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PACIFIC SELECT EXEC II PROSPECTUS MAY 1, 1999
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Pacific Select Exec II is a flexible premium variable life insurance policy
issued by Pacific Life Insurance Company.
This policy is not available in all states. This prospectus provides information that you should know before buying a
This prospectus is not an offer in any policy. It's accompanied by a current prospectus for the Pacific Select Fund, a
state or jurisdiction where we're not fund that provides the underlying portfolios for the variable investment
legally permitted to offer the policy. options offered under the policy. Please read these prospectuses carefully and
keep them for future reference.
The policy is described in detail in this
prospectus. The Pacific Select Fund is Here's a list of all of the investment options available under your policy:
described in its prospectus and in its
Statement of Additional Information (SAI). VARIABLE INVESTMENT OPTIONS
No one has the right to describe the policy Money Market Large-Cap Value
or the Pacific Select Fund any differently High Yield Bond Mid-Cap Value
than they have been described in these Managed Bond Equity
documents. Government Securities Bond and Income
Growth Equity Index
You should be aware that the Securities and Aggressive Equity Small-Cap Index
Exchange Commission (SEC) has not reviewed Growth LT REIT
the policy for its investment merit, and Equity Income International
does not guarantee that the information in Multi-Strategy Emerging Markets
this prospectus is accurate or complete.
It's a criminal offense to say otherwise. FIXED OPTIONS
Fixed Account
Fixed LT Account
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YOUR GUIDE TO THIS PROSPECTUS
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An overview of Pacific Select Exec II 4
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Pacific Select Exec II basics 12
Owners, person insured by the policy, and beneficiaries 13
Policy date, monthly payment date, policy anniversary date 14
Statements and reports we'll send you 15
Your right to cancel 15
Timing of payments, forms and requests 16
Telephone transactions 17
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The death benefit 18
Choosing your death benefit option 18
Choosing a death benefit qualification test 19
Comparing the death benefit options 20
When we pay the death benefit 22
Changing your death benefit option 22
Changing the face amount 23
Optional riders 24
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How premiums work 26
Planned periodic premium payments 26
Deductions from your premiums 27
Allocating your premiums 27
Limits on the premium payments you can make 28
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Your policy's accumulated value 29
Calculating your policy's accumulated value 29
Monthly deductions 29
Lapsing and reinstatement 32
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Your investment options 34
Variable investment options 34
Fixed options 38
Transferring among investment options 38
Transfer programs 39
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Withdrawals, surrenders and loans 41
Making withdrawals 41
Taking out a loan 42
Ways to use your policy's loan and withdrawal features 43
Surrendering your policy 44
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General information about your policy 46
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Variable life insurance and your taxes 49
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About Pacific Life 53
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Illustrations 106
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Appendices 122
Appendix A: Mortality and expense risk face amount charge: rates
per $1,000 of initial face amount 122
Appendix B: Surrender charge: current rates per $1,000 of initial
face amount 123
Appendix C: Maximum surrender charge: rates per $1,000 of initial
face amount 124
Appendix D: Death benefit percentages 125
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Where to go for more information back cover
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Terms used in this prospectus
We've tried to make this prospectus easy to read and understand, but you may
find some words and terms that are new to you. We've identified some of these
below and the pages where you'll find an explanation of what they mean.
If you have any questions, please ask your registered representative or call us
at 1-800-800-7681.
Accumulated value 29 Joint owners 13
Accumulation units 36 Lapse 32
In this prospectus, you and your mean the Age 13 Loan account 42
policyholder or owner. Pacific Life, we, Allocation 27 Modified endowment contract 51
us and our refer to Pacific Life Insurance Assignment 48 Monthly payment date 14
Company. The fund refers to Pacific Select Beneficiary 14 Net amount at risk 30
Fund. Policy means a Pacific Select Exec II Business day 16 Net cash surrender value 44
variable life insurance policy, unless we Cash surrender value 44 Net premium 26
state otherwise. Cash value accumulation test 19 Net single premium 19
Contingent beneficiary 14 Outstanding loan amount 42
Cost of insurance rate 29 Planned periodic premium 26
Death benefit 18 Policy anniversary 14
Death benefit percentage 19 Policy date 14
Death benefit qualification test 19 Policy year 14
Face amount 18 Portfolio 34
Fixed account 38 Proper form 16
Fixed LT account 38 Reinstatement 33
Fixed options 38 Riders 24
General account 54 Separate account 54
Guideline minimum death benefit 19 Seven-pay limit 51
Guideline premium limit 28 Tax code 49
Guideline premium test 19 Unit value 36
Illustration 15 Variable account 34
In force 12 Variable investment option 34
Income benefit 46
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AN OVERVIEW OF PACIFIC SELECT EXEC II
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This overview tells you some key things you should know about your policy. It's
designed as a summary only--please read the entire prospectus and your policy
for more detailed information.
Some states have different rules about how life insurance policies are
described or administered. The terms of your policy, or of any endorsement or
rider, prevail over what's in this prospectus.
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Pacific Select Exec II basics Pacific Select Exec II is a flexible premium variable life insurance policy.
This policy may be appropriate if you . Flexible premium means you can vary the amount and frequency of your premium
want to provide a death benefit for payments.
family members or others or to help
meet other long-term financial . Variable means the policy's value depends on the performance of the investment
objectives. It may not be the right kind options you choose.
of policy if you plan to withdraw money
for short-term needs. . Life insurance means the policy provides a death benefit to the beneficiary
you choose.
Please discuss your insurance needs and
financial objectives with your registered In addition to providing a death benefit that is generally free of federal
representative. income tax, any growth in your policy's accumulated value is tax-deferred. You
can choose from 18 variable investment options, each of which invests in a
You'll find more about the basics of corresponding portfolio of the Pacific Select Fund, and two fixed options, both
Pacific Select Exec II starting on page 12. of which provide a guaranteed minimum rate of interest.
Pacific Select Exec II is designed for long-term financial planning. Please
take some time to read the information in this prospectus before you decide if
this life insurance policy meets your insurance needs and financial objectives.
Your right to cancel
During the free look period, you have the right to cancel your policy and
return it to us or your registered representative for a refund. The amount of
your refund may be more or less than the premium payments you've made,
depending on the state where you signed your application. If you signed your
application in a state that requires us to refund premium payments, we'll hold
the net premiums in the Money Market investment option until the free look
transfer date.
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The death benefit You can choose one of three death benefit options depending on what is more
important to you: a larger death benefit or building the accumulated value of
Your policy provides a death benefit for your policy.
your beneficiary after the person insured
by the policy has died, as long as your The death benefit will always be the greater of the death benefit under the
policy is in force. option you choose or the guideline minimum death benefit.
You'll find more about the death benefit This policy offers two ways to calculate the guideline minimum death benefit:
starting on page 18. the cash value accumulation test and the guideline premium test. These are
called death benefit qualification tests. The test you choose will generally
depend on the amount of premiums you want to pay. In general, you should choose
the cash value accumulation test if you do not want to limit the amount of
premiums you can pay into your policy.
You cannot change your death benefit qualification test. But you can change
your death benefit option and increase or decrease your policy's face amount
(with certain restrictions) while your policy is in force. Any of these changes
may affect your policy charges.
Optional riders
There are nine optional riders that provide extra benefits, some at additional
cost. Not all riders are available in every state, and some riders may only be
added when you apply for your policy.
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How premiums work Deductions from your premiums
We deduct a premium load from each premium payment you make. The premium load
Your policy gives you the flexibility to is made up of a sales load, a state and local tax charge, and a federal tax
choose the amount and frequency of charge.
your premium payments within certain
limits. Each premium payment must be Limits on the premium payments you can make
at least $50. Federal tax law puts limits on the premium payments you can make in relation to
your policy's death benefit. We may refuse all or part of a premium payment you
You'll find more about how premiums make, or remove all or part of a premium from your policy and return it to you
work starting on page 26. under certain circumstances.
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Your policy's accumulated value Accumulated value is the value of your policy on any business day. It is not
guaranteed - it depends on the performance of the investment options you've
Accumulated value is used as the basis chosen, the premium payments you've made, policy charges, and how much you've
for determining policy benefits and borrowed or withdrawn from the policy.
charges. If there is not enough
accumulated value to cover policy Monthly deductions
charges, your policy could lapse. We deduct a monthly charge from your policy's accumulated value on each monthly
payment date. The charge is made up of cost of insurance, an administrative
You'll find more about accumulated charge, and a mortality and expense risk charge. If you add any riders, we'll
value starting on page 29. add any charges for them to your monthly charge.
Lapsing and reinstatement
If there is not enough accumulated value to cover the monthly charge on the day
we make the deduction, your policy may lapse - which means you'll no longer
have any insurance coverage. If your policy is in danger of lapsing, we'll give
you a grace period of 61 days to pay the required premium. If your policy
lapses at the end of the grace period, you have five years from the day it
lapses to apply for a reinstatement.
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AN OVERVIEW OF PACIFIC SELECT EXEC II
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Your investment options You can choose from 18 variable investment options, each of which invests in a
corresponding portfolio of the Pacific Select Fund. We're the investment
adviser for the Pacific Select Fund. We oversee the management of all the
The investment options you choose will fund's portfolios and manage two of the portfolios directly. We've retained
affect your policy's accumulated value, other portfolio managers to manage the other portfolios. The value of each
and may affect the death benefit. portfolio will fluctuate with the value of the investments it holds, and
returns are not guaranteed.
Please review the investment options
carefully and ask your registered You can also choose from two fixed options, the Fixed account and the Fixed LT
representative to help you choose the account, both of which provide a guaranteed minimum annual interest rate of 3%.
right ones for your goals and risk We may offer a higher interest rate. If we do, we'll guarantee that rate for
tolerance. one year.
You'll find more about the investment We allocate your premium payments and accumulated value to the investment
options starting on page 35. options you choose. Your policy's accumulated value will fluctuate depending on
the investment options you've chosen. You bear the investment risk of any
variable investment options you choose.
In some states we'll hold your premium payments in the Money Market investment
option until the free look transfer date. Please turn to Your right to cancel
for details.
You'll find out more about our automatic Transferring among investment options
transfer programs starting on page 39. You can transfer among the investment options during the life of your policy
without paying any current income tax. There is currently no charge for
transfers.
You can make as many transfers as you like between variable investment options.
You can also make automatic transfers from one variable investment option to
another using our dollar cost averaging or portfolio rebalancing programs.
These programs are not available for the fixed options.
You can only make one transfer from each fixed option in any 12-month period.
For the Fixed account, each transfer may be no more than $5,000 or 25% of the
accumulated value in the Fixed account, whichever is greater. For the Fixed LT
account, each transfer may be no more than $5,000 or 10% of the accumulated
value in the Fixed LT account, whichever is greater. You can only transfer to
the fixed options in the policy month right before each policy anniversary.
You can also make automatic transfers from the Fixed account to other
investment options during the first policy year using our first year transfer
program.
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Withdrawals, surrenders and loans You can take out all or part of your policy's accumulated value while your
policy is in force by making withdrawals or surrendering your policy. You can
Making a withdrawal, taking out a loan or take out a loan from us using your policy as security. You can also use your
surrendering your policy can change your policy's loan and withdrawal features to supplement your income, for example,
policy's tax status, generate taxable during retirement.
income, or make your policy more
susceptible to lapsing. Be sure to plan Making withdrawals
carefully before using these policy You can withdraw part of your policy's net cash surrender value starting on
benefits. your policy's first anniversary. This reduces your policy's accumulated value
and could affect the face amount and death benefit.
You'll find more about withdrawals,
surrenders and loans starting on page 41.
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Taking out a loan
You can take out a loan from us using your policy's accumulated value as
security. You pay interest at an annual rate of 3.25% on the amount you borrow.
The accumulated value used to secure your loan is set aside in a loan account,
where it earns interest at an annual rate of 3%.
The amount in the loan account is not available to help pay for any policy
charges. Taking out a loan affects the accumulated value of your policy because
the amount set aside in the loan account misses out on the potential earnings
available through the investment options.
Surrendering your policy
You can surrender or cash in your policy for its net cash surrender value while
the person insured by the policy is still living. If you surrender your policy
during the first 10 policy years, we'll apply a surrender charge. If you
increase your policy's face amount and surrender your policy during the first
10 years after the increase, we'll apply a surrender charge to the amount of
the increase.
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Variable life insurance and your taxes Your beneficiary generally will not have to pay federal income tax on death
benefit proceeds. You'll also generally not be taxed on any or all of your
There are tax issues to consider when you policy's accumulated value unless you receive a cash distribution by making a
own a life insurance policy. These are withdrawal or surrendering your policy.
described in detail starting on page 49.
If your policy is a modified endowment contract, all distributions you receive
during the life of the policy may be subject to tax and a 10% penalty.
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About Pacific Life Pacific Life is a life insurance company based in California. We issue the
policies. Pacific Mutual Distributors, Inc., our subsidiary, is the distributor
When you buy a life insurance policy, of the policies.
you're relying on the insurance company
that issues it to be able to meet its How our accounts work
financial obligations to you. We put your premium payments in our general and separate accounts. We own the
assets in our accounts and make the allocations to the investment options
You'll find more about Pacific Life, and our you've chosen.
strength as a company, starting on page 53.
Amounts allocated to the fixed options are held in our general account. Our
We may use any profit derived from any general account includes all of our assets, except for those held in our
charges under the policy for any lawful separate accounts. Our ability to meet our obligations under the policy is
purpose, including our sales and backed by our strength as an insurance company.
distribution expenses.
Amounts allocated to the variable investment options are held in our separate
account. The assets in this account are kept separate from the assets in our
general account and our other separate accounts, and are protected from our
general creditors.
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AN OVERVIEW OF PACIFIC SELECT EXEC II
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This section of the overview explains the fees and expenses associated with
your Pacific Select Exec II policy.
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Understanding policy expenses Your premium
and cash flow You make a
premium payment
The chart to the right illustrates how
cash normally flows through a Pacific We deduct a
Select Exec II policy. premium load
The dark shaded boxes show the fees
and expenses you pay directly or Net premium
indirectly under your policy. These are We allocate the
explained in the pages that follow. net premium to
the investment
In some states we'll hold your net options you
premium payments in the Money Market choose
investment option until the free look
transfer date. Please turn to Your
right to cancel for details.
Fixed options Variable Pacific Select The fund deducts
We hold amounts investment Fund advisory fees and
you allocate to options The variable other fund
these options in We hold amounts investment options expenses from the
our general you allocate to invest in the portfolios
account these options fund's portfolios
in our separate
account
We deduct:
. cost of
insurance
We make monthly deductions . administrative
charge
. mortality and
expense risk
charge
. rider charges
Loan account Accumulated
Accumulated value We deduct a
value set aside The total value If you make a withdrawal withdrawal charge
to secure of your policy
a policy loan
We deduct a
surrender charge
If you surrender your policy . during the first
10 policy years
. during the first
10 years after
you increase
the face amount
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Deductions from your premiums We deduct a premium load from each premium payment you make. The load is made
up of three charges:
The premium load is explained
in more detail on page 27. Sales load - 2.5% of each premium payment.
State and local tax charge - 2.35% of each premium payment.
Federal tax charge - 1.50% of each premium payment.
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Deductions from your policy's We deduct a monthly charge from your policy's accumulated value in the
accumulated value investment options on each monthly payment date. This charge is made up of
three charges:
The monthly charge is explained
in more detail starting on page 29. Cost of insurance - We deduct a cost of insurance charge based on the cost of
insurance rate for your policy's initial face amount and for each increase you
An example make to the face amount. We calculate this charge by multiplying the current
For a policy that insures a male cost of insurance rate by a discounted net amount at risk at the beginning of
non-smoker who is age 45 when the each policy month. When the person insured by the policy reaches age 100, the
policy is issued, with: cost of insurance charge is zero--in other words, you no longer pay any cost of
. a face amount of $350,000 insurance charge.
. accumulated value of $30,000 after
deducting any outstanding loan Administrative charge - We deduct a charge of $7.50 a month. When the person
amount. insured by the policy reaches age 100, the administrative charge is zero -- in
other words, you no longer pay any administrative charge.
The monthly charge for the M&E risk
face amount charge is: Mortality and expense risk charge - The mortality and expense risk charge
varies depending on your policy's face amount, the age of the person insured by
. $119.70 under death benefit the policy, and accumulated value. We deduct a charge based on your policy's
Option A and Option C initial face amount and on each increase to the face amount. The charge is made
(($350,000 / 1,000) X 0.342) up of two separate charges:
. $159.95 under death benefit . The M&E risk face amount charge, which we deduct every month during the first
Option B (($350,000 / 1,000) X 10 policy years at a rate that is based on the age of the person insured by
0.457) the policy on the policy date and each $1,000 of the initial face amount of
your policy. If you increase your policy's face amount, the charge for the
The monthly charge for the M&E risk amount of the increase is based on the age of the person insured by the policy
asset charge is $9.58 (($25,000 X on the day of the increase.
0.0375%) plus ($5,000 X 0.0042%)).
. The M&E risk asset charge, which we deduct every month at an annual rate of:
Sample rates for the M&E risk face
amount charge appear in Appendix A. . 0.45% (0.0375% monthly), of the first $25,000 of your policy's accumulated
value in the investment options, plus
. 0.05% (0.0042% monthly) of the accumulated value in the investment options
that exceeds $25,000.
For the purposes of this charge, accumulated value is calculated on the monthly
payment date before we deduct the monthly charge, but after we deduct any
outstanding loan amount or allocate any new net premiums, withdrawals or loans.
When the person insured by the policy reaches age 100, the annual rate is 0% --
in other words, you no longer pay this charge.
Riders - If you add any riders to your policy, we add any charges for them to
your monthly charge.
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AN OVERVIEW OF PACIFIC SELECT EXEC II
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Withdrawal and surrender charges You can withdraw part of your policy's net cash surrender value at any time
starting on your policy's first anniversary. There is a $25 charge for each
Withdrawal and surrender charges are withdrawal you make. We deduct this charge proportionately from all of your
explained in more detail on pages 41 and 44. investment options.
An example If you surrender or cash in your policy during the first 10 years of owning the
For a policy: policy, we'll deduct a surrender charge. If you increase your policy's face
. that insures a male non-smoker who is age amount and surrender your policy during the first 10 years after the increase,
45 when the policy is issued we'll apply a surrender charge to the amount of the increase.
. with an initial face amount of $350,000.
The surrender charge is assessed at a rate that is based on the age and risk
For death benefit Option A and Option C, class of the person insured by the policy on the policy date, and each $1,000
the surrender charge is: of the initial face amount of your policy. The amount of the surrender charge
does not change during the first policy year. Starting on the first policy
. $9,096.50 in the first policy year anniversary, we reduce the charge by 0.9259% a month until it reaches zero at
(($350,000 / $1,000) X 25.99) the end of 10 policy years.
. $3,032.17 at the end of the seventh Your policy's surrender charge will never be greater than the maximum surrender
policy year ($9,096.50 - ($9,096.50 X charge. The maximum surrender charge is calculated at a rate that is based on
.9259% X 72 months)) the age and risk class of the person insured by the policy on the policy date,
and each $1,000 of the initial face amount of your policy. It does not change
However, we will never deduct more than the during the first 10 policy years, and then is reduced to zero at the end of the
maximum surrender charge, which is $4,426.10. 10th policy year.
For death benefit Option B, the surrender If you increase your policy's face amount, each increase has a surrender charge
charge is: and maximum surrender charge based on the amount of the increase. If you
decrease the face amount, the decrease will not affect your policy's surrender
. $12,155.50 in the first policy year charge or maximum surrender charge.
(($350,000 / $1,000) X 34.73)
. $4,052.06 at the end of the seventh policy
year ($12,155.50 - ($12,155.50 X
.9259% X 72 months))
However, we will never deduct more than the
maximum surrender charge, which is $5,752.60.
Sample rates for the surrender charge appear
in Appendix B.
Sample rates for the maximum surrender charge
appear in Appendix C.
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Fees and expenses paid by the Pacific The Pacific Select Fund pays advisory fees and other expenses. These are
Select Fund deducted from the assets of the fund's portfolios and may vary from year to
year. They are not fixed and are not part of the terms of your policy. If you
You'll find more about the Pacific Select choose a variable investment option, these fees and expenses affect you
Fund starting on page 34, and in the fund's indirectly because they reduce portfolio returns.
prospectus, which accompanies this
prospectus. Advisory fee
Pacific Life is the investment adviser to the fund. The fund pays an advisory
fee to us for these services. The table below shows the advisory fee as an
annual percentage of each portfolio's average daily net assets.
Other expenses
The table also shows expenses the fund paid in 1998 as an annual percentage of
each portfolio's average daily net assets. To help limit fund expenses, we've
agreed to waive all or part of our investment advisory fees or otherwise
reimburse each portfolio for expenses (not including advisory fees, additional
costs associated with foreign investing and extraordinary expenses) that exceed
0.25% of its average daily net assets. We do this voluntarily, but do not
guarantee that we'll continue to do so after December 31, 2000. No
reimbursement was necessary for 1998.
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Portfolio Advisory fee Other expenses Total expenses
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Money Market/1/ 0.37% 0.06% 0.43%
High Yield Bond/1/ 0.60% 0.06% 0.66%
Managed Bond 0.60% 0.06% 0.66%
Government Securities 0.60% 0.06% 0.66%
Growth 0.65% 0.05% 0.70%
Aggressive Equity 0.80% 0.09% 0.89%
Growth LT 0.75% 0.05% 0.80%
Equity Income/1/ 0.65% 0.05% 0.70%
Multi-Strategy/1/ 0.65% 0.06% 0.71%
Large-Cap Value/2/ 0.85% 0.06% 0.91%
Mid-Cap Value/2/ 0.85% 0.06% 0.91%
Equity 0.65% 0.06% 0.71%
Bond and Income 0.60% 0.10% 0.70%
Equity Index 0.16% 0.05% 0.21%
Small-Cap Index/2/ 0.50% 0.06% 0.56%
REIT/2/ 1.10% 0.06% 1.16%
International 0.85% 0.15% 1.00%
Emerging Markets 1.10% 0.36% 1.46%
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/1/ Total net expenses for these portfolios in 1998, after deduction of an
offset for custodian credits, was: 0.42% for Money Market Portfolio, 0.65% for
High Yield Bond Portfolio, 0.69% for Equity Income Portfolio, and 0.70% for
Multi-Strategy Portfolio.
/2/ Expenses are estimated. There were no actual advisory fees or other
expenses for these portfolios in 1998 because the portfolios started on January
4, 1999.
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PACIFIC SELECT EXEC II BASICS
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When you buy a Pacific Select Exec II life insurance policy, you're entering
into a contract with Pacific Life Insurance Company. Your contract with us is
made up of your application, your policy, applications to change or reinstate
the policy, any amendments, riders or endorsements to your policy, and
specification pages.
Policy amendments and endorsements are a When we approve your signed application, we'll issue your policy. If your
part of your policy and confirm changes application does not meet our underwriting requirements, we can reject it or
you or we make to the policy. ask you for more information. Once we receive your first premium payment, the
policy has been delivered to you and any delivery requirements have been met,
Specification pages summarize information we'll consider your policy to be in force. That's when our obligations under
specific to your policy at the time the the policy begin.
policy is issued.
Your policy will be in force until one of the following happens:
Riders provide extra benefits, some at . the person insured by the policy dies
additional cost. Not all riders are . the grace period expires and your policy lapses, or
available in every state, and some riders . you surrender your policy.
may only be added when you apply for
your policy. If your policy is not in force when the person insured by the policy dies, we
are not obligated to pay the death benefit proceeds to your beneficiary.
This policy may be appropriate if you want Pacific Select Exec II is a flexible premium variable life insurance policy
to provide a death benefit for family members that insures the life of one person and pays death benefit proceeds after that
or others or to help meet other long-term person has died.
financial objectives. It may not be the right
kind of policy if you plan to withdraw money Under a flexible premium life insurance policy, you have the flexibility to
for short-term needs. choose the amount and frequency of your premium payments. You must, however,
pay enough premiums to cover the ongoing cost of policy benefits.
Please discuss your insurance needs and
financial objectives with your registered A premium load is deducted from each premium payment you make. The resulting
representative. net premium is allocated to the investment options you choose, and becomes part
of your policy's accumulated value.
In some states we'll hold your net premium
payments in the Money Market investment Charges are deducted from the accumulated value each month to help cover the
option until the free look transfer date. cost of the policy's death benefit and other expenses. If there is not enough
Please turn to Your right to cancel for accumulated value to cover the monthly charge on the day we make the deduction,
details. your policy may lapse after a grace period - which means you'll no longer have
any insurance coverage.
Investment earnings will increase your policy's accumulated value, while
investment losses will decrease it. The premium payments you'll be required to
make to keep your policy in force will be influenced by the investment results
of the investment options you've chosen.
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Owners, person insured by the policy, Owners
and beneficiaries The owner is the person named on the application who makes the decisions about
the policy and its benefits while it's in force. You can own a policy by
Please consult your financial advisor or yourself or with someone else. Two or more owners are called joint owners. You
a lawyer about designating ownership need the signatures of all owners for all policy transactions.
interests.
If one of the joint owners dies, the surviving owners will hold all rights
If you would like to change the owner of under the policy. If the last joint owner dies, his or her estate will own the
your policy, please contact us or your policy unless you've given us other instructions.
registered representative for a change of
owner form. We can process the change A policy can also be owned by an institution, trust, corporation or group or
only if we receive your instructions in sponsored arrangement. These owners often buy more than one policy, which may
writing. qualify them for reduced charges or lower premium payments.
We may reduce or waive the sales load or surrender charges on policies sold to
our directors or employees, to any of our affiliates, or to trustees, employees
or affiliates of the fund.
You can change the owner of your policy by completing a change of owner form.
Once we've received and recorded your request, the change will be effective as
of the day you signed the change of owner form.
Person insured by the policy
Risk classes are usually based on age, This policy insures the life of one person who is age 85 or younger at the time
gender, health and whether or not the you apply for your policy, and who has given us satisfactory evidence of
person to be insured by the policy smokes. insurability. Your policy refers to this person as the insured. The policy pays
Most insurance companies use similar death benefit proceeds after this person has died.
risk classification criteria.
The person to be insured by the policy is assigned an underwriting or insurance
When we refer to age throughout this risk class which we use to calculate cost of insurance and other charges. We
prospectus, we're using the word as we've normally use the medical or paramedical underwriting method to assign
defined it here, unless we tell you underwriting or insurance risk classes, which may require a medical
otherwise. examination. We may, however, use other forms of underwriting if we think it's
appropriate.
When we use a person's age in policy calculations, we generally use his or her
age as of the nearest policy date, and we add one year to this age on each
policy anniversary date. For example, when we talk about someone "reaching age
100", we're referring to the policy anniversary date closest to that person's
100th birthday, not to the day when he or she actually turns 100.
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Beneficiaries
The beneficiary is the person, people, entity or entities you name to receive
the death benefit proceeds. Here are some things you need to know about naming
beneficiaries:
. You can name one or more primary beneficiaries who each receive an equal share
of the death benefit proceeds unless you tell us otherwise. If one beneficiary
dies, his or her share will pass to the surviving primary beneficiaries in
If you would like to change the proportion to the share of the proceeds they're entitled to receive, unless you
beneficiary of your policy, please tell us otherwise.
contact us or your registered
representative for a change of . You can also name a contingent beneficiary for each primary beneficiary you
beneficiary form. We can process the name. The contingent beneficiary will receive the death benefit proceeds if the
change only if we receive your primary beneficiary dies.
instructions in writing.
. You can choose to make your beneficiary permanent (sometimes called
irrevocable). You cannot change a permanent beneficiary's rights under the
policy without his or her permission.
. If none of your beneficiaries is still living when the death benefit proceeds
are payable, you as the policy owner will receive the proceeds. If you're no
longer living, the proceeds will go to your estate.
. You can change your beneficiary at any time while the person insured by the
policy is still living, and while the policy is in force. The change will be
effective as of the day you signed the change of beneficiary form.
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Policy date, monthly payment date, Your policy date
policy anniversary date This is usually the day we approve your policy application. It's also the
beginning of your first policy year. Your policy's monthly, quarterly, semi-
In Massachusetts, the policy date is annual and annual anniversary dates are based on your policy date.
known as the issue date.
The policy date is set so that it never falls on the 29th, 30th or 31st of any
month. We'll apply your first premium payment as of your policy date or as of
the day we receive your premium, whichever is later.
Backdating your policy
In Ohio, your policy can be backdated You can have your policy backdated up to six months, as long as we approve it.
only three months. Backdating in some cases may lower your cost of insurance rates since these
rates are based on the age of the person insured by the policy. Your first
premium payment must cover the premium load and monthly charges for the period
between the backdated policy date and the day your policy is issued.
Your monthly payment date
This is the day we deduct the monthly charges from your policy's accumulated
value. The first monthly payment date is your policy date, and it's the same
day each month thereafter. Monthly charges are explained in the section called
Your policy's accumulated value.
Your policy anniversary date
This is the same day as your policy date every year after we issue your policy.
A policy year starts on your policy date and each anniversary date, and ends on
the day before the next anniversary date.
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Statements and reports We send the following statements and reports to policy owners:
we'll send you
. a confirmation for many financial transactions, usually including premium
We can create customized hypothetical payments and transfers, loans, loan repayments, withdrawals and surrenders.
illustrations of benefits under your policy Monthly deductions and scheduled transactions made under the dollar cost
based on different assumptions. You'll find averaging, portfolio rebalancing and first year transfer programs are
sample illustrations starting on page 106. reported on your quarterly policy statement.
We'll send you one policy illustration free . a quarterly policy statement. The statement will tell you the accumulated
of charge each policy year if you ask for value of your policy by investment options, cash surrender value, the amount
one. We reserve the right to charge $25 for of the death benefit, the policy's face amount, and any outstanding loan
additional illustrations. amount. It will also include a summary of all transactions that have taken
place since the last quarterly statement, as well as any other information
required by law.
. supplemental schedules of benefits and planned periodic premiums. We'll send
these to you if you change your policy's face amount or change any of the
policy's other benefits.
. financial statements, at least annually or as required by law, of the separate
account and Pacific Select Fund, that include a listing of securities for each
portfolio of the Pacific Select Fund.
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Your right to cancel During the free look period, you have the right to cancel your policy and
return it to us or your registered representative for a refund.
There are special rules for the free look
period in certain states. Here are some The amount of your refund may be more or less than the premium payments you've
examples: made, depending on the state where you signed your application. We'll always
. In California the free look period ends deduct any outstanding loan amount from the amount we refund to you.
30 days after you receive your policy if
you're 60 years old or over or if you're You'll find a complete description of the free look period that applies to your
replacing another life insurance policy. policy on the policy's cover sheet, or on a notice that accompanied your
. In Colorado the free look period ends policy. Generally, the free look period ends 10 days after you receive your
after 15 days. policy. Some states may have a different free look period if you are replacing
. In North Dakota the free look period ends another life insurance policy.
after 20 days.
Please call us or your registered In most states, your refund will be based on the accumulated value of your
representative if you have questions about policy. In these states, we'll allocate your net premiums to the investment
your right to cancel your policy. options you've chosen. If you exercise your right to cancel, your refund will
be:
. any charges or taxes we've deducted from your premiums
. the net premiums allocated to the fixed options
. the accumulated value allocated to the variable investment options
. any monthly charges and fees we've deducted from your policy's accumulated
value in the variable investment options.
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In some states we're required to refund the premium payments you've made. If
you sign your application in one of these states, we'll hold the net premiums
in the Money Market investment option until the free look transfer date. On
that day, we'll transfer the accumulated value in the Money Market investment
option to the investment options you've chosen.
The free look transfer date is the latest of the following:
. 15 days after we issue your policy
. when we consider your policy to be in force.
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Timing of payments, forms and requests Effective date
The effective date of payments, forms and requests you send us is usually
A business day, called a valuation date in determined by the day and time we receive the item in proper form at the
your policy, is any day that the New York mailing address that appears on the back cover of this prospectus.
Stock Exchange and our life insurance
client services offices are open. It usually Planned periodic premium payments, loan requests, transfer requests, loan
ends at 4:00 p.m. Eastern time. payments or withdrawal or surrender requests that we receive in proper form
before 4:00 p.m. Eastern time on a business day will normally be effective as
The New York Stock Exchange is usually of the end of that day, unless the transaction is scheduled to occur on another
closed on weekends and on the following business day. If we receive your payment or request on or after 4:00 p.m.
days: Eastern time on a business day, your payment or request will be effective as of
. New Year's Day, Martin Luther King, Jr. the end of the next business day. If a scheduled transaction falls on a day that
Day, President's Day, Good Friday, is not a business day, we'll process it as of the end of the next business day.
