<PAGE>
As filed with the Securities and Exchange Commission on April 24, 1998
Registration No 333-20355
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT
INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2
PACIFIC SELECT EXEC SEPARATE ACCOUNT OF
PACIFIC LIFE INSURANCE COMPANY
(Exact Name of Registrant)
PACIFIC LIFE INSURANCE COMPANY*
(Name of Depositor)
700 Newport Center Drive
Newport Beach, California 92660
(Address of Depositor's Principal Executive Offices) (Zip Code)
Diane N. Ledger
Vice President
Pacific Life Insurance Company
700 Newport Center Drive
Newport Beach, California 92660
(Name and address of agent for service)
Copies of all communications to:
Jeffrey S. Puretz, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006-2401
It is proposed that this filing will become effective on May 1, 1998 pursuant to
paragraph (b) of Rule 485
Title of securities being registered: Interests in the Separate Account under
Pacific Select Estate Preserver II Last Survivor Flexible Premium Variable Life
Insurance Policies.
Filing fee: None
The Registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940, filed its Rule 24f-2 Notice for the fiscal year ended December 31, 1997
on February 27, 1998, and will file its Rule 24f-2 Notice for the fiscal year
ending December 31, 1998, within the time period required by Section 24 of the
Investment Company Act of 1940 and applicable regulations thereunder.
*On September 1, 1997, Pacific Mutual Life Insurance Company converted from a
mutual insurance company to a stock insurance company under California law, and
changed its name to Pacific Life Insurance Company.
<PAGE>
Pacific Select Exec Separate Account of Pacific Life Insurance Company
CROSS-REFERENCE SHEET
Pursuant to Rule 404(c) of Regulation C under the Securities Act of 1933
(Form N-8B-2 Items required by Instruction as to the Prospectus in Form S-6)
<TABLE>
<CAPTION>
Form N-8B-2 Form S-6
Item Number Heading in Prospectus
<S> <C>
1. (a) Name of trust................................. Prospectus front cover
(b) Title of securities issues.................... Prospectus front cover
2. Name and address of each depositor................. Prospectus front cover
3. Name and address of trustee........................ N/A
4. Name and address of each principal underwriter..... Pacific Life Insurance
Company
5. State of organization of trust..................... Pacific Select Exec Separate
Account
6. Execution and termination of trust agreement....... Pacific Select Exec Separate
Account
7. Changes of name.................................... N/A
8. Fiscal year........................................ N/A
9. Material Litigation................................ N/A
II. General Description of the Trust and Securities of the Trust
10. (a) Registered or bearer securities............... The Policy
(b) Cumulative or distributive securities......... The Policy
(c) Withdrawal or redemption...................... Policy Loans;
Surrender; Partial
Withdrawals
(d) Conversion, transfer, etc..................... Transfer of Accumulated
Value; Policy Loans;
Surrender; Partial
Withdrawals
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Policy
(e) Periodic payment plan......................... N/A
(f) Voting rights................................. Voting of Fund Shares
(g) Notice to security holders.................... Confirmation Statements
and other Reports to
Owners
(h) Consents required............................. Voting of Fund Shares;
Disregard of Voting
Instructions;
Substitution of
Investments
(i) Other provisions.............................. The Policy
11. Type of securities comprising units................ The Policy; Pacific
Select Exec Separate
Account
12. Certain information regarding periodic
payment plan certificates.......................... N/A
13. (a) Load, fees, expenses, etc..................... Charges and Deductions
(b) Certain information regarding periodic
payment plan certificates..................... N/A
(c) Certain percentages........................... Charges and Deductions
(d) Difference in price........................... N/A
(e) Certain other fees, etc....................... Charges and Deductions
(f) Certain other profits or benefits............. The Policy
(g) Ratio of annual charges to income............. N/A
14. Issuance of trust's securities..................... The Policy
15. Receipt and handling of payments from
purchasers......................................... The Policy; Premiums
16. Acquisition and disposition of underlying
securities......................................... Introduction; Pacific
Select Exec Separate
Account; The Policy
17. Withdrawal or redemption........................... Transfer of Accumulated
Value; Policy Loans;
Surrender; Partial
Withdrawals
18. (a) Receipt, custody and disposition
of income..................................... The Policy
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(b) Reinvestment of distributions................. N/A
(c) Reserves or special funds..................... N/A
(d) Schedule of distributions..................... N/A
19. Records, accounts and reports...................... Confirmation Statements
and Other Report to
Owners
20. Certain miscellaneous provisions of trust
agreement
(a) Amendment..................................... N/A
(b) Termination................................... N/A
(c) and (d) Trustee, removal and successor......... N/A
(e) and (f) Depositors, removal and successor...... N/A
21. Loans to security holders.......................... Policy Loans
22. Limitations on liability........................... N/A
23. Bonding arrangements............................... N/A
24. Other material provisions of trust agreement....... N/A
III. Organizations, Personnel and Affiliated Persons of Depositor
25. Organization of depositor.......................... Pacific Life Insurance
Company
26. Fees received by depositor......................... See Items 13(a) and 13(e)
27. Business of depositor.............................. Pacific Life Insurance
Company
28. Certain information as to officials and affiliated
persons of depositor............................... More About Pacific Life
29. Voting securities of depositor..................... N/A
30. Persons controlling depositor...................... N/A
31. Payments by depositor for certain services
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
rendered to trust................................. N/A
32. Payments by depositor for certain other services
rendered to trust................................. N/A
33. Remuneration of employees of depositor for
certain services rendered to trust................ Charges and Deductions
34. Remuneration of other persons for certain
services rendered to trust........................ Charges and Deductions
IV. Distribution and Redemption of Securities
35. Distribution of trust's securities by states...... N/A
36. Suspension of sales of trust's securities......... N/A
37. Revocation of authority to distribute............. N/A
38. (a) Method of distribution....................... Distribution of the Policy
(b) Underwriting agreements...................... Distribution of the Policy
(c) Selling agreements........................... Distribution of the Policy
39. (a) Organization of principal underwriters....... See Item 25
(b) N.A.S.D. membership of principal
underwriters................................. Distribution of the Policy
40. Certain fees received by principal underwriters... See Items 13(a) and 13(e)
41. (a) Business of each principal underwriter....... See Item 39(b)
(b) Branch offices of each principal
underwriter.................................. N/A
(c) Salesmen of each principal underwriter....... N/A
42. Ownership of trust's securities by certain persons N/A
43. Certain brokerage commissions received by
principal underwriters............................ N/A
44. (a) Method of valuation.......................... Determination of Accumulated
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Value
(b) Schedule as to offering price................ Charges and Deductions
(c) Variation in offering price to certain
persons...................................... Charges and Deductions
45. Suspension of redemption rights................... Surrender
46. (a) Redemption Valuation......................... See Items 10(c) and (d)
(b) Schedule as to redemption price.............. Surrender
47. Maintenance of position in underlying securities.. The Pacific Select Fund
V. Information Concerning the Trustee or Custodian
48. Organization and regulation of trustee............ N/A
49. Fees and expenses of trustees..................... N/A
50. Trustee's lien.................................... N/A
VI. Information Concerning Insurance of Holders of Securities
51. Insurance of holders of trust's securities........ Pacific Life Insurance
Company; The Policy
VII. Policy of Registrant
52. (a) Provisions of trust agreement with respect
to selection or elimination of underlying
securities................................... Substitution of Investments
(b) Transactions involving elimination of
underlying securities........................ Substitution of Investments
(c) Policy regarding substitution or
elimination of underlying securities......... See Items 13(a) and 52(a)
(d) Fundamental policy not otherwise
covered...................................... N/A
53. Tax status of trust............................... Federal Income Tax Considerations
VIII. Financial and Statistical Information
</TABLE>
<PAGE>
<TABLE>
<S> <C>
54. Trust's securities during last ten years.......... N/A
55. N/A
56. Certain information regarding periodic payment
plan certificates................................. Premiums
57. N/A
58. N/A
59. Financial statements (Instruction 1(c) of
"Instructions as to the Prospectus" of Form S-6).. Financial Statements
</TABLE>
<PAGE>
[LOGO OF PACIFIC SELECT ESTATE PRESERVER II]
Flexible Premium
Variable Universal Life
PROSPECTUSES FOR
PACIFIC SELECT ESTATE PRESERVER II
LAST SURVIVOR FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNDERWRITTEN BY
PACIFIC LIFE INSURANCE COMPANY
DATED MAY 1, 1998
------------------
PACIFIC SELECT FUND
DATED MAY 1, 1998
<PAGE>
PACIFIC SELECT ESTATE PRESERVER II
LAST SURVIVOR FLEXIBLE PREMIUM
[LOGO OF PACIFIC SELECT ESTATE PRESERVER II]
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 II--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 or financial objectives 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 Portfolio Emerging Markets Portfolio
Net premium payments also may be allocated to the Fixed Account. The
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).
Reports and other information about the Registrant are available on the
Securities and Exchange Commission's internet site at http://www.sec.gov.
---------------
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, 1998
---------------
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............................ 8
Tax Treatment of Death Benefit............................................. 8
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
Withdrawal Charge.......................................................... 25
Corporate and Other Purchasers............................................. 25
Other Charges.............................................................. 25
Guarantee of Certain Charges............................................... 25
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
OTHER INFORMATION.......................................................... 25
Federal Income Tax Considerations........................................ 25
Charge for Our Income Taxes.............................................. 29
Voting of Fund Shares.................................................... 29
Disregard of Voting Instructions......................................... 30
Confirmation Statements and Other Reports to Owners...................... 30
Substitution of Investments.............................................. 30
Replacement of Life Insurance or Annuities............................... 31
Changes to Comply with Law............................................... 31
PERFORMANCE INFORMATION.................................................... 31
THE FIXED ACCOUNT.......................................................... 32
General Description...................................................... 32
Death Benefit............................................................ 32
Policy Charges........................................................... 32
Transfers, Surrenders, Withdrawals, and Policy Loans..................... 33
MORE ABOUT THE POLICY...................................................... 33
Ownership................................................................ 33
Beneficiary.............................................................. 33
The Contract............................................................. 34
Payments................................................................. 34
Assignment............................................................... 34
Errors on the Application................................................ 34
Incontestability......................................................... 34
Payment in Case of Suicide............................................... 34
Dividends................................................................ 34
Policy Illustrations..................................................... 35
Payment Plan............................................................. 35
Optional Insurance Benefits and Other Policies........................... 35
Life Insurance Retirement Plans.......................................... 35
Risks of Life Insurance Retirement Plans................................. 36
Distribution of the Policy............................................... 37
MORE ABOUT PACIFIC LIFE.................................................... 37
Management............................................................... 37
State Regulation......................................................... 39
Telephone Transfer and Loan Privileges................................... 39
Legal Proceedings........................................................ 39
Legal Matters............................................................ 40
Registration Statement................................................... 40
Preparation for the Year 2000............................................ 40
Independent Auditors..................................................... 40
Financial Statements..................................................... 40
ILLUSTRATIONS.............................................................. 82
APPENDICES................................................................. 92
</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 named by you 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 4.0%) 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 Client 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, 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 application is accepted by us,
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.
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 usually 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 its 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 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, or (2) 100% of the product of
(a X b/c - d) where (a) equals the Policy's Accumulated Value 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 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.
6
<PAGE>
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 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 6% of each premium paid during the first ten Policy
Years and 4% of each premium paid thereafter.
--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.
--Optional Insurance Benefits Charges: The monthly deduction will include
charges for any optional insurance Riders or Benefits added to the Policy.
Surrender Charge
No surrender charge will be assessed against Accumulated Value upon surrender
of a Policy.
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.
7
<PAGE>
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.................. .38% .06% .44%
High Yield Bond Portfolio............... .60% .05% .65%
Managed Bond Portfolio.................. .60% .06% .66%
Government Securities Portfolio......... .60% .06% .66%
Growth Portfolio........................ .65% .05% .70%
Aggressive Equity Portfolio............. .80% .06% .86%
Growth LT Portfolio..................... .75% .07% .82%
Equity Income Portfolio................. .65% .05% .70%
Multi-Strategy Portfolio................ .65% .06% .71%
Equity Portfolio........................ .65% .05% .70%
Bond and Income Portfolio............... .60% .06% .66%
Equity Index Portfolio.................. .17% .06% .23%
International Portfolio................. .85% .19% 1.04%
Emerging Markets Portfolio.............. 1.10% .36% 1.46%
</TABLE>
The expenses listed for the Fund Portfolios reflect current expenses for the
year ending December 31, 1997, except that the Advisory Fee for the
International Portfolio has been adjusted to reflect the Advisory Fee without
any waiver. The Actual Advisory Fee paid by the International Portfolio in 1997
was 0.83% of the Portfolio's average daily net assets. This reflects the
Advisory Fee waived by Pacific Life in connection with the change in the
Portfolio Manager to Morgan Stanley that occurred in June, 1997. Pacific Life,
as Investment Adviser to the Fund, adopted the policy to waive our 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 to continue this policy until at least
December 31, 1999. No reimbursement to the Portfolios was necessary for the
Fund's fiscal year 1997. There can be no assurance that the expense
reimbursement arrangement will continue after December 31, 1999, and any
unreimbursed expenses would be reflected in the Policy Owner's Accumulated
Value and in some instances, the death benefit.
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 25.
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 25.
8
<PAGE>
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 Client 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 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 1997, we had $80.0 billion
of individual life insurance in force and total admitted assets of
approximately $31.8 billion. We have been ranked according to admitted assets
as the 20th largest life insurance carrier in the nation for 1997. The Pacific
Life family of companies has total assets and funds under management of over
$236 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.
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. The Fund currently offers
fourteen separate Portfolios that fund the Variable Investments 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
to serve as an investment medium for variable life insurance policies and
variable annuity contracts issued or administered by us. 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 Alliance Capital
Equity emerging growth and Management L.P.
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 Goldman Sachs Asset
securities convertible Management
into or exchangeable for
common stocks
- --------------------------------------------------------------------------------------------
Bond and Provide total return and Investment grade debt Goldman Sachs Asset
Income income consistent with securities. Will Management
prudent investment normally maintain an
management. average portfolio
duration within one-half
year of a
long-term bond index
- --------------------------------------------------------------------------------------------
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 Asset
appreciation corporations domiciled 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. Your Policy Date is usually the
date the application is accepted by us, although your Policy Date will never
be the 29th, 30th, or 31st of any month. 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 and will be applied as of the later of the Policy Date or
the date the initial premium is received at our Home Office. 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 Net Cash Surrender Value 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 shown in
Appendix D; a complete chart is contained in your Policy. Generally, the Death
Benefit Factor is a
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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>
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.
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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.
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
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<PAGE>
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. 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 the 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.
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".
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<PAGE>
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 Portfolio of the Fund. The investment performance of the
Variable Accounts will reflect increases or decreases in the net asset value
per share of the corresponding Portfolio and any dividends or distributions
declared by a Portfolio. Any dividends or distributions from any Portfolio of
the Fund will be automatically reinvested in shares of the same Portfolio,
unless 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 or (2) 100% of the product of (a X b/c - d) where (a)
equals the Policy's Accumulated Value 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%.
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.
20
<PAGE>
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 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 Net Cash Surrender Value 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
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 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
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<PAGE>
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 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.
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<PAGE>
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 6% of each premium paid during the
first ten Policy Years and 4% 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. To the extent that sales and distribution expenses
exceed sales loads, 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.
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. Premium taxes vary from state to
state, and in some instances, among municipalities. 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.
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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.
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
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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.
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".
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 AND OTHER 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 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, and the guaranteed
cost of insurance rates.
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
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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
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Account. In addition, we do not know what standards will be set forth, if any,
in the regulations or ruling which the Treasury Department has stated it
expects to issue. 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 II 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. Also, new tax law has been proposed in
1998 which contains a provision that could adversely affect the owners of
certain "corporate-owned life insurance policies". (As of the date of this
Prospectus, this proposal has not been introduced as a bill and may or may not
ever become law as currently drafted.) Present law provides that a portion of
the interest deductions on indebtedness is reduced if the taxpayer is a direct
or indirect beneficiary of certain life insurance, endowment, or annuity
contracts (even interest on indebtedness that is completely unrelated to the
contract). This rule does not apply under present law if the contract was
issued on 20% owners, officers or employees. The proposal would repeal the
exception other than for 20% owners for taxable years beginning after the date
of enactment. The effect of the proposal would be to increase the after-tax
cost of such policies in most cases. If you have questions regarding the
proposal, please consult your tax advisor.
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
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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.
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
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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.
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, or hold unvoted shares in the
Separate Account, and/or any of our non-insurance subsidiaries holds shares of
a Portfolio, we will vote those shares in the same proportion as other votes
cast by all of our separate accounts in the aggregate.
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DISREGARD OF VOTING INSTRUCTIONS
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that voting rights be
exercised so as to cause a change in the subclassification or investment
objective of a Portfolio or to approve or disapprove an investment advisory
contract. In addition, we may disregard voting instructions of changes
initiated by Policy Owners in the investment policy or the investment adviser
(or portfolio manager) of a Portfolio, provided that our disapproval of the
change is reasonable and is based on a good faith determination that the
change would be contrary to state law or otherwise inappropriate, considering
the Portfolio's objectives and purpose, and considering the effect the change
would have on 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
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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.
REPLACEMENT OF LIFE INSURANCE OR ANNUITIES
The term "replacement" has a special meaning in the life insurance industry
and is described more fully below. Before you make your purchase decision,
Pacific Life wants you to understand how a replacement may impact your
existing plan of insurance.
A policy "replacement" occurs when a new policy or contract is purchased
and, in connection with the sale, an existing policy or contract is
surrendered, lapsed, forfeited, assigned to the replacing insurer, otherwise
terminated, or used in a financed purchase. A "financed purchase" occurs when
the purchase of a new life insurance policy or annuity contract involves the
use of funds obtained from the values of an existing life insurance policy or
annuity contract through withdrawal, surrender or loan.
There are circumstances in which replacing your existing life insurance
policy or annuity contract can benefit you. As a general rule, however,
replacement is not in your best interest. Accordingly, you should make a
careful comparison of the costs and benefits of your existing policy or
contract and the proposed policy or contract to determine whether replacement
is in your best interest.
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.
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.
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.
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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.
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 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
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<PAGE>
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 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, and (2) 100% of the product of
(a X b/c - d) where (a) equals the Policy's Accumulated Value 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.
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<PAGE>
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.
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. 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.
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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 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 such a benefit will result in certain charges,
including a Face Amount component of the mortality and expense risk 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 optional 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
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<PAGE>
results of the ledger illustrations or a comparison of retirement strategies
will also be furnished upon request. Any graphic presentations and retirement
strategy charts must be accompanied by a corresponding ledger illustration;
ledger illustrations must always include or be accompanied by comparable
information that is based on guaranteed cost of insurance rates and that
presents a hypothetical gross rate of return of 0%. Retirement illustrations
will not be furnished with a hypothetical gross rate of return in excess of
12%.
The hypothetical rates of return in ledger illustrations are illustrative
only and should not be interpreted as a representation of past or future
investment results. Policy values and benefits shown in the ledger
illustrations would be different if the gross annual investment rates of
return were different from the hypothetical rates portrayed, if premiums were
not paid when due, and loan interest was paid when due. Withdrawals or loans
may have an adverse effect on Policy benefits.
RISKS OF LIFE INSURANCE RETIREMENT PLANS
Using the Policy as a funding vehicle for 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 Cash 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
Cash 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 Net Cash Surrender Value 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.
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<PAGE>
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 applicable
state regulations to sell variable life insurance. The broker-dealers are
required to be registered with the SEC. 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
and is based on predefined premium receipt levels (called "targets") and the
year in which premiums are received. The targets are 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. Compensation is not expected to exceed 30% of premiums paid up to the first
target, 24% of the premiums paid under targets 2-5, and on the premium in
excess of the sum of targets 1-5, 6% of premiums paid in Policy years 1-10 and
4% 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 DURING THE LAST FIVE YEARS
----------------- -----------------------------------------------
<S> <C>
Thomas C. Sutton Director, Chairman of the Board and Chief Executive Officer
Director, Chairman of of Pacific Life; Director, Chairman of the Board and Chief
the Board and Executive Officer of Pacific LifeCorp, August 1997 to
Chief Executive Officer present; Director, Chairman of the Board and Chief
Executive Officer of Pacific Mutual Holding Company, August
1997 to present; Former Equity Board Member of PIMCO
Advisors L.P.; Former Director of Pacific Corinthian Life
Insurance Company; Director of: Newhall Land & Farming; The
Irvine Company; The Edison Company; PM Group Life Insurance
Company; and similar positions with other affiliated
companies of Pacific Life.
Glenn S. Schafer Director (since November 1994) and President (since January
Director and President 1995) of Pacific Life; Executive Vice President and Chief
Financial Officer of Pacific Life, April 1991 to January
1995; Director and President of Pacific LifeCorp, August
1997 to present; Director and President of Pacific Mutual
Holding Company, August 1997 to present; Former Equity
Board Member of PIMCO Advisors L.P.; Former Director of
Pacific Corinthian Life Insurance Company; Director of PM
Group Life Insurance Company; and similar positions with
other affiliated companies of Pacific Life.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION DURING THE LAST FIVE YEARS
----------------- -----------------------------------------------
<S> <C>
Khanh T. Tran Director (since August 1997), Senior Vice President and
Director, Senior Vice Chief Financial Officer of Pacific Life, June 1996 to
President and Chief present; Vice President and Treasurer of Pacific Life,
Financial Officer November 1991 to June 1996; Senior Vice President and Chief
Financial Officer of Pacific LifeCorp, August 1997 to
present; Senior Vice President and Chief Financial Officer
of Pacific Mutual Holding Company, August 1997 to present;
Chief Financial Officer and Treasurer to other affiliated
companies of Pacific Life.
David R. Carmichael Director (since August 1997), Senior Vice President and
Director, Senior Vice General Counsel of Pacific Life; Senior Vice President and
President and General General Counsel of Pacific LifeCorp, August 1997 to
Counsel present; Senior Vice President and General Counsel of
Pacific Mutual Holding Company, August 1997 to present;
Director of: PM Group Life Insurance Company; Association
of California Health and Life Insurance Companies and
Association of Life Insurance Counsel.
