Benefit Options C and D are currently not available. We will notify
Owners of Pacific Select Estate Preserver Policies when these Death Benefit
Options become available. We will change your current Death Benefit Option to
Option C or D if we receive your request for such a change within 60 days after
we notify you. If you elect to change to Death Benefit Option D we require
evidence of insurability of both Insureds. A change to Death Benefit Option C
does not require evidence of insurability.
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
PACIFIC SELECT ESTATE PRESERVER
LAST SURVIVOR FLEXIBLE PREMIUM
VARIABLE LIFE INSURANCE POLICY
[LOGO of PACIFIC SELECT
ESTATE PRESERVER] ISSUED BY PACIFIC LIFE INSURANCE COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
1-800-800-7681
This prospectus describes Pacific Select Estate Preserver--a Last Survivor
Flexible Premium Variable Life Insurance Policy (individually, the "Policy,"
and collectively, the "Policies") offered by Pacific Life Insurance Company
("Pacific Life", "we", "us", or "our", formerly known as Pacific Mutual Life
Insurance Company). The Policy, for so long as it remains in force, provides
lifetime insurance protection on the lives of two Insureds named in the
Policy, with a death benefit payable when the last surviving Insured dies
while the Policy is in force. Four death benefit options are available under
the Policy. The Policy is designed to provide flexibility in connection with
premium payments and death benefits to permit a Policyholder ("Policy Owner",
"Owner", "you", or "your") to provide for changing insurance needs under a
single insurance policy. A Policy may 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. Variable Investment Options are
funded by one of our separate accounts, the Pacific Select Exec Separate
Account (the "Separate Account"), which is divided into Variable Accounts.
Each of the Variable Accounts that are currently available to you invests in a
corresponding portfolio of the Pacific Select Fund (the "Fund"):
Money Market Portfolio Equity Income Portfolio
High Yield Bond Portfolio Multi-Strategy Portfolio
Managed Bond Portfolio Equity Portfolio
Government Securities Portfolio Bond and Income Portfolio
Growth Portfolio Equity Index Portfolio
Aggressive Equity Portfolio International Portfolio
Growth LT Portolio Emerging Markets Portfolio
Net premium payments also may be allocated to the Fixed Account. Your
Accumulated Value in the Fixed Account will accrue interest at an interest
rate that is guaranteed by us. This prospectus generally describes only the
portion of the Policy involving the Separate Account. For a brief summary of
the Fixed Account, see "The Fixed Account," page 32.
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 insures the lives of two Insureds and is intended to provide
death benefits after the deaths of both of the Insureds. Prospective
applicants for the Policy should consult with their agent regarding the
appropriateness of the Policy, relative to a life insurance policy insuring
the life of only one person, for their financial planning goals.
It may not be advantageous to replace existing insurance with this Policy.
The Policy may be returned according to the terms of its Free-Look Right (see
"Right to Examine a Policy--Free-Look Right," page 22).
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE PACIFIC
SELECT FUND. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
DATE: MAY 1, 1997 AS SUPPLEMENTED SEPTEMBER 2, 1997
----------------
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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
IMPORTANT TERMS.............................................................. 4
SUMMARY OF THE POLICY........................................................ 5
Purpose Of The Policy...................................................... 5
Policy Values.............................................................. 5
The Death Benefit.......................................................... 5
Premium Features........................................................... 6
Investment Options......................................................... 6
Transfer Of Accumulated Value.............................................. 6
Policy Loans............................................................... 6
Free-Look Right............................................................ 6
Surrender Right............................................................ 7
Partial Withdrawals........................................................ 7
Charges And Deductions..................................................... 7
Fund Annual Expenses After Expense Limitation.............................. 8
Tax Treatment Of Increases In Accumulated Value............................ 9
Tax Treatment Of Death Benefit............................................. 9
Contacting Pacific Life And Timing Of Transactions......................... 9
INFORMATION ABOUT PACIFIC LIFE, THE SEPARATE ACCOUNT, AND THE FUND........... 10
Pacific Life Insurance Company............................................. 10
Pacific Select Exec Separate Account....................................... 10
The Pacific Select Fund.................................................... 11
The Investment Adviser And Portfolio Managers.............................. 12
THE POLICY................................................................... 13
Application For A Policy................................................... 13
Premiums................................................................... 13
Allocation Of Net Premiums................................................. 14
Dollar Cost Averaging Option............................................... 15
Portfolio Rebalancing...................................................... 15
Transfer Of Accumulated Value.............................................. 15
Death Benefit.............................................................. 16
Changes In Death Benefit Option............................................ 18
Decrease In Face Amount.................................................... 19
Policy Values.............................................................. 19
Determination Of Accumulated Value......................................... 20
Policy Loans............................................................... 20
Surrender.................................................................. 21
Partial Withdrawals........................................................ 21
Right To Examine A Policy--Free-Look Right................................. 22
Lapse...................................................................... 22
Reinstatement.............................................................. 23
CHARGES AND DEDUCTIONS....................................................... 23
Premium Load............................................................... 23
Deductions From Accumulated Value.......................................... 24
Surrender Charge........................................................... 25
Withdrawal Charge.......................................................... 26
Corporate Purchasers....................................................... 26
Other Charges.............................................................. 26
Guarantee Of Certain Charges............................................... 26
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
OTHER INFORMATION.......................................................... 26
Federal Income Tax Considerations........................................ 26
Charge For Our Income Taxes.............................................. 30
Voting Of Fund Shares.................................................... 30
Disregard Of Voting Instructions......................................... 30
Confirmation Statements And Other Reports To Owners...................... 31
Substitution Of Investments.............................................. 31
Changes To Comply With Law............................................... 31
PERFORMANCE INFORMATION.................................................... 32
THE FIXED ACCOUNT.......................................................... 32
General Description...................................................... 33
Death Benefit............................................................ 33
Policy Charges........................................................... 33
Transfers, Surrenders, Withdrawals, And Policy Loans..................... 33
MORE ABOUT THE POLICY...................................................... 34
Ownership................................................................ 34
Beneficiary.............................................................. 34
The Contract............................................................. 34
Payments................................................................. 34
Assignment............................................................... 35
Errors On The Application................................................ 35
Incontestability......................................................... 35
Payment In Case Of Suicide............................................... 35
Dividends................................................................ 35
Policy Illustrations..................................................... 35
Payment Plan............................................................. 35
Optional Insurance Benefits And Other Policies........................... 36
Life Insurance Retirement Plans.......................................... 36
Risks Of Life Insurance Retirement Plans................................. 37
Distribution Of The Policy............................................... 37
MORE ABOUT PACIFIC LIFE.................................................... 38
Management............................................................... 38
State Regulation......................................................... 40
Telephone Transfer And Loan Privileges................................... 40
Legal Proceedings........................................................ 41
Legal Matters............................................................ 41
Registration Statement................................................... 41
Independent Auditors..................................................... 41
Financial Statements..................................................... 41
ILLUSTRATIONS.............................................................. 81
APPENDICES................................................................. 91
</TABLE>
3
<PAGE>
IMPORTANT TERMS
Accumulated Value--The total value of the amounts in the Investment Options
for the Policy, as well as any amount set aside in the Loan Account, including
any accrued earned interest, as of any Valuation Date.
Age--Generally, age 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
last surviving Insured.
Cash Surrender Value--The Accumulated Value less the surrender charge.
Face Amount--The minimum death benefit for so long as your 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%) declared by us.
General Account--All of our assets other than those allocated to the Separate
Account or to any other of our segregated separate accounts.
Guideline Minimum Death Benefit--The minimum death benefit that is sufficient
for the Policy to qualify as life insurance under the Internal Revenue Code.
It is equal to your Policy's Accumulated Value times the applicable Death
Benefit Percentage shown in Appendix C.
Home Office--The Policy Benefits and Services Department at our main office at
700 Newport Center Drive, Newport Beach, California 92660.
Insured--One of two persons upon whose life your Policy is issued and whose
death may be the contingency upon which the death benefit proceeds are
payable.
Investment Option--A Variable Account or the Fixed Account.
Joint Equal Age--An age determined under a calculation shown in Appendix A
that represents a blending of the age and insurance risks presented by two
Insureds. It is used in calculating the mortality and expense risk charge, the
underwriting surrender charge, the Sales Surrender Target, and the death
benefit under Option D. For example, the Joint Equal Age for a male Insured
Age 55 and a female Insured Age 55 is 53 assuming a standard nonsmoker or
smoker underwriting classification for each Insured.
Loan Account--An account to which amounts are transferred from the Investment
Options as collateral for Policy loans.
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.
Policy Debt--The unpaid Policy loan balance including accrued loan interest.
Policyholder, Policy Owner, Owner, you, or your--The person or persons who own
the Policy. If the Policy has been absolutely assigned, the assignee becomes
the Owner. A collateral assignee is not the Owner.
Sales Surrender Target--The maximum amount of premiums paid against which the
sales surrender charge may be applied. The Sales Surrender Target is equal to
a specified amount that varies with the Joint Equal Age of the Insureds for
each $1,000 of a Policy's initial Face Amount in accordance with schedule
shown in Appendix B.
Survivor--The Insured remaining alive after the first death of the two
Insureds that occurs while your Policy is in force.
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: 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 these
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 Date, such transaction or
event will be deemed to occur on the next following Valuation Date 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
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
Variable Account, Bond and Income Variable Account, Equity Index Variable
Account, International Variable Account, and Emerging Markets Variable Account
are all subaccounts of the Separate Account.
4
<PAGE>
SUMMARY OF THE POLICY
This summary is intended to provide a brief overview of the more significant
aspects of the Policy. Further detail is provided in this prospectus and in the
Policy. Unless the context indicates otherwise, the discussion in this summary
and the remainder of the prospectus relates to the portion of the Policy
involving the Separate Account. The Fixed Account is briefly described under
"The Fixed Account," on page 32 and in the Policy.
PURPOSE OF THE POLICY
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, your 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 life insurance policies and subject
to certain limitations, you may choose the amount and frequency of premium
payments.
Your Policy offers you lifetime insurance protection on the lives of two
Insureds for so long as your Policy is in force. The death benefit proceeds
under your Policy are payable upon the death of the last surviving Insured
named in your Policy. The Policy is intended for situations in which you desire
to provide a benefit to beneficiaries after the deaths of two persons. For
example, the Policy could be used where two spouses wish to provide an estate
benefit for their children after the death of both spouses. The Policy might
not be appropriate where one spouse wishes to provide a benefit to the other
spouse after the death of the first spouse. An insurance policy for a single
insured may be better in this situation. We offer variable life insurance
policies that provide protection for the life of one insured. Applicants should
consult their agent on the appropriateness of the Policy for their situation.
POLICY VALUES
You may allocate net premium payments among the various Investment Options
available to you.
You bear the investment risk on that portion of the net premiums and
Accumulated Value allocated to the Variable Accounts. The death benefit may or
may not increase or decrease depending upon several factors, including the
death benefit 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.
Your Policy will remain in force until the earliest of the death of the
Survivor, lapse, or a full surrender of your Policy.
THE DEATH BENEFIT
You may elect one of four death benefit options under the Policy. THE AMOUNT
OF DEATH BENEFIT IS THE GREATER OF THE POLICY'S GUIDELINE MINIMUM DEATH BENEFIT
OR THE DEATH BENEFIT UNDER THE OPTION YOU SELECT.
<TABLE>
<CAPTION>
OPTION DEATH BENEFIT
-------- -------------
<S> <C>
Option A Face Amount
Option B Face Amount plus Accumulated Value
Option C Face Amount plus premiums paid minus Partial Withdrawals
Option D Face Amount multiplied by the applicable Death Benefit Factor
</TABLE>
You may change the death benefit option to Option A or B subject to certain
conditions. See "Death Benefit" and "Changes in Death Benefit Option," pages 16
and 18, respectively.
5
<PAGE>
PREMIUM FEATURES
We require you to pay 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.
INVESTMENT OPTIONS
You may choose to allocate net premium payments to one or more of the
Investment Options available to you.
The Variable Accounts available to you 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. Each of the available
Variable Accounts invests exclusively in shares of a designated Portfolio of
the Fund. Each of the Portfolios of the Fund, which are shown in the chart on
page 12, has a different investment objective or objectives. See "The Pacific
Select Fund," page 11.
You also may allocate all or a portion of net premium payments and transfer
Accumulated Value to the Fixed 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%, and may in our sole discretion
pay interest in excess of the guaranteed amount. See "The Fixed Account," page
32.
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 15.
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 surrender charges
that would have been 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 the
Policy's Accumulated Value less any surrender charge that would be imposed if
the Policy were surrendered on the date the loan is taken and less 12 times the
current monthly deduction; (b) equals 1 plus the annual loan interest rate
credited; (c) equals 1 plus the annual loan interest rate currently charged;
and (d) equals any existing Policy Debt. The minimum loan is $500 ($200 in
Connecticut, $250 in Oregon). Your Policy will be the only security required
for a loan. 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.
FREE-LOOK RIGHT
You may return the Policy within the Free-Look Period, which is usually 10
days after you receive it (15 days in Colorado, 20 days in North Dakota, and 30
days if you reside in California and are age 60 or older), 10 days after we
mail or deliver this notice of right of withdrawal included in this prospectus,
or 45 days after the application for the Policy is signed, whichever is latest.
However, in Pennsylvania you have a different Free-Look Right, under which your
Policy may be returned only within 10 days after you receive it. 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
6
<PAGE>
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 the Policy while either Insured is living and receive your
Net Cash Surrender Value, which is equal to your Policy's Accumulated Value
less any surrender charge and less any outstanding Policy Debt.
PARTIAL WITHDRAWALS
After the first Policy Anniversary and subject to certain restrictions, you
may make Partial Withdrawals of Net Cash Surrender Value. A withdrawal fee of
$25 will be assessed upon a Partial Withdrawal. A Partial Withdrawal might
decrease the Face Amount on a Policy. See "Partial Withdrawals," page 21.
CHARGES AND DEDUCTIONS
Premium Load
A premium load is deducted from each premium payment under a Policy prior to
allocation of the net premium to the Policy Owner's Accumulated Value. The
premium load consists of the following items:
--A sales load equal to 5% of each premium paid during the first ten Policy
Years and 3% of each premium paid thereafter. (For information on the sales
surrender charge, see page 25.)
--A state and local premium tax charge equal to 2.35% of each premium paid.
--A federal tax charge equal to 1.50% of each premium paid.
Deductions from Accumulated Value
A charge called the monthly deduction is deducted from the Policy's
Accumulated Value on each Monthly Payment Date. The monthly deduction consists
of the following items:
--Cost of Insurance: The amount of the charge is equal to a current cost of
insurance rate multiplied by the net amount at risk (the death benefit less
Accumulated Value) under a Policy at the beginning of the Policy Month.
--Administrative Charge: A monthly administrative charge is deducted equal to
$16 in each of the first five Policy Years, and thereafter at a rate equal
to $6 per month.
--Mortality and Expense Risk Charge: The mortality and expense risk charge
consists of two components:
(1) Face Amount Component--During the first ten Policy Years, the Face
Amount Component will be assessed at a rate determined with reference
to the Joint Equal Age of the Insureds and the initial Face Amount of
the Policy. This component is not assessed after the tenth Policy Year.
(2) Accumulated Value Component--The Accumulated Value Component is
assessed at an annual rate equal to .30% of Accumulated Value in the
first 20 Policy Years and an annual rate equal to .10% of Accumulated
Value thereafter. For purposes of this component, the Accumulated Value
is determined after the deduction of the cost of insurance charge and
charges for any optional insurance Riders or Benefits added to the
Policy.
7
<PAGE>
--Optional Insurance Benefits Charges: The monthly deduction will include
charges for any optional insurance Riders or Benefits added to the Policy.
Surrender Charge
We will assess a surrender charge against Accumulated Value upon surrender of
a Policy until the tenth Policy Anniversary. The surrender charge consists of
two charges: an underwriting surrender charge and a sales surrender charge.
--Underwriting Surrender Charge: The underwriting surrender charge is equal
to a specified amount that varies with the Joint Equal Age of the Insureds
for each $1,000 of a Policy's initial Face Amount in accordance with a
schedule shown in Appendix B. After the first Policy Year, the charge
decreases by 0.9259% per month until it reaches zero at the end of the 120th
Policy Month.
--Sales Surrender Charge: During the first Policy Year, the sales surrender
charge is equal to 25% of the lesser of the premiums paid under the Policy
or the Sales Surrender Target. The Sales Surrender Target is equal to a
specified amount that varies with the Joint Equal Age of the Insureds for
each $1,000 of a Policy's initial Face Amount in accordance with a schedule
shown in Appendix B. After the first Policy Year, the sales surrender charge
as calculated above is adjusted by a reduction factor. This reduction factor
is equal to 99.0741% in the 13th month and reduces by 0.9259% per month
until it reaches zero at the end of the 120th Policy Month.
The operating expenses of the Separate Account are paid by us. For a more
complete description of these charges, see "Charges and Deductions," page 23.
FUND ANNUAL EXPENSES AFTER EXPENSE LIMITATION (as a percentage of each
Portfolio's average daily net assets)
Investment advisory fees and operating expenses of the Fund are paid by the
Fund. Fund expenses are not specified under the terms of the Policy, and they
may vary from year to year.
<TABLE>
<CAPTION>
ADVISORY OTHER TOTAL
FEE EXPENSES EXPENSES
-------- -------- --------
<S> <C> <C> <C>
Money Market Portfolio............................... .40% .08% .48%
High Yield Bond Portfolio............................ .60% .10% .70%
Managed Bond Portfolio............................... .60% .09% .69%
Government Securities Portfolio...................... .60% .10% .70%
Growth Portfolio..................................... .65% .09% .74%
Aggressive Equity Portfolio.......................... .80% .15% .95%
Growth LT Portfolio.................................. .75% .10% .85%
Equity Income Portfolio.............................. .65% .08% .73%
Multi-Strategy Portfolio............................. .65% .11% .76%
Equity Portfolio..................................... .65% .08% .73%
Bond and Income Portfolio............................ .60% .09% .69%
Equity Index Portfolio............................... .21% .08% .29%
International Portfolio.............................. .85% .21% 1.06%
Emerging Markets Portfolio........................... 1.10% 1.05% 2.15%
</TABLE>
The expenses listed for the Fund Portfolios reflect expenses for the year
ended December 31, 1996, adjusted to reflect a decrease in fees for certain
operating expenses. The Aggressive Equity and Emerging Markets Portfolios did
not begin operations until April 1, 1996 and their "other expenses" are on an
annualized basis and reflect the policy adopted by us as Investment Adviser to
the Fund, to waive its fees or otherwise reimburse expenses so that operating
expenses (exclusive of advisory fees, additional custodial fees associated with
holding foreign securities, foreign taxes on dividends, interest or capital
gains, and extraordinary expenses) are not greater than 0.25% of average daily
net assets per year. We began the policy in 1989 and intend
8
<PAGE>
to continue this policy until at least December 31, 1998. In the absence of
this policy, such expenses for the Emerging Markets Portfolio would have
exceeded this expense cap in 1996 and total adjusted expenses would have been
approximately 2.22% on an annualized basis. No reimbursement to the other
Portfolios was necessary for the Fund's fiscal year 1996. There can be no
assurance that the expense reimbursement arrangement will continue after
December 31, 1998, and any unreimbursed expenses would be reflected in the
Policy Owner's Accumulated Value and in some instances, the death benefit.
Actual total expenses after reimbursement and before the adjustment for the
year ended December 31, 1996, were: Money Market Portfolio--0.50%; High Yield
Bond Portfolio--0.71%; Managed Bond Portfolio--0.71%; Government Securities
Portfolio--0.72%; Growth Portfolio--0.76%; Aggressive Equity Portfolio
(annualized)--1.02%; Growth LT Portfolio--0.87%; Equity Income portfolio--
0.75%; Multi-Strategy Portfolio--0.78%; Equity Portfolio--0.74%; Bond and
Income Portfolio--0.71%; Equity Index Portfolio--0.31%; International
Portfolio--1.07%; and Emerging Markets Portfolio (annualized)--2.18%.
The Fund's expenses are assessed at the Fund level and are not direct charges
against the Variable Accounts or the Policy's Accumulated Value. These expenses
are taken into account in computing each Portfolio's per share net asset value,
which in turn is used to compute the corresponding Variable Account's
Accumulation Unit Value. The Fund's investment advisory fees and operating
expenses are more fully described in the Fund's prospectus, which accompanies
this Prospectus.
TAX TREATMENT OF INCREASES IN ACCUMULATED VALUE
We believe that the Accumulated Value under the Policy is currently subject
to the same federal income tax treatment as the cash value under traditional
fixed life insurance. Therefore, generally you will not be deemed to be in
constructive receipt of your 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 26.
TAX TREATMENT OF DEATH BENEFIT
We believe that the death benefit under the Policy is currently subject to
federal income tax treatment consistent with that of traditional fixed life
insurance. Therefore, generally the death benefit will be fully excludable from
the gross income of the Beneficiary under the Internal Revenue Code. See
"Federal Income Tax Considerations," page 26.
CONTACTING PACIFIC LIFE AND TIMING OF TRANSACTIONS
All written requests, notices, and forms required by the Policies, and any
questions or inquiries should be directed to our Policy Benefits and Services
Department at 700 Newport Center Drive, P.O. Box 7500, Newport Beach,
California 92658-7500.
The effective date of certain notices or of instructions is determined by the
date and time on which we "receive" 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, transfer requests, loan requests, loan repayments, 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 Date 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 us if you
have questions regarding the required form of a request.
9
<PAGE>
INFORMATION ABOUT PACIFIC LIFE, THE SEPARATE ACCOUNT, AND THE FUND
PACIFIC LIFE INSURANCE COMPANY
We are a life insurance company that is domiciled in California. Our
operations include both life insurance and annuity products as well as
financial and retirement services. As of the end of 1996, we had over
$50.8 billion of individual life insurance in force and total admitted assets
of approximately $21.2 billion. We have been ranked according to admitted
assets as the 22nd largest life insurance carrier in the nation for 1996.
Together with our subsidiaries and affiliated enterprises, we have total
assets and funds under management of over $136 billion. We are authorized to
conduct life insurance and annuity business in the District of Columbia and
all states except New York. Our principal offices are located at 700 Newport
Center Drive, Newport Beach, California 92660.
We were originally organized on January 2, 1868, under the name "Pacific
Mutual Life Insurance Company of California" and reincorporated as "Pacific
Mutual Life Insurance Company" on July 22, 1936. On September 1, 1997, we
converted from a mutual life insurance company to a stock life insurance
company ultimately controlled by a mutual holding company and were authorized
by California regulatory authorities to change our name to Pacific Life
Insurance Company. As part of the process we have applied for authorization to
do business as Pacific Life Insurance Company in all states in which we do
business. It may be necessary for us to use forms bearing the name Pacific
Mutual Life Insurance Company at some times and places and forms bearing the
name Pacific Life Insurance Company at other times and places during the
transition period. Any request received in proper order or any transaction
made on a form bearing either of these names will be honored.
We are a subsidiary of Pacific LifeCorp, a holding company which, in turn,
is a subsidiary of Pacific Mutual Holding Company, a mutual holding company.
Under their respective charters, Pacific Mutual Holding Company must always
hold at least 51% of the outstanding voting stock of Pacific LifeCorp, and
Pacific LifeCorp must always own 100% of the voting stock of Pacific Life.
Owners of Pacific Life's annuity contracts and life insurance policies have
certain membership interests in Pacific Mutual Holding Company, consisting
principally of the right to vote on the election of the Board of Directors of
the mutual holding company and on other matters, and certain rights upon
liquidation or dissolutions of the mutual holding company.
The principal underwriter for the Policies is Pacific Mutual Distributors,
Inc. ("PMD") one of our wholly owned subsidiaries. PMD is registered as a
broker-dealer with the Securities and Exchange Commission ("SEC").
PACIFIC SELECT EXEC SEPARATE ACCOUNT
The Separate Account is a separate investment account of ours that is 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 us. The assets in the
Separate Account are kept separate from our General Account assets 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 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 our general
corporate obligations. 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.
10
<PAGE>
Each Variable Account available to you 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, generally known as a mutual fund. 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 fourteen separate Portfolios that fund the
Variable Investment Options available to you. Each Portfolio pursues different
investment objectives and policies. We purchase the 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.
Shares of the Fund currently are offered only to separate accounts of ours
and an affiliated insurer to serve as an investment medium for variable life
insurance policies and variable annuity contracts issued or administered by
these insurers. 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 potentially create
conflicts. See "MORE ON THE FUND'S SHARES" in the accompanying prospectus of
the Fund.
The following chart 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.