Memorial Day, July Fourth, Labor Day,
Thanksgiving Day and Christmas Day. Other forms, notices and requests are normally effective as of the next
business day after we receive them in proper form, unless the transaction is
Our client services offices are also usually scheduled to occur on another business day. Change of owner and beneficiary
closed on the following days: forms are effective as of the day you sign the change form, once we receive
. the Monday before New Year's Day, July them in proper form.
Fourth, or Christmas Day, if any of these
holidays falls on a Tuesday Proper form
. the Tuesday before Christmas Day if that We'll process your requests once we receive all letters, forms or other
holiday falls on a Wednesday necessary documents, completed to our satisfaction. Proper form may require,
. the Friday after New Year's Day, July among other things, a signature guarantee or some other proof of authenticity.
Fourth or Christmas Day, if any of these We do not generally require a signature guarantee, but we may ask for one if it
holidays falls on a Thursday appears that your signature has changed, if the signature does not appear to be
. the Friday after Thanksgiving. yours, if we have not received a properly completed application or confirmation
of an application, or for other reasons to protect you and us.
Call us or contact your registered
representative if you have any questions
about the proper form required for a
request.
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When we make payments and transfers
We'll normally send the proceeds of transfers, withdrawals, loans, surrenders,
To request payment of death benefit exchanges and death benefit payments within seven days after the effective date
proceeds, send us proof of death and of the request. We may delay payments and transfers, or the calculation of
payment instructions. payments and transfers based on the value in the variable investment options
under unusual circumstances, for example, if:
. the New York Stock Exchange closes on a day other than a regular holiday or
weekend
. trading on the New York Stock Exchange is restricted
. an emergency exists as determined by the SEC, as a result of which the sale of
securities is not practicable, or it is not practicable to determine the value
of a variable account's assets, or
. the SEC permits a delay for the protection of policy owners.
We may delay transfers and payments from the fixed options, including the
proceeds from withdrawals, surrenders and loans, for up to six months. We'll
pay interest at an annual rate of at least 3% on any withdrawals or surrender
proceeds from the fixed options that we delay for 30 days or more.
We pay interest at an annual rate of at least 3% on death benefit proceeds,
calculated from the day the person insured by the policy dies to the day we pay
the proceeds.
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Telephone transactions You can make loans or transfers by telephone any time after the free look
period as long as we have your signed authorization form on file.
Here are some things you need to know about telephone transactions:
. You must complete a telephone authorization form.
. If your policy is jointly owned, all joint owners must sign the telephone
authorization. We'll take instructions from any owner.
. We may use any reasonable method to confirm that your telephone instructions
are genuine. For example, we may ask you to provide personal identification or
we may record all or part of the telephone conversation. We may refuse any
transaction request made by telephone.
We'll send you a written confirmation of each telephone transaction.
Sometimes, you may not be able to make loans or transfers by telephone, for
example, if our telephone lines are busy because of unusual market activity or
a significant economic or market change, or our telephone lines are out of
service during severe storms or other emergencies. In these cases, you can send
your request to us in writing, or call us the next business day or when service
has resumed.
When you send us your telephone authorization form, you agree that:
. we can accept and act upon instructions you give us over the telephone
. neither we, any of our affiliates, the Pacific Select Fund, or any director,
trustee, officer, employee or agent of ours or theirs will be liable for any
loss, damages, cost or expenses that result from transactions processed
because of a request by telephone that we believe to be genuine, as long as we
have followed our own procedures
. you bear the risk of any loss that arises from your right to make loans or
transfers over the telephone.
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We'll pay death benefit proceeds to your beneficiary after the person insured
by the policy dies while the policy is still in force. Your beneficiary
generally will not have to pay federal income tax on death benefit proceeds.
Your policy's initial amount of insurance This policy offers three death benefit options, Options A, B and C. The option
coverage is its initial face amount. We you choose will generally depend on which is more important to you: a larger
determine the face amount based on death benefit or building the accumulated value of your policy.
instructions provided in your application.
This policy offers two ways to calculate the guideline minimum death benefit:
The minimum face amount when a policy the cash value accumulation test and the guideline premium test. These are
is issued is usually $50,000, but we may called death benefit qualification tests. The test you choose will generally
reduce this in some circumstances. depend on the amount of premiums you want to pay.
You'll find your policy's face amount, Here are some things you need to know about the death benefit:
which includes any increases or decreases, . You choose your death benefit option and death benefit qualification test on
in the specification pages in your policy. your policy application.
. If you do not choose a death benefit option, we'll assume you've chosen
If you signed the application for your Option A.
policy in Florida, the death benefit equals . If you do not choose a death benefit qualification test, we'll assume you've
the accumulated value after the person chosen the guideline premium test.
insured by the policy reaches age 100. . The death benefit will always be the greater of the death benefit under the
option you choose or the guideline minimum death benefit, calculated using the
death benefit qualification test you've chosen.
. The death benefit will never be lower than the face amount of your policy if
you've chosen Option A or B. Of course, the death benefit proceeds will always
be reduced by any outstanding loan amount.
. We'll pay the death benefit proceeds to your beneficiary when we receive proof
of the death of the person insured by the policy.
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Choosing your death benefit option You can choose one of the following three options for the death benefit on your
application.
Option A - the face amount of Option B - the face amount of your policy
your policy. plus its accumulated value.
[GRAPHIC APPEARS HERE] [GRAPHIC APPEARS HERE]
The death benefit changes as your policy's
accumulated value changes. The better your
investment options perform, the larger the
death benefit will be.
Option C - the face amount of your
policy plus the total premiums
you've paid minus any withdrawals
or distributions made.
[GRAPHIC APPEARS HERE]
The more premiums you pay and the
less you withdraw, the larger the
death benefit will be.
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Choosing a death benefit qualification test This policy offers two death benefit qualification tests, which we use to
calculate the guideline minimum death benefit. You choose one of these tests on
The guideline minimum death benefit is the your application. Once you choose a test, you cannot change it.
minimum death benefit needed for your policy
to qualify as life insurance under Section In general, you should choose the cash value accumulation test if you do not
7702 of the Internal Revenue Code. want to limit the amount of premiums you can pay into your policy. If you want
to pay a premium that increases the net amount at risk, however, you need to
Net amount at risk is the difference between provide us with satisfactory evidence of insurability before we can increase
the death benefit that would be payable if the death benefit.
the person insured by the policy died and
the accumulated value of your policy. The guideline minimum death benefit will generally be smaller under the
guideline premium test than under the cash value accumulation test.
There are other limits on premiums you can
pay into your policy, which are described in Cash value accumulation test
How premiums work. If you choose the cash value accumulation test, your policy's guideline minimum
death benefit will be the greater of:
The cash value accumulation test is defined
in Section 7702(b) of the tax code. . the minimum death benefit amount that's needed for the policy to qualify as
life insurance under the tax code or
. 101% of the policy's accumulated value.
An example This test determines what the death benefit should be in relation to your
For a policy that insures a male, age 45 policy's accumulated value. In general, as your policy's accumulated value
when the policy was issued, with a standard increases, the death benefit must also increase to ensure that your policy
nonsmoking risk class, in Policy Year 6 the qualifies as life insurance under the tax code.
guideline minimum death benefit under the
cash value accumulation test is calculated by Under the test, a policy's death benefit must be large enought to ensure that
multiplying each $1,000 of accumulated value its cash surrender value, as defined in Section 7702 of the tax code (and which
by a "net single premium factor" of 2.4728. is based on accumulated value, among other things), is never larger than the
net single premium that's needed to fund future benefits under the policy. The
net single premium under your policy varies according to the age, sex, and risk
class of the person insured by your policy. It's calculated using an interest
rate of at least 4% and the guaranteed mortality charges as of the time the
policy is issued. We'll use a higher interest rate if we've guaranteed it under
your policy.
The death benefit determined by your policy's net single premium will be at
least equal to the amount required for the policy to qualify as life insurance
under the tax code.
Guideline premium test
The guideline premium test is defined in If you choose the guideline premium test, we calculate the guideline minimum
Section 7702(a)(2) of the tax code. death benefit by multiplying your policy's accumulated value by a death benefit
percentage.
Death benefit percentages are defined in
Section 7702(d) of the tax code. You'll find a table of death benefit percentages in Appendix D and in your
policy. The death benefit percentage is based on the guideline premium limit
and the age of the person insured by the policy. It is 250% when the person is
age 40 or younger, and reduces as the person gets older.
Under this test, the total premiums you pay cannot exceed your policy's
guideline premium limit. You'll find a more detailed discussion of the
guideline premium limit in How premiums work.
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Comparing the death benefit The tables below compare the death benefits provided by the policy's three death benefit
options options. The examples are intended only to show differences in death benefits and net
amounts at risk. Accumulated value assumptions may not be realistic.
The example below is based on the following:
. the person insured by the policy is age 45 at the time the policy was issued
and dies at the beginning of the sixth policy year
. face amount is $100,000
. accumulated value at the date of death is $25,000
. total premium paid into the policy is $30,000
. the guideline minimum death benefit under the guideline premium test is
$46,250 (assuming a guideline premium test factor of 185% x accumulated
value)
. the guideline minimum death benefit under the cash value accumulation test is
$61,820.00 (assuming a net single premium factor of $2.4728 for each $1,000
of accumulated value)
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If you select the guideline
premium test, the death
benefit is the larger of
these two amounts
---------------------------
Death Death benefit Guideline Net amount at
benefit How it's under minimum risk used for cost
option calculated the option death benefit of insurance charge
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Option A Face amount $100,000 $46,250 $74,754.01
Option B Face amount plus
accumulated value $125,000 $46,250 $99,692.51
Option C Face amount plus
premiums less distributions $130,000 $46,250 $104,680.21
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If you select the cash value
accumulation test, the death
benefit is the larger of
these two amounts
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Death Death benefit Guideline Net amount at
benefit How it's under minimum risk used for cost
option calculated the option death benefit of insurance charge
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Option A Face amount $100,000 $61,820.00 $74,754.01
Option B Face amount plus
accumulated value $125,000 $61,820.00 $99,692.51
Option C Face amount plus
premiums less distributions $130,000 $61,820.00 $104,680.21
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If the death benefit equals the guideline Here's the same example, but with an accumulated value of $75,000. Because
minimum death benefit, any increase in accumulated value has increased, the guideline minimum death benefit is now:
accumulated value will cause an automatic
increase in the death benefit. . $138,750 for the guideline premium test
. $185,460 for the cash value accumulation test.
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If you select the guideline
premium test, the death
benefit is the larger of
these two amounts
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Death Death benefit Guideline Net amount at
benefit How it's under minimum risk used for cost
option calculated the option death benefit of insurance charge
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Option A Face amount $100,000 $138,750 $63,408.68
Option B Face amount plus
accumulated value $175,000 $138,750 $99,569.51
Option C Face amount plus
premiums less distributions $130,000 $138,750 $63,408.68
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If you select the cash
value accumulation test,
the death benefit is the
larger of these two amounts
---------------------------
Death Death benefit Guideline Net amount at
benefit How it's under minimum risk used for cost
option calculated the option death benefit of insurance charge
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Option A Face amount $100,000 $185,460 $110,003.78
Option B Face amount plus
accumulated value $175,000 $185,460 $110,003.78
Option C Face amount plus
premiums less distributions $130,000 $185,460 $110,003.78
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These examples show that each death benefit option provides a different level
of protection. Keep in mind that cost of insurance charges, which affect your
policy's accumulated value, increase with the amount of the death benefit, as
well as over time. The cost of insurance is charged at a rate per $1,000 of the
discounted net amount at risk. As the net amount at risk increases, your cost
of insurance increases. Accumulated value also varies depending on the
performance of the investment options in your policy.
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When we pay the death benefit We calculate the amount of the death benefit proceeds as of the end of the day
the person insured by the policy dies. If that person dies on a day that is not
Your beneficiary can choose to receive the a business day, we calculate the proceeds as of the next business day.
death benefit proceeds in a lump sum or use
it to buy an income benefit. Please see the Your policy's beneficiary must send us proof that the person insured by the
discussion about income benefits in General policy died while the policy was in force, along with payment instructions.
information about your policy.
Death benefit proceeds equal the total of the death benefits provided by your
It is important that we have a current policy and any riders you've added, minus any outstanding loan amount, minus
address for your beneficiary so that we can any overdue charges.
pay death benefit proceeds promptly. If we
cannot pay the proceeds to your beneficiary We'll pay interest at an annual rate of at least 3% on the death benefit
within five years of the death of the person proceeds, calculated from the day the person insured by the policy dies to the
insured by the policy, we'll be required to day we pay the proceeds. In some states we may pay a higher rate of interest if
pay them to the state. required by law.
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Changing your death benefit option You can change your death benefit option while your policy is in force. Here's
how it works:
We will not change your death benefit option
if it means your policy will be treated as a . You can change the death benefit option once in any policy year.
modified endowment contract, unless you've . You must send us your request in writing.
told us in writing that this would be . You can change to Option A or Option B.
acceptable to you. Modified endowment . You cannot change from any death benefit option to Option C.
contracts are discussed in Variable life . The change will become effective on the first monthly payment date after we
insurance and your taxes. receive your request. If we receive your request on a monthly payment date,
we'll process it that day.
Net amount at risk is the difference . The face amount of your policy will change by the amount needed to make the
between the death benefit that would be death benefit under the new option equal the death benefit under the old option
payable if the person insured by the policy just before the change. We will not let you change the death benefit option if
died and the accumulated value of your doing so means the face amount of your policy will become less than $50,000. We
policy. may waive this minimum amount under certain circumstances.
. Changing the death benefit option can also affect the monthly cost of
insurance charge since this charge varies with the net amount at risk.
. The new death benefit option will be used in all future calculations.
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Changing the face amount You can increase or decrease your policy's face amount starting on the first
policy anniversary as long as we approve it. Here's how it works:
If you change the face amount, we'll send
you a supplemental schedule of benefits . You can change the face amount as long as the person insured by the policy is
and premiums. still living.
If your policy's death benefit is equal to . You can only change the face amount once in any policy year.
the guideline minimum death benefit, and
the net amount at risk is more than three . You must send us your request in writing while your policy is in force.
times the death benefit on the policy date,
we may reduce the death benefit by requiring . The change will become effective on the first monthly payment date after we
you to make a withdrawal from your policy. receive your request. If we receive your request on a monthly payment date,
we'll process it that day.
If we require you to make a withdrawal, we
will not charge you our usual $25 withdrawal . The person insured by the policy will also need to agree to the change in
fee, but the withdrawal may be taxable. face amount, if that person is someone other than you.
Please turn to Withdrawals, surrenders and
loans for information about making . Increasing the face amount may increase the death benefit, and decreasing the
withdrawals. face amount may decrease the death benefit. The amount the death benefit
changes will depend, among other things, on the death benefit option you've
chosen and whether, and by how much, the death benefit is greater than the
face amount before you make the change.
. Changing the face amount can affect the net amount at risk, which affects the
cost of insurance charge. An increase in the face amount may increase the cost
of insurance charge, while a decrease may decrease the charge.
. We can refuse your request to make the face amount less than $50,000. We can
waive this minimum amount in certain situations, such as group or sponsored
arrangements.
Increasing the face amount
Here are some additional things you should know about increasing the face
amount:
. You must give us satisfactory evidence of insurability.
. Each increase you make to the face amount must be $25,000 or more.
. We may charge you a fee of up to $100 for each increase to cover the costs of
processing the request. We deduct the fee on the day the increase is effective
from all of your investment options in proportion to the accumulated value you
have in each option.
. Increasing the face amount will increase the mortality and expense risk
charge.
Decreasing the face amount may affect your Decreasing the face amount
policy's tax status. To ensure your policy Here are some additional things you should know about decreasing the face
continues to qualify as life insurance, we amount:
might be required to return part of your
premium payments to you if you've chosen the . We'll apply any decrease in the face amount in the following order:
guideline premium test, or make . to the most recent increases you made to the face amount in the order you
distributions from the accumulated value, made them
which may be taxable. . to the original face amount.
. We do not charge you for a decrease in face amount.
For more information, please see Variable . We can refuse your request to decrease the face amount if making the change
life insurance and your taxes. means:
. your policy will end because it no longer qualifies as life insurance
. the distributions we'll be required to make from your policy's accumulated
value will be greater than your policy's net cash surrender value
. your policy will become a modified endowment contract and you have not told
us in writing that this is acceptable to you.
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Optional riders There are nine optional riders that provide extra benefits, some at additional
cost. Not all riders are available in every state, and some riders may only be
Ask your registered representative for added when you apply for your policy.
more information about the riders
available with the policy, or about other . Accidental death rider
kinds of life insurance policies offered by Provides additional insurance coverage in the event of the accidental death of
Pacific Life. the person insured by the policy.
There may be tax consequences if you . Children's term rider
exercise your rights under the Accelerated Provides term insurance for the children of the person insured by the policy
living benefits rider. Please see Variable
life insurance and your taxes for more . Annual renewable term rider
information. Provides annual renewal term insurance on the person insured by the policy.
Samples of the provisions for the extra . Annual renewable and convertible term rider
optional benefits are available from us Provides annual renewal term insurance on members of the immediate family of
upon written request. the person insured by the policy.
. Accounting benefit rider
Provides added protection benefit on the person insured by the policy.
. Guaranteed insurability rider
Gives the right to buy additional insurance on the life of the person insured
by the policy on certain specified dates without proof of insurability.
. Waiver of charges rider
Waives certain charges if the person insured by the policy becomes totally
disabled before age 60.
. Accelerated living benefits rider
Gives the policy owner access to a portion of the policy's death benefit if
the person insured by the policy has been diagnosed with a terminal illness
resulting in a life expectancy of six months or less (or longer than six
months in some states).
. Disability benefit rider
Provides a monthly addition to the policy's accumulated value when the person
insured by the policy has a qualifying disability, until he or she reaches age
65.
We guarantee the amounts of the extra benefits when we issue your rider. We'll
add any rider charges to the monthly charge we deduct from your policy's
accumulated value.
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Things to keep in mind
We offer other variable life insurance policies which provide insurance
protection on the life of one person or the lives of two people. The loads and
charges on these policies may be different. Combining a policy and a rider,
however, may be more economical than adding another policy. It may also be more
economical to provide an amount of insurance coverage through a policy alone.
Under certain circumstances, combining a policy with an Annual renewable term
rider or Accounting benefit rider may result in a face amount equal to the face
amount of a single policy. Combining a policy and an Annual renewable term
rider will result in current charges that are lower than for a single policy
with the same face amount.
However, your policy has guaranteed maximum charges. Adding an Annual renewable
term rider will result in guaranteed maximum charges that are higher than for a
single policy with the same face amount.
Combining a policy with an Accounting benefit rider could result in either
higher or lower charges than under a single policy. The timing of certain
charges for policies held for certain periods may also be affected.
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HOW PREMIUMS WORK
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Your policy gives you the flexibility to choose the amount and frequency of
your premium payments within certain limits. Each premium payment must be at
least $50.
The amount, frequency, and period of
time over which you make premium We deduct a premium load from each premium payment, and then allocate your net
payments may affect whether your policy premium to the investment options you've chosen. Depending on the performance
will be classified as a modified endowment of your investment options, and on how many withdrawals, loans or other policy
contract, or no longer qualifies as life features you've taken advantage of, you may need to make additional premium
insurance for tax purposes. See Variable payments to keep your policy in force.
life insurance and your taxes for more
information. If we do not receive your first premium payment within 20 days after we issue
your policy, we can cancel the policy and refund any partial premium payment
you've made. We may waive the 20 day requirement in some cases.
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Planned periodic premium You can schedule the amount and frequency of your premium payments. We refer to
payments scheduled premium payments as your planned periodic premium. Here's how it
works:
Even if you pay all your premiums when
they're scheduled, your policy could . On your application, you choose a fixed amount of at least $50 for each
lapse if the accumulated value, less any premium payment.
outstanding loan amount, is not enough to
pay your monthly charges. Turn to Your . You indicate whether you want to make premium payments annually, semi-
policy's accumulated value for more annually, or quarterly. You can also choose monthly payments using our
information. monthly Uni-check plan, which is described below.
. We send you a notice to remind you of your scheduled premium payment (except
for monthly Uni-check payments, which are paid automatically). If you own
more than one policy, we'll send one notice -- called a listbill -- that
reminds you of your payments for all of your policies. You can choose to
receive the listbill every month. While you do not have to make the premium
payments you've scheduled, not making a premium payment may have an impact on
any financial objectives you may have set for your policy's accumulated value
and death benefit, and could cause your policy to lapse.
. We'll treat any payment you make during the life of your policy as a loan
repayment, not as a premium payment, unless you tell us otherwise. When a
payment, or any portion of it, exceeds your outstanding loan amount, we'll
treat it as a premium payment. Some states may require us to consider your
payments as premium payments if you have not given us instructions to do
otherwise.
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Monthly Uni-check plan
Once you've made your first premium payment, you can make monthly premium
payments using our Uni-check plan. Here's how it works:
. you authorize us to withdraw a specified amount from your checking account
each month
. you can choose any day between the 4th and 28th of the month
. if you do not specify a day for us to make the withdrawal, we'll withdraw
the premium payment on your policy's monthly anniversary. If your policy's
monthly anniversary falls on the 1st, 2nd or 3rd of the month, we'll withdraw
the payment on the 4th of each month.
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Deductions from your premiums We deduct a premium load from each premium payment you make. The load is made
up of three charges:
Your net premium is your premium
payment less the premium load. Sales load
We deduct a 2.5% sales load from each premium payment you make.
This charge helps pay for the cost of distributing our policies and is
guaranteed not to increase. If our sales and distribution expenses are more
than the sales load, we can recover these expenses from other charges, such as
the mortality and expense risk charge and the surrender charge, and from any
mortality gains.
State and local tax charge
We deduct 2.35% from each premium payment to pay state and local premium and
other taxes. The actual taxes we pay vary from state to state, and in some
instances, among municipalities. We do not expect to profit from this charge,
and do not expect to change the rate unless the rate we pay changes.
Federal tax charge
We deduct 1.50% from each premium payment to pay federal taxes. We reserve the
right to change this rate to respond to changes in law.
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Allocating your premiums We generally allocate your net premiums to the investment options you've chosen
on your application on the day we receive them.
There are special restrictions when
allocating premiums to the Fixed LT When we allocate your first premium depends on the state where you signed your
account. policy application. If you signed your application in a state that requires us
to return the premiums you've paid, we'll hold your net premiums in the Money
Please turn to Your investment options Market investment option until the free look transfer date, and then transfer
for more information about the investment them to the investment options you've chosen.
options.
If you signed your application in a state that requires refunds to be based on
accumulated value, we allocate net premiums to the investment options you've
chosen on the day we receive them.
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HOW PREMIUMS WORK
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Limits on the premium payments Federal tax law puts limits on the amount of premium payments you can make in
you can make relation to your policy's death benefit. These limits apply in the following
situations:
Before you buy a policy, you can ask us
or your registered representative for a . If you've chosen the guideline premium test as your death benefit
personalized illustration that will show qualification test and accepting the premium means your policy will no longer
you the guideline single premium and qualify as life insurance for federal income tax purposes.
guideline level annual premiums.
The total amount you can pay in premiums and still have your policy qualify as
life insurance is your policy's guideline premium limit. The sum of the
premiums paid, less any withdrawals, at any time cannot exceed the guideline
premium limit, which is the greater of:
. the guideline single premium or
. the sum of the guideline level annual premiums.
Your policy's guideline single premium and guideline level annual premiums
appear on your policy's specification pages.
We may refuse to accept all or part of a premium payment if, by accepting it,
you will exceed your policy's guideline premium limit. If we find that you've
exceeded your guideline premium limit, we may remove all or part of a premium
you've paid from your policy as of the day we applied it, and return it to you.
We'll adjust the death benefit retroactively to that date to reflect the
reduction in premium payments.
You'll find a detailed discussion of . If applying the premium in that policy year means your policy will become a
modified endowment contracts in Variable modified endowment contract.
life insurance and your taxes.
A life insurance policy will become a modified endowment contract if the sum of
premium payments made during the first seven contract years, less a portion of
withdrawals, exceeds the seven-pay limit defined in Section 7702A of the
Internal Revenue Code.
Unless you've told us in writing that you want your policy to become a modified
endowment contract, we'll remove all or part of the premium payment from your
policy as of the day we applied it and return it to you. We'll also adjust the
death benefit retroactively to that date to reflect the reduction in premium
payments. If we receive such a premium within 20 days before your policy
anniversary, we'll hold it and apply it to your policy on the anniversary date.
In both of these situations, if we remove an excess premium from your policy,
we'll return the premium amount to you no later than 60 days after the end of
that policy year. We may adjust the amount for interest or for changes in
accumulated value that relate to the amount of the excess premium payment we're
returning to you.
If we do not return the premium amount to you within that time, we'll increase
your policy's death benefit retroactively, to the day we applied the premium,
and prospectively so that it's always the amount necessary to ensure your
policy qualifies as life insurance, or to prevent it from becoming a modified
endowment contract. If we increase your death benefit, we'll adjust cost of
insurance or rider charges retroactively and prospectively to reflect the
increase.
Net amount at risk is the difference . If applying the premium payment to your policy will increase the net amount
between the death benefit that would be at risk. This will happen if your policy's death benefit is equal to the
payable if the person insured by the policy guideline minimum death benefit or would be equal to it once we applied your
died and the accumulated value of your premium payment.
policy.
We may choose to accept your premium payment in this situation, but before we
do so, we may require satisfactory evidence of the insurability of the person
insured by the policy.
We will not accept premium payments after the person insured by the policy
reaches age 100.
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YOUR POLICY'S ACCUMULATED VALUE
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Accumulated value is used as the basis for Accumulated value is the value of your policy on any business day.
determining policy benefits and charges.
We use it to calculate how much money is available to you for loans and
withdrawals, and how much you'll receive if you surrender your policy. It also
affects the amount of the death benefit if you choose a death benefit option
that's calculated using accumulated value.
The accumulated value of your policy is not guaranteed - it depends on the
performance of the investment options you've chosen, the premium payments
you've made, policy charges and how much you've borrowed or withdrawn from the
policy.
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Calculating your policy's Your policy's accumulated value is the total amount allocated to the variable
accumulated value investment options and the fixed options, plus the amount in the loan account.
Please see Taking out a loan for We determine the value allocated to the variable investment options on any
information about loans and the loan business day by multiplying the number of accumulation units for each variable
account. investment option credited to your policy on that day, by the variable
investment option's unit value at the end of that day. The process we use to
calculate unit values for the variable investment options is described in Your
investment options.
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Monthly deductions We deduct a monthly charge from your policy's accumulated value in the
investment options each monthly payment date.
If there is not enough accumulated value
to pay the monthly charge, your policy Unless you tell us otherwise, we deduct the monthly charge from the investment
could lapse. The performance of the options that make up your policy's accumulated value, in proportion to the
investment options you choose, not accumulated value you have in each option. This charge is made up of three
making planned premium payments, or charges:
taking out a loan all affect the
accumulated value of your policy. Cost of insurance
This charge covers the cost of providing you with life insurance protection. We
You'll find a discussion about when your deduct a cost of insurance charge based on the cost of insurance rate for your
policy might lapse, and what you can do policy's initial face amount and for each increase you make to the face amount.
to reinstate it, later in this section.
There are maximum or guaranteed cost of insurance rates associated with your
policy. These rates are shown in your policy's specification pages. When the
person insured by your policy reaches age 100, the guaranteed cost of insurance
rate is zero - in other words, you no longer pay any cost of insurance.
Unisex rates are used in the state of The guaranteed rates include the insurance risks associated with insuring one
Montana. They are also used when a policy person. They are calculated using 1980 Commissioners Standard Ordinary
is owned by an employer in connection with Mortality Tables or the 1980 Commissioners Ordinary Mortality Table B, which
employment-related or benefit programs. are used for unisex cost of insurance rates. The rates are also based on the
age, gender and risk class of the person insured by the policy unless unisex
rates are required.
Our current cost of insurance rates are based on the age, risk class, smoking
status and gender (unless unisex rates are required) of the person insured by
the policy. These rates generally increase as the person's age increases, and
they vary with the number of years the policy has been in force. Our current
rates are lower than the guaranteed rates and they will not exceed the
guaranteed rates in the future.
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YOUR POLICY'S ACCUMULATED VALUE
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Choosing a guaranteed period
We'll guarantee our current cost of insurance rates for five years. If the
person insured by the policy is age 65 or younger and in our standard risk
class when the policy is issued, you have the option to extend the guaranteed
period to ten years. You can only do this when the policy is issued and you
cannot change the guaranteed period later.
If you increase the face amount, the cost of insurance rates associated with
the increase will have the same five-year or ten-year guaranteed period that
you chose when the policy was issued. This will be effective on the day of the
increase. However, if the person insured by the policy is older than age 65 or
no longer qualifies for our standard risk class on the day of the increase,
you'll receive the five-year guaranteed period.
There is no charge for extending the guaranteed period to ten years.
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If you add an annual renewable term or How we calculate cost of insurance
accounting benefit rider to your policy, we
will include the face amount of the rider We calculate cost of insurance by multiplying the current cost of insurance
in this calculation of cost of insurance. rate by a discounted net amount at risk at the beginning of each policy month.
Net amount at risk for the cost of insurance calculation is the difference
between a discounted death benefit that would be payable if the person insured
by the policy died and the accumulated value of your policy at the beginning of
the policy month before the monthly charge is due.
First, we calculate the total net amount at risk for your policy in two steps:
. Step 1: we divide the death benefit that would be payable at the beginning of
the policy month by 1.002466.
. Step 2: we subtract your policy's accumulated value at the beginning of the
policy month from the amount we calculated in step 1.
Next, we allocate the net amount at risk in proportion to the face amount and
each increase that's in force as of your monthly payment date.
We then multiply the amount of each allocated net amount at risk by the cost of
insurance rate for each coverage. The sum of these amounts is your cost of
insurance charge.
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Administrative charge
We deduct a charge of $7.50 a month to help cover the costs of administering
and maintaining our policies. We guarantee that this charge will not increase.
When the person insured by the policy reaches age 100, the administrative
charge is zero - in other words, you no longer pay any administrative charge.
Mortality and expense risk charge
Mortality risk is the chance that the people insured by policies we've issued
do not live as long as expected. This means the cost of insurance charges
specified in the policies may not be enough to pay out actual claims.
Expense risk is the chance that our actual administrative and operating
expenses are more than the fees and expenses deducted under the policies and
the separate account.
The mortality and expense risk charge helps compensate us for these risks. It
has two components, which are described in the following box. We guarantee this
charge will not increase.
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An example How we calculate the mortality and expense risk charge
For a policy that insures a male non-
smoker who is age 45 when the policy is The mortality and expense risk charge has two separate charges:
issued, with:
. a face amount of $350,000 . M&E risk face amount charge We deduct a face amount charge every month during
. accumulated value of $30,000 after the first 10 policy years, at a rate that is based on the age of the person
deducting any outstanding loan amount. insured by the policy on the policy date and on a face amount component
factor per $1,000 of the initial face amount of your policy. The rates for
The monthly charge for the M&E risk face the face amount component are shown in Appendix A.
amount charge is:
. $119.70 under death benefit Option A If you increase the face amount, each increase will have a corresponding face
and Option C amount charge related to the amount of the increase. We'll specify these
(($350,000 / 1,000) X 0.342). charges in a supplemental schedule of benefits at the time of the increase.
. $159.95 under death benefit Option B We'll apply each charge for 10 years from the day of the increase. If you
(($350,000 / 1,000) X 0.457). decrease the face amount, the charge will remain the same.
The monthly charge for the M&E risk . M&E risk asset charge We deduct a risk asset charge every month at an annual
asset charge is $9.58 (($25,000 x rate of 0.45% (0.0375% monthly) on the first $25,000 of your policy's
0.0375%) plus ($5,000 x 0.0042%)). accumulated value in the investment options plus an annual rate of 0.05%
(0.0042% monthly) of the accumulated value in the investment options that
Sample rates for the M&E risk exceeds $25,000. For the purposes of this charge, the amount of accumulated
face amount charge appear in Appendix A. value is calculated on the monthly payment date before we deduct the monthly
charge, but after we deduct any outstanding loan amount or allocate any new
net premiums, withdrawals or loans. When the person insured by the policy
reaches age 100, the annual rate is 0%--in other words, you no longer pay
this charge.