Audrey L. Milfs Director (since August 1997), Vice President and Corporate
Director, Vice President Secretary of Pacific Life; Vice President and Secretary of
and Corporate Secretary Pacific LifeCorp, August 1997 to present; Vice President
and Secretary of Pacific Mutual Holding Company, August
1997 to present; similar positions with other affiliated
companies of Pacific Life.
Richard M. Ferry Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Director and Chairman of
Korn/Ferry International; Director of: Avery Dennison
Corporation; Broco, Inc.; ConAm Management; First Business
Bank; Mullin Consulting, Inc.; Northwestern Restaurants,
Inc.; Dole Food Co.; Mrs. Fields' Original Cookies; Rainier
Bells, Inc. Address: 1800 Century Park East, Suite 900,
Los Angeles, California 90067.
Donald E. Guinn Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Chairman Emeritus and
Director of Pacific Telesis Group; Director of: The Dial
Corp.; Bank of America NT&SA; BankAmerica Corporation.
Address: Pacific Telesis Center, 130 Kearny Street,
Room 3704, San Francisco, California 94108-4818.
Ignacio E. Lozano, Jr. Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Director, Chairman and
Former Editor-In-Chief of La Opinion; Former Director of:
BankAmerica Corporation; Bank of America NT&SA; Director
of: The Walt Disney Company; Pacific Enterprises; Southern
California Gas Company; Lozano Communications, Inc.
Address: 411 West Fifth Street, 12th Floor, Los Angeles,
California 90013.
Charles D. Miller Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Director, Chairman and
Chief Executive Officer of Avery Dennison Corporation;
Former Director of Great Western Financial Corporation;
Director of: Korn/Ferry International; Nationwide Health
Properties, Inc.; Edison International. Address: 150 North
Orange Grove Boulevard, Pasadena, California 91109.
Donn B. Miller Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Director, President and
Chief Executive Officer of Pearson-Sibert Oil Co. of Texas;
Director of: The Irvine Company; Automobile Club of
Southern California; St. John's Hospital & Health Care
Foundation. Address: 136 El Camino, Suite 216, Beverly
Hills, California 90212.
Richard M. Rosenberg Director of Pacific Life (since October 1997 and previously
Director from November 1995 to August 1997); Director of Pacific
LifeCorp, August 1997 to present; Director of Pacific
Mutual Holding Company, October 1997 to present; Chairman
and Chief Executive Officer (Retired) of BankAmerica
Corporation; Director of: BankAmerica Corporation; Airborne
Express Corporation; Northrop Grumman Corporation; Potlatch
Corporation; SBC Communications; Chronicle Publishing;
Pollo Rey/Unamas; Former Director of K-2 Incorporated.
Address: 555 California Street, 11th Floor, Unit 3001B, San
Francisco, California 94104.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION DURING THE LAST FIVE YEARS
----------------- -----------------------------------------------
<S> <C>
James R. Ukropina Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Partner with the law firm
of O'Melveny & Meyers; Director of Lockheed Martin
Corporation; Trustee of Stanford University. Address: 400
South Hope Street, 16th Floor, Los Angeles, California
90071-2899.
Raymond L. Watson Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Vice Chairman and Director
of The Irvine Company; Director of: The Walt Disney
Company; The Mitchell Energy and Development Company; The
Irvine Apartment Communities; 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.
Edward Byrd Vice President and Controller of Pacific Life; Vice
Vice President and President and Controller of Pacific LifeCorp, August 1997
Controller to present; Vice President and Controller of Pacific Mutual
Holding Company, August 1997 to present; and similar
positions with other affiliated companies 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 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 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.
39
<PAGE>
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.
PREPARATION FOR THE YEAR 2000
We rely significantly on computer systems and applications in our daily
operations. In 1995, we began the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue. This issue involves the ability of computer systems to properly
recognize the year 2000. The inability to do so could result in major failures
or miscalculations.
We have a coordinated plan to remediate, or replace if necessary, any non-
compliant systems and to obtain assurances of the ability to be year 2000
compliant by our service providers, vendors and those with significant
relationships with us. Our plan is directed and overseen by an experienced
Vice President dedicated to year 2000 compliance. We completed the
identification of all critical systems and are in the process of remediating
systems. In addition, we have retained two internationally recognized
consultants to assist in reviewing and remediating our systems and interfaces
with third parties. Our plan calls for all remediation to be completed by the
fourth quarter of 1998 and testing to commence as remediation is completed and
throughout 1999. Some testing has already begun.
Remediation expenses to make our systems year 2000 compliant are currently
estimated to range from $15 to $20 million, which excludes the cost of our
personnel who support year 2000 compliance efforts. We do not anticipate any
other material future costs associated with the year 2000 compliance efforts.
We do not anticipate any other material future costs associated with the year
2000 compliance project, although there can be no assurance. We currently
expect to be year 2000 compliant; however, there can be no assurances that we
will succeed. In the event we or our significant service providers, vendors,
financial institutions or others with which we conduct business, fail to be
year 2000 compliant, there would be a materially adverse effect on us.
INDEPENDENT AUDITORS
The audited consolidated financial statements for Pacific Life as of
December 31, 1997 and 1996 and for the three years ended December 31, 1997 and
the audited financial statements for Pacific Select Exec Separate Account as
of December 31, 1997 and for the two years ended December 31, 1997 included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports 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, 1997 and for the two years ended December 31, 1997 and 1996
are set forth herein, starting on page 41. The audited consolidated financial
statements of Pacific Life as of December 31, 1997 and 1996 and for the three
years then ended are set forth herein starting on page 53.
The financial statements of Pacific Life should be distinguished from the
financial statements of the Pacific Select Exec Separate Account and should be
considered only as bearing upon our ability to meet our obligations under the
Policies.
40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific 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, Bond and Income, Equity
Index, International, Emerging Markets, Variable Account I, Variable Account
II, Variable Account III, and Variable Account IV Variable Accounts) as of
December 31, 1997 and the related statement of operations for the year then
ended (as to the Equity Variable Account and the Bond and Income Variable
Account, for the period from commencement of operations through December 31,
1997) and statement of changes in net assets for each of the two years in the
period then ended (as to the Aggressive Equity Variable Account, the Emerging
Markets Variable Account, Variable Accounts I, II, III and IV, for the year
ended December 31, 1997 and for the period from commencement of operations
through December 31, 1996). 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, such financial statements 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, 1997
and the results of their operations for the year then ended (as to the Equity
Variable Account and the Bond and Income Variable Account, for the period from
commencement of operations through December 31, 1997) and the changes in their
net assets for each of the two years in the period then ended (as to the
Aggressive Equity Variable Account, the Emerging Markets Variable Account,
Variable Accounts I, II, III and IV, for the year ended December 31, 1997 and
for the period from commencement of operations through December 31, 1996), in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 6, 1998
41
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH GOVERN-
MONEY YIELD MANAGED MENT AGGRESSIVE GROWTH EQUITY MULTI-
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME STRATEGY
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Money Market Portfolio
(5,180 shares; cost
$52,208).............. $ 52,084
High Yield Bond
Portfolio (3,379
shares; cost $33,305). $ 33,707
Managed Bond Portfolio
(6,511 shares; cost
$69,581).............. $ 72,512
Government Securities
Portfolio (967 shares;
cost $10,008)......... $ 10,421
Growth Portfolio (7,315
shares; cost
$143,503)............. $179,989
Aggressive Equity
Portfolio (847 shares;
cost $9,176).......... $ 9,473
Growth LT Portfolio
(6,382 shares; cost
$99,059).............. $110,438
Equity Income Portfolio
(5,373 shares; cost
$100,762)............. $131,486
Multi-Strategy
Portfolio (7,005
shares; cost
$97,141).............. $113,352
Receivables:
Due from Pacific Life
Insurance Company..... 135 114 51 240 39 162 246 51
Fund shares redeemed... 139
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Assets............ 52,223 33,842 72,626 10,472 180,229 9,512 110,600 131,732 113,403
-------- -------- -------- -------- -------- -------- -------- -------- --------
LIABILITIES
Payables:
Due to Pacific Life
Insurance Company..... 139
Fund shares purchased.. 135 114 51 240 39 162 246 51
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Liabilities....... 139 135 114 51 240 39 162 246 51
-------- -------- -------- -------- -------- -------- -------- -------- --------
NET ASSETS.............. $ 52,084 $ 33,707 $ 72,512 $ 10,421 $179,989 $ 9,473 $110,438 $131,486 $113,352
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements
42
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BOND AND EQUITY INTER- EMERGING
EQUITY INCOME INDEX NATIONAL MARKETS VARIABLE VARIABLE VARIABLE VARIABLE
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT I II III IV
-------- -------- -------- -------- -------- -------- -------- -------- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Equity Portfolio (175
shares; cost $4,174).. $ 4,190
Bond and Income
Portfolio (53 shares;
cost $666)............ $ 685
Equity Index Portfolio
(7,283 shares; cost
$140,325)............. $187,288
International Portfolio
(7,956 shares; cost
$115,000)............. $128,941
Emerging Markets
Portfolio (889 shares;
cost $9,098).......... $ 8,416
Edinburgh Overseas
Equity Portfolio (54
shares; cost $544).... $ 539
Turner Core Growth
Portfolio (58 shares;
cost $762)............ $ 783
Frontier Capital
Appreciation Portfolio
(208 shares; cost
$2,892)............... $ 3,109
Enhanced U.S. Equity
Portfolio (116 shares;
cost $1,571).......... $ 1,754
Receivables:
Due from Pacific Life
Insurance Company..... 86 15 217 81 35 1 1 1
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Assets............ 4,276 700 187,505 129,022 8,451 539 784 3,110 1,755
-------- -------- -------- -------- -------- -------- -------- -------- --------
LIABILITIES
Payables:
Fund shares purchased.. 86 15 217 81 35 1 1 1
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Liabilities....... 86 15 217 81 35 1 1 1
-------- -------- -------- -------- -------- -------- -------- -------- --------
NET ASSETS.............. $ 4,190 $ 685 $187,288 $128,941 $ 8,416 $ 539 $ 783 $ 3,109 $ 1,754
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements
43
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH GOVERN-
MONEY YIELD MANAGED MENT AGGRESSIVE GROWTH EQUITY MULTI-
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME STRATEGY
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends.............. $ 2,072 $ 2,559 $ 3,893 $ 498 $14,427 $ 4,656 $ 7,127 $ 7,530
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Investment Income... 2,072 2,559 3,893 498 14,427 4,656 7,127 7,530
------- ------- ------- ------- ------- ------- ------- ------- -------
REALIZED AND UNREALIZED
GAIN (LOSS)
ON INVESTMENTS
Net realized gain from
security transactions. 94 454 367 96 6,822 $ 101 3,899 3,288 695
Net unrealized
appreciation
(depreciation) on
investments........... (121) (335) 1,844 306 15,323 230 1,609 16,626 8,279
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Realized And
Unrealized Gain (Loss)
On Investments......... (27) 119 2,211 402 22,145 331 5,508 19,914 8,974
------- ------- ------- ------- ------- ------- ------- ------- -------
NET INCREASE IN NET
ASSETS
RESULTING FROM
OPERATIONS............. $ 2,045 $ 2,678 $ 6,104 $ 900 $36,572 $ 331 $10,164 $27,041 $16,504
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
See Notes to Financial Statements
44
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BOND AND EQUITY INTER- EMERGING
EQUITY INCOME INDEX NATIONAL MARKETS VARIABLE VARIABLE VARIABLE VARIABLE
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT
ACCOUNT(1) ACCOUNT(1) ACCOUNT ACCOUNT ACCOUNT I II III IV
---------- ---------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends.............. $ 30 $ 11 $ 7,400 $ 4,347 $ 41 $ 8 $ 71 $ 73 $ 63
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Investment Income... 30 11 7,400 4,347 41 8 71 73 63
------- ------- ------- ------- ------- ------- ------- ------- -------
REALIZED AND UNREALIZED
GAIN (LOSS)
ON INVESTMENTS
Net realized gain from
security transactions. 13 5 12,511 4,938 187 2 7 42 7
Net unrealized
appreciation
(depreciation) on
investments........... 16 19 21,545 (62) (644) (4) 31 222 201
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Realized And
Unrealized Gain (Loss)
On Investments......... 29 24 34,056 4,876 (457) (2) 38 264 208
------- ------- ------- ------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS............. $ 59 $ 35 $41,456 $ 9,223 $ (416) $ 6 $ 109 $ 337 $ 271
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) For the period from January 10, 1997 (commencement of operations) to
December 31, 1997.
See Notes to Financial Statements
45
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH GOVERN-
MONEY YIELD MANAGED MENT AGGRESSIVE GROWTH EQUITY MULTI-
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME STRATEGY
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
--------- -------- -------- ---------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS
Net investment income.. $ 2,072 $ 2,559 $ 3,893 $ 498 $ 14,427 $ 4,656 $ 7,127 $ 7,530
Net realized gain from
security transactions. 94 454 367 96 6,822 $ 101 3,899 3,288 695
Net unrealized
appreciation
(depreciation) on
investments........... (121) (335) 1,844 306 15,323 230 1,609 16,626 8,279
--------- -------- -------- -------- -------- -------- -------- -------- --------
Net Increase In Net
Assets Resulting
From Operations........ 2,045 2,678 6,104 900 36,572 331 10,164 27,041 16,504
--------- -------- -------- -------- -------- -------- -------- -------- --------
INCREASE (DECREASE) IN
NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net
premiums.............. 114,902 6,516 11,008 2,026 28,003 2,091 27,890 20,805 20,699
Transfers - policy
charges and
deductions............ (4,303) (1,844) (2,926) (587) (9,059) (469) (6,771) (5,873) (4,507)
Transfers in (from
other variable
accounts)............. 133,629 17,591 15,603 5,190 61,551 12,131 34,622 27,826 9,864
Transfers out (to other
variable accounts).... (214,125) (15,732) (11,609) (4,376) (46,874) (7,838) (39,146) (18,793) (5,914)
Transfers - other...... (7,489) (1,439) (14,668) (562) (10,114) (104) (5,388) (5,380) (2,426)
--------- -------- -------- -------- -------- -------- -------- -------- --------
Net Increase (Decrease)
In Net Assets
Derived From Policy
Transactions........... 22,614 5,092 (2,592) 1,691 23,507 5,811 11,207 18,585 17,716
--------- -------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS................. 24,659 7,770 3,512 2,591 60,079 6,142 21,371 45,626 34,220
--------- -------- -------- -------- -------- -------- -------- -------- --------
NET ASSETS
Beginning of Year...... 27,425 25,937 69,000 7,830 119,910 3,331 89,067 85,860 79,132
--------- -------- -------- -------- -------- -------- -------- -------- --------
End of Year............ $ 52,084 $ 33,707 $ 72,512 $ 10,421 $179,989 $ 9,473 $110,438 $131,486 $113,352
========= ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements
46
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BOND AND EQUITY INTER- EMERGING
EQUITY INCOME INDEX NATIONAL MARKETS VARIABLE VARIABLE VARIABLE VARIABLE
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT
ACCOUNT(1) ACCOUNT(1) ACCOUNT ACCOUNT ACCOUNT I II III IV
---------- ---------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS
Net investment income.. $ 30 $ 11 $ 7,400 $ 4,347 $ 41 $ 8 $ 71 $ 73 $ 63
Net realized gain from
security transactions. 13 5 12,511 4,938 187 2 7 42 7
Net unrealized
appreciation
(depreciation) on
investments........... 16 19 21,545 (62) (644) (4) 31 222 201
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Increase (Decrease)
In Net Assets Resulting
From Operations........ 59 35 41,456 9,223 (416) 6 109 337 271
-------- -------- -------- -------- -------- -------- -------- -------- --------
INCREASE (DECREASE) IN
NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net
premiums.............. 466 56 28,526 26,039 2,039 80 172 656 372
Transfers - policy
charges and
deductions............ (87) (13) (8,168) (7,142) (479) (25) (28) (149) (54)
Transfers in (from
other variable
accounts)............. 4,237 659 51,709 54,246 10,615 408 537 3,409 976
Transfers out (to other
variable accounts).... (438) (53) (25,760) (45,867) (6,460) (3) (163) (1,636) (217)
Transfers - other...... (47) 1 (25,672) (4,997) (162) (4) (17) (51) (9)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Increase In Net As-
sets
Derived From Policy
Transactions........... 4,131 650 20,635 22,279 5,553 456 501 2,229 1,068
-------- -------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS................. 4,190 685 62,091 31,502 5,137 462 610 2,566 1,339
-------- -------- -------- -------- -------- -------- -------- -------- --------
NET ASSETS
Beginning of Year...... 125,197 97,439 3,279 77 173 543 415
-------- -------- -------- -------- -------- -------- -------- -------- --------
End of Year............ $ 4,190 $ 685 $187,288 $128,941 $ 8,416 $ 539 $ 783 $ 3,109 $ 1,754
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) For the period from January 10, 1997 (commencement of operations) to
December 31, 1997.
See Notes to Financial Statements
47
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH GOVERN-
MONEY YIELD MANAGED MENT AGGRESSIVE EQUITY
MARKET BOND BOND SECURITIES GROWTH EQUITY GROWTH 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 appreci-
ation (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 premi-
ums................... 59,965 6,552 21,068 2,042 29,298 911 24,407 21,368
Transfers - policy
charges and deduc-
tions................. (3,056) (1,528) (2,686) (580) (7,697) (146) (5,343) (4,205)
Transfers in (from
other variable ac-
counts)............... 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 As-
sets
Derived From Policy
Transactions........... 2,817 9,149 18,282 1,330 10,517 4,220 24,819 24,067
--------- --------- --------- --------- --------- --------- --------- ---------
NET INCREASE IN NET AS-
SETS................... 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>
(1) For the period from April 8, 1996 (commencement of operations) to December
31, 1996.
See Notes to Financial Statements
48
<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
ACCOUNT ACCOUNT ACCOUNT ACCOUNT(1) I(1) II(1) III(1) 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 appreci-
ation (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 premi-
ums.................... 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 ac-
counts)................ 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 As-
sets
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>
(1) For the period from commencement of operations to December 31, 1996. The
Emerging Markets Variable Account 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 Account IV commenced operations on November 18, 1996.
See Notes to Financial Statements
49
<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, is currently comprised of eighteen 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 Variable Account, the Bond and
Income 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 fourteen 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 the 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 schedules of
investments, are either included elsewhere in this report or provided
separately and should be read in conjunction with the Separate Account's
financial statements.
During the year ended December 31, 1997, the Separate Account organized and
registered the Equity Variable Account and the Bond and Income Variable
Account with the Securities and Exchange Commission under the Investment
Company Act of 1940. Both Variable Accounts commenced operations on January
10, 1997.
The Separate Account was established by Pacific Life Insurance Company
(formerly named Pacific Mutual Life Insurance Company - see Note 1 to
Financial Statements of the Fund on A-66) 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 Life. The
assets of the Separate Account will not be charged with any liabilities
arising out of any other business conducted by Pacific Life, but the
obligations of the Separate Account, including benefits related to variable
life insurance, are obligations of Pacific Life.
The Separate Account held by Pacific Life represents funds from individual
flexible premium variable life policies. The assets of the Separate Account
are carried at market value.
The preparation of the accompanying financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
A. Valuation of Investments
Investments in shares of the Fund are valued at the reported net asset values
of the respective portfolios. 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 Life, 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 Life with respect to
the operations of the Separate Account.
2. DIVIDENDS
During 1997, the Funds have declared dividends for each portfolio except for
the Aggressive Equity Portfolio. The amounts accrued by the Separate Account
for its share of the dividends were reinvested in additional full and
fractional shares of the related portfolio.
3. CHARGES AND EXPENSES
With respect to variable life insurance policies funded by the Separate
Account, Pacific Life makes certain deductions from premiums for sales load
and state premium taxes before amounts are allocated to the Separate Account.
Pacific Life also makes certain deductions from the net assets of each
Variable Account for the mortality and expense risks Pacific Life 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 Life.
4. RELATED PARTY AGREEMENT
Pacific Mutual Distributors, Inc., a wholly-owned subsidiary of Pacific Life,
is the principal underwriter of variable life insurance policies funded by
interests in the Separate Account, and is compensated by Pacific Life.