11
<PAGE>
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
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Current income Highest quality money Pacific Life
consistent with market instruments
preservation of capital
- --------------------------------------------------------------------------------------------
High-Yield High level of current Intermediate and long- Pacific Life
Bond income 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 Capital appreciation Common stock of small Columbus Circle
Equity emerging growth and Investors
medium capitalization
companies
- --------------------------------------------------------------------------------------------
Growth LT Long-term growth of Common stock Janus Capital
capital consistent with Corporation
the preservation of
capital
- --------------------------------------------------------------------------------------------
Equity Income Long-term growth of Dividend paying common J.P. Morgan
capital and income stock Investment Management
Inc.
- --------------------------------------------------------------------------------------------
Multi-Strategy High total return Equity and fixed-income J.P. Morgan
securities Investment Management
Inc.
- --------------------------------------------------------------------------------------------
Equity Capital appreciation Common stocks and Greenwich Street
securities convertible Advisors
into or exchangeable for
common stocks
- --------------------------------------------------------------------------------------------
Bond and High level of current Investment grade debt Greenwich Street
Income income consistent with securities Advisors
prudent investment
management and
preservation of capital
- --------------------------------------------------------------------------------------------
Equity Index Provide investment Stocks included in the Bankers Trust Company
results that correspond S&P 500
to the total return
performance of common
stocks publicly traded
in the U.S.
- --------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Morgan Stanley
appreciation corporations domiciled Asset Management Inc.
outside the United
States
- --------------------------------------------------------------------------------------------
Emerging Long-term capital Common stocks of Blairlogie Capital
Markets appreciation companies domiciled in Management
emerging markets
countries
- --------------------------------------------------------------------------------------------
</TABLE>
THE INVESTMENT ADVISER AND PORTFOLIO MANAGERS
We serve as Investment Adviser to each Portfolio of the Fund. We are
registered with the SEC as an Investment Adviser. For twelve of the
Portfolios, we 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 by insuring the
lives of two Insureds. Anyone wishing to purchase the Policy may submit an
application to us. A Policy can be issued on the life of Insureds for Ages 20
through Age 85 with evidence of insurability satisfactory to us. An Insured's
Age is calculated for most purposes 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. If your application is accompanied
by all or a portion of the initial premium and is accepted by us, your Policy
Date is usually the date the application and premium payment were received at
our Home Office, although your Policy Date will never be the 29th, 30th, or
31st of any month. If your application is not accompanied by all or a portion
of the initial premium payment, your Policy Date is usually the date your
application is accepted by us. We first become obligated under your Policy on
the date your total initial premium is received or on the date your
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. Your initial premium must be received within 20 days after your
Policy is issued, although we may waive the 20 day requirement at our
discretion. If your initial premium is not received or your application is
rejected by us, your Policy will be cancelled and any partial premium received
will be refunded.
Subject to our approval, your Policy may be backdated, but your Policy Date
may not be more than six months prior to the date of your application.
Backdating can be advantageous if the Insureds' lower issue Ages results in
lower cost of insurance rates. If your 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 your Policy
Date is backdated.
Insureds are assigned to underwriting (insurance 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 your 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 "Charges and Deductions: Cost of Insurance"), and underwriting
classes of the Insureds. Thereafter, subject to the limitations described
below, you may choose the amount and frequency of premium payments. The
Policy, therefore, provides the Policy Owner with the flexibility to vary
premium payments to reflect varying financial conditions.
When applying for a Policy, you will determine a Planned Periodic Premium
that provides for the payment of level premiums at fixed intervals over a
specified period of time. You will receive a premium reminder notice annually,
semi-annually, or quarterly; 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 minimum initial premium required must be paid
before the Uni-check plan will be accepted by us. 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 no day is elected
by you, the day on which premiums are paid will be the Monthly Anniversary.
13
<PAGE>
Payment of the Planned Periodic Premium will not guarantee that your Policy
will remain in force. Instead, the continuation 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".
Any premium payment must be for at least $50.00. 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 "Charges and Deductions: Cost of
Insurance". A premium payment would result in an immediate increase in the net
amount at risk if the death benefit under your Policy is, or upon acceptance
of the premium would be, equal to your Guideline Minimum Death Benefit. See
"Death Benefit". If satisfactory evidence of insurability is not received, the
payment, or portion thereof, may be returned. All or a portion of a premium
payment will be rejected and returned to you if it would exceed the maximum
premium limitations prescribed by federal tax law. We also reserve the right
to make distributions from your Policy to the extent we deem it necessary to
continue to qualify your Policy as life insurance under the Internal Revenue
Code ("IRC").
The amount, frequency, and period of time over which you pay premiums might
affect whether 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 than conventional life insurance
contracts.
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
IRC. (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 have 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.
Certain charges will be deducted from each premium payment. See "Charges and
Deductions". The remainder of the premium, known as the net premium, will be
allocated as described below under "Allocation of Net Premiums." Additional
payments will first be treated as premium payments unless you request
otherwise.
ALLOCATION OF NET PREMIUMS
In your application for the Policy, you select the Investment Options to
which net premium payments will be allocated. When your application is
approved and your Policy is issued, your Accumulated Value will be
automatically allocated according to your instructions contained in your
application, or more recent written instructions, if any (except for amounts
allocated to the Loan Account to secure any Policy Debt). 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. Net premiums received after the Free-Look Transfer
Date will be allocated upon receipt among the Investment Options according to
your most recent instructions.
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 for Telephone
Requests is on file at our Home Office. We reserve the right to suspend or
discontinue telephone net premium allocation instructions.
14
<PAGE>
DOLLAR COST AVERAGING OPTION
We currently offer an option under which you may dollar cost average your
allocations in the available 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 under 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. Dollar cost averaging does not
guarantee profits, nor does it assure that a Policy Owner will not have
losses.
A Dollar Cost Averaging Request Form is available upon request. To elect the
Dollar Cost Averaging Option, the Accumulated Value in the Variable Account
from which the Dollar Cost Averaging transfers will be made must be at least
$5,000. After we have received a Dollar Cost Averaging Request in proper form
at our Home Office, we will transfer Accumulated Value in amounts you
designate from the Variable Account from which transfers are to be made to the
Variable Account or Accounts you choose. The minimum amount that may be
transferred to any one Variable Account is $50. After the Free-Look Period,
the first transfer will be effected on your Policy's Monthly, Quarterly, Semi-
Annual, or Annual Anniversary, whichever corresponds to the period selected by
you, on or next following receipt at our Home Office of a Dollar Cost
Averaging Request in proper form. Subsequent transfers will be effected on the
following Monthly, Quarterly, Semi-annual, or Annual Anniversary for so long
as you designate until the total amount elected has been transferred, until
Accumulated Value in the Variable Account from which transfers are made has
been depleted, or until 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 this option by written request
to our Home Office. We may discontinue, modify, or suspend the Dollar Cost
Averaging Option at any time.
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.
TRANSFER OF ACCUMULATED VALUE
Accumulated Value may be transferred among the Variable Accounts by the
Policy Owner upon proper written request to our Home Office. Transfers may not
be made until after the Free-Look Transfer Date if you
15
<PAGE>
reside in a state that requires us to refund premiums if you exercise your
Free-Look Right. 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 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 your
Policy is in the grace period and a payment required to avoid lapse is not
paid. See "Lapse". 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 impose other reasonable limits or suspend or
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 your Policy Anniversary,
except that if you reside in Connecticut, Georgia, Maryland, North Carolina,
North Dakota, or Pennsylvania, you 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".
DEATH BENEFIT
When your Policy is issued, we will determine the initial amount of
insurance based on the instructions provided in the application. That amount
will be shown on the specifications page of your Policy and is called the
"Face Amount". The minimum Face Amount at issuance of a Policy is $100,000. We
may reduce the minimum Face Amount required at issuance under certain
circumstances.
For so long as your Policy remains in force, we will, upon proof of the
death of both Insureds, pay death benefit proceeds to a named Beneficiary.
Death benefit proceeds will consist of the death benefit under the Policy,
plus any insurance proceeds provided by Rider, reduced by any outstanding
Policy Debt (and, if in the grace period, any overdue charges).
Each Policy Owner may select one of four death benefit options: Option A,
Option B, Option C, or Option D. Generally, you designate the death benefit
option in your application. If no option is designated, Option A will be
assumed by us to have been selected. Subject to certain restrictions, you may
change the death benefit option selected to Option A or B.
The death benefit upon the death of the Survivor will be equal to the death
benefit option selected or, if greater, the Guideline Minimum Death Benefit,
which is Accumulated Value (determined as of the end of the Valuation Period
during which the Survivor dies) multiplied by the Death Benefit Percentage.
The Death Benefit Percentage varies according to the Age of the younger
Insured and will be at least equal to the cash value corridor in IRC Section
7702, which addresses the definition of a life insurance policy for tax
purposes. The Death Benefit Percentage is 250% for an Insured at Age 40 or
under, and it declines for older Insureds. A table showing the Death Benefit
Percentages is in Appendix C to this prospectus and in the Policy. Under any
option, for so long as your Policy remains in force, the death benefit will
never be less than the Face Amount of your Policy and will always be
sufficient to qualify the Policy as life insurance under IRC Section 7702.
Option A. Under Option A, the death benefit will be equal to the Face Amount
of your Policy.
Option B. Under Option B, the death benefit will be equal to the Face Amount
of your Policy plus the Accumulated Value. The death benefit under Option B
will always vary as Accumulated Value varies.
Option C. Under Option C, the death benefit will be equal to the Face Amount
of your Policy plus the total premiums paid minus the sum of any partial
withdrawals taken and any other distribution of Accumulated Value.
Option D. Under Option D, the death benefit will be equal to the Face Amount
of the Policy multiplied by a Death Benefit Factor. Death Benefit Factors for
Joint Equal Ages and Policy years, each at 5 year intervals, are
16
<PAGE>
shown in Appendix D; a complete chart is contained in your Policy. Generally,
the Death Benefit Factor is a number from 1.0 to 2.0. The factor that applies
to a Policy varies with the Joint Equal Age of the Insureds and the number of
completed Policy Years, and changes on each Policy Anniversary. Generally, the
Death Benefit Factor will reach the maximum of 2.0 when the sum of the Joint
Equal Age and the number of completed Policy Years is between 85 and 90, so
that the minimum death benefit at that time would be equal to twice the amount
of the Face Amount.
Choosing Among the Options. Options A through D are intended to provide
flexibility in the amount of insurance protection provided under a Policy.
Option A provides for the smallest amount of insurance protection, in that the
death benefit is equal to the Face Amount (assuming that the Guideline Minimum
Death Benefit is not greater than the Face Amount). Under this option,
favorable investment performance will be reflected in increasing Accumulated
Value rather than insurance protection. Options B and C provide for a greater
degree of insurance protection, in that the death benefit under Option B
includes Accumulated Value, and the benefit under Option C includes the amount
of premiums paid minus withdrawals and any other distributions of Accumulated
Value. As between Options B and C, the death benefit under Option B will
reflect the value of growth in Accumulated Value due to performance, and
Option C will not (assuming that Guideline Minimum Death Benefit is not
greater than the death benefit otherwise determined). Option D provides some
assurance that the death benefit will increase gradually over time without
regard to the investment performance of the Investment Options.
Examples of Death Benefit Options. The following examples demonstrate the
determination of death benefits under Options A through D. The examples show
eight hypothetical Policies, each with a Face Amount of $1,000,000 and where
the two Insureds are male and female nonsmokers, each Age 45 at the time of
issue, and assuming that there is no outstanding Policy Debt, that no
withdrawals have been taken, and the other assumptions shown below. (The
examples are intended to portray differences in death benefits; Accumulated
Value assumptions may not be realistic.)
<TABLE>
<CAPTION>
ASSUMPTIONS POLICY I POLICY II POLICY III POLICY IV
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Face Amount.................... $1,000,000 $1,000,000 $1,000,000 $1,000,000
Accumulated Value on Date of
Death......................... $ 600,000 $ 900,000 $1,200,000 $1,800,000
Total Premium Paid on Date of
Death......................... $ 300,000 $ 400,000 $ 500,000 $ 700,000
Youngest Age on Date of Death.. 65 65 65 65
Death Benefit Percentage....... 120% 120% 120% 120%
Death Benefit Factor (Option
D)............................ 108.4% 108.4% 108.4% 108.4%
DEATH BENEFITS OPTIONS
- ----------------------
Death Benefit Under Option A... $1,000,000 $1,080,000 $1,440,000 $2,160,000
Death Benefit Under Option B... $1,600,000 $1,900,000 $2,200,000 $2,800,000
Death Benefit Under Option C... $1,300,000 $1,400,000 $1,500,000 $2,160,000
Death Benefit Under Option D... $1,084,000 $1,084,000 $1,440,000 $2,160,000
<CAPTION>
POLICY
ASSUMPTIONS POLICY V POLICY VI POLICY VII VIII
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Face Amount.................... $1,000,000 $1,000,000 $1,000,000 $1,000,000
Accumulated Value on Date of
Death......................... $ 600,000 $ 900,000 $1,200,000 $1,800,000
Total Premium Paid on Date of
Death......................... $ 300,000 $ 400,000 $ 500,000 $ 700,000
Youngest Age on Date of Death.. 90 90 90 90
Death Benefit Percentage....... 105% 105% 105% 105%
Death Benefit Factor (Option
D)............................ 200% 200% 200% 200%
DEATH BENEFITS OPTIONS
- ----------------------
Death Benefit Under Option A... $1,000,000 $1,000,000 $1,260,000 $1,890,000
Death Benefit Under Option B... $1,600,000 $1,900,000 $2,200,000 $2,800,000
Death Benefit Under Option C... $1,300,000 $1,400,000 $1,500,000 $1,890,000
Death Benefit Under Option D... $2,000,000 $2,000,000 $2,000,000 $2,000,000
</TABLE>
17
<PAGE>
The death benefit shown in these examples is based upon the Guideline
Minimum Death Benefit for the following examples: Policy II, Option A; Policy
III, Options A and D; Policy IV, Options A, C, and D; Policy VII, Option A;
and Policy VIII, Options A and C.
If the death benefit is equal to the Guideline Minimum Death Benefit, we
reserve the right to reduce the death benefit by requiring Partial Withdrawals
be made in order to maintain the net amount at risk at a level that will not
exceed three times the death benefit on the Policy Date. Such Partial
Withdrawals may be taxable to you in whole or in part. See "Federal Income Tax
Considerations." The $25 withdrawal fee will not be assessed on Partial
Withdrawals we require.
The Policy is intended to qualify as a life insurance contract under the
Internal Revenue Code for Federal tax purposes, and the death benefit under
the Policy is intended to qualify for the income tax exclusion under the
Internal Revenue Code. Unless otherwise specified by you in writing, it is
intended that the Policy will not be treated as a modified endowment contract
under the Internal Revenue Code. To these ends, the provisions of the Policy,
including any other Rider, Benefit, or endorsement, are to be interpreted to
ensure such tax qualification and to prevent the Policy from being treated as
a modified endowment contract, notwithstanding any other provisions to the
contrary.
If at any time the premiums paid under your Policy exceed the amount
allowable for such tax qualification, such excess amount shall be removed from
the Policy as of the date of its payment, and any appropriate adjustment in
the death benefit shall be made as of such date. The excess amount shall be
refunded to you no later than 60 days after the end of the applicable Policy
Year. The excess amount removed from the Policy and refunded to you may be
adjusted for interest or for changes in Accumulated Value attributable to the
excess amount. If for some reason this excess amount is not refunded by then,
the death benefit under this Policy shall be increased retroactively and
prospectively so that at no time is the death benefit ever less than the
amount needed to ensure such tax qualification. To the extent that the death
benefit as of any time is increased by this provision, appropriate adjustments
shall be made retroactively in any cost of insurance or supplemental benefits
as of that time that are consistent with such an increase.
If at any time the premiums or other amounts paid under the Policy exceed
the limit for avoiding modified endowment contract treatment, and you have not
specified in writing that such treatment is acceptable to you, such excess
amount shall be removed from the Policy as of the date of its payment, and any
appropriate adjustment in the Policy's death benefit shall be made as of such
date. This excess amount shall be refunded to you no later than 60 days after
the end of the applicable Policy Year. The excess amount removed from the
Policy and refunded to you may be adjusted for interest or for changes in
Accumulated Value attributable to the excess amount. If this excess amount is
not refunded by then, the death benefit under your Policy shall be increased
retroactively and prospectively to the minimum amount necessary so that at no
time is the death benefit ever less than the amount needed to avoid modified
endowment contract treatment. To the extent the death benefit as of any time
is increased by this provision, appropriate adjustments shall be made,
retroactively or otherwise, in any cost of insurance or supplemental benefits
as of that time that are consistent with such an increase.
All calculations of death benefit will be made as of the end of the
Valuation Period during which the Survivor dies. We will pay interest on death
benefit proceeds from the date of the Survivor's death to the date of payment
at an annual rate of not less than 4% or if higher, the interest rate required
by state law. Death benefit proceeds may be paid to the Beneficiary in a lump
sum or under a payment plan offered under the Policy. Your Policy should be
consulted for details.
CHANGES IN DEATH BENEFIT OPTION
After the fifth Policy Year, you may request that the death benefit option
under your Policy be changed to Option A or B. Changes to Option C or D will
not be available. Changes in the death benefit option may be made only once
per Policy Year and should be made in writing to our Home Office. The
effective date of any such change shall be the next Monthly Payment Date on or
next following the date we receive your written request at our Home Office.
18
<PAGE>
A change in the death benefit under a Policy will result in a change in the
Face Amount of the Policy so that the death benefit under the new death
benefit option will equal the death benefit under the former option
immediately prior to the change. From that point on, the change in option will
affect the determination of the death benefit. In addition, 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. A change will not be
permitted if it would result in a Face Amount of less than $100,000, although
we reserve the right to waive this minimum under certain circumstances.
Unless otherwise specified by you in writing, any request for a death
benefit option change will not be accepted by us if the option change would
cause your Policy to be treated as a modified endowment contract.
DECREASE IN FACE AMOUNT
You may request a decrease in the Face Amount under your Policy subject to
approval from us. A decrease in Face Amount may only be made once per Policy
Year and only after the first 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 option chosen by you and
whether, and the degree to which, the death benefit under your Policy exceeds
the Face Amount prior to the change. Changing 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 may 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 the date we receive your written request at
our Home Office.
A decrease will not be permitted if the Face Amount would fall below
$100,000, although we reserve the right to waive the minimum Face Amount under
certain circumstances, such as for group or sponsored arrangements. A decrease
in Face Amount during the first ten Policy Years will result in surrender
charges being deducted from the Accumulated Value. See "Surrender Charges". If
a decrease in the Face Amount would result in total premiums paid exceeding
the premium limitations prescribed under tax law to qualify your Policy as a
life insurance contract, we may refund to you the amount of such excess above
the premium limitations.
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 your Policy, (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, or
(3) if the decrease would cause your Policy to be treated as a modified
endowment contract and you have not specified in writing that such treatment
is acceptable to you.
POLICY VALUES
Accumulated Value. The Accumulated Value is the sum of the amounts under the
Policy held in each Investment Option, as well as the amount set aside in our
Loan Account to secure any Policy Debt.
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 Investment Option also
will be adjusted to reflect the assessment of the monthly deduction. See
"Determination of Accumulated Value". 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 the
Accumulated Value less the surrender charge. Thus, your Accumulated Value will
exceed your Policy's Cash Surrender Value by the amount of the surrender
charge. Once the surrender charge has expired, the Accumulated Value will
equal the Cash Surrender Value.
19
<PAGE>
Net Cash Surrender Value. The Net Cash Surrender Value of your Policy equals
the Cash Surrender Value less any outstanding Policy Debt. You can surrender
your Policy at any time while either Insured is living and receive its Net
Cash Surrender Value. See "Surrender".
DETERMINATION OF ACCUMULATED VALUE
Although the death benefit under your Policy can never be less than the
Policy's Face Amount, your Accumulated Value will vary to a degree that
depends upon several factors, including investment performance of the Variable
Accounts to which Accumulated Value has been allocated, payment of premiums,
the amount of any outstanding Policy Debt, Partial Withdrawals, and the
charges assessed in connection with your Policy.
The amounts allocated to the Variable Accounts will be invested in shares of
the corresponding Portfolios of the Fund. The investment performance of the
Variable Accounts will reflect increases or decreases in the net asset value
per share of the corresponding Portfolio and any dividends or distributions
declared by a Portfolio. Any dividends or distributions from any Portfolio of
the Fund will be automatically reinvested in shares of the same Portfolio,
unless 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, that may be assessed by us 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 a properly completed
Authorization For Telephone Requests has been 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 ($200 in Connecticut, $250 in Oregon). The maximum
amount that can be borrowed at any time is the greater of (1) 100% of your
Accumulated Value in the Fixed Account plus 90% of your Accumulated Value in
the Variable Accounts, less any surrender charges that would have been imposed
if the Policy were surrendered on the date the loan is taken, or (2) 100% of
the product of (a x b/c - d) where (a) equals the Policy's Accumulated Value
less any surrender charge that would be imposed if the Policy were surrendered
on the date the loan is taken and less 12 times the current monthly deduction;
(b) equals 1 plus the annual loan interest rate credited; (c) equals 1 plus
the annual loan interest rate currently charged; and (d) equals any existing
Policy Debt.
When 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
Investment Options in the proportion that each bears to your Accumulated Value
less Policy Debt.
The Policy loan interest rate is 4.50% for years one through ten, and 4.25%
thereafter. We will credit interest monthly on amounts held in the Loan
Account to secure the loan at an annual effective rate of 4.00%.
20
<PAGE>
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 the most recent premium allocation
instructions. In addition, on each Policy Anniversary 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. Any payment we receive from you while you have a loan
outstanding will be first considered a premium payment, unless you tell us in
writing it is a loan repayment.
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 a loan, whether or not
repaid, will have a permanent effect on your Policy's values and might 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 Survivor, the Cash Surrender Value upon surrender, 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 your 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 your Policy in force. See "Lapse".
A loan will not be treated as a distribution from your Policy and will not
result in taxable income to you unless your Policy is a modified endowment
contract or the Policy is surrendered or upon 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".
SURRENDER
You may fully surrender your Policy at any time during the life of either
Insured. The amount received in the event of a full surrender is your Policy's
Net Cash Surrender Value, which is equal to its Accumulated Value less any
applicable surrender charge and less any outstanding Policy Debt.
You may surrender your Policy by sending a written request together with
your 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". For information on the tax
effects of a surrender of a Policy, see "Federal Income Tax Considerations".
PARTIAL WITHDRAWALS
A Policy Owner may make Partial Withdrawals of Net Cash Surrender Value
starting on the first Policy Anniversary. The portion of the first Partial
Withdrawal in each of the first 15 Policy Years of up to the lesser of $10,000
or 10% of the Cash Surrender Value will not reduce the Face Amount under your
Policy. The excess of any Partial Withdrawal over this amount may cause a
reduction in Face Amount if the death benefit option is Option A or D, as
described below.
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
21
<PAGE>
excess, if any, of your Cash Surrender Value immediately prior to the
withdrawal over the result of the Policy Debt divided by 90%. If you do not
make a Partial Withdrawal during one of the first 15 Policy Years, the amount
that you could have withdrawn without affecting Face Amount does not carry
over in the following year.
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 Accumulated Value in the Investment Options unless you
request otherwise. If the Survivor dies after the request for a withdrawal is
sent to us and prior to the withdrawal being effected, the amount of the
withdrawal will be deducted from the death benefit proceeds, which will be
determined without taking into account the withdrawal. A withdrawal fee of $25
will be charged for a Partial Withdrawal. (See "Charges and Deductions.")
Except as noted above, when a Partial Withdrawal is made on a Policy on
which you have selected death benefit Option A or D, the Face Amount under
your Policy is decreased by the excess, if any, of the Face Amount over the
result of the death benefit immediately prior to the Partial Withdrawal minus
the amount of the Partial Withdrawal. A Partial Withdrawal will not change the
Face Amount of your Policy if you have selected death benefit Option B or C.
However, assuming that the death benefit is not equal to the Guideline Minimum
Death Benefit, the Partial Withdrawal will reduce the death benefit by the
amount of the Partial Withdrawal. To the extent the death benefit is the
Guideline Minimum Death Benefit, a Partial Withdrawal may cause the death
benefit to decrease by an amount greater than the amount of the Partial
Withdrawal. See "Death Benefit".
Unless otherwise specified by you in writing, no Partial Withdrawal request
will be accepted by us if the Partial Withdrawal would cause your Policy to be
treated as a modified endowment contract.