Charges for optional riders
If you add any riders to your policy, we add any charges for them to your
monthly charge.
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YOUR POLICY'S ACCUMULATED VALUE
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Lapsing and reinstatement Your policy will lapse if there is not enough accumulated value, after
subtracting any outstanding loan amount, to cover the monthly charge on the day
we make the deduction. Your policy's accumulated value is affected by the
following:
. loans or withdrawals you make from your policy
. not making planned premium payments
. the performance of your investment options
. charges under the policy.
There is no guarantee that your policy will not lapse even if you pay your
planned periodic premium.
If there is not enough accumulated value to pay the total monthly charge, we
deduct the amount that's available and send you, and anyone you've assigned
your policy to, a notice telling you the minimum amount you have to pay to keep
your policy in force. This minimum amount is equal to three times the monthly
charge that was due on the monthly payment date when there was not enough
accumulated value to pay the charge.
We'll give you a grace period of 61 days from when we send the notice to pay
the required premium. Your policy will remain in force during the grace period.
If you do not make the minimum payment
If we do not receive your payment within the grace period, your policy will
lapse with no value. This means we'll end your life insurance coverage.
Remember to tell us if your payment If you make the minimum payment
is a premium payment. Otherwise,
we'll treat it as a loan repayment. If we receive your payment within the grace period, we'll allocate your net
premium to the investment options you've chosen and deduct the monthly charge
from your investment options in proportion to the accumulated value you have in
each option.
If your policy is in danger of lapsing and you have an outstanding loan amount,
you may find that making the minimum payment would cause the total premiums
paid to exceed the maximum amount for your policy's face amount under tax laws.
In that situation, we will not accept the portion of your payment that would
exceed the maximum amount. To stop your policy from lapsing, you'll have to
repay a portion of your outstanding loan amount.
How to avoid future lapsing
To stop your policy from lapsing in the future, you may want to make larger or
more frequent premium payments if tax laws permit it. Or if you have a loan,
you may want to repay a portion of it.
Paying death benefit proceeds during the grace period
If the person insured by the policy dies during the grace period, we'll pay
death benefit proceeds to your beneficiary. We'll reduce the payment by any
unpaid monthly charges and any outstanding loan amount.
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Reinstating a lapsed policy
If your policy lapses, you have five years from the end of the grace period to
apply for a reinstatement. We'll reinstate it if you send us the following:
. a written application
. evidence satisfactory to us that the person insured by the policy is still
insurable
. a premium payment sufficient to keep your policy in force for three months
after the day your policy is reinstated
. payment of all unpaid monthly charges that were due in the grace period.
We'll reinstate your policy as of the first monthly payment date on or after
the day we approve the reinstatement. Once we reinstate your policy, its
accumulated value will be the same as it was on the day your policy lapsed.
We'll allocate it according to your most recent premium allocation
instructions.
Reinstating a lapsed policy with an outstanding loan amount
If you had an outstanding loan amount when your policy lapsed, we will not pay
or credit interest on it during the period between the lapsing and
reinstatement of your policy. There are special rules that apply to reinstating
a policy with an outstanding loan amount:
. If we reinstate your policy on the first monthly payment date that immediately
follows the lapse, we'll also reinstate the loan amount that was outstanding
the day your policy lapsed.
. If we reinstate your policy on any monthly payment date other than the monthly
payment date that immediately follows the lapse, we'll deduct the outstanding
loan amount from your policy's accumulated value. This means you will no longer
have an outstanding loan amount when your policy is reinstated.
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YOUR INVESTMENT OPTIONS
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This section tells you about the investment options available under your policy
and how they work.
You can change your premium allocation We put your premium payments in our general and separate accounts. We own the
instructions by writing, sending a fax, or, if assets in our accounts and allocate your premiums, less any charges, to the
we have your completed telephone authorization investment options you've chosen. Amounts allocated to the fixed options are
form on file, by calling us at 1-800-800-7681. held in our general account. Amounts allocated to the variable investment
Or you can ask your registered representative options are held in our separate account.
to contact us.
You choose your initial investment options on your application. If you choose
You'll find information about when we allocate more than one investment option, you must tell us the dollar amount or
premium payments to your investment options in percentage you want to allocate to each option. You can change your premium
How premiums work. allocation instructions at any time.
The investment options you choose, and how they perform, will affect your
policy's accumulated value and may affect the death benefit. Please review the
investment options carefully and ask your registered representative to help you
choose the right ones for your goals and tolerance for risk. Make sure you
understand any costs you may pay directly and indirectly on your investment
options because they will affect the value of your policy.
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Variable investment options You can choose from 18 variable investment options. Each variable investment
option is set up as a variable account under our separate account and invests
Variable investment options are also known in a corresponding portfolio of the Pacific Select Fund. Each portfolio invests
as variable accounts. These variable in different securities and has its own investment goals, strategies and risks.
accounts are divisions of our separate The value of each portfolio will fluctuate with the value of the investments it
account. We bear the direct operating holds, and returns are not guaranteed. Your policy's accumulated value will
expenses of our separate account. For more fluctuate depending on the investment options you've chosen. You bear the
information about how these accounts work, investment risk of any variable investment options you choose.
see About Pacific Life.
The following chart is a summary of the Pacific Select Fund portfolios. You'll
We're the investment adviser for the find detailed descriptions of the portfolios in the Pacific Select Fund
Pacific Select Fund. We oversee the prospectus that accompanies this prospectus. There's no guarantee that a
management of all the fund's portfolios, portfolio will achieve its investment objective. You should read the fund
and manage two of the portfolios directly. prospectus carefully before investing.
We've retained other portfolio managers to
manage the other portfolios.
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PORTFOLIO THE PORTFOLIO'S THE PORTFOLIO'S PORTFOLIO
INVESTMENT GOAL MAIN INVESTMENTS MANAGER
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Money Market Current income consistent Highest quality money market Pacific Life
with preservation of instruments believed to have
capital. limited credit risk.
High Yield Bond High level of current Fixed income securities with Pacific Life
income. lower and medium-quality credit
ratings and intermediate to
long terms to maturity.
Managed Bond Maximize total return Medium and high-quality fixed Pacific Investment
consistent with prudent income securities with varying Management Company
investment management. terms to maturity.
Government Securities Maximize total return Fixed income securities that Pacific Investment
consistent with prudent are issued or guaranteed by the Management Company
investment management. U.S. government, its agencies
or government-sponsored
enterprises.
Growth Growth of capital. Equity securities of smaller Capital Guardian
and medium-sized companies. Trust Company
Aggressive Equity Capital appreciation. Equity securities of small Alliance Capital
emerging-growth companies and Management L.P.
medium-sized companies.
Growth LT Long-term growth of capital Equity securities of a large Janus Capital
consistent with the number of companies of any Corporation
preservation of capital. size.
Equity Income Long-term growth of capital Equity securities of large and J.P. Morgan
and income. medium-sized dividend-paying Investment Management
U.S. companies. Inc.
Multi-Strategy High total return. A mix of equity and fixed J.P. Morgan
income securities. Investment Management
Inc.
Large-Cap Value Long-term growth of Equity securities of large U.S. Salomon Brothers
capital. Current income is companies. Asset Management Inc
of secondary importance.
Mid-Cap Value Capital appreciation. Equity securities of medium- Lazard Asset
sized U.S. companies believed Management
to be undervalued.
Equity Capital appreciation. Equity securities of large U.S. Goldman Sachs Asset
Current income is of growth-oriented companies. Management
secondary importance.
Bond and Income Total return and income A wide range of fixed income Goldman Sachs Asset
consistent with prudent securities with varying terms Management
investment management. to maturity, with an emphasis
on long-term bonds.
Equity Index Investment results that Equity securities of companies Bankers Trust Company
correspond to the total that are included in the
return of common stocks Standard & Poor's 500 Composite
publicly traded in the U.S. Stock Price Index.
Small-Cap Index Investment results that Equity securities of companies Bankers Trust Company
correspond to the total that are included in the
return of an index of small Russell 2000 Small Stock Index.
capitalization companies.
REIT Current income and long- Equity securities of real Morgan Stanley Asset
term capital appreciation. estate investment trusts. Management
International Long-term capital Equity securities of companies Morgan Stanley Asset
appreciation. of any size located in Management
developed countries outside of
the U.S.
Emerging Markets Long-term growth of Equity securities of companies Blairlogie Capital
capital. that are located in countries Management
generally regarded as "emerging
market" countries.
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YOUR INVESTMENT OPTIONS
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An example Calculating unit values
You ask us to allocate $6,000 to the When you choose a variable investment option, we credit your policy with
Government Securities investment option on accumulation units. The number of units we credit equals the amount we've
a business day. At the end of that day, the allocated divided by the unit value of the variable account. Similarly, the
unit value of the variable account is $15. number of accumulation units in your policy will be reduced when you make a
We'll credit your policy with 400 units transfer, withdrawal or loan from a variable investment option, and when your
($6,000 divided by $15). monthly charges are deducted.
The value of an accumulation unit is not The value of an accumulation unit is the basis for all financial transactions
the same as the value of a share in the relating to the variable investment options. We calculate the unit value for
underlying portfolio. each variable account once every business day, usually at or about 4:00 p.m.
Eastern time.
For information about timing of transactions,
see Pacific Select Exec II basics. Generally, for any transaction, we'll use the next unit value calculated after
we receive your written request. If we receive your written request before 4:00
p.m. Eastern time, we'll use the unit value calculated as of the end of that
business day. If we receive your request on or after 4:00 p.m. Eastern time,
we'll use the unit value calculated as of the end of the next business day.
If a scheduled transaction falls on a day that is not a business day, we'll
process it as of the end of the next business day. For your monthly charge,
we'll use the unit value calculated on your monthly payment date. If your
monthly payment date does not fall on a business day, we'll use the unit value
calculated as of the end of the next business day.
The unit value calculation is based on the following:
. the investment performance of the underlying portfolio
. any dividends or distributions paid by the underlying portfolio
. any charges for any taxes that are, or may become, associated with the
operation of the variable account.
The unit value of a variable account will change with the value of its
corresponding Pacific Select Fund portfolio. Changes in the unit value of a
variable account will not change the number of accumulation units credited to
your policy.
A look at performance
Performance information may appear in advertisements, sales literature, or
reports to policy owners or prospective buyers.
Information about the performance of any variable account of the separate
account reflects only the performance of a hypothetical policy. The
calculations are based on allocating the hypothetical policy's accumulated
value to the variable account during a particular time period.
Performance information is no guarantee of how a variable account will perform
in the future. You should keep in mind 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 period of time that's
shown.
We may show performance information in any way that's allowed under the law
that applies to it. This may include presenting a change in accumulated value
due to the performance of one or more variable accounts, or as a change in a
policy owner's death benefit.
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We may show performance as a change in accumulated value over time or in terms
of the average annual compounded rate of return on accumulated value. This
would be based on allocating premium payments for a hypothetical policy to a
particular variable account over certain periods of time, including one year,
or from the day the variable account started operating. If a portfolio has
existed for longer than its corresponding variable account, we may also show
the hypothetical returns that the variable account would have achieved had it
invested in the portfolio from the day the portfolio started operating.
Performance may reflect the deduction of all policy charges including premium
load, the cost of insurance, the administrative charge, and the mortality and
expense risk charge. The different death benefit options will result in
different expenses for the cost of insurance, and the varying expenses will
result in different accumulated values.
Performance may also reflect the deduction of the surrender charge, if it
applies, by assuming the hypothetical policy is surrendered at the end of the
particular period. At the same time, we may give other performance figures that
do not assume the policy is surrendered and do not reflect any deduction of the
surrender charge.
In our advertisements, sales literature and reports to policy owners, we may
compare performance information for a variable account to:
. 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
. the Consumer Price Index, to assess the real rate of return from buying a
policy by taking inflation into consideration.
Reports and promotional literature may also contain our rating or a rating of
our claims-paying ability. These ratings are set by firms that analyze and rate
insurance companies and by nationally recognized statistical rating
organizations.
You'll find more about Pacific Select Fund Fees and expenses paid by the Pacific Select Fund
fees and expenses in An overview of Pacific The Pacific Select Fund pays advisory fees and other expenses. These are
Select Exec II. deducted from the assets of the fund's portfolios and may vary from year to
year. They are not fixed and are not part of the terms of your policy. If you
choose a variable investment option, these fees and expenses affect you
indirectly because they reduce portfolio returns. The fund is governed by its
own Board of Trustees.
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YOUR INVESTMENT OPTIONS
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Fixed options You can also choose from two fixed options: the Fixed account and the Fixed LT
account. The fixed options provide a guaranteed minimum annual rate of
The fixed options are not securities, so interest. The amounts allocated to the fixed options are held in our general
they do not fall under any securities act. For account.
this reason, the SEC has not reviewed the
disclosure in this prospectus about these Here are some things you need to know about the fixed options:
options. However, other federal securities
laws may apply to the accuracy and completeness . Accumulated value allocated to the fixed options earns interest on a daily
of the disclosure about these options. basis, using a 365-day year. Our minimum annual interest rate is 3%.
For more information about the general account, . We may offer a higher annual interest rate on the fixed options. If we do,
see About Pacific Life. we'll guarantee the higher rate for one year.
. There are no investment risks or direct charges.
. There are limitations on when and how much you can transfer from the fixed
options. These limitations are described below, in Transferring among
investment options.
. We may limit the total amount you allocate to the Fixed LT account for all
Pacific Life policies you own to $1,000,000 in any 12-month period, and
transfer any amount over $1,000,000 to your other investment options according
to your most recent instructions. We may increase the $1,000,000 limit at any
time at our sole discretion. You should contact us to find out if a higher
limit is in effect.
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Transferring among investment options You can transfer among your investment options any time during the life of your
policy without triggering any current income tax. You can make transfers by
If your state requires us to refund your writing to us, by making a telephone transfer, or by signing up for one of our
premiums when you exercise your right to automatic transfer programs. You'll find more information about making
cancel, you can make transfers and use telephone transfers in Pacific Select Exec II basics.
transfer programs only after the free look
transfer date. For more information, please Transfers will normally be effective as of the end of the business day we
see Pacific Select Exec II basics. receive your written or telephone request.
If you live in Connecticut, Georgia, Here are some things you need to know about making transfers:
Maryland, North Carolina, North Dakota, or
Pennsylvania, you can make transfers to the . If you're making transfers between variable investment options, there is no
fixed options any time during the first minimum amount required and you can make as many transfers as you like.
18 months of your policy.
. You can make transfers from the variable investment options to the fixed
You'll find more about the first year options only in the policy month right before each policy anniversary.
transfer program later in this section.
. You can only make one transfer from each fixed option in any 12-month period,
except if you've signed up for the first year transfer program.
. You can only transfer up to the greater of $5,000 or 25% of your policy's
accumulated value in the Fixed account in any 12-month period, except for
scheduled transfers under the first year transfer program.
. You can only transfer up to the greater of $5,000 or 10% of your policy's
accumulated value in the Fixed LT account in any 12-month period.
. Currently, there is no charge for making a transfer but we may charge you in
the future.
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. There is no minimum required value for the investment option you're
transferring to or from.
. You cannot make a transfer if your policy is in the grace period and is in
danger of lapsing.
. We can restrict or suspend transfers.
. We may choose to impose limits on transfer amounts, the value of the
investment options you're transferring to or from, or the number and frequency
of transfers you can make.
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Transfer programs We offer three programs that allow you to make automatic transfers of
accumulated value from one investment option to another. Under the dollar cost
averaging and portfolio rebalancing programs, you can transfer among the
variable investment options. Under the first year transfer program, you can
make transfers from the Fixed account to the Fixed LT account and the variable
investment options.
Since the value of accumulation units can Dollar cost averaging program
change, more units are credited for a Our dollar cost averaging program allows you to make scheduled transfers of $50
scheduled transfer when unit values are or more between variable investment options without paying a transfer fee. It
lower, and fewer units when unit values are does not allow you to make transfers to or from either of the fixed options.
higher. This allows you to average the cost Here's how the program works:
of investments over time. Investing this way
does not guarantee profits or prevent losses. . You can set up this program at any time while your policy is in force.
. You need to complete a request form to enroll in the program.
. You must have at least $5,000 in a variable investment option to start the
program.
. We'll automatically transfer accumulated value from one variable investment
option to one or more of the other variable investment options you've selected
. We'll process transfers as of the end of the business day on your policy's
monthly, quarterly, semi-annual or annual anniversary, depending on the
interval you've chosen. We will not make the first transfer until after the
free look transfer date in states that require us to return your premiums if
you exercise your right to cancel your policy.
. We will not charge you for the dollar cost averaging program or for transfers
made under this program, even if we decide to charge you in the future for
transfers outside of the program, except if we have to by law.
. We have the right to discontinue, modify or suspend the program at any time.
. We'll keep making transfers at the intervals you've chosen until one of the
following happens:
. the total amount you've asked us to transfer has been transferred
. there is no more accumulated value in the investment option you're
transferring from
. your policy enters the grace period and is in danger of lapsing
. you tell us in writing to cancel the program
. we discontinue the program.
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YOUR INVESTMENT OPTIONS
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Because the portfolio rebalancing program Portfolio rebalancing program
matches your original percentage allocations, As the value of the underlying portfolios changes, the value of the allocations
we may transfer money from an investment to the variable investment options will also change. The portfolio rebalancing
option with relatively higher returns to one program automatically transfers your policy's accumulated value among the
with relatively lower returns. variable investment options according to your original percentage allocations.
Here's how the program works:
. You can set up this program at any time while your policy is in force.
. You enroll in the program by sending us a written signed request or a
completed automatic rebalancing form.
. Your first rebalancing will take place on the monthly payment date you choose.
You choose whether we should make transfers quarterly, semi-annually or
annually, based on your policy date.
. If you cancel this program, you must wait 30 days to begin it again.
. You cannot use this program if you're already using the dollar cost averaging
program.
. We do not currently charge for the portfolio rebalancing program or for
transfers made under this program.
. We can discontinue, suspend or change the program at any time.
This program allows you to average the First year transfer program
cost of investments over your first Our first year transfer program allows you to make monthly transfers during the
policy year. Investing this way does first policy year from the Fixed account to the variable investment options or
not guarantee profits or prevent losses. the Fixed LT account. It does not allow you to transfer among variable
investment options.
Here's how the program works:
. You enroll in the program when you apply for your policy.
. You choose a regular amount to be transferred every month for 12 months
. We make the first transfer on the day we allocate your first premium to the
investment options you've chosen. Each transfer will be made on the same day
every month.
. If you sign up for this program, we'll waive the usual transfer limit for the
Fixed account during the first policy year.
. If we make the last transfer during the second policy year, we will not count
it toward the usual one transfer per year limit for the Fixed account.
. If the accumulated value in the Fixed account is less than the amount to be
transferred, we'll transfer the balance and then cancel the program.
. If there is accumulated value remaining in the Fixed account at the end of the
program, our usual rules for the fixed account will apply.
. We do not currently charge for the first year transfer program or for
transfers made under this program.
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WITHDRAWALS, SURRENDERS AND LOANS
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Making a withdrawal, taking out a loan or You can take out all or part of your policy's accumulated value while your
surrendering your policy can change your policy is in force by making withdrawals or surrendering your policy. You can
policy's tax status, generate taxable income, take out a loan from us using your policy as security. You can also use your
or make your policy more susceptible to policy's loan and withdrawal features to supplement your income, for example,
lapsing. Be sure to plan carefully before during retirement.
using these policy benefits.
If you withdraw a larger amount than you've
paid into your policy, your withdrawal may be
considered taxable income.
For more information, see Variable life
insurance and your taxes.
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Making withdrawals You can withdraw part of your policy's net cash surrender value starting on
your policy's first anniversary. Here's how it works:
You can choose to receive your withdrawal in
a lump sum or use it to buy an income benefit. . You must send us a written request that's signed by all joint owners.
Please see the discussion about income . Each withdrawal must be at least $200, and the net cash surrender value of
benefits in General information about your your policy after the withdrawal must be at least $500.
policy. . If your policy has an outstanding loan amount, the maximum withdrawal you can
take is the amount, if any, by which the cash surrender value just before the
We will not accept your request to make a withdrawal exceeds the outstanding loan amount divided by 90%.
withdrawal if it will cause your policy to . We'll charge you $25 for each withdrawal you make.
become a modified endowment contract, unless . If you do not tell us which investment options to take the withdrawal from,
you've told us in writing that you want your we'll deduct the withdrawal and the withdrawal charge from all of your
policy to become a modified endowment contract. investment options in proportion to the accumulated value you have in each
option.
. The accumulated value, cash surrender value and net cash surrender value of
your policy will be reduced by the amount of each withdrawal.
. If the person insured under the policy dies after you've sent a withdrawal
request to us, but before we've made the withdrawal, we'll deduct the amount
of the withdrawal from any death benefit proceeds owing.
How withdrawals affect your policy's death benefit
Making a withdrawal will affect your policy's death benefit in the following
ways:
. if your policy's death benefit does not equal the guideline minimum death
benefit, the death benefit will decrease by the amount of your withdrawal.
. if your policy's death benefit equals the guideline minimum death benefit, the
death benefit may decrease by more than the amount of your withdrawal.
How withdrawals affect your policy's face amount
If you've chosen death benefit Option B or Option C, making a withdrawal does
not reduce your policy's face amount.
If you've chosen death benefit Option A, a withdrawal may reduce your face
amount. You can make one withdrawal during each of the first 15 policy years of
up to 10% of the total premium payments you've made without reducing your
policy's face amount. If you withdraw a larger amount, or make additional
withdrawals, the face amount will be reduced by the amount, if any, by which
the face amount exceeds the death benefit immediately before the withdrawal,
minus the amount of the withdrawal.
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WITHDRAWALS, SURRENDERS AND LOANS
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Taking out a loan You can borrow money from us any time while your policy is in force either by
sending us a request in writing, or over the telephone. You'll find more
The amount in the loan account, plus any information about requesting a loan by telephone in Pacific Select Exec II
interest you owe, is referred to throughout basics.
this prospectus as your outstanding loan
amount. Your policy refers to this amount as When you borrow money from us, we use your policy's accumulated value as
policy debt. security. You pay interest on the amount you borrow. The accumulated value set
aside to secure your loan also earns interest. Here's how it works:
Taking out a loan will affect the growth of
your policy's accumulated value, and may . To secure the loan, we transfer an amount equal to the amount you're
affect the death benefit. borrowing from your accumulated value in the investment options to the loan
account. We'll transfer this amount from your investment options in proportion
An example to the accumulated value you have in each option, unless you tell us
For a policy in policy year 5 with: otherwise.
. accumulated value of $100,000 . Interest owing on the amount you've borrowed accrues daily at an annual rate
of 3.25%. Interest that has accrued during the policy year is due on your
. an outstanding loan amount of $60,000 policy anniversary. If you do not pay the interest when it's due, we'll add it
to the amount of your loan and begin accruing interest on it from the day it
. a most recent monthly charge of $225 was due. We'll also transfer an amount equal to the interest that was due,
from your policy's accumulated value to the loan account. We'll transfer this
The maximum amount you can borrow is the amount from your investment options in proportion to the accumulated value you
greater of: have in each option, unless you tell us otherwise.
. The amount in the loan account earns interest daily at an annual rate of
$25,500 ((90% X ($100,000 - $5,000)) - 3.0%. On your policy anniversary, we transfer the interest that's been
$60,000) credited to the loan account proportionately to your investment options
according to your most recent allocation instructions.
or
How much you can borrow
$32,076.51 The minimum amount you can borrow is $200, unless there are other restrictions
(a X (b / c)) - d, where: in your state. You can borrow up to the larger of the following amounts:
a = $92,300 ($100,000 - $5,000 -
($12 X $225)) . 90% of the accumulated value in the investment options, less any surrender
b = 1.03 charges that would apply if you surrendered your policy on the day you took
c = 1.0325 out the loan.
d = $60,000) . the result of a X (b / c) - d, where:
a = the accumulated value of your policy less any surrender charges that would
have applied if you surrendered your policy on the day you took out the
loan, and less 12 times the most recent monthly charge
b = 1.03
c = 1.0325
d = any outstanding loan amount.
Paying off your loan
You can pay off all or part of the loan any time while your policy is in force.
Unless you tell us otherwise, we'll generally transfer any loan payments you
make proportionately to your investment options according to your most recent
allocation instructions. We may, however, first transfer any loan payments you
make to the fixed options, up to the amount originally transferred from the
fixed options to the loan account. We'll then transfer any excess amount to
your variable investment options according to your most recent allocation
instructions.
While you have an outstanding loan, we'll treat any money you send us as a loan
payment unless you tell us otherwise in writing.
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Your outstanding loan amount could result What happens if you do not pay off your loan
in taxable income if you surrender your If you do not pay off your loan, we'll deduct the amount in the loan account,
policy, if your policy lapses, or if your including any interest you owe, from one of the following:
policy is a modified endowment contract. You
should talk to your tax advisor before . the death benefit proceeds before we pay them to your beneficiary
taking out a loan under your policy. See . the cash surrender value if you surrender your policy
Taking out a loan in Variable life insurance . the amount we refund if you exercise your right to cancel.
and your taxes.
Taking out a loan, whether or not you repay it, will have a permanent effect on
the value of your policy. For example, while your policy's accumulated value is
held in the loan account, it will miss out on the potential earnings available
through the variable investment options. The amount of interest you earn on the
loan account may be less than the amount of interest you would have earned from
the fixed options. These could lower your policy's accumulated value, which
could reduce the amount of the death benefit.
When a loan is outstanding, the amount in the loan account is not available to
help pay for any policy charges. If, after deducting your outstanding loan
amount, there is not enough accumulated value in your policy to cover the
policy charges, your policy could lapse. You may need to make additional
premium payments or loan repayments to prevent your policy from lapsing.
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Ways to use your policy's loan and You can use your policy's loan and withdrawal features to supplement your
withdrawal features income, for example, during retirement.
If you're interested in using your life Using your policy to supplement your income does not change your rights or our
insurance policy to supplement your obligations under the policy. The terms for loans and withdrawals described in
retirement income, please contact us for this prospectus remain the same.
more information.
Here are some things you should consider when setting up an income stream:
We can provide you with illustrations that
give you examples of how this could affect . the rate of return you expect to earn on your investment options
the accumulated value, net cash surrender . how long you would like to receive regular income
value and death benefit of your policy based . the amount of accumulated value you want to maintain in your policy.
on different hypothetical gross rates of
return. We will not use a higher rate than Understanding the risks
12%, and will always compare it with a rate Setting up an income stream may not be suitable for all policy owners. It's
of 0% based on guaranteed insurance costs. important to understand the risks that are involved in using your policy's loan
You'll find sample illustrations and the and withdrawal features.
assumptions they're based on starting on
page 106. You must always leave enough accumulated value in your policy to help ensure
your policy will continue to qualify as life insurance and will not lapse. Your
The hypothetical rates of return are policy will lapse if there is not enough accumulated value, after subtracting
illustrative of past or future results. any outstanding loan amount, to cover the monthly charge on the day we make the
Policy values and benefits would be deduction and the grace period expires. If your policy lapses, we'll end your
different from those shown in the life insurance coverage.
illustrations if:
There are also charges associated with reinstating a lapsed policy.
. the gross annual rates of return are
different from the hypothetical rates You should consult with your financial adviser and carefully consider how much
you can withdraw and borrow from your policy each year to set up your income
. premiums were not paid as illustrated stream.
. loan interest was paid when due. Remember that the performance of your investment options also affects your
policy's accumulated value. Poor performance can increase the danger of your
policy lapsing. And as the cost of insurance generally increases with the age
of the person insured by the policy, this can also reduce the accumulated
value.
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WITHDRAWALS, SURRENDERS AND LOANS
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You can also ask for accompanying charts In addition, you should carefully review the policy statement we send you. Your
and graphs that compare results from statements will allow you to monitor your policy's accumulated value, less your
various retirement strategies. outstanding loan amount, to ensure your policy can continue to support the
income stream you have chosen.
You can ask your registered representative
for illustrations showing how policy If your policy lapses or you surrender your policy after you have taken out a
charges may affect existing accumulated loan, you could face significant income tax liability in the year of the lapse
value and how future withdrawals and loans or surrender. Any outstanding loan amount will automatically be repaid when your
may affect the accumulated value and death policy lapses or you surrender your policy. You could be taxed to the extent
benefit. that the net surrender value plus the outstanding loan amount repaid exceeds the
cost basis of your policy.
Tax issues are described in detail in Interest on a loan is due to us on each policy anniversary. If we do not
Variable insurance and your taxes. receive the interest when due, we'll add it to the outstanding loan amount and
begins accruing interest on it from the day it was due. This has a compounding
effect and can add to your income tax liability.
If the person insured by the policy dies, we'll deduct any outstanding loan
amount from the death benefit. This means the death benefit proceeds will be
less than the death benefit and may be less than the face amount.
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Surrendering your policy You can surrender or cash in your policy at any time while the person insured
by the policy is still living. Your policy's cash surrender value is its
You can choose to receive your money in a accumulated value less any surrender charge that applies. The net cash
lump sum or use it to buy an income benefit. surrender value equals your policy's cash surrender value after deducting any
Please see the discussion about income outstanding loan amount.
benefits in General information about your
policy. Here are some things you need to know about surrendering your policy:
If you increase your policy's face amount, . You must send us your policy and a written request.
we'll send you a supplemental schedule of . We'll send you the policy's net cash surrender value. If you surrender your
benefits that shows the surrender charge policy during the first 10 policy years, we'll deduct a surrender charge that
associated with the increase. helps cover our costs for underwriting, issuing and distributing our policies.
. Your policy's surrender charge is based on the initial face amount of your
policy and will never be greater than the maximum surrender charge. The maximum
surrender charge is calculated at a rate that is based on the age and risk
class of the person insured by the policy, and each $1,000 of initial face
amount.
. There's no surrender charge on the initial face amount after 10 policy years.
. We guarantee the surrender charge rates will not increase.
. If you increase your policy's face amount, each increase has a surrender
charge and maximum surrender charge, based on the amount of the increase, for
10 years.
. If you decrease the face amount, the decrease will not affect your policy's
surrender charge or maximum surrender charge.
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Sample rates for the surrender charge How we calculate the surrender charge
appear in Appendix B.
The surrender charge and the maximum surrender charge are assessed against your
Sample rates for the maximum surrender policy's accumulated value. They are based on the age and risk class of the
charge appear in Appendix C. person insured by the policy, as well as the death benefit option you choose,
for each $1,000 of the initial face amount of your policy.
An example
For a policy: The amount of the surrender charge does not change during the first policy
. that insures a male non-smoker who is year. Starting on the first policy anniversary, we reduce the charge by 0.9259%
age 45 when the policy is issued each month until it reaches zero at the end of 10 policy years.
. with an initial face amount of $350,000.
The maximum surrender charge does not change during the first 10 policy years,
For death benefit Option A and Option C, and then is reduced to zero at the end of the 10th policy year. The maximum
the surrender charge is: surrender charge on the initial face amount of your policy will never be more
than $33.99 per $1,000 of initial face amount.
. $9,096.50 in the first policy year
(($350,000 / $1,000) X 25.99)
. $3,032.17 at the end of the seventh
policy year ($9,096.50 - ($9,096.50 X
.9259% X 72 months))
We will never deduct more than the maximum
surrender charge, which is $4,426.10
For death benefit Option B, the surrender
charge is:
. $12,155.50 in the first policy year
(($350,000 / $1,000) X 34.73)
. $4,052.06 at the end of the seventh
policy year ($12,155.50 - ($12,155.50 X
.9259% X 72 months))
We will never deduct more than the maximum
surrender charge, which is $5,752.60.
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GENERAL INFORMATION ABOUT YOUR POLICY
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This section tells you some additional things you should know about your
policy.
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Income benefit If you surrender or make a withdrawal from your policy, you can use the money
to buy an income benefit that provides a monthly income. Your policy's
beneficiary can use death benefit proceeds to buy an income benefit. In
addition to the income benefit described below, you can choose from other
income benefits we may make available from time to time.
The following is one income benefit available under the Pacific Select Exec II
policy:
. The income benefit is based on the life of the person receiving the income. If
the policy owner is buying the income benefit, monthly income will be based on
the owner's life. If the policy's beneficiary buys the income benefit, monthly
income will be based on the beneficiary's life.
. We'll pay a monthly income for at least 10 years regardless of whether the
person receiving the income is still alive.