50
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SEPARATE ACCOUNT'S COST OF INVESTMENTS 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). The cost and market
value of total Separate Account's investments in the Funds as of December 31,
1997 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
VARIABLE ACCOUNTS
--------------------------------------------------------------
GOVERN-
MONEY HIGH YIELD MANAGED MENT AGGRESSIVE
MARKET BOND BOND SECURITIES GROWTH EQUITY
-------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total cost of invest-
ments at beginning of
year $ 27,433 $ 25,201 $ 67,913 $ 7,723 $ 98,748 $ 3,264
Add:Total net proceeds
from policy transac-
tions 111,337 13,326 18,004 4,096 50,029 10,365
Reinvested distributions
from the Fund:
(a) Net investment in-
come 2,072 2,315 3,703 498 327
(b) Net realized gain 244 190 14,100
-------- -------- -------- -------- -------- --------
Sub-Total 140,842 41,086 89,810 12,317 163,204 13,629
Less:Cost of investments
disposed during the
year 88,634 7,781 20,229 2,309 19,701 4,453
-------- -------- -------- -------- -------- --------
Total cost of invest-
ments at end of year 52,208 33,305 69,581 10,008 143,503 9,176
Add:Unrealized apprecia-
tion (depreciation) (124) 402 2,931 413 36,486 297
-------- -------- -------- -------- -------- --------
Total market value of
investments at end of
year $ 52,084 $ 33,707 $ 72,512 $ 10,421 $179,989 $ 9,473
======== ======== ======== ======== ======== ========
<CAPTION>
GROWTH EQUITY MULTI- BOND AND EQUITY
LT INCOME STRATEGY EQUITY(1) INCOME(1) INDEX
-------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total cost of invest-
ments at beginning of
year $ 79,297 $ 71,762 $ 71,200 $ 99,779
Add:Total net proceeds
from policy transac-
tions 29,507 29,622 22,282 $ 4,587 $ 721 53,891
Reinvested distributions
from the Fund:
(a) Net investment in-
come 530 1,017 3,014 12 10 2,490
(b) Net realized gain 4,126 6,110 4,516 18 1 4,910
-------- -------- -------- -------- -------- --------
Sub-Total 113,460 108,511 101,012 4,617 732 161,070
Less:Cost of investments
disposed during the
year 14,401 7,749 3,871 443 66 20,745
-------- -------- -------- -------- -------- --------
Total cost of invest-
ments at end of year 99,059 100,762 97,141 4,174 666 140,325
Add:Unrealized apprecia-
tion 11,379 30,724 16,211 16 19 46,963
-------- -------- -------- -------- -------- --------
Total market value of
investments at end of
year $110,438 $131,486 $113,352 $ 4,190 $ 685 $187,288
======== ======== ======== ======== ======== ========
<CAPTION>
INTER- EMERGING
NATIONAL MARKETS I II III IV
-------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total cost of invest-
ments at beginning of
year $ 83,435 $ 3,318 $ 77 $ 177 $ 527 $ 416
Add:Total net proceeds
from policy transac-
tions 43,255 9,168 502 723 3,713 1,343
Reinvested distributions
from the Fund:
(a) Net investment in-
come 2,251 41 8 68 73 50
(b) Net realized gain 2,096 3 13
-------- -------- -------- -------- -------- --------
Sub-Total 131,037 12,527 587 971 4,313 1,822
Less:Cost of investments
disposed during the
year 16,037 3,429 43 209 1,421 251
-------- -------- -------- -------- -------- --------
Total cost of invest-
ments at end of year 115,000 9,098 544 762 2,892 1,571
Add:Unrealized apprecia-
tion (depreciation) 13,941 (682) (5) 21 217 183
-------- -------- -------- -------- -------- --------
Total market value of
investments at end of
year $128,941 $ 8,416 $ 539 $ 783 $ 3,109 $ 1,754
======== ======== ======== ======== ======== ========
</TABLE>
- ----------------------------
(1) For the period from January 10, 1997 (commencement of operations) to
December 31, 1997.
51
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. TRANSACTIONS IN SEPARATE ACCOUNT UNITS AND SELECTED ACCUMULATION UNIT **
INFORMATION
Transactions in Separate Account units for the year ended December 31, 1997
and the selected accumulation unit information as of December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
VARIABLE ACCOUNTS
---------------------------------------------------------------------
GOVERN-
MONEY HIGH YIELD MANAGED MENT AGGRESSIVE
MARKET BOND BOND SECURITIES GROWTH EQUITY
----------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 1,797,662 1,071,818 3,332,577 394,531 4,060,628 306,793
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 7,332,882 256,430 517,251 99,445 812,716 189,799
(b) Transfers--policy
charges and deductions (274,716) (72,698) (136,476) (28,791) (260,869) (42,787)
(c) Transfers in (from
other variable ac-
counts) 8,912,985 744,710 758,585 240,788 3,420,209 1,117,526
(d) Transfers out (to
other variable ac-
counts) (14,035,300) (666,562) (568,112) (200,607) (2,758,765) (720,928)
(e) Transfers -- other (490,883) (60,970) (717,810) (25,763) (595,259) (9,566)
----------- ---------- --------- -------- ---------- ----------
Sub-Total 1,444,968 200,910 (146,562) 85,072 618,032 534,044
----------- ---------- --------- -------- ---------- ----------
Total units outstanding
at end of year 3,242,630 1,272,728 3,186,015 479,603 4,678,660 840,837
=========== ========== ========= ======== ========== ==========
Accumulation Unit Value:
At beginning of year $15.26 $24.20 $20.70 $19.85 $29.53 $10.86
At end of year $16.06 $26.48 $22.76 $21.73 $38.47 $11.27
<CAPTION>
GROWTH EQUITY MULTI- BOND AND EQUITY
LT INCOME STRATEGY EQUITY(1) INCOME(1) INDEX
----------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 4,879,333 3,031,251 3,255,044 5,062,679
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 1,453,920 639,734 756,562 40,729 4,994 972,808
(b) Transfers -- policy
charges and deductions (351,905) (177,390) (168,112) (7,611) (1,147) (279,773)
(c) Transfers in (from
other variable ac-
counts) 2,392,868 2,011,731 815,061 375,727 57,435 3,558,114
(d) Transfers out (to
other variable ac-
counts) (2,568,247) (1,473,786) (539,476) (39,428) (3,737) (1,811,915)
(e) Transfers -- other (353,490) (421,911) (221,300) (4,231) 71 (1,805,725)
----------- ---------- --------- -------- ---------- ----------
Sub-Total 573,146 578,378 642,735 365,186 57,616 633,509
----------- ---------- --------- -------- ---------- ----------
Total units outstanding
at end of year 5,452,479 3,609,629 3,897,779 365,186 57,616 5,696,188
=========== ========== ========= ======== ========== ==========
Accumulation Unit Value:
At beginning of year $18.25 $28.32 $24.31 $10.00 $10.00 $24.73
At end of year $20.25 $36.43 $29.08 $11.47 $11.89 $32.88
<CAPTION>
INTER- EMERGING
NATIONAL MARKETS I II III IV
----------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 5,140,103 333,810 7,649 17,011 51,927 41,571
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 1,256,235 196,931 7,660 15,681 56,619 32,122
(b) Transfers -- policy
charges and deductions (344,327) (46,049) (2,403) (2,375) (12,514) (4,516)
(c) Transfers in (from
other variable ac-
counts) 2,634,912 1,014,227 42,342 52,906 309,339 87,218
(d) Transfers out (to
other variable ac-
counts) (2,220,624) (612,170) (1,263) (21,044) (157,101) (22,938)
(e) Transfers -- other (241,927) (15,352) (1,685) (2,195) (4,897) (951)
----------- ---------- --------- -------- ---------- ----------
Sub-Total 1,084,269 537,587 44,651 42,973 191,446 90,935
----------- ---------- --------- -------- ---------- ----------
Total units outstanding
at end of year 6,224,372 871,397 52,300 59,984 243,373 132,506
=========== ========== ========= ======== ========== ==========
Accumulation Unit Value:
At beginning of year $18.96 $9.82 $10.08 $10.18 $10.46 $ 9.97
At end of year $20.72 $9.66 $10.31 $13.06 $12.77 $13.23
</TABLE>
- ----------------------------
(1) For the period from January 10, 1997 (commencement of operations) to
December 31, 1997.
**Accumulation Unit: unit of measure used to calculate the value of a Policy
Owner's interest in a Variable Account during the accumulation period.
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
Pacific Life Insurance Company and
Subsidiaries:
We have audited the accompanying consolidated statements of financial
condition of Pacific Life Insurance Company (formerly Pacific Mutual Life
Insurance Company) and subsidiaries (the "Company") as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholder's equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Pacific Life Insurance
Company and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 19, 1998
53
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1997 1996
- ----------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at estimated fair value:
Fixed maturity securities $13,990.7 $12,193.8
Equity securities 346.4 260.8
Mortgage loans 1,922.1 1,477.3
Real estate 192.1 280.0
Policy loans 3,769.2 3,131.8
Short-term investments 83.8 66.1
Other investments 380.2 208.0
- ----------------------------------------------------------------------------
TOTAL INVESTMENTS 20,684.5 17,617.8
Cash and cash equivalents 110.4 109.0
Deferred policy acquisition costs 716.9 531.5
Accrued investment income 255.4 202.5
Other assets 636.5 462.4
Separate account assets 11,605.1 8,142.1
- ----------------------------------------------------------------------------
TOTAL ASSETS $34,008.8 $27,065.3
============================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life, annuity and other investment
contract deposits $16,644.5 $13,877.4
Future policy benefits 2,133.8 2,506.5
Short-term and long-term debt 253.6 270.1
Other liabilities 1,224.5 572.0
Separate account liabilities 11,605.1 8,142.1
- ----------------------------------------------------------------------------
Total Liabilities 31,861.5 25,368.1
- ----------------------------------------------------------------------------
Commitments and contingencies
Stockholder's Equity:
Common stock - $50 par value; 600,000 shares
authorized, issued and outstanding 30.0
Paid-in capital 120.1
Retained earnings 1,422.0 1,318.0
Unrealized gain on securities available for sale,
net 575.2 379.2
- ----------------------------------------------------------------------------
Total Stockholder's Equity 2,147.3 1,697.2
- ----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $34,008.8 $27,065.3
============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
54
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Insurance premiums $ 504.3 $ 465.4 $ 458.5
Policy fees from universal life, annuity and other
investment contract deposits 431.2 348.6 309.0
Net investment income 1,225.3 1,087.3 1,038.4
Net realized capital gains 85.3 44.0 61.5
Commission revenue 146.6 79.6 62.0
Other income 181.7 123.1 90.3
- ------------------------------------------------------------------------------
TOTAL REVENUES 2,574.4 2,148.0 2,019.7
- ------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and
other investment contract deposits 797.8 665.0 675.2
Policy benefits paid or provided 675.7 652.9 647.5
Commission expenses 303.7 233.6 197.5
Operating expenses 507.7 316.2 278.6
- ------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,284.9 1,867.7 1,798.8
- ------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 289.5 280.3 220.9
Provision for income taxes 113.5 113.7 86.1
- ------------------------------------------------------------------------------
NET INCOME $ 176.0 $ 166.6 $ 134.8
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
55
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Common Stock on Securities
------------- Paid-in Retained Available
Shares Amount Capital Earnings for Sale, net Total
- ---------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1995 $1,016.6 $(207.3) $ 809.3
Net income 134.8 134.8
Change in unrealized
gain (loss) on
securities available
for sale, net 689.3 689.3
- ---------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1995 1,151.4 482.0 1,633.4
Net income 166.6 166.6
Change in unrealized
gain on securities
available for sale, net (102.8) (102.8)
- ---------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1996 1,318.0 379.2 1,697.2
Net income 176.0 176.0
Change in unrealized
gain on securities
available for sale, net 196.0 196.0
Issuance of partnership
units by affiliate $ 85.1 85.1
Initial member
capitalization of
Pacific Mutual Holding
Company (2.0) (2.0)
Issuance of common stock 0.6 $30.0 35.0 (65.0) --
Dividend paid to parent (5.0) (5.0)
- ---------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1997 0.6 $30.0 $120.1 $1,422.0 $ 575.2 $2,147.3
=================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
56
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 176.0 $ 166.6 $ 134.8
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization on fixed maturities (26.6) (45.2) (67.2)
Depreciation and other amortization 38.3 43.8 36.8
Deferred income taxes (14.4) (49.8) (30.3)
Net realized capital gains (85.3) (44.0) (61.5)
Net change in deferred policy acquisition
costs (185.4) (140.4) 48.8
Interest credited to universal life, annuity
and other investment contract deposits 797.8 665.0 675.2
Change in accrued investment income (52.9) (3.7) (16.1)
Change in future policy benefits (372.7) 62.3 88.8
Change in other assets and liabilities 577.4 158.1 151.9
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 852.2 812.7 961.2
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (6,343.2) (4,525.0) (3,001.3)
Sales 2,247.5 2,511.0 1,940.3
Maturities and repayments 2,406.8 1,184.7 926.9
Held to maturity securities:
Purchases (181.9)
Sales 62.3
Maturities and repayments 111.0
Repayments of mortgage loans 179.3 220.4 267.7
Proceeds from sales of mortgage loans and real
estate 104.4 14.5 27.4
Purchases of mortgage loans and real estate (643.7) (414.3) (244.7)
Distributions from partnerships 91.6 78.8 49.0
Change in policy loans (637.4) (338.5) (389.8)
Change in short-term investments (17.7) 37.2 (66.7)
Other investing activity, net 78.8 (144.5) (137.2)
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (2,533.6) (1,375.7) (637.0)
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
57
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1997 1996 1995
- ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 4,373.6 $ 2,105.0 $ 1,437.9
Withdrawals (2,667.3) (1,756.6) (1,774.2)
Net change in short-term debt 8.5 42.5 (38.8)
Repayment of long-term debt (25.0) (5.0) (5.0)
Initial capitalization of Pacific Mutual
Holding Company (2.0)
Dividend paid to parent (5.0)
- ------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING AC-
TIVITIES 1,682.8 385.9 (380.1)
- ------------------------------------------------------------------------------
Net change in cash and cash equivalents 1.4 (177.1) (55.9)
Cash and cash equivalents, beginning of year 109.0 286.1 342.0
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 110.4 $ 109.0 $ 286.1
==============================================================================
</TABLE>
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
In connection with the acquisition of an insurance block of business as
discussed in Note 5, the following assets and liabilities were assumed:
<TABLE>
<S> <C>
Cash $ 1,215.9
Policy loans 440.3
Other assets 43.4
---------
Total assets assumed $ 1,699.6
=========
Policyholder account values $ 1,693.8
Other liabilities 5.8
---------
Total liabilities assumed $ 1,699.6
=========
================================================================================
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
As a result of the Conversion as discussed in Note 1, $65 million of retained
earnings was allocated for the issuance of 600,000 shares of common stock with
a par value totaling $30 million and $35 million was allocated to paid-in
capital.
================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<S> <C> <C> <C>
Income taxes paid $ 144.5 $ 185.9 $ 96.9
Interest paid $ 26.1 $ 27.2 $ 23.3
================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
58
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
CONVERSION TO MUTUAL HOLDING COMPANY STRUCTURE
Pursuant to consent received from the Insurance Department of the State of
California, Pacific Mutual Life Insurance Company ("Pacific Mutual")
implemented a plan of conversion to form a mutual holding company
structure (the "Conversion") on September 1, 1997. The Conversion created
Pacific LifeCorp, an intermediate stock holding company and Pacific Mutual
Holding Company ("PMHC"), a mutual holding company. Pacific Mutual was
converted to a stock life insurance company and renamed Pacific Life
Insurance Company ("Pacific Life"). Under their respective charters, PMHC
must always own 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 PMHC, consisting
principally of the right to vote on the election of the Board of Directors
of PMHC and on other matters, and certain rights upon liquidation or
dissolution of PMHC.
As a result of the Conversion, $65 million of retained earnings was
allocated for the issuance of 600,000 shares of common stock with a par
value totaling $30 million and $35 million was allocated to paid-in
capital.
DESCRIPTION OF BUSINESS
Pacific Life was established in 1868 and is organized under the laws of
the State of California as a stock life insurance company. Pacific Life
conducts business in every state except New York.
Pacific 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,
asset 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 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 Life
Insurance Company and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles ("GAAP") and
include the accounts of Pacific Life and its wholly-owned insurance
subsidiaries, PM Group Life Insurance Company ("PM Group") and World-Wide
Holdings Limited, and its noninsurance subsidiaries, Pacific Asset
Management LLC ("PAM"), Pacific Mutual Distributors, Inc. ("PMD"), Pacific
Mutual Realty Finance, Inc. and Pacific Mezzanine Associates, L.L.C. All
significant intercompany transactions and balances have been eliminated.
Pacific 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).
PAM was initially capitalized on December 31, 1997, when Pacific Life
completed a subsidiary restructuring in which all the assets and
liabilities of Pacific Financial Asset Management Corporation ("PFAMCo")
were contributed into this newly formed limited liability company. PFAMCo
was then merged into Pacific Life. On October 30, 1997, Pacific Corinthian
Life Insurance Company ("PCL"-Note 4), a wholly-owned insurance
subsidiary, was merged into Pacific Life, with Pacific Life as the
surviving entity.
ACCOUNTING PRONOUNCEMENTS ADOPTED
In 1996, the Company 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
59
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Principles to Mutual Life Insurance and Other Enterprises" (the
"Interpretation") issued by the Financial Accounting Standards Board
("FASB"). SFAS No. 120 and the Interpretation permit mutual life insurance
companies and their insurance subsidiaries to adopt all applicable
authoritative GAAP pronouncements in any general purpose financial
statements that they may issue. This differs from prior years when the
Company issued its regulatory financial statements as general purpose
financial statements. The accompanying consolidated financial statements
for 1997, 1996 and 1995 reflect the effects of implementing SFAS No. 120
and the Interpretation.
On January 1, 1997, the Company adopted 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 condition, and determines when related revenues and
expenses should be recognized. Adoption of this accounting standard did
not have a significant impact on the consolidated financial position or
results of operations of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and display
of comprehensive income and its components in a full set of general
purpose financial statements. The Company currently plans to adopt SFAS
No. 130 on January 1, 1998.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS No. 132 revises
current note disclosure requirements for employers' pensions and other
retiree benefits. It does not address recognition or measurement issues.
The Company plans to adopt SFAS No. 132 during 1998.
INVESTMENTS
Available for sale fixed maturity and equity securities are reported at
estimated fair value, with unrealized gains and losses, net of deferred
income tax and adjustments related to deferred policy acquisition costs,
included as a separate component of equity on the accompanying
consolidated statements of financial condition. Trading securities, which
are included in short-term investments, are reported at estimated fair
value with unrealized gains and losses included in net realized capital
gains 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 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 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
60
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the securities at the date of transfer. The estimated 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 determined that the reclassification of these
securities as available for sale was appropriate.
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 estimated fair value and include all
trading securities.
Derivative financial instruments are carried at estimated 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, certain of the Company's investment management and
advisory subsidiaries 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"). In December 1997, PIMCO Advisors
completed a transaction in which it acquired the assets of Oppenheimer
Capital, L.P., including its interest in Oppenheimer Capital, by issuing
approximately 33 million PIMCO Advisors General and Limited Partner units.
In connection with this transaction, the Company increased its investment
in PIMCO Advisors to reflect the excess of the Company's pro rata share of
PIMCO Advisors partners' capital subsequent to this transaction over the
carrying value of the Company's investment in PIMCO Advisors. The net
result of this transaction was to directly increase stockholder's equity
by $85.1 million. The Company's beneficial ownership in PIMCO Advisors was
approximately 42% prior to this transaction and 31% subsequent to the
transaction. Deferred taxes as a result of this transaction have been
established on the accompanying consolidated financial statements. This
investment, which is included in other investments on the accompanying
consolidated statements of financial condition, is accounted for using 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
61
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized, using assumptions consistent with those used in computing
policy reserves. For the years ended December 31, 1997, 1996 and 1995, net
amortization of deferred policy acquisition costs included in commission
expenses amounted to $50.2 million, $42.6 million and $39.4 million,
respectively, and included in operating expenses amounted to $29.4
million, $27.4 million and $20.8 million, respectively, on the
accompanying consolidated statements of operations.
PRESENT VALUE OF FUTURE PROFITS
Included in other assets on the accompanying consolidated statement of
financial condition as of December 31, 1996 was $16.1 million which
represented the present value of estimated future profits of acquired
business in connection with the rehabilitation of First Capital Life
Insurance Company ("FCL"-Note 4). The aforementioned future profits were
discounted to provide an appropriate rate of return and were being
amortized over the rehabilitation plan period. Amortization for the years
ended December 31, 1997, 1996 and 1995 amounted to $16.1 million, $24.2
million and $17.1 million, respectively, and is included in commission
expenses in the accompanying consolidated statements of operations. 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 primarily ranged from 4.0% to 8.4% during 1997,
1996 and 1995.
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 1997, 1996 and 1995.
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
are dividends to policyholders.
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,
1997 and 1996, 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, 1997, has accrued in other liabilities on
the accompanying consolidated statements of financial condition 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.
62
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Commission revenue from Pacific Life's broker dealer subsidiaries is
generally recorded on a settlement basis, generally the third business day
following the trade date. The difference between the settlement date and
trade date is not considered material.
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. Depreciation and
amortization of other assets is included in operating expenses on the
accompanying consolidated statements of operations.
INCOME TAXES
Pacific Life is taxed as a life insurance company for income tax purposes
and is included in the consolidated income tax returns of PMHC. The amount
of 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
contract owners.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 6 and
7 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.
BUSINESS RISKS
The Company operates in a business environment which is subject to various
risks and uncertainties. Such risks and uncertainties include interest
rate risk, credit risk and legal and regulatory changes.
Interest rate risk is the potential for interest rates to change, which
can cause fluctuations in the value of investments. To the extent that
fluctuations in interest rates cause the duration of assets and
liabilities to differ, the Company may have to sell assets prior to their
maturity and realize losses. The Company controls its exposure to this
risk by, among other things, asset/liability matching techniques which
attempt to match the duration of assets and liabilities and utilization of
derivative instruments.
63
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Credit risk is the risk that issuers of investments owned by the Company
may default or that other parties may not be able to pay amounts due to
the Company. 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 also 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.
The Company is subject to various state and Federal regulatory
authorities. The potential exists for changes in regulatory initiatives
which can result in additional, unanticipated expense to the Company.
Existing Federal laws and regulations affect the taxation of life
insurance or annuity products and insurance companies. There can be no
assurance as to what, if any, future legislation might be enacted, or if
enacted, whether such legislation would contain provisions with possible
negative effects on the Company's life insurance or annuity products.
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
financial statement presentation.
2. STATUTORY RESULTS
The following are reconciliations of statutory capital and surplus and
statutory net income for Pacific 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 stockholder's
equity and net income included in the accompanying consolidated financial
statements:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------
(In Millions)
<S> <C> <C>
Statutory capital and surplus $ 944.8 $ 815.2
Deferred policy acquisition costs 730.7 542.0
Unrealized gain on securities available for
sale, net 575.2 379.2
Asset valuation reserve 252.4 209.5
Deferred income tax 240.9 174.6
Subsidiary equity 108.7 60.7
Non-admitted assets 25.2 22.8
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (511.5) (340.4)
Other (69.5) (16.8)
------------------
Stockholder's equity as reported herein $2,147.3 $1,697.2
==================
</TABLE>
64
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $ 121.5 $ 113.1 $ 85.1
Deferred policy acquisition costs 160.4 111.2 76.4
Deferred income tax 41.2 70.9 31.5
Interest maintenance reserve 7.6 3.8 12.2
Net realized gain (loss) on trading se-
curities (5.8) (11.6) 13.2
Earnings of subsidiaries (40.6) (33.0) 5.9
Insurance and annuity reserves (107.0) (91.3) (95.5)
Other (1.3) 3.5 6.0
--------------------------
Net income as reported herein $ 176.0 $ 166.6 $ 134.8
==========================
</TABLE>
RISK-BASED CAPITAL
Risk-based capital is a method developed by the National Association of
Insurance Commissioners ("NAIC") to measure the minimum amount of capital
appropriate for an insurance company to support its overall business
operations in consideration of its size and risk profile. 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. The adequacy of a
company's actual capital is measured by comparing it to the risk-based
capital as determined by the formulas. Companies below minimum risk-based
capital requirements are classified within certain levels, each of which
requires specified corrective action. As of December 31, 1997 and 1996,
Pacific Life and PM Group exceeded the minimum risk-based capital
requirements.