For information on the tax treatment of Partial Withdrawals, see "Federal
Income Tax Considerations".
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 (15 days in Colorado; 20 days in North Dakota;
and 30 days if you are a resident of California and are age 60 or older), 10
days after we mail or deliver this notice of right of withdrawal included in
this prospectus, or within 45 days after you complete the application for
insurance, whichever is later. However, in Pennsylvania, you have a different
Free-Look Right, under which your Policy may be returned only within 10 days
after you receive it. For this purpose, your application is considered
complete when you sign it. It can be mailed or delivered to us or our agent.
The returned Policy will be treated as if we never issued it, except as
indicated below, and we will refund any charges deducted from premiums
received, any net premium allocated to the Fixed Account, plus the sum of your
Accumulated Value allocated to the Variable Accounts plus any Policy Charges
and Fees deducted from your Accumulated Value in the Variable Accounts. 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 amount of the premium
paid. If you have taken a loan during the Free-Look Period, the Policy Debt
will be deducted from the amount refunded. When the application is approved
and the Policy is issued, net premiums will be allocated according to your
instructions, unless the Policy is sold to a resident of a state that requires
a refund of premium, in which case, until the Free-Look Transfer Date, net
premiums received by us will be allocated to the Money Market Variable Account
(except for amounts allocated to the Loan Account to secure a Policy loan).
See "Allocation of Net Premiums".
LAPSE
Your Policy will remain in force until the earliest of the death of the
Survivor or a full surrender of your Policy, unless before either 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 your Policy Owner.
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
22
<PAGE>
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 your 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 your 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. 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 Survivor dies during the
grace period, the death benefit proceeds will equal the amount of the death
benefit immediately prior to the commencement of the grace period, reduced by
any unpaid monthly deductions and any Policy Debt.
REINSTATEMENT
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 provided we receive the following: (1) a
written application from the Policy Owner; (2) evidence of insurability
satisfactory to us for each Insured; and (3) payment of all monthly deductions
that were due and unpaid during the grace period, and payment of a premium at
least sufficient to keep the Policy in force for three months after the date
of reinstatement.
When your Policy is reinstated, the Accumulated Value will be equal to your
Accumulated Value on the date of the lapse subject to the following: If your
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 the Monthly Payment Date next following lapse, any
Policy Debt on the date of lapse will also be reinstated. No interest on
amounts held in our Loan Account to secure Policy Debt will be paid or
credited between lapse and reinstatement. Reinstatement will be effective as
of the Monthly Payment Date on or next following the date of approval by us,
and Accumulated Value minus, if applicable, Policy Debt will be allocated
among the Investment Options in accordance with your most recent premium
allocation instructions.
CHARGES AND DEDUCTIONS
PREMIUM LOAD
A premium load is deducted from each premium payment under a Policy prior to
allocation of the net premium to the Policy Owner's Accumulated Value. The
premium load consists of the following items:
Sales Load. The sales load is equal to 5% of each premium paid during the
first ten Policy Years and 3% of each premium paid thereafter.
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. If surrendered within 10 years after issuance, the
Policy will also be subject to a sales surrender charge, which is described
in "Surrender Charge". To the extent that sales and distribution expenses
exceed sales loads and any amounts derived from the sales surrender charge,
such expenses may be recovered from other charges, including amounts
derived from the charge for mortality and expense risks and from mortality
gains.
We may reduce or waive the sales load on Policies sold to our directors
or employees or any of our affiliates or to trustees or any employees of
the Fund.
23
<PAGE>
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. We reserve the right to change the
premium tax charge to reflect any changes in the law. We do not expect to
profit from this charge.
Federal Tax Charge. A charge equal to 1.50% is assessed against each
premium to pay applicable Federal Tax. We reserve the right to change the
Federal Tax-Charge to reflect any changes in the law.
DEDUCTIONS FROM ACCUMULATED VALUE
A charge called the monthly deduction is deducted from a 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. Unless you request otherwise, the
monthly deduction will be deducted from the Investment Options on a prorata
basis. The monthly deduction consists of the following items:
Cost of Insurance. This monthly charge compensates us for the anticipated
cost of paying death benefits in excess of Accumulated Value to Beneficiaries
of joint Insureds who die. The amount of the charge is equal to a current cost
of insurance rate multiplied by the net amount at risk under a Policy at the
beginning of the Policy Month. We may use any profit we derive from this
charge for any lawful purpose, including the cost of claims processing and
investigation. 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 1.00327374 (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.
Each Policy contains guaranteed cost of insurance rates that may not be
increased. The guaranteed rates are intended to reflect the insurance risk
associated with joint Insureds. They are based on certain of the 1980
Commissioners Standard Ordinary Mortality Tables (and where unisex cost of
insurance rates apply, the 1980 Commissioners Ordinary Mortality Table B), and
the Ages, gender (where permissible), and underwriting classes of the
Insureds. The guaranteed cost of insurance rates are set equal to zero
starting at the Policy Anniversary where the younger Insured reaches age 100,
and will remain zero from that point on. 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 Ages, gender (where
permissible), and underwriting classes of the Insureds. They also vary with
the number of completed Policy Years. The cost of insurance rates generally
increase with the Ages of the Insureds.
Administrative Charge. A monthly administrative charge is deducted equal to
$16 in each of the first 60 Policy Months and $6 per month thereafter. 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 $16 during the first 60 Policy Months and $6 per
month thereafter. We do not expect to profit from this charge.
The monthly administrative charges will be waived on the second or
subsequent Policies acquired by you on the lives of the Insureds who are the
same Insureds as on your initial Policy, and that Policy is in force. However,
we deduct $200 from the initial premium to cover processing costs.
Mortality and Expense Risk Charge. A monthly charge is deducted for
mortality and expense risks assumed by us. The mortality and expense risk
charge consists of two components: a Face Amount Component and an Accumulated
Value Component.
During the first ten Policy Years, the Face Amount Component will be
assessed at a rate determined with reference to the initial Face Amount of the
Policy. The rate will be equal to a Face Amount Component Factor per $1,000 of
initial Face Amount. Face Amount Component Factors are shown in Appendix B,
and they are based upon the Joint Equal Age of the Insureds at the Policy
Date. For example, for a Policy where the Joint Equal Age attributable to the
Insureds is 50 on the Policy Date, and where the Face Amount is $100,000, the
Face Amount Component Factor would be 0.102, and the monthly Face Amount
Component for the first ten Policy Years would be $10.20. This component is
not assessed after the tenth Policy Year.
24
<PAGE>
In addition, a monthly Accumulated Value Component is assessed at an annual
rate equal to .30% of Accumulated Value during the first twenty Policy Years
and .10% of Accumulated Value thereafter. For purposes of this component, the
Accumulated Value is based upon its value on the Monthly Payment Date after
the deduction of the cost of insurance charge and charges for any optional
insurance Riders or Benefits added.
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 or
sales surrender charge. See "Surrender Charge" below.
Optional Insurance Benefits Charges. The monthly deduction will include
charges for any optional insurance Riders or Benefits added to the Policy. See
"Optional Insurance Benefits".
SURRENDER CHARGE
We will assess a Surrender Charge against Accumulated Value upon surrender
of a Policy within ten years after its issuance. The Surrender Charge consists
of two charges: an underwriting surrender charge and a sales surrender charge.
Underwriting Surrender Charge. The underwriting surrender charge will be
assessed at a rate determined with reference to the Joint Equal Age of the
Insureds on the Policy Date for each $1,000 of a Policy's initial Face Amount
in accordance with the schedule shown in Appendix A.
The amount of the charge remains level for the first Policy Year. After the
first Policy Anniversary, the charge decreases by 0.9259% per month until it
reaches zero at the end of the 120th Policy Month.
The charge is based upon the Joint Equal Age of the Insureds and the Face
Amount on the Policy Date, and it does not increase as the Insureds get older
or with increases in the Face Amount. For example, if Insureds of Joint Equal
Age 50 purchase a Policy with an initial Face Amount of $100,000 and surrender
the Policy at the end of the third Policy Year, the underwriting surrender
charge would be $404.45.
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 Insureds' underwriting class, and establishing policy
records. We do not expect to profit from the underwriting surrender charge.
Sales Surrender Charge. During the first Policy Year, the sales surrender
charge is equal to 25% of the lesser of the premiums paid under the Policy or
of the Sales Surrender Target. The Sales Surrender Target is equal to a
specified amount that varies with the Joint Equal Age of the Insureds for each
$1000 of a Policy's initial Face Amount in accordance with a schedule shown in
Appendix B. After the first Policy Year, the charge as calculated above is
adjusted by a reduction factor. This reduction factor is equal to 99.0741% in
the 13th Policy Month and reduces by 0.9259% per month until it reaches zero
at the end of the 120th Policy Month. The Sales Surrender Target does not
increase as the Insureds get older or with increases in the Face Amount due to
a death benefit option change.
For example, if Insureds of Joint Equal Age 50 purchase a Policy with a Face
Amount of $100,000, the Sales Surrender Target, based upon the assumptions
described above, would be $905. The maximum sales surrender charge during the
first Policy Year would be 25% of this amount, or $226.25.
25
<PAGE>
The purpose of the sales surrender charge is to reimburse us for some of the
expenses of distributing the Policies.
We may reduce or waive the sales surrender charge on Policies sold to our
directors or employees or any of our affiliates or to trustees or any
employees of the Fund.
A Surrender Charge (sales and underwriting) may also be deducted on a
decrease in Face Amount in an amount that reflects, as a fractional amount of
the total Surrender Charge that would be applied if the Policy were fully
surrendered, the amount of the decrease relative to the Face Amount
immediately prior to the decrease. Such a Surrender Charge will reduce the
Accumulated Value and will be allocated proportionately to the Accumulated
Value in the Investment Options. After the decrease, the total Surrender
Charge is reduced. The new total Surrender Charge will be determined by
dividing the Face Amount after the decrease by the Face Amount immediately
prior to the decrease and multiplying the result by the total Surrender Charge
that would have applied based on the Face Amount before the decrease.
WITHDRAWAL CHARGE
A withdrawal fee of $25 will be deducted proportionately from the
Accumulated Value in the Investment Options each time a Partial Withdrawal
occurs.
CORPORATE PURCHASERS
The Policy is available for individuals and for corporations and other
institutions. For corporations or other group or sponsored arrangements
purchasing one or more Policies, we may reduce the amount of the sales
surrender charge, underwriting surrender charge, or other charges where the
expenses associated with the sale of the Policy or Policies or the
underwriting or other administrative costs associated with the Policy or
Policies are reduced. Sales, underwriting or other administrative expenses may
be reduced, for reasons such as expected economies resulting from a corporate
purchase or a group or sponsored arrangements, from the amount of the initial
premium payment or payments, or the amount of projected premium payments.
OTHER CHARGES
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 "Summary of the Policy: Fund Annual Expenses After Expense
Limitation" and in the prospectus of the Fund.
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 premium load, the guaranteed cost
of insurance rates, and the surrender charge.
OTHER INFORMATION
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion provides a general description of the federal
income tax considerations relating to the Policy. This discussion is based
upon 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
26
<PAGE>
circumstances of the individual involved, tax advice may be needed by a person
contemplating the purchase of the Policy. It should, therefore, be understood
that these comments concerning federal income tax consequences are not an
exhaustive discussion of all tax questions that might arise under the Policy
and that special rules which are not discussed herein may apply in certain
situations. Moreover, no representation is made as to the likelihood of
continuation of federal income tax or estate or gift tax laws or of the
current interpretations by the IRS or the courts. Future legislation may
adversely affect the tax treatment of life insurance policies or other tax
rules described in this discussion or that relate directly or indirectly to
life insurance policies. Finally, these comments do not take into account any
state or local income tax considerations which may be involved in the purchase
of the Policy.
While we believe that the Policy meets the statutory definition of life
insurance under Section 7702 of the Internal Revenue Code ("IRC") and hence
will receive federal income tax treatment consistent with that of traditional
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, policies with term
insurance on the Insureds, and certain tax requirements relating to joint
survivorship life insurance policies). 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 IRC Section 101(a)(1) 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 or a Partial Withdrawal. In addition, certain
Policy loans and Partial Withdrawals may be taxable in the case of Policies
that are modified endowment contracts. PROSPECTIVE POLICY OWNERS THAT INTEND
TO USE POLICIES TO FUND DEFERRED COMPENSATION ARRANGEMENTS FOR THEIR EMPLOYEES
ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES
OF SUCH ARRANGEMENTS. PROSPECTIVE CORPORATE OWNERS SHOULD CONSULT THEIR TAX
ADVISORS 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 IRC SECTION 59A. Changing the
Policy Owner may also have tax consequences. Exchanging a Policy for another
involving the same Insureds generally will not result in the recognition of
gain or loss according to Section 1035(a) of the IRC. Changing the Insureds
under a Policy will, however, not be treated as a tax-free exchange under
Section 1035, but rather as a taxable exchange.
Diversification Requirements. To comply with regulations under Section
817(h) of the IRC, each Portfolio of the Fund is required to diversify its
investments. For details on these diversification requirements, see "What is
the Federal Income Tax Status of the Fund" in the Fund's prospectus.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In those circumstances, income
and gains from the separate account assets would be includable in the variable
policy owner's gross income. The Treasury Department also announced, in
connection with the issuance of regulations concerning diversification, that
those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor [i.e., the Policy Owner], rather than the insurance
company, to be treated as the owner of the assets in the account." This
announcement also stated 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
27
<PAGE>
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 Portfolios 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 will be treated for tax purposes in one of two ways.
Policies that are not classified as modified endowment contracts will be taxed
as conventional life insurance contracts, as described below. Taxation of pre-
death distributions from Policies that are classified as modified endowment
contracts and that are entered into on or after June 21, 1988 is somewhat
different, as described below.
A life insurance contract becomes a "modified endowment contract" if, at any
time during the first seven contract years, the sum of actual premiums paid
exceeds the sum of the "seven-pay premium." Generally, the "seven-pay premium"
is the level annual premium, such that if paid for each of the first seven
years, will fully pay for all future death and endowment benefits under a life
insurance contract. For example, if the "seven-pay premiums" were $1,000, the
maximum premiums that could be paid during the first seven years to avoid
"modified endowment" treatment would be $1,000 in the first year; $2,000
through the first two years and $3,000 through the first three years, etc.
Under this test, a Select Estate Preserver 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 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 IRC Section 7702, 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 matures or
lapses. CONSULT WITH YOUR TAX ADVISOR ON WHETHER INTEREST PAID (OR ACCRUED BY
AN ACCRUAL BASIS TAXPAYER) ON A LOAN UNDER A POLICY THAT IS NOT A MODIFIED
ENDOWMENT CONTRACT MAY BE DEDUCTIBLE. Tax law provisions may limit the
deduction of interest payable on loan proceeds that are used to purchase or
carry certain life insurance policies.
Modified Endowment Contracts. Pre-death distributions from modified
endowment contracts may give rise to taxable income. Upon full surrender or
maturity of the Policy, the Policy Owner would recognize ordinary income for
federal income tax purposes equal to the amount by which the Net Cash
Surrender Value plus Policy Debt exceeds the investment in the Policy (usually
the premiums paid plus certain pre-death distributions that were taxable less
any premiums previously recovered that were excludable from gross income).
Upon 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. If two or more policies which
are classified as modified endowment contracts are purchased from any one
insurance company, including us, 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.
28
<PAGE>
Amounts received under a modified endowment contract that are included in
gross income are subject to an additional tax equal to 10% of the amount
included in gross income, unless an exception applies. The 10% additional tax
does not apply to any amount received: (i) when the taxpayer is at least 59
1/2 years old; (ii) which is attributable to the taxpayer becoming disabled;
or (iii) which is part of a series of substantially equal periodic payments
(not less frequently than annually) made for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life expectancies) of the taxpayer
and his or her beneficiary.
If a Policy was not originally a modified endowment contract but becomes
one, under Treasury Department regulations which are yet to be prescribed,
pre-death distributions received in anticipation of a failure of a Policy to
meet the seven-pay premium test are to be treated as pre-death distributions
from a modified endowment contract (and, therefore, are to be taxable as
described above) even though, at the time of the distribution(s) the Policy
was not yet a modified endowment contract. For this purpose, pursuant to the
IRC, any distribution made within two years before the Policy is classified as
a modified endowment contract shall be treated as being made in anticipation
of the Policy's failing to meet the seven-pay premium test.
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
loan proceeds that are used to purchase or carry certain life insurance
policies.
Reasonableness Requirement for Charges. Another provision of the tax law
deals with allowable charges for mortality costs and other expenses that are
used in making calculations to determine whether a contract qualifies as life
insurance for federal income tax purposes. For life insurance policies entered
into on or after October 21, 1988, these calculations must be based upon
reasonable mortality charges and other charges reasonably expected to be
actually paid. The Treasury Department has issued proposed regulations and is
expected to promulgate temporary or final regulations governing reasonableness
standards for mortality charges. Under the proposed regulations, the standards
applicable to joint survivor life insurance policies are not entirely clear.
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 the mortality charges used for the purposes of the calculations in
order to retain the qualification of the Policy as life insurance for federal
income tax purposes, and 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 benefits 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 THE RIDER SHOULD
FIRST CONSULT A QUALIFIED TAX ADVISOR.
Split Policy Option Rider. This Rider permits a Policy to be split into two
individual policies. A Policy split could have adverse tax consequences. For
example, it is not clear whether a Policy split will be treated as a
nontaxable exchange under IRC Section 1031 through 1043. If a Policy split is
not treated as a nontaxable exchange, a split could result in the recognition
of taxable income in an amount up to any gain in the Policy at the time of the
split. OWNERS CONSIDERING ADDING A SPLIT POLICY OPTION RIDER OR EXERCISING
RIGHTS UNDER THIS RIDER SHOULD FIRST CONSULT A QUALIFIED TAX ADVISER.
29
<PAGE>
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.
WE DO NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY POLICY.
CHARGE FOR OUR INCOME TAXES
For federal income tax purposes, variable life insurance generally is
treated in a manner consistent with traditional fixed life insurance. We will
review the question of the charge to the Separate Account for our federal
income taxes periodically. 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. A charge might become necessary if our
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 our 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 or by the Fund. We will exercise these voting rights based
on instructions received from persons having the voting interest in
corresponding Variable Accounts of the Separate Account. However, if the
Investment Company Act of 1940 or any regulations thereunder should be
amended, or if the present interpretation thereof should change, and as a
result we determine that we are permitted to vote the shares of the Fund in
our 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 a Policy Owner will have the right to instruct
will be determined as of the date coincident with the date established by the
Fund for determining shareholders eligible to vote at the meeting of the Fund.
If required by the SEC, 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.
If there are shares of a Portfolio held by a Variable Account for which we
do not receive timely voting instructions, we will vote those shares in the
same proportion as all other shares of that Portfolio held by that Variable
Account for which we have received timely voting instructions. If we hold
shares of a Portfolio in our General Account, we will vote those shares in the
same proportion as other votes cast by all of our 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,
30
<PAGE>
considering the Portfolio's objectives and purpose, and considering the effect
the change would have on us. 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 OTHER REPORTS TO OWNERS
A statement will be sent quarterly to you setting forth a summary of the
transactions which occurred during the Policy 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 and transfers, loans,
loan repayments, withdrawals, and surrenders. Confirmation of scheduled
transactions under dollar cost averaging, portfolio rebalancing, and monthly
deductions will appear on your quarterly statement.
You will also be sent annual 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.
Where required, we will not substitute any shares attributable to a Policy
Owner's interest in a Variable Account or the Separate Account without notice,
Policy Owner approval, or prior approval of the SEC 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
investment 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 may be operated as a management investment company under the
Investment Company Act of 1940 or any other form permitted by law, it may be
deregistered under that Act in the event such registration is no longer
required, or it may be combined with other separate accounts of ours or an
affiliate of ours. Subject to compliance with applicable law, we also may
combine one or more Variable Accounts and may establish a committee, board, or
other group to manage one or more aspects of the operation of the Separate
Account.
CHANGES TO COMPLY WITH LAW
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 and modified endowment contracts
under the IRC, under regulations of the United States Treasury Department or
any state.
31
<PAGE>
PERFORMANCE INFORMATION
Performance information for the Variable Accounts of the Separate Account
may appear in advertisements, sales literature, or reports to Policy Owners or
prospective purchasers. Performance information in advertisements or sales
literature may be expressed in any fashion permitted under applicable law,
which may include presentation of a change in a Policy Owner's Accumulated
Value attributable to the performance of one or more Variable Accounts, or as
a change in a Policy Owner's death benefit. Performance quotations may be
expressed as a change in a Policy Owner's Accumulated Value over time or in
terms of the average annual compounded rate of return on the Policy Owner's
Accumulated Value, based upon a hypothetical Policy in which premiums have
been allocated to a particular Variable Account over certain periods of time
that will include one year or from the commencement of operation of the
Variable Account. If a Portfolio has been in existence for a longer period of
time than its corresponding Variable Account, we may also present hypothetical
returns that the Variable Account would have achieved had it invested in its
corresponding Portfolio for periods through the commencement of operation of
the Portfolio. For the period that a particular Variable Account has been in
existence, the performance will be actual performance and not hypothetical in
nature. Any such quotation may reflect the deduction of all applicable charges
to the Policy including premium load, the cost of insurance, the
administrative charge, and the mortality and expense risk charge. The varying
death benefit options will result in different expenses for the cost of
insurance, and the varying expenses will result in different Accumulated
Values. Since the Guideline Minimum Death Benefit is equal to a percentage
(e.g., 250% for an Insured Age 40) times Accumulated Value, it will vary with
Accumulated Value. The cost of insurance charge varies according to the Ages
of the Insureds and therefore the cost of insurance charge reflected in the
performance for the hypothetical Policy is based on the hypothetical Insureds
and death benefit option assumed. The quotation may also reflect the deduction
of the surrender charge, if applicable, by assuming a surrender at the end of
the particular period, although other quotations may simultaneously be given
that do not assume a surrender and do not take into account deduction of the
surrender charge or other charges.
Performance information for a Variable Account may be compared, in
advertisements, sales literature, and reports to Policy Owners, to: (i) other
variable life separate accounts, mutual funds, or investment products tracked
by research firms, ratings services, companies, publications, or persons who
rank separate accounts or investment products on overall performance or other
criteria; and (ii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from the purchase of a Policy. Reports and promotional
literature may also contain our rating or a rating of our claim-paying ability
as determined by firms that analyze and rate insurance companies and by
nationally recognized statistical rating organizations.
Performance information for any Variable Account of the Separate Account
reflects only the performance of a hypothetical Policy whose Accumulated Value
is allocated to the Variable Account during a particular time period on which
the calculations are based. Performance information should be considered in
light of the investment objectives and policies, characteristics and quality
of the Portfolio of the Fund in which the Variable Account invests, and the
market conditions during the given period of time, and should not be
considered as a representation of what may be achieved in the future.
THE FIXED ACCOUNT
You may allocate all or a portion of your net premium payments and transfer
Accumulated Value to our 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 SEC 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.
32
<PAGE>
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 other separate accounts of ours. 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. You may also transfer Accumulated Value from the
Variable Accounts 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 a Policy Owner who has Accumulated Value in the Fixed Account as for a
Policy Owner who has Accumulated Value in the Variable Accounts. See "Death
Benefit".
POLICY CHARGES
Policy charges will be the same whether you who 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, state and local premium tax charge, and federal tax charge;
the deductions from Accumulated Value, including the charges for the cost of
insurance, administrative charge, mortality and expense risk charge, the
charge for any optional insurance benefits added by rider, any death benefit
change charge, the surrender charge, and the withdrawal 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 operating expenses of the
Variable Accounts, as well as the investment advisory fee charged by the Fund,
will not be paid directly or indirectly by you to the extent your 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 states that require us to refund premiums to
Owners who return their Policies during the Free Look Period, you may not make
transfers until after the Free Look Transfer Date. No transfer may be made if
the Policy is in a grace period and the required premium has not been paid.
You may not make more than one transfer from the Fixed Account to the Variable
Accounts in any 12-month period. Further, you may not transfer more than the
greater of 25% of your Accumulated Value in the Fixed Account or $5,000 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 if you reside in
Connecticut, Georgia, Maryland, North Carolina, North Dakota or Pennsylvania,
you may make such a transfer at any time during the first eighteen Policy
Months.
You may also make full surrenders and Partial Withdrawals from the Fixed
Account to the same extent as an Owner who has invested in the Variable
Accounts. See "Surrender" and "Partial Withdrawals". You may
33
<PAGE>
borrow up to the greater of (1) 90% of your Accumulated Value in the Variable
Accounts and 100% of your Accumulated Value in the Fixed Account, less any
surrender charges that would have been 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 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 deductions; (b) equals 1 plus the annual
loan interest rate credited; (c) equals 1 plus the annual loan rate currently
charged; and (d) equals any existing Policy Debt. See "Policy Loans".