. After 10 years, we'll only pay the monthly income for as long as the person
receiving it is still alive.
. The minimum monthly income benefit calculated must be at least $100.
. For this income benefit, the amount you receive will always be at least as
much as the amount guaranteed by your policy.
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Substituting the person insured by your Starting on your policy's first anniversary, you can apply to substitute the
policy person insured by your policy. You must apply in writing and we must receive
satisfactory evidence of insurability of the new person to be insured by the
If you substitute the person insured by policy. You can only add riders on the new person insured by the policy if we
the policy, we'll send you a revised approve the addition of the riders.
schedule of benefits.
The substitution will become effective on the first monthly payment date after
we approve your request. We may have to adjust the face amount, accumulated
value, surrender charge and policy charges to reflect the substitution.
We can refuse your request to substitute if, among other reasons:
. we would be required to end the policy in order to comply with new guideline
premium limits under tax law
. we would be required to make distributions from your policy's accumulated
value that are greater than the net cash surrender value.
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Paying the death benefit in the case of If the person insured by the policy, whether sane or insane, commits suicide
suicide within two years of the policy date, death benefit proceeds will be the total
of all premiums you've paid, less any outstanding loan amount and any
withdrawals you've made.
If you've substituted the person insured by the policy and that person, whether
sane or insane, commits suicide within two years of the day the substitution
was made, we'll calculate death benefit proceeds differently. Proceeds will be
limited to the net cash surrender value of your policy as of the day the
substitution was made, less any increase in any outstanding loan amount, any
withdrawals you've made, and any dividends we've paid in cash, since the day
the substitution was made.
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Replacement of life insurance or The term replacement has a special meaning in the life insurance industry.
annuities Before you make a decision to buy, we want you to understand what impact a
replacement may have on your existing insurance policy.
A replacement occurs when you buy a new life insurance policy or annuity
contract, and a policy or contract you already own has been or will be:
. lapsed, forfeited, surrendered or partially surrendered, assigned to the
replacing insurer, or otherwise terminated
. converted to reduced paid-up insurance, continued as extended term insurance,
or otherwise reduced in value by the use of nonforfeiture benefits or other
policy values
. amended to effect either a reduction in benefits or in the term for which
coverage would otherwise remain in force or for which benefits would be paid
. reissued with any reduction in cash value, or
. pledged as collateral or subject to borrowing, whether in a single loan or
under a schedule of borrowing over a period of time.
There are circumstances when replacing your existing life insurance policy or
annuity contract can benefit you. As a general rule, however, replacement is
not in your best interest. You should carefully compare the costs and benefits
of your existing policy or contract with those of the new policy or contract to
determine whether replacement is in your best interest.
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Errors on your application If the age or gender of the person insured by your policy is stated incorrectly
on your application, the death benefit under your policy will be the greater of
If unisex cost of insurance rates apply the following:
to your policy, we will not adjust the
face amount if we discover that gender . the amount of death benefit that would be purchased by the most recent cost of
has been stated incorrectly on your insurance charge for the correct age and gender or
application. . the guideline minimum death benefit for the correct age and gender.
We'll adjust the accumulated value by recalculating all previous cost of
insurance charges and other monthly deductions based on the correct age and
gender.
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Contesting the validity of your policy We have the right to contest the validity of your policy for two years from the
policy date. Once your policy has been in force for two years from the policy
date during the lifetime of the person insured by the policy, we generally lose
the right to contest its validity.
We also have the right to contest the validity of a policy that you reinstate
for two years from the day that it was reinstated. Once your reinstated policy
has been in force for two years from the reinstatement date during the lifetime
of the person insured by the policy, we generally lose the right to contest its
validity. During this period, we may contest your policy only if there is a
material misrepresentation on your application for reinstatement.
We have the right to contest the validity of an increase in the face amount of
a policy for two years from the day the increase becomes effective. Once the
increased face amount has been in force for two years during the lifetime of
the person insured by the policy, we generally lose the right to contest its
validity.
We also have the right to contest the validity of a policy if there has been a
substitution to the person insured by the policy. We can contest a policy's
validity for two years from the day the substitution becomes effective. Once
the substitution has been in force for two years during the lifetime of the
person insured by the policy, we generally lose the right to contest its
validity.
Regardless of the above, we can contest the validity of your policy for failure
to pay premiums at any time. The policy will terminate upon successful contest
with respect to the person insured by the policy.
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Assigning your policy as collateral You can assign your policy as collateral to secure a loan, mortgage, or other
kind of debt. Here's how it works:
Assigning a policy that's a modified
endowment contract may generate taxable . An assignment does not change the ownership of the policy.
income and a 10% penalty tax. . After the policy has been assigned, your rights and the rights of your
beneficiary will be subject to the assignment. The entire policy, including any
income benefit, rider, benefit and endorsement, will also be subject to the
assignment.
. We're not responsible for the validity of any assignment.
. We must receive and record a copy of the original assignment in a form that's
acceptable to us before we'll consider it binding.
. Unless otherwise provided, the person or organization you assign your policy
to may exercise the rights under the policy, except the right to change the
policy owner or the beneficiary or the right to choose a monthly income
benefit.
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Non-participating This policy will not share in any of our surplus earnings.
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This discussion about taxes is based on our understanding of the present
federal income tax laws as they are currently interpreted by the Internal
Revenue Service (IRS). It's based on the Internal Revenue Code of 1986, as
amended, (the tax code) and does not cover any state or local tax laws.
The tax consequences of owning a policy or This is not a complete discussion of all federal income tax questions that may
receiving proceeds from it may vary by arise under the policy. There are special rules that we do not include here
jurisdiction and according to the that may apply in certain situations.
circumstances of each owner or beneficiary.
We do not know whether the current treatment of life insurance policies under
Speak to a qualified tax adviser for current federal income tax or estate or gift tax laws will continue. We also do
complete information about federal, state not know whether the current interpretations of the laws by the IRS or the
and local taxes that may apply to you. courts will remain the same. Future legislation may adversely change the tax
treatment of life insurance policies, other tax consequences described in this
discussion or tax consequences that relate directly or indirectly to life
insurance policies.
We do not make any guarantees about the tax status of your policy, and you
should not consider the discussion that follows to be tax advice.
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Tax treatment of life insurance policies Definition of life insurance
We believe that the policy qualifies as life insurance. That means it will
In order to qualify as a life insurance receive the same tax advantages as a conventional fixed life insurance policy.
contract for federal income tax purposes, The two main tax advantages are:
the policy must meet the statutory
definition of life insurance. . In general, your policy's beneficiary will not be subject to federal income
tax when he or she receives the death benefit proceeds. This is true regardless
Death benefits may be excluded from income of whether the beneficiary is an individual, corporation, or other entity.
under Section 101(a) of the tax code. . You'll generally not be taxed on any or all of your policy's accumulated value
unless you receive a cash distribution by making a withdrawal, surrendering
your policy, or in some instances, taking a loan from your policy.
The tax laws defining life insurance, however, do not cover all policy
features. Your policy may have features that could prevent it from qualifying
as life insurance. For example, the tax laws have yet to address many issues
concerning the treatment of substandard risk policies and policies with term
insurance on the person insured by the policy. We can make changes to your
policy if we believe the changes are needed to ensure that your policy
continues to qualify as a life insurance contract.
Tax regulations deal with allowable charges for mortality costs and other
expenses that are used in calculating whether a policy qualifies as life
insurance. 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.
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The Treasury Department has issued proposed regulations about reasonable
standards for mortality charges. While we believe that our mortality costs and
other expenses used in calculating whether the policy qualifies as life
insurance are reasonable under current laws, we cannot be sure that the IRS
agrees with us. We can change our mortality charges if we believe the changes
are needed to ensure that your policy qualifies as a life insurance contract.
Section 817(h) of the tax code describes Diversification rules and ownership of the separate account
the diversification rules. Your policy will not qualify for the tax benefit of a life insurance contract
unless the separate account follows certain rules requiring diversification of
For more information about diversification investments underlying the policy. In addition, the IRS requires that the
rules, please see Managing the Pacific policyholder does not have control over the underlying assets.
Select Fund in the accompanying Pacific
Select Fund prospectus. The Treasury Department has announced that the diversification rules "do not
provide guidance concerning the circumstances in which it will treat an
investor, rather than the insurance company, as the owner of the assets in a
separate account." The IRS treats a variable policy owner as the owner of
separate account assets if he or she has the ability to exercise investment
control over them. Owners of the assets are taxed on any income or gains the
assets generate. Although the Treasury Department announced it would provide
further guidance on the issue, it had not done so when we wrote this
prospectus.
No IRS rulings deal with policies that have exactly the same ownership rights
as your policy. Since you have additional flexibility in allocating premiums
and policy values, it is possible the IRS would treat you as the owner of your
policy's proportionate share of the assets of the separate account.
We do not know what will be in future Treasury Department regulations. We
cannot guarantee that the fund's 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 policies. We can modify your policy if
we believe it will prevent you from being considered the owner of your policy's
proportionate share of the assets of the separate account.
Policy exchanges fall under Section 1035(a) Policy exchanges
of the tax code. If you exchange your entire policy for another one that insures the same
person, it generally will be treated as a tax-free exchange and, if so, will
not result in the recognition of gain or loss. If the person insured by the
policy is changed, the exchange will be treated as a taxable exchange.
Change of ownership
You may have taxable income if you transfer ownership of your policy, sell your
policy, or change the ownership of it in any way.
There are special rules for corporate-owned Corporate owners
policies. You should consult your tax There are special tax issues for corporate owners:
adviser.
. using your policy to fund deferred compensation arrangements for employees
Section 59A of the tax code deals with the has special tax consequences
environmental tax. . corporate ownership of a policy may affect your exposure to the alternative
minimum tax and the environmental tax.
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Conventional life insurance policies The tax treatment of your policy will depend upon whether it is a type of
contract known as a modified endowment contract. We describe modified endowment
Under Section 7702A of the tax code, policies contracts later in this section. If your policy is not a modified endowment
that are not classified as modified endowment contract, it will be treated as a conventional life insurance policy and will
contracts are taxed as conventional life have the following tax treatment:
insurance policies.
Surrendering your policy
The cost basis in your policy is generally When you surrender, or cash in, your policy, you'll generally be taxed on the
the premiums you've paid plus any taxable difference, if any, between the cash surrender value and the cost basis in your
distributions less any withdrawals or policy.
premiums previously recovered that were not
taxable. Making a withdrawal
If you make a withdrawal after your policy has been in force for 15 years,
you'll only be taxed on the amount you withdraw that exceeds the cost basis in
the policy.
Special rules apply if you make a withdrawal within the first 15 policy years
and it's accompanied by a reduction in benefits. In this case, there is a
special formula under which you may be taxed on all or a portion of the
withdrawal amount.
Taking out a loan
If you take out a loan, you will not pay tax on the loan amount unless your
policy is surrendered or lapses and you have not repaid your outstanding loan
amount. The interest you pay, or that's accrued, on a loan is generally
nondeductible. Ask your tax adviser for more information.
Loans and corporate-owned policies
If you borrow money to buy or carry certain life insurance policies, tax law
provisions may limit the deduction of interest payable on loan proceeds. If the
taxpayer is an entity that's a direct or indirect beneficiary of certain life
insurance, endowment or annuity contracts, a portion of the entity's deductions
for loan interest may be disallowed, even though this interest may relate to
debt that's completely unrelated to the contract. There may be a limited
exception that applies to contracts issued on 20% owners, officers, directors
or employees of the entity. For more information about this exception, you
should consult your tax adviser.
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Modified endowment contracts A modified endowment contract is a special type of life insurance policy. If
your policy is a modified endowment contract, it will have the tax treatment
Section 7702A of the tax code defines a described below. Any distributions you receive during the life of the policy
class of life insurance policies known as are treated differently than under conventional life insurance policies.
modified endowment contracts. Like other Withdrawals, loans, pledges, assignments and the surrender of your policy are
life insurance policies, the death benefit all considered distributions and may be subject to tax on an income-first basis
proceeds paid to your beneficiary generally and a 10% penalty.
are not subject to federal income tax and
your policy's accumulated value grows on a When a policy becomes a modified endowment contract
tax-deferred basis until you receive a cash A life insurance policy becomes a modified endowment contract if, at any time
distribution. during the first seven policy years, the sum of actual premiums paid exceeds
the seven-pay limit. The seven-pay limit is the cumulative total of the level
If there is a material change to your policy, annual premiums (or seven-pay premiums) required to pay for the policy's future
like a change in the death benefit, we may death and endowment benefits.
have to retest your policy and restart the
seven-pay premium period to determine whether
the change has caused the policy to become a
modified endowment contract.
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For example, if the seven-pay premiums were $1,000 a year, the maximum premiums
you could pay during the first seven years to avoid modified endowment
treatment would be $1,000 in the first year, $2,000 through the first two years
and $3,000 through the first three years, etc. Under this test, a Pacific
Select Exec II policy may or may not be a modified endowment contract,
depending on the amount of premiums paid during the policy's first seven
contract years or after a material change has been made to the policy.
Surrendering your policy
If you surrender your policy, you're taxed on the amount by which the cash
surrender value exceeds the cost basis in the policy.
Making a withdrawal or taking out a loan
If you make a withdrawal or take out a loan from a modified endowment contract,
you're taxed on the amount of the withdrawal or loan that's considered income,
including all previously non-taxed gains. Income is the difference between the
cash surrender value and the cost basis in your policy. It's unclear whether
interest paid, or accrued, on a loan is considered interest for federal income
tax purposes. If you borrow money to buy or carry certain life insurance
policies, tax law provisions may limit the deduction of interest payable on
loan proceeds. You should consult your tax adviser.
All modified endowment contracts we or our affiliates issue to you in a
calendar year are treated as a single contract when we calculate whether a
distribution amount is subject to tax.
10% penalty tax
If any amount you receive from a modified endowment contract is taxable, you
may also have to pay a penalty tax equal to 10% of the taxable amount.
A taxpayer will not have to pay the penalty tax if any of the following
exceptions apply:
. you're at least 59 1/2 years old
. you're receiving an amount because you've become disabled
. you're receiving an amount that's part of a series of substantially equal
periodic payments, paid out at least annually. These payments may be made for
your life or life expectancy or for the joint lives or joint life expectancies
of you and your beneficiaries.
Distributions before a policy becomes a modified endowment contract
If your policy fails the seven-pay test and becomes a modified endowment
contract, any amount you receive or are deemed to have received during the two
years before it became a modified endowment contract may be taxable. The
distribution would be treated as having been made in anticipation of the
policy's failing to meet the seven-pay test under Treasury Department
regulations which are yet to be prescribed.
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Policy riders Accelerated living benefits rider
Amounts received under this rider should be generally excluded from taxable
Please see the discussion of optional income under Section 101(g) of the tax code.
riders in The death benefit.
Benefits under the rider will be taxed, however, if they are paid to someone
Please consult with your tax adviser if other than a person insured by the policy, and the person insured by the
you want to exercise your rights under policy:
this rider.
. is a director, officer or employee of the person receiving the benefit, or
. has a financial interest in a business of the person receiving the benefit.
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ABOUT PACIFIC LIFE
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Pacific Life Insurance Company is a life insurance company based in California.
Along with our subsidiaries and affiliates, our operations include life
insurance, annuity, pension and institutional products, group employee
benefits, broker-dealer operations, and investment advisory services. At the
end of 1998, we had over $89.6 billion of individual life insurance and total
admitted assets of approximately $37.6 billion. In 1998, we were ranked the
18th largest life insurance carrier in the U.S. in terms of admitted assets.
Pacific Life, together with its affiliated enterprises, has total assets and
funds under management of over $290 billion. We are authorized to conduct our
life and annuity business in the District of Columbia and in all states except
New York. Our principal office is at 700 Newport Center Drive, Newport Beach,
California 92660.
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How we're organized Pacific Life was established on January 2, 1868 under the name, Pacific Mutual
Life Insurance Company of California. It was reincorporated as Pacific Mutual
Life Insurance Company on July 22, 1936. On September 1, 1997, Pacific Life
converted from a mutual life insurance company to a stock life insurance
company. Pacific Life is 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 charters, Pacific Mutual Holding Company must always hold at least
51% of the outstanding voting stock of Pacific LifeCorp. 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. They have the right to vote on the election
of the Board of Directors of the mutual holding company and on other matters.
They also have certain rights if the mutual holding company is liquidated or
dissolved.
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How policies are distributed Pacific Mutual Distributors, Inc. (PMD), our subsidiary, is the distributor of
our policies. PMD is located at 700 Newport Center Drive, Newport Beach,
California 92660.
PMD is registered as a broker-dealer with the SEC and is a member of the
National Association of Securities Dealers (NASD). We pay PMD for its services
as our distributor.
The policies are sold by registered representatives of broker-dealers who have
signed agreements with us and PMD. Registered representatives must be licensed
to sell variable life insurance under the state insurance and securities
regulations that apply. Broker-dealers must be registered with the SEC.
How we pay broker-dealers
We pay broker-dealers commission for promoting, marketing and selling our
policies. Broker-dealers pay a portion of the commission to their registered
representatives, under their own arrangements.
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Commissions are based on "target" premiums we determine. The commission we pay
will vary with the agreement, but the most common schedule of commissions we
pay is:
A target premium is a hypothetical premium . 90% of premiums paid up to the first target premium
that is used only to calculate commissions. . 4% of the premiums paid under targets 2-10
It varies with the death benefit option you . 2% of premiums paid in excess of the 10th target premium.
choose, the age of the person insured by the
policy on the policy date, and the gender We may pay broker-dealers an annual renewal commission of up to 0.20% of a
(unless unisex rates are required) and risk policy's accumulated value less any outstanding loan amount. We calculate the
class of the person insured by the policy. renewal amount monthly and it becomes payable on each policy anniversary.
A policy's target premium will be less than We may also pay override payments, expense and marketing allowances, bonuses,
the policy's guideline level premiums. wholesaler fees and training allowances.
Registered representatives who meet certain sales levels can qualify for sales
incentives programs we sponsor. We may also pay them non-cash compensation like
expense-paid trips, expense-paid educational seminars, and merchandise. They
can choose to receive their compensation on a deferred basis.
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How our accounts work We own the assets in our general account and our separate account. We allocate
your net premiums to these accounts according to the investment options you've
chosen.
General account
We can provide you with reports of our Our general account includes all of our assets, except for those held in our
ratings as an insurance company and our separate accounts. We guarantee you an interest rate for up to one year on any
ability to pay claims with respect to amount allocated to the fixed options. The rate is reset annually. The fixed
our general account assets. options are part of our general account, which we may invest as we wish,
according to any laws that apply. We'll credit the guaranteed rate even if the
investments we make earn less. Our ability to pay these guarantees is backed by
our strength as a company.
The fixed options are not securities, so they do not fall under any securities
act. For this reason, the SEC has not reviewed the disclosure in this
prospectus about the fixed options. However, other federal securities laws may
apply to the accuracy and completeness of the disclosure about the fixed
options.
Separate account
You'll find the audited financial statements Amounts allocated to the variable investment options are held in our separate
for the Pacific Select Exec separate account account. The assets in this account are kept separate from the assets in our
later in this section of the prospectus. general account and our other separate accounts, and are protected from our
general creditors.
This section of the prospectus also includes
the audited consolidated financial statements The separate account was established on May 12, 1988 under California law under
for Pacific Life, which we include to show the authority of our Board of Directors. It's registered with the SEC as a type
our strength as a company and our ability of investment company called a unit investment trust. The SEC does not oversee
to meet our obligations under the policies. the administration or investment practices or policies of the account.
The separate account is divided into variable accounts. Each variable account
invests in shares of a designated portfolio of the Pacific Select Fund. We may
add variable accounts that invest in other portfolios of the fund or in other
securities.
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We're the legal owner of the assets in the separate account, and pay its
operating expenses. The separate account is operated only for our variable life
insurance policies. We must keep enough money in the account to pay anticipated
obligations under the insurance policies funded by the account, but we can
transfer any amount that's more than these anticipated obligations to our
general account. Some of the money in the separate account may include charges
we collect from the account and any investment results on those charges.
The separate account is not the only We cannot charge the assets in the separate account attributable to our
investor in the Pacific Select Fund. reserves and other liabilities under the policies funded by the account with
Investment in the fund by other separate any liabilities from our other business.
accounts for variable annuity contracts and
variable life insurance contracts could Similarly, the income, gains or losses, realized or unrealized, of the assets
cause conflicts. For more information, of any variable account belong to that variable account and are credited to or
please see the Statement of Additional charged against the assets held in that variable account without regard to our
Information for the Pacific Select Fund. other income, gains or losses.
Making changes to the separate account
We can add, change or remove any securities that the separate account or any
variable account holds or buys, as long as we comply with the laws that apply.
We can substitute shares of one Pacific Select Fund portfolio with shares of
another portfolio or fund if:
. any portfolio is no longer available for investment
. our management believes that a portfolio is no longer appropriate in view of
the purposes of the policy.
We'll give you any required notice or receive any required approval from policy
owners or the SEC before we substitute any shares. We'll comply with the filing
or other procedures established by insurance regulators as required by law.
We can add new variable accounts, which may include additional subaccounts of
the separate account, to serve as investment options under the policies. These
may be managed separate accounts or they may invest in a new portfolio of the
fund, or in shares of another investment company or one of its portfolios, or
in a suitable investment vehicle with a specified investment objective.
We can add new variable accounts when we believe that it's warranted by
marketing needs or investment conditions. We'll decide on what basis we'll make
new accounts available to existing policy owners.
We can also eliminate any of our variable accounts if we believe marketing, tax
or investment conditions warrant it. We can terminate and liquidate any
variable account.
If we make any changes to variable accounts or substitution of securities, we
can make appropriate changes to this policy or any of our other policies, by
appropriate endorsement, to reflect the change or substitution.
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If we believe it's in the best interests of people holding voting rights under
the policies and we meet any required regulatory approvals we can do the
following:
. operate the separate account as a management investment company, unit
investment trust, or any other form permitted under securities or other laws
. register or deregister the separate account under securities law
. combine the separate account with one of our other separate accounts or our
affiliates' separate accounts
. combine one or more variable accounts
. create a committee, board or other group to manage the separate account.
. change the classification of any variable account.
Taxes we pay
We may be charged for state and local taxes. Currently, we pay these taxes
because they are small amounts with respect to the policy. If these taxes
increase significantly, we may deduct them from the separate account.
We may charge the separate account for any federal, state and local taxes that
apply to the separate account or to our operations. This could happen if our
tax status or the tax treatment of variable life insurance changes.
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Voting rights We're the legal owner of the shares of the Pacific Select Fund that are held by
the variable accounts. We may vote on any matter at shareholder meetings of the
fund. However, we are required by law to vote as you instruct on the shares
relating to your allocation in a variable investment option. This is called
your voting interest.
Your voting interest is calculated as of a day set by the Board of Trustees of
the fund called the record date. Your voting interest equals the accumulated
value in a variable investment option divided by the net asset value of a share
of the corresponding portfolio. Fractional shares are included. If allowed by
law, we may change how we calculate your voting interest.
We'll send you documents from the fund called proxy materials. They include
information about the items you'll be voting on and forms for you to give us
your instructions. We'll vote shares held in the separate account for which we
do not receive voting instructions in the same proportion as all other shares
in the portfolio held by that separate account for which we've received timely
instructions.
We'll vote shares of any portfolio we hold in our general account in the same
proportion as the total votes for all of our separate accounts, including this
separate account. We'll vote shares of any portfolio held by any of our non-
insurance affiliates in the same proportion as the total votes for all of our
separate accounts and those of our insurance affiliates.
If the law changes to allow it, we can vote as we wish on shares of the
portfolios held in the separate account.
When required by state insurance regulatory authorities, we may disregard
voting instructions that:
. would change a portfolio's investment objective or subclassification
. would approve or disapprove an investment advisory contract.
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We may disregard voting instructions on a change initiated by policy owners that
would change a portfolio's investment policy, investment adviser or portfolio
manager if:
. our disapproval is reasonable
. we determine in good faith that the change would be against state law or
otherwise be inappropriate, considering the portfolio's objectives and
purpose, and considering what effect the change would have on us.
If we disregard any voting instructions, we'll include a summary of the action
we took and our reasons for it in the next report to policy owners.
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Preparing for the year 2000 Pacific Life long ago recognized the challenges associated with the Year 2000
date change. This change 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 began prior to 1995 to assess and plan for the potential
impact of the Year 2000. More recently, Pacific Life has been executing a
company-wide plan adopted during 1998 which called for correction or
replacement of remaining non-compliant systems by December 31, 1998.
We have successfully executed this project plan to date. Virtually all affected
systems were remediated and tested in time for use during 1998 year-end
processing cycles. Although it is not possible to certify that any system will
be completely free of Year 2000 problems, we have performed extensive testing
to identify and deal with such potential problems. Additionally, most of the
company's critical systems were subject to an independent third-party review
process which used sophisticated automated tools to identify Year 2000 related
bugs. The results have been very positive and we feel the company's internal
systems are positioned well for the date change in the century.
We plan to continue to test and re-test throughout 1999 and we will respond
promptly should any problems arise at any time thereafter.
We are continuing to work on contingency plans for critical business processes.
When appropriate, alternative methods and procedures are being developed to
work around unanticipated problems.
In addition to the above, we will continue to carefully evaluate responses from
vendors and significant business partners regarding the compliance of their
critical business processes and products. Although ultimately Pacific Life
cannot be responsible for the Year 2000 compliance efforts of these outside
entities, we will take appropriate steps wherever possible to develop
contingency plans to address vendors and partners deemed non-compliant.
Expenses to make our systems Year 2000 compliant are currently estimated to
range from $12 million to $15 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 projects,
although there can be no assurance.
These Year 2000 related statements are designated as "Year 2000 Readiness
Disclosure" pursuant to the Year 2000 Information Readiness Disclosure Act,
enacted October 19, 1998.
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State regulation We're subject to the laws of the state of California governing insurance
companies and to regulations issued by the Commissioner of Insurance of
California. In addition, we're subject to the insurance laws and regulations of
the other states and jurisdictions in which we're 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.
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Legal proceedings and legal matters The separate account is not involved in any legal proceedings that would have a
material effect on policy owners.
Legal matters concerning the issue and sale of the life insurance policies
described in this prospectus, our organization and authority to issue the
policies under California law, and the validity of the forms of the policies
under California law, have been passed upon by our general counsel. Legal
matters relating to federal securities laws and federal income tax laws have
been passed upon by Dechert Price & Rhoads.
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Registration statement We've filed a registration statement with the SEC for Pacific Select Exec II,
under the Securities Act of 1933. The SEC's rules allow us to omit some of the
information required by the registration statement from this prospectus. You
can ask for it from the SEC's office in Washington, D. C. They may charge you a
fee.
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Management The following is a list of our directors and certain officers, along with some
information about their business activities over the past five years. They do
not receive any compensation from the separate account for services they
provide to it nor do we pay any separately allocable compensation for these
services.
Unless otherwise indicated, the business address of each of these people is c/o
Pacific Life Insurance Company, 700 Newport Center Drive, Newport Beach,
California 92660.
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NAME AND POSITION PRINCIPAL OCCUPATION DURING THE LAST FIVE YEARS
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Thomas C. Sutton Director, Chairman of the Board and Chief Executive Officer of Pacific Life;
Director, Chairman Director, Chairman of the Board and Chief Executive Officer of Pacific LifeCorp,
of the Board and August 1997 to present; Director, Chairman of the Board and Chief Executive Officer
Chief Executive of Pacific Mutual Holding Company, August 1997 to present; Trustee and Chairman of
Officer the Board and Former President of Pacific Select Fund; Director and Chairman of the
Board of Pacific Life & Annuity Company (formerly known as PM Group Life Insurance
Company); Management Board Member of PIMCO Advisors L.P., December 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; Edison International; and similar positions with other affiliated companies
of Pacific Life.
Glenn S. Schafer Director (since November 1994) and President (since January 1995) of Pacific Life;
Director and Executive Vice President and Chief Financial Officer of Pacific Life, April 1991 to
President January 1995; Director and President of Pacific LifeCorp, August 1997 to present;
Director and President of Pacific Mutual Holding Company, August 1997 to present;
President (since February 1999) and Former Trustee of Pacific Select Fund;
Management Board Member of PIMCO Advisors L.P., December 1997 to present; Former
Equity Board Member of PIMCO Advisors L.P.; Former Director of Pacific Corinthian
Life Insurance Company; Director of Pacific Life & Annuity Company; and similar
positions with other affiliated companies of Pacific Life.
Khanh T. Tran Director (since August 1997), Senior Vice President and Chief Financial Officer of
Director, Senior Pacific Life, June 1996 to present; Vice President and Treasurer of Pacific Life,
Vice President and November 1991 to June 1996; Senior Vice President and Chief Financial Officer of
Chief Financial Pacific LifeCorp, August 1997 to present; Senior Vice President and Chief Financial
Officer 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 General Counsel of Pacific
Director, Senior Life; Senior Vice President and General Counsel of Pacific LifeCorp, August 1997 to
Vice President and present; Senior Vice President and General Counsel of Pacific Mutual Holding
General Counsel Company, August 1997 to present; Director of: Pacific Life & Annuity Company;
Association of California Life and Health Insurance Companies and Association of
Life Insurance Counsel.
Audrey L. Milfs Director (since August 1997), Vice President and Corporate Secretary of Pacific
Director, Vice Life; Vice President and Corporate Secretary of Pacific LifeCorp, August 1997 to
President and present; Vice President and Secretary of Pacific Mutual Holding Company, August 1997
Corporate Secretary to present; Secretary of Pacific Select Fund; similar positions with other
affiliated companies of Pacific Life.
Richard M. Ferry Director of Pacific Life; Director of Pacific LifeCorp, August 1997 to present;
Director 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; Mullin Consulting, Inc.; Northwestern Restaurants,
Inc.; Dole Food Co.; Mrs. Fields' Original Cookies Inc.; Rainier Bells, Inc.; Mellon
West Coast Advisory Board; Former Director of First Business Bank. Address: 1800
Century Park East, Suite 900, Los Angeles, California 90067.
Donald E. Guinn Director of Pacific Life; Director of Pacific LifeCorp, August 1997 to present;
Director Director of Pacific Mutual Holding Company, August 1997 to present; Chairman
Emeritus and Former Director of Pacific Telesis Group; Director of: The Dial Corp;
BankAmerica Corporation; Former Director of Bank of America NT & SA. Address:
Pacific Telesis Center, 130 Kearny Street, Room 3704, San Francisco, California
94108-4818.
Ignacio E. Lozano, Director of Pacific Life; Director of Pacific LifeCorp, August 1997 to present;
Jr. Director of Pacific Mutual Holding Company, August 1997 to present; Director,
Director Chairman and Former Editor-In-Chief of La Opinion; Former Director of: BankAmerica
Corporation; Bank of America NT&SA; Pacific Enterprises; Director of: The Walt
Disney Company; Southern California Gas Company; Lozano Communications, Inc.; Sempra
Energy and San Diego Gas and Electric Company. Address: 411 West Fifth Street, 12th
Floor, Los Angeles, California 90013.
Charles D. Miller Director of Pacific Life; Director of Pacific LifeCorp, August 1997 to present;
Director Director of Pacific Mutual Holding Company, August 1997 to present; Director,
Chairman and Former Chief Executive Officer of Avery Dennison Corporation; Former
Director of Great Western Financial Corporation; Advisory Board Member of:
Korn/Ferry International; Mellon Bank; Director of: 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, August 1997 to present;
Director 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; Former Director of
St. John's Hospital & Health Care Foundation. Address: 136 El Camino, Suite 216,
Beverly Hills, California 90212.
Richard M. Director of Pacific Life (since October 1997 and previously from November 1995 to
Rosenberg August 1997); Director of Pacific LifeCorp, August 1997 to present; Director of
Director 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; Age Wave;
Former Director of K-2 Incorporated. Address: 555 California Street, 11th Floor,
Unit 3001B, San Francisco, California 94104.
59
</TABLE>
<PAGE>
ABOUT PACIFIC LIFE
<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, August 1997 to present;
Director Director of Pacific Mutual Holding Company, August 1997 to present; Partner with the
law firm of O'Melveny & Meyers LLP; 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, August 1997 to present; Vice
Director Chairman and Director of The Irvine Company; Director of: The Walt Disney Company;
The Mitchell Energy and Development Company; The Irvine Apartment Communities;
Former Director of The Tejon Ranch. Address: 550 Newport Center Drive, 9th Floor,
Newport Beach, California 92660.