DIVIDEND RESTRICTIONS
Dividend payments by Pacific Life to its parent cannot exceed the greater
of 10% of statutory capital and surplus as of the preceding year end or
the statutory net gain from operations for the previous calendar year,
without prior approval from the Insurance Department of the State of
California. Based on this limitation and 1997 statutory results, Pacific
Life could pay approximately $76.5 million in dividends in 1998 without
prior approval.
Extraordinary dividends to Pacific Life from PM Group are subject to
regulatory restrictions and approvals by the Insurance Department of the
State of Arizona, PM Group's state of domicile. The maximum amount of
ordinary dividends that can be paid by PM Group without restriction cannot
exceed the lesser of 10% of surplus as regards policyholders, or the
statutory net gain from operations. During 1997, 1996 and 1995, PM Group
received approval to pay dividends of $14 million, $25 million and $25
million for the years ended December 31, 1997, 1996 and 1995 of which $8
million, $18 million and $17.2 million, respectively, were considered
extraordinary.
In accordance with the terms of the rehabilitation agreement (Note 4), PCL
was 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 were paid.
65
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CLOSED BLOCK
In connection with the Conversion, an arrangement known as a closed block
(the "Closed Block"), was established, for dividend purposes only, for the
exclusive benefit of certain individual life insurance policies that have
an experience based dividend scale for 1997. The Closed Block is designed
to give reasonable assurance to holders of Closed Block policies that
policy dividends will not change solely as a result of the Conversion.
Assets of Pacific Life have been allocated to the Closed Block in an
amount that produces cash flows, which, together with anticipated
revenues, are expected to be sufficient to support the policies. Pacific
Life is not required to support the payment of dividends on these policies
from its general funds. The Closed Block will continue in effect until
either the last policy is no longer in force, or the dissolution of the
Closed Block. Total assets of $316.2 million and total liabilities of
$356.0 million for the Closed Block are included in other assets and other
liabilities, respectively, in the accompanying consolidated statements of
financial condition as of December 31, 1997. The contribution to income
from the Closed Block of $5.7 million, consisting of net revenues and
expenses generated by the Closed Block is included in other income in the
accompanying consolidated statements of operations for the year ended
December 31, 1997.
4. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
On September 30, 1997, PCL completed the rehabilitation of FCL pursuant to
a five-year rehabilitation plan approved by the California Superior Court
and the Insurance Department of the State of California (the
"Rehabilitation Plan"). Under the terms of the Rehabilitation Plan, FCL's
insurance policies in force, primarily individual annuities and universal
life insurance, were restructured and assumed by PCL on December 31, 1992,
pursuant to an assumption reinsurance agreement and asset purchase
agreement. On October 30, 1997, PCL was merged into Pacific Life, with
Pacific Life as the surviving entity.
5. ACQUISITION OF INSURANCE BLOCK OF BUSINESS
On June 1, 1997, Pacific Life acquired a block of corporate-owned life
insurance ("COLI") policies from Confederation Life Insurance Company
(U.S.) in Rehabilitation, which is currently under rehabilitation, which
consisted of approximately 38,000 policies having a face amount of
insurance of $8.6 billion and reserves of approximately $1.7 billion. The
assets received as part of this acquisition amounted to approximately $1.2
billion in cash and approximately $0.4 billion in policy loans. This block
is primarily non-leveraged COLI.
As part of this transaction, an amount equal to the excess of the
estimated fair value of the reserves assumed over the estimated fair value
of the assets acquired which represents the cost of acquiring the
business, amounting to $43.4 million at December 31, 1997, is included in
deferred policy acquisition costs in the accompanying consolidated
statements of financial condition. Amortization of this asset for the year
ended December 31, 1997 was $0.9 million and is included in commission
expenses in the accompanying consolidated statements of operations.
66
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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
Amortized ----------------- Estimated
Cost Gains Losses Fair Value
--------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Securities Available for Sale:
As of December 31, 1997:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 85.4 $ 17.5 $ 102.9
Obligations of states, political
subdivisions and foreign govern-
ments 730.2 89.4 $ 3.0 816.6
Corporate securities 7,704.8 594.3 72.7 8,226.4
Mortgage-backed and asset-backed
securities 4,597.7 147.1 15.5 4,729.3
Redeemable preferred stock 107.8 10.3 2.6 115.5
-------------------------------------
Total fixed maturity securities $13,225.9 $ 858.6 $ 93.8 $13,990.7
=====================================
Total equity securities $ 231.7 $ 123.6 $ 8.9 $ 346.4
=====================================
Securities Available for Sale:
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 govern-
ments 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
=====================================
Total equity securities $ 229.6 $ 40.8 $ 9.6 $ 260.8
=====================================
</TABLE>
67
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
The amortized cost and estimated fair values of fixed maturity securities
as of December 31, 1997, 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>
Securities Available for Sale:
Due in one year or less $ 969.9 $ 1,075.2
Due after one year through five years 2,678.4 2,823.1
Due after five years through ten years 2,810.1 2,939.3
Due after ten years 2,169.8 2,423.8
----------------------
8,628.2 9,261.4
Mortgage-backed and asset-backed securities 4,597.7 4,729.3
----------------------
Total $13,225.9 $13,990.7
======================
</TABLE>
Proceeds from sales of all securities available for sale during 1997, 1996
and 1995 were $2.2 billion, $2.5 billion and $1.9 billion, respectively.
Gross gains of $69.1 million, $89.3 million and $58.0 million and gross
losses of $32.9 million, $29.9 million and $32.3 million were realized on
those sales during 1997, 1996 and 1995, respectively.
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $ 935.1 $ 831.6 $ 808.1
Equity securities 12.8 17.8 7.3
Mortgage loans 129.5 109.4 112.9
Real estate 53.6 51.3 43.2
Policy loans 137.1 113.0 105.2
Other 65.8 71.7 63.2
--------------------------
Gross investment income 1,333.9 1,194.8 1,139.9
Investment expense 108.6 107.5 101.5
--------------------------
Net investment income $1,225.3 $1,087.3 $1,038.4
==========================
</TABLE>
68
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
The change in gross unrealized gain (loss) on investments in available for
sale and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale and trading securities:
Fixed maturity $222.4 $(169.1) $1,039.3
Equity 85.7 6.5 17.2
------------------------
Total $308.1 $(162.6) $1,056.5
========================
</TABLE>
As of December 31, 1997 and 1996, investments in fixed maturity securities
with a carrying value of $14.4 million and $19.6 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, 1997. The Company has no non-income producing fixed maturity
securities, mortgage loans, real estate or other long-term investments as
of December 31, 1997.
7. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity se-
curities (Note 6) $14,337.1 $14,337.1 $12,454.6 $12,454.6
Mortgage loans 1,922.1 1,990.9 1,477.3 1,533.9
Policy loans 3,769.2 3,769.2 3,131.8 3,131.8
Cash and cash equivalents 110.4 110.4 109.0 109.0
Derivative financial instru-
ments:
Interest rate floors and
caps, options and swaptions 22.9 22.9 59.3
Interest rate swap contracts 0.5 0.5 1.0 1.0
Credit and total return
swaps 1.1 1.1
Foreign currency derivatives 4.1 4.1
Liabilities:
Guaranteed interest contracts 3,982.0 4,035.7 2,948.3 3,056.1
Deposit liabilities 733.5 737.4 799.6 800.6
Annuity liabilities 1,883.5 1,872.6 2,459.4 2,459.4
Surplus notes 149.6 164.7 149.6 157.5
Derivative financial instru-
ments:
Options written 1.6 1.6 1.5 1.5
Asset swap contracts 12.6 12.6 12.5 12.5
Credit and total return
swaps 4.0 4.0
Foreign currency derivatives 4.3 4.3
</TABLE>
69
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of these financial instruments as of December 31, 1997 and 1996:
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flows, using a year-end market rate
which is applicable to the yield, credit quality and average maturity of
the composite portfolio.
POLICY LOANS
The 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.
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.
70
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
A reconciliation of the notional or contract amounts and discussion of the
various derivative instruments is as follows:
<TABLE>
<CAPTION>
Balance Terminations Balance
Beginning and End
of Year Acquisitions Maturities of Year
-------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
December 31, 1997:
Interest rate floors and
caps, options and
swaptions $4,538.2 $1,644.2 $3,452.4 $2,730.0
Interest rate swap con-
tracts 988.3 1,356.0 318.2 2,026.1
Asset swap contracts 30.0 47.4 10.0 67.4
Credit and total return
swaps 356.5 98.9 166.9 288.5
Financial futures contracts 609.2 3,930.6 4,325.7 214.1
Foreign currency deriva-
tives 41.4 217.0 51.4 207.0
December 31, 1996:
Interest rate floors and
caps, options and
swaptions 1,834.6 3,075.0 371.4 4,538.2
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 contracts 310.1 3,358.9 3,059.8 609.2
Foreign currency deriva-
tives 15.4 43.1 17.1 41.4
</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 condition. 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 1998 through 2007.
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 through an adjustment to net investment income in
the accompanying consolidated statements of operations over the life of
the agreements. The interest rate swap contracts mature during fiscal
years 1998 through 2021.
71
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
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 through an adjustment to net
investment income in the accompanying consolidated statements of
operations over the life of the agreements. The asset swap contracts
mature during fiscal years 1998 through 2003.
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 through an adjustment to net investment income in
the accompanying consolidated statements of operations over the life of
the agreements. Credit and total return swaps mature during fiscal years
1998 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 through an adjustment to net investment income in
the accompanying consolidated statements of operations over the life of
the agreements. Foreign currency derivatives expire during fiscal years
1998 through 2011.
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.
ANNUITY LIABILITIES
The estimated fair value of annuity liabilities approximates carrying
value and primarily includes policyholder deposits and accumulated
credited interest.
72
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
SURPLUS NOTES
The estimated fair value of surplus notes is based on market quotes.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Life has issued certain contracts to plan sponsors totaling $1.6
billion as of December 31, 1997, pursuant to the terms of which the plan
sponsor retains direct ownership and control of the assets related to
these contracts. Pacific Life agrees to provide benefit responsiveness in
the event that plan benefit requests exceed plan cash flows. In return for
this guarantee, Pacific Life receives a fee which varies by contract.
Pacific Life sets the investment guidelines to provide for appropriate
credit quality and cash flow matching.
8. UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
Detail of universal life, annuity and other investment contract deposit
liabilities follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------
(In Millions)
<S> <C> <C>
Universal life $10,012.0 $ 7,562.5
Annuity 1,817.4 2,459.3
Other investment contract
deposits 4,815.1 3,855.6
-------------------
$16,644.5 $13,877.4
===================
</TABLE>
Detail of universal life, annuity and other investment contract deposits
policy fees and interest credited net of reinsurance ceded follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------------------------
(In Millions)
<S> <C> <C> <C>
Policy fees
Universal life $ 377.5 $ 318.4 $ 292.6
Annuity 50.3 26.6 12.8
Other investment contract
deposits 3.4 3.6 3.6
--------------------------
Total policy fees $ 431.2 $ 348.6 $ 309.0
==========================
Interest credited
Universal life $368.2 $284.3 $267.3
Annuity 116.8 138.7 137.5
Other investment contract de-
posits 312.8 242.0 270.4
--------------------------
Total interest credited $797.8 $665.0 $675.2
==========================
</TABLE>
73
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SHORT-TERM AND LONG-TERM DEBT
Pacific Life borrows for short-term needs by issuing commercial paper.
There was no commercial paper debt outstanding as of December 31, 1997 and
1996. Pacific Life had a revolving credit facility available of $350
million and $250 million as of December 31, 1997 and 1996, respectively.
There was no debt outstanding under the revolving credit facility as of
December 31, 1997 and 1996.
The borrowing limit for PAM as of December 31, 1997 and 1996 was $200
million and $150 million, respectively. The interest rate averaged 5.8%,
5.6% and 6.1% for the years ended December 31, 1997, 1996 and 1995,
respectively. The balance outstanding as of December 31, 1997 and 1996
totaled $104 million and $95.5 million, respectively. Outstanding debt is
due and payable in 1998 and subject to renewal.
During 1992, a wholly-owned subsidiary of Pacific Life 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 4). On December 31, 1996, the
applicable interest rate was 6.2%. The outstanding balance of $25 million
was prepaid per the terms of the agreement on January 27, 1997.
Pacific Life has $150 million of long-term debt which consists 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 Life or any
holder of the surplus notes. The surplus notes are unsecured and
subordinated to all present and future senior indebtedness and policy
claims of Pacific 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 each of the years ended December 31, 1997,
1996 and 1995 and is included in net investment income in the accompanying
consolidated statements of operations.
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,
1997 1996 1995
----------------------------
(In Millions)
<S> <C> <C> <C>
Current $127.9 $163.5 $116.4
Deferred (14.4) (49.8) (30.3)
----------------------------
$113.5 $113.7 $ 86.1
============================
</TABLE>
74
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
The sources of the Company's provision for deferred taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------------------------
(In Millions)
<S> <C> <C> <C>
Reserves $ 20.1 $(28.5) $(28.7)
Investment valuation 3.9 (7.3) 8.1
Deferred policy acquisition costs (18.0) 2.1 (6.0)
Other (20.4) (16.1) (3.7)
----------------------------
$(14.4) $(49.8) $(30.3)
============================
</TABLE>
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,
1997 1996 1995
---------------------------
(In Millions)
<S> <C> <C> <C>
Income taxes at the statutory rate $101.3 $ 98.1 $77.3
Equity tax 5.0 16.3
Amortization of intangibles on equity
method investments 7.6 6.5 6.5
Non-taxable investment income (2.6) (2.1) (2.1)
Other 2.2 (5.1) 4.4
-------------------------
$113.5 $113.7 $86.1
=========================
</TABLE>
The net deferred tax asset (liability) included in other assets on the
accompanying consolidated statements of financial condition was comprised
of the tax effects of the following temporary differences:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------
(In Millions)
<S> <C> <C>
Reserves $ 224.8 $ 244.9
Deferred compensation 25.9 27.6
Investment valuation 20.1 24.0
Postretirement benefits 9.3 9.8
Dividends 7.7 9.6
Depreciation (2.5) (9.8)
Deferred policy acquisition costs (25.9) (43.9)
Other 41.0 23.8
----------------
Deferred taxes from operations 300.4 286.0
Issuance of partnership units by affiliate (47.9)
Unrealized gain on securities available for
sale (307.8) (204.5)
----------------
Net deferred tax asset (liability) $ (55.3) $ 81.5
================
</TABLE>
75
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 condition.
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 a 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,
1997 1996
--------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(39.6) $(35.9)
Future policy benefits 92.2 90.0
Unpaid claims 14.0 4.6
Paid claims 10.2 8.4
</TABLE>
As of December 31, 1997, 72% 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,
1997 1996 1995
--------------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance
premiums $ 70.7 $ 44.3 $ 29.2
Assumed reinsurance included in insurance
premiums 18.1 17.8 15.6
Ceded reinsurance netted against policy fees 77.5 71.0 66.5
Ceded reinsurance netted against net invest-
ment income 204.9 192.5 176.6
Ceded reinsurance netted against interest
credited 165.8 155.2 140.0
Ceded reinsurance netted against policy bene-
fits 93.4 56.7 51.4
Assumed reinsurance included in policy bene-
fits 12.7 9.9 14.5
</TABLE>
76
<PAGE>
Pacific 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,
1997 1996 1995
---------------------------
(In Millions)
<S> <C> <C> <C>
Revenues:
Individual Life Insurance and Annuities $1,137.7 $ 964.0 $ 927.0
Pensions 584.0 507.3 513.9
Group Employee Benefits 507.5 456.0 419.3
Corporate and Other 345.2 220.7 159.5
---------------------------
Total $2,574.4 $2,148.0 $2,019.7
===========================
Income before provision for income taxes:
Individual Life Insurance and Annuities $ 164.0 $ 93.9 $ 102.3
Pensions 98.3 80.7 53.3
Group Employee Benefits 28.8 26.5 25.2
Corporate and Other (1.6) 79.2 40.1
---------------------------
Total $ 289.5 $ 280.3 $ 220.9
===========================
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------
(In Millions)
<S> <C> <C>
Assets:
Individual Life Insurance and Annuities $19,969.2 $15,484.4
Pensions 12,653.6 10,514.8
Group Employee Benefits 368.6 344.4
Corporate and Other 1,017.4 721.7
-------------------
Total $34,008.8 $27,065.3
===================
</TABLE>
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS
PENSION PLANS
Pacific Life has defined benefit pension plans which cover 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 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
77
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
not only for benefits attributed to employment to date but also for those
expected to be earned in the future. All such contributions are made to a
tax-exempt trust. Plan assets consist primarily of group annuity contracts
issued by Pacific Life, as well as participating units of a real estate
trust and mutual funds managed by an indirect subsidiary of Pacific Life.
Components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------------------------
(In Millions)
<S> <C> <C> <C>
Service cost - benefits earned during
the year $ 3.6 $ 3.7 $ 2.8
Interest cost on projected benefit obli-
gation 10.4 9.8 9.3
Actual return on plan assets (33.1) (21.7) (25.0)
Amortization of net obligations and
prior service cost 18.9 9.1 14.0
--------------------------
Net periodic pension cost $ (0.2) $ 0.9 $ 1.1
==========================
</TABLE>
The following table sets forth the pension plan's funded status and
amounts recognized on Pacific Life's consolidated statements of financial
condition:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------
(In Millions)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $ 137.1 $ 121.2
Nonvested benefits 1.2 1.2
----------------
Accumulated benefit obligation 138.3 122.4
Effect of projected future compensation increases 19.6 18.5
----------------
Projected benefit obligation 157.9 140.9
Plan assets at fair value (180.3) (154.2)
----------------
Plan assets in excess of projected benefit
obligation (22.4) (13.3)
Unrecognized net gain 14.7 3.6
Unrecognized transition asset 4.8 6.0
Unrecognized prior service cost 1.2 2.2
----------------
Prepaid pension cost $ (1.7) $ (1.5)
================
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1997 and 1996, the weighted average discount
rate used was 7.0% and 7.5%, respectively, and the rate of increase in
future compensation levels was 5.5% and 6.0%, respectively. The expected
long-term rate of return on plan assets was 8.5% in 1997 and 1996.
In connection with the merger of PCL into Pacific Life as discussed in
Note 4, Pacific Life assumed sponsorship of PCL's defined benefit pension
plan. This pension plan provides for retirement income benefits at age 65
with reduced benefits for early retirement. Effective December 31, 1997,
PCL's defined benefit plan merged into Pacific Life's plan. All benefits
associated with PCL's plan remain unchanged subsequent to the merger.
78
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE PLANS
Pacific 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 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
Life's commitment to qualified employees who retire after April 1, 1994 is
limited to specific dollar amounts. Pacific 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 1997, 1996 and 1995 was
approximately $1.5 million, $1.6 million and $1.7 million, respectively.
Components of net periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------------------------
(In Millions)
<S> <C> <C> <C>
Service cost $ 0.1 $ 0.2 $ 0.2
Interest cost 1.4 1.5 1.9
Amortization (0.7) (0.3) (0.3)
----------------------------
Net periodic postretirement benefit cost $ 0.8 $ 1.4 $ 1.8
============================
</TABLE>
The following table sets forth the Plans' funded status and amounts
recorded in other liabilities on the accompanying consolidated statements
of financial condition:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------
(In Millions)
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $ 17.6 $ 17.3
Fully eligible active Plan participants 1.4 2.0
Other active Plan participants 1.1 2.5
-------------
Total accumulated postretirement obligation 20.1 21.8
Fair value of Plan assets -- --
-------------
Unfunded accumulated postretirement obligation 20.1 21.8
Unrecognized net gain 3.2 3.7
Prior service cost 2.7 1.3
-------------
Accrued postretirement benefit liability $ 26.0 $ 26.8
=============
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 9% for 1997 and 1996 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, 1997 and 1996 would be increased by 8.5% and 11.5%, respectively. The
effect of this change would increase the
79
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
aggregate of the service and interest cost components of the net periodic
benefit cost by 7.7%, 12.3% and 11.4% for 1997, 1996 and 1995,
respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation is 7.0% and 7.5% for 1997 and 1996, respectively.
OTHER PLANS
Pacific Life provides a voluntary Retirement Incentive Savings Plan
("RISP") pursuant to Section 401(k) of the Internal Revenue Code covering
all eligible employees of the Company. Effective October 1, 1997, Pacific
Life's RISP changed the matching percentage of each employee's
contributions from 50% to 75%, up to a maximum of six percent of eligible
employee compensation and restricted the matched investment to an Employee
Stock Ownership Plan ("ESOP") sponsored by Pacific LifeCorp. The ESOP was
formed at the time of the Conversion and is currently only available to
the participants of the RISP in the form of matching contributions.
Pacific 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 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 Life charges fees based upon the
net asset value of the portfolios of the Pacific Select Fund, which
amounted to $27.5 million, $14.3 million and $6.5 million for the years
ended December 31, 1997, 1996 and 1995, respectively. In addition, Pacific
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 $165,000, $108,000 and $28,550 for the years ended December
31, 1997, 1996 and 1995, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $11.4 million, $6.2 million and $5.0 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
Included in equity securities on the accompanying consolidated statements
of financial condition are investments in mutual funds and other
investments managed by PIMCO Advisors which amounted to $46.5 million and
$90.8 million as of December 31, 1997 and 1996, respectively.