Transfers, surrenders, and withdrawals payable from the Fixed Account, and the
payment of Policy loans allocated to the Fixed Account, may be delayed for up
to six months.
MORE ABOUT THE POLICY
OWNERSHIP
The Policy Owner is the individual named as such in the application or in
any later change shown in our records. While the Insureds are 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 either 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 your Policy cannot be changed without his or her consent. Unless
otherwise provided, if no designated Beneficiary is living upon the death of
the Survivor, you are the Beneficiary, if living; otherwise 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 Survivor's death, the
Beneficiary must be living at the time of the Survivor's death.
THE CONTRACT
This Policy is a contract between the Owner and us. The entire contract
consists of the Policy, a copy of the initial application, all subsequent
applications to change the Policy, any endorsements, any Riders and Benefits,
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 transfer or, if
sooner, any 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 a Variable Account's
net assets; or
. The SEC by order permits postponement for the protection of Policy
Owners.
34
<PAGE>
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 and recorded by our Home Office. 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, Rider, Benefit, and endorsement, will be subject
to the assignment. 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".)
ERRORS ON THE APPLICATION
If the Age or sex of either Insured has been misstated, the Face Amount
shall be adjusted as follows in order to reflect the correct Age or sex: the
Face Amount before the adjustment will be multiplied by the monthly cost of
insurance rate used in the Policy Year in which the misstatement is
discovered, based on the misstated Age or sex, and the result will be divided
by the monthly cost of insurance rate for the Policy Year in which the
misstatement is discovered, based on the correct Age and sex. For all Policy
Months following the discovery of the misstatement, Accumulated Value will be
calculated using cost of insurance charges, Rider charges and Benefit charges
based on the correct Age and sex, but Accumulated Value for all Policy Months
through the Month in which the misstatement is discovered will not be
recalculated. Surrender charges and mortality and expense risk charges will
not be recalculated. If unisex cost of insurance rates apply, no adjustment
will be made for a misstatement of sex. See "Charges and Deductions: Cost of
Insurance".
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 initial Face Amount cannot be contested with
respect to a given Insured after the Policy has been in force during the
Insured's lifetime for two years from the Policy Date; and reinstatement
cannot be contested after it has been in force during an Insured's lifetime
for two years from the date of reinstatement.
PAYMENT IN CASE OF SUICIDE
If either 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, dividends paid by us in cash, and Policy
Debt.
DIVIDENDS
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 your
Policy based on both guaranteed and current cost factor assumptions. However,
we reserve the right to charge a $25 fee for requests for illustrations in
excess of one per Policy year.
PAYMENT PLAN
Surrender or withdrawal benefits may be used to purchase a payment plan
providing monthly income for the lifetime of the Insureds, 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
35
<PAGE>
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 $100 a month. Surrender or withdrawal benefits or
death benefit proceeds may be used to purchase any other payment plan that we
make available at that time.
OPTIONAL INSURANCE BENEFITS AND OTHER POLICIES
Subject to certain requirements, you may elect to add one or more of the
following optional insurance benefits to the Policy by a Rider at the time of
application for your Policy (subject to approval of state insurance
authorities). These optional benefits are: guaranteed payment of a specified
coverage amount upon the death of the Survivor, subject to stated conditions;
provision for level or varying coverage on the same two Insureds; renewable
level or varying term insurance on either Insured, or individually on the
Insureds; allowance to split the Policy into individual policies for each
Insured without evidence of individual insurability; allowance to split the
Policy into individual policies for each Insured subject to evidence of
individual insurability; and Policy Owner access to a portion of the Policy's
proceeds if an Insured has been diagnosed with a terminal illness resulting in
a life expectancy of six months or less (or such other period that may be
required by state insurance authorities). The cost of any additional insurance
benefits will be deducted as part of the monthly deduction against Accumulated
Value. See "Charges and Deductions". The amounts of these benefits are fully
guaranteed at issue. Certain restrictions may apply and are described in the
applicable Rider or Benefit. Under certain circumstances, a Policy can be
combined with an added protection benefit to result in a combined coverage
amount equal to the same Face Amount that could be acquired under a single
policy. Combining a Policy and a benefit may result in certain charges,
including a Face Amount component of the mortality and expense risk charge, an
underwriting surrender charge, and possibly cost of insurance charges, for a
Policy that are lower than for the single Policy on the same given Insureds
providing the same coverage amount. We offer other variable life insurance
policies that provide insurance protection on the lives of two insureds or on
the life of a single insured, whose loads and charges may vary. An insurance
agent authorized to sell the Policy can describe these extra benefits and
other policies further. Samples of the provisions for the extra optional
benefits are available from us 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 purposes may obtain additional
information from us. 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 access Accumulated Value as a source of retirement
income for a period of time. This use of a Policy does not alter an Owner's
rights or our obligations under a Policy; the Policy would remain a life
insurance contract that, so long as it remains in force, provides for a death
benefit payable when the Survivor dies.
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.
36
<PAGE>
RISKS OF LIFE INSURANCE RETIREMENT PLANS
Using the Policy as a funding vehicle for retirement income purposes
presents several risks, including the risk that if the Policy is
insufficiently funded in relation to the income stream from the Policy, the
Policy can lapse prematurely and result in significant income tax liability to
the Owner in the year in which the lapse occurs. Other risks associated with
borrowing from the Policy also apply. Loans will be automatically repaid from
the gross death benefit at the death of the Survivor, 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, 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 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, surrender or lapse of the Policy
could result in tax liability to you. In addition, to reinstate a lapsed
Policy, you would be required to make certain payments as described under
"Reinstatement". Thus, you should be careful to fashion a life insurance
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.
The 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 making a 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 us 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 attorney and financial advisers in designing a
life insurance retirement plan that is suitable. Further, you should continue
to monitor the Accumulated Value net of loans remaining in a Policy to assure
that the Policy is sufficiently funded to continue to support the desired
income stream and so that it will not lapse. In this regard, 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.
DISTRIBUTION OF THE POLICY
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, Inc. ("NASD"). We pay PMD for acting as
principal underwriter under a Distribution Agreement. PMD is a wholly-owned
subsidiary of ours. PMD's principal business address is 700 Newport Center
Drive, Newport Beach, California 92660.
We 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
37
<PAGE>
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 promotion 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 90% of
premiums paid up to the first sales surrender target premium (as described in
"Surrender Charge: Sales Surrender Target" and in Appendix B), 8% of the
premiums paid under sales surrender targets 2 and 3; and on the premium in
excess of the sum of sales surrender targets 1-3, 4% of premiums paid in
Policy years 1-10 and 2% of premiums paid thereafter. Broker-dealers may also
receive annual renewal compensation of up to .20% of Accumulated Value less
Policy Debt. The annual renewal compensation will be computed monthly and
payable on each Policy Anniversary. 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 and may
elect to receive compensation on a deferred basis. We make no separate
deductions, other than as previously described, from premiums to pay sales
commissions or sales expenses.
MORE ABOUT PACIFIC LIFE
MANAGEMENT
Our directors and officers 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 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 Life; Equity Board Member of PIMCO Advisors
the Board and L.P.; Director of: Newhall Land & Farming; The Irvine
Chief Executive Officer Company; Edison International; Pacific Corinthian Life
Insurance Company; similar positions with other
subsidiaries of Pacific Life.
Glenn S. Schafer Director (since November 1994) and President of Pacific
Director and President Life, January 1995 to present; Executive Vice President and
Chief Financial Officer of Pacific Life, April 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 Life.
Richard M. Ferry Director of Pacific Life; President, Director and Chairman
Director of Korn/Ferry International; Director of: Avery Dennison
Corporation; ConAm Management; First Business Bank; Mullin
Consulting, Inc.; Northwestern Restaurants, Inc.; Dole Food
Co. Address: 1800 Century Park East, Suite 900, Los Ange-
les, California 90067.
Donald E. Guinn Director of Pacific Life; Chairman Emeritus and Director of
Director Pacific Telesis Group; Director of: The Dial Corp.; Bank of
America NT&SA; BankAmerica Corporation. Address: Pacific
Telesis Center, 130 Kearny Street, Room 3704, San
Francisco, California 94108-4818.
Ignacio E. Lozano, Jr. Director of Pacific Life; Chairman and former Editor-in-
Director Chief of La Opinion; Director of: BankAmerica Corporation;
Bank of America NT&SA; The Walt Disney Company; Pacific
Enterprises. Address: 411 West Fifth Street, 12th Floor,
Los Angeles, California 90013.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Charles A. Lynch Director of Pacific Life; Chairman and former Chief
Director Executive Officer of Fresh Choice, Inc.; Director of:
Nordstrom, Inc.; PST Vans, Inc.; SRI International, Inc;
Age Wave; Bojangles Acquisition Corp.; Cucina Holdings,
Inc.; KRh' Thermal Systems; La Salsa Restaurants; Mid
Peninsula Bank; 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 Life; Director and President Emeritus of
Director Huntington Memorial Hospital; Director of Occidental
College; former President and Chief Executive Officer of
Huntington Memorial Hospital. Address: 314 Arroyo Drive,
South Pasadena, California 91030.
Charles D. Miller Director of Pacific Life; Director, Chairman and Chief Exec-
Director utive Officer of Avery Dennison Corporation; Director of:
Great Western Financial Corporation; Korn/Ferry Interna-
tional; Nationwide Health Properties, Inc.; Edison Interna-
tional. Address: 150 North Orange Grove Boulevard, Pasade-
na, California 91103.
Donn B. Miller Director of Pacific Life; President and Chief Executive
Director Officer 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 Life, February 1996 to present; Managing
Director Director and former Partner of TA Associates, Inc.;
Director of: Ontrack Data International, Inc.; ANSYS, Inc.;
Pivot Point, Inc.; R&D Systems, Inc; Axent Inc. Address:
116 Woodland Road, Pittsburgh, Pennsylvania 15232.
J. Fernando Niebla Director of Pacific Life, May 1995 to present; Vice Chairman
Director and Director of Pacer Infotec, Inc.; Director, Chairman and
Chief Executive Officer of Infotec Commercial Systems,
formerly Infotec Development, Inc.; Director of Union Bank
of California. Address: 3611 South Harbor Boulevard, Suite
260, Santa Ana, CA 92704.
Susan Westerberg Prager Director of Pacific Life; Dean of the UCLA School of Law at
Director 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 Life, November 1995 to present;
Director Director, Chairman and Chief Executive Officer (Retired) of
BankAmerica Corporation; Director of: Airborne Express
Corporation; K-2 Incorporated; Northrop Grumman
Corporation; Potlatch Corporation; Pacific Telesis Group.
Address: 555 California Street, 11th Floor, San Francisco,
California 94104.
James R. Ukropina Director of Pacific Life; Partner with the law firm of
Director O'Melveny & Meyers; Director, former Chairman and Chief
Executive Officer of Pacific Enterprises; Director of
Lockheed Martin Corporation; Trustee of Stanford
University. Address: 400 S. Hope Street, 16th Floor,
Los Angeles, California 90071-2899.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Raymond L. Watson Director of Pacific Life; Vice Chairman and Director of The
Director Irvine Company; Director of: The Walt Disney Company; The
Mitchell Energy and Development Company; and The Tejon
Ranch. Address: 550 Newport Center Drive, 9th Floor,
Newport Beach, California 92660.
Lynn C. Miller Executive Vice President, Individual Insurance, of Pacific
Executive Vice President Life, January 1995 to present; Senior Vice President,
Individual Insurance of Pacific Life, 1989 to 1995.
David R. Carmichael Senior Vice President and General Counsel of Pacific Life;
Senior Vice President Director of: Pacific Corinthian Life Insurance Company; PM
and General Counsel Group Life Insurance Company.
Audrey L. Milfs Vice President and Corporate Secretary of Pacific Life;
Vice President Secretary to other subsidiaries of Pacific Life.
and Corporate Secretary
Edward R. Byrd Vice President and Controller of Pacific Life, August 1992
Vice President and Controller to present; Vice President, Corporate Audit and Financial
Planning of Pacific Life, November 1991 to August 1992.
Khanh T. Tran Senior Vice President and Chief Financial Officer of Pacific
Senior Vice President and Chief Life, June 1996 to present; Vice President and Treasurer of
Financial Officer Pacific Life, November 1991 to June 1996; Chief Financial
Officer to other subsidiaries of Pacific Life.
</TABLE>
No officer or director listed above receives any compensation from the
Separate Account. No separately allocable compensation has been paid by us or
any of our affiliates to any person listed for services rendered to the
Separate 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
operations 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 processed as of the end of that Valuation Date in
accordance with your instructions, (presuming that the Free-Look Period has
expired). 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
40
<PAGE>
requested by us, and we will send a written confirmation of all transfers
requested by telephone within 7 days of the transfer. Upon the submission of a
Telephone Authorization, you authorize us to accept and act upon telephone
instructions for transfers or loans involving your Policy, and agree that
neither we, any of our affiliates, Pacific Select Fund, nor any of our or
their directors, trustees, officers, employees or agents, will be liable for
any loss, damages, cost, or expense (including attorney's fees) arising out of
any requests effected in accordance with the Telephone Authorization and
believed by 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 our organization, 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 AUDITORS
The audited consolidated financial statements for Pacific Mutual Life as of
December 31, 1996 and 1995 and for the three years ended December 31, 1996 and
the audited financial statements for Pacific Select Exec Separate Account as
of December 31, 1996 and for the two years ended December 31, 1996 included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
FINANCIAL STATEMENTS
The audited financial statements of Pacific Select Exec Separate Account as
of December 31, 1996 and for the two years then ended are set forth herein,
starting on page 42. The audited consolidated financial statements of Pacific
Mutual Life as of December 31, 1996 and 1995 and for the three years ended
December 31, 1996 are set forth herein starting on page 54.
The financial statements of Pacific Mutual Life should be distinguished from
the financial statements of the Pacific Select Exec Separate Account and
should be considered only as bearing upon the ability of Pacific Mutual Life
to meet its obligations under the Policies.
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Mutual Life Insurance Company
We have audited the accompanying statement of assets and liabilities of the
Pacific Select Exec Separate Account (comprised of the Money Market, High
Yield Bond, Managed Bond, Government Securities, Growth, Aggressive Equity,
Growth LT, Equity Income, Multi-Strategy, Equity Index, International,
Emerging Markets, Variable Account I, Variable Account II, Variable Account
III, and Variable Account IV Variable Accounts) as of December 31, 1996 and
the related statement of operations for the year then ended and statement of
changes in net assets for each of the two years in the period then ended.
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, 1996 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 14, 1997
42
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT AGGRESSIVE GROWTH EQUITY
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Money Market Portfolio
(2,731 shares; cost
$27,433)............... $ 27,430
High Yield Bond
Portfolio (2,609
shares; cost $25,201).. $ 25,937
Managed Bond Portfolio
(6,420 shares; cost
$67,913)............... $ 69,000
Government Securities
Portfolio (754 shares;
cost $7,723)........... $ 7,830
Growth Portfolio (5,590
shares; cost $98,748).. $119,910
Aggressive Equity
Portfolio (309 shares;
cost $3,264)........... $ 3,331
Growth LT Portfolio
(5,399 shares; cost
$79,297)............... $ 89,067
Equity Income Portfolio
(4,199 shares; cost
$71,762)............... $ 85,860
Receivables:
Due from Pacific Mutual
Life Insurance Company. 94 55 46 51 130 57
Fund shares redeemed... 3 20
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL ASSETS............ 27,524 25,992 69,046 7,881 120,040 3,334 89,087 85,917
-------- -------- -------- -------- -------- -------- -------- --------
LIABILITIES
Payables:
Due to Pacific Mutual
Life Insurance Company. 3 20
Fund shares purchased.. 99 55 46 51 130 57
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL LIABILITIES....... 99 55 46 51 130 3 20 57
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSETS.............. $ 27,425 $ 25,937 $ 69,000 $ 7,830 $119,910 $ 3,331 $ 89,067 $ 85,860
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
43
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS & LIABILITIES (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
MULTI- EQUITY INTER- EMERGING
STRATEGY INDEX NATIONAL MARKETS
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT I ACCOUNT II ACCOUNT III ACCOUNT IV
--------- --------- --------- --------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Multi-Strategy
Portfolio (5,365
shares; cost $71,200). $ 79,132
Equity Index Portfolio
(6,132 shares; cost
$99,779).............. $ 125,197
International Portfolio
(6,328 shares; cost
$83,435).............. $ 97,439
Emerging Markets
Portfolio (339 shares;
cost $3,318).......... $ 3,279
Edinburgh Overseas
Equity Portfolio (8
shares; cost $77)..... $ 77
Turner Core Growth
Portfolio (14 shares;
cost $177)............ $ 167
Frontier Capital
Appreciation Portfolio
(42 shares; cost
$527)................. $ 522
Enhanced U.S. Equity
Portfolio (34 shares,
cost $416)............ $ 397
Receivables:
Due from Pacific Mutual
Life Insurance
Company............... 64 45 95 19
Dividends.............. 6 21 18
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL ASSETS............ 79,196 125,242 97,534 3,298 77 173 543 415
--------- --------- --------- --------- --------- --------- --------- ---------
LIABILITIES
Payables:
Fund shares purchased.. 64 45 95 19
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES....... 64 45 95 19
--------- --------- --------- --------- --------- --------- --------- ---------
NET ASSETS.............. $ 79,132 $ 125,197 $ 97,439 $ 3,279 $ 77 $ 173 $ 543 $ 415
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
44
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT AGGRESSIVE GROWTH EQUITY
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT(1) ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends.............. $ 1,359 $ 1,753 $ 4,145 $ 490 $ 6,582 $ 2 $ 608 $ 3,386
------- ------- ------- ------- ------- ------- ------- --------
NET INVESTMENT INCOME... 1,359 1,753 4,145 490 6,582 2 608 3,386
------- ------- ------- ------- ------- ------- ------- --------
REALIZED AND UNREALIZED
GAIN (LOSS)
ON INVESTMENTS
Net realized gain
(loss) from security
transactions........... 13 300 (203) 62 2,826 (958) 4,372 667
Net unrealized
appreciation
(depreciation) on
investments............ 58 144 (914) (316) 12,466 67 5,509 8,024
------- ------- ------- ------- ------- ------- ------- --------
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS.......... 71 444 (1,117) (254) 15,292 (891) 9,881 8,691
------- ------- ------- ------- ------- ------- ------- --------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS.............. $ 1,430 $ 2,197 $ 3,028 $ 236 $21,874 $ (889) $10,489 $ 12,077
======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
See Notes to Financial Statements.
(1) Operations commenced during 1996 (See Note 1 to Financial Statements).
45
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
MULTI- EQUITY INTER- EMERGING
STRATEGY INDEX NATIONAL MARKETS
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT (1) ACCOUNT I (1) ACCOUNT II (1) ACCOUNT III (1) ACCOUNT IV (1)
-------- -------- -------- ----------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends............ $ 4,627 $ 3,825 $ 1,980 $ 6 $ 21 $ 18
-------- -------- -------- -------- -------- -------- -------- ---------
NET INVESTMENT INCOME. 4,627 3,825 1,980 6 21 18
-------- -------- -------- -------- -------- -------- -------- ---------
REALIZED AND
UNREALIZED GAIN
(LOSS)
ON INVESTMENTS
Net realized gain
(loss) from security
transactions........ 356 1,223 564 $ (3) 1
Net unrealized
appreciation
(depreciation) on
investments......... 2,459 14,294 12,594 (39) (10) (6) (19)
-------- -------- -------- -------- -------- -------- -------- ---------
NET REALIZED AND
UNREALIZED GAIN
(LOSS)
ON INVESTMENTS....... 2,815 15,517 13,158 (42) (10) (5) (19)
-------- -------- -------- -------- -------- -------- -------- ---------
NET INCREASE
(DECREASE) IN NET
ASSETS
RESULTING FROM
OPERATIONS........... $ 7,442 $ 19,342 $ 15,138 $ (42) $ 0 $ (4) $ 16 $ (1)
======== ======== ======== ======== ======== ======== ======== =========
</TABLE>
See Notes to Financial Statements.
(1) Operations commenced during 1996 (See Note 1 to Financial Statements).
46
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT AGGRESSIVE GROWTH EQUITY
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT (1) ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS
Net investment income.. $ 1,359 $ 1,753 $ 4,145 $ 490 $ 6,582 $ 2 $ 608 $ 3,386
Net realized gain
(loss) from security
transactions........... 13 300 (203) 62 2,826 (958) 4,372 667
Net unrealized
appreciation
(depreciation) on
investments............ 58 144 (914) (316) 12,466 67 5,509 8,024
-------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS.............. 1,430 2,197 3,028 236 21,874 (889) 10,489 12,077
-------- -------- -------- -------- -------- -------- -------- --------
INCREASE (DECREASE) IN
NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net
premiums............... 59,965 6,552 21,068 2,042 29,298 911 24,407 21,368
Transfers--policy
charges and deductions. (3,056) (1,528) (2,686) (580) (7,697) (146) (5,343) (4,205)
Transfers in (from
other variable
accounts).............. 64,487 12,323 8,787 2,504 54,635 11,133 48,532 18,530
Transfers out (to other
variable accounts)..... (115,717) (7,278) (8,044) (2,257) (62,175) (7,395) (39,922) (8,965)
Transfers--other....... (2,862) (920) (843) (379) (3,544) (283) (2,855) (2,661)
-------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS
DERIVED FROM POLICY
TRANSACTIONS............ 2,817 9,149 18,282 1,330 10,517 4,220 24,819 24,067
-------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS.................. 4,247 11,346 21,310 1,566 32,391 3,331 35,308 36,144
NET ASSETS
Beginning of year...... 23,178 14,591 47,690 6,264 87,519 53,759 49,716
-------- -------- -------- -------- -------- -------- -------- --------
End of year............ $ 27,425 $ 25,937 $ 69,000 $ 7,830 $119,910 $ 3,331 $ 89,067 $ 85,860
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
(1) Operations commenced during 1996 (See Note 1 to Financial Statements).
47
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
MULTI- EQUITY INTER- EMERGING
STRATEGY INDEX NATIONAL MARKETS
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT (1) ACCOUNT I (1) ACCOUNT II (1) ACCOUNT III (1) ACCOUNT IV (1)
-------- -------- -------- ----------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS
Net investment
income............... $ 4,627 $ 3,825 $ 1,980 $ 6 $ 21 $ 18
Net realized gain
(loss) from security
transactions......... 356 1,223 564 $ (3) 1
Net unrealized
appreciation
(depreciation) on
investments.......... 2,459 14,294 12,594 (39) (10) (6) (19)
-------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE
(DECREASE) IN NET
ASSETS
RESULTING FROM
OPERATIONS............ 7,442 19,342 15,138 (42) (4) 16 (1)
-------- -------- -------- -------- -------- -------- -------- --------
INCREASE (DECREASE) IN
NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net
premiums............. 22,669 31,284 26,068 549 7
Transfers--policy
charges and
deductions........... (3,698) (5,239) (5,477) (77) $ (1) (1) (5) (2)
Transfers in (from
other variable
accounts)............ 5,320 30,324 25,962 3,170 78 178 539 418
Transfers out (to
other variable
accounts)............ (4,577) (11,107) (18,655) (299)
Transfers--other (2,330) (2,082) (2,024) (22) (14)
-------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS
DERIVED FROM POLICY
TRANSACTIONS.......... 17,384 43,180 25,874 3,321 77 177 527 416
-------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS................ 24,826 62,522 41,012 3,279 77 173 543 415
NET ASSETS
Beginning of year.... 54,306 62,675 56,427
-------- -------- -------- -------- -------- -------- -------- --------
End of year.......... $ 79,132 $125,197 $ 97,439 $ 3,279 $ 77 $ 173 $ 543 $ 415
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
(1) Operations commenced during 1996 (See Note 1 to Financial Statements).