Lynn C. Miller Executive Vice President, Individual Insurance, of Pacific Life, January 1995 to
Executive Vice present; Senior Vice President, Individual Insurance, of Pacific Life, 1989 to 1995;
President Executive Vice President of Pacific Life & Annuity Company.
Edward R. Byrd Vice President and Controller of Pacific Life; Vice President and Controller of
Vice President and Pacific LifeCorp, August 1997 to present; Vice President and Controller of Pacific
Controller Mutual Holding Company, August 1997 to present; and similar positions with other
affiliated companies of Pacific Life.
Brian D. Klemens Vice President and Treasurer of Pacific Life, December 1998 to present; Assistant
Vice President and Vice President, Accounting and Assistant Controller of Pacific Life, April 1994 to
Treasurer December 1998.
</TABLE>
<TABLE>
<S> <C>
--------------------------------------------------------------------------------
Financial statements The next several pages contain the audited financial statements for the Pacific
Select Exec Separate Account as of December 31, 1998 and the two years then
ended.
These are followed by the audited consolidated financial statements for Pacific
Life as of December 31, 1998 and 1997 and for the three years ended December
31, 1998, which are included in this prospectus only so you can assess our
ability to meet our obligations under the policies.
--------------------------------------------------------------------------------
Independent Auditors The audited consolidated financial statements for Pacific Life as of December
31, 1998 and 1997 and for the three years ended December 31, 1998 and the
audited financial statements for Pacific Select Exec Separate Account as of
December 31, 1998 and for the two years ended December 31, 1998 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.
</TABLE>
60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Life Insurance Company
We have audited the accompanying statement of assets and liabilities of
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, 1998 and the related statement of operations for the year then ended and
statement of changes in net assets for each of the two years in the period then
ended (as to the Equity Variable Account and the Bond and Income Variable
Account, for the year ended December 31, 1998 and for the period from
commencement of operations through December 31, 1997). 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 Pacific Select Exec Separate Account as of December 31, 1998 and
the results of their operations for the year then ended and the changes in
their net assets for each of the two years in the period then ended (as to the
Equity Variable Account and the Bond and Income Variable Account, for the year
ended December 31, 1998 and for the period from commencement of operations
through December 31, 1997), in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 5, 1999
61
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
(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
(6,873 shares; cost
$69,218)............... $69,107
High Yield Bond
Portfolio (4,645
shares; cost $45,134).. $43,370
Managed Bond Portfolio
(8,941 shares; cost
$97,525)............... $101,864
Government Securities
Portfolio (1,562
shares; cost $16,677).. $17,149
Growth Portfolio (8,711
shares; cost
$187,167).............. $199,670
Aggressive Equity
Portfolio (1,404
shares; cost $16,338).. $17,766
Growth LT Portfolio
(8,674 shares; cost
$152,516).............. $227,277
Equity Income Portfolio
(6,986 shares; cost
$147,393).............. $187,867
Multi-Strategy
Portfolio (7,736
shares; cost
$112,643).............. $133,998
Receivables:
Due from Pacific Life
Insurance Company...... 89 72 174 209 321 153 92 54
Fund shares redeemed... 100
------------------------------------------------------------------------------------
Total Assets............ 69,207 43,459 101,936 17,323 199,879 18,087 227,430 187,959 134,052
------------------------------------------------------------------------------------
LIABILITIES
Payables:
Due to Pacific Life
Insurance Company...... 100
Fund shares purchased.. 89 72 174 209 321 153 92 54
------------------------------------------------------------------------------------
Total Liabilities....... 100 89 72 174 209 321 153 92 54
------------------------------------------------------------------------------------
NET ASSETS.............. $69,107 $43,370 $101,864 $17,149 $199,670 $17,766 $227,277 $187,867 $133,998
------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
62
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES (Continued)
DECEMBER 31, 1998
(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>
ASSETS
Investments:
Equity Portfolio (617
shares; cost $16,061).. $18,066
Bond and Income
Portfolio (397 shares;
cost $5,250)........... $5,282
Equity Index Portfolio
(9,370 shares; cost
$212,820).............. $303,187
International Portfolio
(9,944 shares; cost
$153,283).............. $157,140
Emerging Markets
Portfolio (1,471
shares; cost $11,689).. $10,072
Brandes International
Equity Portfolio (1)
(140 shares;
cost $1,454)........... $1,522
Turner Core Growth
Portfolio (165 shares;
cost $2,467)........... $2,948
Frontier Capital
Appreciation Portfolio
(295 shares;
cost $4,191)........... $4,452
Enhanced U.S. Equity
Portfolio (276 shares;
cost $4,437)........... $4,986
Receivables:
Due from Pacific Life
Insurance Company...... 11 13 161 81 11
Fund shares redeemed... 23 9 19 32
-------------------------------------------------------------------------------
Total Assets............ 18,077 5,295 303,348 157,221 10,083 1,545 2,957 4,471 5,018
-------------------------------------------------------------------------------
LIABILITIES
Payables:
Due to Pacific Life
Insurance Company...... 23 9 19 32
Fund shares purchased.. 11 13 161 81 11
--------------------------------------------------------------------------------
Total Liabilities....... 11 13 161 81 11 23 9 19 32
--------------------------------------------------------------------------------
NET ASSETS.............. $18,066 $5,282 $303,187 $157,140 $10,072 $1,522 $2,948 $4,452 $4,986
--------------------------------------------------------------------------------
</TABLE>
(1) Formerly named Edinburgh Overseas Equity Portfolio
See Notes to Financial Statements
63
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(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.............. $3,392 $3,403 $5,533 $881 $20,232 $5 $6,250 $18,901 $12,030
-------------------------------------------------------------------------------------
Net Investment Income... 3,392 3,403 5,533 881 20,232 5 6,250 18,901 12,030
-------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain
(loss) from security
transactions........... (3) (87) 663 164 10,581 653 5,163 5,470 3,108
Net unrealized
appreciation
(depreciation) on
investments............ 14 (2,165) 1,408 59 (23,983) 1,132 63,381 9,750 5,144
-------------------------------------------------------------------------------------
Net Realized and
Unrealized Gain
(Loss) on Investments... 11 (2,252) 2,071 223 (13,402) 1,785 68,544 15,220 8,252
-------------------------------------------------------------------------------------
NET INCREASE IN NET
ASSETS
RESULTING FROM
OPERATIONS.............. $3,403 $1,151 $7,604 $1,104 $6,830 $1,790 $74,794 $34,121 $20,282
-------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
64
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1998
(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>
INVESTMENT INCOME
Dividends.............. $507 $147 $4,853 $11,985 $117 $87 $52 $21 $154
----------------------------------------------------------------------------------
Net Investment Income... 507 147 4,853 11,985 117 87 52 21 154
----------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain
(loss) from security
transactions........... 369 19 11,629 5,435 (1,951) 8 96 (64) 183
Net unrealized
appreciation
(depreciation) on
investments............ 1,989 13 43,404 (10,085) (935) 72 460 44 366
----------------------------------------------------------------------------------
Net Realized and
Unrealized Gain
(Loss) on Investments... 2,358 32 55,033 (4,650) (2,886) 80 556 (20) 549
----------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS.............. $2,865 $179 $59,886 $7,335 $(2,769) $167 $608 $1 $703
----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
65
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
(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.. $3,392 $3,403 $5,533 $881 $20,232 $5 $6,250 $18,901 $12,030
Net realized gain
(loss) from security
transactions........... (3) (87) 663 164 10,581 653 5,163 5,470 3,108
Net unrealized
appreciation
(depreciation) on
investments............ 14 (2,165) 1,408 59 (23,983) 1,132 63,381 9,750 5,144
------------------------------------------------------------------------------------------
Net Increase in Net
Assets
Resulting from
Operations.............. 3,403 1,151 7,604 1,104 6,830 1,790 74,794 34,121 20,282
------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS
FROM POLICY TRANSACTIONS
Transfer of net
premiums............... 164,872 7,612 13,456 2,186 31,972 4,086 29,295 24,939 14,554
Transfers--policy
charges and
deductions............. (6,168) (2,255) (3,939) (699) (10,609) (969) (9,146) (7,949) (5,260)
Transfers in (from
other variable
accounts).............. 268,634 34,691 52,698 10,097 89,840 20,958 82,877 46,109 13,875
Transfers out (to other
variable accounts)..... (399,943) (29,075) (36,135) (5,218) (87,886) (16,962) (53,981) (35,074) (17,159)
Transfers--other....... (13,775) (2,461) (4,332) (742) (10,466) (610) (7,000) (5,765) (5,646)
------------------------------------------------------------------------------------------
Net Increase in Net
Assets Derived
from Policy
Transactions............ 13,620 8,512 21,748 5,624 12,851 6,503 42,045 22,260 364
------------------------------------------------------------------------------------------
NET INCREASE IN NET
ASSETS.................. 17,023 9,663 29,352 6,728 19,681 8,293 116,839 56,381 20,646
------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year....... 52,084 33,707 72,512 10,421 179,989 9,473 110,438 131,486 113,352
------------------------------------------------------------------------------------------
End of Year............. $69,107 $43,370 $101,864 $17,149 $199,670 $17,766 $227,277 $187,867 $133,998
------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
66
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1998
(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>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS
Net investment income.. $507 $147 $4,853 $11,985 $117 $87 $52 $21 $154
Net realized gain
(loss) from security
transactions........... 369 19 11,629 5,435 (1,951) 8 96 (64) 183
Net unrealized
appreciation
(depreciation) on
investments............ 1,989 13 43,404 (10,085) (935) 72 460 44 366
-----------------------------------------------------------------------------------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations.............. 2,865 179 59,886 7,335 (2,769) 167 608 1 703
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS
FROM POLICY TRANSACTIONS
Transfer of net
premiums............... 2,976 1,056 44,705 28,077 3,183 238 408 1,305 1,358
Transfers--policy
charges and
deductions............. (633) (197) (12,955) (8,359) (663) (62) (93) (245) (156)
Transfers in (from
other variable
accounts).............. 17,627 6,550 108,028 71,891 27,300 749 2,159 1,700 1,697
Transfers out (to other
variable accounts)..... (8,527) (2,820) (73,002) (64,225) (25,040) (97) (880) (1,374) (481)
Transfers--other....... (432) (171) (10,763) (6,520) (355) (12) (37) (44) 111
-----------------------------------------------------------------------------------
Net Increase in Net
Assets Derived
from Policy
Transactions............ 11,011 4,418 56,013 20,864 4,425 816 1,557 1,342 2,529
-----------------------------------------------------------------------------------
NET INCREASE IN NET
ASSETS.................. 13,876 4,597 115,899 28,199 1,656 983 2,165 1,343 3,232
-----------------------------------------------------------------------------------
NET ASSETS
Beginning of Year....... 4,190 685 187,288 128,941 8,416 539 783 3,109 1,754
-----------------------------------------------------------------------------------
End of Year............. $18,066 $5,282 $303,187 $157,140 $10,072 $1,522 $2,948 $4,452 $4,986
-----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
67
<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
68
<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
Assets 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
69
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Pacific Select Exec Separate Account (the "Separate Account") is
registered as a unit investment trust under the Investment Company Act of 1940,
as amended, and during 1998 was 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 in Section B of this report or provided
separately and should be read in conjunction with the Separate Account's
financial statements.
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 B-58) 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 Funds are valued at the reported net asset values
of the respective portfolios. Valuation of securities held by the Funds is
discussed in the notes to their financial statements.
B. Security Transactions
Transactions are recorded on the trade date. Realized gains and losses on
sales of investments are determined on the basis of identified cost.
C. Federal Income Taxes
The operations of the Separate Account will be reported on the Federal income
tax return of Pacific 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 1998, the Funds declared dividends for each portfolio. The amounts
accrued by the Separate Account for its share of the dividends were reinvested
in additional full and fractional shares of the related portfolio.
3. CHARGES AND EXPENSES
With respect to variable life insurance policies funded by the Separate
Account, Pacific 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,
serves as principal underwriter of variable life insurance policies funded by
interests in the Separate Account, without remuneration from the Separate
Account.
70
<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,
1998 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
investments at
beginning of year $52,208 $33,305 $69,581 $10,008 $143,503 $9,176
Add:Total net proceeds
from policy
transactions 180,669 23,481 32,416 8,675 56,862 15,473
Reinvested
distributions from
the Funds:
(a) Net investment
income 3,392 3,082 4,503 663 214 5
(b) Net realized gain 321 1,030 218 20,018
---------------------------------------------------------------
Sub-Total 236,269 60,189 107,530 19,564 220,597 24,654
Less:Cost of
investments disposed
during the year 167,051 15,055 10,005 2,887 33,430 8,316
---------------------------------------------------------------
Total cost of
investments at end of
year 69,218 45,134 97,525 16,677 187,167 16,338
Add:Unrealized
appreciation
(depreciation) (111) (1,764) 4,339 472 12,503 1,428
---------------------------------------------------------------
Total market value of
investments at end of
year $69,107 $43,370 $101,864 $17,149 $199,670 $17,766
---------------------------------------------------------------
<CAPTION>
Growth Equity Multi- Bond and Equity
LT Income Strategy Equity Income Index
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total cost of
investments at
beginning of year $99,059 $100,762 $97,141 $4,174 $666 $140,325
Add:Total net proceeds
from policy
transactions 60,881 40,603 16,738 15,633 5,455 84,675
Reinvested
distributions from
the Funds:
(a) Net investment
income 327 1,300 3,405 40 145 3,133
(b) Net realized gain 5,923 17,601 8,625 467 2 1,720
---------------------------------------------------------------
Sub-Total 166,190 160,266 125,909 20,314 6,268 229,853
Less:Cost of
investments disposed
during the year 13,674 12,873 13,266 4,253 1,018 17,033
---------------------------------------------------------------
Total cost of
investments at end of
year 152,516 147,393 112,643 16,061 5,250 212,820
Add:Unrealized
appreciation 74,761 40,474 21,355 2,005 32 90,367
---------------------------------------------------------------
Total market value of
investments at end of
year $227,277 $187,867 $133,998 $18,066 $5,282 $303,187
---------------------------------------------------------------
<CAPTION>
Inter- Emerging
national Markets I II III IV
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total cost of
investments at
beginning of year $115,000 $9,098 $544 $762 $2,892 $1,571
Add:Total net proceeds
from policy
transactions 47,705 9,932 1,047 1,994 2,546 3,239
Reinvested
distributions from
the Funds:
(a) Net investment
income 1,485 117 87 52 146
(b) Net realized gain 10,500 21 8
---------------------------------------------------------------
Sub-Total 174,690 19,147 1,678 2,808 5,459 4,964
Less:Cost of
investments disposed
during the year 21,407 7,458 224 341 1,268 527
---------------------------------------------------------------
Total cost of
investments at end of
year 153,283 11,689 1,454 2,467 4,191 4,437
Add:Unrealized
appreciation
(depreciation) 3,857 (1,617) 68 481 261 549
---------------------------------------------------------------
Total market value of
investments at end of
year $157,140 $10,072 $1,522 $2,948 $4,452 $4,986
</TABLE>
71
<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, 1998
and the selected accumulation unit information as of December 31, 1998 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 3,242,630 1,272,728 3,186,015 479,603 4,678,660 840,837
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 9,998,490 280,788 567,458 95,603 858,593 345,960
(b) Transfers--policy
charges and deductions (373,932) (84,466) (165,049) (30,660) (283,438) (82,024)
(c) Transfers in (from
other variable
accounts) 16,112,581 1,251,759 2,162,298 411,892 2,206,806 1,764,520
(d) Transfers out (to
other variable
accounts) (24,064,758) (1,034,962) (1,475,354) (204,814) (2,150,435) (1,425,259)
(e) Transfers--other (828,850) (87,604) (176,871) (29,124) (256,086) (51,258)
-----------------------------------------------------------------------
Sub-Total 843,531 325,515 912,482 242,897 375,440 551,939
-----------------------------------------------------------------------
Total units outstanding
at end of year 4,086,161 1,598,243 4,098,497 722,500 5,054,100 1,392,776
-----------------------------------------------------------------------
Accumulation Unit
Value:At beginning of
year $16.06 $26.48 $22.76 $21.73 $38.47 $11.27
At end of year $16.91 $27.14 $24.85 $23.74 $39.51 $12.76
<CAPTION>
Growth Equity Multi- Bond and Equity
LT Income Strategy Equity Income Index
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 5,452,479 3,609,629 3,897,779 365,186 57,616 5,696,188
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 1,193,031 621,209 459,357 229,214 83,678 1,213,083
(b) Transfers--policy
charges and deductions (371,549) (198,432) (168,061) (48,132) (15,662) (350,651)
(c) Transfers in (from
other variable
accounts) 3,139,545 984,220 372,455 1,338,126 518,911 2,722,051
(d) Transfers out (to
other variable
accounts) (2,057,690) (741,626) (498,426) (643,218) (223,441) (1,831,867)
(e) Transfers--other (266,828) (121,899) (164,002) (32,588) (13,550) (270,080)
-----------------------------------------------------------------------
Sub-Total 1,636,509 543,472 1,323 843,402 349,936 1,482,536
-----------------------------------------------------------------------
Total units outstanding
at end of year 7,088,988 4,153,101 3,899,102 1,208,588 407,552 7,178,724
-----------------------------------------------------------------------
Accumulation Unit
Value:At beginning of
year $20.25 $36.43 $29.08 $11.47 $11.89 $32.88
At end of year $32.06 $45.24 $34.37 $14.95 $12.96 $42.23
<CAPTION>
Inter- Emerging
national Markets I II III IV
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 6,224,372 871,397 52,300 59,984 243,373 132,506
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 1,264,542 393,994 21,062 27,463 107,709 92,938
(b) Transfers--policy
charges and deductions (378,357) (82,543) (5,624) (6,243) (20,099) (10,607)
(c) Transfers in (from
other variable
accounts) 3,056,270 3,699,775 70,147 145,602 141,760 118,099
(d) Transfers out (to
other variable
accounts) (2,708,392) (3,409,238) (8,799) (56,670) (125,903) (23,033)
(e) Transfers--other (274,952) (48,335) (1,088) (2,384) (4,033) (5,315)
-----------------------------------------------------------------------
Sub-Total 959,111 553,653 75,698 107,768 99,434 172,082
-----------------------------------------------------------------------
Total units outstanding
at end of year 7,183,483 1,425,050 127,998 167,752 342,807 304,588
-----------------------------------------------------------------------
Accumulation Unit
Value:At beginning of
year $20.72 $9.66 $10.31 $13.06 $12.77 $13.23
At end of year $21.88 $7.07 $11.89 $17.57 $12.99 $16.37
</TABLE>
- ------
** Accumulation Unit: unit of measure used to calculate the value of a Policy
Owner's interest in a Variable Account during the accumulation period.
72
<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 and Subsidiaries (the
"Company") as of December 31, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 1999
73
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1998 1997
- ----------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at estimated fair value:
Fixed maturity securities $13,617.0 $13,938.5
Equity securities 547.5 346.4
Mortgage loans 2,788.7 1,922.1
Real estate 172.7 192.1
Policy loans 3,901.2 3,769.2
Short-term investments 99.9 83.8
Other investments 948.0 432.4
- ----------------------------------------------------------------------------
TOTAL INVESTMENTS 22,075.0 20,684.5
Cash and cash equivalents 150.1 110.4
Deferred policy acquisition costs 889.7 716.9
Accrued investment income 252.3 255.4
Other assets 672.8 636.5
Separate account assets 15,844.0 11,605.1
- ----------------------------------------------------------------------------
TOTAL ASSETS $39,883.9 $34,008.8
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life, annuity and other investment contract
deposits $17,973.0 $16,644.5
Future policy benefits 2,131.6 2,133.8
Short-term and long-term debt 445.1 253.6
Other liabilities 1,162.2 1,224.5
Separate account liabilities 15,844.0 11,605.1
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 37,555.9 31,861.5
- ------------------------------------------------------------------------------
Commitments and contingencies
Stockholder's Equity:
Common stock - $50 par value; 600,000 shares authorized,
issued and outstanding 30.0 30.0
Paid-in capital 126.2 120.1
Retained earnings 1,663.5 1,422.0
Accumulated other comprehensive income -
Unrealized gain on securities available for sale, net 508.3 575.2
- ------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 2,328.0 2,147.3
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $39,883.9 $34,008.8
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
74
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Policy fees from universal life, annuity and other
investment contract deposits $ 525.3 $ 431.2 $ 348.6
Insurance premiums 514.7 504.3 465.4
Net investment income 1,293.8 1,225.3 1,087.3
Net realized capital gains 38.7 85.3 44.0
Commission revenue 220.1 146.6 79.6
Other income 216.6 181.7 123.1
- ------------------------------------------------------------------------------
TOTAL REVENUES 2,809.2 2,574.4 2,148.0
- ------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and
other investment contract deposits 880.8 797.8 665.0
Policy benefits paid or provided 719.5 675.7 652.9
Commission expenses 386.1 303.7 233.6
Operating expenses 467.8 507.7 316.2
- ------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,454.2 2,284.9 1,867.7
- ------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 355.0 289.5 280.3
Provision for income taxes 113.5 113.5 113.7
- ------------------------------------------------------------------------------
NET INCOME $ 241.5 $ 176.0 $ 166.6
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
75
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
- -------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1996 $1,151.4 $ 482.0 $1,633.4
Comprehensive income:
Net income 166.6 166.6
Change in unrealized gain on
securities available for sale,
net (102.8) (102.8)
--------
Total comprehensive income 63.8
- -------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1996 1,318.0 379.2 1,697.2
Comprehensive income:
Net income 176.0 176.0
Change in unrealized gain on
securities available for sale,
net 196.0 196.0
--------
Total comprehensive income 372.0
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
Comprehensive income:
Net income 241.5 241.5
Change in unrealized gain on
securities available for sale,
net (66.9) (66.9)
--------
Total comprehensive income 174.6
Issuance of partnership units by
affiliate 6.1 6.1
- -------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1998 0.6 $30.0 $126.2 $1,663.5 $ 508.3 $2,328.0
- -------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
76
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 241.5 $ 176.0 $ 166.6
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization on fixed maturities (39.4) (26.6) (45.2)
Depreciation and other amortization 26.0 38.3 43.8
Deferred income taxes (20.6) (14.4) (49.8)
Net realized capital gains (38.7) (85.3) (44.0)
Net change in deferred policy acquisition
costs (172.8) (185.4) (140.4)
Interest credited to universal life, annuity
and other investment contract deposits 880.8 797.8 665.0
Change in accrued investment income 3.1 (52.9) (3.7)
Change in future policy benefits (2.2) (372.7) 62.3
Change in other assets and liabilities 99.4 577.4 158.1
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 977.1 852.2 812.7
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (4,302.3) (6,272.3) (4,525.0)
Sales 2,201.9 2,224.1 2,511.0
Maturities and repayments 2,196.1 2,394.6 1,184.7
Repayments of mortgage loans 334.9 179.3 220.4
Proceeds from sales of mortgage loans and real
estate 43.3 104.4 14.5
Purchases of mortgage loans and real estate (1,246.3) (643.7) (414.3)
Distributions from partnerships 119.5 91.6 78.8
Change in policy loans (132.0) (637.4) (338.5)
Change in short-term investments (16.1) (17.7) 37.2
Other investing activity, net (564.2) 43.5 (144.5)
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,365.2) (2,533.6) (1,375.7)
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
77
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1998 1997 1996
- ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 4,007.0 $ 4,373.6 $ 2,105.0
Withdrawals (3,770.7) (2,667.3) (1,756.6)
Net change in short-term debt 191.5 8.5 42.5
Repayment of long-term debt (25.0) (5.0)
Initial capitalization of Pacific Mutual
Holding Company (2.0)
Dividend paid to parent (5.0)
- ------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 427.8 1,682.8 385.9
- ------------------------------------------------------------------------------
Net change in cash and cash equivalents 39.7 1.4 (177.1)
Cash and cash equivalents, beginning of year 110.4 109.0 286.1
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 150.1 $ 110.4 $ 109.0
- ------------------------------------------------------------------------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
In connection with the acquisition of an insurance block of business in 1997,
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 in 1997, 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 to paid-in
capital.
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<S> <C> <C> <C>
Income taxes paid $127.9 $153.0 $189.6
Interest paid $ 24.0 $ 26.1 $ 27.3
- ---------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
78
<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 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 and
institutional products, group employee benefits, broker-dealer operations
and investment management and advisory services. Pacific Life's 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, broker-dealer operations and
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 wholly-owned noninsurance subsidiaries, Pacific
Asset Management LLC ("PAM"), Pacific Mutual Distributors, Inc. ("PMD"),
Pacific Mutual Realty Finance, Inc. and Pacific Mezzanine Associates,
L.L.C. (50% owned). 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.
NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," and
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits."
79
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS No. 130 established standards for the reporting and display of
comprehensive income and its components in financial statements (Note 11).
SFAS No. 131 established standards for the way information about operating
segments is reported in financial statements. It also established standards
for related disclosures about products and services, geographic areas and
major customers (Note 13). SFAS No. 132 standardized disclosure
requirements for employers' pensions and other retiree benefits (Note 14).
Adoption of these accounting standards did not have a significant impact on
the consolidated financial position or results of operations of the
Company.
On January 1, 1998, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("SOP") 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 provides guidance on when a liability should be
recognized for guaranty fund and other assessments and how to measure the
liability. Adoption of this accounting standard did not have a significant
impact on the consolidated financial position or results of operations of
the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. SFAS No.
133 establishes accounting and reporting standards for derivative
instruments and hedging activities. The Company currently plans to adopt
SFAS No. 133 on January 1, 2000. The impact on the consolidated financial
position or results of operations of the Company due to the adoption of
this statement has not yet been determined.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires that certain costs incurred in developing internal use computer
software be capitalized. The Company currently plans to adopt SOP 98-1 on
January 1, 1999. The adoption is not expected to have a significant impact
on the consolidated financial position or results of operations of the
Company.
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 on
the accompanying consolidated statements of operations.
Realized gains and losses on investment transactions are determined on a
specific identification basis and are included in net realized capital
gains on the accompanying consolidated statements of operations.
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 on the accompanying consolidated statements of financial condition,
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 included in net
realized capital gains on the accompanying consolidated statements of
operations.
Mortgage loans and policy loans are stated at unpaid principal balances.
80
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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% as of December 31,
1997. During 1998, the Company increased its investment in PIMCO Advisors
to reflect its pro rata share of the increase to PIMCO Advisors partners'
capital due to the issuance of additional partnership units. For the year
ended December 31, 1998, there was a direct increase to the Company's
stockholder's equity of $6.1 million. During 1998, the Company also
acquired the beneficial ownership of additional partnership units which
increased its ownership to 33% as of December 31, 1998. Deferred taxes
resulting from these transactions have been included in the accompanying
consolidated financial statements. The Company's investment in PIMCO
Advisors, 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 recognized, using assumptions consistent
with those used in computing policy reserves. For the years ended December
31, 1998, 1997 and 1996, net amortization of deferred policy acquisition
costs included in commission expenses amounted to $73.0 million,
$50.2 million and $42.6 million, respectively, and included in operating
expenses amounted to $33.5 million, $29.4 million and $27.4 million,
respectively, on the accompanying consolidated statements of operations.
PRESENT VALUE OF FUTURE PROFITS
In connection with the rehabilitation of First Capital Life Insurance
Company ("FCL"-Note 4), an asset was established which represented the
present value of estimated future profits of the acquired business. The
future profits were discounted to provide an appropriate rate of return and
were amortized over the rehabilitation plan period. Amortization for the
years ended December 31, 1997 and 1996 amounted to $16.1 million and
$24.2 million, respectively, and is included in commission expenses on 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.
81
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 1998,
1997 and 1996.
FUTURE POLICY BENEFITS
Life insurance reserves are valued using the net level premium method.
Interest rate assumptions ranged from 4.5% to 9.3% for 1998, 1997 and 1996.
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. Dividends to policyholders are
included in policy benefits paid or provided on the accompanying
consolidated statements of operations.
Dividends are accrued 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, 1998
and 1997, participating experience rated policies paying dividends
represented approximately 1% of direct written life insurance in force.
REVENUES AND EXPENSES
Insurance premiums are recognized as revenue when due. Benefits and
expenses, other than deferred policy acquisition costs, are recognized when
incurred.
Generally, receipts for universal life, annuities and other investment
contracts are classified as deposits. Policy fees from these contracts
include mortality charges, surrender charges and earned policy service
fees. Expenses related to these products include interest credited to
account balances and benefit amounts in excess of account balances.
Commission revenue from Pacific Life's broker-dealer subsidiaries is
generally recorded on the trade date.
DEPRECIATION AND AMORTIZATION
Depreciation of investment real estate is computed on the straight-line
method over the estimated useful lives which range from 5 to 30 years.
Certain other assets are depreciated or amortized on the straight-line
method over 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. Prior to
1998, Pacific Life was subject to an equity tax calculated by a prescribed
formula that incorporated a differential earnings rate between stock and
mutual life insurance companies. In December 1998, the Internal Revenue
Service released Revenue Ruling 99-3 which exempts Pacific Life from this
tax for taxable years beginning in 1998. 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.
82
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 6 and
7 has 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 that is subject to various
risks and uncertainties. Such risks and uncertainties include, but are not
limited to, 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. Additionally, the Company includes contractual provisions
limiting withdrawal rights for certain of its products. A substantial
portion of the Company's liabilities are not subject to surrender or can be
surrendered only after deduction of a surrender charge or a market value
adjustment.
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 approval procedures, limits and ongoing monitoring. Real estate and
mortgage loan investment risks are limited by diversification of geographic
location and property type. Management does not believe that significant
concentrations of credit risk 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. The Company manages this risk through credit approvals and
limits on exposure to any specific counterparty. 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 that 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,
cases might be decided or future legislation might be enacted, or if
decided or enacted, whether such cases or 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 1998
financial statement presentation.
83
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 on the accompanying consolidated financial
statements:
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------
(In Millions)
<S> <C> <C>
Statutory capital and surplus $1,157.4 $ 944.8
Deferred policy acquisition costs 908.0 730.7
Unrealized gain on securities available for
sale, net 508.3 575.2
Deferred income tax 307.1 289.2
Asset valuation reserve 298.7 252.4
Non admitted assets 40.4 25.2
Subsidiary equity 26.5 60.4
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (654.4) (511.5)
Other (114.4) (69.5)
------------------
Stockholder's equity as reported herein $2,328.0 $2,147.3
------------------
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $ 187.6 $ 121.5 $113.1
Deferred policy acquisition costs 177.3 160.4 111.2
Interest maintenance reserve 24.1 7.6 3.8
Deferred income tax 17.9 41.2 70.9
Net realized gain (loss) on trading
securities 9.2 (5.8) (11.6)
Earnings of subsidiaries (32.8) (40.6) (33.0)
Insurance and annuity reserves (145.1) (107.0) (91.3)
Other 3.3 (1.3) 3.5
------------------------
Net income as reported herein $ 241.5 $ 176.0 $166.6
------------------------
</TABLE>
84
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS (Continued)
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, 1998 and 1997, Pacific Life
and PM Group exceeded the minimum risk-based capital requirements.
CODIFICATION
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). The Codification, which is intended to
standardize regulatory accounting and reporting for the insurance industry,
is proposed to be effective January 1, 2001. However, statutory accounting
principles will continue to be established by individual state laws and
permitted practices and it is uncertain when, or if, the states of
California and Arizona will require adoption of Codification for the
preparation of statutory financial statements. The Company has not
finalized the quantification of the effects of Codification on its
statutory financial statements.
DIVIDEND RESTRICTIONS
Dividend payments by Pacific Life to its parent in any 12-month period
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 1998
statutory results, Pacific Life could pay approximately $240.9 million in
dividends in 1999 without prior approval. No dividends were paid during
1998.
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. PM Group received approval to pay
dividends of $14 million and $25 million for the years ended December 31,
1997 and 1996 of which $8 million and $18 million, respectively, were
considered extraordinary. No dividends were paid during 1998.
PERMITTED PRACTICE
As discussed in Note 1, the Company beneficially owns approximately 33% of
the outstanding General and Limited Partner units in PIMCO Advisors L.P. as
of December 31, 1998. Net cash distributions received on these units are
recorded as income as permitted by the Insurance Department of the State of
California for statutory accounting purposes.