Pacific Life provides certain support services to PIMCO Advisors. Charges
for these services are based on an allocation of actual costs and amounted
to $1.2 million, $1.4 million and $1.9 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
15. TERMINATION AND NON-COMPETITION AGREEMENTS
Effective November 15, 1994, in connection with the PIMCO Advisors
transaction (Note 1), termination and non-competition agreements were
entered into with certain former key employees of PAM's subsidiaries.
These agreements provide terms and conditions for the allocation of future
proceeds received from distributions and sales of certain PIMCO Advisors
units and other noncompete payments. When the amount of future obligations
to be made to a key employee is determinable, a liability for such amount
is established.
80
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. TERMINATION AND NON-COMPETITION AGREEMENTS (CONTINUED)
For the years ended December 31, 1997, 1996 and 1995, approximately $85.8
million, $35.3 million and $28.6 million, respectively, is included in
operating expenses in the consolidated statements of operations related to
the termination and non-competition agreements. This includes payments of
$43.1 million in 1997 to former key employees who elected to sell to PAM's
subsidiaries their rights to the future proceeds from the PIMCO Advisors
units.
16. INVESTMENT COMMITMENTS
The Company has outstanding commitments to make investments primarily in
mortgage loans, limited partnerships and other investments as follows (In
Millions):
<TABLE>
<S> <C>
Years Ending December 31:
------------------------
1998 $245.4
1999-2002 131.8
2003 and thereafter 16.6
------
Total $393.8
======
</TABLE>
17. LITIGATION
The Company has been named in civil litigation proceedings which appear to
be substantially similar to other litigation brought against many life
insurers alleging misconduct in the sale of products. These matters are
sometimes referred to as market conduct litigation. The litigation against
the Company purports to include all persons in the United States who
purchased life insurance and annuity products from the Company during the
period from 1982 to present. The Company has retained national and local
counsel experienced in the handling of similar matters for other life
insurers. Informal discovery has commenced in these matters. At this time,
it is not feasible to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome in such actions.
Further, the Company is a respondent in a number of other legal
proceedings, some of which involve allegations for extra-contractual
damages.
In the opinion of management, the outcome of the foregoing proceedings is
not likely to have a material adverse effect on the consolidated financial
position or results of operations of the Company.
---------------------------------------------------------------------------
81
<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 $33,456,
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 $33,456,
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 $126,322,
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 $126,322,
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 $33,456,
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 $33,456,
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 $33,456,
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 $33,456,
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 0.60% 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
0.08% of the average daily net assets of a Portfolio, which amounts to 0.68%
of the average daily net assets of a Portfolio including the investment
advisory fees, operating expenses, and exclusive of any foreign taxes. Foreign
taxes for the year ended December 31, 1997 were: 0.02% for the Equity Income
Portfolio; 0.01% for the Multi-Strategy Portfolio; 0.25% for the International
Portfolio; 0.02% for the Growth LT Portfolio; 0.01% for the Equity Portfolio;
0.01% for the Equity Index Portfolio; and 0.19% for the Emerging Markets
Portfolio.
82
<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 -0.68%, 5.28%, and
11.24%. 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.
83
<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: $33,456
<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 $ 35,129 $1,500,000 $1,500,000 $ 1,500,000
2 $ 72,014 $1,500,000 $1,500,000 $ 1,500,000
3 $ 110,744 $1,500,000 $1,500,000 $ 1,500,000
4 $ 151,410 $1,500,000 $1,500,000 $ 1,500,000
5 $ 194,109 $1,500,000 $1,500,000 $ 1,500,000
6 $ 238,943 $1,500,000 $1,500,000 $ 1,500,000
7 $ 286,019 $1,500,000 $1,500,000 $ 1,500,000
8 $ 335,449 $1,500,000 $1,500,000 $ 1,500,000
9 $ 387,350 $1,500,000 $1,500,000 $ 1,500,000
10 $ 441,846 $1,500,000 $1,500,000 $ 1,500,000
15 $ 758,029 $1,500,000 $1,500,000 $ 1,500,000
20 $1,161,567 $1,500,000 $1,500,000 $ 2,092,724
25 $1,676,596 $1,500,000 $1,500,000 $ 3,693,451
30 $2,333,917 $1,500,000 $2,036,470 $ 6,431,747
35 $3,172,844 $1,500,000 $2,757,622 $10,917,428
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF ANNUAL INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY ------------------------------- ------------------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ -------- ---------- ----------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 27,433 $ 29,147 $ 30,862 $ 27,433 $ 29,147 $ 30,862
2 $ 54,393 $ 59,530 $ 64,873 $ 54,393 $ 59,530 $ 64,873
3 $ 80,852 $ 91,178 $ 102,346 $ 80,852 $ 91,178 $ 102,346
4 $106,783 $ 124,124 $ 143,629 $106,783 $ 124,124 $ 143,629
5 $132,154 $ 158,399 $ 189,110 $132,154 $ 158,399 $ 189,110
6 $157,046 $ 194,155 $ 239,346 $157,046 $ 194,155 $ 239,346
7 $181,307 $ 231,313 $ 294,713 $181,307 $ 231,313 $ 294,713
8 $205,328 $ 270,334 $ 356,169 $205,328 $ 270,334 $ 356,169
9 $229,113 $ 311,316 $ 424,393 $229,113 $ 311,316 $ 424,393
10 $252,663 $ 354,361 $ 500,137 $252,663 $ 354,361 $ 500,137
15 $379,720 $ 619,740 $ 1,042,726 $379,720 $ 619,740 $ 1,042,726
20 $486,773 $ 949,728 $ 1,955,816 $486,773 $ 949,728 $ 1,955,816
25 $557,831 $1,379,717 $ 3,517,573 $557,831 $1,379,717 $ 3,517,573
30 $528,338 $1,939,495 $ 6,125,473 $528,338 $1,939,495 $ 6,125,473
35 $227,861 $2,626,307 $10,397,550 $227,861 $2,626,307 $10,397,550
</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 ILLUSTRATION 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 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: $33,456
<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 $ 35,129 $1,500,000 $1,500,000 $ 1,500,000
2 $ 72,014 $1,500,000 $1,500,000 $ 1,500,000
3 $ 110,744 $1,500,000 $1,500,000 $ 1,500,000
4 $ 151,410 $1,500,000 $1,500,000 $ 1,500,000
5 $ 194,109 $1,500,000 $1,500,000 $ 1,500,000
6 $ 238,943 $1,500,000 $1,500,000 $ 1,500,000
7 $ 286,019 $1,500,000 $1,500,000 $ 1,500,000
8 $ 335,449 $1,500,000 $1,500,000 $ 1,500,000
9 $ 387,350 $1,500,000 $1,500,000 $ 1,500,000
10 $ 441,846 $1,500,000 $1,500,000 $ 1,500,000
15 $ 758,029 $1,500,000 $1,500,000 $ 1,500,000
20 $1,161,567 $1,500,000 $1,500,000 $ 2,016,563
25 $1,676,596 $1,500,000 $1,500,000 $ 3,547,294
30 $2,333,917 $ 0* $1,734,179 $ 6,124,527
35 $3,172,844 $ 0* $2,338,096 $10,237,472
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF ANNUAL INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY ------------------------------- ------------------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ -------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 27,417 $ 29,130 $ 30,845 $ 27,417 $ 29,130 $ 30,845
2 $ 54,325 $ 59,458 $ 64,799 $ 54,325 $ 59,458 $ 64,799
3 $ 80,690 $ 91,006 $ 102,163 $ 80,690 $ 91,006 $ 102,163
4 $106,480 $ 123,798 $ 143,278 $106,480 $ 123,798 $ 143,278
5 $131,657 $ 157,857 $ 188,520 $131,657 $ 157,857 $ 188,520
6 $156,296 $ 193,326 $ 238,430 $156,296 $ 193,326 $ 238,430
7 $180,214 $ 230,092 $ 293,351 $180,214 $ 230,092 $ 293,351
8 $203,327 $ 268,146 $ 353,780 $203,327 $ 268,146 $ 353,780
9 $225,524 $ 307,455 $ 420,262 $225,524 $ 307,455 $ 420,262
10 $246,681 $ 347,984 $ 493,422 $246,681 $ 347,984 $ 493,422
15 $346,326 $ 584,744 $1,009,221 $346,326 $ 584,744 $1,009,221
20 $392,872 $ 856,427 $1,884,639 $392,872 $ 856,427 $1,884,639
25 $323,589 $1,186,386 $3,378,376 $323,589 $1,186,386 $3,378,376
30 $ 0* $1,651,599 $5,832,883 $ 0* $1,651,599 $5,832,883
35 $ 0* $2,226,758 $9,749,973 $ 0* $2,226,758 $9,749,973
</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 ILLUSTRATION 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 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: $126,322
<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 $ 132,638 $1,610,332 $ 1,617,019 $ 1,623,709
2 $ 271,908 $1,719,370 $ 1,739,626 $ 1,760,680
3 $ 418,142 $1,827,086 $ 1,868,054 $ 1,912,315
4 $ 571,687 $1,933,447 $ 2,002,545 $ 2,080,166
5 $ 732,909 $2,038,416 $ 2,143,350 $ 2,265,948
6 $ 902,193 $2,142,065 $ 2,290,840 $ 2,471,677
7 $ 1,079,941 $2,244,228 $ 2,445,164 $ 2,699,340
8 $ 1,266,576 $2,345,351 $ 2,607,105 $ 2,951,786
9 $ 1,462,543 $2,445,442 $ 2,777,042 $ 3,231,719
10 $ 1,668,308 $2,544,512 $ 2,955,370 $ 3,542,134
15 $ 2,862,140 $3,046,171 $ 4,013,495 $ 5,711,300
20 $ 4,385,805 $3,502,286 $ 5,337,380 $ 9,323,678
25 $ 6,330,432 $3,898,551 $ 7,009,296 $15,446,074
30 $ 8,812,322 $4,120,245 $ 8,981,425 $25,625,156
35 $11,979,914 $3,995,513 $11,139,838 $42,933,744
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF ANNUAL INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY --------------------------------- -----------------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ ---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 110,332 $ 117,019 $ 123,709 $ 110,332 $ 117,019 $ 123,709
2 $ 219,370 $ 239,626 $ 260,680 $ 219,370 $ 239,626 $ 260,680
3 $ 327,086 $ 368,054 $ 412,315 $ 327,086 $ 368,054 $ 412,315
4 $ 433,447 $ 502,545 $ 580,166 $ 433,447 $ 502,545 $ 580,166
5 $ 538,416 $ 643,350 $ 765,948 $ 538,416 $ 643,350 $ 765,948
6 $ 642,065 $ 790,840 $ 971,677 $ 642,065 $ 790,840 $ 971,677
7 $ 744,228 $ 945,164 $ 1,199,340 $ 744,228 $ 945,164 $ 1,199,340
8 $ 845,351 $1,107,105 $ 1,451,786 $ 845,351 $1,107,105 $ 1,451,786
9 $ 945,442 $1,277,042 $ 1,731,719 $ 945,442 $1,277,042 $ 1,731,719
10 $1,044,512 $1,455,370 $ 2,042,134 $1,044,512 $1,455,370 $ 2,042,134
15 $1,546,171 $2,513,495 $ 4,211,300 $1,546,171 $2,513,495 $ 4,211,300
20 $2,002,286 $3,837,380 $ 7,823,678 $2,002,286 $3,837,380 $ 7,823,678
25 $2,398,551 $5,509,296 $13,946,074 $2,398,551 $5,509,296 $13,946,074
30 $2,620,245 $7,481,425 $34,125,156 $2,620,245 $7,481,425 $24,125,156
35 $2,495,513 $9,639,838 $40,889,280 $2,495,513 $9,639,838 $40,889,280
</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 ILLUSTRATION 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 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: $126,322
<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 $ 132,638 $1,610,315 $1,617,002 $ 1,623,691
2 $ 271,908 $1,719,299 $1,739,552 $ 1,760,602
3 $ 418,142 $1,826,916 $1,867,873 $ 1,912,123
4 $ 571,687 $1,933,126 $2,002,198 $ 2,079,790
5 $ 732,909 $2,037,883 $2,142,763 $ 2,265,302
6 $ 902,193 $2,141,249 $2,289,926 $ 2,470,654
7 $ 1,079,941 $2,243,022 $2,443,794 $ 2,697,783
8 $ 1,266,576 $2,343,095 $2,604,573 $ 2,948,932
9 $ 1,462,543 $2,441,318 $2,772,434 $ 3,226,545
10 $ 1,668,308 $2,537,523 $2,947,537 $ 3,533,312
15 $ 2,862,140 $3,004,462 $3,963,840 $ 5,651,669
20 $ 4,385,805 $3,380,452 $5,180,880 $ 9,118,167
25 $ 6,330,432 $3,602,456 $6,604,091 $14,867,672
30 $ 8,812,322 $3,518,079 $8,098,392 $24,240,719
35 $11,979,914 $2,897,979 $9,411,641 $39,786,752
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF ANNUAL INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY --------------------------------- ------------------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ ---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 110,315 $ 117,002 $ 123,691 $ 110,315 $ 117,002 $ 123,691
2 $ 219,299 $ 239,552 $ 260,602 $ 219,299 $ 239,552 $ 260,602
3 $ 326,916 $ 367,873 $ 412,123 $ 326,916 $ 367,873 $ 412,123
4 $ 433,126 $ 502,198 $ 579,790 $ 433,126 $ 502,198 $ 579,790
5 $ 537,883 $ 642,763 $ 765,302 $ 537,883 $ 642,763 $ 765,302
6 $ 641,249 $ 789,926 $ 970,654 $ 641,249 $ 789,926 $ 970,654
7 $ 743,022 $ 943,794 $ 1,197,783 $ 743,022 $ 943,794 $ 1,197,783
8 $ 843,095 $1,104,573 $ 1,448,932 $ 843,095 $1,104,573 $ 1,448,932
9 $ 941,318 $1,272,434 $ 1,726,545 $ 941,318 $1,272,434 $ 1,726,545
10 $1,037,523 $1,447,537 $ 2,033,312 $1,037,523 $1,447,537 $ 2,033,312
15 $1,504,462 $2,463,840 $ 4,151,669 $1,504,462 $2,463,840 $ 4,151,669
20 $1,880,452 $3,680,880 $ 7,618,167 $1,880,452 $3,680,880 $ 7,618,167
25 $2,102,456 $5,104,091 $13,367,672 $2,102,456 $5,104,091 $13,367,672
30 $2,018,079 $6,598,392 $22,740,719 $2,018,079 $6,598,392 $22,740,719
35 $1,397,979 $7,911,641 $37,892,145 $1,397,979 $7,911,641 $37,892,145
</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 ILLUSTRATION 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 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: $33,456
<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 $ 35,129 $1,533,456 $1,533,456 $ 1,533,456
2 $ 72,014 $1,566,912 $1,566,912 $ 1,566,912
3 $ 110,744 $1,600,368 $1,600,368 $ 1,600,368
4 $ 151,410 $1,633,824 $1,633,824 $ 1,633,824
5 $ 194,109 $1,667,280 $1,667,280 $ 1,667,280
6 $ 238,943 $1,700,736 $1,700,736 $ 1,700,736
7 $ 286,019 $1,734,192 $1,734,192 $ 1,734,192
8 $ 335,449 $1,767,648 $1,767,648 $ 1,767,648
9 $ 387,350 $1,801,104 $1,801,104 $ 1,801,104
10 $ 441,846 $1,834,560 $1,834,560 $ 1,834,560
15 $ 758,029 $2,001,840 $2,001,840 $ 2,001,840
20 $1,161,567 $2,169,120 $2,169,120 $ 2,169,120
25 $1,676,596 $2,336,400 $2,336,400 $ 3,639,885
30 $2,333,917 $2,503,680 $2,503,680 $ 6,341,698
35 $3,172,844 $ 0* $2,670,960 $10,767,672
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF ANNUAL INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY -------------------------------- ------------------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ -------- ---------- ----------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 27,431 $ 29,145 $ 30,860 $ 27,431 $ 29,145 $ 30,860
2 $ 54,377 $ 59,513 $ 64,856 $ 54,377 $ 59,513 $ 64,856
3 $ 80,799 $ 91,122 $ 102,286 $ 80,799 $ 91,122 $ 102,286
4 $106,652 $ 123,985 $ 143,480 $106,652 $ 123,985 $ 143,480
5 $131,888 $ 158,112 $ 188,801 $131,888 $ 158,112 $ 188,801
6 $156,564 $ 193,628 $ 238,770 $156,564 $ 193,628 $ 238,770
7 $180,499 $ 230,418 $ 293,722 $180,499 $ 230,418 $ 293,722
8 $204,143 $ 268,997 $ 354,660 $204,143 $ 268,997 $ 354,660
9 $227,497 $ 309,456 $ 422,248 $227,497 $ 309,456 $ 422,248
10 $250,561 $ 351,890 $ 497,223 $250,561 $ 351,890 $ 497,223
15 $373,805 $ 612,130 $ 1,032,750 $373,805 $ 612,130 $ 1,032,750
20 $466,612 $ 923,500 $ 1,926,075 $466,612 $ 923,500 $ 1,926,075
25 $485,646 $1,285,401 $ 3,466,557 $485,646 $1,285,401 $ 3,466,557
30 $269,517 $1,651,729 $ 6,039,712 $269,517 $1,651,729 $ 6,039,712
35 $ 0* $1,960,037 $10,254,926 $ 0* $1,960,037 $10,254,926
</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 ILLUSTRATION 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 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: $33,456
<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 $ 35,129 $1,533,456 $1,533,456 $1,533,456
2 $ 72,014 $1,566,912 $1,566,912 $1,566,912
3 $ 110,744 $1,600,368 $1,600,368 $1,600,368
4 $ 151,410 $1,633,824 $1,633,824 $1,633,824
5 $ 194,109 $1,667,280 $1,667,280 $1,667,280
6 $ 238,943 $1,700,736 $1,700,736 $1,700,736
7 $ 286,019 $1,734,192 $1,734,192 $1,734,192
8 $ 335,449 $1,767,648 $1,767,648 $1,767,648
9 $ 387,350 $1,801,104 $1,801,104 $1,801,104
10 $ 441,846 $1,834,560 $1,834,560 $1,834,560
15 $ 758,029 $2,001,840 $2,001,840 $2,001,840
20 $1,161,567 $2,169,120 $2,169,120 $2,169,120
25 $1,676,596 $2,336,400 $2,336,400 $3,366,792
30 $2,333,917 $ 0* $2,503,680 $5,824,143
35 $3,172,844 $ 0* $ 0* $9,746,092
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF ANNUAL INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY ------------------------------ ------------------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 27,414 $ 29,128 $ 30,842 $ 27,414 $ 29,128 $ 30,842
2 $ 54,306 $ 59,439 $ 64,778 $ 54,306 $ 59,439 $ 64,778
3 $ 80,627 $ 90,940 $ 102,094 $ 80,627 $ 90,940 $ 102,094
4 $106,326 $123,634 $ 143,104 $106,326 $123,634 $ 143,104
5 $131,345 $157,520 $ 188,156 $131,345 $157,520 $ 188,156
6 $155,729 $192,705 $ 237,752 $155,729 $192,705 $ 237,752
7 $179,259 $229,035 $ 292,180 $179,259 $229,035 $ 292,180
8 $201,805 $266,441 $ 351,868 $201,805 $266,441 $ 351,868
9 $223,192 $304,813 $ 417,262 $223,192 $304,813 $ 417,262
10 $243,212 $344,013 $ 488,859 $243,212 $344,013 $ 488,859
15 $328,269 $562,983 $ 982,656 $328,269 $562,983 $ 982,656
20 $324,398 $769,868 $1,788,043 $324,398 $769,868 $1,788,043
25 $ 87,534 $873,287 $3,206,468 $ 87,534 $873,287 $3,206,468
30 $ 0* $582,159 $5,546,803 $ 0* $582,159 $5,546,803
35 $ 0* $ 0* $9,281,992 $ 0* $ 0* $9,281,992
</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 ILLUSTRATION 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 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: $33,456
<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 $ 35,129 $1,500,000 $1,500,000 $ 1,500,000
2 $ 72,014 $1,503,000 $1,503,000 $ 1,503,000
3 $ 110,744 $1,506,000 $1,506,000 $ 1,506,000
4 $ 151,410 $1,510,500 $1,510,500 $ 1,510,500
5 $ 194,109 $1,516,500 $1,516,500 $ 1,516,500
6 $ 238,943 $1,522,500 $1,522,500 $ 1,522,500
7 $ 286,019 $1,530,000 $1,530,000 $ 1,530,000
8 $ 335,449 $1,539,000 $1,539,000 $ 1,539,000
9 $ 387,350 $1,549,500 $1,549,500 $ 1,549,500
10 $ 441,846 $1,563,000 $1,563,000 $ 1,563,000
15 $ 758,029 $1,675,500 $1,675,500 $ 1,675,500
20 $1,161,567 $1,903,500 $1,903,500 $ 2,084,612
25 $1,676,596 $2,317,500 $2,317,500 $ 3,680,002
30 $2,333,917 $2,766,000 $2,766,000 $ 6,409,138
35 $3,172,844 $ 0* $3,000,000 $10,879,828
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF ANNUAL INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY -------------------------------- ------------------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ -------- ---------- ----------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 27,433 $ 29,147 $ 30,862 $ 27,433 $ 29,147 $ 30,862
2 $ 54,393 $ 59,529 $ 64,873 $ 54,393 $ 59,529 $ 64,873
3 $ 80,849 $ 91,175 $ 102,342 $ 80,849 $ 91,175 $ 102,342
4 $106,774 $ 124,115 $ 143,619 $106,774 $ 124,115 $ 143,619
5 $132,131 $ 158,375 $ 189,085 $132,131 $ 158,375 $ 189,085
6 $157,000 $ 194,105 $ 239,292 $157,000 $ 194,105 $ 239,292
7 $181,218 $ 231,216 $ 294,608 $181,218 $ 231,216 $ 294,608
8 $205,184 $ 270,175 $ 355,993 $205,184 $ 270,175 $ 355,993
9 $228,898 $ 311,074 $ 424,120 $228,898 $ 311,074 $ 424,120
10 $252,356 $ 354,010 $ 499,734 $252,356 $ 354,010 $ 499,734
15 $378,289 $ 618,013 $ 1,040,613 $378,289 $ 618,013 $ 1,040,613
20 $477,955 $ 939,167 $ 1,948,236 $477,955 $ 939,167 $ 1,948,236
25 $504,465 $1,315,534 $ 3,504,764 $504,465 $1,315,534 $ 3,504,764
30 $259,396 $1,663,050 $ 6,103,941 $259,396 $1,663,050 $ 6,103,941
35 $ 0* $1,788,182 $10,361,741 $ 0* $1,788,182 $10,361,741
</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 ILLUSTRATION 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>
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: $33,456
<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 $ 35,129 $1,500,000 $1,500,000 $ 1,500,000
2 $ 72,014 $1,503,000 $1,503,000 $ 1,503,000
3 $ 110,744 $1,506,000 $1,506,000 $ 1,506,000
4 $ 151,410 $1,510,500 $1,510,500 $ 1,510,500
5 $ 194,109 $1,516,500 $1,516,500 $ 1,516,500
6 $ 238,943 $1,522,500 $1,522,500 $ 1,522,500
7 $ 286,019 $1,530,000 $1,530,000 $ 1,530,000
8 $ 335,449 $1,539,000 $1,539,000 $ 1,539,000
9 $ 387,350 $1,549,500 $1,549,500 $ 1,549,500
10 $ 441,846 $1,563,000 $1,563,000 $ 1,563,000
15 $ 758,029 $1,675,500 $1,675,500 $ 1,675,500
20 $1,161,567 $1,903,500 $1,903,500 $ 1,985,879
25 $1,676,596 $2,317,500 $2,317,500 $ 3,496,707
30 $2,333,917 $ 0* $2,766,000 $ 6,040,342
35 $3,172,844 $ 0* $ 0* $10,099,759
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF ANNUAL INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY ------------------------------ ------------------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 27,417 $ 29,130 $ 30,845 $ 27,417 $ 29,130 $ 30,845
2 $ 54,324 $ 59,458 $ 64,798 $ 54,324 $ 59,458 $ 64,798
3 $ 80,687 $ 91,003 $ 102,160 $ 80,687 $ 91,003 $ 102,160
4 $106,469 $123,787 $ 143,267 $106,469 $123,787 $ 143,267
5 $131,631 $157,829 $ 188,490 $131,631 $157,829 $ 188,490
6 $156,241 $193,267 $ 238,367 $156,241 $193,267 $ 238,367
7 $180,109 $229,978 $ 293,227 $180,109 $229,978 $ 293,227
8 $203,140 $267,940 $ 353,552 $203,140 $267,940 $ 353,552
9 $225,203 $307,099 $ 419,866 $225,203 $307,099 $ 419,866
10 $246,145 $347,385 $ 492,750 $246,145 $347,385 $ 492,750
15 $341,463 $579,122 $1,002,671 $341,463 $579,122 $1,002,671
20 $362,207 $819,921 $1,855,962 $362,207 $819,921 $1,855,962
25 $154,837 $979,269 $3,330,197 $154,837 $979,269 $3,330,197
30 $ 0* $700,685 $5,752,707 $ 0* $700,685 $5,752,707
35 $ 0* $ 0* $9,618,818 $ 0* $ 0* $9,618,818
</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 ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
91
<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.)