48
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT
MARKET BOND BOND SECURITIES 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 $ 944 $ 2,208 $ 294 $ 656
Net realized gain (loss) from
security transactions............... 31 (92) (141) (41) (1,046)
Net unrealized appreciation on
investments......................... 65 1,042 4,063 624 16,423
-------- -------- -------- -------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............ 1,514 1,894 6,130 877 16,033
-------- -------- -------- -------- ---------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums............. 72,942 5,029 7,113 1,962 25,318
Transfers--policy charges and
deductions*......................... (3,157) (1,065) (1,983) (490) (6,369)
Transfers in (from other variable
accounts)........................... 29,120 7,781 15,186 2,845 30,352
Transfers out (to other variable
accounts)........................... (110,816) (6,185) (2,813) (2,390) (22,297)
Transfers--other*.................... (1,021) (242) (508) (449) (2,935)
-------- -------- -------- -------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS..... (12,932) 5,318 16,995 1,478 24,069
-------- -------- -------- -------- ---------
NET INCREASE (DECREASE) IN NET ASSETS. (11,418) 7,212 23,125 2,355 40,102
NET ASSETS
Beginning of year.................... 34,596 7,379 24,565 3,909 47,417
-------- -------- -------- -------- ---------
End of year.......................... $ 23,178 $ 14,591 $ 47,690 $ 6,264 $ 87,519
======== ======== ======== ======== =========
</TABLE>
* Prior year amounts have been reclassified to conform with current year
presentation.
See Notes to Financial Statements.
49
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROWTH EQUITY MULTI- EQUITY INTER-
LT INCOME STRATEGY INDEX NATIONAL
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net investment income................. $ 3,592 $ 577 $ 1,401 $ 1,015 $ 1,070
Net realized gain from security trans-
actions.............................. 1,225 785 71 2,069 574
Net unrealized appreciation on invest-
ments................................ 3,892 7,737 7,406 10,698 2,646
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............. 8,709 9,099 8,878 13,782 4,290
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums.............. 12,930 13,169 14,278 11,713 16,778
Transfers--policy charges and deduc-
tions*............................... (2,765) (2,773) (2,760) (2,873) (3,967)
Transfers in (from other variable ac-
counts).............................. 32,699 16,222 5,601 17,636 25,476
Transfers out (to other variable ac-
counts).............................. (8,074) (4,940) (2,670) (6,615) (16,093)
Transfers--other*..................... (1,148) (1,283) (1,192) (1,361) (1,211)
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS...... 33,642 20,395 13,257 18,500 20,983
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS............. 42,351 29,494 22,135 32,282 25,273
NET ASSETS
Beginning of year..................... 11,408 20,222 32,171 30,393 31,154
-------- -------- -------- -------- --------
End of year........................... $ 53,759 $ 49,716 $ 54,306 $ 62,675 $ 56,427
======== ======== ======== ======== ========
</TABLE>
*Prior year amounts have been reclassified to conform with current year
presentation.
See Notes to Financial Statements.
50
<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 during 1996 was comprised of sixteen subaccounts called
Variable Accounts: the Money Market Variable Account, the High Yield Bond
Variable Account, the Managed Bond Variable Account, the Government Securities
Variable Account, the Growth Variable Account, the Aggressive Equity Variable
Account, the Growth LT Variable Account, the Equity Income Variable Account,
the Multi-Strategy Variable Account, the Equity Index Variable Account, the
International Variable Account, the Emerging Markets Variable Account, and the
Variable Accounts I through IV. The assets in each of the first twelve
Variable Accounts are invested in shares of the corresponding portfolios of
Pacific Select Fund and the assets of the last four Variable Accounts are
invested in shares of corresponding portfolios of M Fund, Inc. (Collectively,
the "Funds"). Each Variable Account pursues different investment objectives
and policies. The financial statements of the Funds, including the portfolios
of investments, are either included elsewhere in the report or provided
separately and should be read in conjunction with the Separate Account's
financial statements.
The Separate Account has organized and registered with the Securities and
Exchange Commission six new Variable Accounts, the Aggressive Equity Variable
Account, the Emerging Markets Variable Account, Variable Account I, Variable
Account II, Variable Account III, and Variable Account IV. The Aggressive
Equity Portfolio and the Emerging Markets Portfolio commenced operations on
April 8, 1996, Variable Account I and Variable Account III commenced
operations on October 11, 1996, Variable Account II commenced operations on
October 17, 1996, and Variable IV commenced operations on November 18, 1996.
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 Funds are valued at the reported net asset
values of the respective portfolios. Valuation of securities held by the Funds
is discussed in the notes to their financial statements.
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 1996, the Funds have declared dividends for each portfolio except for
the Emerging Markets 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.
51
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 Mutual Distributors, Inc., 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.
5. SELECTED ACCUMULATION UNIT**INFORMATION
Selected accumulation unit information for the year ended December 31, 1996
were as follows:
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT AGGRESSIVE GROWTH EQUITY
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACCUMULATION UNIT
VALUE:
Beginning $ 14.52 $ 21.74 $ 19.86 $ 19.28 $ 23.89 $ 10.00 $ 15.49 $ 23.72
========= ========= ========= ======= ========= ======= ========= =========
Ending $ 15.26 $ 24.20 $ 20.70 $ 19.85 $ 29.53 $ 10.86 $ 18.25 $ 28.32
========= ========= ========= ======= ========= ======= ========= =========
Number of Units Out-
standing
at End of Year 1,797,662 1,071,818 3,332,577 394,531 4,060,628 306,793 4,879,333 3,031,251
</TABLE>
<TABLE>
<CAPTION>
MULTI- EQUITY INTER- EMERGING
STRATEGY INDEX NATIONAL MARKETS
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT I ACCOUNT II ACCOUNT III ACCOUNT IV
-------- -------- -------- -------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACCUMULATION UNIT
VALUE:
Beginning $ 21.60 $ 20.21 $ 15.55 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
========= ========= ========= ======= ======= ======= ======= =======
Ending $ 24.31 $ 24.73 $ 18.96 $ 9.82 $ 10.08 $ 10.18 $ 10.46 $ 9.97
========= ========= ========= ======= ======= ======= ======= =======
Number of Units Out-
standing
at End of Year 3,255,044 5,062,679 5,140,103 333,810 7,649 17,011 51,927 41,571
</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
52
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. POLICY OWNERS' COST OF INVESTMENT IN THE FUNDS SHARES
The investment in the Funds shares are carried at identified cost, which
represents the amount available for investment (including reinvested
distributions of net investment income and realized gains). Total cost and
market value of total Policy Owners' investments in the Funds as of
December 31, 1996 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT AGGRESSIVE GROWTH EQUITY
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT (1) ACCOUNT ACCOUNT
-------- -------- -------- ----------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total cost of invest-
ments at beginning of
year $ 23,106 $ 13,881 $ 45,342 $ 5,877 $ 78,927 $ 49,540 $ 43,643
Add: Total proceeds
from sales of units 79,532 13,771 23,511 2,711 36,760 $ 11,359 41,766 28,447
Reinvested distri-
butions from the
Funds:
(a) Net investment
income 1,359 1,593 3,180 352 455 2 608 841
(b) Net realized
gain 160 965 138 6,127 2,545
-------- -------- -------- -------- -------- -------- -------- --------
Sub-Total 103,997 29,405 72,998 9,078 122,269 11,361 91,914 75,476
Less: Cost of invest-
ments disposed during
the year 76,564 4,204 5,085 1,355 23,521 8,097 12,617 3,714
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of invest-
ments at end of year 27,433 25,201 67,913 7,723 98,748 3,264 79,297 71,762
Add: Unrealized ap-
preciation (deprecia-
tion) (3) 736 1,087 107 21,162 67 9,770 14,098
-------- -------- -------- -------- -------- -------- -------- --------
Total market value of
investments at end of
year $ 27,430 $ 25,937 $ 69,000 $ 7,830 $119,910 $ 3,331 $ 89,067 $ 85,860
======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
MULTI- EQUITY INTER- EMERGING
STRATEGY INDEX NATIONAL MARKETS
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT (1) ACCOUNT I (1) ACCOUNT II (1) ACCOUNT III (1) ACCOUNT IV (1)
-------- -------- -------- ----------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total cost of invest-
ments at beginning of
year $ 48,796 $ 51,564 $ 54,916
Add: Total proceeds
from sales of units 21,499 46,889 31,432 $ 3,410 $ 78 $ 172 $ 522 $ 399
Reinvested distri-
butions from the
Funds:
(a) Net investment
income 1,796 1,856 1,980 1 4
(b) Net realized
gain 2,831 1,969 5 21 14
-------- -------- -------- -------- -------- -------- -------- --------
Sub-Total 74,922 102,278 88,328 3,410 78 178 543 417
Less: Cost of invest-
ments disposed during
the year 3,722 2,499 4,893 92 1 1 16 1
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of invest-
ments at end of year 71,200 99,779 83,435 3,318 77 177 527 416
Add: Unrealized ap-
preciation (deprecia-
tion) 7,932 25,418 14,004 (39) (10) (5) (19)
-------- -------- -------- -------- -------- -------- -------- --------
Total market value of
investments at end of
year $ 79,132 $125,197 $ 97,439 $ 3,279 $ 77 $ 167 $ 522 $ 397
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) Operations commenced during 1996 (See Note 1 to Financial Statements).
53
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Pacific Mutual Life Insurance Company and Subsidiaries:
We have audited the accompanying consolidated statements of financial
position of Pacific Mutual Life Insurance Company and subsidiaries (the
"Company") as of December 31, 1996 and 1995, and the related
consolidated statements of operations and equity and cash flows for
each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Pacific Mutual Life
Insurance Company and subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company has adopted all applicable generally accepted accounting
principles relating to mutual life insurance companies for all periods
presented.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 1997
54
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
1996 1995
- ---------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at fair value:
Fixed maturity securities $12,193.8 $11,359.2
Equity securities 260.8 218.5
Short-term investments 66.1 103.3
Mortgage loans 1,477.3 1,346.2
Real estate 280.0 288.6
Policy loans 3,131.8 2,793.3
Other investments 208.0 214.6
- ---------------------------------------------------------------------------
TOTAL INVESTMENTS 17,617.8 16,323.7
Cash and cash equivalents 109.0 286.1
Deferred policy acquisition costs 531.5 391.1
Accrued investment income 202.5 198.8
Other assets 462.4 416.5
Separate account assets 8,142.1 5,686.9
- ---------------------------------------------------------------------------
TOTAL ASSETS $27,065.3 $23,303.1
- ---------------------------------------------------------------------------
LIABILITIES AND EQUITY
Liabilities:
Universal life, annuity and other investment contract
deposits $13,877.4 $12,719.4
Future policy benefits 2,442.0 2,378.9
Policyholders' dividends payable 64.5 65.3
Borrowings 120.5 83.0
Surplus notes 149.6 149.6
Other liabilities 572.0 586.6
Separate account liabilities 8,142.1 5,686.9
- ---------------------------------------------------------------------------
Total Liabilities 25,368.1 21,669.7
- ---------------------------------------------------------------------------
Commitments and contingencies
Equity:
Retained earnings 1,318.0 1,151.4
Unrealized gain on available for sale securities, net 379.2 482.0
- ---------------------------------------------------------------------------
Total Equity 1,697.2 1,633.4
- ---------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $27,065.3 $23,303.1
- ---------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
55
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND EQUITY
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Insurance premiums $ 465.4 $ 458.5 $ 455.9
Policy fees from universal life, annuity and
other investment contract deposits 348.6 309.0 280.0
Net investment income 1,063.0 1,022.3 933.6
Net realized capital gains (losses) 68.3 77.6 (2.1)
Investment management fees 14.1 12.9 144.6
Other income 188.6 139.4 203.6
- -------------------------------------------------------------------------------
TOTAL REVENUES 2,148.0 2,019.7 2,015.6
- -------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and
other investment contract deposits 653.2 654.2 638.6
Policy benefits paid or provided 664.7 668.5 590.2
Commission expenses 199.8 167.8 139.9
Operating expenses 350.0 308.3 433.8
- -------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 1,867.7 1,798.8 1,802.5
- -------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 280.3 220.9 213.1
Provision for income taxes 113.7 86.1 111.7
- -------------------------------------------------------------------------------
NET INCOME 166.6 134.8 101.4
Equity, beginning of year 1,633.4 809.3 942.8
Change in unrealized gain (loss) on available for
sale securities, net (102.8) 689.3 (234.9)
- -------------------------------------------------------------------------------
EQUITY, END OF YEAR $1,697.2 $1,633.4 $ 809.3
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
56
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 166.6 $ 134.8 $ 101.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization (1.4) (30.4) (28.3)
Deferred income taxes (49.7) (30.3) 26.2
Net realized capital (gains) losses (68.3) (77.6) 2.1
Deferred policy acquisition costs (140.4) 48.8 (126.5)
Interest credited to universal life, annuity
and other investment contract deposits 653.2 654.2 638.6
Change in accrued investment income (3.7) (16.1) 28.5
Change in future policy benefits 63.1 89.3 48.7
Change in policyholders' dividends payable (0.8) (0.5) (0.2)
Change in other assets and liabilities 169.7 172.9 (51.2)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 788.3 945.1 639.3
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
Purchases (4,525.0) (3,001.3) (4,376.9)
Sales 2,511.0 1,940.3 2,690.3
Maturities and repayments 1,184.7 926.9 1,220.4
Held to maturity securities:
Purchases (181.9) (415.0)
Sales 62.3
Maturities and repayments 111.0 202.2
Repayments of mortgage loans 220.4 267.7 399.1
Proceeds from sales of mortgage loans and real
estate 14.5 27.4 52.8
Purchases of mortgage loans and real estate (414.3) (244.7) (237.7)
Distributions from partnerships 78.8 49.0
Change in policy loans (338.5) (389.8) (349.7)
Change in short-term investments 37.2 (66.7) 129.0
Other investing activity, net (120.1) (121.1) 15.7
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,351.3) (620.9) (669.8)
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
57
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1996 1995 1994
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 2,105.0 $ 1,437.9 $ 1,355.0
Withdrawals (1,756.6) (1,774.2) (1,376.0)
Net change in borrowings 37.5 (43.8) 36.9
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING AC-
TIVITIES 385.9 (380.1) 15.9
- -------------------------------------------------------------------------------
Net change in cash and cash equivalents (177.1) (55.9) (14.6)
Cash and cash equivalents, beginning of year 286.1 342.0 356.6
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 109.0 $ 286.1 $ 342.0
- -------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMA-
TION
Federal income taxes paid $ 185.9 $ 96.9 $ 82.8
Interest paid $ 27.2 $ 23.3 $ 24.1
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
58
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pacific Mutual Life Insurance Company ("Pacific Mutual Life") was
established in 1868 and is organized under the laws of the State of
California as a mutual life insurance company. Pacific Mutual Life
conducts business in every state except New York.
Pacific Mutual Life and its subsidiaries and affiliates have primary
business operations which consist of life insurance, annuities, pension
products, group employee benefits and investment management and advisory
services. These primary business operations provide a broad range of life
insurance, accumulation and investment products for individuals and
businesses and offer a range of investment products to institutions and
pension plans. Additionally, through its major subsidiaries and
affiliates, Pacific Mutual Life provides a variety of group employee
benefits, as well as investment management and advisory services.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Pacific Mutual Life
Insurance Company and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles ("GAAP") and
include the accounts of Pacific Mutual Life and its wholly-owned
insurance subsidiaries, Pacific Corinthian Life Insurance Company ("PCL"-
Note 3), PM Group Life Insurance Company ("PM Group") and World-Wide
Holdings Limited, and its noninsurance subsidiaries, Pacific Financial
Asset Management Corporation ("PFAMCo"), Pacific Mutual Distributors,
Inc. ("PMD"), Pacific Mutual Realty Finance, Inc., Pacific Mezzanine
Associates, L.L.C. and MC Associates, LLC. All significant intercompany
transactions and balances have been eliminated. Pacific Mutual Life
prepares its regulatory financial statements based on accounting
practices prescribed or permitted by the Insurance Department of the
State of California. These consolidated financial statements differ from
those followed in reports to regulatory authorities (Note 2).
On December 21, 1995, Pacific Mutual Life completed a subsidiary
reorganization in which PFAMCo became a direct, wholly-owned subsidiary
of Pacific Mutual Life. Prior to the reorganization PFAMCo was a wholly-
owned, second-tier subsidiary of Pacific Mutual Life. 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 Life
which consisted of investments in subsidiaries as follows: PFAMCo, PMD
and PM Group.
ACCOUNTING PRONOUNCEMENTS ADOPTED
Pacific Mutual Life has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 120, "Accounting and Reporting by
Mutual Life Insurance Enterprises and by Insurance Enterprises for
Certain Long-Duration Participating Contracts," and Interpretation No.
40, "Applicability of Generally Accepted Accounting Principles to Mutual
Life Insurance and Other Enterprises" (the "Interpretation") issued by
the Financial Accounting Standards Board. SFAS No. 120 and the
Interpretation require that mutual life insurance companies and their
insurance subsidiaries adopt all applicable authoritative GAAP
pronouncements in any general purpose financial statements that they may
issue. This differs from prior years when Pacific Mutual Life issued its
regulatory financial statements as general purpose financial statements.
The accompanying consolidated financial statements for 1996, 1995 and
1994 reflect the effects of implementing SFAS No. 120 and the
Interpretation.
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires that long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used
shall be assessed for recoverability if certain events or changes in
circumstances are present. An impairment loss shall be recognized if the
carrying amount of
59
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the asset exceeds the fair value of the asset. Adoption of this
accounting standard did not have a significant impact on the consolidated
financial position or consolidated results of operations of the Company.
On January 1, 1996, the Company also adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights." SFAS No. 122 requires that rights
acquired to service mortgage loans for others be recognized separately
from the mortgage loan asset. SFAS No. 122 also requires that capitalized
mortgage servicing rights be assessed for impairment based on the fair
value of those rights and any impairment should be recognized through a
valuation allowance. Adoption of this accounting standard did not have a
significant impact on the consolidated financial position or consolidated
results of operations of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," as amended by SFAS No. 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS
No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This
statement provides consistent accounting standards for securitizations
and other transfers of financial assets, determines when financial assets
(liabilities) should be considered sold (settled) and removed from the
statement of financial position, and determines when related revenues and
expenses should be recognized. The Company currently plans to adopt SFAS
No. 125 beginning on January 1, 1997. The adoption is not expected to
have a significant impact on the consolidated financial position or
consolidated results of operations of the Company.
INVESTMENTS
Fixed maturity securities and equity securities are reported at fair
value, with unrealized gains and losses, net of deferred income tax and
adjustments to related deferred policy acquisition costs, included as a
separate component of equity on the accompanying consolidated statements
of financial position. Trading securities, which are included in short-
term investments, are reported at fair value with unrealized gains and
losses included in net realized capital gains (losses) on the
accompanying consolidated statements of operations.
For mortgage-backed securities included in fixed maturity securities the
Company recognizes income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the
securities. When estimates of prepayments change, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount
that would have existed had the new effective yield been applied since
the acquisition of the securities. This adjustment is reflected in net
investment income.
In the first and second quarter of 1995, Pacific Mutual Life sold two
securities from the held to maturity category. The amortized cost of the
securities was $62.3 million and a net after tax loss of $0.7 million was
realized on the sales. The securities were sold due to the significant
deterioration of the issuer's creditworthiness.
Beginning with the third quarter of 1995, Pacific Mutual Life transferred
approximately $1.5 billion of securities from the held to maturity
category to the available for sale category. This amount represented the
amortized cost of the securities at the date of transfer. The fair value
of those securities was approximately $1.6 billion, resulting in a net
after tax unrealized gain of $52.5 million, which was reflected as a
direct increase to equity. The change in classification was a result of a
change in management's intent with respect to these securities. In order
to have the flexibility to respond to changes in interest rates and to
take advantage of changes in the availability of and the yield on
alternative investments, management has determined that the
reclassification of these securities as available for sale was
appropriate.
60
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains and losses on investment transactions are determined on a
specific identification basis and are included in revenues.
Short-term investments are carried at fair value and include all trading
securities.
Derivative financial instruments are carried at fair value. Unrealized
gains and losses of derivatives used to hedge securities classified as
available for sale are reflected in a separate component of equity,
similar to the accounting of the underlying hedged assets. Realized gains
and losses on derivatives used for hedging are deferred and amortized
over the average life of the related hedged assets or insurance
liabilities. Unrealized gains and losses of other derivatives are
reflected in operations.
Mortgage loans and policy loans are stated at unpaid principal balances.
Real estate is carried at depreciated cost, or for real estate acquired
in satisfaction of debt, estimated fair value less estimated selling
costs at the date of acquisition if lower than the related unpaid
balance.
On November 15, 1994, PFAMCo 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. ("PIMCO
Advisors"). Collectively, PFAMCo and various of its subsidiaries
beneficially own approximately 42% of the outstanding General and Limited
Partner units of PIMCO Advisors as of December 31, 1996 and 1995. This
investment, which is included in other investments on the accompanying
consolidated statements of financial position, is accounted for on the
equity method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all liquid debt instruments with an
original maturity of three months or less.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new insurance business, principally commissions,
medical examinations, underwriting, policy issue and other expenses, all
of which vary with and are primarily related to the production of new
business, have been deferred. For universal life, annuity and other
investment contract products, such costs are generally amortized in
proportion to the present value of expected gross profits using the
assumed crediting rate. Adjustments are reflected in earnings or equity
in the period the Company experiences deviations in gross profit
assumptions. Adjustments directly affecting equity result from experience
deviations due to changes in unrealized gains and losses in investments
classified as available for sale. For life insurance products, such costs
are being amortized over the premium-paying period of the related
policies in proportion to premium revenues recognized, using assumptions
consistent with those used in computing policy reserves. For the years
ended December 31, 1996, 1995 and 1994, net amortization of deferred
policy acquisition costs included in operating expenses amounted to $70.0
million, $63.3 million and $44.2 million, respectively, on the
accompanying consolidated statements of operations and equity.
PRESENT VALUE OF FUTURE PROFITS
Included in other assets is $16.1 million and $38.4 million which
represents the present value of estimated future profits of acquired
business in connection with the rehabilitation of First Capital Life
Insurance Company ("FCL" -Note 3) as of December 31, 1996 and 1995,
respectively. The aforementioned future profits are discounted to
61
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provide an appropriate rate of return and are being amortized over the
rehabilitation plan period. Amortization for the years ended December 31,
1996, 1995 and 1994 amounted to $24.2 million, $17.1 million and $4.7
million, respectively. During 1996, the Company changed certain
assumptions regarding the estimated life which resulted in an increase in
amortization in 1996 of approximately $17.0 million.
UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
Universal life, annuity and other investment contract deposits are valued
using the retrospective deposit method and consist principally of
deposits received plus interest credited less accumulated assessments.
Interest credited to these policies ranged from 4% to 8.4% during 1996,
1995 and 1994.
The following detail of universal life, annuity and other investment
contract deposits is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
-------------------
(In Millions)
<S> <C> <C>
Universal life $ 7,562.5 $ 6,930.7
Annuity 2,459.3 2,426.6
Other investment contract deposits 3,855.6 3,362.1
-------------------
$13,877.4 $12,719.4
-------------------
</TABLE>
The following detail of universal life, annuity and other investment
contract deposits policy fees and interest credited is as follows:
<TABLE>
<CAPTION>
Years Ended December
31,
1996 1995 1994
--------------------
(In Millions)
<S> <C> <C> <C>
Policy fees
Universal life $318.4 $292.6 $267.1
Annuity 26.6 12.8 9.4
Other investment contract deposits 3.6 3.6 3.5
--------------------
Total policy fees $348.6 $309.0 $280.0
--------------------
Interest credited
Universal life $279.3 $258.6 $226.9
Annuity 131.9 125.2 120.7
Other investment contract deposits 242.0 270.4 291.0
--------------------
Total interest credited $653.2 $654.2 $638.6
--------------------
</TABLE>
FUTURE POLICY BENEFITS
Life insurance reserves are valued using the net level premium method.
Interest rate assumptions range from 4.5% to 9.3% for 1996, 1995 and
1994. Mortality, morbidity and withdrawal assumptions are generally based
on the Company's experience, modified to provide for possible unfavorable
deviations. Future dividends for participating business are provided for
in the liability for future policy benefits. Included in policy benefits
paid or provided on the accompanying consolidated statements of
operations and equity are dividends to policyholders.
62
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Dividends are provided based on dividend formulas approved by the Board
of Directors and reviewed for reasonableness and equitable treatment of
policyholders by an independent consulting actuary. As of December 31,
1996 and 1995, participating experience rated policies paying dividends
represented approximately 1% of direct written life insurance in force.
STATE GUARANTY FUND ASSESSMENTS
Insurance companies are subject to assessments by life and health
guaranty associations in most states in which they are licensed to do
business. These assessments are based on the volume and type of business
they sell in those states and may be partially recovered in some states
through a future reduction in premium taxes. Based on current information
available from the National Organization of Life and Health Guaranty
Association, the Company, as of December 31, 1996, has accrued in other
liabilities on the accompanying consolidated statements of financial
position an amount adequate for anticipated payments of known
insolvencies, net of estimated recoveries of premium tax offsets.