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 had an
experience based dividend scale for 1997. The Closed Block was 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
85
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CLOSED BLOCK (Continued)
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 $311.6 million and $316.2 million and total liabilities of
$352.8 million and $356.0 million for the Closed Block are included in
other assets and other liabilities, respectively, on the accompanying
consolidated statements of financial condition as of December 31, 1998 and
1997, respectively. The contribution to income from the Closed Block of
$5.1 million and $5.7 million, consisting of net revenues and expenses
generated by the Closed Block, is included in other income on the
accompanying consolidated statements of operations for the years ended
December 31, 1998 and 1997, respectively.
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 BLOCKS 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
("Confederation Life"), 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.
The remaining cost of acquiring this business, representing the amount
equal to the excess of the estimated fair value of the reserves assumed
over the estimated fair value of the assets acquired, amounted to $36.5
million and $43.4 million as of December 31, 1998 and 1997, respectively,
and is included in deferred policy acquisition costs on the accompanying
consolidated statements of financial condition. Amortization of this asset
for the years ended December 31, 1998 and 1997 was $7.7 million and $0.9
million, respectively, and is included in commission expenses on the
accompanying consolidated statements of operations.
In January 1999, Pacific Life signed a definitive agreement to acquire a
payout annuity block of business from Confederation Life. This block of
business consists of approximately 18,000 policies, having reserves
amounting to approximately $2.0 billion. The transaction is subject to
various regulatory and Court approvals and is anticipated to close during
1999.
86
<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, 1998:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 94.0 $ 24.9 $ 118.9
Obligations of states, political
subdivisions and foreign govern-
ments 726.0 118.0 $ 16.1 827.9
Corporate securities 7,766.0 438.0 122.4 8,081.6
Mortgage-backed and asset-backed
securities 4,391.7 139.6 52.9 4,478.4
Redeemable preferred stock 104.0 11.3 5.1 110.2
--------------------------------------
Total fixed maturity securities $13,081.7 $ 731.8 $ 196.5 $13,617.0
--------------------------------------
Total equity securities $ 364.4 $ 202.6 $ 19.5 $ 547.5
--------------------------------------
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 7,658.6 594.3 72.7 8,180.2
Mortgage-backed and asset-backed
securities 4,597.2 147.1 15.5 4,728.8
Redeemable preferred stock 102.3 10.3 2.6 110.0
--------------------------------------
Total fixed maturity securities $13,173.7 $ 858.6 $ 93.8 $13,938.5
--------------------------------------
Total equity securities $ 226.4 $ 122.5 $ 2.5 $ 346.4
--------------------------------------
</TABLE>
87
<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 value of fixed maturity securities as
of December 31, 1998, 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 $ 479.8 $ 482.6
Due after one year through five years 3,131.7 3,236.6
Due after five years through ten years 2,923.1 3,033.4
Due after ten years 2,155.4 2,386.0
--------------------
8,690.0 9,138.6
Mortgage-backed and asset-backed
securities 4,391.7 4,478.4
--------------------
Total $13,081.7 $13,617.0
--------------------
</TABLE>
Gross gains of $110.6 million, $69.1 million and $89.3 million and gross
losses of $35.9 million, $32.9 million and $29.9 million on securities
available for sale were realized during 1998, 1997 and 1996, respectively.
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
--------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $ 915.9 $ 925.4 $ 820.7
Equity securities 17.5 12.8 17.8
Mortgage loans 174.6 129.5 109.4
Real estate 38.1 53.6 51.3
Policy loans 154.5 137.1 113.0
Other 100.2 75.5 82.6
--------------------------
Gross investment income 1,400.8 1,333.9 1,194.8
Investment expense 107.0 108.6 107.5
--------------------------
Net investment income $1,293.8 $1,225.3 $1,087.3
--------------------------
</TABLE>
88
<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 on investments in available for sale
and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale securities:
Fixed maturity $(229.5) $223.5 $(168.6)
Equity 63.1 85.7 6.3
------------------------
Total $(166.4) $309.2 $(162.3)
------------------------
Trading securities:
Fixed maturity $ (2.5) $ (1.1) $ (0.5)
Equity 0.2
------------------------
Total $ (2.5) $ (1.1) $ (0.3)
------------------------
</TABLE>
As of December 31, 1998 and 1997, investments in fixed maturity securities
with a carrying value of $13.0 million and $14.4 million, respectively,
were on deposit with state insurance departments to satisfy regulatory
requirements.
No investment, aggregated by issuer, exceeded 10% of total stockholder's
equity as of December 31, 1998.
7. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity
securities (Note 6) $14,164.5 $14,164.5 $14,284.9 $14,284.9
Mortgage loans 2,788.7 2,911.2 1,922.1 1,990.9
Policy loans 3,901.2 3,901.2 3,769.2 3,769.2
Cash and cash equivalents 150.1 150.1 110.4 110.4
Derivative financial
instruments:
Interest rate floors, caps,
options and swaptions 67.9 67.9 22.9 22.9
Interest rate swap contracts 0.5 0.5
Foreign currency derivatives 108.2 108.2 4.1 4.1
Liabilities:
Guaranteed interest contracts 5,665.3 5,751.0 3,982.0 4,035.7
Deposit liabilities 599.9 626.7 733.5 737.4
Annuity liabilities 1,448.0 1,430.1 1,883.5 1,872.6
Short-term debt 295.5 295.5 104.0 104.0
Surplus notes 149.6 176.0 149.6 164.7
Derivative financial
instruments:
Options written 1.6 1.6
Interest rate swap contracts 23.3 23.3
Asset swap contracts 3.6 3.6 12.6 12.6
Credit default and total
return swaps 9.1 9.1 4.0 4.0
</TABLE>
89
<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, 1998 and 1997:
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 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 at that time. 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.
90
<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, 1998:
Interest rate floors, caps,
options and swaptions $2,730.0 $ 160.6 $ 237.6 $2,653.0
Interest rate swap
contracts 2,026.1 960.8 378.3 2,608.6
Asset swap contracts 67.4 30.3 34.5 63.2
Credit default and total
return swaps 288.5 771.5 410.4 649.6
Financial futures contracts 214.1 4,108.4 3,713.6 608.9
Foreign currency
derivatives 207.0 959.4 35.2 1,131.2
December 31, 1997:
Interest rate floors, caps,
options and swaptions 4,538.2 1,644.2 3,452.4 2,730.0
Interest rate swap
contracts 988.3 1,356.0 318.2 2,026.1
Asset swap contracts 30.0 47.4 10.0 67.4
Credit default 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
derivatives 41.4 217.0 51.4 207.0
</TABLE>
Interest Rate Floors, Caps, Options and Swaptions
The Company uses interest rate floors, caps, options and swaptions to hedge
against fluctuations in interest rates and to take positions in its total
return portfolios. Interest rate floor agreements entitle the Company to
receive the difference when the current rate of the underlying index is
below the strike rate. Interest rate cap agreements entitle the Company to
receive the difference when the current rate of the underlying index is
above the strike rate. 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. Floors, caps and options are
reported as assets and options written are reported as liabilities in the
accompanying 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 in the accompanying consolidated
statements of operations over the term of the agreement. Interest rate
floors and caps, options and swaptions mature during the years 1999 through
2017.
Interest Rate Swap Contracts
The Company uses interest rate swaps to manage interest rate risk and to
take positions in its total return portfolios. 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 the years 1999 through 2021.
91
<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 fixed income
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 the years 2000
through 2005.
Credit Default and Total Return Swaps
The Company uses credit default and total return swaps to take advantage of
market opportunities. Credit default swaps involve the receipt of fixed
rate payments in exchange for assuming potential credit exposure 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 default and total return swaps mature during the years
1999 through 2028.
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 by delivery of the financial instrument.
Price changes on futures are settled daily through the required 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 losses and gains, respectively, on the related
foreign currency denominated 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 the years 1999 through 2013.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
The estimated fair value of fixed maturity guaranteed interest contracts is
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.
92
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (Continued)
SHORT-TERM DEBT
The carrying amount of short-term debt is a reasonable estimate of its fair
value because the interest rates are variable and based on current market
values.
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 401(k) plans totaling $1.6
billion as of December 31, 1998, pursuant to the terms of which the 401(k)
plan 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
The detail of universal life, annuity and other investment contract deposit
liabilities is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------------
(In Millions)
<S> <C> <C>
Universal life $10,218.0 $10,012.0
Annuity 1,429.0 1,817.4
Other investment contract deposits 6,326.0 4,815.1
------------------------
$17,973.0 $16,644.5
------------------------
</TABLE>
The detail of universal life, annuity and other investment contract
deposits policy fees and interest credited net of reinsurance ceded is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
--------------------------
(In Millions)
<S> <C> <C> <C>
Policy fees:
Universal life $ 439.9 $ 377.5 $ 318.4
Annuity 82.1 50.3 26.6
Other investment contract deposits 3.3 3.4 3.6
---------------------------
Total policy fees $ 525.3 $ 431.2 $ 348.6
---------------------------
Interest credited:
Universal life $ 440.8 $ 368.2 $ 284.3
Annuity 79.8 116.8 138.7
Other investment contract deposits 360.2 312.8 242.0
---------------------------
Total interest credited $ 880.8 $ 797.8 $ 665.0
---------------------------
</TABLE>
93
<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.
Principal of $234.9 million and interest payable of $0.6 million was
outstanding as of December 31, 1998, bearing an average interest rate of
5.22%, and was repaid in January 1999. There was no commercial paper debt
outstanding as of December 31, 1997. Pacific Life has a revolving credit
facility available of $350 million as of December 31, 1998 and 1997. There
was no debt outstanding under the revolving credit facility as of December
31, 1998 and 1997.
PAM had bank borrowings outstanding of $60 million and $104 million as of
December 31, 1998 and 1997, respectively. The interest rate averaged 5.8%,
5.8% and 5.6% for the years ended December 31, 1998, 1997 and 1996,
respectively. Outstanding debt is due and payable in 1999 and subject to
renewal. The borrowing limit for PAM as of December 31, 1998 and 1997 was
$200 million.
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, 1998,
1997 and 1996 and is included in net investment income on the accompanying
consolidated statements of operations.
10. INCOME TAXES
The Company accounts for income taxes using the liability method. 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 tax law is enacted. Recording the effects of a 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>
Years Ended December 31,
1998 1997 1996
----------------------------
<S> <C> <C> <C>
(In Millions)
Current $ 134.1 $ 127.9 $ 163.5
Deferred (20.6) (14.4) (49.8)
----------------------------
$ 113.5 $ 113.5 $ 113.7
----------------------------
</TABLE>
94
<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,
1998 1997 1996
----------------------------
(In Millions)
<S> <C> <C> <C>
Non deductible reserves $ 28.2 $ (27.6) $ (6.4)
Duration hedging 20.8 (2.6) (14.9)
Partnership income 20.8
Deferred policy acquisition costs (12.6) (18.0) 2.1
Investment valuation (24.5) 3.9 (7.3)
Policyholder reserves (29.5) 20.1 (28.5)
Other (2.6) 9.8 5.2
----------------------------
Deferred taxes from operations 0.6 (14.4) (49.8)
Release of subsidiary deferred taxes (21.2)
----------------------------
Deferred tax provision $ (20.6) $ (14.4) $ (49.8)
----------------------------
</TABLE>
The Company's acquisition of a controlling interest in a subsidiary allowed
such subsidiary to be included in PMHC's consolidated income tax return.
That inclusion resulted in the release of certain deferred taxes.
A reconciliation of the provision for income taxes based on the prevailing
corporate statutory tax rate to the provision reflected in the consolidated
financial statements is as follows:
<TABLE>
Years Ended December 31,
1998 1997 1996
----------------------------
<S> <C> <C> <C>
(In Millions)
Income taxes at the statutory rate $ 124.2 $ 101.3 $ 98.1
Equity tax (5.0) 5.0 16.3
Amortization of intangibles on equity
method investments 4.3 7.6 6.5
Non-taxable investment income (3.6) (2.6) (2.1)
Other (6.4) 2.2 (5.1)
----------------------------
Provision for income taxes $ 113.5 $ 113.5 $ 113.7
----------------------------
</TABLE>
95
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (Continued)
The net deferred tax liability is comprised of the following tax effected
temporary differences:
<TABLE>
December 31,
1998 1997
----------------
<S> <C> <C>
(In Millions)
Policyholder reserves $ 254.3 $ 224.8
Investment valuation 44.7 20.2
Deferred compensation 33.7 25.9
Dividends 7.6 7.7
Non deductible reserves 5.9 34.1
Depreciation (2.4) (2.5)
Duration hedging (8.5) 12.3
Deferred policy acquisition costs (13.3) (25.9)
Partnership income (20.8)
Other (1.4) 3.8
----------------
Deferred taxes from operations 299.8 300.4
Deferred taxes assumed in acquisition of
subsidiary 4.8
Issuance of partnership units by affiliate (74.9) (47.9)
Unrealized gain on securities available for
sale (272.3) (307.8)
----------------
Net deferred tax liability $ (42.6) $ (55.3)
----------------
</TABLE>
96
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMPREHENSIVE INCOME
The Company displays comprehensive income and its components in the
accompanying consolidated statements of stockholder's equity and the note
herein. The Company's only component of other comprehensive income,
unrealized gain (loss) on securities available for sale, is shown net of
reclassification adjustments, as defined by SFAS No. 130, and net of income
tax in the accompanying consolidated statements of stockholder's equity.
The disclosure of the gross components of other comprehensive income is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---------------------------
<S> <C> <C> <C>
(In Millions)
Calculation of Holding Gain (Loss):
-----------------------------------
Gross holding gain (loss) on
securities
available for sale $ (13.4) $ 338.2 $ (75.7)
Tax (expense) benefit 4.5 (117.1) 26.5
---------------------------
Holding gain (loss) on securities
available for sale, net of tax $ (8.9) $ 221.1 $ (49.2)
---------------------------
Calculation of Reclassification Adjustment:
-------------------------------------------
Realized gain on sale of securities
available for sale $ 89.3 $ 38.9 $ 82.6
Tax expense (31.3) (13.8) (29.0)
---------------------------
Reclassification adjustment, net of tax $ 58.0 $ 25.1 $ 53.6
---------------------------
Amounts Reported in Other Comprehensive Income:
-----------------------------------------------
Holding gain (loss) on securities
available for sale, net of tax $ (8.9) $ 221.1 $ (49.2)
Less reclassification adjustment, net of tax 58.0 25.1 53.6
---------------------------
Net unrealized gain (loss) recognized
in other comprehensive income $ (66.9) $ 196.0 $ (102.8)
---------------------------
</TABLE>
97
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. REINSURANCE
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. 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. 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,
1998 1997
--------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(46.0) $(39.6)
Future policy benefits 108.9 92.2
Unpaid claims 12.5 14.0
Paid claims 24.3 10.2
</TABLE>
As of December 31, 1998, 79% 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,
1998 1997 1996
------------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance premi-
ums $ 82.7 $ 70.7 $ 44.3
Assumed reinsurance included in insurance premiums 17.2 18.1 17.8
Ceded reinsurance netted against policy fees 65.0 77.5 71.0
Ceded reinsurance netted against net investment
income 203.3 204.9 192.5
Ceded reinsurance netted against interest credited 162.8 165.8 155.2
Ceded reinsurance netted against policy benefits 121.3 93.4 56.7
Assumed reinsurance included in policy benefits 17.7 12.7 9.9
</TABLE>
98
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT INFORMATION
The Company's six operating segments are Individual Insurance, Institutional
Products Group, Annuities, Group Employee Benefits, Broker-Dealers and
Investment Management. These segments have been identified based on
differences in products and services offered. All other activity is included
in Corporate and Other.
The Individual Insurance segment offers universal life, variable universal
life and other life insurance products to individuals, small businesses and
corporations through a network of distribution channels that include branch
offices, marketing organizations, national accounts and a national producer
group. The Institutional Products Group segment offers investment and
annuity products to pension fund sponsors and other institutional investors
primarily through its home office marketing team. The Annuities segment
offers variable and fixed annuities to individuals, small businesses and
qualified plans through financial institutions, National Association of
Securities Dealers ("NASD") firms, and regional and national wirehouses.
The Group Employee Benefits segment offers group life, health and dental
insurance, and stop loss insurance products to corporate, government and
labor-management-negotiated plans. The group life, health and dental
insurance is distributed through a network of sales offices and the stop
loss insurance is distributed through a network of third party
administrators. The Broker-Dealers segment includes five NASD registered
firms that provide securities and affiliated insurance brokerage services
and investment advisory services through more than 3,100 registered
representatives. The Investment Management segment is primarily comprised of
the Company's investment in PIMCO Advisors (Note 1). PIMCO Advisors offers a
diversified range of investment products through separately managed
accounts, and institutional, retail and offshore funds.
Corporate and Other primarily includes investment income, expenses and
assets not attributable to the major segments and the operations of the
Company's reinsurance subsidiary located in the United Kingdom. Corporate
and Other also includes the elimination of intersegment revenues, expenses
and assets.
The Company uses the same accounting policies and procedures to measure
segment income and assets as it uses to measure its consolidated net income
and assets. Net investment income and capital gains are allocated based on
invested assets purchased and held as is required for transacting the
business of that segment. Overhead expenses are allocated based on services
provided. Interest expense is allocated based on the short-term borrowing
needs of the segment and is included in net investment income. The income
tax provision is allocated based on each segment's actual tax liability.
Intersegment revenues include commissions paid by the Individual Insurance
segment and the Annuities segment for variable product sales to the Broker-
Dealers segment. Investment Management segment assets have been reduced by
an intersegment note payable of $110 million as of December 31, 1998. The
related intersegment note receivable is included in Corporate and Other
segment assets.
The Company generates substantially all of its revenues and income from
customers located in the United States. Additionally, substantially all of
the Company's assets are located in the United States.
Depreciation expense and capital expenditures are not material and have not
been reported herein. The Company's significant non cash item is interest
credited to universal life, annuity and other investment contract deposits
and is disclosed herein.
99
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT INFORMATION (Continued)
Financial information for each of the business segments is as follows:
<TABLE>
<CAPTION>
Institutional Group
Individual Products Employee Broker- Investment Corporate
Insurance Group Annuities Benefits Dealers Management and Other Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External customers and (In Millions)
other revenue
December 31, 1998 $ 414.6 $ 43.3 $ 124.0 $521.2 $236.1 $ 17.1 $ 17.4 $ 1,373.7
December 31, 1997 379.2 61.6 83.3 480.6 154.0 21.8 3.2 1,183.7
December 31, 1996 335.4 36.8 41.4 431.7 82.2 22.2 5.7 955.4
Intersegment revenues
December 31, 1998 185.3 (185.3) -
December 31, 1997 143.3 (143.3) -
December 31, 1996 98.0 (98.0) -
Net investment income
December 31, 1998 565.7 565.5 88.6 23.1 0.9 8.0 42.0 1,293.8
December 31, 1997 485.2 509.6 149.4 24.9 0.8 6.2 49.2 1,225.3
December 31, 1996 404.1 465.5 149.6 21.9 0.8 4.8 40.6 1,087.3
Net realized capital
gains (losses)
December 31, 1998 3.4 (13.6) 4.6 1.7 4.0 38.6 38.7
December 31, 1997 9.8 12.8 0.6 2.0 20.8 39.3 85.3
December 31, 1996 5.7 5.0 (4.5) 2.3 1.1 34.4 44.0
Net income of equity
method investees
December 31, 1998 103.0 103.0
December 31, 1997 80.1 80.1
December 31, 1996 61.3 61.3
Total revenues
December 31, 1998 983.7 595.2 217.2 546.0 422.3 132.1 (87.3) 2,809.2
December 31, 1997 874.2 584.0 233.3 507.5 298.1 128.9 (51.6) 2,574.4
December 31, 1996 745.2 507.3 186.5 455.9 181.0 89.4 (17.3) 2,148.0
Segment profit (loss)
before income tax
provision
December 31, 1998 151.1 74.6 34.1 10.3 9.9 60.1 14.9 355.0
December 31, 1997 132.4 98.3 23.5 28.8 6.4 24.6 (24.5) 289.5
December 31, 1996 109.3 80.7 (16.5) 26.3 4.3 34.1 42.1 280.3
Income tax provision
(benefit)
December 31, 1998 52.6 21.2 11.3 2.9 4.5 2.1 18.9 113.5
December 31, 1997 55.8 33.9 9.4 9.1 2.7 10.1 (7.5) 113.5
December 31, 1996 44.8 27.5 (0.4) 6.2 1.8 21.5 12.3 113.7
Segment net income
(loss)
December 31, 1998 98.5 53.4 22.8 7.4 5.4 58.0 (4.0) 241.5
December 31, 1997 76.6 64.4 14.1 19.7 3.7 14.5 (17.0) 176.0
December 31, 1996 64.5 53.2 (16.1) 20.1 2.5 12.6 29.8 166.6
Interest credited on
universal life, annuity
and other investment
contract deposits
December 31, 1998 449.6 354.1 71.0 6.1 880.8
December 31, 1997 378.8 299.8 106.2 13.0 797.8
December 31, 1996 290.3 232.9 132.8 9.0 665.0
Segment assets
As of December 31, 1998 14,578.2 15,221.0 8,384.2 361.1 55.8 267.3 1,016.3 39,883.9
As of December 31, 1997 13,426.7 12,241.7 6,310.8 368.6 52.4 305.4 1,303.2 34,008.8
</TABLE>
100
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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 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 mutual funds managed by an
affiliate of Pacific Life.
Components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----------------------------
(In Millions)
<S> <C> <C> <C>
Service cost - benefits earned during
the year $ 4.0 $ 3.6 $ 3.7
Interest cost on projected benefit
obligation 10.9 10.4 9.8
Expected return on plan assets (15.0) (12.8) (11.2)
Amortization of net obligations and
prior service cost (1.4) (1.4) (1.4)
----------------------------
Net periodic pension cost (benefit) $ (1.5) $ (0.2) $ 0.9
----------------------------
</TABLE>
101
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
The following tables set forth the pension plans' reconciliation of benefit
obligation, plan assets and funded status for the years ended:
<TABLE>
December 31,
1998 1997
----------------
(In Millions)
<S> <C> <C>
Change in Benefit Obligation:
-----------------------------
Benefit obligation, beginning of year $157.9 $140.9
Service cost 4.0 3.6
Interest cost 10.9 10.4
Plan expense (0.3) (0.2)
Actuarial loss 11.9 10.1
Benefits paid (6.6) (6.9)
----------------
Benefit obligation, end of year $177.8 $157.9
----------------
Change in Plan Assets:
----------------------
Fair value of plan assets, beginning of year $180.3 $154.2
Actual return on plan assets 21.9 33.2
Plan expense (0.3) (0.2)
Benefits paid (6.6) (6.9)
----------------
Fair value of plan assets, end of year $195.3 $180.3
----------------
Funded Status Reconciliation:
-----------------------------
Funded status $ 17.5 $ 22.4
Unrecognized transition asset (3.6) (4.8)
Unrecognized prior service cost (1.0) (1.2)
Unrecognized actuarial gain (9.7) (14.7)
----------------
Prepaid pension cost $ 3.2 $ 1.7
----------------
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1998 and 1997, the weighted average discount
rate used was 6.5% and 7.0%, respectively, and the rate of increase in
future compensation levels was 5.0% and 5.5%, respectively. The expected
long-term rate of return on plan assets was 8.5% in 1998 and 1997.
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.
POSTRETIREMENT BENEFITS
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
102
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
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 net periodic postretirement benefit cost for the years ended December
31, 1998, 1997 and 1996 is $0.7 million, $0.8 million and $1.4 million,
respectively. As of December 31, 1998 and 1997, the accumulated benefit
obligation is $19.3 million and $20.0 million, respectively. The fair value
of the plan assets as of December 31, 1998 and 1997 is zero. The amount of
accrued benefit cost included in other liabilities on the accompanying
consolidated statements of financial condition is $25.3 million and $26.0
million as of December 31, 1998 and 1997, respectively.
The Plans include both indemnity and HMO coverage. The assumed health care
cost trend rate used in measuring the accumulated benefit obligation for
indemnity coverage was 8% and 9% for 1998 and 1997, respectively, and is
assumed to decrease gradually to 3.5% in 2003 and remain at that level
thereafter. The assumed health care cost trend rate used in measuring the
accumulated benefit obligation for HMO coverage was 7% and 8% for 1998 and
1997, respectively, and is assumed to decrease gradually to 3% 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, 1998 would be increased by 8.0%, and the aggregate of the
service and interest cost components of the net periodic benefit cost would
increase by 7.5%. If the health care cost trend rate assumptions were
decreased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1998 would be decreased by 6.8%, and the aggregate of the
service and interest cost components of the net periodic benefit cost would
decrease by 6.5%.
The discount rate used in determining the accumulated postretirement
benefit obligation is 6.5% and 7.0% for 1998 and 1997, 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 6% 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.
15. 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 $42.1
million, $27.5 million and $14.3 million for the years ended December 31,
1998, 1997 and 1996, respectively. In addition, Pacific Life provides
certain support services to the Pacific Select Fund for an administration
fee which is based on an
103
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. TRANSACTIONS WITH AFFILIATES (Continued)
allocation of actual costs. Such administration fees amounted to $232,000,
$165,000 and $108,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $16.9 million, $11.4 million and $6.2 million
for the years ended December 31, 1998, 1997 and 1996, 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 $40.3 million and
$46.5 million as of December 31, 1998 and 1997, 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, $1.2 million and $1.4 million for the years ended December
31, 1998, 1997 and 1996, respectively.
16. 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.
For the years ended December 31, 1998, 1997 and 1996, approximately $49.4
million, $85.8 million and $35.3 million, respectively, is included in
operating expenses on the accompanying 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.
17. COMMITMENTS
The Company has outstanding commitments to make investments primarily in
fixed maturities, mortgage loans, limited partnerships and other
investments as follows (In Millions):
<TABLE>
<S> <C>
Years Ending December 31:
1999 $172.7
2000-2003 202.1
2004 and thereafter 55.9
------
Total $430.7
------
</TABLE>
The Company leases office facilities under various non-cancelable operating
leases. Aggregate minimum future commitments as of December 31, 1998
through the term of the leases are approximately $37.5 million.
104
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. LITIGATION
The Company was named in civil litigation proceedings similar to other
litigation brought against many life insurers alleging misconduct in the
sale of products, sometimes referred to as market conduct litigation. The
class of plaintiffs included, with some exceptions, all persons who owned,
as of December 31, 1997 (or as of the date of policy termination, if
earlier), individual whole life, universal life or variable life insurance
policies sold by the Company on or after January 1, 1982. The Company has
settled this litigation pursuant to a finalsettlement agreement approved by
the Court in November 1998. The settlement agreement is currently being
implemented. The cost of the settlement has been included in the
accompanying consolidated statements of operations during the three years
ended December 31, 1998.
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.
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105
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<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
--------------------------------------------------------------------------------------------
If you ask us, we'll provide Illustrations 1 through 14, which appear on the following pages, illustrate how
you with different kinds of the death benefit, accumulated value and net cash surrender value of a
illustrations: hypothetical policy may vary over an extended period of time, based on certain
hypothetical rates of return.
. Illustrations similar to
the ones in this prospectus, These illustrations are based on a hypothetical policy with the following
but based on information you characteristics:
give us about the age of the
person to be insured by the . the annual premium is $10,000
policy, their risk class, the . on the policy date, the person insured by the policy is a 45-year old male
face amount, the death benefit select non-smoker
and premium payments.
The death benefit option, death benefit qualification test and the cost of
. Illustrations that show the insurance rates vary by illustration, as follows:
allocation of premium payments
to specified variable --------------------------------------------------------------------------------------------
accounts. These will reflect Face amount Death benefit Qualification test Cost of insurance rate
the expenses of the portfolio --------------------------------------------------------------------------------------------
of the fund in which the Illustration 1 $439,120 Option A Guideline premium Current
variable account invests. Illustration 2 $439,120 Option A Guideline premium Guaranteed
Illustration 3 $186,995 Option B Guideline premium Current
. Illustrations that use a Illustration 4 $186,995 Option B Guideline premium Guaranteed
hypothetical gross rate of Illustration 5 $439,120 Option C Guideline premium Current
return that's greater than Illustration 6 $439,120 Option C Guideline premium Guaranteed
12%. These are available Illustration 7 $439,120 Option A Cash value accumulation Current
only to certain large Illustration 8 $439,120 Option A Cash value accumulation Guaranteed
institutional investors. Illustration 9 $186,995 Option B Cash value accumulation Current
Illustration 10 $186,995 Option B Cash value accumulation Guaranteed
Illustration 11 $439,120 Option C Cash value accumulation Current
Illustration 12 $439,120 Option C Cash value accumulation Guaranteed
Illustration 13 $439,120 Option A Guideline premium Current
Illustration 14 $439,120 Option A Guideline premium Guaranteed
Assumptions
Here are the assumptions we're using:
. The hypothetical rates of return are equal to constant gross annual rates of
0%, 6% and 12%.
. All premium payments are made at the beginning of the policy year.
. An amount equal to the annual premium, after taxes, is invested to earn
interest at 5% compounded annually for the second column of each table, Total
premiums paid plus interest at 5%, which shows the amount that would
accumulate.
. No policy loans have been taken out.
. The amounts shown for the death benefits, accumulated values and net cash
surrender values reflect charges deducted from the variable accounts. This
means that the net investment return on the variable accounts is lower than the
gross investment return on the assets.
. The amounts shown for the death benefits, accumulated values and net cash
surrender values also reflect premium loads, cost of insurance, administrative
charges, mortality and expense risk charges, and surrender charges.
The fund's investment advisory . Illustrations 1 through 12 assume total annual advisory fees and expenses of
fees and expenses are shown in .77% of total average daily net assets of the fund. This reflects average
An overview of Pacific Select advisory fees of .69% and average expenses of .08% based upon fees and expenses
Exec II. of portfolios available as investment options under the policy.
</TABLE>
106
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<TABLE>
<S> <C>
. Illustrations 13 and 14 assume total annual advisory fees and expenses of .72%
of total average daily net assets of the fund. This reflects weighted average
advisory fees of .65% and weighted average expenses of .08% based upon fees
and expenses of portfolios available as investment options under the policy.
. There are no charges against the variable accounts for income taxes but we
reserve the right to impose charges in the future.
Things to keep in mind
Here are a few things to keep in mind when reviewing the illustrations:
. The values shown would be different if, although the gross annual investment
rates of return averaged 0%, 6% or 12% over a period of years, they also rose
above or fell below those averages for individual policy years.
. After we've deducted the charges and fund expenses described in the
assumptions above, the illustrated gross annual investment rates of return of
0%, 6% and 12% correspond to approximate net annual rates of return of -.77%,
5.18%, and 11.14% for illustrations 1 to 12 and -.72%, 5.24%, and 11.19% for
illustrations 13 and 14.
. The amounts shown would be different if unisex insurance rates were used or if
the people insured by the policy were females and insurance rates for females
were used.
. For the illustrations that assume current cost of insurance rates, the amounts
shown would be different if either person insured by the policy was a smoker
and rates for smokers were used.
. The fund expenses used in the illustrations do not include foreign taxes.