92
<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>
93
<PAGE>
APPENDIX B
RATES PER $1000 OF INITIAL FACE AMOUNT
<TABLE>
<CAPTION>
FACE AMOUNT FACE AMOUNT
JOINT COMPONENT JOINT COMPONENT
EQUAL OF M&E RISK EQUAL OF M&E RISK
AGE TARGET CHARGE AGE TARGET CHARGE
- ----- ------ ----------- ----- ------ -----------
<S> <C> <C> <C> <C> <C>
15 2.28 0.051 58 16.74 0.208
16 2.35 0.052 59 18.04 0.230
17 2.43 0.053 60 19.35 0.253
18 2.50 0.054 61 20.64 0.275
19 2.57 0.055 62 21.89 0.298
20 2.65 0.056 63 23.08 0.320
21 2.73 0.056 64 24.20 0.341
22 2.81 0.057 65 25.26 0.362
23 2.89 0.058 66 26.25 0.382
24 2.98 0.059 67 27.20 0.401
25 3.07 0.060 68 28.12 0.420
26 3.16 0.061 69 29.00 0.439
27 3.25 0.062 70 29.87 0.457
28 3.35 0.063 71 30.73 0.475
29 3.45 0.064 72 31.59 0.492
30 3.55 0.065 73 32.46 0.510
31 3.66 0.066 74 33.35 0.528
32 3.77 0.067 75 34.26 0.547
33 3.88 0.068 76 35.19 0.566
34 4.04 0.069 77 36.14 0.585
35 4.21 0.070 78 37.09 0.605
36 4.38 0.072 79 38.06 0.626
37 4.56 0.073 80 39.04 0.647
38 4.75 0.074 81 40.02 0.668
39 4.95 0.075 82 41.01 0.689
40 5.15 0.076 83 42.00 0.711
41 5.37 0.078 84 43.00 0.733
42 5.59 0.079 85 44.00 0.756
43 5.82 0.080 86 45.00 0.778
44 6.20 0.082 87 46.00 0.801
45 6.60 0.085 88 47.00 0.824
46 7.03 0.087 89 48.00 0.848
47 7.49 0.090 90 49.00 0.871
48 7.98 0.093 91 50.00 0.895
49 8.50 0.097 92 51.00 0.919
50 9.05 0.102 93 52.00 0.944
51 9.64 0.107 94 53.00 0.968
52 10.27 0.113 95 54.00 0.993
53 10.94 0.120 96 55.00 1.018
54 11.94 0.134 97 56.00 1.044
55 13.03 0.150 98 57.00 1.069
56 14.21 0.168 99 58.00 1.095
57 15.45 0.188 100 59.00 1.121
</TABLE>
94
<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>
95
<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.
96
<PAGE>
[LOGO OF PACIFIC SELECT ESTATE PRESERVER II]
Underwritten By
Pacific Life Insurance Company
700 Newport Center Drive
P.O. Box 9000
Newport Beach, California 92660
<PAGE>
Underwritten by:
[LOGO OF PACIFIC LIFE]
PACIFIC LIFE INSURANCE COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CA 92660
(800) 800-7681
VISIT US AT OUR WEBSITE: WWW.PACIFICLIFE.COM
[LOGO OF INSURANCE MARKETPLACE STANDARDS ASSOCIATION]
*Membership promotes ethical market conduct for individual life insurance and
annuities
FORM NO. 15-20648-02
<PAGE>
SUPPLEMENT DATED MAY 1, 1998 TO
PROSPECTUS DATED MAY 1, 1998 FOR
PACIFIC SELECT ESTATE PRESERVER AND PACIFIC SELECT ESTATE PRESERVER II
LAST SURVIVOR FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
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>
Supplement to Prospectus Dated May 1, 1998 for
Pacific Select Exec, Pacific Select Choice, Pacific Select Estate
Preserver Last Survivor and Pacific Select Estate Preserver II Last Survivor
Flexible Premium Variable Life Insurance Policies
and Pacific Select Estate Maximizer
Modified Single Premium Variable Life Insurance Policies
Each Issued by Pacific Life Insurance Company
Capitalized terms used in this supplement are defined in the prospectuses
referred to above or the prospectus for M Fund, Inc. ("M Fund").
Introduction
A Policy Owner may choose to allocate net premium payments to four
additional options available under the Policy (the "Investment Options") that
are funded through the Variable Accounts of the Separate Account: The Edinburgh
Overseas Equity Variable Account ("Variable Account I"), Turner Core Growth
Variable Account ("Variable Account II"), the Frontier Capital Appreciation
Variable Account ("Variable Account III"), and the Enhanced U.S. Equity Variable
Account ("Variable Account IV"). A Policy Owner also may transfer Accumulated
Value to the Variable Accounts funding these additional Variable Investment
Options. The Variable Accounts funding the additional Variable Investment
Options invest in the following corresponding portfolios ("Portfolios") of M
Fund:
Variable Account I: Edinburgh Overseas Equity Fund
Variable Account II: Turner Core Growth Fund
Variable Account III: Frontier Capital Appreciation Fund
Variable Account IV: Enhanced U.S. Equity Fund
In addition to these Investment Options, a Policy Owner may allocate all or
a portion of net premium payments and transfer Accumulated Value to the Variable
Accounts or the Fixed Account of Pacific Life Insurance Company ("Pacific Life",
"we" "us", or "our", formerly known as Pacific Mutual Life Insurance Company)
described in the accompanying prospectus for the Policy.
Except as described below in relation to the four additional Variable
Investment Options, all features of the Policy and all operational procedures
regarding the Policy remain in effect as described in the Policy's prospectus.
INFORMATION ABOUT M FUND
M Fund, Inc.
M Fund is a diversified, open-end management investment company registered
with the Securities and Exchange Commission ("SEC") under the Investment Company
Act of 1940. M Fund currently offers four separate Portfolios as Investment
Options under the Policies. Each Portfolio pursues different investment
objectives and policies. The shares of each Portfolio are purchased by us 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. M Fund shares may be redeemed
by us at their net asset value to the extent necessary to make payments under
the Policies.
<PAGE>
The chart below summarizes some basic information about each Portfolio of M
Fund offered to the Separate Account. There can be no assurance that any
Portfolio will achieve its objective. More detailed information is contained in
the accompanying prospectus of M Fund, including information on the risks
associated with the investments and investment techniques of each Portfolio of M
Fund.
M FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS SUPPLEMENT AND SHOULD BE
READ CAREFULLY BEFORE INVESTING.
<TABLE>
<CAPTION>
Primary Investments Investment
(under normal Adviser/Portfolio
Portfolio Objective circumstances) Manager
- ----------------------- -------------------- -------------------- ---------------------
<S> <C> <C> <C>
Edinburgh Overseas Long-term capital Common stock and M Financial Invest-
Equity Fund appreciation with common stock equi- ment Advisers, Inc.
reasonable invest- valents of foreign ("MFIA")/Edinburgh
ment risk through issuers, including Fund Managers plc.
active management smaller issuers and
and investment in issuers located in
common stock and small, emerging
common stock equi- markets
valents of foreign
issuers
Turner Core Growth Long-term capital Common stocks that MFIA/Turner
Fund appreciation through show strong earnings Investment Partners,
a diversified port- potential with Inc.
folio of common reasonable market
stocks that show prices
strong earnings
potential with
reasonable market
prices
Frontier Capital Maximum capital Common stock of com- MFIA/Frontier
Appreciation Fund appreciation through panies of all sizes, Capital Management
investment in common with emphasis on Company, Inc.
stock of companies stocks of small- to
of all sizes, with medium-capitaliza-
emphasis on stocks tion companies
of small- to medium- (i.e., companies
----
capitalization with market capi-
companies talization of less
than $3 billion)
Enhanced U.S. Equity Above-market total Common stocks of MFIA/Franklin
Fund return through in- companies perceived Portfolio Associates
vestment in common to provide a return LLC
stock of companies higher than that of
perceived to provide the S&P 500 at
a return higher than approximately the
that of the same level of
Standard & Poor's investment risk
500 Composite Stock
Price Index ("S&P
500") at approximately
the same level of
investment risk as the
S&P 500
</TABLE>
-2-
<PAGE>
The Investment Adviser and Portfolio Managers
M Financial Investment Advisers, Inc. ("MFIA") serves as Investment Adviser
to each Portfolio of M Fund. MFIA has engaged other firms, as shown in the
chart above, to serve as Portfolio Managers under the supervision of MFIA and M
Fund's Board of Directors.
We assume no responsibility for the operation of M Fund or any Portfolio
thereof, or the compliance of M Fund or the Portfolio with any applicable law.
SUMMARY OF THE POLICY
The following supplements the discussion included in the Policy's
prospectus under "SUMMARY OF THE POLICY: Charges and Deductions".
M Fund Expenses after Expense Limitation (as a percentage of each Fund's average
net assets).
<TABLE>
<CAPTION>
Advisory Other Total
Fee Expenses Expenses
--------- --------- ---------
<S> <C> <C> <C>
Edinburgh Overseas Equity Fund 1.05% .25% 1.30%
Turner Core Growth Fund .45% .25% .70%
Frontier Capital Appreciation Fund .90% .25% 1.15%
Enhanced U.S. Equity Fund .55% .25% .80%
</TABLE>
The expenses listed for each of the M Fund Portfolios reflect current
expenses for the year ended December 31, 1997, and reflect the policy of MFIA to
pay operating expenses of M Fund (not including brokerage or other portfolio
transaction expenses or expenses of litigation, indemnification, taxes or other
extraordinary expenses) to the extent such expenses, as accrued for each
Portfolio for the year ended December 31, 1997, exceed .25% of that Portfolio's
average daily net assets. In the absence of this policy, such expenses would
have exceeded the expense cap and total expenses for the year ended December 31,
1997, would have been 4.94% for the Edinburgh Overseas Equity Fund, 6.20% for
the Turner Core Growth Fund, 2.86% for the Frontier Capital Appreciation Fund
and 5.42% for the Enhanced U.S. Equity Fund, respectively; MFIA has extended
this policy through December 31, 1998. There can be no assurance that MFIA will
continue this policy in the future.
M 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 net asset value, which in
turn is used to compute the corresponding Variable Account's Accumulation Unit
Value. M Fund's investment advisory fees and operating expenses are more fully
described in M Fund's prospectus, which accompanies this prospectus.
THE POLICY
All features of the Policy described in its prospectus remain intact.
-3-
<PAGE>
The following discussion supplements the one included in the Policy's
prospectus under "CHARGES AND DEDUCTIONS - Other Charges."
Other Charges
M Fund and each of its Portfolios incur certain charges, including the
investment advisory fee, and certain operating expenses. M Fund is
governed by its Board of Directors. M Fund's expenses are not fixed or
specified under the terms of the Policy, and these expenses may vary from
year to year. The advisory fees and other expenses are more fully
described in the prospectus of M Fund.
We will exercise voting rights attributable to shares of M Fund consistent
with the discussion in the prospectus on "Voting of Fund Shares." The rights we
have as described in the prospectus under "Disregard of Voting Instructions" and
"Substitution of Investments" also apply to M Fund and its Portfolios.
Report to Owners
We will send to each Policy Owner any annual and semiannual reports
containing financial statements for M Fund that we receive from that fund.
ILLUSTRATIONS
Upon request, we will furnish individualized illustrations reflecting allocation
of net premiums to one or more of the Variable Accounts that each invest in a
corresponding Portfolio of M Fund, which will reflect the expenses (after
payment of certain operating expenses by MFIA and exclusive of foreign taxes) of
the Portfolio(s), described above, and under "SUMMARY OF THE POLICY: Charges and
Deductions". Foreign taxes were equal to 0.23% and 0.01% of the average daily
net assets of the Edinburgh Overseas Equity Fund, and the Enhanced U.S. Equity
Fund, respectively.
Supplement Dated May 1, 1998
Form No. 15-20535-03
-4-
<PAGE>
PART II. ADDITIONAL INFORMATION NOT REQUIRED IN PROSPECTUS
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement on Form S-6 comprises the following papers and
documents:
The facing sheet.
The cross-reference sheet.
The Prospectus consisting of 96 pages (including illustrations)
Supplement to Prospectus dated May 1, 1998 consisting of 1 page.
Supplement to Prospectus dated May 1, 1998 consisting of 4 pages.
The undertaking to file reports.
Representation pursuant to Section 26(e) of the Investment Company Act of
1940.
The signatures.
Written consent of the following person (included in the exhibits shown below):
Deloitte & Touche LLP, independent auditors
The following exhibits:
1. (1) (a) Resolution of the Board of Directors of the Depositor dated
November 22, 1989 and copies of the Memoranda concerning Pacific
Select Exec Separate Account dated May 12, 1988 and January 26,
1993./1/
(b) Resolution of the Board of Directors of Pacific Life Insurance
Company authorizing conformity to the terms of the current
Bylaws.
(2) Inapplicable
(3) (a) Distribution Agreement Between Pacific Mutual Life Insurance
Company and Pacific Equities Network/1/
(b) Form of Selling Agreement Between Pacific Equities Network and
Various Broker-Dealers/1/
(4) Inapplicable
(5) (a) Last Survivor Flexible Premium Variable Life Insurance
Policy (Form 97-56)/1/
(b) Accelerated Living Benefit Rider (Form R92-ABR)/1/
(c) Policy Split Option Rider (Form R94-PSO)/1/
(d) Last Survivor Added Protection Benefit (Form R96-LSAPB)/1/
(e) Individual Annual Renewable Term Rider (Form R96-ART)/1/
(f) Enhanced Policy Split Option Rider (Form R96-EPSO)/1/
(6) (a) Articles of Incorporation of Pacific Life Insurance
Company
(b) Bylaws of Pacific Life Insurance Company
(7) Inapplicable
(8) Inapplicable
(9) (a) Participation Agreement between Pacific Mutual Life Insurance
Company and Pacific Select Fund/1/
(b) M Fund Inc. Participation Agreement with Pacific Mutual Life
Insurance Company/2/
(10) Applications and General Questionnaire/1/
2. Form of Opinion and consent of legal officer of Pacific Mutual as to
legality of Policies being registered/1/ (Incorporated by reference to
Exhibit No. 3 filed in Registrant's Registration Statement on Form S-6
filed via EDGAR on January 24, 1997, File No. 333-20355, Accession Number
00001017062-97-000074.)
3. Inapplicable
<PAGE>
4. Inapplicable
5. Inapplicable
6. (a) Consent of Independent Auditors
(b) Consent of Dechert Price & Rhoads/1/
7. Opinion of Actuary
8. Memorandum Describing Issuance, Transfer, and Redemption
Procedures/1/
9. Powers of Attorney
/1/ Filed as part of the Registration Statement on Form S-6 EL24, filed via
EDGAR on January 24, 1997, File No. 333-20355 Accession Number
0001017062-97-000074.
/2/ Filed as part of Post-Effective Amendment No. 1 to the Registration
Statement on Form S-6 filed via EDGAR on April 29, 1997, File No.
333-20355, Accession Number 0001017062-97-000775.
<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
REPRESENTATION PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY ACT OF 1940
Pacific Life Insurance Company and Registrant represent that the fees and
charges to be deducted under the Variable Life Insurance Policy ("Policy")
described in the prospectus contained in this registration statement are, in the
aggregate, reasonable in relation to the services rendered, the expenses to be
incurred, and the risks assumed in connection with the Policy.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Pacific Select Exec Separate Account of Pacific Life Insurance Company,
certifies that it meets all of the requirements for effectiveness of this
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment No. 2 to the Registration
Statement on Form S-6 to be signed on its behalf by the undersigned thereunto
duly authorized, all in the City of Newport Beach, and State of California, on
this 24th day of April, 1998.
PACIFIC SELECT EXEC SEPARATE ACCOUNT
(Registrant)
BY: PACIFIC LIFE INSURANCE COMPANY
(Depositor)
BY: _____________________________________
Thomas C. Sutton*
Chairman & Chief Executive Officer
*BY: /s/SHARON A. CHEEVER
Sharon A. Cheever
as attorney-in-fact
(Power of attorney is contained as Exhibit 9 of this Post-Effective Amendment
No. 2 to the Registration Statement on Form S-6, File No. 333-20355, of Pacific
Select Exec Separate Account.)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Pacific Life
Insurance Company certifies that it meets all of the requirements for
effectiveness of this Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 2
to the Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, all in the City of Newport Beach, and State of
California, on this 24th day of April, 1998.
BY: PACIFIC LIFE INSURANCE COMPANY
(Registrant)
BY: _____________________________________
Thomas C. Sutton*
Chairman & Chief Executive Officer
*BY: /s/SHARON A. CHEEVER
Sharon A. Cheever
as attorney-in-fact
(Power of Attorney is contained as Exhibit 9 of this Post-Effective Amendment
No. 2 to the Registration Statement on Form S-6, File No. 333-20355, of Pacific
Select Exec Separate Account.)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Post Effective
Amendment No. 2 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Thomas C. Sutton* Director, Chairman ____________, 1998
of the Board and
Chief Executive Officer
Glenn S. Schafer* President ____________, 1998
Khanh T. Tran* Director, Senior Vice ____________, 1998
President and Chief
Financial Officer
David R. Carmichael* Director, Senior Vice ____________, 1998
President and General
Counsel
Audrey L. Milfs* Director, Vice President ____________, 1998
and Corporate Secretary
Richard M. Ferry* Director ____________, 1998
Donald E. Guinn* Director ____________, 1998
Ignacio E. Lozano, Jr.* Director ____________, 1998
Charles D. Miller* Director ____________, 1998
Donn B. Miller* Director ____________, 1998
Richard M. Rosenberg* Director ____________, 1998
James R. Ukropina* Director ____________, 1998
Raymond L. Watson* Director ____________, 1998
Edward Byrd* Vice President and
Controller ____________, 1998
*BY: /s/SHARON A. CHEEVER April 24, 1998
Sharon A. Cheever
as attorney-in-fact
</TABLE>
(Powers of Attorney are contained as Exhibit 9 of this Post Effective Amendment
No. 2 to the Registration Statement on Form S-6, File No. 333-20355, of Pacific
Select Exec Separate Account.)