REVENUES AND EXPENSES
Insurance premiums are recognized as revenue when due. Benefits and
expenses, other than deferred policy acquisition costs, are recognized
when incurred.
Generally, receipts for universal life, annuities and other investment
contracts are classified as deposits. Policy fees from these contracts
include mortality charges, surrender charges and earned policy service
fees. Expenses related to these products include interest credited to
account balances and benefit amounts in excess of account balances.
Investment management fees are recorded as revenues during the period
such services are performed.
DEPRECIATION AND AMORTIZATION
Depreciation of investment real estate is computed on the straight-line
method over the estimated useful lives which range from 15 to 30 years.
Certain other assets are depreciated or amortized on the straight-line
method over varying periods ranging from 3 to 40 years. Depreciation of
investment real estate is included in net investment income on the
accompanying consolidated statements of operations and equity.
Depreciation and amortization of other assets is included in operating
expenses on the accompanying consolidated statements of operations and
equity.
FEDERAL INCOME TAXES
Pacific Mutual Life is taxed as a life insurance company for Federal
income tax purposes and files a consolidated Federal income tax return
with all its includable domestic subsidiaries. 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. Deferred income taxes are provided for
timing differences in the recognition of revenues and expenses for
financial reporting and income tax purposes.
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
policyholders and contract owners.
63
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 5
and 6 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
the Company 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 GAAP 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.
2. STATUTORY RESULTS
The following are reconciliations of statutory surplus and statutory net
income for Pacific Mutual Life as calculated in accordance with
accounting practices prescribed or permitted by the Insurance Department
of the State of California, to the amounts reported as equity and net
income included in the accompanying consolidated financial statements:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------
(In Millions)
<S> <C> <C>
Statutory surplus $ 815.2 $ 723.2
Deferred policy acquisition costs 542.0 411.9
Unrealized gain on available for sale securi-
ties, net 379.2 482.0
Asset valuation reserve 209.4 191.4
Deferred income tax 174.6 129.2
Subsidiary equity 60.7 66.0
Non-admitted assets 22.8 22.5
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (340.4) (249.1)
Other (16.7) 5.9
------------------
Equity as reported herein $1,697.2 $1,633.4
------------------
</TABLE>
64
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December
31,
1996 1995 1994
----------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $113.1 $ 85.1 $ 81.0
Deferred policy acquisition costs 111.2 76.4 59.4
Deferred income tax 70.9 31.5 (27.7)
Interest maintenance reserve 3.8 12.2 (7.7)
Net realized gain (loss) on trading securi-
ties (11.6) 13.2 (2.0)
Earnings of subsidiaries (33.0) 5.9 20.7
Insurance and annuity reserves (91.3) (95.5) (28.2)
Other 3.5 6.0 5.9
----------------------
Net income as reported herein $166.6 $134.8 $101.4
----------------------
</TABLE>
RISK-BASED CAPITAL
Each insurance company's state of domicile imposes minimum risk-based
capital requirements that were developed by the National Association of
Insurance Commissioners ("NAIC"). The formulas for determining the amount
of risk-based capital specify various weighting factors that are applied
to financial balances or various levels of activity based on the
perceived degree of risk. Regulatory compliance is determined by a ratio
of a company's regulatory total adjusted capital, as defined by the NAIC,
to its authorized control level risk-based capital, as defined by the
NAIC. Companies below specific trigger points or ratios are classified
within certain levels, each of which requires specified corrective
action. As of December 31, 1996 and 1995, the Company's ratios exceeded
the minimum risk-based capital requirements.
DIVIDENDS
Dividends to Pacific Mutual Life from its insurance subsidiaries are
subject to regulatory restrictions and approvals. The maximum amount of
dividends that can be paid by PM Group cannot exceed the lesser of 10% of
surplus as regards to policyholders, or the net statutory gain from
operations, without prior approval from the Insurance Commissioner of the
State of Arizona. During 1996, 1995 and 1994, PM Group received approval
to pay extraordinary dividends in excess of these limitations. PM Group
paid dividends of $25 million, $25 million and $20 million for the years
ended December 31, 1996, 1995 and 1994 of which $18 million, $17.2
million and $12.4 million, respectively, were considered extraordinary.
In accordance with the terms of the rehabilitation agreement (Note 3),
PCL is precluded from paying any dividends during the rehabilitation
period without the prior consent of the Insurance Department of the State
of California. No such dividends have been paid.
3. 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 Life, through its wholly-owned subsidiary, PCL,
will facilitate the rehabilitation of FCL. In accordance with the five-
year rehabilitation agreement, insurance policies of FCL were
restructured and substantially all the assets and certain liabilities of
FCL were assumed by PCL on December 31, 1992, pursuant to an assumption
reinsurance agreement and asset purchase agreement and have been
accounted for as a purchase transaction.
65
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY (CONTINUED)
The rehabilitation agreement provides for the holders of restructured
policies to share in a substantial percentage of the unallocated
statutory surplus of PCL at the end of the rehabilitation period.
Policyholders have the option to surrender their restructured policies
with reduced benefits during this five-year period. During the
rehabilitation plan period, PCL is prohibited from issuing new insurance
policies. PCL will merge into Pacific Mutual Life, with Pacific Mutual
Life as the surviving entity, within thirty days following September 30,
1997, the end of the rehabilitation period.
In the event PCL is unable to pay contract benefits, Pacific Mutual Life
is obligated to contribute funds to pay those benefits in accordance with
the rehabilitation agreement.
4. ACQUISITION OF INSURANCE BLOCK OF BUSINESS
In 1996, Pacific Mutual Life signed a definitive agreement to acquire a
block of corporate-owned life insurance ("COLI") policies from
Confederation Life Insurance Company (U.S.) in Rehabilitation, which is
currently under rehabilitation. This block consists of approximately
40,000 policies, having a face amount of $9 billion and reserves of $1.7
billion. This block is primarily non-leveraged COLI. The transaction is
expected to close during the first half of 1997.
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity and equity securities are shown below. The
estimated fair value of publicly traded securities is 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. The Company 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
Amortized ----------------- Fair
Cost Gains Losses Value
-------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Available for Sale Securities
-----------------------------
As of December 31, 1996:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 297.9 $ 11.2 $ 0.3 $ 308.8
Obligations of states, political
subdivisions and foreign
governments 638.1 46.2 1.0 683.3
Corporate securities 6,848.3 506.3 91.9 7,262.7
Mortgage-backed and asset-backed
securities 3,753.6 98.0 19.4 3,832.2
Redeemable preferred stock 102.5 6.4 2.1 106.8
-------------------------------------
Total Fixed Maturity Securities $11,640.4 $ 668.1 $ 114.7 $12,193.8
-------------------------------------
Equity Securities $ 229.6 $ 40.8 $ 9.6 $ 260.8
-------------------------------------
</TABLE>
66
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Gross Unrealized Estimated
Amortized ----------------- Fair
Cost Gains Losses Value
-------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Available for Sale Securities
-----------------------------
As of December 31, 1995:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 378.4 $ 33.4 $ 411.8
Obligations of states, political
subdivisions and foreign
governments 625.1 70.7 $ 3.3 692.5
Corporate securities 6,179.1 537.1 45.0 6,671.2
Mortgage-backed and asset-backed
securities 3,366.9 138.6 12.0 3,493.5
Redeemable preferred stock 89.4 3.1 2.3 90.2
-------------------------------------
Total Fixed Maturity Securities $10,638.9 $ 782.9 $ 62.6 $11,359.2
-------------------------------------
Equity Securities $ 192.3 $ 32.2 $ 6.0 $ 218.5
-------------------------------------
</TABLE>
The amortized cost and estimated fair values of fixed maturity securities
as of December 31, 1996, 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>
Amortized Estimated
Cost Fair Value
--------------------
(In Millions)
<S> <C> <C>
Available for Sale:
Due in one year or less $ 1,482.3 $ 1,489.0
Due after one year through five years 2,830.0 3,042.3
Due after five years through ten years 1,907.4 1,991.7
Due after ten years 1,667.1 1,838.6
-------------------
7,886.8 8,361.6
Mortgage-backed and asset-backed securities 3,753.6 3,832.2
-------------------
Total $11,640.4 $12,193.8
-------------------
</TABLE>
Proceeds from sales of all available for sale securities during 1996,
1995 and 1994 were $2.5 billion, $1.9 billion and $2.7 billion,
respectively. Gross gains of $89.3 million, $58.0 million and $56.0
million and gross losses of $29.9 million, $32.3 million and $70.8
million were realized on those sales during 1996, 1995 and 1994,
respectively.
67
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
--------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $ 831.6 $ 808.1 $ 741.3
Equity securities 17.8 7.3 8.9
Mortgage loans 107.9 112.9 136.3
Real estate 51.3 43.2 37.2
Policy loans 113.0 105.2 89.0
Other 48.9 47.1 3.3
--------------------------
Gross investment income 1,170.5 1,123.8 1,016.0
Investment expense 107.5 101.5 82.4
--------------------------
Net investment income $1,063.0 $1,022.3 $ 933.6
--------------------------
</TABLE>
The change in gross unrealized gain (loss) on investments in available
for sale and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
--------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale and trading securi-
ties:
Fixed maturity $(169.1) $1,039.3 $(320.6)
Equity 6.5 17.2 (29.7)
--------------------------
Total $(162.6) $1,056.5 $(350.3)
--------------------------
</TABLE>
As of December 31, 1996 and 1995, investments in fixed maturity
securities with a carrying value of $19.6 million and $20.5 million,
respectively, were on deposit with state insurance departments to satisfy
regulatory requirements.
No investment, aggregated by issuer, exceeded 10% of total equity as of
December 31, 1996.
The Company has no non-income producing fixed maturity securities,
mortgage loans, real estate or other long-term investments as of December
31, 1996.
68
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity
securities (Note 5) $12,454.6 $12,454.6 $11,577.7 $11,577.7
Mortgage loans 1,477.3 1,533.9 1,346.2 1,535.1
Policy loans 3,131.8 3,131.8 2,793.3 2,793.3
Cash and cash equivalents 109.0 109.0 286.1 286.1
Derivative financial in-
struments:
Interest rate floors and
caps, options and
swaptions 59.3 59.3 39.4 39.4
Interest rate swap
contracts 1.0 1.0 2.4 2.4
Credit and total return
swaps 1.1 1.1 1.0 1.0
Liabilities:
Guaranteed interest con-
tracts 2,948.3 3,056.1 2,375.9 2,459.3
Deposit liabilities 799.6 800.6 876.3 899.4
Annuity liabilities 2,459.4 2,459.4 2,427.2 2,427.2
Surplus notes 149.6 157.5 149.6 157.7
Derivative financial in-
struments:
Options written 1.5 1.5 1.5 1.5
Asset swap contracts 12.5 12.5 3.5 3.5
Foreign currency deriva-
tives 4.3 4.3 5.0 5.0
</TABLE>
The following methods and assumptions were used to estimate the fair
value of these financial instruments as of December 31, 1996 and 1995:
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flow, using a year-end market rate
which is applicable to the yield, credit quality and average maturity of
the composite portfolio.
POLICY LOANS
The carrying amounts of policy loans are a reasonable estimate of their
fair values.
CASH AND CASH EQUIVALENTS
The carrying amounts of these items are a reasonable estimate of their
fair values.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose value or cash flows are
"derived" from another source, such as an underlying security. They can
facilitate total return and, when used for hedging, they achieve the
lowest cost and most efficient execution of positions. Derivatives can
also be used to leverage by using very large notional amounts or by
creating formulas that multiply changes in the underlying security. The
Company's approach is to avoid highly leveraged or overly complex
investments. The Company 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 as well as
for facilitating total return. Risk is limited through modeling
derivative performance in product portfolios for hedging and setting loss
limits in total return portfolios.
69
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
Derivatives used by the Company involve elements of credit risk and
market risk in excess of amounts recognized in the accompanying
consolidated financial statements. The notional amounts of these
instruments reflect the extent of involvement in the various types of
financial instruments. The estimated fair values of these instruments are
based on quoted market prices, dealer quotations or internal price
estimates believed to be comparable to dealer quotations. These amounts
estimate what the Company would have to pay or receive if the contracts
were terminated. The Company determines, on an individual counterparty
basis, the need for collateral or other security to support financial
instruments with off-balance sheet counterparty risk.
A reconciliation of the notional or contract amounts and discussion of
the various derivative instruments is as follows:
<TABLE>
<CAPTION>
Balance Balance
Beginning Terminations End
of Year Acquisitions and Maturities of Year
---------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
December 31, 1996:
Interest rate floors and
caps, options and
swaptions $2,159.6 $3,075.0 $ 371.4 $4,863.2
Interest rate swap con-
tracts 619.6 620.9 252.2 988.3
Asset swap contracts 20.0 15.3 5.3 30.0
Credit and total return
swaps 146.1 307.2 96.8 356.5
Financial futures con-
tracts 310.1 3,358.9 3,059.8 609.2
Foreign currency deriva-
tives 15.4 43.1 17.1 41.4
December 31, 1995:
Interest rate floors and
caps, options and
swaptions 1,950.9 1,126.6 917.9 2,159.6
Interest rate swap con-
tracts 370.5 339.0 89.9 619.6
Asset swap contracts 30.0 10.0 20.0
Credit and total return
swaps 116.3 99.8 70.0 146.1
Financial futures con-
tracts 137.6 1,877.0 1,704.5 310.1
Foreign currency deriva-
tives 35.2 19.8 15.4
</TABLE>
Interest Rate Floors and Caps, Options and Swaptions
----------------------------------------------------
The Company uses interest rate floors and caps, options and swaptions to
hedge against fluctuations in interest rates and in its total return
portfolios. Interest rate floor agreements entitle the Company to receive
the differential, if below, between the specified rate and the current
value of the underlying index. Interest rate cap agreements entitle the
Company to receive the differential, if above, between the specified rate
and the current value of the underlying index. Options purchased involve
the right, but not the obligation, to purchase the underlying securities
at a specified price during a given time period. Swaptions are options to
enter into a swap transaction at a specified price. The Company uses
written covered call options on a limited basis. Gains and losses on
covered calls are offset by gains and losses on the underlying position.
Options and floors are reported as assets and options written are
reported as liabilities in the consolidated statements of financial
position. Cash requirements for these instruments are generally limited
to the premium paid by the Company at acquisition. The purchase premium
of these instruments is amortized on a constant effective yield basis and
included as a component of net investment income over the term of the
agreement. Interest rate floors and caps, options and swaptions mature
during fiscal years 1997 through 2007.
70
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
Interest Rate Swap Contracts
----------------------------
The Company uses interest rate swaps to manage interest rate risk. The
interest rate swap agreements generally involve the exchange of fixed and
floating rate interest payments or the exchange of floating to floating
interest payments tied to different indexes. Generally, no premium is
paid to enter into the contract and no principal payments are made by
either party. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. The interest rate swap contracts mature during fiscal
years 1997 through 2026.
Asset Swap Contracts
--------------------
The Company uses asset swap contracts to manage interest rate and equity
risk to better match portfolio duration to liabilities. Asset swap
contracts involve the exchange of upside equity potential for preferred
cash flow streams. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. The asset swap contracts mature during fiscal years
1998 through 2000.
Credit and Total Return Swaps
-----------------------------
The Company uses credit and total return swaps to take advantage of
market opportunities. Credit swaps involve the receipt of floating or
fixed rate payments in exchange for assuming potential credit losses of
an underlying security. Total return swaps involve the exchange of
floating rate payments for the total return performance of a specified
index or market. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. Credit and total return swaps mature during fiscal
years 1997 through 2013.
Financial Futures Contracts
---------------------------
The Company uses exchange-traded financial futures contracts to hedge
cash flow timing differences between assets and liabilities and overall
portfolio duration. Assets and liabilities are rarely acquired or sold at
the same time, which creates a need to hedge their change in value during
the unmatched period. In addition, foreign currency futures may be used
to hedge foreign currency risk on non U.S. dollar denominated securities.
Financial futures contracts obligate the holder to buy or sell the
underlying financial instrument at a specified future date for a set
price and may be settled in cash or delivery of the financial instrument.
Price changes on futures are settled daily through the daily margin cash
flows. The notional amounts of the contracts do not represent future cash
requirements, as the Company intends to close out open positions prior to
expiration.
Foreign Currency Derivatives
----------------------------
The Company enters into foreign exchange forward contracts and swaps to
hedge against fluctuations in foreign currency exposure. Foreign currency
derivatives involve the exchange of foreign currency denominated payments
for U.S. dollar denominated payments. Gains and losses on foreign
exchange forward contracts offset currency gains and losses on the
related assets. The amounts to be received or paid under the foreign
currency swaps are accrued and recognized in the consolidated statements
of operations through an adjustment to net investment income over the
life of the agreements. Foreign currency derivatives expire during fiscal
years 1997 through 2006.
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 value of deposit liabilities
with no defined maturities is the amount payable on demand.
71
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
ANNUITY LIABILITIES
The fair value of annuity liabilities approximates carrying value and
primarily includes policyholder deposits and accumulated credited
interest.
SURPLUS NOTES
The estimated fair value of surplus notes is based on market quotes.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Mutual Life has issued PRO GIC and Diversifier GIC contracts to
plan sponsors totaling $1.1 billion as of December 31, 1996, pursuant to
the terms of which the plan sponsor retains direct ownership and control
of the assets related to these contracts. Pacific Mutual Life agrees to
provide benefit responsiveness in the event that plan benefit requests
exceed plan cash flows. In return for this guarantee, Pacific Mutual Life
receives a fee which varies by contract. Pacific Mutual Life sets the
investment guidelines to provide for appropriate credit quality and cash
flow matching.
7. CONCENTRATION OF CREDIT RISK
The Company 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.
The Company is exposed to credit loss in the event of nonperformance by
the counterparties to interest rate swap contracts and other derivative
securities. However, the Company does not anticipate nonperformance by
the counterparties.
8. BORROWINGS
Pacific Mutual Life borrows for short-term needs by issuing commercial
paper. There were no commercial paper borrowings outstanding as of
December 31, 1996 and 1995. Pacific Mutual Life has a revolving credit
facility available of $250 million as of December 31, 1996 and 1995.
There were no borrowings under the revolving credit facility outstanding
as of December 31, 1996 and 1995.
PFHC had the ability to borrow up to $50 million from certain banks at
variable rates of interest. On December 21, 1995, outstanding loans
totaling $37 million were transferred to PFAMCo (Note 1). The borrowing
limit as of December 31, 1996 and 1995 was $150 million and $100 million,
respectively. The interest rate averaged 5.6%, 6.1% and 4.6% for the
years ended December 31, 1996, 1995 and 1994, respectively. The balance
outstanding as of December 31, 1996 and 1995 totaled $95.5 million and
$53 million, respectively. Outstanding borrowings are due and payable in
1997 and are subject to renewal.
During 1992, PFHC entered into a credit agreement with a group of banks
for borrowings of $45 million. Proceeds of this note were paid to PCL in
connection with the issuance of a certificate of contribution by PCL
(Note 3). On December 31, 1996 and 1995, the applicable interest rate was
6.2% and 6.5%, respectively. The outstanding balance of $25 million as of
December 31, 1996 was prepaid per the terms of the agreement on January
27, 1997.
72
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SURPLUS NOTES
Pacific Mutual Life has $150 million of 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 Surplus Notes may not be
redeemed at the option of Pacific Mutual Life or any holder of the Notes.
The Surplus Notes are unsecured and subordinated to all present and
future senior indebtedness and policy claims of Pacific Mutual Life. Each
payment of interest on and the payment of principal of the Surplus Notes
may be made only with the prior approval of the Insurance Commissioner of
the State of California. Interest expense amounted to $11.8 million for
the years ended December 31, 1996, 1995 and 1994 and is included in net
investment income in the accompanying consolidated statements of
operations and equity.
10. INCOME TAXES
As required by SFAS No. 109, "Accounting for Income Taxes," the Company
accounts for income taxes using the liability method. Under SFAS No. 109,
the deferred tax consequences of changes in tax rates or laws must be
computed on the amounts of temporary differences and carryforwards
existing at the date a new law is enacted. Recording the effects of the
change involves adjusting deferred tax liabilities and assets with a
corresponding charge or credit recognized in the provision for income
taxes. The objective is to measure a deferred tax liability or asset
using the enacted tax rates and laws expected to apply to taxable income
in the periods in which the deferred tax liability or asset is expected
to be settled or realized.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------------------
(In Millions)
<S> <C> <C> <C>
Current $163.5 $116.4 $ 85.5
Deferred (49.8) (30.3) 26.2
------------------------
$113.7 $ 86.1 $111.7
------------------------
</TABLE>
The sources of the Company's provision for deferred taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------------------
(In Millions)
<S> <C> <C> <C>
Deferred policy acquisition costs $ 2.1 $ (6.0) $ (5.0)
Interest in advance 2.0 2.9 25.4
Investment valuation (7.3) 8.1 11.4
Reserves (28.5) (28.7) 7.1
Other (18.1) (6.6) (12.7)
------------------------
$(49.8) $(30.3) $ 26.2
------------------------
</TABLE>
73
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes based on the
prevailing corporate tax rate to the provision reflected in the
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
----------------------------
(In Millions)
<S> <C> <C> <C>
Income taxes at the statutory rate $ 98.1 $ 77.3 $ 74.6
Equity tax-current year 16.3 36.1
Amortization of intangibles on equity
method investments 6.5 6.5
Non-taxable investment income (2.1) (2.1) (4.7)
Equity tax-recomputation of prior years (17.3)
Other 12.2 4.4 5.7
----------------------------
$ 113.7 $ 86.1 $ 111.7
----------------------------
</TABLE>
The net deferred tax asset (liability) included in other assets on the
accompanying consolidated statement of financial position was comprised
of the tax effects of the following temporary differences:
<TABLE>
<CAPTION>
December 31,
1996 1995
----------------
(In Millions)
<S> <C> <C>
Reserves $ 244.9 $ 216.4
Deferred compensation 27.6 25.4
Investment valuation 24.0 16.7
Postretirement benefits 9.8 9.4
Dividends 9.6 10.4
Interest in advance 1.7 3.6
Depreciation (9.8) (10.0)
Deferred policy acquisition costs (43.9) (41.8)
Other 22.1 6.1
----------------
Deferred taxes from operations 286.0 236.2
Unrealized gain on available for sale securities (204.5) (259.6)
----------------
Net deferred tax asset (liability) $ 81.5 $ (23.4)
----------------
</TABLE>
11.REINSURANCE
The Company accounts for reinsurance transactions utilizing SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration And Long-
Duration Contracts." SFAS No. 113 establishes the conditions required for
a contract with a reinsurer to be accounted for as reinsurance and
prescribes accounting and reporting standards for those contracts.
Amounts receivable from reinsurers for reinsurance on future policy
benefits, universal life deposits, and unpaid losses is reported as an
asset and included in other assets on the accompanying consolidated
statements of financial position.
74
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. REINSURANCE (CONTINUED)
The Company has reinsurance agreements with other insurance companies for
the purpose of diversifying risk and limiting exposure on larger risks
or, in the case of the producer-owned reinsurance company, to diversify
risk and retain top producing agents. All assets associated with
reinsured business remain with, and under the control of the Company.
Approximate amounts recoverable (payable) from (to) reinsurers include
the following amounts:
<TABLE>
<CAPTION>
December 31,
1996 1995
--------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(35.9) $(42.7)
Future policy benefits 90.0 87.7
Unpaid claims 4.6 7.8
Paid claims 8.4 7.9
</TABLE>
As of December 31, 1996, 85% of the reinsurance recoverables were from
one reinsurer, of which 100% is secured by payables to the reinsurer. To
the extent that the assuming companies become unable to meet their
obligations under these agreements, the Company remains contingently
liable. The Company does not anticipate nonperformance by the assuming
companies.