Here's what foreign taxes were for the year ended December 31, 1998:
------------------------------------------------
Percentage of average
Portfolio daily net assets
------------------------------------------------
Aggressive Equity 0.01%
Growth LT 0.01%
Equity Income 0.01%
Equity Index 0.01%
International 0.23%
Emerging Markets 0.26%
------------------------------------------------
107
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<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
-------------------------------------------------------------------------------
Illustration 1
Death benefit Option A and guideline premium test at current cost of insurance
rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:A
GUIDELINE PREMIUM TEST
FACE AMOUNT:$439,120
MALE SELECT NONSMOKER ISSUE AGE 45
ANNUAL PREMIUM:$10,000
------------------------------------------------------------------------------
Flexible premium Total
variable universal life premiums End of year DEATH BENEFIT assuming
Illustration of death benefits, accumulated End of paid plus hypothetical gross annual investment
values and net cash surrender values. policy interest at return of
year 5% 0% 6% 12%
All premium payments are illustrated as if ------------------------------------------------------------------------------
made at the beginning of the policy year. 1 $10,500 $439,120 $439,120 $439,120
2 $21,525 $439,120 $439,120 $439,120
This illustration assumes no policy loans or 3 $33,101 $439,120 $439,120 $439,120
partial withdrawals have been made. 4 $45,256 $439,120 $439,120 $439,120
5 $58,019 $439,120 $439,120 $439,120
The death benefits, accumulated values and 6 $71,420 $439,120 $439,120 $439,120
cash surrender values will differ if 7 $85,491 $439,120 $439,120 $439,120
premiums are paid in different amounts or 8 $100,266 $439,120 $439,120 $439,120
frequencies. 9 $115,779 $439,120 $439,120 $439,120
10 $132,068 $439,120 $439,120 $439,120
The hypothetical investment rates shown 15 $226,575 $439,120 $439,120 $439,120
above and elsewhere in this prospectus are 20 $347,193 $439,120 $439,120 $646,489
illustrative only and should not be 25 $501,135 $439,120 $439,120 $1,104,065
interpreted as a representation of past or 30 $697,608 $439,120 $572,027 $1,775,987
future investment results. Actual rates of 35 $948,363 $439,120 $772,653 $2,997,053
return may be more or less than those shown ------------------------------------------------------------------------------
and will depend on a number of factors, End of year End of year
including the investment allocations made to ACCUMULATED VALUE NET CASH SURRENDER VALUE
variable accounts by the owner and the End of assuming hypothetical gross assuming hypothetical gross
experience of the accounts. No representation policy annual investment return of annual investment return of
can be made by us, the separate account or year 0% 6% 12% 0% 6% 12%
the fund that these hypothetical rates of ------------------------------------------------------------------------------
return can be achieved for any one year or 1 $7,033 $7,517 $8,002 $0 $0 $0
sustained over any period of time. 2 $13,895 $15,300 $16,766 $3,750 $5,156 $6,621
3 $20,594 $23,371 $26,387 $11,718 $14,494 $17,510
This is an illustration only. An illustration 4 $27,167 $31,792 $37,016 $19,558 $24,183 $29,407
is not intended to predict actual performance. 5 $33,640 $40,602 $48,783 $27,300 $34,262 $42,443
Interest rates, dividends, and values set 6 $40,023 $49,831 $61,826 $34,951 $44,758 $56,754
forth in the illustration are not guaranteed. 7 $46,321 $59,505 $76,296 $42,517 $55,701 $72,491
8 $52,529 $69,646 $92,349 $49,993 $67,110 $89,813
9 $58,644 $80,274 $110,165 $57,376 $79,006 $108,897
10 $64,653 $91,404 $129,933 $64,653 $91,404 $129,933
15 $100,991 $165,049 $278,286 $100,991 $165,049 $278,286
20 $132,201 $257,720 $529,909 $132,201 $257,720 $529,909
25 $157,736 $377,955 $951,781 $157,736 $377,955 $951,781
30 $175,408 $534,605 $1,659,800 $175,408 $534,605 $1,659,800
35 $182,767 $735,860 $2,854,336 $182,767 $735,860 $2,854,336
------------------------------------------------------------------------------
</TABLE>
108
<PAGE>
<TABLE>
<S> <C>
-------------------------------------------------------------------------------
Illustration 2
Death benefit Option A and guideline premium test at guaranteed cost of
insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:A
GUIDELINE PREMIUM TEST
FACE AMOUNT:$439,120
MALE SELECT NONSMOKER ISSUE AGE 45
ANNUAL PREMIUM:$10,000
------------------------------------------------------------------------------
Flexible premium variable universal life Total
Illustration of death benefits, premiums
accumulated values and net cash End of paid plus End of year DEATH BENEFIT assuming
surrender values. policy interest at hypothetical gross annual investment return of
year 5% 0% 6% 12%
All premium payments are illustrated as ------------------------------------------------------------------------------
if made at the beginning of the policy 1 $10,500 $439,120 $439,120 $439,120
year. 2 $21,525 $439,120 $439,120 $439,120
3 $33,101 $439,120 $439,120 $439,120
This illustration assumes no policy loans 4 $45,256 $439,120 $439,120 $439,120
or partial withdrawals have been made. 5 $58,019 $439,120 $439,120 $439,120
6 $71,420 $439,120 $439,120 $439,120
*Additional payment will be required to 7 $85,491 $439,120 $439,120 $439,120
prevent policy termination. 8 $100,266 $439,120 $439,120 $439,120
9 $115,779 $439,120 $439,120 $439,120
The death benefits, accumulated values 10 $132,068 $439,120 $439,120 $439,120
and cash surrender values will differ if 15 $226,575 $439,120 $439,120 $439,120
premiums are paid in different amounts or 20 $347,193 $439,120 $439,120 $548,975
frequencies. 25 $501,135 $439,120 $439,120 $931,605
30 $697,608 $439,120 $439,120 $1,483,788
The hypothetical investment rates shown 35 $948,363 $0* $520,061 $2,482,115
above and elsewhere in this prospectus ------------------------------------------------------------------------------
are illustrative only and should not be End of year End of year
interpreted as a representation of past ACCUMULATED VALUE NET CASH SURRENDER VALUE
or future investment results. Actual End of assuming hypothetical gross assuming hypothetical gross
rates of return may be more or less than policy annual investment return of annual investment return of
those shown and will depend on a number year 0% 6% 12% 0% 6% 12%
of factors, including the investment ------------------------------------------------------------------------------
allocations made to variable accounts by 1 $7,033 $7,517 $8,002 $0 $0 $0
the owner and the experience of the 2 $13,895 $15,300 $16,766 $3,750 $5,156 $6,621
accounts. No representation can be made 3 $20,594 $23,371 $26,387 $11,718 $14,494 $17,510
by us, the separate account or the fund 4 $27,167 $31,792 $37,016 $19,558 $24,183 $29,407
that these hypothetical rates of return 5 $33,640 $40,602 $48,783 $27,300 $34,262 $42,443
can be achieved for any one year or 6 $38,007 $47,793 $59,779 $32,935 $42,721 $54,707
sustained over any period of time. 7 $42,134 $55,170 $71,844 $38,330 $51,366 $68,040
8 $45,999 $62,726 $85,094 $43,462 $60,190 $82,558
This is an illustration only. An 9 $49,571 $70,448 $99,656 $48,303 $69,180 $98,388
illustration is not intended to predict 10 $52,819 $78,319 $115,677 $52,819 $78,319 $115,677
actual performance. Interest rates, 15 $72,595 $130,608 $237,677 $72,595 $130,608 $237,677
dividends, and values set forth in the 20 $80,332 $191,120 $449,980 $80,332 $191,120 $449,980
illustration are not guaranteed. 25 $67,413 $262,674 $803,108 $67,413 $262,674 $803,108
30 $15,310 $355,958 $1,386,718 $15,310 $355,958 $1,386,718
35 $0* $495,296 $2,363,919 $0* $495,296 $2,363,919
------------------------------------------------------------------------------
109
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
------------------------------------------------------------------------------------
Illustration 3
Death benefit Option B and guideline premium test at current cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:B
GUIDELINE PREMIUM TEST
FACE AMOUNT:$186,955
MALE SELECT NONSMOKER ISSUE AGE 45
ANNUAL PREMIUM:$10,000
------------------------------------------------------------------------------------
Flexible premium Total
variable universal life premiums End of year DEATH BENEFIT assuming
Illustration of death benefits, End of paid plus hypothetical gross annual investment
accumulated values and net cash policy interest at return of
surrender values. year 5% 0% 6% 12%
------------------------------------------------------------------------------------
All premium payments are illustrated as 1 $10,500 $194,991 $195,506 $196,021
if made at the beginning of the policy 2 $21,525 $202,850 $204,376 $205,965
year. 3 $33,101 $210,574 $213,631 $216,943
4 $45,256 $218,203 $223,330 $229,104
This illustration assumes no policy 5 $58,019 $225,743 $233,500 $242,586
loans or partial withdrawals have been 6 $71,420 $233,200 $244,169 $257,539
made. 7 $85,491 $240,575 $255,364 $274,128
8 $100,266 $247,865 $267,110 $292,529
The death benefits, accumulated values 9 $115,779 $255,069 $279,430 $312,941
and cash surrender values will differ if 10 $132,068 $262,181 $292,348 $335,579
premiums are paid in different amounts or 15 $226,575 $300,792 $372,205 $497,876
frequencies. 20 $347,193 $335,360 $471,883 $769,046
25 $501,135 $365,111 $595,989 $1,223,247
The hypothetical investment rates shown 30 $697,608 $388,142 $749,048 $1,984,303
above and elsewhere in this prospectus 35 $948,363 $402,462 $936,735 $3,261,683
are illustrative only and should not be ------------------------------------------------------------------------------------
interpreted as a representation of past End of year End of year
or future investment results. Actual ACCUMULATED VALUE NET CASH SURRENDER VALUE
rates of return may be more or less than End of assuming hypothetical gross assuming hypothetical gross
those shown and will depend on a number policy annual investment return of annual investment return of
of factors, including the investment year 0% 6% 12% 0% 6% 12%
allocations made to variable accounts by ------------------------------------------------------------------------------------
the owner and the experience of the 1 $7,996 $8,511 $9,026 $1,502 $2,016 $2,532
accounts. No representation can be made 2 $15,855 $17,381 $18,970 $10,082 $11,608 $13,197
by us, the separate account or the fund 3 $23,579 $26,636 $29,948 $18,528 $21,585 $24,896
that these hypothetical rates of return 4 $31,208 $36,335 $42,109 $26,878 $32,005 $37,779
can be achieved for any one year or 5 $38,748 $46,505 $55,591 $35,140 $42,897 $51,983
sustained over any period of time. 6 $46,205 $57,174 $70,544 $43,318 $54,288 $67,658
7 $53,580 $68,369 $87,133 $51,415 $66,204 $84,968
This is an illustration only. An 8 $60,870 $80,115 $105,534 $59,427 $78,671 $104,091
illustration is not intended to predict 9 $68,074 $92,435 $125,946 $67,353 $91,713 $125,225
actual performance. Interest rates, 10 $75,186 $105,353 $148,584 $75,186 $105,353 $148,584
dividends, and values set forth in the 15 $113,797 $185,210 $310,881 $113,797 $185,210 $310,881
illustration are not guaranteed. 20 $148,365 $284,888 $582,051 $148,365 $284,888 $582,051
25 $178,116 $408,994 $1,036,252 $178,116 $408,994 $1,036,252
30 $201,147 $562,053 $1,797,308 $201,147 $562,053 $1,797,308
35 $215,467 $749,740 $3,074,687 $215,467 $749,740 $3,074,688
------------------------------------------------------------------------------------
</TABLE>
110
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<TABLE>
<S> <C>
---------------------------------------------------------------------------------------
Illustration 4
Death benefit Option B and guideline premium test at guaranteed cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:B
GUIDELINE PREMIUM TEST
FACE AMOUNT:$186,995
MALE SELECT NONSMOKER ISSUE AGE 45
ANNUAL PREMIUM:$10,000
---------------------------------------------------------------------------------------
Flexible premium Total
variable universal life premiums
Illustration of death benefits, End of paid plus End of year DEATH BENEFIT assuming
accumulated values and net cash policy interest at hypothetical gross annual investment return of
surrender values. year 5% 0% 6% 12%
---------------------------------------------------------------------------------------
All premium payments are 1 $10,500 $194,991 $195,506 $196,021
illustrated as if made at the 2 $21,525 $202,850 $204,376 $205,965
beginning of the policy year. 3 $33,101 $210,574 $213,631 $216,943
4 $45,256 $218,203 $223,330 $229,104
This illustration assumes no policy 5 $58,019 $225,743 $233,500 $242,586
loans or partial withdrawals have been 6 $71,420 $232,254 $243,193 $256,534
made. 7 $85,491 $238,602 $253,271 $271,910
8 $100,266 $244,775 $263,738 $288,860
The death benefits, accumulated values 9 $115,779 $250,756 $274,598 $307,539
and cash surrender values will differ if 10 $132,068 $256,530 $285,851 $328,119
premiums are paid in different amounts 15 $226,575 $286,942 $354,142 $474,071
or frequencies. 20 $347,193 $309,782 $434,574 $712,614
25 $501,135 $321,223 $525,852 $1,102,385
The hypothetical investment rates shown 30 $697,608 $315,465 $623,985 $1,740,160
above and elsewhere in this prospectus 35 $948,363 $281,700 $717,711 $2,782,967
are illustrative only and should not be ---------------------------------------------------------------------------------------
interpreted as a representation of past End of year End of year
or future investment results. Actual ACCUMULATED VALUE NET CASH SURRENDER VALUE
rates of return may be more or less than End of assuming hypothetical gross assuming hypothetical gross
those shown and will depend on a number policy annual investment return of annual investment return of
of factors, including the investment year 0% 6% 12% 0% 6% 12%
allocations made to variable accounts by ---------------------------------------------------------------------------------------
the owner and the experience of the 1 $7,996 $8,511 $9,026 $1,502 $2,016 $2,532
accounts. No representation can be made 2 $15,855 $17,381 $18,970 $10,082 $11,608 $13,197
by us, the separate account or the fund 3 $23,579 $26,636 $29,948 $18,528 $21,585 $24,896
that these hypothetical rates of return 4 $31,208 $36,335 $42,109 $26,878 $32,005 $37,779
can be achieved for any one year or 5 $38,748 $46,505 $55,591 $35,140 $42,897 $51,983
sustained over any period of time. 6 $45,259 $56,198 $69,539 $42,373 $53,312 $66,653
7 $51,607 $66,276 $84,915 $49,442 $64,111 $82,751
This is an illustration only. An 8 $57,780 $76,743 $101,865 $56,336 $75,300 $100,422
illustration is not intended to predict 9 $63,761 $87,603 $120,544 $63,040 $86,881 $119,822
actual performance. Interest rates, 10 $69,535 $98,856 $141,124 $69,535 $98,856 $141,124
dividends, and values set forth in the 15 $99,947 $167,147 $287,076 $99,947 $167,147 $287,076
illustration are not guaranteed. 20 $122,787 $247,579 $525,619 $122,787 $247,579 $525,619
25 $134,228 $338,857 $915,390 $134,228 $338,857 $915,390
30 $128,470 $436,990 $1,553,165 $128,470 $436,990 $1,553,165
35 $94,705 $530,716 $2,595,972 $94,706 $530,716 $2,595,972
---------------------------------------------------------------------------------------
111
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
---------------------------------------------------------------------------------
Illustration 5
Death benefit Option C and guideline premium test at current cost of insurance
rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:C
GUIDELINE PREMIUM TEST
FACE AMOUNT:$439,120
MALE SELECT NONSMOKER ISSUE AGE 45
ANNUAL PREMIUM:$10,000
---------------------------------------------------------------------------------
Flexible premium Total
variable universal life premiums
Illustration of death benefits, End of paid plus End of year DEATH BENEFIT assuming
accumulated values and net cash policy interest at hypothetical gross annual investment return of
surrender values. year 5% 0% 6% 12%
---------------------------------------------------------------------------------
All premium payments are illustrated as 1 $10,500 $449,120 $449,120 $449,120
if made at the beginning of the policy 2 $21,525 $459,120 $459,120 $459,120
year. 3 $33,101 $469,120 $469,120 $469,120
4 $45,256 $479,120 $479,120 $479,120
This illustration assumes no policy 5 $58,019 $489,120 $489,120 $489,120
loans or partial withdrawals have been 6 $71,420 $499,120 $499,120 $499,120
made. 7 $85,491 $509,120 $509,120 $509,120
8 $100,266 $519,120 $519,120 $519,120
The death benefits, accumulated values 9 $115,779 $529,120 $529,120 $529,120
and cash surrender values will differ if 10 $132,068 $539,120 $539,120 $539,120
premiums are paid in different amounts 15 $226,575 $589,120 $589,120 $589,120
or frequencies. 20 $347,193 $639,120 $639,120 $639,120
25 $501,135 $689,120 $689,120 $1,077,318
The hypothetical investment rates shown 30 $697,608 $739,120 $739,120 $1,734,602
above and elsewhere in this prospectus 35 $948,363 $789,120 $789,120 $2,928,765
are illustrative only and should not be ---------------------------------------------------------------------------------
interpreted as a representation of past End of year End of year
or future investment results. Actual ACCUMULATED VALUE NET CASH SURRENDER VALUE
rates of return may be more or less than End of assuming hypothetical gross assuming hypothetical gross
those shown and will depend on a number policy annual investment return of annual investment return of
of factors, including the investment year 0% 6% 12% 0% 6% 12%
allocations made to variable accounts by --------------------------------------------------------------------------------
the owner and the experience of the 1 $7,025 $7,508 $7,993 $0 $0 $0
accounts. No representation can be made 2 $13,867 $15,271 $16,735 $3,722 $5,126 $6,591
by us, the separate account or the fund 3 $20,531 $23,303 $26,314 $11,654 $14,426 $17,438
that these hypothetical rates of return 4 $27,049 $31,664 $36,877 $19,440 $24,055 $29,268
can be achieved for any one year or 5 $33,448 $40,389 $48,548 $27,107 $34,049 $42,208
sustained over any period of time. 6 $39,734 $49,506 $61,461 $34,662 $44,434 $56,389
7 $45,912 $59,038 $75,760 $42,108 $55,233 $71,955
This is an illustration only. An 8 $51,973 $68,999 $91,594 $49,437 $66,463 $89,058
illustration is not intended to predict 9 $57,911 $79,406 $109,132 $56,643 $78,138 $107,864
actual performance. Interest rates, 10 $63,705 $90,264 $128,551 $63,705 $90,264 $128,551
dividends, and values set forth in the 15 $97,831 $161,026 $273,038 $97,831 $161,026 $273,038
illustration are not guaranteed. 20 $123,539 $246,059 $516,184 $123,539 $246,059 $516,184
25 $137,514 $349,070 $928,722 $137,514 $349,070 $928,722
30 $131,559 $474,552 $1,621,123 $131,559 $474,552 $1,621,123
35 $93,079 $633,702 $2,789,300 $93,079 $633,702 $2,789,300
---------------------------------------------------------------------------------
</TABLE>
112
<PAGE>
<TABLE>
<S> <C>
----------------------------------------------------------------------------------
Illustration 6
Death benefit Option C and guideline premium test at guaranteed cost of
insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:C
GUIDELINE PREMIUM TEST
FACE AMOUNT:$439,120
MALE SELECT NONSMOKER ISSUE AGE 45
ANNUAL PREMIUM:$10,000
----------------------------------------------------------------------------------
Flexible premium variable universal life Total
Illustration of death benefits, premiums
accumulated values and net cash surrender End of paid plus End of year DEATH BENEFIT assuming
values. policy interest at hypothetical gross annual investment return of
year 5% 0% 6% 12%
All premium payments are illustrated as if ----------------------------------------------------------------------------------
made at the beginning of the policy year. 1 $10,500 $449,120 $449,120 $449,120
2 $21,525 $459,120 $459,120 $459,120
This illustration assumes no policy loans 3 $33,101 $469,120 $469,120 $469,120
or partial withdrawals have been made. 4 $45,256 $479,120 $479,120 $479,120
5 $58,019 $489,120 $489,120 $489,120
* Additional payment will be required to 6 $71,420 $499,120 $499,120 $499,120
prevent policy termination. 7 $85,491 $509,120 $509,120 $509,120
8 $100,266 $519,120 $519,120 $519,120
The death benefits, accumulated values and 9 $115,779 $529,120 $529,120 $529,120
cash surrender values will differ if 10 $132,068 $539,120 $539,120 $539,120
premiums are paid in different amounts or 15 $226,575 $589,120 $589,120 $589,120
frequencies. 20 $347,193 $639,120 $639,120 $639,120
25 $501,135 $0* $689,120 $808,285
The hypothetical investment rates shown 30 $697,608 $0* $739,120 $1,296,248
above and elsewhere in this prospectus are 35 $948,363 $0* $0* $2,176,732
illustrative only and should not be ----------------------------------------------------------------------------------
interpreted as a representation of past or End of year End of year
future investment results. Actual rates of ACCUMULATED VALUE NET CASH SURRENDER VALUE
return may be more or less than those shown End of assuming hypothetical gross assuming hypothetical gross
and will depend on a number of factors, policy annual investment return of annual investment return of
including the investment allocations made year 0% 6% 12% 0% 6% 12%
to variable accounts by the owner and the ---------------------------------------------------------------------------------
experience of the accounts. No 1 $7,025 $7,508 $7,993 $0 $0 $0
representation can be made by us, the 2 $13,867 $15,271 $16,735 $3,722 $5,126 $6,591
separate account or the fund that these 3 $20,531 $23,303 $26,314 $11,654 $14,426 $17,438
hypothetical rates of return can be 4 $27,049 $31,664 $36,877 $19,440 $24,055 $29,268
achieved for any one year or sustained over 5 $33,448 $40,389 $48,548 $27,107 $34,049 $42,208
any period of time. 6 $37,412 $47,152 $59,089 $32,340 $42,080 $54,016
7 $41,029 $53,964 $70,528 $37,224 $50,160 $66,724
This is an illustration only. An 8 $44,257 $60,791 $82,943 $41,720 $58,255 $80,406
illustration is not intended to predict 9 $47,044 $67,585 $96,410 $45,776 $66,317 $95,142
actual performance. Interest rates, 10 $49,330 $74,292 $111,017 $49,330 $74,292 $111,017
dividends, and values set forth in the 15 $60,640 $115,515 $218,342 $60,640 $115,515 $218,342
illustration are not guaranteed. 20 $49,426 $148,833 $392,730 $49,426 $148,833 $392,730
25 $0* $155,645 $696,797 $0* $155,645 $696,797
30 $0* $91,665 $1,211,447 $0* $91,665 $1,211,447
35 $0* $0* $2,073,078 $0* $0* $2,073,078
---------------------------------------------------------------------------------
113
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
----------------------------------------------------------------------------
Illustration 7
Death benefit Option A and cash value accumulation test at current cost of
insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:A
CASH VALUE ACCUMULATION TEST
FACE AMOUNT:$439,120
MALE SELECT NONSMOKER ISSUE AGE 45
ANNUAL PREMIUM:$10,000
----------------------------------------------------------------------------
Flexible premium variable universal life Total
Illustration of death benefits, accumulated premiums End of year DEATH BENEFIT assuming
values and net cash surrender values. End of paid plus hypothetical gross annual investment
policy interest at return of
All premium payments are illustrated as if year 5% 0% 6% 12%
made at the beginning of the policy year. ----------------------------------------------------------------------------
1 $10,500 $439,120 $439,120 $439,120
This illustration assumes no policy loans 2 $21,525 $439,120 $439,120 $439,120
or partial withdrawals have been made. 3 $33,101 $439,120 $439,120 $439,120
4 $45,256 $439,120 $439,120 $439,120
The death benefits, accumulated values and 5 $58,019 $439,120 $439,120 $439,120
cash surrender values will differ if 6 $71,420 $439,120 $439,120 $439,120
premiums are paid in different amounts or 7 $85,491 $439,120 $439,120 $439,120
frequencies. 8 $100,266 $439,120 $439,120 $439,120
9 $115,779 $439,120 $439,120 $439,120
The hypothetical investment rates shown 10 $132,068 $439,120 $439,120 $439,120
above and elsewhere in this prospectus 15 $226,575 $439,120 $439,120 $534,415
are illustrative only and should not be 20 $347,193 $439,120 $439,120 $885,585
interpreted as a representation of past or 25 $501,135 $439,120 $568,414 $1,397,540
future investment results. Actual rates of 30 $697,608 $439,120 $712,425 $2,159,004
return may be more or less than those shown 35 $948,363 $439,120 $880,967 $3,329,577
and will depend on a number of factors, ----------------------------------------------------------------------------
including the investment allocations made End of year End of year
to variable accounts by the owner and the ACCUMULATED VALUE NET CASH SURRENDER VALUE
experience of the accounts. No End of assuming hypothetical gross assuming hypothetical gross
representation can be made by us, the policy annual investment return of annual investment return of
separate account or the fund that these year 0% 6% 12% 0% 6% 12%
hypothetical rates of return can be ----------------------------------------------------------------------------
achieved for any one year or sustained 1 $7,033 $7,517 $8,002 $0 $0 $0
over any period of time. 2 $13,895 $15,300 $16,766 $3,750 $5,156 $6,621
3 $20,594 $23,371 $26,387 $11,718 $14,494 $17,510
This is an illustration only. An 4 $27,167 $31,792 $37,016 $19,558 $24,183 $29,407
illustration is not intended to predict 5 $33,640 $40,602 $48,783 $27,300 $34,262 $42,443
actual performance. Interest rates, 6 $40,023 $49,831 $61,826 $34,951 $44,758 $56,754
dividends, and values set forth in the 7 $46,321 $59,505 $76,296 $42,517 $55,701 $72,491
illustration are not guaranteed. 8 $52,529 $69,646 $92,349 $49,993 $67,110 $89,813
9 $58,644 $80,274 $110,165 $57,376 $79,006 $108,897
10 $64,653 $91,404 $129,933 $64,653 $91,404 $129,933
15 $100,991 $165,049 $277,907 $100,991 $165,049 $277,907
20 $132,201 $257,720 $521,688 $132,201 $257,720 $521,688
25 $157,736 $374,190 $920,007 $157,736 $374,190 $920,007
30 $175,408 $516,958 $1,566,641 $175,408 $516,958 $1,566,641
35 $182,767 $691,700 $2,614,249 $182,767 $691,700 $2,614,249
----------------------------------------------------------------------------
</TABLE>
114
<PAGE>
<TABLE>
<S> <C>
-----------------------------------------------------------------------------
Illustration 8
Death benefit Option A and cash value accumulation test at guaranteed
cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:A
CASH VALUE ACCUMULATION TEST
FACE AMOUNT:$439,120
MALE SELECT NONSMOKER ISSUE AGE 45
ANNUAL PREMIUM:$10,000
-----------------------------------------------------------------------------
Flexible premium variable universal life Total
Illustration of death benefits, accumulated premiums
values and net cash surrender values. End of paid plus End of year DEATH BENEFIT assuming
policy interest at hypothetical gross annual investment return of
All premium payments are illustrated as if year 5% 0% 6% 12%
made at the beginning of the policy year. -----------------------------------------------------------------------------
1 $10,500 $439,120 $439,120 $439,120
This illustration assumes no policy loans 2 $21,525 $439,120 $439,120 $439,120
or partial withdrawals have been made. 3 $33,101 $439,120 $439,120 $439,120
4 $45,256 $439,120 $439,120 $439,120
*Additional payment will be required to 5 $58,019 $439,120 $439,120 $439,120
prevent policy termination. 6 $71,420 $439,120 $439,120 $439,120
7 $85,491 $439,120 $439,120 $439,120
The death benefits, accumulated values and 8 $100,266 $439,120 $439,120 $439,120
cash surrender values will differ if 9 $115,779 $439,120 $439,120 $439,120
premiums are paid in different amounts or 10 $132,068 $439,120 $439,120 $439,120
frequencies. 15 $226,575 $439,120 $439,120 $456,959
20 $347,193 $439,120 $439,120 $735,399
The hypothetical investment rates shown 25 $501,135 $439,120 $439,120 $1,108,707
above and elsewhere in this prospectus are 30 $697,608 $439,120 $484,978 $1,614,365
illustrative only and should not be 35 $948,363 $0* $572,037 $2,306,149
interpreted as a representation of past or -----------------------------------------------------------------------------
future investment results. Actual rates of End of year End of year
return may be more or less than those shown ACCUMULATED VALUE NET CASH SURRENDER VALUE
and will depend on a number of factors, End of assuming hypothetical gross assuming hypothetical gross
including the investment allocations made policy annual investment return of annual investment return of
to variable accounts by the owner and the year 0% 6% 12% 0% 6% 12%
experience of the accounts. No ----------------------------------------------------------------------------
representation can be made by us, the 1 $7,033 $7,517 $8,002 $0 $0 $0
separate account or the fund that these 2 $13,895 $15,300 $16,766 $3,750 $5,156 $6,621
hypothetical rates of return can be 3 $20,594 $23,371 $26,387 $11,718 $14,494 $17,510
achieved for any one year or sustained 4 $27,167 $31,792 $37,016 $19,558 $24,183 $29,407
over any period of time. 5 $33,640 $40,602 $48,783 $27,300 $34,262 $42,443
6 $38,007 $47,793 $59,779 $32,935 $42,721 $54,707
This is an illustration only. An 7 $42,134 $55,170 $71,844 $38,330 $51,366 $68,040
illustration is not intended to predict 8 $45,999 $62,726 $85,094 $43,462 $60,190 $82,558
actual performance. Interest rates, 9 $49,571 $70,448 $99,656 $48,303 $69,180 $98,388
dividends, and values set forth in the 10 $52,819 $78,319 $115,677 $52,819 $78,319 $115,677
illustration are not guaranteed. 15 $72,595 $130,608 $237,629 $72,595 $130,608 $237,629
20 $80,332 $191,120 $433,216 $80,332 $191,120 $433,216
25 $67,413 $262,674 $729,867 $67,413 $262,674 $729,867
30 $15,310 $351,915 $1,171,434 $15,310 $351,915 $1,171,434
35 $0* $449,141 $1,810,695 $0* $449,141 $1,810,695
----------------------------------------------------------------------------
115
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
----------------------------------------------------------------------------
Illustration 9
Death benefit Option B and cash value accumulation test at current cost of
insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:B
CASH VALUE ACCUMULATION TEST
FACE AMOUNT:$186,995
MALE SELECT NONSMOKER ISSUE AGE 45
ANNUAL PREMIUM:$10,000
----------------------------------------------------------------------------
Flexible premium variable universal life Total
Illustration of death benefits, accumulated premiums
values and net cash surrender values. End of paid plus End of year DEATH BENEFIT assuming
policy interest at hypothetical gross annual investment return of
All premium payments are illustrated as if year 5% 0% 6% 12%
made at the beginning of the policy year. ----------------------------------------------------------------------------
1 $10,500 $194,991 $195,506 $196,021
This illustration assumes no policy loans 2 $21,525 $202,850 $204,376 $205,965
or partial withdrawals have been made. 3 $33,101 $210,574 $213,631 $216,943
4 $45,256 $218,203 $223,330 $229,104
The death benefits, accumulated values and 5 $58,019 $225,743 $233,500 $242,586
cash surrender values will differ if 6 $71,420 $233,200 $244,169 $257,539
premiums are paid in different amounts or 7 $85,491 $240,575 $255,364 $274,128
frequencies. 8 $100,266 $247,865 $267,110 $292,529
9 $115,779 $255,069 $279,430 $312,941
The hypothetical investment rates shown 10 $132,068 $262,181 $292,348 $335,579
above and elsewhere in this prospectus 15 $226,575 $300,792 $372,205 $595,965
are illustrative only and should not be 20 $347,193 $335,360 $483,483 $975,329
interpreted as a representation of past 25 $501,135 $365,111 $619,788 $1,529,551
or future investment results. Actual rates 30 $697,608 $388,142 $770,295 $2,354,839
of return may be more or less than those 35 $948,363 $402,462 $947,126 $3,624,415
shown and will depend on a number of ----------------------------------------------------------------------------