<PAGE>
EXHIBIT 99.1(1)(b)
Resolution of the Board of Directors of Pacific Life Insurance Company
authorizing conformity to the terms of the current Bylaws
<PAGE>
PACIFIC LIFE INSURANCE COMPANY
CERTIFIED COPY OF RESOLUTION OF BOARD OF DIRECTORS
I, AUDREY L. MILFS, do hereby certify that I am the duly elected, qualified
and acting Secretary of Pacific Life Insurance Company (formerly Pacific Mutual
Life Insurance Company), a California corporation, and as such I do hereby
further certify that the following is a true and correct copy of a resolution
adopted at a meeting of the Board of Directors of said corporation held on the
27/th/ day of August, 1997, at which a quorum was present and voted in favor
thereof, and that said resolution has not been revoked or amended and is now in
full force and effect.
RESOLVED, that on and after September 1, 1997, any provision of any
resolution of the Board of Directors or consent of the members of this
Corporation adopted prior to the date hereof that conflicts or is inconsistent
with the Bylaws of this Corporation, be, and they hereby are, without further
action of the Board of Directors, amended to the extent necessary to conform
such provision to the terms of the current Bylaws of this Corporation.
IN WITNESS WHEREOF, I have executed this certificate as Secretary of said
corporation on this 22/nd/ day of October, 1997.
/s/ AUDREY L. MILFS
Secretary
<PAGE>
EXHIBIT 99.1(6)(a)
Pacific Life's Articles of Incorporation
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PACIFIC LIFE INSURANCE COMPANY
Thomas C. Sutton and Audrey L. Milfs certify that:
1. They are the Chief Executive Officer and Secretary, respectively, of
Pacific Mutual Life Insurance Company (the "Company"), a mutual life insurance
company organized under the laws of the State of California.
2. The Articles of Incorporation of this Corporation are amended and restated
to read as follows:
AMENDED AND
RESTATED ARTICLES OF INCORPORATION
of
PACIFIC LIFE INSURANCE COMPANY
I.
The name of the Corporation is PACIFIC LIFE INSURANCE COMPANY.
II.
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code. The business of the Corporation is to be an insurer, subject
to the provisions of the California Insurance Code. This insurer is organized
to transact life and disability insurance as specifically authorized by its
California Certificate of Authority.
1
<PAGE>
III.
The Corporation is authorized to issue six hundred thousand shares of
Common Stock with a par value of fifty dollars ($50.00) per share, having an
aggregate par value of thirty million dollars ($30,000,000). Common Stock shall
only be issued to Pacific LifeCorp.
IV.
(a) The liability of the directors of the Corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
(b) The Corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the California Corporations Code) for
breach of duty to the Corporation and its shareholders through Bylaw provisions,
agreements with agents, vote of shareholders or disinterested directors, or
otherwise, in excess of the indemnification otherwise permitted by Section 317
of the California Corporations Code, provided that any such excess
indemnification involving a breach of duty to the Corporation and its
shareholders shall be subject to the limits on such excess indemnification set
forth in Section 204 of the Corporations Code and shall be paid only from
realized or realizable earned surplus as specified in Section 10530 of the
California Insurance Code.
V.
The number of directors of this Corporation shall be not less than 9
or greater than 17. The exact number of directors shall be fixed within these
specified limits by the Board of Directors or the shareholders in the manner
provided in the Bylaws.
VI.
Any action which may be taken at a meeting of the shareholders,
may be taken without a meeting if authorized by a writing signed by all of the
holders of shares who would be entitled to vote at a meeting for such purpose,
and filed with the secretary of the Corporation.
3. The foregoing Amendment and Restatement of Articles of Incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment and restatement of Articles of Incorporation has
been duly approved by the required vote of members.
2
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
IN WITNESS WHEREOF, each of the undersigned, being the duly authorized
Chief Executive Officer and the Secretary of the Company, for the purpose of
amending the Articles of Incorporation of the Corporation pursuant to Section
11542 of the California Insurance Code, declares under penalty of perjury that
the statements contained in the foregoing Certificate are true of his or her own
knowledge, and makes and files this Certificate, and accordingly has set his or
her hand, this 27th day of August, 1997. Executed at Newport Beach, California.
/s/ TC SUTTON
-------------------------------------------------
Thomas C. Sutton
Chief Executive Officer
/s/ AUDREY L. MILFS
-------------------------------------------------
Audrey L. Milfs
Secretary
3
<PAGE>
EXHIBIT 99.1(6)(b)
BYLAWS OF
PACIFIC LIFE INSURANCE COMPANY
AS ADOPTED ON AUGUST 27, 1997
(EFFECTIVE SEPTEMBER 1, 1997)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<C> <S> <C>
Article I. OFFICES............................... 1
SECTION 1. Principal Executive Office............ 1
SECTION 2. Other Offices......................... 1
Article II. MEETINGS OF SHAREHOLDERS.............. 1
SECTION 1. Place of Meetings..................... 1
SECTION 2. Annual Meetings....................... 1
SECTION 3. Notice of Meetings.................... 1
SECTION 4. Special Meetings...................... 2
SECTION 5. Adjourned Meetings and Notice Thereof. 2
SECTION 6. Consent to Shareholders' Meetings..... 2
SECTION 7. Voting Rights; Cumulative Voting...... 2
SECTION 8. Quorum................................ 2
SECTION 9. Proxies............................... 2
SECTION 10. Conduct of Meeting.................... 3
Article III. BOARD OF DIRECTORS.................... 3
SECTION 1. Powers................................ 3
SECTION 2. Number of Directors................... 4
SECTION 3. Term of Office and Election........... 4
SECTION 4. Resignation........................... 4
SECTION 5. Vacancies............................. 4
SECTION 6. Place of Meetings..................... 4
SECTION 7. Regular Annual Meetings............... 5
SECTION 8. Other Regular Meetings................ 5
SECTION 9. Special Meetings...................... 5
SECTION 10. Adjournment........................... 5
SECTION 11. Entry of Notice....................... 5
SECTION 12. Waiver of Notice...................... 6
SECTION 13. Quorum................................ 6
SECTION 14. Action by Telephonic Communications... 6
SECTION 15. Action Without a Meeting.............. 6
SECTION 16. Fees and Compensation................. 6
Article IV. OFFICERS.............................. 7
SECTION 1. Number and Qualifications............. 7
SECTION 2. Election, Term of Office.............. 7
SECTION 3. Other Officers, etc................... 7
SECTION 4. Removal............................... 7
SECTION 5. Resignation........................... 7
SECTION 6. Vacancies............................. 7
SECTION 7. Chairman of the Board................. 7
SECTION 8. President............................. 8
SECTION 9. Vice Presidents....................... 8
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
SECTION 10. Secretary............................. 8
SECTION 11. Treasurer............................. 8
Article V. INSURANCE POLICIES, CONTRACTS, CHECKS,
DRAFTS,BANK ACCOUNTS, ETC......... 8
SECTION 1. Insurance Policies, How Signed........ 8
SECTION 2. Checks, Drafts, etc................... 8
SECTION 3. Contracts, etc., How Executed......... 8
SECTION 4. Bank Accounts......................... 9
Article VI. INVESTMENTS........................... 9
SECTION 1. Investments in the Corporation's Name. 9
Article VII. CERTIFICATES AND TRANSFER OF SHARES... 9
SECTION 1. Certificates for Shares............... 9
SECTION 2. Transfer on the Books................. 9
SECTION 3. Lost or Destroyed Certificates........ 9
SECTION 4. Transfer Agents and Registrars........ 10
SECTION 5. Closing Stock Transfer Books.......... 10
Article VIII. CORPORATE RECORDS, REPRESENTATION OF
SHARES OF OTHER CORPORATIONS...... 10
SECTION 1. Inspection of Bylaws.................. 10
SECTION 2. Inspection of Corporate Records....... 10
SECTION 3. Annual Reports........................ 10
SECTION 4. Representation of Shares of
Other Corporations................ 10
Article IX. AMENDMENTS............................ 11
SECTION 1. Amendment of Bylaws................... 11
Article X. INDEMNIFICATION....................... 11
SECTION 1. Liability of Directors................ 11
SECTION 2. Indemnification of Agents............. 11
</TABLE>
ii
<PAGE>
BYLAWS
FOR THE REGULATION, EXCEPT AS
OTHERWISE PROVIDED BY STATUTE
OR ITS ARTICLES OF INCORPORATION,
OF
PACIFIC LIFE INSURANCE COMPANY
Article I.
OFFICES
-------
SECTION 1. Principal Executive Office. The principal executive office for
--------------------------
the transaction of business of the corporation is hereby fixed and located at
700 Newport Center Drive, City of Newport Beach, County of Orange, State of
California.
SECTION 2. Other Offices. Branch or subordinate offices may at any time
-------------
be established by the board of directors at any place or places where the
corporation is qualified to do business.
Article II.
MEETINGS OF SHAREHOLDERS
------------------------
SECTION 1. Place of Meetings. All meetings of shareholders shall be held
-----------------
at either the principal executive office of the corporation or any other place
within the State of California designated by the board of directors pursuant to
authority hereinafter granted to said board.
SECTION 2. Annual Meetings. The annual meetings of shareholders shall be
---------------
held at such date and time as designated by the board of directors.
SECTION 3. Notice of Meetings. Notice of all meetings of shareholders,
------------------
whether annual or special, shall be given in writing to the shareholders
entitled to vote. The notice shall be given by the secretary, assistant
secretary, or other persons charged with that duty. If there is no such
officer, or if he or she neglects or refuses this duty, notice may be given by
any director. Notice of any meeting of shareholders shall be given to each
shareholder entitled to notice not less than ten (10) nor more than sixty (60)
days before a meeting. Notice of any meeting of shareholders shall specify the
place, the day, and the hour of the meeting and the general nature of the
business to be transacted. A notice may be given to a shareholder either
personally, or by mail, or other means of written communication, charges
prepaid, addressed to the shareholder at his or her address appearing on the
books of the corporation or given by the shareholder to the corporation for the
purpose of notice.
SECTION 4. Special Meetings. Special meetings of shareholders, for any
----------------
purpose or purposes whatsoever, may be called at any time by the chief executive
officer or by the board of directors or by
1
<PAGE>
shareholders holding ten percent (10%) or more of the voting power of the
corporation. [Cal. Corp. Code (S)(S) 600, 601]/1/
SECTION 5. Adjourned Meetings and Notice Thereof. Any shareholders'
-------------------------------------
meeting, annual or special, whether or not a quorum is present, may be adjourned
from time to time by the vote of a majority of the shareholders who are either
present in person or represented by proxy thereat, but in the absence of a
quorum no other business may be transacted at any such meeting.
When any shareholders' meeting, either annual or special, is adjourned for
forty-five (45) days or more, notice of the adjourned meeting shall be given as
in the case of an original meeting. Save as aforesaid, it shall not be
necessary to give any notice of the time and place of the adjourned meeting or
of the business to be transacted at an adjourned meeting, other than by
announcement at the meeting at which such adjournment is taken.
SECTION 6. Consent to Shareholders' Meetings. The transactions of any
---------------------------------
meeting of shareholders, however called and noticed, shall be valid as though
had at a meeting duly held after regular call and notice if a quorum be present
either in person or by proxy, and if, either before or after the meeting, each
of the shareholders entitled to vote, not present in person or by proxy, sign a
written waiver of notice, or a consent to the holding of such a meeting, or an
approval of the minutes thereof. All such waivers, consents or approvals shall
be filed with the corporation records or made a part of the minutes of the
meeting.
Any action which may be taken at a meeting of the shareholders, may be
taken without a meeting if authorized by a writing signed by all of the holders
of shares who would be entitled to vote at a meeting for such purpose, and filed
with the secretary of the corporation.
SECTION 7. Voting Rights; Cumulative Voting. Only persons in whose names
--------------------------------
shares entitled to vote stand on the stock records of the corporation on the day
of any meeting of shareholders, unless some other day be fixed by the board of
directors for the determination of shareholders of record, then on such other
day, shall be entitled to vote at such meeting.
Every shareholder entitled to vote shall be entitled to one vote for each
of said shares and in any election of directors he or she shall have the right
to cumulate his or her votes as provided in Section 708, of the Corporations
Code of California.
SECTION 8. Quorum. The presence in person or by proxy of the holders of a
------
majority of the shares entitled to vote at any meeting shall constitute a quorum
for the transaction of business.
SECTION 9. Proxies. Every shareholder entitled to vote or execute consents
-------
shall have the right to do so either in person or by an agent or agents
authorized by a written proxy executed by such shareholder or his or her duly
authorized agent and filed with the secretary of the corporation; provided that
no such proxy shall be valid after the expiration of eleven (11) months from the
date of its execution unless the shareholder executing it specifies therein the
length of time for which such proxy is to continue in force. Any proxy duly
executed is not revoked, and continues in full force and effect, until an
instrument revoking it, or a duly executed proxy bearing a later date, is filed
with the secretary.
_______________
/1/ Citations are inserted for reference only, and do not constitute a part of
the Bylaws.
2
<PAGE>
SECTION 10. Conduct of Meeting. The chairman of the board shall preside
------------------
as chairman at all meetings of the shareholders. The chairman shall conduct
each such meeting in a businesslike and fair manner, but shall not be obligated
to follow any technical, formal or parliamentary rules or principles of
procedure. The chairman's rulings on procedural maters shall be conclusive and
binding on all shareholders unless at the time of a ruling a request for a vote
is made to the shareholders entitled to vote and which are represented in person
or by proxy at the meeting, in which case the decision of a majority of such
shareholders shall be conclusive and binding. Without limiting the generality
of the foregoing, the chairman shall have all the powers usually vested in the
chairman of a meeting of shareholders.
Article III.
BOARD OF DIRECTORS
------------------
SECTION 1. Powers. Subject to limitations of the articles of
------
incorporation and of these bylaws, and of any statutory provisions as to action
to be authorized or approved by the shareholders, all corporate powers shall be
exercised by or under the authority of, and the business and affairs of the
corporation shall be controlled by or under the direction of, the board of
directors. [Corp. Code (S) 300] Without prejudice to such general powers, but
subject to the same limitations, it is hereby expressly declared that the
directors shall have the following powers, to-wit:
First. Corporate Business. To delegate the management of the day-to-day
----- ------------------
operation of the business and affairs of the corporation to persons,
provided that the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised under the ultimate direction of
the board of directors.
Second. Select and Remove Officers, Agents and Employees. To select and
------ ------------------------------------------------
remove all officers, agents and employees of the corporation, prescribe the
powers and duties for them as may not be inconsistent with law, the
articles of incorporation or these bylaws, fix their compensation and
require from them security for faithful service.
Third. Appoint Committees. To appoint, by resolution adopted by a
----- ------------------
majority of the authorized number of directors, one or more committees, each
consisting of two or more directors, and to fix, by resolution or
resolutions, the quorum for the transaction of business of committees, other
than the executive committee, which may be less than a majority, but not
less than one-third of the authorized number of committee members. Any such
committee, to the extent provided in the resolution of the board, shall have
all the authority of the board, except with respect to:
(a) The approval of any action for which shareholders' approval or
approval of the outstanding shares is required by law.
(b) The filing of vacancies on the board or in any committee.
(c) The fixing of compensation of the directors for serving on the board
or any committee.
(d) The amendment or repeal of bylaws or the adoption of new bylaws.
3
<PAGE>
(e) The amendment or repeal of any resolution of the board which by its
express terms is not so amendable or repealable.
(f) A dividend or other distribution to shareholders of the corporation,
except at a rate, in a periodic amount or within a price range set forth in
the articles or determined by the board.
(g) The appointment of other committees of the board or the members
thereof.
Fourth. Incur Indebtedness. To borrow money and incur indebtedness for
------ ------------------
the purposes of the corporation and to cause to be executed and delivered
therefor, in the corporate name, promissory notes, bonds, debentures, deeds
of trust, pledges, hypothecations, or other evidences of debt and
securities therefor.
SECTION 2. Number of Directors. The number of directors of the
-------------------
corporation shall be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of the board, but shall consist of not less
than nine (9) nor more than seventeen (17) directors.
SECTION 3. Term of Office and Election. At each annual meeting of
---------------------------
shareholders, directors shall be elected to hold office until the next annual
meeting. All directors shall hold office for the term for which they are
elected and until their respective successors are elected and qualified, except
that each director who attains retirement age, as determined by the board of
directors, during the term for which elected shall hold office only until the
next annual meeting of shareholders following attainment of retirement age at
which time a person may be elected as director to complete the unexpired term of
office, if any, for which the director attaining retirement age had been
elected.
SECTION 4. Resignation. Any director may resign at any time by giving
-----------
written notice to the board of directors or to the chairman of the board, the
president or the secretary of the corporation. Any such resignation shall take
effect at the date of receipt of such notice or at any later time specified
therein; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 5. Vacancies. If any vacancies occur in the board of directors by
---------
reason of death, resignation, removal or otherwise, or if the authorized number
of directors shall be increased, the directors then in office shall continue to
act, and such vacancies and newly created directorships may be filled by a
majority of the directors then in office, although less than a quorum. A
director elected to fill a vacancy or a newly created directorship shall hold
office until his or her successor has been elected and qualified or until his or
her earlier death, resignation or removal. The shareholders may elect a
director at any time to fill any vacancy not filled by the directors. [Cal.
Corp. Code (S) 305]
SECTION 6. Place of Meetings. Regular meetings of the board of directors
-----------------
shall be held at any place within or without the State of California which has
been designated from time to time by resolution of the board of directors. In
the absence of such designation, regular meetings, other than the annual
meeting, shall be held at the principal executive office of the corporation,
unless not less than ten (10) days prior to said meeting a written notice
designating another location is mailed to each director at the address as shown
upon the records of the corporation. Special meetings of the board may be held
either at a place so designated or at the principal executive office of the
corporation.
4
<PAGE>
SECTION 7. Regular Annual Meetings. Unless otherwise provided by
-----------------------
resolution of the board of directors, immediately following each annual meeting
of shareholders, the board of directors shall hold a regular annual meeting for
the purpose of organization, election of officers, and the transaction of other
business. The regular annual meeting shall be held at the principal executive
office of the corporation or at such other place as designated by resolution of
the board. Notice of such meeting is hereby dispensed with.
SECTION 8. Other Regular Meetings. Other regular meetings of the board of
----------------------
directors shall be held without call, on such dates and at such times as may be
fixed by the board. Call and notice of all regular meetings of the board of
directors are hereby dispensed with.
SECTION 9. Special Meetings. Special meetings of the board of directors
----------------
for any purpose or purposes shall be called at any time by the chief executive
officer or, if he or she is absent or unable or refuses to act, by any three (3)
directors.
Special meetings of the board shall be held upon six days' notice by mail
or forty-eight (48) hours' notice delivered personally or by telephone,
including a voice messaging system or other system or technology designed to
record and communicate messages, telegraph, facsimile, electronic mail or other
electronic means. Any such notice shall be addressed or delivered to each
director at such director's address as it is shown upon the records of the
corporation or as may have been given to the corporation by the director for
purposes of notice or, if such address is not shown on such records or is not
readily ascertainable, at the place in which the meetings of the directors are
regularly held. [Cal. Corp. Code (S) 307]
Notice by mail shall be deemed to have been given at the time a written
notice is deposited in the United States mail, postage prepaid. Any other
written notice shall be deemed to have been given at the time it is personally
delivered to the recipient or is delivered to a common carrier for transmission,
or actually transmitted by the person given the notice by electronic means, to
the recipient. Oral notice shall be deemed to have been given at the time it is
communicated, in person or by telephone or wireless, to the recipient or to a
person at the office of the recipient who the person given the notice has reason
to believe will promptly communicate it to the recipient. [Cal. Corp. Code (S)
307]
SECTION 10. Adjournment. A majority of the directors present, whether or
-----------
not a quorum is present, may adjourn any directors meeting to another time and
place. Notice of the time and place of holding an adjourned meeting need not be
given to absent directors if the time and place be fixed at the meeting
adjourned, except as provided in the next sentence. If the meeting is adjourned
for more than twenty-four (24) hours, notice of any adjournment to another time
or place shall be given prior to the time of the adjourned meeting to the
directors who were not present at the time of the adjournment.
SECTION 11. Entry of Notice. Whenever any director has been absent from
---------------
any special meeting of the board of directors, an entry in the minutes to the
effect that notice has been duly given shall be prima facie evidence that due
notice of such special meeting was given to such director as required by law and
these bylaws.
SECTION 12. Waiver of Notice. The transactions of any meeting of the
----------------
board of directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum be present and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice of or consent to holding
such meeting or an approval of the
5
<PAGE>
minutes thereof. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
SECTION 13. Quorum. A majority of the total number of directors then in
------
office constitutes a quorum of the board for the transaction of business, except
to adjourn, as provided in Section 10 of this Article III. Every act or
decision done or made by a majority of the directors present at a meeting duly
held at which a quorum is present shall be regarded as an act of the board,
unless a greater number be required by law or by the articles of incorporation.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for such meeting.
SECTION 14. Action by Telephonic Communications. Members of the board may
-----------------------------------
participate in a meeting through use of conference telephone or similar
communications equipment, and participation in a meeting pursuant to this
provision shall constitute presence in person at such meeting if all of the
following apply:
(a) Each member participating in the meeting can communicate with all of
the other members concurrently.
(b) Each member is provided the means of participating in all matters
before the board, including the capacity to propose, or to interpose an
objection, to a specific action to be taken by the corporation.
(c) The corporation adopts and implements some means of verifying both of
the following:
(i) A person communicating by telephone, electronic video screen, or
other communications equipment is a director entitled to participate
in the board meeting; and
(ii) All statements, questions, actions, or votes were made by
that director and not by another person not permitted to participate
as a director.
SECTION 15. Action Without a Meeting. Any action required or permitted to
------------------------
be taken by the board may be taken without a meeting, if all members of the
board shall individually or collectively consent in writing to that action.
Such consent or consents shall have the same effect as a unanimous vote of the
board and shall be filed with the minutes of the proceedings of the board.
SECTION 16. Fees and Compensation. Directors and members of committees
---------------------
may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by the board.
Directors who are salaried officers of the corporation shall not receive
additional fees or compensation for their services as directors. Nothing herein
contained shall be construed to preclude any director from serving the
corporation in any other capacity as an officer, agent, employee, or otherwise,
and receiving compensation therefor.
6
<PAGE>
Article IV.