Revenues and benefits are shown net of the following reinsurance
transactions:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
--------------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance
premiums $ 44.3 $ 29.2 $ 26.0
Assumed reinsurance included in insurance
premiums 17.8 15.6 20.2
Ceded reinsurance netted against policy fees 71.0 66.5 66.7
Ceded reinsurance netted against net invest-
ment income 192.5 176.6 151.0
Ceded reinsurance netted against interest
credited 155.2 140.0 119.9
Ceded reinsurance netted against policy ben-
efits 56.7 51.4 45.4
Assumed reinsurance included in policy bene-
fits 9.9 14.5 16.8
</TABLE>
75
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SEGMENT INFORMATION
The operations of the Company have been classified into four business
segments as follows: Individual Life Insurance and Annuities, Pensions,
Group Employee Benefits and Corporate and Other. These segments are based
on the organization of the Company and are generally distinguished by the
products offered. The Corporate and Other segment generally includes the
assets and operations that do not support the other segments such as
certain non-life insurance related subsidiary operations. Depreciation
expense and capital expenditures are not material and have not been
reported. Revenues, income before income taxes and assets by segment are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
-----------------------------
(In Millions)
<S> <C> <C> <C>
Revenues:
Individual Life Insurance and Annuities $ 962.1 $ 927.0 $ 795.9
Pensions 507.3 513.9 464.0
Group Employee Benefits 454.2 419.3 423.7
Corporate and Other 224.4 159.5 332.0
-----------------------------
$ 2,148.0 $ 2,019.7 $ 2,015.6
-----------------------------
Income before income taxes:
Individual Life Insurance and Annuities $ 92.0 $ 102.3 $ 94.8
Pensions 80.7 53.3 34.3
Group Employee Benefits 24.7 25.2 36.5
Corporate and Other 82.9 40.1 47.5
-----------------------------
$ 280.3 $ 220.9 $ 213.1
-----------------------------
<CAPTION>
December 31,
1996 1995 1994
-----------------------------
(In Millions)
<S> <C> <C> <C>
Assets:
Individual Life Insurance and Annuities $15,484.4 $12,953.2 $10,912.3
Pensions 8,097.2 7,592.5 6,497.9
Group Employee Benefits 344.4 329.8 341.3
Corporate and Other 3,139.3 2,427.6 1,954.3
-----------------------------
$27,065.3 $23,303.1 $19,705.8
-----------------------------
</TABLE>
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS
PENSION PLAN
Pacific Mutual Life provides a qualified noncontributory defined benefit
pension plan which covers all eligible employees who have one year of
continuous employment and have attained age 21. The full-benefit vesting
period for all participants is five years.
Benefits for employees are based on years of service and the highest five
consecutive years of compensation during the last ten years of
employment. Pacific Mutual Life's funding policy is to contribute amounts
to the plan sufficient to meet the minimum funding requirements set forth
in the Employee Retirement Income Security Act of 1974, plus such
additional amounts as may be determined appropriate. Contributions are
intended to provide not only for benefits attributed to employment to
date but also for those expected to be earned in the future. All
76
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
such contributions are made to a tax-exempt trust. Plan assets consist
primarily of group annuity contracts issued by Pacific Mutual Life, as
well as participating units of a real estate trust and mutual funds
managed by an indirect subsidiary of Pacific Mutual Life.
Components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Years Ended December
31,
1996 1995 1994
----------------------
(In Millions)
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 3.7 $ 2.8 $ 3.2
Interest cost on projected benefit obligation 9.4 8.8 8.5
Actual return on plan assets (19.7) (24.1) 0.6
Amortization of net obligations and prior serv-
ice cost 8.0 14.0 (11.4)
----------------------
Net periodic pension cost $ 1.4 $ 1.5 $ 0.9
----------------------
</TABLE>
The following table sets forth the Plan's funded status and
amounts recognized on Pacific Mutual Life's consolidated
statements of financial position:
<TABLE>
<CAPTION>
December 31,
1996 1995
----------------
(In Millions)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $ 114.4 $ 115.8
Nonvested benefits 1.2 0.8
----------------
Accumulated benefit obligation 115.6 116.6
Effect of projected future compensation increases 18.5 19.5
----------------
Projected benefit obligation 134.1 136.1
Plan assets at fair value (141.2) (125.6)
----------------
Plan assets (in excess) less than projected benefit
obligation (7.1) 10.5
Unrecognized net gain (loss) 2.5 (15.5)
Unrecognized transition asset 6.0 7.2
Unrecognized prior service cost 2.2 2.5
----------------
Accrued pension cost $ 3.6 $ 4.7
----------------
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1996 and 1995, the weighted average
discount rate used was 7.5% and 7%, respectively, and the rate of
increase in future compensation levels was 6% for both years. The
expected long-term rate of return on plan assets was 8.5% in 1996 and
1995.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE PLANS
Pacific Mutual Life 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
Life'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 Life's
77
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
commitment to qualified employees who retire after April 1, 1994 is
limited to specific dollar amounts. Pacific Mutual Life 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 programs during 1996, 1995 and 1994 was
approximately $1.6 million, $1.7 million and $1.7 million, respectively.
Components of net periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995 1994
-------------------
(In Millions)
<S> <C> <C> <C>
Service cost $ 0.2 $ 0.2 $ 0.2
Interest cost 1.5 1.9 1.8
Amortization (0.3) (0.3) (0.3)
-------------------
Net periodic postretirement benefit cost $ 1.4 $ 1.8 $ 1.7
-------------------
</TABLE>
The following table sets forth the Plan's funded status and amounts
recorded in other liabilities on the accompanying consolidated statements
of financial position:
<TABLE>
<CAPTION>
December
31,
1996 1995
-----------
(In
Millions)
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $17.3 $20.9
Fully eligible active plan participants 2.0 1.7
Other active plan participants 2.5 2.3
-----------
Total accumulated postretirement obligation 21.8 24.9
Fair value of plan assets -- --
-----------
Unfunded accumulated postretirement obligation 21.8 24.9
Unrecognized net gain 3.7 0.4
Prior service cost 1.3 1.6
-----------
Accrued postretirement benefit liability $26.8 $26.9
-----------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 9% for 1996 and 10% for 1995 and is assumed to
decrease gradually to 4% in 2003 and remain at that level thereafter. The
amount reported is materially effected by the health care cost trend rate
assumptions. If the health care cost trend rate assumptions were
increased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1996 and 1995 would be increased by 11.5% and 10.9%,
respectively. The effect of this change would increase the aggregate of
the service and interest cost components of the net periodic benefit cost
by 12.3%, 11.4% and 13.6% for 1996, 1995 and 1994, respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation is 7.5% and 7% for 1996 and 1995, respectively.
OTHER PLANS
Pacific Mutual Life has a voluntary Retirement Incentive Savings Plan
pursuant to Section 401(k) of the Internal Revenue Code covering all
eligible employees of the Company. Pacific Mutual Life matches 50% of
each employees' contributions, up to a maximum of six percent of eligible
compensation.
78
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
Pacific Mutual Life also has a deferred compensation plan which permits
certain employees to defer portions of their compensation and earn a
guaranteed interest rate on the deferred amounts. The interest rate is
determined annually and is guaranteed for one year. The compensation
which has been deferred has been accrued and the primary expense, other
than compensation, related to this plan is interest on the deferred
amounts.
The Company also has performance based incentive compensation plans for
its employees.
14. TRANSACTIONS WITH AFFILIATES
Pacific Mutual Life serves as the investment advisor for the Pacific
Select Fund, the investment vehicle provided to the Company's variable
life and variable annuity contractholders. Pacific Mutual Life charges
fees based upon the net asset value of the portfolios of the Pacific
Select Fund, which amounted to $14.3 million, $6.5 million and $3.0
million for the years ended December 31, 1996, 1995 and 1994,
respectively. In addition, Pacific Mutual Life entered into an agreement
with the Pacific Select Fund on October 1, 1995, to provide certain
support services for an administration fee which is based on an
allocation of actual costs. Such administration fees amounted to $108,000
and $28,550 for the years ended December 31, 1996 and 1995, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $6.2 million, $5.0 million and $0.4 million
for the years ended December 31, 1996, 1995 and 1994, respectively.
Included in equity securities on the accompanying consolidated statements
of financial position are investments in mutual funds and other
investments managed by PIMCO Advisors which amounted to $110.6 million
and $77.6 million as of December 31, 1996 and 1995, respectively.
Pacific Mutual Life provides certain support services to PIMCO Advisors.
Charges for these services are based on an allocation of actual costs and
amounted to $1.4 million, $1.9 million and $0.2 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
15. SUBSIDIARY PROFIT-SHARING PLANS AND OTHER COMPENSATION PLANS
Prior to the PIMCO Advisors transaction (Note 1), certain of PFAMCo's
direct subsidiaries had nonqualified profit-sharing plans (the "Profit-
Sharing Plans") covering certain key employees ("Key Employees") and
other employees. The Profit-Sharing Plans provided for awards based on
the profitability of the respective subsidiary, as defined in the
employment agreements. Such profitability was primarily based on income
before income taxes and before profit-sharing. The awards ranged from 40%
to 80% of such amounts depending on the level of profitability. The
profit-sharing awards were fully vested as of the PIMCO Advisors
transaction date of November 15, 1994.
In addition, Key Employees of certain indirect subsidiaries participated
in long-term incentive plans that provided compensation under the Profit-
Sharing Plans for a specified period of time subsequent to their
termination of employment. These plans were terminated as of the PIMCO
Advisors transaction date.
Effective November 15, 1994, termination and non-competition agreements
were entered into with certain Key Employees. These agreements provide
terms and conditions for the allocation of future proceeds from
distributions and sales of certain PIMCO Advisors units and other
noncompete payments. When the amount of future payments to be made to a
Key Employee is determinable, a liability for such amount is established
and is included in other liabilities in the consolidated statements of
financial position.
For the years ended December 31, 1996, 1995 and 1994, approximately $35.3
million, $28.6 million and $166.9 million, respectively, is included in
operating expenses in the consolidated statements of operations related
to the above agreements.
79
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. INVESTMENT COMMITMENTS
The Company has outstanding commitments to make investments in fixed
maturities and other investments as follows (In Millions):
<TABLE>
<CAPTION>
Years Ending
December 31:
------------
<S> <C>
1997 $193.1
1998-2001 109.0
2002 and thereafter 19.5
------
Total $321.6
------
</TABLE>
17. LITIGATION
The Company is a respondent 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 consolidated financial position of the Company.
--------------------------------------------------------------------------
80
<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 are illustrated based on the Guideline Premium Test and include
the following:
Death Benefit Option A, Face Amount $1,500,000, Annual Premium $33,093,
male nonsmoker, issue Age 55, and female nonsmoker, issue Age 55, current
cost of insurance rates:
Death Benefit Option A, Face Amount $1,500,000, Annual Premium $33,093,
male nonsmoker, issue Age 55, and female nonsmoker, issue Age 55,
guaranteed cost of insurance rates:
Death Benefit Option B, Face Amount $1,500,000, Annual Premium $124,955,
male nonsmoker, issue Age 55, and female nonsmoker, issue Age 55, current
cost of insurance rates:
Death Benefit Option B, Face Amount $1,500,000, Annual Premium $124,955,
male nonsmoker, issue Age 55, and female nonsmoker, issue Age 55,
guaranteed cost of insurance rates:
Death Benefit Option C, Face Amount $1,500,000, Annual Premium $33,093,
male nonsmoker, issue Age 55, and female nonsmoker, issue Age 55, current
cost of insurance rates:
Death Benefit Option C, Face Amount $1,500,000, Annual Premium $33,093,
male nonsmoker, issue Age 55, and female nonsmoker, issue Age 55,
guaranteed cost of insurance rates:
Death Benefit Option D, Face Amount $1,500,000, Annual Premium $33,093,
male nonsmoker, issue Age 55, and female nonsmoker, issue Age 55, current
cost of insurance rates:
Death Benefit Option D, Face Amount $1,500,000, Annual Premium $33,093,
male nonsmoker, issue Age 55, and female nonsmoker, issue Age 55,
guaranteed cost of insurance rates:
The values would be different from those shown if the gross annual
investment rates of return averaged 0%, 6% or 12% over a period of years, but
also fluctuated above or below those averages for individual policy years.
The second column of each table, labeled "Total Premiums Paid Plus Interest
at 5%," shows the amount which would accumulate if an amount equal to the
annual premium (after taxes) were invested to earn interest at 5% compounded
annually. All premium payments are illustrated as if they were made at the
beginning of the year. These illustrations assume that no Policy loans have
been made.
The amounts shown for the death benefits, Accumulated Values and Net Cash
Surrender Values reflect the fact that the net investment return on the
Variable Accounts is lower than the gross investment return on the assets as a
result of charges levied against the Variable Accounts. These values also take
into account the premium loads, the administrative charges and the mortality
and expense risk charges. The Fund's daily investment advisory fee is assumed
to be equivalent to an annual weighted rate of 0.62% 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 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
0.18% of the average daily net assets of a Portfolio, which amounts to 0.80%
of the average daily net assets of a Portfolio including the investment
advisory fees, operating expenses and any foreign taxes. Foreign taxes for the
year ended December 31, 1996 were the following percentages of the average
daily net assets of the Portfolios: 0.02% for the Equity Income Portfolio;
0.01% for the Multi-Strategy Portfolio; 0.38% for the International Portfolio;
0.02% for the Growth LT Portfolio; 0.01% for the Equity Portfolio; and 0.01%
for the Equity Index Portfolio. For the Emerging Markets Portfolio, which
commenced operations April 1, 1996, foreign taxes (annualized) were 0.14% of
average daily net assets.
81
<PAGE>
After deduction of the charges and Fund expenses described above, the
illustrated gross annual investment rates of return of 0%, 6%, and 12%
correspond to approximate net annual rates of return of -0.80%, 5.15%, and
11.10%. 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 Insureds' Ages, underwriting classes, 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.
82
<PAGE>
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES
BASED ON CURRENT COST OF INSURANCE RATES
DEATH BENEFIT OPTION: A FACE AMOUNT: $1,500,000
MALE NONSMOKER ISSUE AGE 55 FEMALE NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $33,093
<TABLE>
<CAPTION>
END OF YEAR DEATH BENEFIT
TOTAL ASSUMING
PREMIUMS HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ---------------------------------
YEAR 5% 0% 6% 12%
------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1 $ 34,748 $1,500,000 $1,500,000 $ 1,500,000
2 $ 71,233 $1,500,000 $1,500,000 $ 1,500,000
3 $ 109,542 $1,500,000 $1,500,000 $ 1,500,000
4 $ 149,767 $1,500,000 $1,500,000 $ 1,500,000
5 $ 192,003 $1,500,000 $1,500,000 $ 1,500,000
6 $ 236,350 $1,500,000 $1,500,000 $ 1,500,000
7 $ 282,916 $1,500,000 $1,500,000 $ 1,500,000
8 $ 331,809 $1,500,000 $1,500,000 $ 1,500,000
9 $ 383,147 $1,500,000 $1,500,000 $ 1,500,000
10 $ 437,052 $1,500,000 $1,500,000 $ 1,500,000
15 $ 749,804 $1,500,000 $1,500,000 $ 1,500,000
20 $1,148,964 $1,500,000 $1,500,000 $ 2,058,461
25 $1,658,405 $1,500,000 $1,500,000 $ 3,615,192
30 $2,308,594 $1,500,000 $1,987,614 $ 6,262,689
35 $3,138,418 $1,500,000 $2,680,090 $10,572,653
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR NET CASH SURRENDER
END OF YEAR ACCUMULATED VALUE VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL 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 $ 27,403 $ 29,115 $ 30,828 $ 15,050 $ 16,762 $ 18,475
2 $ 54,300 $ 59,427 $ 64,760 $ 43,320 $ 48,447 $ 53,780
3 $ 80,665 $ 90,963 $ 102,100 $ 71,058 $ 81,355 $ 92,492
4 $106,471 $ 123,751 $ 143,185 $ 98,236 $ 115,516 $ 134,950
5 $131,687 $ 157,819 $ 188,393 $124,825 $ 150,956 $ 181,531
6 $156,397 $ 193,314 $ 238,264 $150,907 $ 187,824 $ 232,774
7 $180,446 $ 230,151 $ 293,158 $176,329 $ 226,034 $ 289,041
8 $204,229 $ 268,790 $ 354,017 $201,484 $ 266,045 $ 351,272
9 $227,749 $ 309,321 $ 421,495 $226,377 $ 307,948 $ 420,122
10 $251,009 $ 351,840 $ 496,320 $251,009 $ 351,840 $ 496,320
15 $376,158 $ 613,129 $ 1,030,407 $376,158 $ 613,129 $ 1,030,407
20 $480,620 $ 935,697 $ 1,923,795 $480,620 $ 935,697 $ 1,923,795
25 $548,216 $1,352,287 $ 3,443,040 $548,216 $1,352,287 $ 3,443,040
30 $513,665 $1,892,966 $ 5,964,466 $513,665 $1,892,966 $ 5,964,466
35 $203,578 $2,552,467 $10,069,194 $203,578 $2,552,467 $10,069,194
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND 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 INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
83
<PAGE>
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES
BASED ON GUARANTEED COST OF INSURANCE RATES
DEATH BENEFIT OPTION: A FACE AMOUNT: $1,500,000
MALE NONSMOKER ISSUE AGE 55 FEMALE NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $33,093
<TABLE>
<CAPTION>
END OF YEAR DEATH BENEFIT
TOTAL ASSUMING
PREMIUMS HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ---------------------------------
YEAR 5% 0% 6% 12%
------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1 $ 34,748 $1,500,000 $1,500,000 $1,500,000
2 $ 71,233 $1,500,000 $1,500,000 $1,500,000
3 $ 109,542 $1,500,000 $1,500,000 $1,500,000
4 $ 149,767 $1,500,000 $1,500,000 $1,500,000
5 $ 192,003 $1,500,000 $1,500,000 $1,500,000
6 $ 236,350 $1,500,000 $1,500,000 $1,500,000
7 $ 282,916 $1,500,000 $1,500,000 $1,500,000
8 $ 331,809 $1,500,000 $1,500,000 $1,500,000
9 $ 383,147 $1,500,000 $1,500,000 $1,500,000
10 $ 437,052 $1,500,000 $1,500,000 $1,500,000
15 $ 749,804 $1,500,000 $1,500,000 $1,500,000
20 $1,148,964 $1,500,000 $1,500,000 $1,982,145
25 $1,658,405 $1,500,000 $1,500,000 $3,469,980
30 $2,308,594 $ 0* $1,675,155 $5,960,197
35 $3,138,418 $ 0* $2,251,538 $9,909,050
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR NET CASH SURRENDER
END OF YEAR ACCUMULATED VALUE VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL 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 $ 27,387 $ 29,098 $ 30,811 $ 15,034 $ 16,745 $ 18,458
2 $ 54,232 $ 59,356 $ 64,686 $ 43,252 $ 48,376 $ 53,706
3 $ 80,503 $ 90,791 $ 101,918 $ 70,895 $ 81,184 $ 92,310
4 $106,168 $ 123,425 $ 142,836 $ 97,933 $ 115,190 $ 134,601
5 $131,192 $ 157,278 $ 187,804 $124,329 $ 150,415 $ 180,941
6 $155,648 $ 192,486 $ 237,350 $150,158 $ 186,996 $ 231,860
7 $179,356 $ 228,934 $ 291,800 $175,238 $ 224,816 $ 287,683
8 $202,232 $ 266,606 $ 351,632 $199,487 $ 263,861 $ 348,887
9 $224,166 $ 305,466 $ 417,370 $222,794 $ 304,094 $ 415,998
10 $245,035 $ 345,471 $ 489,612 $245,035 $ 345,471 $ 489,612
15 $342,816 $ 578,146 $ 996,817 $342,816 $ 578,146 $ 996,817
20 $386,857 $ 842,172 $1,852,472 $386,857 $ 842,172 $1,852,472
25 $314,103 $1,156,601 $3,304,743 $314,103 $1,156,601 $3,304,743
30 $ 0* $1,595,386 $5,676,378 $ 0* $1,595,386 $5,676,378
35 $ 0* $2,144,322 $9,437,190 $ 0* $2,144,322 $9,437,190
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
*Additional payment will be required to prevent policy termination.
THE DEATH BENEFITS, ACCUMULATED VALUES AND 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 INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
84
<PAGE>
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES
BASED ON CURRENT COST OF INSURANCE RATES
DEATH BENEFIT OPTION: B FACE AMOUNT: $1,500,000
MALE NONSMOKER ISSUE AGE 55 FEMALE NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $124,955
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT ASSUMING
PREMIUMS HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ----------------------------------
YEAR 5% 0% 6% 12%
------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
1 $ 131,203 $1,610,215 $ 1,616,895 $ 1,623,577
2 $ 268,966 $1,719,005 $ 1,739,224 $ 1,760,238
3 $ 413,617 $1,826,346 $ 1,867,204 $ 1,911,345
4 $ 565,500 $1,932,207 $ 2,001,064 $ 2,078,409
5 $ 724,978 $2,036,555 $ 2,141,036 $ 2,263,094
6 $ 892,430 $2,139,464 $ 2,287,476 $ 2,467,359
7 $ 1,068,254 $2,240,771 $ 2,440,511 $ 2,693,125
8 $ 1,252,869 $2,340,925 $ 2,600,906 $ 2,943,166
9 $ 1,446,716 $2,439,938 $ 2,769,016 $ 3,220,095
10 $ 1,650,254 $2,537,821 $ 2,945,213 $ 3,526,809
15 $ 2,831,167 $3,031,806 $ 3,986,930 $ 5,661,982
20 $ 4,338,344 $3,477,832 $ 5,281,972 $ 9,195,810
25 $ 6,261,927 $3,861,718 $ 6,906,345 $15,147,891
30 $ 8,716,959 $4,069,681 $ 8,805,117 $24,977,850
35 $11,850,273 $3,931,393 $10,855,223 $41,545,164
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR NET CASH SURRENDER
END OF YEAR ACCUMULATED VALUE VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL 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 $ 110,215 $ 116,895 $ 123,577 $ 97,862 $ 104,543 $ 111,225
2 $ 219,005 $ 239,224 $ 260,238 $ 208,025 $ 228,244 $ 249,258
3 $ 326,346 $ 367,204 $ 411,345 $ 316,738 $ 357,597 $ 401,738
4 $ 432,207 $ 501,064 $ 578,409 $ 423,972 $ 492,829 $ 570,174
5 $ 536,555 $ 641,036 $ 763,094 $ 529,693 $ 634,174 $ 756,231
6 $ 639,464 $ 787,476 $ 967,359 $ 633,974 $ 781,986 $ 961,869
7 $ 740,771 $ 940,511 $ 1,193,125 $ 736,654 $ 936,393 $ 1,189,008
8 $ 840,925 $1,100,906 $ 1,443,166 $ 838,180 $1,098,161 $ 1,440,421
9 $ 939,938 $1,269,016 $ 1,720,095 $ 938,566 $1,267,643 $ 1,718,723
10 $1,037,821 $1,445,213 $ 2,026,809 $1,037,821 $1,445,213 $ 2,026,809
15 $1,531,806 $2,486,930 $ 4,161,982 $1,531,806 $2,486,930 $ 4,161,982
20 $1,977,832 $3,781,972 $ 7,695,810 $1,977,832 $3,781,972 $ 7,695,810
25 $2,361,718 $5,406,345 $13,647,891 $2,361,718 $5,406,345 $13,647,891
30 $2,569,681 $7,305,117 $23,477,850 $2,569,681 $7,305,117 $23,477,850
35 $2,431,393 $9,355,223 $39,566,823 $2,431,393 $9,355,223 $39,566,823
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND 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 INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
85
<PAGE>
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES
BASED ON GUARANTEED COST OF INSURANCE RATES
DEATH BENEFIT OPTION: B FACE AMOUNT: $1,500,000
MALE NONSMOKER ISSUE AGE 55 FEMALE NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $124,955
<TABLE>
<CAPTION>
END OF YEAR DEATH BENEFIT
TOTAL ASSUMING
PREMIUMS HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ---------------------------------
YEAR 5% 0% 6% 12%
------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1 $ 131,203 $1,610,198 $1,616,878 $ 1,623,560
2 $ 268,966 $1,718,935 $1,739,150 $ 1,760,160
3 $ 413,617 $1,826,176 $1,867,024 $ 1,911,154
4 $ 565,500 $1,931,886 $2,000,717 $ 2,078,034
5 $ 724,978 $2,036,023 $2,140,450 $ 2,262,450
6 $ 892,430 $2,138,649 $2,286,564 $ 2,466,339
7 $ 1,068,254 $2,239,569 $2,439,146 $ 2,691,573
8 $ 1,252,869 $2,338,675 $2,598,380 $ 2,940,319
9 $ 1,446,716 $2,435,823 $2,764,419 $ 3,214,936
10 $ 1,650,254 $2,530,848 $2,937,400 $ 3,518,011
15 $ 2,831,167 $2,990,239 $3,937,464 $ 5,602,605
20 $ 4,338,344 $3,356,585 $5,126,342 $ 8,991,611
25 $ 6,261,927 $3,567,367 $6,504,018 $14,574,387
30 $ 8,716,959 $3,471,757 $7,929,868 $23,608,422
35 $11,850,273 $2,842,857 $9,145,372 $38,447,040
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR NET CASH SURRENDER
END OF YEAR ACCUMULATED VALUE VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL 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 $ 110,198 $ 116,878 $ 123,560 $ 97,845 $ 104,526 $ 111,207
2 $ 218,935 $ 239,150 $ 260,160 $ 207,955 $ 228,170 $ 249,180
3 $ 326,176 $ 367,024 $ 411,154 $ 316,568 $ 357,416 $ 401,546
4 $ 431,886 $ 500,717 $ 578,034 $ 423,651 $ 492,482 $ 569,799
5 $ 536,023 $ 640,450 $ 762,450 $ 529,160 $ 633,588 $ 755,587
6 $ 638,649 $ 786,564 $ 966,339 $ 633,159 $ 781,074 $ 960,849
7 $ 739,569 $ 939,146 $ 1,191,573 $ 735,451 $ 935,028 $ 1,187,456
8 $ 838,675 $1,098,380 $ 1,440,319 $ 835,930 $1,095,635 $ 1,437,574
9 $ 935,823 $1,264,419 $ 1,714,936 $ 934,451 $1,263,047 $ 1,713,563
10 $1,030,848 $1,437,400 $ 2,018,011 $1,030,848 $1,437,400 $ 2,018,011
15 $1,490,239 $2,437,464 $ 4,102,605 $1,490,239 $2,437,464 $ 4,102,605
20 $1,856,585 $3,626,342 $ 7,491,611 $1,856,585 $3,626,342 $ 7,491,611
25 $2,067,367 $5,004,018 $13,074,387 $2,067,367 $5,004,018 $13,074,387
30 $1,971,757 $6,429,868 $22,108,422 $1,971,757 $6,429,868 $22,108,422
35 $1,342,857 $7,645,372 $36,616,228 $1,342,857 $7,645,372 $36,616,228
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND 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 INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
86
<PAGE>
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES
BASED ON CURRENT COST OF INSURANCE RATES
DEATH BENEFIT OPTION: C FACE AMOUNT: $1,500,000
MALE NONSMOKER ISSUE AGE 55 FEMALE NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $33,093
<TABLE>
<CAPTION>
END OF YEAR DEATH BENEFIT
TOTAL ASSUMING
PREMIUMS HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ----------------------------------
YEAR 5% 0% 6% 12%
------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1 $ 34,748 $1,533,093 $1,533,093 $ 1,533,093
2 $ 71,233 $1,566,187 $1,566,187 $ 1,566,187
3 $ 109,542 $1,599,280 $1,599,280 $ 1,599,280
4 $ 149,767 $1,632,374 $1,632,374 $ 1,632,374
5 $ 192,003 $1,665,467 $1,665,467 $ 1,665,467
6 $ 236,350 $1,698,561 $1,698,561 $ 1,698,561
7 $ 282,916 $1,731,654 $1,731,654 $ 1,731,654
8 $ 331,809 $1,764,748 $1,764,748 $ 1,764,748
9 $ 383,147 $1,797,841 $1,797,841 $ 1,797,841
10 $ 437,052 $1,830,935 $1,830,935 $ 1,830,935
15 $ 749,804 $1,996,403 $1,996,403 $ 1,996,403
20 $1,148,964 $2,161,870 $2,161,870 $ 2,161,870
25 $1,658,405 $2,327,338 $2,327,338 $ 3,561,830
30 $2,308,594 $2,492,806 $2,492,806 $ 6,173,524
35 $3,138,418 $ 0* $2,658,273 $10,425,261
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR NET CASH SURRENDER
END OF YEAR ACCUMULATED VALUE VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL 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 $ 27,401 $ 29,113 $ 30,826 $ 15,048 $ 16,760 $ 18,473
2 $ 54,284 $ 59,411 $ 64,743 $ 43,304 $ 48,431 $ 53,763
3 $ 80,612 $ 90,907 $ 102,041 $ 71,005 $ 81,300 $ 92,434
4 $ 106,342 $ 123,613 $ 143,039 $ 98,107 $ 115,378 $ 134,804
5 $ 131,425 $ 157,535 $ 188,087 $124,563 $ 150,673 $ 181,225
6 $ 155,920 $ 192,793 $ 237,695 $150,430 $ 187,303 $ 232,205
7 $ 179,649 $ 229,268 $ 292,181 $175,531 $ 225,151 $ 288,063
8 $ 203,060 $ 267,471 $ 352,528 $200,315 $ 264,726 $ 349,783
9 $ 226,155 $ 307,486 $ 419,380 $224,782 $ 306,114 $ 418,007
10 $ 248,936 $ 349,404 $ 493,448 $248,936 $ 349,404 $ 493,448
15 $ 370,336 $ 605,643 $1,020,601 $370,336 $ 605,643 $1,020,601
20 $ 460,775 $ 909,908 $1,894,161 $460,775 $ 909,908 $1,894,161
25 $ 477,163 $1,259,571 $3,392,219 $477,163 $1,259,571 $3,392,219
30 $ 258,991 $1,603,377 $5,879,547 $258,991 $1,603,377 $5,879,547
35 $ 0* $1,858,280 $9,928,820 $ 0* $1,858,280 $9,928,820
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
*Additional payment will be required to prevent policy termination.