factors, including the investment End of year End of year
allocations made to variable accounts ACCUMULATED VALUE NET CASH SURRENDER VALUE
by the owner and the experience of the End of assuming hypothetical gross assuming hypothetical gross
accounts. No representation can be made by policy annual investment return of annual investment return of
us, the separate account or the fund that year 0% 6% 12% 0% 6% 12%
these hypothetical rates of return can be ----------------------------------------------------------------------------
achieved for any one year or sustained over 1 $7,996 $8,511 $9,026 $1,502 $2,016 $2,532
any period of time. 2 $15,855 $17,381 $18,970 $10,082 $11,608 $13,197
3 $23,579 $26,636 $29,948 $18,528 $21,585 $24,896
This is an illustration only. An 4 $31,208 $36,335 $42,109 $26,878 $32,005 $37,779
illustration is not intended to predict 5 $38,748 $46,505 $55,591 $35,140 $42,897 $51,983
actual performance. Interest rates, 6 $46,205 $57,174 $70,544 $43,318 $54,288 $67,658
dividends, and values set forth in the 7 $53,580 $68,369 $87,133 $51,415 $66,204 $84,968
illustration are not guaranteed. 8 $60,870 $80,115 $105,534 $59,427 $78,671 $104,091
9 $68,074 $92,435 $125,946 $67,353 $91,713 $125,225
10 $75,186 $105,353 $148,584 $75,186 $105,353 $148,584
15 $113,797 $185,210 $309,914 $113,797 $185,210 $309,914
20 $148,365 $284,814 $574,556 $148,365 $284,814 $574,556
25 $178,116 $408,009 $1,006,910 $178,116 $408,009 $1,006,910
30 $201,147 $558,951 $1,708,745 $201,147 $558,951 $1,708,745
35 $215,467 $743,645 $2,845,744 $215,467 $743,645 $2,845,744
----------------------------------------------------------------------------
</TABLE>
116
<PAGE>
<TABLE>
<S> <C>
----------------------------------------------------------------------------
Illustration 10
Death benefit Option B and cash value accumulation test at guaranteed cost
of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:B
CASH VALUE ACCUMULATION TEST
FACE AMOUNT:$186,995
MALE SELECT NONSMOKER ISSUE AGE 45
ANNUAL PREMIUM:$10,000
----------------------------------------------------------------------------
Flexible premium variable universal life Total
Illustration of death benefits, accumulated premiums
values and net cash surrender values. End of paid plus End of year DEATH BENEFIT assuming
policy interest at hypothetical gross annual investment return of
All premium payments are illustrated as if year 5% 0% 6% 12%
made at the beginning of the policy year. ----------------------------------------------------------------------------
1 $10,500 $194,991 $195,506 $196,021
This illustration assumes no policy loans 2 $21,525 $202,850 $204,376 $205,965
or partial withdrawals have been made. 3 $33,101 $210,574 $213,631 $216,943
4 $45,256 $218,203 $223,330 $229,104
The death benefits, accumulated values and 5 $58,019 $225,743 $233,500 $242,586
cash surrender values will differ if 6 $71,420 $232,254 $243,193 $256,534
premiums are paid in different amounts or 7 $85,491 $238,602 $253,271 $271,910
frequencies. 8 $100,266 $244,775 $263,738 $288,860
9 $115,779 $250,756 $274,598 $307,539
The hypothetical investment rates shown 10 $132,068 $256,530 $285,851 $328,119
above and elsewhere in this prospectus 15 $226,575 $286,942 $354,142 $547,560
are illustrative only and should not be 20 $347,193 $309,782 $434,574 $860,821
interpreted as a representation of past 25 $501,135 $321,223 $525,852 $1,282,245
or future investment results. Actual rates 30 $697,608 $315,465 $623,985 $1,854,228
of return may be more or less than those 35 $948,363 $281,701 $717,711 $2,637,680
shown and will depend on a number of ----------------------------------------------------------------------------
factors, including the investment End of year End of year
allocations made to variable accounts by ACCUMULATED VALUE NET CASH SURRENDER VALUE
the owner and the experience of the End of assuming hypothetical gross assuming hypothetical gross
accounts. No representation can be made by policy annual investment return of annual investment return of
us, the separate account or the fund that year 0% 6% 12% 0% 6% 12%
these hypothetical rates of return can be ----------------------------------------------------------------------------
achieved for any one year or sustained over 1 $7,996 $8,511 $9,026 $1,502 $2,016 $2,532
any period of time. 2 $15,855 $17,381 $18,970 $10,082 $11,608 $13,197
3 $23,579 $26,636 $29,948 $18,528 $21,585 $24,896
This is an illustration only. An 4 $31,208 $36,335 $42,109 $26,878 $32,005 $37,779
illustration is not intended to predict 5 $38,748 $46,505 $55,591 $35,140 $42,897 $51,983
actual performance. Interest rates, 6 $45,259 $56,198 $69,539 $42,373 $53,312 $66,653
dividends, and values set forth in the 7 $51,607 $66,276 $84,915 $49,442 $64,111 $82,751
illustration are not guaranteed. 8 $57,780 $76,743 $101,865 $56,336 $75,300 $100,422
9 $63,761 $87,603 $120,544 $63,040 $86,881 $119,822
10 $69,535 $98,856 $141,124 $69,535 $98,856 $141,124
15 $99,947 $167,147 $284,743 $99,947 $167,147 $284,743
20 $122,787 $247,579 $507,100 $122,787 $247,579 $507,100
25 $134,228 $338,857 $844,108 $134,228 $338,857 $844,108
30 $128,470 $436,990 $1,345,486 $128,470 $436,990 $1,345,486
35 $94,706 $530,716 $2,070,999 $94,706 $530,716 $2,070,999
----------------------------------------------------------------------------
117
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<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
----------------------------------------------------------------------------
Illustration 11
Death benefit Option C and cash value accumulation test at current cost of
insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:C
CASH VALUE ACCUMULATION TEST
FACE AMOUNT:$439,120
MALE SELECT NONSMOKER ISSUE AGE 45
ANNUAL PREMIUM:$10,000
----------------------------------------------------------------------------
Flexible premium variable universal life Total
Illustration of death benefits, premiums
accumulated values and net cash surrender End of paid plus End of year DEATH BENEFIT assuming
values. policy interest at hypothetical gross annual investment return of
year 5% 0% 6% 12%
All premium payments are illustrated as if ----------------------------------------------------------------------------
made at the beginning of the policy year. 1 $10,500 $449,120 $449,120 $449,120
2 $21,525 $459,120 $459,120 $459,120
This illustration assumes no policy loans 3 $33,101 $469,120 $469,120 $469,120
or partial withdrawals have been made. 4 $45,256 $479,120 $479,120 $479,120
5 $58,019 $489,120 $489,120 $489,120
The death benefits, accumulated values and 6 $71,420 $499,120 $499,120 $499,120
cash surrender values will differ if 7 $85,491 $509,120 $509,120 $509,120
premiums are paid in different amounts or 8 $100,266 $519,120 $519,120 $519,120
frequencies. 9 $115,779 $529,120 $529,120 $529,120
10 $132,068 $539,120 $539,120 $539,120
The hypothetical investment rates shown 15 $226,575 $589,120 $589,120 $589,120
above and elsewhere in this prospectus 20 $347,193 $639,120 $639,120 $871,240
are illustrative only and should not be 25 $501,135 $689,120 $689,120 $1,376,440
interpreted as a representation of past 30 $697,608 $739,120 $739,120 $2,127,702
or future investment results. Actual 35 $948,363 $789,120 $806,951 $3,282,451
rates of return may be more or less than ----------------------------------------------------------------------------
those shown and will depend on a number of End of year End of year
factors, including the investment ACCUMULATED VALUE NET CASH SURRENDER VALUE
allocations made to variable accounts by End of assuming hypothetical gross assuming hypothetical gross
the owner and the experience of the policy annual investment return of annual investment return of
accounts. No representation can be made by year 0% 6% 12% 0% 6% 12%
us, the separate account or the fund that ----------------------------------------------------------------------------
these hypothetical rates of return can be 1 $7,025 $7,508 $7,993 $0 $0 $0
achieved for any one year or sustained 2 $13,867 $15,271 $16,735 $3,722 $5,126 $6,591
over any period of time. 3 $20,531 $23,303 $26,314 $11,654 $14,426 $17,438
4 $27,049 $31,664 $36,877 $19,440 $24,055 $29,268
This is an illustration only. An 5 $33,448 $40,389 $48,548 $27,107 $34,049 $42,208
illustration is not intended to predict 6 $39,734 $49,506 $61,461 $34,662 $44,434 $56,389
actual performance. Interest rates, 7 $45,912 $59,038 $75,760 $42,108 $55,233 $71,955
dividends, and values set forth in the 8 $51,973 $68,999 $91,594 $49,437 $66,463 $89,058
illustration are not guaranteed. 9 $57,911 $79,406 $109,132 $56,643 $78,138 $107,864
10 $63,705 $90,264 $128,551 $63,705 $90,264 $128,551
15 $97,831 $161,026 $273,038 $97,831 $161,026 $273,038
20 $123,539 $246,059 $513,238 $123,539 $246,059 $513,238
25 $137,514 $349,070 $906,116 $137,514 $349,070 $906,116
30 $131,559 $474,552 $1,543,928 $131,559 $474,552 $1,543,928
35 $93,079 $633,585 $2,577,247 $93,079 $633,585 $2,577,247
----------------------------------------------------------------------------
</TABLE>
118
<PAGE>
<TABLE>
<S> <C>
-------------------------------------------------------------------------------
Illustration 12
Death benefit Option C and cash value accumulation test at guaranteed cost of
insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:C
CASH VALUE ACCUMULATION TEST
FACE AMOUNT:$439,120
MALE SELECT NONSMOKER ISSUE AGE 45
ANNUAL PREMIUM:$10,000
-------------------------------------------------------------------------------
Flexible premium variable universal life Total
Illustration of death benefits, accumulated premiums
values and net cash surrender values. End of paid plus End of year DEATH BENEFIT assuming
policy interest at hypothetical gross annual investment return of
All premium payments are illustrated as if year 5% 0% 6% 12%
made at the beginning of the policy year. -------------------------------------------------------------------------------
1 $10,500 $449,120 $449,120 $449,120
This illustration assumes no policy loans 2 $21,525 $459,120 $459,120 $459,120
or partial withdrawals have been made. 3 $33,101 $469,120 $469,120 $469,120
4 $45,256 $479,120 $479,120 $479,120
*Additional payment will be required to 5 $58,019 $489,120 $489,120 $489,120
prevent policy termination. 6 $71,420 $499,120 $499,120 $499,120
7 $85,491 $509,120 $509,120 $509,120
The death benefits, accumulated values and 8 $100,266 $519,120 $519,120 $519,120
cash surrender values will differ if 9 $115,779 $529,120 $529,120 $529,120
premiums are paid in different amounts or 10 $132,068 $539,120 $539,120 $539,120
frequencies. 15 $226,575 $589,120 $589,120 $589,120
20 $347,193 $639,120 $639,120 $666,458
The hypothetical investment rates shown 25 $501,135 $0* $689,120 $1,013,317
above and elsewhere in this prospectus are 30 $697,608 $0* $739,120 $1,482,517
illustrative only and should not be 35 $948,363 $0* $0* $2,123,915
interpreted as a representation of past or -------------------------------------------------------------------------------
future investment results. Actual rates of End of year End of year
return may be more or less than ACCUMULATED VALUE NET CASH SURRENDER VALUE
those shown and will depend on a number of End of assuming hypothetical gross assuming hypothetical gross
factors, including the investment policy annual investment return of annual investment return of
allocations made to variable accounts by year 0% 6% 12% 0% 6% 12%
the owner and the experience of the ------------------------------------------------------------------------------
accounts. No representation can be made by 1 $7,025 $7,508 $7,993 $0 $0 $0
us, the separate account or the fund that 2 $13,867 $15,271 $16,735 $3,722 $5,126 $6,591
these hypothetical rates of return can be 3 $20,531 $23,303 $26,314 $11,654 $14,426 $17,438
achieved for any one year or sustained over 4 $27,049 $31,664 $36,877 $19,440 $24,055 $29,268
any period of time. 5 $33,448 $40,389 $48,548 $27,107 $34,049 $42,208
6 $37,412 $47,152 $59,089 $32,340 $42,080 $54,016
This is an illustration only. An 7 $41,029 $53,964 $70,528 $37,224 $50,160 $66,724
illustration is not intended to predict 8 $44,257 $60,791 $82,943 $41,720 $58,255 $80,406
actual performance. Interest rates, 9 $47,044 $67,585 $96,410 $45,776 $66,317 $95,142
dividends, and values set forth in the 10 $49,330 $74,292 $111,017 $49,330 $74,292 $111,017
illustration are not guaranteed. 15 $60,640 $115,515 $218,342 $60,640 $115,515 $218,342
20 $49,426 $148,833 $392,603 $49,426 $148,833 $392,603
25 $0* $155,645 $667,071 $0* $155,645 $667,071
30 $0* $91,665 $1,075,761 $0* $91,665 $1,075,761
35 $0* $0* $1,667,612 $0* $0* $1,667,612
------------------------------------------------------------------------------
119
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
-----------------------------------------------------------------------------
Illustration 13
Death benefit Option A and guideline premium test at current cost of
insurance rates
Based on a weighted average of annual advisory fees and expenses of the
portfolios
DEATH BENEFIT OPTION:A
GUIDELINE PREMIUM TEST
FACE AMOUNT:$439,120
MALE SELECT NONSMOKER ISSUE AGE 45
ANNUAL PREMIUM:$10,000
----------------------------------------------------------------------------
Flexible premium variable universal life Total
Illustration of death benefits, accumulated premiums
values and net cash surrender values. End of paid plus End of year DEATH BENEFIT assuming
policy interest at hypothetical gross annual investment return of
All premium payments are illustrated as if year 5% 0% 6% 12%
made at the beginning of the policy year. ----------------------------------------------------------------------------
1 $10,500 $439,120 $439,120 $439,120
This illustration assumes no policy loans 2 $21,525 $439,120 $439,120 $439,120
or partial withdrawals have been made. 3 $33,101 $439,120 $439,120 $439,120
4 $45,256 $439,120 $439,120 $439,120
The death benefits, accumulated values 5 $58,019 $439,120 $439,120 $439,120
and cash surrender values will differ if 6 $71,420 $439,120 $439,120 $439,120
premiums are paid in different amounts 7 $85,491 $439,120 $439,120 $439,120
or frequencies. 8 $100,266 $439,120 $439,120 $439,120
9 $115,779 $439,120 $439,120 $439,120
The hypothetical investment rates shown 10 $132,068 $439,120 $439,120 $439,120
above and elsewhere in this prospectus 15 $226,575 $439,120 $439,120 $439,120
are illustrative only and should not be 20 $347,193 $439,120 $439,120 $650,959
interpreted as a representation of past 25 $501,135 $439,120 $442,038 $1,113,926
or future investment results. Actual rates 30 $697,608 $439,120 $577,667 $1,795,698
of return may be more or less than those 35 $948,363 $439,120 $781,632 $3,037,156
shown and will depend on a number of ----------------------------------------------------------------------------
factors, including the investment End of year End of year
allocations made to variable accounts by ACCUMULATED VALUE NET CASH SURRENDER VALUE
the owner and the experience of the End of assuming hypothetical gross assuming hypothetical gross
accounts. No representation can be made by policy annual investment return of annual investment return of
us, the separate account or the fund that year 0% 6% 12% 0% 6% 12%
these hypothetical rates of return can be ---------------------------------------------------------------------------
achieved for any one year or sustained over 1 $7,037 $7,521 $8,006 $1,484 $1,968 $2,453
any period of time. 2 $13,906 $15,313 $16,780 $8,353 $9,760 $11,227
3 $20,617 $23,396 $26,416 $15,064 $17,843 $20,863
This is an illustration only. An 4 $27,203 $31,836 $37,068 $21,650 $26,282 $31,515
illustration is not intended to predict 5 $33,694 $40,669 $48,866 $28,141 $35,116 $43,313
actualperformance. Interest rates, 6 $40,098 $49,927 $61,951 $35,025 $44,855 $56,878
dividends, and year values set forth in 7 $46,419 $59,638 $76,473 $42,614 $55,833 $72,669
the illustration are not guaranteed. 8 $52,653 $69,821 $92,594 $50,117 $67,285 $90,058
9 $58,798 $80,500 $110,494 $57,530 $79,231 $109,226
10 $64,839 $91,689 $130,366 $64,839 $91,689 $130,366
15 $101,392 $165,798 $279,689 $101,392 $165,798 $279,689
20 $132,904 $259,332 $533,573 $132,904 $259,332 $533,573
25 $158,828 $381,067 $960,281 $158,828 $381,067 $960,281
30 $176,987 $539,876 $1,678,222 $176,987 $539,876 $1,678,222
35 $184,971 $744,411 $2,892,530 $184,971 $744,411 $2,892,530
----------------------------------------------------------------------------
</TABLE>
120
<PAGE>
<TABLE>
<S> <C>
--------------------------------------------------------------------------------
Illustration 14
Death benefit Option A and guideline premium test at guaranteed cost of
insurance rates
Based on a weighted average of annual advisory fees and expenses of the
portfolios
DEATH BENEFIT OPTION:A
GUIDELINE PREMIUM TEST
FACE AMOUNT:$439,120
MALE SELECT NONSMOKER ISSUE AGE 45
ANNUAL PREMIUM:$10,000
---------------------------------------------------------------------------------
Flexible premium Total
variable universal life premiums
Illustration of death benefits, End of paid plus End of year DEATH BENEFIT assuming
accumulated values and net cash policy interest at hypothetical gross annual investment return of
surrender values. year 5% 0% 6% 12%
---------------------------------------------------------------------------------
All premium payments are 1 $10,500 $439,120 $439,120 $439,120
illustrated as if made at the 2 $21,525 $439,120 $439,120 $439,120
beginning of the policy year. 3 $33,101 $439,120 $439,120 $439,120
4 $45,256 $439,120 $439,120 $439,120
This illustration assumes no policy 5 $58,019 $439,120 $439,120 $439,120
loans or partial withdrawals have been 6 $71,420 $439,120 $439,120 $439,120
made. 7 $85,491 $439,120 $439,120 $439,120
8 $100,266 $439,120 $439,120 $439,120
*Additional payment will be required 9 $115,779 $439,120 $439,120 $439,120
to prevent policy termination. 10 $132,068 $439,120 $439,120 $439,120
15 $226,575 $439,120 $439,120 $439,120
The death benefits, accumulated values 20 $347,193 $439,120 $439,120 $553,225
and cash surrender values will differ 25 $501,135 $439,120 $439,120 $940,555
if premiums are paid in different 30 $697,608 $439,120 $439,120 $1,501,113
amounts or frequencies. 35 $948,363 $0* $530,365 $2,516,596
---------------------------------------------------------------------------------
The hypothetical investment rates shown End of year End of year
above and elsewhere in this prospectus ACCUMULATED VALUE NET CASH SURRENDER VALUE
are illustrative only and should not be End of assuming hypothetical gross assuming hypothetical gross
interpreted as a representation of past policy annual investment return of annual investment return of
or future investment results. Actual year 0% 6% 12% 0% 6% 12%
rates of return may be more or less than ---------------------------------------------------------------------------------
those shown and will depend on a number 1 $7,037 $7,521 $8,006 $1,484 $1,968 $2,453
of factors, including the investment 2 $13,906 $15,313 $16,780 $8,353 $9,760 $11,227
allocations made to variable accounts by 3 $20,617 $23,396 $26,416 $15,064 $17,843 $20,863
the owner and the experience of the 4 $27,203 $31,836 $37,068 $21,650 $26,282 $31,515
accounts. No representation can be made 5 $33,694 $40,669 $48,866 $28,141 $35,116 $43,313
by us, the separate account or the fund 6 $38,081 $47,889 $59,904 $33,009 $42,817 $54,831
that these hypothetical rates of return 7 $42,230 $55,301 $72,021 $38,426 $51,497 $68,217
can be achieved for any one year or 8 $46,120 $62,898 $85,337 $43,583 $60,362 $82,800
sustained over any period of time. 9 $49,719 $70,667 $99,980 $48,451 $69,399 $98,712
10 $52,995 $78,593 $116,099 $52,995 $78,593 $116,099
This is an illustration only. An 15 $72,949 $131,301 $239,024 $72,949 $131,301 $239,024
illustration is not intended to predict 20 $80,921 $192,597 $453,463 $80,921 $192,597 $453,463
actual performance. Interest rates, 25 $68,290 $265,605 $810,823 $68,290 $265,605 $810,823
dividends, and values set forth in the 30 $16,532 $361,798 $1,402,909 $16,532 $361,798 $1,402,909
illustration are not guaranteed. 35 $0* $505,110 $2,396,758 $0* $505,110 $2,396,758
---------------------------------------------------------------------------------
121
</TABLE>
<PAGE>
APPENDIX A - MORTALITY AND EXPENSE RISK FACE AMOUNT CHARGE:
RATES PER $1,000 OF INITIAL FACE AMOUNT
<TABLE>
<CAPTION>
Death Benefit Option A or C Death Benefit Option B
--------------------------------------- ---------------------------------------
Nonsmoker Smoker Nonsmoker Smoker
Issue ------------------- ------------------- ------------------- -------------------
age Male Female Unisex Male Female Unisex Male Female Unisex Male Female Unisex
- ----- ----- ------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5 0.069 0.059 0.067 0.069 0.059 0.067 0.180 0.167 0.176 0.180 0.167 0.176
10 0.066 0.058 0.064 0.066 0.058 0.064 0.175 0.161 0.172 0.175 0.161 0.172
15 0.064 0.055 0.062 0.064 0.055 0.062 0.172 0.158 0.168 0.172 0.158 0.168
20 0.123 0.103 0.119 0.151 0.120 0.145 0.255 0.234 0.251 0.255 0.234 0.251
25 0.149 0.126 0.144 0.186 0.147 0.178 0.279 0.254 0.273 0.279 0.254 0.274
30 0.167 0.143 0.162 0.204 0.165 0.196 0.308 0.279 0.302 0.308 0.279 0.302
35 0.189 0.162 0.184 0.225 0.185 0.217 0.346 0.310 0.339 0.346 0.310 0.339
40 0.251 0.214 0.244 0.302 0.249 0.291 0.395 0.348 0.385 0.395 0.348 0.385
45 0.342 0.290 0.332 0.419 0.343 0.404 0.457 0.395 0.444 0.457 0.396 0.444
50 0.425 0.359 0.412 0.519 0.424 0.500 0.537 0.456 0.519 0.537 0.456 0.519
55 0.503 0.424 0.487 0.605 0.493 0.583 0.634 0.535 0.619 0.634 0.535 0.619
60 0.655 0.553 0.635 0.801 0.641 0.766 0.694 0.639 0.711 0.801 0.640 0.766
65 0.857 0.699 0.825 0.882 0.812 0.898 0.857 0.699 0.825 0.882 0.812 0.898
70 0.854 0.680 0.819 0.862 0.779 0.866 0.854 0.680 0.819 0.862 0.779 0.866
75 0.848 0.674 0.813 0.860 0.769 0.864 0.848 0.674 0.813 0.860 0.769 0.864
80 0.838 0.705 0.811 0.855 0.765 0.895 0.838 0.705 0.811 0.855 0.765 0.895
85 0.937 0.885 0.916 0.964 0.902 0.965 0.937 0.885 0.916 0.964 0.902 0.965
- ----- --------------------------------------- ---------------------------------------
</TABLE>
If the person insured by the policy is assigned a risk classification other
than standard, a factor is applied to the M&E risk face amount charge according
to the nonstandard table rating assigned to that person insured. If the person
insured is assigned a nonstandard rating reflected in the table below, the rate
above that applies to the person insured is multiplied by the nonstandard table
factor below that applies.
NONSTANDARD TABLE FACTORS
-------------------------
<TABLE>
<CAPTION>
Nonstandard Table Number
Issue -------------------------------------------------------------------------------
age 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-45 1.05 1.10 1.15 1.20 1.25 1.30 1.35 1.40 1.45 1.50 1.55 1.60 1.65 1.70 1.75 1.80
50 1.05 1.10 1.15 1.20 1.25 1.30 1.35 1.40 1.45 1.50 1.55 1.60 1.65 1.65 1.65 1.65
55 1.05 1.10 1.15 1.20 1.25 1.30 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35
60 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05
65-85 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
----- -------------------------------------------------------------------------------
</TABLE>
Representative figures shown. For issue ages not listed, please ask your
registered representative.
122
<PAGE>
APPENDIX B - SURRENDER CHARGE: CURRENT RATES PER $1,000 OF INITIAL FACE
AMOUNT
<TABLE>
<CAPTION>
Death Benefit Option A or C Death Benefit Option B
--------------------------------------- ---------------------------------------
Nonsmoker Smoker Nonsmoker Smoker
Issue ------------------- ------------------- ------------------- -------------------
age Male Female Unisex Male Female Unisex Male Female Unisex Male Female Unisex
- ----- ----- ------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5 5.24 4.48 5.09 5.24 4.48 5.09 13.68 12.69 13.38 13.68 12.69 13.38
10 5.02 4.41 4.89 5.02 4.41 4.89 13.30 12.24 13.07 13.30 12.24 13.07
15 4.86 4.18 4.73 4.86 4.18 4.73 13.07 12.01 12.77 13.07 12.01 12.77
20 9.35 7.83 9.04 11.48 9.12 11.02 19.38 17.78 19.08 19.38 17.78 19.08
25 11.32 9.58 10.97 14.14 11.17 13.53 21.20 19.30 20.75 21.20 19.30 20.82
30 12.69 10.87 12.33 15.50 12.54 14.90 23.41 21.20 22.95 23.41 21.20 22.95
35 14.36 12.31 13.95 17.10 14.06 16.49 26.30 23.56 25.76 26.30 23.56 25.76
40 19.08 16.26 18.51 22.95 18.92 22.12 30.02 26.45 29.26 30.02 26.45 29.26
45 25.99 22.04 25.20 31.84 26.07 30.70 34.73 30.02 33.74 34.73 30.10 33.74
50 32.30 27.28 31.30 39.44 32.22 38.00 40.81 34.66 39.44 40.81 34.66 39.44
55 38.15 32.15 36.95 45.90 37.39 44.23 48.88 40.58 46.97 48.88 40.58 46.97
58 44.61 37.62 43.21 53.43 43.70 51.45 54.11 44.99 52.54 53.43 44.99 52.52
59 46.97 39.60 45.49 53.35 45.98 53.59 54.02 46.59 53.96 53.35 46.66 53.96
60 49.63 41.88 48.08 52.95 48.07 53.23 53.89 48.41 53.88 52.95 48.46 53.23
61 52.52 44.16 50.84 52.54 49.94 52.84 53.62 50.31 53.76 52.54 50.39 52.84
62 53.23 46.44 53.45 52.13 51.96 52.45 53.23 52.39 53.66 52.13 52.44 52.45
63 52.88 48.79 53.13 51.95 53.41 52.11 52.88 53.96 53.13 51.95 53.41 52.11
64 52.50 51.30 52.76 52.05 53.08 51.94 52.50 53.83 52.76 52.05 53.08 51.94
65 52.23 52.97 52.51 52.04 52.85 52.04 52.23 52.97 52.51 52.04 52.85 52.04
66 51.67 53.12 52.00 51.74 52.58 51.84 51.67 53.12 52.00 51.74 52.58 51.84
70 51.29 51.15 51.63 51.31 52.33 51.43 51.29 51.15 51.63 51.31 52.33 51.43
75 50.63 49.40 50.98 50.65 51.68 50.77 50.63 49.40 50.98 50.65 51.68 50.77
80 49.91 46.06 50.19 49.90 50.62 49.80 49.91 46.06 50.19 49.90 50.62 49.80
85 48.14 48.74 48.30 48.07 48.75 48.17 48.14 48.74 48.30 48.07 48.75 48.17
- ----- --------------------------------------- --------------------------------------
</TABLE>
If the person insured by the policy is assigned a risk classification other
than standard, a factor is applied to the surrender charge rate according to
the nonstandard table rating assigned to that person insured. If the person
insured is assigned a nonstandard rating reflected in the table of nonstandard
table factors at the bottom of Appendix A on the previous page, the rate above
that applies to the person insured is multiplied by the nonstandard table
factor that applies.
Representative figures shown. For issue ages not listed, please ask your
registered representative.
123
<PAGE>
APPENDIX C - MAXIMUM SURRENDER CHARGE: RATES PER $1,000 OF INITIAL FACE
AMOUNT
<TABLE>
<CAPTION>
Death Benefit Option A or C Death Benefit Option B
----------------------------------------- -----------------------------------------
Nonsmoker Smoker Nonsmoker Smoker
Issue -------------------- -------------------- -------------------- --------------------
age Male Female Unisex Male Female Unisex Male Female Unisex Male Female Unisex
- ----- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5 1.222 0.772 1.146 1.222 0.772 1.146 3.770 2.926 3.608 3.770 2.926 3.608
10 1.258 0.784 1.182 1.258 0.784 1.182 3.830 2.998 3.656 3.830 2.998 3.656
15 1.282 0.820 1.206 1.282 0.820 1.206 3.866 3.034 3.704 3.866 3.034 3.704
20 3.284 2.444 3.132 4.408 3.120 4.170 6.690 5.622 6.478 6.960 5.992 6.808
25 4.342 3.368 4.172 5.678 4.226 5.424 7.732 6.612 7.494 7.932 6.932 7.772
30 5.246 4.164 5.056 6.802 5.210 6.528 8.954 7.662 8.676 9.054 7.902 8.856
35 6.302 5.096 6.082 8.130 6.330 7.826 10.618 9.040 10.292 10.758 9.180 10.492
40 8.918 7.302 8.632 11.306 8.902 10.898 13.140 10.984 12.680 13.240 10.924 12.850
45 12.646 10.400 12.246 15.762 12.464 15.192 16.436 13.410 15.802 16.426 13.188 15.882
50 16.190 13.352 15.696 19.972 15.812 19.260 20.546 16.538 19.692 20.666 16.158 19.832
55 19.504 16.132 18.916 23.740 18.904 22.954 25.462 20.360 24.542 25.682 20.070 24.802
58 22.934 18.978 22.230 27.542 21.978 26.664 27.880 23.094 27.646 27.542 23.224 28.566
59 24.190 20.014 23.448 28.872 23.096 27.940 28.098 24.120 28.326 28.872 24.438 29.336
60 25.560 21.144 24.770 30.358 24.308 29.318 28.282 25.222 28.728 30.358 25.710 29.318
61 27.004 22.364 26.178 32.018 25.586 30.768 28.238 26.262 29.042 32.018 26.880 30.768
62 28.374 23.544 27.512 33.558 26.840 32.172 28.374 26.500 29.214 33.558 28.136 32.172
63 29.796 24.792 28.910 33.978 28.138 33.640 29.796 26.506 28.910 33.978 28.138 33.640
64 31.276 26.126 30.356 33.060 29.484 33.992 31.276 26.682 30.356 33.060 29.484 33.992
65 32.196 26.922 31.250 32.556 30.276 33.054 32.196 26.922 31.250 32.556 30.276 33.054
66 32.752 27.516 31.800 32.018 30.794 32.278 32.752 27.516 31.800 32.018 30.794 32.278
70 31.732 26.730 30.812 30.676 29.622 31.038 31.732 26.730 30.812 30.676 29.622 31.038
75 30.034 25.452 29.164 28.330 27.772 28.812 30.034 25.452 29.164 28.330 27.772 28.812
80 26.284 22.080 25.458 24.830 23.970 26.030 26.284 22.080 25.458 24.830 23.970 26.030
85 18.606 14.570 17.918 18.282 15.656 18.240 18.606 14.570 17.918 18.282 15.656 18.240
- ----- ----------------------------------------- -----------------------------------------
</TABLE>
If the person insured by the policy is assigned a risk classification other
than standard, a factor is applied to the maximum surrender charge rate
according to the nonstandard table rating assigned to that person insured. If
the person insured is assigned a nonstandard rating reflected in the table
setting of nonstandard table factors at the bottom of Appendix A, the rate
above that applies to the person insured is multiplied by the applicable
nonstandard table factor that applies if Death Benefit Option A or C is
selected. We apply a factor of 1.00 to the maximum surrender charge for a
person insured assigned a risk classification other than standard who selects
Death Benefit Option B.
Representative figures shown. For issue ages not listed, please ask your
registered representative.
124
<PAGE>
APPENDIX D - DEATH BENEFIT PERCENTAGES
<TABLE>
<CAPTION>
--------------- --------------- --------------- ----------------------------
Age Percentage Age Percentage Age Percentage Age Percentage
--------------- --------------- --------------- ----------------------------
<S> <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 greater than 93 101
-------------- --------------- --------------- ----------------------------
125
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PACIFIC SELECT EXEC II WHERE TO GO FOR MORE INFORMATION
<S> <C>
The Pacific Select Exec II variable For more information about Pacific Select Exec II, please call or write to us
life insurance policy is underwritten by at the address below. You should also use this address to send us any notices,
Pacific Life Insurance Company. forms or requests about your policy.
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How to contact us Pacific Life Insurance Company
Client Services Department
700 Newport Center Drive
P.O. Box 7500
Newport Beach, California 92658-7500
1-800-800-7681
7 a.m. through 5 p.m. Pacific time
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How to contact the SEC You can also find reports and other information about the policy and separate
account from the SEC. The SEC may charge you a fee for this information.
Public Reference Section of the SEC
Washington, D.C. 20549-6009
1-800-SEC-0330
Internet: www.sec.gov
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PACIFIC SELECT EXEC II
Flexible Premium Variable Insurance Policy
Issued by Pacific Life Insurance Company
Supplement dated May 1, 1999 to
Prospectus dated May 1, 1999
The attached prospectus describes two death benefit qualification tests
available in connection with the Pacific Select Exec II Flexible Premium
Variable Life Insurance Policy ("Policy")--the cash value accumulation test
and the guideline premium test. As of the date of this supplement to the
prospectus, the cash value accumulation test is not yet available.
The attached prospectus describes an Accounting benefit rider under "The
death benefit: Optional riders". As of the date of this supplement to the
prospectus, the optional Accounting benefit rider is not yet available.
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