OFFICERS
--------
SECTION 1. Number and Qualifications. The officers of the corporation
-------------------------
shall be a chairman of the board, a president, a secretary, a treasurer, and
such other officers as may be appointed in accordance with the provisions of
Section 3 of this Article IV. One person may hold one or more offices and
perform the duties thereof. The president or chairman of the board shall be
designated by the board as the chief executive officer of the corporation, and
one officer shall be designated by the board as the chief financial officer of
the corporation. [Cal. Corp. Code (S) 312(a)]
SECTION 2. Election, Term of Office. Each officer, except such officers
------------------------
as may be appointed in accordance with the provisions of Section 3 of this
Article IV, shall be chosen annually by and serve at the pleasure of the board
of directors and shall hold their respective office until their resignation,
removal or other disqualification from service or until their successor shall
have been duly chosen and qualified. [Cal. Corp. Code (S) 312(b)]
SECTION 3. Other Officers, etc. The board of directors may elect, and may
-------------------
empower the chief executive officer to appoint, such other officers as the
business of the corporation may require, each of whom shall hold office for such
period, have such authority and perform such duties as are provided in these
bylaws or as the board may from time to time determine. [Cal. Corp. Code (S)
312(b)]
SECTION 4. Removal. Any officer chosen under Section 2 of this Article IV
-------
may be removed, either with or without cause, by a majority vote of the
directors present at any regular meeting of the board of directors. Any
officer, except an officer chosen by the board of directors pursuant to Section
2 of this Article IV, may also be removed at any time, with or without cause, by
the chief executive officer, if such powers of removal have been conferred by
the board of directors.
SECTION 5. Resignation. Any officer may resign at any time by giving
-----------
written notice to the board of directors or to the chairman of the board or to
the secretary of the corporation. Any such resignation shall take effect at the
date of receipt of such notice or at any later time specified therein; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
SECTION 6. Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these bylaws for regular election or appointment to such
office.
SECTION 7. Chairman of the Board. The chairman of the board shall, if
---------------------
present, preside at all meetings of the board and exercise and perform such
other powers and duties as may be from time to time assigned by the board.
SECTION 8. President. The president shall have such powers and duties as
---------
may be prescribed from time to time by the board of directors, the chairman of
the board, or elsewhere in these bylaws. In the absence or disability of the
chairman of the board, he or she shall exercise the powers and perform the
duties of the chairman of the board.
7
<PAGE>
SECTION 9. Vice Presidents. Vice presidents shall have such powers and
---------------
perform such duties as may be prescribed from time to time by the chief
executive officer, the board of directors, or elsewhere in these bylaws.
SECTION 10. Secretary. The secretary shall keep, or cause to be kept, a
---------
book of minutes at the principal executive office, or such other place as the
board of directors may order, of all meetings of the directors, committees and
shareholders with the time and place of holding, whether regular or special, and
if special, how authorized, the notice thereof given, the names of those present
at directors' and committee meetings, the number of shareholders present or
represented at shareholders' meetings and the proceedings thereof.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board and any committees thereof required by these
bylaws or by law to be given, shall keep the seal of the corporation in safe
custody, and shall have such other powers and perform such other duties as may
be prescribed by the board.
SECTION 11. Treasurer. The treasurer shall have custody of all the funds,
---------
securities and other valuables of the corporation which may have or shall come
into his or her hands. He or she shall have such powers and perform such duties
as may be prescribed by the chief executive officer, the board of directors or
elsewhere in these bylaws.
Article V.
INSURANCE POLICIES, CONTRACTS, CHECKS,
DRAFTS, BANK ACCOUNTS, ETC.
---------------------------
SECTION 1. Insurance Policies, How Signed. All policies issued by this
------------------------------
corporation shall be signed by the chairman or president and countersigned by
the secretary, both either personally or by facsimile.
SECTION 2. Checks, Drafts, etc. All checks, drafts or other orders for
-------------------
payment of money, notes or other evidences of indebtedness, except as in these
bylaws otherwise provided, issued in the name of or payable to the corporation
shall be signed or endorsed by such person or persons and in such manner as from
time to time shall be determined by resolution of the board of directors or by
resolution of a committee thereof, if the board of directors delegate such
authority to it.
SECTION 3. Contracts, etc., How Executed. The board of directors, or a
-----------------------------
committee thereof if such authority is delegated to it by the board of
directors, except as by law or in these bylaws otherwise provided, may authorize
any officer or officers, agent or agents, to enter into any contract or execute
any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to special instances; and unless so
authorized, no officer, agent or employee shall have any power or authority to
bind the corporation by any contract or engagement or to pledge its credit to
render it liable for any purpose or to any amount.
SECTION 4. Bank Accounts. All funds of the corporation not otherwise
-------------
employed shall be deposited from time to time to the credit of the corporation,
and in its name, in such banks, trust companies, or other depositories as the
board of directors may select or as may be selected by any committee, officer or
officers, agent or agents of the corporation to whom such powers may from time
to time be delegated by the
8
<PAGE>
board of directors; and for the purpose of such deposits the chairman of the
board, the president, any vice president, the secretary, the treasurer, or any
other officer or agent or employee of the corporation to whom such power may be
delegated by the board of directors or by a committee thereof, if such authority
be delegated to it by the board of directors, may endorse, assign and deliver
checks, drafts and other orders for the payments of monies which are payable to
the order of the corporation.
Article VI.
INVESTMENTS
-----------
SECTION 1. Investments in the Corporation's Name. All investments of the
-------------------------------------
corporation shall be made in the name of Pacific Life Insurance Company or its
nominee.
Article VII.
CERTIFICATES AND TRANSFER OF SHARES
-----------------------------------
SECTION 1. Certificates for Shares. Certificates for shares shall be of
-----------------------
such form and device as the board of directors may designate and shall state the
name of the record holder of the shares represented thereby; its number; date of
issuance; the number of shares for which it is issued; the par value; a
statement of the rights, privileges, preferences and restrictions, if any; a
statement as to redemption or conversion, if any; a statement of liens or
restrictions upon transfer or voting, if any; if the shares be assessable, or,
if assessments are collectible by personal action, a plain statement of such
facts.
Every certificate for shares must be signed in the name of the corporation
by the chairman, and the secretary or an assistant secretary or must be
authenticated by facsimiles of the signatures of the chairman and secretary or
by a facsimile of the signature of its chairman and the written signature of its
secretary or an assistant secretary.
SECTION 2. Transfer on the Books. Upon surrender to the secretary or
---------------------
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
SECTION 3. Lost or Destroyed Certificates. Any person claiming a
------------------------------
certificate of stock to be lost or destroyed shall make an affidavit or
affirmation of that fact and advertise the same in such a manner as the board of
directors may require, and shall, if the directors so require, give the
corporation a bond of indemnity, in form, in such amount and with one or more
sureties satisfactory to the board, whereupon a new certificate may be issued of
the same tenor and for the same number of shares as the one alleged to be lost
or destroyed.
SECTION 4. Transfer Agents and Registrars. The board of directors may
------------------------------
appoint one or more transfer agents or transfer clerks, and one or more
registrars, which shall be an incorporated bank or trust company -- either
domestic or foreign, who shall be appointed at such times and places as the
requirements of the corporation may necessitate and the board of directors may
designate.
9
<PAGE>
SECTION 5. Closing Stock Transfer Books. The board of directors may close
----------------------------
the transfer books in their discretion for a period not exceeding thirty (30)
days preceding any meeting, annual or special, of the shareholders, or the day
appointed for the payment of a dividend.
Article VIII.
CORPORATE RECORDS, REPRESENTATION OF
SHARES OF OTHER CORPORATIONS
----------------------------
SECTION 1. Inspection of Bylaws. The corporation shall keep in its
--------------------
principal executive office for the transaction of business the original or a
copy of these bylaws as amended or otherwise altered to date, certified by the
secretary, which shall be open to inspection by the shareholders at all
reasonable times during office hours.
SECTION 2. Inspection of Corporate Records. (a) The accounting books and
-------------------------------
records and minutes of proceedings of the shareholders and the board and
committees of the board of the corporation shall be open to inspection upon the
written demand on the corporation of any shareholder at any reasonable time
during usual business hours, for a purpose reasonably related to such
shareholder's interests. The right of inspection created by this subsection
shall extend to the records of each subsidiary of the corporation keeping any
such records in California or having its principal executive office in
California. [See Cal. Corp. Code (S) 1601]
---
(b) Such inspection may be made in person or by agent or attorney, and the
right of inspection includes the right to copy and make extracts. [See Cal.
---
Corp. Code (S) 1601]
(c) Demand of inspection shall be made in writing upon the chief executive
officer, secretary or assistant secretary of the corporation. [Cal. Corp. Code
(S) 1601]
SECTION 3. Annual Reports. The making of annual reports to shareholders
--------------
is hereby waived.
SECTION 4. Representation of Shares of Other Corporations. The chief
----------------------------------------------
executive officer or any other officer is authorized to vote, represent and
exercise on behalf of the corporation all rights incident to any and all shares
or other evidence of ownership of any other business entities such as
corporations, business trusts and partnerships standing in the name of the
corporation. The authority herein granted to said officers to vote or represent
on behalf of the corporation any and all such evidences of ownership held by the
corporation may be exercised either by such officers in person or by any person
authorized so to do by proxy or power of attorney duly executed by said
officers.
Article IX.
AMENDMENTS
----------
SECTION 1. Amendment of Bylaws. A bylaw or bylaws may be adopted,
-------------------
amended, or repealed by the vote of shareholders entitled to exercise a
majority of the voting power of the corporation or by the written assent of
such shareholders. Subject to the rights of the shareholders as provided in
this Section 1 of this Article IX, a bylaw or bylaws, other than a bylaw or
amendment thereof changing the authorized
10
<PAGE>
number of directors, may be adopted, amended, or repealed by the board of
directors. [Cal. Corp. Code (S) 211]
Article X.
INDEMNIFICATION
---------------
SECTION 1. Liability of Directors. The liability of the directors of the
----------------------
corporation for monetary damages shall be eliminated to the fullest extent
permissible under California law. [Cal. Corp. Code (S)(S) 204(a)(10), 309]
SECTION 2. Indemnification of Agents. The corporation is authorized to
-------------------------
provide indemnification of agents (as defined in Section 317 of the California
Corporations Code) through agreements with agents, vote of shareholders or
disinterested directors, or otherwise, to the fullest extent possible under
California Law, provided that any excess indemnification permitted by Section
317, involving a breach of duty to the corporation and its shareholders shall be
subject to the limits of such excess indemnification set forth in Section 204 of
the California Corporations Code and shall be paid only with such funds as may
be distributed as dividends to shareholders under applicable law. [Cal. Corp.
Code (S)(S) 204(a)(11), 317]
11
<PAGE>
EXHIBIT 99.6(a)
Consent of Independent Auditors
<PAGE>
[Letterhead of Deloitte & Touche LLP]
CONSENT OF INDEPENDENT AUDITORS
Pacific Life Insurance Company:
We consent to the use in this Post-Effective Amendment No. 2 to Registration
Statement No. 333-20355 of our report dated February 6, 1998 related to the
financial statements of Pacific Select Exec Separate Account as of December 31,
1997 and for each of the two years in the period then ended and of our report
dated February 19, 1998 related to the consolidated financial statements of
Pacific Life Insurance Company and subsidiaries as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997 appearing
in the Prospectus of Pacific Select Estate Preserver II, which is a part of such
Registration Statement.
We also consent to the reference to us under the heading "Financial Statements"
and "Independent Auditors" appearing in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
April 23, 1998
<PAGE>
EXHIBIT 99.7
Opinion of Actuary
<PAGE>
EXHIBIT 99.7
[LETTERHEAD OF PACIFIC LIFE]
April 17, 1998
PACIFIC LIFE INSURANCE COMPANY
700 Newport Center Drive
Newport Beach, CA 92660
RE: Pacific Select Estate Preserver II Last Survivor Flexible Premium Variable
Life Insurance Policy
To whom it may concern:
In my capacity as Assistant Vice President of the Product Design Department of
Pacific Life Insurance Company, I have provided actuarial advice concerning:
The preparation of the Post-Effective Amendment No. 2 to the Registration
Statement on Form S-6 filed by Pacific Life Insurance Company with the
Securities and Exchange Commission under the Securities Act of 1933 with respect
to variable life insurance policies (the "Registration Statement") and the
preparation of the policy forms for the variable life insurance policies
described in the Registration Statement (the "Policies").
It is my professional opinion that:
The illustration of death benefits, cash values and accumulated premiums shown
in the Appendix to the prospectus, based on the assumptions stated in the
illustrations and on two pages immediately preceding the illustrations, are
consistent with the provisions of the Policies. The rate structure of the
Policies has not been designed so as to make the relationship between premiums
and benefits, as shown in the illustrations, appear to be correspondingly more
favorable to the prospective Insureds of the policies at ages 55 in the
underwriting classes illustrated than to prospective Insureds of Policies at
other ages or underwriting classes.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ PIERRE DELISLE
- -------------------
Pierre Delisle, FSA
Assistant Vice President
<PAGE>
EXHIBIT 99.9
Powers of Attorney
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye and Robin Yonis Sandlaufer his/her true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution for him/her in his/her name, place, and stead, in any and all
Registration Statements applicable to Pacific Select Separate Account of Pacific
Life Insurance Company, Pacific Select Exec Separate Account of Pacific Life
Insurance Company, Pacific Select Variable Annuity Separate Account of Pacific
Life Insurance Company, Separate Account A of Pacific Life Insurance Company,
Separate Account B of Pacific Life Insurance Company and Pacific Corinthian
Variable Separate Account of Pacific Life Insurance Company and any amendments
or supplements thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Dated: 2/25/98 /s/ TC SUTTON
Thomas C. Sutton
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye and Robin Yonis Sandlaufer his/her true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution for him/her in his/her name, place, and stead, in any and all
Registration Statements applicable to Pacific Select Separate Account of Pacific
Life Insurance Company, Pacific Select Exec Separate Account of Pacific Life
Insurance Company, Pacific Select Variable Annuity Separate Account of Pacific
Life Insurance Company, Separate Account A of Pacific Life Insurance Company,
Separate Account B of Pacific Life Insurance Company and Pacific Corinthian
Variable Separate Account of Pacific Life Insurance Company and any amendments
or supplements thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Dated: February 25, 1998 /s/ GLENN S. SCHAFER
Glenn S. Schafer
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye and Robin Yonis Sandlaufer his/her true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution for him/her in his/her name, place, and stead, in any and all
Registration Statements applicable to Pacific Select Separate Account of Pacific
Life Insurance Company, Pacific Select Exec Separate Account of Pacific Life
Insurance Company, Pacific Select Variable Annuity Separate Account of Pacific
Life Insurance Company, Separate Account A of Pacific Life Insurance Company,
Separate Account B of Pacific Life Insurance Company and Pacific Corinthian
Variable Separate Account of Pacific Life Insurance Company and any amendments
or supplements thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Dated: 2/25/98 /s/ RICHARD M. FERRY
Richard M. Ferry
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye and Robin Yonis Sandlaufer his/her true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution for him/her in his/her name, place, and stead, in any and all
Registration Statements applicable to Pacific Select Separate Account of Pacific
Life Insurance Company, Pacific Select Exec Separate Account of Pacific Life
Insurance Company, Pacific Select Variable Annuity Separate Account of Pacific
Life Insurance Company, Separate Account A of Pacific Life Insurance Company,
Separate Account B of Pacific Life Insurance Company and Pacific Corinthian
Variable Separate Account of Pacific Life Insurance Company and any amendments
or supplements thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Dated: 2/25/98 /s/ DONALD E. GUINN
Donald E. Guinn
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye and Robin Yonis Sandlaufer his/her true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution for him/her in his/her name, place, and stead, in any and all
Registration Statements applicable to Pacific Select Separate Account of Pacific
Life Insurance Company, Pacific Select Exec Separate Account of Pacific Life
Insurance Company, Pacific Select Variable Annuity Separate Account of Pacific
Life Insurance Company, Separate Account A of Pacific Life Insurance Company,
Separate Account B of Pacific Life Insurance Company and Pacific Corinthian
Variable Separate Account of Pacific Life Insurance Company and any amendments
or supplements thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Dated: 2/25/98 /s/ IGNACIO E. LOZANO, JR.
Ignacio E. Lozano, Jr.
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye and Robin Yonis Sandlaufer his/her true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution for him/her in his/her name, place, and stead, in any and all
Registration Statements applicable to Pacific Select Separate Account of Pacific
Life Insurance Company, Pacific Select Exec Separate Account of Pacific Life
Insurance Company, Pacific Select Variable Annuity Separate Account of Pacific
Life Insurance Company, Separate Account A of Pacific Life Insurance Company,
Separate Account B of Pacific Life Insurance Company and Pacific Corinthian
Variable Separate Account of Pacific Life Insurance Company and any amendments
or supplements thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Dated: 2/25/98 /s/ CHARLES D. MILLER
Charles D. Miller
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye and Robin Yonis Sandlaufer his/her true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution for him/her in his/her name, place, and stead, in any and all
Registration Statements applicable to Pacific Select Separate Account of Pacific
Life Insurance Company, Pacific Select Exec Separate Account of Pacific Life
Insurance Company, Pacific Select Variable Annuity Separate Account of Pacific
Life Insurance Company, Separate Account A of Pacific Life Insurance Company,
Separate Account B of Pacific Life Insurance Company and Pacific Corinthian
Variable Separate Account of Pacific Life Insurance Company and any amendments
or supplements thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Dated: Feb 25, 1998 /s/ DONN B. MILLER
Donn B. Miller
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye and Robin Yonis Sandlaufer his/her true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution for him/her in his/her name, place, and stead, in any and all
Registration Statements applicable to Pacific Select Separate Account of Pacific
Life Insurance Company, Pacific Select Exec Separate Account of Pacific Life
Insurance Company, Pacific Select Variable Annuity Separate Account of Pacific
Life Insurance Company, Separate Account A of Pacific Life Insurance Company,
Separate Account B of Pacific Life Insurance Company and Pacific Corinthian
Variable Separate Account of Pacific Life Insurance Company and any amendments
or supplements thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Dated: 2/25/1998 /s/ RICHARD M. ROSENBERG
Richard M. Rosenberg
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye and Robin Yonis Sandlaufer his/her true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution for him/her in his/her name, place, and stead, in any and all
Registration Statements applicable to Pacific Select Separate Account of Pacific
Life Insurance Company, Pacific Select Exec Separate Account of Pacific Life
Insurance Company, Pacific Select Variable Annuity Separate Account of Pacific
Life Insurance Company, Separate Account A of Pacific Life Insurance Company,
Separate Account B of Pacific Life Insurance Company and Pacific Corinthian
Variable Separate Account of Pacific Life Insurance Company and any amendments
or supplements thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Dated: 2/25/98 /s/ JAMES R. UKROPINA
James R. Ukropina
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye and Robin Yonis Sandlaufer his/her true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution for him/her in his/her name, place, and stead, in any and all
Registration Statements applicable to Pacific Select Separate Account of Pacific
Life Insurance Company, Pacific Select Exec Separate Account of Pacific Life
Insurance Company, Pacific Select Variable Annuity Separate Account of Pacific
Life Insurance Company, Separate Account A of Pacific Life Insurance Company,
Separate Account B of Pacific Life Insurance Company and Pacific Corinthian
Variable Separate Account of Pacific Life Insurance Company and any amendments
or supplements thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Dated: Feb 25, 1998 /s/ RAYMOND L. WATSON
Raymond L. Watson
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye and Robin Yonis Sandlaufer his/her true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution for him/her in his/her name, place, and stead, in any and all
Registration Statements applicable to Pacific Select Separate Account of Pacific
Life Insurance Company, Pacific Select Exec Separate Account of Pacific Life
Insurance Company, Pacific Select Variable Annuity Separate Account of Pacific
Life Insurance Company, Separate Account A of Pacific Life Insurance Company,
Separate Account B of Pacific Life Insurance Company and Pacific Corinthian
Variable Separate Account of Pacific Life Insurance Company and any amendments
or supplements thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Dated: February 25, 1998 /s/ DAVID R. CARMICHAEL
David R. Carmichael
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye and Robin Yonis Sandlaufer his/her true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution for him/her in his/her name, place, and stead, in any and all
Registration Statements applicable to Pacific Select Separate Account of Pacific
Life Insurance Company, Pacific Select Exec Separate Account of Pacific Life
Insurance Company, Pacific Select Variable Annuity Separate Account of Pacific
Life Insurance Company, Separate Account A of Pacific Life Insurance Company,
Separate Account B of Pacific Life Insurance Company and Pacific Corinthian
Variable Separate Account of Pacific Life Insurance Company and any amendments
or supplements thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Dated: 2/25/98 /s/ AUDREY L. MILFS
Audrey L. Milfs
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye and Robin Yonis Sandlaufer his/her true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution for him/her in his/her name, place, and stead, in any and all
Registration Statements applicable to Pacific Select Separate Account of Pacific
Life Insurance Company, Pacific Select Exec Separate Account of Pacific Life
Insurance Company, Pacific Select Variable Annuity Separate Account of Pacific
Life Insurance Company, Separate Account A of Pacific Life Insurance Company,
Separate Account B of Pacific Life Insurance Company and Pacific Corinthian
Variable Separate Account of Pacific Life Insurance Company and any amendments
or supplements thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Dated: 02-25-98 /s/ KHANH T. TRAN
Khanh T. Tran
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye and Robin Yonis Sandlaufer his/her true
and lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution for him/her in his/her name, place, and stead, in any and all
Registration Statements applicable to Pacific Select Separate Account of Pacific
Life Insurance Company, Pacific Select Exec Separate Account of Pacific Life
Insurance Company, Pacific Select Variable Annuity Separate Account of Pacific
Life Insurance Company, Separate Account A of Pacific Life Insurance Company,
Separate Account B of Pacific Life Insurance Company and Pacific Corinthian
Variable Separate Account of Pacific Life Insurance Company and any amendments
or supplements thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Dated: March 10, 1998 /s/ EDWARD R. BYRD
Edward R. Byrd