THE DEATH BENEFITS, ACCUMULATED VALUES AND 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 INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
87
<PAGE>
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES
BASED ON GUARANTEED COST OF INSURANCE RATES
DEATH BENEFIT OPTION: C FACE AMOUNT: $1,500,000
MALE NONSMOKER ISSUE AGE 55 FEMALE NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $33,093
<TABLE>
<CAPTION>
END OF YEAR DEATH BENEFIT
TOTAL ASSUMING
PREMIUMS HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ----------------------------------
YEAR 5% 0% 6% 12%
------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1 $ 34,748 $1,533,093 $1,533,093 $1,533,093
2 $ 71,233 $1,566,187 $1,566,187 $1,566,187
3 $ 109,542 $1,599,280 $1,599,280 $1,599,280
4 $ 149,767 $1,632,374 $1,632,374 $1,632,374
5 $ 192,003 $1,665,467 $1,665,467 $1,665,467
6 $ 236,350 $1,698,561 $1,698,561 $1,698,561
7 $ 282,916 $1,731,654 $1,731,654 $1,731,654
8 $ 331,809 $1,764.748 $1,764,748 $1,764,748
9 $ 383,147 $1,797,841 $1,797,841 $1,797,841
10 $ 437,052 $1,830,935 $1,830,935 $1,830,935
15 $ 749,804 $1,996,403 $1,996,403 $1,996,403
20 $1,148,964 $2,161,870 $2,161,870 $2,161,870
25 $1,658,405 $2,327,338 $2,327,338 $3,288,721
30 $2,308,594 $ 0* $2,492,806 $5,660,371
35 $3,138,418 $ 0* $ 0* $9,421,538
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED END OF YEAR NET CASH
VALUE SURRENDER VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL 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 $ 27,384 $ 29,095 $ 30,808 $ 15,032 $ 16,743 $ 18,456
2 $ 54,213 $ 59,336 $ 64,666 $ 43,233 $ 48,356 $ 53,686
3 $ 80,441 $ 90,725 $ 101,849 $ 70,833 $ 81,118 $ 92,241
4 $106,016 $123,263 $ 142,663 $ 97,781 $115,028 $ 134,428
5 $130,883 $156,945 $ 187,444 $124,021 $150,082 $ 180,582
6 $155,088 $191,873 $ 236,681 $149,598 $186,383 $ 231,191
7 $178,413 $227,890 $ 290,645 $174,296 $223,773 $ 286,527
8 $200,730 $264,924 $ 349,746 $197,985 $262,179 $ 347,001
9 $221,865 $302,860 $ 414,411 $220,492 $301,487 $ 413,038
10 $241,613 $341,555 $ 485,112 $241,613 $341,555 $ 485,112
15 $325,018 $556,709 $ 970,662 $325,018 $556,709 $ 970,662
20 $319,427 $757,001 $1,756,052 $319,427 $757,001 $1,756,052
25 $ 81,840 $848,885 $3,132,115 $ 81,840 $848,885 $3,132,115
30 $ 0* $534,523 $5,390,830 $ 0* $534,523 $5,390,830
35 $ 0* $ 0* $8,972,893 $ 0* $ 0* $8,972,893
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
*Additional payment will be required to prevent policy termination.
THE DEATH BENEFITS, ACCUMULATED VALUES AND 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 INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
88
<PAGE>
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES
BASED ON CURRENT COST OF INSURANCE RATES
DEATH BENEFIT OPTION: D FACE AMOUNT: $1,500,000
MALE NONSMOKER ISSUE AGE 55 FEMALE NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $33,093
<TABLE>
<CAPTION>
END OF YEAR DEATH BENEFIT
TOTAL ASSUMING
PREMIUMS HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ----------------------------------
YEAR 5% 0% 6% 12%
------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1 $ 34,748 $1,500,000 $1,500,000 $ 1,500,000
2 $ 71,233 $1,503,000 $1,503,000 $ 1,503,000
3 $ 109,542 $1,506,000 $1,506,000 $ 1,506,000
4 $ 149,767 $1,510,500 $1,510,500 $ 1,510,500
5 $ 192,003 $1,516,500 $1,516,500 $ 1,516,500
6 $ 236,350 $1,522,500 $1,522,500 $ 1,522,500
7 $ 282,916 $1,530,000 $1,530,000 $ 1,530,000
8 $ 331,809 $1,539,000 $1,539,000 $ 1,539,000
9 $ 383,147 $1,549,500 $1,549,500 $ 1,549,500
10 $ 437,052 $1,563,000 $1,563,000 $ 1,563,000
15 $ 749,804 $1,675,500 $1,675,500 $ 1,675,500
20 $1,148,964 $1,903,500 $1,903,500 $ 2,050,039
25 $1,658,405 $2,317,500 $2,317,500 $ 3,601,312
30 $2,308,594 $2,766,000 $2,766,000 $ 6,239,497
35 $3,138,418 $ 0* $3,000,000 $10,534,316
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR NET CASH SURRENDER
END OF YEAR ACCUMULATED VALUE VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL 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 $ 27,403 $ 29,115 $ 30,828 $ 15,050 $ 16,762 $ 18,475
2 $ 54,300 $ 59,426 $ 64,760 $ 43,320 $ 48,446 $ 53,780
3 $ 80,662 $ 90,960 $ 102,097 $ 71,055 $ 81,352 $ 92,489
4 $106,462 $ 123,741 $ 143,175 $ 98,227 $ 115,506 $ 134,940
5 $131,665 $ 157,795 $ 188,368 $124,803 $ 150,932 $ 181,505
6 $156,350 $ 193,263 $ 238,210 $150,860 $ 187,773 $ 232,720
7 $180,358 $ 230,055 $ 293,054 $176,240 $ 225,938 $ 288,936
8 $204,086 $ 268,631 $ 353,841 $201,341 $ 265,886 $ 351,096
9 $227,535 $ 309,079 $ 421,223 $226,162 $ 307,707 $ 419,850
10 $250,702 $ 351,489 $ 495,918 $250,702 $ 351,489 $ 495,918
15 $374,733 $ 611,409 $ 1,028,304 $374,733 $ 611,409 $ 1,028,304
20 $471,832 $ 925,179 $ 1,915,924 $471,832 $ 925,179 $ 1,915,924
25 $495,038 $1,288,369 $ 3,429,821 $495,038 $1,288,369 $ 3,429,821
30 $245,823 $1,610,293 $ 5,942,378 $245,823 $1,610,293 $ 5,942,378
35 $ 0* $1,671,722 $10,032,682 $ 0* $1,671,722 $10,032,682
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
*Additional payment will be required to prevent policy termination.
THE DEATH BENEFITS, ACCUMULATED VALUES AND 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 INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
89
<PAGE>
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES
BASED ON GUARANTEED COST OF INSURANCE RATES
DEATH BENEFIT OPTION: D FACE AMOUNT: $1,500,000
MALE NONSMOKER ISSUE AGE 55 FEMALE NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $33,093
<TABLE>
<CAPTION>
END OF YEAR DEATH BENEFIT
TOTAL ASSUMING
PREMIUMS HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT -----------------------------------
YEAR 5% 0% 6% 12%
------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1 $ 34,748 $1,500,000 $1,500,000 $ 1,500,000
2 $ 71,233 $1,503,000 $1,503,000 $ 1,503,000
3 $ 109,542 $1,506,000 $1,506,000 $ 1,506,000
4 $ 149,767 $1,510,500 $1,510,500 $ 1,510,500
5 $ 192,003 $1,516,500 $1,516,500 $ 1,516,500
6 $ 236,350 $1,522,500 $1,522,500 $ 1,522,500
7 $ 282,916 $1,530,000 $1,530,000 $ 1,530,000
8 $ 331,809 $1,539,000 $1,539,000 $ 1,539,000
9 $ 383,147 $1,549,500 $1,549,500 $ 1,549,500
10 $ 437,052 $1,563,000 $1,563,000 $ 1,563,000
15 $ 749,804 $1,675,500 $1,675,500 $ 1,675,500
20 $1,148,964 $1,903,500 $1,903,500 $ 1,950,062
25 $1,658,405 $2,317,500 $2,317,500 $ 3,417,266
30 $2,308,594 $ 0* $2,766,000 $ 5,873,001
35 $3,138,418 $ 0* $ 0* $ 9,767,270
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED END OF YEAR NET CASH
VALUE SURRENDER VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL 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 $ 27,387 $ 29,098 $ 30,811 $ 15,034 $ 16,745 $ 18,458
2 $ 54,231 $ 59,355 $ 64,685 $ 43,251 $ 48,375 $ 53,705
3 $ 80,499 $ 90,787 $ 101,914 $ 70,892 $ 81,180 $ 92,306
4 $106,158 $123,414 $ 142,824 $ 97,923 $115,179 $ 134,589
5 $131,166 $157,250 $ 187,774 $124,303 $150,387 $ 180,911
6 $155,593 $192,427 $ 237,287 $150,103 $186,937 $ 231,797
7 $179,251 $228,820 $ 291,676 $175,134 $224,702 $ 287,559
8 $202,045 $266,400 $ 351,405 $199,300 $263,655 $ 348,660
9 $223,846 $305,111 $ 416,975 $222,473 $303,738 $ 415,602
10 $244,500 $344,873 $ 488,942 $244,500 $344,873 $ 488,942
15 $337,967 $572,542 $ 990,291 $337,967 $572,542 $ 990,291
20 $356,295 $805,807 $1,822,487 $356,295 $805,807 $1,822,487
25 $146,012 $950,434 $3,254,539 $146,012 $950,434 $3,254,539
30 $ 0* $638,189 $5,593,334 $ 0* $638,189 $5,593,334
35 $ 0* $ 0* $9,302,162 $ 0* $ 0* $9,302,162
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
*Additional payment will be required to prevent policy termination.
THE DEATH BENEFITS, ACCUMULATED VALUES AND 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 INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
90
<PAGE>
APPENDIX A
DESCRIPTION OF JOINT EQUAL AGE CALCULATION
1. A Joint Equal Age (JEA) conversion changes many possible combinations of
Ages, risk classes, substandard ratings and sexes for two lives into a "two
life status" in which both Insureds are assumed to have the same Age, sex
(both always male), and risk class (both nonsmoker, or smoker).
2. Certain Policy charges are based on the JEA determined at issue. JEA
eliminates many of the tables needed when Age rates are used. JEA will be
used to determine the rates per $1000 of initial Face Amount for the Sales
Surrender Target, underwriting surrender charge and the Face Amount
component of the mortality and expense risk charge. JEA determined at issue
is also used to determine the death benefit under Death Benefit Option D.
Age is used for cost of insurance rates, both current and guaranteed.
3. To calculate JEA, the two Ages are each converted to an adjusted Age, the
difference in adjusted Ages is converted to an Age add-on, and the Age add-
on is added to the younger adjusted Age. The steps are as follows:
a. Smoker Age Adjustment:
If both Insureds are smoker or both Insureds are nonsmoker, no smoker
adjustment is made. If exactly one Insured is a smoker, the Age of the
smoker is adjusted as follows:
<TABLE>
<CAPTION>
NUMBER OF
SMOKERS SMOKER AGE ADD-ON
--------- -----------------
<S> <C>
0 0
1 female +4
1 male +6
1 unisex +5
2 0
</TABLE>
b. Sex Age Adjustment:
Each female Insured has a 5 year Age reduction. Each male Insured has a
0 year Age reduction. Each unisex Insured has a 1 year Age reduction.
c. Table rating Age adjustment:
The substandard Table ratings represent a multiple of standard
mortality rates. An Age adjustment will be added to each Insured with a
substandard Table rating as follows:
TABLE RATING AGE ADJUSTMENT
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Table Rating 0 A B C D E F H J L N P
----------------------------------------------------------------
Age Adjustment 0 2 4 6 8 10 12 14 15 16 18 19
</TABLE>
The adjusted Age for substandard is capped at Age 100.
For uninsurable Insureds, the adjusted Age will always be 100,
independently of the Age and sex of the uninsurable Insureds. (We
reserve the right to reject an application for a policy.)
91
<PAGE>
d. After the Ages are adjusted for sex, smoker, and table ratings, the
younger adjusted Age is subtracted from the older adjusted Age. The
difference is used to determine an adjusted Age add-on.
<TABLE>
<CAPTION>
DIFFERENCE IN ADD TO YOUNGER DIFFERENCE IN ADD TO YOUNGER
ADJUSTED AGE ADJUSTED AGE ADJUSTED AGE ADJUSTED AGE
------------- -------------- ------------- --------------
<S> <C> <C> <C>
0 0 40-44 12
1-2 1 45-47 13
3-4 2 48-50 14
5-6 3 51-53 15
7-9 4 54-56 16
10-12 5 57-60 17
13-15 6 61-64 18
16-18 7 65-69 19
19-23 8 70-75 20
24-28 9 76-82 21
29-34 10 83-91 22
35-39 11 92-100 23
</TABLE>
e. Add the Age add-on factor from Step d to the younger adjusted Age. This
is the Joint Equal Age, or JEA.
EXAMPLE: Assuming a male smoker, Age 65, and a female nonsmoker, Age 55, Table
D substandard rating, JEA is calculated as follows:
<TABLE>
<CAPTION>
MALE FEMALE
---- ------
<S> <C> <C> <C>
Age 65 55
Step a--Smoker Age Adjustment 71 55
Step b--Sex Age Adjustment 71 50
Step c--Table Rating Age Adjustment 71 58
Step d--Subtract Younger from Older 71-58=13
Step e--Add Adjusted Age Add-On 58+6=64 JEA
</TABLE>
92
<PAGE>
APPENDIX B
RATES PER $1000 OF INITIAL FACE AMOUNT
<TABLE>
<CAPTION>
FACE AMOUNT FACE AMOUNT
JOINT SALES UNDERWRITING COMPONENT JOINT SALES UNDERWRITING COMPONENT
EQUAL SURRENDER SURRENDER OF M&E RISK EQUAL SURRENDER SURRENDER OF M&E RISK
AGE TARGET CHARGE CHARGE AGE TARGET CHARGE CHARGE
- ----- --------- ------------ ----------- ----- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
15 2.28 2.0 0.051 58 16.74 7.0 0.208
16 2.35 2.1 0.052 59 18.04 7.3 0.230
17 2.43 2.1 0.053 60 19.35 7.6 0.253
18 2.50 2.2 0.054 61 20.64 7.9 0.275
19 2.57 2.3 0.055 62 21.89 8.2 0.298
20 2.65 2.3 0.056 63 23.08 8.5 0.320
21 2.73 2.4 0.056 64 24.20 8.9 0.341
22 2.81 2.4 0.057 65 25.26 9.3 0.362
23 2.89 2.5 0.058 66 26.25 9.7 0.382
24 2.98 2.6 0.059 67 27.20 10.1 0.401
25 3.07 2.7 0.060 68 28.12 10.5 0.420
26 3.16 2.8 0.061 69 29.00 10.9 0.439
27 3.25 2.9 0.062 70 29.87 11.3 0.457
28 3.35 3.0 0.063 71 30.73 11.7 0.475
29 3.45 3.1 0.064 72 31.59 12.1 0.492
30 3.55 3.2 0.065 73 32.46 12.5 0.510
31 3.66 3.3 0.066 74 33.35 12.9 0.528
32 3.77 3.4 0.067 75 34.26 13.3 0.547
33 3.88 3.5 0.068 76 35.19 13.7 0.566
34 4.04 3.6 0.069 77 36.14 14.1 0.585
35 4.21 3.7 0.070 78 37.09 14.5 0.605
36 4.38 3.8 0.072 79 38.06 14.9 0.626
37 4.56 3.9 0.073 80 39.04 15.3 0.647
38 4.75 4.0 0.074 81 40.02 15.7 0.668
39 4.95 4.1 0.075 82 41.01 16.1 0.689
40 5.15 4.2 0.076 83 42.00 16.5 0.711
41 5.37 4.3 0.078 84 43.00 16.9 0.733
42 5.59 4.4 0.079 85 44.00 17.3 0.756
43 5.82 4.5 0.080 86 45.00 17.7 0.778
44 6.20 4.6 0.082 87 46.00 18.1 0.801
45 6.60 4.7 0.085 88 47.00 18.5 0.824
46 7.03 4.8 0.087 89 48.00 18.9 0.848
47 7.49 4.9 0.090 90 49.00 19.3 0.871
48 7.98 5.0 0.093 91 50.00 19.7 0.895
49 8.50 5.1 0.097 92 51.00 20.1 0.919
50 9.05 5.2 0.102 93 52.00 20.5 0.944
51 9.64 5.3 0.107 94 53.00 20.9 0.968
52 10.27 5.4 0.113 95 54.00 21.3 0.993
53 10.94 5.5 0.120 96 55.00 21.7 1.018
54 11.94 5.8 0.134 97 56.00 22.1 1.044
55 13.03 6.1 0.150 98 57.00 22.5 1.069
56 14.21 6.4 0.168 99 58.00 22.9 1.095
57 15.45 6.7 0.188 100 59.00 23.3 1.121
</TABLE>
93
<PAGE>
APPENDIX C
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 >93 101
</TABLE>
94
<PAGE>
APPENDIX D
DEATH BENEFIT FACTOR TABLE
RATE PER $1.00 OF FACE AMOUNT
<TABLE>
<CAPTION>
JOINT
EQUAL
AGE POLICY YEARS*
----- -----------------------------------------------------------------------------------------
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75+
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
15 1.000 1.000 1.000 1.001 1.002 1.005 1.010 1.022 1.048 1.102 1.210 1.415 1.702 1.957 2.000
20 1.000 1.000 1.001 1.002 1.004 1.009 1.021 1.046 1.100 1.207 1.411 1.700 1.957 2.000 2.000
25 1.000 1.000 1.001 1.003 1.008 1.019 1.044 1.097 1.204 1.408 1.697 1.956 2.000 2.000 2.000
30 1.000 1.001 1.003 1.007 1.018 1.042 1.094 1.200 1.404 1.694 1.955 2.000 2.000 2.000 2.000
35 1.000 1.002 1.006 1.016 1.039 1.091 1.197 1.400 1.692 1.954 2.000 2.000 2.000 2.000 2.000
40 1.001 1.005 1.014 1.036 1.087 1.192 1.395 1.688 1.953 2.000 2.000 2.000 2.000 2.000 2.000
45 1.002 1.011 1.032 1.081 1.185 1.388 1.682 1.952 2.000 2.000 2.000 2.000 2.000 2.000 2.000
50 1.006 1.025 1.072 1.174 1.376 1.674 1.949 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
55 1.015 1.058 1.157 1.358 1.660 1.945 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
60 1.035 1.128 1.327 1.636 1.936 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
65 1.079 1.274 1.595 1.920 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
70 1.175 1.519 1.891 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
75 1.357 1.822 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
80 1.620 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
85 1.894 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
90 1.969 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
95 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
99 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
</TABLE>
* Factors are portrayed for both Joint Equal Ages and Policy Anniversaries, at
five year intervals. See your Policy for one year increments in Death
Benefit factors.
95
<PAGE>
[LOGO of PACIFIC SELECT ESTATE PRESERVER]
<TABLE>
<S> <C>
Issued By Principal Underwriter
Pacific 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
</TABLE>
<PAGE>
Sponsored by:
[LOGO of PACIFIC LIFE]
PACIFIC LIFE INSURANCE COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CA 92660
Distributed by:
[LOGO of PACIFIC MUTUAL DISTRIBUTORS, INC.]
Member NASD & SIPC
700 NEWPORT CENTER DRIVE, NB-3
NEWPORT BEACH, CA 92660
1-800-800-7681
FORM NO. 15-20514-02
